**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**2006Third Quarter**

**FORM 10-Q**

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

| **For Quarter Ended September 30, 2006** | ** ** | **Commission  file number 1-14066** |
|------------------------------------------|------------|-------------------------------------|

 

**SOUTHERN COPPER CORPORATION**

(Exact name ofregistrant as specified in its charter)

| **Delaware**                                             |   | **13-3849074**       |
|----------------------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of                         |   | (I.R.S. Employer     |
|  incorporation or organization)                     |   | Identification  No.) |
|                                                     |   |                 |
| **11811  North Tatum Blvd. Suite 2500 Phoenix, AZ**      |   | **85028**            |
| (Address of  principal executive offices)                |   | (Zip Code)           |
|                                                     |   |                 |
| Registrant’s  telephone number, including area code |   | **(602)  977-6595**  |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for the past90 days.
|   | Yes x | No o |
|--------|-------|------|

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. (See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act).
| Large accelerated filer  x | Accelerated filer o | Non-accelerated filer o |
|----------------------------|---------------------|-------------------------|

 

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

 

As of October 31,2006 there were outstanding 294,460,850 shares of Southern Copper Corporationcommon stock, par value $0.01 per share.

 

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Southern CopperCorporation

INDEX TO FORM 10-Q
| Part I. Financial  Information:                          |                                                                                                              |
|----------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------|
|                                                     |                                                                                                              |   |
| Item.  1                                                 | Condensed  Consolidated Combined Financial Statements (unaudited)                                                 |   |
|                                                     |                                                                                                              |   |
|                                                     | Condensed  Consolidated Combined Statement of Earnings three and nine months ended September  30, 2006 and 2005   |   |
|                                                     |                                                                                                              |   |
|                                                     | Condensed  Consolidated Balance Sheet September 30, 2006 and December 31, 2005                                    |   |
|                                                     |                                                                                                              |   |
|                                                     | Condensed  Consolidated Combined Statement of Cash Flows three and nine months ended  September 30, 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 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 – FINANCIALINFORMATION

Item1.  Condensed Consolidated CombinedFinancial Statements

Southern CopperCorporation

CONDENSEDCONSOLIDATED COMBINED STATEMENT OF EARNINGS

(Unaudited)
| ** **                                                                                    | ** ** | **3 Months Ended  September, 30** | ** ** | **9 Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2006**                                         | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                    | ** ** | **(in thousands)**                          | ** ** |
| Net sales:                                                                                    |       |                                             |       |                                             |       |   |   |   |   |
| Non affiliates                                                                                |       | $                                                | 1,412,238  |                                             | $          | 1,030,193 |   | $ | 3,810,278 |   | $ | 2,894,730 |   |
| Affiliates                                                                                    |       | —                                           |       | —                                           |       | — |   | 28,357 |   |
| Total net sales                                                                               |       | 1,412,238                                        |       | 1,030,193                                        |       | 3,810,278 |   | 2,923,087 |   |
|                                                                                          |       |                                             |       |                                             |       |   |   |   |   |
| Operating costs  and expenses:                                                                |       |                                             |       |                                             |       |   |   |   |   |
| Cost of sales (exclusive of depreciation,  amortization and depletion shown separately below) |       | 509,258                                          |       | 382,994                                          |       | 1,437,990 |   | 1,185,669 |   |
| Selling, general and administrative                                                           |       | 25,162                                           |       | 20,199                                           |       | 72,491 |   | 59,202 |   |
| Depreciation, amortization and depletion                                                      |       | 67,702                                           |       | 74,818                                           |       | 198,787 |   | 206,329 |   |
| Exploration                                                                                   |       | 5,655                                            |       | 6,361                                            |       | 14,864 |   | 17,205 |   |
| Total operating  costs and expenses                                                           |       | 607,777                                          |       | 484,372                                          |       | 1,724,132 |   | 1,468,405 |   |
|                                                                                          |       |                                             |       |                                             |       |   |   |   |   |
| Operating income                                                                              |       | 804,461                                          |       | 545,821                                          |       | 2,086,146 |   | 1,454,682 |   |
|                                                                                          |       |                                             |       |                                             |       |   |   |   |   |
| Interest expense                                                                              |       | (31,602                                          | )          | (37,675                                          | )          | (82,711 | ) | (86,231 | ) |
| Capitalized  interest                                                                         |       | 7,403                                            |       | 4,747                                            |       | 19,009 |   | 12,316 |   |
| Gain on  derivative instruments                                                               |       | —                                           |       | 5,489                                            |       | — |   | 2,789 |   |
| Loss on debt  prepayments                                                                     |       | (100                                             | )          | —                                           |       | (960 | ) | (7,664 | ) |
| Other income (expense)                                                                        |       | 5,320                                            |       | 126                                              |       | 12,808 |   | 310 |   |
| Interest income                                                                               |       | 10,848                                           |       | 5,051                                            |       | 34,456 |   | 13,541 |   |
| Earnings before  taxes on income and minority interest                                        |       | 796,330                                          |       | 523,559                                          |       | 2,068,748 |   | 1,389,743 |   |
|                                                                                          |       |                                             |       |                                             |       |   |   |   |   |
| Taxes on income                                                                               |       | 271,944                                          |       | 152,573                                          |       | 679,680 |   | 405,443 |   |
| Minority interest                                                                             |       | 2,803                                            |       | 1,576                                            |       | 6,630 |   | 4,598 |   |
|                                                                                          |       |                                             |       |                                             |       |   |   |   |   |
| Net earnings                                                                                  |       | $                                                | 521,583    |                                             | $          | 369,410 |   | $ | 1,382,438 |   | $ | 979,702 |   |
|                                                                                          |       |                                             |       |                                             |       |   |   |   |   |
| Per common share  amounts:                                                                    |       |                                             |       |                                             |       |   |   |   |   |
| Net earnings  basic and diluted                                                               |       | $                                                | 1.77       |                                             | $          | 1.25 |   | $ | 4.69 |   | $ | 3.33 |   |
| Dividends paid                                                                                |       | $                                                | 1.00       |                                             | $          | 0.52 |   | $ | 3.75 |   | $ | 2.34 |   |
| Weighted average  common shares outstanding (Basic)                                           |       | 294,461                                          |       | 294,456                                          |       | 294,461 |   | 294,456 |   |
| Weighted average common  shares outstanding (Diluted)                                         |       | 294,461                                          |       | 294,456                                          |       | 294,461 |   | 294,456 |   |

 

The accompanying notesare an integral part of these condensed consolidated combined financialstatements. All the share and per share amounts for prior periods had beenrestated to reflect the common stock split see note H.

3

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Southern CopperCorporation

CONDENSEDCONSOLIDATED BALANCE SHEET

(Unaudited)
| ** **                                                          | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **                                                          | ** ** | **(in thousands)** | ** ** |
| ASSETS                                                              |       |                    |       |                  |       |
| Current assets:                                                     |       |                    |       |                  |       |
| Cash and cash equivalents                                           |       | $                       | 918,099    |                  | $          | 876,003 |   |
| Accounts receivable trade – Non-affiliates                     |       | 474,577                 |       | 342,412               |       |
| Accounts receivable – Affiliates                               |       | 3,717                   |       | 9,099                 |       |
| Accounts receivable – other                                    |       | 45,008                  |       | 34,949                |       |
| Inventories                                                         |       | 480,473                 |       | 395,845               |       |
| Deferred income tax                                                 |       | 23,138                  |       | 5,248                 |       |
| Prepaid and other current assets                                    |       | 60,426                  |       | 50,798                |       |
| Total current assets                                                |       | 2,005,438               |       | 1,714,354             |       |
|                                                                |       |                    |       |                  |       |
| Property, net                                                       |       | 3,486,514               |       | 3,326,126             |       |
| Capitalized mine  stripping, net                                    |       | —                  |       | 289,369               |       |
| Leachable  material, net                                            |       | 221,956                 |       | 210,118               |       |
| Intangible  assets, net                                             |       | 118,761                 |       | 120,861               |       |
| Other assets,  net                                                  |       | 43,219                  |       | 26,746                |       |
| Total Assets                                                        |       | $                       | 5,875,888  |                  | $          | 5,687,574 |   |
|                                                                |       |                    |       |                  |       |
| LIABILITIES                                                         |       |                    |       |                  |       |
| Current  liabilities:                                               |       |                    |       |                  |       |
| Current portion of long-term debt                                   |       | $                       | 10,000     |                  | $          | 10,000 |   |
| Accounts payable                                                    |       | 232,646                 |       | 284,977               |       |
| Accrued income taxes                                                |       | 121,210                 |       | 275,763               |       |
| Due to affiliated companies                                         |       | 4,892                   |       | 6,355                 |       |
| Accrued workers’ participation                                 |       | 206,426                 |       | 195,552               |       |
| Other accrued liabilities                                           |       | 34,259                  |       | 22,985                |       |
| Total current liabilities                                           |       | 609,433                 |       | 795,632               |       |
|                                                                |       |                    |       |                  |       |
| Long-term debt                                                      |       | 1,527,793               |       | 1,162,065             |       |
| Deferred income  taxes                                              |       | 208,556                 |       | 259,089               |       |
| Other  liabilities                                                  |       | 89,494                  |       | 120,795               |       |
| Asset retirement  obligation                                        |       | 11,943                  |       | 11,221                |       |
| Total non-current liabilities                                       |       | 1,837,786               |       | 1,553,170             |       |
|                                                                |       |                    |       |                  |       |
| Commitments and  Contingencies (Note J)                             |       |                    |       |                  |       |
|                                                                |       |                    |       |                  |       |
| MINORITY  INTEREST                                                  |       | 13,207                  |       | 12,695                |       |
|                                                                |       |                    |       |                  |       |
| STOCKHOLDERS’  EQUITY                                          |       |                    |       |                  |       |
| Common stock                                                        |       | 2,946                   |       | 2,946                 |       |
| Additional  paid-in capital                                         |       | 772,108                 |       | 772,696               |       |
| Retained  earnings                                                  |       | 2,745,800               |       | 2,648,359             |       |
| Other  accumulative comprehensive loss                              |       | (8,407                  | )          | (13,090               | )          |
| Treasury stock                                                      |       | (96,985                 | )          | (84,834               | )          |
| Total Stockholders’ Equity                                     |       | 3,415,462               |       | 3,326,077             |       |
|                                                                |       |                    |       |                  |       |
| Total  Liabilities, Minority Interest and Stockholders’ Equity |       | $                       | 5,875,888  |                  | $          | 5,687,574 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated combined financialstatements.

4

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Southern CopperCorporation

CONDENSEDCONSOLIDATED COMBINED STATEMENT OF CASH FLOWS

(Unaudited)
| ** **                                                                             | ** ** | **3 Months Ended  September 30,** | ** ** | **9 Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2006**                                         | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                             | ** ** | **(in thousands)**                          | ** ** |
| OPERATING  ACTIVITIES                                                                  |       |                                             |       |                                             |       |   |   |   |   |
|                                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| Net earnings                                                                           |       | $                                                | 521,583    |                                             | $          | 369,410 |   | $ | 1,382,438 |   | $ | 979,702 |   |
| Adjustments to  reconcile net earnings to net cash provided from operating activities: |       |                                             |       |                                             |       |   |   |   |   |
| Depreciation, amortization and depletion                                               |       | 67,702                                           |       | 74,818                                           |       | 198,787 |   | 206,329 |   |
| Capitalized mine stripping and leachable material                                      |       | (43,384                                          | )          | (25,353                                          | )          | (43,384 | ) | (77,898 | ) |
| Remeasurement loss(gain)                                                               |       | 6,172                                            |       | (1,089                                           | )          | (5,210 | ) | 10,946 |   |
| Gain on sale of property                                                               |       | (1,881                                           | )          | (2,084                                           | )          | (1,881 | ) | (2,084 | ) |
| Provision for deferred income taxes                                                    |       | 1,105                                            |       | (51,653                                          | )          | 17,340 |   | (18,217 | ) |
| Amortization of deferred financing cost                                                |       | —                                           |       | 12,530                                           |       | — |   | 14,965 |   |
| Unrealized gain on derivative instruments                                              |       | (8,330                                           | )          | —                                           |       | (6,512 | ) | — |   |
| Minority interest                                                                      |       | 2,803                                            |       | 1,576                                            |       | 6,630 |   | 4,598 |   |
|                                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| Cash provided  from (used for) operating assets and liabilities:                       |       |                                             |       |                                             |       |   |   |   |   |
| Accounts receivable                                                                    |       | (12,453                                          | )          | (85,814                                          | )          | (147,686 | ) | 46,061 |   |
| Inventories                                                                            |       | (19,132                                          | )          | (15,620                                          | )          | (84,628 | ) | (31,778 | ) |
| Accounts payable and accrued liabilities                                               |       | (4,149                                           | )          | 245,993                                          |       | (240,843 | ) | (42,108 | ) |
| Other operating assets and liabilities                                                 |       | 12,549                                           |       | (64,361                                          | )          | 18,053 |   | (97,901 | ) |
| Net cash provided by operating activities                                              |       | 522,585                                          |       | 458,353                                          |       | 1,093,104 |   | 992,615 |   |
|                                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| INVESTING ACTIVITIES                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| Capital expenditures                                                                   |       | (102,311                                         | )          | (118,081                                         | )          | (333,031 | ) | (263,311 | ) |
| Purchase of marketable securities                                                      |       | —                                           |       | —                                           |       | — |   | (74,339 | ) |
| Sales of marketable securities                                                         |       | —                                           |       | —                                           |       | — |   | 119,606 |   |
| Sales of property                                                                      |       | 3,220                                            |       | 1,177                                            |       | 4,586 |   | 1,177 |   |
| Other                                                                                  |       | (2,813                                           | )          | 1,455                                            |       | (2,176 | ) | (11,678 | ) |
| Net cash used  for investing activities                                                |       | (101,904                                         | )          | (115,449                                         | )          | (330,621 | ) | (228,545 | ) |
|                                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| FINANCING  ACTIVITIES                                                                  |       |                                             |       |                                             |       |   |   |   |   |
| Debt repaid                                                                            |       | (2,315                                           | )          | (680,080                                         | )          | (23,825 | ) | (1,098,685 | ) |
| Debt incurred                                                                          |       | 361                                              |       | 793,646                                          |       | 389,553 |   | 993,646 |   |
| Escrow on long-term loans                                                              |       | —                                           |       | —                                           |       | (149 | ) | (311 | ) |
| Dividends paid to common stockholders                                                  |       | (294,458                                         | )          | (153,556                                         | )          | (1,104,212 | ) | (603,599 | ) |
| Distributions to minority interest                                                     |       | (1,465                                           | )          | (650                                             | )          | (6,336 | ) | (4,159 | ) |
| Other                                                                                  |       | 6,967                                            |       | —                                           |       | — |   | 123 |   |
| Net cash used  for financing activities                                                |       | (290,910                                         | )          | (40,640                                          | )          | (744,969 | ) | (712,985 | ) |
|                                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                          |       | (12,622                                          | )          | (6,560                                           | )          | 24,582 |   | 5,078 |   |
|                                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| Increase in cash  and cash equivalents                                                 |       | 117,149                                          |       | 295,704                                          |       | 42,096 |   | 56,163 |   |
| Cash and cash  equivalents, at beginning of period                                     |       | 800,950                                          |       | 471,166                                          |       | 876,003 |   | 710,707 |   |
| Cash and cash  equivalents, at end of period                                           |       | $                                                | 918,099    |                                             | $          | 766,870 |   | $ | 918,099 |   | $ | 766,870 |   |

 

5

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| ** **                                         | ** ** | **3 Months Ended  September 30,** | ** ** | **9 Months Ended  September 30,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                         | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **(in thousands)**                          | ** ** |
| Supplemental  disclosure of cash flow information: |       |                                             |       |                                             |       |   |   |   |   |
| Cash paid during  the period for:                  |       |                                             |       |                                             |       |   |   |   |   |
| Interest                                           |       | $                                                | 18,672     |                                             | $          | 19,121 |   | $ | 40,620 |   | $ | 74,808 |   |
| Income taxes                                       |       | $                                                | 251,200    |                                             | $          | 122,624 |   | $ | 978,838 |   | $ | 569,309 |   |
|                                               |       |                                             |       |                                             |       |   |   |   |   |
| Non cash transactions:                             |       |                                             |       |                                             |       |   |   |   |   |
| Common stock split:                                |       |                                             |       |                                             |       |   |   |   |   |
| Increase in Common  stock                          |       | 1,472                                            |       |                                             |       |   |   |   |   |
| Decrease in Additional  paid-in capital            |       | 1,472                                            |       |                                             |       |   |   |   |   |

 

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

6

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Southern CopperCorporation

NOTES TOCONDENSED CONSOLIDATED COMBINED FINANCIAL STATEMENTS

(Unaudited)

A.           In the opinion ofSouthern Copper Corporation, (the “Company”, “Southern Copper” or “SCC”), theaccompanying unaudited condensed consolidated combined financial statementscontain all adjustments (consisting only of normal recurring adjustments)necessary to present fairly the Company’s financial position as of September30, 2006 and the results of operations and cash flows for the three and ninemonths ended September 30, 2006 and 2005. The condensed consolidated combined financial statements for the threeand nine month periods ended September 30, 2006 and 2005 have been subjected toa review by PricewaterhouseCoopers, the Company’s independent registered publicaccounting firm, whose report dated November 2, 2006, is presented on page46.  The results of operations for thethree and nine months ended September 30, 2006 and 2005 are not necessarilyindicative of the results to be expected for the full year.  The December 31, 2005 balance sheet data wasderived from audited financial statements, but does not include all disclosuresrequired by accounting principles generally accepted in the United States ofAmerica.  The accompanying condensedconsolidated combined financial statements should be read in conjunction withthe consolidated combined financial statements at December 31, 2005 and notesincluded in the Company’s 2005 annual report on Form 10-K/A Amendment No. 2.

In the first quarter of 2006, the Company reclassified from additionalpaid-in capital to treasury stock the carrying value of its investment inshares held by one of its Mexican subsidiaries in its controlling shareholder,Grupo Mexico, S.A.B. de C.V. (Grupo Mexico). At September 30, 2006 and December 31, 2005, the carrying amount was$92.5 million and $80.3 million, respectively. Certain prior year amounts havebeen reclassified to conform to the current presentation.

B.             Changes in AccountingPrinciple – Capitalized Mine Stripping

At the March 17, 2005 meeting of the Emerging Issues Task Force (EITF),the EITF reached a consensus that stripping costs incurred during theproduction phase of a mine are variable production costs that should beincluded in the costs of the inventory produced (extracted) during the periodthat the stripping costs are incurred. The EITF noted that the consensus does not address the accounting forstripping costs incurred during the pre-production phase of a mine.  The consensus with respect to this issue wasratified by the FASB on March 30, 2005, and is effective for the firstreporting period in fiscal years beginning after December 15, 2005, with earlyadoption permitted.

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

C.             Inventorieswere as follows:

(In millions)
|                                             | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                        |       |                         |       |                        |       |
| Metals at lower  of average cost or market: |       |                         |       |                        |       |
| Finished goods                              |       | $                            | 165.8      |                        | $          | 106.9 |   |
| Work-in-process                             |       | 138.9                        |       | 135.4                       |       |
| Supplies at  average cost                   |       | 175.8                        |       | 153.5                       |       |
| Total inventories                           |       | $                            | 480.5      |                        | $          | 395.8 |   |

 

7

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D.            Income taxes:

The Company’s income tax provision for the nine months ended September30, 2006 and 2005 was $679.7 million and $405.4 million, respectively.  These provisions include income taxes forPeru, Mexico and the United States.  Theeffective tax rates for the 2006 and 2005 periods are 32.9% and 29.2%,respectively.  The increase in the 2006effective tax rate is attributable to the following factors: 1) anon-deductible expense of $29.4 million for workers’ participation resultingfrom a change in Mexican law regarding the basis of calculation in the 2005period, 2) a tax refund of $43.4 million received by our Mexican subsidiary inthe 2005 period for asset-based taxes (minimum income tax) paid in prior years,and 3) a decrease of 1% in the 2006 statutory tax rate for our Mexicanoperations.

E.              Provisionally PricedSales:

At September 30, 2006, the Company has recorded provisionally pricedsales of 123.8 million pounds of copper, at an average forward price of $3.44per pound.  Also, the Company hasrecorded provisionally priced sales of 2.9 million pounds of molybdenum atSeptember 30, 2006 market price of $27.00 per pound.  These sales are subject to final pricingbased on the average monthly LME or COMEX copper prices and Dealer Oxidemolybdenum prices in the future month of settlement.

Following are the provisionally priced copper and molybdenum salesoutstanding at September 30, 2006:

| Copper  (million lbs.) | ** ** | **Priced at** | ** ** | **Month of  Settlement** |
|-----------------------------|------------|--------------------|------------|-------------------------------|
| 74.2                        |       | 3.44222            |       | October 2006                  |
| 36.7                        |       | 3.44616            |       | November 2006                 |
| 2.2                         |       | 3.42553            |       | December 2006                 |
| 4.8                         |       | 3.38652            |       | March 2007                    |
| 5.9                         |       | 3.36702            |       | April 2007                    |
| 123.8                       |       | 3.43737            |       |                          |

 

| Molybdenum  (million lbs.) | ** ** | **Priced at** | ** ** | **Month of  Settlement** |
|---------------------------------|------------|--------------------|------------|-------------------------------|
| 1.4                             |       | 27.00000           |       | October 2006                  |
| 0.7                             |       | 27.00000           |       | November 2006                 |
| 0.8                             |       | 27.00000           |       | December 2006                 |
| 2.9                             |       | 27.00000           |       |                          |

 

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 occasionally uses derivative instruments to manage itsexposure to market risk from changes in commodity prices and interest rate riskexposure.  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:

Transactions under this copper price protection program are notaccounted for as hedges under SFAS No. 133 and are adjusted to fair marketvalue based on the copper price as of the last day of the respective reportingperiod with the gain or loss recorded in total net sales. The actual impact ofthis protection program

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on the Company’s fourth quarter copper production can not be fullydetermined until the maturity of each copper swap contract with finaladjustments based on the average annual copper price. As a result of thiscopper price protection program, the Company decided to change its accountingpolicy to recognize the change in the fair market value of these financialinstruments against net sales. The Company believes that this income statementclassification reflects better the intention of this copper price protectionprogram. Before the second quarter of 2006, the change in the fair market valueof our derivative instruments was accounted for in a separate non-operatingincome statement line item.

In the first nine months of 2006 and 2005 the Company entered intocopper swaps contracts to protect a portion of its 2006 and 2005 copperproduction for future sales at a fixed copper price.  Related to the settlement of these copperswap contracts the Company recorded a loss of $30.3 million in the thirdquarter of 2006 and $288.2 million and $11.2 million in the nine month periodof 2006 and 2005, respectively.  Theselosses were recorded in net sales on the condensed consolidated combinedstatement of earnings.

At September 30, 2006, the Company has copper swap contracts to protect57.3 million pounds of copper production for the October-December period of2006 at prices ranging from $3.52 per pound through $3.68 per pound.  These contracts are as follows:

| Pounds  (in millions) | ** ** | **Period**    | ** ** | **Copper Swap  Price (1)** | ** ** | ** ** |
|----------------------------|------------|---------------|------------|--------------------------------------|------------|------------|
| 26.5                       |       | October 2006  |       | $3.58                                |       | (2)        |
| 22.0                       |       | November 2006 |       | $3.56                                |       | (2)        |
| 8.8                        |       | December 2006 |       | $3.59                                |       | (2)        |

 

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

(2)                  The copper swapprice is the per pound weighted average for the month or a portion of the monthin the case of some contracts.  Pricesfor October 2006 range from $3.52 to $3.68, prices for November 2006 range from$3.52 to $3.60, and the price for December 2006 range from $3.58 to $3.59.

Interest rate swaps:

In 2005, the Company entered into interest rate swap agreements tohedge its exposure to interest rate changes on its variable rate debt.  These facilities were terminated in July 2005and the Company recorded a gain of $3.9 million and $1.1 million in the third quarterand first nine months of 2005, respectively.

G.             Asset RetirementObligation:

In 2005, the Company accrued an asset retirement obligation for itsmining properties in Peru, as required by the Mine Closure Law, enacted in 2003and adopted in 2005.  This law requiresthe Company to present a mine closure plan to the Peruvian Ministry of Energyand Mines (“MEM”) by August 2006.  InApril 2006, the Company selected Walsh Peru S.A., a Peruvian subsidiary ofWalsh Environmental Scientists and Engineers, Inc. (Boulder, Colorado), and theMines Group, Inc. (Reno, Nevada) both independent consultants, to work in thedevelopment of the mine closure plan. The Conceptual plan, without costs, was submitted to MEM in August 2006and is subject to review by MEM for 45 days. After the MEM review, the Companywill have 90 days to prepare and submit the mine closure plan, including costs,which is then subject to approval by MEM and open to public discussion andcomment in the area of Company operations. In application of SFAS No. 143 and according to the criteria establishedby FIN-47, the Company has made an estimate of this potential liability andrecorded such

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liability, based on its review of the law. However, the Company cannotassure that the amount of this liability recorded will be adequate until ourmine plan is reviewed and accepted by MEM.

The closure cost recognized for this liability includes the estimatedcost required at the Peruvian operations, based on the Company’s experience andincludes costs at the Ilo smelter and refinery, tailings disposal and thedismantling of the Toquepala and Cuajone concentrators, repair shops andauxiliary services.  In this regard, theCompany recorded an additional asset retirement liability in 2005 of $5.2million for this new law and increased net property by $4.6 million.

The following table summarizes the asset retirement obligation activityfor the first nine months of 2006 and 2005 (in millions):
|                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Balance as of  January 1,        |       | $        | 11.2       |     | $          | 5.6 |   |
| Additions,  changes in estimates |       | —   |       | —   |       |
| Accretion  expense               |       | 0.7      |       | 0.3      |       |
| Balance as of September  30,     |       | $        | 11.9       |     | $          | 5.9 |   |

 

H.            Stockholders Equity

Common stock:

On August 30, 2006 the Executive Committee of the Board of Directorsdeclared a two-for-one split of the Company’s outstanding common stock.  On October 2, 2006 common shareholders ofrecord at the close of business on September 15, 2006, received one additionalshare of common stock for every share owned. The Company’s common stock began trading at its post-split price onOctober 3, 2006.  The split increased thenumber of shares outstanding to 294,460,850 from 147,230,425.  The stock split has been recorded in our ninemonth 2006 financial statements.  Allshare and per share amounts have been retroactively adjusted to reflect thestock split.

I.                 Related PartyTransactions:

Receivable and payable balances with affiliated companies are shownbelow (in millions):
|                                               | ** ** | **As of**         | ** ** |
|-----------------------------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                                    | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Affiliate  receivable:                        |       |                   |       |   |   |
| Grupo Mexico  Servicios, S.A de C.V.          |       | $                      | —     |   | $ | 2.6 |   |
| Grupo Mexico,  S.A.B. de C.V.                 |       | —                 |       | 0.4 |   |
| Mexico  Constructora Industrial, S.A. de C.V. |       | 3.4                    |       | 5.0 |   |
| Intermodal  Mexico, S.A. de C.V.              |       | —                 |       | 0.4 |   |
| Ferrocarril  Mexicano, S.A. de C.V.           |       | —                 |       | 0.4 |   |
| Other                                         |       | 0.3                    |       | 0.3 |   |
|                                          |       | $                      | 3.7        |   | $ | 9.1 |   |
| Affiliate  payable:                           |       |                   |       |   |   |
| Grupo Mexico,  S.A.B. de C.V.                 |       | $                      | 2.5        |   | $ | 2.5 |   |
| Ferrocarril  Mexicano, S.A. de C.V.           |       | 2.1                    |       | 3.0 |   |
| Other                                         |       | 0.3                    |       | 0.9 |   |
|                                          |       | $                      | 4.9        |   | $ | 6.4 |   |

 

The Company has entered into certain transactions in the ordinarycourse of business with parties that are controlling shareholders or theiraffiliates.

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These transactions include the lease of office space, airtransportation and construction services and products and services relating tomining and refining.  The Company lendsand borrows funds among affiliates for acquisitions and other corporatepurposes.  These financial transactionsbear interest.

The Company sold to Asarco LLC (“Asarco”), an affiliate of GrupoMexico, $0.3 million and $11.6 million of metal products in the first ninemonths of 2006 and 2005, respectively; and purchased metal products from Asarcofor $1.1 million in the first nine months of 2005. In addition, the Companypaid $0.9 million to Asarco in the first nine months of 2005 for tollingservices. There were no purchases of metal products and tolling services fromAsarco in the first nine months of 2006.

Grupo Mexico, the Company’s ultimate parent and the majority indirectstockholder of the Company, and its affiliates provide various services to theCompany.  In 2005, these activities wereprincipally related to accounting, legal, tax, financial, treasury, humanresources, price risk assessment and hedging, purchasing, procurement andlogistics, sales and administrative and other support services.  Grupo Mexico is reimbursed for these supportservices.  The total amount paid by theCompany to Grupo Mexico for such services in the first nine months of 2006 and2005 was $10.3 million.  The Companyexpects to continue to pay for these services going forward in an amount of$13.8 million per year.

The Company’s Mexican operations paid fees of $12.7 million and $18.9million in the first nine months of 2006 and 2005, respectively; primarily forfreight services provided by Ferrocarril Mexicano, S.A. de C.V., a subsidiaryof Grupo Mexico.

In addition, the Company’s Mexican operations paid fees of $24.7million and $18.9 million in the first nine months of 2006 and 2005,respectively, for construction services provided by Mexico ConstructoraIndustrial S.A. de C.V., an indirect subsidiary of Grupo Mexico.

The Larrea family controls a majority of the capital stock of GrupoMexico, and has extensive interests in other businesses, including oil drillingservices, construction, aviation and real estate.  The Company engages in certain transactionsin the ordinary course of business with other entities controlled by the Larreafamily relating to mining and refining services, the lease of office space, andair transportation and construction services. In connection with this, the Company paid fees of $0.8 million and $1.7million in the first nine months of 2006 and 2005, respectively, formaintenance services provided by Mexico Compañia de Productos Automotrices S.A.de C.V., a company controlled by the Larrea family. Additionally, in the thirdquarter of 2006 our Mexican subsidiary provided a short-term, interest bearingloan of $10.6 million to Mexico Transportes Aereos, S.A. de C.V. (“MexTransport”)for the purchase of an airplane. MexTransport, a company controlled by the Larrea family, provides aviationservices to our Mexican operations.

TheCompany purchased $3.4 million and $2.9 million in the first nine months of2006 and 2005, respectively; of industrial material from companies in which Mr.Carlos Gonzalez has a proprietary interest. Mr. Carlos Gonzalez is the son of SCC’s Chief Executive Officer.  In addition, the Company purchased $0.5million and $0.2 million in the first nine months of 2006 and 2005,respectively, of industrial material from companies in which Mr. AlejandroGonzalez is employed as a sales representative. Mr. Alejandro Gonzalez is the son of SCC’s Chief Executive Officer.

It is anticipated that in the future the Company willenter into similar transactions with such parties.

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J.                Commitments andContingencies:

Peruvian Operations

Royalty charge-

In June 2004, the Peruvian Congress enacted legislation imposing aroyalty charge to be paid by mining companies in favor of the regionalgovernments and communities where mining resources are located.  Under the new law, the Company is subject toa 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 $48.6 million and $26.2 million in thefirst nine months of 2006 and 2005 respectively, for this royalty.  These provisions are included in “Cost ofsales (exclusive of depreciation, amortization and depletion)” on the condensedconsolidated combined statement of earnings.

In April 2005, a Constitutional Tribunal ruled the law constitutional andadditionally stated that the royalty charge applies to all concessions held inthe mining industry, implying that those entities with tax stability contractsare subject to this charge.  In 1996, theCompany entered into a tax stability contract with the Peruvian government (a “Guaranteeand Promotional Measures for Investment Contract”), relating to our solventextraction and electrowinning (“SX/EW”) production, which agreement purportsto, among other things, fix tax rates and other charges relating to suchproduction.  The Company believes thatthe Constitutional Tribunal’s interpretation relating to entities with taxstability contracts is incorrect and intends to protest the imposition of theroyalty charge on SX/EW production, when and if assessed.  Provisions made by the Company for theroyalty charge do not include approximately $11.9 million of additionalpotential liability relating to its SX/EW production from June 30, 2004 throughSeptember 30, 2006.

Power purchase agreement-

In 1997, SCC sold its 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 was alsocompleted under which SCC agreed to purchase all of its power needs for itsPeruvian operations from Enersur for twenty years, commencing in 1997.

The Company agreed to amend its power purchase agreement in June 2003,resolving certain issues that arose between the parties and reducing powercosts for the remaining life of the agreement. The Company made a one-time contractual payment of $4.0 million toEnersur under the terms of the new agreement. The new agreement releases Enersur from the obligation to constructadditional capacity upon notice to meet the Company’s increased electricityrequirements from the planned expansion and modernization.  SCC believes it can satisfy the need forincreased electricity requirements from other sources, including local powerproviders.

Environmental matters-

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

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In accordance with Peruvian 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 currentoperations that did not have an approved environmental impact study at thetime.  SCC’s PAMA was approved in January1997 and contains 34 mitigation measures and projects necessary to (1) bringthe existing 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, 31 of these projects werecompleted, including all PAMA commitments related to the Company’s operationsin Cuajone and Toquepala.  The threepending PAMA projects all relate to the Ilo smelter operations.  The primary areas of environmental concernare the smelter reverberatory slag eroded from slag deposits up until 1994, andatmospheric emissions from the Ilo smelter.

The slag remediation program is progressing as scheduled and isexpected to be completed by January 2007. With respect to the smelter emissions, the third phase of the Ilomodernization has started and is scheduled to be completed by January2007.  In July 2003, the Company awardedthe contract to provide the technology and basic engineering for themodernization of the Ilo smelter to Fluor Chile S.A. and Xstrata plc (formerlyM.I.M. Holdings Limited).  The Companybelieves that the selected proposal complies with the current environmentalregulations.  This project is the Company’slargest capital investment project and is estimated at $500 million, including$505.8 million expended through September 2006 (which includes $51.5 million ofcapitalized interest not included in the budget).  Beginning in 1995 and continuing while thisproject is under construction, the Company established an emissions curtailmentprogram that has allowed SCC to comply with the annual sulfur dioxide airquality standard (established by the MEM in 1996) in the populated areas of thecity of Ilo.

In 2003, the Peruvian Congress published a new law announcing futureclosure and remediation obligations for the mining industry.  The law was amended in May 2004 and again inMay 2005.  The current modificationestablishes that mining companies must submit their mine closure plans withinone year of publication of final regulations. On August 16, 2005 final regulations were published and the Companyinitiated the preparation of the required mine closure plan.  This plan, in its final form, will include the estimated cost required for thePeruvian operations, including cost at the Ilo smelter and refinery, tailingsdisposal, and the dismantling of the Toquepala and Cuajone concentrators, shopsand auxiliary services.

As the law requires that the mine closure plan be prepared by anindependent consulting entity, the Company engaged Walsh Peru S.A., a Peruviansubsidiary of Walsh Environmental Scientists and Engineers, Inc. (Boulder,Colorado), and the Mines Group Inc (Reno, Nevada) independent consultingentities to prepare the mine closure plan. The conceptual plan, without costs, was submitted to MEM in August 2006and is subject to review by MEM for 45 days. After the MEM review, the Companywill have 90 days to prepare and resubmit the mine closure plan, includingcosts, which is then subject to approval by MEM and open to public discussionand comment in the area of Company operations. Additionally, the law requires companies to provide financial guaranteesto insure that remediation programs are completed.  The Company believes the liability for theseasset retirement obligations cannot currently be precisely measured, orestimated, until the Company has completed its final mine closure plan and isreasonably confident that it will be approved by MEM in most material respects.  However, the Company has made a preliminaryestimate of this liability and has recorded such amount in its financialstatements.  As of September 30, 2006,the Company has recorded $5.6 million for this liability.  The Company believes that this

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estimate should be viewed with caution, pending final approval of itsmine closure plan, expected later in 2006 or early 2007.

For the Company’s Peruvian operations, environmental capitalexpenditures were $117.2 million and $140.3 million in the first nine months of2006 and 2005, respectively.  The Companyexpects to spend approximately $148.2 million for environmental capitalexpenditures in 2006, for the Ilo smelter modernization project.

Mexican operations-

Environmental matters-

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

The principal legislation applicable to the Company’s Mexicanoperations is the federal *Ley General del EquilibrioEcológico y la Protección al Ambiente* (the General Law of EcologicalBalance and Environmental Protection, or the Environmental Law), which isenforced by the *Procuraduría Federal de Protección alAmbiente* (Federal Bureau of Environmental Protection or thePROFEPA).  The PROFEPA monitorscompliance with environmental legislation and enforces Mexican environmentallaws, regulations and official standards and, if warranted, the PROFEPA mayinitiate administrative proceedings against companies that violate environmentallaws, which in the most egregious cases may result in the temporary orpermanent closing of non-complying facilities, the revocation of operatinglicenses and/or other sanctions or fines. Also, according to the *Código Penal Federal*(Federal Criminal Code), the PROFEPA must inform corresponding authoritiesregarding environmental crimes.

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

Due to the proximity of certain facilities of Minera Mexico to urbancenters, the authorities may implement certain measures that may impact orrestrain the operation of such facilities. Any enforcement action to shut down any such facilities may have anadverse effect on the operating results of the relevant subsidiary.

The Company has instituted extensive environmental conservationprograms at its mining facilities 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.

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For the Company’s Mexican operations, environmental capitalexpenditures were $5.3 million and $5.0 million in the first nine months of2006 and 2005, respectively. Approximately $25.7 million has been budgeted for environmental capitalexpenditures in 2006, 77% of which belongs to projects at La Caridad mine whichhave been delayed as a result of the mine closure.

Litigation matters-

Peruvian operations-

Garcia-Ataucuri and Others vs. SCC:  In April 1996, the Company was served with acomplaint filed in Peru by approximately 800 former employees seeking thedelivery of a substantial number of “labor shares” (*accioneslaborales*) of its Peruvian Branch plus dividends on such shares, tobe issued in a proportional way to each former employee in accordance withtheir time of work with SCC’s Branch in Peru.

The Company conducts its operations in Peru through a registeredBranch.  Although the Branch has neithercapital nor liability separate from that of the Company, under Peruvian law itis deemed to have an equity capital for purposes of determining the economicinterest of the holders of the labor shares. The labor shares litigation is based on claims of former employees forownership of labor shares issued during the 1970s until 1989 under a formerPeruvian mandated profit sharing system. In 1971, the Peruvian Governmentenacted legislation providing that workers in the mining industry wouldparticipate in the pre-tax profits of the enterprises for which they worked ata rate of 10%.  This participation wasdistributed 40% in cash and 60% as an equity interest in the enterprise. Underthe law, the equity participation was originally delivered to the “MiningCommunity”, an organization representing all workers.  The cash portion was distributed to theworkers after the close of the year.  Theaccrual for this participation was (and continues to be) a current liability ofthe Company, until paid.  In 1978, thelaw was amended and the equity distribution was calculated at 5.5% of pre-taxprofits and was made to individual workers of the enterprise in the form of “laborshares” to be issued in Peru by the Peruvian Branch of SCC.  These labor shares represented an equityinterest in the enterprise.  In addition,according to the 1978 law, the equity participations previously distributed tothe “Mining Community” were returned to the Company and redistributed in theform of labor shares to the individual employees or former employees.  The cash participation was adjusted to 4.0%of pre-tax earnings and continued to be distributed to employees following theclose of the year.  Effective in 1992,the law was amended to its present status, and the workers’ participation inpre-tax profits was set at 8%, with 100% payable in cash.  The equity participation component waseliminated from the law.

In 1995, the Company offered to exchange new common shares of theCompany for the labor shares issued under the prior Peruvian law.  Approximately 80.8% of the issued labor shareswere exchanged for the Company’s common shares, greatly reducing the minorityinterest on the Company’s balance sheet. What remains of the workers’ equityparticipation is now included in the condensed consolidated balance sheet underthe caption “Minority Interest”. At September 30, 2006, the labor shareminority interest in the Company’s Peruvian Branch amounted to 0.71%.

Since 1995, the Company has periodically purchased labor shares on theopen market.

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

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1)              As stated above, inApril 1996, the Company was served with a complaint filed in Peru byapproximately 800 former employees, (García Ataucuri and others vs. SCC),seeking the delivery of 38,763,806.80 “labor shares” (acciones laborales) (orS/. 3,876,380,679.56), as required by Law # 22333, to be issued in aproportional way to each former employee or worker in accordance with theirtime of work with SCC’s Branch in Peru, plus dividends on such shares. Thisamount corresponds to the total number of labor shares for all of the Company’sPeruvian workers, and the complaint is seeking to have labor shares issued tothe plaintiffs proportionally to each in accordance with their time of workwith the Company, plus dividends on such labor shares. In December 1999, acivil court of first instance of Lima decided against the Company, ordering thedelivery of the labor shares and dividends to the plaintiffs.  The Company appealed this decision in January2000.  On October 10, 2000, the SuperiorCourt of Lima affirmed the lower court’s decision, which had been adverse tothe Company.  On appeal by the Company,the Peruvian Supreme Court annulled the proceeding noting that the civil courtslacked jurisdiction and that the matter had to be decided by a labor court. On March8, 2002, Mr. García Ataucuri restated the claim to comply with Peruvian laborlaw and procedure requirements, and increased the number of plaintiffs toapproximately 958 ex-workers.  The laborjudge dismissed the lawsuit in January 2005. The plaintiffs have appealed to the Lima Labor superior court.

2)              Additionally, on May10, 2006, the Company was served with a new complaint filed in Peru, this timeby 44 former employees, (Cornejo Flores and others vs. SCC), of the Companyseeking delivery of (1) labor shares (or shares of whatever other current legaldenomination)corresponding to years 1971 to December 31,1977 (we understand theplaintiffs are seeking the same 38,763,806.80 labor shares mentioned in theprior lawsuit), that should have been issued in accordance with Law # 22333,plus interest and (2) labor shares resulting from capital increases made by theBranch in 1980 “...for the amount of the workers’ participation of S/.17,246,009,907.20, equivalent to 172,460,099.72 labor shares”, plus dividends.On May 23, 2006, the Company answered this new complaint, denying the validityof the claim.

These two (2) complaints are similar to an April 1996 lawsuit filed byMr. Garcia Ataucuri and others seeking delivery of 38,763,806.80 labor sharesplus dividends and S/. 1,118,439,980.23 in labor shares resulting from capitalincreases made by the Branch. This case was dismissed on August 21, 1997 andthe dismissal confirmed on appeal.

It should be noted that these two (2) lawsuits refer to the original Peruviancurrency called “sol de oro,” which was later changed to the “new sol.”   One billion of soles de oro is equivalent totoday’s one new sol.  The labor sharesare currently called investment shares.

The Company asserts that the claims are meritless and that the laborshares were distributed to the former employees in accordance with the profitsharing law then in effect. We do not believe that an unfavorable outcome isreasonably possible. The Company has not made a provision for these lawsuits becauseit believes that it has meritorious defenses to the claims asserted in thecomplaints.

Class actions

Three purported class action derivative lawsuits have been filed in theDelaware Court of Chancery (New Castle County) late in December 2004 and early January2005 relating to the acquisition of Minera Mexico by SCC.  On January 31, 2005, the three actions LemonBay, LLP v. Americas Mining Corporation, et al., Civil Action No. 961-N,Therault Trust v. Luis Palomino Bonilla, et al., and Southern Copper Corporation,et al., Civil Action No. 969-N, and James Sousa v. Southern

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Copper Corporation, et al., Civil Action No. 978-N were consolidatedinto one action titled, In re Southern Copper Corporation ShareholderDerivative Litigation, Consol.  C. A. No.961-N and the complaint filed in Lemon Bay was designated as the operativecomplaint in the consolidated lawsuit. The consolidated action purports to be brought on behalf of the Company’scommon stockholders.

The consolidated complaint alleges, among other things, that theacquisition of Minera Mexico is the result of breaches of fiduciary duties bythe Company’s directors and is not entirely fair to the Company and itsminority stockholders.  The consolidatedcomplaint seeks, among other things, a preliminary and permanent injunction toenjoin the acquisition, the award of damages to the class, the award of damagesto the Company and such other relief that the court deems equitable, includinginterest, attorneys’ and experts’ fees and costs.  The Company believes that this lawsuit iswithout merit and is vigorously defending itself against this action.

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

Mexican operations-

The Mexican Geological Services (MGS) Royalties:

In August 2002, MGS (formerly named Council of Mineral Resources (“COREMI”))filed with the Third Federal District Judge in Civil Matters, an action demandingfrom Mexcobre the payment of royalties since 1997.  Mexcobre answered and denied MGS’s claims inOctober 2002.  In December 2005, Mexcobresigned an agreement with MGS.  Under theterms of this agreement the parties established a new procedure to calculatethe royalty payments applicable for 2005 and the following years, and theCompany paid in January 2006, $6.9 million of royalties for 2005 and $8.5million as payment on account of royalties from the third quarter 1997 throughthe last quarter of 2004.  We estimatethat the payment made on January 11 will cover 100% of the royalty paymentsrequired for past periods.  Any residualpayments will be determined by a judicial ruling from the above mentionedcourt.  On an ongoing basis the Companywill be required to pay a 1% royalty on La Caridad’s copper production valueafter deduction of treatment and refining charges and certain other carryingcosts.

San Luis Potosi Facilities:

The municipality of San Luis Potosi has granted DesarrolladoraIntersaba, S.A. de C.V., licenses for use of land and construction for housingand/or commercial zones in the former Ejido Capulines, where the residentialproject “Villa Magna” is expected to be developed in the near future.

The “Villa Magna” residential project will be developed within an areathat IMMSA’s approved Risk Analysis by SEMARNAT (the federal environmentalauthority) has secured as a safeguard and buffer zone due to the use by IMMSAof Anhydrous Ammonia Gas.

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

(1)                     First,against the municipality of San Luis Potosi, requesting the annulment of theauthorization and licenses granted to Desarrolladora Intersaba S.A. de C.V. todevelop “Villa Magna” within the zinc plant’s safeguard and buffer zone; and

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

The first action was resolved by denying IMMSA’s interest on August23rd by a Federal court. IMMSA submitted on September 21st its last appealbefore the Supreme Court of Justice.

Based on the foregoing, IMMSA is expecting that in the near futureDesarrolladora Intersaba, S.A. de C.V., files a lawsuit against IMMSA,requesting payment of certain damages supposedly caused by IMMSA, during theprocedure of annulment requested.

These actions are awaiting final resolutions.  IMMSA believes that, should the outcome ofthe above 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 the foregoing, IMMSA has initiated a series of legal andadministrative procedures against the Municipality of San Luis Potosi due toits refusal to issue IMMSA’s a use of land permit in respect to its zincplant.  The Municipality has refused togrant such license based on the argument that IMMSA has failed to submit, aspart of the application process, a “*manifestación de impactoambiental*” (environmental impact assessment).  IMMSA believes that the environmental impactassessment is not required because IMMSA will not undertake constructionactivities.  The trial judge has orderedthe Municipality to continue the analysis of IMMSA’s request to issue the “*licencia de uso de suelo*” (land use permit).  The municipality has refused to issue theland use permit.  IMMSA has filed arequest for relief against such resolution to compel the court to issue the landuse permit.

These procedures are awaiting final resolution.

Additionally, on May 11, 2006 the municipality of San Luis Potosipublished regulations regarding commercial, industrial and rendering servicesactivities, which entered into force on May 12, 2006.  These regulations establish the obligation toobtain within 30 days of the publication, a municipal license to operate saidactivities.  After the publication it wasknown that it would also cover any local environmental and health activities.

IMMSA, due to its activities, has always been legally considered afederally regulated corporation, and the Company has initiated legal actionsagainst the regulations mentioned above.

Based on the foregoing, IMMSA has submitted an Amparo action before aFederal court in Mexico challenging the constitutionally and legality of theregulations.

Tax contingency matters-

U.S. Internal Revenue Service (“IRS”)

The Company is regularly audited by the federal, state and foreign taxauthorities both in the United States and internationally.  These audits can result in proposedassessments.  In 2002, the IRS issued apreliminary Notice of Proposed Adjustment for the years 1994 through 1996.  In 2003, the Company settled thesedifferences with the IRS and made a payment of $4.4 million, including interest.  Generally, the years 1994 through 1996 arenow closed to further adjustment.

18

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The IRS completed field audit work for all years preceding 2003 andcurrently is auditing 2003 and 2004. During the audit of the tax years 1997 through 1999, the IRS questionedthe Company’s accounting policy for determination of useful lives fordepreciable property, the calculation of deductible and creditable Peruviantaxes, the methodology of capitalizing interest and the capitalizing of certaincosts (drilling, blasting and hauling) into inventory value as items forpossible adjustment.  In the fourthquarter of 2003, the Company and the IRS had jointly requested technical advicefrom the IRS National Office to help resolve the inventory value dispute.  In August 2005 the National Office of the IRSresponded to the IRS field audit group’s request for technical advice.  The issuance of this technical advicememorandum (“TAM”) allowed the IRS to close the field audit work for the auditcycles 1997 through 1999 and 2000 through 2002. The TAM accepts the position of the IRS field office and concludes thatthe Company is required to capitalize the drilling, blasting and hauling costsof material transported to its leach dumps based on the weight of materialmoved, without regard to metal content or recoverability.

On October 5, 2005 the Company filed a formal protest with the IRS toappeal the proposed changes with respect to the TAM conclusion, as well asother items of adjustment proposed 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.  The Company believes that the positions thatit is reporting to the IRS are correct and appropriate.  The Company believes that it has substantialdefenses to the proposed IRS adjustments and that adequate provisions have beenmade so that resolution of any issues raised by the IRS will not have amaterial adverse effect on its financial condition or results of operations.Discussions with the Appeals Office representatives have begun and the partieshave agreed to working through the protested issues and concluding the appealsprocess by December 31, 2007.

Significant management judgment is required in determining theprovision for tax contingencies.  Theestimate of the probable cost for resolution of the tax contingencies has beendeveloped in consultation with legal and tax counsel.  The Company does not believe that there is areasonable likelihood that there is an exposure to loss in excess of theamounts accrued.

Peruvian operations:

In Peru the *Superintendencia Nacionalde Administración Tributaria* (SUNAT), the Peruvian TaxAdministration, regularly audits the Company. These audits can result in proposed assessments.

1)                In 2002 theCompany received assessments and penalties from SUNAT for fiscal years 1996through 1999, in which several deductions taken were disallowed.  SUNAT has challenged the Company’sdepreciation method and deduction of other expenses related to charges incurredoutside of Peru from 1996 through 1999, and the deduction of certain exchangedifferences and interest expenses from 1997 through 1999.  The Company appealed these variousassessments and resolution is still pending.

In February 2003, the Peruvian tax court confirmed SUNAT’s assessmentsand penalties with regard to depreciation and deductions of other expenses incurredoutside of Peru for fiscal years 1996 and 1997. Consequently, the Company recognized an additional tax and workers’participation liability for fiscal years 1998 and 1999 on the amounts assessedby SUNAT.  Therefore, in 2003 the Companyrecorded a charge to workers’ participation, included in cost of sales(exclusive of depreciation amortization and depletion) on the statement ofearnings and income tax expense of $0.5 million and $4.4 million, respectively.

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The Company, however, has not recognized a liability for penalties andinterest assessed by SUNAT in connection with the depreciation and otherexpenses deduction as it considers they are not applicable.  The status of the penalty appeals and othertax contingencies is as follows:

a) Year 1996:  With regardto the appeal of the penalty related to fiscal year 1996, the Company wasrequired to issue a letter of credit to SUNAT of $3.4 million, which was issuedin July 2003.  This deposit is recordedin other assets on the condensed consolidated balance sheet.  The Peruvian tax court denied the Company’sappeal in February 2004.  Consequently,in April 2004, the Company filed a lawsuit against the Peruvian tax court andSUNAT in the superior court of Peru.  TheCompany was not required to issue a deposit for appeal of assessments andrulings with respect to any other years. In September 2005, the Superior Court declared the Company’s claimvalid.  SUNAT has appealed this decisionto the Supreme Court in Lima.

b) Year 1997:  With regardto the penalty issued by SUNAT related to fiscal year 1997, in November 2002the Peruvian tax court indicated that the penalty needed to be modified anddeclared the previously issued penalty null. Consequently, SUNAT issued a new penalty in December 2003.  This penalty and penalties related to fiscalyears 1998 and 1999 have been protested before SUNAT.  The Company’s appeal before the Peruvian taxcourt related to the assessments (pertaining to the deduction of certaininterest expense) for fiscal year 1997 was denied.  In this regard, in May 2003, the Companyfiled a lawsuit before the superior court against SUNAT and the Peruvian taxcourt, seeking the reversal of the ruling of the tax court.  In July 2005 the Superior Court remanded thecase to SUNAT for a new pronouncement. SUNAT has appealed the court’s decision to the Supreme Court in Lima.

c) SUNAT has not ruled on the portion of the 1998 and 1999 assessmentrelated to the interest deductions. However, in August 2006, SUNAT ruled on other 1998/1999 issues relatedto payment of commissions to certain financial institutions.  The ruling resolved one issue in favor of theCompany and other issues against the Company. The Company has appealed before the Peruvian tax court the portion ofthe claim decided against the Company.

d) Years 2000 and 2001: In December 2004 and January 2005, theCompany received assessments and penalties from SUNAT for the fiscal years 2000and 2001, in which certain deductions taken by the Company weredisallowed.  SUNAT has objected to the Company’smethod of deducting vacation pay accruals in 2000, a deduction in 2000 for afixed asset write-off, as well as certain other deductions in both years.  The Company has appealed these assessmentsand resolution is still pending. Additionally, the Company received penalties and assessments from SUNATrelating to treatment of foreign exchange differences for 2000 and 2001.  The Company has appealed these assessmentsand resolution is still pending.

In June 2006, a resolution of the fiscal court was published whichfound in favor of the tax payer, that profits related to foreign exchangedifferences need not be included in calculations for monthly advance taxpayments.  This resolution is mandatoryin future cases.  Therefore, the Companyexpects that the portion of the 2000/2001 tax assessment related to foreignexchange difference will be removed from the assessment.

In September 2006, SUNAT declared not valid the Company’s claim relatedto the income tax rate applied to commissions paid to certain financialinstitutions. The Company has appealed SUNAT’s decision before the Peruvian taxcourt.

e) The Company has not recorded any expense associated with theassessment challenging deductions of interest expense for the years 1997, 1998,nor has the

20

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Company recorded any expense associated with the assessments for theyears 2000 and 2001.

Mexican operations

Labor matters

During the first half of 2006, there were a number of work stoppages atsome of the Company’s Mexican operations. While some of these work stoppages were of a short-term nature withlittle or no production loss, others have been more disruptive.  An illegal work stoppage at the La Caridadcopper mine in Sonora began in the first quarter of 2006 and ended when themine was returned to the Company on July 26, 2006.  An illegal work stoppage at the San Martinpolymetallic complex in Zacatecas commenced in the first quarter of 2006 andended in May 2006.  Additionally, workersat the Cananea copper mine went on an illegal work stoppage on June 1, 2006returning to work six weeks later on July 17, 2006.  These work stoppages have been declaredillegal by the Mexican authorities.  OnJune 9, 2006, the Company announced the closing of the La Caridad mine aspicketing workers made it impossible to continue operations. As a result ofthese illegal work stoppages, the Company declared “force majeure” on certainof its June and July copper contracts. On July 14, 2006, with the approval of a Labor Court, the Company firedthe La Caridad workers. Individual work agreements, and the collective unioncontract, were terminated in compliance with the provisions of the rulingrendered by federal labor authorities. On July 26, 2006, the La Caridadinstallations were returned to the Company and the Company commenced to hireworkers to resume operations. In July 2006, the Company reopened the La Caridadmine and by September 30, 2006 restored production to 70% of capacity.  The Company expects to restore 100% ofproductive capacity in the fourth quarter of 2006.

Additionally, in recent years the Company has experienced a number ofstrikes or other labor disruptions that have had an adverse impact on itsoperations and operating results.  Forexample, in Peru on August 31, 2004, unionized workers at the mining units inToquepala and Cuajone initiated strike and sought additional wage increasesbased on high metal prices.  In Mexico,on July 12, 2004, the workers of La Caridad went on strike asking for thereview of certain contractual clauses. Such a review was performed and the workers returned to work 18 dayslater.  On October 15, 2004, the workersof Cananea went on strike, followed by La Caridad workers.  The strike lasted for six days at La Caridadand nine days at Cananea.  In each case,the operations at the particular mine ceased until the strike wasresolved.  The Company cannot giveassurances that they will not experience strikes or other labor-related workstoppages in the future that could have a material adverse effect on itsfinancial condition and results of operations.

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 rescueeffort.  Federal and local governmentalhelp and support was received.  As aresult of the accident 8 miners were injured and 65 perished.

The Coahuila Public District Attorney (*Procuradorde Justicia*) initiated an investigation to establish (1) the causesof the accident and (2) the responsible party. The investigation is underway; however, it will be necessary for theinvestigation team to have access to the site where the explosion occurred,which at present is blocked.  Recoveryefforts are also continuing, however progress is very slow as access is blockedby debris and rocks.  It may still takeseveral more months to complete this effort. The underground coal mining operations at

21

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Pasta de Conchos have been suspended and it is uncertain if and whensuch operations will resume.

Other legal matters-

The Company is involved in various other legal proceedings incidentalto its operations, but the Company does not believe that decisions adverse toit in any such proceedings individually or in the aggregate would have amaterial adverse effect on its financial position or results of operations.

Our direct and indirect parent corporations, including AMC and GrupoMexico, have from time to time been named parties in various litigationsinvolving Asarco.  In March 2003, AMCpurchased its interest in SCC from Asarco. In August 2002 the U.S. Department of Justice brought a claim allegingfraudulent conveyance in connection with AMC’s then-proposed purchase of SCCfrom Asarco.  That action was settledpursuant to a Consent Decree dated February 2, 2003.  The consent decree is binding solely on theU.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.  While Grupo Mexico and its affiliates believethat these claims are without merit, we cannot assure you that these or futureclaims, if successful, will not have an adverse effect on the Company’s parentcorporation or the Company.  Any increasein the financial obligations of the Company’s parent corporation, as a resultof matters related to Asarco or otherwise could, among other matters, result inthe Company’s parent corporation attempting to obtain increased dividends orother funding from the Company.  In 2005,certain subsidiaries of Asarco filed bankruptcy petitions in connection withalleged asbestos liabilities.  In July2005, the unionized workers of Asarco commenced a work stoppage, which wassettled in November 2005.  As a result ofvarious factors, including the above-mentioned work stoppage, on August 9, 2005Asarco filed a voluntary petition for relief under Chapter 11 of the U.S.Bankruptcy Code before the U.S. Bankruptcy Court in Corpus Christi, Texas.  Asarco’s bankruptcy case is being joined withthe bankruptcy cases of its subsidiaries. Asarco is operating and managing its businesses as a debtor inpossession.  Asarco LLC’s bankruptcycould result in additional claims being filed against Grupo Mexico and itssubsidiaries, including SCC, Minera Mexico or its subsidiaries.

Asarco has informed us that it believes that by utilizing the Chapter11 process it can achieve an orderly restructuring of its business and finallyresolve, among other contingencies, its environmental and asbestos claims.  However, it is impossible to predict how thebankruptcy court will ultimately rule with respect to such petitions and theimpact such rulings will have on Asarco and its subsidiaries.

K.            Segment and RelatedInformation:

The Company operates in a single industry, namely mining copper.  Prior to the April 1, 2005 acquisition ofMinera Mexico, the Company determined that its operations in Peru fell withinone segment.  With the acquisition ofMinera Mexico the Company continues to operate principally in one industry, themining of copper.  However, because ofthe demands of managing operations in two countries, effective April 1, 2005Company management views the new Southern Copper as having three operatingsegments and manages on the basis of these segments.  Additionally, in mining copper, the Companyproduces a number of by-products, most important of which are molybdenum,silver and zinc.  The significantincrease in the price of molybdenum over the past two years has had animportant impact on the Company’s earnings. Nevertheless, the Company

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continues to manage its operations on the basis of the three coppersegments.  Added to the segmentinformation is the information regarding the Company’s molybdenum sales.  The segments identified by the Company are:

1.               Peruvianoperations, which includes the Toquepala and Cuajone mine complexes and the smeltingand refining plants, industrial railroad and port facilities which service bothmines.

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 thatproduce zinc, copper, silver and gold, a coal and coke mine, and severalindustrial processing facilities for zinc and copper.  This group is identified as the IMMSA unit.

The Chief Operating Officer of the Company focuses on operating incomeas a measure of performance to evaluate different segments, and to makedecisions to allocate resources to the reported segments.

Financial information relating to Southern Copper’s segments is asfollows:
| ** **                                                             | ** ** | **Three Months Ended September 30, 2006** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                                             | ** ** |
| ** **                                                             | ** ** | **Mexican  Open Pit**                                         | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate  and other  Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                   |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net sales  outside of segments                                         |       | $                                                                  | 366.6      |   | $ | 160.2 |   | $ | 885.4 |   | $ | — |   | $ | 1,412.2 |   |
| Intersegment  sales                                                    |       | 87.9                                                               |       | 29.1 |   | 32.6 |   | (149.6 | ) | — |   |
| Cost of sales  (exclusive of depreciation, amortization and depletion) |       | 240.0                                                              |       | 96.8 |   | 343.9 |   | (171.5 | ) | 509.2 |   |
| Selling, general  and administrative expense                           |       | 8.3                                                                |       | 6.5 |   | 8.4 |   | 1.9 |   | 25.1 |   |
| Depreciation,  amortization and depletion                              |       | 39.5                                                               |       | 7.0 |   | 21.1 |   | 0.2 |   | 67.8 |   |
| Exploration                                                            |       | 0.5                                                                |       | 2.1 |   | 3.0 |   | — |   | 5.6 |   |
| Operating income                                                       |       | $                                                                  | 166.2      |   | $ | 76.9 |   | $ | 541.6 |   | $ | 19.8 |   | 804.5 |   |
| Less:                                                                  |       |                                                               |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                                               |       |   |   |   |   |   |   | (13.4 | ) |
| Loss on debt prepayment                                                |       |                                                               |       |   |   |   |   |   |   | (0.1 | ) |
| Other income (expense)                                                 |       |                                                               |       |   |   |   |   |   |   | 5.3 |   |
| Taxes on income                                                        |       |                                                               |       |   |   |   |   |   |   | (271.9 | ) |
| Minority interest                                                      |       |                                                               |       |   |   |   |   |   |   | (2.8 | ) |
| Net earnings                                                           |       |                                                               |       |   |   |   |   |   |   | $ | 521.6 |   |
|                                                                   |       |                                                               |       |   |   |   |   |   |   |   |   |
| Capital  expenditure                                                   |       | $                                                                  | 34.1       |   | $ | 12.7 |   | $ | 55.5 |   | $ | — |   | $ | 102.3 |   |
| Property, net                                                          |       | $                                                                  | 1,587.9    |   | $ | 277.6 |   | $ | 1,587.5 |   | $ | 33.5 |   | $ | 3,486.5 |   |
| Total assets                                                           |       | $                                                                  | 2,625.7    |   | $ | 617.3 |   | $ | 3,201.1 |   | $ | (568.2 | ) | $ | 5,875.9 |   |

 

23

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| ** **                                                             | ** ** | **Three Months Ended September 30, 2005** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                                             | ** ** |
| ** **                                                             | ** ** | **Mexican  Open Pit**                                         | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate  and other  Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                   |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net sales outside of  segments                                         |       | $                                                                  | 395.0      |   | $ | 63.4 |   | $ | 571.8 |   | $ | — |   | $ | 1,030.2 |   |
| Intersegment sales                                                     |       | 13.9                                                               |       | 21.6 |   | 7.9 |   | (43.4 | ) | — |   |
| Cost of sales  (exclusive of depreciation, amortization and depletion) |       | 151.0                                                              |       | 67.0 |   | 191.3 |   | (26.3 | ) | 383.0 |   |
| Selling, general and  administrative expense                           |       | 7.4                                                                |       | 3.9 |   | 8.4 |   | 0.5 |   | 20.2 |   |
| Depreciation,  amortization and depletion                              |       | 49.4                                                               |       | 6.1 |   | 19.3 |   | — |   | 74.8 |   |
| Exploration                                                            |       | 0.9                                                                |       | 1.9 |   | 3.6 |   | — |   | 6.4 |   |
| Operating income                                                       |       | $                                                                  | 200.2      |   | $ | 6.1 |   | $ | 357.1 |   | $ | (17.6 | ) | 545.8 |   |
| Less:                                                                  |       |                                                               |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                                               |       |   |   |   |   |   |   | (27.8 | ) |
| Gain on  derivative instruments                                        |       |                                                               |       |   |   |   |   |   |   | 5.5 |   |
| Loss on debt  prepayment                                               |       |                                                               |       |   |   |   |   |   |   | — |   |
| Other income  (expense)                                                |       |                                                               |       |   |   |   |   |   |   | 0.1 |   |
| Taxes on income                                                        |       |                                                               |       |   |   |   |   |   |   | (152.6 | ) |
| Minority  interest                                                     |       |                                                               |       |   |   |   |   |   |   | (1.6 | ) |
| Net earnings                                                           |       |                                                               |       |   |   |   |   |   |   | $ | 369.4 |   |
|                                                                   |       |                                                               |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                   |       | $                                                                  | 12.7       |   | $ | 9.0 |   | $ | 96.4 |   | $ | — |   | $ | 118.1 |   |
| Property net                                                           |       | $                                                                  | 1,540.0    |   | $ | 263.0 |   | $ | 1,360.3 |   | $ | 23.5 |   | $ | 3,186.8 |   |
| Total assets                                                           |       | $                                                                  | 2,366.1    |   | $ | 469.9 |   | $ | 3,194.5 |   | $ | (633.6 | ) | $ | 5,396.9 |   |

 
| ** **                                                             | ** ** | **Nine Months Ended September 30, 2006** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                                            | ** ** |
| ** **                                                             | ** ** | **Mexican  Open Pit**                                        | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate  and other  Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                   |       |                                                              |       |   |   |   |   |   |   |   |   |
| Net sales outside of  segments                                         |       | $                                                                 | 1,092.1    |   | $ | 430.3 |   | $ | 2,287.9 |   | $ | — |   | $ | 3,810.3 |   |
| Intersegment sales                                                     |       | 247.5                                                             |       | 54.5 |   | 32.6 |   | (334.6 | ) | — |   |
| Cost of sales  (exclusive of depreciation, amortization and depletion) |       | 624.7                                                             |       | 258.5 |   | 898.1 |   | (343.3 | ) | 1,438.0 |   |
| Selling, general and  administrative expense                           |       | 24.6                                                              |       | 15.5 |   | 27.4 |   | 5.0 |   | 72.5 |   |
| Depreciation,  amortization and depletion                              |       | 116.3                                                             |       | 21.1 |   | 61.2 |   | 0.3 |   | 198.9 |   |
| Exploration                                                            |       | 1.1                                                               |       | 5.1 |   | 8.6 |   | — |   | 14.8 |   |
| Operating income                                                       |       | $                                                                 | 572.9      |   | $ | 184.6 |   | $ | 1,325.2 |   | $ | 3.4 |   | 2,086.1 |   |
| Less:                                                                  |       |                                                              |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                                              |       |   |   |   |   |   |   | (29.2 | ) |
| Loss on debt  prepayment                                               |       |                                                              |       |   |   |   |   |   |   | (1.0 | ) |
| Other income  (expense)                                                |       |                                                              |       |   |   |   |   |   |   | 12.8 |   |
| Taxes on income                                                        |       |                                                              |       |   |   |   |   |   |   | (679.7 | ) |
| Minority interest                                                      |       |                                                              |       |   |   |   |   |   |   | (6.6 | ) |
| Net earnings                                                           |       |                                                              |       |   |   |   |   |   |   | $ | 1,382.4 |   |
|                                                                   |       |                                                              |       |   |   |   |   |   |   |   |   |
| Capital expenditure                                                    |       | $                                                                 | 122.1      |   | $ | 32.3 |   | $ | 178.6 |   | $ | — |   | $ | 333.0 |   |
| Property net                                                           |       | $                                                                 | 1,587.9    |   | $ | 277.6 |   | $ | 1,587.5 |   | $ | 33.5 |   | $ | 3,486.5 |   |
| Total assets                                                           |       | $                                                                 | 2,625.7    |   | $ | 617.3 |   | $ | 3,201.1 |   | $ | (568.2 | ) | $ | 5,875.9 |   |

 

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| ** **                                                             | ** ** | **Nine Months Ended September 30, 2005** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                                            | ** ** |
| ** **                                                             | ** ** | **Mexican  Open Pit**                                        | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate  and other  Eliminations** | ** ** | **Combined** | ** ** |
|                                                                   |       |                                                              |       |   |   |   |   |   |   |   |   |
| Net sales  outside of segments                                         |       | $                                                                 | 1,215.6    |   | $ | 176.5 |   | $ | 1,531.0 |   | $ | — |   | $ | 2,923.1 |   |
| Intersegment  sales                                                    |       | 88.4                                                              |       | 151.5 |   | 7.9 |   | (247.8 | ) | — |   |
| Cost of sales  (exclusive of depreciation, amortization and depletion) |       | 644.3                                                             |       | 255.5 |   | 538.0 |   | (252.1 | ) | 1,185.7 |   |
| Selling, general  and administrative expense                           |       | 20.4                                                              |       | 11.7 |   | 25.1 |   | 2.0 |   | 59.2 |   |
| Depreciation,  amortization and depletion                              |       | 132.6                                                             |       | 17.4 |   | 56.4 |   | (0.1 | ) | 206.3 |   |
| Exploration                                                            |       | 3.3                                                               |       | 4.6 |   | 9.3 |   | — |   | 17.2 |   |
| Operating income                                                       |       | $                                                                 | 503.4      |   | $ | 38.8 |   | $ | 910.1 |   | $ | 2.4 |   | 1,454.7 |   |
| Less:                                                                  |       |                                                              |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                                              |       |   |   |   |   |   |   | (60.3 | ) |
| Gain on derivative instruments                                         |       |                                                              |       |   |   |   |   |   |   | 2.8 |   |
| Loss on debt prepayment                                                |       |                                                              |       |   |   |   |   |   |   | (7.7 | ) |
| Other income (expense)                                                 |       |                                                              |       |   |   |   |   |   |   | 0.2 |   |
| Taxes on income                                                        |       |                                                              |       |   |   |   |   |   |   | (405.4 | ) |
| Minority interest                                                      |       |                                                              |       |   |   |   |   |   |   | (4.6 | ) |
| Net earnings                                                           |       |                                                              |       |   |   |   |   |   |   | $ | 979.7 |   |
|                                                                   |       |                                                              |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                  |       | $                                                                 | 40.4       |   | $ | 24.9 |   | $ | 198.0 |   | $ | — |   | $ | 263.3 |   |
| Property net                                                           |       | $                                                                 | 1,540.0    |   | $ | 263.0 |   | $ | 1,360.3 |   | $ | 23.5 |   | $ | 3,186.8 |   |
| Total assets                                                           |       | $                                                                 | 2,366.1    |   | $ | 469.9 |   | $ | 3,194.5 |   | $ | (633.6 | ) | $ | 5,396.9 |   |

 

Sales value persegment:
| ** ** | ** ** | **Three Months Ended September 30, 2006** | ** ** |
|------------|------------|--------------------------------------------------------------------|------------|
| ** ** | ** ** | **(in millions)**                                             | ** ** |
| ** ** | ** ** | **Mexican  Open Pit**                                         | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|       |       |                                                               |       |   |   |   |   |   |   |   |   |
| Copper     |       | $                                                                  | 422.9      |   | $ | 42.7 |   | $ | 764.5 |   | $ | (115.3 | ) | $ | 1,114.8 |   |
| Molybdenum |       | 3.0                                                                |       | — |   | 108.9 |   | — |   | 111.9 |   |
| Other      |       | 28.8                                                               |       | 146.8 |   | 44.6 |   | (34.7 | ) | 185.5 |   |
| Total      |       | $                                                                  | 454.7      |   | $ | 189.5 |   | $ | 918.0 |   | $ | (150.0 | ) | $ | 1,412.2 |   |

 
| ** ** | ** ** | **Three Months Ended September 30, 2005** | ** ** |
|------------|------------|--------------------------------------------------------------------|------------|
| ** ** | ** ** | **(in millions)**                                             | ** ** |
| ** ** | ** ** | **Mexican  Open Pit**                                         | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|       |       |                                                               |       |   |   |   |   |   |   |   |   |
| Copper     |       | $                                                                  | 295.3      |   | $ | 11.7 |   | $ | 384.0 |   | $ | (17.4 | ) | $ | 673.6 |   |
| Molybdenum |       | 72.5                                                               |       | — |   | 183.8 |   | — |   | 256.3 |   |
| Other      |       | 46.2                                                               |       | 73.3 |   | 11.9 |   | (31.1 | ) | 100.3 |   |
| Total      |       | $                                                                  | 414.0      |   | $ | 85.0 |   | $ | 579.7 |   | $ | (48.5 | ) | $ | 1,030.2 |   |

 
| ** ** | ** ** | **Nine Months Ended September 30, 2006** | ** ** |
|------------|------------|-------------------------------------------------------------------|------------|
| ** ** | ** ** | **(in millions)**                                            | ** ** |
| ** ** | ** ** | **Mexican  Open Pit**                                        | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|       |       |                                                              |       |   |   |   |   |   |   |   |   |
| Copper     |       | $                                                                 | 1,215.6    |   | $ | 100.3 |   | $ | 1,887.6 |   | $ | (263.6 | ) | $ | 2,939.9 |   |
| Molybdenum |       | 38.7                                                              |       | — |   | 334.7 |   | — |   | 373.4 |   |
| Other      |       | 85.4                                                              |       | 384.7 |   | 98.2 |   | (71.3 | ) | 497.0 |   |
| Total      |       | $                                                                 | 1,339.7    |   | $ | 485.0 |   | $ | 2,320.5 |   | $ | (334.9 | ) | $ | 3,810.3 |   |

 

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|            | ** ** | **Nine Months Ended September 30, 2005** | ** ** |
|------------|------------|-------------------------------------------------------------------|------------|
| ** ** | ** ** | **(in millions)**                                            | ** ** |
| ** ** | ** ** | **Mexican  Open Pit**                                        | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Combined** | ** ** |
|       |       |                                                              |       |   |   |   |   |   |   |   |   |
| Copper     |       | $                                                                 | 942.0      |   | $ | 110.7 |   | $ | 946.3 |   | $ | (177.8 | ) | $ | 1,821.2 |   |
| Molybdenum |       | 225.8                                                             |       | — |   | 563.6 |   | — |   | 789.4 |   |
| Other      |       | 141.4                                                             |       | 217.2 |   | 28.9 |   | (75.0 | ) | 312.5 |   |
| Total      |       | $                                                                 | 1,309.2    |   | $ | 327.9 |   | $ | 1,538.8 |   | $ | (252.8 | ) | $ | 2,923.1 |   |

 

Geographic breakdown of Southern Copper’s sales is asfollows:
|                                            | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | **(in millions)**                               | ** ** |
| ** **                                 | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| United States                              |       | $                                                    | 494.0      |                                                | $          | 316.5 |   | $ | 1,355.8 |   | $ | 943.2 |   |
| Europe                                     |       | 424.3                                                |       | 218.9                                               |       | 1,182.1 |   | 586.5 |   |
| Mexico                                     |       | 245.2                                                |       | 228.0                                               |       | 776.4 |   | 639.3 |   |
| Peru                                       |       | 18.4                                                 |       | 15.8                                                |       | 73.9 |   | 47.9 |   |
| Latin America  (excluding Mexico and Peru) |       | 159.7                                                |       | 181.9                                               |       | 449.2 |   | 555.0 |   |
| Australia                                  |       | 1.0                                                  |       | 3.6                                                 |       | 1.0 |   | 3.6 |   |
| Asia                                       |       | 99.9                                                 |       | 65.5                                                |       | 260.1 |   | 158.8 |   |
| Derivative  instruments                    |       | (30.3                                                | )          | —                                              |       | (288.2 | ) | (11.2 | ) |
| Total                                      |       | $                                                    | 1,412.2    |                                                | $          | 1,030.2 |   | $ | 3,810.3 |   | $ | 2,923.1 |   |

 

Major Customer Segment Information:

For the nine months ended September 30, 2006, the Company had revenuesfrom a copper customer of the Mexican and Peruvian operations, which amountedto 12.5% of total revenue.

L.              Impactof New Accounting standards:

In February 2006 the FASB published SFAS No. 155 “Accounting forCertain Hybrid Financial Instruments” an amendment of SFAS No. 133 and140.  This statement improves financialreporting by eliminating the exemption from applying statement 133 to interestsin securitized financial assets so that similar instruments are accounted forsimilarly regardless of the form of the instruments.  This statement also improves financialreporting by allowing a preparer to elect fair value measurement atacquisition, at issuance or when a previously recognized financial instrumentis subject to a remeasurement (new basis) event, on an instrument-by-instrumentbasis, in cases in which a derivative would otherwise have to bebifurcated.  Providing a fair valuemeasurement election also results in more financial instruments being measuredat what the Board regards as the most relevant attribute for financialinstruments, fair value.  SFAS 155 willbe effective for all instruments acquired or issued after the beginning of anentity’s first fiscal year that begins after September 15, 2006.  The Company is evaluating the impact thatthis statement may have on its financial position or results of operations.

In March 2006 the FASB published SFAS No. 156 “Accounting for Servicingof Financial Assets an amendment of FASB Statement No. 140”.  This statement requires that all separatelyrecognized servicing assets and servicing liabilities be initially measured atfair value, if practicable.  The Boardconcluded that fair value is the most relevant measurement attribute for theinitial recognition of all servicing assets and SFAS No. 156 permits, but doesnot require, the subsequent measurement of servicing assets and servicingliabilities at fair value.  An entitythat uses derivative

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instruments to mitigate the risks inherent in servicing assets andservicing liabilities is required to account for those derivative instrumentsat fair value.  Under this Statement, anentity can 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 tosubsequently measure servicing assets and servicing liabilities at fair valueis expected to recognize declines in fair value of the servicing assets andservicing liabilities more consistently than by reporting other-than-temporaryimpairments. The Company is evaluating the impact that this statement may haveon its financial position or results of operations.

The Board decided to require additional disclosures and separatepresentation in the statement of financial position of the carrying amounts ofservicing assets and servicing liabilities that an entity elects tosubsequently measure at fair value to address concerns about comparability thatmay result from the use of elective measurement methods.

SFAS No. 156 will be adopted by the Company as of the beginning of thefiscal year that begins after September 15, 2006. The Company is evaluating theimpact that this statement may have on its financial position or results ofoperations.

In June 2006, the FASB published FIN 48 “Accounting for Uncertainty inIncome Taxes” —an interpretation of FASB Statement No. 109. This interpretationclarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes. It prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. Also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition.

An enterprise that presents a classified statement of financialposition should classify a liability for unrecognized tax benefits as currentto the extent that the enterprise anticipates making a payment within one yearor the operating cycle, if longer. An income tax liability should not beclassified as a deferred tax liability unless it results from a taxabletemporary difference (that is, a difference between the tax basis of an assetor a liability as calculated using this Interpretation and its reported amountin the statement of financial position). This Interpretation does not changethe classification requirements for deferred taxes.

This interpretation is effective for fiscal years beginning afterDecember 15, 2006. Earlier application of the provisions of this Interpretationis encouraged if the enterprise has not yet issued financial statements,including interim financial statements, in the period this Interpretation isadopted. The Company is evaluating the impact that this statement may have onits financial position or results of operations.

In September 2006 the FASB published SFAS No. 157 “Fair ValueMeasurements”. This Statement defines fair value, establishes a framework formeasuring fair value in generally accepted accounting principles (GAAP), andexpands disclosures about fair value measurements. This Statement applies underother accounting pronouncements that require or permit fair value measurements,the Board having previously concluded in those accounting pronouncements thatfair value is the relevant measurement attribute. Accordingly, this Statementdoes not require any new fair value measurements.

The definition of fair value retains the exchange price notion inearlier definitions of fair value. This Statement clarifies that the exchangeprice is the price in an orderly transaction between market participants tosell the asset or transfer the liability in the market in which the reportingentity would transact for the asset or liability, that is, the principal ormost advantageous market for the asset or liability. The transaction to sellthe asset or transfer the liability is a

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hypothetical transaction at the measurement date, considered from theperspective of a market participant that holds the asset or owes the liability.Therefore, the definition focuses on the price that would be received to sellthe asset or paid to transfer the liability (an exit price), not the price thatwould be paid to acquire the asset or received to assume the liability.

This Statement emphasizes that fair value is a market-basedmeasurement, not an entity-specific measurement. Therefore, a fair valuemeasurement should be determined based on the assumptions that marketparticipants would use in pricing the asset or liability. As a basis forconsidering market participant assumptions in fair value measurements, thisStatement establishes a fair value hierarchy that distinguishes between (1)market participant assumptions developed based on market data obtained fromsources independent of the reporting entity (observable inputs) and (2) thereporting entity’s own assumptions about market participant assumptionsdeveloped based on the best information available in the circumstances(unobservable inputs). The notion of unobservable inputs is intended to allowfor situations in which there is little, if any, market activity for the assetor liability at the measurement date. In those situations, the reporting entityneed not undertake all possible efforts to obtain information about marketparticipant assumptions. However, the reporting entity must not ignoreinformation about market participant assumptions that is reasonably availablewithout undue cost and effort.

This Statement is effective for financial statements issued for fiscalyears beginning after November 15, 2007, and interim periods within thosefiscal years. Earlier application is encouraged, provided that the reportingentity has not yet issued financial statements for that fiscal year, includingfinancial statements for an interim period within that fiscal year.

With certain exceptions, the provisions of this Statement should beapplied prospectively as of the beginning of the fiscal year in which thisStatement is initially applied. The Company is evaluating the impact that thisstatement may have on its financial position or results of operations.

In September 2006 the FASB published SFAS No. 158 “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans” anamendment of FASB Statements No. 87, 88, 106, and 132(R). This Statementimproves financial reporting by requiring an employer to recognize theoverfunded or underfunded status of a defined benefit postretirement plan(other than a multiemployer plan) as an asset or liability in its statement offinancial position and to recognize changes in that funded status in the yearin which the changes occur through comprehensive income of a business entity orchanges in unrestricted net assets of a not-for-profit organization. This Statementalso improves financial reporting by requiring an employer to measure thefunded status of a plan as of the date of its year-end statement of financialposition, with limited exceptions.

This Statement requires an employer that is a business entity and sponsorsone or more single-employer defined benefit plans to:

Recognize the funded status of a benefit plan–measured as thedifference between plan assets at fair value (with limited exceptions) and thebenefit obligation–in its statement of financial position. For a pension plan,the benefit obligation is the projected benefit obligation; for any otherpostretirement benefit plan, such as a retiree health care plan, the benefitobligation is the accumulated postretirement benefit obligation.

Recognize as a component of other comprehensive income, net of tax, thegains or losses and prior service costs or credits that arise during the periodbut are not recognized as components of net periodic benefit cost pursuant toFASB Statement No. 87, Employers’ Accounting for Pensions, or No. 106,Employers’ Accounting for Postretirement Benefits Other Than Pensions. Amountsrecognized in accumulated other

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comprehensive income, including the gains or losses, prior servicecosts or credits, and the transition asset or obligation remaining from theinitial application of Statements 87 and 106, are adjusted as they aresubsequently recognized as components of net periodic benefit cost pursuant tothe recognition and amortization provisions of those Statements.

Measure defined benefit plan assets and obligations as of the date ofthe employer’s fiscal year-end statement of financial position (with limitedexceptions).

Disclose in the notes to financial statements additional informationabout certain effects on net periodic benefit cost for the next fiscal yearthat arise from delayed recognition of the gains or losses, prior service costsor credits, and transition asset or obligation.

This Statement amends Statement 87, FASB Statement No. 88, Employers’Accounting for Settlements and Curtailments of Defined Benefit Pension Plansand for Termination Benefits, Statement 106, and FASB Statement No. 132(revised 2003), Employers’ Disclosures about Pensions and Other PostretirementBenefits, and other related accounting literature. Upon initial application ofthis Statement and subsequently, an employer should continue to apply theprovisions in Statements 87, 88, and 106 in measuring plan assets and benefitobligations as of the date of its statement of financial position and indetermining the amount of net periodic benefit cost.

Companies, such as Southern Copper Corporation, with publicly-tradedequity securities are required to adopt the recognition and disclosureprovisions of this Statement as of the end of the fiscal year ending afterDecember 15, 2006. The Company is evaluating the impact that this statement mayhave on its financial position and, or results of operations and will adoptthis statement in the fourth quarter of 2006.

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Part I Item 1a. Risk Factors

Set forth below are certain changes from the risk factors previouslydisclosed in SCC’s Amendment No. 2 on Form 10-K/A for the year ended December31, 2005 filed on August 29, 2006 with the Securities and Exchange Commission.

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

During the first half of 2006, there were a number of work stoppages atsome of our Mexican operations.  Whilesome of these work stoppages were of a short-term nature with little or noproduction loss, others have been more disruptive. An illegal work stoppage atthe La Caridad copper mine in Sonora began in the first quarter of 2006 andended when the mine was returned to the Company on July 26, 2006.  An illegal work stoppage at the San Martinpolymetallic complex in Zacatecas commenced in the first quarter of 2006 andended in May 2006.  Additionally, workersat the Cananea copper mine went on an illegal work stoppage on June 1, 2006,returning to work six weeks later on July 17, 2006.  These work stoppages have been declaredillegal by the Mexican authorities.  OnJune 9, 2006, we announced the closing of the La Caridad mine as picketingworkers made it impossible to continue operations.  As a result of these illegal work stoppages,we declared “force majeure” on certain of our June and July coppercontracts.  On July 14, 2006, with theapproval of a Labor Court, the Company fired the La Caridad workers. Individualwork agreements, and the collective union contract, were terminated incompliance with the provisions of the ruling rendered by federal laborauthorities. On July 26, 2006, the installations were returned to the Companyand the Company commenced to hire workers to resume operations.  In July 2006, the Company reopened the LaCaridad mine and by September 30, 2006 restored production to 70% ofcapacity.  The Company expects to restore100% of productive capacity in the fourth quarter of 2006.

However, we cannot assure you that we will notexperience strikes or other labor-related work stoppages that could have amaterial adverse effect on our financial condition and results of operations.

***Peruvian economic and political conditions may have an adverse impacton our business.***

On April 9, 2006, Peruvian citizens participated in the election forpresident, congress and representatives to the Andean Parliament, to beappointed for the five-year period commencing July 28, 2006.  24 political parties participated in thiselection process.

As none of the presidential candidates received more than 50 percent ofthe valid votes; on June 4, 2006 a run-off election between the top two votegetters was held. On June 16, 2006 the National Office of Electoral Processesproclaimed Mr. Alan Garcia president-elect, thereby bringing the electoralprocess to an end. Mr. Garcia assumed office on July 28, 2006.  At the inauguration an appeal was made to themining industry for a voluntary contribution for regional development.  The Company and the mining industry are workingwith government representatives to determine a proper response to this appeal.  Mr. Garcia, a member of the APRA party, waspresident of Peru from 1985 to 1990.

Because we have significant operations in Peru, we cannot provide anyassurance that political developments in Peru, including the 2006 presidentialand congressional elections, will not have a material adverse effect on marketconditions, prices of our securities, our ability to obtain financing, and ourresults of operations and financial condition.

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***Mexican economic and political conditions may have an adverse impact onour business.***

A general election was held in Mexico on Sunday, July 2, 2006.  Voters went to the polls to elect, on thefederal level: a new President of the Republic for six years, 500 members tothe Chamber of Deputies and 128 members to the Senate.  On July 6, 2006 preliminary results declaredMr. Felipe Calderon winner of the presidential election, by a very slim margin.Mr. Calderon is a member of Partido Accion Nacional (the National ActionParty). Mr. Andres Lopez Obrador, the candidate of the Partido de la RevolucionDemocratica, the runner-up to Mr. Calderon filed challenges in many electoraldistricts, alleging several irregularities and called for street protests. TheFederal Electoral Tribunal, Mexico ́s highest court in electoral matters, confirmedMr. Felipe Calderon as the elected President on September 5, 2006, anddismissed all assumed fraud allegations.

Because we have significant operations in Mexico, we cannot provide anyassurance that political developments in Mexico, including the 2006 presidentialand congressional elections, will not have a material adverse effect on marketconditions, prices of our securities, our ability to obtain financing, and ourresults of operations and financial condition.

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Part I Items 2 and 3.

MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

Our business is primarily the production and sale of copper.  In the process of producing copper, a numberof valuable metallurgical by-products 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, focuses on copper production cost control,production enhancement and maintaining a prudent and conservative capitalstructure to improve profitability.  Webelieve we achieve these goals through capital spending programs, explorationefforts and cost reduction programs.  Ouraim is to remain profitable during periods of low copper prices and to maximizefinancial performance in periods of high copper prices.

We discuss below several matters that we believe are important tounderstand our results 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 commonindustry metric to measure performance is operating cash costs per pound ofcopper produced.  Operating cash cost isa non-GAAP measure that does not have a standardized meaning and may not becomparable to similarly titled measures provided by other companies.  A reconciliation of our operating cash costper pound to the cost of sales (including depreciation, amortization anddepletion), is presented under the subheading “Non-GAAP InformationReconciliation”, below.  We have definedoperating cash cost per pound as cost of sales (including depreciation,amortization and depletion); plus selling, general and administrative charges,treatment and refining charges; less by-products revenue and sales premiums,depreciation amortization and depletion, workers’ participation and othermiscellaneous charges, the Peruvian royalty charge and the change in inventorylevels; divided by total pounds of copper produced and purchased by us.  In our calculation of operating cash cost perpound of copper produced we credit against our costs the revenues from the saleof by-products, principally molybdenum, zinc and silver and the premiums overmarket price that we receive on copper sales. We account for the by-product revenue in this way because we considerour principal business to be the production 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 alsoinclude copper sales premiums as a credit, as these amounts are in excess ofpublished copper prices.  The recentsurge in the price of molybdenum has had a significant effect on ourtraditional calculation of cash cost and its comparability betweenperiods.  Accordingly, we present cashcosts with and without crediting the by-products revenues against our costs.

We exclude from our calculation of operating cash cost depreciation,amortization and depletion, which are considered non-cash expenses.  Exploration is considered a discretionaryexpenditure and is also excluded. Workers’ participation provisions are determined on the basis of pre-taxearnings and are also excluded. Additionally excluded from operating cash cost are items of anon-recurring nature, and the new Peruvian royalty and in periods prior to 2006the portion of mine stripping costs that we capitalized.

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Our operating cash costs per pound, as defined, are presented in thetable below, for the three and nine months ended September 30, 2006 and2005.  We present cash costs with andwithout the inclusion of by-product revenues.
|                                                                                   | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                        | ** ** | **(in cents per pound)**              | ** ** |
| Cash cost per  pound of copper produced and purchased                             |       | 25.1                                                 |       | (1.3                                                | )          | 27.5 |   | (6.6 | ) |
| Cash cost per pound of  copper produced and purchased without by-products revenue |       | 124.0                                                |       | 97.3                                                |       | 123.1 |   | 97.9 |   |

 

A reconciliation of the Company’s operating cash costs per pound toGAAP cost of sales is presented below.

As seen on the chart above, our per pound cash cost for the thirdquarter and nine months of 2006 when calculated with by-products revenue is25.1 cents and 27.5 cents respectively, compared with credits of 1.3 cents and6.6 cents in the third quarter and nine months of 2005, respectively.  The reduction in by-products credit was dueto lower molybdenum prices and volume partially offset by increases in silverand zinc prices.  The price of molybdenumin the third quarter and nine months of 2006 averaged $25.94 per pound and$24.13 per pound, respectively, as compared to $30.06 per pound and $31.71 perpound in the comparable 2005 periods. The price of zinc averaged $1.53 and $1.35 per pound in the third quarterand first nine months of 2006, respective increases of 159.3% and 128.8% overthe comparable 2005 periods.  The silverprice averaged $11.65 and $11.19 per ounce in the third quarter and first ninemonths of 2006, respective increases of 64.8% and 58.3% over the comparable2005 periods.

Our cash costs, excluding by-product revenues, were higher by 26.7cents and 25.2 cents per pound in the third quarter and nine months of 2006,respectively, than the comparable 2005 periods. The principal reason for the higher cost is the increased use of thirdparty concentrates.  As a result of workstoppages at our Mexican open-pit copper mines we purchased additional copperconcentrates to meet our smelting requirements. The impact of this material increased our per pound operating cash costby 34.0 and 21.6 cents in the third quarter and first nine months of 2006,respectively, over the comparable 2005 periods.

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

We are subject to market risks arising from the volatility of copperand other metal prices.  Assuming thatexpected metal production and sales are achieved, that tax rates are unchanged,giving no effect to potential hedging programs, metal price sensitivity factorswould indicate the following change in estimated 2006 earnings resulting frommetal price changes:
|                                                                     | ** ** | **Copper** | ** ** | **Molybdenum** | ** ** | **Zinc** | ** ** | **Silver** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|----------------|------------|----------|------------|------------|------------|
| Change in metal  prices (per pound, except silver – per ounce) |       | $          | 0.01       |           | $          | 1.00     |       | $          | 0.01       |   | $ | 1.00 |   |
| Annual change in net  earnings (in millions)                        |       | $          | 8.1        |           | $          | 14.1     |       | $          | 1.7        |   | $ | 11.0 |   |

 

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Inflation and Devaluation of the Peruvian Nuevo Soland the Mexican Peso. Our functional currency is the U.S. dollar.  Portions of our operating costs aredenominated in Peruvian nuevos soles and Mexican pesos.  Since our revenues are primarily denominatedin U.S. dollars, when inflation/deflation in Peru or Mexico is not offset by achange in the exchange rate of the nuevo sol or the peso, respectively, to thedollar, our financial position, results of operations and cash flows could beadversely affected in our wage adjustments. In addition, the dollar value of our net monetary assets denominated innuevos soles or pesos can be affected by devaluation of the nuevo sol or thepeso, resulting in a remeasurement loss in our condensed consolidated combinedfinancial statements.

For the three and nine months ended September 30, 2006 and 2005,inflation and devaluation rates were as follows:
|                                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Peru:                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Inflation rate                              |       | 0.0                                                  | %          | (0.2                                                | )%         | 1.4 | % | 0.9 | % |
| Nuevo sol/dollar  (change in exchange rate) |       | (0.3                                                 | )%         | 2.8                                                 | %          | (5.3 | )% | 1.9 | % |
|                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Mexico:                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Inflation rate                              |       | 1.8                                                  | %          | 0.9                                                 | %          | 2.5 | % | 1.7 | % |
| Peso/dollar (change in  exchange rate)      |       | (3.1                                                 | )%         | 0.1                                                 | %          | 3.2 | % | (3.7 | )% |

 

Expansion and Modernization Program.

As we near the target date, January 2007,established in our PAMA, the Ilo smelter modernization project is on scheduleand as of September 30, 2006 is 94.1% completed. Investments in thesmelter project exceed $400 million, excluding capitalized interest, and havegenerated more than 3,500 new jobs during the construction; 50% of them fromthe city of Ilo. With the completion of the Ilo smelter modernization project,we will have fulfilled our total obligation under the PAMA. Investment for allsteps of the PAMA is expected to be more than $600 million.

Additionally, our crushing and conveying project at the Toquepala mineis in full production. The primary crusher and associated overland conveyingsystem are fully operational; construction of the operating ramp for thisproject will continue until expected completion in the fourth quarter of2006.  The project is 97.9% complete.  We will construct a new SX/EW plant at theCananea mine with a 33,000 mtpy capacity. The Company signed a contract withBechtel International, Inc. to develop the plant’s basic engineering which was64% complete at the end of September 2006 and is expected to be finished inDecember 2006. Also in Cananea mine, the Company is developing a crushing andconveying system project with a 15 million mtpy capacity and an approximately$50 million investment. The basic engineering is 95% complete, the crusher hasbeen acquired and the bids for the conveying system are under final evaluation.

The Company is currently in the process of evaluating an Ilo smelterexpansion from 1.2 million tons to 1.8 million tons of concentrates and an Ilorefinery expansion from 280,000 tons to 360,000 tons.

Regarding our exploration activities, in May 2006, we began apre-feasibility study at Los Chancas, a copper-molybdenum property in southernPeru.  We expect that the study will becompleted late this year at which time we would hope to move forward with afull feasibility study.  It is our planto fast track this project. Additionally, we have requested bids for a pre-feasibility study for TiaMaria a copper deposit in the department of Arequipa, Peru.  We expect to begin this study in the fourthquarter of 2006 and be completed before the middle of 2007 in order to startconstruction of this project.

34

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Also an expansion of the Cananea concentrator is under a technical andeconomic evaluation. The expanded concentrator would have an additional millingcapacity of 35,000 tons per year and would begin production in the year 2009.In parallel, due to improving molybdenum grades, we hope to build a molybdenumplant to produce concentrates with approximately 4,000 tons of molybdenumcontent

ACCOUNTING ESTIMATES

Our discussion and analysis of financial condition and results ofoperations are based on our condensed consolidated combined financialstatements, which have been prepared in accordance with US GAAP.  Preparation of these condensed consolidatedcombined financial statements requires our management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during thereporting periods.  Management makes itsbest estimate of the ultimate outcome for these items based on historicaltrends and other information available when the financial statements areprepared.  Changes in estimates arerecognized in accordance with the accounting rules for the estimate, which istypically in the period when new information becomes available tomanagement.  Areas where the nature ofthe estimate makes it reasonably possible that actual results could materiallydiffer from amounts estimated include: ore reserves, estimated mine strippingratios, leachable material and related amortization, the estimated useful livesof fixed assets, asset retirement obligations, litigation and contingencies,valuation allowances for deferred tax assets, fair value of financialinstruments and inventory obsolescence. We base our estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances.  Actual results may differ from theseestimates under different assumptions or conditions.

RESULTS OF OPERATIONS

The following highlights key financial and operating results for threeand nine months ended September 30, 2006 and 2005:
|                                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                   | ** ** | **(dollars in millions)**                  | ** ** |
| ** **                                   | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Statement of Earnings  Data                  |       |                                                 |       |                                                |       |   |   |   |   |
|                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Net sales                                    |       | $                                                    | 1,412.2    |                                                | $          | 1,030.2 |   | $ | 3,810.3 |   | $ | 2,923.1 |   |
| Operating costs and  expenses                |       | (607.7                                               | )          | (484.4                                              | )          | (1,724.2 | ) | (1,468.4 | ) |
| Operating income                             |       | 804.5                                                |       | 545.8                                               |       | 2,086.1 |   | 1,454.7 |   |
| Non-operating income (expense)               |       | (8.2                                                 | )          | (22.2                                               | )          | (17.4 | ) | (65.0 | ) |
| Earnings before taxes  and minority Interest |       | 796.3                                                |       | 523.6                                               |       | 2,068.7 |   | 1,389.7 |   |
| Taxes on income                              |       | (271.9                                               | )          | (152.6                                              | )          | (679.7 | ) | (405.4 | ) |
| Minority interest                            |       | (2.8                                                 | )          | (1.6                                                | )          | (6.6 | ) | (4.6 | ) |
| Net earnings                                 |       | $                                                    | 521.6      |                                                | $          | 369.4 |   | $ | 1,382.4 |   | $ | 979.7 |   |

 

Mine copper production amounted to 311.5 million pounds in the thirdquarter of 2006, a decrease of 20.7% compared with the third quarter of2005.  This decrease of 81.3 millionpounds included a decrease of 72.5 million pounds from the Mexican open pitoperations, a decrease of 9.4 million pounds from the Peruvian open pit minesand an increase of 0.6 million pounds from the Mexican underground mines.

The decrease of 72.5 million pounds in the production from the Mexicanopen pit mines was due to the La Caridad mine closing and the Cananea mineillegal work stoppage.

35

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The decrease of 9.4 million pounds from the Peruvian open pit mines wasthe result of lower ore grade and recovery in the Toquepala mine.  The increase of 0.6 million pounds in theMexican underground mines was due to higher grades and recoveries in SanMartin, Charcas and Santa Barbara.

Molybdenum production decreased from 8.5 million pounds in the thirdquarter of 2005 to 5.1 million pounds in the third quarter of 2006.  This 40.0% decrease in production is due to2.0 million of lower production in the Mexican operations as result of theclosing of the La Caridad mine and a decrease of 1.4 million pounds in Peruvianproduction, mainly due to lower ore grade and recovery at the Cuajone mine.

Mine zinc production amounted to 81.1 million pounds in the thirdquarter of 2006, a 0.5% decrease from the third quarter of 2005.  The decrease of 0.4 million pounds in zincproduction is due to lower grade.  Wewill restore 100% of the zinc production at the San Luis Potosi zinc refineryby the end of October.  The refinery wasshut down in the first quarter of this year after a major electrical disruptionthat started a fire at the power substation.

The table below outlines the average metal prices during the three andnine months periods ended September 30, 2006 and 2005:

Average Metals Prices
|                                         | ** ** | **Three Months Ended Sept. 30,** | ** ** | **Nine Months Ended Sept. 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **% Change** | ** ** | **2006** | ** ** | **2005** | ** ** | **% Change** | ** ** |
| Copper ($ per  pound – LME)   |       | $                                                    | 3.48       |                                                | $          | 1.70 |   | 104.7 |   | $ | 3.00 |   | $ | 1.57 |   | 91.1 |   |
| Copper ($ per  pound – COMEX) |       | $                                                    | 3.54       |                                                | $          | 1.70 |   | 108.2 |   | $ | 3.06 |   | $ | 1.57 |   | 94.9 |   |
| Molybdenum ($ per  pound)          |       | $                                                    | 25.94      |                                                | $          | 30.06 |   | (13.7 | ) | $ | 24.13 |   | $ | 31.71 |   | (23.9 | ) |
| Zinc ($ per  pound – LME)     |       | $                                                    | 1.53       |                                                | $          | 0.59 |   | 159.3 |   | $ | 1.35 |   | $ | 0.59 |   | 128.8 |   |
| Silver ($ per ounce –  COMEX) |       | $                                                    | 11.65      |                                                | $          | 7.07 |   | 64.8 |   | $ | 11.19 |   | $ | 7.07 |   | 58.3 |   |

 

Net Sales.  Net sales in the third quarter of 2006increased $382.0 million to $1,412.2 million from $1,030.2 million in thecomparable period in 2005.  Net sales inthe first nine months of 2006 increased $887.2 million to $3,810.3 million from$2,923.1 million in the comparable period in 2005.  The increases in net sales were principallythe result of higher copper, zinc and silver prices reduced by lower molybdenumprices, lower sales volumes and losses on derivative instruments. Gain andlosses on copper derivative instruments are included in the net salesamount.  Losses on copper derivativeinstruments decreased net sales by $30.3 million and $288.2 million in thethird quarter and first nine months of 2006, respectively; and by nil and $11.2million in the third quarter and first nine months of 2005, respectively.

The table below presents information regarding the volume of our coppersales by segment for the three and nine months ended September 30, 2006 and2005:

Copper Sales (million pounds):
|                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **               | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Copper:                  |       |                                                 |       |                                                |       |   |   |   |   |
| Peruvian operations      |       | 225.1                                                |       | 213.3                                               |       | 620.6 |   | 571.8 |   |
| Mexican open-pit         |       | 116.0                                                |       | 166.6                                               |       | 420.5 |   | 597.7 |   |
| Mexican IMMSA unit       |       | 9.4                                                  |       | 6.4                                                 |       | 28.4 |   | 81.2 |   |
| Intersegment elimination |       | (31.7                                                | )          | (14.7                                               | )          | (87.5 | ) | (141.6 | ) |
| Total copper sales       |       | 318.8                                                |       | 371.6                                               |       | 982.0 |   | 1,109.1 |   |

 

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The table below presents information regarding the volume of sales bysegment of our significant by-products for the three and nine months endedSeptember 30, 2006 and 2005:

By-product Sales:
|                                                                                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in million pounds except silver – in   million ounces)** | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Peruvian  operations                                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Molybdenum contained in concentrates                                                                     |       | 4.3                                                  |       | 6.5                                                 |       | 15.2 |   | 18.2 |   |
| Zinc - refined and in concentrate                                                                        |       | 15.9                                                 |       | —                                              |       | 26.4 |   | — |   |
| Silver                                                                                                   |       | 1.2                                                  |       | 1.0                                                 |       | 4.1 |   | 2.8 |   |
|                                                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Mexican open-pit                                                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Molybdenum contained in concentrates                                                                     |       | 0.1                                                  |       | 2.6                                                 |       | 1.7 |   | 6.9 |   |
| Zinc - refined and in concentrate                                                                        |       | 6.0                                                  |       | 29.1                                                |       | 15.4 |   | 79.0 |   |
| Silver                                                                                                   |       | 0.8                                                  |       | 1.1                                                 |       | 3.4 |   | 5.7 |   |
|                                                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Mexican IMMSA  unit                                                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Zinc - refined and in concentrate                                                                        |       | 63.7                                                 |       | 72.3                                                |       | 198.0 |   | 219.7 |   |
| Silver                                                                                                   |       | 3.1                                                  |       | 2.4                                                 |       | 9.0 |   | 8.2 |   |
|                                                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Intersegment  elimination                                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Zinc - refined and in concentrate                                                                        |       | (19.4                                                | )          | (32.7                                               | )          | (33.4 | ) | (71.8 | ) |
| Silver                                                                                                   |       | (0.2                                                 | )          | (0.2                                                | )          | (1.9 | ) | (2.6 | ) |
|                                                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Total by-product  sales                                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Molybdenum contained in concentrates                                                                     |       | 4.4                                                  |       | 9.1                                                 |       | 16.9 |   | 25.1 |   |
| Zinc - refined and in concentrate                                                                        |       | 66.2                                                 |       | 68.7                                                |       | 206.4 |   | 226.9 |   |
| Silver                                                                                                   |       | 4.9                                                  |       | 4.3                                                 |       | 14.6 |   | 14.1 |   |

 

At September 30, 2006, the Company has recorded provisionally pricedsales of 123.8 million pounds of copper, at an average forward price of $3.44per pound.  Also the Company has recordedprovisionally priced sales of 2.9 million pounds of molybdenum at an averageprice of $27.00 per pound.  These salesare subject to final pricing based on the average monthly LME or COMEX copperprices and Dealer Oxide molybdenum prices in the future month of settlement,which will occur largely in the fourth quarter of 2006.

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

Operating Costs and Expenses.Operating costs and expenses were $607.7 million in the third quarter of 2006compared with $484.4 million in the third quarter of 2005.  Cost of sales (exclusive of depreciation,amortization and depletion) for the three months ended September 30, 2006 was$509.2 million compared with $383.0 million in the comparable 2005 period.

The principal reason for the increase in cost of sales in the thirdquarter 2006, as compared to the third quarter of 2005, is the illegal workstoppage activity in Mexico in 2006.  Inorder to meet smelting requirements and fulfill customer deliveries we wererequired to increase our purchases of copper concentrates on the open market.  This coupled with the increased copper pricesin 2006 added an incremental $153.0 million to our 2006 cost of sales over the2005 amount.  Other factors increasingcost of sales include an increase in mining royalties of $5.3 million andincreased workers’ participation of $13.8 million.  Factors partially reducing cost of salesinclude lower fuel, power and repair costs of $41.7 million at our Mexicanoperations, which were shut down due to strike activity.

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Operating costs and expenses were $1,724.2 million in the first ninemonths of 2006 compared with $1,468.4 million in the first nine months of2005.  Cost of sales (exclusive ofdepreciation, amortization and depletion) for the nine months ended September,2006 was $1,438.0 million compared with $1,185.7 million in the comparable 2005period. The increase in cost of sales in the nine-month 2006 period is dueprincipally to $277.7 million of higher cost of copper concentrates purchasedfrom third parties, to cover production work stoppages losses and an increaseof $31.3 million net due to our new accounting for mine stripping cost.  Also, increases in workers’ participation of$41.9 million and higher mining royalties of $19.8 million added to 2006 costof sale.  These increases were partiallyoffset by a decrease in production cost due to $26.2 million of lower fuel andpower cost and $30.3 million of lower operating and repair material costreflecting the loss in production in our Mexican operations during part of thesecond and third quarters.  Additionally,cost of sales includes an inventory increase of $29.4 million.

Depreciation, amortization and depletion for the nine months endedSeptember 30, 2006, were $198.8 million compared with $206.3 million in thefirst nine months of 2005.  The decreaseof $7.4 million is mainly attributable $16.3 million of lower amortization in2006 of the capitalized stripping cost in our Mexican open pit operations, netof $3.7 and $4.8 of higher depreciation in our IMMSA unit and our Peruvianoperations, respectively.

Selling and administrative expenses for the nine months ended September30, 2006, were $72.5 million compared with $59.2 million in the first ninemonths of 2005.  The increase of $13.3million is mainly attributable to $4.3 million of higher salaries and wages,$4.1 million of higher fees for consulting and other services and $0.9 millionof higher equipment rental.

Non-Operating Income (Expense):  Interest expense in the third quarter and thefirst nine months of 2006 were approximately 16.1% and 4.1% lower,respectively, than the comparable 2005 periods. These decreases are the result of the re-structuring of long-term debt.

In the three and nine months ended September 30, 2006 we recorded aloss on debt prepayments of $0.1 million and $1.0 million, respectively; due tothe repurchase of $2.3 million and $18.8 million of our Yankee bonds,respectively; compared with $7.7 million in the nine months ended September2005 related to a prepayment penalty on the retirement of our Peruvian bondsand the repurchase of Yankee bonds.

Interest income was $10.8 million and $34.5 million in the thirdquarter and first nine months of 2006, respectively, compared to $5.1 and $13.5million in the third quarter and first nine months of 2005, respectively.  These increases were principally the resultof higher cash balances in the periods and higher rates of interest earned.

Taxes on income for the nine months ended September 30, 2006 and 2005were $679.7 million and $405.4 million, respectively.  These provisions include income taxes forPeru, Mexico and the United States.  Theeffective tax rates for the 2006 and 2005 periods are 32.9% and 29.2%,respectively.  The increase in the 2006effective tax rate is attributable to the following factors: 1) anon-deductible expense of $29.4 million for workers’ participation resultingfrom a change in Mexican law regarding the basis of calculation in the 2005period, 2) a tax refund of $43.4 million received by our Mexican subsidiary inthe 2005 period for asset-based taxes (minimum income tax) paid in prior years,and 3)a decrease of 1% in the 2006 statutory tax rate for our Mexicanoperations.

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Segment Results Analysis

Peruvian Open Pit Operations

The following table sets forth net sales, operating cost and expensesand operating income for our Peruvian open pit operations segment, for thethree and nine months ended September 30, 2006 and 2005:
|                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **(in millions)**                               | ** ** |
| Net sales                     |       | $                                                    | 918.0      |                                                | $          | 579.7 |   | $ | 2,320.5 |   | $ | 1,538.9 |   |
| Operating costs  and expenses |       | (376.4                                               | )          | (222.6                                              | )          | (995.3 | ) | (628.8 | ) |
| Operating income              |       | $                                                    | 541.6      |                                                | $          | 357.1 |   | $ | 1,325.2 |   | $ | 910.1 |   |

 

Net sales in the third quarter 2006 increased $338.3 million to $918.0million from $579.7 million in the comparable period of 2005.  Net sales in the first nine months of 2006increased $781.6 million to $2,320.5 million from $1,538.9 million in the firstnine months of 2005.  The increase in netsales is principally the result of higher copper prices.  Copper sales volume increased in 2006,principally as a result of the copper purchased from our Mexicanoperations.  Molybdenum sales volume,however, decreased in the 2006 period, due to lower production, and lowermolybdenum sales prices.  Additionally,losses on copper derivatives of $29.9 million and $168.2 million are includedin the third quarter and first nine months of 2006, respectively.

Operating cost and expenses in the third quarter of 2006 increased by$153.8 million to $376.4 million from $222.6 million in the third quarter of2005, principally due to higher cost of sales. Cost of sales (exclusive of depreciation, amortization and depletion)for the three months ended September 30, 2006 was $343.9 million compared to$191.3 million in the same period of 2005. The increase in cost of sales includes $149.8 million of metalspurchased, mainly from our Mexican operations, $6.9 million of capitalized minestripping cost in 2005, $15.5 million of higher workers’ participation and $9.8million of higher mining royalties.

Operating cost and expenses in the first nine months of 2006 increasedby $366.5 million to $995.3 million from $628.8 million in the first ninemonths of 2005, principally due to higher cost of sales.  Cost of sales (exclusive of depreciation,amortization and depletion) for the nine months ended September 30, 2006 was$898.1 million compared to $538.0 million in the same period of 2005.  The increase in cost of sales includes $294.0million of metals purchased, mainly from our Mexican operations, $28.1 millionof lower capitalized mine stripping cost, $37.2 million of higher workers’participation and $22.3 million of higher mining royalties.

Mexican Open Pit Operations

The following table sets forth net sales, operating cost and expensesand operating income for our Mexican open pit operations segment for the threeand nine months periods ended September 30, 2006 and 2005:
|                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **(in millions)**                               | ** ** |
| Net sales                     |       | $                                                    | 454.5      |                                                | $          | 408.9 |   | $ | 1,339.6 |   | $ | 1,304.0 |   |
| Operating costs  and expenses |       | (288.3                                               | )          | (208.7                                              | )          | (766.7 | ) | (800.6 | ) |
| Operating income              |       | $                                                    | 166.2      |                                                | $          | 200.2 |   | $ | 572.9 |   | $ | 503.4 |   |

 

Net sales in the third quarter of 2006 increased $45.6 million to$454.5 million from $408.9 million in the third quarter of 2005.  Net sales in the first nine months of

39

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2006 increased $35.6 million to $1,339.6 million from $1,304.0 millionin the nine months of 2005.  The increasein net sales is the result of the increase in metal prices, significantlyreduced by lower copper sales volume due to work stoppages in Cananea and LaCaridad and a loss on copper derivatives of $0.4 million and $120.0 million inthe third quarter and in the first nine months of $2006, respectively.

Operating cost and expenses in the third quarter of 2006 increased by$79.6 million to $288.3 million from $208.7 million in the third quarter of2005, principally due to higher cost of sales. Cost of sales (exclusive of depreciation, amortization and depletion)increased $89.0 million to $240.0 million from $151.0 million in 2005.  The increase in cost of sales was principallydue to an increase of $95.7 million of higher copper concentrates purchasedfrom third parties to cover the strike related production losses and $17.7million of capitalized mine stripping cost in 2005 which in 2006 is charged toproduction, partially offset by $32.9 million of lower power, fuel and otherproduction cost due to the production loss at La Caridad and Cananea.

Operating cost and expenses in the first nine months of 2006 decreasedby $33.9 million to $766.7 million from $800.6 million in the first nine monthsof 2005, principally due to lower cost of sales and lower depreciation,amortization and depletion.  Cost ofsales (exclusive of depreciation, amortization and depletion) decreased $19.6million to $624.7 million from $644.3 million in 2005.  The decrease in cost of sales was principallydue to $70.9 million of lower power, fuel and other production cost due tostrike-related production losses, $19.0 million of lower workers participation,which includes the effect of an adjustment of $29.4 million in 2005; $11.7 oflower sales expenses and an increase of $15.3 million in translation gain.These decreases were reduced by $102.2 million of higher purchases of thirdparty copper concentrates to cover the lost production.

Mexican Underground Operations (IMMSA)

The following table sets forth net sales, operating cost and expensesand operating income for our IMMSA segment, for the three and nine monthsperiods ended September 30, 2006 and 2005:
|                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **(in millions)**                               | ** ** |
| Net sales                     |       | $                                                    | 189.3      |                                                | $          | 85.0 |   | $ | 484.8 |   | $ | 328.0 |   |
| Operating costs  and expenses |       | (112.4                                               | )          | (78.9                                               | )          | (300.2 | ) | (289.2 | ) |
| Operating income              |       | $                                                    | 76.9       |                                                | $          | 6.1 |   | $ | 184.6 |   | $ | 38.8 |   |

 

Net sales in the third quarter 2006 increased $104.3 million to $189.3million from $85.0 million in the comparable period of 2005.  Net sales in the first nine months of 2006increased $156.8 million to $484.8 million from $328.0 million in thecomparable period of 2005.  The increasein net sales in both the three month and nine month periods of 2006 isprincipally due to higher market prices for zinc copper and silver, offsetsomewhat by lower volume of zinc sales in both 2006 periods, and lower volumeof copper sales in the nine months 2006 period.

Operating cost and expenses in the third quarter of 2006 increased by$33.5 million to $112.4 million from $78.9 million in the third quarter of2005.  Cost of sales (exclusive ofdepreciation, amortization and depletion) increased $29.8 million to $96.8 millionin the third quarter of 2006 from $67.0 million in the third quarter of 2005principally due to $14.0 million of higher purchases of metals from thirdparties, $1.8 million of higher operating and repair material cost and $11.4million of higher workers’ participation.

40

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Operating costs and expenses in the first nine months of 2006 increasedby $11.0 million to $300.2 million from $289.2 million in the first nine monthsof 2005.  Cost of sales (exclusive ofdepreciation, amortization and depletion) increased $3.0 million to $258.5million in the first nine months of 2006 from $255.5 million in the first ninemonths of 2005 principally due to $2.5 million of lower power, fuel and otherproduction cost net of $23.5 million of higher workers’ participation and $36.4million of lower purchases of metals from third parties. The remaining increasein operating costs and expenses was due to $3.7 million of higher depreciation,amortization and depletion and $3.8 million of higher selling, general andadministrative expenses

Intersegment Eliminations and Adjustments

The net sales, operating costs and expenses and operating incomedisplayed above will not be directly equal to amounts in our condensedconsolidated combined statement of earnings because the adjustments ofintersegment operating revenues and expenses must be taken into account.  Please see Note K of the financialstatements.

CASH FLOW

The following table shows the cash flow for the three and nine monthsended September 30, 2006 and 2005:
|                                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **(in millions)**                               | ** ** |
| Net cash  provided from operating activities |       | $                                                    | 522.6      |                                                | $          | 458.4 |   | $ | 1,093.1 |   | $ | 992.6 |   |
| Net cash used  for investment activities     |       | $                                                    | (101.9     | )                                                   | (115.4     | ) | $ | (330.6 | ) | $ | (228.5 | ) |
| Net cash used for  financing activities      |       | $                                                    | (290.9     | )                                                   | $          | (40.6 | ) | $ | (745.0 | ) | $ | (713.0 | ) |

 

Third Quarter:  Net cash provided by operating activities was$522.6 million in the third quarter of 2006, compared with $458.4 million inthe 2005 period. The increase of $64.2 million was principally due to anincrease of $152.2 million in earnings caused by higher metal prices, reducedby a build-up of working capital of $103.4 million mainly due to therequirement to make higher monthly income tax payments.

Net cash used in investing activities was $101.9 million in the thirdquarter of 2006 compared with $115.4 million in the third quarter of 2005 andincluded $102.3 million for capital expenditures.  The capital expenditures included investmentsat our Peruvian operations of $30.9 million for the Ilo smelter modernizationproject and $24.6 million for various other replacement expenditures.  In addition, we spent $46.8 million forreplacement assets at our Mexican operations, of which $34.1 million was at ourMexican open pit operations and $12.7 million in our IMMSA unit.  In the third quarter of 2005, cash used forinvestment activities was $115.4 million; this amount includes capital spendingof $118.1 million, $75.0 million which was in the Ilo smelter modernizationproject, $21.4 from other replacement expenditures in Peru and $21.7 millionfrom replacement expenditures in Mexico.

Net cash used in financing activities in the third quarter of 2006 was$290.9 million, compared with $40.6 million in the third quarter of 2005.  The third quarter of 2006 includes a dividenddistribution of $294.5 million and the repurchase by our Mexican operations of$2.3 million Yankee bonds.  The thirdquarter of 2005 includes a dividend distribution of $153.6 million and $113.6million of net debt incurred.

Nine Months:  Net cash provided by operating activities was$1,093.1 million in the first nine months of 2006 compared with $992.6 millionin the same period of 2005.  The increaseof $100.5 million was principally due to $402.7 million of higher earnings, netof a build-up of working capital of $329.4 million mainly due to therequirement to make higher monthly income tax payments.

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Net cash used in investing activities was $330.6 million in the firstnine months of 2006 compared with $228.5 million in the first nine months of2005 and included $333.0 million for capital expenditures.  The capital expenditures included investmentsat our Peruvian operations of $117.2 million for the Ilo smelter modernizationproject and $61.4 for various other replacement expenditures.  In addition, we spent $154.4 million forreplacement assets at our Mexican operations, of which $122.1 million was atour Mexican open pit operations and $32.3 million at our IMMSA unit.  In the first nine months of 2005, cash usedfor investing activities was $228.5 million; this amount includes capitalspending of $263.3 million, $140.3 million of which was in the Ilo smeltermodernization project, $57.7 million from other replacement expenditures inPeru and $65.3 million from replacement expenditures in Mexico.  Investing activities in 2005 also includednet sales of marketable securities of $45.3 million.

Net cash used in financing activities in the first nine months of 2006was $745.0 million, compared with $713.0 million in the first nine months of2005.  The first nine months of 2006includes a dividend distribution of $1,104.2 million and net debt incurred of$365.7 million.  The first nine months of2005 includes a dividend distribution of $603.6 million and net debt repaid of$105.0 million.

LIQUIDITY AND CAPITAL RESOURCES

On August 25, 2006, the Company paid a quarterly dividend of $1.00 pershare, totaling $294.5 million.  OnOctober 26, 2006, the Board of Directors approved a quarterly dividend of $1.375 per share, totaling $404.9 million, to be paid on December 7, 2006, toshareholders of record as of November 16, 2006.

The Company’s biggest outstanding capital investment project is the Ilosmelter modernization.  This project willmodernize the smelter and bring SCC into compliance 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).  The project is using the Australian ISASMELTtechnology and the Company believes that it will comply with the currentenvironmental regulations.  It isestimated that the construction of the project will be completed before January2007, the deadline established by the PAMA. The estimated cost of this project is $500 million including $ 505.8million expended through September 30, 2006 which includes $51.5 million ofcapitalized interest not included in budget.

We expect that we will meet our cash requirements for 2006 and beyondfrom internally generated funds, cash on hand and from additional externalfinancing, if required.  At September 30,2006 the Company’s debt as a percentage of total capitalization (the total ofdebt, minority interest and stockholders’ equity) was 31.0% as compared with26.0% at December 31, 2005.  At September30, 2006, the Company’s cash and cash equivalent amounted to $918.1 millioncompared to $876.0 million at December 31, 2005.

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NON-GAAP INFORMATION RECONCILIATION

Reconciliation of operating cash cost to GAAP cost of sales in millionsof dollars and cents per pound.
|                                                                            | ** ** | **Three Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                                                                 | ** ** | **$  million**                                       | ** ** | **¢ per  pound** | ** ** | **$  million** | ** ** | **¢ per  pound** | ** ** |
| CASH COST                                                                  |       |                                                 |       |   |   |   |   |   |   |
| Cost of sales  (including depreciation, amortization and depletion) - GAAP |       | $                                                    | 577.0      |   | 161.1 |   | $ | 457.8 |   | 117.6 |   |
| Add:                                                                       |       |                                                 |       |   |   |   |   |   |   |
| Selling, general  and administrative expenses                              |       | 25.2                                                 |       | 7.0 |   | 20.2 |   | 5.2 |   |
| Treatment and  refining charges                                            |       | 12.1                                                 |       | 3.4 |   | 11.7 |   | 3.0 |   |
| Less:                                                                      |       |                                                 |       |   |   |   |   |   |   |
|                                                                       |       |                                                 |       |   |   |   |   |   |   |
| By-products  revenue                                                       |       | (354.0                                               | )          | (98.9 | ) | (383.9 | ) | (98.6 | ) |
| Depreciation,  amortization and depletion                                  |       | (67.7                                                | )          | (18.9 | ) | (74.8 | ) | (19.2 | ) |
| Workers’  participation                                               |       | (66.7                                                | )          | (18.6 | ) | (52.9 | ) | (13.6 | ) |
| Royalty charge  and other                                                  |       | (38.8                                                | )          | (10.8 | ) | (1.2 | ) | (0.3 | ) |
| Inventory change                                                           |       | 2.7                                                  |       | 0.8 |   | 18.1 |   | 4.6 |   |
| Operating cash  cost                                                       |       | 89.8                                                 |       | 25.1 |   | (5.0 | ) | (1.3 | ) |
|                                                                       |       |                                                 |       |   |   |   |   |   |   |
| Add by-product  revenue                                                    |       | 354.0                                                |       | 98.9 |   | 383.9 |   | 98.6 |   |
|                                                                       |       |                                                 |       |   |   |   |   |   |   |
| Operating cash  cost, without by-product revenue                           |       | $                                                    | 443.8      |   | 124.0 |   | $ | 378.9 |   | 97.3 |   |
|                                                                       |       |                                                 |       |   |   |   |   |   |   |
| Total pounds of copper  produced and purchased (in millions)               |       | 358.1                                                |       |   |   | 389.4 |   |   |   |

 
|                                                                            | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                                 | ** ** | **$  million**                                      | ** ** | **¢ per  pound** | ** ** | **$  Million** | ** ** | **¢ per  pound** | ** ** |
| CASH COST                                                                  |       |                                                |       |   |   |   |   |   |   |
| Cost of sales  (including depreciation, amortization and depletion) - GAAP |       | $                                                   | 1,636.8    |   | 154.3 |   | $ | 1,392.0 |   | 122.8 |   |
| Add:                                                                       |       |                                                |       |   |   |   |   |   |   |
| Selling, general  and administrative expenses                              |       | 72.5                                                |       | 6.8 |   | 59.2 |   | 5.2 |   |
| Treatment and  refining charges                                            |       | 28.8                                                |       | 2.7 |   | 38.8 |   | 3.4 |   |
| Less:                                                                      |       |                                                |       |   |   |   |   |   |   |
| By-products  revenue                                                       |       | (1,014.6                                            | )          | (95.6 | ) | (1,183.9 | ) | (104.5 | ) |
| Depreciation,  amortization and depletion                                  |       | (198.8                                              | )          | (18.7 | ) | (206.3 | ) | (18.2 | ) |
| Workers’  participation                                               |       | (202.7                                              | )          | (19.1 | ) | (160.5 | ) | (14.2 | ) |
| Royalty charge  and other                                                  |       | (92.1                                               | )          | (8.8 | ) | (47.2 | ) | (4.0 | ) |
| Inventory change                                                           |       | 62.4                                                |       | 5.9 |   | 33.0 |   | 2.9 |   |
| Operating cash  cost                                                       |       | 292.3                                               |       | 27.5 |   | (74.9 | ) | (6.6 | ) |
|                                                                       |       |                                                |       |   |   |   |   |   |   |
| Add by-product  revenue                                                    |       | 1,014.6                                             |       | 95.6 |   | 1,183.9 |   | 104.5 |   |
|                                                                       |       |                                                |       |   |   |   |   |   |   |
| Operating cash  cost, without by-product revenue                           |       | $                                                   | 1,306.9    |   | 123.1 |   | $ | 1,109.0 |   | 97.9 |   |
|                                                                       |       |                                                |       |   |   |   |   |   |   |
| Total pounds of copper  produced and purchased (in millions)               |       | 1,061.0                                             |       |   |   | 1,133.3 |   |   |   |

 

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Impact of New Accounting Standards

Please see note L to our condensed consolidated combined financialstatements.

Cautionary Statement:

Forward-looking statements in this report and in other Companystatements include statements regarding expected commencement dates of miningor 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’sproducts.  Actual results could differmaterially depending upon factors including the risks and uncertaintiesrelating to general U.S. and international economic and political conditions,the cyclical and volatile prices of copper, other commodities and supplies,including fuel and electricity, availability of materials, insurance coverage,equipment, required permits or approvals and financing, the occurrence of unusualweather or operating conditions, lower than expected ore grades, water andgeological problems, the failure of equipment or processes to operate inaccordance with specifications, failure to obtain financial assurance to meetclosure and remediation obligations, labor relations, litigation andenvironmental risks as well as political and economic risk associated withforeign operations.  Results ofoperations are directly affected by metal prices on commodity exchanges thatcan be volatile.

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Item 4.    Controlsand Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of September 30, 2006, the Company carried out an evaluation, underthe supervision and with the participation of the Company’s DisclosureCommittee and the Company’s management, including the Chief Executive Officerand the Chief Financial Officer, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures (as such term isdefined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of1934, as amended).  Based upon thatevaluation, the Chief Executive Officer and the Chief Financial Officerconcluded that the Company’s disclosure controls and procedures are effectivein timely alerting them to material information relating to the Company(including its consolidated subsidiaries) required to be included in theCompany’s periodic SEC filings.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

There was no change in the Company’s internal controls over financialreporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under theSecurities Exchange Act of 1934, as amended) that occurred during the quarterended September 30, 2006 that has materially affected, or is reasonably likelyto materially affect, the Company’s internal controls over financial reporting.

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Mexico City, November 2, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM

To the Board of Directors and Shareholders of Southern CopperCorporation:

We have reviewed the accompanying condensed consolidated balance sheetof Southern Copper Corporation and subsidiaries as of September 30, 2006 andthe related condensed consolidated combined statement of earnings and cashflows for each of the three-month and nine-month periods ended September 30,2006 and September 30, 2005.  Theseinterim condensed consolidated combined financial statements are theresponsibility of the Company’s management.

We conducted our review in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  A review of interim financial informationconsists principally of applying analytical procedures and making inquiries ofpersons responsible for financial and accounting matters.  It is substantially less in scope than anaudit conducted in accordance with the standards of the Public CompanyAccounting Oversight Board, the objective of which is the expression of anopinion regarding the financial statements taken as a whole.  Accordingly, we do not express such anopinion.

Based on our review, we are not aware of any material modificationsthat should be made to the accompanying condensed consolidated combined interimfinancial statements for them to be in conformity with accounting principlesgenerally accepted in the United States of America.

We have previously audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States), the consolidatedbalance sheet as of December 31, 2005 and the related consolidated combinedstatement of earnings, changes in stockholders’ equity and cash flows for theyear then ended, management’s assessment of the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2005 and theeffectiveness of the Company’s internal control over financial reporting as ofDecember 31, 2005; and in our report dated March 13, 2006, we expressedunqualified opinions thereon.  Theconsolidated combined financial statements and management’s assessment of theeffectiveness of internal control over financial reporting referred to aboveare not presented herein.  In ouropinion, the information set forth in the accompanying condensed consolidatedbalance sheet as of September 30, 2006, is fairly stated in all materialrespects in relation to the consolidated balance sheet from which it has beenderived.

PRICEWATERHOUSECOOPERS

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PART II – OTHER INFORMATION

Item 1. – Legal Procedures

The information provided in Note J to the condensed consolidatedcombined financial statements contained in Part I of this Form 10-Q, is incorporatedherein by reference.

Item 6. – Exhibits

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

 

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PART II – OTHERINFORMATION

SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                  | SOUTHERN COPPER  CORPORATION  (Registrant)            |
|------------------|-------------------------------------------------------|
|             |                                                  |
|             |                                                  |
|             |                                                  |
|             |                                                  |
|             | /s/ Oscar  Gonzalez Rocha                             |
|             | Oscar Gonzalez  Rocha                                 |
|             | President and  Chief Executive Officer                |
|             |                                                  |
| November 3, 2006 |                                                  |
|             |                                                  |
|             |                                                  |
|             |                                                  |
|             | /s/ J. Eduardo  Gonzalez Felix                        |
|             | J. Eduardo  Gonzalez Felix                            |
|             | Vice President,  Finance and Chief  Financial Officer |
|             |                                                  |
| November 3, 2006 |                                                  |

 

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