**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**2006**

 

**First Quarter**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 
| **For Quarter Ended March 31, 2006** | **Commission file number 1-14066** |
|--------------------------------------|------------------------------------|

 

**SOUTHERN COPPER CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                    | ** ** | **13-3849074**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  Incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **2575  East Camelback Rd. Phoenix, AZ**                        | ** ** | **85016**                             |
| (Address of principal executive offices)                        |       | (Zip Code)                            |
|                                                            |       |                                  |
| Registrant’s telephone number, including  area code        |       | **(602) 977-6595**                    |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yesý               Noo

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. (See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act).

 
| Large  accelerated filer ý | Accelerated  filer o | Non-accelerated  filer o |
|---------------------------------|----------------------|--------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined by Rule12b-2 of the Act).                          Yes o   No ý

 

Asof April 30, 2006 there were outstanding 147,228,025 shares of Southern CopperCorporation common stock, par value $0.01 per share.

 

 

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Southern Copper Corporation

 

INDEX TO FORM 10-Q

 
| Part I. Financial Information:                           |                                                                                                 |
|----------------------------------------------------------|------------------------------------------------------------------------------------------------------|
|                                                     |                                                                                                 |   |
| Item 1.                                                  | Condensed Consolidated  Combined Financial Statements (unaudited)                                    |   |
|                                                     |                                                                                                 |   |
|                                                     | Condensed  Consolidated Combined Statement of Earnings  three months ended March 31, 2006 and 2005   |   |
|                                                     |                                                                                                 |   |
|                                                     | Condensed Consolidated  Balance Sheet  March 31, 2006 and December 31, 2005                          |   |
|                                                     |                                                                                                 |   |
|                                                     | Condensed  Consolidated Combined Statement of Cash Flows  three months ended March 31, 2006 and 2005 |   |
|                                                     |                                                                                                 |   |
|                                                     | Notes  to Condensed Consolidated Combined Financial Statements                                       |   |
|                                                     |                                                                                                 |   |
| Item 1a.                                                 | Risk factors                                                                                         |   |
|                                                     |                                                                                                 |   |
| Items 2 and 3.                                           | Management’s Discussion and  Analysis of Financial Condition and Results of Operations          |   |
|                                                     |                                                                                                 |   |
| Item 4.                                                  | Controls and  Procedures                                                                             |   |
|                                                     |                                                                                                 |   |
| Report of Independent Registered Public Accounting  Firm |                                                                                                 |
|                                                     |                                                                                                 |   |
| Part II. Other  Information:                             |                                                                                                 |
|                                                     |                                                                                                 |   |
| Item 1.                                                  | Legal Procedures                                                                                     |   |
|                                                     |                                                                                                 |   |
| Item 6.                                                  | Exhibits                                                                                             |   |
|                                                     |                                                                                                 |   |
| Signatures                                               |                                                                                                 |   |
|                                                     |                                                                                                 |   |
| Exhibit 15                                               | - Independent Registered  Public Accounting Firm Awareness Letter                                    |   |
|                                                     |                                                                                                 |   |
| Exhibit 31.1                                             | - Certification  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                           |   |
|                                                     |                                                                                                 |   |
| Exhibit 31.2                                             | - Certification  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                           |   |
|                                                     |                                                                                                 |   |
| Exhibit 32.1                                             | - Certification  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                           |   |
|                                                     |                                                                                                 |   |
| Exhibit 32.2                                             | - Certification  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                           |   |

 

2

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Part I – FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Combined Financial Statements

 

Southern Copper Corporation

 

CONDENSED CONSOLIDATED COMBINED STATEMENT OF EARNINGS

(Unaudited)

 
| ** **                                                                                     | ** ** | **3 Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
| ** **                                                                                     | ** ** | **(in thousands)**                      | ** ** |
|                                                                                           |       |                                         |       |   |   |
| Net sales:                                                                                     |       |                                         |       |   |   |
| Non affiliates                                                                                 |       | $                                            | 1,121,291  |   | $ | 924,085 |   |
| Affiliates                                                                                     |       | —                                       |       | 21,990 |   |
| Total net sales                                                                                |       | 1,121,291                                    |       | 946,075 |   |
|                                                                                           |       |                                         |       |   |   |
| Operating costs and  expenses:                                                                 |       |                                         |       |   |   |
| Cost of sales  (exclusive of depreciation, amortization and depletion shown separately  below) |       | 406,944                                      |       | 389,570 |   |
| Selling, general  and administrative                                                           |       | 24,016                                       |       | 18,598 |   |
| Depreciation,  amortization and depletion                                                      |       | 53,103                                       |       | 60,967 |   |
| Exploration                                                                                    |       | 4,573                                        |       | 5,347 |   |
| Total operating  costs and expenses                                                            |       | 488,636                                      |       | 474,482 |   |
|                                                                                           |       |                                         |       |   |   |
| Operating income                                                                               |       | 632,655                                      |       | 471,593 |   |
|                                                                                           |       |                                         |       |   |   |
| Interest expense                                                                               |       | (22,907                                      | )          | (26,998 | ) |
| Capitalized interest                                                                           |       | 5,095                                        |       | 3,991 |   |
| Loss on derivative  instruments                                                                |       | —                                       |       | (7,276 | ) |
| Loss on debt  prepayments                                                                      |       | —                                       |       | (1,690 | ) |
| Other income (expense)                                                                         |       | (978                                         | )          | 835 |   |
| Interest income                                                                                |       | 9,305                                        |       | 5,452 |   |
| Earnings before taxes  on income and minority interest                                         |       | 623,170                                      |       | 445,907 |   |
|                                                                                           |       |                                         |       |   |   |
| Taxes on income                                                                                |       | 199,872                                      |       | 146,121 |   |
| Minority interest                                                                              |       | 1,723                                        |       | 1,425 |   |
|                                                                                           |       |                                         |       |   |   |
| Net earnings                                                                                   |       | $                                            | 421,575    |   | $ | 298,361 |   |
|                                                                                           |       |                                         |       |   |   |
| Per common share  amounts:                                                                     |       |                                         |       |   |   |
| Net earnings basic and  diluted                                                                |       | $                                            | 2.86       |   | $ | 2.03 |   |
| Dividends paid                                                                                 |       | $                                            | 2.75       |   | $ | 0.68 |   |
| Weighted average common  shares outstanding (Basic)                                            |       | 147,228                                      |       | 147,226 |   |
| Weighted average common  shares outstanding (Diluted)                                          |       | 147,228                                      |       | 147,226 |   |

 

The accompanying notesare an integral part of these condensed consolidated combined financialstatements.

 

3

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SouthernCopper Corporation

 

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

 
| ** **                                                          | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **                                                          | ** ** | **(in thousands)** | ** ** |
| ASSETS                                                              |       |                    |       |                  |       |
| Current assets:                                                     |       |                    |       |                  |       |
| Cash and cash  equivalents                                          |       | $                       | 775,627    |                  | $          | 876,003 |   |
| Accounts  receivable trade:                                         |       |                    |       |                  |       |
| Non affiliates                                                      |       | 325,224                 |       | 342,412               |       |
| Affiliates                                                          |       | 5,234                   |       | 9,099                 |       |
| Accounts  receivable – other                                   |       | 29,332                  |       | 34,949                |       |
| Inventories                                                         |       | 436,148                 |       | 395,845               |       |
| Deferred income  tax – current portion                         |       | 4,292                   |       | 5,248                 |       |
| Prepaid and  other current assets                                   |       | 63,252                  |       | 50,798                |       |
| Total current  assets                                               |       | 1,639,109               |       | 1,714,354             |       |
|                                                                |       |                    |       |                  |       |
| Property, net                                                       |       | 3,414,357               |       | 3,326,126             |       |
| Capitalized mine  stripping, net                                    |       | —                  |       | 289,369               |       |
| Leachable material, net                                             |       | 199,612                 |       | 210,118               |       |
| Intangible assets, net                                              |       | 120,157                 |       | 120,861               |       |
| Other assets, net                                                   |       | 42,369                  |       | 26,746                |       |
| Total Assets                                                        |       | $                       | 5,415,604  |                  | $          | 5,687,574 |   |
|                                                                |       |                    |       |                  |       |
| LIABILITIES                                                         |       |                    |       |                  |       |
| Current liabilities:                                                |       |                    |       |                  |       |
| Current portion  of long-term debt                                  |       | $                       | 10,000     |                  | $          | 10,000 |   |
| Accounts payable                                                    |       | 210,180                 |       | 284,977               |       |
| Accrued income  taxes                                               |       | 322,875                 |       | 275,763               |       |
| Due to  affiliated companies                                        |       | 7,378                   |       | 6,355                 |       |
| Deferred income  taxes                                              |       | 8,369                   |       | —                |       |
| Accrued workers’  participation                                |       | 138,541                 |       | 195,552               |       |
| Other accrued  liabilities                                          |       | 98,378                  |       | 22,985                |       |
| Total current  liabilities                                          |       | 795,721                 |       | 795,632               |       |
|                                                                |       |                    |       |                  |       |
| Long-term debt                                                      |       | 1,162,135               |       | 1,162,065             |       |
| Deferred income taxes                                               |       | 181,267                 |       | 259,089               |       |
| Other liabilities                                                   |       | 90,317                  |       | 120,795               |       |
| Asset retirement  obligation                                        |       | 11,461                  |       | 11,221                |       |
| Total  non-current liabilities                                      |       | 1,445,180               |       | 1,553,170             |       |
|                                                                |       |                    |       |                  |       |
| Commitments and  Contingencies (Note I)                             |       |                    |       |                  |       |
|                                                                |       |                    |       |                  |       |
| MINORITY INTEREST                                                   |       | 11,516                  |       | 12,695                |       |
|                                                                |       |                    |       |                  |       |
| STOCKHOLDERS’ EQUITY                                           |       |                    |       |                  |       |
| Common stock                                                        |       | 1,474                   |       | 1,474                 |       |
| Additional paid-in  capital                                         |       | 773,580                 |       | 774,168               |       |
| Retaining earnings                                                  |       | 2,484,368               |       | 2,648,359             |       |
| Other accumulative  comprehensive loss                              |       | (11,989                 | )          | (13,090               | )          |
| Treasury stock                                                      |       | (84,246                 | )          | (84,834               | )          |
| Total  Stockholders’ Equity                                    |       | 3,163,187               |       | 3,326,077             |       |
|                                                                |       |                    |       |                  |       |
| Total  Liabilities, Minority Interest and Stockholders’ Equity |       | $                       | 5,415,604  |                  | $          | 5,687,574 |   |

 

The accompanying notesare an integral part of these condensed consolidated combined financialstatements.

 

4

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Southern Copper Corporation

 

CONDENSED CONSOLIDATED COMBINED STATEMENT OF CASHFLOWS

(Unaudited)

 
| ** **                                                                             | ** ** | **3 Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                             | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
| ** **                                                                             | ** ** | **(in thousands)**                      | ** ** |
|                                                                                   |       |                                         |       |   |   |
| OPERATING ACTIVITIES                                                                   |       |                                         |       |   |   |
|                                                                                   |       |                                         |       |   |   |
| Net earnings                                                                           |       | $                                            | 421,575    |   | $ | 298,361 |   |
| Adjustments to  reconcile net earnings to net cash provided from operating activities: |       |                                         |       |   |   |
| Depreciation,  amortization and depletion                                              |       | 53,103                                       |       | 60,967 |   |
| Capitalized mine  stripping and leachable material                                     |       | —                                       |       | (24,623 | ) |
| Remeasurement  loss                                                                    |       | 572                                          |       | 326 |   |
| Provision for  deferred income taxes                                                   |       | 19,712                                       |       | 5,087 |   |
| Loss on  derivative instruments                                                        |       | —                                       |       | 7,276 |   |
| Loss on debt  prepayments                                                              |       | —                                       |       | 2,153 |   |
| Minority  interest                                                                     |       | 1,723                                        |       | 1,425 |   |
|                                                                                   |       |                                         |       |   |   |
| Cash provided  from (used for) operating assets and liabilities:                       |       |                                         |       |   |   |
| Accounts receivable                                                                    |       | 24,364                                       |       | 59,742 |   |
| Inventories                                                                            |       | (40,303                                      | )          | (1,166 | ) |
| Accounts payable  and accrued liabilities                                              |       | (78,820                                      | )          | (67,600 | ) |
| Other operating  assets and liabilities                                                |       | 35,801                                       |       | 10,542 |   |
| Net cash provided from  operating activities                                           |       | 437,727                                      |       | 352,490 |   |
|                                                                                   |       |                                         |       |   |   |
| INVESTING ACTIVITIES                                                                   |       |                                         |       |   |   |
| Capital  expenditures                                                                  |       | (143,117                                     | )          | (75,261 | ) |
| Purchase of  marketable securities                                                     |       | —                                       |       | (74,339 | ) |
| Sales of  marketable securities                                                        |       | —                                       |       | 45,267 |   |
| Other                                                                                  |       | (1,811                                       | )          | (723 | ) |
| Net cash used for  investing activities                                                |       | (144,928                                     | )          | (105,056 | ) |
|                                                                                   |       |                                         |       |   |   |
| FINANCING ACTIVITIES                                                                   |       |                                         |       |   |   |
| Debt repaid                                                                            |       | —                                       |       | (289,043 | ) |
| Debt incurred                                                                          |       | —                                       |       | 170,000 |   |
| Dividends paid  to common stockholders                                                 |       | (404,877                                     | )          | (100,000 | ) |
| Distributions to  minority interest                                                    |       | (2,985                                       | )          | (780 | ) |
| Other                                                                                  |       | 588                                          |       | — |   |
| Net cash used for financing  activities                                                |       | (407,274                                     | )          | (219,823 | ) |
|                                                                                   |       |                                         |       |   |   |
| Effect of exchange rate  changes on cash and cash equivalents                          |       | 14,099                                       |       | (3,323 | ) |
|                                                                                   |       |                                         |       |   |   |
| (Decrease) increase in  cash and cash equivalents                                      |       | (100,376                                     | )          | 24,288 |   |
| Cash and cash  equivalents, at beginning of period                                     |       | 876,003                                      |       | 710,707 |   |
|                                                                                   |       |                                         |       |   |   |
| Cash and cash  equivalents, at end of period                                           |       | $                                            | 775,627    |   | $ | 734,995 |   |
|                                                                                   |       |                                         |       |   |   |
| Supplemental disclosure  of cash flow information, cash paid during the period for:    |       |                                         |       |   |   |
| Interest                                                                               |       | $                                            | 19,304     |   | $ | 31,530 |   |
| Income taxes                                                                           |       | $                                            | 245,313    |   | $ | 262,406 |   |
|                                                                                        |            |                                              |            |  |  |  |  |  |  |

 

The accompanying notesare an integral part of these condensed consolidated combined financialstatements.

 

5

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Southern Copper Corporation

 

NOTES TO CONDENSED CONSOLIDATED COMBINED FINANCIALSTATEMENTS

(Unaudited)

 

A.           Inthe opinion of Southern Copper Corporation, (the “Company”, “Southern Copper”or “SCC”), the accompanying unaudited  condensedconsolidated combined financial statements contain all adjustments (consistingonly of normal recurring adjustments) necessary to present fairly the Company’sfinancial position as of March 31, 2006 and the results of operations and cashflows for the three months ended March 31 2006 and 2005. The condensed consolidatedcombined financial statements for the three month periods ended March 31, 2006and 2005 have been subjected to a review by PricewaterhouseCoopers, the Company’sindependent registered public accounting firm, whose report dated May 2, 2006,is presented on page 35. The results of operations for the three months ended March31, 2006 and 2005 are not necessarily indicative of the results to be expectedfor the full year. The December 31, 2005 balance sheet data was derived fromaudited financial statements, but does not include all disclosures required byaccounting principles generally accepted in the United States of America. Theaccompanying condensed consolidated combined financial statements should beread in conjunction with the consolidated financial statements at December 31,2005 and notes included in the Company’s 2005 annual report on Form 10-K/AAmendment No. 1.

 

The Company hasreclassified from additional paid-in capital to treasury stock the carryingvalue of its investment in shares held by one of its Mexican subsidiaries inits controlling shareholder, Grupo Mexico. At March 31, 2006 andDecember 31, 2005, the carrying amount was $80 million.

 

B.             Change in AccountingPrinciple – Capitalized Mine Stripping

 

At the March 17,2005 meeting of the Emerging Issues Task Force (EITF), the EITF reached aconsensus that stripping costs incurred during the production phase of a mineare variable production costs that should be included in the costs of theinventory produced (extracted) during the period that the stripping costs areincurred. The EITF noted that the consensus does not address the accounting forstripping costs incurred during the pre-production phase of a mine. Theconsensus with respect to this issue was ratified by the FASB on March 30,2005, and is effective for the first reporting period in fiscal years beginningafter December 15, 2005, with early adoption permitted.

 

On January 1, 2006the Company adopted this consensus by reversing $289.4 million of netcumulative capitalized stripping cost as of December 31, 2005 and recording anet charge of $181.3 million to retained earnings after recognition of workers’participation and tax benefit of $108.1 million.

 

C.             Inventories were asfollows:

 
| **(in millions)**                           | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Metals at lower of  average cost or market: |       |                     |       |                        |       |
| Finished goods                              |       | $                        | 82.2       |                        | $          | 106.9 |   |
| Work-in-process                             |       | 194.3                    |       | 135.4                       |       |
| Supplies at average  cost                   |       | 159.6                    |       | 153.5                       |       |
| Total inventories                           |       | $                        | 436.1      |                        | $          | 395.8 |   |

 

6

----

 

D.            Income Taxes:

 

The Company’s income taxprovision for the three months ended March 31, 2006 and 2005 was $199.9 millionand $146.1 million, respectively. These provisions include income taxes forPeru, Mexico and the United States. The effective tax rates for the 2006 and2005 periods are 32.1% and 32.8%, respectively.

 

E.              Provisionally PricedSales:

 

At March 31, 2006, theCompany has recorded provisionally priced sales of 134.4 million pounds ofcopper, at an average forward price of $2.47 per pound. Also the Company hasrecorded provisionally priced sales of 5.7 million pounds of molybdenum at thequarter-end market price of $22.60 per pound. These sales are subject to finalpricing based on the average monthly LME or COMEX copper prices and DealerOxide molybdenum prices in the future months of settlement.

 

Following are theprovisionally priced copper and molybdenum sales outstanding at March 31, 2006:

 

| **Copper  (million lbs.)** | ** ** | **Priced at** | ** ** | **Month of  Settlement** | ** ** |
|---------------------------------|------------|--------------------|------------|-------------------------------|------------|
| 91.0                            |       | $                  | 2.48038    |                          | April 2006 |   |
| 24.7                            |       | 2.46136            |       | May 2006                      |       |
| 7.7                             |       | 2.44918            |       | June 2006                     |       |
| 11.0                            |       | 2.43806            |       | July 2006                     |       |
| 134.4                           |       | $                  | 2.47165    |                          |       |   |

 

| **Molybdenum  (million lbs.)** | ** ** | **Priced at** | ** ** | **Month of  Settlement** | ** ** |
|-------------------------------------|------------|--------------------|------------|-------------------------------|------------|
| 2.6                                 |       | $                  | 22.60      |                          | April 2006 |   |
| 2.2                                 |       | 22.60              |       | May 2006                      |       |
| 0.9                                 |       | 22.60              |       | June 2006                     |       |
| 5.7                                 |       | $                  | 22.60      |                          |       |   |

 

Management believes that the final pricing of these sales will not havea material effect on the Company’s financial position or results of operations.

 

F.              DerivativeInstruments:

 

The Company occasionallyuses derivative instruments to manage its exposure to market risk from changesin commodity prices and interest rate risk exposure. The Company does not enterinto derivative contracts unless it anticipates a future activity that islikely to occur that will result in exposing the Company to market risk.

 

Copper swaps:

 

In the first quarter of 2005, the Company entered into copper swapcontracts to protect a portion of its 2005 copper production for future salesat a fixed copper

 

7

----

 

price. The Company recorded a loss of $1.0 million related to thesecopper swap contracts in the first quarter of 2005. In addition, the Companyrecorded a loss of $6.3 million related to the loss in fair value of copperswaps held at March 31, 2005. These losses were recorded as non-operating itemson the condensed consolidated combined statement of earnings. At March 31, 2006and during the first quarter of 2006, the Company did not hold any copper swappositions.

 

During April 2006,the Company entered into copper swap contracts to protect 501.2 million poundsof copper production for the second and third quarter of 2006 at prices rangingfrom $2.55 per pound through $3.37 per pound. These contracts are as follows:

 
| **Pounds  (in millions)** | ** ** | **Period**     | ** ** | **Copper Swap  Price (1)** | ** ** |
|--------------------------------|------------|----------------|------------|--------------------------------------|------------|
| 110.2                          |       | April 2006     |       | $                                    | 2.75       | (2) |
| 163.2                          |       | May 2006       |       | $                                    | 2.76       | (2) |
| 125.1                          |       | June 2006      |       | $                                    | 2.88       | (2) |
| 59.2                           |       | July 2006      |       | $                                    | 3.04       | (2) |
| 31.4                           |       | August 2006    |       | $                                    | 3.21       | (2) |
| 12.1                           |       | September 2006 |       | $                                    | 3.24       | (2) |

 

----

(1)                                  SCCwill receive (pay) if the actual average COMEX copper price for period is under(over) swap price on quantity hedged.

 

(2)                                  Thecopper swap price is the per pound weighted average for the month. Prices forApril 2006 range from $2.58 to $3.07, prices for May 2006 range from $2.55 to $2.98,prices for June 2006 range from $2.63 to $3.37, prices for July 2006 range from$2.95 to $3.30, prices for August 2006 range from $3.03 to $3.28 and prices forSeptember 2006 range from $3.22 to $3.25.

 

G.             Asset RetirementObligation

 

In 2005 theCompany added an asset retirement obligation for its mining properties in Peru,as required by the Mine Closure Law, enacted in 2003 and adopted in 2005. Thislaw requires the Company to present a mine closure plan to the PeruvianMinistry of Energy and Mines (“MEM”) by August 2006. In April 2006, the Companyhas selected Walsh Peru S.A., a Peruvian subsidiary of Walsh EnvironmentalScientists and Engineers, Inc. (Boulder, Colorado), and the Mines Group Inc.(Reno, Nevada), both independent consultants, to work in the development of themine closure plan and we expect to have the final plan at the end of July 2006.The final plan will be subject to review and approval by MEM and open to publicdiscussion and comment in the area of the Company’s operations. In applicationof SFAS No. 143 and according to the criteria established by FIN-47, theCompany has made an estimate of this potential liability and recorded suchliability, based on its review of the law. However, the Company cannot assurethat the amount of this liability recorded will be adequate until our mine planis presented, reviewed and accepted by MEM.

 

Theclosure cost recognized for this liability includes the estimated cost requiredat the Peruvian operations, based on the Company’s experience and includes costsat the Ilo smelter, tailing disposal, dismantling of the Toquepala and Cuajoneconcentrators, repair shops and auxiliary services. In this regard, the Companyrecorded an additional asset retirement liability in 2005 of $5.2 million forthis new law and increased net property by $4.6 million.

 

Thefollowing table summarizes the asset retirement obligation activity for the firstquarter 2006 and 2005 (in millions):

 

| ** **                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Balance as of January  1,        |       | $        | 11.2       |     | $          | 5.6 |   |
| Additions, changes in  estimates |       | —   |       | —   |       |
| Accretion expense                |       | 0.3      |       | 0.1      |       |
| Balance as of March 31,          |       | $        | 11.5       |     | $          | 5.7 |   |

 

8

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H.            Related PartyTransactions:

 

Receivableand payable balances with affiliated companies and related parties are shownbelow (in millions):

 

| ** **                                   | ** ** | **As of**      | ** ** |
|----------------------------------------------|------------|---------------------|------------|
| ** **                                   | ** ** | **March  31, 2006** | ** ** | **December  31 2005** | ** ** |
| Affiliate receivable:                        |       |                |       |   |   |
| Grupo Mexico Servicios S.A. de C.V.          |       | $                   | —     |   | $ | 2.6 |   |
| Grupo Mexico S.A. de C.V.                    |       | —              |       | 0.4 |   |
| Mexico Constructora Industrial, S.A. de C.V. |       | 4.4                 |       | 5.0 |   |
| Intermodal Mexico, S.A. de C.V.              |       | 0.5                 |       | 0.4 |   |
| Ferrocarril Mexicano, S.A. de C.V.           |       | —              |       | 0.4 |   |
| Other                                        |       | 0.3                 |       | 0.3 |   |
|                                         |       | $                   | 5.2        |   | $ | 9.1 |   |
| Affiliate payable:                           |       |                |       |   |   |
| Grupo Mexico S.A. de C.V.                    |       | $                   | 3.1        |   | $ | 2.5 |   |
| Ferrocarril Mexicano, S.A. de C.V.           |       | 3.7                 |       | 3.0 |   |
| Higher Technology                            |       | 0.4                 |       | — |   |
| Other                                        |       | 0.2                 |       | 0.9 |   |
|                                         |       | $                   | 7.4        |   | $ | 6.4 |   |

 

TheCompany has entered into certain transactions in the ordinary course ofbusiness with parties that are controlling shareholders or their affiliates.These transactions include the lease of office space, air transportation andconstruction services and products and services relating to mining andrefining. The Company lends and borrows funds among affiliates for acquisitionsand other corporate purposes. These financial transactions bear interest.

 

Theformer holders of the Company’s Class A common stock until June 2005 andtheir affiliates purchased copper and other products from the Company from timeto time at prices determined by reference to the LME and COMEX market price forcopper and published prices for other products, if available.

 

The Company purchased metal products from Asarco for $1.1million in the first quarter of 2005. There were no purchases of metal productsfrom Asarco in the first quarter of 2006. In addition the Company paid $0.9million to Asarco in the first quarter of 2005 for tolling services.

 

SociedadMinera Cerro Verde, S.A., an affiliate of Phelps Dodge Overseas Corporation andClimax Molybdenum B.V., stockholders of the Company until June 2005, purchased$0.7 million of acid products from the Company in the first quarter of 2005.

 

CerroWire and Cable LLC (“Cerro”), an affiliated company of one of the Company’sstockholders until June 2005, purchased $10.2 million of copper products fromthe Company in the first quarter of 2005.

 

OnJanuary 15, 2004, the Company entered into a tolling agreement with Asarco. Underthe terms of this agreement, in the first quarter of 2004 the Company, throughits wholly owned US subsidiary, Southern Peru Limited (“SPL”), commenceddelivering to Asarco, at its Amarillo, Texas refinery, copper cathodes forconversion into copper rods, which the Company sells to customers in the UnitedStates. The Company delivered 16,000 tons of copper during the first quarter of2005 to the Asarco refinery. In July 2005 Asarco declared Force Majeure, notifying SPL that becauseof a strike at their facilities, they would be unable to accept shipments fromthe Company. Accordingly, deliveries to the refinery were suspended and theCompany has redirected the copper otherwise intended for delivery to therefinery to other customers. This contract with Asarco terminated at the end of2005 and has not been renewed.

 

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Grupo Mexico, theCompany’s ultimate parent and the majority indirect stockholder of the Company,and its affiliates provide various services to the Company. In 2005, theseactivities were principally related to accounting, legal, tax, financial,treasury, human resources, price risk assessment and hedging, purchasing,procurement and logistics, sales and administrative and other support services.Grupo Mexico is reimbursed for these support services. The total amount paid bythe Company to Grupo Mexico for such services in the first quarter of 2006 and2005 was $3.4 million. The Company expects to continue to pay for theseservices going forward in an amount of $13.8 million per year.

 

The Company paid$0.5 million in the first quarter of 2005 in interest expense related toborrowings from Grupo Mexico.

 

TheCompany’s Mexican operations paid fees of $4.9 million and $ 3.3 million in thefirst quarter of 2006 and 2005, respectively, primarily for freight servicesprovided by Ferrocarril Mexicano, S.A. de C.V., an indirect subsidiary of GrupoMexico.

 

Inaddition, the Company’s Mexican operations paid fees of $7.8 million and $2.4million in the first quarter of 2006 and 2005, respectively, for constructionservices provided by Mexico Constructora Industrial S.A. de C.V., an indirectsubsidiary of Grupo Mexico.

 

TheLarrea family controls a majority of the capital stock of Grupo Mexico, and hasextensive interests in other businesses, including oil drilling services,construction and real estate. The Company engages in certain transactions inthe ordinary course of business with other entities controlled by the Larrea familyrelating to mining and refining services, the lease of office space, and airtransportation and construction services. In connection with this, the Companypaid fees of $0.6 millions and $0.5 million in the first quarter of 2006 and 2005,respectively for maintenance services provided by Mexico Compañia de ProductosAutomotrices S.A. de C.V.

 

It isanticipated that in the future the Company will enter into similar transactionswith such parties.

 

I.                 Commitments andContingencies:

 

Peruvian Operations

 

*Royaltycharge:*

 

In June 2004, thePeruvian Congress enacted legislation imposing a royalty charge to be paid bymining companies in favor of the regional governments and communities wheremining resources are located. Under the new law, the Company is subject to a 1%to 3% royalty, based on sales, applicable to the value of the concentratesproduced in our Toquepala and Cuajone mines. The Company made provisions of $8.3million and $6.9 million in the first quarter of 2006 and 2005 respectively,for this royalty. These provisions are included in “Cost of sales (exclusive ofdepreciation, amortization and depletion)” on the condensed consolidatedcombined statement of earnings.

 

In April 2005, a ConstitutionalTribunal ruled the law constitutional and additionally stated that the royaltycharge applies to all concessions held in the mining industry, implying thatthose entities with tax stability contracts are subject to this charge. In1996, the Company entered into a tax stability contract with the Peruviangovernment (a “Guaranty and Promotional Measures for Investment Contract”)relating to our Solvent Extraction and Electrowinning (“SX/EW”) production,which agreement purports to, among other things, fix tax rates and any other chargesrelating to such production. The Company believes that the ConstitutionalTribunal’s interpretation relating to entities with tax stability contracts isincorrect and intends to protest the imposition of the royalty charge on SX/EWproduction, when and if assessed. Provisions made by the Company for theroyalty charge do not include approximately $7.4 million of additionalpotential liability relating to its SX/EW production from June 30, 2004 throughMarch 31, 2006.

 

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*Powerpurchase agreement–*

 

In 1997, SCC soldits Ilo power plant to an independent power company, Enersur S.A. (“Enersur”),for $33.6 million. In connection with the sale, a power purchase agreement wasalso completed under which SCC agreed to purchase all of its power needs forits Peruvian operations from Enersur for twenty years, commencing in 1997.

 

The Company agreedto amend its power purchase agreement in June 2003, resolving certain issuesthat arose between the parties and reducing power costs for the remaining lifeof the agreement. The Company made a one-time contractual payment of $4.0million to Enersur under the terms of the new agreement. The new agreementreleases Enersur from the obligation to construct additional capacity uponnotice to meet the Company’s increased electricity requirements from theplanned expansion and modernization. SCC believes it can satisfy the need forincreased electricity requirements from other sources, including local powerproviders.

 

*Environmentalmatters–*

 

The Company’soperations are subject to applicable Peruvian environmental laws andregulations. The Peruvian government, through its *Ministerio de Energía y Minas* (the Ministry of Energy andMines, or MEM) conducts certain annual audits of the Company’s Peruvian miningand metallurgical operations. Through these environmental audits, mattersrelated to environmental commitments, compliance with legal requirements,atmospheric emissions and effluent monitoring are reviewed. The Companybelieves that it is in material compliance with applicable Peruvianenvironmental laws and regulations.

 

In accordance withPeruvian regulations, in 1996 SCC submitted its *Programa de Adecuación y Manejo Ambiental* (the EnvironmentalCompliance and Management Program, known by its Spanish acronym, PAMA) to theMEM. A third-party environmental audit was conducted in order to elaborate thePAMA. The PAMA applied to all current operations that did not have an approvedenvironmental impact study at the time. SCC’s PAMA was approved in January 1997and contains 34 mitigation measures and projects necessary to (1) bring theexisting operations into compliance with the environmental standardsestablished by the MEM and (2) identify areas impacted by operations that areno longer active and need to be reclaimed or remedied. By the end of 2005, 31of these projects were completed, including all PAMA commitments related to theCompany’s operations in Cuajone and Toquepala. The three pending PAMA projectsall relate to the Ilo smelter operations. The primary areas of environmentalconcern are the smelter reverberatory slag eroded from slag deposits up until1994, and atmospheric emissions from the Ilo smelter.

 

The slagremediation program is progressing as scheduled and is expected to be completedby 2007. With respect to the smelter emissions, the third phase of the Ilosmelter modernization has started and is scheduled to be completed by 2007. InJuly 2003, the Company awarded the contract to provide the technology and basicengineering for the modernization of the Ilo smelter to Fluor Chile S.A. andXstrata plc (formerly M.I.M. Holdings Limited). The Company believes that theselected proposal complies with the current environmental regulations. Thisproject is the Company’s largest short-term capital investment project and isestimated at $500 million, including $451.8 million expended through March 2006.Beginning in 1995 and continuing while this project is under construction, theCompany established an emissions curtailment program that has allowed SCC tocomply with the annual sulfur dioxide air quality standard (established by theMEM in 1996) in the populated areas of the city of Ilo.

 

On October 14,2003, the Peruvian Congress published a new law announcing future closure andremediation obligations for the mining industry. The law was amended on May 28,2004 and again on May 8, 2005. The current modification establishes that miningcompanies submit their mine closure plans within one year of publication offinal regulations. On August 16, 2005 final regulations were published and theCompany has initiated the preparation of the required mine closure plan. Aspart of the law and the qualifying regulations the Company is also required toengage an independent consulting entity to prepare the mine closure plan. InApril 2006, the Company selected Walsh Peru S.A., a Peruvian subsidiary ofWalsh Environmental

 

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Scientists andEngineers, Inc. (Boulder, Colorado), and the Mines Group Inc. (Reno, Nevada),both independent consultants, to work in the development of the Mine ClosurePlan and we expect to have the final plan at the end of July 2006. The finalplan, which is required by August 2006, is subject to approval by MEM and opento public discussion and comment in the area of Company operations. Additionally,the law requires companies to provide financial guarantees to insure thatremediation programs are completed. The Company believes the liability forthese asset retirement obligations cannot currently be precisely measured, orestimated, until the Company has substantially completed its mine closure planand is reasonably confident that it will be approved by MEM in most materialrespects. However the Company has made a preliminary estimate of this liabilityand has recorded such amount in its financial statements. As of March 31, 2006the Company has recorded $5.3 million for this liability. The Company believesthat this estimate should be viewed with caution, pending final approval of itsmine closure plan, expected later in 2006.

 

For the Company’sPeruvian operations, environmental capital expenditures were $63.3 million and$30.6 million in the first quarter of 2006 and 2005, respectively. Approximately$87.5 million has been budgeted for environmental capital expenditures in 2006,which is for the Ilo smelter modernization project.

 

*Mexicanoperations–*

 

*Environmentalmatters–*

 

Some of theCompany’s operations are subject to applicable Mexican federal, state andmunicipal environmental laws, to Mexican official standards, and to regulationsfor the protection of the environment, including regulations relating to watersupply, water pollution, air pollution, noise pollution and hazardous and solidwastes. Some of these laws and regulations are relevant to legal proceedingspertaining to the Company’s San Luis Potosí facilities.

 

The principallegislation applicable to the Company’s Mexican operations is the federal *Ley General del Equilibrio Ecológico y la Protecciónal Ambiente* (the General Law of Ecological Balance and EnvironmentalProtection, or the Environmental Law), which is enforced by the *Procuraduría Federal de Protección al Ambiente*(Federal Bureau of Environmental Protection, or the PROFEPA). The PROFEPAmonitors compliance with environmental legislation and enforces Mexicanenvironmental laws, regulations and official standards and, if warranted, thePROFEPA may initiate administrative proceedings against companies that violateenvironmental laws, which in the most egregious cases may result in thetemporary or permanent closing of non-complying facilities, the revocation ofoperating licenses and/or other sanctions or fines. Also, according to the *Código Penal Federal* (Federal CriminalCode), the PROFEPA must inform corresponding authorities regardingenvironmental crimes.

 

Mexicanenvironmental regulations have become increasingly stringent over the lastdecade, and this trend is likely to continue and has been influenced by theenvironmental agreement entered into by Mexico, the United States and Canada inconnection with NAFTA in February 1999. However, the Company’s management doesnot believe that continued compliance with the Environmental Law or Mexicanstate environmental laws will have a material adverse effect on the Company’sbusiness, properties, result of operations, financial condition or prospects orwill result in material capital expenditures. Although the Company believesthat all of its facilities are in material compliance with applicableenvironmental, mining and other laws and regulations, the Company cannot assureyou that stricter enforcement of existing laws and regulations or the adoptionof additional laws and regulations would not have a material adverse effect onthe Company’s business, properties, results of operations, financial conditionor prospects.

 

Due to theproximity of certain facilities of Minera Mexico to urban centers, theauthorities may implement certain measures that may impact or restrain theoperation of such facilities. Any enforcement action to shut down any suchfacilities may have an adverse effect on the operating results of the relevantsubsidiary.

 

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The Company hasinstituted extensive environmental conservation programs at its miningfacilities in Peru and Mexico. The Company’s environmental programs includewater recovery systems to conserve water and minimize contamination of nearbystreams, reforestation programs to stabilize the surfaces of the tailings damsand the implementation of scrubbing technology in the mines to reduce dustemissions.

 

For the Company’sMexican operations, environmental capital expenditures were $0.8 million and $0.4million in the first quarter of 2006 and 2005, respectively. Approximately $25.7million has been budgeted for environmental capital expenditures in 2006.

 

*Litigationmatters–*

 

Peruvian Operations

 

Garcia-Ataucuri andOthers vs. SCC:  In April 1996, the Company was served with acomplaint filed in Peru by approximately 800 former employees seeking thedelivery of 38,763,806.80 “labor shares” to be issued in a proportional way toeach in accordance with their time of work with SCC, plus dividends. TheCompany conducts its operations in Peru through a registered Branch. Althoughthe Branch 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 investment shares. Thelabor shares litigation is based on claims of former employees for ownership oflabor shares issued during the 1970s until 1989 under a former Peruvianmandated profit sharing system. The Company asserts that the claims aremeritless and that the labor shares were distributed to the former employees inaccordance with the then in effect Peruvian profit sharing system. We do notbelieve that an unfavorable outcome is reasonably possible. In 1971, thePeruvian Government enacted legislation providing that workers in the miningindustry would participate in the pre-tax profits of the enterprises for whichthey worked at a rate of 10%. This participation was distributed to the workerswith 40% in cash and 60% as an equity interest in the enterprise. What remainsof the equity participation is now included in the condensed consolidatedbalance sheet caption “Minority interest.” Under the law, the equity participation was originally delivered to the “MiningCommunity”, an organization representing all workers. The cash portion wasdistributed to the workers after the close of the year. The accrual for thisparticipation was (and continues to be) a current liability of the Company,until paid. In 1978, the law was amended and the equity distribution wascalculated at 5.5% of pre-tax profits and was made to individual workers of theenterprise in the form of labor shares. These labor shares represented anequity interest in the enterprise. In addition, equity participationspreviously distributed to the “Mining Community” were returned to the Companyand redistributed in the form of labor shares to individual employees or formeremployees. The cash participation was adjusted to 4.5% of pre-tax earnings andcontinued to be distributed to employees following the close of the year.Effective in 1992, the law was amended to its present status. The workers’participation in pre-tax profits was set at 8%, with 100% payable in cash. Theequity participation component was eliminated from the law. In 1995, theCompany offered to exchange new common shares of the Company for the laborshares issued under the prior Peruvian law. Approximately 80.8% of the issuedlabor shares were exchanged for the Company’s common shares, greatly reducingthe Minority interest on the Company’s balance sheet. Since 1995, the Companyhas periodically purchased labor shares on the open market. In 1998, laborshares were renamed “investment shares.” At March 31, 2006, the investment share interest in the Company’sPeruvian Branch amounted to 0.71%.

 

As stated above, inApril 1996, the Company was served with a complaint filed in Peru byapproximately 800 former employees seeking the delivery of a substantial numberof “labor shares” (now referred to as “investment shares”) of its PeruvianBranch plus dividends on such shares. This amount corresponds to the totalnumber of labor shares for all of the Company’s Peruvian workers, and thecomplaint is seeking to have such shares issued to the plaintiffs proportionallyto each in accordance with their time of work with the Company, plus dividendson such shares. In December 1999, a civil court of first instance of Limadecided against the

 

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Company, ordering thedelivery of the investment shares and dividends to the plaintiffs. The Companyappealed this decision in January 2000. On October 10, 2000, the Superior Courtof Lima affirmed the lower court’s decision, which had been adverse to theCompany. On appeal by the Company, the Peruvian Supreme Court annulled theproceeding noting that the civil courts lacked jurisdiction and that the matterhad to be decided by a labor court. Thelower court dismissed the lawsuit in January 2005. The plaintiffs have appealedto the superior court.

 

The Company has not made a provision for this lawsuit because it believesthat it has meritorious defenses to the claims asserted in the complaint.

 

*Classactions*

 

Three purportedclass action derivative lawsuits have been filed in the Delaware Court ofChancery (New Castle County) late in December 2004 and early January 2005relating to the acquisition of Minera Mexico by SCC. On January 31, 2005, thethree actions Lemon Bay, LLP v. Americas Mining Corporation, et al., CivilAction No. 961-N, Therault Trust v. Luis Palomino Bonilla, et al., andSouthern Copper Corporation, et al., Civil Action No. 969-N, and James Sousa v.Southern Copper Corporation, et al., Civil Action No. 978-N were consolidatedinto one action titled,  In re SouthernCopper Corporation Shareholder Derivative Litigation, Consol. C. A. No. 961-Nand the complaint filed in Lemon Bay was designated as the operative complaintin the consolidated lawsuit. The consolidated action purports to be brought onbehalf of the Company’s common stockholders.

 

The consolidatedcomplaint alleges, among other things, that the acquisition of Minera Mexico isthe result of breaches of fiduciary duties by the Company’s directors and isnot entirely fair to the Company and its minority stockholders. Theconsolidated complaint seeks, among other things, a preliminary and permanentinjunction to enjoin the acquisition, the award of damages to the class, theaward of damages to the Company and such other relief that the court deemsequitable, including interest, attorneys’ and experts’ fees and costs. TheCompany believes that this lawsuit is without merit and is vigorously defendingitself against this action.

 

The Company’smanagement believes that the outcome of the aforementioned legal proceedingwill not have a material adverse effect on the Company’s financial position orresults of operations.

 

Mexican Operations

 

The MexicanGeological Services (MGS) Royalties:

 

When Mexcobreoriginally received mining concessions related to its La Caridad unit in 1970,it was required to pay royalties to the Mexican Geological Services - “MGS”(formerly named the Council of Mineral Resources – COREMI). When the Mining Lawcame into effect in 1992, it was believed that this obligation was terminated. However,MGS, the Mexican Superintendent of Mining and the Mexican Secretary of Economy,did not concede that the royalty obligation to MGS was terminated and, in 1995,MGS initiated a series of legal actions. In August 2002, MGS filed with theThird Federal District Judge in Civil Matters, an action demanding fromMexcobre the payment of royalties since 1997. Mexcobre answered and denied MGS’sclaims in October 2002. In December 2005, Mexcobre signed an agreement with MGS.Under the terms of this agreement the parties established a new procedure tocalculate the royalty payments applicable for 2005 and the following years, andthe Company paid in January 2006, $6.9 million of royalties for 2005 and $8.5million as payment on account for royalties from the third quarter 1997 throughthe last quarter of 2004. We estimate that the payment made on January 11 willcover 100% of the royalty payments required for past periods. On an ongoingbasis the Company will be required to pay a 1% royalty on La Caridad’s copperproduction value after deduction of treatment and refining charges and certainother carrying costs.

 

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San Luis PotosíFacilities:

 

The municipality of SanLuis Potosí has granted Desarrolladora Intersaba, S.A. de C.V., licenses of useof land and construction for housing and/or commercial zones in the formerEjido Capulines, where the residential project “Villa Magna” is expected to bedeveloped in the near future.

 

The “Villa Magna”residential project will be developed within an area that IMMSA’s approved RiskAnalysis by SEMARNAT (the federal environmental authority) has secure as asafeguard and buffer zone due to the use by IMMSA of Anhydrous Ammonia Gas.

 

Based on the foregoing,IMMSA has initiated two different actions regarding this matter:

 

(1)   first, against theMunicipality of San Luis Potosí, requesting the annulment of the authorizationand licenses granted to Desarrolladora Intersaba, S.A. de C.V. to develop “VillaMagna” within the zinc plant’s safeguard and buffer zone; and

 

(2)   second, filedbefore SEMARNAT a request for a declaration of a safeguard and buffer zonesurrounding IMMSA’s zinc plant.

 

These actions areawaiting final resolutions. IMMSA believes that, should the outcome of theabove mentioned legal proceedings be adverse to IMMSA’s interests, theconstruction of the “Villa Magna” housing and commercial development would not,in itself, affect the operations of IMMSA’s zinc plant.

 

In addition to theforegoing, IMMSA has initiated a series of legal and administrative proceduresagainst the Municipality of San Luis Potosí due to its refusal to issue IMMSA’suse of land permit in respect of its zinc plant. The Municipality has refusedto grant such license based on the argument that IMMSA has failed to submit, aspart of the application process, *a “manifestaciónde impacto ambiental”* (environmental impact assessment). IMMSAbelieves that the environmental impact assessment is not required because IMMSAwill not undertake construction activities. The trial judge has ordered theMunicipality to continue the analysis of IMMSA’s request to issue the “*licencia de uso de suelo”* (use of landpermit). The municipality has refused to issue the land use permit. IMMSA hasfiled a request for relief against such resolution to compel the court to issuethe land use permit.

 

Tax contingency matters–

 

U.S. InternalRevenue Service (IRS)

 

The Company isregularly audited by the federal, state and foreign tax authorities both in theUnited States and internationally. These audits can result in proposedassessments. In 2002, IRS issued a preliminary Notice of Proposed Adjustmentfor the years 1994 through 1996. In 2003, the Company settled these differenceswith the IRS and made a payment of $4.4 million, including interest. Generally,the years 1994 through 1996 are now closed to further adjustment.

 

The IRS completedthe field audit work for all years preceding 2003 and currently is auditing2003 and 2004. During the audit of the tax years 1997 through 1999, the IRSquestioned the Company’s accounting policy for determination of useful lives,the calculation of deductible and creditable Peruvian taxes, the methodology ofcapitalizing interest and the capitalizing of certain costs (drilling, blastingand hauling) into inventory value as items for possible adjustment. In thefourth quarter of 2003, the Company and the IRS had jointly requested technicaladvice from the IRS National Office to help resolve the inventory value dispute.In August 2005 the National Office of the IRS responded to the IRS field auditgroup’s request for technical advice. The issuance of this technical advicememorandum (TAM) allowed the IRS to close the field audit work of the auditcycles 1997 through 1999 and 2000 through 2002. The TAM accepts the position ofthe IRS field office and concludes that

 

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the Company isrequired to capitalize mining costs to its leach dumps based on the weight ofmaterial moved, without regard to metal content or recoverability.

 

On October 5, 2005the Company filed a formal protest with the IRS to appeal the proposed changeswith respect to the TAM conclusion, as well as other items of adjustmentproposed by the IRS field audit group. These other adjustments include themethodology of capitalizing interest, the determination of useful lives fordepreciable property, the calculation of deductible and creditable Peruviantaxes and the established service fee between the Company and related parties. TheCompany believes that the positions that it is reporting to the IRS are correctand appropriate. The Company believes that it has substantial defenses to theproposed IRS adjustments and that adequate provisions have been made so thatresolution of any issues raised by the IRS will not have a material adverseeffect on its financial condition or results of operations. The Company isawaiting notification from the IRS Appeals Office for the first scheduledappeals conference related to its protest. Significant management judgment isrequired in determining the provision for tax contingencies. The estimate ofthe probable cost for resolution of the tax contingencies has been developed inconsultation with legal and tax counsel. The Company does not believe thatthere is a reasonable likelihood that there is an exposure to loss in excess ofthe amounts accrued.

 

PeruvianOperations:

 

In Peru the Superintendencia Nacional deAdministración Tributaria (SUNAT), the Peruvian Tax Administration, regularlyaudits the Company. These audits can result in proposed assessments.

 

1)              In2002 the Company received assessments and penalties from SUNAT for fiscalyears 1996 through 1999, in which several deductions taken were disallowed.SUNAT has challenged the Company’s depreciation method and deduction of otherexpenses related to charges incurred outside of Peru from 1996 through 1999,and the deduction of certain exchange differences and interest expenses from1997 through 1999. The Company appealed these various assessments andresolution is still pending.

 

In February 2003, the Peruvian tax court confirmedSUNAT’s assessments and penalties with regard to depreciation and deductions ofother expenses incurred outside of Peru for fiscal years 1996 and 1997. Consequently,the Company recognized an additional tax and workers participation liabilityfor fiscal years 1998 and 1999 on the amounts assessed by SUNAT. Therefore, in2003 the Company recorded a charge to workers’ participation, included in costof sales (exclusive of depreciation, amortization and depletion) on thestatement of earnings and income tax expense of $0.5 million and $4.4 million,respectively. The Company, however, has not recognized a liability forpenalties and interest assessed by SUNAT in connection with the depreciationand other expenses deduction as it considers they are not applicable. The statusof the penalty appeals and other tax contingencies is as follows:

 

a)              Year 1996:     Withregard to the appeal of the penalty related to fiscal year 1996, the Companywas required to issue a letter of credit to SUNAT of $3.4 million, which wasissued in July 2003. This deposit is recorded in other assets on the condensed consolidatedbalance sheet. The Peruvian tax court denied the Company’s appeal in February2004. Consequently, in April 2004, the Company filed a lawsuit against thePeruvian tax court and SUNAT in the superior court of Peru. The Company was notrequired to issue a deposit for appeal of assessments and rulings with respectto any other years. In September, 2005 the Superior Court declared the Company’sclaim valid. SUNAT has appealed this decision to the Supreme Court in Lima.

 

b)             Year 1997:     With regard to the penalty issuedby SUNAT related to fiscal year 1997, in November 2002 the Peruvian tax courtindicated that the penalty needed to be modified and declared the previouslyissued penalty null. Consequently, SUNAT issued a new penalty in December 2003.This penalty and penalties related to fiscal

 

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years 1998 and 1999 have been protested before SUNAT. TheCompany’s appeal before the Peruvian tax court related to the assessments(pertaining to the deduction of certain interest expense) for fiscal year 1997was denied. In this regard, in May 2003, the Company filed a lawsuit before thesuperior court against SUNAT and the Peruvian tax court, seeking the reversalof the ruling of the tax court. In July, 2005 the Superior Court remanded thecase to SUNAT for a new pronouncement. SUNAT has appealed the courts decisionto the Supreme Court in Lima.

 

c)              SUNAThas not ruled on the interest deductions for 1998 or 1999.

 

d)             TheCompany has not recorded any expense associated with the assessment challengingdeductions of interest expense for the years 1997, 1998, or 1999, nor has theCompany recorded any expense associated with the assessments for the years 2000and 2001.

 

e)              Years1998 and 1999:  The Company’s appeal isstill pending resolution by SUNAT.

 

In December 2004and January 2005, the Company received assessments and penalties from SUNAT forthe fiscal years 2000 and 2001, in which certain deductions taken by theCompany were disallowed. SUNAT has objected to the Company’s method ofdeducting vacation pay accruals in 2000, a deduction in 2000 for a fixed assetwrite-off, as well as certain other deductions in both years. The Company hasappealed these assessments and resolution is still pending. The Companyreceived penalties and assessments from SUNAT relating to the treatment offoreign exchange differences for 2000 and 2001. The Company has appealed theseassessments and resolution is still pending.

 

Mexican Operations

 

Labor matters—

 

During the first quarterof 2006, there were a number of work stoppages at some of the Company’s Mexicanoperations, most of these work stoppages were of a short-term nature withnormal operations restored after a few days, with little or no production loss.However, work stoppages at the La Caridad copper mine in Sonora and at the SanMartin polymetalic mining complex in Zacatecas commenced in the first quarterof 2006 and are continuing into the second quarter of 2006. The Companybelieves that the work stoppage at La Caridad is an attempt to pressure theMexican government to recognize a discredited union leader. While the stoppageswere declared illegal, the Company has been forced to declare force majeure on some of its commercialcontracts. At present the Company is working with the Mexican authorities toresolve these illegal work stoppages.

 

Additionally, inrecent years the Company has experienced a number of work stoppages or otherlabor disruptions that have had an adverse impact on its operations andoperating results. For example, in Peru on August 31, 2004, unionized workersat the mining units in Toquepala and Cuajone initiated work stoppages and soughtadditional wage increases based on high metal prices. In Mexico, on July 12,2004, the workers of Mexicana de Cobre site went on strike asking for thereview of certain contractual clauses. Such a review was performed and theworkers returned to work 18 days later. On October 15, 2004, the workers ofMexicana de Cananea went on strike, followed by the Mexicana de Cobre workers. Thestrike lasted for six days at Mexicana de Cobre and nine days at Mexicana deCananea. In each case, the operations at the particular mine ceased until thestrike was resolved. The Company cannot give assurances that they will notexperience strikes or other labor-related work stoppages in the future thatcould have a material adverse effect on its financial condition and results ofoperations.

 

Mine accident-

 

On February 19, 2006 an explosion occurred at the IMMSA unit’s Pasta deConchos coal mine, located in San Juan de Sabinas, Coahuila, Mexico. Immediately,IMMSA along with neighboring industry initiated a rescue effort. Federal andlocal governmental help

 

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and support was received. As a result of the accident 8 miners wereinjured and 65 perished.

 

The Coahuila public district attorney (Procurador de Justica) initiatedan investigation to establish (1) the causes of the accident and, (2) theresponsible party. The investigation is underway; however, it will be necessaryfor the investigation team to have access to the site where the explosionoccurred, which at present is blocked. Recovery efforts are also continuing, however,progress is very slow as access is blocked by debris and rocks. It may take afurther 3 to 6 months to complete this effort. The underground coal mining operationsat Pasta de Conchos have been suspended and it is uncertain when suchoperations will resume.

 

Other legal matters–

 

The Company isinvolved in various other legal proceedings incidental to its operations, butthe Company does not believe that decisions adverse to it in any suchproceedings individually or in the aggregate would have a material adverseeffect on its financial position or results of operations.

 

Our direct andindirect parent corporations, including AMC and Grupo Mexico, have from time totime been named parties in various litigations involving Asarco. In March 2003,AMC purchased its interest in SCC from Asarco. In August 2002 the U.S.Department of Justice brought a claim alleging fraudulent conveyance inconnection with AMC’s then-proposed purchase of SCC from Asarco. That actionwas settled pursuant to a Consent Decree dated February 2, 2003. Theconsent decree is binding solely on the U.S. government. In October 2004, AMC,Grupo Mexico, Mexicana de Cobre and other parties, not including SCC, werenamed in a lawsuit filed in New York State court in connection with allegedasbestos liabilities, which lawsuit claims, among other matters, that AMC’spurchase of SCC from Asarco should be voided as a fraudulent conveyance. WhileGrupo Mexico and its affiliates believe that these claims are without merit, wecannot assure you that these or future claims, if successful, will not have anadverse effect on our parent corporations or us. Any increase in the financialobligations of our parent corporations, as a result of matters related toAsarco or otherwise could, among other matters; result in our parentcorporations attempting to obtain increased dividends or other funding from us.In 2005, certain subsidiaries of Asarco filed bankruptcy petitions inconnection with alleged asbestos liabilities. In July 2005, the unionizedworkers of Asarco commenced a work stoppage, which was settled in November 2005.As a result of various factors, including the above-mentioned work stoppage, onAugust 9, 2005 Asarco filed a voluntary petition for relief under Chapter 11 ofthe U.S. Bankruptcy Code before the U.S. Bankruptcy Court in Corpus Christi,Texas. Asarco’s bankruptcy case is being joined with the bankruptcy cases ofits subsidiaries. Asarco is operating and managing its businesses as a debtorin possession. Asarco LLC’s bankruptcy could result in additional claims beingfiled against Grupo Mexico and its subsidiaries, including SCC, Minera Mexicoor its subsidiaries.

 

Asarco believesthat by utilizing the Chapter 11 process it can achieve an orderlyrestructuring of its business and finally resolve, among other contingencies,its environmental and asbestos claims. However, it is impossible to predict howthe bankruptcy court will ultimately rule with respect to such petitions andthe impact such rulings will have on Asarco and its subsidiaries.

 

J.                Segment andRelated Information:

 

The Company operates ina single industry, namely mining copper. Prior to the April 1, 2005 acquisitionof Minera Mexico, the Company determined that its operations in Peru fellwithin one segment. With the acquisition of Minera Mexico the Company continuesto operate principally in one industry, the mining of copper. However, becauseof the demands of managing operations in two countries, effective April 1,2005, Company management views the new Southern Copper as having threeoperating segments and manages on the basis of these segments. Additionally, inmining copper the Company produces a number of metal by-products, mostimportant of which are molybdenum, silver and zinc. The significant increase inthe price of molybdenum

 

18

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over the past two years has had an important impact onthe Company’s earnings. Nevertheless, the Company continues to manage itsoperations on the basis of the three copper segments. Added to the segmentinformation is information regarding the Company’s molybdenum sales. Thesegments identified by the Company are:

 

1.               Peruvianoperations, which includes the Toquepala and Cuajone mine complexes and thesmelting and refining plants, industrial railroad and port facilities whichservice both mines.

 

2.               Mexicanopen pit copper mines, which includes La Caridad and Cananea mine complexes andthe smelting and refining plants and support facilities which service bothmines.

 

3.               Mexicanunderground mining operations, which includes five underground mines that producezinc, copper, silver and gold, a coal and coke mine, and several industrialprocessing facilities for zinc and copper. This group is identified as theIMMSA Unit.

 

The Chief OperatingOfficer of the Company focuses on operating income as measure of performance toevaluate different segments, and to make decisions to allocate resources to thereported segments.

 

Financial informationrelating to Southern Copper’s segments is as follows:

 
| ** **                                                             | ** ** | **Three Months Ended March 31, 2006** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                                         | ** ** |
| ** **                                                             | ** ** | **Mexican  Open Pit**                                     | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate  and other  Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                   |       |                                                           |       |   |   |   |   |   |   |   |   |
| Net sales  outside of segments                                         |       | $                                                              | 388.9      |   | $ | 116.6 |   | $ | 615.8 |   |   |   | $ | 1,121.3 |   |
| Intersegment  sales                                                    |       | 95.9                                                           |       | 17.1 |   | — |   | $ | (113.0 | ) | — |   |
| Cost of sales  (exclusive of depreciation, amortization and depletion) |       | 183.9                                                          |       | 74.9 |   | 267.5 |   | (119.4 | ) | 406.9 |   |
| Selling, general  and administrative expense                           |       | 7.8                                                            |       | 3.8 |   | 9.3 |   | 3.1 |   | 24.0 |   |
| Depreciation,  amortization and depletion                              |       | 26.7                                                           |       | 6.9 |   | 19.8 |   | (0.3 | ) | 53.1 |   |
| Exploration                                                            |       | 0.5                                                            |       | 1.7 |   | 2.4 |   | — |   | 4.6 |   |
| Operating Income                                                       |       | $                                                              | 265.9      |   | $ | 46.4 |   | $ | 316.8 |   | $ | 3.6 |   | 632.7 |   |
| Less:                                                                  |       |                                                           |       |   |   |   |   |   |   |   |   |
| Interest  expense, net                                                 |       |                                                           |       |   |   |   |   |   |   | (8.5 | ) |
| Other income  (expense)                                                |       |                                                           |       |   |   |   |   |   |   | (1.0 | ) |
| Taxes on income                                                        |       |                                                           |       |   |   |   |   |   |   | (199.9 | ) |
| Minority  interest                                                     |       |                                                           |       |   |   |   |   |   |   | (1.7 | ) |
| Net earnings                                                           |       |                                                           |       |   |   |   |   |   |   | $ | 421.6 |   |
|                                                                   |       |                                                           |       |   |   |   |   |   |   |   |   |
| Capital  expenditure                                                   |       | $                                                              | 50.8       |   | $ | 7.8 |   | $ | 84.5 |   |   |   | $ | 143.1 |   |
| Property, net                                                          |       | $                                                              | 1,579.7    |   | $ | 270.3 |   | $ | 1,534.0 |   | $ | 30.4 |   | $ | 3,414.4 |   |
| Total assets                                                           |       | $                                                              | 2,692.0    |   | $ | 552.3 |   | $ | 2,856.4 |   | $ | (685.1 | ) | $ | 5,415.6 |   |
|                                                                        |            |                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

19

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| ** **                                                             | ** ** | **Three Months Ended March 31, 2005** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                                         | ** ** |
| ** **                                                             | ** ** | **Mexican  Open Pit**                                     | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate  and other  Eliminations** | ** ** | **Combined** | ** ** |
|                                                                   |       |                                                           |       |   |   |   |   |   |   |   |   |
| Net sales  outside of segments                                         |       | $                                                              | 405.6      |   | $ | 53.3 |   | $ | 487.2 |   |   |   | $ | 946.1 |   |
| Intersegment  sales                                                    |       | 70.3                                                           |       | 103.3 |   | — |   | $ | (173.6 | ) | — |   |
| Cost of sales  (exclusive of depreciation, amortization and depletion) |       | 254.2                                                          |       | 123.4 |   | 172.3 |   | (160.3 | ) | 389.6 |   |
| Selling, general  and administrative expense                           |       | 6.1                                                            |       | 3.7 |   | 8.5 |   | 0.3 |   | 18.6 |   |
| Depreciation,  amortization and depletion                              |       | 36.7                                                           |       | 5.4 |   | 18.6 |   | 0.3 |   | 61.0 |   |
| Exploration                                                            |       | 0.8                                                            |       | 1.5 |   | 3.0 |   | — |   | 5.3 |   |
| Operating Income                                                       |       | $                                                              | 178.1      |   | $ | 22.6 |   | $ | 284.8 |   | $ | (13.9 | ) | 471.6 |   |
|                                                                   |       |                                                           |       |   |   |   |   |   |   |   |   |
| Less:                                                                  |       |                                                           |       |   |   |   |   |   |   |   |   |
| Interest  expense, net                                                 |       |                                                           |       |   |   |   |   |   |   | (17.5 | ) |
| Loss on  derivative instruments                                        |       |                                                           |       |   |   |   |   |   |   | (7.3 | ) |
| Loss on debt  prepayment                                               |       |                                                           |       |   |   |   |   |   |   | (1.7 | ) |
| Other income  (expense)                                                |       |                                                           |       |   |   |   |   |   |   | 0.8 |   |
| Taxes on income                                                        |       |                                                           |       |   |   |   |   |   |   | (146.1 | ) |
| Minority  interest                                                     |       |                                                           |       |   |   |   |   |   |   | (1.4 | ) |
| Net earnings                                                           |       |                                                           |       |   |   |   |   |   |   | $ | 298.4 |   |
|                                                                   |       |                                                           |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                  |       | $                                                              | 14.7       |   | $ | 10.2 |   | $ | 50.4 |   | — |   | $ | 75.3 |   |
| Property, net                                                          |       | $                                                              | 1,559.7    |   | $ | 260.0 |   | $ | 1,249.4 |   | $ | 19.7 |   | $ | 3,088.8 |   |
| Total assets                                                           |       | $                                                              | 3,457.5    |   | $ | 699.8 |   | $ | 2,696.6 |   | $ | (1,506.3 | ) | $ | 5,347.6 |   |
|                                                                        |            |                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Salesvalue per segment:

 
| ** **                 | ** ** | **Three months ended March 31, 2006** | ** ** |
|----------------------------|------------|----------------------------------------------------------------|------------|
| **(****in millions)** | ** ** | **Mexican  Open Pit**                                     | ** ** | **Mexican  IMMSA  Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|                       |       |                                                           |       |   |   |   |   |   |   |   |   |
| Copper                     |       | $                                                              | 417.4      |   | $ | 24.8 |   | $ | 483.1 |   | $ | (85.1 | ) | $ | 840.2 |   |
| Molybdenum                 |       | 34.0                                                           |       | — |   | 100.3 |   | — |   | 134.3 |   |
| Other                      |       | 33.4                                                           |       | 108.9 |   | 32.4 |   | (27.9 | ) | 146.8 |   |
| Total                      |       | $                                                              | 484.8      |   | $ | 133.7 |   | $ | 615.8 |   | $ | (113.0 | ) | $ | 1,121.3 |   |

 
| ** **             | ** ** | **Three months ended March 31, 2005** | ** ** |
|------------------------|------------|----------------------------------------------------------------|------------|
| **(in millions)** | ** ** | **Mexican  Open Pit**                                     | ** ** | **Mexican  IMMSA  Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Combined** | ** ** |
|                   |       |                                                           |       |   |   |   |   |   |   |   |   |
| Copper                 |       | $                                                              | 348.2      |   | $ | 83.7 |   | $ | 277.6 |   | $ | (148.7 | ) | $ | 560.8 |   |
| Molybdenum             |       | 75.4                                                           |       | — |   | 201.3 |   | — |   | 276.7 |   |
| Other                  |       | 52.3                                                           |       | 72.9 |   | 8.3 |   | (24.9 | ) | 108.6 |   |
| Total                  |       | $                                                              | 475.9      |   | $ | 156.6 |   | $ | 487.2 |   | $ | (173.6 | ) | $ | 946.1 |   |

 

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The geographic breakdownof Southern Copper’s sales is as follows:

 
| ** **                                | ** ** | **Three months  Ended March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|
| **(in millions)**                         | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
|                                      |       |                                             |       |   |   |
| United States                             |       | $                                                | 489.6      |   | $ | 217.6 |   |
| Europe                                    |       | 264.4                                            |       | 187.6 |   |
| Mexico                                    |       | 156.5                                            |       | 295.5 |   |
| Peru                                      |       | 25.3                                             |       | 14.6 |   |
| Latin America,  excluding Mexico and Peru |       | 118.2                                            |       | 188.9 |   |
| Asia                                      |       | 67.3                                             |       | 41.9 |   |
| Total                                     |       | $                                                | 1,121.3    |   | $ | 946.1 |   |

 

Major Customer Segment Information:

 

For the three months ended March 31, 2006, the Company has revenues froma copper customer of the Mexican and Peruvian operations, which amounts to 11.6%of total revenue.

 

K.            Impact of NewAccounting Standards:

 

In February 2006 the FASBpublished SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments” anamendment of SFAS No. 133 and 140. This statement improves financial reportingby eliminating the exemption from applying statement 133 to interests insecuritized financial assets so that similar instruments are accounted forsimilarly regardless of the form of the instruments. This Statement alsoimproves financial reporting by allowing a preparer to elect fair valuemeasurement at acquisition, at issuance, or when a previously recognized financialinstrument is subject to a remeasurement (new basis) event, on aninstrument-by-instrument basis, in cases in which a derivative would otherwisehave to be bifurcated. Providing a fair value measurement election also resultsin more financial instruments being measured at what the Board regards as themost relevant attribute for financial instruments, fair value. SFAS 155 will beeffective for all instruments acquired or issued after the beginning of anentity’s first fiscal year that begins after September 15, 2006. The Company isevaluating the impact that this statement may have on its financial position orresults of operations.

 

InMarch 2006 the FASB published SFAS No. 156 “Accounting for Servicing ofFinancial Assets” an amendment of SFAS No. 140. This Statement requires thatall separately recognized servicing assets and servicing liabilities beinitially measured at fair value, if practicable. The Board concluded that fairvalue is the most relevant measurement attribute for the initial recognition ofall servicing assets and servicing liabilities, because it represents the bestmeasure of future cash flows. SFAS No. 156 permits, but does not require, thesubsequent measurement of servicing assets and servicing liabilities at fairvalue. An entity that uses derivative instruments to mitigate the risksinherent in servicing assets and servicing liabilities is required to accountfor those derivative instruments at fair value. Under this Statement, an entitycan elect subsequent fair value measurement of its servicing assets andservicing liabilities by class, thus simplifying its accounting and providingfor income statement recognition of the potential offsetting changes in fairvalue of the servicing assets, servicing liabilities, and related derivativeinstruments. An entity that elects to subsequently measure servicing assets andservicing liabilities at fair value is expected to recognize declines in fairvalue of the servicing assets and servicing liabilities more consistently thanby reporting other-than-temporary impairments.

 

The Board decided torequire additional disclosures and separate presentation in the statement offinancial position of the carrying amounts of servicing assets and

 

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servicing liabilitiesthat an entity elects to subsequently measure at fair value to address concernsabout comparability that may result from the use of elective measurementmethods.

 

SFAS156 will be adopted by the Company as of the beginning of fiscal years thatbegins after September 15, 2006.

 

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Part I Item 1a. Risk Factors 

 

Set forth below are certainchanges from the risk factors previously disclosed in SCC’s AmendmentNo. 1 on Form 10-K/A for the year ended December 31, 2005 filed on March 282006 with the Securities and Exchange Commission

 

***We may be adversely affected bylabor disputes***

 

During the first quarterof 2006, there was a number of work stoppages at some of the Company’s Mexicanoperations, most of these work stoppages were of a short-term nature withnormal operations restored after a few days, with little or no production loss.However, work stoppages at the La Caridad copper mine in Sonora and at the SanMartin polymetalic mining complex in Zacatecas commenced in the first quarterof 2006 and are continuing into the second quarter of 2006. The Companybelieves that the work stoppage at La Caridad is an attempt to pressure theMexican government to recognize a discredited union leader. While the stoppageswere declared illegal, the Company has been forced to declare force majeure on some of its commercialcontracts. At present the Company is working with the Mexican authorities toresolve these illegal work stoppages.

 

***Peruvian economic and politicalconditions may have an adverse impact on our business.***

 

On April 9, 2006, Peruvian citizens participated inthe election for president, congress and representatives to the AndeanParliament, to be appointed for the five year-period commencing July 28, 2006. 24political parties participated in this election process.

 

Official voting results with99.967% of votes counted, published by the Peruvian Bureau of Elections (“ONPE”)show that Mr. Ollanta Humala, the candidate of the Union for Peru party, leadsthe presidential election with 30.627% of the votes, followed by the candidateof the APRA party, Mr. Alan Garcia (24.320%), and the candidate of the “UnidadNacional” party, Ms. Lourdes Flores (23.802%). According to Peruvian electorallaw, since none of the candidates received more than 50 percent of the validvotes, a run-off election between the top two vote getters will follow. Thisrun-off election is anticipated to take place on Sunday, May 28, 2006 betweenMr. Ollanta Humala and Mr. Alan García.

 

Because we have significantoperations in Peru, we cannot provide any assurance that future politicaldevelopments in Peru, including the 2006 presidential and congressional elections,will not have a material adverse effect on market conditions, prices of oursecurities, our ability to obtain financing, and our results of operations andfinancial condition.

 

***Mexican economic andpolitical conditions may have an adverse impact on our business.***

 

Presidential elections inMexico are scheduled for July 2, 2006. According to the latest polls the leadingcandidates are Felipe Calderón, a conservative candidate of Partido AcciónNacional (the National Action Party), Andrés López Obrador,  the candidate of the Partido de la RevoluciónDemocrática and the former Mayor of Mexico City and Roberto Madrazo, of thePartido Revolucionario Institucional or PRI, a former Tabasco state governor. ThePRI ruled Mexico for over 70 years through 2000.

 

Because we have significantoperations in Mexico, we cannot provide any assurance that politicaldevelopments in Mexico, including the 2006 presidential and congressionalelections, will not have a material adverse effect on market conditions, pricesof our securities, our ability to obtain financing, and our results of operationsand financial condition.

 

23

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Part IItem 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

EXECUTIVE OVERVIEW

 

Our business is primarily the production and sale ofcopper. In the process of producing copper, a number of valuable metallurgicalbyproducts are recovered, such as molybdenum, zinc, silver, lead and gold,which we also produce and sell. Market forces outside of our control largelydetermine the sales prices for our products. Our management, therefore, focuseson copper production cost control, production enhancement and prudent andconservative capital structure to improve profitability. We believe we achievethese goals through capital spending programs, exploration efforts and costreduction programs. Our aim is to remain profitable during periods of lowcopper prices and to maximize financial performance in periods of high copperprices.

 

Wediscuss below several matters that we believe are important to understand ourresults of operations and financial condition. These matters include, (i) our “operatingcash costs” as a measure of our performance, (ii) metal prices, (iii) theeffects of inflation and other local currency issues and (iv) our expansion andmodernization program.

 

Operating Cash Costs.An overall benchmark used by us and a common industry metric to measureperformance is operating cash costs per pound of copper produced. Operatingcash cost is a non-GAAP measure that does not have a standardized meaning andmay not be comparable to similarly titled measures provided by other companies.A reconciliation of our cash cost per pound to the cost of sales (includingdepreciation, amortization and depletion), is presented under the subheading “Non-GAAPInformation Reconciliation”, below. We have defined operating cash cost perpound as cost of sales (including depreciation, amortization and depletion);plus selling, general and administrative charges, treatment and refiningcharges; less byproducts revenue and sales premiums, depreciation amortizationand depletion, worker’s participation and other miscellaneous charges, Peruvianroyalty charge and the change in inventory levels; divided by total pounds ofcopper produced and purchased by us. In our calculation of operating cash costper pound of copper produced we credit against our costs the revenues from thesale of byproducts, principally molybdenum, zinc and silver and the premiumsover market price that we receive on copper sales. We account for the byproductrevenue in this way because we consider our principal business to be theproduction and sale of copper. We believe that our Company is viewed by theinvestment community as a copper company, and is valued, in large part, by theinvestment community’s view of the copper market and our ability to producecopper at a reasonable cost. We also include copper sales premiums as a credit,as these amounts are in excess of published copper prices. The recent surge inthe price of molybdenum has had a significant effect on our traditionalcalculation of cash cost and its comparability between periods. Accordingly, wepresent cash costs with and without crediting the byproducts revenues againstour costs.

 

We exclude from ourcalculation of operating cash cost depreciation, amortization and depletion,which are considered non-cash expenses. Exploration is considered adiscretionary expenditure and is also excluded. Worker’s participationprovisions are determined on the basis of pre-tax earnings and are alsoexcluded. Additionally excluded from operating cash cost are items of anon-recurring nature, and the new Peruvian royalty and in periods prior to 2006the position of mine stripping costs that we capitalized.

 

Our operating cash costsper pound, as defined, are presented in the table below for the three monthsended March 31, 2006 and 2005. We present cash costs with and without theinclusion of byproduct revenues.

 

24

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| ** **                                                                       | ** ** | **Three Months,  Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                                       | ** ** | **(in cents per pound)**           | ** ** |
|                                                                             |       |                                              |       |   |   |
| Cash cost per  pound of copper produced and purchased                            |       | 21.4                                              |       | (16.1 | ) |
| Cash cost per  pound of copper produced and purchased without byproducts revenue |       | 116.7                                             |       | 95.6 |   |

 

A reconciliation of theCompany’s operating cash costs per pound to GAAP cost of sales is presentedbelow.

 

As seen on the chartabove, our cash cost for the first quarter of 2006 when calculated withbyproducts revenue is 21.4 cents compared with a credit of 16.1 cents per poundin the first quarter of 2005. The reduction in byproducts credit was due to lowermolybdenum prices and volume partially offset by increases in silver and zincprices. The price of molybdenum in the first quarter of 2006 averaged $22.25 perpound, as compared to $30.43 per pound in the comparable 2005 period. The priceof silver and zinc in the first quarter of 2006 was approximately 39% and 70%higher, respectively, than in the first quarter of 2005. The impact of thecredit for molybdenum revenue was by far the largest effect. In the firstquarter of 2006, molybdenum revenue was a credit of 38.7 cents per pound ascompared to 75.7 cents per pound in the first quarter of 2005.

 

Our cash cost, excludingbyproduct revenues, was higher by 21.1 cents in the first quarter of 2006. In2006, we adopted a new accounting policy, see Note B to our financial statements,which requires that we charge to production cost all mine stripping cost. Underour previous policy, in 2005, a portion of our mine stripping cost wascapitalized. In the first quarter of 2005 our cash costs were reduced by 2.7cents for capitalized mine stripping cost. In addition, our copper productionwas lower by approximately 2.6 million pounds, due largely to a decrease ofapproximately 10.8 million pounds at our Mexican operations, which includes an8.6 million pound decrease in our Mexican open pit operations mainly at LaCaridad Mine due to an illegal work stoppage and lower ore grade and recoveriesand a decrease of 2.2 million pounds in our IMMSA unit mainly due to a onemonth illegal work stoppage at the San Martin unit.

 

Metals Prices.The profitability of our operations is dependent on, and our financialperformance is significantly affected by, the international market prices forthe products we produce, especially for copper, molybdenum, zinc and silver. Metalsprices historically have been subject to wide fluctuations and are affected bynumerous factors beyond our control. These factors, which affect each commodityto varying degrees, include international economic and political conditions,levels of supply and demand, the availability and cost of substitutes,inventory levels maintained by producers and others and, to a lesser degree,inventory carrying costs and currency exchange rates. In addition, the marketprices of certain metals have on occasion been subject to rapid short-termchanges due to speculative activities.

 

We are subject to marketrisks arising from the volatility of copper and other metal prices. Assumingthat expected metal production and sales are achieved, that tax rates areunchanged, giving no effect to potential hedging programs, metal pricesensitivity factors would indicate the following change in estimated 2006earnings resulting from metal price changes.

 

| ** **                                   | ** ** | **Copper** | ** ** | **Molybdenum** | ** ** | **Zinc** | ** ** | **Silver** | ** ** |
|----------------------------------------------|------------|------------|------------|----------------|------------|----------|------------|------------|------------|
|                                         |       |       |       |           |       |     |       |       |       |
| Change in metal prices                       |       | $          | 0.01       |           | $          | 1.00     |       | $          | 0.01       |   | $ | 1.00 |   |
| Annual change in net  earnings (in millions) |       | $          | 8.5        |           | $          | 14.4     |       | $          | 1.7        |   | $ | 10.8 |   |

 

25

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Inflation and Devaluationof the Peruvian Nuevo Sol and the Mexican Peso. Ourfunctional currency is the U.S. dollar. Portions of our operating costs aredenominated in Peruvian nuevos soles and Mexican pesos. Since our revenues areprimarily denominated in U.S. dollars, when inflation/deflation in Peru orMexico is not offset by a change in the exchange rate of the Nuevo sol or thepeso, respectively, to the dollar, our financial position, results ofoperations and cash flows could be adversely affected in our wage adjustments. Inaddition, the dollar value of our net monetary assets denominated in nuevossoles or pesos can be affected by devaluation of the Nuevo sol or the peso,resulting in a remeasurement loss in our condensed consolidated combinedfinancial statement.

 

For the three months ended March 31, 2006 and 2005,inflation and devaluation rates were as follows:

 
| ** **                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|
| **Peru:**                                 | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Peruvian inflation rate                   |       | 1.5                                              | %          | 0.5 | % |
| New Sol/Dollar (change  in exchange rate) |       | (2.1                                             | )%         | (0.6 | )% |
|                                      |       |                                             |       |   |   |
| ** **                                | ** ** | **Three Months Ended  March 31,** | ** ** |
| **Mexico:**                               | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Mexican inflation rate                    |       | 0.9                                              | %          | 0.8 | % |
| Peso/Dollar (change in  exchange rate)    |       | 2.2                                              | %          | 0.3 | % |

 

Expansion and Modernization program

 

OurIlo, Peru smelter modernization project is moving ahead on schedule with constructionwork in process in order to finish by the end of 2006. The anode plant part ofthis project was commissioned in the first quarter of 2006 and replaces Iloblister production with anodes. At March 31, 2006, the smelter project hasreached 76% completion. Additionally, the Company’s leaching dumps, crushingand conveying project at the Toquepala mine is in production. The primarycrusher and associated overland conveying system are fully operational;construction of the ramp for this project will continue until completion in thethird quarter of 2006. The project is 95.7% complete. We will expand our SX/EWproduction at the Cananea mine with a new 32,800mtpy plant. Our studiesindicate that this will provide a more attractive return than our previouslyconsidered two-stage expansion. The bidding process for basic engineering iscurrently under way. In addition, a crushing / conveying / spreading system isalso in the basic engineering stage.

 

ACCOUNTINGESTIMATES

 

SouthernCopper Corporation’s discussion and analysis of its financial condition andresults of operations are based upon its condensed consolidated combinedfinancial statements, which have been prepared in accordance with US GAAP. Preparationof these condensed consolidated combined financial statements requires SouthernCopper’s management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosures of contingent assets andliabilities at the date of the financial statements, and the reported amountsof revenues and expenses during the reporting period. Management makes its bestestimate of the ultimate outcome for these items based on historical trends andother information available when the financial statements are prepared. Changesin estimates are recognized in accordance with the accounting rules for theestimate, which is typically in the period when new information becomesavailable to management. Areas where the nature of the estimate makes itreasonably possible that actual results could materially differ from amountsestimated include: ore reserves, estimated mine stripping ratios, leachablematerial and related amortization, the estimated useful lives of fixed assets,asset retirement obligations, litigation and contingencies, valuationallowances for deferred tax assets, fair value of financial instruments andinventory obsolescence. The Company bases its estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances. Actual results may differ from

 

26

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theseestimates under different assumptions or conditions.

 

RESULTS OF OPERATIONS

 

The following highlightskey financial and operating results for the three-months ended March 31, 2006and 2005.

 
| ** **                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                    | ** ** | **(in millions)**                           | ** ** |
| **Statement of Earnings Data** | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
|                                          |       |                                             |       |   |   |
| Net sales                                     |       | $                                                | 1,121.3    |   | $ | 946.1 |   |
| Operating costs and  expenses                 |       | (488.6                                           | )          | (474.5 | ) |
| Operating income                              |       | 632.7                                            |       | 471.6 |   |
| Non-operating expense                         |       | (9.5                                             | )          | (25.7 | ) |
| Earnings before taxes  and minority interest  |       | 623.2                                            |       | 445.9 |   |
| Taxes on income                               |       | (199.9                                           | )          | (146.1 | ) |
| Minority interest                             |       | (1.7                                             | )          | (1.4 | ) |
| Net earnings                                  |       | $                                                | 421.6      |   | $ | 298.4 |   |

 

Minecopper production amounted to 354.0 million pounds in the first quarter of2006, a decrease of 0.7% compared with the first quarter of 2005. This decreaseof 2.6 million pounds included 8.6 million pounds from the Mexican open pitoperations, a decrease of 2.2 million pounds from the Mexican underground minesand an increase of 8.2 million pounds from the Peruvian open pit mines.

 

Thedecrease of 8.6 million pounds in the production from the Mexican open pitmines was due to a decrease in ore milled, as a result of an illegal workstoppage at the La Caridad mine, lower ore grade and recoveries and a decreasein SX-EW production due to lower quantities of PLS treated. The increase of 8.2million pounds from the Peruvian open pit mines was the result of higher oregrades and recoveries in both the Cuajone and Toquepala mines, net of adecrease in SX/EW copper production due to lower PLS grade. The decrease of 2.2million pounds in the Mexican underground mines was due to an illegal workstoppage at the San Martin mine which did not produce in March.

 

Molybdenumproduction decreased from 8.9 million pounds in the first quarter of 2005 to7.6 million pounds in the first quarter of 2006. This 14.6% decrease inproduction was the result of a decrease of 0.8 million pounds in the Peruvianproduction, due to lower ore grades at the Toquepala and Cuajone units and adecrease of 0.4 million pounds in La Caridad mine.

 

Mine zinc productionamounted to 76.3 million pounds in the first quarter of 2006, a slight decreasefrom the first quarter of 2005.

 

The table below outlinesthe average metal prices during the three months periods ended March 31, 2006and 2005.

 

Average Metals Prices

 

| ** **                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                         | ** ** | **2005** | ** ** | **%Change** | ** ** |
| Copper ($ per pound –  LME)   |       | $                                                | 2.24       |   | $ | 1.48 |   | 51.4 |   |
| Copper ($ per pound –  COMEX) |       | $                                                | 2.25       |   | $ | 1.47 |   | 53.1 |   |
| Molybdenum ($ per  pound)          |       | $                                                | 22.25      |   | $ | 30.43 |   | (26.9 | ) |
| Zinc ($ per pound –  LME)     |       | $                                                | 1.02       |   | $ | 0.60 |   | 70.0 |   |
| Silver ($ per ounce –  COMEX) |       | $                                                | 9.70       |   | $ | 6.99 |   | 38.8 |   |

 

27

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Net Sales:Net sales in the first quarter of 2006 increased $175.2 million to $1,121.3million from $946.1 million in the comparable period in 2005. The increase innet sales was principally the result of higher copper prices, and to a lesserextent higher zinc and silver prices. A decrease in the sales price ofmolybdenum and lower production and sale of molybdenum reduced these increases.

 

The table below presentsinformation regarding the volume of our copper sales by segment for the three monthsended March 31, 2006 and 2005.

 

Copper Sales (pounds):

 
| ** **                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Copper:                    |       |                                             |       |   |   |
| Peruvian  operations       |       | 187,086                                          |       | 176,628 |   |
| Mexican Open-pit           |       | 174,500                                          |       | 238,220 |   |
| Mexican IMMSA  unit        |       | 9,693                                            |       | 63,953 |   |
| Inter segment  elimination |       | (37,299                                          | )          | (118,486 | ) |
| Total copper sales         |       | 333,980                                          |       | 360,315 |   |

 

The table below presents information regarding the volume of sales by segment of our significant byproducts for the three months ended March 31, 2006 and 2005.

 

Byproduct Sales 

 
| **(in thousand of pounds except silver - in** | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **thousand ounces)**                                                        | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Peruvian operations                                                              |       |                                             |       |   |   |
| Molybdenum  contained in concentrates                                            |       | 5,676                                            |       | 6,554 |   |
| Zinc-refined and  in concentrate                                                 |       | 10,486                                           |       | — |   |
| Silver                                                                           |       | 1,626                                            |       | 944 |   |
|                                                                             |       |                                             |       |   |   |
| Mexican Open-pit                                                                 |       |                                             |       |   |   |
| Molybdenum  contained in concentrates                                            |       | 1,623                                            |       | 2,172 |   |
| Zinc-refined and  in concentrate                                                 |       | 9,473                                            |       | 25,351 |   |
| Silver                                                                           |       | 1,417                                            |       | 2,826 |   |
|                                                                             |       |                                             |       |   |   |
| Mexican IMMSA unit                                                               |       |                                             |       |   |   |
| Zinc-refined and  in concentrate                                                 |       | 73,717                                           |       | 76,015 |   |
| Silver                                                                           |       | 2,927                                            |       | 2,703 |   |
|                                                                             |       |                                             |       |   |   |
| Intersegment  elimination                                                        |       |                                             |       |   |   |
| Zinc-refined and  in concentrate                                                 |       | (13,946                                          | )          | (22,203 | ) |
| Silver                                                                           |       | (1,165                                           | )          | (1,455 | ) |
|                                                                             |       |                                             |       |   |   |
| Total Byproduct sales                                                            |       |                                             |       |   |   |
| Molybdenum  contained in concentrates                                            |       | 7,299                                            |       | 8,726 |   |
| Zinc-refined and  in concentrate                                                 |       | 79,730                                           |       | 79,163 |   |
| Silver                                                                           |       | 4,805                                            |       | 5,018 |   |

 

At March 31, 2005, theCompany has recorded provisionally priced sales of 134.4 million pounds ofcopper, at an average forward price of $2.47 per pound. Also the Company hasrecorded provisionally priced sales of 5.7 million pounds of molybdenum at anaverage price of $22.60 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, which will occur largely inthe second quarter of 2006.

 

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

 

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Operating Costs and Expenses:Operating costs and expenses were $488.6 million in the first quarter of 2006compared with $474.5 million in the first quarter of 2005. Cost of sales(exclusive of depreciation, amortization and depletion) for the three monthsended March 31, 2006 was $406.9 million compared with $389.6 million in thecomparable 2005 period. The increase in cost of sales is attributable to anincrease of $9.6 million in production cost due to the adoption of a newaccounting policy which requires that all mine stripping costs for operatingproperties be charged to production. Additionally 2006 includes $14.9 million inincreased fuel and power cost, $1.4 million of mining royalties partiallyoffset by an increase in inventory of $30.6 million.

 

Selling and administrativeexpenses for the three months ended March 31, 2006 were $24.0 million comparedwith $ 18.6 million in the third quarter of 2005. The increase of $5.4 millionis mainly attributable to an increase in fees for consulting services of $ 2.2million, an increase in salaries and wages of $ 2.3 million and the tax onfinancial transactions in Peru.

 

Non-Operating Income(Expense):  Interestexpense in the first quarter of 2006 was approximately 15.2% lower than thecomparable 2005 period. This decrease is largely attributable to reductions indebt levels and lower interest rates.

 

In the three months endedMarch 31, 2005 we recorded a loss on derivative instruments of $7.3 million. Seenote F to our condensed consolidated combined financial statements for moreinformation on these programs. The Company did not hold any derivativeinstruments in the first quarter of 2006.

 

In the three months endedMarch 31, 2005 we recorded a loss on debt prepayments of $1.7 million, related toa prepayment penalty on the retirement of our Peruvian bonds.

 

Interest income was $9.3million in the first quarter of 2006 compared to $5.5 million in the firstquarter of 2005. This increase was principally the result of higher cashbalances in the period.

 

Taxes on Income:  Taxes on income for the first quarter ended March31, 2006, was $199.9 million compared with $146.1 million for the same period of2005. The increase was principally due to higher earnings in 2006. Theeffective tax rate for the three months ended March 31, 2006, was 32.1%compared to 32.8% for the same period in 2005.

 

Segment Results Analysis

 

Peruvian Open PitOperations

 

The following table setforth net sales, operating cost and expenses and operating income for ourPeruvian open pit operations segment, for the three months ended March 31, 2006and 2005:

 

| ** **                    | ** ** | **Three Months ended  March 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **(in millions)**                           | ** ** |
| Net sales                     |       | $                                                | 615.8      |   | $ | 487.2 |   |
| Operating costs and  expenses |       | (299.0                                           | )          | (202.4 | ) |
| Operating income              |       | $                                                | 316.8      |   | $ | 284.8 |   |

 

Net sales in the firstquarter 2006 increased $128.6 million to $615.8 million from $487.2 million inthe comparable period of 2005. The increase in net sales is principally the resultof higher copper prices in the first quarter of 2006. Copper sales volume increasedin 2006, principally as a result of the copper purchased from our Mexicanoperations. Molybdenum sales volume, however, decreased in 2006 period, due to lowerproduction.

 

29

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Operating cost andexpenses in the first quarter of 2006 increased by $96.6 million to $299.0million from $202.4 million in the first quarter of 2005, principally due tohigher cost of sales. Cost of sales (exclusive of depreciation, amortizationand depletion) for the three months ended March 31, 2006 was $267.5 millioncompared to $172.3 million in the same period of 2005. The increase in cost ofsales includes $77.9 million of metals purchased from our Mexican operations,$9.6 million of lower capitalized mine stripping cost, $2.5 million of nethigher fuel and power cost, $5.0 million of higher workers’ participation and$1.3 million of higher mining royalties.

 

Mexican Open PitOperations

 

The following table setsforth net sales, operating cost and expenses and operating income for our Mexicanopen pit operations segment for the three months periods ended March 31, 2006and 2005:

 

| ** **                    | ** ** | **Three Months ended  March 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **(in millions)**                           | ** ** |
| Net sales                     |       | $                                                | 484.8      |   | $ | 475.9 |   |
| Operating costs and  expenses |       | (218.9                                           | )          | (297.8 | ) |
| Operating income              |       | $                                                | 265.9      |   | $ | 178.1 |   |

 

Net sales in the firstquarter of 2006 increased $8.9 million to $484.8 million from $475.9 million inthe first quarter of 2005. The increase in net sales is principally result ofhigher copper and silver prices partially offset by lower copper sales volume.

 

Operating cost andexpenses in the first quarter of 2006 decreased by $78.9 million to $218.9million from $297.8 million in the first quarter of 2005, principally due to lowercost of sales and depreciation, amortization and depletion. Cost of sales(exclusive of depreciation, amortization and depletion) decreased $70.3 millionto $183.9 million from $254.2 million in 2005. The decrease in cost of saleswas principally due $75.1 million of lower copper and other metals purchased fromthird parties, principally from IMMSA and an increase in metal inventory of$21.6 million net of an increase of $17.2 million in fuel and power costs. Thedecrease of $10.0 million in depreciation, amortization and depletion wasprincipally due to the amortization of capitalized mine stripping and leachablematerial cost in the 2005 quarter.

 

Mexican UndergroundOperations (IMMSA)

 

The following table setforth net sales, operating cost and expenses and operating income for our IMMSAsegment, for the three months period ended March 31, 2006 and 2005.

 

| ** **                    | ** ** | **Three Months ended  March 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **(in millions)**                           | ** ** |
| Net sales                     |       | $                                                | 133.7      |   | $ | 156.6 |   |
| Operating costs and  expenses |       | (87.3                                            | )          | (134.0 | ) |
| Operating income              |       | $                                                | 46.4       |   | $ | 22.6 |   |

 

Net sales in the firstquarter 2006 decreased $22.9 million to $133.7 million from $156.6 million inthe comparable period of 2005. The decrease in net sales is principally theresult of lower copper production in the first quarter 2006 due to strike activityand the accident at the Pasta de Conchos coal mine. Operating cost and expensesin the first quarter of 2006 decreased by $46.7 million to $87.3 million from $134.0million in the first quarter of 2005. Cost of sales (exclusive of depreciation,amortization and depletion) decreased $48.5 million to $74.9 million in the firstquarter of 2006 from $123.4 million in the first quarter of 2005 principallydue to

 

30

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$66.1 million of lowerpurchases of metals from third parties, $4.8 of lower power and fuel cost,partially offset by $10.8 million of higher workers’ participation.

 

Intersegment Eliminationsand Adjustments

 

The net sales, operatingcosts and expenses and operating income displayed above will not be directlyequal to amounts in our condensed consolidated combined statement of earningsbecause the adjustments of intersegment operating revenues and expenses must betaken into account. Please see Note J of the financial statements.

 

**CASH FLOW**

 

The following table showsthe cash flow for the three months ended March 31, 2006 and 2005.

 
| ** **                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **(in millions)**                           | ** ** |
| Net cash provided from  operating activities |       | $                                                | 437.7      |   | $ | 352.5 |   |
| Net cash used for  investing activities      |       | $                                                | (144.9     | ) | $ | (105.1 | ) |
| Net cash used for  financing activities      |       | $                                                | (407.3     | ) | $ | (219.8 | ) |

 

Net cash provided byoperating activities was $437.7 million in the first quarter of 2006, comparedwith $352.5 million in the 2005 period. The increase of $85.2 million wasprincipally due to higher earnings.

 

Net cash used ininvesting activities was $144.9 million in the first quarter of 2006 comparedwith $105.1 million in the first quarter of 2005 and included $143.1 millionfor capital expenditures. The capital expenditures included investments at ourPeruvian operations of $63.3 million for the Ilo smelter modernization projectand $21.2 million for various other replacement expenditures. In addition, wespent $58.6 million for replacement assets at our Mexican operations, $ 50.8million of which belongs to our Mexican open pit operations and $7.8 million inour IMMSA unit. In the first quarter of 2005, cash used for investingactivities was $105.1 million; this amount includes capital spending of $75.3million, $30.6 million of which was in the Ilo smelter modernization project,$19.8 million from other replacement expenditures in Peru and $24.9 millionfrom replacement expenditure in Mexico. Investing activities also includes net purchasesof marketable securities of $29.1 million in the first quarter of 2005.

 

Net cash used in financing activities in the firstquarter of 2006 was $407.3 million, compared with $219.8 million in the firstquarter of 2005. The first quarter of 2006 includes a dividend distribution of$404.9 million, compared with a distribution of $100.0 million in the firstquarter of 2005. The first quarter of 2005 also includes a net debt pay-down of$119.0 million.

 

LIQUIDITY AND CAPITAL RESOURCES

 

On March 3, 2006, theCompany paid a quarterly dividend of $2.75 per share, totaling $404.9 million. OnApril 25, 2006 the Board of Directors approved a quarterly dividend of $2.75per share, totaling $404.9 million, to be paid on June 2, 2006 to shareholdersof record as of May 16, 2006.

 

TheCompany’s biggest outstanding capital investment project is the Ilo smeltermodernization. This project will modernize the smelter and bring SCC intocompliance with PAMA requirements. In July 2003, we awarded the contract toprovide the technology and basic engineering for the modernization of the Ilosmelter to Fluor Chile S.A. and Xstrata plc (formerly M.I.M. Holding Limited). Theproject is using the Australian ISASMELT technology and the Company believesthat it will comply with the current environmental regulations. It is estimatedthat the construction of the project will be completed before January 2007, thedeadline established by the PAMA.

 

31

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Theestimated cost of this project is $500 million including $451.8 millionexpended through March 31, 2006.

 

We expect that we willmeet our cash requirements for 2006 and beyond from internally generated funds,cash on hand and from additional external financing if required.

 

At March 31, 2006 theCompany’s debt as a percentage of total capitalization (the total of debt,minority interest and stockholders equity) was 27.0% as compared with 26.0% atDecember 31, 2005. At March 31, 2006, the Company’s cash and cash equivalentamounted to $775.6 million compared to $876.0 million at December 31, 2005.

 

NON-GAAP INFORMATIONRECONCILIATION

 

Reconciliation of operating cash cost to GAAP cost ofsales in millions of dollars and cents per pound.

 
| ** **                                                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| **CASH COST**                                                              | ** ** | **$  million**                                   | ** ** | **¢ per  pound** | ** ** | **$  million** | ** ** | **¢ per  pound** | ** ** |
| Cost of sales  (including depreciation, amortization and depletion) – GAAP |       | $                                                | 460.0      |   | 131.5 |   | $ | 450.5 |   | 122.7 |   |
| Add:                                                                            |       |                                             |       |   |   |   |   |   |   |
| Selling, general  and administrative expenses                                   |       | 24.0                                             |       | 6.9 |   | 18.6 |   | 5.1 |   |
| Treatment and  refining charges                                                 |       | 12.2                                             |       | 3.5 |   | 4.6 |   | 1.3 |   |
| Less:                                                                           |       |                                             |       |   |   |   |   |   |   |
| By products  revenue                                                            |       | (333.4                                           | )          | (95.3 | ) | (410.4 | ) | (111.7 | ) |
| Depreciation,  amortization and depletion                                       |       | (53.1                                            | )          | (15.2 | ) | (61.0 | ) | (16.6 | ) |
| Workers  participation                                                          |       | (61.6                                            | )          | (17.6 | ) | (56.8 | ) | (15.5 | ) |
| Royalty charge  and other                                                       |       | (7.4                                             | )          | (2.2 | ) | (8.2 | ) | (2.4 | ) |
| Inventory change                                                                |       | 34.2                                             |       | 9.8 |   | 3.5 |   | 1.0 |   |
| **Operating  cash cost**                                                        | ** ** | **74.9**                                         | ** ** | **21.4** | ** ** | **(59.2** | **)** | **(16.1** | **)** |
|                                                                            |       |                                             |       |   |   |   |   |   |   |
| Add byproduct  revenue                                                          |       | 333.4                                            |       | 95.3 |   | 410.4 |   | 111.7 |   |
|                                                                            |       |                                             |       |   |   |   |   |   |   |
| **Operating  cash cost, without byproduct revenue**                             | ** ** | **$**                                            | **408.3**  | ** ** | **116.7** | ** ** | **$** | **351.2** | ** ** | **95.6** | ** ** |
|                                                                            |       |                                             |       |   |   |   |   |   |   |
| Total pounds of  copper  produced and purchased (in  millions)             |       |                                             |       | 349.7 |   |   |   | 367.3 |   |

 

Impact of New AccountingStandards

 

Please see note “K” to our condensed consolidatedcombined financial statements.

 

Cautionary Statement:

 

Forward-looking statements in this report and in otherCompany statements include statements regarding expected commencement dates ofmining or metal production operations, projected quantities of future metalproduction, anticipated production rates, operating efficiencies, costs andexpenditures as well as projected demand or supply for the Company’s products.Actual results could differ materially depending upon factors including therisks and uncertainties relating to general U.S. and international economic andpolitical 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

 

32

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grades, water and geological problems, the failure ofequipment or processes to operate in accordance with specifications, failure toobtain financial assurance to meet closure and remediation obligations, laborrelations, litigation and environmental risks as well as political and economicrisk associated with foreign operations. Results of operations are directlyaffected by metal prices on commodity exchanges that can be volatile.

 

33

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Item 4. Controls and Procedures

 

EVALUATION OF DISCLOSURECONTROLS AND PROCEDURES

 

As of March 31, 2006, the Company carried out anevaluation, under the supervision and with the participation of the Company’sDisclosure Committee and the Company’s management, including the ChiefExecutive Officer and the Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures (assuch term is defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, asamended).  Based upon that evaluation, the Chief Executive Officer and theChief Financial Officer concluded that the Company’s disclosure controls andprocedures are effective in timely alerting them to material informationrelating to the Company (including its consolidated subsidiaries) required tobe included in the Company’s periodic SEC filings.

 

CHANGES IN INTERNALCONTROLS OVER FINANCIAL REPORTING

 

There was no change inthe Company’s internal controls over financial reporting (as such term isdefined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934, as amended) that occurredduring the quarter ended March 31, 2006 that has materially affected, or isreasonably likely to materially affect, the Company’s internal controls overfinancial reporting.

 

34

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Mexico City, May 2, 2006

 

REPORT OFINDEPENDENT REGISTERED 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 subsidiaries as of March 31, 2006 and the related condensedconsolidated combined statements of earnings and cash flows for each of thethree-month periods ended March 31, 2006 and 2005. These interim condensed consolidatedcombined 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 of interim financial information consistsprincipally of applying analytical procedures and making inquiries of personsresponsible for financial and accounting matters. It is substantially less inscope than an audit conducted in accordance with the standards of the PublicCompany Accounting Oversight Board, the objective of which is the expression ofan opinion regarding the financial statements taken as a whole. Accordingly, wedo not express such an opinion.

 

Based on our review weare not aware of any material modifications that should be made to theaccompanying condensed consolidated combined interim financial statements forthem to be in conformity with accounting principles generally accepted in theUnited States of America.

 

We previously audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheet as of December 31, 2005, andthe related consolidated combined statement of earnings, changes in stockholder’sequity and cash flows for the year then ended, management’s assessment of theeffectiveness of the Company’s internal control over financial reporting as ofDecember 31, 2005 and the effectiveness of the Company’s internal controlover financial reporting as of December 31, 2005; and in our report datedMarch 13, 2006, we expressed unqualified opinions thereon. The consolidatedcombined financial statements and management’s assessment of the effectivenessof internal control over financial reporting referred to above are notpresented herein. In our opinion, the information set forth in the accompanyingcondensed consolidated balance sheet as of March 31, 2006, is fairlystated in all material respects in relation to the consolidated balance sheetfrom which it has been derived.

 

PRICEWATERHOUSECOOPERS

 

35

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Part II - OTHER INFORMATION

 

Item 1. - Legal Procedures

 

The information providedin Note H to the condensed consolidated combined financial statements containedin Part I of this Form 10-Q, is incorporated herein by reference.

 

Item6.            Exhibits

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

 

36

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SIGNATURES

 

Pursuant to therequirement 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                |   |
| Date: May 2, 2006 |                                                  |   |
|              |                                                  |   |
|              |                                                  |   |
|              | /s/ J. Eduardo Gonzalez Felix                         |   |
|              | J.  Eduardo Gonzalez Felix                            |   |
| Date: May 2, 2006 | Vice  President, Finance and Chief  Financial Officer |   |

 

37

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