** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **
| **x**                                                                                                                                                                                            | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                       | ** **                                                                                               |
| **For the quarterly period ended  March 31,  2008**                                                                                                                               |
| ** **                                                                                                                                                                                       |
| **or**                                                                                                                                                                                           |
| ** **                                                                                                                                                                                       |
| **o**                                                                                                                                                                                            | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **                                                                                                                                                                                       | ** **                                                                                               |
| **For the transition period from                          to** |
| ** **                                                                                                                                                                                       |
| **Commission File Number:  1-14066**                                                                                                                                                   |

 

**SOUTHERN COPPER CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                      | ** ** | **13-3849074**                        |
|-------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or   organization) |       | (I.R.S. Employer  Identification No.) |
|                                                              |       |                                  |
| **11811 North Tatum Blvd.  Suite 2500 Phoenix, AZ**          | ** ** | **85028**                             |
| Address of principal  executive offices)                          |       | (Zip Code)                            |

 

**(602) 494-5328**

Registrant’s telephone number, including areacode

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.                                                                  x Yes    o No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company. Seedefinitions of “large accelerated filer”, “accelerated filer and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act).               Yes o        Nox

 

Asof April 30, 2008 there were outstanding 294,465,650 shares of SouthernCopper Corporation common stock, par value $0.01 per share.

 

 

----

 

Southern Copper Corporation

 

INDEX TO FORM 10-Q

 
| ** **                                               | **Page No.**                                                                                       |
|----------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                                     |                                                                                                    |
| Part I.  Financial Information:                     |                                                                                                    |
|                                                     |                                                                                                    |
| Item. 1                                                  | Condensed  Consolidated Financial Statements (unaudited)                                                |   |
|                                                     |                                                                                                    |   |
|                                                     | Condensed Consolidated Statement of Earnings for the  three months ended March 31, 2008 and 2007   | 3 |
|                                                     |                                                                                                    |   |
|                                                     | Condensed Consolidated Balance Sheet March 31,  2008 and December 31, 2007                    | 4 |
|                                                     |                                                                                                    |   |
|                                                     | Condensed Consolidated Statement of Cash Flows for the  three months ended March 31, 2008 and 2007 | 5-6 |
|                                                     |                                                                                                    |   |
|                                                     | Notes to Condensed Consolidated Financial Statements                                                    | 7-28 |
|                                                     |                                                                                                    |   |
| Item 2.                                                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations             | 29-41 |
|                                                     |                                                                                                    |   |
| Item 3.                                                  | Quantitative  and Qualitative Disclosure about Market Risk                                              | 42-44 |
|                                                     |                                                                                                    |   |
| Item 4.                                                  | Controls  and Procedures                                                                                | 45 |
|                                                     |                                                                                                    |   |
| Report of Independent Registered Public Accounting  Firm | 46                                                                                                      |
|                                                     |                                                                                                    |
| Part II. Other Information:                         |                                                                                                    |
|                                                     |                                                                                                    |
| Item 1.                                                  | Legal  Proceedings                                                                                      | 47 |
|                                                     |                                                                                                    |
| Item 1a.                                                 | Risk factors                                                                                            | 47 |
|                                                     |                                                                                                    |
| Item 6.                                                  | Exhibits                                                                                                | 48 |
|                                                     |                                                                                                    |
|                                                     | Signatures                                                                                              | 49 |
|                                                     |                                                                                                    |
|                                                     | List of Exhibits                                                                                        | 50 |
|                                                     |                                                                                                    |
| Exhibit 31.1                                        | Certification Pursuant to Section 302 of theSarbanes-Oxley Act of 2002                             | 51-52 |
|                                                     |                                                                                                    |
| Exhibit 31.2                                        | Certification Pursuant to Section 302 of theSarbanes-Oxley Act of 2002                             | 53-54 |
|                                                     |                                                                                                    |
| Exhibit 32.1                                        | Certification Pursuant to Section 906 of theSarbanes-Oxley Act of 2002                             | 55 |
|                                                     |                                                                                                    |
| Exhibit 32.2                                        | Certification Pursuant to Section 906 of theSarbanes-Oxley Act of 2002                             | 56 |

 

2

----

 

Part I - FINANCIALINFORMATION

 

Item 1.  Condensed Consolidated FinancialStatements

 

Southern Copper Corporation

 

CONDENSED CONSOLIDATEDSTATEMENT OF EARNINGS

(Unaudited)

 
| ** **                                                                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                    | ** ** | **March 31,**               | ** ** |
| ** **                                                                                    | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                                                                                    | ** ** | **(in thousands)**          | ** ** |
|                                                                                          |       |                             |       |   |   |
| Net sales                                                                                     |       | $                                | 1,499,206  |   | $ | 1,358,337 |   |
|                                                                                          |       |                             |       |   |   |
| Operating costs and expenses:                                                                 |       |                             |       |   |   |
| Cost of sales (exclusive of depreciation,  amortization and depletion shown separately below) |       | 520,589                          |       | 466,645 |   |
| Selling, general and administrative                                                           |       | 24,655                           |       | 23,799 |   |
| Depreciation, amortization and depletion                                                      |       | 81,196                           |       | 74,098 |   |
| Exploration                                                                                   |       | 8,056                            |       | 6,418 |   |
| Total operating costs and expenses                                                            |       | 634,496                          |       | 570,960 |   |
|                                                                                          |       |                             |       |   |   |
| Operating income                                                                              |       | 864,710                          |       | 787,377 |   |
|                                                                                          |       |                             |       |   |   |
| Interest expense                                                                              |       | (28,928                          | )          | (29,806 | ) |
| Capitalized interest                                                                          |       | 1,088                            |       | 4,966 |   |
| Gain (loss) on derivative instruments                                                         |       | 2,927                            |       | (21,180 | ) |
| Other income (expense)                                                                        |       | (3,500                           | )          | 20,662 |   |
| Interest income                                                                               |       | 17,415                           |       | 21,928 |   |
|                                                                                          |       |                             |       |   |   |
| Earnings before income taxes and minority  interest                                           |       | 853,712                          |       | 783,947 |   |
|                                                                                          |       |                             |       |   |   |
| Income taxes                                                                                  |       | 286,022                          |       | 230,674 |   |
| Minority interest                                                                             |       | 2,707                            |       | 1,591 |   |
|                                                                                          |       |                             |       |   |   |
| Net earnings                                                                                  |       | $                                | 564,983    |   | $ | 551,682 |   |
|                                                                                          |       |                             |       |   |   |
| Per common share amounts:                                                                     |       |                             |       |   |   |
| Net earnings basic and diluted                                                                |       | $                                | 1.92       |   | $ | 1.87 |   |
| Dividends paid                                                                                |       | $                                | 1.40       |   | $ | 1.70 |   |
| Weighted average common shares outstanding  (basic and diluted)                               |       | 294,466                          |       | 294,461 |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

3

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Southern Copper Corporation

 

CONDENSED CONSOLIDATEDBALANCE SHEET

(Unaudited)

 
| ** **                                                                                      | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                                      | ** ** | **2008**                | ** ** | **2007**              | ** ** |
| ** **                                                                                      | ** ** | **(in thousands)** | ** ** |
| ASSETS                                                                                          |       |                    |       |                  |       |
| Current assets:                                                                                 |       |                    |       |                  |       |
| Cash and cash equivalents                                                                       |       | $                       | 1,472,781  |                  | $          | 1,409,272 |   |
| Short-term investments                                                                          |       | 112,019                 |       | 117,903               |       |
| Accounts receivable trade, less allowance  for doubtful accounts (2008 - $4,553; 2007 - $4,585) |       | 585,535                 |       | 404,598               |       |
| Accounts receivable other (including  affiliates 2008 $1,968 and 2007 $1,644)                   |       | 28,992                  |       | 58,180                |       |
| Inventories                                                                                     |       | 455,311                 |       | 448,283               |       |
| Deferred income tax - current portion                                                           |       | 79,342                  |       | 72,303                |       |
| Other current assets                                                                            |       | 124,916                 |       | 124,970               |       |
| Total current assets                                                                            |       | 2,858,896               |       | 2,635,509             |       |
|                                                                                            |       |                    |       |                  |       |
| Property, net                                                                                   |       | 3,552,796               |       | 3,568,311             |       |
| Leachable material, net                                                                         |       | 205,714                 |       | 220,243               |       |
| Intangible assets, net                                                                          |       | 115,377                 |       | 115,802               |       |
| Other assets, net                                                                               |       | 45,354                  |       | 40,693                |       |
| Total Assets                                                                                    |       | $                       | 6,778,137  |                  | $          | 6,580,558 |   |
|                                                                                            |       |                    |       |                  |       |
| LIABILITIES                                                                                     |       |                    |       |                  |       |
| Current liabilities:                                                                            |       |                    |       |                  |       |
| Current portion of long-term debt                                                               |       | $                       | 160,000    |                  | $          | 160,000 |   |
| Accounts payable                                                                                |       | 360,614                 |       | 255,070               |       |
| Accrued income taxes                                                                            |       | 177,531                 |       | 132,175               |       |
| Due to affiliated companies                                                                     |       | 6,176                   |       | 3,870                 |       |
| Accrued workers’ participation                                                             |       | 235,950                 |       | 313,251               |       |
| Interest                                                                                        |       | 18,579                  |       | 37,325                |       |
| Other accrued liabilities                                                                       |       | 33,599                  |       | 25,499                |       |
| Total current liabilities                                                                       |       | 992,449                 |       | 927,190               |       |
|                                                                                            |       |                    |       |                  |       |
| Long-term debt                                                                                  |       | 1,289,815               |       | 1,289,754             |       |
| Deferred income taxes                                                                           |       | 191,208                 |       | 219,501               |       |
| Non-current taxes payable                                                                       |       | 156,535                 |       | 154,721               |       |
| Other liabilities and reserves                                                                  |       | 116,651                 |       | 111,442               |       |
| Asset retirement obligation                                                                     |       | 13,386                  |       | 13,145                |       |
| Total non-current liabilities                                                                   |       | 1,767,595               |       | 1,788,563             |       |
|                                                                                            |       |                    |       |                  |       |
| Commitments and Contingencies (Note M)                                                          |       |                    |       |                  |       |
|                                                                                            |       |                    |       |                  |       |
| MINORITY INTEREST                                                                               |       | 16,863                  |       | 16,685                |       |
|                                                                                            |       |                    |       |                  |       |
| STOCKHOLDERS’ EQUITY                                                                       |       |                    |       |                  |       |
| Common stock                                                                                    |       | 2,949                   |       | 2,949                 |       |
| Additional paid-in capital                                                                      |       | 839,615                 |       | 825,543               |       |
| Retained earnings                                                                               |       | 3,373,418               |       | 3,220,857             |       |
| Accumulated other comprehensive loss                                                            |       | (26,554                 | )          | (26,554               | )          |
| Treasury stock                                                                                  |       | (188,198                | )          | _(174,675             | )          |
| Total Stockholders’ Equity                                                                 |       | 4,001,230               |       | 3,848,120             |       |
|                                                                                            |       |                    |       |                  |       |
| Total Liabilities, Minority Interest and  Stockholders’ Equity                             |       | $                       | 6,778,137  |                  | $          | 6,580,558 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

4

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Southern Copper Corporation

 

CONDENSED CONSOLIDATEDSTATEMENT OF CASH FLOWS

(Unaudited)

 
| ** **                                                                             | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                             | ** ** | **March 31,**               | ** ** |
| ** **                                                                             | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                                                                             | ** ** | **(in thousands)**          | ** ** |
|                                                                                   |       |                             |       |   |   |
| OPERATING ACTIVITIES                                                                   |       |                             |       |   |   |
|                                                                                   |       |                             |       |   |   |
| Net earnings                                                                           |       | $                                | 564,983    |   | $ | 551,682 |   |
| Adjustments to reconcile net earnings to  net cash provided from operating activities: |       |                             |       |   |   |
| Depreciation, amortization and depletion                                               |       | 81,196                           |       | 74,098 |   |
| Capitalized leachable material                                                         |       | (2,246                           | )          | (20,461 | ) |
| Loss on currency translation effect                                                    |       | 18,601                           |       | (4,682 | ) |
| Provision for deferred income taxes                                                    |       | (38,052                          | )          | 20,246 |   |
| Unrealized (gain)loss on derivative  instruments                                       |       | (8,237                           | )          | 22,688 |   |
| Minority interest                                                                      |       | 2,707                            |       | 1,591 |   |
| Cash provided from (used for) operating  assets and liabilities:                       |       |                             |       |   |   |
| Accounts receivable                                                                    |       | (130,825                         | )          | 81,034 |   |
| Inventories                                                                            |       | (7,028                           | )          | (42,984 | ) |
| Accounts payable and accrued liabilities                                               |       | 21,850                           |       | (184,907 | ) |
| Other operating assets and liabilities                                                 |       | 353                              |       | _50,582 |   |
| Net cash provided from operating activities                                            |       | 503,302                          |       | 548,887 |   |
|                                                                                   |       |                             |       |   |   |
| INVESTING ACTIVITIES                                                                   |       |                             |       |   |   |
| Capital expenditures                                                                   |       | (49,894                          | )          | (85,030 | ) |
| Purchase of short-term investments                                                     |       | —                           |       | (100,000 | ) |
| Net proceeds from short-term investments                                               |       | 5,225                            |       | — |   |
| Other                                                                                  |       | (817                             | )          | 881 |   |
| Net cash used for investing activities                                                 |       | (45,486                          | )          | (184,149 | ) |
|                                                                                   |       |                             |       |   |   |
| FINANCING ACTIVITIES                                                                   |       |                             |       |   |   |
| Dividends paid to common stockholders                                                  |       | (412,302                         | )          | (500,584 | ) |
| Distributions to minority interest                                                     |       | (3,160                           | )          | (1,759 | ) |
| Other                                                                                  |       | 61                               |       | 61 |   |
| Net cash used for financing activities                                                 |       | (415,401                         | )          | (502,282 | ) |
|                                                                                   |       |                             |       |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                          |       | 21,094                           |       | 3,616 |   |
| Increase (decrease) in cash and cash equivalents                                       |       | 63,509                           |       | (133,928 | ) |
|                                                                                   |       |                             |       |   |   |
| Cash and cash equivalents, at beginning of  period                                     |       | 1,409,272                        |       | 1,022,778 |   |
|                                                                                   |       |                             |       |   |   |
| Cash and cash equivalents, at end of period                                            |       | $                                | 1,472,781  |   | $ | 888,850 |   |

 

5

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| ** **                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **March 31,**               | ** ** |
| ** **                                        | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                                        | ** ** | **(in thousands)**          | ** ** |
| Supplemental disclosure of cash flow  information |       |                             |       |   |   |
| Cash paid during the period for:                  |       |                             |       |   |   |
| Interest                                          |       | $                                | 52,705     |   | $ | 50,361 |   |
| Income taxes                                      |       | $                                | 216,194    |   | $ | 264,511 |   |
| Workers’ participation                       |       | $                                | 115,830    |   | $ | 171,436 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

6

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Southern Copper Corporation

 

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

A.           In the opinion of Southern Copper Corporation, (the “Company”, “SouthernCopper” or “SCC”), the accompanying unaudited condensed consolidated financialstatements contain all adjustments (consisting only of normal recurringadjustments) necessary to present fairly the Company’s financial position as ofMarch 31, 2008 and the results of operations and cash flows for the threemonths ended March 31, 2008 and 2007. The condensed consolidated financialstatements for the three months ended March 31, 2008 and 2007 have beensubject to a review by PricewaterhouseCoopers, the Company’s independentregistered public accounting firm, whose report dated May 5, 2008, is presentedon page 46. The results of operations for the three months ended March 31,2008 and 2007 are not necessarily indicative of the results to be expected forthe full year. The December 31, 2007 balance sheet data was derived fromaudited financial statements, but does not include all disclosures required bygenerally accepted accounting principles in the United States of America. Theaccompanying condensed consolidated financial statements should be read inconjunction with the consolidated combined financial statements at December 31,2007 and notes included in the Company’s 2007 annual report on Form 10-K.

 

B.             Adoption of NewAccounting Standards:

 

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”).SFAS No. 159 permits companies, at their election, to measure specifiedfinancial instruments and warranty and insurance contracts at fair value on acontract-by-contract basis, with changes in fair value recognized in earningseach reporting period. The election, called the “fair value option,” willenable some companies to reduce the volatility in reported earnings caused bymeasuring related assets and liabilities differently, and it is easier thanusing the complex hedge-accounting requirements in SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”),to achieve similar results. Subsequent changes in fair value for designateditems will be required to be reported in earnings in the current period. SFAS No. 159is effective for financial statements issued for fiscal years beginning after November 15,2007 and therefore became effective for the Company as of January 1, 2008.The Company has not elected to measure any eligible items at fair value. Accordingly,the adoption of SFAS No. 159 has not impacted the Company’s results ofoperations and financial position.

 

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements” (“SFAS No. 157”), which defines fair value,establishes a framework for measuring fair value in accordance with generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements. SFAS No. 157 does not require any new fair valuemeasurements; rather, it applies under other accounting pronouncements thatrequire or permit fair value measurements. The provisions of SFAS No. 157are to be applied prospectively as of the beginning of the fiscal year in whichit is initially applied, with any transition adjustment recognized as a cumulative-effectadjustment to the opening balance of retained earnings. The provisions of SFAS No. 157were adopted by the Company on January 1, 2008 and do not have any effecton its overall financial position or results of operations. All fair valueadjustments at March 31, 2008 represent assets measured at fair value on arecurring basis. Fair values as of March 31, 2008 were calculated asfollows (in million):

 

7

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| ** **                            | ** ** | **Balance  at March  31, 2008** | ** ** | **Quoted Prices  in Active  Markets for  Identical  Assets** | ** ** | **Significant  Other  Observable  Inputs** | ** ** | **Significant  unobservable  inputs** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------|------------|
| ** **                            | ** ** | ** **                                | ** ** | **(Level 1)**                                                          | ** ** | **(Level 2)**                         | ** ** | **(Level 3)**                    | ** ** |
| Short-term Investments                |       | $                                         | 112.0      |                                                                        | $          | 112.0                                      |       | —                                |       | — |   |
| Derivative Instruments                |       |                                      |       |                                                                        |       |                                       |       |                                  |       |
| Exchange rate derivative, dollar/peso |       | 1.8                                       |       | 1.8                                                                         |       | —                                     |       | —                                |       |
| Copper derivative                     |       | 6.4                                       |       | 6.4                                                                         |       | —                                     |       | —                                |       |
| Total                                 |       | $                                         | 120.2      |                                                                        | $          | 120.2                                      |       | —                                |       | — |   |

 

C.             Short-termInvestments:

 

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

 
| ** **                                                                                                       | ** ** | **As of**     | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| **Investments**                                                                                                  | ** ** | **2008**           | ** ** | **2007** | ** ** |
| Short-term investments in securities issued  by public companies with a weighted average interest rate of 3.24%. |       | $                  | 112.0      |   | $ | 117.9 |   |
|                                                                                                                  |            |                    |            |  |  |  |  |

 

Short-term investments in securities consist oftrading securities issued by public companies. Each security is independent ofthe others.

 

In the first quarter 2008, the Company earnedinterest of $0.9 million related to these investments which was recorded asinterest income in the Condensed Consolidated Statement of Earnings. Inaddition, the Company redeemed $5.2 million of these investments and recorded amark to market adjustment of $0.7 million. The mark to market adjustment wasrecorded as interest expense in the Condensed Consolidated Statement ofEarnings.

 

D.            Inventories were as follows:

 
| ** **                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(in millions)**                     | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Metals at lower of average cost or market: |       |               |       |                  |       |
| Finished goods                             |       | $                  | 63.1       |                  | $          | 65.7 |   |
| Work-in-process                            |       | 154.0              |       | 140.7                 |       |
| Supplies at average cost                   |       | 238.2              |       | 241.9                 |       |
| Total inventories                          |       | $                  | 455.3      |                  | $          | 448.3 |   |

 

E.              Financing

 

On April 1, 2008, the Company paid $150.0million of the remaining balance of its series A Yankee bonds. With thispayment the series A Yankee bonds were fully repaid.

 

F.              Income taxes:

 

The income tax for the three months ended March 31,2008 and 2007 was $286.0 million and $230.7 million, respectively. Theseprovisions include income taxes for Peru, Mexico and the United States. Theeffective tax rates for the 2008 and

 

8

----

 

2007 periods are 33.5% and 29.4%, respectively. The2008 effective income tax rate increase primarily reflects a large shift in themix of earnings from Mexico, principally as a result of a lengthy strike at theCananea mine, to the higher tax jurisdiction, Peru which represents an increaseof 2.9% in the effective income tax rate. In addition, various tax adjustmentsto the first quarter 2008 Peru tax provision also contributed to the rateincrease.

 

On October 1, 2007, the Mexican governmentenacted a new law, which took effect on January 1, 2008. The lawintroduced a flat tax, which replaced Mexico’s asset tax and applies totaxpaying entities along with Mexico’s regular income tax. In general Mexicancompanies are subject to paying the greater of the flat tax or the income tax;the application of this rule resulted in a provision in the first quarterof 2008 based upon the regular income tax calculation. This tax law change didnot have an effect on the Company’s first quarter 2008 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 following years.Although the flat tax is defined as minimum tax it has a wider taxable base asmany of the tax deductions allowed for income tax purposes are not allowed forthe flat tax.

 

FIN No. 48 – Accounting for Uncertainty inIncome Taxes.

 

There were not material changes in the provision forunrecognized tax benefits in the first quarter of 2008.

 

G.             Provisionally Priced Sales:

 

At March 31, 2008, the Company has recordedprovisionally priced sales of 103.4 million pounds of copper, at an averageforward price of $3.82 per pound. Also the Company has recorded provisionallypriced sales of 4.1 million pounds of molybdenum at the March 31, 2008market price of $33.25 per pound. These sales are subject to final pricingbased on the average monthly LME or COMEX copper prices and Dealer Oxidemolybdenum prices in the future month of settlement.

 

Following are the provisionally priced copper andmolybdenum sales outstanding at March 31, 2008:

 
| **Copper  (million lbs.)** | ** ** | **Priced at** | ** ** | **Month of  Settlement** | ** ** |
|---------------------------------|------------|--------------------|------------|-------------------------------|------------|
| 25.7                            |       | 3.851202           |       | April 2008               |       |
| 34.1                            |       | 3.827787           |       | May 2008                 |       |
| 23.8                            |       | 3.813801           |       | June 2008                |       |
| 8.7                             |       | 3.810124           |       | July 2008                |       |
| 5.5                             |       | 3.767540           |       | September 2008           |       |
| 5.6                             |       | 3.750760           |       | October 2008             |       |
| 103.4                           |       | 3.821483           |       |                          |       |

 
| **Molybdenum   (million lbs.)** | ** ** | **Priced at** | ** ** | **Month of  Settlement** | ** ** |
|-------------------------------------------|------------|--------------------|------------|-------------------------------|------------|
| 1.6                                       |       | 33.25              |       | April 2008               |       |
| 1.5                                       |       | 33.25              |       | May 2008                 |       |
| 1.0                                       |       | 33.25              |       | June 2008                |       |
| 4.1                                       |       | 33.25              |       |                          |       |

 

Management believes that the final pricing of thesesales will not have a material effect on the Company’s financial position orresults of operations.

 

9

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H.            Derivative Instruments

 

The Company occasionally uses derivative instrumentsto manage its exposure to market risk from changes in commodity prices,interest rate and exchange rate risk exposures and to enhance return on assets.The Company does not enter into derivative contracts unless it anticipates afuture activity that is likely to occur that will result in exposing theCompany to market risk.

 

Copperderivatives:

 

Fromtime to time the Company has entered into derivative instruments to protect afixed copper, or zinc price for a portion of its metal sales.

 

In the first quarter of 2008, the Company enteredinto copper collar and swap contracts to protect a portion of its 2008 sales ofcopper production. Related to the fair value of these copper derivativecontracts the Company recorded an unrealized gain of $6.4 million in the firstquarter of 2008. This gain was recorded in net sales in the CondensedConsolidated Statement of Earnings.

 

At March 31, 2008 the Company has copper collarcontracts to protect 198.4 million pounds of copper production for the April-December 2008period at weighted average minimum and maximum LME prices of $3.40 per poundand $4.23 per pound, respectively. If the LME price falls below the minimumprice, the Company will be paid the difference between the minimum price andthe actual price. If the LME price exceeds the maximum price, the Company willpay the difference between the maximum price and the actual price. In addition,the Company has copper swap contracts to protect 175.1 million pounds of copperproduction for the April-August 2008 period at an average COMEX price of $3.87per pound.

 

Gas swaps:

 

In the first quarter of 2007 the Company enteredinto a gas swap contract to protect part of its gas consumption for 900,000MMBTUs with a fixed price of $7.525. Related to the settlement of this gas swapcontract the Company recorded a loss of $0.9 million in the first quarter of2007 which was charged to production cost. In the first quarter of 2008 theCompany did not hold any gas swap derivative.

 

Exchange rate derivatives, U.S. dollar/Mexican pesocontracts:

 

Because more than 85% of the Company’s salescollections in Mexico are in US dollars and many of its costs are in Mexicanpesos, the Company entered into zero-cost derivative contracts with the purposeof protecting, within a range, against an appreciation of the Mexican peso tothe US dollar. In these contracts if the exchange rate settles at or below thebarrier, the Company does not sell US dollars, if the exchange rate settlesabove the barrier price established in the contract the Company sells USdollars at the strike price established in the contract.

 

In the first quarter of 2008 and 2007 the exerciseof some of these zero-cost derivative contracts resulted in gains of $1.1million and $1.5 million, respectively, which were recorded as gain onderivative instruments in the condensed consolidated statement of earnings.

 

At March 31, 2008 the Company held thefollowing exchange rate derivative operations:

 

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| **Notional Amount  (millions)** | ** ** | **Due Date, Weekly  expiration during** | ** **       | **Strike Price  (Mexican Pesos/U.S.  Dollars)** | ** ** | **Barrier Price  (Mexican Pesos/  U.S. Dollars)** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------|------------------|-----------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| $                                    | 45.0       |                                                   | 4th Quarter 2008 |                                                      | 11.32      |                                                             | 10.60      |   |
| $                                    | 60.0       |                                                   | 1st Quarter 2009 |                                                      | 11.25      |                                                             | 10.60      |   |

 

At March 31, 2008, the fair value of the abovelisted exchange rate derivative contracts is a gain of $1.8 million which wasrecorded as Gain (loss) on derivative instruments in the condensed consolidatedstatement of earnings. Each notional amount includes a group of weeklytransactions that have the same strike and barrier price.

 

In addition, the $53.0 million exchange derivativecontract held at December 31, 2007 was cancelled and the Companyrecognized a gain of $0.3 million in the first quarter of 2008, which isincluded in the $1.1 million noted above.

 

I.                 Asset Retirement Obligation:

 

In 2005 the Company added an estimated assetretirement obligation for its mining properties in Peru, as required by thePeruvian Mine Closure Law. In accordance with the law, a conceptual mineclosure plan, without costs, was submitted to the Peruvian Ministry of Energyand Mines (“MEM”) in August 2006. While the plan was subject to a MEMreview in 45 days, the Company did not receive the MEM response until November 2007.The Company responded to MEM’s review in March 2008. The Company responseis now subject to approval by MEM and open to public discussion and comment inthe area of Company operations. However, as of March 31, 2008, the Companyhas made an estimated provision of $6.5 million for this liability in itsfinancial statements, but believes that this estimate should be viewed withcaution, pending final approval of the mine closure plan.

 

The closure cost recognized for this liabilityincludes the estimated cost required at the Peruvian operations, based on theCompany’s experience, and includes cost at the Ilo smelter, the tailingdisposal, and dismantling the Toquepala and Cuajone concentrators, and theshops and auxiliary facilities. Based on this estimated cost, we recorded anadditional asset retirement liability in 2005 of $5.2 million, which increasedour previously recorded asset retirement liability to $11.2 million. Thisincreased net property by $4.6 million.

 

The following table summarizes the asset retirementobligation activity for the first three months of 2008 and 2007 (in millions):

 
| ** **                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Balance as of January 1    |       | $        | 13.1       |     | $          | 12.2 |   |
| Additions, changes in estimates |       | —   |       | —   |       |
| Accretion expense               |       | 0.3      |       | 0.2      |       |
| Balance as of March 31,    |       | $        | 13.4       |     | $          | 12.4 |   |

 

J.                Related Party Transactions:

 

Receivable and payable balances with affiliatedcompanies are shown below (in millions):

 

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| ** **                                                  | ** ** | **As of**               | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                  | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|                                                        |       |                         |       |   |   |
| Affiliate receivable:                                       |       |                         |       |   |   |
| Grupo Mexico S.A.B de C.V. and affiliates                   |       | $                            | 0.8        |   | $ | 1.5 |   |
| Mexico Proyectos y Desarrollos S.A. de C.V.  and affiliates |       | 0.7                          |       | — |   |
| Ferrocarril Mexicano, S.A. de C.V.                          |       | 0.5                          |       | — |   |
| Other                                                       |       | —                       |       | 0.1 |   |
|                                                        |       | $                            | 2.0        |   | $ | 1.6 |   |
| Affiliate payable:                                          |       |                         |       |   |   |
| Grupo Mexico S.A.B. de C.V. and affiliates                  |       | $                            | 6.2        |   | $ | 3.0 |   |
| Ferrocarril Mexicano, S.A. de C.V.                          |       | —                       |       | 0.9 |   |
|                                                        |       | $                            | 6.2        |   | $ | 3.9 |   |

 

The Company has entered into certain transactions inthe ordinary course of business with parties that are controlling shareholdersor their affiliates. These transactions include the lease of office space, airtransportation and construction services and products and services relating tomining and refining. The Company lends and borrows funds among affiliates foracquisitions and other corporate purposes. These financial transactions bearinterest and are subject to review and approval by senior management, as areall related party transactions. It is our policy that the Audit Committee ofthe Board of Directors shall review all related party transactions. The Companyis prohibited from entering or continuing a material related party transactionthat has not been reviewed and approved or ratified by the Audit Committee.

 

Grupo Mexico, the Company’s ultimate parent and themajority indirect stockholder of the Company, and its affiliates providevarious 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 MexicoServicios S.A de C.V., a subsidiary of Grupo Mexico for these services. Thetotal amount paid by the Company for such services in the first quarter 2008and 2007 was $3.2 million. The Company expects to continue to pay for theseservices in the future.

 

The Company’s Mexican operations paid fees of $2.0million and $4.1 million in the first quarter of 2008 and 2007, respectively,primarily for freight services provided by Ferrocarril Mexicano, S.A. de C.V.,a subsidiary of Grupo Mexico.

 

In addition, the Company’s Mexican operations paid$1.9 million and $2.7 mi1lion in the first quarter of 2008 and 2007,respectively, for construction services provided by Mexico ConstructoraIndustrial S.A. de C.V., an indirect subsidiary of Grupo Mexico.

 

The Larrea family controls a majority of the capitalstock of Grupo Mexico, and has extensive interests in other businesses,including oil drilling services, construction, aviation, and real estate. TheCompany engages in certain transactions in the ordinary course of business withother entities controlled by the Larrea family relating to mining and refiningservices, the lease of office space, sale of vehicles and air transportationand construction services. In connection with this, the Company paid fees of$0.3 million and $1.0 million in the first quarter of 2008 and 2007,respectively, for maintenance services and sale of vehicles provided by MexicoCompañia de Productos Automotrices, S.A. de C.V., a company controlled by theLarrea family. Additionally, in the third quarter of 2006, one of our Mexicansubsidiaries provided a short-term interest bearing loan of $10.6

 

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million to Mexico Transportes Aereos, S.A. de C.V. (“MexTransport”)for the purchase of an airplane, which was paid in the first quarter of 2007. MexTransport,a company controlled by the Larrea family, provides aviation services to ourMexican operations. Our Mexican subsidiaries have provided a guaranty for a new$10.8 million loan obtained by MexTransport. The guaranty provided toMexTransport is backed up by the transport services provided by MexTransport tothe Company’s Mexican subsidiaries. The Company paid fees of $0.7 million inthe first quarter of 2008, to MexTransport for aviation services.

 

The Company purchased $1.5 million and $1.2 millionin the first quarter of 2008 and 2007, respectively, of industrial materialsfrom Higher Technology S.A.C in which Mr. Carlos Gonzalez has aproprietary interest. The Company paid fees of $0.2 million and $0.2 million inthe first quarter of 2008 and 2007, respectively, for maintenance servicesprovided by Servicios y Fabricaciones Mecanicas S.A.C., a company in which Mr. CarlosGonzalez has a proprietary interest. Mr. Carlos Gonzalez is the son of SCC’sChief Executive Officer.

 

The Company purchased less than $0.1 million and$0.1 million in the first quarter of 2008 and 2007, respectively, of industrialmaterial from Sempertrans France Belting Technology, in which Mr. AlejandroGonzalez is employed as a sales representative. Also, the Company purchased$0.2 million in the first quarter of 2008 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.

 

The Company purchased $0.6 million and $0.6 millionin the first quarter of 2008 and 2007, respectively, of industrial material andservices from Breaker, S.A. de C.V., a company in which Mr. Jorge Gonzalezhas a proprietary interest. Mr. Jorge Gonzalez is the son-in-law of SCC’sChief Executive Officer.

 

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

 

K.            Employee Benefit Plan:

 

SCC Defined Benefit Pension Plan-

 

The components of the net periodic benefit costs forthe three months ended March 31 are as follows ($ in millions):

 
| ** **                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Interest cost                  |       | $        | 0.2        |     | $          | 0.2 |   |
| Expected return on plan assets |       | (0.1     | )          | (0.1     | )          |
| Amortization of net loss       |       | —   |       | —   |       |
| Net periodic benefit cost      |       | $        | 0.1        |     | $          | 0.1 |   |

 

SCC Post-retirement Health Care Plan-

 

The components of the net periodic benefit costs forthe post-retirement health care plan for the three months ended March 31,2008 and 2007 are individually, and in total, less than $0.1 million.

 

Minera Mexico Pension Plans-

 

The components of the net periodic benefit costs forthe three months ended March 31 are as follows ($ in millions):

 

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| ** **                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Interest cost                  |       | $        | 0.5        |     | $          | 0.5 |   |
| Service cost                   |       | 0.6      |       | 0.5      |       |
| Expected return on plan assets |       | (0.7     | )          | (0.5     | )          |
| Net periodic benefit cost      |       | $        | 0.4        |     | $          | 0.5 |   |

 

Minera Mexico Post-retirement Health Care Plan-

 

The components of the net periodic cost for thethree months ended March 31, 2008 and 2007 are as follows ($ in millions):

 
| ** **                | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
|                      |       |     |       |     |       |
| Interest cost             |       | $        | 0.8        |     | $          | 0.6 |   |
| Service cost              |       | 0.1      |       | 0.1      |       |
| Net periodic benefit cost |       | $        | 0.9        |     | $          | 0.7 |   |

 

L.              Comprehensive Income (in millions):

 
| ** **                                     | ** ** | **Three months ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **March 31, 2008,**    | ** ** |
| ** **                                     | ** ** | **2008**                         | ** ** | **2007** | ** ** |
|                                           |       |                             |       |   |   |
| Net income                                     |       | $                                | 565.0      |   | $ | 551.7 |   |
| Other comprehensive income (loss) net of  tax: |       |                             |       |   |   |
| Unrealized gain (loss) on investments          |       | —                           |       | (1.0 | ) |
| Comprehensive income                           |       | $                                | 565.0      |   | $ | 550.7 |   |

 

The unrealized loss oninvestment activity in the 2007 period was related to an investment in aMexican construction company which was sold in 2007. This investment wasaccounted for as an available for-sale investment.

 

M.         Commitments and Contingencies

 

Environmental matters:

 

The Company has institutedextensive environmental conservation programs at its mining facilities in Peruand Mexico. The Company’s environmental programs include, among other things,water recovery 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 aresubject to applicable Peruvian environmental laws and regulations. The Peruviangovernment, through its Ministry of Energy and Mines (“MEM”) conducts annualaudits of the Company’s Peruvian mining and metallurgical operations. Throughthese environmental audits, matters related to environmental commitments,compliance with legal requirements, atmospheric emissions, and effluentmonitoring are reviewed. The Company believes that it is in material compliancewith applicable Peruvian environmental laws and regulations.

 

In the first quarter of2007, with the completion of the Ilo smelter modernization, the Companycompleted a 10-year environmental program agreed to with the Peruviangovernment in 1997. This program applied to all of the Company’s Peruvianoperations

 

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and contained34 mitigation measures and projects necessary to (1) bring the existingoperations into compliance with the environmental standards established by theMEM and (2) identify areas impacted by operations that were no longer activeand needed to be reclaimed.

 

In 2003 the Peruvian congress published a new lawannouncing future closure and remediation obligations for the mining industry. InAugust 2006 and March 2008, in accordance with this law and itsamendments the Company prepared and submitted to MEM a closure plan. TheCompany is awaiting MEM’s review of this plan. See note I “Asset RetirementObligation” for further disclosure of thismatter.

 

For the Company’s Peruvianoperations, environmental capital expenditures were $1.5 million and $11.7million in the first quarter of 2008, and 2007, respectively. The Companyexpects to spend approximately $14.1 million for environmental capitalexpenditures in 2008.

 

Mexican operations

 

The Company’s operations aresubject to applicable Mexican federal, state and municipal environmental laws,to Mexican official standards, and to regulations for the protection of theenvironment, including regulations relating to water supply, water quality, airquality, noise levels and hazardous and solid waste. Some of these laws andregulations are relevant to legal proceedings pertaining to the Company’s SanLuis Potosi copper facilities.

 

The principal legislationapplicable to the Company’s Mexican operations is the federal General Law ofEcological Balance and Environmental Protection, which is enforced by theFederal Bureau of Environmental Protection (“PROFEPA”). The PROFEPA monitorscompliance with environmental legislation and enforces Mexican environmentallaws, regulations and official standards. PROFEPA may initiate administrativeproceedings against companies that violate environmental laws, which in themost egregious cases may result in the temporary or permanent closing ofnon-complying facilities, the revocation of operating licenses and/or othersanctions or fines. Also, according to the Federal Criminal Code,the PROFEPA must inform correspondingauthorities regarding environmental non-compliance.

 

Mexican environmentalregulations have become increasingly stringent over the last decade, and thistrend is likely to continue and has been influenced by the environmental treatyentered into by Mexico, United States and Canada in connection with NAFTA in February 1999.However, the Company’s management does not believe that continued compliancewith the Environmental Law or Mexican State environmental laws will have amaterial adverse effect on the Company’s business, properties, results ofoperations, financial condition or prospects or will result in material capitalexpenditures. Although the Company believes that all of its facilities are inmaterial compliance 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 ofcertain facilities of Minera Mexico to urban centers, the authorities mayimplement certain measures that may impact or restrain the operation of suchfacilities.

 

For the Company’s Mexicanoperations, environmental capital expenditures were $1.1 million and $4.1million in the first quarter of 2008 and 2007, respectively. Approximately,$45.2 million has been budgeted for environmental capital expenditures in 2008.

 

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Litigationmatters:

 

Peruvian operations

 

Garcia-Ataucuri and Others against SCC:  In April 1996, the Company was servedwith a complaint filed in Peru by approximately 800 former employees seekingthe delivery of a substantial number of “labor shares” (acciones laborales) ofits Peruvian Branch plus dividends on such shares, to be issued in aproportional way to each former employee in accordance with their time of workwith SCC’s Peruvian Branch.

 

The Company conducts its operations in Peruthrough a registered Branch.  Althoughthe Peruvian Branch has neither capital nor liability separate from that of theCompany, under Peruvian law it is deemed to have an equity capital for purposesof determining the economic interest of the holders of the labor shares.  The labor share litigation is based on claimsof former employees for ownership of labor shares issued during the 1970s 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.

 

In1995, the Company offered to exchange new common shares of the Company for thelabor 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” bythe Branch in Peru, the Company 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 anadverse decision of an appellate civil court, affirming a decision of a lowercivil court, to the Peruvian Supreme Court. On September 19, 2001, the Peruvian Supreme Court annulled theproceedings noting that the civil courts lacked jurisdiction and that thematter had to be decided by a labor court. On March 8, 2002, Mr. García Ataucuri restated the claim tocomply with Peruvian labor law and procedural requirements, and increased thenumber of plaintiffs to approximately 958 ex-workers.  In January 2005, the lower labor judgedismissed the lawsuit on procedural grounds without deciding on the merits ofthe

 

16

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case.  In March 2005,the plaintiffs appealed this decision but the appellate court dismissed theappeal due to procedural defects and remanded the case to the lower labor courtfor further proceedings.  The lower laborcourt, on motions from the plaintiffs, reinstated the appeal of the dismissalof the case of seven plaintiffs that had cured the procedural defects.  As of December 31, 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 decisiondescribed below.

 

InOctober 2007, in a separate proceeding initiated by Mr. GarcíaAtaucuri against the justices of the Peruvian Supreme Court, the PeruvianConstitutional Court nullified the Peruvian Supreme Court decision issued on September 19,2001 because it had violated Mr. Garcia-Ataucuri’s constitutional dueprocess rights by obliging him and the other plaintiffs to commence a newproceeding before the labor courts when they had litigated against the Companyin civil courts for over 10 years.  ThePeruvian Constitutional Court ordered the Supreme Court to decide again on themerits of the case accepting or denying the Company’s 2000 appeal.

 

Althoughthe Company was not formally a party to the Garcia Ataucuri proceedings beforethe Peruvian Constitutional Court, the nullity of the favorable decision of theSupreme Court, issued on September 19, 2001, is final and cannot beappealed by the Company.

 

Itis uncertain how the Peruvian Supreme Court will decide on the Company’s 2000appeal and the merits of the case in view of the decision of the PeruvianConstitutional Court.

 

2)              Additionally, on May 10, 2006, theCompany was served with a new complaint filed in Peru, this time by 44 formeremployees, (Cornejo Flores and others vs. SCC), seeking delivery of (1) laborshares (or shares of whatever other current legal denomination)corresponding toyears 1971 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 Company answered this new complaint, denyingthe validity of the claim.  As of March 31,2008 the case remains in the discovery stage.

 

TheCompany asserts that the claims are without merit and that the labor shareswere distributed to the former employees in accordance with the profit sharinglaw then in effect.  The Company does notbelieve that an unfavorable outcome is reasonably possible.  The Company has not made a provision forthese lawsuits because it believes that it has meritorious defenses to theclaims asserted in the complaints.

 

Mineria Integral S.A.C.: In January 2007, theCompany was served with three claims filed in Peru by Mineria IntegralS.A.C.  The claims allege that theCompany has trespassed on certain mining rights of the plaintiff, in Ilo,Department of Moquegua, and seek that the Company desist from the trespass andpay compensation in the amount

 

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of $49.1 million. The Company believes that these administrative procedures are withoutmerit and is vigorously defending itself against these actions.

 

Mexican operations

 

The Mexican Geological Services (MGS) Royalties:In August 2002, MGS (formerly named Council of Mineral Resources(“COREMI”)) filed with the Third Federal District Judge in Civil Matters, anaction demanding from Mexcobre (La Caridad) the payment of royalties since1997.  In December 2005, Mexcobresigned an agreement with MGS.  Under theterms of this agreement the parties established a new procedure to calculatethe royalty payments applicable for 2005 and the following years, and theCompany paid in January 2006, $6.9 million of royalties for 2005 and $8.5million as payment on account of royalties from the third quarter 1997 throughthe last quarter of 2004.  The Companyestimates that the payment made on January 11, 2006 will cover 100% of theroyalty payments required for 2004 and prior periods.  On January 22, 2007 the Third FederalDistrict Judge issued a ruling regarding the payment related to the period fromthe third quarter of 1997 through the fourth quarter of 2004.  This ruling was appealed by both parties in February 2007.  The appeal was lost by the Company in October 2007.  The Company filed a protective action (*Amparo*) before the First Unitary Tribunal of the FirstCircuit.  The Company believes that thepayment made on account for this period is correct.  On an ongoing basis the Company is requiredto pay a 1% royalty on La Caridad’s copper production value after deduction oftreatment and refining charges and certain other carrying costs.

 

San Luis Potosi Facilities: The municipality ofSan Luis Potosi has granted Desarrolladora Intersaba, S.A. de C.V.(“Intersaba”), licenses for use of land and construction of housing and/orcommercial zones in the former *Ejido Capulines*zone, where the residential project “Villa Magna” is expected to be developedin the near future.

 

The “Villa Magna” residential project is beingdeveloped within an area that IMMSA’s Risk Analysis approved by SEMARNAT (thefederal environmental authority), has secured as a safeguard and buffer zonedue to the use by IMMSA of anhydrous ammonia gas.

 

Based on the foregoing, IMMSA has initiated twodifferent actions regarding this matter. First, against the municipality of San Luis Potosi, requesting theannulment of the authorization and licenses granted to Intersaba to develop“Villa Magna” within the zinc plant’s safeguard and buffer zone, and second,filed before SEMARNAT for the declaration of a safeguard and buffer zone surroundingIMMSA’s zinc plant.

 

In August 2006, the first action was resolvedby a Federal Court, which denied IMMSA’s request.  In September 2006, IMMSA submitted itsfinal appeal to the Supreme Court of Justice and in February 2007, thecourt ruled against IMMSA.

 

IMMSA believes that while this outcome was adverseto its interests, the construction of the “Villa Magna” housing and commercialdevelopment will not, in itself, affect the operations of IMMSA’s zinc plant.

 

Intersaba has filed a lawsuit against IMMSA,requesting payment of damages in the amount of approximately $11.0 millionsupposedly caused by IMMSA during these proceedings.  IMMSA intends to vigorously defend againstthis lawsuit.

 

In addition to the foregoing, IMMSA has initiateda series of legal and administrative procedures against the Municipality of SanLuis Potosi due to its refusal to issue IMMSA’s use of land permit (*licencia de uso 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.

 

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Labor matters:

 

In recent years the Company has experienced anumber of strikes or other labor disruptions that have had an adverse impact onits operations and operating results.

 

Peruvian Operations

 

Collective bargaining agreements with theCompany’s Peruvian labor unions expired in early 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 and administrativepersonnel and contractors.  Newcollective bargaining agreements, for periods ranging from three to six yearswere signed by the end of third quarter 2007 with all of the Company’s Peruvianunions.

 

Mexican operations

 

In the last seven years the Cananea mine hasexperienced more than nine labor stoppages totaling more than 350 days ofinactivity.  Beginning on July 30,2007, our Cananea mine in Mexico started a work stoppage.  On January 11, 2008 the Mexican federallabor court declared the Cananea strike illegal and ordered the workers toreturn to work within 24 hours.  Thisruling was challenged before a federal judge who upheld the union’s case on February 14,2008.  The Company appealed thisruling.  The workers partially returnedto work and the Company resumed operations. However, on April 11, 2008 the workers restarted the labor stoppage andshut down production.  The Company hastried unsuccessfully to resolve the current labor stoppage that obstructsproduction at Cananea, hence the Board of Directors has decided to offer allemployees a severance payment in accordance with the collective bargainingagreement and applicable law.  This wasoffered in order to award the employees with a significant severance paymentthat will allow them to choose the labor alternative that is best for each ofthem.  It is expected that production atCananea will remain suspended until these labor issues are resolved.  The Company is currently evaluating the impact of this labor situation on ouroverall financial position and results of operations.

 

Also on July 30 2007, our Taxco and SanMartin mines went on strike. At present both mines continue on stand-by.  However, the Company believes that the strikeactivity will not result in an impairment of assets.

 

During 2006, there were a number of work stoppages atsome of the Company’s Mexican operations. While some of these work stoppages were of a short-term nature withlittle or no production 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:  Three purported class action derivativelawsuits have been filed in the Delaware Court of Chancery (New Castle County)late in December 2004 and early January 2005 relating to theacquisition of Minera Mexico by SCC.  On January 31,2005, the three actions Lemon Bay, LLP v. Americas Mining Corporation, et al.,Civil

 

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Action No. 961-N, Therault Trust v. LuisPalomino Bonilla, et al., and Southern Copper Corporation, et al., Civil ActionNo. 969-N, and James Sousa v. Southern Copper Corporation, et al., CivilAction No. 978-N were consolidated into one action titled, In re SouthernCopper Corporation Shareholder Derivative Litigation, Consol.  C. A. No. 961-N and the complaint filedin Lemon Bay was designated as the operative complaint in the consolidatedlawsuit.  The consolidated actionpurports to be brought on behalf of the Company’s common stockholders.

 

The consolidated complaint alleges, among otherthings, that the acquisition of Minera Mexico is the result of breaches offiduciary duties by the Company’s directors and is not entirely fair to theCompany and its minority stockholders. The consolidated complaint seeks, among other things, a preliminary andpermanent injunction to enjoin the acquisition, the award of damages to theclass, the award of damages to the Company and such other relief that the courtdeems equitable, including interest, attorneys’ and experts’ fees and costs.  The defendants believe that this lawsuit iswithout merit and are vigorously defending themselves against the action.

 

The Company’s management believes that the outcomeof the aforementioned legal proceeding will not have a material adverse effecton the Company’s financial position or results of operations.

 

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

 

The Company’s direct and indirect parentcorporations, including AMC and Grupo Mexico, have from time to time been namedparties in various litigation involving Asarco LLC (“Asarco”).  In August 2002 the U.S. Department ofJustice brought a claim alleging fraudulent conveyance in connection with AMC’sthen-proposed purchase of SCC from a subsidiary of Asarco.  That action was settled pursuant to a ConsentDecree dated February 2, 2003.  In March 2003,AMC purchased its interest in SCC from Asarco. In October 2004, AMC, Grupo Mexico, Mexicana de Cobre and otherparties, not includingSCC, were named in alawsuit filed in New York State court in connection with alleged asbestosliabilities, which lawsuit claims, among other matters, that AMC’s purchase ofSCC 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 byAsarco, as described below.  However, on November 16,2007, this lawsuit after being removed to Federal Court was transferred to theUnited States District Court for the Southern District of Texas in Brownsville,Texas, for resolution in conjunction with a new lawsuit filed by Asarco, thedebtor in possession, as described below. On February 2, 2007 a complaint was filed by Asarco, the debtor inpossession, alleging many of the matters previously claimed in the New YorkState lawsuit, including that AMC’s purchase of SCC from Asarco should bevoided as a fraudulent conveyance.  Inlate December 2004 and early January 2005, three purported classaction derivative  lawsuits were filed inthe Delaware Court of Chancery (New Castle County) relating to the mergertransaction between SCC and Minera Mexico. On January 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 minority stockholders.The case is currently in the early stages of discovery.  The defendants believe that the lawsuit iswithout merit and are vigorously 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 could1, among other effects, resultin the 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

 

20

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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.

 

Other:

 

Regionaldevelopment contribution

 

In December 2006, the Company’s PeruvianBranch signed a contract with the Peruvian government committing the Company toannual contributions for five years to support the regional development ofPeru.  This was in response to an appealby the president of Peru to the mining industry.   The contributions are being used for socialbenefit programs.  In 2008 and 2007, theCompany made a contribution of $17.9 million and $16.1 million, calculatedbased on 2007 and 2006 Peruvian earnings after income tax, respectively.  These contributions were deposited with aseparate entity, the “Asociacion Civil Ayuda del Cobre” which will makedisbursements for approved investments in accordance with the agreement.  The following years’ contributions couldincrease or decrease depending on copper prices.  The commitment of the Branch is for a totalof 1.25% of its annual earnings, after Peruvian income tax.  If the copper price drops below $1.79 perpound the contribution will cease.  Inthe first quarter of 2008 the Company made a provision of $3.2 million based onPeruvian Branch earnings.

 

Royalty charge

 

In June 2004, the Peruvian Congress enactedlegislation imposing a royalty charge to be paid by mining companies.  Under this law, the Company is subject to a1% to 3% royalty, based on sales, applicable to the value of the concentratesproduced in our Toquepala and Cuajone mines. The Company made provisions of $14.8 million, and $10.1 million in thefirst quarter of 2008 and 2007, respectively, for this royalty.  These provisions are included in “Cost ofsales (exclusive of depreciation, amortization and depletion)” in the condensedconsolidated statement of earnings.

 

Power purchase agreement

 

In 1997, SCC sold its Ilo power plant to anindependent power company, Enersur S.A. (“Enersur”).  In connection with the sale, a power purchaseagreement was also completed under which SCC agreed to purchase all of itspower needs for its Peruvian operations from Enersur for twenty years,commencing in 1997.  In 2003 the agreementwas amended releasing Enersur from its obligation to construct additionalcapacity to meet the Company’s increased electricity requirements.  SCC believes it can satisfy the need forincreased electricity requirements from other sources, including local powerproviders.

 

Tax contingency matters:

 

Tax contingencies are provided for under FIN No 48(see Note F “Income Taxes.”)

 

N.            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 in recent years has had an important impact on the Company’searnings.

 

21

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Nevertheless, the Company continues to manage itsoperations on the basis of the three copper segments.  Each of its segments report independently to the Chief OperatingOfficer and he focuses on operating income as a measure of performance toevaluate different segments, and to make decisions to allocate resources to thereported segments.

 

Thethree segments identified are groups of 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,including commercial transactions between groups.

 

Intersegment sales are based on arms-length pricesat the time of sale.  These may not bereflective of actual prices realized by the Company due to various factors,including additional processing, timing of sales to outside customers andtransportation cost.  Added to thesegment information is information regarding the Company’s molybdenumsales.  The segments identified by theCompany 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.

 

2.               Mexican open pit operations, which includesLa Caridad and Cananea mine complexes and the smelting and refining plants andsupport facilities which service both mines.

 

3.               Mexican underground mining operations, whichincludes five underground mines that produce zinc, copper, silver and gold, acoal mine  which produces coal and coke,and several industrial processing facilities for zinc and copper.  This group is identified as the IMMSA unit.

 

ThePeruvian operations include two open pit copper mines whose mineral output istransported by rail to Ilo, Peru where it is processed at the Company’s Ilosmelter and refinery, without distinguishing between the products of the twomines.  The resulting product, anodes andrefined copper, are then shipped to customers throughout the world.  These shipments are recorded as revenue ofthe Company’s Peruvian mines.

 

TheMexican open pit segment includes two copper mines whose mineral output isprocessed in the same smelter and refinery without distinguishing between theproducts of the two mines.  The resultantproduct, anodes and refined copper, are then shipped to customers throughoutthe world.  These shipments are recordedas revenues of the Company’s Mexican open pit mines.

 

TheCompany has determined that it is necessary to classify the Peruvian Open Pitoperations as a separate operating segment from the Mexican Open Pit operationsdue to the very distinct regulatory and political environments in which theyoperate.  The Company’s Chief OperatingOfficer must consider the operations in each country separately when analyzingresults of the Company and making key decisions.  The open pit mines in Peru must comply withstricter environmental rules and must continually deal with a politicalclimate that has a very distinct vision of the mining industry as compared toMexico.  In addition, the collectivebargaining agreement contracts are negotiated very distinctly in each of thetwo countries.  These key differencesresult in the Company taking varying decisions with regards to the twocountries.

 

TheIMMSA segment includes five mines whose minerals are processed in the samesmelter and refinery.  This segment alsoincludes a coal underground mine.  Salesof product from this segment are recorded as revenues of the Company’s IMMSAunit.  While the Mexican undergroundmines are subject to a very similar regulatory

 

22

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environmentof the Mexican open pit mines, the nature of the products and processes of twoMexican operations vary distinctly. These differences cause the Company’s Chief Operating Officer to take avery different approach when analyzing results and making decisions regardingthe two Mexican operations.

 

Financialinformation is regularly prepared for each of the three segments and theresults of the Company’s operations are regularly reported to the ChiefOperating Officer on the segment basis. The Chief Operating Officer of the Company focuses on operating incomeand on total assets as measures of performance to evaluate different segmentsand to make decisions to allocate resources to the reported segments.  These are common measures in the miningindustry.

 

Financialinformation relating to Southern Copper’s segments is as follows:

 
| ** **                                                             | ** ** | **Three Months Ended March 31, 2008 ** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                                               | ** ** |
| ** **                                                             | ** ** | ** **                                                           | ** ** | **Mexican** | ** ** | ** ** | ** ** | **Corporate** | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **Mexican **                                                    | ** ** | **IMMSA** | ** ** | **Peruvian** | ** ** | **and other** | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **Open Pit**                                                    | ** ** | **Unit** | ** ** | **Operations** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales outside of segments                                          |       | $                                                                    | 443.9      |   | $ | 133.8 |   | $ | 921.5 |   | $ | — |   | $ | 1,499.2 |   |
| Intersegment sales                                                     |       | 26.2                                                                 |       | 28.3 |   | — |   | (54.5 | ) | — |   |
| Cost of sales (exclusive of depreciation,  amortization and depletion) |       | 183.4                                                                |       | 85.6 |   | 307.0 |   | (55.4 | ) | 520.6 |   |
| Selling, general and administrative                                    |       | 8.9                                                                  |       | 6.4 |   | 10.3 |   | (0.9 | ) | 24.7 |   |
| Depreciation, amortization and depletion                               |       | 45.2                                                                 |       | 8.0 |   | 28.3 |   | (0.3 | ) | 81.2 |   |
| Exploration                                                            |       | 1.9                                                                  |       | 1.8 |   | 4.3 |   | — |   | 8.0 |   |
| Operating income                                                       |       | $                                                                    | 230.7      |   | $ | 60.3 |   | $ | 571.6 |   | $ | 2.1 |   | 864.7 |   |
| Less:                                                                  |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                                                 |       |   |   |   |   |   |   | (10.4 | ) |
| Gain on derivative instruments                                         |       |                                                                 |       |   |   |   |   |   |   | 2.9 |   |
| Other income (expense)                                                 |       |                                                                 |       |   |   |   |   |   |   | (3.5 | ) |
| Income taxes                                                           |       |                                                                 |       |   |   |   |   |   |   | (286.0 | ) |
| Minority interest                                                      |       |                                                                 |       |   |   |   |   |   |   | (2.7 | ) |
| Net earnings                                                           |       |                                                                 |       |   |   |   |   |   |   | $ | 565.0 |   |
|                                                                   |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Capital expenditure                                                    |       | $                                                                    | 23.3       |   | $ | 6.9 |   | $ | 18.3 |   | $ | 1.4 |   | $ | 49.9 |   |
| Property, net                                                          |       | $                                                                    | 1,596.4    |   | $ | 249.3 |   | $ | 1,643.6 |   | $ | 63.5 |   | $ | 3,552.8 |   |
| Total assets                                                           |       | $                                                                    | 2,988.8    |   | $ | 657.9 |   | $ | 3,217.0 |   | $ | (85.6 | ) | $ | 6,778.1 |   |

 

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| ** **                                                             | ** ** | **Three Months Ended March 31, 2007 ** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                                               | ** ** |
| ** **                                                             | ** ** | ** **                                                           | ** ** | **Mexican** | ** ** | ** ** | ** ** | **Corporate** | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **Mexican**                                                          | ** ** | **IMMSA** | ** ** | **Peruvian** | ** ** | **and other** | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **Open Pit**                                                    | ** ** | **Unit** | ** ** | **Operations** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales outside of segments                                          |       | $                                                                    | 513.7      |   | $ | 128.5 |   | $ | 716.1 |   | — |   | $ | 1,358.3 |   |
| Intersegment sales                                                     |       | 69.7                                                                 |       | 22.2 |   | — |   | $ | (91.9 | ) | — |   |
| Cost of sales (exclusive of depreciation,  amortization and depletion) |       | 188.3                                                                |       | 64.6 |   | 304.3 |   | (90.6 | ) | 466.6 |   |
| Selling, general and administrative                                    |       | 10.4                                                                 |       | 5.5 |   | 10.0 |   | (2.1 | ) | 23.8 |   |
| Depreciation, amortization and depletion                               |       | 43.0                                                                 |       | 7.8 |   | 23.3 |   | — |   | 74.1 |   |
| Exploration                                                            |       | 0.8                                                                  |       | 1.9 |   | 3.7 |   | — |   | 6.4 |   |
| Operating income                                                       |       | $                                                                    | 340.9      |   | $ | 70.9 |   | $ | 374.8 |   | $ | 0.8 |   | 787.4 |   |
| Less:                                                                  |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                                                 |       |   |   |   |   |   |   | (2.9 | ) |
| Loss on derivative instruments                                         |       |                                                                 |       |   |   |   |   |   |   | (21.2 | ) |
| Other income (expense)                                                 |       |                                                                 |       |   |   |   |   |   |   | 20.7 |   |
| Income taxes                                                           |       |                                                                 |       |   |   |   |   |   |   | (230.7 | ) |
| Minority interest                                                      |       |                                                                 |       |   |   |   |   |   |   | (1.6 | ) |
| Net earnings                                                           |       |                                                                 |       |   |   |   |   |   |   | $ | 551.7 |   |
|                                                                   |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Capital expenditure                                                    |       | $                                                                    | 20.4       |   | $ | 6.7 |   | $ | 31.4 |   | $ | 26.5 |   | $ | 85.0 |   |
| Property, net                                                          |       | $                                                                    | 1,576.4    |   | $ | 266.2 |   | $ | 1,645.6 |   | $ | 67.2 |   | $ | 3,555.4 |   |
| Total assets                                                           |       | $                                                                    | 2,873.1    |   | $ | 709.7 |   | $ | 2,991.9 |   | $ | (291.2 | ) | $ | 6,283.5 |   |

 

Salesvalue per segment:

 
| ** ** | ** ** | **Three Months Ended March 31, 2008 ** | ** ** |
|------------|------------|----------------------------------------------------------------------|------------|
| ** ** | ** ** | **(in millions)**                                               | ** ** |
| ** ** | ** ** | ** **                                                           | ** ** | **Mexican ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** ** | ** ** | **Mexican**                                                          | ** ** | **IMMSA** | ** ** | **Peruvian** | ** ** | **Intersegment** | ** ** | ** ** | ** ** |
| ** ** | ** ** | **Open Pit**                                                    | ** ** | **Unit** | ** ** | **Operations** | ** ** | **Elimination** | ** ** | **Consolidated** | ** ** |
|       |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Copper     |       | $                                                                    | 315.0      |   | $ | 27.9 |   | $ | 728.4 |   | $ | (30.2 | ) | $ | 1,041.1 |   |
| Molybdenum |       | 125.7                                                                |       | — |   | 156.9 |   | — |   | 282.6 |   |
| Other      |       | 29.4                                                                 |       | 134.2 |   | 36.2 |   | (24.3 | ) | 175.5 |   |
| Total      |       | $                                                                    | 470.1      |   | $ | 162.1 |   | $ | 921.5 |   | $ | (54.5 | ) | $ | 1,499.2 |   |

 
| ** ** | ** ** | **Three Months Ended March 31, 2007** | ** ** |
|------------|------------|----------------------------------------------------------------|------------|
| ** ** | ** ** | **(in millions)**                                         | ** ** |
| ** ** | ** ** | ** **                                                     | ** ** | **Mexican** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** ** | ** ** | **Mexican**                                                    | ** ** | **IMMSA** | ** ** | **Peruvian** | ** ** | **Intersegment** | ** ** | ** ** | ** ** |
| ** ** | ** ** | **Open Pit**                                              | ** ** | **Unit** | ** ** | **Operations** | ** ** | **Elimination** | ** ** | **Consolidated** | ** ** |
|       |       |                                                           |       |   |   |   |   |   |   |   |   |
| Copper     |       | $                                                              | 458.0      |   | $ | 15.1 |   | $ | 558.7 |   | $ | (68.1 | ) | $ | 963.7 |   |
| Molybdenum |       | 98.9                                                           |       | — |   | 113.3 |   | — |   | 212.2 |   |
| Other      |       | 26.5                                                           |       | 135.6 |   | 44.1 |   | (23.8 | ) | 182.4 |   |
| Total      |       | $                                                              | 583.4      |   | $ | 150.7 |   | $ | 716.1 |   | $ | (91.9 | ) | $ | 1,358.3 |   |

 

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The geographic breakdownof the Company’s sales is as follows (in millions):

 
| ** **                                | ** ** | **Three Months   Ended March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                               | ** ** | **2007** | ** ** |
| United States                             |       | $                                                      | 414.3      |   | $ | 432.1 |   |
| Europe                                    |       | 360.3                                                  |       | 216.0 |   |
| Mexico                                    |       | 319.5                                                  |       | 260.5 |   |
| Peru                                      |       | 39.3                                                   |       | 21.5 |   |
| Latin America (excluding Mexico and Peru) |       | 281.2                                                  |       | 185.9 |   |
| Asia                                      |       | 78.2                                                   |       | 242.3 |   |
| Derivative instruments                    |       | 6.4                                                    |       | — |   |
| Total                                     |       | $                                                      | 1,499.2    |   | $ | 1,358.3 |   |

 

Major Customer SegmentInformation:

 

For the three monthsended March 31, 2008, the Company had revenues from two copper customersof the Mexican and Peruvian operations, which amounted to 17.3% of totalrevenue; revenues from one of these customers amounted to 12.3% of totalrevenue.  In addition, the Company hadrevenues from two molybdenum customers of the Peruvian and Mexican operations,which amounted to 15.3% of total revenues; revenues from one of these customersamounted to 10.4% of total revenue, these customers represent 80.5% of theCompany’s molybdenum sales value.

 

For the three monthsended March 31, 2007, the Company had revenue from two copper customers ofthe Mexican and Peruvian operations, which amounted to 27.3% of total revenue;revenues from one of these customers amounted to 14.6% of total revenue.  In addition, the Company had revenue from twomolybdenum customers of the Peruvian and Mexican operations, which amounted to13.4% of total revenues; these customers represent 85.9% of the Company’smolybdenum sales value.

 

O.            Impact of New Accounting Standards:

 

On March 19, 2008 The FinancialAccounting Standards Board (FASB) issued FASB Statement No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities”.  The new standard is intended to improvefinancial reporting about derivative instruments and hedging activities byrequiring enhanced disclosures to enable investors to better understand theireffects on an entity’s financial position, financial performance, and cashflows.  This statement is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008.  TheCompany is currently analyzing this statement in order to adopt it.

 

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

 

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

 

The adoption of this statement will causesome changes to our Company’s presentation of financial results and ourstatement of position.  However, thesechanges are not expected to be of a material nature.

 

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In December 2007, the FASB publishedSFAS No. 141-R, which replaces SFAS No. 141, “Business Combinations.”  This statement improves the reporting ofinformation about a business combination and its effects. This statementestablishes principles and requirements for how the acquirer will recognize andmeasure the identifiable assets acquired, the liabilities assumed, and anynon-controlling interest in the acquisition. Also, the statement determines the recognition and measurement ofgoodwill acquired in the business combination or a gain from a bargainpurchase, and finally, determines the disclosure requirements to enable usersof the financial statements to evaluate the nature and financial effects of thebusiness combination.

 

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

 

P.              Stockholders’ Equity:

 

Treasury Stock:

 

Activity in treasury stock in the three month periodended March 31, 2008 is as follows (in millions):

 
| Southern Copper common shares                                                 |   |   |   |
|-------------------------------------------------------------------------------|--------|--------|--------|
| Balance as of December 31, 2007                                          |   | $      | 4.4    |   |
| Purchase of shares                                                            |   | — |   |
| Used for corporate purposes                                                   |   | — |   |
| Balance as of March 31, 2008                                             |   | $      | 4.4    |   |
|                                                                          |   |   |   |
| Parent Company (Grupo Mexico) common shares                                   |   |   |   |
| Balance as of December 31, 2007                                          |   | 170.3  |   |
| Other activity, including dividend, interest and currency translation  effect |   | 13.5   |   |
| Balance as of March 31, 2008                                             |   | 183.8  |   |
|                                                                          |   |   |   |
| Treasury stock balance as of March 31, 2008                              |   | $      | 188.2  |   |

 

In the first three monthsof 2008 the Company awarded 4.8 million shares of Grupo Mexico under theemployee stock purchase plan.

 

Directors’ Stock Award Plan:

 

The Company established a stock award compensationplan for certain directors who are not compensated as employees of theCompany.  Under this plan, participantswill receive 400 shares of common stock upon election and 400 additional sharesfollowing each annual meeting of stockholders thereafter.  200,000 shares of Southern Copper commonstock have been reserved for this plan. At March 31, 2008 and 2007, 72,000 and 67,600 shares, respectively,have been granted under this plan.  Thefair value of the award is measured each year at the date of the grant.

 

Employee StockPurchase Plan:

 

In January 2007,the Company 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 

 

26

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for sharespurchased through monthly payroll deductions over the eight year period of theplan.  At the end of the eight yearperiod, the Company will grant the participant a bonus of 1 share for every 10shares purchased by the employee.

 

If Grupo Mexicopays dividends 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 ofvoluntary resignation of the employee, the Company will pay to the employee thepurchase price applying a deduction over the amount to be paid to the employeebased 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 or death of the employee, theCompany will render the buyer or his legal beneficiary, the shares effectivelypaid as of the date of retirement or death.

 

For the three months ended March 31, 2008 and2007, the stock based compensation expense under this plan was $0.5 million inboth periods.  As of March 31, 2008,there was $14.4 million of unrecognized compensation expense under this plan,which is expected to be recognized over the remaining period of 8 years.

 

The following table presents the stock award activityfor the three months ended March 31, 2008:

 
| ** **                                 | ** ** | **Shares** | ** ** | **Unit Weighted  Average Grant  Date Fair Value** | ** ** |
|--------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------|------------|
| Outstanding shares at January 1, 2008 |       | 4,834,717  |       | $                                                                     | 3.50       |   |
| Granted                                    |       | —     |       |                                                                  |       |
| Exercised                                  |       | —     |       |                                                                  |       |
| Forfeited                                  |       | —     |       |                                                                  |       |
| Outstanding shares at March 31, 2008  |       | 4,834,717  |       | $                                                                     | 3.50       |   |

 

27

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Executive Stock Purchase Plan:

 

Grupo Mexico also offers a stock purchase plan forcertain members of its executive management and the executive management of itssubsidiaries and certain affiliated companies. Under this plan, participants will receive incentive cash bonuses whichare used to purchase up to 750,000 shares of Grupo Mexico over an eight yearperiod.  The fair value of the award isestimated on the date of grant and is recognized as compensation expense over aweighted average requisite service period of eight years.  The Company recorded $0.1 million and $0.5million, net of tax, in compensation expense in the first quarter of 2008 and2007, respectively.  As of March 31,2008, there was $3.1 million of unrecognized compensation cost, related to thisplan, which is expected to be recognized over a weighted average period ofeight years.

 

The following table presents the stock award activityfor the three months ended March 31, 2008 and 2007:

 
| ** **                                 | ** ** | **Shares** | ** ** | **Unit Weighted   Average Grant   Date Fair Value** | ** ** |
|--------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------|------------|
| Outstanding shares at January 1, 2008 |       | 457,500    |       | $                                                                                 | 2.30       |   |
| Granted                                    |       |       |       |                                                                              |       |
| Exercised                                  |       | (90,000    | )          | $                                                                                 | 2.30       |   |
| Forfeited                                  |       | —     |       |                                                                              |       |
| Outstanding shares at March 31, 2008  |       | 367,500    |       | $                                                                                 | 2.30       |   |
|                                       |       |       |       |                                                                              |       |
| Outstanding shares at January 1, 2007 |       | 750,000    |       | $                                                                                 | 2.70       |   |
| Granted                                    |       |       |       |                                                                              |       |
| Exercised                                  |       | (67,500    | )          | $                                                                                 | 2.70       |   |
| Forfeited                                  |       | —     |       |                                                                              |       |
| Outstanding shares at March 31, 2007  |       | 682,500    |       | $                                                                                 | 2.40       |   |

 

Q.            Subsequent events:

 

On April 1, 2008 theCompany paid $150.0 million of the remaining balance of its series A Yankeebonds, with this payment the series A Yankee bonds were fully repaid.

 

On April 24, 2008,the Board of Directors approved a quarterly dividend of $1.70 per share,totaling $500.6 million, to be paid on June 3, 2008 to shareholders ofrecord as of May 14, 2008.

 

OnApril 24, 2008, the Board of Directors approved the change of the annualstockholders meeting to May 28, 2008, at 9:00 am, Mexico City time, atEdificio Parque Reforma, Campos Eliscos No. 400, 12th floor, Colonia Lomas deChapultepec, Mexico City, Mexico.

 

28

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Part I

 

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

EXECUTIVE OVERVIEW

 

Our business is primarilythe production and sale of copper.  Inthe process of producing copper, a number of valuable metallurgical by-productsare recovered, such as molybdenum, zinc, silver, lead and gold, which we alsoproduce and sell.  Market forces outsideof our control largely determine the sales prices for our products.  Our management, therefore, focuses on copperproduction cost control, production enhancement and maintaining a prudent andconservative capital structure to improve profitability.  We believe we achieve these goals throughcapital spending programs, exploration efforts and cost reduction programs.  Our aim is to remain profitable duringperiods of low copper prices and to maximize financial performance in periodsof high copper prices.

 

Ournet income and earnings per share for the three months ended March 31,2008 and 2007 were $565.0 million and $1.92 per share and $551.7 million and$1.87 per share, respectively.  Theincrease in net earnings in the 2008 first quarter period was due principallyto the higher sales price for the most of our metals, as well as highermolybdenum sales volume, despite the effects of the Cananea strike, which hasreduced copper production in the first quarter of 2008.

 

Mine copper productionamounted to 281.9 million pounds in the first quarter 2008, a decrease of 95.7million pounds compared with the first quarter 2007.  The decrease in production is principally dueto the lower production at the Cananea mine which reached approximately 27% ofcapacity in the first quarter of 2008 and operated at full capacity in thefirst quarter of 2007.  In April 2008the Cananea mine was again shut down due to strike activity.

 

In the last five yearsour Cananea mine has produced an average of 150,000 tons of copper per year,which is equivalent to approximately 23% of the aggregate copper production ofthe Company.  The Cananea production hasbeen affected by high unit costs due to constant labor stoppages andobstruction of third party contractors by the miners union.  The mine has the capacity to produce 180,000tons of copper per year and has the potential to increase its capacity to220,000 tons in the near future.  However,the mine has been experiencing irregular operations, working during 2007 at 50%of its capacity.  We will stock ourreserves at Cananea until it can produce with efficiency, certainty andcompetitiveness.

 

In the last seven yearsour Cananea mine has experienced more than nine labor stoppages. We have triedunsuccessfully to resolve the current labor stoppage that obstructsproduction at Cananea; hence the Board of Directors has decided to offer allemployees a severance payment in accordance with the collective bargaining agreementand applicable law.  This was offered inorder to award the employees with a significant severance payment that willallow them to choose the labor alternative that is best for each of them.  It isexpected that production at Cananea will remain suspended until these laborissues are resolved.  We arecurrently evaluating the impact of this labor situation on our overall financialposition and results of operations.

 

29

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Also on July 30 2007, our Taxco and San Martin mines went onstrike.  At present both mines remain onstand-by.  However, we believe that thestrike activity will not result in an impairment of our assets.

 

Molybdenum productionincreased 0.6 million pounds, from 8.1 million pounds in the first quarter 2007to 8.7 million pounds in the first quarter 2008.  This increase is principally due to higherrecoveries at all of our mines.  Minezinc production amounted to 54.6 million pounds in the first quarter 2008, a23.5% decrease from the first quarter 2007. Refined zinc production in the first quarter 2008 was 56.0 millionpounds, 19.1% higher than in the first quarter 2007 due to the recovery of fullcapacity at the San Luis Potosi refinery.

 

During the first quarterof 2008, we have focused our capital investment efforts on our previouslyannounced investment program at our Peruvian operations.  This $2.1 billion investment program wouldpermit us to increase our copper production by 270,000 tons per year by 2011,an increase of 39% of the current production level.

 

In addition, subject tothe satisfactory resolution of social issues and the acquisition of thenecessary governmental permits, we plan to invest approximately $1.2 billion inthe Los Chancas project, a copper-molybdenum property in the southern part ofPeru.

 

We discuss below severalmatters that we believe are important to understand our results of operationsand financial condition.  These mattersinclude, (i) our “operating cash costs” as a measure of our performance, (ii) metalprices, (iii) business segments, (iv) the effect of inflation and otherlocal currency issues and, (v) our expansion and modernization program andenvironmental protection programs.  Thisdiscussion should be read in conjunction with the management discussion andanalysis of financial condition and results of operations at December 31,2007 included in the Company’s 2007 annual report on Form 10-K.

 

Operating Cash Costs: An overall benchmark used by us and acommon industry metric to measure performance is operating cash costs per poundof copper produced.  Operating cash costis a non-GAAP measure that does not have a standardized definition and may notbe comparable to similarly titled measures provided by other companies.  A reconciliation of our operating cash costper pound to the cost of sales (including depreciation, amortization anddepletion) as presented in the statement of earnings, is presented under thesubheading “Non-GAAP Information Reconciliation”, below.  We have defined operating cash cost per poundas cost of sales (including depreciation, amortization and depletion); plusselling, general and administrative charges, treatment and refining charges;less by-products revenue and sales premiums, depreciation, amortization anddepletion, workers’ participation and other miscellaneous charges, the mineroyalty charges and the change in inventory levels; divided by total pounds ofcopper produced and purchased by us.  Inour calculation of operating cash cost per pound of copper produced, we creditagainst our costs the revenues from the sale of by-products, principallymolybdenum, zinc and silver and the premiums over market price that we receiveon copper sales.  We account for theby-product revenues in this way because we consider our principal business tobe the production and sale of copper.  Webelieve that our Company is viewed by the investment community as a coppercompany, and is valued, in large part, by the investment community’s view ofthe copper market and our ability to produce copper at a reasonable cost.  We also include copper sales premiums as acredit, as these amounts are in excess of published copper prices.  The increase in recent years in the price ofmolybdenum has had a significant effect on our traditional calculation of cashcost and its comparability between periods. Accordingly, we present cash costs with and without crediting theby-products revenues against our costs.

 

We exclude from ourcalculation of operating cash cost depreciation, amortization and depletion,which are considered non-cash expenses. Exploration is considered a discretionary expenditure and is alsoexcluded.  Workers’ participationprovisions are 

 

30

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determined on the basisof pre-tax earnings and are also excluded. Additionally, excluded from operating cash cost are items of anon-recurring nature, and the mine royalty charges.

 

Our operating cash costsper pound, as defined, are presented in the table below, for the three monthsended March 31, 2008 and 2007.  Wepresent cash costs with and without the inclusion of by-product revenues.

 
| ** **                                                                        | ** ** | **Three Months   Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2008**                                               | ** ** | **2007** | ** ** |
| ** **                                                                        | ** ** | **(in cents per pound)**                | ** ** |
| Cash cost per pound of copper produced and purchased                              |       | (15.0                                                  | )          | 4.6 |   |
| Cash cost per pound of copper produced and purchased without  by-products revenue |       | 151.0                                                  |       | 123.1 |   |

 

As seen on the chartabove, our per pound cash cost for the first quarter of 2008 when calculatedwith by-products revenue is a credit of 15.0 cents compared with a cost of 4.6cents in the first quarter of 2007.  Theincrease in the by-products credit in the 2008 period was due to higher pricesfor molybdenum and silver, as well as the higher production and sale ofmolybdenum.  The increased molybdenumproduction was the result of higher recoveries at all of our mines.  Zinc production, however, was lower in the2008 period when compared to the 2007 period, due to strikes in the Taxco andSan Martin mines in Mexico.

 

Our cash cost, excludingby-product revenues, was higher by 27.9 cents per pound in the first quarter of2008 than the comparable 2007 period and is mainly due to the lower copperproduction at Cananea due to the lingering effect of its recent strike.

 

Metal Prices. The profitability of our operations is dependent on, and our financialperformance is significantly affected by, the international market prices forthe products we produce, especially for copper, molybdenum, zinc andsilver.  Historically, metal prices havebeen subject to wide fluctuations and are affected by numerous factors beyondour control.  These factors, which affecteach commodity to varying degrees, include international economic and politicalconditions, levels of supply and demand, the availability and cost ofsubstitutes, inventory levels maintained by producers and others and, to alesser degree, inventory carrying costs and currency exchange rates.  In addition, the market prices of certainmetals have on occasion been subject to rapid short-term changes due tospeculative activities.

 

We are subject to marketrisks arising from the volatility of copper and other metal prices.  Assuming that expected metal production andsales are achieved, that tax rates are unchanged, giving no effect to hedgingprograms, metal price sensitivity factors would indicate the following changein estimated 2008 earnings resulting from metal price changes:

 
| ** **                                                    | ** ** | **Copper** | ** ** | **Molybdenum** | ** ** | **Zinc** | ** ** | **Silver** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|----------------|------------|----------|------------|------------|------------|
| Change in metal prices (per pound, except silver - per ounce) |       | $          | 0.01       |           | $          | 1.00     |       | $          | 0.01       |   | $ | 1.00 |   |
| Annual change in net earnings (in millions)                   |       | $          | 6.6        |           | $          | 20.2     |       | $          | 1.3        |   | $ | 8.6 |   |

 

Business segments.

 

Our Company operates in asingle industry, the copper industry.  Weoperate our business in three segments. These segments are our Peruvian operations, our Mexican 

 

31

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open-pit operations andour Mexican 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 and coke mine, and several industrialprocessing facilities for zinc, copper and silver.

 

Segment information isincluded in our review of “Results of Operations” and also in Note N of ourCondensed Consolidated Financial Statements.

 

Inflation and Devaluationof the Peruvian Nuevo Sol and the Mexican Peso.

 

Our functional currencyis the U.S. dollar.  Portions of ouroperating costs are denominated in Peruvian nuevos soles and Mexicanpesos.  Since our revenues are primarilydenominated in U.S. dollars, when inflation/deflation in Peru or Mexico is notoffset by a change in the exchange rate of the nuevo sol or the peso,respectively, to the dollar, our financial position, results of operations andcash flows could be adversely affected to the extent that theinflation/devaluation effects are passed onto us by our suppliers or reflectedin our wage adjustments.  In addition,the dollar value of our net monetary assets denominated in nuevos soles orpesos can be affected by devaluation of the nuevo sol or the peso, resulting ina remeasurement loss in our financial statements.  Recent inflation and devaluation rates areprovided in the table below.  For thethree months ended March 31, 2008 and 2007, inflation and devaluationrates were as follows:

 
| ** **                                        | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                        | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Peru:                                             |       |                                                 |       |   |   |
| Peruvian inflation rate                           |       | 2.2                                                  | %          | 0.6 | % |
| Nuevo sol/dollar (appreciation)/ devaluation rate |       | (8.4                                                 | )%         | (0.4 | )% |
|                                              |       |                                                 |       |   |   |
| Mexico:                                           |       |                                                 |       |   |   |
| Mexican inflation rate                            |       | 1.5                                                  | %          | 1.0 | % |
| Peso/dollar (appreciation)/ devaluation rate      |       | (1.6                                                 | )%         | 1.6 | % |

 

Capital Expansion Program.

 

During the first quarterof 2008, we have focused our capital investment in our previously announcedinvestment program at our Peruvian operations. This program includes the development of five projects in Peru (1) theTia Maria SX/EW copper project, (2) the Toquepala concentrator expansion, (3) theCuajone concentrator expansion, (4) the Ilo smelter expansion, and (5) theIlo copper refinery expansion, with a total investment of $2.1 billion.  This investment would permit us to increaseour copper production by 270,000 tons per year by 2011, which represents 39% ofthe current production level.

 

Investment in the TiaMaria project is underway. We have committed $388 million in purchase ordersand contracts for major equipment acquisition including, 20 trucks, 2 shovels,2 drilling machines and mine auxiliary equipment; and primary, secondary andtertiary crushers, 8.6 kilometers of overland conveyors, spreaders and reclaimsystems.  We expect to receive thisequipment during 2009 when we will start construction of the new unit.  We expect to invest $65 million in thisproject during 2008.  When 

 

32

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completed at the end of2010, Tia Maria will produce 120,000 tons of copper cathodes per year.

 

The Toquepala and Cuajoneexpansions are also underway.  We havesigned agreements for the acquisition of major mine equipment and havecontracted technical and environmental studies which are expected to beconcluded by November 2009, in parallel we will continue with theengineering and procurement process.

 

Also,subject to the satisfactory resolution of social issues and the acquisition ofthe necessary governmental permits, we plan to invest approximately $1.2billion in the Los Chancas project, a copper-molybdenum property in the southern part of Peru.  This is in addition to the $2.1billion previously announced for our other Peruvian projects.  We expect this project will increase ourannual copper production by 80,000 tons. The feasibility study for this project is in process and we expect tocomplete it by the end of 2008.

 

Ilo SmelterModernization:  This project wascompleted in January 2007 and has allowed us to increase sulfur captureover the 92% requirement established in our agreement with the Peruviangovernment.  The new smelter maintainsproduction at current levels.  Performancetests are pending completion for the Isasmelt furnace with Xstrata and acidplant with Chemetics.  These are expectedto be completed in the next few months. The facility is currently operating at full capacity and we expect tosmelt 1.1 million tons of concentrates in 2008.

 

Tailings disposal atQuebrada Honda: This project will increase the height of the existing QuebradaHonda Dam to 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 been received.  Construction of the main civil works and someaccess roads for the main and lateral dams has been completed.  The first stage of this project will be underdevelopment until 2012.  The total costof this project is estimated to be $66.0 million, with $18.1 million expendedthrough March 31, 2008 and $16.9 million committed.

 

Cananea: The are twomajor Cananea projects, an SX/EW plant to increase cathode production by 33,000tons and a crusher and conveyor system for leach material, these projects havebeen temporarily suspended until the resolution of the labor problems atCananea.

 

El Arco Project: In April 2008,feasibility study bids were received from four engineering companies and areunder review, we expect to award the bid in the second quarter of 2008, afterwhich the study will be initiated.

 

The above informationabout potential projects are estimates only. We cannot make any assurance that we will undertake any of theseprojects or that the information noted is accurate.

 

ACCOUNTING ESTIMATES

 

Our discussion andanalysis of financial condition and results of operations are based on ourcondensed consolidated financial statements, which have been prepared inaccordance with US GAAP.  Preparation ofthese condensed consolidated financial statements requires our management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements, and the reported amounts of revenues and expensesduring the reporting periods.  Managementmakes its best estimate of the ultimate outcome for these items based onhistorical trends and other information available when the financial statementsare prepared.  Changes in estimates arerecognized in accordance with the accounting rules for the estimate, whichis typically in the period when new information becomes available tomanagement.  Areas 

 

33

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where the nature of theestimate makes it reasonably possible that actual results could materiallydiffer from amounts estimated include: ore reserves, revenue recognition,estimated mine stripping ratios, leachable material and related amortization,the estimated useful lives of fixed assets, asset retirement obligations,litigation and contingencies, valuation allowances for deferred tax assets, taxpositions, fair value of financial instruments and inventory obsolescence.  We base our estimates on historical experienceand on various other assumptions that are believed to be reasonable under thecircumstances.  Actual results may differfrom these estimates under different assumptions or conditions.

 

RESULTS OF OPERATIONS

 

The following highlightskey financial and operating results for three months ended March 31, 2008and 2007 (in millions):

 
| ** **                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Statement of Earnings Data:                 |       |     |       |     |       |
|                                        |       |     |       |     |       |
| Net sales                                   |       | $        | 1,499.2    |     | $          | 1,358.3 |   |
| Operating costs and expenses                |       | (634.5   | )          | (570.9   | )          |
| Operating income                            |       | 864.7    |       | 787.4    |       |
| Non-operating income (expense)              |       | (11.0    | )          | (3.5     | )          |
| Earnings before taxes and minority Interest |       | 853.7    |       | 783.9    |       |
| Income taxes                                |       | (286.0   | )          | (230.7   | )          |
| Minority interest                           |       | (2.7     | )          | (1.5     | )          |
| Net earnings                                |       | $        | 565.0      |     | $          | 551.7 |   |

 

Mine copper production amounted to 281.9 millionpounds in the first quarter of 2008 compared with 377.6 million pounds in thefirst quarter of 2007, a decrease of 25.3%. This decrease amounting to 95.7 million pounds, included 87.5 millionpounds from the Mexican open pit operations, 3.9 million pounds from theMexican underground mines and 4.3 million pounds from the Peruvian open pitmines.

 

The decrease of 87.5 million pounds in the Mexicanopen-pit mines production included 77.5 million pounds from the Cananea mineand 10.0 million pounds from the La Caridad mine.  The decrease in production at the Cananeamine was due to the effect of its strike. The decrease at La Caridad mine is due to lower ore and pregnant leachsolution (“PLS”) grades.  The decrease of3.9 million pounds at the Mexican underground mines was due to the work stoppage atthe San Martin mine.  The decrease in thePeruvian mines came from the Toquepala mine, which decreased by 12.2 millionpounds, and was the result of lower ore grades and recoveries, partially offsetby an increase of 6.2 million pounds from the Cuajone mine due to higherquality of material mined and improved recoveries and an increase of 1.7million pounds from the Toquepala SX/EW plant due to higher PLS grade.

 

Molybdenum production increased by 0.6 million poundsto 8.7 million pounds in the first quarter of 2008 from 8.1 million pounds inthe first quarter of 2007.  This increasein production was principally the result of higher recoveries in all our mines.

 

Mine zinc production decreased 16.7 million pounds inthe first quarter of 2008 to 54.6 million pounds compared with 71.3 millionpounds in the first quarter of 2007. This 23.5% decrease in production was due to the work stoppages atSan Martin and Taxco mines which started on July 30, 2007 and continue todate.

 

The table below outlinesthe average metal prices during the three-month periods ended March 31,2008 and 2007:

 

34

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AverageMetal Prices

 
| ** **                       | ** ** | **Three Months EndedMarch 31,** | ** ** |
|----------------------------------|------------|------------------------------------------------|------------|
| ** **                       | ** ** | **2008**                                       | ** ** | **2007** | ** ** | **% Change** | ** ** |
| Copper ($per pound – LME)   |       | $                                              | 3.54       |   | $ | 2.69 |   | 31.6 |   |
| Copper ($per pound – COMEX) |       | $                                              | 3.53       |   | $ | 2.70 |   | 30.7 |   |
| Molybdenum ($per pound)          |       | $                                              | 33.01      |   | $ | 25.81 |   | 27.9 |   |
| Zinc ($per pound – LME)     |       | $                                              | 1.10       |   | $ | 1.57 |   | (29.9 | ) |
| Silver ($per ounce – COMEX) |       | $                                              | 17.62      |   | $ | 13.29 |   | 32.6 |   |

 

NetSales.  Net sales in the first quarter of 2008increased $140.9 million to $1,499.2 million from $1,358.3 million in thecomparable period in 2007.  The increasein net sales in the first quarter 2008 was the result of higher metal pricesfor our principal products except zinc, and higher molybdenum salesvolume.  Net sales also include anunrealized gain of $6.4 million on copper derivative instruments in the firstquarter of 2008.

 

Thetable below presents information regarding the volume of our copper sales bysegment for the three months ended March 31, 2008 and 2007:

 

Copper Sales (million pounds):

 
| ** **               | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Copper:                  |       |                                             |       |   |   |
| Peruvian operations      |       | 185.8                                            |       | 211.0 |   |
| Mexican open-pit         |       | 85.1                                             |       | 173.5 |   |
| Mexican IMMSA unit       |       | 9.4                                              |       | 7.2 |   |
| Intersegment elimination |       | (9.5                                             | )          | (25.2 | ) |
| Total copper sales       |       | 270.8                                            |       | 366.5 |   |

 

Thetable below presents information regarding the volume of sales by segment ofour significant by-products for the three months ended March 31, 2008 and2007:

 

By-productSales:

 
| ** **                                                                                             | ** ** | **Three Months EndedMarch 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| **(in million pounds except silver – in million ounces)** | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| Peruvian operations                                                                                    |       |                                           |       |   |   |
| Molybdenum contained in concentrates                                                                   |       | 4.9                                            |       | 4.2 |   |
| Zinc – refined and in concentrate                                                                 |       | 5.3                                            |       | 11.4 |   |
| Silver                                                                                                 |       | 0.8                                            |       | 1.4 |   |
|                                                                                                   |       |                                           |       |   |   |
| Mexican open-pit                                                                                       |       |                                           |       |   |   |
| Molybdenum contained in concentrates                                                                   |       | 4.0                                            |       | 3.8 |   |
| Zinc – refined and in concentrate (1)                                                             |       | —                                         |       | — |   |
| Silver                                                                                                 |       | 0.7                                            |       | 1.0 |   |
|                                                                                                   |       |                                           |       |   |   |
| Mexican IMMSA unit                                                                                     |       |                                           |       |   |   |
| Zinc – refined and in concentrate                                                                 |       | 51.1                                           |       | 64.2 |   |
| Silver                                                                                                 |       | 2.0                                            |       | 2.2 |   |
|                                                                                                   |       |                                           |       |   |   |
| Intersegment elimination                                                                               |       |                                           |       |   |   |
| Zinc – refined and in concentrate                                                                 |       | (3.9                                           | )          | (10.0 | ) |
| Silver                                                                                                 |       | (0.5                                           | )          | (0.2 | ) |
|                                                                                                   |       |                                           |       |   |   |
| Total by-product sales                                                                                 |       |                                           |       |   |   |
| Molybdenum contained in concentrates                                                                   |       | 8.9                                            |       | 8.0 |   |
| Zinc – refined and in concentrate                                                                 |       | 52.5                                           |       | 65.6 |   |
| Silver                                                                                                 |       | 3.0                                            |       | 4.4 |   |

 

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AtMarch 31, 2008, the Company has recorded provisionally priced sales of103.4 million pounds of copper, at an average forward price of $3.82 perpound.  Also the Company has recordedprovisionally priced sales of 4.1 million pounds of molybdenum at the March 31,2008 market price of $33.25 per pound. These sales are subject to final pricing based on the average monthlyLME or COMEX copper prices and Dealer Oxide molybdenum prices in the futuremonth of settlement, which will occur largely in the next seven months.

 

Managementbelieves that the final pricing of these sales will not have a material effecton the Company’s financial position or results of operations.

 

OperatingCosts and Expenses.Operating costs and expenses were $634.5 million in the first quarter of 2008compared with $571.0 million in the first quarter of 2007.  The increase of $63.5 million was principallydue to higher cost of sales (exclusive of depreciation, amortization anddepletion) and higher depreciation, amortization and depletion.

 

Costof sales (exclusive of depreciation, amortization and depletion) for the threemonths ended March 31, 2008 was $520.6 million compared with $466.6million in the comparable 2007 period. The increase in cost of sales of $54.0 million in the first quarter 2008was principally due to $23.1 million of higher production cost due to increasein power, fuel, tires and material repair. Additionally, cost of sales was higher due to $23.2 million of loss oncurrency translation and $4.8 million of higher mine royalties.

 

Depreciation,amortization and depletion for the three months ended March 31, 2008, were$81.2 million compared with $74.1 million in the comparable periods of2007.  The increase of $7.1 million ismainly attributable to higher depreciation in our Peruvian operations due tothe start-up of the modernized Ilo smelter and higher amortization ofcapitalized leach material.

 

Non-OperatingIncome (Expense):Interest expense in the first quarter of 2008 was approximately 2.9% lower thanthe comparable 2007 period.  Thisvariance is mainly result of the changes in average debt levels in the period.

 

Interestincome was $17.4 million in the first quarter of 2008, compared to $21.9million in the first quarter of 2007. This decrease was principally result of lower average of interest ratesearned.

 

Thegain on derivative instruments was $2.9 million in the first quarter of 2008and a loss of $21.2 million in the first quarter of 2007.  These amounts consist of the following (inmillions):

 
| ** **                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Loss short-term investments                                  |       | $                                                | —     |   | $ | (22.7 | ) |
| Gain on exchange rate derivatives, US  dollar / Mexican peso |       | 2.9                                              |       | _1.5 |   |
| Net gain (loss)                                              |       | $                                                | 2.9        |   | $ | (21.2 | ) |

 

36

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Foradditional information please see Note H “Derivative instruments” to theCondensed Consolidated Financial Statements.

 

Otherincome (expense) was an expense of $3.5 million in the first quarter of 2008compared to an income of $20.7 million in the first quarter of 2007.  The decrease in the first quarter of 2008 wasprincipally due to $13.9 million of lower dividends received from Grupo Mexico,$4.8 million of net cost of sale and disposal of assets, $1.3 million of highercontribution to the Peruvian regional development and $4.2 million of lowermiscellaneous income.

 

Incometaxes: The income taxfor the three months ended March 31, 2008 and 2007 was $286.0 million and$230.7 million, respectively.  Theseamounts include income taxes for Peru, Mexico and the United States.  The effective tax rates for the 2008 and 2007periods are 33.5% and 29.4%, respectively. The 2008 effective income tax rate increase primarily reflects a largeshift in the mix of earnings from Mexico, principally as a result of a lengthystrike at the Cananea mine, to the higher tax jurisdiction, Peru whichrepresents an increase of 2.9% in the effective income tax rate. In addition,various tax adjustments to the first quarter 2008 Peru tax provision, alsocontributed to the rate increase.

 

OnOctober 1, 2007, the Mexican government enacted a new law, which generallytakes effect on January 1, 2008. The law introduces a flat tax, which replaced Mexico’s asset tax andapplies to taxpaying entities along with Mexico’s regular income tax.  In general Mexican companies are subject topaying the greater of the flat tax or the income tax; the application of this rule resultedin a provision in the first quarter of 2008 based upon the regular income taxcalculation.  This tax law change did nothave an effect on the Company’s first quarter 2008 deferred tax position.

 

Theflat tax is calculated by applying a 16.5% tax rate in 2008, a 17% tax rate in2009, and 17.5% in 2010 and the following years.  Although the flat tax is defined as minimumtax it has a wider taxable base as many of the tax deductions allowed forincome tax purposes are not allowed for the flat tax.

 

Segment Results Analysis

 

Peruvian Open Pit Operations

 

Thefollowing table sets forth net sales, operating cost and expenses and operatingincome for our Peruvian open pit operations segment, for the three months endedMarch 31, 2008 and 2007:

 
| ** **                   | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                   | ** ** | **March 31,**               | ** ** | **Change** | ** ** |
| ** **                   | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Value**  | ** ** | **%** | ** ** |
| Net sales                    |       | $                                | 921.5      |       | $          | 716.1      |       | $ | 205.4 |   | 28.7 | % |
| Operating costs and expenses |       | (349.9                           | )          | (341.3     | )          | (8.6       | )          | (2.5 | )% |
| Operating income             |       | $                                | 571.6      |       | $          | 374.8      |       | $ | 196.8 |   | 52.5 | % |

 

Netsales in the first quarter of 2008 increased $205.4 million to $921.5 millionfrom $716.1 million in the comparable period of 2007.  The increase in net sales is principally theresult of higher copper and molybdenum prices, as well as higher molybdenumsales volume due to higher production. Copper sales volume decreased in the first quarter of 2008 when comparedto the first quarter of 2007, principally as a result of lower sale ofconcentrates.  In 2007, we have a backlogof concentrates due to the start up of the Ilo smelter which was subsequentlysold.  The increase in net sales value isalso due, to a certain extent, to a change in copper product mix, in the firstquarter of 2008, we sold higher refined copper in place of concentrates, as a 

 

37

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resultof the Ilo smelter operating at full capacity in the first quarter 2008.  Net sales in the first quarter of 2008 alsoinclude an unrealized gain on copper derivative instruments of $4.3 million.

 

Operatingcosts and expenses in the first quarter of 2008 increased by $8.6 million to$349.9 million from $341.3 million in the first quarter of 2007, principallydue to higher cost of sales and higher depreciation, amortization anddepletion.  Cost of sales (exclusive ofdepreciation, amortization and depletion) for the three months ended March 31,2008 was $307.0 million compared to $304.3 million in the same period of2007.  The principal elements of cost ofsales, creating the change between the first quarters of 2008 and 2007, includethe following, higher production cost in 2008 of $54.5 million, which includesincreases in salaries, power, explosives, tires and other operating material.In addition, increased cost also includes higher workers’ participation of $9.6million, higher royalties of $4.6 million and a higher exchange loss of $10.5million due to appreciation of the nuevo sol against the US dollar.  These increases in cost were reduced by $74.3million related to the lower cost of outside concentrates purchased and lowerfreights related to the reduction in concentrates shipped.  Depreciation, amortization and depletion forthe three months ended March 31, 2008 was $28.3 million compared to $23.3million in the same period of 2007.  Theincrease of $5.0 million in depreciation, amortization and depletion is due tothe depreciation of the Ilo smelter modernization project completed in firstquarter 2008, which represents a $3.9 million increase and the depreciation ofother new investments.

 

Mexican Open Pit Operations

 

Thefollowing table sets forth net sales, operating cost and expenses and operatingincome for our Mexican open pit operations segment for the three months ended March 31,2008 and 2007:

 
| ** **                   | ** ** | **Three Months Ended ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------|------------|----------------------------------------|------------|------------|------------|------------|------------|
| ** **                   | ** ** | **March 31,**                     | ** ** | **Change** | ** ** |
| ** **                   | ** ** | **2008**                               | ** ** | **2007**   | ** ** | **Value**  | ** ** | **%** | ** ** |
| Net sales                    |       | $                                      | 470.1      |       | $          | 583.4      |       | $ | (113.3 | ) | (19.4 | )% |
| Operating costs and expenses |       | (239.4                                 | )          | (242.5     | )          | 3.1        |       | 1.2 | % |
| Operating income             |       | $                                      | 230.7      |       | $          | 340.9      |       | $ | (110.2 | ) | 32.3 | % |

 

Netsales in the first quarter of 2008 decreased $113.3 million to $470.1 millionfrom $583.4 million in the first quarter of 2007.  The decrease in sales is principally due tolower production and sale of copper from Cananea mine due to the strike.  Sales of Cananea’s copper in the firstquarter of 2008 and 2007 were 25.5 million pounds and 102.1 million pounds,respectively.  In addition, theproduction and sale of silver in the first quarter of 2008, was reduced by theeffect of the strike.  Net sales in thefirst quarter of 2008 also include an unrealized gain on copper derivativeinstruments of $2.1 million.

 

Operatingcosts and expenses in the first quarter of 2008 decreased by $3.1 million to$239.4 million from $242.5 million in the first quarter of 2007, principallydue to lower cost of sales.  Cost ofsales (exclusive of depreciation, amortization and depletion) decreased $4.9million to $183.4 million from $188.3 million in 2007.  The decrease in cost of sales was the effectof the partial recovery of the Cananea production capacity.  Cost of sales in 2008 includes $18.9 millionof unproductive costs and $4.3 million of rehabilitation costs related to theCananea strike.

 

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Mexican Underground Operations (IMMSA)

 

Thefollowing table sets forth net sales, operating cost and expenses and operatingincome for our IMMSA segment, for the three month period ended March 31,2008 and 2007:

 
| ** **                   | ** ** | **Three Months Ended ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------|------------|----------------------------------------|------------|------------|------------|------------|------------|
| ** **                   | ** ** | **March 31,**                     | ** ** | **Change** | ** ** |
| ** **                   | ** ** | **2008**                               | ** ** | **2007**   | ** ** | **Value**  | ** ** | **%** | ** ** |
| Net sales                    |       | $                                      | 162.1      |       | $          | 150.7      |       | $ | 11.4 |   | 7.6 | % |
| Operating costs and expenses |       | (101.8                                 | )          | (79.8      | )          | (22.0      | )          | (27.6 | )% |
| Operating income             |       | $                                      | 60.3       |       | $          | 70.9       |       | $ | (10.6 | ) | (15.0 | )% |

 

Netsales in the first quarter 2008 increased $11.4 million to $162.1 million from$150.7 million in the comparable period of 2007.  The increase in net sales in the firstquarter 2008 is principally due to higher prices and sales volume of copper,silver and lead.  Lead price increased61.7% from $0.81 per pound in the first quarter of 2007 to $1.31 per pound inthe first quarter of 2008.  Zinc pricesand sales volume decreased in the first quarter 2008 compared to the firstquarter 2007.  The volume decrease is dueto the strikes at the San Martin and Taxco mines.

 

Operatingcosts and expenses in the first quarter of 2008 increased by $22.0 million to$101.8 million from $79.8 million in the first quarter of 2007, principally dueto higher cost of sales.  Cost of sales(exclusive of depreciation, amortization and depletion) increased $21.0 millionto $85.6 million from $64.6 million in 2007. The increase in cost of sales was mainly effect of higher metalpurchased to cover the loss on production caused by the strikes at San Martinand Taxco.

 

IntersegmentEliminations and Adjustments

 

Thenet sales, operating costs and cost and expenses and operating income displayedabove will not be directly equal to amounts in our condensed consolidatedstatement of earnings because the adjustments of intersegment operatingrevenues and expenses must be taken into account.  Please see Note N of the condensedconsolidated financial statements.

 

CASHFLOW

 

Thefollowing table shows the cash flow for the three months ended March 31,2008 and 2007.

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **March 31,**               | ** ** |
| ** **                                  | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                                  | ** ** | **(in millions)**           | ** ** |
| Net cash provided from operating activities |       | $                                | 503.3      |   | $ | 548.9 |   |
| Net cash used for investing activities      |       | $                                | (45.5      | ) | $ | (184.1 | ) |
| Net cash used for financing activities      |       | $                                | (415.4     | ) | $ | (502.3 | ) |

 

Netcash provided by operating activities was $503.3 million in the first quarterof 2008, compared with $548.9 million in the 2007 period.  Cash provided from operating activities inthe first quarter 2008 and 2007 were primarily the result of higher netearnings in both years, which were the result of improved sales prices for mostof our metal products adjusted for non-cash items and the change in thebalances of operating assets and liabilities. Also molybdenum sales volume contributed to the increase in cash flow.

 

39

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Infirst quarter 2008, our earnings were $565.0 million, approximately 112.3% ofthe net operating cash flow.  Significantitems deducted from, or added to arrive to operating cash flow included,depreciation amortization and depletion of $81.2 million and $18.6 million ofloss in currency translation which positively increased operating cash flow and$38.1 million of deferred income tax, which lowered our cash flow.  Additionally, an increase in working capitaldecreased operating cash flow by $115.7 million.

 

Infirst quarter 2007, our earnings were $551.7 million, approximately 100.5% ofthe net operating cash flow.  Significantitems deducted from, or added to arrive to operating cash flow included,depreciation amortization and depletion of $74.1 million, $20.2 million ofdeferred income tax and $22.7 million of unrealized loss on derivativeinstruments, which positively increased operating cash flow and $20.5 millionof capitalized leachable material, which lowered our cash flow.  Additionally, an increase in working capitaldecreased operating cash flow by $96.3 million.

 

Netcash used in investing activities was $45.5 million in the first quarter of2008 and included $49.9 million for capital expenditures.  The capital expenditures included $18.3 millionof investments at our Peruvian operations, $2.4 million for the primary crusherat the Toquepala concentrator, $1.5 million for the tailings disposal atQuebrada Honda and $14.4 million for various other replacement expenditures.  In addition, we spent $31.6 million forreplacement assets at our Mexican operations, $23.3 million of which pertainsto our Mexican open pit operations, $6.9 million to our IMMSA unit and $1.4million to the Mexican administrative office.

 

Inthe first quarter of 2007, net cash used for investing activities was $184.1million; this amount includes capital spending of $85.0 million.  The capital expenditures included $31.4million of investments at our Peruvian operations, $11.7 million of which forthe Ilo smelter modernization project, $4.9 million for the new PLS dam projectand $14.8 million for various other replacement expenditures.  In addition, we spent $27.1 million forreplacement assets at our Mexican operations, $20.4 million of which pertainsto our Mexican open pit operations and $6.7 million in our IMMSA unit.  Also in the first quarter of 2007, wepurchased offices (approximately eight floors) in a building in Mexico City for$26.5 million.  The first quarter of 2007also includes the purchase of $100.0 million in short-term investments.

 

Netcash used in financing activities in the first quarter of 2008 was $415.4million, compared with $502.3 million in the first quarter of 2007.  The first quarter of 2008 includes a dividenddistribution of $412.3 million, compared with a distribution of $500.6 millionin the first quarter of 2007.

 

LIQUIDITYAND CAPITAL RESOURCES

 

OnFebruary 29, 2008, the Company paid a quarterly dividend of $1.40 pershare, totaling $412.3 million.  On April 24,2008, the Board of Directors approved a quarterly dividend of $1.70 per share,totaling $500.6 million, to be paid on June 3, 2008 to shareholders ofrecord as of May 14, 2008.

 

OnApril 1, 2008 the Company paid $150.0 million of the remaining balance ofits series A Yankee bonds, with this payment the series A Yankee bonds werefully repaid.

 

Weexpect that we will meet our cash requirements for 2008 and beyond frominternally generated funds, cash on hand and from additional externalfinancing, if required.  At March 31,2008, the Company’s debt as a percentage of total capitalization (the total ofdebt, minority interest and stockholders’ equity) was 26.5% as compared with27.3% at December 31, 2007.  At March 31,2008, the Company’s cash and cash equivalents amounted to $1,472.8 millioncompared to $1,409.3 million at December 31, 2007.

 

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NON-GAAPINFORMATION RECONCILIATION

 

Reconciliationof operating cash cost to GAAP cost of sales in millions of dollars and centsper pound.

 
| ** **                                                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                                                      | ** ** | **$  million**                                   | ** ** | **¢ per  pound** | ** ** | **$  million** | ** ** | **¢ per  pound** | ** ** |
| Cost of sales (including depreciation,  amortization and depletion) – GAAP |       | $                                                | 601.8      |   | 206.5 |   | $ | 540.7 |   | 146.0 |   |
| Add:                                                                            |       |                                             |       |   |   |   |   |   |   |
| Selling, general and administrative  expenses                                   |       | 24.7                                             |       | 8.5 |   | 23.8 |   | 6.4 |   |
| Treatment and refining charges                                                  |       | 5.7                                              |       | 2.0 |   | 19.0 |   | 5.1 |   |
| Less:                                                                           |       |                                             |       |   |   |   |   |   |   |
| By-products revenue (1)                                                         |       | (483.6                                           | )          | (166.0 | ) | (438.7 | ) | (118.5 | ) |
| Depreciation, amortization and depletion                                        |       | (81.2                                            | )          | (27.9 | ) | (74.1 | ) | (20.0 | ) |
| Workers’ participation                                                     |       | (69.2                                            | )          | (23.7 | ) | (71.4 | ) | (19.3 | ) |
| Royalty charge and other                                                        |       | (52.6                                            | )          | (18.1 | ) | (15.2 | ) | (4.0 | ) |
| Inventory change                                                                |       | 10.7                                             |       | 3.7 |   | 33.0 |   | 8.9 |   |
| **Operating cash cost**                                                         | ** ** | **(43.7**                                        | **)**      | **(15.0** | **)** | **17.1** | ** ** | **4.6** | ** ** |
|                                                                            |       |                                             |       |   |   |   |   |   |   |
| Add by-product revenue                                                          |       | 483.6                                            |       | 166.0 |   | 438.7 |   | 118.5 |   |
|                                                                            |       |                                             |       |   |   |   |   |   |   |
| Operating cash cost, without by-product  revenue                                |       | $                                                | 439.9      |   | 151.0 |   | $ | 455.8 |   | 123.1 |   |
|                                                                            |       |                                             |       |   |   |   |   |   |   |
| Total pounds of copper produced and  purchased (in millions)                    |       |                                             |       | 291.4 |   |   |   | 370.3 |   |

----

(1)           Includes netby-product sales revenue and premiums on sales of refined products.

 

Impact of New Accounting Standards

 

Pleasesee note O to our condensed consolidated financial statements.

 

41

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Item 3. Quantitative andQualitative Disclosure about Market Risk

 

A portion of our outstanding debt bears interest atvariable rates and accordingly is sensitive to changes in interest rates.  Interest rate changes would also result ingains or losses in the market value of our fixed rate debt portfolio due todifferences in market interest rates and the rates at the inception of the debtagreements.  Based upon our indebtednessat December 31, 2007, a change in interest rates of one percent (or 100basis points) would impact net income and cash flows by $0.6 million 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)                               |       | $          | 6.6        |           | $          | 20.2     |       | $          | 1.3        |   | $ | 8.6 |   |

 

Weoccasionally use derivative instruments to manage our exposure to market riskfrom changes in commodity prices, interest rate and exchange rate riskexposures and to enhance return on assets. We generally do not enter into derivative contracts unless we anticipatea future activity that is likely to occur that will result in exposing us tomarket risk.

 

Copperderivatives:

 

Fromtime to time we have entered into derivative instruments to protect a fixedcopper, or zinc price for a portion of our metal sales.

 

In the first quarter of 2008, we entered into copper collar and swapcontracts to protect a portion of our 2008 sales of copper production.  Related to the valuation of these copperderivative contracts we recorded an unrealized gain of $6.4 million.  This gain was recorded in net sales in theCondensed Consolidated Statement of Earnings.

 

At March 31, 2008 we hadcopper collar contracts to protect 198.4 million pounds of copper productionfor the April-December 2008 period at weighted average minimum and maximumLME prices of $3.40 per pound and $4.23 per pound, respectively.  If the LME price falls below the minimumprice, we will be paid the difference between the minimum price and the actualprice.  If the LME price exceeds themaximum price, we will pay the difference between the maximum price and theactual price.  In addition, we havecopper swap contracts to protect 175.1 million pounds of copper production forthe April-August 2008 period at an average COMEX price of $3.87 per pound.

 

Gasswaps:

 

In the first quarter of 2007 we entered into gas swapcontract to protect part of our gas consumption for 900,000 MMBTUs with a fixedprice of $7.525.  Related to thesettlement of this gas swap contract we recorded a loss of $0.9 million in thefirst quarter of 2007 which was charged to production cost.  In the first quarter of 2008 we did not holdany gas swap derivative.

 

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Exchangerate derivatives, U.S. dollar/Mexican peso contracts:

 

Becausemore than 85% of our sales collections in Mexico are in US dollars and many ofour costs are in Mexican pesos, we entered into zero-cost derivative contractswith the purpose of protecting, within a range, against an appreciation of theMexican peso to the US dollar.  In thesecontracts if the exchange rate settles at or below the barrier, we do not sellUS dollars, if the exchange rate settles above the barrier price established inthe contract we sell US dollars at the strike price established in thecontract.

 

Inthe first quarter of 2008 and 2007 the exercise of some of these zero-costderivative contracts resulted in gains of $1.1 million and $1.5 million,respectively, which were recorded as gain on derivative instruments in thecondensed consolidated statement of earnings.

 

AtMarch 31, 2008 we 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)** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------|------------------|-----------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| $                                    | 45.0       |                                                   | 4th Quarter 2008 |                                                      | 11.32      |                                                             | 10.60      |   |
| $                                    | 60.0       |                                                   | 1st Quarter 2009 |                                                      | 11.25      |                                                             | 10.60      |   |

 

AtMarch 31, 2008, the fair value of the above listed exchange ratederivative contracts is a gain of $1.8 million which was recorded as Gain(loss) on derivative instruments in the condensed consolidated statement ofearnings.  Each notional amount includesa group of weekly transactions that have the same strike and barrier price.

 

Inaddition, the $53.0 million exchange derivative contract held at December 31,2007 was cancelled and we recognized a gain of $0.3 million in the firstquarter of 2008, which is included in the $1.1 million noted above.

 

Short-TermInvestment:

 

The balance of short-term investments was as follows (inmillions):

 
| ** **                                                                                                      | ** ** | **As of  March 31,** | ** ** | **As of  December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| **Investment**                                                                                                  | ** ** | **2008**                       | ** ** | **2007**                          | ** ** |
| Short-term investment in securities issued  by public companies with a weighted average interest rate of 3.24%. |       | $                              | 112.0      |                              | $          | 117.9 |   |
|                                                                                                                 |            |                                |            |                                   |            |  |  |

 

Short-term investments in securities consist of trading securities issued bypublic companies.  Each security is independentof the others.

 

In the first quarter 2008, we earned interest of $0.9million related to these investments which was recorded as interest income inthe Condensed Consolidated Statement of Earnings.  In addition, we redeemed $5.2 million ofthese investments and recorded a mark to market adjustment of $0.7million.  The mark to market adjustmentwas recorded as interest expense in the Condensed Consolidated Statement ofEarnings.

 

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 or 

 

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supplyfor the Company’s products.  Actualresults could differ materially depending upon factors including the risks anduncertainties relating to general U.S. and international economic and politicalconditions, the cyclical and volatile prices of copper, other commodities andsupplies, including fuel and electricity, availability of materials, insurancecoverage, equipment, required permits or approvals and financing, theoccurrence of unusual weather or operating conditions, lower than expected oregrades, water and geological problems, the failure of equipment or processes tooperate in accordance with specifications, failure to obtain financialassurance to meet closure and remediation obligations, labor relations,litigation and environmental risks as well as political and economic riskassociated with foreign operations. Results of operations are directly affected by metal prices on commodityexchanges that can be volatile.

 

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Item4.  Controls and Procedures

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

Asof March 31, 2008, the Company conducted an evaluation under thesupervision and with the participation of the Company’s Disclosure Committeeand the Company’s management, including the Chief Executive Officer and ChiefFinancial Officer, of the effectiveness and the design and operation of theCompany’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and the ChiefFinancial Officer have concluded that the Company’s disclosure controls andprocedures are effective as of March 31, 2008, to ensure that informationrequired to be disclosed in reports filed or submitted under the Exchange Actis:

 
| 1.     | recorded,  processed, summarized and reported within the time periods specified in the  SEC’s rules and forms, and                                                               |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                       |
| 2.     | accumulated  and communicated to management, including the Chief Executive Officer and  Chief Financial Officer, as appropriate, to allow timely decisions regarding  required disclosure. |

 

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

 

Therewas no change in the Company’s internal controls over financial reporting (assuch term is defined in Rules 13a-15(f) and 15d-15(f) under the SecuritiesExchange Act of 1934, as amended) that occurred during the quarter ended March 31,2008 that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal controls over financial reporting.

 

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REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Tothe Board of Directors and Shareholders of Southern Copper Corporation:

 

Wehave reviewed the accompanying condensed consolidated balance sheet of SouthernCopper Corporation and its subsidiaries as of March 31, 2008, and therelated condensed consolidated statements of earnings for each of thethree-month periods ended March 31, 2008 and March 31, 2007 and thecondensed consolidated statement of cash flows for the three-month periodsended March 31, 2008 and March 31, 2007.  These interim financial statements are theresponsibility of the Company’s management.

 

Weconducted our review in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). A review of interim financial information consists principally ofapplying analytical procedures and making inquiries of persons responsible forfinancial and accounting matters.  It issubstantially less in scope than an audit conducted in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theobjective of which is the expression of an opinion regarding the financialstatements taken as a whole. Accordingly, we do not express such an opinion.

 

Basedon our review, we are not aware of any material modifications that should bemade to the accompanying condensed consolidated interim financial statementsfor them to be in conformity with accounting principles generally accepted inthe United States of America.

 

Wepreviously audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheet asof December 31, 2007 and the related consolidated statement of earnings,changes in stockholders ́ equity and of cash flows for the year then ended (notpresented herein), and in our report dated February 29, 2008, we expressedan unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth inthe accompanying condensed consolidated balance sheet as of December 31,2007, is fairly stated in all material respects in relation to the consolidatedbalance sheet from which it has been derived.

 

PricewaterhouseCoopers

 

Mexico, D.F.

 

May 5, 2008

 

46

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PART II– OTHER INFORMATION

 

Item 1. – Legal Procedures

 

Theinformation provided in Note M to the condensed consolidated financialstatements contained in Part I of this Form 10-Q, is incorporatedherein by reference.

 

Item 1a.  Risk Factors

 

Setforth below are certain changes from the risk factors previously disclosed inSCC’s Form 10-K for the year ended December 31, 2007 filed on February 29,2008 with the Securities and Exchange Commission.

 

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

 

In the last seven years the Cananea mine hasexperienced more than nine labor stoppages totaling more than 350 days ofinactivity. Beginning on July 30, 2007, our Cananea mine in Mexico starteda work stoppage.  On January 11,2008 the Mexican federal labor court declared the Cananea strike illegal andordered the workers to return to work within 24 hours.  This ruling was challenged before a federaljudge who upheld the union’s case on February 14, 2008.  The Company appealed this ruling.  The workers partially returned to work andthe Company resumed operations.  Howeveron April 11, 2008 the workers restarted the labor stoppage and shutdown production.  The Company has triedunsuccessfully to resolve the current labor stoppage that obstructsproduction at Cananea, hence the Board of Directors has decided to offer allemployees a severance payment in accordance with the collective bargainingagreement and applicable law.  This wasoffered in order to award the employees with a significant severance paymentthat will allow them to choose the labor alternative that is best for each ofthem.  It is expected that production atCananea will remain suspended until these labor issues are resolved.  Weare currently evaluating the impact of this labor situation on our overallfinancial position and results of operations.

 

Also on July 30 2007, our Taxco and SanMartin mines went on strike.  At presentboth mines continue on stand-by. However, we believe that the strike activitywill not result in an impairment of our assets.

 

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Item6. – Exhibits

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                             |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                             |
| 31.1                 |       | Certification  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                    |
|                 |       |                                                                                                                                                                                             |
| 31.2                 |       | Certification  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                    |
|                 |       |                                                                                                                                                                                             |
| 32.1                 |       | Certification  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.,  Section 1350. This document is being furnished in accordance with SEC  Release No. 33-8238. |
|                 |       |                                                                                                                                                                                             |
| 32.2                 |       | Certification  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.,  Section 1350. This document is being furnished in accordance with SEC  Release No. 33-8238. |

 

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PART II – OTHERINFORMATION

 

SIGNATURES

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                 | SOUTHERN COPPER CORPORATION  (Registrant)          |
|----------------------|----------------------------------------------------|
|                 |                                               |
|                 |                                               |
|                 | /s/ Oscar Gonzalez Rocha                           |
|                 | Oscar Gonzalez Rocha                               |
|                 | President and Chief Executive Officer              |
|                 |                                               |
| April 30,  2008 |                                               |
|                 |                                               |
|                 |                                               |
|                 | /s/ Genaro Guerrero                                |
|                 | Genaro Guerrero                                    |
|                 | Vice President Finance and Chief Financial Officer |
|                 |                                               |
| April 30,  2008 |                                               |

 

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SOUTHERN COPPER CORPORATION

List of Exhibits

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                             |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                             |
| 31.1                 |       | Certification  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                    |
|                 |       |                                                                                                                                                                                             |
| 31.2                 |       | Certification  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                    |
|                 |       |                                                                                                                                                                                             |
| 32.1                 |       | Certification  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.,  Section 1350. This document is being furnished in accordance with SEC  Release No. 33-8238. |
|                 |       |                                                                                                                                                                                             |
| 32.2                 |       | Certification  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.,  Section 1350. This document is being furnished in accordance with SEC  Release No. 33-8238. |

 

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