Table of Contents

 

 

 

**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 SEPTEMBER 30, 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                                **

 

**CommissionFile Number: 1-14066**

 

**SOUTHERNCOPPER CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **13-3849074**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or  organization) |       | (I.R.S. Employer Identification No.) |
|                                                            |       |                                 |
| **11811 North Tatum Blvd. Suite 2500 Phoenix,  AZ**        | ** ** | **85028**                            |
| Address of principal executive offices)                         |       | (Zip Code)                           |
|                                                            |       |                                 |
| **(602) 494-5328**                                              |
| Registrant’s telephone number, including area code         |

 

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

**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.  See definitions of “large accelerated filer”,“accelerated filer and “smaller reporting company” in Rule 12b-2 of theExchange Act.

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act).            Yes o    No **x**

 

Asof October 31, 2008 there were outstanding 871,000,000 shares of SouthernCopper Corporation common stock, par value $0.01 per share.

 

 

 

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Table of Contents

 

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 and nine months ended  September 30, 2008 and 2007   |       | 3                 |
|                                                     |                                                                                                                  |       |              |
|                                                     | Condensed  Consolidated Balance Sheet September 30, 2008 and December 31, 2007                              |       | 4                 |
|                                                     |                                                                                                                  |       |              |
|                                                     | Condensed  Consolidated Statement of Cash Flows for the three and nine months ended  September 30, 2008 and 2007 |       | 5-6               |
|                                                     |                                                                                                                  |       |              |
|                                                     | Notes to  Condensed Consolidated Financial Statements                                                                 |       | 7-33              |
|                                                     |                                                                                                                  |       |              |
| Item 2.                                                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                           |       | 34-50             |
|                                                     |                                                                                                                  |       |              |
| Item 3.                                                  | Quantitative  and Qualitative Disclosure about Market Risk                                                            |       | 51-54             |
|                                                     |                                                                                                                  |       |              |
| Item 4.                                                  | Controls and  Procedures                                                                                              |       | 55                |
|                                                     |                                                                                                                  |       |              |
| Report of  Independent Registered Public Accounting Firm |                                                                                                                  | 56         |
|                                                     |                                                                                                                  |       |              |
| Part II. Other  Information:                        |                                                                                                                  |       |
|                                                     |                                                                                                                  |       |              |
| Item 1.                                                  | Legal Proceedings                                                                                                     |       | 57                |
|                                                     |                                                                                                                  |       |              |
| Item 1A.                                                 | Risk factors                                                                                                          |       | 57-58             |
|                                                     |                                                                                                                  |       |              |
| Item 6.                                                  | Exhibits                                                                                                              |       | 59                |
|                                                     |                                                                                                                  |       |              |
|                                                     | Signatures                                                                                                            |       | 60                |
|                                                     |                                                                                                                  |       |              |
|                                                     | List of  Exhibits                                                                                                     |       | 61                |
|                                                     |                                                                                                                  |       |              |
| Exhibit 15                                          | Independent  Accountants’ Awareness Letter                                                                       |       | 1                 |
|                                                     |                                                                                                                  |       |              |
| Exhibit 31.1                                        | Certification  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                         |       | 1-2               |
|                                                     |                                                                                                                  |       |              |
| Exhibit 31.2                                        | Certification  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                         |       | 1-2               |
|                                                     |                                                                                                                  |       |              |
| Exhibit 32.1                                        | Certification  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                         |       | 1                 |
|                                                     |                                                                                                                  |       |              |
| Exhibit 32.2                                        | Certification  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                         |       | 1                 |

 

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Part I - FINANCIALINFORMATION

 

Item1.  Condensed Consolidated FinancialStatements

 

Southern Copper Corporation

 

CONDENSED CONSOLIDATEDSTATEMENT OF EARNINGS

(Unaudited)

 
| ** **                                                                                    | ** ** | **3 Months Ended** | ** ** | **9 Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                    | ** ** | **September 30,**       | ** ** | **September 30,**       | ** ** |
| ** **                                                                                    | ** ** | **2008**                     | ** ** | **2007**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                                    | ** ** | **(in thousands)**      | ** ** |
| Net sales                                                                                     |       | $                            | 1,440,077  |                         | $          | 1,606,414 |   | $ | 4,401,079 |   | $ | 4,791,213 |   |
|                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Operating costs and expenses:                                                                 |       |                         |       |                         |       |   |   |   |   |
| Cost of sales (exclusive of depreciation,  amortization and depletion shown separately below) |       | 645,798                      |       | 560,003                      |       | 1,716,845 |   | 1,588,982 |   |
| Selling, general and administrative                                                           |       | 25,937                       |       | 23,570                       |       | 77,318 |   | 73,276 |   |
| Depreciation, amortization and depletion                                                      |       | 83,944                       |       | 81,538                       |       | 248,339 |   | 240,102 |   |
| Exploration                                                                                   |       | 8,452                        |       | 7,710                        |       | 25,504 |   | 22,681 |   |
| Total operating costs and expenses                                                            |       | 764,131                      |       | 672,821                      |       | 2,068,006 |   | 1,925,041 |   |
|                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Operating income                                                                              |       | 675,946                      |       | 933,593                      |       | 2,333,073 |   | 2,866,172 |   |
|                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Interest expense                                                                              |       | (28,115                      | )          | (31,181                      | )          | (84,530 | ) | (91,969 | ) |
| Capitalized interest                                                                          |       | 2,305                        |       | 3,703                        |       | 4,834 |   | 10,146 |   |
| (Loss) gain on derivative instruments                                                         |       | (13,621                      | )          | 2,993                        |       | (12,700 | ) | (73,699 | ) |
| Other income (expense)                                                                        |       | 23,779                       |       | (5,526                       | )          | 23,944 |   | 20,146 |   |
| Interest income                                                                               |       | 9,764                        |       | 23,528                       |       | 39,360 |   | 63,532 |   |
| Earnings before income taxes and minority  interest                                           |       | 670,058                      |       | 927,110                      |       | 2,303,981 |   | 2,794,328 |   |
|                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Income taxes                                                                                  |       | 249,700                      |       | 296,109                      |       | 764,614 |   | 881,199 |   |
| Minority interest                                                                             |       | 2,556                        |       | 3,156                        |       | 8,115 |   | 7,640 |   |
|                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Net earnings                                                                                  |       | $                            | 417,802    |                         | $          | 627,845 |   | $ | 1,531,252 |   | $ | 1,905,489 |   |
|                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Per common share amounts:                                                                     |       |                         |       |                         |       |   |   |   |   |
| Net earnings basic and diluted                                                                |       | $                            | 0.47       |                         | $          | 0.71 |   | $ | 1.73 |   | $ | 2.16 |   |
| Dividends paid                                                                                |       | $                            | 0.57       |                         | $          | 0.53 |   | $ | 1.60 |   | $ | 1.60 |   |
| Weighted average common shares outstanding  (basic and diluted)                               |       | 882,170                      |       | 883,397                      |       | 882,989 |   | 883,391 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements. All the shares and per share amounts forprior periods have been restated to reflect the three-for-one common stocksplit that occurred on July 10, 2008. See note P.

 

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Southern Copper Corporation

 

CONDENSED CONSOLIDATEDBALANCE SHEET

(Unaudited)

 
| ** **                                                                                      | ** ** | **September 30****,** | ** ** | **December 31****,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------------|------------|---------------------------|------------|
| ** **                                                                                      | ** ** | **2008**                   | ** ** | **2007**                  | ** ** |
| ** **                                                                                      | ** ** | **(in thousands)**    | ** ** |
| ASSETS                                                                                          |       |                       |       |                      |       |
| Current assets:                                                                                 |       |                       |       |                      |       |
| Cash and cash equivalents                                                                       |       | $                          | 1,175,648  |                      | $          | 1,409,272 |   |
| Short-term investments                                                                          |       | 83,038                     |       | 117,903                   |       |
| Accounts receivable trade, less allowance  for doubtful accounts (2008 - $4,545; 2007 - $4,585) |       | 387,848                    |       | 385,611                   |       |
| Accounts receivable other (including  affiliates 2008 - $839; 2007 - $1,644)                    |       | 51,313                     |       | 77,167                    |       |
| Inventories                                                                                     |       | 492,521                    |       | 448,283                   |       |
| Deferred income tax                                                                             |       | 67,709                     |       | 72,303                    |       |
| Other current assets                                                                            |       | 91,921                     |       | 124,970                   |       |
| Total current assets                                                                            |       | 2,349,998                  |       | 2,635,509                 |       |
|                                                                                            |       |                       |       |                      |       |
| Property, net                                                                                   |       | 3,661,876                  |       | 3,568,311                 |       |
| Leachable material, net                                                                         |       | 168,032                    |       | 220,243                   |       |
| Intangible assets, net                                                                          |       | 114,510                    |       | 115,802                   |       |
| Other assets, net                                                                               |       | 52,295                     |       | 40,693                    |       |
| Total Assets                                                                                    |       | $                          | 6,346,711  |                      | $          | 6,580,558 |   |
|                                                                                            |       |                       |       |                      |       |
| LIABILITIES                                                                                     |       |                       |       |                      |       |
| Current liabilities:                                                                            |       |                       |       |                      |       |
| Current portion of long-term debt                                                               |       | $                          | 10,000     |                      | $          | 160,000 |   |
| Accounts payable                                                                                |       | 289,717                    |       | 255,070                   |       |
| Accrued income taxes                                                                            |       | 76,940                     |       | 132,175                   |       |
| Due to affiliated companies                                                                     |       | 8,738                      |       | 3,870                     |       |
| Accrued workers’ participation                                                             |       | 219,856                    |       | 313,251                   |       |
| Interest                                                                                        |       | 11,934                     |       | 37,325                    |       |
| Other accrued liabilities                                                                       |       | 36,977                     |       | 25,499                    |       |
| Total current liabilities                                                                       |       | 654,162                    |       | 927,190                   |       |
|                                                                                            |       |                       |       |                      |       |
| Long-term debt                                                                                  |       | 1,284,911                  |       | 1,289,754                 |       |
| Deferred income taxes                                                                           |       | 196,855                    |       | 219,501                   |       |
| Non-current taxes payable                                                                       |       | 167,474                    |       | 154,721                   |       |
| Other liabilities and reserves                                                                  |       | 116,619                    |       | 111,442                   |       |
| Asset retirement obligation                                                                     |       | 14,462                     |       | 13,145                    |       |
| Total non-current liabilities                                                                   |       | 1,780,321                  |       | 1,788,563                 |       |
|                                                                                            |       |                       |       |                      |       |
| Commitments and Contingencies (Note M)                                                          |       |                       |       |                      |       |
|                                                                                            |       |                       |       |                      |       |
| MINORITY INTEREST                                                                               |       | 15,786                     |       | 16,685                    |       |
|                                                                                            |       |                       |       |                      |       |
| STOCKHOLDERS’ EQUITY                                                                       |       |                       |       |                      |       |
| Common stock                                                                                    |       | 8,846                      |       | 8,846                     |       |
| Additional paid-in capital                                                                      |       | 868,152                    |       | 819,646                   |       |
| Retained earnings                                                                               |       | 3,335,553                  |       | 3,220,857                 |       |
| Accumulated other comprehensive loss                                                            |       | (26,545                    | )          | (26,554                   | )          |
| Treasury stock                                                                                  |       | (289,564                   | )          | (174,675                  | )          |
| Total Stockholders’ Equity                                                                 |       | 3,896,442                  |       | 3,848,120                 |       |
|                                                                                            |       |                       |       |                      |       |
| Total Liabilities, Minority Interest and  Stockholders’ Equity                             |       | $                          | 6,346,711  |                      | $          | 6,580,558 |   |

 

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

 

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Southern Copper Corporation

 

CONDENSED CONSOLIDATEDSTATEMENT OF CASH FLOWS

(Unaudited)

 
| ** **                                                                             | ** ** | **3 Months Ended  September 30,** | ** ** | **9 Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2008**                                         | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                             | ** ** | **(in thousands)**                          | ** ** |
| OPERATING ACTIVITIES                                                                   |       |                                             |       |                                             |       |   |   |   |   |
|                                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| Net earnings                                                                           |       | $                                                | 417,802    |                                             | $          | 627,845 |   | $ | 1,531,252 |   | $ | 1,905,489 |   |
| Adjustments to reconcile net earnings to  net cash provided from operating activities: |       |                                             |       |                                             |       |   |   |   |   |
| Depreciation, amortization and depletion                                               |       | 83,944                                           |       | 81,538                                           |       | 248,339 |   | 240,102 |   |
| Capitalized leachable material                                                         |       | —                                           |       | (5,874                                           | )          | (2,246 | ) | (45,903 | ) |
| (Gain) loss on currency translation effect                                             |       | (15,533                                          | )          | 4,205                                            |       | 6,498 |   | 4,772 |   |
| Provision for deferred income taxes                                                    |       | 4,440                                            |       | 714                                              |       | (10,290 | ) | 59,054 |   |
| Gain on sale of property                                                               |       | (26,330                                          | )          | —                                           |       | (28,573 | ) | — |   |
| Loss on sale of short-term investment                                                  |       | 2,661                                            |       | 13,799                                           |       | 4,596 |   | 43,187 |   |
| Unrealized (gain) loss on derivative  instruments                                      |       | (20,543                                          | )          | (12,835                                          | )          | (18,444 | ) | 46,782 |   |
| Minority interest                                                                      |       | 2,556                                            |       | 3,156                                            |       | 8,115 |   | 7,640 |   |
|                                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| Cash provided from (used for) operating  assets and liabilities:                       |       |                                             |       |                                             |       |   |   |   |   |
| Accounts receivable                                                                    |       | 109,372                                          |       | (119,386                                         | )          | 23,617 |   | (133,389 | ) |
| Inventories                                                                            |       | (943                                             | )          | 8,494                                            |       | (44,238 | ) | (49,056 | ) |
| Accounts payable and accrued liabilities                                               |       | 28,057                                           |       | 70,670                                           |       | (172,697 | ) | (224,202 | ) |
| Other operating assets and liabilities                                                 |       | 111,391                                          |       | 55,935                                           |       | 60,921 |   | 71,546 |   |
| Net cash provided by operating activities                                              |       | 696,874                                          |       | 728,261                                          |       | 1,606,850 |   | 1,926,022 |   |
|                                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| INVESTING ACTIVITIES                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| Capital expenditures                                                                   |       | (134,161                                         | )          | (72,086                                          | )          | (314,931 | ) | (251,078 | ) |
| Purchase of short-term investments                                                     |       | —                                           |       | —                                           |       | — |   | (100,000 | ) |
| Net proceeds from sale of short-term  investments                                      |       | 11,816                                           |       | 6,201                                            |       | 30,295 |   | 16,813 |   |
| Sale of property                                                                       |       | 55,447                                           |       | —                                           |       | 59,727 |   | — |   |
| Other                                                                                  |       | 1,101                                            |       | 155                                              |       | 1,101 |   | 891 |   |
| Net cash used for investing activities                                                 |       | (65,797                                          | )          | (65,730                                          | )          | (223,808 | ) | (333,374 | ) |
|                                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| FINANCING ACTIVITIES                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| Debt repaid                                                                            |       | —                                           |       | —                                           |       | (155,025 | ) | (5,000 | ) |
| Dividends paid to common stockholders                                                  |       | (503,543                                         | )          | (471,113                                         | )          | (1,416,437 | ) | (1,413,380 | ) |
| Distributions to minority interest                                                     |       | (2,387                                           | )          | (1,429                                           | )          | (9,123 | ) | (4,593 | ) |
| Repurchase of common shares                                                            |       | (68,471                                          | )          | —                                           |       | (68,471 | ) | — |   |
| Other                                                                                  |       | 61                                               |       | (881                                             | )          | 855 |   | (604 | ) |
| Net cash used for financing activities                                                 |       | (574,340                                         | )          | (473,423                                         | )          | (1,648,201 | ) | (1,423,577 | ) |
|                                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                          |       | (31,348                                          | )          | (7,514                                           | )          | 31,535 |   | 3,359 |   |
|                                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| Increase (decrease) in cash and cash  equivalents                                      |       | 25,389                                           |       | 181,594                                          |       | (233,624 | ) | 172,430 |   |
| Cash and cash equivalents, at beginning of  period                                     |       | 1,150,259                                        |       | 1,013,614                                        |       | 1,409,272 |   | 1,022,778 |   |
| Cash and cash equivalents, at end of period                                            |       | $                                                | 1,175,648  |                                             | $          | 1,195,208 |   | $ | 1,175,648 |   | $ | 1,195,208 |   |

 

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| ** **                                        | ** ** | **3 Months Ended  September 30,** | ** ** | **9 Months Ended  September 30,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                        | ** ** | **2008**                                         | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                        | ** ** | **(in thousands)**                          | ** ** |
| Supplemental disclosure of cash flow  information |       |                                             |       |                                             |       |   |   |   |   |
| Cash paid during the period for:                  |       |                                             |       |                                             |       |   |   |   |   |
| Interest                                          |       | $                                                | 50,346     |                                             | $          | 50,346 |   | $ | 114,362 |   | $ | 115,726 |   |
| Income taxes                                      |       | $                                                | 230,847    |                                             | $          | 267,039 |   | $ | 779,190 |   | $ | 828,373 |   |
| Workers participation                             |       | $                                                | 2,742      |                                             | $          | 1,021 |   | $ | 292,781 |   | $ | 299,872 |   |

 

Noncash transactions:

 

Commonstock split:

 

OnJuly 10, 2008 the Company made a three-for-one split of its common sharesincreasing common shares account by $5,897 thousand and decreasing theadditional paid-in capital account by $5,897 thousand.

 

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

 

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Southern Copper Corporation

 

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

A.           Inthe opinion of Southern Copper Corporation, (the “Company”, “Southern Copper”or “SCC”), the accompanying unaudited condensed consolidated financialstatements contain all adjustments (consisting only of normal recurringadjustments) necessary to state fairly the Company’s financial position as of September 30,2008 and the results of operations and cash flows for the three and nine monthsended September 30, 2008 and 2007. The condensed consolidated financial statements for the three and ninemonths ended September 30, 2008 and 2007 have been subject to a review byPricewaterhouseCoopers, the Company’s independent registered public accountingfirm, whose report dated November 06, 2008, is presented on page 56.  The results of operations for the three andnine months ended September 30, 2008 and 2007 are not necessarilyindicative of the results to be expected for the full year.  The December 31, 2007 balance sheet datawas derived from audited financial statements, but does not include alldisclosures required by generally accepted accounting principles in the UnitedStates of America.  The accompanyingcondensed consolidated financial statements should be read in conjunction withthe consolidated combined financial statements at December 31, 2007 andnotes included in the Company’s 2007 annual report on Form 10-K.

 

B.             Adoption ofNew Accounting Standards:

 

InFebruary 2007, the FASB issued SFAS No. 159, The Fair Value Optionfor Financial Assets and Financial Liabilities (“SFAS No. 159”).  SFAS No. 159 permits companies, at theirelection, to measure specified financial instruments and warranty and insurancecontracts at fair value on a contract-by-contract basis, with changes in fairvalue recognized in earnings each reporting period.  The election, called the “fair value option,”will enable some companies to reduce the volatility in reported earnings causedby measuring 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.  Subsequentchanges in fair value for designated items will be required to be reported inearnings 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 tomeasure any eligible items at fair value. Accordingly, the adoption of SFAS No. 159 has not impacted theCompany’s results of operations and financial position.

 

InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements” (“SFAS No. 157”), which defines fair value, establishes aframework for measuring fair value in accordance with generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  SFAS No. 157 does notrequire any new fair value measurements; rather, it applies under otheraccounting pronouncements that require or permit fair value measurements.  The provisions of SFAS No. 157 are to beapplied prospectively as of the beginning of the fiscal year in which it isinitially applied, with any transition adjustment recognized as acumulative-effect adjustment to the opening balance of retained earnings.  The provisions of SFAS No. 157 wereadopted by the Company on January 1, 2008 and do not have any effect onits overall financial position or results of operations.  Fair values as of September 30, 2008were calculated as follows (in million):

 

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| ** **                            | ** ** | **Balance at  September  30, 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                |       | $                                             | 83.0       |                                                                        | $          | 83.0                                       |       | —                                |       | — |   |
| Derivative instruments:               |       |                                          |       |                                                                        |       |                                       |       |                                  |       |
| Exchange rate derivative, dollar/peso |       | (14.8                                         | )          | —                                                                      |       | $                                          | (14.8      | )                                     | —     |   |
| Copper derivative                     |       | 33.7                                          |       | —                                                                      |       | 33.7                                       |       | —                                |       |
| Gas swap                              |       | (0.4                                          | )          | —                                                                      |       | (0.4                                       | )          |                                  |       |
| Total                                 |       | $                                             | 101.5      |                                                                        | $          | 83.0                                       |       | $                                     | 18.5       |   | — |   |

 

SFASNo. 157 establishes a fair value hierarchy that prioritizes the inputs tovaluation techniques used to measure fair value.  The hierarchy gives the highest priority tounadjusted quoted prices in active markets for identical assets or liabilities(level 1 measurement) and the lowest priority to unobservable inputs (level 3measurements).  The three levels of thefair value hierarchy under SFAS No. 157 are described below:

 

Level1 - Unadjusted quoted prices in active markets that are accessible at themeasurement date for identical, unrestricted assets or liabilities;

 

Level2 - Inputs that are observable, either directly or indirectly, but do notqualify as Level 1 inputs. (i.e., quoted prices for similar assets orliabilities)

 

Level3

 

Pricesor valuation techniques that require inputs that are both significant to thefair value measurement and unobservable (i.e., supported by little or no marketactivity).

 

C.             Short-termInvestments:

 

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

 
| ** **                                                                                                      | ** ** | **As of**                   | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **Investments**                                                                                                 | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
| Short-term investments in securities issued  by public companies with a weighted average interest rate of 2.95% |       | $                                | 83.0       |   | $ | 117.9 |   |
|                                                                                                                 |            |                                  |            |  |  |  |  |

 

Short-term investments in securities consist of trading securitiesissued by public companies.  Eachsecurity is independent of the others.

 

In the third quarter and nine months of 2008, theCompany earned interest of $0.8 million and $3.4 million, respectively, relatedto these investments which were recorded as interest income in the condensedconsolidated statement of earnings.  Inaddition, in the third quarter and first nine months of 2008, the Companyredeemed $11.8 million and $30.3 million, respectively, of these investments.

 

At September 30, 2008 the mark to marketadjustment of these investments was a loss of $2.7 million which was recordedas interest expense in the condensed consolidated statement of earnings.

 

Pleasesee note Q “Subsequent event”.

 

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D.            Inventories were as follows:

 
| **(in millions)**                     | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Metals at lower of average cost or market: |       |                         |       |                        |       |
| Finished goods                             |       | $                            | 57.1       |                        | $          | 65.7 |   |
| Work-in-process                            |       | 179.8                        |       | 140.7                       |       |
| Supplies at average cost                   |       | 255.6                        |       | 241.9                       |       |
| Total inventories                          |       | $                            | 492.5      |                        | $          | 448.3 |   |

 

E.              Financing

 

OnApril 1, 2008, the Company paid $150.0 million of the remaining balance ofits series A Yankee bonds.  With thispayment the series A Yankee bonds were fully repaid.  Additionally, in both June 2008 and2007, the Company paid $5.0 million of its Mitsui loan.

 

F.              Income taxes:

 

Theincome tax for the nine months ended September 30, 2008 and 2007 were$764.6 million and $881.2 million, respectively.  These provisions include income taxes forPeru, Mexico and the United States.  Theeffective tax rates for the 2008 and 2007 periods are 33.2% and 31.5%,respectively.  The estimated annualeffective tax rate for 2008 is 33.7%, compared with 34.7% in 2007.  The decrease in the estimated annualeffective tax rate is largely due to the incremental U.S. tax on dividendincome in 2007.  The dividend income waseliminated in financial consolidation (book income) but was taxable in the U.S.at the difference between the 35% U.S. statutory rate and the effective rate of28% on the dividend from the Mexican subsidiary.  In addition, the variability in the dollarrelative to the Mexican peso and the Peruvian nuevo sol caused a decrease inthe estimated effective tax rate. Further, the inclusion of loss carryforwards of some of Minera Mexico’ssubsidiaries in the Mexican tax calculation also contributed to the ratedecrease.

 

OnOctober 1, 2007, the Mexican government enacted a new tax law, which tookeffect 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 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 nine months of 2008 based upon the regular incometax calculation.  This tax law change didnot have an effect on the Company’s first nine months 2008 deferred taxposition.

 

Theflat tax is calculated by applying a 16.5% tax rate in 2008, a 17% tax rate in2009, and a 17.5% tax rate 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.

 

FINNo. 48 - Accounting for Uncertainty in Income Taxes.

 

Therewere no material changes in the unrecognized tax benefits in the first ninemonths of 2008.  The Company believesthat it is reasonably possible that changes to the unrecognized tax benefitcould occur in the next twelve months due to tax audit settlements with theU.S. Internal Revenue Service (“IRS”). This settlement is expected to cover the open years 1997 through 2002inclusive.  The Company has notcalculated an estimate of the changes that will occur.  Once the final settlement has been reachedthe unrecognized tax benefits will be adjusted. The Company 

 

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believesthat the change will not be materially adverse to its results or financialposition.

 

Inthe third quarter of 2008 the IRS notified the Company that the Company’s 2005and 2006 U.S. federal income tax returns had been selected forexamination.  The examination of thesetax returns will commence during the fourth quarter of 2008.

 

G.             Provisionally Priced Sales:

 

AtSeptember 30, 2008, the Company has recorded provisionally priced sales of120.5 million pounds of copper, at an average forward price of $2.89 perpound.  Also the Company has recordedprovisionally priced sales of 4.6 million pounds of molybdenum at the September 30,2008 market price of $32.25 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.

 

Followingare the provisionally priced copper and molybdenum sales outstanding at September 30,2008:

 
| **Copper**              | ** ** | **Priced at** | ** ** | **Month of  Settlement** | ** ** |
|-------------------------|------------|--------------------|------------|-------------------------------|------------|
| **(million lbs.)** | ** ** | ** **         | ** ** | ** **                    | ** ** |
| 37.5                    |       | 2.90               |       | October 2008             |       |
| 33.5                    |       | 2.89               |       | November 2008            |       |
| 3.7                     |       | 2.88               |       | December 2008            |       |
| 2.0                     |       | 2.89               |       | January 2009             |       |
| 16.7                    |       | 2.89               |       | February 2009            |       |
| 26.1                    |       | 2.89               |       | March 2009               |       |
| 1.0                     |       | 2.89               |       | April 2009               |       |
| 120.5                   |       | 2.89               |       |                          |       |

 
| **Molybdenum**          | ** ** | **Priced at** | ** ** | **Month of Settlement** |   |
|-------------------------|------------|--------------------|------------|-----------------------------------|--------|
| **(million lbs.)** | ** ** | ** **         | ** ** | ** **                        |   |
| 1.1                     |       | 32.25              |       | October 2008                 |   |
| 2.3                     |       | 32.25              |       | November 2008                |   |
| 1.2                     |       | 32.25              |       | December 2008                |   |
| 4.6                     |       | 32.25              |       |                              |   |

 

Pleasesee note Q “Subsequent event”.

 

H.            Derivative Instruments

 

TheCompany occasionally uses derivative instruments to manage its exposure tomarket risk from changes in commodity prices, interest rate and exchange raterisk exposures and to enhance return on assets. The Company does not enter into derivative contracts unless itanticipates a future activity that is likely to occur that will result inexposing the Company 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 nine months of 2008, the Company entered into coppercollar and swap contracts to protect a portion of its 2008 sales of copper production.  As a result, the Company recorded a realizedgain of $18.5 million and $29.2 million in the third quarter and first ninemonths of 2008, respectively, compared with a loss of $0.3 million in the thirdquarter and a gain of $3.0 million in the first nine months of 2007,respectively.  These gains (losses) wererecorded in net sales in the 

 

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condensed consolidated statement of earnings and in accounts receivableother in the condensed consolidated balance sheet.

 

At September 30, 2008 the Company has copper collar contracts toprotect 66.1 million pounds of copper production for the October-December 2008period at weighted average minimum and maximum LME prices of $3.40 per poundand $4.23 per pound, respectively.  Ifthe LME price falls below the minimum price, the Company will be paid thedifference between the minimum price and the actual price.  If the LME price exceeds the maximum price,the Company will pay the difference between the maximum price and the actualprice.  Related to the fair value ofthese copper derivative contracts the Company recorded an unrealized gain of$33.7 million at the end of September 2008.  This gain was recorded in net sales in thecondensed consolidated statement of earnings and in accounts receivable otherin the condensed consolidated balance sheet.

 

Gasswaps:

 

In2008 and 2007 the Company entered into gas swap contracts to protect part ofits gas consumptions as follows:

 
| ** **               | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **               | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Gas volume (MMBTUs)      |       | 305,000                          |       | —                          |       | 305,000 |   | 900,000 |   |
| Fixed price              |       | 8.2175                           |       | —                          |       | 8.2175 |   | 7.5250 |   |
| Gain (loss) (in million) |       | $                                | (0.7       | )                               | —     |   | $ | (0.7 | ) | $ | (0.9 | ) |
|                          |            |                                  |            |                                 |            |  |  |  |  |  |  |  |

 

Thegains (losses) obtained were charged to production cost. As of September 30,2008 the Company held a gas swap contract to protect 155,000 MMBTUs of our gasconsumption with a fixed price of $8.2175 per MMBTU for the month of October 2008.  Related to the settlement of this gas swapcontract the Company recorded an unrealized loss of $0.4 million in the thirdquarter of 2008 which was included in the $0.7 million reported in the tableabove.

 

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

 

Becausemore than 85% of the Company’s sales collections in Mexico are in US dollarsand many of its costs are in Mexican pesos, the Company entered into zero-costderivative contracts with the purpose of protecting, within a range, against anappreciation of the Mexican peso to the US dollar.

 

AtSeptember 30, 2008 the Company held two types of exchange rate derivativecontracts:

 

Inthe first type of exchange rate derivative contract, if the exchange ratesettles at or below the barrier price, the Company does not sell US dollars, ifthe exchange rate settles above the barrier price and below the strike priceestablished in the contract, the Company sells the notional amount of USdollars settling in the week at the strike price.  If the exchange rate settles above the strikeprice established in the contract, the Company sells double the underlyingamount of US dollars settling in the week at the strike price established inthe contract.  At September 30,2008, the Company held the following contracts of this type:

 
| **Notional  Amount** | ** ** | **Underlying  amount ** | ** ** | **Due Date, Weekly  expiration during** | ** ** | **Strike Price**              | ** ** | **Barrier Price**                       | ** ** |
|----------------------|------------|------------------------------|------------|--------------------------------------------------------|------------|------------------------------------|------------|----------------------------------------------|------------|
| **(millions)**       | ** ** | **(millions)**               | ** ** | ** **                                             | ** ** | **(Mexican  Pesos/U.S.  Dollars)** | ** ** | **(Mexican Pesos/  U.S. Dollars)** | ** ** |
| $                    | 15.0       |                         | $          | 1.25                                                   |       | 4th Quarter  2008                  |       | 11.32                                        |       | 10.60 |   |
| $                    | 30.0       |                         | $          | 1.25                                                   |       | 1st Quarter  2009                  |       | 11.25                                        |       | 10.60 |   |

 

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Inthe second type of exchange rate derivative contract, if the exchange rate isless than or equal to the strike price, the Company sells US dollars in anamount equal to the underlying amount for the expiration period at the strikeprice.  The difference between the strikeprice and the market exchange rate is considered a gain to the Company.  The total accumulated gain over the life ofthe contract cannot exceed 200 cents per dollar transacted in the first contractand 500 cents per dollar transacted in the second and third contract.  If the exchange rate is above the strikeprice, the Company sells dollars in an amount equal to 2 times the underlyingamount for the expiration period at the strike price and the loss does notreduce the accumulated gain.  At September 30,2008, the Company held the following contracts of this type:

 
| **Notional  Amount ** | ** ** | **Underlying  amount** | ** ** | **Expiration  Period** | ** ** | **Due Date** | ** ** | **Strike Price**                                | ** ** |
|----------------------------|------------|------------------------|------------|------------------------|------------|-------------------|------------|------------------------------------------------------|------------|
| **(millions)**             | ** ** | **(millions)**         | ** ** | ** **             | ** ** | ** **        | ** ** | **(Mexican Pesos/  U.S. Dollars)**         | ** ** |
| $                          | 7.5        |                   | $          | 2.5                    |       | Monthly           |       | October 10,  2008 through December 11, 2008     |       | 10.80 |   |
| $                          | 15.0       |                   | $          | 2.5                    |       | Monthly           |       | January 13,  2009 through June 11, 2009    |       | 10.59 |   |
| $                          | 10.0       |                   | $          | 2.5                    |       | Weekly            |       | October 03,  2008 through October 24, 2008 |       | 10.80 |   |
| $                          | 107.5      |                   | $          | 2.5                    |       | Weekly            |       | October 31,  2008 through August 21, 2009  |       | 10.53 |   |

 

Inthe third quarter and first nine months of 2008 the exercise of some of thesezero-cost derivative contracts resulted in gains of $1.1 million and $2.1million, respectively, compared with gains of $1.9 million and $6.0 million inthe third quarter and first nine months of 2007, respectively, which wererecorded as gain on derivative instruments in the condensed consolidatedstatement of earnings.

 

AtSeptember 30, 2008, the fair value of the above listed exchange ratederivative contracts is a loss of $14.8 million which was recorded as a loss onderivative instruments in the condensed consolidated statement ofearnings.  Each notional amount includesa group of weekly transactions that have the same strike and barrier price.

 

Thetwo exchange derivative contracts of the second type held at June 30, 2008were cancelled in the third quarter of 2008 and the Company recognized a gainof $0.7 million, which is included in the $1.1 million and $2.1 million notedabove.

 

The$53.0 million exchange derivative contract held at December 31, 2007 wascancelled in the first quarter 2008 and the Company recognized a gain of $0.3million, which is included in the $2.1 million noted above.

 

Pleasesee note Q “Subsequent event”.

 

I.                 Asset Retirement Obligation:

 

The Company maintains an estimated asset retirement obligation for itsmining properties in Peru, as required by the Peruvian Mine Closure Law.  In accordance with the law, a conceptual mineclosure plan, without costs, was submitted to the Peruvian Ministry of Energyand Mines (“MEM”) in August 2006. The Company received MEM’s response in November 2007 and respondedto MEM’s review in March 2008.  In June 2008,the MEM requested additional information regarding the closure plan.  The Company complied with this request in July 2008.  Since the end of September 2008, publicdiscussion of the Company’s closure plan has begun in the areas of the Company’soperations.  In addition, this closureplan is being reviewed with INRENA and DIGESA, the Peruvian government agenciesfor the preservation of natural resources and for environmental and waterresources, respectively.

 

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The closure cost recognized for this liability includes the estimatedcost required at the Peruvian operations, based on the Company’s experience,and includes cost at the Ilo smelter, the tailing disposal, and dismantling theToquepala and Cuajone concentrators, and the shops and auxiliary facilities.

 

As of September 30, 2008, the Company has made an estimatedprovision of $7.4 million for this liability in its financial statements, butbelieves that this estimate should be viewed with caution, pending finalapproval of the mine closure plan.

 

The following table summarizes the asset retirement obligation activityfor the first nine months of 2008 and 2007 (in millions):

 
| ** **                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Balance as of January 1     |       | $        | 13.1       |     | $          | 12.2 |   |
| Additions, changes in estimates  |       | 0.7      |       | —   |       |
| Accretion expense                |       | 0.7      |       | 0.7      |       |
| Balance as of September 30, |       | $        | 14.5       |     | $          | 12.9 |   |

 

J.                Related Party Transactions:

 

Receivable and payable balances with affiliated companies are shownbelow (in millions):

 
| ** **                                  | ** ** | **As of**                   | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **September 30****,  2008** | ** ** | **December 31****,  2007** | ** ** |
|                                        |       |                             |       |   |   |
| Affiliate receivable:                       |       |                             |       |   |   |
| Grupo Mexico  S.A.B de C.V. and affiliates  |       | $                                | 0.8        |   | $ | 1.5 |   |
| Other                                       |       | —                           |       | 0.1 |   |
|                                        |       | $                                | 0.8        |   | $ | 1.6 |   |
| Affiliate payable:                          |       |                             |       |   |   |
| Grupo Mexico  S.A.B. de C.V. and affiliates |       | $                                | 8.7        |   | $ | 3.9 |   |

 

TheCompany has entered into certain transactions in the ordinary course ofbusiness with parties that are controlling shareholders or theiraffiliates.  These transactions includethe lease of office space, air transportation and construction services andproducts and services relating to mining and refining.  The Company lends and borrows funds amongaffiliates for acquisitions and other corporate purposes.  These financial transactions bear interestand are subject to review and approval by senior management, as are all relatedparty transactions.  It is our policythat the Audit Committee of the Board of Directors shall review all relatedparty transactions.  The Company isprohibited from entering or continuing a material related party transaction thathas not been reviewed and approved or ratified by the Audit Committee.

 

GrupoMexico, the Company’s ultimate parent and the majority indirect stockholder ofthe Company, and its affiliates provide various services to the Company.  These services are principally related toaccounting, legal, tax, financial, treasury, human resources, price riskassessment and hedging, purchasing, procurement and logistics, sales andadministrative and other support services. The Company pays to Grupo Mexico Servicios S.A de C.V., a subsidiary ofGrupo Mexico for these services.  Thetotal amount paid by the Company for such services in the first nine months of2008 and 2007 was $9.6 million and $10.3 million, respectively.  The Company expects to continue to pay forthese services in the future.

 

TheCompany’s Mexican operations paid fees of $7.9 million and $10.4 million in thefirst nine months of 2008 and 2007, respectively, primarily for freightservices provided by Ferrocarril Mexicano, S.A. de C.V., a subsidiary of GrupoMexico.

 

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Inaddition, the Company’s Mexican operations paid $16.0 million and $10.3 mi1lionin the first nine months of 2008 and 2007, respectively, for constructionservices provided by Mexico Constructora Industrial S.A. de C.V., an indirectsubsidiary of Grupo Mexico.

 

TheLarrea family controls a majority of the capital stock of Grupo Mexico, and hasextensive interests in other businesses, including oil drilling services,construction, aviation, and real estate. The Company engages in certain transactions in the ordinary course ofbusiness with other entities controlled by the Larrea family relating to miningand refining services, the lease of office space, sale of vehicles and airtransportation and construction services. In connection with this, the Company paid fees of $1.7 million and $1.9million in the first nine months of 2008 and 2007, respectively, formaintenance services and sale of vehicles provided by Mexico Compañia deProductos Automotrices, S.A. de C.V., a company controlled by the Larreafamily.  Additionally, our Mexicansubsidiaries have provided a guaranty for a $10.8 million loan obtained byMexico Transportes Aereos, S.A. de C.V. (“MexTransport”).  MexTransport, a company controlled by theLarrea family, provides aviation services to our Mexican operations.  The guaranty provided to MexTransport isbacked up by the transport services provided by MexTransport to the Company’sMexican subsidiaries.  The Company paidfees of $2.2 million and $0.8 million in the first nine months of 2008 and2007, respectively, to MexTransport for aviation services.

 

TheCompany purchased $3.4 million and $4.2 million in the first nine months of2008 and 2007, respectively of industrial materials from Higher TechnologyS.A.C in which Mr. Carlos Gonzalez, son of SCC’s Chief Executive Officer,is the principal owner.  The Company paidfees of $0.6 million and $0.5 million in the first nine months of 2008 and2007, respectively, for maintenance services provided by Servicios yFabricaciones Mecanicas S.A.C., a company in which Mr. Carlos Gonzalez isthe principal owner.

 

TheCompany purchased $0.7 million and $0.5 million in the first nine months of2008 and 2007, respectively, of industrial material from Sempertrans FranceBelting Technology, in which Mr. Alejandro Gonzalez, son of SCC’s ChiefExecutive Officer, is employed as a sales representative.  Also, the Company purchased $0.5 million and$0.3 million in the first nine months of 2008 and 2007, respectively, ofindustrial material from PIGOBA, S.A. de C.V., a company in which Mr. AlejandroGonzalez is the principal owner.

 

TheCompany purchased $1.7 million and $3.4 million in the first nine months of2008 and 2007, respectively, of industrial material and services from Breaker,S.A. de C.V., a company in which Mr. Jorge Gonzalez, son-in-law of SCC’sChief Executive Officer, is the principal owner.

 

It is anticipated that in the future the Company will enter intosimilar transactions with the same parties.

 

K.            Employee Benefit Plan:

 

SCC Defined Benefit Pension Plan-

 

The components of the net periodic benefit costs for the nine monthsended September 30, are as follows ($ in millions):

 

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| ** **                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Interest cost                   |       | $        | 0.5        |     | $          | 0.5 |   |
| Amortization of net loss (gain) |       | 0.1      |       | 0.1      |       |
| Expected return on plan assets  |       | (0.4     | )          | (0.4     | )          |
| Net periodic benefit cost       |       | $        | 0.2        |     | $          | 0.2 |   |

 

SCCPost-retirement Health Care Plan-

 

Thecomponents of the net periodic benefit costs for the post-retirement healthcare plan for the nine months ended September 30, 2008 and 2007 areindividually, and in total, less than $0.1 million.

 

MineraMexico Pension Plans-

 

Thecomponents of the net periodic benefit costs for the nine months ended September 30,2008 and 2007 are as follows ($ in millions):

 

| ** **                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Interest cost                  |       | $        | 1.5        |     | $          | 1.4 |   |
| Service cost                   |       | 1.9      |       | 1.5      |       |
| Expected return on plan assets |       | (2.3     | )          | (1.5     | )          |
| Net periodic benefit cost      |       | $        | 1.1        |     | $          | 1.4 |   |

 

Minera Mexico Post-retirement Health Care Plan-

 

The components of the net periodic cost for the nine months ended September 30,2008 and 2007 are as follows ($ in millions):

 

| ** **                | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
|                      |       |     |       |     |       |
| Interest cost             |       | $        | 2.3        |     | $          | 1.7 |   |
| Service cost              |       | 0.5      |       | 0.4      |       |
| Net periodic benefit cost |       | $        | 2.8        |     | $          | 2.1 |   |

 

L.              Comprehensive Income (in millions):

 

| ** **                                     | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                     | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income                                     |       | $                                | 417.8      |                            | $          | 627.8 |   | $ | 1,531.3 |   | $ | 1,905.5 |   |
| Other comprehensive income (loss) net of  tax: |       |                             |       |                            |       |   |   |   |   |
| Unrealized gain (loss) on investments          |       | —                           |       | —                          |       | — |   | (1.0 | ) |
| Comprehensive income                           |       | $                                | 417.8      |                            | $          | 627.8 |   | $ | 1,531.3 |   | $ | 1,904.5 |   |

 

The unrealized loss on investmentactivity in the 2007 period was related to an investment in a Mexicanconstruction company which was sold in 2007. This investment was accounted for as an available for-sale investment.

 

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M.         Commitments and Contingencies

 

Environmental matters:

 

The Company has institutedextensive environmental conservation programs at its mining facilities in Peruand Mexico.  The Company’s environmentalprograms include, among other features, water recovery systems to conservewater and minimize impact on nearby streams, reforestation programs tostabilize the surfaces of the tailings dams, and the implementation ofscrubbing technology in the mines to reduce dust emissions.

 

Peruvian operations

 

The Company’s operations aresubject to applicable Peruvian environmental laws and regulations.  The Peruvian government, through the MEMconducts annual audits of the Company’s Peruvian mining and metallurgicaloperations.  Through these environmentalaudits, matters related to environmental commitments, compliance with legalrequirements, atmospheric emissions, and effluent monitoring are reviewed.  The Company believes that it is in materialcompliance with applicable Peruvian environmental laws and regulations.

 

In the first quarter 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 appliedto all of the Company’s Peruvian operations and contained 34 mitigationmeasures and projects necessary to (1) bring the existing operations intocompliance with the environmental standards established by the MEM and (2) identifyareas impacted by operations that were no longer active and needed to bereclaimed.

 

In 2003 the Peruvian congress published a new law announcing futureclosure and remediation obligations for the mining industry.  In August 2006 and March 2008, inaccordance with this law and its amendments the Company prepared and submittedto MEM a closure plan.  In June 2008,the MEM requested additional information regarding the closure plan.  Since the end of September 2008, publicdiscussion the Company’s closure plan has begun in the areas of the Company’soperations.  In addition, this closureplan is being reviewed by Peruvian government agencies.  See note I “Asset Retirement Obligation” forfurther discussion of this matter.

 

Also,the Company has initiated environmental impact assessments for the expansion ofits concentrators at Toquepala and Cuajone, and for the Tia Maria project,located in the Department of Arequipa, which will have mining and leachingoperations.

 

For the Company’s Peruvianoperations, environmental capital expenditures were $5.1 million and $21.6million in the first nine months of 2008, and 2007, respectively.

 

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 and regulations arerelevant to legal proceedings pertaining to the Company’s San Luis Potosicopper facilities.

 

The principal legislationapplicable to the Company’s Mexican operations is the Federal General Law ofEcological Balance and Environmental Protection, which is enforced by theFederal Bureau of Environmental Protection (“PROFEPA”).  PROFEPA monitors compliance withenvironmental legislation and enforces Mexican environmental 

 

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laws, regulations andofficial standards.  PROFEPA may initiateadministrative proceedings against companies that violate environmental laws,which in the most extreme cases may result in the temporary or permanentclosing of non-complying facilities, the revocation of operating licensesand/or other sanctions or fines.  Also,according to the Federal Criminal Code,PROFEPA must inform corresponding authorities regarding environmentalnon-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 in1999.  However, the Company’s managementdoes not believe that continued compliance with the federal environmental lawor Mexican state environmental laws will have a material adverse effect on theCompany’s business, properties, results of operations, financial condition orprospects or will result in material capital expenditures.  Although the Company believes that all of itsfacilities are in material compliance with applicable environmental, mining andother laws and regulations, the Company cannot assure that future laws andregulations would not have a material adverse effect on the Company’s business,properties, results of operations, financial condition or prospects.

 

Due to the proximity ofcertain facilities of Minera Mexico to urban centers, the authorities mayimplement certain measures that may impact or restrain the operation of suchfacilities.

 

For the Company’s Mexicanoperations, environmental capital expenditures were $6.7 million and $20.4million in the first nine months of 2008 and 2007, respectively.

 

Litigation matters:

 

Peruvian operations

 

Garcia-Ataucuri and Othersagainst SCC:  In April 1996, theCompany was served with a complaint filed in Peru by approximately 800 formeremployees seeking the delivery of a substantial number of “labor shares”(acciones laborales) of its Peruvian Branch plus dividends on such shares, tobe issued in a proportional way to each former employee in accordance withtheir time of work with SCC’s Peruvian Branch.

 

The Company conducts itsoperations in Peru through a registered Branch. Although the Peruvian Branch has neither capital nor liability separatefrom that of the Company, under Peruvian law it is deemed to have an equitycapital for purposes of determining the economic interest of the holders of thelabor shares.  The labor share litigationis based on claims of former employees for ownership of labor shares issuedduring the 1970s until 1989 under a former Peruvian mandated profit sharingsystem. In 1971, the Peruvian government enacted legislation providing thatworkers in the mining industry would participate in the pre-tax profits of theenterprises for which they worked at a rate of 10%.  This participation was distributed 40% in cashand 60% as an equity interest in the enterprise.  Under the law, the equity participation wasoriginally delivered to the “Mining Community”, an organization representingall workers.  The cash portion wasdistributed to the workers after the close of the year.  The accrual for this participation was (andcontinues 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 

 

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to its present status, andthe workers’ participation in pre-tax profits was set at 8%, with 100% payablein cash.  The equity participationcomponent was eliminated from the law.

 

In 1995, the Company offeredto exchange new common shares of the Company for the labor shares issued underthe prior Peruvian law.  Approximately80.8% of the issued labor shares were exchanged for the Company’s commonshares, greatly reducing the minority interest on the Company’s balancesheet.  What remains of the workers’equity participation is now included on the consolidated balance sheet underthe caption “Minority interest.”

 

In relation to the issuanceof “labor shares” by the Branch in Peru, the Company is a defendant in thefollowing lawsuits:

 

1)              As stated above, in April 1996, theCompany was served with a complaint filed in Peru by approximately 800 formeremployees, (Garcia Ataucuri and others vs. SCC), seeking the delivery of38,763,806.80 “labor shares” (acciones laborales), now “investment shares”(acciones de inversion) (or S/. 3,876,380,679.56), as required by Law # 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 case.  In March 2005, theplaintiffs appealed this decision but the appellate court dismissed the appealdue to procedural defects and remanded the case to the lower labor court forfurther proceedings.  The lower labor court,on motions from the plaintiffs, reinstated the appeal of the dismissal of thecase of seven plaintiffs that had cured the procedural defects.  As of September 30, 2008, the caseremains open with no further new developments. The labor court has temporarily lost jurisdiction over this case untilthe Supreme Court decides on the Constitutional Tribunal’s decision describedbelow.

 

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 new proceedingbefore the labor courts when they had litigated against the Company in civilcourts for over 10 years.  The PeruvianConstitutional Court ordered the Supreme Court to decide again on the merits ofthe case accepting or denying the Company’s 2000 appeal.

 

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)              On May 10, 2006, the Company was servedwith a second complaint filed in Peru, this time by 44 former employees,(Cornejo Flores and others vs. SCC), seeking delivery of (1) labor shares(or shares of whatever other current legal denomination) corresponding to years1971 to December 31, 1977 (the plaintiffs are seeking the same38,763,806.80 labor shares mentioned in the prior lawsuit), that should have 

 

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beenissued in accordance with Law # 22333, plus interest and (2) labor sharesresulting from capital increases made by the Branch in 1980 “ for the amount ofthe 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 September 30,2008 the case remains open with no new developments.

 

3)              Additionally, on June 27, 2008, theCompany was served with a new complaint filed in Peru, this time by 82 formeremployees, (Alejandro Zapata Mamani and others vs. SPCC), seeking delivery oflabor shares (or shares of whatever other current legal denomination)corresponding to years 1971 to December 31, 1977 (the plaintiffs areseeking the same 38,763,806.80 labor shares mentioned in the two previous laborshare lawsuits), that should have been issued in accordance with Law # 22333,plus interest, and labor shares resulting from capital increases, plusdividends.  The Company answered this newcomplaint, denying the validity of the claim. As of September 30, 2008 thecase remains open with no new developments.

 

The Company asserts that theclaims are without merit and that the labor shares were distributed to theformer employees in accordance with the profit sharing law then in effect.  The Company does not believe that anunfavorable outcome is reasonably possible. The Company has not made a provision for these lawsuits because itbelieves that it has meritorious defenses to the claims asserted in thecomplaints.

 

Mineria Integral S.A.C.: In January 2007,the Company was served with three claims filed in Peru by Mineria IntegralS.A.C.  The claims alleged that theCompany had trespassed on certain mining rights of the plaintiff, in Ilo,Department of Moquegua, and sought that the Company desist from the trespassand pay compensation in the amount of $49.1 million.  In September 2008, the RegionalDirection of Moquegua ruled in favor of SPCC denying the plaintiff’sclaim.  The plaintiff has not appealedthis decision and therefore the case is closed.

 

Mexican operations -

 

The Mexican GeologicalServices (“MGS”) Royalties: In August 2002, MGS (formerly named Council ofMineral Resources (“COREMI”)) filed with the Third Federal District Judge inCivil Matters, an action demanding from Mexcobre (La Caridad) the payment ofroyalties since 1997.  In December 2005,Mexcobre signed an agreement with MGS. Under the terms of this agreement the parties established a newprocedure to calculate the royalty payments applicable for 2005 and thefollowing years, and the Company paid in January 2006, $6.9 million ofroyalties for 2005 and $8.5 million as payment on account of royalties from thethird quarter 1997 through the last quarter of 2004.  The Company estimates that the payment madeon January 11, 2006 will cover 100% of the royalty payments required for2004 and prior periods.  On January 22,2007 the Third Federal District Judge issued a ruling regarding the paymentrelated to the period from the third quarter of 1997 through the fourth quarterof 2004.  This ruling was appealed byboth parties in February 2007.  Theappeal was lost by the Company in October 2007.  The Company filed a protective action(Amparo) before the Ninth collegiate Civil Tribunal which rendered a negativeruling on August 27, 2008.  TheCompany will enter into the judicial process to determine the final amount tobe paid to MGS.  On an ongoing basis theCompany is required to pay a 1% royalty on La Caridad’s copper production valueafter deduction of treatment and refining charges and certain other carryingcosts.

 

San Luis Potosi Facilities:The municipality of San Luis Potosi has granted Desarrolladora Intersaba, S.A.de C.V. (“Intersaba”), licenses for use of land and construction of housingand/or commercial zones in the former Ejido Capulines zone, where someresidential projects like “Villa Magna” and other new residential projects arebeing developed within, an area, designated as a buffer zone due to IMMSA’s useof anhydrous ammonia gas.  Thisdesignation as a buffer zone was granted by the risk area 

 

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of SEMARNAT (the federalenvironmental authority) within its approval of the IMMSA’s Risk Analysis.

 

Regarding this situation, anumber of actions occurred, including the following:

 

1)     Against the municipality of San Luis Potosi, requesting theannulment of Desarrolladora Intersaba’s authorizations and licenses grantedwithin the zinc plant’s buffer zone.

 

In August 2006, theaction regarding the annulment of Villa Magna licenses was decided by a federalappeals court, which denied IMMSA’s request. In September 2006, IMMSA submitted its final appeal to the SupremeCourt of Justice and in February 2007, the court ruled against IMMSA.

 

IMMSA believes that eventhough the outcome was adverse to its interest, the construction of the “VillaMagna” housing and commercial development will not affect the operations ofIMMSA’s zinc plant by itself.

 

Intersaba has filed alawsuit against IMMSA, requesting payment of damages in the amount ofapproximately $11.0 million, supposedly caused by IMMSA during theseproceedings.  IMMSA has vigorously takenall necessary steps to defend against this lawsuit.  A decision is expected in the near future.

 

2)     In addition to the foregoing, IMMSA has initiated a series oflegal and administrative procedures against the Municipality of San Luis Potosidue to its refusal to issue IMMSA’s use of land permit (licencia de uso desuelo) in respect to its zinc plant.  Afederal judge ruled that IMMSA’s use of land permit should be granted.  The municipal authorities are evaluating howto comply with the ruling.

 

3)     Additionally, Ejido Capulines, an agricultural community, fileda protective action against IMMSA’s Risk Analysis approved by SEMARNAT.  As previously noted, this approval determinesa buffer zone around the San Luis facilities. IMMSA has taken all necessary steps to defend against the action.

 

4)     Also, new lawsuits were filed by IMMSA against the Municipalityof San Luis Potosi challenging other licenses granted in the safeguard area.

 

5)     IMMSA filed on October 7, 2008 a lawsuit against SEMARNATbefore the Federal Tax and Administrative Justice Court seeking the nullity ofa July 24, 2008 denial of the Company’s request for a safeguarddeclaration.

 

The Ejidal Commissariat ofthe “Ejido Pilares de Nacozari”, initiated a protective action (Amparo) againstthe second expropriation decree (by means of which 2.322 hectares wereexpropriated for public use), ignoring the judicial settlement reached with theCompany on this matter. The judicial settlement had been ratified in January 2006.  The Company will defend the settlementreached with the Ejido and seek the dismissal of the case.

 

Mrs. Martinez, the wifeof a miner, who died in the Pasta de Conchos accident, initiated a protectiveaction against the negative ruling issued by the Ministry of Economy denyingher request to launch a procedure to cancel Industrial Minera México’s coalconcessions, which she argued the accident should trigger.

 

The First DistrictAdministrative Judge flatly dismissed the case, but this ruling was laterrevised by an appeals court.  Mrs. Martinezfiled a new protective action against a new ruling issued by the Ministry ofEconomy.  The Company is certain that anaccident cannot trigger a procedure of cancellation of the coalconcessions.  Although the Company cannotpredict the outcome of the procedures filed by Mrs. Martinez, the Companyasserts that the claims of Mrs. Martinez are without merit and isvigorously defending against the actions.

 

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Labor matters:

 

In recent years the Companyhas experienced a number of strikes or other labor disruptions that have had anadverse impact on its operations and operating results.

 

Peruvian Operations

 

Collective bargainingagreements with the Company’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 theCananea mine has experienced more than nine labor stoppages totaling morethan 542 days of inactivity.  Beginningon 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. The workers partially returned to work and theCompany resumed operations. However, on April 11, 2008 the workersrestarted the labor stoppage and shut down production, based upon a newfederal ruling. On September 4, 2008, the Fourth Labor District Judge grantedthe Company’s motion for reconsideration of a ruling by the Federal Laborcourt, which will issue a new decision. The Company has tried unsuccessfully to resolve the current labor stoppage thatobstructs production at Cananea, hence in the second quarter 2008, the Board ofDirectors decided to offer all employees a severance payment in accordance withthe collective bargaining agreement and applicable law.  This was offered in order to award theemployees a significant severance payment that allows them to choose the laboralternative that is best for each of them. During the second and third quarters of 2008, a group of employees wasliquidated at a cost to the Company of $14.4 million, which was recorded in costof sales on the condensed consolidated statement of earnings.  In accordance with SFAS No. 112, theCompany has estimated a liability of $48.4 million which has been recorded onthe condensed consolidated balance sheet. It is expected that production at Cananea will remain suspended untilthese labor issues are resolved.

 

Additionally, our Taxco andSan Martin mines have been on strike since July 2007.  It is expected that operations at these mineswill remain suspended until these labor issues are resolved.  However, the Company believes that the strikeactivity will not result in an impairment of assets.

 

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 Action No. 961-N, Therault Trust v. Luis Palomino Bonilla, et al.,and Southern Copper Corporation, et al., Civil Action No. 969-N, and JamesSousa v. Southern Copper Corporation, et al., Civil Action No. 978-N wereconsolidated into one action titled, In re Southern Copper CorporationShareholder Derivative Litigation, Consol. C. A. No. 961-N and the complaint filed in Lemon Bay was designatedas the operative complaint in the consolidated lawsuit.  The consolidated action purports to bebrought on behalf of the Company’s common stockholders.

 

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The consolidated complaintalleges, among other things, that the acquisition of Minera Mexico is theresult of breaches of fiduciary duties by the Company’s directors and is notentirely fair to the Company and its minority stockholders.  The consolidated complaint seeks, among otherthings, a preliminary and permanent injunction to enjoin the acquisition, theaward of damages to the class, the award of damages to the Company and suchother relief that the court deems equitable, including interest, attorneys’ andexperts’ fees and costs.  The defendantsbelieve that this lawsuit is without merit and are vigorously defendingthemselves against the action.

 

The Company’s managementbelieves that the outcome of the aforementioned legal proceeding will not havea material adverse effect on the Company’s financial position or results ofoperations.

 

The Company is involved invarious other legal proceedings incidental to its operations, but the Companydoes not believe that decisions adverse to it in any such proceedingsindividually or in the aggregate would have a material adverse effect on itsfinancial position or results of operations.

 

The Company’s direct andindirect parent corporations, including AMC and Grupo Mexico, have from time totime been named parties 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 a lawsuit filed in New York State court in connection withalleged asbestos liabilities, which lawsuit claims, among other matters, thatAMC’s purchase of SCC from Asarco should be voided as a fraudulentconveyance.  The lawsuit filed in NewYork State court was stayed as a result of the August 2005 Chapter 11bankruptcy filing by Asarco, as described below.  However, on November 16, 2007, thislawsuit after being removed to federal court was transferred to the UnitedStates District Court for the Southern District of Texas in Brownsville, Texas,for resolution in conjunction with a new lawsuit filed by Asarco’s creditors,as described below.  On February 2,2007 a complaint was filed by Asarco on behalf of Asarco’s creditors, ,alleging many of the matters previously claimed in the New York State lawsuit,including that AMC’s purchase of SCC from Asarco should be voided as afraudulent conveyance.  In June 2008the lawsuit was concluded in Brownsville, Texas. The constructive fraudulentconveyance claim was dismissed; however the actual fraud and the aiding andabetting the breach of fiduciary duties counts were favorable to plaintiffs.The court’s decision did not determine the damage amount. Grupo Mexico willappeal the ruling. While Grupo Mexico and its affiliates believe that theseclaims are without merit, the Company cannot assure you that these or futureclaims, if successful, will not have an adverse effect on the Company’s parentcorporation or the Company.  Any increasein the financial obligations of the Company’s parent corporation, as a resultof matters related to Asarco or otherwise could, among other effects; result inthe Company’s parent corporation attempting to obtain increased dividends orother funding from the Company.  In 2005,certain subsidiaries of Asarco filed bankruptcy petitions in connection withalleged asbestos liabilities.  In July 2005,the unionized workers of Asarco commenced a work stoppage.  As a result of various factors, including theabove-mentioned work stoppage, in August 2005 Asarco filed a voluntarypetition for relief under Chapter 11 of the U.S. Bankruptcy Code before theU.S. Bankruptcy Court in Corpus Christi, Texas. Asarco’s bankruptcy case is being joined with the bankruptcy cases ofits subsidiaries.  Asarco’s bankruptcycould result in additional claims being filed against Grupo Mexico and itssubsidiaries, including SCC, Minera Mexico or its subsidiaries.

 

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Other:

 

Regionaldevelopment contribution:

 

In December 2006, theCompany’s Peruvian Branch signed a contract with the Peruvian governmentcommitting the Company to annual contributions for five years to support theregional development of Peru.  This wasin response to an appeal by the president of Peru to the mining industry.  The contributions are being used for socialbenefit programs.  In 2008 and 2007, theCompany made 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, Copper Assistance Civil Association (Asociación Civil Ayudadel Cobre) which will make disbursements for approved investments in accordancewith the agreement.  The following years’contributions could increase 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 average annual LME copper price isbelow $1.79 per pound the contribution will cease.  In the first nine months of 2008 the Companymade a provision of $12.0 million based on Peruvian Branch earnings.

 

Royalty charge

 

In June 2004, thePeruvian Congress enacted legislation imposing a royalty charge to be paid bymining companies.  Under this law, theCompany is subject to a 1% to 3% royalty, based on sales, applicable to thevalue of the concentrates produced in our Toquepala and Cuajone mines.  The Company made provisions of $50.6 millionand $46.7 million in the first nine months of 2008 and 2007, respectively, forthis royalty.  These provisions areincluded in “Cost of sales (exclusive of depreciation, amortization anddepletion)” in the condensed consolidated statement of earnings.

 

Power purchase agreement

 

In 1997, SCC sold its Ilopower plant to an independent power company, Enersur S.A. (“Enersur”).  In connection with the sale, a power purchaseagreement was also completed under which SCC agreed to purchase all of itspower needs for its Peruvian operations from Enersur for twenty years,commencing in 1997.  In 2003 theagreement was 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 providedfor under FIN No 48 (see Note F “Income Taxes.”)

 

N.            Segment and Related Information:

 

Company management views Southern Copper as having three operatingsegments and manages on the basis of these segments.  The significant increase in the price ofmolybdenum in recent years has had an important impact on the Company’searnings.  Nevertheless, the Companycontinues to manage its operations on the basis of the three coppersegments.  Each of its segments reportindependently to the Chief Operating Officer and he focuses on operating incomeas a measure of performance to evaluate different segments, and to makedecisions to allocate resources to the reported segments.

 

Thethree segments identified are groups of mines with similar economic characteristics,type of products, processes and support facilities, similar regulatoryenvironments, similar employee bargaining contracts and similar currencyrisks.  In addition, each mine within theindividual group earns revenues from 

 

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similartype of customers for their products and services and each group incursexpenses independently, including commercial transactions between groups.

 

Intersegment sales are based on arms-length prices at the time ofsale.  These may not be reflective ofactual prices realized by the Company due to various factors, includingadditional processing, timing of sales to outside customers and transportationcost.  Added to the segment informationis information regarding the Company’s molybdenum sales.  The segments identified by the Company are:

 

1.               Peruvian operations, which includes theToquepala and Cuajone mine complexes and the smelting and refining plants,industrial railroad and port facilities which service both mines.

 

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 processingfacilities for zinc and copper.  Thisgroup 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 throughout theworld.  These shipments are recorded asrevenues 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 environment of the Mexican openpit mines, the nature of the products and processes of the two Mexicanoperations vary distinctly.  Thesedifferences cause the Company’s Chief Operating Officer to take a verydifferent approach when analyzing results and making decisions regarding thetwo 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 income andon total assets as measures of performance to evaluate 

 

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differentsegments and to make decisions to allocate resources to the reportedsegments.  These are common measures inthe mining industry.

 

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

 
| ** **                                                             | ** ** | **Three Months Ended September 30, 2008** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                                             | ** ** |
| ** **                                                             | ** ** | **Mexican  Open Pit**                                         | ** ** | **Mexican  IMMSA  Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate and  other  Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales outside of segments                                          |       | $                                                                  | 465.3      |   | $ | 109.8 |   | $ | 865.0 |   | — |   | $ | 1,440.1 |   |
| Intersegment sales                                                     |       | 36.4                                                               |       | 16.9 |   | — |   | $ | (53.3 | ) | — |   |
| Cost of sales (exclusive of depreciation, amortization  and depletion) |       | 207.8                                                              |       | 116.7 |   | 372.8 |   | (51.5 | ) | 645.8 |   |
| Selling, general and administrative                                    |       | 9.6                                                                |       | 5.4 |   | 9.8 |   | 1.2 |   | 26.0 |   |
| Depreciation, amortization and depletion                               |       | 47.3                                                               |       | 8.4 |   | 28.8 |   | (0.5 | ) | 84.0 |   |
| Exploration                                                            |       | 1.2                                                                |       | 3.1 |   | 4.1 |   | — |   | 8.4 |   |
| Operating income                                                       |       | $                                                                  | 235.8      |   | $ | (6.9 | ) | $ | 449.5 |   | $ | (2.5 | ) | 675.9 |   |
| Less:                                                                  |       |                                                               |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                                               |       |   |   |   |   |   |   | (16.0 | ) |
| Loss on derivative instruments                                         |       |                                                               |       |   |   |   |   |   |   | (13.6 | ) |
| Other income (expense)                                                 |       |                                                               |       |   |   |   |   |   |   | 23.8 |   |
| Income taxes                                                           |       |                                                               |       |   |   |   |   |   |   | (249.7 | ) |
| Minority interest                                                      |       |                                                               |       |   |   |   |   |   |   | (2.6 | ) |
| Net earnings                                                           |       |                                                               |       |   |   |   |   |   |   | $ | 417.8 |   |
|                                                                   |       |                                                               |       |   |   |   |   |   |   |   |   |
| Capital expenditure                                                    |       | $                                                                  | 29.9       |   | $ | 11.6 |   | $ | 86.5 |   | $ | 6.2 |   | $ | 134.2 |   |
| Property, net                                                          |       | $                                                                  | 1,625.3    |   | $ | 263.2 |   | $ | 1,737.3 |   | $ | 36.1 |   | $ | 3,661.9 |   |
| Total assets                                                           |       | $                                                                  | 2,789.9    |   | $ | 683.3 |   | $ | 2,909.6 |   | $ | (36.1 | ) | $ | 6,346.7 |   |

 
| ** **                                                             | ** ** | **Three Months Ended September 30, 2007** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                                             | ** ** |
| ** **                                                             | ** ** | **Mexican  Open Pit**                                         | ** ** | **Mexican  IMMSA  Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate and  other  Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                   |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net sales outside of segments                                          |       | $                                                                  | 418.9      |   | $ | 158.7 |   | $ | 1,028.8 |   |   |   | $ | 1,606.4 |   |
| Intersegment sales                                                     |       | 62.4                                                               |       | 19.8 |   |   |   | $ | (82.2 | ) | — |   |
| Cost of sales (exclusive of depreciation,  amortization and depletion) |       | 171.3                                                              |       | 96.4 |   | 374.0 |   | (81.7 | ) | 560.0 |   |
| Selling, general and administrative expense                            |       | 8.3                                                                |       | 5.5 |   | 9.0 |   | 0.8 |   | 23.6 |   |
| Depreciation, amortization and depletion                               |       | 43.7                                                               |       | 9.9 |   | 27.4 |   | 0.5 |   | 81.5 |   |
| Exploration                                                            |       | 0.7                                                                |       | _2.9 |   | 4.1 |   | — |   | 7.7 |   |
| Operating income                                                       |       | $                                                                  | 257.3      |   | $ | 63.8 |   | $ | 614.3 |   | $ | (1.8 | ) | 933.6 |   |
| Less:                                                                  |       |                                                               |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                                               |       |   |   |   |   |   |   | (4.0 | ) |
| Gain on derivative instruments                                         |       |                                                               |       |   |   |   |   |   |   | 3.0 |   |
| Other income (expense)                                                 |       |                                                               |       |   |   |   |   |   |   | (5.5 | ) |
| Income taxes                                                           |       |                                                               |       |   |   |   |   |   |   | (296.1 | ) |
| Minority interest                                                      |       |                                                               |       |   |   |   |   |   |   | (3.2 | ) |
| Net earnings                                                           |       |                                                               |       |   |   |   |   |   |   | $ | 627.8 |   |
|                                                                   |       |                                                               |       |   |   |   |   |   |   |   |   |
| Capital expenditure                                                    |       | $                                                                  | 39.8       |   | $ | 7.3 |   | $ | 24.5 |   | $ | 0.5 |   | $ | 72.1 |   |
| Property, net                                                          |       | $                                                                  | 1,604.2    |   | $ | 245.7 |   | $ | 1,662.4 |   | $ | 70.2 |   | $ | 3,582.5 |   |
| Total assets                                                           |       | $                                                                  | 3,400.7    |   | $ | 647.4 |   | $ | 3,383.7 |   | $ | (682.5 | ) | $ | 6,749.3 |   |

 

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| ** **                                                             | ** ** | **Nine Months Ended September 30, 2008** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                                            | ** ** |
| ** **                                                             | ** ** | **Mexican  Open Pit**                                        | ** ** | **Mexican  IMMSA  Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate and  other  Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales outside of segments                                          |       | $                                                                 | 1,343.0    |   | $ | 369.0 |   | $ | 2,689.1 |   | — |   | $ | 4,401.1 |   |
| Intersegment sales                                                     |       | 96.5                                                              |       | 82.9 |   | — |   | $ | (179.4 | ) | — |   |
| Cost of sales (exclusive of depreciation,  amortization and depletion) |       | 591.8                                                             |       | 311.3 |   | 992.0 |   | (178.2 | ) | 1,716.9 |   |
| Selling, general and administrative                                    |       | 28.1                                                              |       | 16.6 |   | 31.2 |   | 1.4 |   | 77.3 |   |
| Depreciation, amortization and depletion                               |       | 139.9                                                             |       | 24.4 |   | 85.2 |   | (1.2 | ) | 248.3 |   |
| Exploration                                                            |       | 4.1                                                               |       | 7.2 |   | 14.2 |   | — |   | 25.5 |   |
| Operating income                                                       |       | $                                                                 | 675.6      |   | $ | 92.4 |   | $ | 1,566.5 |   | $ | (1.4 | ) | 2,333.1 |   |
| Less:                                                                  |       |                                                              |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                                              |       |   |   |   |   |   |   | (40.3 | ) |
| Loss on derivative instruments                                         |       |                                                              |       |   |   |   |   |   |   | (12.7 | ) |
| Other income (expense)                                                 |       |                                                              |       |   |   |   |   |   |   | 23.9 |   |
| Income taxes                                                           |       |                                                              |       |   |   |   |   |   |   | (764.6 | ) |
| Minority interest                                                      |       |                                                              |       |   |   |   |   |   |   | (8.1 | ) |
| Net earnings                                                           |       |                                                              |       |   |   |   |   |   |   | $ | 1,531.3 |   |
|                                                                   |       |                                                              |       |   |   |   |   |   |   |   |   |
| Capital expenditure                                                    |       | $                                                                 | 107.9      |   | $ | 30.9 |   | $ | 167.9 |   | $ | 8.3 |   | $ | 315.0 |   |
| Property, net                                                          |       | $                                                                 | 1,625.3    |   | $ | 263.2 |   | $ | 1,737.3 |   | $ | 36.1 |   | $ | 3,661.9 |   |
| Total assets                                                           |       | $                                                                 | 2,789.9    |   | $ | 683.3 |   | $ | 2,909.6 |   | $ | (36.1 | ) | $ | 6,346.7 |   |

 
| ** **                                                             | ** ** | **Nine Months Ended September 30, 2007** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                                            | ** ** |
| ** **                                                             | ** ** | **Mexican  Open Pit**                                        | ** ** | **Mexican  IMMSA  Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate  and other  Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                   |       |                                                              |       |   |   |   |   |   |   |   |   |
| Net sales outside of segments                                          |       | $                                                                 | 1,620.9    |   | $ | 471.5 |   | $ | 2,698.8 |   |   |   | $ | 4,791.2 |   |
| Intersegment sales                                                     |       | 210.3                                                             |       | 71.3 |   | — |   | $ | (281.6 | ) | — |   |
| Cost of sales (exclusive of depreciation,  amortization and depletion) |       | 569.0                                                             |       | 268.5 |   | 1,036.4 |   | (284.9 | ) | 1,589.0 |   |
| Selling, general and administrative expense                            |       | 29.2                                                              |       | 18.3 |   | 29.1 |   | (3.4 | ) | 73.2 |   |
| Depreciation, amortization and depletion                               |       | 130.7                                                             |       | 27.6 |   | 80.7 |   | 1.1 |   | 240.1 |   |
| Exploration                                                            |       | 3.3                                                               |       | 6.9 |   | 12.5 |   | — |   | 22.7 |   |
| Operating income                                                       |       | $                                                                 | 1,099.0    |   | $ | 221.5 |   | $ | 1,540.1 |   | $ | 5.6 |   | 2,866.2 |   |
| Less:                                                                  |       |                                                              |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                                              |       |   |   |   |   |   |   | (18.4 | ) |
| Loss on derivative instruments                                         |       |                                                              |       |   |   |   |   |   |   | (73.7 | ) |
| Other income (expense)                                                 |       |                                                              |       |   |   |   |   |   |   | 20.2 |   |
| Income taxes                                                           |       |                                                              |       |   |   |   |   |   |   | (881.2 | ) |
| Minority interest                                                      |       |                                                              |       |   |   |   |   |   |   | (7.6 | ) |
| Net earnings                                                           |       |                                                              |       |   |   |   |   |   |   | $ | 1,905.5 |   |
|                                                                   |       |                                                              |       |   |   |   |   |   |   |   |   |
| Capital expenditure                                                    |       | $                                                                 | 102.1      |   | $ | 16.8 |   | $ | 104.9 |   | $ | 27.3 |   | $ | 251.1 |   |
| Property, net                                                          |       | $                                                                 | 1,604.2    |   | $ | 245.7 |   | $ | 1,662.4 |   | $ | 70.2 |   | $ | 3,582.5 |   |
| Total assets                                                           |       | $                                                                 | 3,400.7    |   | $ | 647.4 |   | $ | 3,383.7 |   | $ | (682.5 | ) | $ | 6,749.3 |   |

 

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Salesvalue per segment:

 
| ** ** | ** ** | **Three Months Ended September 30, 2008** | ** ** |
|------------|------------|--------------------------------------------------------------------|------------|
| ** ** | ** ** | **(in millions)**                                             | ** ** |
| ** ** | ** ** | **Mexican  Open Pit**                                         | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|       |       |                                                               |       |   |   |   |   |   |   |   |   |
| Copper     |       | $                                                                  | 311.7      |   | $ | 14.4 |   | $ | 636.4 |   | $ | (35.1 | ) | $ | 927.4 |   |
| Molybdenum |       | 139.2                                                              |       | — |   | 179.7 |   | — |   | 318.9 |   |
| Other      |       | 50.8                                                               |       | 112.3 |   | 48.9 |   | (18.2 | ) | 193.8 |   |
| Total      |       | $                                                                  | 501.7      |   | $ | 126.7 |   | $ | 865.0 |   | $ | (53.3 | ) | $ | 1,440.1 |   |

 
| ** ** | ** ** | **Three Months Ended September 30, 2007** | ** ** |
|------------|------------|--------------------------------------------------------------------|------------|
| ** ** | ** ** | **(in millions)**                                             | ** ** |
| ** ** | ** ** | **Mexican  Open Pit**                                         | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|       |       |                                                               |       |   |   |   |   |   |   |   |   |
| Copper     |       | $                                                                  | 375.9      |   | $ | 32.7 |   | $ | 791.1 |   | $ | (62.6 | ) | $ | 1,137.1 |   |
| Molybdenum |       | 86.2                                                               |       | — |   | 188.6 |   | — |   | 274.8 |   |
| Other      |       | 19.2                                                               |       | 145.8 |   | 49.1 |   | (19.6 | ) | 194.5 |   |
| Total      |       | $                                                                  | 481.3      |   | $ | 178.5 |   | $ | 1,028.8 |   | $ | (82.2 | ) | $ | 1,606.4 |   |

 
| ** ** | ** ** | **Nine Months Ended September 30, 2008** | ** ** |
|------------|------------|-------------------------------------------------------------------|------------|
| ** ** | ** ** | **(in millions)**                                            | ** ** |
| ** ** | ** ** | **Mexican  Open Pit**                                        | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|       |       |                                                              |       |   |   |   |   |   |   |   |   |
| Copper     |       | $                                                                 | 939.6      |   | $ | 75.3 |   | $ | 2,070.6 |   | $ | (107.4 | ) | $ | 2,978.1 |   |
| Molybdenum |       | 382.4                                                             |       | — |   | 485.6 |   | — |   | 868.0 |   |
| Other      |       | 117.5                                                             |       | 376.6 |   | 132.9 |   | (72.0 | ) | 555.0 |   |
| Total      |       | $                                                                 | 1,439.5    |   | $ | 451.9 |   | $ | 2,689.1 |   | $ | (179.4 | ) | $ | 4,401.1 |   |

 
| ** ** | ** ** | **Nine Months Ended September 30, 2007** | ** ** |
|------------|------------|-------------------------------------------------------------------|------------|
| ** ** | ** ** | **(in millions)**                                            | ** ** |
| ** ** | ** ** | **Mexican  Open Pit**                                        | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|       |       |                                                              |       |   |   |   |   |   |   |   |   |
| Copper     |       | $                                                                 | 1,441.2    |   | $ | 83.9 |   | $ | 2,099.1 |   | $ | (209.9 | ) | $ | 3,414.3 |   |
| Molybdenum |       | 314.2                                                             |       | — |   | 463.2 |   | — |   | 777.4 |   |
| Other      |       | 75.8                                                              |       | 458.9 |   | 136.5 |   | (71.7 | ) | 599.5 |   |
| Total      |       | $                                                                 | 1,831.2    |   | $ | 542.8 |   | $ | 2,698.8 |   | $ | (281.6 | ) | $ | 4,791.2 |   |

 

Thegeographic breakdown of the Company’s sales is as follows (in millions):

 
| ** **                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| United States                             |       | $                                                    | 417.2      |                                                | $          | 455.4 |   | $ | 1,182.3 |   | $ | 1,359.4 |   |
| Europe                                    |       | 284.7                                                |       | 467.2                                               |       | 1,006.2 |   | 1,093.9 |   |
| Mexico                                    |       | 347.4                                                |       | 237.2                                               |       | 1,017.7 |   | 971.7 |   |
| Peru                                      |       | 33.3                                                 |       | 50.7                                                |       | 111.5 |   | 103.1 |   |
| Latin America (excluding Mexico and Peru) |       | 251.5                                                |       | 327.4                                               |       | 806.1 |   | 762.9 |   |
| Asia                                      |       | 51.8                                                 |       | 68.8                                                |       | 214.4 |   | 497.2 |   |
| Derivative instruments                    |       | 54.2                                                 |       | (0.3                                                | )          | 62.9 |   | 3.0 |   |
| Total                                     |       | $                                                    | 1,440.1    |                                                | $          | 1,606.4 |   | $ | 4,401.1 |   | $ | 4,791.2 |   |

 

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MajorCustomer Segment Information:

 

Forthe nine months ended September 30, 2008, the Company had revenues fromtwo copper customers of the Mexican and Peruvian operations, which amounted to16.1% of total revenue; revenues from one of these customers amounted to 11.4%of total revenue.  In addition, theCompany had revenues from two molybdenum customers of the Peruvian and Mexicanoperations, which amounted to 16.4% of total revenues; revenues from one ofthese customers amounted to 9.0% of total revenue, these customers represent83.0% of the Company’s molybdenum sales revenue.

 

Forthe nine months ended September 30, 2007, the Company had revenue from twocopper customers of the Mexican and Peruvian operations, which amounted to21.8% of total revenue; revenues from one of these customers amounted to 14.0%of total revenue.  In addition, theCompany had revenue from two molybdenum customers of the Peruvian and Mexicanoperations, which amounted to 13.0% of total revenues; these customersrepresent 80.0% of the Company’s molybdenum sales revenue.

 

O.            Impact of New Accounting Standards:

 

In May 2008, the Financial AccountingStandards Board (FASB) issued FASB Statement No. 162, “The Hierarchy ofGenerally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and theframework for selecting the principles to be used in the preparation offinancial statements of nongovernmental entities that are presented inconformity with generally accepted accounting principles in the UnitedStates.  This Statement is effective 60days following the SEC’s approval of the Public Company Accounting OversightBoard amendments to AU Section 411, “The Meaning of Present Fairly inConformity With Generally Accepted Accounting Principles.”  The Company does not expect any materialimpact on its financial position and results of operations with the adoption ofthis statement.

 

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 the effect that this statement will have on itsfinancial position and results of operations.

 

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

 

SFAS No. 160 will be effective forfiscal years, and interim periods 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.

 

In December 2007, the FASB publishedSFAS No. 141-R, which replaces SFAS No. 141, “Business Combinations.”  This statement improves the reporting ofinformation about a business combination and its effects.  This statement establishes principles and 

 

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requirements for how the acquirer willrecognize and measure the identifiable assets acquired, the liabilitiesassumed, and any non-controlling interest in the acquisition.  Also, the statement determines the recognitionand measurement of goodwill acquired in the business combination or a gain froma bargain purchase, and finally, determines the disclosure requirements toenable users of the financial statements to evaluate the nature and financialeffects of the business combination.

 

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

 

P.              Stockholders’ Equity:

 

Commonstock:

 

OnJune 19, 2008 the Executive Committee of the Board of Directors declared athree-for-one split of the Company’s outstanding common stock.  On July 10, 2008 common shareholders ofrecord at the close of business on June 30, 2008, received two additionalshares of common stock for every share owned. The Company’s common stock began trading at its post-split price on July 10,2008.  The split increased the number ofshares outstanding to 883,410,150 from 294,470,050.  The stock split was recorded in our 2008financial statements.  All share and pershare amounts have been retroactively adjusted to reflect the stock split.

 

Treasury Stock:

 

Activity in treasury stockin the nine month period ended September 30, 2008 is as follows (inmillions):

 

| Southern Copper common shares                                                 |   |   |   |
|-------------------------------------------------------------------------------|--------|--------|--------|
| Balance as of December 31, 2007                                          |   | $      | 4.4    |   |
| Purchase of shares                                                            |   | 68.5   |   |
| Used for corporate purposes                                                   |   | (0.1   | )      |
| Balance as of September 30, 2008                                         |   | $      | 72.8   |   |
|                                                                          |   |   |   |
| Parent Company (Grupo Mexico) common shares                                   |   |   |   |
| Balance as of December 31, 2007                                          |   | 170.3  |   |
| Other activity, including dividend,  interest and currency translation effect |   | 46.5   |   |
| Balance as of September 30, 2008                                         |   | $      | 216.8  |   |
|                                                                          |   |   |   |
| Treasury stock balance as of  September 30, 2008                         |   | $      | 289.6  |   |

 

Inthe nine months of 2008 the Company distributed 13,200 shares of SouthernCopper (4,400 shares prior to the stock split) to directors under the Directors’Stock Award Plan.  In the first ninemonths of 2008 the Company did not award any share of Grupo Mexico under theemployee stock purchase plan.

 

On June 19, 2008 GrupoMexico announced a three-for-one split of their outstanding common stock whichwas effective on June 30, 2008. Accordingly all share amounts on the Employee and Executive StockPurchase Plans have been retroactively adjusted to reflect the stock split.

 

On August 22, 2008Grupo Mexico paid a dividend of 1 share for each 150 shares held, asconsequence the number of Grupo Mexico shares held by the Company increased by2,792,315 shares from 433,351,490 shares to 436,143,805 shares. Please see noteQ 

 

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“Subsequent event” for October announcementregarding the sale of Grupo Mexico shares.

 

SCC share repurchaseprogram:

 

Pursuant to the $300 millionshare repurchase program authorized by the Company’s Board of Directors in thefirst quarter of 2008, in the third quarter of 2008 the Company purchased 3.3million shares of its common stock at a cost of $68.5 million.  These shares will be available for generalcorporate purposes.  The Company maypurchase additional shares from time to time, based on market conditions andother factors.  This repurchase programhas no expiration date and may be modified or discontinued at any time.

 

The following table presentsthe repurchase program activity for the three months ended September 30,2008:

 
| **Period** | ** ** | **Total  Number of  Shares** | ** ** | **Average  Price  Paid per** | ** ** | **Total Number of  Shares Purchased  as Part of  Publicly** | ** ** | **Maximum Number of  Shares that May  Yet Be Purchased  Under the Plan @** | ** ** |
|------------|------------|-----------------------------------|------------|-----------------------------------|------------|--------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|
| **From**   | ** ** | **To**                            | ** ** | **Purchased**                     | ** ** | **Share**                                                                            | ** ** | **Announced Plan**                                                                                                 | ** ** | **$19.08** | ** ** |
|       |       |                              |       |                              |       |                                                                                 |       |                                                                                                                    |       |   |   |
| 08/11/2008 |       | 08/31/2008                        |       | 410,150                           |       | $                                                                                    | 22.91      |                                                                                                                    | 410,150    |   | 15,230,733 |   |
|       |       |                              |       |                              |       |                                                                                 |       |                                                                                                                    |       |   |   |
| 09/01/2008 |       | 09/30/2008                        |       | 2,900,000                         |       | $                                                                                    | 20.37      |                                                                                                                    | 3,310,150  |   | 12,134,666 |   |
|       |       |                              |       |                              |       |                                                                                 |       |                                                                                                                    |       |   |   |
|       |       | Total                             |       | 3,310,150                         |       | $                                                                                    | 20.69      |                                                                                                                    |       |   |   |   |

 

As a result of therepurchase of SCC common shares the indirect ownership of Grupo Mexico hasincreased from 75.1% to 75.4% at September 30, 2008.  Please see note Q “Subsequent event” forsubsequent activity under the SCC share repurchase program.

 

Directors’ Stock Award Plan:

 

The Company established astock award compensation plan for certain directors who are not compensated asemployees of the Company.  Under thisplan, participants will receive 1,200 shares (400 shares before the stocksplit) of common stock upon election and 1,200 additional shares following eachannual meeting of stockholders thereafter. 600,000 shares of Southern Copper common stock have been reserved forthis plan.  As of September 30, 2008and 2007, 229,200 and 216,000 shares, respectively, have been granted underthis plan.  The fair value of the awardis measured each year at the date of the grant. For the first nine months of 2008 and 2007, the stock based compensationexpense under this plan equaled $0.5 million and $0.4 million, respectively.

 

Employee Stock Purchase Plan:

 

In January 2007, the Company offered to eligible employees a stockpurchase plan (the “Employee Stock Purchase Plan”) through a trust thatacquires shares of Grupo Mexico stock for sale to its employees, and employeesof subsidiaries, and certain affiliated companies.  The purchase price is established at theapproximate fair market value on the grant date.  Every two years employees will be able toacquire title to 50% of the shares paid in the previous two years.  The employees will pay for shares purchasedthrough monthly payroll deductions over the eight year period of the plan.  At the end of the eight year period, theCompany will grant the participant a bonus of 1 share for every 10 sharespurchased by the employee.

 

If Grupo Mexico pays dividends on shares during the eight year period,the participants will be entitled to receive the dividend in cash for allshares that 

 

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have been fully purchased and paid as of the date that the dividend ispaid.  If the participant has onlypartially paid for shares, the entitled dividends will be used to reduce theremaining liability owed for purchased shares.

 

In the case of voluntary resignation of the employee, the Company willpay to the employee the purchase price applying a deduction over the amount tobe paid to the employee based on the following schedule.

 
| **If the resignation occurs during:** | ** ** | **% Deducted** | ** ** |
|-----------------------------------------------------------|------------|---------------------|------------|
| 1st year after the grant date                             |       | 90                  | %          |
| 2nd year after the grant date                             |       | 80                  | %          |
| 3rd year after the grant date                             |       | 70                  | %          |
| 4th year after the grant date                             |       | 60                  | %          |
| 5th year after the grant date                             |       | 50                  | %          |
| 6th year after the grant date                             |       | 40                  | %          |
| 7th year after the grant date                             |       | 20                  | %          |

 

In the case of involuntary termination of the employee, the Companywill pay to the employee the difference between the fair market value of theshares at the date of termination of employment, and the purchase price.  When the fair market value of the shares ishigher than the purchase price, the Company will apply a deduction over theamount to be paid to the employee based on the following schedule.

 
| **If the termination occurs during:** | ** ** | **% Deducted** | ** ** |
|-----------------------------------------------------------|------------|---------------------|------------|
| 1st year after the grant date                             |       | 100                 | %          |
| 2nd year after the grant date                             |       | 95                  | %          |
| 3rd year after the grant date                             |       | 90                  | %          |
| 4th year after the grant date                             |       | 80                  | %          |
| 5th year after the grant date                             |       | 70                  | %          |
| 6th year after the grant date                             |       | 60                  | %          |
| 7th year after the grant date                             |       | 50                  | %          |

 

In case of retirement ordeath of the employee, the Company will render the buyer or his legalbeneficiary, the shares effectively paid as of the date of retirement or death.

 

For the nine months ended September 30,2008 and 2007, the stock based compensation expense under this plan was $1.6million and $1.5 million, respectively. As of September 30, 2008, there was $13.3 million of unrecognizedcompensation expense under this plan, which is expected to be recognized overthe remaining six years and three months period.

 

The following table presentsthe stock award activity for the nine months ended September 30, 2008 and2007:

 
| ** **                                     | ** ** | **Shares** | ** ** | **Unit Weighted Average  Grant Date Fair Value** | ** ** |
|------------------------------------------------|------------|------------|------------|---------------------------------------------------------------------------|------------|
| Outstanding shares at January 1, 2008     |       | 14,504,151 |       | $                                                                         | 1.17       |   |
| Granted                                        |       | —     |       | —                                                                    |       |
| Exercised                                      |       | (23,655    | )          | 1.17                                                                      |       |
| Received as dividend                           |       | 96,515     |       | —                                                                    |       |
| Forfeited                                      |       | —     |       | —                                                                    |       |
| Outstanding shares at September 30,  2008 |       | 14,577,011 |       | $                                                                         | 1.16       |   |
|                                           |       |       |       |                                                                      |       |
| Outstanding shares at January 1, 2007     |       | —     |       | —                                                                    |       |
| Granted                                        |       | 14,144,094 |       | $                                                                         | 1.17       |   |
| Exercised                                      |       | —     |       | —                                                                    |       |
| Forfeited                                      |       | —     |       | —                                                                    |       |
| Outstanding shares at September 30,  2007 |       | 14,144,094 |       | $                                                                         | 1.17       |   |

 

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Executive Stock PurchasePlan:

 

Grupo Mexico also offers astock purchase plan for certain members of its executive management and theexecutive management of its subsidiaries and certain affiliated companies.  Under this plan, participants will receiveincentive cash bonuses which are used to purchase up to 2,250,000 (750,000before the stock split) shares of Grupo Mexico over an eight year period.  The fair value of the award is estimated onthe date of grant and is recognized as compensation expense over a weightedaverage requisite service period of eight years.  The Company recorded $1.3 million and $0.5million, net of tax, in compensation expense in the first nine months of 2008and 2007, respectively.  As of September 30,2008, there was $1.9 million of unrecognized compensation cost, related to thisplan, which is expected to be recognized over the remaining period.

 

The following table presentsthe stock award activity for the nine months ended September 30, 2008 and2007:

 
| ** **                                     | ** ** | **Shares** | ** ** | **Unit Weighted  Average Grant  Date Fair Value** | ** ** |
|------------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------|------------|
| Outstanding shares at January 1, 2008     |       | 1,372,500  |       | $                                                                     | 0.77       |   |
| Granted                                        |       |       |       |                                                                  |       |
| Exercised                                      |       | (675,000   | )          | $                                                                     | 0.77       |   |
| Forfeited                                      |       | —     |       |                                                                  |       |
| Outstanding shares at September 30,  2008 |       | 697,500    |       | $                                                                     | 0.77       |   |
|                                           |       |       |       |                                                                  |       |
| Outstanding shares at January 1, 2007     |       | 2,250,000  |       | $                                                                     | 0.77       |   |
| Granted                                        |       |       |       |                                                                  |       |
| Exercised                                      |       | (652,500   | )          | $                                                                     | 0.77       |   |
| Forfeited                                      |       | —     |       |                                                                  |       |
| Outstanding shares at September 30,  2007 |       | 1,597,500  |       | $                                                                     | 0.77       |   |

 

Q.            Subsequent events:

 

Dividends:

 

OnOctober 31, 2008, the Company announced a dividend of $0.34 per share tobe paid on December 5, 2008 to its shareholders of record at the close ofbusiness on November 18, 2008.

 

SCC share repurchaseprogram:

 

On October 31, 2008 theCompany announced that the Board of Directors approved an increase in its sharerepurchase program from $300 million to $500 million.

 

During October 2008,the Company has purchased 9.1 million shares of its common stock at a cost of$115.1 million under the share repurchase program.  With these purchases the Company haspurchased, under this program a total of 12.4 million shares at a cost of$183.6 million with an average cost of $14.79 per share.  As a result of the repurchase of SCC commonshares the indirect ownership of Grupo Mexico has increased to 76.2% at October 31,2008.

 

GrupoMexico common shares:

 

OnOctober 31, 2008, the Company announced that the Board of Directors’ AuditCommittee and the Independent Directors approved the sale of 350 million sharesof Grupo Mexico to its indirect parent company, Grupo Mexico. Such shares havebeen owned by Minera Mexico, for several years as an asset of the Minera Mexico’s

 

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employeebenefit plan.  The purchase price pershare in the transaction will be the market price.

 

Continuingeconomic instability

 

Asa result of the world’s economic uncertainty, certain of our assets positionsand derivative contracts have been affected, as follows:

 

Shortterm investments:

 

Asof October 31, 2008 a further mark-to-market adjustment of these investmentswould generate an additional loss of $1.7 million.

 

Accountsreceivable - Provisional sales:

 

Inthe month of October, 2008 the market prices of copper and molybdenum declinedfrom September 30, 2008, and also forecast copper prices used to valueprovisionally priced copper sales declined. Based on these updated prices thevalue of provisional priced sales and accounts receivable would have declinedby approximately, $137.6 million.

 

Derivativeinstruments

 

Coppercollar contracts:

 

Asthe copper market price continued to decrease in October, the open copperderivative contracts have continued to appreciate in value.  A valuation, based on prices as of October 31,2008, generated an additional gain of $60.1 million.

 

Exchangerate derivatives, US dollar / Mexican peso:

 

AtOctober 31, 2008 the Mexican peso exchange rate increased from 10.79Mexican pesos per dollar to 12.91 Mexican pesos per dollar.  Therefore, the fair value of the openpositions at September 30, 2008 would have increased the unrealized lossby $48.3 million.

 

Capitalexpansion and exploration program:

 

DuringOctober 2008, the Company has committed $25.4 million to purchase seven320 ton trucks for the Toquepala and Cuajone expansion projects.

 

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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.  Additionally, with thecompletion of the Ilo smelter modernization we are producing a substantialamount of sulfuric acid for sale to customers. Market forces outside of our control largely determine the sales pricesfor our products.  Our management,therefore, focuses on copper production cost control, production enhancementand maintaining a prudent and conservative capital structure to improveprofitability.  We believe we achievethese goals through capital spending programs, exploration efforts and costreduction programs.  Our aim is to remainprofitable during periods of low copper prices and to maximize financialperformance in periods of high copper prices.

 

The third quarter of 2008has been a turbulent period for the world’s economy; copper prices began todecline late in the third quarter and have continued the slide into the fourthquarter.  Our strength has positioned usto face the challenge as world economic stability is sought.  Our strengths lie in the quality of ourproductive assets, our low cost operations, our manageable low debt level andour short-term project pipeline. We believe that our strong financial positionwill permit us to continue with the development of our immediate capitalinvestment projects which are expected to add 220,000 tons of copper by 2011and which will be a source of value creation for our shareholders.

 

Oneof our strengths is the cash position, which at September 30, 2008 is inexcess of $1.1 billion.  These fundssupport our operational needs as well as our capital program.  The Risk and Cash Management Committee,comprised of members of senior management, regularly reviews the safety of ourcash position with particular emphasis on risk. We believe that our cash investments at September 30, 2008 aremaintained in low risk and quality instruments with financially solventinstitutions.

 

Ournet earnings and earnings per share for the three months ended September 30,2008 were $417.8 million and $0.47 per share and for the three months ended September 30,2007 were $627.8 million and $0.71 per share. Net income and earnings per share for the nine months ended September 30,2008 was $1,531.3 million and $1.73 per share and for the nine months ended September 30,2007 were $1,905.5 million and $2.16 per share. The decrease in net earnings in both periods of 2008 was mainly due tothe Cananea strike, which has reduced production volume in 2008 and lowercopper and zinc prices, partially offset by the higher sales volume and pricesof molybdenum.

 

Netearnings include gains of $54.2 million and $62.9 million in the third quarterand the nine month period of 2008, respectively, from our copper derivativeprogram.  Additionally, during thequarter we purchased 3.3 million shares of our common shares.

 

Mine copper productionamounted to 261.6 million pounds in the third quarter 2008, a decrease of 40.1million pounds compared with the third quarter 2007.  The decrease in production is mainly due tothe Cananea strike and to a lesser extent lower ore grade at Toquepala.

 

Molybdenum productionincreased by 3.5% to 10.0 million pounds and 27.3 million pounds in the thirdquarter and nine months of 2008, respectively, compared with 9.7 million poundsand 26.3 million pounds in the comparable 2007 periods. These increases weremainly 

 

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due to higher ore gradeand recovery at the La Caridad mine and higher recovery at the Cuajone mine.

 

Mine zinc productiondecreased 5.3 million pounds in the third quarter 2008, to 59.3 million poundscompared with 64.6 million pounds in the third quarter of 2007.  This 8.3% decrease in production was due tothe work stoppages at the San Martin and Taxco mines, which started on July 30,2007 and continues to date.

 

During the third quarter2008, the Cananea, San Martin and Taxco operations have continued on strikeaffecting our operations and results.  Wecontinue to take steps to reduce costs related to this work stoppage. Basedupon a recent ruling relating to Cananea by a federal collegiate tribunal whichwas favorable to us, we expect that the labor judicial authorities will declarethe strike illegal. If a favorable ruling is reached, the next step would be toregain control of the properties.  Webelieve that once in control of the assets full production can be ramped up inapproximately three months.

 

Capital expenditurestotaled $134.2 million and $314.9 million for the third quarter and first ninemonths of 2008, respectively.  Projectedcapital expenditure and exploration spending for the year 2008 approximate$450.0 million, and include investments in the Tia Maria greenfield project inPeru and the projects to expand capacity at Toquepala and Cuajone.

 

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, (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 (exclusive of 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 (exclusive of depreciation, amortization and depletion); plusselling, general and administrative charges, treatment and refining charges;less by-products revenue and sales premiums, workers’ participation and othermiscellaneous charges, the mine royalty charges and the change in inventorylevels; divided by total pounds of copper produced and purchased by us.  In our calculation of operating cash cost perpound of copper produced, we credit against our costs the revenues from thesale of by-products, principally molybdenum, zinc and silver and the premiumsover market price that we receive on copper sales.  We account for the by-product revenues inthis way because we consider our principal business to be the production andsale of copper.  We believe that ourCompany is viewed by the investment community as a copper company, and isvalued, in large part, by the investment community’s view of the copper marketand 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 

 

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discretionary expenditureand is also excluded.  Workers’participation provisions are determined on the basis of pre-tax earnings andare also excluded.  Additionally,excluded from operating cash cost are items of a non-recurring nature, the mineroyalty charges and the regional development contribution made from Peruvianearnings.

 

Our operating cash costsper pound, as defined, are presented in the table below, for the three and ninemonths ended September 30, 2008 and 2007. We present cash costs with and without the inclusion of by-productrevenues.

 
| ** **                                                                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **Positive  (negative)  Variance** | ** ** | **2008** | ** ** | **2007** | ** ** | **Positive  (negative)  Variance** | ** ** |
| ** **                                                                        | ** ** | **(cents per pound)**                      | ** ** |
| Cash cost per pound of copper produced and purchased                              |       | 18.0                                                 |       | (22.4                                               | )          | (40.4 | ) | 4.0 |   | (10.4 | ) | (14.4 | ) |
| Less: by-products revenue                                                         |       | 184.6                                                |       | 168.3                                               |       | 16.3 |   | 175.4 |   | 143.3 |   | 32.1 |   |
| Cash cost per pound of copper produced and purchased without  by-products revenue |       | 202.6                                                |       | 145.9                                               |       | (56.7 | ) | 179.4 |   | 132.9 |   | (46.5 | ) |

 

As seen on the chartabove, our per pound cash cost for the third quarter and nine months of 2008when calculated with by-products revenue are costs of 18.0 cents per pound and4.0 cents per pound, respectively, compared with credits of 22.4 cents perpound and 10.4 cents per pound in the third quarter and nine months of 2007,respectively.  The increase in theby-products credit in the 2008 periods was due to higher molybdenum prices andhigher molybdenum sales volume in the nine month period.  The increased molybdenum production in thenine month period was the result of higher average recoveries at La Caridadmine.

 

Our cash cost, excludingby-product revenues, were higher by 56.7 cents per pound and 46.5 cents perpound in the third quarter and first nine months of 2008 than the comparable2007 periods and is mainly due to higher power and fuel cost as well as thelower copper production at Cananea due to the ongoing strike.

 

Metal Prices. The profitability of our operations isdependent on, and our financial performance is significantly affected by, theinternational market prices for the products we produce, especially for copper,molybdenum, zinc and silver. Historically, metal prices have been subject to wide fluctuations andare affected by numerous factors beyond our control.  These factors, which affect each commodity tovarying degrees, include international economic and political conditions,levels of supply and demand, the availability and cost of substitutes,inventory levels maintained by producers and others and, to a lesser degree,inventory carrying costs and currency exchange rates.  In addition, the market prices of certainmetals have on occasion been subject to rapid short-term changes due tospeculative activities.

 

We believe that thecurrent economic downturn has significantly lowered the price of copper inrecent months.  The LME price per poundof copper averaged approximately $3.64 per pound in July and August anddropped to an average price of $3.17 per pound in September and decreasedto $1.81 per pound at October 31, 2008. In addition, we have seen price decreases in these same periods for ourother principal by-products.  Furtherdeclines in price could occur as we go through this uncertain economic period.

 

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:

 

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| ** **                                                    | ** ** | **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        |           | $          | 22.1     |       | $          | 1.3        |   | $ | 8.4 |   |

 

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 open-pit operationsand our 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 mine, and several industrial processingfacilities 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 the three and nine months ended September 30,2008 and 2007:

 
| ** **                                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                         | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Peru:                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Peruvian inflation rate                            |       | 1.7                                                  | %          | 1.2                                                 | %          | 5.3 | % | 3.0 | % |
| Nuevo sol/dollar (appreciation) / devaluation rate |       | 0.3                                                  | %          | (2.6                                                | )%         | (0.7 | )% | (3.4 | )% |
|                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Mexico:                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Mexican inflation rate                             |       | 1.8                                                  | %          | 1.6                                                 | %          | 3.9 | % | 2.2 | % |
| Peso/dollar (appreciation) / devaluation rate      |       | 4.9                                                  | %          | 1.2                                                 | %          | (0.8 | )% | 0.4 | % |

 

In October 2008, theMexican peso has declined from 10.79 Mexican pesos per dollar to 12.91 Mexicanpesos per dollar.  Additionally, in October 2008,the Peruvian nuevo sol has declined from 2.98 Peruvian nuevos soles per dollarto 3.09 Peruvian nuevos soles per dollar.

 

Assuming an exchange ratevariance of 10% on our September 30, 2008 monetary position, our netearnings would increase (decrease) as follows:

 

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| **Variance**                                           | ** ** | **Effect in net earnings** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                             | ** ** | **($ in million)**              | ** ** |
| Increase of 10% in exchange rate dollar / Mexican peso |       | $                                         | 32.9       |   |
| Decrease of 10% in exchange rate dollar / Mexican peso |       | $                                         | (40.2      | ) |
| Increase of 10% in exchange rate dollar / nuevo sol    |       | $                                         | 15.0       |   |
| Decrease of 10% in exchange rate dollar / nuevo sol    |       | $                                         | (18.3      | ) |

 

Capital Expansion andExploration Program.

 

During the thirdquarter of 2008, we continued with our investment projects at our Peruvianoperations.  During 2011, we expect theTia Maria project and the Toquepala expansion to increase our annual copperproduction by 220,000 tons, an increase of 32% over the current productioncapacity.

 

Investment in theTia Maria project is underway.  As of September 2008,we have spent $78.9 million of the $579.8 million committed for this project inpurchase orders and contracts for the acquisition of major equipment.  This includes $381.0 million committed at afixed price to avoid cost escalation in the capital budget.

 

The Toquepalaexpansion project is also underway.  Forthe Toquepala project, we have spent $4.8 million as part of the $86.9 millioncommitted in the purchase of two 73 cubic yard shovels, two mine drills andseven 320 ton trucks.  We continued withthe feasibility study, basic and detailed engineering and procurementsupport.  The environmental impactassessment is also underway and is expected to be completed by November 2009.

 

For the Cuajone projectwe have signed a feasibility study contract and will continue with theengineering, procurement process and an environmental impact assessment.

 

Regarding our copperdeposit projects at El Arco and Los Chancas and the underground polymetallicmine in Angangueo, We will continue to evaluate these projects taking intoaccount the changes in the financial and economic conditions.

 

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 facility is currentlyoperating at full capacity.

 

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 equipment and materials has been receivedand are at the final installation stage. The first stage of this project will be under development until 2012.  The total cost of this project is estimatedto be $66.0 million, with $32.1 million expended through September 30,2008 and $8.3 million committed.

 

Cananea: Major Cananeaprojects including, an SX/EW plant to increase cathode production by 33,000 tonsand a crusher and conveyor system for leach material; have been suspendedpending the resolution of the labor problems at the site.

 

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 in 

 

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accordance with USGAAP.  Preparation of these condensedconsolidated financial statements requires our management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during the reportingperiods.  Management makes its bestestimate of the ultimate outcome for these items based on historical trends andother information available when the financial statements are prepared.  Changes in estimates are recognized inaccordance with the accounting rules for the estimate, which is typicallyin the period when new information becomes available to management.  Areas where the nature of the estimate makesit reasonably possible that actual results could materially differ from amountsestimated include: ore reserves, revenue recognition, estimated mine strippingratios, leachable material and related amortization, the estimated useful livesof fixed assets, asset retirement obligations, litigation and contingencies,valuation allowances for deferred tax assets, tax positions, fair value offinancial instruments and inventory obsolescence.  We base our estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances.  Actual resultsmay differ from these estimates under different assumptions or conditions.

 

RESULTS OF OPERATIONS

 

The following highlightskey financial and operating results for three and nine months ended September 30,2008 and 2007 (in millions):

 
| **Statement of Earnings Data:**                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                         | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Net sales                                          |       | $                                                    | 1,440.1    |                                                | $          | 1,606.4 |   | $ | 4,401.1 |   | $ | 4,791.2 |   |
| Operating costs and expenses                       |       | (764.2                                               | )          | (672.8                                              | )          | (2,068.0 | ) | (1,925.0 | ) |
| Operating income                                   |       | 675.9                                                |       | 933.6                                               |       | 2,333.1 |   | 2,866.2 |   |
| Non-operating income (expense)                     |       | (5.8                                                 | )          | (6.5                                                | )          | (29.1 | ) | (71.9 | ) |
| Earnings before income taxes and minority interest |       | 670.1                                                |       | 927.1                                               |       | 2,304.0 |   | 2,794.3 |   |
| Income taxes                                       |       | (249.7                                               | )          | (296.1                                              | )          | (764.6 | ) | (881.2 | ) |
| Minority interest                                  |       | (2.6                                                 | )          | (3.2                                                | )          | (8.1 | ) | (7.6 | ) |
| Net earnings                                       |       | $                                                    | 417.8      |                                                | $          | 627.8 |   | $ | 1,531.3 |   | $ | 1,905.5 |   |

 

Mine copper production amounted to 261.6 millionpounds in the third quarter of 2008 compared with 301.7 million pounds in thethird quarter of 2007, a decrease of 13.3%. This decrease amounting to 40.1 million pounds, included 28.4 millionpounds from the Mexican open pit operations, 1.0 million pounds from theMexican underground mines and 10.7 million pounds from the Peruvian open pitmines.

 

The decrease of 28.4 million pounds in the Mexicanopen-pit mines production included 28.0 million pounds from the Cananea mineand 0.4 million pounds from the La Caridad mine.  The decrease in production at the Cananeamine was due to the effect of its strike. The decrease of 1.0 million pounds at the Mexican underground mines wasmainly due to the work stoppage at the San Martin mine.  The decrease in the Peruvian mines came fromthe Toquepala mine, which decreased by 20.1 million pounds, and was the resultof lower ore grades and recoveries, partially offset by an increase of 7.8million pounds from the Cuajone mine due to higher ore grades and recoveriesand an increase of 1.6 million pounds from the Toquepala SX/EW plant due tohigher PLS grade.

 

Molybdenum mineproduction increased by 0.3 million pounds in the third quarter of 2008 to 10.0million pounds compared with 9.7 million pounds in the third quarter of2007.  

 

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This increase wasmainly due to higher grades at the La Caridad and Cuajone mines, partiallyoffset by lower grades at the Toquepala mine.

 

Mine zinc productiondecreased 5.3 million pounds in the third quarter 2008, to 59.3 million poundscompared with 64.6 million pounds in the third quarter of 2007.  This 8.3% decrease in production was due tothe work stoppages at the San Martin and Taxco mines, which started on July 30,2007 and continues to date.

 

Average Metal Prices

 

The table below outlinesthe average metal prices during the three and nine month periods ended September 30,2008 and 2007:

 
| ** **                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **% Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **% Change** | ** ** |
| Copper ($ per pound - LME)   |       | $                                                    | 3.48       |                                                | $          | 3.50 |   | (0.6 | )% |   | $ | 3.62 |   | $ | 3.22 |   | 12.4 | % |
| Copper ($ per pound - COMEX) |       | $                                                    | 3.45       |                                                | $          | 3.48 |   | (0.9 | )% |   | $ | 3.59 |   | $ | 3.21 |   | 11.8 | % |
| Molybdenum ($ per pound)     |       | $                                                    | 33.27      |                                                | $          | 31.33 |   | 6.2 | % |   | $ | 33.01 |   | $ | 29.19 |   | 13.1 | % |
| Zinc ($ per pound - LME)     |       | $                                                    | 0.80       |                                                | $          | 1.46 |   | (45.2 | )% |   | $ | 0.95 |   | $ | 1.56 |   | (39.1 | )% |
| Silver ($ per ounce - COMEX) |       | $                                                    | 14.92      |                                                | $          | 12.70 |   | 17.5 | % |   | $ | 16.57 |   | $ | 13.11 |   | 26.4 | % |

 

Net Sales. Net sales in the third quarter and first nine months of 2008 decreasedby $166.3 million and $390.1 million, respectively, compared to the thirdquarter and first nine months of 2007. These 10.4% and 8.1% decreases, respectively, were principally due tolower sales volume resulting from the Cananea mine strike and lower copper andzinc prices, partially offset by higher molybdenum prices.  Net sales in the third quarter and first ninemonths of 2008 also include gains on copper derivative of $54.2 million and$62.9 million, respectively, compared to a loss of $0.3 million and a gain of$3.0 million in the 2007 comparable periods, respectively.

 

The table below presentsinformation regarding the volume of our copper sales by segment for the threeand nine months ended September 30, 2008 and 2007:

 

Copper Sales(million pounds):

 
| ** **               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **               | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Copper:                  |       |                                                 |       |                                                |       |   |   |   |   |
| Peruvian operations      |       | 204.0                                                |       | 219.9                                               |       | 569.2 |   | 640.8 |   |
| Mexican open-pit         |       | 82.9                                                 |       | 105.9                                               |       | 245.7 |   | 437.5 |   |
| Mexican IMMSA unit       |       | 7.4                                                  |       | 7.6                                                 |       | 26.0 |   | 24.5 |   |
| Intersegment elimination |       | (10.0                                                | )          | (18.2                                               | )          | (31.9 | ) | (64.9 | ) |
| Total copper sales       |       | 284.3                                                |       | 315.2                                               |       | 809.0 |   | 1,037.9 |   |

 

The table below presentsinformation regarding the volume of sales by segment of our significantby-products for the three and nine months ended September 30, 2008 and2007:

 

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By-product Sales:

 
| ** **                                                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in million pounds except silver - in  million ounces)** | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Peruvian operations                                                                           |       |                                                 |       |                                                |       |   |   |   |   |
| Molybdenum contained in concentrates                                                          |       | 5.9                                                  |       | 6.6                                                 |       | 15.6 |   | 15.9 |   |
| Zinc - refined and in concentrate (1)                                                         |       | 3.6                                                  |       | 8.9                                                 |       | 13.1 |   | 32.1 |   |
| Silver                                                                                        |       | 1.2                                                  |       | 1.5                                                 |       | 2.9 |   | 3.6 |   |
|                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Mexican open-pit                                                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Molybdenum contained in concentrates                                                          |       | 4.2                                                  |       | 2.5                                                 |       | 12.0 |   | 10.3 |   |
| Zinc - refined and in concentrate                                                             |       | —                                               |       | —                                              |       | — |   | — |   |
| Silver                                                                                        |       | 1.5                                                  |       | 0.8                                                 |       | 3.2 |   | 2.9 |   |
|                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Mexican IMMSA unit                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Zinc - refined and in concentrate                                                             |       | 56.0                                                 |       | 57.3                                                |       | 162.0 |   | 191.3 |   |
| Silver                                                                                        |       | 2.3                                                  |       | 2.8                                                 |       | 6.6 |   | 8.5 |   |
|                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Intersegment elimination                                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Zinc - refined and in concentrate                                                             |       | (3.1                                                 | )          | (8.4                                                | )          | (11.9 | ) | (30.0 | ) |
| Silver                                                                                        |       | (0.3                                                 | )          | (0.2                                                | )          | (1.6 | ) | (0.7 | ) |
|                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Total by-product sales                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Molybdenum contained in concentrates                                                          |       | 10.1                                                 |       | 9.1                                                 |       | 27.6 |   | 26.2 |   |
| Zinc - refined and in concentrate                                                             |       | 56.5                                                 |       | 57.8                                                |       | 163.2 |   | 193.4 |   |
| Silver                                                                                        |       | 4.7                                                  |       | 4.9                                                 |       | 11.1 |   | 14.3 |   |

 

----

(1) The Peruvianoperations purchased zinc products from IMMSA for resale to its customers.

 

At September 30,2008, the Company has recorded provisionally priced sales of 120.5 millionpounds of copper, at an average forward price of $2.89 per pound.  Also the Company has recorded provisionallypriced sales of 4.6 million pounds of molybdenum at the September 30, 2008market price of $32.25 per pound.  Thesesales are subject to final pricing based on the average monthly LME or COMEXcopper prices and Dealer Oxide molybdenum prices in the future month ofsettlement, which will occur largely in the next seven months.  Please see Item 3. Quantitative andqualitative disclosures about market risk.

 

Operating Costs andExpenses.

 

Three months: Operating costs and expenses were $764.1million in the third quarter of 2008 compared with $672.8 million in the thirdquarter of 2007.  The increase of $91.3million was principally due to higher cost of sales (exclusive of depreciation,amortization and depletion).

 

Cost of sales (exclusiveof depreciation, amortization and depletion) for the three months ended September 30,2008 was $645.8 million compared with $560.0 million in the comparable 2007period.  The third quarter 2008 increasein cost of sales of $85.8 million was primarily attributable to the following:1) $55.0 million of higher fuel and power cost, mainly in our Peruvianoperations (the average unit cost for our power consumption increased by 63.5%in 2008, as escalation factors in our power purchase agreement increased withthe higher cost of coal and other fuels). 2) an increase of $37.2 million forcopper purchased to third parties to cover the decrease in production atCananea, reduced by 3) a decrease in workers participation of $9.5 million,largely as a result of the strikes at Cananea and some of our other Mexicanfacilities.

 

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Other factors thatincreased the cost of sales in the third quarter 2008 include $3.6 million ofseverance payments and $15.1 million of continuing cost at Cananea mine.

 

Nine months: Operating costs and expenses were$2,068.0 million in the first nine months of 2008 compared with $1,925.0million in the first nine months of 2007. The increase of $143.0 million was principally due to $127.9 million ofhigher cost of sales (exclusive of depreciation, amortization and depletion),$8.2 million of higher depreciation, amortization and depletion and $2.8million of higher exploration expenses.

 

Cost of sales (exclusiveof depreciation, amortization and depletion) for the first nine months ended September 30,2008 was $1,716.8 million compared with $1,589.0 million in the comparable 2007period.  The increase in cost of sales of$127.8 million in the first nine months of 2008 was primarily attributable tothe following 1) higher fuel and power costs of $93.6 million, mostly relatedto our Peruvian operations and 2) higher labor costs and other production costsof $32.3 million, mainly in our Peruvian operations due new labor agreementsand the appreciation of the nuevo sol, as well as escalation factors in thecost of materials.  Decreasing our 2008nine months cost of sales include a decrease of $39.0 million in workers’participation, attributable to the strikes at some of our Mexicanoperations.  In addition, other factorseffecting the change in cost of sales in the nine month period include $14.4million of severance payments and $54.2 million of continuing cost at Cananeamine.

 

Depreciation,amortization and depletion for the nine months ended September 30, 2008,were $248.3 million compared with $240.1 million in the comparable period of2007.  The increase of $8.2 million isprincipally due to $9.2 million of higher depreciation at our Mexican open pitoperations due to higher amortization of leach material and $4.5 million ofhigher depreciation at our Peruvian operations due to the capitalization of theIlo smelter modernization and other capital projects, partially offset by adecrease of $3.2 million of lower depreciation at our IMMSA unit due to the endof mine development amortization in 2007 and $2.3 million of lower depreciationat our Mexican corporate office due to the change to rental offices.

 

Exploration expense forthe nine months ended September 30, 2008 was $25.5 million compared with$22.7 million in the comparable period of 2007. This increase of $2.8 million was due to $1.7 million in explorationexpenses at our Peruvian operations and $1.1 million at our Mexican operations.

 

Non-Operating Income(Expense):Interest expense in the third quarter and first nine months of 2008 were 9.8%and 8.1% lower than the comparable 2007 periods.  This decrease is mainly the result of loweraverage debt levels in the periods.  Inaddition, the third quarter and nine months of 2008 periods include anadditional charge of $2.7 million and $4.6 million, respectively, related to aloss on fair value of short term investments.

 

Interest income was $9.8million and $39.4 million in the third quarter and the first nine months of2008, compared to $23.5 million and $63.5 million in the comparable periods of2007.  These decreases were principallythe result of lower cash balances and lower average of interest rates earned.

 

The loss on derivativeinstruments were $13.6 million and $12.7 million in the third quarter and ninemonths of 2008, respectively, compared with a gain of $3.0 million and a lossof $73.7 million in the third quarter and first nine months of 2007,respectively.  These amounts consist ofthe following (in millions):

 

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| ** **                                                       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                       | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Loss on short-term investments                                   |       | $                                                    | —     |                                                | $          | 1.6 |   | $ | — |   | $ | (79.9 | ) |
| (Loss) gain on exchange rate derivatives, US dollar/Mexican peso |       | (13.6                                                | )          | 1.4                                                 |       | (12.7 | ) | 7.5 |   |
| Dual currency notes                                              |       | —                                               |       | —                                              |       | — |   | (1.3 | ) |
| Net (loss) gain                                                  |       | $                                                    | (13.6      | )                                                   | $          | 3.0 |   | $ | (12.7 | ) | $ | (73.7 | ) |

 

For additionalinformation please see Note H “Derivative instruments” to the condensedconsolidated financial statements.

 

Other income (expense)was an income of $23.8 million in the third quarter of 2008 compared to anexpense of $5.5 million in the third quarter of 2007.  The increase of $29.3 million in the thirdquarter of 2008 was principally due to $26.3 million of gains on the sale ofinactive properties in our Mexican operations, including an administrativeoffice building in Mexico City.

 

Other income (expense)was an income of $23.9 million for the nine months of 2008 compared to incomeof $20.1 million in the nine months of 2007. In the nine month period of 2008 other income and expenses includes$28.6 million of net gain on sale of inactive properties in our Mexicanoperations.

 

Income taxes: The income tax for the nine monthsended September 30, 2008 and 2007 were $764.6 million and $881.2 million,respectively.  These provisions includeincome taxes for Peru, Mexico and the United States.  The effective tax rates for the 2008 and 2007periods are 33.2% and 31.5%, respectively. The estimated annual effective tax rate for 2008 is 33.7%, compared with34.7% in 2007.  The decrease in theestimated annual effective tax rate is largely due to the incremental U.S. taxon dividend income in 2007.  The dividendincome was eliminated in financial consolidation (book income) but was taxablein the U.S. at the difference between the 35% U.S. statutory rate and theeffective rate of 28% on the dividend from the Mexican subsidiary.  In addition, the variability in the dollarrelative to the Mexican peso and the Peruvian nuevo sol caused a decrease inthe estimated effective tax rate. Further, the inclusion of loss carryforwards of some of Minera Mexico’ssubsidiaries in the Mexican tax calculation also contributed to the ratedecrease.

 

On October 1, 2007,the Mexican government enacted a new tax law, which took effect on January 1,2008.  The law introduced a flat tax,which replaced Mexico’s asset tax and applies to taxpaying entities along withMexico’s regular income tax.  In generalMexican companies are subject to paying the greater of the flat tax or theincome tax; the application of this rule resulted in a provision in thenine months of 2008 based upon the regular income tax calculation.  This tax law change did not have an effect onthe Company’s nine months 2008 deferred tax position.

 

The flat tax iscalculated by applying a 16.5% tax rate in 2008, a 17% tax rate in 2009, and a17.5% tax rate in 2010 and the following years. Although the flat tax is defined as minimum tax it has a wider taxablebase as many of the tax deductions allowed for income tax purposes are notallowed for the flat tax.

 

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Segment ResultsAnalysis

 

Peruvian Open PitOperations

 

The following table setsforth net sales, operating cost and expenses and operating income for ourPeruvian open pit operations segment, for the three and nine months periodsended September 30, 2008 and 2007:

 
| ** **                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                    |       | $                                                    | 865.0      |                                                | $          | 1,028.8 |   | $ | 2,689.1 |   | $ | 2,698.8 |   |
| Operating costs and expenses |       | (415.5                                               | )          | (414.5                                              | )          | (1,122.6 | ) | (1,158.7 | ) |
| Operating income             |       | $                                                    | 449.5      |                                                | $          | 614.3 |   | $ | 1,566.5 |   | $ | 1,540.1 |   |

 

Three months: Net sales in the third quarter of 2008 decreased by $163.8 million, to$865.0 million in the third quarter of 2008 compared with $1,028.8 million inthe third quarter of 2007.  This decreasein net sales was the result of lower copper, molybdenum, silver and zinc salesvolume and lower copper and zinc prices, partially offset by an increase inmolybdenum and silver prices.  The lowercopper sales volume was a result of lower production mainly at the Toquepalamine due to lower ore grades.  The lowermolybdenum sales volume was mainly result of lower production at the Toquepalamine due to lower recoveries.  The lowerzinc sales volume was due to lower purchases from IMMSA due to the strikes atthe San Martin and Taxco mines.  Netsales in the third quarter of 2008 also includes a gain on copper derivativeinstruments of $36.3 million compared with a loss on copper derivativeinstruments of $0.2 million in the same period of 2007.

 

Operating costs andexpenses in the third quarter of 2008 increased by $1.0 million to $415.5million from $414.5 million in the third quarter of 2007, principally due to$1.4 million of higher depreciation, amortization and depletion and $0.8million of higher selling, general and administrative partially offset by $1.2million of lower cost of sales (exclusive of depreciation, amortization anddepletion).

 

Depreciation,amortization and depletion in the third quarter of 2008 was $28.8 millioncompared with $27.4 million in the third quarter of 2007.  The increase of $1.4 million is due to thecapitalization of the modernized Ilo smelter and other capital projects.  Selling, general and administrative in thethird quarter 2008 was $9.8 million compared with $9.0 million in the thirdquarter of 2007.  The increase of $0.8million was due to higher tax on financial transaction and higher laborcost.  Cost of sales (exclusive ofdepreciation, amortization and depletion) for the three months ended September 30,2008 was $372.8 million compared to $374.0 million in the same period of2007.  The principal elements of cost ofsales, creating this change, include the following, $59.2 million of lowermetal purchases mainly from IMMSA due to strikes at some of its mines, and $3.1million of lower workers participation due to lower income, partially offset byincreases in production cost of $8.1 million in salaries due to the new laboragreements and the appreciation of the Nuevo sol, $45.2 million of higher powerand fuel cost as escalation factors based on cost of coal and other fuelsincreased our principal power supply contracts and $10.8 million in explosives,tires and other operating material.

 

Nine months: Net sales in the nine months ended September 30,2008 decreased by $9.7 million to $2,689.1 million from $2,698.8 million in thenine months of 2007.  The decrease in netsales in the 2008 period was a result of lower copper, molybdenum, silver andzinc sales due to lower production partially offset by higher prices of all ofour products except zinc.  The decreasein net sales value was also partially offset due to a change in copper productmix.  In the nine months of 2008, we soldhigher refined copper in place of concentrates, as a result of the Ilo smelteroperating at 

 

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full capacity in the 2008period.  Net sales in the nine months of2008 also includes a gain on copper derivative instruments of $42.1 millioncompared with a gain on copper derivative instruments of $1.5 million in thesame period of 2007.

 

Operating costs andexpenses in the nine months of 2008 decreased by $36.1 million to $1,122.6million from $1,158.7 million in the nine months of 2007, principally due tolower cost of sales and higher depreciation, amortization and depletion.  Cost of sales (exclusive of depreciation,amortization and depletion) for the nine months ended September 30, 2008was $992.0 million compared to $1,036.4 million in the same period of2007.  The decrease of $44.4 millionbetween the first nine months of 2008 and 2007, is mainly due to $221.4 millionof lower metal purchased mainly from IMMSA, partially offset by higherproduction cost in 2008 of $174.7 million, which includes increases of $31.9million in salaries, $106.8 million of fuel and power, and $36.0 million ofexplosives, tires and other operating material.

 

Mexican Open PitOperations

 

The following table setsforth net sales, operating cost and expenses and operating income for ourMexican open pit operations segment for the three and nine months ended September 30,2008 and 2007:

 
| ** **                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                    |       | $                                                    | 501.7      |                                                | $          | 481.3 |   | $ | 1,439.5 |   | $ | 1,831.2 |   |
| Operating costs and expenses |       | (265.9                                               | )          | (224.0                                              | )          | (763.9 | ) | (732.2 | ) |
| Operating income             |       | $                                                    | 235.8      |                                                | $          | 257.3 |   | $ | 675.6 |   | $ | 1,099.0 |   |

 

Net sales in the thirdquarter and first nine months of 2008 increased by $20.4 million and decreasedby $391.7 million, respectively, compared with the same periods in 2007.  The increase in the third quarter 2008 wasdue to higher molybdenum and silver sales volume and prices, partially reducedby lower copper sales volume and prices. The decrease in the nine months period of 2008 was principally theeffect of the lower production and sale of copper, molybdenum and silver fromthe Cananea mine due to the strike.

 

Operating costs andexpenses in the third quarter of 2008 increased by $41.9 million to $265.9million from $224.0 million in the third quarter of 2007, principally due tohigher cost of sales and higher depreciation, amortization and depletion mainlydue to higher amortization of capitalized leach material.  Cost of sales (exclusive of depreciation,amortization and depletion) increased $36.5 million to $207.8 million from$171.3 million in 2007.  The increase incost of sales was mainly due to higher metals purchased of $39.0 million tocover the lost production at the Cananea mine due to the ongoing strike.

 

Other factors thatincreased cost of sales in the 2008 period include $3.6 million of severancepayments and $15.1 million of continuing cost at Cananea mine.

 

Operating costs andexpenses in the first nine months of 2008 increased by $31.7 million to $763.9million from $732.2 million in the same period of 2007, principally due tohigher cost of sales of $22.8 million and higher depreciation, amortization anddepletion of $9.2 million mainly due to higher amortization of capitalizedleach material.

 

Cost of sales (exclusiveof depreciation, amortization and depletion) in the first nine months of 2008increased $22.8 million to $591.8 million from $569.0 million in 2007.  The principal elements of cost of sales,creating the change between the first nine 

 

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months of 2008 and 2007,include the following, 1) $84.8 million of increased metal purchases to coverthe lost production at the Cananea mine due to the ongoing strike, 2) $14.4million of severance payments and 3) $54.2 million of continuing cost atCananea mine, partially offset by 1) $64.2 million of lower production cost, 2) $36.9million of lower workers participation, 3) $10.6 million of lower salesexpenses and 4) $18.5 million of increase in metal inventory.  These changes in costs were primarilyattributable to a decrease in production as a result of the Cananea strike.

 

In addition, otherfactors effecting the change in cost of sales in the nine month period include$14.4 million of severance payments and $54.2 million of continuing cost atCananea mine.

 

MexicanUnderground Operations (IMMSA)

 

The following table setsforth net sales, operating cost and expenses and operating income for our IMMSAsegment, for the three month and nine month periods ended September 30,2008 and 2007:

 
| ** **                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                    |       | $                                                    | 126.7      |                                                | $          | 178.5 |   | $ | 451.9 |   | $ | 542.8 |   |
| Operating costs and expenses |       | (133.6                                               | )          | (114.7                                              | )          | (359.5 | ) | (321.3 | ) |
| Operating income             |       | $                                                    | (6.9       | )                                                   | $          | 63.8 |   | $ | 92.4 |   | $ | 221.5 |   |

 

Net sales in the thirdquarter and first nine months of 2008 decreased by $51.8 million and $90.9million compared with the same periods of 2007. These decreases in net sales in the third quarter and first nine monthsof 2008 were principally due to lower sales volume of zinc and silver in bothperiods and also lower copper sales volume in the third quarter of 2008.  These volume decreases are due to the strikesat the San Martin and Taxco mines in both periods and were partially offset byhigher copper and silver prices in the nine months 2008.  Zinc prices also decreased in both 2008periods compared to the 2007 periods.

 

Operating costs andexpenses in the third quarter of 2008 increased by $18.9 million to $133.6million compared with $114.7 million in the third quarter of 2007. Thisdecrease was principally due to higher cost of sales (exclusive ofdepreciation, amortization and depletion). Cost of sales (exclusive of depreciation, amortization and depletion)increased $20.3 million to $116.7 million from $96.4 million in 2007.  The increase in cost of sales was mainly dueto higher metals purchased of $27.7 million to cover the lost production at theTaxco and San Martin mines due to the ongoing strikes and $10.1 million ofhigher production cost, partially offset by lower workers participation of $6.7million and $2.2 million currency translation gain effect due to thedepreciation of the Mexican peso.

 

Operating cost andexpenses in the first nine months of 2008, increased by $38.2 million to $359.5million from $321.3 million in the first nine months of 2007.  This increase was principally due to highercost of sales.  Cost of sales (excludingdepreciation, amortization and depletion) increased by $42.8 million to $311.3million from $268.5 million in the first nine months of 2007.  The increase in cost of sales is mainly dueto $70.1 million of higher metal purchases, partially offset by $13.4 millionof lower workers participation and $27.6 million of an insurance reimbursementrelated to repair expenses incurred in 2007 at the Nueva Rosita mine accident.

 

Intersegment Eliminationsand Adjustments

 

The net sales, operatingcosts and expenses and operating income displayed above will not be directlyequal to amounts in our condensed consolidated statement of earnings becausethe adjustments of intersegment operating revenues and expenses must be takeninto account.  Please see Note N of thecondensed consolidated financial statements.

 

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CASH FLOW

 

The following table showsthe cash flow for the three and nine months ended September 30, 2008 and2007.

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                  | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **Variance** | ** ** | **2008** | ** ** | **2007** | ** ** | **Variance** | ** ** |
| Net cash provided from operating activities |       | $                                | 696.9      |                            | $          | 728.3 |   | $ | 31.4 |   | $ | 1,606.9 |   | $ | 1,926.0 |   | $ | 319.1 |   |
| Net cash used for investing activities      |       | $                                | (65.8      | )                               | $          | (65.7 | ) | $ | (0.1 | ) | $ | (223.8 | ) | $ | (333.4 | ) | $ | 109.6 |   |
| Net cash used for financing activities      |       | $                                | (574.3     | )                               | $          | (473.4 | ) | $ | (100.9 | ) | $ | (1,648.2 | ) | $ | (1,423.6 | ) | $ | (224.6 | ) |

 

Three months:

 

The decrease of $31.4million in the third quarter of 2008 cash provided from operating activitieswas due to the reduction of $210.0 million in net earnings and a reduction of$53.6 million on adjustments to reconcile earnings to cash reduced by a $232.2million of decrease in working capital. The reduction in earnings was primarily due to the Cananea strike.

 

In the third quarter2008, our earnings were $417.8 million, approximately 60.0% of the netoperating cash flow.  Significant itemsdeducted to arrive to operating cash flow included, a gain on sale ofinvestment of $26.3 million, $20.5 million of unrealized gain on derivativeinstruments and a foreign currency translation gain of $15.5 million.  Depreciation, amortization and depletion of$83.9 million were added to operating cash flow.  Additionally, a decrease in working capitalincreased operating cash flow by $247.9 million.

 

In the third quarter2007, our earnings were $627.8 million, approximately 86.2% of the netoperating cash flow.  Significant itemsdeducted from, or added to arrive to operating cash flow included, depreciationamortization and depletion of $81.5 million, and $13.8 million of loss in shortterm investment, which positively increased operating cash flow and, $12.8million of unrealized gain on derivative instruments and $5.9 million ofcapitalized leachable material, which lowered our operating cash flow.  Additionally, a decrease in working capitalincreased operating cash flow by $15.7 million.

 

Net cash used ininvesting activities in the third quarter of 2008 included $134.2 million forcapital expenditures.  The capitalexpenditures included $86.5 million of investments at our Peruvian operations,$7.0 million for the Toquepala and Cuajone expansion, $35.3 million for the TiaMaria project, $12.3 million for the tailings disposal at Quebrada Honda and $31.9million for various other replacement expenditures.  In addition, we spent $47.7 million forreplacement assets at our Mexican operations, $29.9 million of which was at ourMexican open pit operations, $11.6 million at our IMMSA unit and $6.2 millionfor an administrative office in Mexico City. The third quarter 2008 cash from investing activities also includesproceeds of $55.4 million from the sale of property by our Mexican operations.

 

In the third quarter of2007, net cash used for investing activities included $72.1 million used forcapital expenditures, and proceeds of $6.2 million received on the redemptionof bonds with a face value of $20.0 million. The capital expenditures included investments at our Peruvian operationsof $24.5 million which included $12.7 million for four Komatzu trucks, $2.7million for a new ball mill in the Cuajone concentrator, $4.4 million for thetailing disposal project, $1.9 million for the new 

 

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PLS dams at Huanaqueraproject and $2.8 million for various other replacement expenditures.  In addition, we spent $47.6 million forreplacement assets at our Mexican operations, including, $9.6 million for theleach ore crushing, transportation and stacking system project at Cananea, $3.4million for the gas handling system at the La Caridad smelter, $1.8 million forthe PLS dams and leaching system at Cananea, $25.0 million for various otherreplacement expenditures at our Mexican open pit operations, $7.3 million forour IMMSA unit and $0.5 million for our Mexican corporate office.

 

Netcash used in financing activities in the third quarter of 2008 was $574.3million, compared with $473.4 million in the third quarter of 2007.  The third quarter of 2008 includes a dividenddistribution of $503.5 million, compared with a distribution of $471.1 millionin the third quarter of 2007.  Inaddition, in the third quarter of 2008 we purchased 3.3 million shares of ourcommon stock at a cost of $68.5 million.

 

Nine months:

 

In the nine months of2008, our earnings were $1,531.3 million, approximately 95.3% of the netoperating cash flow.  Significant itemsdeducted from, or added to arrive to operating cash flow included, depreciationamortization and depletion of $248.3 million and which positively increasedoperating cash flow and $10.3 million of deferred income tax, $28.6 million ofnet gain on sale of property and $18.4 million of unrealized gain on derivativeinstruments, which lowered our cash flow. Additionally, an increase in working capital decreased operating cashflow by $132.4 million.

 

In the nine months of2007, our earnings were $1,905.5 million, approximately 98.9% of the netoperating cash flow.  Significant itemsdeducted from, or added to arrive to operating cash flow included, depreciationamortization and depletion of $240.1 million, $59.1 million of deferred incometax, $46.8 million of unrealized loss on derivative instruments and $43.2million of loss in short term investment, which positively increased operatingcash flow and $45.9 million of capitalized leachable material, which loweredour cash flow.  Additionally, an increasein working capital decreased operating cash flow by $335.1 million.

 

Net cash used ininvesting activities in the nine months of 2008 included $314.9 million forcapital expenditures.  The capitalexpenditures included $167.9 million of investments at our Peruvian operations,$7.0 million for the Toquepala and Cuajone expansions, $78.9 million for theTia Maria project, $15.8 million for the tailings disposal at Quebrada Hondaand $66.2 million for various other replacement expenditures.  In addition, we spent $147.0 million forreplacement assets at our Mexican operations, $107.9 million of which was for ourMexican open pit operations, $30.9 million for our IMMSA unit and $8.3 millionfor the Mexican administrative office.

 

Net cash used ininvesting activities in the nine months of 2007 included $251.1 million forcapital expenditures, $100.0 million for the purchase of short-term investmentsand proceeds of $16.8 million received for the redemption of short-terminvestments.  The capital expendituresincluded investments at our Peruvian operations of $104.9 million, including,$21.0 million for the Ilo smelter modernization project, $13.5 million for fourKomatzu trucks, $3.9 million for a new ball mill at the Cuajone concentrator,$10.8 million for the tailing disposal project, $9.0 million for the new PLSdams at Huanaquera project and $46.7 million for various other replacementexpenditures.  In addition, we spent$146.2 million for replacement assets at our Mexican operations, including,$10.6 million of which for the leachable ore crushing, transportation and stackingsystem project at Cananea, $4.1 million for the PLS dams and leaching systemproject at Cananea, $9.6 million for the gas handling system in the smelter atLa Caridad and $77.8 million for various other replacement expenditures at ourMexican open pit operations, $16.8 million at our IMMSA unit and $27.3 millionfor our Mexican corporate office.

 

Netcash used in financing activities in the first nine months of 2008 was $1,648.2

 

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million,compared with $1,423.6 million in the same period of 2007.  The first nine months of 2008 includes adividend distribution of $1,416.4 million, compared with a distribution of$1,413.4 million in the same period of 2007. The first nine months of 2008 also includes a debt repayment of $155.0million and the acquisition of 3.3 million of treasury shares at a cost of$68.5 million.

 

LIQUIDITYAND CAPITAL RESOURCES

 

On September 5,2008, we paid a quarterly dividend of $0.57 per share, totaling $503.5 million.On October 31, 2008, we announced a dividend of $0.34 per share to be paidon December 5, 2008 to shareholders of record as of November 18,2008.

 

Pursuant to the$300 million share repurchase program authorized by the Company’s Board ofDirectors in the first quarter of 2008, in the third quarter of 2008 wepurchased 3.3 million shares of our common stock at a cost of $68.5million.  These shares will be availablefor general corporate purposes.  On October 31,2008 we announced that the Board of Directors approved an increase in our sharerepurchase program from $300 million to $500 million.  We may purchase additional shares from timeto time, based on market conditions and other factors.  This repurchase program has no expirationdate and may be modified or discontinued at any time.

 

During October 2008,we have purchased 9.1 million shares of our common stock at a cost of $115.1million under the share repurchase program. With these purchases we have purchased, under this program, a total of12.4 million shares at a cost of $183.6 million with an average cost of $14.79per share.

 

As a result of therepurchase of SCC common shares the indirect ownership of Grupo Mexico hasincreased from 75.1% to 75.4% at September 30, 2008.  Purchases of common shares subsequent to September 30,2008 have further increased the ownership percentage of Grupo Mexico to 76.2%.

 

On October 31, 2008,the Company announced that the Board of Directors’ Audit Committee and theIndependent Directors approved the sale of 350 million shares of Grupo Mexico,owned by Minera Mexico, for several years as an asset of such Minera Mexico’semployee benefit plan.  The purchaseprice per share in the transaction will be the market price.

 

On April 1, 2008 wepaid $150.0 million of the remaining balance of our series A Yankee bonds.  With this payment, the series A Yankee bondswere fully repaid.

 

One of our strengths isthe cash position, which at September 30, 2008 is in excess of $1.1billion.  We expect that we will meet ourcash requirements for 2008 and beyond from internally generated funds, cash onhand and from additional external financing, if required.  At September 30, 2008, our debt as apercentage of total capitalization (the total of debt, minority interest andstockholders’ equity) was 24.9% as compared with 27.3% at December 31,2007.  At September 30, 2008, ourcash and cash equivalents amounted to $1,175.6 million compared to $1,409.3million at December 31, 2007.

 

Asa regular part of control and safeguards our Risk and Cash Management Committeeregularly reviews the safety of our cash position with particular emphasis onrisks.  This committee is comprised ofmembers of senior management. We believe that the Company’s cash positions at September 30,2008 are maintained in low risk and quality financial instruments withfinancially solvent institutions.

 

NON-GAAP INFORMATIONRECONCILIATION

 

Reconciliation ofoperating cash cost to GAAP cost of sales in millions of dollars and cents perpound.

 

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| ** **                                                                 | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
| ** **                                                                 | ** ** | **$ million**                                       | ** ** | **¢ per pound** | ** ** | **$ million** | ** ** | **¢ per pound** | ** ** |
| Cost of sales (exclusive depreciation, amortization and depletion) -  GAAP |       | $                                                        | 645.8      |   | 222.4 |   | $ | 560.0 |   | 194.6 |   |
| Add:                                                                       |       |                                                     |       |   |   |   |   |   |   |
| Selling, general and administrative expenses                               |       | 25.9                                                     |       | 8.9 |   | 23.6 |   | 8.2 |   |
| Treatment and refining charges                                             |       | 2.0                                                      |       | 0.7 |   | 11.7 |   | 4.1 |   |
| By-products revenue (1)                                                    |       | (536.0                                                   | )          | (184.6 | ) | (484.1 | ) | (168.3 | ) |
| Less:                                                                      |       |                                                     |       |   |   |   |   |   |   |
| Workers’ participation                                                |       | (75.6                                                    | )          | (26.0 | ) | (84.9 | ) | (29.5 | ) |
| Royalty charge and other                                                   |       | 20.7                                                     |       | 7.1 |   | (71.9 | ) | (25.0 | ) |
| Inventory change                                                           |       | (30.5                                                    | )          | (10.5 | ) | (18.8 | ) | (6.5 | ) |
| **Operating cash cost**                                                    | ** ** | **52.3**                                                 | ** ** | **18.0** | ** ** | **$** | **(64.4** | **)** | **(22.4** | **)** |
|                                                                       |       |                                                     |       |   |   |   |   |   |   |
| Add by-product revenue                                                     |       | 536.0                                                    |       | 184.6 |   | 484.1 |   | 168.3 |   |
|                                                                       |       |                                                     |       |   |   |   |   |   |   |
| Operating cash cost, without by-product revenue                            |       | $                                                        | 588.3      |   | 202.6 |   | $ | 419.7 |   | 145.9 |   |
|                                                                       |       |                                                     |       |   |   |   |   |   |   |
| Total pounds of copper produced and purchased (in millions)                |       | 290.4                                                    |       |   |   | 287.7 |   |   |   |

 

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

 
| ** **                                                                    | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| ** **                                                                    | ** ** | **$ million**                                      | ** ** | **¢ per pound** | ** ** | **$ million** | ** ** | **¢ per pound** | ** ** |
| Cost of sales (exclusive of depreciation, amortization and depletion)  - GAAP |       | $                                                       | 1,716.8    |   | 202.8 |   | $ | 1,589.0 |   | 156.8 |   |
| Add:                                                                          |       |                                                    |       |   |   |   |   |   |   |
| Selling, general and administrative expenses                                  |       | 77.3                                                    |       | 9.1 |   | 73.3 |   | 7.2 |   |
| Treatment and refining charges                                                |       | 29.8                                                    |       | 3.5 |   | 47.2 |   | 4.7 |   |
| By-products revenue (1)                                                       |       | (1,485.2                                                | )          | (175.4 | ) | (1,452.7 | ) | (143.3 | ) |
| Less:                                                                         |       |                                                    |       |   |   |   |   |   |   |
| Workers’ participation                                                   |       | (219.0                                                  | )          | (25.9 | ) | (258.0 | ) | (25.5 | ) |
| Royalty charge and other                                                      |       | (95.8                                                   | )          | (11.3 | ) | (111.3 | ) | (11.0 | ) |
| Inventory change                                                              |       | 9.9                                                     |       | 1.2 |   | 7.6 |   | 0.7 |   |
| **Operating cash cost**                                                       | ** ** | **$**                                                   | **33.8**   | ** ** | **4.0** | ** ** | **$** | **(104.9** | **)** | **(10.4** | **)** |
|                                                                          |       |                                                    |       |   |   |   |   |   |   |
| Add by-product revenue                                                        |       | 1,485.2                                                 |       | 175.4 |   | 1,452.7 |   | 143.3 |   |
|                                                                          |       |                                                    |       |   |   |   |   |   |   |
| Operating cash cost, without by-product revenue                               |       | 1,519.0                                                 |       | 179.4 |   | $ | 1,347.8 |   | 132.9 |   |
|                                                                          |       |                                                    |       |   |   |   |   |   |   |
| Total pounds of copper produced and purchased (in millions)                   |       | 846.7                                                   |       |   |   | 1,013.5 |   |   |   |

 

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(1)      Includes net by-productsales revenue and premiums on sales of refined products.

 

Impact of NewAccounting Standards

 

Pleasesee note O to our condensed consolidated financial statements.

 

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Item 3. Quantitative andQualitative Disclosure about Market Risk

 

A portion of ouroutstanding debt bears interest at variable rates and accordingly is sensitiveto changes in interest rates.  Interestrate changes would also result in gains or losses in the market value of ourfixed rate debt portfolio due to differences in market interest rates and therates at the inception of the debt agreements. Based upon our indebtedness at September 30, 2008, a change ininterest rates of one percent (or 100 basis points) would impact net income andcash flows by $0.6 million annually.

 

On July 14, 2008,Standard & Poor’s upgraded Peru’s foreign currency debt rating to investmentgrade.  This rating improvement, and theone made by Fitch in April 2008, clearly indicates the consistent progressof Peru, a mining friendly country.

 

We are also exposed tomarket risk associated with changes in foreign currency exchange rates ascertain costs incurred are in currencies other than our functionalcurrency.  To manage the volatilityrelated to the risk, we may enter into forward exchange contracts, currencyswaps or other currency hedging arrangements.

 

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, and giving no effects topotential hedging programs metal price sensitivity factors would indicate thefollowing change in estimated 2008 net earnings resulting from metal pricechanges:

 
| ** **                                                   | ** ** | **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        |           | $          | 22.1     |       | $          | 1.3        |   | $ | 8.4 |   |

 

We occasionally usederivative instruments to manage our exposure to market risk from changes incommodity prices, interest rate and exchange rate risk exposures and to enhancereturn on assets.  We generally do notenter into derivative contracts unless we anticipate a future activity that islikely to occur that will result in exposing us to market 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 ninemonths of 2008, we entered into copper collar and swap contracts to protect aportion of our 2008 sales of copper production. As a result, we recorded a realized gain of $18.5 million and $29.2million in the third quarter and first nine months of 2008, respectively,compared with a loss of $0.3 million and a gain of $3.0 million in the thirdquarter and first nine months of 2007, respectively.  These gains loss were recorded in net salesin the condensed consolidated statement of earnings and in accounts receivableother in the condensed consolidated balance sheet.

 

At September 30,2008 we have copper collar contracts to protect 66.1 million pounds of copperproduction for the October-December 2008 period at weighted averageminimum and maximum LME prices of $3.40 per pound and $4.23 per pound,respectively.  If the LME price fallsbelow the minimum price, we will be paid the difference between the minimumprice and the actual price.  If the LMEprice exceeds the maximum price, we will pay the difference between the maximumprice and the actual price.  Related tothe fair value of these copper derivative contracts we recorded an unrealizedgain of $33.7 million at the end of September 2008.  This gain was recorded in net sales in the 

 

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condensed consolidatedstatement of earnings and in accounts receivable other in the condensedconsolidated balance sheet.

 

Gas swaps:

 

In 2008 and 2007 theCompany entered into gas swap contracts to protect part of its gas consumptionsas follows:

 
| ** **               | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **               | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Gas volume (MMBTUs)      |       | 305,000                          |       | -                               |       | 305,000 |   | 900,000 |   |
| Fixed price              |       | 8.2175                           |       | -                               |       | 8.2175 |   | 7.5250 |   |
| Gain (loss) (in million) |       | $                                | (0.7       | )                               | -          |   | $ | (0.7 | ) | $ | (0.9 | ) |
|                          |            |                                  |            |                                 |            |  |  |  |  |  |  |  |

 

The gains (losses)obtained were charged to production cost. As of September 30, 2008 theCompany holds a gas swap contract to protect 155,000 MMBTUs of our gasconsumption with a fixed price of $8.2175 per MMBTU for the month of October 2008.  Related to the settlement of this gas swapcontract the Company recorded an unrealized loss of $0.4 million in the thirdquarter of 2008 which was included in the $0.7 million reported in the tableabove.

 

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

 

Because more than 85% ofour sales collections in Mexico are in US dollars and many of our costs are inMexican pesos, we entered into zero-cost derivative contracts with the purposeof protecting, within a range, against an appreciation of the Mexican peso tothe US dollar.

 

At September 30,2008, we held two types of exchange rate derivative contracts:

 

In the first type ofexchange rate derivative contract, if the exchange rate settles at or below thebarrier price, we do not sell US dollars, if the exchange rate settles abovethe barrier price and below the strike price established in the contract, wesell the underlying amount of US dollars settling in the week at the strikeprice.  If the exchange rate settlesabove the strike price established in the contract, we sell double the notionalamount of US dollars settling in the week at the strike price established inthe contract.  At September 30,2008, we held the following contracts of this type:

 
| **Notional  Amount ** | ** ** | **Underlying  amount ** | ** ** | **Due Date, Weekly  expiration during** | ** ** | **Strike Price  (Mexican  Pesos/U.S.  Dollars)** | ** ** | **Barrier Price  (Mexican Pesos/  U.S. Dollars)** | ** ** |
|----------------------------|------------|------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| **(millions)**             | ** ** | **(millions)**               | ** ** | ** **                                             | ** ** | ** **                                            | ** ** | ** **                                                       | ** ** |
| $                          |  15.0 |                         | $          |  1.25                                             |       | 4th  Quarter 2008                                     |       | 11.32                                                            |       | 10.60 |   |
| $                          |  30.0 |                         | $          |  1.25                                             |       | 1st  Quarter 2009                                     |       | 11.25                                                            |       | 10.60 |   |

 

In the second type ofexchange rate derivative contract, if the exchange rate is less than or equalto the strike price, we sell US dollars in an amount equal to the underlyingamount for the expiration period at the strike price.  The difference between the strike price andthe market exchange rate is considered a gain for us.  The total accumulated gain over the life ofthe contract cannot exceed 200 cents per dollar transacted in the firstcontract and 500 cents per dollar transacted in the second and third contract.  If the exchange rate is above the strikeprice, we sell dollars in an amount equal to two times the underlying amountfor the expiration period at the strike price and the loss does not reduce theaccumulated gain.  At September 30,2008, we held the following contracts of this type:

 

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| **Notional  Amount ** | ** ** | **Underlying  amount ** | ** ** | **Expiration  Period** | ** ** | **Due Date** | ** ** | **Strike Price  (Mexican Pesos/  U.S. Dollars)** | ** ** |
|----------------------------|------------|------------------------------|------------|------------------------|------------|-------------------|------------|-----------------------------------------------------------------|------------|
| **(millions)**             | ** ** | **(millions)**               | ** ** | ** **             | ** ** | ** **        | ** ** | ** **                                                      | ** ** |
| $                          | 7.5        |                         | $          | 2.5                    |       | Monthly           |       | October 10, 2008  through December 11, 2008           |       | 10.80 |   |
| $                          | 15.0       |                         | $          | 2.5                    |       | Monthly           |       | January 13, 2009  through June 11, 2009               |       | 10.59 |   |
| $                          | 10.0       |                         | $          | 2.5                    |       | Weekly            |       | October 03, 2008  through October 24, 2008            |       | 10.80 |   |
| $                          | 107.5      |                         | $          | 2.5                    |       | Weekly            |       | October 31, 2008  through August 21, 2009             |       | 10.53 |   |

 

In the third quarter andfirst nine months of 2008 the exercise of some of these zero-cost derivativecontracts resulted in gains of $1.1 million and $2.1 million, respectively,compared with gains of $1.9 million and $6.0 million in the third quarter andfirst nine months of 2007, respectively, which were recorded as gain onderivative instruments in the condensed consolidated statement of earnings.

 

At September 30,2008, the fair value of the above listed exchange rate derivative contracts isa loss of $14.8 million which was recorded as loss on derivative instruments inthe condensed consolidated statement of earnings.  Each notional amount includes a group ofweekly transactions that have the same strike and barrier price.

 

The two exchangederivative contracts of the second type held at June 30, 2008 wascancelled in the third quarter of 2008 and we recognized a gain of $0.7million, which is included in $1.1 million and $2.1 million noted above.

 

The $53.0 millionexchange derivative contract held at December 31, 2007 was cancelled inthe first quarter 2008 and we recognized a gain of $0.3 million, which isincluded in the $2.1 million noted above.

 

Short-termInvestment:

 

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

 
| **Investment**                                                                                                  | ** ** | **As of  September 30,** | ** ** | **As of  December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                      | ** ** | **2008**                           | ** ** | **2007**                          | ** ** |
| Short-term investment in securities issued by public companies with a  weighted average interest rate of 2.95%. |       | $                                  | 83.0       |                              | $          | 117.9 |   |
|                                                                                                                 |            |                                    |            |                                   |            |  |  |

 

Short-terminvestments in securities consist of trading securities issued by publiccompanies.  Each security is independentof the others.

 

In the third quarter andnine months of 2008, we earned interest of $0.8 million and $3.4 million,respectively, related to these investments which were recorded as interestincome in the condensed consolidated statement of earnings.  In addition, in the third quarter and firstnine months of 2008, we redeemed $11.8 million and $30.3 million, respectively,of these investments.

 

At September 30,2008 the mark to market adjustment of these investments was a loss of $2.7million which was recorded as interest expense in the condensed consolidatedstatement of earnings.

 

Continuing economicinstability:

 

As a result of the world’seconomic crisis, certain of our assets positions and derivative contracts havebeen affected, as follows:

 

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Short term investments:

 

As of October 31,2008 a further mark-to-market adjustment of these investments would generate anadditional loss of $1.7 million.

 

Accounts receivable -Provisional sales:

 

In the month of October,2008 the market prices of copper and molybdenum declined from September 30,2008, and also forecast copper prices used to value provisionally priced coppersales declined. Based on these updated prices the value of provisionally pricedsales and accounts receivable would have declined by approximately, $137.6million.

 

Derivative instruments

 

Copper collar contracts:

 

As the copper marketprice continued to decrease in October, the open copper derivative contractshave continued to appreciate in value. A valuation, based on October 31,2008, generated an additional gain of $60.1 million.

 

Exchange ratederivatives, US dollar / Mexican peso:

 

At October 31, 2008the Mexican peso exchange rate increased from 10.79 Mexican pesos per dollar to12.91 Mexican pesos per dollar. Therefore, the fair value of the open positions at September 30,2008 would have increased the unrealized loss by $48.3 million.

 

CautionaryStatement:

 

Forward-lookingstatements in this report and in other Company statements include statementsregarding expected commencement dates of mining or metal production operations,projected quantities of future metal production, anticipated production rates,operating efficiencies, costs and expenditures as well as projected demand orsupply for the Company’s products.  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 risk associatedwith foreign operations.  Results ofoperations are directly affected by metal prices on commodity exchanges thatcan be volatile.

 

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Item 4.  Controls and Procedures

 

EVALUATION OFDISCLOSURE CONTROLS AND PROCEDURES

 

As of September 30,2008, the Company conducted an evaluation under the supervision and with theparticipation of the Company’s Disclosure Committee and the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,of the effectiveness and the design and operation of the Company’s disclosurecontrols and procedures.  Based on thatevaluation, the Chief Executive Officer and the Chief Financial Officer haveconcluded that the Company’s disclosure controls and procedures are effectiveas of September 30, 2008, to ensure that information required to bedisclosed in reports filed or submitted under the Exchange Act is:

 
| 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 ININTERNAL CONTROLS OVER FINANCIAL REPORTING

 

There was no change inthe Company’s internal controls over financial reporting (as such term isdefined in Rules 13a-15(f) and 15d-15(f) under the SecuritiesExchange Act of 1934, as amended) that occurred during the quarter ended September 30,2008 that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal controls over financial reporting.

 

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Report of IndependentRegistered Public Accounting Firm

 

To the Board of Directorsand Shareholders of Southern Copper Corporation:

 

We have reviewed theaccompanying condensed consolidated balance sheet of Southern CopperCorporation and its subsidiaries as of September 30, 2008, and the relatedcondensed consolidated statements of earnings for each of the nine-monthperiods ended September 30, 2008 and September 30, 2007 and thecondensed consolidated statement of cash flows for the nine-month periods endedSeptember 30, 2008 and September 30, 2007.  These interim financial statements are theresponsibility of the Company’s management.

 

We conducted our reviewin accordance with the standards of the Public Company Accounting OversightBoard (United States).  A review ofinterim financial information consists principally of applying analyticalprocedures and making inquiries of persons responsible for financial andaccounting matters.  It is substantiallyless in scope than an audit conducted in accordance with the standards of thePublic Company Accounting Oversight Board (United States), the objective ofwhich is the expression of an opinion regarding the financial statements takenas a whole.  Accordingly, we do notexpress such an opinion.

 

Based on our review, weare not aware of any material modifications that should be made to theaccompanying condensed consolidated interim financial statements for them to bein conformity with accounting principles generally accepted in the UnitedStates of America.

 

We previously audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheet as of December 31, 2007,and the related consolidated statement of earnings, changes in stockholders’equity, and of cash flows for the year then ended (not presented herein), andin our report dated February 29, 2008, we expressed an unqualified opinionon those consolidated financial statements. In our opinion, the information set forth in the accompanying condensedconsolidated balance sheet as of December 31, 2007, is fairly stated inall material respects in relation to the consolidated balance sheet from whichit has been derived.

 

PricewaterhouseCoopersS.C.

 

 

Mexico, D.F.

November 6, 2008

 

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PART II - OTHERINFORMATION

 

Item 1. - LegalProcedures

 

The information providedin Note M to the condensed consolidated financial statements contained in Part Iof this Form 10-Q, is incorporated herein by reference.

 

Item 1A.  Risk Factors:

 

Set forth below arecertain changes from the risk factors previously disclosed in SCC’s Form 10-Kfor the year ended December 31, 2007 filed on February 29, 2008 withthe Securities and Exchange Commission.

 

**GeneralRisks Relating to Our Business**

 

***Wemay be adversely affected by labor disputes.***

 

In the last seven yearsthe Cananea mine has experienced more than nine labor stoppages totalingmore than 542 days of inactivity. Beginning on July 30, 2007, our Cananea mine in Mexico started awork stoppage.  On January 11, 2008the Mexican Federal Labor Court declared the Cananea strike illegal and orderedthe workers to return to work within 24 hours. The workers partially returnedto work and the Company resumed operations. However, on April 11, 2008 theworkers restarted the labor stoppage and shut down production, based upona new federal ruling. On September 4, 2008, the Fourth Labor DistrictJudge granted the Company the right for a new revision regarding a ruling bythe Federal Labor court which will issue a new decision.  The Company has tried unsuccessfully toresolve the current labor stoppage that obstructs production at Cananea,hence in the second quarter 2008, the Board of Directors decided to offer allemployees a severance payment in accordance with the collective bargainingagreement and applicable law.  This wasoffered in order to award the employees a significant severance payment thatallows them to choose the labor alternative that is best for each of them.  During the second and third quarter of 2008,a group of employees was liquidated at a cost to the Company of $14.4 million,which was recorded in cost of sales on the condensed consolidated statement ofearnings.  In accordance with SFAS No. 112,the Company has estimated a liability of $48.4 million which have been recordedon the condensed consolidated balance sheet. It is expected that production at Cananea will remain suspended untilthese labor issues are resolved.

 

Additionally, our Taxcoand San Martin mines have been on strike since July 2007.  It is expected that operations at these mineswill remain suspended until these labor issues are resolved.  However, the Company believes that the strikeactivity will not result in an impairment of assets.

 

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

 

Our financial performanceis significantly affected by the market prices of the metals that we produce,particularly the market prices of copper, molybdenum, zinc andsilver.   LME copper prices declinedfrom $3.98 per pound at June 30, 2008 to $2.91 per pound at September 30,2008, and further to $1.81 per pound at October 31, 2008.  A continued decline in metals prices and, inparticular, copper or molybdenum prices, could have an adverse impact on ourresults of operations and financial condition, and we might, in very adversemarket conditions, consider curtailing or modifying certain of our mining andprocessing operations and slowing down or postponing our announced capitalinvestment programs.

 

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

 

The continued creditcrisis and related turmoil in the global financial system has had and maycontinue to have an impact on our business and our financial condition.  The global economic recession and creditcrisis in the financial markets may prompt banks to limit or deny lending to usor to our customers, which may have an adverse effect on our liquidity and onour ability to carry out our announced capital investment programs.  Additionally, the global economic recessionand credit crisis may prompt our customers to slow down or reduce the purchaseof our products.  A change in the demandof our products could impact our results of operations and financial condition.

 

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Item 6. - Exhibits

 
| **Exhibit No.** | ** ** | **Description  of Exhibit**                                                                                                                                                                      |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                             |
| 15.                  |       | Independent  Accountants’ Awareness Letter                                                                                                                                                  |
|                 |       |                                                                                                                                                                                             |
| 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 - OTHER INFORMATION

 

SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                  | SOUTHERN COPPER  CORPORATION(Registrant)             |
|-----------------------|------------------------------------------------------|
|                  |                                                 |
|                  |                                                 |
|                  | /s/ Oscar  Gonzalez Rocha                            |
|                  | Oscar Gonzalez  Rocha                                |
|                  | President and  Chief Executive Officer               |
|                  |                                                 |
| November 5, 2008 |                                                 |
|                  |                                                 |
|                  |                                                 |
|                  | /s/ Genaro  Guerrero                                 |
|                  | Genaro Guerrero                                      |
|                  | Vice President  Finance and Chief  Financial Officer |
|                  |                                                 |
| November 5, 2008 |                                                 |

 

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SOUTHERN COPPER CORPORATION

 

List of Exhibits

 
| **Exhibit No.** | ** ** | **Description  of Exhibit**                                                                                                                                                                      |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                             |
| 15.                  |       | Independent  Accountants’ Awareness Letter                                                                                                                                                  |
|                 |       |                                                                                                                                                                                             |
| 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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