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**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

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** **

| **x**                                                                                                                                                                                                                                                                                                                           | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                      |
| **For the  quarterly period ended March 31, 2009**                                                                                                                                                                                                                                                                         |
| ** **                                                                                                                                                                                                                                                                                                                      | ** **                                                                                              |
| ** **                                                                                                                                                                                                                                                                                                                      | **or**                                                                                                  |
|                                                                                                                                                                                                                                                                                                                            |                                                                                                    |
| **o**                                                                                                                                                                                                                                                                                                                           | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                            |
| **For the  transition period from                           to                         ** |

 

**Commission File Number: 1-14066**

 

**SOUTHERNCOPPER CORPORATION**

(Exact name ofregistrant 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’stelephone number, including area code

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.   Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every

InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the

preceding12 months (or for such shorter period that the registrant was required tosubmit and post such files).   Yes o No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-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 |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).   Yes o No x

 

As of April 30, 2009there were outstanding 850 million shares of Southern Copper Corporation commonstock, par value $0.01 per share.

 

 

 

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Southern Copper Corporation (“SCC”)

 

INDEX TO FORM 10-Q

 
| ** **                                               | ** **                                                                                               | **Page No.** |
|----------------------------------------------------------|----------------------------------------------------------------------------------------------------------|-------------------|
| Part I.  Financial Information:                |                                                                                                     |
|                                                     |                                                                                                     |              |
| Item. 1                                                  | Condensed Consolidated  Financial Statements (unaudited)                                                 |              |
|                                                     |                                                                                                     |              |
|                                                     | Condensed Consolidated  Statement of Earnings for the three months ended March 31, 2009 and 2008    | 3                 |
|                                                     |                                                                                                     |              |
|                                                     | Condensed Consolidated  Balance Sheet March 31, 2009 and December 31, 2008                     | 4                 |
|                                                     |                                                                                                     |              |
|                                                     | Condensed Consolidated  Statement of Cash Flows for the three months ended March 31, 2009 and  2008 | 5                 |
|                                                     |                                                                                                     |              |
|                                                     | Notes to  Condensed Consolidated Financial Statements                                                    | 6-30              |
|                                                     |                                                                                                     |              |
| Item 2.                                                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations              | 31-44             |
|                                                     |                                                                                                     |              |
| Item 3.                                                  | Quantitative  and Qualitative Disclosure about Market Risk                                               | 45-48             |
|                                                     |                                                                                                     |              |
| Item 4.                                                  | Controls and  Procedures                                                                                 | 49                |
|                                                     |                                                                                                     |              |
| Report of  Independent Registered Public Accounting Firm | 50                                                                                                       |
|                                                     |                                                                                                     |
| Part II. Other  Information:                        |                                                                                                     |
|                                                     |                                                                                                     |              |
| Item 1.                                                  | Legal Proceedings                                                                                        | 51                |
|                                                     |                                                                                                     |              |
| Item 1A.                                                 | Risk factors                                                                                             | 51-52             |
|                                                     |                                                                                                     |              |
| Item 4.                                                  | Submission of  Matters to a Vote of Security Holders                                                     | 53                |
|                                                     |                                                                                                     |              |
| Item 6.                                                  | Exhibits                                                                                                 | 54                |
|                                                     |                                                                                                     |              |
|                                                     | Signatures                                                                                               | 55                |
|                                                     |                                                                                                     |              |
|                                                     | List of Exhibits                                                                                         | 56                |
|                                                     |                                                                                                     |              |
| Exhibit 15                                          | Independent  Accountants’ Awareness Letter                                                          | 57                |
|                                                     |                                                                                                     |              |
| Exhibit 31.1                                        | Certification Pursuant  to Section 302 of theSarbanes-Oxley Act of 2002                             | 58-59             |
|                                                     |                                                                                                     |              |
| Exhibit 31.2                                        | Certification Pursuant  to Section 302 of theSarbanes-Oxley Act of 2002                             | 60-61             |
|                                                     |                                                                                                     |              |
| Exhibit 32.1                                        | Certification Pursuant  to Section 906 of theSarbanes-Oxley Act of 2002                             | 62                |
|                                                     |                                                                                                     |              |
| Exhibit 32.2                                        | Certification Pursuant  to Section 906 of theSarbanes-Oxley Act of 2002                             | 63                |

 

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Part I — FINANCIAL INFORMATION

 

Item 1.  Condensed Consolidated Financial Statements

 

Southern Copper Corporation

 

CONDENSED CONSOLIDATED STATEMENT OF EARNINGS

(Unaudited)

 
| ** **                                                                                    | ** ** | **3 Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                    | ** ** | **March 31,** | ** ** |
| ** **                                                                                    | ** ** | **2009**           | ** ** | **2008** | ** ** |
| ** **                                                                                    | ** ** | **(in thousands)** | ** ** |
| Net sales                                                                                     |       | $                  | 621,998    |   | $ | 1,499,206 |   |
|                                                                                          |       |               |       |   |   |
| Operating costs and expenses:                                                                 |       |               |       |   |   |
| Cost of sales (exclusive of depreciation, amortization and depletion  shown separately below) |       | 375,455            |       | 520,589 |   |
| Selling, general and administrative                                                           |       | 18,792             |       | 24,655 |   |
| Depreciation, amortization and depletion                                                      |       | 78,221             |       | 81,196 |   |
| Exploration                                                                                   |       | 5,402              |       | 8,056 |   |
| Total operating costs and expenses                                                            |       | 477,870            |       | 634,496 |   |
|                                                                                          |       |               |       |   |   |
| Operating income                                                                              |       | 144,128            |       | 864,710 |   |
|                                                                                          |       |               |       |   |   |
| Interest expense                                                                              |       | (24,183            | )          | (27,235 | ) |
| Capitalized interest                                                                          |       | 2,075              |       | 1,088 |   |
| (Loss) gain on derivative instruments                                                         |       | (2,604             | )          | 2,408 |   |
| Other income (expense)                                                                        |       | 2,657              |       | (4,674 | ) |
| Interest income                                                                               |       | 5,198              |       | 17,415 |   |
| Income before income taxes                                                                    |       | 127,271            |       | 853,712 |   |
|                                                                                          |       |               |       |   |   |
| Income taxes                                                                                  |       | 48,025             |       | 286,022 |   |
|                                                                                          |       |               |       |   |   |
| Net income                                                                                    |       | 79,246             |       | 567,690 |   |
|                                                                                          |       |               |       |   |   |
| Less: Net income attributable to the non-controlling interest                                 |       | 554                |       | 2,707 |   |
|                                                                                          |       |               |       |   |   |
| Net income attributable to Southern Copper Corporation                                        |       | $                  | 78,692     |   | $ | 564,983 |   |
|                                                                                          |       |               |       |   |   |
| Earnings per share — basic and diluted:                                                  |       |               |       |   |   |
| Net income attributable to SCC basic and diluted                                              |       | $                  | 0.09       |   | $ | 0.64 |   |
| Dividend paid to SCC common shareholders                                                      |       | $                  | 0.12       |   | $ | 0.47 |   |
|                                                                                          |       |               |       |   |   |
| Weighted average common shares outstanding (basic and diluted)                                |       | 852,772            |       | 883,397 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

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Southern Copper Corporation

 

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

 
| ** **                                                                                      | ** ** | **March 31**  | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                      | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                                                                                      | ** ** | **(in thousands)** | ** ** |
| ASSETS                                                                                          |       |               |       |                  |       |
| Current assets:                                                                                 |       |               |       |                  |       |
| Cash and cash equivalents                                                                       |       | $                  | 291,275    |                  | $          | 716,740 |   |
| Short-term investments                                                                          |       | 50,981             |       | 62,376                |       |
| Accounts receivable trade, less allowance for doubtful accounts (2009  - $4,805; 2008 - $4,811) |       | 168,038            |       | 104,149               |       |
| Accounts receivable other (including affiliates 2009 — $1,664; 2008 -  $1,925)             |       | 70,626             |       | 29,439                |       |
| Inventories                                                                                     |       | 449,291            |       | 451,597               |       |
| Deferred income tax                                                                             |       | 22,192             |       | 64,711                |       |
| Other current assets                                                                            |       | 133,801            |       | 124,681               |       |
| Total current assets                                                                            |       | 1,186,204          |       | 1,553,693             |       |
|                                                                                            |       |               |       |                  |       |
| Property, net                                                                                   |       | 3,804,119          |       | 3,803,764             |       |
| Leachable material, net                                                                         |       | 144,036            |       | 156,294               |       |
| Intangible assets, net                                                                          |       | 113,619            |       | 114,056               |       |
| Deferred income tax                                                                             |       | 59,246             |       | 83,106                |       |
| Other assets                                                                                    |       | 56,942             |       | 53,411                |       |
| Total assets                                                                                    |       | $                  | 5,364,166  |                  | $          | 5,764,324 |   |
|                                                                                            |       |               |       |                  |       |
| LIABILITIES                                                                                     |       |               |       |                  |       |
| Current liabilities:                                                                            |       |               |       |                  |       |
| Current portion of long-term debt                                                               |       | $                  | 10,000     |                  | $          | 10,000 |   |
| Accounts payable                                                                                |       | 313,562            |       | 413,351               |       |
| Accrued income taxes                                                                            |       | 19,227             |       | 34,378                |       |
| Due to affiliated companies                                                                     |       | 9,760              |       | 8,965                 |       |
| Accrued workers’ participation                                                             |       | 81,701             |       | 205,466               |       |
| Interest                                                                                        |       | 20,126             |       | 40,968                |       |
| Other accrued liabilities                                                                       |       | 31,326             |       | 24,335                |       |
| Total current liabilities                                                                       |       | 485,702            |       | 737,463               |       |
|                                                                                            |       |               |       |                  |       |
| Long-term debt                                                                                  |       | 1,280,042          |       | 1,279,972             |       |
| Deferred income taxes                                                                           |       | 116,180            |       | 169,342               |       |
| Non-current taxes payable                                                                       |       | 71,140             |       | 70,266                |       |
| Other liabilities and reserves                                                                  |       | 87,777             |       | 93,875                |       |
| Asset retirement obligation                                                                     |       | 18,215             |       | 18,007                |       |
| Total non-current liabilities                                                                   |       | 1,573,354          |       | 1,631,462             |       |
|                                                                                            |       |               |       |                  |       |
| Commitments and Contingencies (Note L)                                                          |       |               |       |                  |       |
|                                                                                            |       |               |       |                  |       |
| STOCKHOLDERS’ EQUITY                                                                       |       |               |       |                  |       |
| Common stock                                                                                    |       | 8,846              |       | 8,846                 |       |
| Additional paid-in capital                                                                      |       | 994,069            |       | 993,826               |       |
| Retained earnings                                                                               |       | 2,895,655          |       | 2,916,517             |       |
| Accumulated other comprehensive loss                                                            |       | (22,174            | )          | (23,477               | )          |
| Treasury stock                                                                                  |       | (585,733           | )          | (514,453              | )          |
| Total SCC stockholders’ equity                                                             |       | 3,290,663          |       | 3,381,259             |       |
| Non-controlling interest                                                                        |       | 14,447             |       | 14,140                |       |
| Total equity                                                                                    |       | 3,305,110          |       | 3,395,399             |       |
|                                                                                            |       |               |       |                  |       |
| Total liabilities and equity                                                                    |       | $                  | 5,364,166  |                  | $          | 5,764,324 |   |

 

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

 

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Southern Copper Corporation

 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 
| ** **                                                                             | ** ** | **3 Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                             | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| ** **                                                                             | ** ** | **(in thousands)**                 | ** ** |
| OPERATING ACTIVITIES                                                                   |       |                               |       |   |   |
|                                                                                   |       |                               |       |   |   |
| Net income attributable to SCC                                                         |       | $                                  | 78,692     |   | $ | 564,983 |   |
| Adjustments to reconcile net earnings to net cash provided from  operating activities: |       |                               |       |   |   |
| Depreciation, amortization and depletion                                               |       | 78,221                             |       | 81,196 |   |
| Capitalized leachable material                                                         |       | —                             |       | (2,246 | ) |
| (Gain) loss on currency translation effect                                             |       | (1,394                             | )          | 18,601 |   |
| Provision for deferred income taxes                                                    |       | 18,927                             |       | (38,052 | ) |
| (Gain) loss on sale of short-term investment                                           |       | (707                               | )          | 1,693 |   |
| Unrealized gain on derivative instruments                                              |       | (25,079                            | )          | (8,237 | ) |
| Non-controlling interest                                                               |       | 554                                |       | 2,707 |   |
|                                                                                   |       |                               |       |   |   |
| Cash provided from (used for) operating assets and liabilities:                        |       |                               |       |   |   |
| Accounts receivable                                                                    |       | (107,336                           | )          | (130,825 | ) |
| Inventories                                                                            |       | 2,306                              |       | (7,028 | ) |
| Accounts payable and accrued liabilities                                               |       | (250,462                           | )          | 21,850 |   |
| Other operating assets and liabilities                                                 |       | 11,994                             |       | (3,444 | ) |
| Net cash (used for) provided from operating activities                                 |       | (194,284                           | )          | 501,198 |   |
|                                                                                   |       |                               |       |   |   |
| INVESTING ACTIVITIES                                                                   |       |                               |       |   |   |
| Capital expenditures                                                                   |       | (62,978                            | )          | (49,894 | ) |
| Net proceeds from sale of short-term investments                                       |       | 12,102                             |       | 7,329 |   |
| Other                                                                                  |       | 204                                |       | (817 | ) |
| Net cash used for investing activities                                                 |       | (50,672                            | )          | (43,382 | ) |
|                                                                                   |       |                               |       |   |   |
| FINANCING ACTIVITIES                                                                   |       |                               |       |   |   |
| Dividends paid to common stockholders                                                  |       | (99,555                            | )          | (412,302 | ) |
| Distributions to non-controlling interest                                              |       | —                             |       | (3,160 | ) |
| Repurchase of common shares                                                            |       | (71,566                            | )          | — |   |
| Other                                                                                  |       | 70                                 |       | 61 |   |
| Net cash used for financing activities                                                 |       | (171,051                           | )          | (415,401 | ) |
|                                                                                   |       |                               |       |   |   |
| Effect of exchange rate changes on cash and cash equivalents                           |       | (9,458                             | )          | 21,094 |   |
|                                                                                   |       |                               |       |   |   |
| Increase (decrease) in cash and cash equivalents                                       |       | (425,465                           | )          | 63,509 |   |
| Cash and cash equivalents, at beginning of period                                      |       | 716,740                            |       | 1,409,272 |   |
| Cash and cash equivalents, at end of period                                            |       | $                                  | 291,275    |   | $ | 1,472,781 |   |
|                                                                                   |       |                               |       |   |   |
| Supplemental disclosure of cash flow information                                       |       |                               |       |   |   |
| Cash paid during the period for:                                                       |       |                               |       |   |   |
| Interest                                                                               |       | $                                  | 43,954     |   | $ | 46,330 |   |
| Income taxes                                                                           |       | $                                  | 32,806     |   | $ | 216,194 |   |
| Workers participation                                                                  |       | $                                  | 82,742     |   | $ | 115,830 |   |

 

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

 

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Southern Copper Corporation

 

NOTES TO CONDENSED CONSOLIDATED 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 March 31,2009 and the results of operations and cash flows for the three months ended March 31,2009 and 2008.  The condensedconsolidated financial statements for the three months ended March 31,2009 have been subject to a review by Galaz, Yamazaki, Ruiz Urquiza S.C., a memberfirm of Deloitte Touche Tohmatsu, the Company’s independent registered publicaccounting firm, whose report dated May 8, 2009, is presented on page 50.  The results of operations for the threemonths ended March 31, 2009 and 2008 are not necessarily indicative of theresults to be expected for the full year. The December 31, 2008 balance sheet data was derived from auditedfinancial statements, but does not include all disclosures required bygenerally accepted accounting principles in the United States of America.  The accompanying condensed consolidatedfinancial statements should be read in conjunction with the consolidatedfinancial statements at December 31, 2008 and notes included in theCompany’s 2008 annual report on Form 10-K.

 

 

B.             Adoption ofNew Accounting Standards:

 

On January 1, 2009 the Company adopted the followingpronouncements of the Financial Accounting Standards Board (“FASB”)pronouncements:

 

On March 19, 2008 the FASB issued SFAS No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities.”  This new standard improves financialreporting about derivative instruments and hedging activities by requiringenhanced disclosures to enable investors to better understand their effects onan entity’s financial position, financial performance, and cash flows.  The adoption of this statement has not had amaterial effect on the Company’s financial position and results of operations.See disclosures required in note G, Derivative instruments.

 

In December 2007, the FASB issued SFAS No. 160 “Non-ControllingInterests in Consolidated Financial Statements” — an amendment of ARB No. 51.  This statement addresses the reporting ofminority interests, now called “non-controlling interest”, in the results ofthe parent and provides direction for the recording of such interests in thefinancial statements.  It also providesguidance for the recording of various transactions related to thenon-controlling interest, as well as certain disclosure requirements.  The adoption of this statement caused somechanges to the Company’s presentation of financial results and statement ofposition.  However, these changes are notof a material nature.

 

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

 

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C.             Short-termInvestments:

 

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

 
| ** **                                                                                                                                                                  | ** ** | **As of**               | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| **Investments**                                                                                                                                                             | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
| Short-term investments in securities issued by public companies with  a weighted average interest rate of 1.07% at March 31,2009 and 1.85% at  December 31, 2008. |       | $                       | 51.0       |   | $ | 62.4 |   |
|                                                                                                                                                                             |            |                         |            |  |  |  |  |

 

Short-terminvestments in securities consist of available for sale securities issued bypublic companies.  Each security isindependent of the others.

 

In thefirst quarter of 2009 and 2008, the Company earned interest of $0.3 million and$1.6 million, respectively, related to these investments which were recorded asinterest income in the condensed consolidated statement of earnings.  In addition, in the first quarter of 2009 and2008, the Company redeemed $12.1 million and $5.2 million, respectively, ofthese investments.

 

In thefirst quarter of 2009 and 2008 the Company recorded a gain of $0.7 million anda loss of $1.7 million, respectively. The Company considered these gains/losses other than temporary, andtherefore has recorded them as other income (expense) in the condensedconsolidated statement of earnings.

 

D.            Inventories were as follows:

 
| **(in millions)**                          | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Metals at lower of average cost or market: |       |                     |       |                        |       |
| Finished goods                             |       | $                        | 46.7       |                        | $          | 46.7 |   |
| Work-in-process                            |       | 141.0                    |       | 135.8                       |       |
| Supplies at average cost                   |       | 261.6                    |       | 269.1                       |       |
| Total inventories                          |       | $                        | 449.3      |                        | $          | 451.6 |   |

 

E.              Income taxes:

 

The income tax provisionfor the first quarter of 2009 and 2008 was $48.0 million and $286.0 million,respectively.  These provisions includeincome taxes for Peru, Mexico and the United States.  The provision for income taxes was based onour effective tax rate of 37.7% for the first three months of 2009 as comparedto 33.5% during the same period in 2008. The increase in the effective tax rate for the first quarter 2009 islargely due to the incremental U.S. tax provided on dividend distributions madeby our Mexican subsidiary to the U.S. parent. This dividend distribution is taxable in the U.S. at the differencebetween the 35% U.S. statutory rate and the foreign tax credit rate of 28.5%.

 

As of March 27,2009, Grupo Mexico, through its wholly-owned subsidiary, Americas MiningCorporation (“AMC”), became the beneficial owner of 80% of SCC’s commonstock.  As a result of this new level ofownership, SCC will be included in AMC’s consolidated US federal income taxreturn commencing from March 27, 2009. AMC is a holding company and most of the business assets and operationsof AMC belong to ASARCO LLC and its subsidiaries.  In accordance with paragraph 40 of FAS No. 109,it is expected that current and deferred taxes will be allocated to members ofthe AMC group as if each were a separate taxpayer.  The Company has initiated discussions withAMC to put in place a tax sharing agreement in order to establish this allocationas well as other procedures and policies necessary for an equitable 

 

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management of US federalincome tax matters.  At present, SCC isproviding current and deferred 2009 US income taxes, as if it were still aseparate filer.  It is believed thattaxes provided on this basis will not be materially different from theprovision necessary once the Company has reached a tax sharing agreement withAMC.

 

FIN No. 48 —Accounting for Uncertainty in Income Taxes.

 

There were no materialchanges in the unrecognized tax benefits in the first three months of2009.  In the United States, the taxyears 2003 and 2004 are currently before the appeals division of the IRS.  The tax years 2005, 2006 and 2007 arecurrently under IRS field examination, which commenced in November 2008.  Management does not expect that any of theopen years will result in a cash payment within the preceding twelve months of March 31,2010.  The Company’s reasonableexpectations about future resolutions of uncertain items did not materiallychange during the quarter ended March 31, 2009.

 

F.              Provisionally Priced Sales:

 

At March 31, 2009,the Company has recorded provisionally priced sales of 26.6 million pounds ofcopper, at an average forward price of $1.83 per pound.  Also the Company has recorded provisionallypriced sales of 10.1 million pounds of molybdenum at the March 31, 2009market price of $8.13 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.

 

Following are theprovisionally priced copper and molybdenum sales outstanding at March 31,2009:

 
| **Copper  (million lbs.)** | ** ** | **Priced at** | ** ** | **Month of   Settlement** | ** ** |
|----------------------------|------------|---------------|------------|---------------------------|------------|
| 24.9                       |       | 1.83          |       | April 2009           |       |
| 1.1                        |       | 1.83          |       | May 2009             |       |
| 0.6                        |       | 1.85          |       | July 2009            |       |
| 26.6                       |       | 1.83          |       |                      |       |

 
| **Molybdenum  (million lbs.)** | ** ** | **Priced at** | ** ** | **Month of   Settlement** | ** ** |
|--------------------------------|------------|---------------|------------|---------------------------|------------|
| 3.0                            |       | 8.13          |       | April 2009           |       |
| 2.9                            |       | 8.13          |       | May 2009             |       |
| 3.1                            |       | 8.13          |       | June 2009            |       |
| 0.8                            |       | 8.13          |       | July 2009            |       |
| 0.3                            |       | 8.13          |       | August 2009          |       |
| 10.1                           |       | 8.13          |       |                      |       |

 

Management believes thatthe final pricing of these sales will not have a material effect on the Company’sfinancial position or results of operations.

 

G.             Derivative Instruments

 

The Company occasionallyuses derivative instruments to manage its exposure to market risk from changesin commodity prices, interest rate and exchange rate risk exposures and toenhance return on assets.  The Companydoes not enter into derivative contracts unless it anticipates a futureactivity that is likely to occur that will result in exposing the Company tomarket 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.

 

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In the firstquarter of 2008, the Company entered into copper collar and swap contracts toprotect a portion of its 2008 sales of copper production.  As a result, the Company recorded a gain of$6.4 million in the first quarter of 2008. This gain was recorded in net sales in the condensed consolidatedstatement of earnings and in accounts receivable other in the condensedconsolidated balance sheet.  The Companydid not hold any copper or zinc derivative contracts in the first quarter of2009.

 

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

 

Because more than 85% ofthe Company’s sales collections in Mexico are in US dollars and many of itscosts are in Mexican pesos, the Company entered into zero-cost derivativecontracts with the purpose of protecting, within a range, against anappreciation of the Mexican peso to the US dollar.

 

At March 31, 2009the Company held exchange rate derivative contracts with the followingconditions:

 

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 firstcontract and 500 cents per dollar transacted in the second contract.  If the exchange rate is above the strikeprice, the Company sells dollars in an amount equal to two times the underlyingamount for the expiration period at the strike price and the loss does notreduce the accumulated gain.  At March 31,2009, the Company held the following contracts:

 
| **Notional   Amount (1)  (millions)** | ** ** | **Underlying   amount  (millions)** | ** ** | **Expiration  Period** | ** ** | **Due Date** | ** ** | **Strike Price  (Mexican Pesos/   U.S. Dollars)** | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|------------------------|------------|--------------|------------|---------------------------------------------------|------------|
| $                                     | 7.5        |                                | $          | 2.5                    |       | Monthly      |       | April 13, 2009  through June 11, 2009   |       | 10.59 |   |
| $                                     | 52.5       |                                | $          | 2.5                    |       | Weekly       |       | April 3, 2009 through  August 21, 2009  |       | 10.53 |   |

 

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(1) Eachnotional amount includes a group of weekly transactions that have the samestrike price.

 

At March 31, 2009,the fair value of the above listed exchange rate derivative contracts is a lossof $31.7 million, of which $29.1 million was included in the 2008 consolidatedstatement of earnings.

 

Related to the exchangerate derivative contracts the Company recorded a net loss of $2.6 million inthe first quarter of 2009 compared with a gain of $2.4 million in the firstquarter of 2008.  These gains and losseswere recorded as (loss) gain on derivative instruments in the condensed consolidatedstatement of earnings.

 

H.            Asset Retirement Obligation:

 

The Companymaintains an estimated asset retirement obligation for its mining properties inPeru, as required by the Peruvian Mine Closure Law.  In accordance with the requirements of thislaw the Company has prepared and submitted the required closure plans to thePeruvian Ministry of Energy and Mines (“MEM”). These plans have been reviewed by the responsible governmental agencyand have been open to public discussion in the areas of the Company’soperations.  The Company is awaiting MEM’sreport, which is expected to consolidate the issues raised in the recent reviewfor the closure plan.

 

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The closure costrecognized for this liability includes the estimated cost required at thePeruvian operations, based on the Company’s experience, and includes cost atthe Ilo smelter, the tailing disposal, and dismantling the Toquepala andCuajone concentrators, and the shops and auxiliary facilities.

 

As of March 31,2009, the Company has made an estimated provision of $18.2 million for thisliability in its financial statements, but believes that this estimate shouldbe viewed with caution, pending final approval of the mine closure plan.

 

The followingtable summarizes the asset retirement obligation activity for the first quarterof 2009 and 2008 (in millions):

 
| ** **                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Balance as of January 1    |       | $        | 18.0       |     | $          | 13.1 |   |
| Additions, changes in estimates |       |     |       | —   |       |
| Accretion expense               |       | 0.2      |       | 0.3      |       |
| Balance as of March 31,    |       | $        | 18.2       |     | $          | 13.4 |   |

 

I.                 Related Party Transactions:

 

Receivable andpayable balances with affiliated companies are shown below (in millions):

 
| ** **                                                 | ** ** | **As of**               | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                 | ** ** | **March 31, 2009** | ** ** | **December 31****, 2008** | ** ** |
| Affiliate receivable:                                      |       |                    |       |   |   |
| Grupo Mexico S.A.B de C.V. and affiliates                  |       | $                       | 0.7        |   | $ | 0.8 |   |
| Ferrocarril Mexicano S.A. de C.V.                          |       | 0.9                     |       | 0.3 |   |
| Mexico Proyectos y Desarrollos S.A. de C.V. and affiliates |       | —                  |       | 0.8 |   |
|                                                       |       | $                       |  1.6  |   | $ | 1.9 |   |
| Affiliate payable:                                         |       |                    |       |   |   |
| Grupo Mexico S.A.B. de C.V. and affiliates                 |       | $                       | 9.6        |   | $ | 8.9 |   |
| Mexico Proyectos y Desarrollos S.A. de C.V. and affiliates |       | 0.2                     |       | — |   |
|                                                       |       | $                       |  9.8  |   | $ | 8.9 |   |

 

The Company has enteredinto certain transactions in the ordinary course of business with parties thatare controlling shareholders or their affiliates.  These transactions include the lease ofoffice space, air transportation and construction services and products andservices relating to mining and refining. The Company lends and borrows funds among affiliates for acquisitions andother corporate purposes.  Thesefinancial transactions bear interest and are subject to review and approval bysenior management, as are all related party transactions.  It is our policy that the Audit Committee ofthe Board of Directors shall review all related party transactions.  The Company is prohibited from entering orcontinuing a material related party transaction that has not been reviewed andapproved or ratified by the Audit Committee.

 

Grupo Mexico, the Company’sultimate parent and the majority indirect stockholder of the Company, and itsaffiliates provide various services to the Company.  These services are principally related toaccounting, legal, tax, financial, treasury, human resources, price riskassessment and hedging, purchasing, procurement and logistics, sales andadministrative and other support services. The Company pays Grupo Mexico Servicios S.A de C.V., a subsidiary ofGrupo Mexico for these services.  Thetotal amount paid by the Company for such services in the first quarter of 2009and 2008 was $1.7 million and $3.2 million, respectively.  The Company expects to continue to pay forthese services in the future.

 

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The Company’s Mexicanoperations paid fees of $2.4 million and $3.9 million in the first quarter of2009 and 2008, respectively, primarily for freight services and constructionservices provided by subsidiaries of Grupo Mexico.

 

The Larrea familycontrols a majority of the capital stock of Grupo Mexico, and has extensiveinterests in other businesses, including oil drilling services, construction,aviation, and real estate.  The Companyengages in certain transactions in the ordinary course of business with otherentities controlled by the Larrea family relating to mining and refiningservices, the lease of office space, sale of vehicles and air transportationand construction services.  In connectionwith this, the Company paid fees of less than $0.1 million and $0.3 million inthe first quarter of 2009 and 2008, respectively, for maintenance services andsale of vehicles provided by Mexico Compañia de Productos Automotrices, S.A. deC.V., a company controlled by the Larrea family.  Additionally, in 2007, our Mexicansubsidiaries have provided guaranties for loans totaling $10.8 million obtainedby Mexico Transportes Aereos, S.A. de C.V. (“MexTransport”).  These loans mature in 2010 ($2.3 million) and2013 ($8.4 million).  MexTransport, acompany controlled by the Larrea family, provides aviation services to ourMexican operations.  The guarantyprovided to MexTransport is backed up by the transport services provided byMexTransport to the Company’s Mexican subsidiaries.  The Company paid fees of $0.3 million and$0.7 million in the first quarter of 2009 and 2008, respectively, toMexTransport for aviation services.

 

The Company purchased$1.0 million and $1.5 million in the first quarter of 2009 and 2008,respectively, of industrial materials from Higher Technology S.A.C in which Mr. CarlosGonzalez has a proprietary interest.  TheCompany paid fees of $0.1 million and $0.2 million in the first quarter of 2009and 2008, respectively, for maintenance services provided by Servicios yFabricaciones Mecanicas S.A.C., a company in which Mr. Carlos Gonzalez hasa proprietary interest.  Mr. CarlosGonzalez is the son of SCC’s Chief Executive Officer.

 

The Company purchased$0.3 million and less than $0.1 million in the first quarter of 2009 and 2008,respectively, of industrial material from Sempertrans France BeltingTechnology, in which Mr. Alejandro Gonzalez is employed as a salesrepresentative.  Also, the Companypurchased $0.1 million and $0.2 million in the first quarter of 2009 and 2008,respectively, of industrial material from PIGOBA, S.A. de C.V., a company inwhich Mr. Alejandro Gonzalez has a proprietary interest.  Mr. Alejandro Gonzalez is the son of SCC’sChief Executive Officer.

 

The Company purchased$0.4 million and $0.6 million in the first quarter of 2009 and 2008,respectively, of industrial material and services from Breaker, S.A. de C.V., acompany in which Mr. Jorge Gonzalez, son-in-law of SCC’s Chief ExecutiveOfficer, has a proprietary interest.

 

It is anticipatedthat in the future the Company will enter into similar transactions with thesame parties.

 

J.                Benefit Plans:

 

SCC DefinedBenefit Pension Plan-

 

The components ofthe net periodic benefit costs for the three months ended March 31, are asfollows (in millions):

 
| ** **                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Interest cost                   |       | $        | 0.2        |     | $          | 0.2 |   |
| Expected return on plan assets  |       | (0.1     | )          | (0.1     | )          |
| Amortization of net loss (gain) |       | (*       | )          | (*       | )          |
| Net periodic benefit cost       |       | $        | 0.1        |     | $          | 0.1 |   |

 

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(*)amount is lower than $0.1 million.

 

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SCC Post-retirementHealth Care Plan-

 

The components of the netperiodic benefit costs for the post-retirement health care plan for the threemonths ended March 31, 2009 and 2008 are individually, and in total, lessthan $0.1 million.

 

Minera Mexico PensionPlans-

 

The components of the netperiodic benefit costs for the three months ended March 31, 2009 and 2008are as follows (in millions):

 
| ** **                             | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |
| Interest cost                          |       | $        | 0.5        |     | $          | 0.5 |   |
| Service cost                           |       | 0.6      |       | 0.6      |       |
| Expected return on plan assets         |       | (0.7     | )          | (0.7     | )          |
| Amortization of transition assets, net |       | (*       | )          | (*       | )          |
| Amortization of net actuarial loss     |       | (0.2     | )          | (*       | )          |
| Amortization of prior services cost    |       | (*       | )          | (*       | )          |
| Net periodic benefit cost              |       | $        | 0.2        |     | $          | 0.4 |   |

 

----

(*) amount is lower than$0.1 million

 

Minera MexicoPost-retirement Health Care Plan-

 

The components ofthe net periodic cost for the three months ended March 31, 2009 and 2008are as follows (in millions):

 
| ** **                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |
| Interest cost                         |       | $        | 1.2        |     | $          | 0.8 |   |
| Service cost                          |       | 0.2      |       | 0.1      |       |
| Amortization of net loss (gain)       |       | 0.2      |       | (*)      |       |
| Amortization of transition obligation |       | 0.4      |       | —   |       |
| Net periodic benefit cost             |       | $        | 2.0        |     | $          | 0.9 |   |

 

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(*) amount islower than $0.1 million

 

 

K.            Comprehensive Income (in millions):

 
| ** **                                                        | ** ** | **Three months ended** | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                        | ** ** | **March 31,**     | ** ** |
| ** **                                                        | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Net income                                                        |       | $                      | 79.2       |   | $ | 567.7 |   |
| Other comprehensive income (loss) net of tax:                     |       |                   |       |   |   |
| Additional decrease in liability for employee benefit obligation  |       | 1.3                    |       | — |   |
| Comprehensive income                                              |       | 80.5                   |       | 567.7 |   |
| Comprehensive income attributable to the non-controlling interest |       | 0.5                    |       | 2.7 |   |
| Comprehensive income attributable to SCC                          |       | $                      | 80.0       |   | $ | 565.0 |   |

 

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L.    Commitments and Contingencies

 

**Environmentalmatters:**

 

The Company has instituted extensive environmentalconservation programs at its mining facilities in Peru and Mexico.  The Company’s environmental programs include,among other features, water recovery systems to conserve water and minimizeimpact on nearby streams, reforestation programs to stabilize the surface ofthe tailings dams and the implementation of scrubbing technology in the minesto reduce dust emissions.

 

Peruvian operations

 

The Company’s operations are subject to applicablePeruvian environmental laws and regulations. The Peruvian government, through the MEM conducts annual audits of theCompany’s Peruvian mining and metallurgical operations.  Through these environmental audits, mattersrelated to environmental commitments, compliance with legal requirements,atmospheric emissions, and effluent monitoring are reviewed.  The Company believes that it is in materialcompliance with applicable Peruvian environmental laws and regulations.

 

In 2003 thePeruvian congress published a new law announcing future closure and remediationobligations for the mining industry.  Inaccordance with the requirements of this law the Company has prepared andsubmitted the required closure plans to MEM. These plans have been reviewed by the responsible governmental agencyand have been open to public discussion in the areas of the Company’soperations.  The Company is awaitingfeedback from MEM regarding public comments made to these plans.  See Note H, Asset retirement obligation, forfurther discussion of this matter.

 

For the Company’s Peruvian operations, environmentalcapital expenditures were $1.1 million and $1.5 million in the first quarter of2009 and 2008, respectively.

 

Mexican operations

 

The Company’s operations are subject to applicableMexican federal, state and municipal environmental laws, to Mexican officialstandards, and to regulations for the protection of the environment, includingregulations relating to water supply, water quality, air quality, noise levelsand hazardous and solid waste.  Some ofthese laws and regulations are relevant to legal proceedings pertaining to theCompany’s San Luis Potosi copper facilities.

 

The principal legislation applicable to the Company’sMexican operations is the Federal General Law of Ecological Balance andEnvironmental Protection, which is enforced by the Federal Bureau ofEnvironmental Protection (“PROFEPA”). PROFEPA monitors compliance with environmental legislation and enforcesMexican environmental laws, regulations and official standards.  PROFEPA may initiate administrativeproceedings against companies that violate environmental laws, which in themost extreme cases may result in the temporary or permanent closing ofnon-complying facilities, the revocation of operating licenses and/or othersanctions or fines.  Also, according tothe Federal Criminal Code, PROFEPA must inform corresponding authoritiesregarding environmental non-compliance.

 

Mexican environmental regulations have becomeincreasingly stringent over the last decade, and this trend is likely tocontinue and has been influenced by the environmental treaty entered into byMexico, United States and Canada in connection with NAFTA in 1999.  However, the Company’s management does notbelieve that continued compliance with the federal environmental law or Mexicanstate environmental laws will have a material adverse effect on the Company’sbusiness, properties, results of operations, financial condition or prospectsor 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 

 

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regulations, the Company cannot assure that futurelaws and regulations would not have a material adverse effect on the Company’sbusiness, properties, results of operations, financial condition or prospects.

 

For the Company’s Mexican operations, environmentalcapital expenditures were $7.6 million and $1.1 million in the first quarter of2009 and 2008, respectively.

 

**Litigation matters**:

 

Peruvian operations

 

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

 

The Company conducts its operations in Peru through aregistered Branch.  Although the PeruvianBranch has neither capital nor liability separate from that of the Company,under Peruvian law it is deemed to have an equity capital for purposes ofdetermining the economic interest of the holders of the labor shares.  The labor share litigation is based on claimsof former employees for ownership of labor shares issued during the 1970s until1979 under a former Peruvian mandated profit sharing system.  In 1971, the Peruvian government enactedlegislation providing that workers in the mining industry would participate inthe pre-tax profits of the enterprises for which they worked at a rate of10%.  This participation was distributed40% in cash and 60% as an equity interest in the enterprise.  Under the law, the equity participation wasoriginally delivered to the “Mining Community”, an organization representingall workers in the mining industry.  Thecash portion was distributed 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 the closeof the year.  Effective in 1992, the lawwas amended to its present status, and the workers’ participation in pre-taxprofits was set at 8%, with 100% payable in cash.  The equity participation component waseliminated from the law.

 

In 1995, the Company offered to exchange new commonshares of the Company for the labor shares issued under the prior Peruvianlaw.  Approximately 80.8% of the issuedlabor shares were exchanged for the Company’s common shares, greatly reducingthe minority interest, now called non-controlling interest, on the Company’sbalance sheet.  What remains of theworkers’ equity participation is now included on the consolidated balance sheetunder the caption “Non-controlling interest.”

 

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

 

1)              As stated above, in April 1996, the Company wasserved with a complaint filed in Peru by approximately 800 former employees,(Garcia Ataucuri and others vs. SCC), seeking the delivery of 38,763,806.80 “laborshares” (acciones laborales), now “investment shares” (acciones de inversion)(or Nuevos soles (“S/.”) 3,876,380,679.56), as required by Law No. 22333,to be issued in a proportional way to each former employee or worker inaccordance with their time of work with SCC’s Branch in Peru, plus dividends onsuch shares.  In 2000 SCC appealed anadverse decision of 

 

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an appellate civil court,affirming a decision of a lower civil court, to the Peruvian SupremeCourt.  On September 19, 2001, thePeruvian Supreme Court annulled the proceedings noting that the civil courtslacked jurisdiction and that the matter had to be decided by a laborcourt.  On March 8, 2002, Mr. GarciaAtaucuri restated the claim to comply with Peruvian labor law and proceduralrequirements, and increased the number of plaintiffs to approximately 958ex-workers.  In January 2005, thelower labor judge dismissed the lawsuit on procedural grounds without decidingon the merits of the case.  In March 2005,the plaintiffs appealed this decision but the appellate court dismissed theappeal due to procedural defects and remanded the case to the lower labor courtfor further proceedings.  The lower laborcourt, on motions from the plaintiffs, reinstated the appeal of the dismissalof the case of seven plaintiffs that had cured the procedural defects.  As of March 31, 2009, the case remainsopen 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.

 

In October 2007, ina separate proceeding initiated by Mr. Garcia Ataucuri against thejustices of the Peruvian Supreme Court, the Peruvian Constitutional Courtnullified the Peruvian Supreme Court decision issued on September 19, 2001because it had violated Mr. Garcia Ataucuri’s constitutional due processrights by obliging him and the other plaintiffs to commence a new proceedingbefore the labor courts when they had litigated against the Company in civilcourts for over 10 years.  The PeruvianConstitutional Court ordered the Supreme Court to decide again on the merits ofthe case accepting or denying the Company’s 2000 appeal.

 

Although the Company wasnot formally a party to the Garcia Ataucuri proceedings before the PeruvianConstitutional Court, the nullity of the favorable decision of the SupremeCourt, issued on September 19, 2001, is final and cannot be appealed bythe Company.

 

It is uncertain how thePeruvian Supreme Court will decide on the Company’s 2000 appeal and the meritsof the case in view of the decision of the Peruvian Constitutional Court.

 

2)              On May 10, 2006, the Company was served with asecond complaint filed in Peru, this time by 44 former employees, (CornejoFlores and others vs. SCC), seeking delivery of (1) labor shares (orshares of whatever other current legal denomination) corresponding to years1971 to December 31, 1977 (the plaintiffs are seeking the same38,763,806.80 labor shares mentioned in the prior lawsuit), that should havebeen issued in accordance with Law No. 22333, plus interest and (2) laborshares resulting from capital increases made by the Branch in 1980 “for theamount of the workers’ participation of S/.17,246,009,907.20, equivalent to172,460,099.72 labor shares”, plus dividends. On May 23, 2006, the Company answered this new complaint, denyingthe validity of the claim.  As of March 31,2009 the case remains open with no new developments.

 

3)              On June 27, 2008, the Company was served with anew complaint filed in Peru, this time by 82 former employees, (AlejandroZapata Mamani and others vs. SPCC), seeking delivery of labor shares (or sharesof whatever other current legal denomination) corresponding to years 1971 to December 31,1977 (the plaintiffs are seeking the same 38,763,806.80 labor shares mentionedin the two previous labor share lawsuits), that should have been issued inaccordance with Law No. 22333, plus interest, and labor shares resultingfrom capital increases, plus dividends. The Company answered this new complaint, denying the validity of theclaim.  As of March 31, 2009 thecase remains open with no new developments.

 

4)              Additionally, in January 2009, the Company wasserved with a new complaint filed in Peru, this time by 12 former employees(Arenas Rodriguez and others —represented by Mr. Cornejo Flores- vs SPCC)seeking delivery of labor shares (or shares of whatever other current legaldenomination) corresponding to years 1971 to December 31, 1977 

 

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(the plaintiffs areseeking the same 38,763,806.80 labor shares mentioned in the three previouslabor share lawsuits), that should have been issued in accordance with Law No. 22333,plus interest, and labor shares resulting from capital increases, plusdividends.  The Company answered this newcomplaint, denying the validity of the claim. As of March 31, 2009 the case remains open with no newdevelopments.

 

The Company asserts thatthe claims 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.

 

Mexican operations

 

The Mexican Geological Services (“MGS”) Royalties: In August 2002,MGS (formerly named Council of Mineral Resources (“COREMI”)) filed with theThird Federal District Judge in Civil Matters, an action demanding fromMexcobre (La Caridad) the payment of royalties since 1997.  In December 2005, Mexcobre signed anagreement with MGS.  Under the terms ofthis agreement the parties established a new procedure to calculate the royaltypayments applicable for 2005 and the following years, and the Company paid in January 2006,$6.9 million of royalties for 2005 and $8.5 million as payment on account ofroyalties from the third quarter 1997 through the last quarter of 2004.  On January 22, 2007 the Third FederalDistrict Judge issued a ruling regarding the payment related to the period fromthe third quarter of 1997 through the fourth quarter of 2004.  This ruling was appealed by both parties in February 2007.  The appeal was lost by the Company in October 2007.  The Company filed a protective action(Amparo) before the Ninth collegiate Civil Tribunal which rendered a negativeruling on August 27, 2008.  TheCompany is defending its economic interest in the judicial process to determinethe final amount to be paid to MGS.  Onan ongoing basis the Company is required to pay a 1% royalty on La Caridad’scopper production value after deduction of treatment and refining charges andcertain other carrying costs.

 

San Luis Potosi Facilities: The municipality of SanLuis Potosi has granted Desarrolladora Intersaba, S.A. de C.V. (“Intersaba”),licenses for use of land and construction of housing and/or commercial zones inthe former Ejido Capulines zone, where some residential projects like “VillaMagna” and other new residential projects are being developed within an areadesignated as a buffer zone due to IMMSA’s use of anhydrous ammonia gas.  This designation as a buffer zone was grantedby the risk area of SEMARNAT (the federal environmental authority) within itsapproval of the IMMSA’s Risk Analysis.

 

Regarding this situation, a number of actionsoccurred, including the following:

 

1)              Against the municipality of San LuisPotosi, requesting the annulment of Desarrolladora Intersaba’s authorizationsand licenses granted within the zinc plant’s buffer zone.

 

In August 2006,the action regarding the annulment of Villa Magna licenses was decided by afederal appeals court, which denied IMMSA’s request.  In September 2006, IMMSA submitted itsfinal appeal to the Supreme Court of Justice and in February 2007, thecourt ruled against IMMSA.

 

IMMSA believesthat even though the outcome was adverse to its interest, the construction ofthe “Villa Magna” housing and commercial development will not affect theoperations of IMMSA’s zinc plant by itself.

 

In 2008, Intersabafiled a lawsuit against IMMSA, requesting a payment of approximately $0.8million, due to the damages caused by the IMMSA litigation.  In 

 

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November 2008,a local court ruled in favor of Intersaba and ordered IMMSA to pay $0.7million.  IMMSA appealed this ruling.

 

In March 2009,based on the fact that Intersaba did not present, on a timely basis, accountingdocuments necessary to support its damage allegations, a federal judge ruledthat IMMSA did not have to pay Intersaba. The Company expects that Intersaba will appeal this ruling.

 

2)              In addition to the foregoing, IMMSA hasinitiated a series of legal and administrative procedures against theMunicipality of San Luis Potosi due to its refusal to issue IMMSA’s use of landpermit (licencia de uso de suelo) in respect to its zinc plant.  A federal judge ruled that IMMSA’s use ofland permit should be granted.  In February 2009,the municipal authorities confirmed that local regulation permit IMMSA to usethe land for industrial purposes.

 

3)              Additionally, Ejido Capulines, an agriculturalcommunity, filed a protective action against IMMSA’s Risk Analysis approved bySEMARNAT.  As previously noted, thisapproval determines a buffer zone around the San Luis facilities.

 

On November 4,2008, a federal judge terminated the case and noted that the Ejido Capulinesdid not prove any harm caused by IMMSA’s Risk Analysis authorization.  In December 2008, the Ejido Capulinesappealed this decision before the Federal court Jurisdiction.  The appeal is pending.

 

4)              Also, new lawsuits were filed by IMMSAagainst the municipality of San Luis Potosi challenging other licenses grantedin the safeguard area.

 

IMMSA’s annulmentof the licenses was denied by the court. Nevertheless IMMSA believes that this ruling will not have a materialadverse effect on its operations.

 

5)              IMMSA filed on October 7, 2008 a lawsuitagainst SEMARNAT before the Federal Tax and Administrative Justice Courtseeking the nullity of a July 24, 2008 denial of the Company’s request fora safeguard declaration.

 

In March 2009,the Federal Tax and Administrative Justice Court granted IMMSA the nullity froma SEMARNAT official communication dated July 24, 2008.  In March 2009, IMMSA requested from thecourt a clarification of the decision.

 

The Ejidal Commissariat of the “Ejido Pilares deNacozari”, initiated a protective action (Amparo) against the secondexpropriation decree (by means of which 2.322 hectares were expropriated forpublic use), ignoring the judicial settlement reached with the Company on thismatter.  The judicial settlement had beenratified in January 2006.  TheCompany will defend the settlement reached with the Ejido and seek thedismissal of the case.

 

Pasta de Conchos Accident:

 

Mrs. Martinez, the wife of a miner, who died inthe Pasta de Conchos accident, initiated a protective action against thenegative ruling issued by the Ministry of Economy denying her request to launcha procedure to cancel IMMSA’s coal concessions, which she argued the accidentshould trigger.

 

The First District Administrative Judge flatlydismissed the case, but this ruling was later revised by an appeals court.  Mrs. Martinez filed a new protectiveaction against a new ruling issued by the Ministry of Economy.  The Company is certain that an accident byitself cannot trigger a procedure of cancellation of the coal concessions.  Although the Company cannot predict theoutcome of the procedures filed by Mrs. Martinez, the Company asserts thatthe claims of Mrs. Martinez are without merit and is vigorously defendingagainst the actions.

 

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**Labor matters**:

 

In recent years the Company has experienced a numberof strikes or other labor disruptions that have had an adverse impact on itsoperations and operating results.

 

Peruvian Operations

 

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

 

From June 30to July 5, 2008 the three major unions went on strike in support of amining federation strike.  During thisstrike operations were near normal; an insignificant amount of production waslost as work continued with the support of staff and administrative personneland with contractors.

 

Mexican operations

 

Approximately 75%of the Mexican labor force was unionized at December 31, 2008, representedby two separate unions.  Under Mexicanlaw, the terms of employment for unionized workers is set forth in collectivebargaining agreements.  Mexican companiesnegotiate the salary provisions of collective bargaining agreements with thelabor unions annually and negotiate other benefits every two years.  The Company conducts negotiations separatelyat each mining complex and each processing plant.

 

In the last eight years the Cananea mine hasexperienced more than nine labor stoppages totaling more than 725 days ofinactivity through March 31, 2009. Beginning on July 30, 2007, our Cananea mine in Mexico started awork stoppage which continues into 2009. On January 11, 2008 the Mexican Federal Labor Court declared theCananea strike illegal and ordered the workers to return to work within 24hours.  The workers partially returned towork and the Company resumed operations. However, on April 11, 2008 the workers restarted the labor stoppage andshut down production, based upon a new federal ruling.  The Company has tried unsuccessfully toresolve the current labor stoppage that obstructs production at Cananea,in the second quarter 2008 the Board of Directors offered all Cananea employeesa severance payment in accordance with the collective bargaining agreement andapplicable law.  This was offered inorder to award the employees a significant severance payment that allows themto choose the labor alternative that is best for each of them.  During 2008, under this plan a group ofemployees was terminated at a cost to the Company of $15.2 million, which wasrecorded in cost of sales on the consolidated statement of earnings.  There were no termination payments made inthe first quarter of 2009.  In December 2008,the Mexican Federal Labor Court ruled in favor of the Company and declared thestrike illegal.  The union appealed thisdecision.  On January 7, 2009 thejudge of the fifth district on labor matters annulled the favorable decision tothe Company.  The Company filed a requestfor a review of this ruling before an appellate federal court, which declaredthe strike legal on March 19, 2009. On March 20, 2009 the Company notified the Mexican Federal LaborCourt of the termination of all the individual labor contracts of the Cananeaworkers, including the collective bargaining agreement with the union.  This decision was based upon a finding by theMexican mining authorities that confirmed that the Cananea mine was in a forcemajeure situation; since it was unable to operate due to severe damages causedby striking workers.  On April 14,2009, the Mexican Federal Labor Court issued a resolution approving thetermination of Cananea’s labor relationships with individual and unionizedemployees, as well as the termination of its collective bargaining agreementwith its employees and with the National Mining and Metal Workers Union.

 

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In addition, the Mexican Federal Labor Courtdetermined that damages to the machinery, materials, facilities and otherequipment at the Cananea mine significantly hinder its operation and, as aresult, the termination of all labor relationships are legally justified.

 

To repair the damages suffered by the Cananea mine andplant, significant investments and reconstruction work will be required overseveral months.  Hence, the Company isassessing the best course of action to take once it establishes the legal andsafety conditions necessary to allow the Company to restore operations atCananea.

 

The court ordered the Company to compensate theworkers with three months pay plus 12 days salary for each year worked at themine.  The Company estimates that theliability for these termination payments has been provided for by a provision previouslyaccrued on its consolidated balance sheet. The workers’ union announced the appeal of this ruling.

 

Additionally, our Taxco and San Martin mines have beenon strike since July 2007.  It isexpected that operations at these mines will remain suspended until these laborissues are resolved.

 

**Other legal matters**:

 

Class actions: Three purported class action derivative lawsuits have been filed in theDelaware Court of Chancery (New Castle County) late in December 2004 andearly January 2005 relating to the acquisition of Minera Mexico by SCC.  On January 31, 2005, the three actionsLemon Bay, LLP v. Americas Mining Corporation, et al., Civil Action No. 961-N,Therault Trust v. Luis Palomino Bonilla, et al., and Southern CopperCorporation, et al., Civil Action No. 969-N, and James Sousa v. SouthernCopper Corporation, et al., Civil Action No. 978-N were consolidated intoone action titled, In re Southern Copper Corporation Shareholder DerivativeLitigation, Consol.  Civil Action No. 961-Nand the complaint filed in Lemon Bay was designated as the operative complaintin the consolidated lawsuit.  Theconsolidated action purports to be brought on behalf of the Company’s commonstockholders.

 

The consolidated complaint alleges, among otherthings, that the acquisition of Minera Mexico is the result of breaches offiduciary duties by the Company’s directors and is not entirely fair to theCompany and its minority stockholders. The consolidated complaint seeks, among other things, a preliminary andpermanent injunction to enjoin the acquisition, the award of damages to theclass, the award of damages to the Company and such other relief that the courtdeems equitable, including interest, attorneys’ and experts’ fees andcosts.  The defendants believe that thislawsuit is without merit and are vigorously defending against the action.

 

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

 

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

 

The Company’s direct and indirect parent corporations,including AMC and Grupo Mexico, have from time to time been named parties invarious litigations involving Asarco LLC (“Asarco”).  In August 2002 the U.S. Department ofJustice brought a claim alleging fraudulent conveyance in connection with AMC’sthen-proposed purchase of SCC from a subsidiary of Asarco.  That action was settled pursuant to a ConsentDecree dated February 2, 2003.  In March 2003,AMC purchased its interest in SCC from Asarco. In October 2004, AMC, Grupo Mexico, Mexicana de Cobre and otherparties, not including 

 

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SCC, were named in a lawsuit filed in New York Statecourt in connection with alleged asbestos liabilities, which lawsuit claims,among other matters, that AMC’s purchase of SCC from Asarco should be voided asa fraudulent conveyance.  The lawsuitfiled in New York State court was stayed as a result of the August 2005Chapter 11 bankruptcy filing by Asarco, as described below.  However, on November 16, 2007, thislawsuit after being removed to federal court was transferred to the UnitedStates District Court for the Southern District of Texas in Brownsville, Texas,for resolution in conjunction with a new lawsuit filed by Asarco’s creditors,as described below.  On February 2,2007 a complaint was filed by Asarco on behalf of Asarco’s creditors, allegingmany of the matters previously claimed in the New York State lawsuit, includingthat AMC’s purchase of SCC from Asarco should be voided as a fraudulentconveyance.  In June 2008 thelawsuit was concluded in Brownsville, Texas. The constructive fraudulent conveyance claim was dismissed; however theactual fraud and the aiding and abetting the breach of fiduciary duties countswere favorable to plaintiffs.  On April 3,2009, the United States District Court for the Southern District of Texasordered AMC to return to Asarco a number of shares of common stock of SCC equalto those acquired by AMC in 2003, which represents approximately 30.6% of SCC’scurrent outstanding common shares, and an amount equal to the dividends paid onthose shares of common stock of SCC since the date of their acquisition byAMC.  Grupo México announced that itintends to appeal the referred opinion and order from the U.S. District Court.

 

In 2005, certain subsidiaries of Asarco filedbankruptcy petitions in connection with alleged asbestos liabilities.  In July 2005, the unionized workers ofAsarco commenced a work stoppage.  As aresult of various factors, including the above-mentioned work stoppage, in August 2005Asarco filed a voluntary petition for relief under Chapter 11 of the U.S.Bankruptcy Code before the U.S. Bankruptcy Court in Corpus Christi, Texas.  Asarco’s bankruptcy case is being joined withthe bankruptcy cases of its subsidiaries. Asarco’s bankruptcy could result in additional claims being filedagainst Grupo Mexico and its subsidiaries, including SCC, Minera Mexico or itssubsidiaries.

 

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.

 

**Other commitments**:

 

Regional developmentcontribution:

 

In December 2006, the Company’s Peruvian Branchsigned a contract with the Peruvian government committing the Company to makeannual contributions for five years to support the regional development ofPeru.  This was in response to an appealby the president of Peru to the mining industry.  The contributions are being used for socialbenefit programs.  In 2009, 2008 and2007, the Company made non-deductible contributions of $12.2 million, $18.9million and $16.1 million out of 2008, 2007 and 2006 earnings,respectively.  These contributions weredeposited with a separate entity, Copper Assistance Civil Association(Asociacion Civil Ayuda del Cobre) which will make disbursements for approvedinvestments in accordance with the agreement. Future contributions could increase or decrease depending on copperprices.  The commitment of the Branch isfor a total of 1.25% of its annual earnings, after Peruvian income tax.  If the average annual LME copper price isbelow $1.79 per pound the contribution will cease.  In the first quarter of 2009 the Company madea provision of $0.6 million based on Peruvian Branch earnings.

 

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Royalty charge

 

In June 2004, the Peruvian Congress enactedlegislation imposing a royalty charge to be paid by mining companies.  Under this law, the Company is subject to a1% to 3% royalty, based on sales, applicable to the value of the concentratesproduced in our Toquepala and Cuajone mines. The Company made provisions of $3.7 million and $14.8 million in thefirst quarter of 2009 and 2008, respectively, for this royalty.  These provisions are included in “Cost ofsales (exclusive of depreciation, amortization and depletion)” in theconsolidated statement of earnings.

 

Power purchase agreement

 

In 1997, SCC sold its Ilo power plant to anindependent power company, Enersur S.A. (“Enersur”).  In connection with the sale, a power purchaseagreement was also completed under which SCC agreed to purchase all of itspower needs for its Peruvian operations from Enersur for twenty years,commencing in 1997.  In 2003 theagreement was amended releasing Enersur from its obligation to constructadditional capacity to meet the Company’s increased electricity requirementsand reducing the computation of the power cost as called for in the originalagreement.  This change represents a costsavings to the Company of approximately $245 million through March 31,2009.

 

The Company has recently reached a Memorandum ofUnderstanding (MOU) with Enesur regarding its power supply agreement.  The MOU contains new economic terms that theCompany believes better reflect current economic conditions in Peru and in thepower industry.  The Company expects toobtain savings in its future power costs if the MOU is finalized as it ispresently constituted.  Additionally, theMOU includes an option for providing power for the Tia Maria project.

 

**Tax contingency matters:**

 

Tax contingencies are provided for under FIN No 48(see Note E, Income Taxes).

 

M.         Segment and Related Information:

 

Company managementviews Southern Copper as having three operating segments and manages on thebasis of these segments.  Each of itssegments report independently to the Chief Operating Officer and he focuses onoperating income as a measure of performance to evaluate different segments,and to make decisions to allocate resources to the reported segments.

 

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

 

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

 

1.     Peruvian operations, which includes the Toquepala andCuajone mine complexes and the smelting and refining plants, industrialrailroad and port facilities which service both mines.

 

2.     Mexican open pit operations, which includes La Caridadand Cananea mine complexes 

 

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andthe smelting and refining plants and support facilities which service bothmines.

 

3.     Mexican underground mining operations, which includesfive underground mines that produce zinc, copper, silver and gold, a coal minewhich produces coal and coke, and several industrial processing facilities forzinc and copper.  This group isidentified as the IMMSA unit.

 

The Peruvian operationsinclude two open pit copper mines whose mineral output is transported by railto Ilo, Peru where it is processed at the Company’s smelter and refinery,without distinguishing between the products of the two mines.  The resulting product, anodes and refinedcopper, are then shipped to customers throughout the world.  These shipments are recorded as revenue ofthe Company’s Peruvian mines.

 

The Mexican open pitsegment includes two copper mines whose mineral output is processed in the samesmelter and refinery without distinguishing between the products of the twomines.  The resultant product, anodes andrefined copper, are then shipped to customers throughout the world.  These shipments are recorded as revenues ofthe Company’s Mexican open pit mines.

 

The Company hasdetermined that it is necessary to classify the Peruvian open pit operations asa separate operating segment from the Mexican open pit operations due to thevery distinct regulatory and political environments in which they operate.  The Company’s Chief Operating Officer mustconsider the operations in each country separately when analyzing results ofthe Company and making key decisions. The open pit mines in Peru must comply with stricter environmental rules andmust continually deal with a political climate that has a very distinct visionof the mining industry as compared to Mexico. In addition, the collective bargaining agreement contracts arenegotiated very distinctly in each of the two countries.  These key differences result in the Companytaking varying decisions with regards to the two countries.

 

The IMMSA segmentincludes five mines whose minerals are processed in the same smelter andrefinery.  This segment also includes anunderground coal mine.  Sales of productfrom this segment are recorded as revenues of the Company’s IMMSA unit.  While the Mexican underground mines aresubject to a very similar regulatory environment as the Mexican open pit mines,the nature of the products and processes of the two Mexican operations varydistinctly.  These differences cause theCompany’s Chief Operating Officer to take a very different approach whenanalyzing results and making decisions regarding the two Mexican operations.

 

Financial information isregularly prepared for each of the three segments and the results of theCompany’s operations are regularly reported to the Chief Operating Officer onthe segment basis.  The Chief OperatingOfficer of the Company focuses on operating income and on total assets asmeasures of performance to evaluate different segments and to make decisions toallocate resources to the reported segments. These are common measures in the mining industry.

 

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Financial information relating to Southern Copper’s segments is asfollows:

 
| ** **                                                            | ** ** | **Three Months Ended March 31, 2009  (in millions)** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                            | ** ** | **Mexican  Open Pit**                                     | ** ** | **Mexican  IMMSA  Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate  and other  Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                            | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales outside of segments                                         |       | $                                                         | 172.3      |   | $ | 90.3 |   | $ | 346.8 |   | $ | 12.6 |   | $ | 622.0 |   |
| Intersegment sales                                                    |       | 0.8                                                       |       | 27.2 |   | — |   | (28.0 | ) | — |   |
| Cost of sales (exclusive of depreciation, amortization and depletion) |       | 98.6                                                      |       | 99.4 |   | 199.1 |   | (21.6 | ) | 375.5 |   |
| Selling, general and administrative                                   |       | 7.5                                                       |       | 3.3 |   | 6.9 |   | 1.1 |   | 18.8 |   |
| Depreciation, amortization and depletion                              |       | 41.3                                                      |       | 6.1 |   | 30.2 |   | 0.6 |   | 78.2 |   |
| Exploration                                                           |       | 0.7                                                       |       | 1.2 |   | 3.5 |   | — |   | 5.4 |   |
| Operating income                                                      |       | $                                                         | 25.0       |   | $ | 7.5 |   | $ | 107.1 |   | $ | 4.5 |   | 144.1 |   |
| Less:                                                                 |       |                                                      |       |   |   |   |   |   |   |   |   |
| Interest, net                                                         |       |                                                      |       |   |   |   |   |   |   | (16.9 | ) |
| Loss on derivative instruments                                        |       |                                                      |       |   |   |   |   |   |   | (2.6 | ) |
| Other income (expense)                                                |       |                                                      |       |   |   |   |   |   |   | 2.7 |   |
| Income taxes                                                          |       |                                                      |       |   |   |   |   |   |   | (48.0 | ) |
| Non-controlling interest                                              |       |                                                      |       |   |   |   |   |   |   | (0.6 | ) |
| Net income attributable to SCC                                        |       |                                                      |       |   |   |   |   |   |   | $ | 78.7 |   |
|                                                                  |       |                                                      |       |   |   |   |   |   |   |   |   |
| Capital expenditure                                                   |       | $                                                         | 25.6       |   | $ | 4.8 |   | $ | 24.0 |   | $ | 8.6 |   | $ | 63.0 |   |
| Property, net                                                         |       | $                                                         | 1,643.7    |   | $ | 270.0 |   | $ | 1,847.6 |   | $ | 42.8 |   | $ | 3,804.1 |   |
| Total assets                                                          |       | $                                                         | 2,624.2    |   | $ | 590.7 |   | $ | 2,050.6 |   | $ | 98.7 |   | $ | 5,364.2 |   |

 
| ** **                                                            | ** ** | **Three Months Ended March 31, 2008  (in millions)** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                            | ** ** | **Mexican  Open Pit**                                     | ** ** | **Mexican  IMMSA  Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate  and other  Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                            | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales outside of segments                                         |       | $                                                         | 443.9      |   | $ | 133.8 |   | $ | 892.5 |   | $ | 29.0 |   | $ | 1,499.2 |   |
| Intersegment sales                                                    |       | 26.2                                                      |       | 28.3 |   | — |   | (54.5 | ) | — |   |
| Cost of sales (exclusive of depreciation, amortization and depletion) |       | 183.4                                                     |       | 85.6 |   | 278.4 |   | (26.8 | ) | 520.6 |   |
| Selling, general and administrative                                   |       | 8.9                                                       |       | 6.4 |   | 9.9 |   | (0.5 | ) | 24.7 |   |
| Depreciation, amortization and depletion                              |       | 45.2                                                      |       | 8.0 |   | 28.0 |   | — |   | 81.2 |   |
| Exploration                                                           |       | 1.9                                                       |       | 1.8 |   | 4.3 |   | — |   | 8.0 |   |
| Operating income                                                      |       | $                                                         | 230.7      |   | $ | 60.3 |   | $ | 571.9 |   | $ | 1.8 |   | 864.7 |   |
| Less:                                                                 |       |                                                      |       |   |   |   |   |   |   |   |   |
| Interest, net                                                         |       |                                                      |       |   |   |   |   |   |   | (8.7 | ) |
| Gain on derivative instruments                                        |       |                                                      |       |   |   |   |   |   |   | 2.4 |   |
| Other income (expense)                                                |       |                                                      |       |   |   |   |   |   |   | (4.7 | ) |
| Income taxes                                                          |       |                                                      |       |   |   |   |   |   |   | (286.0 | ) |
| Non-controlling interest                                              |       |                                                      |       |   |   |   |   |   |   | (2.7 | ) |
| Net income attributable to SCC                                        |       |                                                      |       |   |   |   |   |   |   | $ | 565.0 |   |
|                                                                  |       |                                                      |       |   |   |   |   |   |   |   |   |
| Capital expenditure                                                   |       | $                                                         | 23.3       |   | $ | 6.9 |   | $ | 18.3 |   | $ | 1.4 |   | $ | 49.9 |   |
| Property, net                                                         |       | $                                                         | 1,596.4    |   | $ | 249.3 |   | $ | 1,643.6 |   | $ | 63.5 |   | $ | 3,552.8 |   |
| Total assets                                                          |       | $                                                         | 2,988.8    |   | $ | 657.9 |   | $ | 2,363.2 |   | $ | 768.2 |   | $ | 6,778.1 |   |

 

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Sales value per segment:

 
| ** ** | ** ** | **Three Months Ended March 31, 2009  (in millions)** | ** ** |
|------------|------------|-----------------------------------------------------------|------------|
| ** ** | ** ** | **Mexican  Open Pit**                                     | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate &  Elimination** | ** ** | **Consolidated** | ** ** |
|       |       |                                                      |       |   |   |   |   |   |   |   |   |
| Copper     |       | $                                                         | 107.7      |   | $ | 13.1 |   | $ | 303.0 |   | $ | 4.6 |   | $ | 428.4 |   |
| Molybdenum |       | 37.4                                                      |       | — |   | 21.5 |   | — |   | 58.9 |   |
| Other      |       | 28.0                                                      |       | 104.4 |   | 22.3 |   | (20.0 | ) | 134.7 |   |
| Total      |       | $                                                         | 173.1      |   | $ | 117.5 |   | $ | 346.8 |   | $ | (15.4 | ) | $ | 622.0 |   |

 
| ** ** | ** ** | **Three Months Ended March 31, 2008  (in millions)** | ** ** |
|------------|------------|-----------------------------------------------------------|------------|
| ** ** | ** ** | **Mexican  Open Pit**                                     | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate &  Elimination** | ** ** | **Consolidated** | ** ** |
|       |       |                                                      |       |   |   |   |   |   |   |   |   |
| Copper     |       | $                                                         | 315.0      |   | $ | 27.9 |   | $ | 709.8 |   | $ | (11.6 | ) | $ | 1,041.1 |   |
| Molybdenum |       | 125.7                                                     |       | — |   | 156.9 |   | — |   | 282.6 |   |
| Other      |       | 29.4                                                      |       | 134.2 |   | 25.8 |   | (13.9 | ) | 175.5 |   |
| Total      |       | $                                                         | 470.1      |   | $ | 162.1 |   | $ | 892.5 |   | $ | (25.5 | ) | $ | 1,499.2 |   |

 

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

 
| ** **                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| United States                             |       | $                                      | 215.9      |   | $ | 414.3 |   |
| Europe                                    |       | 125.7                                  |       | 360.3 |   |
| Mexico                                    |       | 134.7                                  |       | 319.5 |   |
| Peru                                      |       | 14.4                                   |       | 39.3 |   |
| Latin America (excluding Mexico and Peru) |       | 80.6                                   |       | 281.2 |   |
| Asia                                      |       | 50.7                                   |       | 78.2 |   |
| Derivative instruments                    |       | —                                 |       | 6.4 |   |
| Total                                     |       | $                                      | 622.0      |   | $ | 1,499.2 |   |

 

Major Customer SegmentInformation:

 

For the three monthsended March 31, 2009, the Company had revenues from two copper customersof the Mexican and Peruvian operations, which amounted to 18.9% of totalrevenue; revenues from one of these customers amounted to 12.0% of totalrevenue.  In addition, the Company hadrevenues from two molybdenum customers of the Peruvian and Mexican operations,which amounted to 7.9% of total revenues; revenues from one of these customersamounted to 5.8% of total revenue, these customers represent 83.5% of theCompany’s molybdenum sales revenue.

 

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

 

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N.    Impact of New Accounting Standards:

 

InApril 2009, the FASB issued FASB Staff Position (“FSP”) FAS 107-1 “Disclosureabout Fair Value of Financial Instruments” to require disclosures about fairvalue of financial instruments for interim reporting periods of publicly tradedcompanies as well as in annual financial statements.  This FSP also amends APB Opinion No. 28 “InterimFinancial Reporting”, to require those disclosures in summarized financialinformation at interim reporting periods. This FSP applies to all financial instruments within the scope of SFAS107 and requires disclosing in the body or in the accompanying notes, the fairvalue of all financial instruments for which it is practicable to estimate thatvalue, whether recognized or not recognized in the statement of financialposition.  Fair value informationdisclosed shall be presented together with the related carrying amount in aform that makes clear whether the fair value and carrying amount representsassets or liabilities and how the carrying amount is reported in the statementof financial position.  Also the entityshall disclose the methods and significant assumptions used to estimate the fairvalue of financial instruments and shall describe their changes, if any, in theperiod.  This FSP is effective forinterim reporting periods ending after June 15, 2009, with early adoptionpermitted for periods ending after March 15, 2009.  The Company will adopt the disclosuresrequired by this FSP in the second quarter of 2009.

 

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

 

O.    Stockholders’ Equity:

 

Common stock:

 

During the first quarterof 2009 Grupo Mexico, through its wholly owned subsidiary AMC, purchased 4.9million shares.  With this purchase andthe Company’s repurchase of its common shares the indirect ownership of GrupoMexico increased to 80.0% at March 31, 2009.  Please see Note E, Income taxes, fordisclosure about the US federal income tax implications of this increase inownership.

 

Treasury Stock:

 

Activity in treasury stock in the three month periodended March 31, 2009 and 2008 is as follows (in millions):

 
| ** **                                                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Southern Copper common shares                                                 |       |     |       |     |       |
| Balance as of December 31,                                               |       | $        | 388.9      |     | $          | 4.4 |   |
| Purchase of shares                                                            |       | 71.6     |       | —   |       |
| Used for corporate purposes                                                   |       | —   |       | —   |       |
| Balance as of March 31,                                                  |       | $        | 460.5      |     | $          | 4.4 |   |
|                                                                          |       |     |       |     |       |
| Parent Company (Grupo Mexico) common shares                                   |       |     |       |     |       |
| Balance as of December 31,                                               |       | $        | 125.5      |     | $          | 170.3 |   |
| Other activity, including dividend, interest and currency translation  effect |       | (0.3     | )          | 13.5     |       |
| Balance as of March 31,                                                  |       | $        | 125.2      |     | $          | 183.8 |   |
|                                                                          |       |     |       |     |       |
| Treasury stock balance as of March 31,                                   |       | $        | 585.7      |     | $          | 188.2 |   |

 

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In the first quarter 2009and 2008 the Company awarded 12.1 million shares and 14.5 million shares ofGrupo Mexico, respectively, under the employee stock purchase plan.

 

SCC share repurchase program:

 

Pursuant to the $500 million share repurchase programauthorized by the Company’s Board of Directors in 2008, in the first quarter of2009 the Company purchased 4.9 million shares of its common stock at a cost of$71.6 million.  These shares will beavailable for general corporate purposes. The Company may purchase additional shares from time to time, based onmarket conditions and other factors. This repurchase program has no expiration date and may be modified ordiscontinued at any time.

 

The following table summarizes the repurchase programactivity since its inception in 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** | ** ** | **Total  Cost** | ** ** |
|---------------------|------------|------------------------------|------------|-------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-----------------|------------|
| **From**            | ** ** | **To**                       | ** ** | **Purchased**                 | ** ** | **Share**                                                          | ** ** | **Announced  Plan**                                                             | ** ** | **@ $17.42**    | ** ** | **($ in  million)** | ** ** |
|                |       |                         |       |                          |       |                                                               |       |                                                                            |       |            |       |   |   |
| 2008:               |       |                         |       |                          |       |                                                               |       |                                                                            |       |            |       |   |   |
| 08/11/08            |       | 12/31/08                     |       | 28,510,150                    |       | 13.49                                                              |       | 28,510,150                                                                      |       |            |       | $ | 384.6 |   |
|                |       |                         |       |                          |       |                                                               |       |                                                                            |       |            |       |   |   |
| First quarter 2009: |       |                         |       |                          |       |                                                               |       |                                                                            |       |            |
| 01/12/09            |       | 01/31/09                     |       | 1,075,000                     |       | 15.17                                                              |       | 29,585,150                                                                      |       |            |       | 16.3 |   |
| 02/01/09            |       | 02/28/09                     |       | 2,260,350                     |       | 13.45                                                              |       | 31,845,500                                                                      |       |            |       | 30.4 |   |
| 03/01/09            |       | 03/27/09                     |       | 1,564,650                     |       | 15.89                                                              |       | 33,410,150                                                                      |       | 2,513,064       |       | 24.9 |   |
| Total               |       |                         |       | 4,900,000                     |       | 14.61                                                              |       |                                                                            |       |            |       | 71.6 |   |
|                |       |                         |       |                          |       |                                                               |       |                                                                            |       |            |       |   |   |
| Total purchased     |       | 33,410,150                   |       | 13.66                         |       |                                                               |       |                                                                            |       | $               | 456.2      |   |

 

As a result of the repurchase of SCC common shares andAMC’s purchase of SCC shares, the Grupo Mexico’s direct and indirect ownershiphas increased to 80% at March 31, 2009.

 

Directors’ Stock Award Plan:

 

The Company established a stock award compensationplan for certain directors who are not compensated as employees of theCompany.  Under this plan, participantswill receive 1,200 shares of common stock upon election and 1,200 additionalshares following each annual meeting of stockholders thereafter.  600,000 shares of Southern Copper commonstock have been reserved for this plan. As of March 31, 2009 the Company has granted 229,200 shares underthis plan which includes 13,200 additional shares granted since March 31,2008 at which time the cumulative amount of shares granted was 216,000shares.  The fair value of the award ismeasured each year at the date of the grant.

 

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Employee StockPurchase Plan:

 

In January 2007,the Company offered to eligible employees a stock purchase plan (the “EmployeeStock Purchase Plan”) through a trust that acquires shares of Grupo Mexicostock for sale to its employees, and employees of subsidiaries, and certainaffiliated companies.  The purchase priceis established at the approximate fair market value on the grant date.  Every two years employees will be able toacquire title to 50% of the shares paid in the previous two years.  The employees will pay 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 shares purchasedby the employee.

 

If Grupo Mexicopays dividends on shares during the eight year period, the participants will beentitled to receive the dividend in cash for all shares that have been fullypurchased and paid as of the date that the dividend is paid.  If the participant has only partially paidfor shares, the entitled dividends will be used to reduce the remainingliability owed for purchased shares.

 

In the case ofvoluntary resignation of the employee, the Company will pay to the employee thepurchase price applying a deduction over the amount to be paid to the employeebased on the following schedule.

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

 

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

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

 

In case of retirement or death of the employee, theCompany will render the buyer or his legal beneficiary, the shares effectivelypaid as of the date of retirement or death.

 

For the three months ended March 31, 2009 and2008, the stock based compensation expense under this plan was $0.5 million inboth periods.  As of March 31, 2009,there was $12.3 million of unrecognized compensation expense under this plan,which is expected to be recognized over the remaining five years and ninemonths period.

 

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The following table presents the stock award activityfor the three months ended March 31, 2009 and 2008:

 
| ** **                                 | ** ** | **Shares** | ** ** | **Unit Weighted Average  Grant Date Fair Value** | ** ** |
|--------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|
| Outstanding shares at January 1, 2009 |       | 14,577,011 |       | $                                                | 1.16       |   |
| Granted                                    |       | —     |       |                                             |       |
| Exercised                                  |       | (2,469,689 | )          | 1.16                                             |       |
| Received as dividend                       |       | —     |       |                                             |       |
| Forfeited                                  |       | —     |       |                                             |       |
| Outstanding shares at March 31, 2009  |       | 12,107,322 |       | $                                                | 1.16       |   |
|                                       |       |       |       |                                             |       |
| Outstanding shares at January 1, 2008 |       | 14,504,151 |       | $                                                | 1.17       |   |
| Granted                                    |       | —     |       |                                             |       |
| Exercised                                  |       | —     |       |                                             |       |
| Forfeited                                  |       | —     |       |                                             |       |
| Outstanding shares at March 31, 2008  |       | 14,504,151 |       | $                                                | 1.17       |   |

 

Executive Stock Purchase Plan:

 

Grupo Mexico also offers a stock purchase plan forcertain members of its executive management and the executive management of itssubsidiaries and certain affiliated companies. Under this plan, participants will receive incentive cash bonuses whichare used to purchase up to 2,250,000 shares of Grupo Mexico over an eight yearperiod.  The fair value of the award isestimated on the date of grant and is recognized as compensation expense over aweighted average requisite service period of eight years.  The Company recorded less than $0.1 millionand $0.1 million, net of tax, in compensation expense in the first quarter of2009 and 2008, respectively.  As of March 31,2009, 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 presents the stock award activityfor the three months ended March 31, 2009 and 2008:

 
| ** **                                 | ** ** | **Shares** | ** ** | **Unit Weighted  Average Grant  Date Fair Value** | ** ** |
|--------------------------------------------|------------|------------|------------|---------------------------------------------------|------------|
| Outstanding shares at January 1, 2009 |       | 697,500    |       | $                                                 | 0.77       |   |
| Granted                                    |       | —     |       |                                              |       |
| Exercised                                  |       | —     |       |                                              |       |
| Forfeited                                  |       | —     |       |                                              |       |
| Outstanding shares at March 31, 2009  |       | 697,500    |       | $                                                 | 0.77       |   |
|                                       |       |       |       |                                              |       |
| Outstanding shares at January 1, 2008 |       | 1,372,500  |       | $                                                 | 0.77       |   |
| Granted                                    |       | —     |       |                                              |       |
| Exercised                                  |       | (270,000   | )          | $                                                 | 0.77       |   |
| Forfeited                                  |       | —     |       |                                              |       |
| Outstanding shares at March 31, 2008  |       | 1,102,500  |       | $                                                 | 0.77       |   |

 

P.     Financial instruments:

 

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

 

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

 

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

 

Level 3 — Prices or valuationtechniques that require inputs that are both significant to the fair valuemeasurement and unobservable (i.e., supported by little or no market activity).

 

All fair valueadjustments at March 31, 2009 represent assets or liabilities measured atfair value on a recurring basis.  Fairvalues as of March 31, 2009 were calculated as follows (in millions):

 
| ** **                  | ** ** | **Balance at  March 31, 2009** | ** ** | **Quoted prices in  active markets  for identical  assets** | ** ** | **Significant  other  observable  inputs** | ** ** | **Significant  unobservable   inputs** | ** ** |
|-----------------------------|------------|-------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------|------------|----------------------------------------|------------|
| ** **                  | ** ** | ** **                          | ** ** | **(Level 1)**                                               | ** ** | **(Level 2)**                              | ** ** | **(Level 3)**                          | ** ** |
| Assets:                     |       |                                |       |                                                        |       |                                       |       |                                   |       |
| Short-term investments      |       | $                                   | 51.0       |                                                        | $          | —                                     |       | $                                      | 42.5       |   | $ | 8.5 |   |
| Derivative instruments      |       | (31.7                               | )          | —                                                      |       | (31.7                                      | )          | —                                 |       |
| Provisionally priced sales: |       |                                |       |                                                        |       |                                       |       |                                   |       |
| Copper                      |       | 7.0                                 |       | 7.0                                                         |       | —                                     |       | —                                 |       |
| Molybdenum                  |       | (8.0                                | )          | (8.0                                                        | )          | —                                     |       | —                                 |       |
|                        |       |                                |       |                                                        |       |                                       |       |                                   |       |
| Liabilities:                |       |                                |       |                                                        |       |                                       |       |                                   |       |
| Pension plans               |       | 39.5                                |       | 26.7                                                        |       | 12.9                                       |       | —                                 |       |
| Long-term debt (*)          |       | (992.6                              | )          | (948.9                                                      | )          | —                                     |       | (43.7                                  | )          |
| Total                       |       | $                                   | (934.7     | )                                                           | $          | (923.2                                     | )          | $                                      | 23.7       |   | $ | (35.2 | ) |

 

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(*) Long-term debt iscarried at amortized cost and its carrying value as of March 31, 2009 is$1,306.4 million. The $992.6 million represents the estimated fair value of thedebt.

 

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

 

The table below setsforth a summary of changes in the fair value of the Company’s Level 3 short-terminvestments (corporate bond, asset backed obligations, and mortgage backedsecurities) and the long-term debt (Mitsui loan) for the first quarter 2009.

 
| Balance at beginning of period                   |   | $    | (32.7 | ) |
|--------------------------------------------------|--------|------|-------|---|
| Unrealized gain (losses)                         |   | (0.5 | )     |
| Purchases, sales, issuance and settlements (net) |   | (1.9 | )     |
| Transfers in/out of Level 3                      |   | (0.1 | )     |
| Balance at end of period                         |   | $    | (35.2 | ) |

 

The total amount of unrealized losses for the periodwas included in other income in the condensed consolidated statement ofearnings for the quarter ended March 31, 2009.

 

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Q.    Subsequent events:

 

Dividends:

 

On April 23,2009, the Board of Directors authorized a dividend of 4.5 cents per sharepayable on June 2, 2009, to SCC shareholders of record at the close ofbusiness on May 13, 2009.

 

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Part I

 

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

 

*The following discussion providesinformation that management believes is relevant to an assessment andunderstanding of the consolidated financial condition and results of operationsof Southern Copper Corporation and its subsidiaries (collectively, “SCC”, “theCompany”, “our”, and “we”).  This itemshould be read in conjunction with our interim unaudited Condensed ConsolidatedFinancial Statements and the notes thereto included in this quarterlyreport.  Additionally, the followingdiscussion and analysis should be read in conjunction with the ManagementDiscussion and Analysis of Financial Condition and Results of Operations andthe Consolidated Financial Statements included in Part II of our annualreport on Form 10-K for the year ended December 31, 2008*.

 

EXECUTIVE OVERVIEW

 

Business: Our business is primarily theproduction and sale of copper.  In theprocess of producing copper, a number of valuable metallurgical by-products arerecovered, such as molybdenum, zinc, silver, lead and gold, which we alsoproduce and sell.  Market forces outsideof our control largely determine the sales prices for our products.  We, therefore, focus on copper production,cost control, production enhancement and maintaining a prudent capitalstructure to remain profitable.  Webelieve we achieve these goals through capital spending programs, explorationefforts and cost reduction programs.  Ouraim is to remain profitable during periods of low copper prices and to maximizefinancial performance in periods of high copper prices.

 

Earnings: Our first quarter 2009 results havecontinued to be negatively impacted by the decrease in the market price of ourproducts.  However, we believe we areseeing the first signs of the end of the destocking stage and the appearance ofnew demand in parts of Asia.  Recentcopper market prices have started to reflect this change in circumstances.  LME and COMEX copper prices at April 30,2009 increased 55.6% and 47.2%, respectively, from the prices at December 31,2008.  Nevertheless, during the currenteconomic situation we are carefully controlling our cash expenditures andcosts, which include a reduction of $87.3 million in our 2009 capitalexpenditure and exploration budget.

 

Netincome attributable to SCC and income per share for the first quarter 2009 were$78.7 million and $0.09 per share and $565.0 million and $0.64 per share forfirst quarter 2008.  The decrease in netincome was mainly due to the lower metal prices.

 

Sharerepurchase: During the first quarter of 2009, underthe $500 million share repurchase program, we purchased 4.9 million shares ofour common stock at an average cost of $14.61 per share.  Also, during the same period Grupo Mexico,through its wholly owned subsidiary Americas Mining Corporation (“AMC”),purchased 4.9 million of our common shares. With these acquisitions Grupo Mexico directly or indirectly owns 80% ofour outstanding shares.

 

Production: Mine copper production amounted to 264.1 millionpounds in the first quarter of 2009 compared with 281.9 million pounds in thefirst quarter of 2008, a decrease of 6.3%. This decrease was principally due to the strike at Cananea.  However, in the first quarter of 2009 we haveincreases over the first quarter of 2008 in molybdenum production of 3.4%, zincmined and refined production of 9.2% and 4.0%, respectively, and silver minedand refined production of 1.8% and 1.5%, respectively.

 

Cananea strike: Operations at our Cananea, San Martinand Taxco facilities remained closed during the first quarter of 2009, due tostrike activities.  These strikes beganin July 2007, and despite our efforts, remain unresolved.  However, on April 14, 2009, 

 

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the MexicanFederal Labor Court issued a resolution, based on force majeure, approving thetermination of Cananea’s labor relationship with individual and unionizedemployees, as well as the termination of its collective bargaining agreementwith its employees and with the National Mining and Metal Workers Union.

 

In addition, theMexican Federal Labor Court determined that damages to the machinery,materials, facilities and other equipment at the Cananea mine significantlyhinder its operation and, as a result, the termination of all labor relationshipsare legally justified.

 

To repair thedamages suffered by the Cananea mine and plant, significant investments andreconstruction work will be required over several months.  Hence, we are assessing the best course ofaction to take once the legal and safety conditions necessary to allow us torestore operations at Cananea are established.

 

The court orderedus to compensate the workers with three months pay plus 12 days salary for eachyear worked at the mine.  We estimatethat the liability for these termination payments has been provided for by aprovision previously accrued on our consolidated balance sheet.  The workers’ union announced the appeal ofthis ruling.

 

Reevaluation of capitalexpenditures: Aspreviously announced, capital projects have been reevaluated as a result of thesharp decrease in metal prices and the world’s unsettled economy.  For 2009 we have further reduced our capitaland exploration budget from $415.3 million to $328.0 million.  Of this amount, $236.1 million is for specialprojects, $69.2 million is for maintenance and replacement capital expendituresand $22.7 million for exploration.

 

KEY MATTERS:

 

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 andother local currency issues, (v) our expansion and modernization programand environmental protection programs.

 

 

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 meaning and may not becomparable to similarly titled measures provided by other companies.  A reconciliation of our operating cash costper pound to the cost of sales (exclusive of depreciation, amortization anddepletion) as presented in the condensed consolidated statement of earnings, ispresented under the subheading “Non-GAAP Information Reconciliation,”below.  We have defined operating cashcost per pound as cost of sales (exclusive of depreciation, amortization anddepletion); plus selling, general and administrative charges, treatment andrefining charges, and by-products revenue and sales premiums; less workers’participation and other miscellaneous charges, including the Peruvian mineroyalty charge and the change in inventory levels; divided by total pounds ofcopper produced and purchased by us.  Inour calculation of operating cash cost per pound of copper produced, we creditagainst our costs the revenues from the sale of by-products, principally molybdenum,zinc, silver and the premium over market price that we receive on coppersales.  We account for the by-productrevenues in this way because we consider our principal business to be theproduction and sale of copper.  Webelieve that our Company is viewed by the investment community as a coppercompany, and is valued, in large part, by the investment community’s view ofthe copper market and our ability to produce copper at a reasonable cost.  We also include copper sales premiums as acredit, as these amounts are in excess of published copper prices.  The increase in recent years in the price ofmolybdenum as well as increases in silver and zinc, has had a significanteffect on our traditional calculation of cash cost and its 

 

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comparability betweenperiods.  Accordingly, we present cashcosts with and without crediting the by-products revenues against our costs.

 

We exclude from ourcalculation of operating cash cost depreciation, amortization and depletion,which are considered non-cash expenses. Exploration is considered a discretionary expenditure and is alsoexcluded.  Workers’ participationprovisions are determined on the basis of pre-tax earnings and are alsoexcluded.  Additionally, excluded fromoperating cash cost are items of a non-recurring nature and the mine royaltycharges.

 

Our operating cash costsper pound, as defined, are presented in the table below, for the three monthsended March 31, 2009 and 2008.  Wepresent cash costs with and without the inclusion of by-product revenues.

 
| ** **                                                                                  | ** ** | **Three Months Ended  March 31,** | ** ** | **Positive  (negative)** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|--------------------------|------------|
| ** **                                                                                  | ** ** | **2009**                               | ** ** | **2008**                 | ** ** | **Variance** | ** ** |
| ** **                                                                                  | ** ** | **(cents per pound)**                  | ** ** |
| Operating cash cost per pound of copper produced and purchased                              |       | 64.4                                   |       | (12.6                    | )          | (77.0 | ) |
| Less: by-products revenue                                                                   |       | 75.7                                   |       | 162.9                    |       | (87.2 | ) |
| Operating cash cost per pound of copper produced and purchased  without by-products revenue |       | 140.1                                  |       | 150.3                    |       | 10.2 |   |

 

As seen on the chartabove, our per pound cash cost for the first quarter of 2009 when calculatedwith by-products revenue are costs of 64.4 cents per pound compared with acredit of 12.6 cents per pound in the first quarter of 2008.  The decrease in the by-products credit in the2009 period was principally due to lower molybdenum, zinc and silver prices,which decreased from the first quarter of 2008 by 73.5%, 51.8% and 28.3%,respectively.  Increases in the volume ofmolybdenum, zinc and silver sales partially reduced the price decline.

 

Our cash cost, excludingby-product revenues, was lower by 10.2 cents per pound in the first quarter of2009 than the comparable 2008 period and is due to lower power, fuel andmaterial repair costs partially offset by the lower copper production atCananea 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.  Metalprices historically have been subject to wide fluctuations and are affected bynumerous factors beyond our control. These factors, which affect each commodity to varying degrees, includeinternational economic and political conditions, levels of supply and demand,the availability and cost of substitutes, inventory levels maintained byproducers and others and, to a lesser degree, inventory carrying costs andcurrency exchange rates.  In addition,the market prices of certain metals have on occasions been subject to rapidshort-term changes due to speculative activities.

 

We are subject to marketrisks arising from the volatility of copper and other metal prices.  Assuming that expected metal production andsales are achieved, that tax rates are unchanged, giving no effect to potentialhedging programs, metal price sensitivity factors would indicate the followingchange in estimated 2009 net income attributable to SCC resulting from metalprice 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 income attributable to SCC (in millions)      |       | $          | 6.0        |           | $          | 23.1     |       | $          | 1.3        |   | $ | 10.1 |   |

 

Business Segments.

 

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

 

Segment information isincluded in our review of “Results of Operations” and also in Note M 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 months ended March 31, 2009 and2008:

 
| ** **                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                       | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| Peru:                                            |       |                                   |       |   |   |
| Peruvian inflation rate                          |       | 0.4                                    | %          | 2.2 | % |
| Nuevo sol/dollar devaluation/(appreciation) rate |       | 0.6                                    | %          | (8.4 | )% |
|                                             |       |                                   |       |   |   |
| Mexico:                                          |       |                                   |       |   |   |
| Mexican inflation rate                           |       | 1.0                                    | %          | 1.5 | % |
| Peso/dollar devaluation/(appreciation) rate      |       | 5.9                                    | %          | (1.6 | )% |

 

Capital Expansion andExploration Program.

 

We made capitalexpenditures of $63.0 million and $49.9 million in the first quarter 2009 and2008, respectively, and we expect to make capital expenditures, ofapproximately $305.3 million in 2009 and $22.7 million, additionally forexploration.  In general, the 

 

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capital expenditures andprojects described below are intended to increase production and/or decreasecosts.

 

In light of the currentbusiness environment we have suspended most of our capital investments in newas well as in expansion projects.  Setforth below are descriptions of some of our current expected capitalexpenditures.  We expect to meet the cashrequirements for these projects from cash on hand, internally generated fundsand from additional external financing, if required.

 

PeruvianOperations:

 

Tia Maria project:  As a result of an engineering revaluation inthe first quarter of 2009, we decided to move forward with the project afterreducing the total budget from $1.2 billion estimated at the end of the fourthquarter 2008 to $949 million, of which $115.8 million was spent as of March 31,2009.

 

Toquepala concentratorexpansion:  As of the end of March 2009,we have spent $50.8 million on this project. The basic engineering was completed by Hatch Engineering in January 2009.  We will review Hatch’s proposal for thedetailed engineering in May 2009; at which time we may consider solicitingadditional proposals, a process that would take about three more months.  The environmental impact assessment isunderway and is expected to be completed in the fourth quarter of thisyear.  However, we have decided to put onhold any new additional spending for this project.

 

Ilo SmelterModernization:  The complimentary projectto the Ilo smelter modernization is the construction of a marine trestle tooffload directly to offshore ships the sulfuric acid produced at thesmelter.  At March 31, 2009 thisproject reached 69.8% completion and is expected to be completed in June 2009.  The completed project is expected to easecongestion in our Ilo area.

 

Tailings disposal atQuebrada Honda: This project will increase the height of the existing QuebradaHonda dam to impound future tailings from the Toquepala and Cuajone mills.  The procurement of the main equipment andmaterials was finished.  Construction ofthe principle civil, mechanical and electrical installations for the main andlateral dams has been completed.  Thelateral dam was commissioned in December 2008 and the main dam wascommissioned in March 2009. Progress on the first stage of this project is 99.7% complete, withfinal completion expected in the second quarter of 2009.  The total cost of this project is estimatedto be $66.0 million, with $38.9 million expended through March 31, 2009.

 

Mexican operations:

 

We are continuing withthe environmental projects at our Mexican mining and metallurgical facilities.  At La Caridad metallurgical complex the gashandling project has been completed and the first stage (copper bearing dust)of the dust and effluent treatment plant project is in operational testing.  These projects are at 100% and 78% ofcompletion, respectively, and have a combined budget of $9.0 million for 2009.

 

Other capitalexpenditures:

 

The feasibility study forEl Arco project was finished during the first quarter 2009.  The selected production scale for the projectindicates an annual production of 190,000 tons of copper, 105,000 ounces ofgold and 1,700 tons of molybdenum with an estimated mine life of 35 years.  The project has an estimated capital cost ofapproximately $1.8 billion.  Consideringa copper price of $1.50 per pound, the economic evaluation of this projectindicates a positive return for the Company. The Board of Directors has given approval to proceed with theenvironmental impact assessment and the basic engineering for El Arco and alsohas approved $20.9 million for the purchase of mineral land and for drillingwater wells.  Given the investment sizewe are evaluating several options to develop this project.

 

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We are also looking veryclosely our maintenance and replacement capital expenditures.  The 2009 budget has been reduced from $79.0million to $69.2 million.

 

ACCOUNTING ESTIMATES

 

Our discussion andanalysis of financial condition and results of operations are based on ourcondensed consolidated financial statements, which have been prepared inaccordance with US GAAP.  Preparation ofthese condensed consolidated financial statements requires our management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements, and the reported amounts of revenues and expensesduring the reporting periods.  Managementmakes its best estimate of the ultimate outcome for these items based onhistorical trends and other information available when the financial statementsare prepared.  Changes in estimates arerecognized in accordance with the accounting rules for the estimate, whichis typically in the period when new information becomes available tomanagement.  Areas where the nature ofthe estimate makes it reasonably possible that actual results could materiallydiffer from amounts estimated include: ore reserves, revenue recognition,estimated mine stripping ratios, leachable material and related amortization,the estimated useful lives of fixed assets, asset retirement obligations,litigation and contingencies, valuation allowances for deferred tax assets, taxpositions, fair value of financial instruments and inventory obsolescence.  We base our estimates on 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 the three months ended March 31,2009 and 2008 (in millions):

 
| ** **                                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                          | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| Statement of Earnings Data:                         |       |                                   |       |   |   |
|                                                |       |                                   |       |   |   |
| Net sales                                           |       | $                                      | 622.0      |   | $ | 1,499.2 |   |
| Operating costs and expenses                        |       | (477.9                                 | )          | (634.5 | ) |
| Operating income                                    |       | 144.1                                  |       | 864.7 |   |
| Non-operating income (expense)                      |       | (16.8                                  | )          | (11.0 | ) |
| Income before income taxes                          |       | 127.3                                  |       | 853.7 |   |
| Income taxes                                        |       | (48.0                                  | )          | (286.0 | ) |
| Net income attributable to non-controlling interest |       | (0.6                                   | )          | (2.7 | ) |
| Net income attributable to SCC                      |       | $                                      | 78.7       |   | $ | 565.0 |   |

 

Mine copper production amounted to 264.1 millionpounds in the first quarter of 2009 compared with 281.9 million pounds in thefirst quarter of 2008, a decrease of 6.3%. This decrease of 17.8 million pounds, included a decrease of 20.4million pounds from the Mexican open pit operations partially offset by anincrease of 2.3 million pounds from the Peruvian open pit mines and 0.3 millionpounds from the Mexican underground mines.

 

The 20.4 million pound decrease in the Mexicanopen-pit mines production included a decrease of 27.4 million pounds from theCananea mine net of an increase of 7.0 million pounds from the La Caridadmine.  The Cananea mine decrease was dueto the effect of its strike, which limited first quarter 2008 production to27.4 million pounds and eliminated all production in the first quarter of2009.  The increase in production at LaCaridad mine was due to increased ore mined and higher PLS grade.  The increase in 

 

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the Peruvian mines came from the Toquepala mine, whichincreased by 3.2 million pounds, and was the result of higher ore mined,partially offset by a decrease of 0.9 million pounds from the Cuajone mine dueto lower ore grade.

 

Molybdenum mineproduction increased by 0.3 million pounds in the first quarter of 2009 to 8.9million pounds compared with 8.6 million pounds in the first quarter of2008.  This increase was mainly due tohigher ore grade and recovery at the La Caridad mine and higher recovery atCuajone mine, partially offset by lower ore grade and recovery at the Toquepalamine.

 

Mine zinc productionincreased 5.0 million pounds in the first quarter 2009, to 59.6 million poundscompared with 54.6 million pounds in the first quarter of 2008.  This 9.2% increase in production was due tohigher ore grades and recoveries at Charcas, Santa Eulalia and Santa Barbaramines.

 

Average Metal Prices

 

The table below outlinesthe average metal prices during the three months period ended March 31,2009 and 2008:

 
| ** **                             | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------|------------|
| ** **                             | ** ** | **2009**                              | ** ** | **2008** | ** ** | **% Change** | ** ** |
| Copper ($ per pound — LME)   |       | 1.56                                  |       | 3.54 |   | (55.9 | ) |
| Copper ($ per pound — COMEX) |       | 1.57                                  |       | 3.53 |   | (55.5 | ) |
| Molybdenum ($ per pound)          |       | 8.75                                  |       | 33.01 |   | (73.5 | ) |
| Zinc ($ per pound — LME)     |       | 0.53                                  |       | 1.10 |   | (51.8 | ) |
| Silver ($ per ounce — COMEX) |       | 12.63                                 |       | 17.62 |   | (28.3 | ) |

 

Net Sales. Net sales in the first quarter of 2009 decreased by $877.2 millioncompared to the first quarter of 2008. This 58.5% decrease was principally due to lower metal sales prices.

 

The table below presentsinformation regarding the volume of our copper sales by segment for the threemonths ended March 31, 2009 and 2008:

 

Copper Sales(million pounds):

 
| ** **                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------|------------|---------------------------------------|------------|
| ** **                         | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| Copper:                            |       |                                  |       |   |   |
| Peruvian operations                |       | 186.8                                 |       | 180.8 |   |
| Mexican open-pit                   |       | 68.8                                  |       | 85.1 |   |
| Mexican IMMSA unit                 |       | 10.7                                  |       | 9.4 |   |
| Other and intersegment elimination |       | (1.2                                  | )          | (4.5 | ) |
| Total copper sales                 |       | 265.1                                 |       | 270.8 |   |

 

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The table below presentsinformation regarding the volume of sales by segment of our significantby-products for the three months ended March 31, 2009 and 2008:

 

By-product Sales:

 
| **(in million pounds except  silver — in  million ounces)** | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                       | **2009**   | ** **                            | **2008**   | ** ** |
| Peruvian operations                                              |       |                                  |       |   |   |
| Molybdenum contained in concentrates                             |       | 3.7                                   |       | 4.9 |   |
| Silver                                                           |       | 1.0                                   |       | 0.8 |   |
|                                                             |       |                                  |       |   |   |
| Mexican open-pit                                                 |       |                                  |       |   |   |
| Molybdenum contained in concentrates                             |       | 5.2                                   |       | 4.0 |   |
| Silver                                                           |       | 1.2                                   |       | 0.7 |   |
|                                                             |       |                                  |       |   |   |
| Mexican IMMSA unit                                               |       |                                  |       |   |   |
| Zinc — refined and in concentrate                           |       | 58.1                                  |       | 51.1 |   |
| Silver                                                           |       | 3.0                                   |       | 2.0 |   |
|                                                             |       |                                  |       |   |   |
| Other and intersegment elimination                               |       |                                  |       |   |   |
| Zinc — refined and in concentrate                           |       | 1.1                                   |       | 1.4 |   |
| Silver                                                           |       | (1.2                                  | )          | (0.5 | ) |
|                                                             |       |                                  |       |   |   |
| Total by-product sales                                           |       |                                  |       |   |   |
| Molybdenum contained in concentrates                             |       | 8.9                                   |       | 8.9 |   |
| Zinc — refined and in concentrate                           |       | 59.2                                  |       | 52.5 |   |
| Silver                                                           |       | 4.0                                   |       | 3.0 |   |

 

Operating Costs andExpenses.

 

Operating costs andexpenses were $477.9 million in the first quarter of 2009 compared with $634.5million in the first quarter of 2008. The decrease of $156.6 million was principally due to lower cost ofsales (exclusive of depreciation, amortization and depletion).

 

Cost of sales (exclusiveof depreciation, amortization and depletion) for the first quarter 2009 was$375.5 million compared with $520.6 million in the first quarter 2008.  The decrease of $145.1 million was primarilyattributable to the following: 1) $59.0 million of lower workers participationdue to reduced in earnings, 2) $39.5 million of lower fuel and power cost,mainly in our Peruvian operations (the average unit cost for our powerconsumption decreased by 25.4% in 2009, as effect of lower cost of coal andother fuels over our power purchased agreement), 3) $23.4 million of lowerproduction costs including labor and operating and repair material costs, 4) adecrease of $10.5 million in the Peruvian mining royalty charge and $20.0million gain in currency translation effect.

 

Non-Operating Income(Expense):Interest expense in the first quarter of 2009 was 11.2% lower than thecomparable 2008 period.  This decrease isprincipally due to the lower average debt level in the first quarter of 2009,which was 11% lower than in the first quarter of 2008.

 

Interest income was $5.2million in the first quarter of 2009, compared to $17.4 million in the first quarterof 2008.  The decrease was largely theresult of lower cash balances.

 

The loss on derivativeinstruments was $2.6 million in the first quarter of 2009, compared with a gainof $2.4 million in the first quarter of 2008. These amounts both the gain and loss were the result of USdollar/Mexican peso exchange rate derivatives activity.  Please see details in note G, Derivativeinstruments, of our condensed consolidated financial statements.

 

Other income (expense)was income of $2.7 million in the first quarter of 2009 compared to expense of$4.7 million in the first quarter of 2008. This positive turn-around of $7.3 million was principally the result ofa few discrete events, including (1) in the first quarter of 2009, wereceived a termination fee of $1.9 million related to our offer to acquire aCanadian mining company, with properties in Mexico.  The selling party in this agreement rescindedtheir acceptance of our bid after receiving a higher offer.  (2) As a result of lower earnings ourPeruvian company’s accrual for our 

 

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contribution to theregional development fund decreased by $2.6 million. (3) Charges for assetdisposals decreased by $1.5 million.

 

Income taxes: The income tax provision for the firstquarter of 2009 and 2008 was $48.0 million and $286.0 million,respectively.  These provisions includeincome taxes for Peru, Mexico and the United States.  The provision for income taxes was based onour effective tax rate of 37.7% for the first three months of 2009 as comparedto 33.5% during the same period in 2008. The increase in the effective tax rate for the first quarter 2009 islargely due to the incremental U.S. tax provided on dividend distributions madeby our Mexican subsidiary to the U.S. parent. This dividend distribution is taxable in the U.S. at the differencebetween the 35% U.S. statutory rate and the foreign tax credit rate of 28.5%.

 

As of March 27,2009, Grupo Mexico, through its wholly-owned subsidiary, Americas MiningCorporation (“AMC”), became the beneficial owner of 80% of SCC’s commonstock.  As a result of this new level ofownership, SCC will be included in AMC’s consolidated US federal income taxreturn commencing from March 27, 2009. AMC is a holding company and most of the business assets and operationsof AMC belong to ASARCO LLC and its subsidiaries.  In accordance with paragraph 40 of FAS No. 109,it is expected that current and deferred taxes will be allocated to members ofthe AMC group as if each were a separate taxpayer.  We have initiated discussions with AMC to putin place a tax sharing agreement in order to establish this allocation as wellas other procedures and policies necessary for an equitable management of USfederal income tax matters.  At present,SCC is providing current and deferred 2009 US income taxes, as if it were stilla separate filer.  It is believed thattaxes provided on this basis will not be materially different from theprovision necessary once we have reached a tax sharing agreement with AMC.

 

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 month periods ended March 31,2009 and 2008 (in millions):

 
| ** **                   | ** ** | **Three Months Ended  March 31,** | ** ** | **Variance** | ** ** |
|------------------------------|------------|----------------------------------------|------------|--------------|------------|
| ** **                   | ** ** | **2009**                               | ** ** | **2008**     | ** ** | **Value** | ** ** | **%** | ** ** |
| Net sales                    |       | $                                      | 346.8      |         | $          | 892.5 |   | $ | (545.7 | ) | (61.1 | ) |
| Operating costs and expenses |       | (239.7                                 | )          | (320.6       | )          | 80.9 |   | (25.2 | ) |
| Operating income             |       | $                                      | 107.1      |         | $          | 571.9 |   | $ | (464.8 | ) | (81.3 | ) |

 

Net sales in the firstquarter of 2009 decreased by $545.7 million, to $346.8 million compared with$892.5 million in the first quarter of 2008. This decrease in net sales was principally the result of lower metalprices.  Net sales in the first quarterof 2008 also included a gain on copper derivative instruments of $4.3 million.

 

Operating costs andexpenses in the first quarter of 2009 decreased by $80.9 million to $239.7million from $320.6 million in the first quarter of 2008, principally due to$79.3 million of lower cost of sales (exclusive of depreciation, amortizationand depletion).

 

Cost of sales (exclusiveof depreciation, amortization and depletion) for the first quarter 2009 was$199.1 million compared to $278.4 million in the first quarter 2008.  The principal elements of cost of sales,creating this reduction, include the following, 1) $22.3 million of lower fueland power cost due to reduction in market prices, 2) $4.3 million of otherproduction cost including labor and repair material; 

 

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3) $11.1 million of lowermining royalties and $38.3 million of lower workers participation both due tolower earnings.

 

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 month periods ended March 31,2009 and 2008 (in millions):

 
| ** **                   | ** ** | **Three Months Ended  March 31,** | ** ** | **Variance** | ** ** |
|------------------------------|------------|----------------------------------------|------------|--------------|------------|
| ** **                   | ** ** | **2009**                               | ** ** | **2008**     | ** ** | **Value** | ** ** | **%** | ** ** |
| Net sales                    |       | $                                      | 173.1      |         | $          | 470.1 |   | $ | (297.0 | ) | (63.2 | ) |
| Operating costs and expenses |       | (148.1                                 | )          | (239.4       | )          | 91.3 |   | (38.1 | ) |
| Operating income             |       | $                                      | 25.0       |         | $          | 230.7 |   | $ | (205.7 | ) | (89.2 | ) |

 

Net sales in the firstquarter of 2009 decreased by $297.0 million, to $173.1 million compared with$470.1 million in the first quarter of 2008. The decrease was due to lower market metal prices and lower copper salesvolume.  The decrease in copper salesvolume was result of the lost production at the Cananea mine due to the ongoingstrike.  Net sales in the first quarterof 2008 also included a gain on copper derivatives of $2.1 million.

 

Operating costs andexpenses in the first quarter of 2009 decreased by $91.3 million to $148.1million from $239.4 million in the first quarter of 2008, principally due tolower cost of sales.  Cost of sales(exclusive of depreciation, amortization and depletion) decreased $84.8 millionto $98.6 million from $183.4 million in the first quarter of 2008.  The decrease in cost of sales was mainly dueto: 1) lower production cost of $23.3 million due to lower fuel and power costsand the strike at the Cananea mine; 2) $17.0 million decrease in workersparticipation due to lower earnings; 3) $12.3 million of gain in currencytranslation and 4) $15.4 million of increase in inventory due to shippingdelays.

 

MexicanUnderground Operations (IMMSA)

 

The following table setsforth net sales, operating cost and expenses and operating income for our IMMSAsegment, for the three month periods ended March 31, 2009 and 2008 (inmillions):

 
| ** **                   | ** ** | **Three Months Ended  March 31,** | ** ** | **Variance** | ** ** |
|------------------------------|------------|----------------------------------------|------------|--------------|------------|
| ** **                   | ** ** | **2009**                               | ** ** | **2008**     | ** ** | **Value** | ** ** | **%** | ** ** |
| Net sales                    |       | $                                      | 117.5      |         | $          | 162.1 |   | $ | (44.6 | ) | (27.5 | ) |
| Operating costs and expenses |       | (110.0                                 | )          | (101.8       | )          | (8.2 | ) | 8.1 |   |
| Operating income             |       | $                                      | 7.5        |         | $          | 60.3 |   | $ | (52.8 | ) | (87.6 | ) |

 

Net sales in the firstquarter of 2009 decreased by $44.6 million, to $117.5 million compared with$162.1 million in the first quarter of 2008. This decrease in net sales was principally due to lower metal pricespartially offset by higher copper, zinc and silver sales volume.  These volume increases were mainly due tohigher ore grades and recoveries at the Santa Eulalia, Santa Barbara andCharcas mines.

 

Operating costs andexpenses in the first quarter of 2009 increased by $8.2 million to $110.0million compared with $101.8 million in the first quarter of 2008.  This increase was principally due to highercost of sales (exclusive of depreciation, amortization and depletion).  Cost of sales (exclusive of depreciation,amortization and depletion) increased $13.8 million to $99.4 million from $85.6million in 2008.

 

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The increase in cost ofsales was mainly due to $15.2 million of higher inventory consumption.

 

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 M of thecondensed consolidated financial statements.

 

CASH FLOW

 

The following table showsthe cash flow for the three months ended March 31, 2009 and 2008 (inmillions):

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|
| ** **                                             | ** ** | **March 31,**     | ** ** |
| ** **                                             | ** ** | **2009**               | ** ** | **2008** | ** ** | **Variance** | ** ** |
| Net cash (used for) provided from operating activities |       | $                      | (194.3     | ) | $ | 501.2 |   | $ | (695.5 | ) |
| Net cash used for investing activities                 |       | $                      | (50.7      | ) | $ | (43.4 | ) | $ | (7.3 | ) |
| Net cash used for financing activities                 |       | $                      | (171.1     | ) | $ | (415.4 | ) | $ | 244.3 |   |

 

Net cash (used for)provided from operating activities:

 

The decrease of $695.5million in the first quarter 2009 cash provided from operating activitiescompared with first quarter 2008 was due to the reduction of $486.3 million innet income attributable to SCC, an increase of $14.9 million on adjustments toreconcile earnings to cash and $224.1 million of increased working capitalneeds.  The reduction in net income wasprimarily due to lower metal prices.

 

In the first quarter2009, net income attributable to SCC was $78.7 million.  Significant items deducted from, or added toarrive to operating cash flow included depreciation, amortization and depletionof $78.2 million and an $18.9 million deferred income tax provision, whichincreased operating cash flow and $25.1 million of unrealized gain onderivative instruments which decreased operating cash cost.  Additionally, an increase in working capitaldecreased operating cash flow by $343.5 million.

 

The first quarter 2009decrease from working capital includes (in millions):

 
| Accounts receivable                      |   | $      | (107.3 | ) |
|------------------------------------------|--------|--------|--------|---|
| Inventories                              |   | 2.3    |   |
| Accounts payable and accrued liabilities |   | (250.5 | )      |
| Other operating assets and liabilities   |   | 12.0   |   |
| Total                                    |   | $      | (343.5 | ) |

 

The increase in accountsreceivable value was due to the higher metal prices for most of our products,the LME copper price increased 39% during the quarter and silver and zincincreased around 15% with only the molybdenum price decreasing in thequarter.  The decrease in accountspayable and accrued liabilities was mainly due to a $123.8 million decrease inworkers participation, principally due to the payment of the 2008 provision byour Peruvian operations, a $99.8 million decrease in accounts payable, a $20.8million decrease in accrued interest, which includes semi-annual payments of$44.0 million and $15.2 million of lower income tax payable.

 

In the first quarter 2008, net income attributable toSCC was $565.0 million, approximately 112.7% of the net operating cashflow.  Significant items deducted from, 

 

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or added to arrive to operating cash flow included,depreciation amortization and depletion of $81.2 million and $18.6 million ofloss in currency translation which positively increased operating cash flow and$38.1 million of deferred income tax, which lowered our cash flow.  Additionally, an increase in working capitaldecreased operating cash flow by $119.4 million.

 

The first quarter 2008decrease from working capital includes (in millions):

 
| Accounts receivable                      |   | $    | (130.8 | ) |
|------------------------------------------|--------|------|--------|---|
| Inventories                              |   | (7.0 | )      |
| Accounts payable and accrued liabilities |   | 21.8 |   |
| Other operating assets and liabilities   |   | (3.4 | )      |
| Total                                    |   | $    | (119.4 | ) |

 

The increase in accountsreceivable value was mainly due higher metal prices.  The increase in accounts payable and accruedliabilities was mainly due to higher workers participation and income taxaccrual.

 

Net cash used forinvesting activities:

 

Net cash used forinvesting activities in the first quarter of 2009 included $63.0 million forcapital expenditures.  The capitalexpenditures included $24.0 million of investments at our Peruvian operations,$9.9 million for the Tia Maria project, $0.8 million for tailings disposalproject, $0.7 million for Cuajone expansion and $12.6 million for various otherreplacement expenditures.  In addition,we spent $39.0 million for replacement assets at our Mexican operations, $25.6million of which was at our Mexican open pit operations, $4.8 million at ourIMMSA unit and $8.6 million for an administrative office in Mexico City.  The first quarter 2009 cash from investingactivities also includes proceeds of $12.1 million from the redemption ofshort-term investments.

 

Net cash used for investing activities in the firstquarter of 2008 was $43.4 million and included $49.9 million for capitalexpenditures.  The capital expendituresincluded $18.3 million of investments at our Peruvian operations, $2.4 millionfor the primary crusher at the Toquepala concentrator, $1.5 million for thetailings disposal at Quebrada Honda and $14.4 million for various otherreplacement expenditures.  In addition,we spent $31.6 million for replacement assets at our Mexican operations, $23.3million at our Mexican open pit operations, $6.9 million at our IMMSA unit and$1.4 million at our Mexican administrative office.

 

Net cash used forfinancing activities:

 

Netcash used for financing activities in the first quarter of 2009 was $171.1million, compared with $415.4 million in the first quarter of 2008.  The first quarter of 2009 includes a dividenddistribution of $99.6 million, compared with a distribution of $412.3 millionin the first quarter of 2008.  Inaddition, in the first quarter of 2009 we purchased 4.9 million shares of ourcommon stock at a cost of $71.6 million.

 

LIQUIDITYAND CAPITAL RESOURCES

 

On March 30, 2009,we paid a quarterly dividend of 11.7 cents per share, totaling $99.6million.  On April 23, 2009, ourBoard of Directors authorized a dividend of 4.5 cents per share to be paid on June 2,2009 to SCC shareholders of record at the close of business on May 23,2009.

 

In the firstquarter of 2009, pursuant to our $500 million share repurchase program wepurchased of 4.9 million shares of our common stock at a cost of $71.6million.  These shares will be availablefor general corporate purposes.  Also,during the same period, Grupo Mexico, through its wholly owned subsidiary AMC,purchased 4.9 million of our 

 

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commonshares.  With these acquisitions GrupoMexico directly or indirectly owns 80% of our outstanding shares.  Please see note E, Income taxes, of ourcondensed consolidated financial statements regarding disclosure about the USfederal income tax implications of this increase in ownership.

 

Weexpect that we will meet our cash requirements for 2009 and beyond from cash onhand, internally generated funds and from additional external financing ifrequired.

 

Ourratio of debt to total capitalization was 28.1% at March 31, 2009 comparedwith 27.5% at December 31, 2008.

** **

**ContractualObligations**

** **

The following tablesummarizes our significant contractual obligations as of March 31, 2009:

 
| ** **                                        | ** ** | ** ** | ** ** | **Payments due by Period** | ** ** |
|---------------------------------------------------|------------|------------|------------|----------------------------|------------|
| ** **                                        | ** ** | **Total**  | ** ** | **9 months  2009**         | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014 and  Thereafter** | ** ** |
| ** **                                        | ** ** | ** ** | ** ** | **(in millions)**          | ** ** |
| Long-term debt                                    |       | $          | 1,306.4    |                       | $          | 10.0 |   | $ | 10.0 |   | $ | 10.0 |   | $ | 10.0 |   | $ | 10.0 |   | $ | 1,256.4 |   |
| Interest on debt                                  |       | 2,188.2    |       | 94.7                       |       | 94.2 |   | 94.0 |   | 93.5 |   | 93.3 |   | 1,718.5 |   |
| FIN No. 48 (a)                               |       | 71.1       |       | —                     |       | — |   | — |   | — |   | — |   | — |   |
| Workers’ participation                       |       | 81.3       |       | 75.1                       |       | 6.2 |   |   |   |   |   |   |   |   |   |
| Contribution to the Peruvian regional development |       | 12.7       |       | 12.2                       |       | 0.5 |   |   |   |   |   |   |   |   |   |
| Pension and post-retirement obligations           |       | 93.5       |       | 24.6                       |       | 5.2 |   | 5.4 |   | 5.6 |   | 6.0 |   | 46.7 |   |
| Purchase obligations:                             |       |       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Commitment to purchase energy                     |       | 1,015.0    |       | 138.2                      |       | 134.0 |   | 117.3 |   | 117.3 |   | 117.3 |   | 390.9 |   |
| Capital expenditure projects and material         |       | 1,093.4    |       | 227.6                      |       | 769.1 |   | 96.7 |   | — |   | — |   | — |   |
| Total                                             |       | $          | 5,861.6    |                       | $          | 582.4 |   | $ | 1,019.2 |   | $ | 323.4 |   | $ | 226.4 |   | $ | 226.6 |   | $ | 3,412.5 |   |

 

----

(a)  The above table does not include anyfuture payment related to FIN No.48 liabilities because there is often a highdegree of uncertainty regarding the timing of future cash outflows.  As of March 31, 2009 the liabilityrecognized by us is $71.1 million and is included as non-current liability inthe condensed consolidated balance sheet.

 

Interest on debt iscalculated at rates in effect at March 31, 2009.

 

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

 

Pursuant to our agreementwith the Peruvian Government signed on December 28, 2006 we have committedto make annual contributions for five years for the regional development ofPeru based on Peruvian Branch earnings after income tax.  Future contributions could increase ordecrease depending on copper prices.  Thecommitment of the Branch is for a total of 1.25% of its annual earnings, afterPeruvian income tax.  If the averageannual LME copper price drops below $1.79 per pound the contribution willcease.  For an additional discussion onthis matter please see “Regional development contribution” on Note L,Commitments and Contingencies, of the consolidated financial statements.

 

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Pension and postretirement obligations include the benefit expected to be paid under ourpost-retirement benefit plans.  Pleaserefer to Note J, Benefit plans, of our condensed consolidated financialstatements.

 

We have a commitment topurchase power for our Peruvian operations from Energia del Sur, S.A. until2017.  Amounts indicated on the abovetable are based on power costs in 2008, which are subject to change as energy generationcosts change and our forecasted power requirements through the life of theagreements change.

 

Capital expenditureprojects include committed purchase orders and executed contracts principallyfor our Peruvian projects of Tia Maria and the Toquepala concentratorexpansion.  These commitments are underre-evaluation and subject to renegotiation due to the current economicsituation.

 

NON-GAAP INFORMATIONRECONCILIATION

 

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

 
| ** **                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| ** **                                                                         | ** ** | **$ million**                    | ** ** | **¢ per pound** | ** ** | **$ million** | ** ** | **¢ per pound** | ** ** |
| Cost of sales (exclusive of depreciation, amortization and depletion)  — GAAP |       | $                                     | 375.5      |   | 136.7 |   | $ | 520.6 |   | 178.7 |   |
| Add:                                                                               |       |                                  |       |   |   |   |   |   |   |
| Selling, general and administrative expenses                                       |       | 18.8                                  |       | 6.8 |   | 24.7 |   | 8.5 |   |
| Treatment and refining charges                                                     |       | 5.9                                   |       | 2.1 |   | 5.7 |   | 2.0 |   |
| By-products revenue (1)                                                            |       | (208.0                                | )          | (75.7 | ) | (474.8 | ) | (162.9 | ) |
| Less:                                                                              |       |                                  |       |   |   |   |   |   |   |
| Workers’ participation                                                        |       | (10.2                                 | )          | (3.7 | ) | (69.2 | ) | (23.7 | ) |
| Royalty charge and other                                                           |       | (10.5                                 | )          | (3.7 | ) | (54.4 | ) | (18.9 | ) |
| Inventory change                                                                   |       | 5.3                                   |       | 1.9 |   | 10.7 |   | 3.7 |   |
| **Operating cash cost**                                                            | ** ** | **$**                                 | **176.8**  | ** ** | **64.4** | ** ** | **$** | **(36.7** | **)** | **(12.6** | **)** |
|                                                                               |       |                                  |       |   |   |   |   |   |   |
| Add by-product revenue                                                             |       | 208.0                                 |       | 75.7 |   | 474.8 |   | 162.9 |   |
|                                                                               |       |                                  |       |   |   |   |   |   |   |
| Operating cash cost, without by-product revenue                                    |       | $                                     | 384.8      |   | 140.1 |   | $ | 438.1 |   | 150.3 |   |
|                                                                               |       |                                  |       |   |   |   |   |   |   |
| Total pounds of copper produced and purchased (in millions)                        |       |                                  |       | 274.6 |   |   |   | 291.4 |   |
|                                                                                    |            |                                       |            |  |  |  |  |  |  |  |  |  |  |

 

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

 

Impact of NewAccounting Standards

Pleasesee Note N 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 March 31, 2009, a change in interestrates of one percent (or 100 basis points) would impact net income and cash flowsby $0.5 million annually.

 

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.

 

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 months ended March 31, 2009 and2008:

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **March 31,**     | ** ** |
| ** **                                        | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Peru:                                             |       |                   |       |   |   |
| Peruvian inflation rate                           |       | 0.4                    | %          | 2.2 | % |
| Nuevo sol/dollar devaluation/ (appreciation) rate |       | 0.6                    | %          | (8.4 | )% |
|                                              |       |                   |       |   |   |
| Mexico:                                           |       |                   |       |   |   |
| Mexican inflation rate                            |       | 1.0                    | %          | 1.5 | % |
| Peso/dollar devaluation/ (appreciation) rate      |       | 5.9                    | %          | (1.6 | )% |

 

Change in monetaryposition:

 

Assuming an exchange ratevariance of 10% at March 31, 2009 we estimate our net monetary position inPeruvian nuevo sol and Mexican peso would increase (decrease) our net earningsas follows:

 
| **Variance**                                                 | ** ** | **Effect in net earnings** | ** ** |
|--------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                   | ** ** | **($ in million)**    | ** ** |
| Appreciation of 10% in exchange rate dollar vs. nuevo sol    |       | $                          | 10.7       |   |
| Devaluation of 10% in exchange rate dollar vs. nuevo sol     |       | $                          | (13.0      | ) |
| Appreciation of 10% in exchange rate dollar vs. Mexican peso |       | $                          | 13.4       |   |
| Devaluation of 10% in exchange rate dollar vs. Mexican peso  |       | $                          | (10.9      | ) |

 

Metal price sensitivity:

 

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 

 

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sensitivity factors wouldindicate the following change in estimated 2009 net income attributable to SCCresulting from metal price changes:

 
| ** **                                                        | ** ** | **Copper** | ** ** | **Molybdenum** | ** ** | **Zinc** | ** ** | **Silver** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|----------------|------------|----------|------------|------------|------------|
| Change in metal prices (per pound except silver — per ounce) |       | $          | 0.01       |           | $          | 1.00     |       | $          | 0.01       |   | $ | 1.00 |   |
| Change in net income attributable to SCC (in millions)            |       | $          | 6.0        |           | $          | 23.1     |       | $          | 1.3        |   | $ | 10.1 |   |

 

Provisionally pricedsales:

 

At March 31, 2009,we have recorded provisionally priced sales of 26.6 million pounds of copper,at an average forward price of $1.83 per pound. Also we have recorded provisionally priced sales of 10.1 million poundsof molybdenum at the March 31, 2009 market price of $8.13 per pound.  These sales are subject to final pricingbased on the average monthly LME or COMEX copper prices and Dealer Oxidemolybdenum prices in the future month of settlement.  See note F to our condensed consolidatedfinancial statements.

 

Derivative instruments:

 

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 is likelyto 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 firstquarter 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 gain of $6.4 million in the first quarter of2008.  This gain was recorded in netsales in the condensed consolidated statement of earnings and in accountsreceivable other in the condensed consolidated balance sheet.  We did not hold any copper or zinc derivativecontracts in the first quarter of 2009.

 

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 to theUS dollar.

 

At March 31, 2009,we held exchange rate derivative contracts with the following conditions:

 

If the exchange rate isless than or equal to the strike price, we sell US dollars in an amount equalto the underlying amount 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 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 March 31,2009, we held the following contracts:

 

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| **Notional  Amount (1)  (millions)** | ** ** | **Underlying  amount  (millions)** | ** ** | **Expiration  Period** | ** ** | **Due Date** | ** ** | **Strike Price  (Mexican Pesos/  U.S. Dollars)** | ** ** |
|--------------------------------------|------------|------------------------------------|------------|------------------------|------------|--------------|------------|--------------------------------------------------|------------|
| $                                    | 7.5        |                               | $          | 2.5                    |       | Monthly      |       | April 13, 2009  through June 11, 2009  |       | 10.59 |   |
| $                                    | 52.5       |                               | $          | 2.5                    |       | Weekly       |       | April 3, 2009 through  August 21, 2009 |       | 10.53 |   |

 

----

(1) Each notional amountincludes a group of weekly transactions that have the same strike price.

 

At March 31, 2009,the fair value of the above listed exchange rate derivative contracts is a lossof $31.7 million, of which $29.1 million was included in the 2008 consolidatedstatement of earnings.

 

Related to the exchangerate derivative contracts we recorded a net loss of $2.6 million in the firstquarter of 2009 compared with a gain of $2.4 million in the first quarter of2008.  These gains/losses were recordedas (loss) gain on derivative instruments in the condensed consolidatedstatement of earnings.

 

Short-termInvestment:

 

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

 
| **Investment **                                                                                                                                                       | ** ** | **As of March 31,**

**2009** | ** ** | **As of December 31,**

**2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|----------------------------------|------------|
| Short-term investment in securities issued by public companies with a  weighted average interest rate of 1.07% at March 31,2009 and 1.85% at  December 31, 2008. |       | $                             | 51.0       |                             | $          | 62.4 |   |
|                                                                                                                                                                            |            |                               |            |                                  |            |  |  |

 

Short-term investments insecurities consist of available for sale securities issued by public companies.  Each security is independent of the others.

 

Inthe first quarter of 2009 and 2008, we earned interest of $0.3 million and $1.6million, respectively, related to these investments which were recorded asinterest income in the condensed consolidated statement of earnings.  In addition, in the first quarter of 2009 and2008, we redeemed $12.1 million and $5.2 million, respectively, of theseinvestments.

 

Inthe first quarter of 2009 and 2008 we recorded a gain of $0.7 million and aloss of $1.7 million, respectively.  Weconsidered these gains/losses other than temporary, and therefore have recordedthem as other income (expense) in the condensed consolidated statement ofearnings.

 

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. Actual results could differ materially depending upon factors includingthe risks and uncertainties relating to general U.S. and international economicand political conditions, the cyclical and volatile prices of copper, othercommodities and supplies, including fuel and electricity, availability ofmaterials, insurance coverage, equipment, required permits or approvals andfinancing, the occurrence of unusual weather or operating conditions, lowerthan expected ore 

 

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grades, water andgeological problems, the failure of equipment or processes to operate inaccordance with specifications, failure to obtain financial assurance to meetclosure and remediation obligations, labor relations, litigation andenvironmental risks as well as political and economic risk associated withforeign 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 March 31,2009, 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 March 31, 2009, to ensure that information required to be disclosedin reports filed or submitted under the Exchange Act is:

 

1.                                       recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms,and

 

2.                                       accumulated and communicated tomanagement, including the Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure.

 

 

CHANGES ININTERNAL 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 March 31,2009 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 March 31, 2009, and the relatedcondensed consolidated statements of earnings and cash flows for thethree-month period ended March 31, 2009. These interim financial statements are the responsibility of the Company’smanagement.

 

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.

 

The accompanyingcondensed consolidated financial information as of December 31, 2008, andfor the three-month period ended March 31, 2008, were not audited orreviewed by us and, accordingly, we do not express an opinion or any other formof assurance on them.

 

Galaz, Yamazaki, Ruiz Urquiza S.C.

Member of Deloitte ToucheTohmatsu

 

 

C.P.C. Arturo Vargas Arellano

Mexico, D.F.

May 8, 2009

 

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PART II — OTHERINFORMATION

 

Item 1. — LegalProcedures

 

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

 

Item 1A.  Risk Factors:

 

The following riskfactors contain information that supplement those contained in our Annualreport on Form 10-K for the year ended December 31, 2008 filed withthe Securities and Exchange Commission on March 2, 2009.

 

**GeneralRisks Relating to Our Business**

 

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

 

Related to theCananea strike, on January 7, 2009 the judge of the fifth district onlabor matters annulled a favorable decision to the Company.  The Company filed a request for a review ofthis ruling before an appellate federal court, which declared the strike legalon March 19, 2009.  On March 20,2009 the Company notified the Mexican Federal Labor Court of the termination ofall the individual labor contracts of the Cananea workers, including thecollective bargaining agreement with the union. This decision was based upon afinding by the Mexican mining authorities who confirmed that the Cananea minewas in a force majeure situation; since it was unable to operate due to severedamages caused by striking workers.  On April 14,2009, the Mexican Federal Labor Court issued a resolution approving thetermination of Cananea’s labor relationships with individual and unionizedemployees, as well as the termination of its collective bargaining agreementwith its employees and with the National Mining and Metal Workers Union.

 

In addition, theMexican Federal Labor Court determined that damages to the machinery,materials, facilities and other equipment at the Cananea mine significantlyhinder its operation and, as a result, the termination of all laborrelationships are legally justified.

 

To repair thedamages suffered by the Cananea mine and plant, significant investments andreconstruction work will be required over several months.  Hence, the Company is assessing the bestcourse of action to take once it establishes the legal and safety conditionsnecessary to allow the Company to restore operations at Cananea.

 

The court ordered theCompany to compensate the workers with three months pay plus 12 days salary foreach year worked at the mine.  TheCompany estimates that the liability for these termination payments has beenprovided for by a provision previously accrued on its consolidated balancesheet.  The workers’ union announced theappeal of this ruling.

 

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.

 

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

 

Our direct and indirectparent corporations, including AMC and Grupo Mexico, have from time to timebeen named parties in various litigations involving Asarco LLC (“Asarco”).

 

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On April 3, 2009,the United States District Court for the Southern District of Texas orderedAMC, a wholly owned subsidiary of Grupo Mexico, to return to Asarco a number ofshares of common stock of SCC equal to those acquired by AMC in 2003, whichrepresents approximately 30.6% of SCC’s current outstanding common shares, andan amount equal to the dividends paid on those shares of common stock of SCCsince the date of their acquisition by AMC. Grupo Mexico announced that it intends to appeal this decision.

 

The Company cannot assureyou that these or future claims, if successful, will not have an adverse effecton the Company’s parent corporation or the Company.  Any increase in the financial obligations ofthe Company’s parent corporation, as a result of matters related to Asarco orotherwise could, among other effects, result in the Company’s parentcorporation attempting to obtain increased dividends or other funding from theCompany.

 

***AMC’s80% ownership of SCC could result in federal income tax contingencies.***

 

In March 2009, GrupoMexico, through its wholly-owned subsidiary, Americas Mining Corporation (AMC),became the beneficial owner of 80% of SCC’s common stock.  As a result of this new level of ownership,SCC will be included in AMC’s consolidated US federal income tax returncommencing from March 2009.  AMC isa holding company and most of the business assets and operations of AMC belongto ASARCO LLC and its subsidiaries.  TheCompany has initiated discussions with AMC to put in place a tax sharingagreement, in order to allocate taxes within the consolidated group and suchother procedures necessary for an equitable management of US federal income taxmatters.

 

We cannot assure you thatthe tax sharing agreement will not have any negative consequences in thefuture.  Additionally, members of aconsolidated group share with each other joint and several liabilities fortaxes reported by the entire group.  Thismeans that the Internal Revenue Service has the right to collect the entire taxliability of the group from any member of the group.  Thus, SCC could become exposed to fullresponsibility for the 2009 federal income taxes and future federal incometaxes of other members of the AMC group. There could be limitations on the amount of capital carryforwards andforeign tax credit carryforwards that the SCC group will be able to utilize inthe future.  Also, there could belimitations restricting the computation of allowable foreign tax credits forSCC.  We cannot assure you that futurefederal income tax provisions and payments will not exceed what was previouslycalculated prior to SCC joining the AMC group.

 

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Item4. — Submissionof Matters to a Vote of Security Holders

 

The annual meeting ofstockholders of the Company was held on Wednesday, April 30, 2009, atwhich shareholders of record at the close of business on March 3, 2009(the “record date”) were entitled to vote at the annual meeting.

 

At the annual meeting,the holders of Common Stock were asked to elect 13 directors.  All of the thirteen persons nominated asdirectors of the Corporation to represent the Common Stockholders were electedand each of the director nominees received the following votes:

 
| ** **                       | ** ** | **Number of Shares** | ** ** |
|----------------------------------|------------|----------------------|------------|
| **Name**                         | ** ** | **For**              | ** ** | **Withheld** | ** ** |
| German Larrea Mota-Velasco       |       | 805,233,614          |       | 44,002,043 |   |
| Oscar Gonzalez Rocha             |       | 795,875,737          |       | 53,359,920 |   |
| Xavier Garcia de Quevedo  Topete |       | 796,705,418          |       | 52,530,239 |   |
| Emilio Carrillo Gamboa           |       | 802,585,564          |       | 46,650,093 |   |
| Alfredo Casar Perez              |       | 811,292,852          |       | 37,942,805 |   |
| Alberto de la Parra Zavala       |       | 811,202,081          |       | 38,033,576 |   |
| Genaro Larrea Mota-Velasco       |       | 784,226,226          |       | 65,009,431 |   |
| Armando Ortega Gomez             |       | 811,151,573          |       | 38,084,084 |   |
| Daniel Muñiz Quintanilla    |       | 811,263,579          |       | 37,972,078 |   |
| Luis Miguel Palomino Bonilla     |       | 840,246,885          |       | 8,988,772 |   |
| Gilberto Perezalonso Cifuentes   |       | 842,284,935          |       | 6,950,722 |   |
| Juan Rebolledo Gout              |       | 811,273,023          |       | 37,962,634 |   |
| Carlos Ruiz Sacristan            |       | 843,276,051          |       | 5,959,606 |   |

 

The stockholders approvedthe selection of Galaz, Yamazaki, Ruiz Urquiza S.C. a member firm of DeloitteTouche Tohmatsu, as independent accountants for calendar year 2009.  The proposal received the following votes:

 
| ** **   | ** ** | **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|--------------|------------|-------------|------------|-------------|------------|-------------|------------|
|         |       |        |       |        |       |        |       |
| Common Stock |       | 847,463,689 |       | 1,101,706   |       | 670,262     |       |

 

The Secretary reportedthat no other business was brought to the attention of the shareholders or bythem.

 

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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              |
|             |                                                |
| May 7, 2009 |                                                |
|             |                                                |
|             |                                                |
|             | /s/ Genaro  Guerrero                                |
|             | Genaro Guerrero                                     |
|             | Vice President  Finance and Chief Financial Officer |
|             |                                                |
| May 7, 2009 |                                                |

 

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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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