**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**2005**

**SecondQuarter**

 

**FORM 10-Q**

 

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

 

| **For  Quarter Ended June 30, 2005** | ** ** | **Commission  file number 1-14066** |
|-------------------------------------------|------------|-------------------------------------|

 

**SOUTHERN PERU COPPER CORPORATION**

(Exact name ofregistrant as specified in its charter)

 
| **Delaware**                                                     |   | **13-3849074**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  Incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **2575  East Camelback Rd. Phoenix, AZ**                         |   | **85016**                             |
| (Address of  principal executive offices)                        |   | (Zip Code)                            |

 

Registrant’s telephone number, including area code   **(602) 977-6595**

 

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

 

Yes   ý  No   o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Securities Act of 1934)

 

Yes   ý  No   o

 

As of July 31, 2005there were outstanding 147,228,025 shares of Southern Peru Copper Corporationcommon stock, par value $0.01 per share.

 

 

----

 

Southern PeruCopper Corporation

and Subsidiaries

 

INDEX TO FORM 10-Q

 
| Part I.  Financial Information:  |   |
|---------------------------------------|--------|
|                                  |   |   |   |
| Item 1.                               |   | Condensed Consolidated  Combined Financial Statements (unaudited) |   |
|                                  |   |   |   |
|                                  |   | Condensed Consolidated Combined Statement of Earnings Three months and Six months ended June 30, 2005 and 2004 |   |
|                                  |   |   |   |
|                                  |   | Condensed  Consolidated Combined Balance Sheet June 30, 2005 and December 31,  2004 |   |
|                                  |   |   |   |
|                                  |   | Condensed  Consolidated Combined Statement of Cash Flows Three months and Six months  ended June 30, 2005 and 2004 |   |
|                                  |   |   |   |
|                                  |   | Notes  to Condensed Consolidated Combined Financial Statements |   |
|                                  |   |   |   |
| Items 2. and 3.                       |   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations and Quantitative and  Qualitative Disclosure about Market Risk |   |
|                                  |   |   |   |
| Item  4.                              |   | Controls  and Procedures |   |
|                                  |   |   |   |
| Independent  Accountants’ Report |   |
|                                  |   |   |   |
|                                  |   |   |   |
| Part II. Other Information:      |   |
|                                  |   |   |   |
| Item 1.                               |   | Legal Procedures |   |
|                                  |   |   |   |
| Item 4.                               |   | Submission of Matter to a  Vote of Security Holders |   |
|                                  |   |   |   |
| 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

----

 

Part I -FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Combined Financial Statements

 

Southern PeruCopper Corporation

and Subsidiaries

 

CONDENSEDCONSOLIDATED COMBINED STATEMENT OF EARNINGS

(Unaudited)

 
| ** **                                                                                     | ** ** | **3 Months Ended   June 30,**               | ** ** | **6 Months Ended   June 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                     | ** ** | **2005**                                         | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                     | ** ** | **(in thousands, except for per share amounts)** | ** ** |
|                                                                                           |       |                                             |       |                               |       |   |   |   |   |
| Net sales:                                                                                     |       |                                             |       |                               |       |   |   |   |   |
| Non affiliates                                                                                 |       | $                                                | 951,645    |                               | $          | 698,155 |   | $ | 1,875,730 |   | $ | 1,283,192 |   |
| Affiliates                                                                                     |       | 6,367                                            |       | 24,070                             |       | 28,357 |   | 41,556 |   |
| Total net sales                                                                                |       | 958,012                                          |       | 722,225                            |       | 1,904,087 |   | 1,324,748 |   |
|                                                                                           |       |                                             |       |                               |       |   |   |   |   |
| Operating costs  and expenses:                                                                 |       |                                             |       |                               |       |   |   |   |   |
| Cost of sales  (exclusive of depreciation, amortization and depletion shown separately  below) |       | 413,105                                          |       | 311,391                            |       | 802,675 |   | 574,024 |   |
| Selling, general  and administrative                                                           |       | 20,405                                           |       | 17,375                             |       | 39,003 |   | 33,998 |   |
| Depreciation,  amortization and depletion                                                      |       | 70,544                                           |       | 47,767                             |       | 131,511 |   | 95,300 |   |
| Exploration                                                                                    |       | 5,497                                            |       | 3,573                              |       | 10,844 |   | 7,236 |   |
| Total operating  costs and expenses                                                            |       | 509,551                                          |       | 380,106                            |       | 984,033 |   | 710,558 |   |
|                                                                                           |       |                                             |       |                               |       |   |   |   |   |
| Operating income                                                                               |       | 448,461                                          |       | 342,119                            |       | 920,054 |   | 614,190 |   |
|                                                                                           |       |                                             |       |                               |       |   |   |   |   |
| Interest expense                                                                               |       | (21,866                                          | )          | (32,864                            | )          | (44,812 | ) | (63,639 | ) |
| Capitalized  interest                                                                          |       | 3,991                                            |       | 3,208                              |       | 6,260 |   | 4,545 |   |
| Loss on  derivative instruments                                                                |       | (4,845                                           | )          | —                             |       | (12,121 | ) | — |   |
| Loss on debt  prepayments                                                                      |       | (6,079                                           | )          | —                             |       | (10,099 | ) | — |   |
| Other -  (expense) income                                                                      |       | (2,423                                           | )          | 19,273                             |       | (1,588 | ) | 19,447 |   |
| Interest income                                                                                |       | 3,038                                            |       | 2,289                              |       | 8,490 |   | 3,625 |   |
|                                                                                           |       |                                             |       |                               |       |   |   |   |   |
| Earnings before  taxes on income and minority interest                                         |       | 420,277                                          |       | 334,025                            |       | 866,184 |   | 578,168 |   |
| Taxes on income                                                                                |       | 106,749                                          |       | 99,065                             |       | 252,870 |   | 171,923 |   |
| Minority  interest                                                                             |       | 1,597                                            |       | 3,918                              |       | 3,022 |   | 7,729 |   |
|                                                                                           |       |                                             |       |                               |       |   |   |   |   |
| Net earnings                                                                                   |       | $                                                | 311,931    |                               | $          | 231,042 |   | $ | 610,292 |   | $ | 398,516 |   |
|                                                                                           |       |                                             |       |                               |       |   |   |   |   |
| Per common share  amounts:                                                                     |       |                                             |       |                               |       |   |   |   |   |
| Net earnings -  basic and diluted                                                              |       | $                                                | 2.12       |                               | $          | 1.57 |   | $ | 4.15 |   | $ | 2.71 |   |
| Dividends paid                                                                                 |       | $                                                | 2.38       |                               | $          | 0.54 |   | $ | 3.63 |   | $ | 0.81 |   |
| Weighted average  common shares outstanding (Basic)                                            |       | 147,226                                          |       | 147,222                            |       | 147,226 |   | 147,222 |   |
| Weighted average  common shares outstanding (Diluted)                                          |       | 147,226                                          |       | 147,231                            |       | 147,226 |   | 147,231 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedcombined financial statements.

 

3

----

 

Southern PeruCopper Corporation

and Subsidiaries

 

CONDENSEDCONSOLIDATED COMBINED BALANCE SHEET

(unaudited)

 
| ** **                                                          | ** ** | **June 30,**  | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| ** **                                                          | ** ** | **(in thousands)** | ** ** |
| ASSETS                                                              |       |               |       |                  |       |
| Current assets:                                                     |       |               |       |                  |       |
| Cash and cash  equivalents                                          |       | $                  | 471,166    |                  | $          | 710,707 |   |
| Marketable  securities                                              |       | —             |       | 45,267                |       |
| Accounts  receivable, net                                           |       | 301,154            |       | 458,560               |       |
| Accounts  receivable - Stockholders and affiliates                  |       | 15,677             |       | 15,664                |       |
| Inventories                                                         |       | 366,046            |       | 352,377               |       |
| Prepaid and  other current assets                                   |       | 111,800            |       | 52,966                |       |
| Total current  assets                                               |       | 1,265,843          |       | 1,635,541             |       |
|                                                                |       |               |       |                  |       |
| Net property                                                        |       | 3,109,552          |       | 3,068,486             |       |
| Capitalized mine  stripping, net                                    |       | 315,009            |       | 318,116               |       |
| Leachable  material, net                                            |       | 161,344            |       | 134,621               |       |
| Intangible  assets, net                                             |       | 105,044            |       | 123,496               |       |
| Other assets,  net                                                  |       | 69,880             |       | 38,933                |       |
| Total Assets                                                        |       | $                  | 5,026,672  |                  | $          | 5,319,193 |   |
|                                                                |       |               |       |                  |       |
| LIABILITIES                                                         |       |               |       |                  |       |
| Current  liabilities:                                               |       |               |       |                  |       |
| Current portion  of long-term debt                                  |       | $                  | 41,250     |                  | $          | 152,314 |   |
| Accounts payable                                                    |       | 214,466            |       | 142,362               |       |
| Accrued income  taxes                                               |       | 127,866            |       | 293,295               |       |
| Due to  affiliated companies                                        |       | 12,154             |       | 66,524                |       |
| Deferred income  taxes                                              |       | 52,549             |       | 42,500                |       |
| Accrued workers’  participation                                |       | 86,439             |       | 84,245                |       |
| Other accrued  liabilities                                          |       | 38,919             |       | 180,678               |       |
| Total current  liabilities                                          |       | 573,643            |       | 961,918               |       |
|                                                                |       |               |       |                  |       |
| Long-term debt                                                      |       | 1,070,433          |       | 1,177,974             |       |
| Deferred income  taxes                                              |       | 277,193            |       | 243,600               |       |
| Other  liabilities                                                  |       | 117,026            |       | 105,179               |       |
| Asset retirement  obligation                                        |       | 5,830              |       | 5,643                 |       |
| Total  non-current liabilities                                      |       | 1,470,482          |       | 1,532,396             |       |
|                                                                |       |               |       |                  |       |
| Commitments and  Contingencies (Note I)                             |       |               |       |                  |       |
|                                                                |       |               |       |                  |       |
| MINORITY  INTEREST                                                  |       | 10,527             |       | 11,284                |       |
|                                                                |       |               |       |                  |       |
| STOCKHOLDERS’  EQUITY                                          |       |               |       |                  |       |
| Common stock                                                        |       | 1,474              |       | 1,474                 |       |
| Additional  paid-in capital                                         |       | 726,318            |       | 728,265               |       |
| Accumulated  comprehensive income                                   |       | 2,248,694          |       | 2,088,445             |       |
| Treasury stock                                                      |       | (4,466             | )          | (4,589                | )          |
| Total  Stockholders’ Equity                                    |       | 2,972,020          |       | 2,813,595             |       |
|                                                                |       |               |       |                  |       |
| Total  Liabilities, Minority Interest and Stockholders’ Equity |       | $                  | 5,026,672  |                  | $          | 5,319,193 |   |

 

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

 

4

----

 

Southern PeruCopper Corporation

and Subsidiaries

 

CONDENSEDCONSOLIDATED COMBINED STATEMENT OF CASH FLOWS

(unaudited)

 
| ** **                                                                             | ** ** | **3 Months Ended  June 30,** | ** ** | **6 Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                                                             | ** ** | **2005**                          | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                             | ** ** | **(in thousands)**                | ** ** | **(in thousands)**                | ** ** |
| OPERATING  ACTIVITIES                                                                  |       |                              |       |                              |       |   |   |   |   |
| Net earnings                                                                           |       | $                                 | 311,931    |                              | $          | 231,042 |   | $ | 610,292 |   | $ | 398,516 |   |
| Adjustments to  reconcile net earnings to net cash provided from operating activities: |       |                              |       |                              |       |   |   |   |   |
| Depreciation,  amortization and depletion                                              |       | 70,544                            |       | 47,767                            |       | 131,511 |   | 95,300 |   |
| Capitalized mine  stripping and leachable material                                     |       | (27,922                           | )          | (27,696                           | )          | (52,545 | ) | (43,844 | ) |
| Remeasurement  loss (income)                                                           |       | 11,709                            |       | (7,974                            | )          | 12,035 |   | (4,703 | ) |
| Provision for  deferred income taxes                                                   |       | 28,349                            |       | 575                               |       | 33,436 |   | 19,919 |   |
| Gain on sale of  property                                                              |       | (2,084                            | )          | (22,316                           | )          | (2,084 | ) | (22,316 | ) |
| Loss on  derivative instruments                                                        |       | 4,845                             |       | —                            |       | 12,121 |   | — |   |
| Loss on debt  prepayments                                                              |       | 6,079                             |       | —                            |       | 10,099 |   | — |   |
| Minority  interest                                                                     |       | 1,597                             |       | 3,918                             |       | 3,022 |   | 7,729 |   |
|                                                                                   |       |                              |       |                              |       |   |   |   |   |
| Cash provided  from (used for) operating assets and liabilities:                       |       |                              |       |                              |       |   |   |   |   |
| Accounts  receivable                                                                   |       | 62,548                            |       | (367                              | )          | 131,875 |   | (68,807 | ) |
| Inventories                                                                            |       | (22,618                           | )          | (26,792                           | )          | (16,158 | ) | (54,098 | ) |
| Accounts payable  and accrued liabilities                                              |       | (231,818                          | )          | 76,280                            |       | (303,367 | ) | 81,930 |   |
| Other operating  assets and liabilities                                                |       | (21,114                           | )          | 23,847                            |       | (35,975 | ) | 27,648 |   |
| Net cash  provided by operating activities                                             |       | 192,046                           |       | 298,284                           |       | 534,262 |   | 437,274 |   |
|                                                                                   |       |                              |       |                              |       |   |   |   |   |
| INVESTING  ACTIVITIES                                                                  |       |                              |       |                              |       |   |   |   |   |
| Capital  expenditures                                                                  |       | (69,078                           | )          | (36,205                           | )          | (142,617 | ) | (89,232 | ) |
| Purchase of  marketable securities                                                     |       | —                            |       | —                            |       | (74,339 | ) | — |   |
| Sales of  marketable securities                                                        |       | 74,339                            |       | —                            |       | 119,606 |   | — |   |
| Other                                                                                  |       | (13,932                           | )          | (10,139                           | )          | (16,377 | ) | (7,249 | ) |
| Sales of  property                                                                     |       | 631                               |       | 22,316                            |       | 631 |   | 22,316 |   |
| Net cash used in  investing activities                                                 |       | (8,040                            | )          | (24,028                           | )          | (113,096 | ) | (74,165 | ) |
|                                                                                   |       |                              |       |                              |       |   |   |   |   |
| FINANCING  ACTIVITIES                                                                  |       |                              |       |                              |       |   |   |   |   |
| Debt incurred                                                                          |       | 30,000                            |       | —                            |       | 200,000 |   | — |   |
| Debt repaid                                                                            |       | (129,562                          | )          | (185,148                          | )          | (418,605 | ) | (193,790 | ) |
| Escrow on  long-term loans                                                             |       | (311                              | )          | (5,241                            | )          | (311 | ) | (5,241 | ) |
| Dividends paid  to common stockholders                                                 |       | (350,043                          | )          | (43,368                           | )          | (450,043 | ) | (64,973 | ) |
| Distributions to  minority interest                                                    |       | (2,729                            | )          | (507                              | )          | (3,509 | ) | (507 | ) |
| Treasury stock  transaction                                                            |       | 123                               |       | 71                                |       | 123 |   | 71 |   |
| Other                                                                                  |       | —                            |       | 5,075                             |       | — |   | (98 | ) |
| Net cash used  for financing activities                                                |       | (452,522                          | )          | (229,118                          | )          | (672,345 | ) | (264,538 | ) |
|                                                                                   |       |                              |       |                              |       |   |   |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                          |       | 4,687                             |       | 5,288                             |       | 11,638 |   | 4,839 |   |
|                                                                                   |       |                              |       |                              |       |   |   |   |   |
| (Decrease) increase  in cash and cash equivalents                                      |       | (263,829                          | )          | 50,426                            |       | (239,541 | ) | 103,410 |   |
| Cash and cash  equivalents, at beginning of period                                     |       | 734,995                           |       | 404,594                           |       | 710,707 |   | 351,610 |   |
|                                                                                   |       |                              |       |                              |       |   |   |   |   |
| Cash and cash  equivalents, at end of period                                           |       | $                                 | 471,166    |                              | $          | 455,020 |   | $ | 471,166 |   | $ | 455,020 |   |
|                                                                                   |       |                              |       |                              |       |   |   |   |   |   |   |   |
| Supplemental  disclosure of cash flow information:                                     |       |                              |       |                              |       |   |   |   |   |
| Cash paid during  the period for:                                                      |       |                              |       |                              |       |   |   |   |   |
|                                                                                   |       |                              |       |                              |       |   |   |   |   |
| Interest                                                                               |       | $                                 | 14,275     |                              | $          | 18,496 |   | $ | 45,805 |   | $ | 54,960 |   |
| Income taxes                                                                           |       | $                                 | 313,277    |                              | $          | 35,306 |   | $ | 446,685 |   | $ | 87,110 |   |

 

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

 

5

----

 

Southern PeruCopper Corporation

and Subsidiaries

 

NOTES TO CONDENSEDCONSOLIDATED COMBINED FINANCIAL STATEMENTS

(Unaudited)

 

A.           In the opinion ofSouthern Peru Copper Corporation (the “Company”, “Southern Peru” or “SPCC”),the accompanying 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 June 30,2005 and the results of operations and cash flows for the three months and sixmonths ended June 30, 2005 and 2004. The condensed consolidated combined financial statements for the threemonths and six months period ended June 30, 2005 and 2004 have beensubjected to a review by PricewaterhouseCoopers, the Company’s independentpublic auditors whose report dated July 22, 2005, is presented on page 34.  The results of operations for the threemonths and six months ended June 30, 2005 and 2004 are not necessarilyindicative of the results to be expected for the full year.  The accompanying condensed consolidatedcombined financial statements should be read in conjunction with theconsolidated combined financial statements and notes thereto included in theCompany’s 2004 annual report on Form 10-K and with the combined statementsat December 31, 2004 included in the Company’s Registration Statementdated June 6, 2005, as amended.

 

On April 1, 2005,the Company acquired Minera México S.A. de C.V. (“MM”) from Americas MiningCorporation (“AMC”), a subsidiary of Grupo México S.A. de C.V., the controllingstockholder of the Company.  The Companyexchanged 67,207,640 newly-issued shares of its common stock for theoutstanding shares of MM’s direct majority stockholder, and MM became a99%-owned subsidiary of the Company.  Asa part of this transaction, the Company paid a special transaction dividend of$100 million to all of its stockholders. Upon completion of the merger, Grupo México increased its indirectbeneficial ownership of the Company’s capital stock from approximately 54.2% toapproximately 75.1%.  The Company is nowin the process of integrating the two companies that had previously beenaffiliated but operated independently.

 

The April 2005,transaction is accounted for in a manner similar to a pooling of interests,since it involves the combination of entities under common control.  Accordingly, all of MM’s historical assetsand liabilities are combined with SPCC on a historical cost basis for allperiods prior to April 1, 2005, since they were under common controlduring all of these periods.  Thedifference in the value of the new shares is recognized in equity. The resultsof operations, cash flows and balance sheet for periods prior to April 1,2005, have also been prepared on a combined basis and intercompany balances andtransactions have been eliminated.

 

B.             Common Stock:

 

In connection with the acquisition of MM, the Company’s class A common stock was converted into common stock and preferential voting rights were eliminated.  On June 9, 2005, Cerro Trading Company, Inc., SPC Investors L.L.C., Phelps Dodge Overseas Capital Corporation and Climax Molybdenum B.V., subsidiaries of two of SPCC’s founding shareholders’ and affiliates, sold their equity holdings in SPCC.

 

C.             Inventories were asfollows:

(inmillions)

 
| ** **                                  | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Metals at lower  of average cost or market: |       |                    |       |                        |       |
| Finished goods                              |       | $                       | 23.2       |                        | $          | 22.1 |   |
| Work-in-process                             |       | 201.0                   |       | 187.2                       |       |
| Supplies at  average cost                   |       | 141.8                   |       | 143.1                       |       |
| Total  inventories                          |       | $                       | 366.0      |                        | $          | 352.4 |   |

 

6

----

 

D.            Income Taxes:

 

The Company’s income taxprovision for the six months ended June 30, 2005 and 2004 was $252.9million and $171.9 million, respectively. These provisions include income taxes for Peru, Mexico and the UnitedStates.  The effective tax rates for the2005 and 2004 periods are 29.2% and 29.7%, respectively.  While these tax rates are comparable, includedin the 2005 tax provision is a refund of $43.4 million received by our Mexicansubsidiary for asset-based taxes (minimum income tax) paid in prior years.  Without the benefit of this credit theCompany’s effective tax rate for the 2005 period would increase to 34.2%.  The disparity in the tax rates is the resultof an increase in permanent difference in our Mexican operations, substantiallyall of which is related to a one time non-deductible expense of $28.2 millionfor workers’ participation resulting from a change in law regarding the basisof calculation.

 

E.              ProvisionallyPriced Sales:

 

At June 30, 2005,the Company has recorded provisionally priced sales of 105.2 million pounds ofcopper, at an average forward price of $1.56 per pound. Also the Company hasrecorded provisionally priced sales of 6.4 million pounds of molybdenum at thequarter-end market price of $35.25 per pound. These sales are subject to finalpricing based on the average monthly LME or COMEX copper prices and DealerOxide molybdenum prices in the future month of settlement, which will occur inthe third quarter of 2005.

 

Following are theprovisionally priced copper and molybdenum sales outstanding at June 30,2005:

 

| **Copper**         | ** ** | **Priced at** | ** ** | **Month of  Settlement** | ** ** |
|--------------------|------------|---------------|------------|--------------------------|------------|
| **(million lbs.)** | ** ** | ** **    | ** ** | ** **               | ** ** |
| 93.0               |       | 1.56656       |       | July 2005           |       |
| 12.2               |       | 1.54644       |       | August 2005         |       |
| 105.2              |       | 1.56422       |       |                     |       |
|               |       |          |       |                     |       |
| **Molybdenum**     | ** ** | **Priced at** | ** ** | **Month of  Settlement** | ** ** |
| **(million lbs.)** |       |          |       |                     |       |
| 2.6                |       | 35.25         |       | July 2005           |       |
| 2.6                |       | 35.25         |       | August 2005         |       |
| 1.2                |       | 35.25         |       | September 2005      |       |
| 6.4                |       | 35.25         |       |                     |       |

 

Provisional sales priceadjustments included in accounts receivable and net sales were as follows at June 30(in millions):

 

| ** ** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------|------------|----------|------------|----------|------------|
| Copper     |       | $        | 1.7        |     | $          | (0.3 | ) |
| Molybdenum |       | 10.5     |       | 15.4     |       |
| Total      |       | $        | 12.2       |     | $          | 15.1 |   |

 

AtJuly 22, 2005, the market price of copper and molybdenumincreased(decreased) by $0.05 and $(4.0) per pound respectively.  Therefore the Company’s accounts receivableas of June 30, 2005, would have changed by $5.1 millions and $(25.7)million, respectively, if the Company would have used these market prices inits sales forward price adjustment.

 

F.              Derivative Instruments:

 

The Company occasionallyuses derivative instruments to manage its exposure to market risk from changesin commodity prices and interest rate risk exposure.  The Company does not enter into derivativecontracts unless it anticipates a future activity that is likely to occur thatwill result in exposing the Company to market risk.  Although these derivative instruments areused as economic hedges, such

 

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transactions arecurrently recorded at fair value within the balance sheet with related gainsand losses recorded in earnings, as they do not qualify for hedge accountingunder SFAS No. 133, “Accounting for Derivatives”.

 

Copperswaps:

 

Inthe first half of 2005, the Company entered into copper swap contracts toprotect a portion of its 2005 copper production for future sales at a fixedcopper price.  The Company recordedlosses of $2.1 million and $9.4 million related to these copper swap contractin the second quarter of 2005 and the six month period of 2005,respectively.  These losses are recordedas non-operating items on the condensed consolidated combined statement ofearnings.

 

Interest rate swaps:

 

In October 2004, MM and Citibank-Banamex entered into an interest rate swap agreement for a notional principal amount of $600 million.  Under this agreement, MM agreed to pay Banamex a fixed rate equivalent to 3.49% and, in exchange, Banamex agreed to pay a variable rate equivalent to 3-month LIBOR.  Payments under the interest rate swap are scheduled to match the interest payment dates of the $600 million Citibank credit facility.  The facility was repaid and the related swap was terminated on July 28, 2005.

 

Additionally, in April 2005, the Company entered into a contract to hedge interest rate exposure on $120 million of its $200 million Citibank credit facility.  Under this contract SPCC pays fixed rate interest payments at 4.46% and receives a variable rate equivalent to three month LIBOR.  Payments under the interest rate swap are scheduled to match the interest payment dates of the $600 million credit facility.  The facility was repaid and the related swap was terminated on July 28, 2005.

 

At June 30, 2005 the Company recorded a loss of $2.7 million related to these contracts recorded as non-operating items on the condensed consolidated combined statement of earnings.

 

The fair value of the interest rate swaps used to hedge the interest rate risk was calculated based on discounted expected future cash flows of interest to be received and paid.

 

G.             Debt andCredit Facilities:

 

OnJuly 27, 2005 the Company issued $200 million 6.375% Notes due 2015 and$600 million 7.5% Notes due 2035.  TheNotes are senior unsecured obligations of Southern Peru.  The Company paid $8.8 million of costsrelated to the issuance of these notes. The net proceeds from the issuance and sale of the Notes were used torepay outstanding indebtedness of our Peruvian and Mexican Operations, undertheir $200 million and $600 million ($480 million outstanding) credit facilities,respectively, and the balance will be used for general corporate purposes,including repayment of additional debt.

 

InJanuary 2005, SPCC signed a $200 million credit facility with a group ofbanks led by Citibank, N.A.  In the firstquarter of 2005, proceeds of this credit facility were used to prepay $170million of the bonds issued under SPCC’s Peruvian bond program.  In April 2005 an additional drawdown of$30 million was used to prepay the remaining outstanding bonds.  The Company capitalized $2.8 million of costsassociated with this facility.  TheCompany paid a prepayment penalty of 1%, or $2.0 million, to the Peruvianbondholders.  Additionally, the Companywrote off $2.3 million of previously capitalized bond issuance cost.  Both amounts are included in the statement ofearnings on the line item “Loss on debt prepayments”. On July 28, 2005this credit facility was repaid.

 

OnMarch 30, 2005, the Company prepaid $120.0 million of the principal amountoutstanding under MM’s $600.0 million Citibank credit facility. On July 28,2005 the remaining balance, $480 million, of this credit facility was repaid.

 

OnMay 5, 2005, the Company repurchased $94.6 million of MM’s outstandingsenior

 

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unsecuredbonds (referred to as Yankee bonds).  Inconnection with this purchase the Company paid a premium of $5.7 million, whichis included in the statement of earnings on the line “Loss on debt prepayments”.

 

H.            Related PartyTransaction:

 

On January 15, 2004, the Companyentered into a tolling agreement with ASARCO, LLC (“Asarco”), a formershareholder of the Company and a subsidiary of Grupo Mexico.  Under terms of the agreement, in the firstquarter of 2004 the Company, through its wholly owned US subsidiary, SouthernPeru Limited (“SPL”), commenced delivering to Asarco, at its Amarillo, Texasrefinery, copper cathodes for conversion into copper rods, which the Company isselling to customers in the United States. The Company is obligated to deliver 60,000 tons of copper to the Asarcorefinery in 2005 under the agreement. Deliveries to the Asarco refinery, whichare made on a monthly basis, amounted to approximately 29,500 tons in the firstsix months of 2005.  In the first sixmonths of 2005 the Company sold a portion of the copper treated by Asarco,approximately $13.7 million, to an affiliated entity, The Marmon Group – CerroWire, a stockholder of the Company until June 9, 2005. The Company paysAsarco a tolling charge upon its receipt of copper rods. These charges arebased on competitive market terms.

 

The Company’s Mexicanoperations have a contract with Ferrocarril Mexicano, S.A. de C.V. (“FerroMex”),a subsidiary of Grupo Mexico, which provides for transportation services.  The Company uses FerroMex’s railroad both toship a portion of its mine production and to carry supplies to itsoperations.  The Company paysmarket-based rates for these services. In the six months ended June 30, 2005 and 2004, the Companyrecorded charges of $8.1 million and $8.9 million, respectively, for thisservice.

 

I.                 Commitments andContingencies:

 

Commitments:

 

Peruvian Operations

 

Royalty Charge:

 

In June 2004, thePeruvian Congress enacted legislation imposing a royalty charge to be paid bymining companies in favor of the regional governments and communities wheremining resources are located. In November 2004, more than 5,000 Peruviancitizens filed a request to the Peruvian Constitutional Tribunal to have thelaw declared unconstitutional. However, in April 2005, the ConstitutionalTribunal ruled the royalty law to be constitutional and therefore applicable tomining activities in Peru.  On June 28,2005 the court dismissed the lawsuit and the Company has decided not toappeal.  Under the new law, the Companyis subject to a 1% to 3% royalty charge, based on sales, applicable to thevalue of the concentrates produced in the Toquepala and Cuajone mines. TheCompany made provisions of $17.6 million and $15.6 million in 2004 and thefirst six months of 2005, respectively, for this new royalty charge, which wentinto effect as of June 25, 2004. These provisions were included in cost ofsales (exclusive of depreciation, amortization and depletion) on the Company’scondensed consolidated combined statement of earnings.

 

In addition, theConstitutional Tribunal stated that this charge applied to all concessions heldin the mining industry, implying that those entities with stability contractsare subject to this charge. The Company believes that this interpretation isincorrect and intends to protest the imposition of the royalty charge on itsSX/EW production, which is operating under a tax stability agreement (“Guarantyand Promotional Measures for Investment Contract”).  Provisions made by the Company for theroyalty charge do not include approximately $3.8 million of additionalpotential liability relating to its SX/EW production from June 30, 2004 throughJune 30, 2005.

 

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Powerpurchase agreement:

 

In 1997, the Company soldits Ilo power plant to an independent power company, Enersur S.A., for $33.6million.  In connection with the sale, apower purchase agreement was also completed, under which the Company agreed topurchase all of its power needs for its Peruvian operations from Enersur S.A.for twenty years commencing in 1997.

 

The Company agreed to amend its power purchaseagreement in June 2003, resolving certain issues that arose between theparties and reducing power costs for the remaining life of the agreement.  The Company made a one-time contractualpayment of $4.0 million to Enersur S.A. under terms of the new agreement. Thenew agreement releases Enersur S.A. from the obligation to construct additionalcapacity upon notice to meet the Company’s increased electricity requirementsfrom the planned expansion and modernization. SPCC believes it can satisfy theneed for increased electricity requirements from other sources, including localpower providers.

 

Environmental matters:

 

Peruvian Operations

 

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

 

In accordance withPeruvian regulations, in 1996 SPCC submitted its *Programa deAdecuación y Manejo Ambiental*(the Environmental Compliance andManagement Program, known by its Spanish acronym, PAMA) to the MEM.  A third-party environmental audit wasconducted in order to elaborate the PAMA. The PAMA applied to all current operations that did not have an approvedenvironmental impact study at the time. SPCC’s PAMA was approved in January 1997 and contains 34 mitigationmeasures and projects necessary to (1) bring the existing operations intocompliance with the environmental standards established by the MEM and (2) identifyareas impacted by operations that are no longer active and need to be reclaimedor remediated.  By the end of 2004, 31 ofthese projects were completed, including all PAMA commitments related to theCompany’s operations in Cuajone and Toquepala. The three pending PAMA projects all relate to the Ilo smelteroperations.  The primary areas ofenvironmental concern are the smelter reverberatory slag eroded from slagdeposits up until 1994, and atmospheric emissions from the Ilo smelter.

 

The slag remediationprogram is progressing as scheduled and is expected to be completed by 2007.  With respect to the smelter emissions, thethird phase of the Ilo smelter modernization has started and is scheduled to becompleted by 2007.  In July 2003,the Company awarded the contract to provide the technology and basicengineering for the modernization of the Ilo smelter to Fluor Chile S.A. andXstrata plc (formerly M.I.M. Holdings Limited). The Company believes that the selected proposal complies with thecurrent environmental regulations.  Thisproject is the Company’s largest short-term capital investment project and isestimated at $500 million, including $219.3 million expended through June 30,2005.  Beginning in 1995 and continuingwhile this project is under construction, the Company has established anemissions curtailment program that has allowed the Company to comply with theannual sulfur dioxide air quality standard (established by the MEM in 1996) inthe populated areas of the city of Ilo.

 

On October 14, 2003,the Peruvian Congress published a new law announcing future closure andremediation obligations for the mining industry.  The law was amended on May 28, 2004 andagain on May 8, 2005.  The currentmodification establishes that mining companies submit their mine closure planswithin one year of publication of final regulations and that MEM publish suchfinal regulations within 60 days, approximately by July 22, 2005 (as of July 22,2005 these regulations have not been

 

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published).  The Company is awaiting publication of the regulationsin order to prepare the required mine closure plan.  Additionally, the law requires companies toprovide financial guarantees to insure that remediation programs are completed.  The Company anticipates that this law, whenin force, will increase its asset retirement obligations and require futureexpenditures and amortizations over the life of the mine to satisfy itsrequirements.  The Company believes theliability for these asset retirement obligations cannot currently be measured,or reasonably estimated, based on the proposed generalities of this law.  The Company is studying the impact this lawwill have on its results, but currently cannot reasonably estimate the effectuntil final regulations are published.

 

The Company foreseessignificant environmental capital expenditures in 2005.  During the first six months of 2005, $65.3million of environmental capital expenditures were made on the smelter project,from a 2005 budget of $171 million.

 

Mexican Operations

 

Some of the Company’soperations are subject to Mexican federal, state and municipal environmentallaws, to Mexican official standards, and to regulations for the protection ofthe environment, including regulations relating to water supply, waterpollution, air pollution, noise pollution and hazardous and solid wastes.  Some of these laws and regulations arerelevant to legal proceedings pertaining to the Company’s San Luis Potosífacilities.

 

The principal legislationapplicable to the Company’s Mexican operations is the federal Ley General delEquilibrio Ecológico 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 al Ambiente (Federal Bureauof Environmental Protection, or the PROFEPA). The PROFEPA monitors compliance with environmental legislation andenforces Mexican environmental laws, regulations and official standards and, ifwarranted, the PROFEPA may initiate administrative proceedings against companiesthat violate environmental laws, which in the most egregious cases may resultin the temporary or permanent closing of noncomplying facilities, therevocation of operating licenses and/or other sanctions or fines.  Also, according to the Código Penal Federal(Federal Criminal Code), the PROFEPA has to inform corresponding authoritiesregarding environmental crimes.

 

The Company’s operationsnear the U.S.-Mexican border are also subject to the Agreement on Cooperationfor the Protection and Improvement of the Environment in the Border Area, orthe La Paz Agreement, which was concluded in 1983 between the United States andMexico for the purpose of improving air quality along the border.  The La Paz Agreement establishes sulfurdioxide emissions standards and requires the installation and maintenance ofemission monitoring and record-keeping systems at our smelters in northwesternMexico.  In order to maintain compliancewith sulfur dioxide emissions standards promulgated under the Environmental Lawand the La Paz Agreement, MM shut down the Cananea smelter and operations atMonterrey in December 1999.  Mexicanenvironmental regulations have become increasingly stringent over the lastdecade, and this trend is likely to continue and may be influenced by theenvironmental agreement entered into by Mexico, the United States and Canada inconnection with NAFTA in February 1999. However, the Company’s management does not believe that continuedcompliance with the Environmental Law or Mexican state environmental laws willhave a material adverse effect on the Company’s business, properties, resultsof operations, financial condition or prospects or will result in materialcapital expenditures.  Although theCompany believes that all of its facilities are in material compliance withapplicable environmental, mining and other laws and regulations, the Companycannot assure you that stricter enforcement of existing laws and regulations orthe adoption of additional laws and regulations would not have a material adverseeffect on the Company’s business, properties, results of operations, financialcondition or prospects.

 

Due to the proximity ofcertain facilities of our Mexican Operations subsidiaries near urban centers,the authorities may implement certain measures that may impact or restrain theoperation of such facilities.  Any enforcementaction to shut down

 

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any such facilities mayhave an adverse effect on the operating results of the relevant subsidiary.

 

The Company hasinstituted extensive environmental conservation programs at its miningfacilities in Peru and Mexico.  TheCompany’s environmental programs include water recovery systems to conservewater and minimize contamination of nearby streams, revegetation programs tostabilize the surfaces of the tailings dams and the implementation of scrubbingtechnology in the mines to reduce dust emissions.

 

Litigation Matters:

 

Peruvian Operations

 

Garcia-Ataucuriand others vs. SPCC:  In April 1996, the Company was servedwith a complaint filed in Peru by approximately 800 former employees seekingthe delivery of 38,763,806.80 “labor shares” to be issued in a proportional wayto each in accordance with their time of work with SPCC, plus dividends.  SPCC conducts its operations in Peru througha registered Branch. Although the Branch has neither capital nor liabilityseparate from that of the Company, under Peruvian law it is deemed to have anequity capital for purposes of determining the economic interest of the holdersof investment shares. The labor shares litigation is based on claims of formeremployees for ownership of labor shares issued during the 1970s until 1989under a former Peruvian mandated profit sharing system. We assert that theclaims are meritless and that the labor shares were distributed to the formeremployees in accordance with the then in effect Peruvian profit sharing system.We do not believe that an unfavorable outcome is reasonably possible. In 1971,the Peruvian Government enacted legislation providing that workers in themining industry would participate in the pre-tax profits of the enterprises forwhich they worked at a rate of 10%. This participation was distributed to theworkers with 40% in cash and 60% as an equity interest in the enterprise. Whatremains of the equity participation is now included in the balance sheetcaption “Minority interest.”  Under thelaw, the equity participation was originally delivered to the “Mining Community”,an organization representing all workers. The cash portion was distributed tothe workers after the close of the year. The accrual for this participation was(and continues to be) a current liability of the Company, until paid. In 1978,the law was amended and the equity distribution was calculated at 5.5% ofpre-tax profits and was made to individual workers of the enterprise in theform of labor shares. These labor shares represented an equity interest in theenterprise. In addition, equity participations previously distributed to the “MiningCommunity” were returned to the Company and redistributed in the form of laborshares to individual employees or former employees. The cash participation wasadjusted to 4.5% of pre-tax earnings and continued to be distributed toemployees following the close of the year. Effective in 1992, the law wasamended to its present status. The workers participation in pre-tax profits wasset at 8%, with 100% payable in cash. The equity participation component waseliminated from the law. In 1995, the Company offered to exchange new commonshares of the Company for the labor shares issued under the prior Peruvian law.Approximately 80.8% of the labor shares issued were exchanged for SPCC commonshares, greatly reducing the Minority interest on the Company’s balance sheet.Since 1995, the Company has periodically purchased labor shares on the openmarket. In 1998, labor shares were renamed “investment shares.”  At June 30, 2005, the investment shareinterest in the Company’s Peruvian Branch amounted to 0.71%.

 

Asstated above, in April 1996, the Company was served with a complaint filedin Peru by approximately 800 former employees seeking the delivery of asubstantial number of “labor shares” (now referred to as “investment shares”)of its Peruvian Branch plus dividends on such shares. This amount correspondsto the total number of labor shares for the full SPCC workers, and thecomplaint is seeking to have such shares issued to the plaintiffs inproportional way to each in accordance with their time of work with SPCC, plusdividends on such shares.  In December 1999,a civil court of first instance of Lima decided against the Company, orderingthe delivery of the investment shares and dividends to the plaintiffs.

 

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TheCompany appealed this decision in January 2000. On October 10, 2000,the Superior Court of Lima affirmed the lower court’s decision, which had beenadverse to the Company. On appeal by the Company, the Peruvian Supreme Courtannulled the proceeding noting that the civil courts lacked jurisdiction andthat the matter had to be decided by a labor court. The Lower Court dismissed the lawsuit in January 2005.  The plaintiffs have appealed to the SuperiorCourt.

 

The Company has not made a provision for this lawsuitbecause it believes that it has meritorious defenses to the claims asserted in the complaint.

 

InJune 2004, the Peruvian Congress enacted Law N° 28258, creating a “royaltycharge” to be paid by mining companies in favor of the regional governments andcommunities where mining resources are located.

 

TheCompany and other mining companies have individually challenged before lowercourts the constitutionality of this law through an “injunction procedure”(Acción de Amparo). In January 2005, a civil court in Lima accepted alawsuit initiated by the Company, challenging the constitutionality of themining royalty law of June 2004.

 

In April 2005, theConstitutional Tribunal ruled the royalty law to be constitutional andtherefore applicable to mining activities in Peru.  The decision issued by the PeruvianConstitutional Tribunal cannot be appealed and must be observed by lowercourts.  In view of this, the Companybelieves that it is unlikely that the Company’s injunction procedure lawsuitwill be successful.  In effect, on June 28,2005, the Civil Judge ruled declaring the lawsuit null and void.  The Company will not appeal the decision.

 

*Class Action*

 

Three purported classaction derivative lawsuits have been filed in the Delaware Court of Chancery(New Castle County) late in December 2004 and early January 2005relating to the merger transaction between the Company and MM, (the “Transaction”).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, etal., and Southern Peru Copper Corporation, et al.,*Civil Action No. 969-N,and *James Sousa v. Southern Peru CopperCorporation, et al.,*Civil Action No. 978-N—were consolidatedinto one action titled, *In re Southern PeruCopper Corporation Shareholder Derivative Litigation,*Consol. C.A. No. 961-Nand the complaint filed in *Lemon Bay*wasdesignated as the operative complaint in the consolidated lawsuit.  The consolidated action purports to bebrought on behalf of the Company’s common stockholders.

 

The consolidatedcomplaint alleges, among other things, that the Transaction is the result ofbreaches of fiduciary duties by the Company’s directors and is not entirelyfair to the Company and its minority stockholders. The consolidated complaintseeks, among other things, a preliminarily and permanent injunction to enjointhe Transaction, the award of damages to the class, the award of damages to theCompany and such other relief that the court deems equitable, includinginterest, attorneys’ and experts’ fees and costs. The Company believes thatthis lawsuit is without merit and is vigorously defending against this action.

 

The Company does notbelieve that the aforementioned legal proceedings and tax contingencies mentionedbelow will have a material adverse effect on the financial position or resultsof operations of the Company and its consolidated subsidiaries.

 

Mexican Operations

 

Ejido land matter:

 

In July 1991, theMexican agricultural community of Pilares de Nacozari Ejido, or Ejido,commenced an action in the first federal district court in Sonora, Mexico

 

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against the MexicanMinistry of Agrarian Reform, or the Ministry. The action alleged improper expropriation of approximately 1,500hectares of land adjacent to the La Caridad mine and on which certain ofMexcobre’s facilities are currently located. Mexcobre was not named as a defendant in the action although it wasincluded as an interested third party due to its ownership of the land.  Mexcobre bought the land in question in 1976from the *Banco Nacional de Obras y ServiciosPúblicos*, which had previously acquired it as a beneficiary of theexpropriation by the Ministry in 1973 and has alleged legal and physicalimpossibility of returning the land.

 

After two previousrulings stating that it is impossible to return the land as a means ofrestitution, a third and final ruling from the Mexican Appellate District Courtinstructed the district court judge to resolve the legal and materialimpossibility of returning the land as a means of restitution.  We believe that if the Ejido requestsindemnity instead of a return of the land, Mexcobre’s financial liability withrespect to such compensation would not be material.

 

Coremi royalties:

 

When Mexcobre originallyreceived mining concessions related to its La Caridad unit in 1970, it wasrequired to pay royalties to the Council of Mineral Resources, which isreferred to as Coremi.  When the MiningLaw came into effect in 1992, this obligation was terminated.  However, Coremi, the Mexican Superintendentof Mining and the Mexican Secretary of Economy, did not concede that theroyalty obligation to Coremi was terminated and, in 1995, Coremi initiated aseries of legal actions that are still pending. In August 2002, Coremi filed with the Third Federal District Judgein Civil Matters, an action demanding from Mexcobre the payment of royaltiesdue since 1997.  Mexcobre answered anddenied Coremi’s claims in October 2002 and currently is in the discoverystage (*etapa de ofrecimiento de pruebas*).  The parties are currently seeking anegotiated settlement.  The Company andMexcobre believe that any such payment related to this matter would not bematerial to it or to Mexcobre.

 

San Luis Potosí facilities:

 

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

 

The “Villa Magna”residential project will be developed within what IMMSA believes are theboundaries of an environmental and safeguard buffer zone required to be createdand maintained pursuant to the Environmental Law and its regulations, based ona risk study approved by the Environmental and Natural Resources Ministry.  This risk study revealed that the operationof the zinc refinery, by its nature, represents potential risks to thirdparties.

 

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

 

(i)                       first,against the Municipality of San Luis Potosí, requesting the annulment of theauthorization and licenses granted to Desarrolladora Intersaba, S.A. de C.A. dodevelop “Villa Magna” within the zinc plant’s safeguard and buffer zone; and

 

(ii)                    second,against the PROFEPA’s administrative resolution “advising” (rather thanenforcing) the Municipality to acknowledge the safeguard buffer zone aroundIMMSA’s zinc refinery as approved by the Environmental and Natural ResourcesMinistry.

 

These actions areawaiting final resolutions.  IMMSAbelieves that, should the outcome of the above mentioned legal proceedings beadverse to IMMSA’s interests,

 

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the construction of the “VillaMagna” housing and commercial development would not, in itself, affect theoperations of IMMSA’s zinc plant.

 

In addition to theforegoing, IMMSA has initiated a series of legal and administrative proceduresagainst the Municipality of San Luis Potosí due to its refusal to issue IMMSA’suse of land permit in respect of its zinc plant.  The Municipality has refused to grant suchlicense based on the argument that IMMSA has failed to submit, as part of theapplication process, *a manifestación deimpacto ambiental* (environmental impact assessment).  IMMSA believes that the environmental impactassessment is not required because IMMSA will not undertake constructionactivities. The trial judge has ordered the Municipality to continue theanalysis of IMMSA’s request to issue the *licenciade uso de suelo* (use of land permit).

 

*Tax*contingency*matters*-

 

Peruvian Operations

 

The Company is regularly audited by the federal, stateand foreign tax authorities both in the United States and internationally.These audits can result in proposed assessments. In 2002, the Internal RevenueService (IRS) has issued a preliminary Notice of Proposed Adjustment for theyears 1994 through 1996. In 2003, the Company settled these differences withthe IRS and made a payment of $4.4 million, including interest. Generally, theyears 1994 through 1996 are now closed to further adjustment.

 

The IRS is now completing its field audit of the taxyears 2000 through 2002 and had previously completed the field audit work for1997 through 1999. During the audit of the tax years 1997 through 1999, the IRSquestioned the Company’s accounting policy for determination of useful lives,the calculation of deductible and creditable Peruvian taxes, the methodology ofcapitalizing interest and the capitalizing of certain costs (drilling, blastingand hauling) into inventory value as items for possible adjustment. In thefourth quarter of 2003, the Company and the IRS had jointly requested technicaladvice from the IRS National Office to help resolve the inventory valuedispute. The years 1997 through 2002 will remain open until the inventory valueand all outstanding issues are resolved. The Company believes that thepositions that it is reporting to the IRS are correct and appropriate.  The Company believes that it has substantialdefenses to the IRS assessments and that adequate provisions have been made sothat resolution of any issues raised by the IRS will not have an adverse effecton its financial condition or results of operations. Significant managementjudgment is required in determining the provision 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 notbelieve that there is a reasonable likelihood that there is an exposure to lossin excess of the amounts accrued therefore.

 

In December 2004 and January 2005, theCompany received assessments and penalties from the Peruvian Tax Administration(“SUNAT”) for the fiscal years 2000 and 2001, in which certain deductions takenby the Company were disallowed. SUNAT has objected to the Company’s method ofdeducting vacation pay accruals in 2000, a deduction in 2000 for a fixed assetwrite-off, as well as certain other deductions in both years.  The Company has appealed these assessmentsand resolution is still pending.

 

In prior years, the Company received assessments andpenalties from SUNAT for fiscal years 1996 through 1999, in which severaldeductions 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 appealedthese assessments and resolution is still pending.

 

In February 2003, the Peruvian tax courtconfirmed SUNAT’s assessments and penalties with regard to depreciation anddeductions of other expenses incurred outside of Peru for fiscal years 1996 and1997.  Consequently, the Companyrecognized an additional tax and workers participation liability for fiscalyears 1998 and 1999 on

 

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the amounts assessed by SUNAT. Therefore, in 2003 theCompany recorded 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. The Company, however, has not recognized a liability forpenalties and interest assessed by SUNAT in connection with the depreciationand other expenses deduction as it considers they are not applicable. Thestatus of the penalty appeals is as follows:

 

With regard to the appeal of the penalty related tofiscal year 1996, the Company was required to issue a letter of credit to SUNATof $3.4 million, which was issued in July 2003. This deposit is recordedin other assets on the condensed consolidated combined balance sheet. ThePeruvian tax court denied the Company’s appeal in February 2004.  Consequently, in April 2004, the Companyfiled a lawsuit against the Peruvian tax court and SUNAT in the superior courtof Peru, which is the final level of the judicial courts. The Company was notrequired to issue a deposit for appeal of assessments and rulings with respectto any other years.  With regard to thepenalty issued by SUNAT related to fiscal year 1997, in November 2002 thePeruvian tax court indicated that the penalty needed to be modified anddeclared the previously issued penalty null. According to this tax courtresolution, 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 continues to appeal SUNAT’sassessment of all penalties and interest related to the disallowance of theabove-mentioned items for fiscal years 1997 through 1999.  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 Company filed a lawsuit before the superior court against SUNAT and thePeruvian tax court seeking the reversal of the ruling of the tax court. The taxcourt has not ruled on the interest deductions for 1998 or 1999.  The Company has not recorded any expenseassociated with the assessment challenging deductions of interest expense forthe years 1997, 1998, or 1999, nor has the Company recorded any expenseassociated with the assessments for the years 2000 and 2001.

 

MexicanOperations

 

InMay 2005, the Mexican Supreme Court rendered a decision that changed themethod of computing the amount of statutory workers’ profit sharing required tobe paid by some Mexican companies.  TheSupreme Court’s ruling in effect prohibited the application of net operatingloss carryforwards in computing the income used as the base for determining theworkers’ profit sharing amounts.  TheCompany has elected to recognize in its results of operations for the first sixmonths of 2005 $28.2 million for workers’ profit sharing related to 2004 inaddition to the 2005 year-to-date estimate of our potential liability.

 

*Labor matters*

 

Inthe last several years the Company has experienced a number of strikes or otherlabor disruptions that have had an adverse impact on its operations andoperating results.  For example, in Peruon August 31, 2004, unionized workers at the mining units in Toquepala andCuajone initiated work stoppages and sought additional wage increasesbased on high metal prices.  The strikewas resolved on September 13, 2004. In Mexico, on July 12, 2004, the workers of Mexicana de Cobre sitewent on strike asking for the review of certain contractual clauses.  Such a review was performed and the workersreturned to work 18 days later.  On October 15,2004, the workers of Mexicana de Cananea went on strike, following by theMexicana de Cobre workers.  The strikelasted for six days at Mexicana de Cobre and nine days at Mexicana deCananea.  In each case, the operations atthe particular mine ceased until the strike was resolved.  The Company cannot make assurances that theywill not experience strikes or other labor-related work stoppages in thefuture that could have a material adverse effect on its financial condition andresults of operations.

 

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InJuly 2005, the unionized workers of Asarco commenced a work stoppage,which could have a material adverse effect on Asarco and its businessprospects.  A further deterioration ofthe financial condition of Asarco could result in additional claims being filedagainst Grupo México and its subsidiaries, including SPCC, Minera México or itssubsidiaries.  Any increase in thefinancial obligations of our parent corporations, as a result of mattersrelated to Asarco or otherwise, could, among other matters, result in ourparent corporations attempting to obtain increased dividends or other fundingfrom us.  We understand that as a resultof various factors, including ongoing labor problems, Asarco is considering anumber of restructuring alternatives, including a judicial filing for protectionfrom its creditors.  It is also possiblethat an involuntary judicial filing may be commenced against Asarco by certainof its creditors.  Any such filings orother restructuring activities could occur at any time.

 

*Other legal matters*

 

TheCompany is involved in various other legal proceedings incidental to itsoperations, but the Company does not believe that decisions adverse to it inany such proceedings individually or in the aggregate would have a materialadverse effect on its financial position and results of operations.  The Company’s direct and indirect parentcorporations, including AMC and Grupo México, have from time to time been namedparties in various litigations involving ASARCO LLC (“Asarco”).  In August 2002, the U.S. Department ofJustice brought a claim alleging fraudulent conveyance in connection withAsarco’s environmental liabilities and AMC’s then-proposed purchase of SPCCfrom Asarco.  That action was settledpursuant to a Consent Decree dated February 2, 2003.  In October 2004, AMC, Grupo México,Mexicana de Cobre and other parties, not including SPCC, were named in alawsuit filed in New York State court in connection with alleged asbestosliabilities, which lawsuit claims, among other matters, that AMC’s purchase ofSPCC from Asarco should be voided as a fraudulent conveyance.  While Grupo México and its affiliates believethat these claims are without merit, the Company cannot assure you that theseor future claims, if successful, will not have an adverse effect on its parentcorporation or on it.

 

J.                Capitalized MineStripping:

 

TheCompany uses the accounting policy of capitalizing mine stripping afterproduction has commenced, during periods when waste material exceeds thelife-of-mine stripping ratio.  Thispolicy is one of a number of policies that are used in the mining industry toaddress waste removal during operations. The policy results in the smoothing of stripping costs over the life ofthe mine and facilitates the matching of mine production costs over the life ofthe mine with mine revenues.

 

InMarch 17, 2005 Emerging Issues Task Force or “EITF” reached a consensus onissue No.04-06, “Accounting for Stripping costs Incurred during Production inthe Mining Industry”, which was ratified by the Financial Accounting StandardBoard or “FASB”, on March 30, 2005 and the subsequent modification to thetransition provision approved by the EITF in its June, 2005 meeting.  The consensus stated that stripping costsincurred during the production phase of a mine are variable production coststhat should be included in the cost of the inventory produced (extracted)during the period that the stripping costs are incurred. The Company isexploring a number of alternatives in adopting this consensus, which couldinvolved restating the effect of this change in accounting principal for priorperiods or recognizing any cumulative effect adjustment in retained earnings inthe period of adoption.

 

AtJune 30, 2005, the Company had on its balance sheet $315.0 million of costsassociated with capitalized mine striping, net, which may be impacted by thisconsensus.  We anticipate that asignificant portion of this asset may be written off and equity and net incomewould be reduced accordingly.  In addition,future-operating income could be negatively impacted to the extent that costspreviously

 

17

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capitalizedare expensed at a faster rate than we had previously amortized stripping costs.

 

K.            Segment and RelatedInformation:

 

SouthernPeru operates in a single industry, namely mining copper.  Prior to the April 1, 2005 acquisitionof Minera Mexico, the Company determined that its operations in Peru fellwithin one segment.  With the acquisitionof Minera Mexico the Company continues to operate principally in one industry,the mining of copper.  However, becauseof the demands of managing operations in two countries, effective April 1,2005, Company management views the new Southern Peru as having three operatingsegments and manages on the basis of these segments.  Additionally, in mining copper the Companyproduces a number of metal 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 an importantimpact on the Company’s earnings.  Nevertheless,the Company continues to manage its operations on the basis of the three coppersegments.  Added to the segmentinformation is information regarding the Company’s molybdenum sales.  The segments identified by the Company are:

 

1.               Peruvian operations,which includes the Toquepala and Cuajone mine complexes and the smelting andrefining plants, industrial railroad and port facilities which service bothmines.

 

2.               Mexican open pitcopper mines, which includes La Caridad and Cananea mine complexes and thesmelting and refining plants and support facilities which service both mines.

 

3.               Mexican undergroundmining operations, which includes five underground mines that produce zinc,copper, silver and gold, a coal and coke mine, and several industrialprocessing facilities for zinc and copper. This group is identified as the IMMSA Unit.

 

The Chief OperatingOfficer of the Company focus on Operating Income as measure of performance toevaluate different segments and to make decisions to allocate resources to thereported segments.

 

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

 
| ** **                                   | ** ** | **Three Months Ended June 30, 2005** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                   | ** ** | **(Unaudited, in millions)**              | ** ** |
| ** **                                   | ** ** | **Mexican  Open Pit**                     | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate and  other  Eliminations** | ** ** | **Consolidated** | ** ** |
|                                         |       |                                      |       |   |   |   |   |   |   |   |   |
| Net sales  outside of segments               |       | $                                         | 420.2      |   | $ | 59.9 |   | $ | 477.9 |   | $ | — |   | $ | 958.0 |   |
| Intersegment  sales                          |       | 4.2                                       |       | 26.5 |   | — |   | (30.7 | ) | — |   |
| Cost of sales                                |       | 239.1                                     |       | 65.1 |   | 174.4 |   | (65.5 | ) | 413.1 |   |
| Exploration                                  |       | 1.6                                       |       | 1.2 |   | 2.7 |   | — |   | 5.5 |   |
| Depreciation,  amortization and depletion    |       | 46.5                                      |       | 5.9 |   | 18.5 |   | (0.4 | ) | 70.5 |   |
| Selling, general  and Administrative expense |       | 6.9                                       |       | 4.1 |   | 8.2 |   | (1.2 | ) | 20.4 |   |
| **Operating  Income**                        | ** ** | **$**                                     | **130.3**  | ** ** | **$** | **10.1** | ** ** | **$** | **274.1** | ** ** | **$** | **34.0** | ** ** | **$** | **448.5** | ** ** |
|                                         |       |                                      |       |   |   |   |   |   |   |   |   |
| Less:                                        |       |                                      |       |   |   |   |   |   |   |   |   |
| Interest, net                                |       |                                      |       |   |   |   |   |   |   | 14.9 |   |
| Loss on  derivative instruments              |       |                                      |       |   |   |   |   |   |   | 4.8 |   |
| Loss on debt  prepayment                     |       |                                      |       |   |   |   |   |   |   | 6.1 |   |
| Other (income)  expense                      |       |                                      |       |   |   |   |   |   |   | 2.5 |   |
| Taxes on income                              |       |                                      |       |   |   |   |   |   |   | 106.7 |   |
| Minority  interest                           |       |                                      |       |   |   |   |   |   |   | 1.6 |   |
| **Net  Earnings**                            | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **311.9** | ** ** |
|                                         |       |                                      |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                        |       | 12.5                                      |       | 5.4 |   | 51.2 |   | — |   | 69.1 |   |
| Total Assets                                 |       | $                                         | 2,229.3    |   | $ | 629.4 |   | $ | 2,300.0 |   | $ | (132.0 | ) | $ | 5,026.7 |   |

 

18

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| ** **                                   | ** ** | **Three Months Ended June 30, 2004** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                   | ** ** | **(Unaudited, in millions)**              | ** ** |
| ** **                                   | ** ** | **Mexican  Open Pit**                     | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate and  other  Eliminations** | ** ** | **Consolidated** | ** ** |
|                                         |       |                                      |       |   |   |   |   |   |   |   |   |
| Net sales  outside of segments               |       | $                                         | 281.6      |   | $ | 51.6 |   | $ | 389.0 |   | $ | — |   | $ | 722.2 |   |
| Intersegment  sales                          |       | 0.3                                       |       | 20.3 |   | — |   | (20.6 | ) | — |   |
| Cost of sales                                |       | 115.5                                     |       | 49.1 |   | 168.7 |   | (21.9 | ) | 311.4 |   |
| Exploration                                  |       | 0.4                                       |       | 0.8 |   | 2.4 |   | — |   | 3.6 |   |
| Depreciation,  amortization and depletion    |       | 23.2                                      |       | 5.5 |   | 18.7 |   | 0.4 |   | 47.8 |   |
| Selling, general  and Administrative expense |       | 5.3                                       |       | 3.4 |   | 7.3 |   | (1.4 | ) | 17.4 |   |
| **Operating  Income**                        | ** ** | **$**                                     | **137.5**  | ** ** | **$** | **13.1** | ** ** | **$** | **191.9** | ** ** | **$** | **(0.4** | **)** | **$** | **342.1** | ** ** |
|                                         |       |                                      |       |   |   |   |   |   |   |   |   |
| Less:                                        |       |                                      |       |   |   |   |   |   |   |   |   |
| Interest, net                                |       |                                      |       |   |   |   |   |   |   | 27.4 |   |
| Loss on  derivative instruments              |       |                                      |       |   |   |   |   |   |   | — |   |
| Loss on debt  prepayment                     |       |                                      |       |   |   |   |   |   |   | — |   |
| Other (income)  expense                      |       |                                      |       |   |   |   |   |   |   | (19.3 | ) |
| Taxes on income                              |       |                                      |       |   |   |   |   |   |   | 99.1 |   |
| Minority  interest                           |       |                                      |       |   |   |   |   |   |   | 3.9 |   |
| **Net  Earnings**                            | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **231.0** | ** ** |
|                                         |       |                                      |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                        |       | 4.6                                       |       | 3.6 |   | 28.0 |   | — |   | 36.2 |   |
| Total Assets                                 |       | $                                         | 2,971.8    |   | $ | 540.2 |   | $ | 2,098.1 |   | $ | (828.4 | ) | $ | 4,781.7 |   |

 
| ** **                                   | ** ** | **Six Months Ended June 30, 2005** | ** ** |
|----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                   | ** ** | **(Unaudited, in millions)**            | ** ** |
| ** **                                   | ** ** | **Mexican  Open Pit**                   | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate and  other  Eliminations** | ** ** | **Consolidated** | ** ** |
|                                         |       |                                    |       |   |   |   |   |   |   |   |   |
| Net sales  outside of segments               |       | $                                       | 825.8      |   | $ | 113.1 |   | $ | 965.2 |   | $ | — |   | $ | 1,904.1 |   |
| Intersegment  sales                          |       | 74.5                                    |       | 129.8 |   | — |   | (204.3 | ) | — |   |
| Cost of sales                                |       | 493.3                                   |       | 188.5 |   | 346.8 |   | (225.9 | ) | 802.7 |   |
| Exploration                                  |       | 2.4                                     |       | 2.7 |   | 5.7 |   | — |   | 10.8 |   |
| Depreciation,  amortization and depletion    |       | 83.2                                    |       | 11.3 |   | 37.0 |   | — |   | 131.5 |   |
| Selling, general  and Administrative expense |       | 12.9                                    |       | 7.7 |   | 16.7 |   | 1.8 |   | 39.0 |   |
| **Operating  Income**                        | ** ** | **$**                                   | **308.6**  | ** ** | **$** | **32.7** | ** ** | **$** | **558.9** | ** ** | **$** | **19.9** | ** ** | **$** | **920.1** | ** ** |
| ** **                                   | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Less:                                        |       |                                    |       |   |   |   |   |   |   |   |   |
| Interest, net                                |       |                                    |       |   |   |   |   |   |   | 30.1 |   |
| Loss on  derivative instruments              |       |                                    |       |   |   |   |   |   |   | 12.1 |   |
| Loss on debt  prepayment                     |       |                                    |       |   |   |   |   |   |   | 10.1 |   |
| Other (income)  expense                      |       |                                    |       |   |   |   |   |   |   | 1.6 |   |
| Taxes on income                              |       |                                    |       |   |   |   |   |   |   | 252.9 |   |
| Minority  interest                           |       |                                    |       |   |   |   |   |   |   | 3.0 |   |
| **Net  Earnings**                            | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **610.3** | ** ** |
|                                         |       |                                    |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                        |       | 26.1                                    |       | 14.9 |   | 101.6 |   | — |   | 142.6 |   |
| Total Assets                                 |       | $                                       | 2,229.3    |   | $ | 629.4 |   | $ | 2,300.0 |   | $ | (132.0 | ) | $ | 5,026.7 |   |

 

19

----

 
| ** **                                    | ** ** | **Six Months Ended June 30, 2004** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                    | ** ** | **(Unaudited, in millions)**            | ** ** |
| ** **                                    | ** ** | **Mexican  Open Pit**                   | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate and  other  Eliminations** | ** ** | **Consolidated** | ** ** |
|                                          |       |                                    |       |   |   |   |   |   |   |   |   |
| Net sales  outside of segments                |       | $                                       | 565.8      |   | $ | 95.8 |   | $ | 663.1 |   | $ | — |   | $ | 1,324.7 |   |
| Intersegment  sales                           |       | 0.2                                     |       | 62.0 |   | — |   | (62.2 | ) | — |   |
| Cost of sales                                 |       | 257.5                                   |       | 106.6 |   | 277.5 |   | (67.6 | ) | 574.0 |   |
| Exploration                                   |       | 0.4                                     |       | 2.2 |   | 4.6 |   | — |   | 7.2 |   |
| Depreciation,  amortization and depletion     |       | 45.8                                    |       | 11.1 |   | 37.7 |   | 0.7 |   | 95.3 |   |
| Selling, general  and administrative expenses |       | 11.3                                    |       | 7.0 |   | 14.3 |   | 1.4 |   | 34.0 |   |
| **Operating  Income**                         | ** ** | **$**                                   | **251.0**  | ** ** | **$** | **30.9** | ** ** | **$** | **329.0** | ** ** | **$** | **3.3** | ** ** | **$** | **614.2** | ** ** |
|                                          |       |                                    |       |   |   |   |   |   |   |   |   |
| Less:                                         |       |                                    |       |   |   |   |   |   |   |   |   |
| Interest, net                                 |       |                                    |       |   |   |   |   |   |   | 55.5 |   |
| Loss on  derivative instruments               |       |                                    |       |   |   |   |   |   |   | — |   |
| Loss on debt  prepayment                      |       |                                    |       |   |   |   |   |   |   | — |   |
| Other (income)  expense                       |       |                                    |       |   |   |   |   |   |   | (19.4 | ) |
| Taxes on income                               |       |                                    |       |   |   |   |   |   |   | 171.9 |   |
| Minority  interest                            |       |                                    |       |   |   |   |   |   |   | 7.7 |   |
| **Net  Earnings**                             | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **398.5** | ** ** |
|                                          |       |                                    |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                         |       | 20.8                                    |       | 6.8 |   | 61.6 |   | — |   | 89.2 |   |
| Total Assets                                  |       | $                                       | 2,971.8    |   | $ | 540.2 |   | $ | 2,098.1 |   | $ | (828.4 | ) | $ | 4,781.7 |   |

 

Salesvalue per segment:

 
| ** **         | ** ** | **Three months ended June 30, 2005** | ** ** | ** **              | ** ** |
|--------------------|------------|-------------------------------------------|------------|-------------------------|------------|
| **(in  millions)** | ** ** | **Mexican  Open Pit**                     | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|               |       |                                      |       |                    |       |   |   |   |   |   |   |
| Copper             |       | $                                         | 306.2      |                    | $          | 15.4 |   | $ | 290.7 |   | $ | (15.7 | ) | $ | 596.6 |   |
| Molybdenum         |       | 77.9                                      |       | —                  |       | 178.5 |   | — |   | 256.4 |   |
| Other              |       | 40.3                                      |       | 71.0                    |       | 8.7 |   | (15.0 | ) | 105.0 |   |
| Total              |       | $                                         | 424.4      |                    | $          | 86.4 |   | $ | 477.9 |   | $ | (30.7 | ) | $ | 958.0 |   |
|               |       |                                      |       |                    |       |   |   |   |   |   |   |
| ** **         | ** ** | **Three months ended June 30, 2004** | ** ** | ** **              | ** ** |
| **(in  millions)** | ** ** | **Mexican  Open Pit**                     | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|               |       |                                      |       |                    |       |   |   |   |   |   |   |
| Copper             |       | $                                         | 219.3      |                    | $          | 10.6 |   | $ | 290.5 |   | $ | (2.8 | ) | $ | 517.6 |   |
| Molybdenum         |       | 33.9                                      |       | —                  |       | 88.4 |   | — |   | 122.3 |   |
| Other              |       | 28.7                                      |       | 61.3                    |       | 10.1 |   | (17.8 | ) | 82.3 |   |
| Total              |       | $                                         | 281.9      |                    | $          | 71.9 |   | $ | 389.0 |   | $ | (20.6 | ) | $ | 722.2 |   |

 

20

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| ** **         | ** ** | **Six months ended June 30, 2005** | ** ** | ** **              | ** ** |
|--------------------|------------|-----------------------------------------|------------|-------------------------|------------|
| **(in  millions)** | ** ** | **Mexican  Open Pit**                   | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|               |       |                                    |       |                    |       |   |   |   |   |   |   |
| Copper             |       | $                                       | 655.7      |                    | $          | 127.5 |   | $ | 568.3 |   | $ | (192.8 | ) | $ | 1,158.7 |   |
| Molybdenum         |       | 153.3                                   |       | —                  |       | 379.8 |   | — |   | 533.1 |   |
| Other              |       | 91.3                                    |       | 115.4                   |       | 17.1 |   | (11.5 | ) | 212.3 |   |
| Total              |       | $                                       | 900.3      |                    | $          | 242.9 |   | $ | 965.2 |   | $ | (204.3 | ) | $ | 1,904.1 |   |
|               |       |                                    |       |                    |       |   |   |   |   |   |   |
| ** **         | ** ** | **Six months ended June 30, 2004** | ** ** | ** **              | ** ** |
| **(in  millions)** | ** ** | **Mexican  Open Pit**                   | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|               |       |                                    |       |                    |       |   |   |   |   |   |   |
| Copper             |       | $                                       | 453.3      |                    | $          | 39.5 |   | $ | 504.0 |   | $ | (25.3 | ) | $ | 971.5 |   |
| Molybdenum         |       | 49.8                                    |       |                    |       | 140.6 |   | — |   | 190.4 |   |
| Other              |       | 62.9                                    |       | 118.3                   |       | 18.5 |   | (36.9 | ) | 162.8 |   |
| Total              |       | $                                       | 566.0      |                    | $          | 157.8 |   | $ | 663.1 |   | $ | (62.2 | ) | $ | 1,324.7 |   |

 

Thegeographic breakdown of Southern Peru’s sales is as follows:

 
| ** **                                      | ** ** | **Three Months,  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|
| ** **                                      | ** ** | **2005**                               | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States                                   |       | $                                      | 405.8      |                                | $          | 383.5 |   | $ | 721.5 |   | $ | 586.1 |   |
| Europe                                          |       | 180.2                                  |       | 157.4                               |       | 367.7 |   | 277.9 |   |
| Mexico                                          |       | 47.1                                   |       | 43.9                                |       | 244.0 |   | 183.2 |   |
| Peru                                            |       | 17.3                                   |       | 11.0                                |       | 31.9 |   | 21.5 |   |
| Latin America, excluding Mexico & Peru |       | 183.7                                  |       | 97.7                                |       | 373.2 |   | 166.0 |   |
| Asia                                            |       | 123.9                                  |       | 28.7                                |       | 165.8 |   | 90.0 |   |
| Total                                           |       | $                                      | 958.0      |                                | $          | 722.2 |   | $ | 1,904.1 |   | $ | 1,324.7 |   |

 

Major customer segment information:

 

For the six months ended June 30, 2005, theCompany has revenues from a copper customer of the Mexican operations, whichamounts to 10.6% of total revenue. Additionally, in the same period a molybdenum customer of the Peruvianoperations has made purchases representing 16.6% of total revenue.

 

L.              Impact of NewAccounting Standards:

 

In March 2005, theFASB issued Interpretation 47, “Accounting for Conditional Asset RetirementObligations” (“FIN 47”).  FIN 47clarifies the term “conditional asset retirement obligation” as used in FASBStatement No. 143, (FAS 143) “Accounting for Asset Retirement Obligations”with regard to existing uncertainties about timing and method of a liabilitysettlement.  FIN 47 requires an entity torecognize a liability if the fair value can be reasonably estimated even thoughthe timing and method of liability settlement may be uncertain.  FIN 47 also clarifies when an entity wouldhave sufficient information to reasonably estimate the fair value of an assetretirement obligation.  The effectivedate of FIN 47 is no later than the end of fiscal years ending after December 15,2005.  The Company is presentlyevaluating the impact of the new interpretation however; management does notexpect that the adoption will have a material impact on the Company’s resultsof operations or financial position.

 

In March 17, 2005Emerging Issues Task Force, or EITF, reached a consensus in the

 

21

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issue 04-06, “Accountingfor Stripping costs Incurred during Production in the Mining Industry”, whichwas ratified by the Financial Accounting Standards Board, or FASB, on March 30,2005 and the subsequent modification to the transition provisions approved bythe EITF in its June 15-16, 2005 meeting. The consensus states that stripping costs incurred during the productionphase of a mine are variable production costs that should be included in thecosts of the inventory produced (extracted) during the period that thestripping costs are incurred.  TheCompany is exploring a number of alternatives in adopting this consensus, whichcould involve restating the effect of this change in accounting principal forprior periods or recognizing any cumulative effect adjustment in retainedearnings in the period of adoption.

 

In June 2005, theFASB published SFAS No. 154, “Accounting changes and Error Corrections areplacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”),which changes the requirements for the accounting for and reporting of a changein accounting principle and redefines restatement as the revising of previouslyissued financial statements to reflect the correction of an error.  SFAS No. 154 requires retrospectiveapplication to prior periods financial statements of changes in accountingprinciple, unless it is impracticable to determine the period-specific effectsof the cumulative effect of the change. This Statement also carries forward without change the guidancecontained in Opinion 20 for reporting the correction of an error in previouslyissued financial statements and a change in accounting estimate.  This Statement does not change the transitionprovisions of any existing accounting pronouncement. SFAS No. 154 will beeffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005. The Company is evaluating the impact that this statement may have on itsfinancial position or results of operations.

 

22

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Part I Items 2 and 3

 

MANAGEMENT’SDISCUSSION AND ANALYSIS OF

FINANCIALCONDITION AND RESULTS OF OPERATIONS

AND QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

EXECUTIVEOVERVIEW

 

Ourbusiness is primarily the production and sale of copper.  In the process of producing copper, a numberof valuable metallurgical byproducts are recovered, such as molybdenum, zinc,silver, lead and gold, which we also produce and sell.  The sales prices for our products are largelydetermined by market forces outside of our control.  Our management, therefore, focuses on copperproduction cost control, production enhancement and prudent and conservativecapital structure to improve profitability. We believe we achieve these goals through capital spending programs,exploration efforts and cost reduction programs.  Our aim is to remain profitable duringperiods of low copper prices and to maximize financial performance in periodsof high copper prices.

 

Wediscuss below several matters that we believe are important to understand ourresults of operations and financial condition. These matters include, (i) our “operating cash costs” as a measureof our performance, (ii) metal prices, (iii) our recent acquisitionof Minera Mexico and (iv) the effects of inflation and other localcurrency issues.

 

Operating Cash Costs.An overall benchmark used by us and a common industry metric to measureperformance is operating cash costs per pound of copper produced. Operatingcash cost is a non-GAAP measure that does not have a standardized meaning andmay not be comparable to similarly titled measures provided by other companies.A reconciliation of SPCC’s cash cost per pound to the cost of sales (includingdepreciation, amortization and depletion), is presented under the subheading “Non-GAAPInformation Reconciliation”, below.  Wehave defined operating cash cost per pound as cost of sales (includingdepreciation, amortization and depletion); plus selling, general andadministrative charges, treatment and refining charges; less byproductsrevenue, depreciation amortization and depletion, worker’s participation andother miscellaneous charges, Peruvian royalty charge and the change in inventorylevels; divided by total pounds of copper produced by SPCC.  In our calculation of operating cash cost perpound of copper produced we credit against our costs the revenues from the saleof byproducts, principally molybdenum, zinc and silver. We account for thisbyproduct revenue because we consider our principal business to be theproduction and sale of copper. We believe that our Company is viewed by theinvestment community as a copper company, and is valued, in large part, by theinvestment community’s view of the copper market and our ability to producecopper at a reasonable cost. The recent surge in the price of molybdenum,however, has had a significant effect on our traditional calculation of cashcost and its comparability between periods. Accordingly, we present cash costswith and without crediting the byproducts revenues against our costs.

 

We exclude from ourcalculation of operating cash cost depreciation, amortization and depletion,which are considered non-cash expenses. Exploration is considered a discretionary expenditure and is alsoexcluded.  Worker’s participationprovisions are determined on the basis of pre-tax earnings and are alsoexcluded.  Additionally excluded fromoperating cash cost are items of a non-recurring nature, and the portion of ourmine stripping costs that we capitalize.

 

Our operating cash costsper pound, as defined, are presented in the table below for the three monthsand six months ended June 30, 2005 and June 30, 2004.  We present cash costs with and without theinclusion of byproduct revenues below, as the recent increases in the price ofmolybdenum have significantly affected our calculation of cash costs.

 

23

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| ** **                                                         | ** ** | **Three Months,  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|
| ** **                                                         | ** ** | **2005**                               | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                         | ** ** | **(in cents per pound)**               | ** ** | **(in cents per pound)**            | ** ** |
|                                                               |       |                                   |       |                                |       |   |   |   |   |
| Cash cost per  pound of copper produced                            |       | (2.7                                   | )          | 24.9                                |       | (9.4 | ) | 29.7 |   |
| Cash cost per  pound of copper produced without byproducts revenue |       | 102.0                                  |       | 81.6                                |       | 98.8 |   | 79.1 |   |

 

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

 

As seen on the chartabove, our cash cost for the second quarter and six months of 2005 whencalculated with byproducts revenue are a credit of 2.7 cents and 9.4 cents perpound, respectively.  The increasedbyproducts credit was due to higher molybdenum and zinc prices.  The price of molybdenum in the second quarterand six months of 2005 averaged $35.27 and $33.29 per pound, the highestquarterly molybdenum prices experienced by SPCC since operations began.  The principal use of molybdenum is in thesteel industry, in recent quarters supply deficits have pushed molybdenumprices to new highs.  The price of zincin the second quarter and six months of 2005 was approximately 23% higher thanin the same period in 2004.

 

Our cash cost, excludingbyproduct revenues, was higher by 20.4 cents and 19.7 cents in the 2005-secondquarter and six-month period.  The reasonfor this increase is the decrease in the copper produced at our Peruvian mines,as a result of lower ore grades.  Inaddition, we experienced higher fuel and power cost at both our Peruvian andMexican operations.

 

Metals 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 commodityto varying degrees, include international economic and political conditions,levels of supply and demand, the availability and cost of substitutes,inventory levels maintained by producers and others and, to a lesser degree,inventory carrying costs and currency exchange rates.  In addition, the market prices of certainmetals have on occasion been subject to rapid short-term changes due tospeculative activities.

 

We are subject to marketrisks arising from the volatility of copper and other metal prices.  Assuming that metal production and sales arethe same as in the first six months of 2005, that tax rates are unchanged andgiving no effect to potential hedging programs or changes in past production,metal price sensitivity factors would indicate the estimated change in netearnings in 2005 resulting from metal price changes in 2005 as provided in thetable below:

 
| ** **                                   | ** ** | **Copper** | ** ** | **Molybdenum** | ** ** | **Zinc** | ** ** | **Silver** | ** ** |
|----------------------------------------------|------------|------------|------------|----------------|------------|----------|------------|------------|------------|
|                                         |       |       |       |           |       |     |       |       |       |
| Change in metal  prices                      |       | $          | 0.01       |           | $          | 1.00     |       | $          | 0.01       |   | $ | 1.00 |   |
| Annual change in  net earnings (in millions) |       | $          | 9.4        |           | $          | 17.9     |       | $          | 1.8        |   | $ | 10.4 |   |

 

Minera Mexico Acquisition. On April 1, 2005, we acquiredMinera Mexico from Americas Mining Corporation, a subsidiary of Grupo Mexico,our controlling stockholder.  MineraMexico is the largest mining company in Mexico and the eleventh largest copperproducer in the world on a stand-alone basis. On April 1, 2005, we exchanged 67,207,640 newly-issued shares ofour common stock for the outstanding shares of Minera Mexico’s direct majoritystockholder, and Minera Mexico became our 99.1% owned subsidiary.  As a part of this transaction, on March 1,2005, we paid a special transaction dividend of $100 million to all of our stockholders.  Upon completion of the merger, Grupo Mexicoincreased its indirect beneficial ownership of our capital stock fromapproximately 54.2% to approximately 75.1%.

 

24

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We are now in the processof integrating two companies that had previously been affiliated but operatedindependently.  With this acquisition, wehave increased our total reserves of contained copper by 107%, or 23,199million tons, based on year-end 2004 reserves, and have increased our annualcopper production by 81%, equivalent to 320,000 tons of copper, based on 2004production.

 

Inflation and Devaluationof the Peruvian Nuevo Sol and the Mexican Peso.  Our functional currency is the U.S.dollar.  Portions of our operating costsare denominated 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 consolidated combined financialstatement.

 

Forthe three and six months ended June 30, 2005 and 2004, inflation anddevaluation rates were as follows:

 
| ** **                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Peru:                                     |       |                                  |       |                                |       |   |   |   |   |
| Peruvian  inflation rate                  |       | 0.5                                   | %          | 0.9                                 | %          | 1.0 | % | 3.0 | % |
| New Sol/Dollar  (change in exchange rate) |       | (0.3                                  | )%         | 0.3                                 | %          | (0.9 | )% | 0.2 | % |
|                                      |       |                                  |       |                                |       |   |   |   |   |
| ** **                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
| ** **                                | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Mexico:                                   |       |                                  |       |                                |       |   |   |   |   |
| Mexican inflation rate                    |       | —                                |       | 0.1                                 | %          | 0.8 | % | 1.6 | % |
| Peso/Dollar  (change in exchange rate)    |       | (4.0                                  | )%         | 2.3                                 | %          | (3.7 | )% | 1.6 | % |

 

ACCOUNTINGESTIMATES

 

SouthernPeru Copper Corporation’s discussion and analysis of its financial conditionand results of operations, as well as quantitative and qualitative disclosuresabout market risks, are based upon its consolidated combined financialstatements, which have been prepared in accordance with US GAAP.  Preparation of these consolidated combinedfinancial statements requires Southern Peru’s 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 period.  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, whichis typically in the period when new information becomes available tomanagement.  Areas where the nature ofthe estimate makes it reasonably possible that actual results could materiallydiffer from amounts estimated include: ore reserves, capitalized mine strippingand related estimated mine stripping ratios, leachable material and relatedamortization, the estimated useful lives of fixed assets, asset retirementobligations, litigation and contingencies, valuation allowances for deferredtax assets, fair value of financial instruments and inventoryobsolescence.  The Company bases itsestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances.  Actual results may differ from theseestimates under different assumptions or conditions.

 

25

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RESULTS OF OPERATIONS

 

The following highlightskey financial and operating results for the three-month and six-month periodsended June 30, 2005 and 2004.

 
| ** **                                   | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                                   | ** ** | **(dollars in millions)**              | ** ** |
| **Statement  of Earnings Data**              | ** ** | **2005**                               | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                         |       |                                   |       |                                 |       |   |   |   |   |
| Net sales                                    |       | $                                      | 958.0      |                                 | $          | 722.2 |   | $ | 1,904.1 |   | $ | 1,324.7 |   |
| Operating costs  and expenses                |       | (509.5                                 | )          | (380.1                               | )          | (984.0 | ) | (710.5 | ) |
| Operating income                             |       | 448.5                                  |       | 342.1                                |       | 920.1 |   | 614.2 |   |
| Non-operating  income (expense)              |       | (28.2                                  | )          | (8.1                                 | )          | (53.9 | ) | (36.1 | ) |
| Earnings before  taxes and minority interest |       | 420.3                                  |       | 334.0                                |       | 866.2 |   | 578.1 |   |
| Taxes on income                              |       | (106.8                                 | )          | (99.1                                | )          | (252.9 | ) | (171.9 | ) |
| Minority  interest                           |       | (1.6                                   | )          | (3.9                                 | )          | (3.0 | ) | (7.7 | ) |
| Net earnings                                 |       | $                                      | 311.9      |                                 | $          | 231.0 |   | $ | 610.3 |   | $ | 398.5 |   |

 

The table below outlines theaverage metal prices during the three and six month periods ended June 30,2005 and 2004.

 

Average Metals Prices

 
| ** **                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                  | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **%Change** | ** ** | **2005** | ** ** | **2004** | ** ** | **%Change** | ** ** |
| Copper (per  pound - LME)   |       | $                                     | 1.54       |                                | $          | 1.27 |   | 21 |   | $ | 1.51 |   | $ | 1.25 |   | 21 |   |
| Copper (per  pound - COMEX) |       | 1.53                                  |       | 1.23                                |       | 24 |   | 1.50 |   | 1.23 |   | 22 |   |
| Molybdenum (per  pound)     |       | 35.27                                 |       | 14.57                               |       | 142 |   | 33.29 |   | 11.42 |   | 192 |   |
| Zinc (per pound -  LME)     |       | 0.58                                  |       | 0.47                                |       | 23 |   | 0.59 |   | 0.48 |   | 23 |   |
| Silver (per  ounce - COMEX) |       | 7.16                                  |       | 6.25                                |       | 15 |   | 7.07 |   | 6.48 |   | 9 |   |
|                             |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Net Sales:Net sales in the second quarter of 2005 increased $235.8 million to $958million from the comparable period in 2004. Net sales for the first six months of 2005 totaled $1,904.1 million,compared with $1,324.7 million for the same period of 2004. The increase in netsales was principally the result of higher copper and molybdenum prices.

 

Net sales for ourPeruvian operations, Mexican open-pit operations and IMMSA unit were $477.9million, $424.4 million and $86.4 million, respectively, in the second quarterof 2005, compared with $389.0 million, $281.9 million and $71.9 million,respectively, for the second quarter of 2004. The increase in sales of our Peruvian operations was principallyattributable to the significant improvement in copper and molybdenum prices andalso to an increase of 15% in silver prices. These price increases were reduced by a decrease in the production andsale of copper.  Copper sales volumedecreased by approximately 24%, as ore grades at our Peruvian mines decreasedin 2005-second quarter, as compared to the 2004-second quarter.  The increase in sales from our Mexicanopen-pit operation was attributable to increased sales volume of copper andzinc, offset somewhat by decreases in sales volume of molybdenum and silver;and increases in sales prices for all of their principal products, copper,zinc, molybdenum and silver.  Theincrease in our IMMSA unit’s sales was due to increased volume of sales ofcopper, zinc and silver and increases in prices for each of these metals.

 

Net sales for ourPeruvian operations, Mexican open-pit operations and IMMSA unit were $965.2million, $900.3 million and $242.9 million, respectively, in the first sixmonths of 2005, compared with $663.1 million, $566.0 million and $157.8million,

 

26

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respectively, for thefirst six months of 2004.  All threesegments benefited from improved prices in the 2005 period.   The effect of price increase at our Peruvianoperations was somewhat reduced by lower sales volume of copper and silver,molybdenum sales volume, however, increased by approximately 20%.  The principal reason for the sales increaseof our Mexican open-pit operation was, in addition to price increases, highercopper sales volume, approximately 19% and higher silver volume, reduced bydecrease in the sales volume of molybdenum and zinc.  The increase in the six month net sales ofour IMMSA unit was largely attributable to a significantly higher volume ofcopper sales and a higher volume of zinc sales. The IMMSA unit also benefited from higher sales prices.

 

At June 30, 2005,our Peruvian operations have recorded provisionally priced sales of 63.2million pounds of copper, at an average forward price of $1.57 per pound.  In addition, our Peruvian operations haverecorded provisionally priced sales of 4.8 million pounds of molybdenum at thequarter–end price of $35.25 per pound. Our Mexican open-pit operations have recorded provisionally priced salesof 42.0 million pounds of copper, at an average forward price of $1.55 perpound.  In addition, our Mexican open-pitoperations have recorded provisionally priced sales of 1.6 million pounds ofmolybdenum, at the quarter-end price of $35.25 per pound.  These sales are subject to final pricing inthe third quarter of 2005.  Based on thechanges in the market price of copper and molybdenum at July 22, 2005,receivables of our Peruvian operations and our Mexican open-pit operationswould have decreased by $3.8 million and $16.8 million, respectively, if theCompany would have used these market prices in its forward sales adjustment.

 

The table below presentsinformation regarding the volume of our copper sales by segment for the threeand six-month periods ended June 30, 2005 and 2004.

 

Copper sales (tons):

 
| ** **                 | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                 | ** ** | **2005**                               | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Copper:                    |       |                                   |       |                                 |       |   |   |   |   |
| Peruvian  operations       |       | 82,501                                 |       | 108,373                              |       | 162,617 |   | 178,810 |   |
| Mexican Open-pit           |       | 86,326                                 |       | 76,508                               |       | 193,714 |   | 162,640 |   |
| Mexican IMMSA  unit        |       | 4,911                                  |       | 4,362                                |       | 33,919 |   | 15,251 |   |
| Inter segment  elimination |       | (2,636                                 | )          | (1,975                               | )          | (55,712 | ) | (10,061 | ) |
| Total copper  sales        |       | 171,102                                |       | 187,268                              |       | 334,538 |   | 346,640 |   |

 

The table below presents information regarding the volume of sales by segment of our significant byproducts for the three and six-month periods ended June 30, 2005 and 2004.

 

Byproduct sales

 
| ** **                                   | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                   | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Peruvian  operations                         |       |                                  |       |                                |       |   |   |   |   |
| Molybdenum  contained in concentrates (tons) |       | 2,323                                 |       | 2,214                               |       | 5,296 |   | 4,420 |   |
| Silver (‘000  ounces)                   |       | 820                                   |       | 1,161                               |       | 1,764 |   | 2,101 |   |
|                                         |       |                                  |       |                                |       |   |   |   |   |
| Mexican Open-pit                             |       |                                  |       |                                |       |   |   |   |   |
| Molybdenum  contained in concentrates (tons) |       | 952                                   |       | 1,066                               |       | 1,937 |   | 2,009 |   |
| Zinc-refined and  in concentrate (tons)      |       | 11,115                                |       | 9,702                               |       | 22,172 |   | 23,036 |   |
| Silver (‘000  ounces)                   |       | 1,425                                 |       | 1,758                               |       | 4,589 |   | 4,035 |   |
|                                         |       |                                  |       |                                |       |   |   |   |   |
| Mexican IMMSA  unit                          |       |                                  |       |                                |       |   |   |   |   |
| Zinc-refined and  in concentrate (tons)      |       | 32,401                                |       | 29,499                              |       | 66,881 |   | 60,482 |   |
| Silver (‘000  ounces)                   |       | 3,124                                 |       | 2,860                               |       | 5,827 |   | 5,518 |   |
|                                         |       |                                  |       |                                |       |   |   |   |   |
| Intersegment  elimination                    |       |                                  |       |                                |       |   |   |   |   |
| Zinc                                         |       | (7,665                                | )          | (7,897                              | )          | (17,294 | ) | (22,617 | ) |
| Silver                                       |       | (648                                  | )          | (762                                | )          | (2,441 | ) | (1,661 | ) |
|                                         |       |                                  |       |                                |       |   |   |   |   |
| Total Byproduct  sales                       |       |                                  |       |                                |       |   |   |   |   |
| Molybdenum  contained in concentrates (tons) |       | 3,275                                 |       | 3,280                               |       | 7,233 |   | 6,429 |   |
| Zinc-refined and  in concentrate (tons)      |       | 35,851                                |       | 31,304                              |       | 71,759 |   | 60,901 |   |
| Silver (‘000  ounces)                   |       | 4,721                                 |       | 5,016                               |       | 9,739 |   | 9,993 |   |

 

27

 

At June 30, 2005,the Company has recorded provisionally priced sales of 105.2 million pounds ofcopper, at an average forward price of $1.56 per pound. Also the Company hasrecorded provisionally priced sales of 6.4 million pounds of molybdenum at thequarter-end market price of $35.25 per pound. These sales are subject to finalpricing based on the average monthly LME or COMEX copper prices and DealerOxide molybdenum prices in the future month of settlement, which will occur inthe third quarter of 2005.

 

AtJuly 22, 2005, the market price of the copper and molybdenumincreased(decreased) by $0.05 and $(4.0) per pound respectively.  Therefore the Company’s accounts receivableas of June 30, 2005 would have changed by $5.1 millions and $(25.7)millions respectively, if the Company would have used these market prices inits sales forward price adjustment.

 

Operating Costs andExpenses: Operating costs and expenses were $509.5 million inthe second quarter of 2005 compared with $380.1 million in the second quarterof 2004.  Cost of sales for the threemonths ended June 30, 2005 was $413.1 million compared with $311.4 millionin the comparable 2004 period.  Theincrease in cost of sales is attributable to increases in the cost of fuel andpower, $8.7 million of mining royalties, $22.9 million of purchased copper andan increase of $30.1 million in the provision for workers’ participation. Theprovision for workers participation is accrued at 8% and 10% of pre-taxearnings in our Peruvian and Mexican operations, respectively.  Included in the three month and six month2005 results, are adjustments of $6.9 million and $28.2 million, respectively,related to a change in the base of calculation for the Mexican workers’participation, see “Liquidity and capital resources” for a discussion of thismatter.

 

Operating costs andexpenses for our Peruvian operations, Mexican open-pit operations and IMMSAunit were $200.1 million, $259.7 million and $49.7 million, respectively, inthe second quarter of 2005, compared with $197.1 million, $144.4 million and$38.6 million, respectively, for the second quarter of 2004.  Increases in the cost of power and fuelaffected all of our segments in 2005.  Inaddition, our Peruvian operations recorded an increase of $5.1 million for workers’participations and $8.7 million for mining royalties.  Included in three month results of theMexican open-pit operations and the IMMSA unit are charges of $6.9 million,related to a change in the base of calculation for workers’ participation.

 

For the first half of2005, operating cost and expenses were $984.0 million compared with $710.5million in the first half of 2004. Cost of sales for the 2005 period was $802.7million, compared with $574.0 million in the 2004 six-month period. The cost ofsales increase of $228.7 million in 2005 was the result of an increase in powerand fuel costs, $15.6 million of mining royalties, $36.2 millions of purchasedcopper and a $70.7 million increase in workers’ participation.

 

For the first half of2005 operating costs and expenses for our Peruvian operations, Mexican open-pitoperations and IMMSA unit were $402.3 million, $501.2 million and $80.5million, respectively, compared to $334.1 million, $311.5 million and $64.9million, respectively in the 2004 six-month period.  Increases in power and fuel affected allsegments in 2005.  In addition, ourPeruvian operation recorded a royalty charge of $15.6 million in the six-month2005 period.  Workers’ participationsincreased in all segments in the 2005 period and our Mexican open-pit operationand IMMSA unit recorded workers’ participations related to a change in the baseof calculation.

 

Non-operating income(expense):  Interestexpense in the second quarter of 2005 and the

 

28

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first six months of 2005was approximately 33% and 30% lower than the comparable 2004 periods,respectively.  These decreases in the2005 periods are largely attributable to reductions in debt levels.

 

In the three month andsix month periods ended June 30, 2005 we recorded losses on derivativeinstruments of $4.8 million and $12.1 million, respectively.  These losses are principally related to ourcopper swaps. The second quarter results include a loss of $2.7 million relatedto our interest rate swap program.  Seenote F to our consolidated combined financial statements for more informationon this program.

 

In the three month andsix month periods ended June 30, 2005 we recorded loss on debt prepaymentsof $6.1 million and $10.1 million, respectively.  The second quarter amount includes a $5.7million premium paid on the retirement of a portion of MM’s Yankee bonds.   We, also, paid a prepayment penalty of $2.0million on the retirement of our Peruvian bonds, $1.7 million of which wasrecorded in the first quarter. In addition, we wrote off $2.3 million ofpreviously capitalized bond issuance cost.

 

Other (expense)income inthe second quarter of 2005 and 2004 amounted to $(2.4) million and $19.3million, respectively.  In the secondquarter of 2004, our Mexican subsidiary sold non-core property in Monterrey,Chihuahua and other locations and gains of $22.3 millions were recognized onthese sales and are included in other income (expense) on our consolidatedcombined financial statements.

 

Taxes on Income:  Taxes on income for the six months ended June 30,2005, were $252.9 million, compared with $171.9 million for the same period in2004.  The increase was principally dueto higher earnings in 2005.  Theeffective tax rate for the six months ended June 30, 2005, was 29.2%compared to 29.7% for the same period in 2004. Included in the 2005 tax provision is a refund of $43.4 million receivedby our Mexican subsidiary for asset-based taxes (minimum income tax) paid inprior years.  Without the benefit of thiscredit the Company’s effective tax rate for the 2005 period would increase to34.2%.  The disparity in the tax rates isthe result of an increase in permanent difference in our Mexican operations,substantially all of which is related to a one time non-deductible expense of$28.2 million for workers’ participation resulting from a change in lawregarding the basis of calculation.

 

CASH FLOW

 

The following table showsthe changes in cash flow for the three and six month periods ended June 30,2005 and 2004.

 
| ** **                                        | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                                        | ** ** | **(dollars in million)**               | ** ** |
| ** **                                        | ** ** | **2005**                               | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                              |       |                                   |       |                                 |       |   |   |   |   |
| Net cash  provided from operating activities      |       | $                                      | 192.0      |                                 | $          | 298.3 |   | $ | 534.3 |   | $ | 437.3 |   |
| Net cash used  for investing activities           |       | (8.0                                   | )          | (24.0                                | )          | (113.1 | ) | (74.2 | ) |
| Net cash used  for financing activities           |       | (452.5                                 | )          | (229.1                               | )          | (672.3 | ) | (264.5 | ) |
| Effect of  exchange rate changes on cash          |       | 4.7                                    |       | 5.2                                  |       | 11.6 |   | 4.8 |   |
| Increase  (decrease) in cash and cash equivalents |       | $                                      | (263.8     | )                                    | $          | 50.4 |   | $ | (239.5 | ) | $ | 103.4 |   |

 

Second Quarter:Net cash provided by operating activities was $192.0 million in the secondquarter of 2005, compared with $298.3 million in 2004 period.  The main reasons for this significantdecrease is a decrease of $286.0 million in working capital contribution,largely due to payment of income tax and workers’ participation liabilitiesoffset somewhat by an increase in earnings.

 

Net cash used ininvesting activities was $8.0 million in the second quarter of 2005 including$69.0 million for capital expenditures and $13.6 million of other investingactivities offset by $74.3 million proceeds from the sale of marketablesecurities. The capital expenditures included investments at our Peruvianoperations of $34.7 million for the Ilo smelter modernization project, $5.2million for the Toquepala leach dump project and $11.2 million for variousother maintenance and replacement expenditures. 

 

29

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In addition, we spent$17.9 million for maintenance and replacement assets at our Mexicanoperations.  In the second quarter of2004, cash used for investing activities was $24.0 million.  The Company anticipates that capitalexpenditures will be higher in the second half of 2005 as major projects moveforward.

 

Netcash used in financing activities in the second quarter of 2005 was $452.5million, compared with $229.1 million in the second quarter of 2004.  The second quarter of 2005 includes adividend distribution of $350.0 million, compared with a distribution of $43.4million in the second quarter of 2004. Additionally, in the second quarter of 2005, we repurchased $94.6million of MM’s Yankee bonds, paid down $30 million of Peruvian bonds and madea $5 million loan payment to Mitsui.

 

Six Months:Net cash provided by operating activities was $534.3 million in the first sixmonths of 2005, an increase of $97.0 million over the comparable 2004period.  The increase was principally dueto earnings.

 

Cash used in investingactivities was $113.1 million in the six-month period ended June 30, 2005.This includes $142.6 million of capital expenditures and net proceeds of $45.3million from the redemption (purchase) of marketable securities. Thesignificant capital expenditures included investments at our Peruvianoperations of $65.3 million for the Ilo smelter modernization project, $16.7million for the Toquepala leach dump project and $19.6 million for maintenanceand replacement assets. In addition, $41.0 million was expended on our Mexicanoperations.  In the six months periodended June 30, 2004, cash used for capital expenditures was $89.2million.  The increase is principally due to the investment in smeltermodernization, the Toquepala mine leaching project and mining equipment.

 

Cash used in financingactivities for the six months ended June 30, 2005 was $672.3 million,compared with $264.5 million provided in the comparable 2004 period. The sixmonths ended June 30, 2005, included dividend distributions of $450.0million, compared with $65 million in 2004 and net debt payments of $218.6million compared to $193.8 million in the six month 2004 period.

 

LIQUIDITY AND CAPITAL RESOURCES

 

OnJuly 27, 2005 the Company issued $200 million 6.375% Notes due 2015 and$600 million 7.5% Notes due 2035.  The Notesare senior unsecured obligations of Southern Peru.  The net proceeds from the issuance and saleof the Notes were used to repay outstanding indebtedness of Southern Peru andits subsidiary, Minera Mexico, under their $200 million and $600 million ($480million outstanding) credit facilities, respectively, and the balance will beused for general corporate purposes, including repayment of additional debt.

 

On May 13, 2005, theCompany paid a dividend of $2.3776 per share, totaling $350 million.  On July 15, 2005, the Company announceda dividend of $1.043 per share, totaling $153.6 million, payable August 19,2005 to shareholders of record at the close of business on August 5, 2005.

 

InJanuary 2005, SPCC signed a $200 million credit facility with a group ofbanks led by Citibank, N.A.  In the firstquarter of 2005, proceeds of this credit facility were used to prepay $170million of the bonds issued under SPCC’s Peruvian bond program.  In April 2005 an additional drawdown of$30 million was used to prepay the remaining outstanding bonds.  The Company capitalized $2.8 million of costsassociated with this facility.  TheCompany paid a prepayment penalty of 1%, or $2.0 million, to the Peruvianbondholders.  Additionally, the Companywrote off $2.3 million of previously capitalized bond issuance cost.  Both amounts are included in the statement ofearnings on the line item “Loss on debt prepayments”. On July 28,2005 thiscredit facility was repaid, see above.

 

On March 30, 2005,we prepaid $120 million of the principal amount outstanding under MM’s $600million Citibank credit facility. On July 28, 2005 the remaining balance,$480 million, of this credit facility was repaid, see above. In addition, on May 5,

 

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2005, we repurchased$94.6 million outstanding Yankee bonds. In connection with this purchase we paid a premium of $5.7 million,which has been charged to earnings under the caption “Loss on debt prepayment”.

 

TheCompany’s biggest outstanding capital investment project is the Ilo smeltermodernization.  This project willmodernize the smelter and bring SPCC into compliance with PAMArequirements.  In July 2003, weawarded the 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. Holding Limited).  The project isusing the Australian ISASMELT technology and the Company believes that it willcomply with the current environmental regulations.  It is estimated that the construction of theproject will be completed before January 2007, the deadline established bythe PAMA.  The new estimated cost of thisproject is $500 million including $219.3 million expended through June 30,2005.

 

The Company has, on hand,sufficient funds to continue this project but significant funds may benecessary for its completion.  TheCompany plans to finance its currently foreseeable liquidity requirements withcash on hand, funds from operations and other financing sources.

 

In May 2005, theMexican Supreme Court rendered a decision that changed the method of computingthe amount of statutory worker’s profit sharing required to be paid by someMexican companies, including our Minera México subsidiary.  The Supreme Court’s ruling in effectprohibited the application of net operating loss carryforwards in computing theincome used as the base for determining the workers’ profit sharingamounts.  We are currently evaluating thepossibility of a judicial challenge to this ruling.  Nevertheless, we have elected to recognize inour results of operations for the first six months of 2005 a charge to earningsreflecting preliminary estimates of $28.2 million for workers’ profit sharingrelated to 2004 in addition to our year-to-date estimate or our potential 2005liability.  The 2004 workers’ profitsharing liability estimate may vary in subsequent interim periods as wecontinue to evaluate the basis of this calculation.  In addition, the ruling may affect our futureresults of operations and liquidity to the extent we pay higher workers’ profitsharing amount.

 

At June 30, 2005 theCompany’s debt as a percentage of total capitalization (the total of debt,minority interest and stockholders equity) was 27.2% as compared with 32.0% at December 31,2004.  At June 30, 2005, the Company’scash and marketable securities amounted to $471.2 million compared to $756.0million at December 31, 2004.

 

NON-GAAP INFORMATIONRECONCILIATION

 

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

 
| ** **                                                                 | ** ** | **Three Months, Ended June 30,** | ** ** | **Six Months, Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                 | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                 | ** ** | **$  Million**                        | ** ** | **¢ per  pound**               | ** ** | **$  Million** | ** ** | **¢ per  pound** | ** ** | **$  Million** | ** ** | **¢ per  pound** | ** ** | **$  Million** | ** ** | **¢ per  pound** | ** ** |
| CASH COST                                                                  |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of sales  (including depreciation, amortization and depletion) - GAAP |       | 483.7                                 |       | 129.3                               |       | 359.1 |   | 90.4 |   | 934.2 |   | 126.0 |   | 669.3 |   | 85.3 |   |
| Add:                                                                       |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses                              |       | 20.4                                  |       | 5.5                                 |       | 17.4 |   | 4.4 |   | 39.0 |   | 5.3 |   | 34.0 |   | 4.3 |   |
| Treatment and  refining charges                                            |       | 10.8                                  |       | 2.9                                 |       | 6.2 |   | 1.6 |   | 15.4 |   | 2.1 |   | 13.6 |   | 1.7 |   |
| Less:                                                                      |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| By products  revenue                                                       |       | (391.6                                | )          | (104.7                              | )          | (225.2 | ) | (56.7 | ) | (802.0 | ) | (108.2 | ) | (387.1 | ) | (49.3 | ) |
| Depreciation,  amortization and depletion                                  |       | (70.5                                 | )          | (18.9                               | )          | (47.8 | ) | (12.0 | ) | (131.5 | ) | (17.7 | ) | (95.3 | ) | (12.1 | ) |
| Workers  participation                                                     |       | (50.6                                 | )          | (13.5                               | )          | (20.5 | ) | (5.2 | ) | (107.7 | ) | (14.5 | ) | (37.0 | ) | (4.7 | ) |
| Royalty charge  and other                                                  |       | (23.8                                 | )          | (6.3                                | )          | (3.7 | ) | (1.0 | ) | (31.8 | ) | (4.4 | ) | (8.4 | ) | (1.1 | ) |
| Inventory change                                                           |       | 11.4                                  |       | 3.0                                 |       | 13.4 |   | 3.4 |   | 14.9 |   | 2.0 |   | 44.2 |   | 5.6 |   |
| **Operating  cash cost**                                                   | ** ** | **(10.2**                             | **)**      | **(2.7**                            | **)**      | **98.9** | ** ** | **24.9** | ** ** | **(69.5** | **)** | **(9.4** | **)** | **233.3** | ** ** | **29.7** | ** ** |
|                                                                       |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Add by products  revenue                                                   |       | 391.6                                 |       | 104.7                               |       | 225.2 |   | 56.7 |   | 802.0 |   | 108.2 |   | 387.1 |   | 49.3 |   |
|                                                                       |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Operating  cash cost, without by products revenue**                      | ** ** | **381.4**                             | ** ** | **102.0**                           | ** ** | **324.1** | ** ** | **81.6** | ** ** | **732.5** | ** ** | **98.8** | ** ** | **620.4** | ** ** | **79.1** | ** ** |
|                                                                       |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total pounds of  copper produced and purchased, in million                 |       |                                  |       | 374.0                               |       |   |   | 397.4 |   |   |   | 741.3 |   |   |   | 784.6 |   |

 

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Impactof New Accounting Standards

 

Pleasesee note “L” to our consolidated combined financial statements – page 21.

 

Cautionary statement:

 

Forward-lookingstatements in this report and in other Company statements include statementsregarding expected commencement dates of mining or metal production operations,projected quantities of future metal production, anticipated production rates,operating efficiencies, costs and expenditures as well as projected demand orsupply for the Company’s products. Actual results could differ materiallydepending upon factors including the risks and uncertainties relating togeneral U.S. and international economic and political conditions, the cyclicaland volatile prices of copper, other commodities and supplies, including fueland electricity, availability of materials, insurance coverage, equipment,required permits or approvals and financing, the occurrence of unusual weatheror operating conditions, lower than expected ore grades, water and geologicalproblems, the failure of equipment or processes to operate in accordance withspecifications, failure to obtain financial assurance to meet closure andremediation obligations, labor relations, litigation and environmental risks aswell as political and economic risk associated with foreign operations. Resultsof operations are directly affected by metal prices on commodity exchanges thatcan be volatile.

 

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Item4. Controls and Procedures

 

EVALUATION OF DISCLOSURECONTROLS AND PROCEDURES

 

Asof June 30, 2005, the Company carried out an evaluation, under thesupervision and with the participation of the Company’s Disclosure Committeeand the Company’s management, including the Chief Executive Officer and theChief Financial Officer, of the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the Chief Executive Officer and the Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures areeffective in 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 INTERNALCONTROLS OVER FINANCIAL REPORTING

 

There was no change inthe Company’s internal controls over financial reporting (as such term isdefined in Rules 13a-15(f) and 15d-15(f) under the SecuritiesExchange Act of 1934, as amended) that occurred during the quarter ended June 30,2005 that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal controls over financial reporting.

 

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Mexico, D.F., July 22, 2005

 

REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directorsand Shareholders of Southern Peru Copper Corporation:

 

We have reviewed theaccompanying condensed consolidated combined balance sheet of Southern PeruCopper Corporation and subsidiaries (a Delaware Corporation) as of June 30,2005 and the related condensed consolidated combined statements of earnings andcash flows for each of the three-month periods ended June 30, 2005 and2004. These interim consolidated combined financial statements are theresponsibility of the Company’s management.

 

We conducted our reviewsin accordance with standards established by the Public Company AccountingOversight Board (United States).  Areview of interim financial information consists principally of applyinganalytical procedures to financial data and making inquiries of personsresponsible for financial and accounting matters.  It is substantially less in scope than anaudit conducted in accordance with the Public Company Accounting OversightBoard, the objective of which is the expression of an opinion regarding theconsolidated combined financial statements taken as a whole.  Accordingly, we do not express such anopinion.

 

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

 

PRICEWATERHOUSECOOPERS

 

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Part II - OTHER INFORMATION

 

Item 1 - Legal Procedures

 

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

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

At theannual meeting of stockholders of the Company held on May 16, 2005, theholders of the Common Stock, voting as a class, were asked to elect twodirectors, the holders of Class A Common Stock, voting as a class, wereasked to elect 11 directors, and both classes, voting together, were asked toapprove the extension of the term of the Company’s Directors’ Stock Award Planand to ratify the selection of PricewaterhouseCoopers, as independentaccountants for 2005.

 

Votescast in the election of directors by holders of Common Stock were as follows:

 
| ** **                      | ** ** | **Number of Shares** | ** ** |
|---------------------------------|------------|----------------------|------------|
| **Names**                       | ** ** | **For**              | ** ** | **Withheld** | ** ** |
| Luis Miguel  Palomino Bonilla   |       | 9,357,130            |       | 182,420 |   |
| Gilberto  Perezalonso Cifuentes |       | 8,448,176            |       | 1,091,374 |   |

 

In theelection of the directors by holders of Class A Common Stock, each of thefollowing directors received 65,900,833 votes and no votes were withheld.

 
| Germán  Larrea Mota-Velasco      |   | Harold  S. Handelsman       |
|---------------------------------------|--------|-----------------------------|
| Oscar  González Rocha            |   | Genaro  Larrea Mota-Velasco |
| Emilio  Carrillo Gamboa               |   | Armando  Ortega Gómez  |
| Jaime  Fernando Collazo González |   | Juan  Rebolledo Gout        |
| Xavier García de Quevedo Topete  |   | Carlos  Ruiz Sacristán |
| J.  Eduardo González Félix  |   |                        |

 

Accordingly,each individual was duly elected as a director of the Corporation to serve histerm of office or until his successor has been duly elected and qualified.

 

Stockholdersapproved the extension of the term of the Company’s Directors’ Stock Award Planas follows:

 
| ** **                 | ** ** | **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|----------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Common Stock               |       | 4,386,112   |       | 1,318,283   |       | 949,915     |       |
| Class A  Common Stock |       | 329,504,165 |       | —      |       | —      |       |
| Total                      |       | 333,890,277 |       | 1,318,283   |       | 949,915     |       |

 

Stockholdersratified the selection of the independent accountants as follows:

 
| ** **                 | ** ** | **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|----------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Common Stock               |       | 9,293,282   |       | 204,876     |       | 41,392      |       |
| Class A  Common Stock |       | 329,504,165 |       | —      |       | —      |       |
| Total                      |       | 338,797,447 |       | 204,876     |       | 41,392      |       |

 

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Item6.    Exhibits

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

 

36

 

Part II – OTHERINFORMATION

 

SIGNATURES

 

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

 

 
|                       | SOUTHERN PERU COPPER CORPORATION                     |
|----------------------------|------------------------------------------------------|
|                       | (Registrant)                                         |
|                       |                                                 |
|                       |                                                 |
|                       | /s/ Oscar  González Rocha                       |
|                       | Oscar González  Rocha                           |
|                       | President and Chief Executive Officer                |
| Date:  August 5, 2005 |                                                 |
|                       |                                                 |
|                       |                                                 |
|                       | /s/ J.  Eduardo González Félix             |
|                       | J. Eduardo  González Félix                 |
| Date: August 5, 2005  | Vice President, Finance and Chief  Financial Officer |

 

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