**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**2007**

**Third Quarter**

** **

**FORM 10-Q**

** **

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF**

**THESECURITIES EXCHANGE ACT OF 1934**

 

| **For Quarter Ended September 30, 2007** | ** ** | **Commission file number 1-14066** |
|------------------------------------------|------------|------------------------------------|

 

**SOUTHERNCOPPER CORPORATION**

(Exact name of registrant as specified in its charter)

 

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

 

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

 
|   | Yes  x | No  o |
|--------|------------------|-----------------|

 

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

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

 

Indicateby check mark whether the registrant is a shell company (as defined by Rule12b-2 of the Act).

 
|   | Yes  o | No  x |
|--------|------------------|-----------------|

 

Asof October 31, 2007 there were outstanding 294,465,650 shares of SouthernCopper Corporation common stock, par value $0.01 per share.

 

 

----

 

Southern Copper Corporation

 

INDEX TO FORM 10-Q

 
| Part I. Financial Information:                           |                                                                                                     |
|----------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                     |                                                                                                     |   |
| Item. 1                                                  | Condensed Consolidated  Financial Statements (unaudited)                                                 |   |
|                                                     |                                                                                                     |   |
|                                                     | Condensed Consolidated  Statement of Earnings three and nine months ended September 30, 2007 and 2006    |   |
|                                                     |                                                                                                     |   |
|                                                     | Condensed Consolidated  Balance Sheet September 30, 2007 and December 31, 2006                           |   |
|                                                     |                                                                                                     |   |
|                                                     | Condensed Consolidated  Statement of Cash Flows three and nine months ended September 30, 2007 and  2006 |   |
|                                                     |                                                                                                     |   |
|                                                     | Notes to  Condensed Consolidated Financial Statements                                                    |   |
|                                                     |                                                                                                     |   |
| Items 2 and 3.                                           | Management’s Discussion  and Analysis of Financial Condition and Results of Operations              |   |
|                                                     |                                                                                                     |   |
| Item 4.                                                  | Controls and Procedures                                                                                  |   |
|                                                     |                                                                                                     |   |
| Report of  Independent Registered Public Accounting Firm |                                                                                                     |
|                                                     |                                                                                                     |   |
| Part II. Other  Information:                             |                                                                                                     |
|                                                     |                                                                                                     |   |
| Item 1.                                                  | Legal Procedures                                                                                         |   |
|                                                     |                                                                                                     |   |
| Item 1a.                                                 | Risk factors                                                                                             |   |
|                                                     |                                                                                                     |   |
| Item 6.                                                  | Exhibits                                                                                                 |   |
|                                                     |                                                                                                     |   |
| Signatures                                               |                                                                                                     |   |
|                                                     |                                                                                                     |   |
|                                                     | List  of Exhibits                                                                                        |   |
|                                                     |                                                                                                     |   |
| Exhibit  31.1                                            | Certification  Pursuant to Section 302 of theSarbanes-Oxley Act of 2002                                  |   |
|                                                     |                                                                                                     |   |
| Exhibit  31.2                                            | Certification  Pursuant to Section 302 of theSarbanes-Oxley Act of 2002                                  |   |
|                                                     |                                                                                                     |   |
| Exhibit  32.1                                            | Certification  Pursuant to Section 906 of theSarbanes-Oxley Act of 2002                                  |   |
|                                                     |                                                                                                     |   |
| Exhibit  32.2                                            | Certification  Pursuant to Section 906 of theSarbanes-Oxley Act of 2002                                  |   |

 

2

----

 

Part I – FINANCIALINFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

Southern Copper Corporation

 

CONDENSED CONSOLIDATEDSTATEMENT OF EARNINGS

(Unaudited)

 
| ** **                                                                                    | ** ** | **3 Months Ended** | ** ** | **9 Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                    | ** ** | **September 30,**       | ** ** | **September 30,**       | ** ** |
| ** **                                                                                    | ** ** | **2007**                     | ** ** | **2006**                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                    | ** ** | **(in thousands)**           | ** ** |
| Net sales                                                                                     |       | $                            | 1,606,414  |                         | $          | 1,412,238 |   | $ | 4,791,213 |   | $ | 3,810,278 |   |
|                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Operating costs and expenses:                                                                 |       |                         |       |                         |       |   |   |   |   |
| Cost of sales (exclusive of depreciation,  amortization and depletion shown separately below) |       | 559,815                      |       | 509,258                      |       | 1,588,794 |   | 1,437,990 |   |
| Selling, general and administrative                                                           |       | 23,570                       |       | 25,162                       |       | 73,276 |   | 72,491 |   |
| Depreciation, amortization and depletion                                                      |       | 81,538                       |       | 67,702                       |       | 240,102 |   | 198,787 |   |
| Exploration                                                                                   |       | 7,710                        |       | 5,655                        |       | 22,681 |   | 14,864 |   |
| Total operating costs and expenses                                                            |       | 672,633                      |       | 607,777                      |       | 1,924,853 |   | 1,724,132 |   |
|                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Operating income                                                                              |       | 933,781                      |       | 804,461                      |       | 2,866,360 |   | 2,086,146 |   |
|                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Interest expense                                                                              |       | (31,181                      | )          | (31,602                      | )          | (91,969 | ) | (82,711 | ) |
| Capitalized interest                                                                          |       | 3,703                        |       | 7,403                        |       | 10,146 |   | 19,009 |   |
| Gain (loss) on derivative instruments                                                         |       | 2,993                        |       | —                       |       | (73,699 | ) | — |   |
| Loss on debt prepayments                                                                      |       | —                       |       | (100                         | )          | — |   | (960 | ) |
| Other income (expense)                                                                        |       | (5,714                       | )          | 5,320                        |       | 19,958 |   | 12,808 |   |
| Interest income                                                                               |       | 23,528                       |       | 10,848                       |       | 63,532 |   | 34,456 |   |
| Earnings before income taxes and minority  interest                                           |       | 927,110                      |       | 796,330                      |       | 2,794,328 |   | 2,068,748 |   |
|                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Income taxes                                                                                  |       | 296,109                      |       | 271,944                      |       | 881,199 |   | 679,680 |   |
| Minority interest                                                                             |       | 3,156                        |       | 2,803                        |       | 7,640 |   | 6,630 |   |
|                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Net earnings                                                                                  |       | $                            | 627,845    |                         | $          | 521,583 |   | $ | 1,905,489 |   | $ | 1,382,438 |   |
|                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Per common share amounts:                                                                     |       |                         |       |                         |       |   |   |   |   |
| Net earnings basic and diluted                                                                |       | $                            | 2.13       |                         | $          | 1.77 |   | $ | 6.47 |   | $ | 4.69 |   |
| Dividends paid                                                                                |       | $                            | 1.60       |                         | $          | 1.00 |   | $ | 4.80 |   | $ | 3.75 |   |
| Weighted average common shares                                                                |       |                         |       |                         |       |   |   |   |   |
| outstanding (basic and diluted)                                                               |       | 294,466                      |       | 294,461                      |       | 294,466 |   | 294,461 |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

3

----

 

Southern Copper Corporation

 

CONDENSED CONSOLIDATEDBALANCE SHEET

(Unaudited)

 
| ** **                                                                                      | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                                      | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **                                                                                      | ** ** | **(in thousands)** | ** ** |
| ASSETS                                                                                          |       |                    |       |                  |       |
| Current assets:                                                                                 |       |                    |       |                  |       |
| Cash and cash equivalents                                                                       |       | $                       | 1,195,208  |                  | $          | 1,022,778 |   |
| Marketable securities                                                                           |       | 320,000                 |       | 280,000               |       |
| Accounts receivable trade, less allowance  for doubtful accounts (2007 - $5,949; 2006 - $5,948) |       | 648,450                 |       | 560,227               |       |
| Accounts receivable other                                                                       |       | 29,551                  |       | 43,569                |       |
| Accounts receivable other, from affiliates                                                      |       | 897                     |       | 2,630                 |       |
| Inventories                                                                                     |       | 462,708                 |       | 413,652               |       |
| Deferred income taxes                                                                           |       | 38,050                  |       | 65,638                |       |
| Prepaid and other current assets                                                                |       | 77,920                  |       | 54,383                |       |
| Total current assets                                                                            |       | 2,772,784               |       | 2,442,877             |       |
|                                                                                            |       |                    |       |                  |       |
| Property, net                                                                                   |       | 3,582,546               |       | 3,538,295             |       |
| Leachable material, net                                                                         |       | 239,888                 |       | 231,516               |       |
| Intangible assets, net                                                                          |       | 116,387                 |       | 118,107               |       |
| Deferred income taxes                                                                           |       | —                  |       | 14,549                |       |
| Other assets, net                                                                               |       | 37,661                  |       | 31,070                |       |
| Total Assets                                                                                    |       | $                       | 6,749,266  |                  | $          | 6,376,414 |   |
|                                                                                            |       |                    |       |                  |       |
| LIABILITIES                                                                                     |       |                    |       |                  |       |
| Current liabilities:                                                                            |       |                    |       |                  |       |
| Current portion of long-term debt                                                               |       | $                       | 160,000    |                  | $          | 10,000 |   |
| Accounts payable                                                                                |       | 264,851                 |       | 271,064               |       |
| Accrued income taxes                                                                            |       | 136,016                 |       | 226,047               |       |
| Due to affiliated companies                                                                     |       | 4,039                   |       | 3,581                 |       |
| Accrued workers’ participation                                                             |       | 243,703                 |       | 299,892               |       |
| Interest                                                                                        |       | 22,376                  |       | 37,140                |       |
| Other accrued liabilities                                                                       |       | 21,708                  |       | 11,847                |       |
| Total current liabilities                                                                       |       | 852,693                 |       | 859,571               |       |
|                                                                                            |       |                    |       |                  |       |
| Long-term debt                                                                                  |       | 1,363,293               |       | 1,518,111             |       |
| Deferred income taxes                                                                           |       | 197,543                 |       | 194,759               |       |
| Non-current taxes payable                                                                       |       | 54,943                  |       | —                |       |
| Other liabilities                                                                               |       | 121,555                 |       | 111,196               |       |
| Asset retirement obligation                                                                     |       | 12,905                  |       | 12,183                |       |
| Total non-current liabilities                                                                   |       | 1,750,239               |       | 1,836,249             |       |
| Commitments and contingencies (Note M)                                                          |       |                    |       |                  |       |
|                                                                                            |       |                    |       |                  |       |
| MINORITY INTEREST                                                                               |       | 16,363                  |       | 13,989                |       |
|                                                                                            |       |                    |       |                  |       |
| STOCKHOLDERS’ EQUITY                                                                       |       |                    |       |                  |       |
| Common stock                                                                                    |       | 2,949                   |       | 2,949                 |       |
| Additional paid-in capital                                                                      |       | 775,096                 |       | 772,693               |       |
| Retaining earnings                                                                              |       | 3,498,614               |       | 3,010,307             |       |
| Other accumulated comprehensive loss                                                            |       | (23,288                 | )          | (22,332               | )          |
| Treasury stock                                                                                  |       | (123,400                | )          | (97,012               | )          |
| Total stockholders’ equity                                                                 |       | 4,129,971               |       | 3,666,605             |       |
|                                                                                            |       |                    |       |                  |       |
| Total Liabilities, Minority Interest and  Stockholders’ Equity                             |       | $                       | 6,749,266  |                  | $          | 6,376,414 |   |

 

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

 

4

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Southern Copper Corporation

 

CONDENSED CONSOLIDATEDSTATEMENT OF CASH FLOWS

(Unaudited)

 
| ** **                                                                             | ** ** | **3 Months Ended  September 30,** | ** ** | **9 Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2007**                                         | ** ** | **2006**                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                             | ** ** | **(in thousands)**                          | ** ** |
| OPERATING ACTIVITIES                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| Net earnings                                                                           |       | $                                                | 627,845    |                                             | $          | 521,583 |   | $ | 1,905,489 |   | $ | 1,382,438 |   |
| Adjustments to reconcile net earnings to  net cash provided from operating activities: |       |                                             |       |                                             |       |   |   |   |   |
| Depreciation, amortization and depletion                                               |       | 81,538                                           |       | 67,702                                           |       | 240,102 |   | 198,787 |   |
| Capitalized leachable material                                                         |       | (5,874                                           | )          | (43,384                                          | )          | (45,903 | ) | (43,384 | ) |
| Remeasurement loss(gain)                                                               |       | 4,205                                            |       | 6,172                                            |       | 4,772 |   | (5,210 | ) |
| Provision for deferred income taxes                                                    |       | 714                                              |       | 1,105                                            |       | 59,054 |   | 17,340 |   |
| Loss on sale of marketable securities                                                  |       | 13,799                                           |       | —                                           |       | 43,187 |   | — |   |
| Unrealized (gain)loss on derivative instruments                                        |       | (14,895                                          | )          | (8,330                                           | )          | 46,782 |   | (6,512 | ) |
| Minority interest                                                                      |       | 3,157                                            |       | 2,803                                            |       | 7,640 |   | 6,630 |   |
|                                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| Cash provided from (used for) operating  assets and liabilities:                       |       |                                             |       |                                             |       |   |   |   |   |
| Accounts receivable                                                                    |       | (119,386                                         | )          | (12,453                                          | )          | (133,389 | ) | (147,686 | ) |
| Inventories                                                                            |       | 8,494                                            |       | (19,132                                          | )          | (49,056 | ) | (84,628 | ) |
| Accounts payable and accrued liabilities                                               |       | 70,670                                           |       | (4,149                                           | )          | (303,082 | ) | (256,843 | ) |
| Other operating assets and liabilities                                                 |       | 57,994                                           |       | 10,668                                           |       | 150,426 |   | 32,102 |   |
| Net cash provided by operating activities                                              |       | 728,261                                          |       | 522,585                                          |       | 1,926,022 |   | 1,093,034 |   |
|                                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| INVESTING ACTIVITIES                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| Capital expenditures                                                                   |       | (72,086                                          | )          | (102,311                                         | )          | (251,078 | ) | (333,031 | ) |
| Purchase of marketable securities                                                      |       | —                                           |       | —                                           |       | (100,000 | ) | — |   |
| Proceeds from sale of marketable securities                                            |       | 6,201                                            |       | —                                           |       | 16,813 |   | — |   |
| Other                                                                                  |       | 155                                              |       | 407                                              |       | 891 |   | __2,410 |   |
| Net cash used for investing activities                                                 |       | (65,730                                          | )          | (101,904                                         | )          | (333,374 | ) | (330,621 | ) |
|                                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| FINANCING ACTIVITIES                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| Debt repaid                                                                            |       | —                                           |       | (1,954                                           | )          | (5,000 | ) | (23,464 | ) |
| Debt incurred                                                                          |       | —                                           |       | —                                           |       | — |   | 389,192 |   |
| Dividends paid to common stockholders                                                  |       | (471,113                                         | )          | (294,458                                         | )          | (1,413,380 | ) | (1,104,212 | ) |
| Distributions to minority interest                                                     |       | (1,429                                           | )          | (1,465                                           | )          | (4,593 | ) | (6,336 | ) |
| Other                                                                                  |       | (881                                             | )          | 6,967                                            |       | (604 | ) | (79 | ) |
| Net cash used for financing activities                                                 |       | (473,423                                         | )          | (290,910                                         | )          | (1,423,577 | ) | (744,899 | ) |
|                                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                          |       | (7,514                                           | )          | (12,622                                          | )          | 3,359 |   | 24,582 |   |
|                                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| Increase in cash and cash equivalents                                                  |       | 181,594                                          |       | 117,149                                          |       | 172,430 |   | 42,096 |   |
| Cash and cash equivalents, at beginning of  period                                     |       | 1,013,614                                        |       | 800,950                                          |       | 1,022,778 |   | 876,003 |   |
| Cash and cash equivalents, at end of period                                            |       | $                                                | 1,195,208  |                                             | $          | 918,099 |   | $ | 1,195,208 |   | $ | 918,099 |   |

 

5

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| ** **                                        | ** ** | **3 Months Ended  September 30,** | ** ** | **9 Months Ended  September 30,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                         | ** ** | **2006**                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                        | ** ** | **(in thousands)**                          | ** ** |
| Supplemental disclosure of cash flow  information |       |                                             |       |                                             |       |   |   |   |   |
| Cash paid during the period for:                  |       |                                             |       |                                             |       |   |   |   |   |
| Interest                                          |       | $                                                | 6,471      |                                             | $          | 18,672 |   | $ | 27,976 |   | $ | 40,620 |   |
| Income taxes                                      |       | $                                                | 267,039    |                                             | $          | 236,833 |   | $ | 828,372 |   | $ | 805,568 |   |
| Workers participation                             |       | $                                                | 1,021      |                                             | $          | 14,367 |   | $ | 299,872 |   | $ | 173,270 |   |

 

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

 

6

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Southern Copper Corporation

 

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

A.           In the opinion of Southern CopperCorporation, (the “Company”, “Southern Copper” or “SCC”), the accompanyingunaudited condensed consolidated financial statements contain all adjustments(consisting only of normal recurring adjustments) necessary to present fairlythe Company’s financial position as of September 30, 2007 and the results ofoperations and cash flows for the three and nine months ended September 30,2007 and 2006. The condensed consolidated financial statements for the threeand nine month periods ended September 30, 2007 and 2006 have been subjected toa review by PricewaterhouseCoopers, the Company’s independent registered publicaccounting firm, whose report dated October 31, 2007, is presented on page 55. Theresults of operations for the three and nine months ended September 30, 2007and 2006 are not necessarily indicative of the results to be expected for thefull year. The December 31, 2006 balance sheet data was derived from auditedfinancial statements, but does not include all disclosures required bygenerally accepted accounting principles in the United States of America. Theaccompanying condensed consolidated financial statements should be read inconjunction with the consolidated financial statements at December 31, 2006 and notes included in theCompany’s 2006 annual report on Form 10-K.

 

B.             Change in Accounting Principle – Adoption ofFIN 48:

 

Financial Accounting Standards Board (FASB)Interpretation No. 48 “Accounting for Uncertainty in Income Taxes”, (FIN 48)was issued in July 2006 and interprets FASB Statement of Financial AccountingStandards (SFAS) No. 109. FIN 48 replaces SFAS No.5 with respect to accountingfor all tax positions, both certain and uncertain. FIN 48 became effective forthe Company on January 1, 2007 and prescribes a comprehensive model for therecognition, measurement, financial statement presentation and disclosure ofuncertain tax positions taken or expected to be taken in a tax return. FIN 48provides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.

 

The Company classifies income tax-relatedinterest and penalties as income taxes in the financial statements.

 

The total amount of unrecognized taxbenefits as of the January 1, 2007 date of adoption of FIN 48 was $32.0 million.This amount related entirely to U.S. income tax matters. The Company has nounrecognized Peruvian or Mexican tax benefits. The cumulative effect of theimplementation of FIN 48 on retained earnings was a net reduction of $3.5million. There were no material changes to the amount of unrecognized taxbenefits during the nine months ended September 30, 2007.

 

The amount of unrecognized tax benefitsthat, if recognized, would affect the effective tax rate was $25.4 million atadoption and did not materially change by September 30, 2007.

 

As of the January 1, 2007 adoption of FIN48, the Company’s liability for uncertain tax positions included accruedinterest of $13.9 million. The liability included no accrued penalties becausemanagement expects no penalties to apply to the resolution of any of itsuncertain tax positions. The amount of the increase in accrued interest duringthe nine months ended September 30, 2007 was not material.

 

7

----

 

Various tax positions are currently underreview by the U.S. Internal Revenue Service (“IRS”) Appeals Office. It is notlikely that this review will result in a cash payment within twelve months ofSeptember 30, 2007.

 

Such positions include the determinationof appropriate depreciation periods for fixed assets, the capitalization ofcosts to the copper inventory inherent in leachable dumps, and depletiondeductions.

 

The IRS requests the Company to uselonger depreciable lives, resulting in the same expense being spread over alonger period. The IRS also requests the Company to capitalize more interestexpense against capital projects, converting current interest expense intofuture depreciation expense.

 

The IRS requests the Company capitalizethe cost of drilling, blasting, hauling, and dumping leachable material andwaste as an inventory item. This will result in a deferral of these expensesfor ten to fifteen years, until electrowon copper leached from the dumpedmaterial is sold. These three adjustments, if accepted by the company, willgenerally not affect the company’s total tax expense, but will accelerate taxesdue to earlier years.

 

The IRS has also questioned the value ofservices rendered by a sister company, SAASA, and seeks to disallow a portionof the fees paid.

 

Lastly, the Company deducts, for U.S. taxpurposes, a depletion allowance based on a percentage of its income from mining.The IRS requests the Company report a lower income from mining, and allocatemore profit to smelting and refining. These last two adjustments would resultin a permanent increase in taxable income and, if accepted by the Company, willresult in a greater tax expense. All five adjustments would change the year inwhich tax is due, and result in interest charges. Any interest paid will be anexpense deductible for tax purposes.

 

As of the January 1, 2007 adoption of FIN48, management did not expect that a final resolution of the IRS review wouldresult in a significant change in the Company’s liability. The Company’sreasonable expectations about future resolutions of uncertain items did notmaterially change during the nine months ended September 30, 2007.

 

The following tax years remain open toexamination and adjustment by the Company’s three major tax jurisdictions:

 
| Peru:   | 2003  and all following years (years 1997 through 2002 have been examined by the  Peruvian tax authority and the issues raised are being contested; no new  issues can be raised for these years). |
|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| U.S.:   | 1997  and all following years                                                                                                                                                                      |
| Mexico: | 2001  and all following years                                                                                                                                                                      |

 

InMay 2007 the FASB published FASB Staff Position (FSP) FIN 48-1, “Definition ofSettlement on FASB Interpretation No. 48” This FSP amends FIN 48 to provide guidance on how an enterprise shoulddetermine whether a tax position is effectively settled for the purpose ofrecognizing previously unrecognized tax benefits. This FSP makes a number ofconforming changes throughout FIN-48 to the term “*ultimatesettlement”* or “*ultimately settled”*:  When the term was used to describerecognition that term is replaced with “*effectively settled”*and when the term is used to describe measurement that term is replaced with “settlement”or “settled”. FSP FIN 48-1 has not had an effect on the Company’s financialresults.

 

8

----

 

C.             MarketableSecurities:

 

Commencing in 2006 the Company beganmaking short term investments (90 days to 1 year) in leveraged, indexedinstruments. The marketable securities were as follows (in millions):

 
| ** **                                                                                                                                                                                                      | ** ** | **Face Value**          | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| **Investment**                                                                                                                                                                                                  | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
| 3–month note, issued December 12, 2006,  with extensions every 3 months up to a maximum of 12 months, and with an  interest rate of 7%; established by a pool of Mexican and Peruvian bond  issues.        |       | $                            | 100.0      |   | $ | 100.0 |   |
| 3–month note, issued December 12, 2006,  with extensions every 3 months up to a maximum of 13 months and 5 days, with  an interest rate of 7%; established by a pool of Mexican and Peruvian bond  issues. |       | 100.0                        |       | 100.0 |   |
| 3–month note, issued January 19, 2007, with  extensions every 3 months up to a maximum of 12 months, and with an interest  rate of 7.25%; established by a pool of Mexican and Peruvian bond issues.       |       | 100.0                        |       | — |   |
| 180–day note, maturing June 12, 2007 with  an interest rate of 6%, with barrier range of $37.669 and $69.957 of SCC  stock price, NYSE symbol PCU.                                                         |       | —                       |       | 40.0 |   |
| 180–day note, maturing June 28, 2007 with  an interest rate of 6%, with barrier range of $38.738 and $71.942 of SCC  stock price, NYSE symbol PCU.                                                         |       | —                       |       | 20.0 |   |
| 300–day note, maturing December 24, 2007  with an interest rate of 3.6%, with barrier range of $50.00 and $75.00 of SCC  stock price, NYSE symbol PCU.                                                     |       | 20.0                         |       | 20.0 |   |
|                                                                                                                                                                                                            |       | $                            | 320.0      |   | $ | 280.0 |   |

 

Someof these investment instruments are indexed to SCC common stock prices whileothers are leveraged and indexed to certain bond pools. Both types ofinstruments could cause the principal of the investment to be reduced if the establishedranges are breached. Since the notes are not principal protected the Companymay lose part or all of the initial investment. These instruments have beendeemed to contain embedded derivatives and have been subject to valuation usinga binomial model.

 

Relatedto these marketable securities, the Company has recorded a gain of $1.6 millionand a loss of $79.9 million in the 2007 third quarter and the first nine monthsof 2007, respectively. In addition, the Company recorded a loss on thesemarketable securities of $11.6 million in the fourth quarter of 2006. Therealized amount of these losses was $13.8 million and $43.2 million for thethird quarter of 2007 and the first nine months of 2007, respectively. Thelosses on these marketable securities are recorded as loss on derivativeinstruments in the condensed consolidated statement of earnings. The unrealizedportion of the loss of $48.3 million, at September 30, 2007 is recorded inaccounts payable.

 

OnOctober 3, 2007, the Company liquidated $300 million of the marketablesecurities investments and received $276.4 million. As of September 30, 2007,the loss was recorded as unrealized loss on derivative instruments.

 

Inthe three and nine months ended September 30, 2007 the Company earned interestof $5.6 million and $18.0 million on these investments, respectively, whichwere recorded in interest income in the condensed consolidated statement ofearnings.

 

9

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D.            Inventories were as follows:

(in millions)

 
| ** **                                 | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Metals at lower of average cost or market: |       |                         |       |                        |       |
| Finished goods                             |       | $                            | 86.1       |                        | $          | 116.1 |   |
| Work-in-process                            |       | 159.5                        |       | 121.9                       |       |
| Supplies at average cost                   |       | 217.1                        |       | 175.7                       |       |
| Total inventories                          |       | $                            | 462.7      |                        | $          | 413.7 |   |

 

E.              Financing

 

OnOctober 3, 2007, as part of the transaction involving the liquidation of themarketable securities investments (as mentioned in Note C), the Companyredeemed $68.6 million of its series B Yankee bonds, for $85.2 million. Theexcess paid over the face value of the bonds, of $16.6 million will be recordedin the fourth quarter of 2007 as loss on repurchase of debt.

 

F.              Income taxes:

 

Theincome tax for the nine months ended September 30, 2007 and 2006 was $881.2million and $679.7 million, respectively. These provisions include income taxesfor Peru, Mexico and the United States. The effective tax rates for the 2007and 2006 periods are 31.5% and 32.9%, respectively. A decrease of 1% in thestatutory Mexican tax rate contributed to the decrease in the 2007 effectiveincome tax rate. In addition, a tax inflation adjustment and the effect ofcurrency conversion adjustment in our Mexican operations also contributed tothe reduction in the effective tax rate.

 

OnOctober 1, 2007, the Mexican government enacted a new law, which generallytakes effect on January 1, 2008. The law introduces a flat tax, which replacesMexico’s asset tax and will apply to taxpaying entities along with Mexico’sregular income tax. This new law will not generate additional current taxliabilities unless the Mexican subsidiaries of the Company report annual netloss positions. For purposes of deferred tax accounting under FAS No. 109, theCompany will calculate the impact of this new law in the fourth quarter of 2007and record the effect, if any, in its fourth quarter financial statements.

 

G.             Provisionally Priced Sales:

 

AtSeptember 30, 2007, the Company has recorded provisionally priced sales of204.7 million pounds of copper, at an average forward price of $3.64 per pound.Also the Company has recorded provisionally priced sales of 61.1 million poundsof molybdenum at the September 30, 2007 market price of $31.35 per pound. Thesesales are subject to final pricing based on the average monthly LME or COMEXcopper prices and Dealer Oxide molybdenum prices in the future month ofsettlement.

 

Followingare the provisionally priced copper and molybdenum sales outstanding atSeptember 30, 2007:

 

10

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| **Copper  (million lbs.)** | ** ** | **Priced at** | ** ** | **Month of  Settlement** | ** ** |
|---------------------------------|------------|--------------------|------------|-------------------------------|------------|
| 70.2                            |       | 3.654706           |       | October 2007                  |       |
| 44.9                            |       | 3.647771           |       | November  2007                |       |
| 28.4                            |       | 3.641911           |       | December  2007                |       |
| 19.3                            |       | 3.633750           |       | January 2008                  |       |
| 6.5                             |       | 3.618310           |       | February  2008                |       |
| 24.3                            |       | 3.602430           |       | March 2008                    |       |
| 11.1                            |       |               | 3.583380   |                          | April 2008 |   |
| 204.7                           |       | 3.638193           |       |                          |       |
|                                 |            |                    |            |                               |            |  |

 
| **Molybdenum  (million lbs.)** | ** ** | **Priced at** | ** ** | **Month of  Settlement** | ** **     |
|-------------------------------------|------------|--------------------|------------|-------------------------------|----------------|
| 2.3                                 |       | 31.35              |       | October 2007                  |           |
| 2.4                                 |       | 31.35              |       | November  2007                |           |
| 1.4                                 |       |               | 31.35      |                          | December  2007 |   |
| 6.1                                 |       | 31.35              |       |                          |           |
|                                     |            |                    |            |                               |                |  |

 

Managementbelieves that the final pricing of these sales will not have a material effecton the Company’s financial position or results of operations.

 

H.            Derivative Instruments

 

TheCompany occasionally uses derivative instruments to manage its exposure tomarket risk from changes in commodity prices, interest rate and exchange raterisk exposures and to enhance return on assets. The Company does not enter intoderivative contracts unless it anticipates a future activity that is likely tooccur that will result in exposing the Company to market risk.

 

Copper and zinc derivatives:

 

From time to time the Company has enteredinto derivative instruments to protect a fixed copper, or zinc price for aportion of our metal sales.

 

In2007 and 2006 the Company entered into copper collar and swaps contracts toprotect a portion of its 2007 and 2006 sales of copper production. Related tothe settlement of these copper swap contracts the Company recorded losses of$0.3 million and $30.1 million in the third quarter of 2007 and 2006,respectively, and a gain of $3.0 million and a loss of $288.0 million in thenine months period of 2007 and 2006, respectively. These gains and losses wererecorded in net sales in the condensed consolidated statement of earnings.

 

Inthe third quarter of 2006 the Company entered into a zinc swap contract to protecta portion of the sale of zinc concentrates purchased during the recovery from afire at the San Luis Potosi zinc refinery. Related to the settlement of thiscontract the Company recorded in the third quarter of 2006, a loss of $0.2million which was recorded in net sales in the condensed consolidated statementof earnings. The Company did not enter into any zinc derivative contracts inthe first nine months of 2007 and did not hold any open zinc contract at theend of September of 2007.

 

AtSeptember 30, 2007 the Company has copper collar contracts to protect 73.1million pounds of copper production for the October – December 2007 period atweighted average minimum and maximum LME prices of $3.20 per pound and $4.07per pound, respectively. If the price falls below the minimum LME price, theCompany will be in a gain position. If the price exceeds the maximum LME price,the Company will be in a loss position.

 

11

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Gasswaps:

 

In2006 and 2007 the Company entered into gas swap contracts to protect part ofits gas consumptions as follows:

 
| ** **               | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **               | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Gas volume (MMBTUs)      |       | —                           |       | 920,000                         |       | 900,000 |   | 2,730,000 |   |
| Fixed price              |       | —                           |       | 4.2668                          |       | 7.5250 |   | 4.2668 |   |
| Gain (loss) (in million) |       | —                           |       | $                               | 1.3        |   | $ | (0.9 | ) | $ | 4.9 |   |
|                          |            |                                  |            |                                 |            |  |  |  |  |  |  |  |

 

Thegains (losses) obtained were included in the production cost. At September 30,2007, the Company did not hold any open gas swap contract.

 

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

 

Becausemore than 85% of the Company’s sales collections in Mexico are in US dollarsand many of its costs are in Mexican pesos, during 2006 the Company enteredinto zero-cost derivative contracts with the purpose of protecting, within arange, against an appreciation of the Mexican peso to the US dollar. In thesecontracts if the exchange rate settles at or below the barrier, the Companydoes not sell US dollars, if the exchange rate settles above the barrier price establishedin the contract the Company sells US dollars at the strike price established inthe contract.

 

Inthe third quarter and first nine months of 2007 the exercise of these zero-costderivative contracts resulted in gains of $1.9 million and $6.0 million,respectively, which were recorded as gain on derivative instruments in thecondensed consolidated statement of earnings.

 

AtSeptember 30, 2007 the Company held the following exchange rate derivativeoperations:

 
| **Notional Amount  (millions)** | ** ** | **Due Date, Weekly  expiration during** | ** ** | **Strike Price  (Mexican  Pesos/U.S.  Dollars)** | ** ** | **Barrier Price  (Mexican  Pesos/U.S.  Dollars)** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------|------------|
| $  24.0                    |       | 4th Quarter 2007                                       |       | 11.35                                                 |       | 10.65                                                  |       |
| $  24.0                    |       | 4th Quarter 2007                                       |       | 11.65                                                 |       | 11.35                                                  |       |
| $  28.0                    |       | 1st Quarter 2008                                       |       | 11.60                                                 |       | 11.28                                                  |       |
| $  28.0                    |       | 1st Quarter 2008                                       |       | 11.28                                                 |       | 10.70                                                  |       |

 

AtSeptember 30, 2007, the fair value of the above listed exchange rate derivativecontracts is a gain of $1.6 million which was recorded as gain on derivativeinstruments in the condensed consolidated statement of earnings. Each notionalamount includes a group of weekly transactions that have the same strike andbarrier price.

 

Dual currency notes:

 

In2007 the Company invested $560.0 million in dual currency notes which providedan above market interest return subject to a barrier range of the Mexicanpeso/US dollar exchange rates. These investments matured in the first andsecond quarters of 2007. Related to these investments, in the second quarter of2007 the Company realized an exchange loss of $1.3 million, which was recordedas a loss on derivative instruments in the condensed consolidated statement ofearnings.

 

12

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TheCompany earned no interest income in the third quarter of 2007 and earnedinterest income of $2.1 million in the first nine months of 2007 which wasrecorded as interest income in the condensed consolidated statement ofearnings.

 

Therewere no open positions at September 30, 2007.

 

Additionally, the Company holds embeddedderivatives which are described in note C “Marketable Securities.”

 

I.                 Asset Retirement Obligation:

 

In2005 the Company added an estimated asset retirement obligation for its miningproperties in Peru, as required by the Mine Closure Law, enacted in 2003 andregulated in 2005. In accordance with the law, a conceptual mine closure plan,without costs, was submitted to the Peruvian Ministry of Energy and Mines (“MEM”)in August 2006. According to regulations, the plan was subject to review by MEMfor 45 days. After the MEM review the Company will have 90 days to prepare andresubmit the mine closure plan, including costs, which will then be subject toMEM approval and open to public discussion and comment in the area of theCompany operations. The Company is still awaiting MEM’s initial review. However,as of September 30, 2007, the Company has made an estimated provision of $6.2million for this liability in its financial statements, but believes that thisestimate should be viewed with caution, pending final approval of the mine closureplan.

 

Theclosure cost recognized for this liability includes the estimated cost requiredat the Peruvian operations, based on the Company’s experience, and includescost at the Ilo smelter, the tailing disposal, and dismantling the Toquepalaand Cuajone concentrators, and the shops and auxiliary facilities. Based onthis estimated cost, we recorded an additional asset retirement liability in2005 of $5.2 million, which increased our previously recorded asset retirementliability to $11.2 million. This increased net property by $4.6 million.

 

Thefollowing table summarizes the asset retirement obligation activity for thefirst nine months of 2007 and 2006 (in millions):

 
| ** **                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Balance as of January 1         |       | $        | 12.2       |     | $          | 11.2 |   |
| Additions, changes in estimates |       | —   |       | —   |       |
| Accretion expense               |       | 0.7      |       | 0.7      |       |
| Balance as of September 30      |       | $        | 12.9       |     | $          | 11.9 |   |

 

J.                Related Party Transactions:

 

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

 
| ** **                                                   | ** ** | **As of**               | ** ** |
|--------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                   | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
| Affiliate receivable:                                        |       |                         |       |   |   |
| Mexico  Proyectos y Desarrollos S.A. de C. V. and affiliates |       | $                            | 0.7        |   | $ | 2.6 |   |
| Other                                                        |       | 0.2                          |       | — |   |
| Total                                                        |       | $                            | 0.9        |   | $ | 2.6 |   |
|                                                         |       |                         |       |   |   |
| Affiliate payable:                                           |       |                         |       |   |   |
| Grupo Mexico  S.A.B. de C.V.                                 |       | $                            | 2.2        |   | $ | 0.4 |   |
| Ferrocarril  Mexicano S.A. de C. V.                          |       | 1.4                          |       | 3.2 |   |
| Other                                                        |       | 0.4                          |       | — |   |
| Total                                                        |       | $                            | 4.0        |   | $ | 3.6 |   |

 

13

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TheCompany has entered into certain transactions in the ordinary course ofbusiness with parties that are controlling shareholders or their affiliates. Thesetransactions include the lease of office space, air transportation andconstruction services and products and services relating to mining and refining.The Company lends and borrows funds among affiliates for acquisitions and othercorporate purposes. These financial transactions bear interest and are subjectto review and approval by senior management, as are all related partytransactions. It is our policy that the Audit Committee of the Board ofDirectors shall review all related party transactions. The Company isprohibited from entering or continuing a material related party transactionthat has not been reviewed and approved or ratified by the Audit Committee.

 

GrupoMexico, the Company’s ultimate parent and the majority indirect stockholder ofthe Company, and its affiliates provide various services to the Company. Theseactivities were principally related to accounting, legal, tax, financial,treasury, human resources, price risk assessment and hedging, purchasing,procurement and logistics, sales and administrative, and other support services.Grupo Mexico is paid for these support services by the Company. The totalamount paid by the Company to Grupo Mexico for such services in the first ninemonths of 2007 and 2006 was $10.3 million. The Company expects to continue topay  $13.8 million per year for theseservices in future years.

 

TheCompany’s Mexican operations paid fees of $10.4 million and $12.7 million inthe first nine months of 2007 and 2006, respectively, primarily for freightservices provided by Ferrocarril Mexicano, S.A. de C.V., a subsidiary of GrupoMexico.

 

Inaddition, the Company’s Mexican operations paid fees of $10.3 million and $24.7million in the first nine months of 2007 and 2006, respectively, forconstruction services provided by Mexico Constructora Industrial S.A. de C.V.,an indirect subsidiary of Grupo Mexico.

 

TheLarrea family controls a majority of the capital stock of Grupo Mexico, and hasextensive interests in other businesses, including oil drilling services,construction, and real estate. The Company engages in certain transactions inthe ordinary course of business with other entities controlled by the Larreafamily relating to mining and refining services, the lease of office space, andair transportation and construction services. In connection with this, theCompany paid fees of $1.9 million and $1.7 million in the first nine months of2007 and 2006, respectively, for maintenance services provided by MexicoCompañia de Productos Automotrices S.A. de C.V., a company controlled by theLarrea family. Also, in the third quarter of 2007, the Company paid fees of$0.8 million for drilling services provided by Perforadora Mexico S.A de C.V, acompany controlled by the Larrea family. Additionally, in the third quarter of2006, one of our Mexican subsidiaries provided a short-term interest bearingloan of $10.6 million to Mexico Transportes Aereos, S.A. de C.V. (“MexTransport”)for the purchase of an airplane, which was paid in the first quarter of 2007,Mextransport, a company controlled by the Larrea family, provides aviationservices to our Mexican operations. Our Mexican subsidiaries have provided aguaranty for a new $10.8 million loan obtained by MexTransport. The guarantyprovided to MexTransport is backed up by the transport services provided byMexTransport to the Company’s Mexican subsidiaries. The Company also paid feesof $0.8 million in the first nine months of 2007 to MexTransport.

 

14

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TheCompany purchased $4.2 million and $3.0 million in the first nine months of2007 and 2006, respectively, of industrial materials from Higher TechnologyS.A.C a company in which Mr. Carlos Gonzalez has a proprietary interest; alsothe Company paid fees $0.5 million and $0.4 million in the in the first ninemonths of 2007 and 2006, respectively, for maintenance services provided byServicios y Fabricaciones Mecanicas S.A.C a company in which Mr. CarlosGonzalez has a proprietary interest. Mr. Carlos Gonzalez is the son of SCC’sChief Executive Officer. In addition, the Company purchased $0.5 million and$0.4 million in the first nine months of 2007 and 2006, respectively, ofindustrial material from Sempertrans France Belting Technology in which Mr.Alejandro Gonzalez is employed as a sales representative. Mr. AlejandroGonzalez is the son of SCC’s Chief Executive Officer

 

Itis anticipated that in the future the Company will enter into similartransactions with such parties.

 

K.            Employee Benefit Plan:

 

SCCDefined Benefit Pension Plan-

 

Thecomponents of the net periodic benefit costs for the nine months endedSeptember 30 are as follows ($ in millions):

 
| ** **                     | ** ** | **2007** | ** ** | **2006(1)** | ** ** |
|--------------------------------|------------|----------|------------|-------------|------------|
|                           |       |     |       |        |       |
| Interest cost                  |       | $        | 0.5        |        | $          | 0.5 |   |
| Expected return on plan assets |       | (0.4     | )          | (0.4        | )          |
| Amortization of net loss       |       | 0.1      |       | 0.1         |       |
| Net periodic benefit cost      |       | $        | 0.2        |        | $          | 0.2 |   |

 

----

(1)                  2006quarter based on average of annual amount.

 

SCCPost-retirement Health Care Plan-

 

Thecomponents of the net period benefit costs for the post-retirement health careplan for the nine months ended September 30, 2007 and 2006 are individually,and in total, less than $0.1 million.

 

MineraMexico Pension Plans-

 

Thecomponents of the net periodic benefit costs for the nine month ended September30 are as follows ($ in millions):

 
| ** **                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Interest cost                  |       | $        | 1.4        |     | $          | 1.4 |   |
| Service cost                   |       | 1.5      |       | 1.5      |       |
| Expected return of plan assets |       | (1.5     | )          | (1.5     | )          |
| Net periodic benefit cost      |       | $        | 1.4        |     | $          | 1.4 |   |

 

MineraMexico Post-retirement Health Care Plan–

 

Thecomponents of the net periodic cost for the nine months ended September 30,2007 and 2006 are as follows ($ in millions):

 

15

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| ** **                | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
|                      |       |     |       |     |       |
| Interest cost             |       | $        | 1.7        |     | $          | 1.7 |   |
| Service cost              |       | 0.4      |       | 0.4      |       |
| Net periodic benefit cost |       | $        | 2.1        |     | $          | 2.1 |   |

 

L.              Comprehensive Income:

 
| ** **                                     | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                     | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                     |       | $                                | 627,845    |                            | $          | 521,583 |   | $ | 1,905,489 |   | $ | 1,382,438 |   |
| Other comprehensive income (loss) net of  tax: |       |                             |       |                            |       |   |   |   |   |
| Unrealized gain (loss) on investments          |       | (2                               | )          | 2,975                           |       | (956 | ) | 4,683 |   |
| Comprehensive income                           |       | $                                | 627,843    |                            | $          | 524,558 |   | $ | 1,904,533 |   | 1,387,121 |   |
|                                                |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

The unrealized gain (loss) on investmentactivity in the 2007 and 3006 periods were related to an investment inPromotora y Operadora de Infraestructura, S.A. de C.V, formerly known as GrupoTribasa S.A. de C.V. (TRIBASA), a Mexican construction company. This investmentwas accounted for as an available for-sale investment.

 

M.         Commitments and Contingencies

 

Peruvian Operations

 

Regional development contribution:

 

On December 28, 2006, the Company’s Peruvian branchsigned a contract with the Peruvian government that commits the Company to makeannual contributions for five years for the regional development of Peru. Thishas been in response to an appeal by the president of Peru to the miningindustry. The Company, as well as the mining industry, has responded positivelyto help with this cause. The programs envisioned will focus initially onnutrition for young children and expectant mothers, education and healthservices. The Company has a program of contributions, starting in 2007 with acontribution of $16.1 million, calculated based on 2006 Peruvian earnings afterincome tax. In accordance with the agreement, the contribution from 2006earnings was segregated from the Branch’s resources by April 30, 2007. Thefunds were deposited with a separate entity, the “Asociacion Civil Ayuda delCobre” which will make disbursements for approved investments in accordancewith the agreement. The following four years’ contributions could increase ordecrease depending on copper prices. The commitment of the Branch is for atotal of 1.25% of its annual earnings, after Peruvian income tax. If the copperprice drops below $1.79 per pound the contribution will cease. The Company madea provision of $11.6 million in the first nine months of 2007 based on Peruvianbranch earnings.

 

Royalty charge:

 

In June 2004, the Peruvian Congress enactedlegislation imposing a royalty charge to be paid by mining companies in favorof the regional governments and communities where mining resources are located.Under this law, the Company is subject to a 1% to 3% royalty, based on sales,applicable to the value of the concentrates produced in our Toquepala andCuajone mines. The Company made provisions of $46.7 million and $48.6 millionin the first nine months of 2007 and 2006, respectively, for this royalty. 

 

16

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These provisions are included in “Cost of sales(exclusive of depreciation, amortization and depletion)” in the condensedconsolidated statement of earnings.

 

In 2005, a Constitutional Tribunal ruled the lawconstitutional and additionally stated that the royalty charge applies to allconcessions held in the mining industry, implying that those entities with taxstability contracts are subject to this charge. In 1996, the Company enteredinto a tax stability contract with the Peruvian government (a “Guarantee andPromotional Measures for Investment Contract”), relating to our solventextraction and electrowinning (“SX/EW”) production, which agreement  purports to, among other things, fix taxrates and other charges relating to such production. The Company believes thatthe Constitutional Tribunal’s interpretation relating to entities with taxstability contracts is incorrect and intends to protest the imposition of theroyalty charge on SX/EW production, when and if assessed. Provisions made by theCompany for the royalty charge do not include approximately $20.6 million ofadditional potential liability relating to its SX/EW production from June 30,2004 through September 30, 2007.

 

Power purchase agreement:

 

In 1997, SCC sold its Ilo power plant to anindependent power company, Enersur S.A. (“Enersur”). In connection with thesale, a power purchase agreement was also completed under which SCC agreed topurchase all of its power needs for its Peruvian operations from Enersur fortwenty years, commencing in 1997.

 

In 2003 the agreement was amended releasing Enersurfrom its obligation to construct additional capacity to meet the Company’sincreased electricity requirements. SCC believes it can satisfy the need forincreased electricity requirements from other sources, including local powerproviders.

 

Environmental matters:

 

The Company has instituted extensive environmentalconservation programs at its mining facilities in Peru and Mexico. The Company’senvironmental programs include water recovery systems to conserve water andminimize impact on nearby streams, reforestation programs to stabilize thesurfaces of the tailings dams, and the implementation of scrubbing technologyin the mines to reduce dust emissions.

 

Peruvian operations:

 

The Company’s operations are subject to applicablePeruvian environmental laws and regulations. The Peruvian government, throughits Ministerio de Energia y Minas (Ministry of Energy and Mines, or “MEM”)conducts annual audits of the Company’s Peruvian mining and metallurgicaloperations. Through these environmental audits, matters related toenvironmental commitments, compliance with legal requirements, atmosphericemissions, and effluent monitoring are reviewed. The Company believes that itis in material compliance with applicable Peruvian environmental laws andregulations.

 

In accordance with Peruvian regulations, in 1996 SCCsubmitted its Programa de Adecuacion y Manejo Ambiental (the EnvironmentalCompliance and Management Program, known by its Spanish acronym, PAMA) to theMEM. A third-party environmental audit was conducted in order to elaborate thePAMA. The PAMA applied to all current operations that did not have an approvedenvironmental impact study at the time. SCC’s PAMA was approved in January 1997and contained 34 mitigation measures and projects necessary to (1) bring theexisting operations into compliance with the environmental standardsestablished by the MEM and (2) identify areas impacted by operations that wereno longer active and needed to be reclaimed. By the end of the first quarter of2007, all PAMA related projects were completed.

 

17

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Withthe smelter modernization project, the Company increased sulfur capture overthe 92% requirement established by the PAMA. The new smelter maintainsproduction at current levels. There are still some unresolved technical issuesthat need to be worked through before the performance test can be completed andthe Company can receive the necessary warranties from the major contractors. Thenominal and design capacity for the Isasmelt furnace was reached in less than45 days; compared with other smelting furnaces using this technology, thestart-up of the Ilo smelter has been achieved in the shortest time. Also, the sulfurcapture during the second and third quarters of 2007 was over the 92% requiredby Peruvian regulations.

 

As of September 30, 2007, spending on this projectwas $570.4 million, including $58.5 million of capitalized interest.

 

In2003 the Peruvian congress published a new law announcing future closure andremediation obligations for the mining industry. In accordance with this lawand its amendments the Company prepared and submitted to MEM a conceptual planin August 2006. See note I “Asset Retirement Obligation” for further disclosureof this matter.

 

For the Company’s Peruvian operations, environmentalcapital expenditures were $21.3 million and $117.3 million in the first ninemonths of 2007 and 2006, respectively.

 

Mexican operations:

 

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

 

The principal legislation applicable to the Company’sMexican operations is the federal Ley General del Equilibrio Ecologico y laProteccion al Ambiente (the “General Law of Ecological Balance andEnvironmental Protection”, or the “Environmental Law”), which is enforced bythe Procuraduria Federal de Proteccion al Ambiente (“Federal Bureau ofEnvironmental Protection” or the “PROFEPA”). The PROFEPA monitors compliancewith environmental legislation and enforces Mexican environmental laws,regulations and official standards. PROFEPA may initiate administrativeproceedings against companies that violate environmental laws, which in themost egregious cases may result in the temporary or permanent closing ofnon-complying facilities, the revocation of operating licenses and/or othersanctions or fines. Also, according to the Codigo Penal Federal (FederalCriminal Code), the PROFEPA must inform corresponding authorities regardingenvironmental non-compliance.

 

Mexican environmental regulations have becomeincreasingly stringent over the last decade, and this trend is likely tocontinue and has been influenced by the environmental treaty entered into byMexico, United States and Canada in connection with NAFTA in February 1999. However,the Company’s management does not believe that continued compliance with theEnvironmental Law or Mexican State environmental laws will have a materialadverse effect on the Company’s business, properties, results of operations,financial condition or prospects or will result in material capitalexpenditures. Although the Company believes that all of its facilities are inmaterial compliance with applicable environmental, mining and other laws andregulations, the Company cannot assure that future laws and regulations wouldnot have a material adverse effect on the Company’s business, properties,results of operations, financial condition or prospects.

 

Due to the proximity of certain facilities of MineraMexico to urban centers, the authorities may implement certain measures thatmay impact or restrain the operation of such facilities.

 

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For the Company’s Mexican operations, environmentalcapital expenditures were $20.4 million and $5.3 million in the first ninemonths of 2007 and 2006, respectively.

 

Litigation matters:

 

Peruvian operations:

 

Garcia-Ataucuri and Others against SCC:  In April 1996, the Company was served with acomplaint filed in Peru by approximately 800 former employees seeking thedelivery of a substantial number of “labor shares” (acciones laborales) of itsPeruvian Branch plus dividends on such shares, to be issued in a proportionalway to each former employee in accordance with their time of work with SCC’sBranch in Peru.

 

The Company 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 the labor shares. The labor share 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. In 1971, the PeruvianGovernment enacted legislation providing that workers in the mining industrywould participate in the pre-tax profits of the enterprises for which theyworked at a rate of 10%. This participation was distributed 40% in cash and 60%as an equity interest in the enterprise. Under the law, the equityparticipation was originally delivered to the “Mining Community”, an organizationrepresenting all workers. The cash portion was distributed to the workers afterthe close of the year. The accrual for this participation was (and continues tobe) a current liability of the Company, until paid. In 1978, the law wasamended and the equity distribution was calculated at 5.5% of pre-tax profitsand was made to individual workers of the enterprise in the form of “laborshares” to be issued in Peru by the Peruvian Branch of SCC. These labor sharesrepresented an equity interest in the enterprise. In addition, according to the1978 law, the equity participations previously distributed to the “MiningCommunity” were returned to the Company and redistributed in the form of laborshares to the individual employees or former employees. The cash participationwas adjusted to 4.0% 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, and the workers’ participation in pre-taxprofits was set at 8%, with 100% payable in cash. The equity participationcomponent was eliminated 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 issued labor shares were exchanged for the Company’scommon shares, greatly reducing the minority interest on the Company’s balancesheet. What remains of the workers’ equity participation is now included in thecondensed consolidated balance sheet under the caption “Minority Interest”.

 

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

 

1)              As stated above, in April 1996, the Companywas served with a complaint filed in Peru by approximately 800 formeremployees, (Garcia Ataucuri and others vs. SCC), seeking the delivery of38,763,806.80 “labor shares” (acciones laborales) (or S/. 3,876,380,679.56), asrequired by Law # 22333, to be issued in a proportional way to each former employeeor worker in accordance with their time of work with SCC’s Branch in Peru, plusdividends on such shares. The amount claimed corresponds to the total number oflabor shares for all of the Company’s Peruvian workers. In December 1999, acivil court of first instance of Lima decided against the Company, ordering thedelivery of the labor shares and dividends to the plaintiffs. The Companyappealed this decision in January 2000. On October 10, 

 

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2000, the Superior Court ofLima affirmed the lower court’s decision, which had been adverse to the Company.On appeal by the Company, the Peruvian Supreme Court annulled the proceedingnoting that the civil courts lacked jurisdiction and that the matter had to bedecided by a labor court. On March 8, 2002, Mr. García Ataucuri restated theclaim to comply with Peruvian labor law and procedure requirements, andincreased the number of plaintiffs to approximately 958 ex-workers. The lowerlabor judge dismissed the lawsuit in January 2005 on procedural grounds withoutdeciding on the merits of the case. In March 2005, the plaintiffs appealed tothe Lima Labor Superior Court. The Superior Court annulled the appeal due toprocedural defects and remanded the case to the lower court for furtherproceedings. The lower court, on motions from the plaintiffs, reinstated theappeal of the dismissal of the case of seven plaintiffs that had cured theprocedural defects. As of September 30, 2007, the case remains open with nofurther new developments.

 

In October 2007, in aseparate proceeding initiated by Mr. García Ataucuri against the justices ofthe Peruvian Supreme Court, the Peruvian Constitutional Court notified itsdecision that nullified the Peruvian Supreme Court decision issued on September19, 2001 in the Garcia Ataucuri vs. SCC case. That decision had been favorableto the Company as it had annulled all proceedings in the Garcia Ataucuri vs.SCC lawsuit noting that the civil courts lacked jurisdiction and that the matterhad to be decided by a labor court. Mr. Garcia Ataucuri, in his extraordinaryconstitutional appeal, alleged that the members of the Peruvian Supreme Courthad violated his constitutional due process rights when they issued a decisionthat obligated him and the other plaintiffs to commence a new proceeding beforethe labor courts when they had litigated against the Company in civil courtsfor over 10 years. The decision of the Peruvian Constitutional Court orders theSupreme Court to decide again on the merits of the case accepting or denyingthe Company’s extraordinary appeal submitted to the Supreme Court in 2000.

 

Although the Company was notformally a party to the Garcia Ataucuri proceedings before the PeruvianConstitutional Court, the nullity of the originally favorable decision of theSupreme Court (issued on September 19, 2001) is final and cannot be appealed bythe Company.

 

It is uncertain how theSupreme Court will decide on the Company’s 2000 appeal and the merits of thecase in view of the decision of the Peruvian Constitutional Court. In October2007, a Peruvian prosecuting attorney in charge of investigating an accusationmade by Mr. Garcia Ataucuri against various officers of the Company’s Peruvianbranch, alleging that the non issuance of the labor shares requested by him inthe Garcia Ataucuri vs. SCC case presumable constitutes an illegalappropriation of the same, has rendered his opinion on the merits of theaccusation to the pertinent criminal judge. The prosecuting attorney’s opinionis under review by the criminal judge, who has the option of accepting it andinitiating the corresponding criminal proceeding or declaring it without merit.The Company asserts that the accusations of Mr. Garcia Ataucuri are withoutmerit and will vigorously fight them.

 

In response to Mr. GarciaAtaucuri’s criminal accusation, SCC filed a Habeas Corpus against theprosecuting attorney. The judge from the 39th criminal court has declaredfounded the Habeas Corpus considering that the due process has been affectedand has also nullified and declared without grounds the criminal accusationfiled by the prosecuting attorney. This resolution can be appealed.

 

2)              Additionally, on May 10, 2006, the Companywas served with a new complaint filed in Peru, this time by 44 formeremployees, (Cornejo Flores and others vs. SCC), seeking delivery of (1) laborshares (or shares of whatever other current legal denomination)corresponding toyears 1971 to December 31,1977 (we understand the plaintiffs are seeking thesame 38,763,806.80 labor shares mentioned in the prior 

 

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lawsuit), that should havebeen issued in accordance with Law # 22333, plus interest” and (2) labor sharesresulting from capital increases made by the Branch in 1980 “ for the amount ofthe workers’ participation of S/.17,246,009,907.20, equivalent to172,460,099.72 labor shares”, plus dividends. On May 23, 2006, the Companyanswered this new complaint, denying the validity of the claim. As of September30, 2007 the case remains in the discovery stage.

 

The Company asserts that theclaims are without merit and that the labor shares were distributed to theformer employees in accordance with the profit sharing law then in effect. Wedo not believe that an unfavorable outcome is reasonably possible. The Companyhas not made a provision for these lawsuits because it believes that it hasmeritorious defenses to the claims asserted in the complaints.

 

Mineria Integral S.A.C.:

 

In January 2007, the Companywas served with three claims filed in Peru by Mineria Integral S.A.C. Theclaims allege that the Company has trespassed on certain mining rights of theplaintiff, in Ilo, Department of Moquegua, and seek that the Company desistfrom the trespass and pay compensation in the amount of $49,139,476. TheCompany believes that these administrative procedures are without merit and isvigorously defending itself against these actions.

 

Class actions

 

Three purported class actionderivative lawsuits have been filed in the Delaware Court of Chancery (NewCastle County) late in December 2004 and early January 2005 relating to theacquisition of Minera Mexico by SCC. On January 31, 2005, the three actionsLemon Bay, LLP v. Americas Mining Corporation, et al., Civil Action No. 961-N,Therault Trust v. Luis Palomino Bonilla, et al., and Southern CopperCorporation, et al., Civil Action No. 969-N, and James Sousa v. Southern CopperCorporation, et al., Civil Action No. 978-N were consolidated into one actiontitled, In re Southern Copper Corporation Shareholder Derivative Litigation,Consol. C. A. No. 961-N and the complaint filed in Lemon Bay was designated asthe operative complaint in the consolidated lawsuit. The consolidated actionpurports to be brought on behalf of the Company’s common stockholders.

 

The consolidated complaintalleges, among other things, that the acquisition of Minera Mexico is theresult of breaches of fiduciary duties by the Company’s directors and is notentirely fair to the Company and its minority stockholders. The consolidatedcomplaint seeks, among other things, a preliminary and permanent injunction toenjoin the acquisition, the award of damages to the class, the award of damagesto the Company and such other relief that the court deems equitable, includinginterest, attorneys’ and experts’ fees and costs. The Company believes thatthis lawsuit is without merit and is vigorously defending itself against thisaction.

 

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

 

Mexican operations-

 

The Mexican GeologicalServices (MGS) Royalties:

 

In August 2002, MGS(formerly named Council of Mineral Resources (“COREMI”)) filed with the ThirdFederal District Judge in Civil Matters, an action demanding from Mexcobre thepayment of royalties since 1997. In December 2005, Mexcobre signed an agreementwith MGS. Under the terms of this agreement the parties established a new 

 

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procedure to calculate theroyalty payments applicable for 2005 and the following years, and the Companypaid in January 2006, $6.9 million of royalties for 2005 and $8.5 million aspayment on account of royalties from the third quarter 1997 through the lastquarter of 2004. We estimate that the payment made on January 11, 2006 willcover 100% of the royalty payments required for 2004 and prior periods. OnJanuary 22, 2007 the Third Federal District Judge issued a ruling regarding thepayment related to the period from the third quarter of 1997 through the fourthquarter of 2004. This ruling was appealed by both parties in February 2007. Theappeal is still pending. The Company believes that the payment made on accountfor this period is correct.

 

Onan ongoing basis the Company is required to pay a 1% royalty on La Caridad’scopper production value after deduction of treatment and refining charges andcertain other carrying costs.

 

SanLuis Potosi Facilities:

 

Themunicipality of San Luis Potosi has granted Desarrolladora Intersaba, S.A. deC.V. (“Intersaba”), licenses for use of land and construction of housing and/orcommercial zones in the former Ejido Capulines zone, where the residentialproject “Villa Magna” is expected to be developed in the near future.

 

The“Villa Magna” residential project is being developed within an area that IMMSA’sRisk Analysis approved by SEMARNAT (the federal environmental authority), hassecured as a safeguard and buffer zone due to the use by IMMSA of anhydrousammonia gas.

 

Basedon the foregoing, IMMSA has initiated two different actions regarding thismatter. First, against the municipality of San Luis Potosi, requesting theannulment of the authorization and licenses granted to Intersaba to develop “VillaMagna” within the zinc plant’s safeguard and buffer zone; and second, filedbefore SEMARNAT for the declaration of a safeguard and buffer zone surroundingIMMSA’s zinc plant.

 

InAugust 2006, the first action was resolved by a Federal Court, which deniedIMMSA’s request. In September 2006, IMMSA submitted its final appeal to theSupreme Court of Justice and in February 2007, the court ruled against IMMSA.

 

IMMSAbelieves that while this outcome was adverse to its interests, the constructionof the “Villa Magna” housing and commercial development will not, in itself,affect the operations of IMMSA’s zinc plant.

 

Intersabahas filed a lawsuit against IMMSA, requesting payment of damages in the amountof approximately $11.0 million supposedly caused by IMMSA during theseproceedings. IMMSA intends to vigorously defend against this lawsuit.

 

Inaddition to the foregoing, IMMSA has initiated a series of legal andadministrative procedures against the Municipality of San Luis Potosi due toits refusal to issue IMMSA’s use of land permit (*licencia deuso de suelo*) in respect to its zinc plant. A federal judge ruledthat IMMSA’s use of land permit should be granted. The municipal authoritiesare evaluating how to comply with the ruling.

 

Taxcontingency matters-

 

TheCompany is regularly audited by federal, state and foreign tax authorities,both, in the United States and internationally. The amount of unrecognized taxbenefits resulting from uncertain tax positions has been developed inconsultation with legal and tax counsel and in accordance with the requirementsof FIN 48, which was adopted effective January 1, 2007, see Note B above.

 

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U.S. Internal Revenue Service (IRS)

 

IRSaudits can result in proposed assessments. In 2002, the IRS issued apreliminary Notice of Proposed Adjustment for the years 1994 through 1996. In2003, the Company settled these differences with the IRS and made a payment of$4.4 million, including interest. The years 1994 through 1996 are now closed tofurther adjustment.

 

In the second quarter of 2007, the IRS completedfield audit work for the years 2003 and 2004. Issues raised were the same asthose pending resolution from prior audits. No new issues were raised and nonew federal audits have been scheduled.

 

During the audit of the tax years 1997 through 1999,the IRS questioned the Company’s accounting policy for determination of usefullives for depreciable property, the calculation of deductible and creditablePeruvian taxes, the methodology of capitalizing interest and the capitalizingof certain costs (drilling, blasting and hauling) into inventory value as itemsfor possible adjustment. In 2003, the Company and the IRS jointly requestedtechnical advice from the IRS National Office to help resolve the inventoryvalue dispute. In 2005 the National Office of the IRS responded to the requestfor technical advice with the issuance of a technical advice memorandum (TAM). ThisTAM allowed the IRS to close the field audit work for the audit cycles 1997through 1999 and 2000 through 2002. The TAM accepts the position of the IRSfield office and concludes that the Company is required to capitalize thedrilling, blasting and hauling costs of material transported to its leach dumpsbased on the weight of material moved, without regard to metal content orrecoverability.

 

In October 2005, the Company filed two formalprotests, covering the years 1997 through 2002, with the IRS to appeal theproposed changes with respect to the TAM conclusion, as well as other items ofadjustment proposed by the IRS field audit group.

 

These other adjustments include the methodology ofcapitalizing interest, the determination of useful lives for depreciableproperty, the calculation of deductible and creditable Peruvian taxes and theestablished service fee between the Company and related parties. Discussionswith the Appeals Office representatives have begun and the parties have agreedto working through the protested issues and concluding the appeals process assoon as practicable. During the quarter ending September 30, 2007 the Companyand the IRS continued to exchange information aimed at settling the disputes.

 

On June 12, 2007 the Company filed a formal protestwith the IRS to appeal the proposed changes raised from the 2003 and 2004 audit.Although no new issues were identified, the application of the prior cycleissues to new years did give rise to additional proposed adjustments. Theresulting liability amounts for these probable proposed adjustments as well astheir possible effects on taxes through the current reporting period wereincluded within the FIN 48 liability.

 

Peruvian operations:

 

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

 

In 2002, the Company received assessments andpenalties from SUNAT for fiscal years 1996 through 1999, in which severaldeductions taken were disallowed. After appeal, the Company settled many of theissues with SUNAT in 2003. However, the portion of the assessment related tothe disallowance of financial expenses was pending resolution. In addition, theCompany did not recognize a liability for penalties and interest related to theportion of the assessments settled in 2003 or for the pending assessmentrelated to financial expenses, as it considered that they were not 

 

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applicable. The status of these pending issues aswell as other tax contingencies is as follows:

 

a)Year 1996:  With regard to the appeal ofthe penalty related to fiscal year 1996, the Company was required to issue aletter of credit to SUNAT of $3.6 million, which was issued in July 2003. Thisdeposit is recorded in other assets in the condensed consolidated balance sheet.The Company was not required to issue a deposit for the appeal of theassessments and rulings with respect to any other year. In February 2004, thePeruvian tax court denied the Company’s appeal. Subsequently, in April 2004,the Company filed a lawsuit against the Peruvian tax court and SUNAT before theSuperior Court of Peru. In September 2005, the Superior Court declared theCompany’s claim valid. SUNAT appealed this decision to the Peruvian SupremeCourt in Lima. In December 2006, the Peruvian Supreme Court confirmed theopinion of the lower court that declared valid SPCC’s claim. SUNAT has notappealed this decision and in March 2007 issued a resolution in favor of SPCC’sclaim. In August 2007 SUNAT refunded to the Company the $3.6 million depositplus and additional $1 million of interest. The case is now closed.

 

b)Year 1997:  In November 2002, with regardto the penalty issued by SUNAT related to fiscal year 1997, the Peruvian taxcourt indicated that the penalty needed to be modified and declared thepreviously issued penalty null. Consequently, SUNAT issued a new penalty inDecember 2003. This penalty had been protested before SUNAT. The Company’sappeal before the Peruvian tax court related to the assessments (pertaining tothe deduction of certain financial expense) for fiscal year 1997 was denied. InMay 2003, the Company filed a lawsuit before the Superior Court against SUNATand the Peruvian tax court, seeking the reversal of the ruling of the tax court.In July 2005 the Superior Court decided in favor of the Company and remandedthe case to SUNAT for a new pronouncement. SUNAT has appealed the court’sdecision to the Peruvian Supreme Court in Lima. In December 2006, the SupremeCourt declared null the lower court’s opinion and remanded the case back to thelower court for final resolution.

 

InMarch 2007 the lower court declared null the original resolutions issued bySUNAT and the tax court, found in SPCC’s favor, and ordered SUNAT to accept the1997 interest deduction. SUNAT has appealed this decision and resolution isstill pending in the Supreme Court. This decision, if it is affirmed on appeal,is very important for SPCC as assessments related to the years 1998 through2001 are based on SUNAT’s disallowance of similar interest expense deductions.

 

c) Years 1998 and 1999: In August 2006, SUNAT ruledon the part of the 1998/1999 issues related to payment of commissions tocertain financial institutions. The ruling resolved one issue in favor of theCompany and other issues against the Company. The Company has appealed beforethe Peruvian tax court the portion of the claim decided against the Company.

 

In July 2007, SUNAT ruled on the remaining 1998/1999issues related to financial deductions. The ruling resolved one issue in favorof the Company and other issue against the Company. The Company will continueto contest the adverse portion of this ruling.

 

d) Years 2000 and 2001: In December 2004 and January2005, the Company received assessments and penalties from SUNAT for fiscalyears 2000 and 2001, in which certain deductions taken by the Company weredisallowed. SUNAT has objected to the Company’s method of deducting vacationpay accruals in 2000, a deduction in 2000 for a fixed asset write-off, as wellas certain other deductions in both years. The Company has appealed theseassessments and resolution is still pending. Additionally, the Company receivedpenalties and assessments from SUNAT relating to treatment of foreign exchangedifferences for 2000 and 2001. The Company has appealed these assessmentsbefore the Peruvian tax court and resolution is still pending.

 

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In June 2006, a tax court decision was publishedwith regards to another company, which states that profits related to foreignexchange differences need not be included in calculations for monthly advancetax payments. The tax court has indicated that this decision is applicable toall future cases that are similar. In view of this, the Company expects thatthe portion of the 2000/2001 tax assessment related to foreign exchangedifference will be removed from the assessment.

 

In September 2006, SUNAT declared invalid theCompany’s claim related to the income tax rate applied to commissions paid tocertain financial institutions. The Company has appealed SUNAT’s decisionbefore the Peruvian tax court.

 

e) Year 2002: In December 2006, the Company receivedassessments and penalties from SUNAT for fiscal year 2002 disallowing theincome tax rate applied to services received from non domiciled companies andcertain deductions taken. In February 2007, the Company filed a protest beforeSUNAT regarding these assessments.

 

f) Year 2003: In August 2007, the Company receivedassessments and penalties from SUNAT for fiscal year 2003 disallowing theincome tax rate applied to services received from non domiciled companies andcertain deductions taken. In September 2007, the Company filed a protest beforeSUNAT regarding these assessments.

 

Mexican Operations:

 

MM is regularly examined by the Servicios deAdministracion Tributaria (“SAT”), the Mexican tax administration. Theseexaminations can result in proposed assessments.

 

a) Year 1995: In March 2001, SAT issued anassessment related to the 1995 tax year, disallowing certain deductions relatedto the Company’s housing and local travel expenses. The Company has appealedthis assessment. The tax court ruled against the Company. In March 2007, SATmade the final liquidation of MM’s consolidated income tax and the Company paid$0.9 million. With this payment the case is closed.

 

b) Year 1999: In May 2005 SAT issued an assessment against MM claiming that MMunderstated the asset value used in the determination of the asset tax. Inaddition, SAT claimed that MM improperly reduced its consolidated resultsthrough the consolidation of two subsidiaries.

 

MM believes that the 1999 SAT assessment is notlegal. Accordingly, in July 2005, MM filed a nullity motion with theMetropolitan Regional Tax Court, Exchequer Division, against the assessment,which is currently at the stage of submission of expert and documentaryevidence.

 

Labor matters:

 

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

 

Mexican operations

 

During 2006, there were a number of work stoppagesat some of the Company’s Mexican operations. While some of these work stoppageswere of a short-term nature with little or no production loss, others have beenmore disruptive. A strike at the La Caridad copper mine in Sonora began in thefirst quarter of 2006 and ended in July 2006. A strike at the San Martinpolymetallic complex in Zacatecas commenced in the first quarter of 2006 andended in May 2006. Workers at the Cananea copper mine went on a strike on June1, 2006, returning to work six weeks later on July 17, 2006. These workstoppages were declared illegal by the Mexican authorities. On June 9, 2006,the Company announced the closing of the La Caridad mine as picketing workers 

 

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made it impossible to continue operations. As aresult of these strikes, the Company declared “force majeure” on certain of itsJune and July copper contracts. On July 14, 2006, with the approval of a laborcourt, the Company dismissed the La Caridad workers. Individual workagreements, and the collective union contract, were terminated in compliancewith the provisions of the ruling rendered by federal labor authorities. OnJuly 26, 2006, the installations were returned to the Company and the Companycommenced to hire workers to resume operations. In July 2006, the Company reopenedthe La Caridad mine and in the fourth quarter of 2006 restored production to100% capacity.

 

Since July 30, 2007, our Mexican mines of Cananea,Taxco and San Martin have ceased operations due to work stoppages promoted, bya minority group of the union workers. Even though the labor authoritiesdeclared these stoppages illegal, operations have not yet resumed at the mines.Proceedings in this regards are currently in process in Mexican federal courtsand we are confident that the final outcome will be favorable to us, and planto sign new labor contracts, and to establish modern productivity practices forthe benefit of the workers and the Company.

 

The contribution of these three mining units to theCompany’s revenue is less than 14% and the Company was for the most part, ableto offset the loss of revenue due to these work stoppages with additionalvolumes of molybdenum and copper from our other mines and from bettermolybdenum prices.

 

The 4,201 workers from eight of eleven mining unitsand plants of Minera Mexico voted on September 5, 2007 to elect unionrepresentation, from among the “Sindicato de Trabajadores Mineros Metalurgicosy Similares de la Republica Mexicana” and the “Sindicato Nacional deTrabajadores de la Exploracion, Explotacion y Beneficio de Minas de laRepublica Mexicana” which belongs to the National Federation of IndependentUnions with 332,000 members. The individual re-count was made in the presenceof the legal representatives of the unions and the government laborauthorities.

 

By overwhelming majority, 97% of the workers decidedto change to the union “Sindicato Nacional de Trabajadores de la Exploracion,Explotacion y Beneficio de Minas de la Republica Mexicana” looking for solidwork stability, better union representatives and improved conditions for theworkers.

 

On October 15, 2007the Federal Labor Board for Conciliation and Arbitration pronounced a legaldecision in favor of the “Sindicato Nacional de Trabajadores de la Exploracion,Explotacion y Beneficio de Minas de la Republica Mexicana”.

 

Peruvian Operations

 

Collective bargaining agreements with the Company’snine Peruvian labor unions were due to expire in 2007. As a result, on April28, 2007 the workers of a newly unified workers union at our Peruvian smelterin Ilo initiated a strike to demand better wages and benefits. In addition, onApril 30, 2007 Peru’s largest mining union launched a nationwide strike todemand better job benefits. The workers at our two Peruvian mines joined thenationwide miners’ strike and also supported the unified Ilo union. The laborminister declared the strike inappropriate and the workers returned to workafter five days when the nationwide strike was resolved by the government. Theworkers received guarantees from the government over working conditions andcontracts.

 

OnJune 9, 2007 the workers of the Toquepala employees union signed a five yearand nine month collective bargaining agreement with the Company. This agreementincludes a salary increase of 11% retroactive to December 1, 2006.

 

OnJune 23, 2007 the unionized workers at some of our Peruvian operationsinitiated a strike demanding better wages and benefits. At the request of thePeruvian labor 

 

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authorities,the workers returned to work after five days to restart negotiations with theCompany.

 

OnJuly 11, 2007 the workers of four Peruvian unions, the Ilo workers union, therefinery employees union, and the unified workers of Toquepala and Cuajoneunions, signed a six year agreement with the Company. These agreements includea salary increase of 41.67% over the six years, 11% of which is for the firstyear retroactive to December 1, 2006. In addition, each worker will receive aone time payment of approximately $5,000 upon subscribing.

 

OnOctober 2, 2007, the workers of Ilo, Toquepala and Cuajone belonging to thethree unions did not signed the July 11, 2007 agreements, began a strikedemanding higher wages and benefits. After eight days of strike, the workersreturned to work when union leaders and the Company signed a settlement pactgiving the Peruvian labor ministry the authority to settle the finalconditions.

 

OnOctober 26, 2007, the Peruvian labor ministry issued its final pronouncement,settling the open issues with these three unions. The settlement, for a threeyear agreement, includes a salary increase of 11% in the first year and 5% inboth the second and third years. In addition, each worker will receive a onetime payment of approximately $2,700 upon signing the agreement. Also, theCompany will have the ability to adjust work schedules to more adequately meetproduction needs.

 

Duringthese brief strikes at the Peruvian operations, the Company continued normaloperations with the support of staff and administrative personnel andcontractors.

 

Mine accident:

 

On February 19, 2006 an explosion occurred at theIMMSA unit’s Pasta de Conchos coal mine, located in San Juan de Sabinas,Coahuila, Mexico. Immediately thereafter and for 14 months, IMMSA conducted acomprehensive rescue effort. Federal and local governmental help and supportwas received. As a result of the accident eight miners were injured and 65perished.

 

Both the Coahuila Public District Attorney(Procuradoria de Justicia) and the Federal Attorney’s Office (ProcuraduriaFederal de la Republica) initiated investigations to establish the causes ofthe accident and the responsible party. A local judge at San Juan de Sabinasordered five mine representatives to stand trial for the accident. On April 16,2007 the judge terminated the case due to the indemnification for damages tothe families of the victims. Recovery efforts have stopped due to increasedhazards and potential health risks for the recovery workers. Federal laborofficials are evaluating the conditions of the mine.

 

Other legal matters:

 

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

 

Our direct and indirect parent corporations,including AMC and Grupo Mexico, have from time to time been named parties invarious litigations involving Asarco. In August 2002 the U.S. Department ofJustice brought a claim alleging fraudulent conveyance in connection with AMC’sthen-proposed purchase of SCC from Asarco. That action was settled pursuant toa Consent Decree dated February 2, 2003. In March 2003, AMC purchased itsinterest in SCC from Asarco. In October 2004, AMC, Grupo Mexico, Mexicana deCobre and other parties, not including SCC, were named in a lawsuit filed inNew York State court in connection with alleged asbestos liabilities, 

 

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which lawsuit claims, among other matters, that AMC’spurchase of SCC from Asarco should be voided as a fraudulent conveyance. Thelawsuit filed in New York State court was stayed as a result of the August 9,2005 Chapter 11 bankruptcy filing by Asarco, as described below. On February 2,2007 a complaint was filed by Asarco, the debtor in possession, alleging manyof the matters previously claimed in the New York State lawsuit, including thatAMC’s purchase of SCC from Asarco should be voided as a fraudulent conveyance. WhileGrupo Mexico and its affiliates believe that these claims are without merit, wecannot assure you that these or future claims, if successful, will not have anadverse effect on the Company’s parent corporation or the Company. Any increasein the financial obligations of the Company’s parent corporation, as a resultof matters related to Asarco or otherwise could, among other effects; result inthe Company’s parent corporation attempting to obtain increased dividends orother funding from the Company. In 2005, certain subsidiaries of Asarco filedbankruptcy petitions in connection with alleged asbestos liabilities. In July2005, the unionized workers of Asarco commenced a work stoppage. As a result ofvarious factors, including the above-mentioned work stoppage, on August 9, 2005Asarco filed a voluntary petition for relief under Chapter 11 of the U.S.Bankruptcy Code before the U.S. Bankruptcy Court in Corpus Christi, Texas. Asarco’sbankruptcy case is being joined with the bankruptcy cases of its subsidiaries. Asarco’sbankruptcy could result in additional claims being filed against Grupo Mexicoand its subsidiaries, including SCC, Minera Mexico or its subsidiaries.

 

N.            Segment and Related Information:

 

TheCompany operates in a single industry, namely mining copper. Prior to the April1, 2005 acquisition of Minera Mexico, the Company determined that itsoperations in Peru fell within one segment. With the acquisition of MineraMexico the Company continues to operate principally in one industry, the miningof copper. However, because of the demands of managing operations in twocountries, effective April 1, 2005 Company management views the new SouthernCopper as having three operating segments and manages the Company on the basisof these segments. Additionally, in mining copper, the Company produces anumber of by-products, most important of which are molybdenum, silver and zinc.The significant increase in the price of molybdenum over recent years has hadan important impact on the Company’s earnings. Nevertheless, the Companycontinues to manage its operations on the basis of the three copper segments. Addedto the segment information is the information regarding the Company’smolybdenum sales. The segments identified by the Company are:

 
|   | 1.     | Peruvian  operations, which include the Toquepala and Cuajone mine complexes and the  smelting and refining plants, industrial railroad and port facilities which  service both mines.                                                                          |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                            |
|   | 2.     | Mexican  open pit copper mines, which include La Caridad and Cananea mine complexes  and the smelting and refining plants and support facilities which service  both mines.                                                                                     |
|   |   |                                                                                                                                                                                                                                                            |
|   | 3.     | Mexican  underground mining operations, which include five underground mines that  produce zinc, copper, silver and gold, a coal and coke mine, and several  industrial processing facilities for zinc and copper. This group is  identified as the IMMSA unit. |

 

TheChief Operating Officer of the Company focuses on operating income as a measureof performance to evaluate different segments, and to make decisions toallocate resources to the reported segments.

 

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

 

28

----

 
| ** **                                                             | ** ** | **Three Months Ended September 30, 2007  (in millions)** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **Mexican  Open Pit**                                                             | ** ** | **Mexican  IMMSA  Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate  and other  Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales outside of segments                                          |       | $                                                                                      | 418.9      |   | $ | 158.7 |   | $ | 1,028.8 |   |   |   | $ | 1,606.4 |   |
| Intersegment sales                                                     |       | 62.4                                                                                   |       | 19.8 |   |   |   | $ | (82.2 | )  | — |   |
| Cost of sales (exclusive of depreciation,  amortization and depletion) |       | 171.3                                                                                  |       | 96.4 |   | 373.8 |   | (81.7 | ) | 559.8 |   |
| Selling, general and administrative                                    |       | 8.3                                                                                    |       | 5.5 |   | 9.0 |   | 0.8 |   | 23.6 |   |
| Depreciation, amortization and depletion                               |       | 43.7                                                                                   |       | 9.9 |   | 27.4 |   | 0.5 |   | 81.5 |   |
| Exploration                                                            |       | 0.7                                                                                    |       | 2.9 |   | 4.1 |   | — |   | 7.7 |   |
| Operating income                                                       |       | $                                                                                      | 257.3      |   | $ | 63.8 |   | $ | 614.5 |   | $ | (1.8 | ) | 933.8 |   |
| Less:                                                                  |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                                                                   |       |   |   |   |   |   |   | (4.0 | ) |
| Gain on derivative instruments                                         |       |                                                                                   |       |   |   |   |   |   |   | 3.0 |   |
| Other income (expense)                                                 |       |                                                                                   |       |   |   |   |   |   |   | (5.7 | ) |
| Income taxes                                                           |       |                                                                                   |       |   |   |   |   |   |   | (296.1 | ) |
| Minority interest                                                      |       |                                                                                   |       |   |   |   |   |   |   | (3.2 | ) |
| Net earnings                                                           |       |                                                                                   |       |   |   |   |   |   |   | $ | 627.8 |   |
|                                                                   |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Capital expenditure                                                    |       | $                                                                                      | 39.8       |   | $ | 7.3 |   | $ | 24.5 |   | $ | 0.5 |   | $ | 72.1 |   |
| Property, net                                                          |       | $                                                                                      | 1,604.2    |   | $ | 245.7 |   | $ | 1,662.4 |   | $ | 70.2 |   | $ | 3,582.5 |   |
| Total assets                                                           |       | $                                                                                      | 3,400.7    |   | $ | 647.4 |   | $ | 3,383.7 |   | $ | (682.5 | ) | $ | 6,749.3 |   |

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

 

29

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| ** **                                                             | ** ** | **Nine Months Ended September 30, 2007  (in millions)** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **Mexican  Open Pit**                                                            | ** ** | **Mexican  IMMSA  Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate  and other  Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales outside of segments                                          |       | $                                                                                     | 1,620.9    |   | $ | 471.5 |   | $ | 2,698.8 |   |   |   | $ | 4,791.2 |   |
| Intersegment sales                                                     |       | 210.3                                                                                 |       | 71.3 |   | — |   | $ | (281.6 | ) | — |   |
| Cost of sales (exclusive of depreciation,  amortization and depletion) |       | 569.0                                                                                 |       | 268.5 |   | 1,036.2 |   | (284.9 | ) | 1,588.8 |   |
| Selling, general and administrative                                    |       | 29.2                                                                                  |       | 18.3 |   | 29.1 |   | (3.4 | ) | 73.2 |   |
| Depreciation, amortization and depletion                               |       | 130.7                                                                                 |       | 27.6 |   | 80.7 |   | 1.1 |   | 240.1 |   |
| Exploration                                                            |       | 3.3                                                                                   |       | 6.9 |   | ___12.5 |   | — |   | 22.7 |   |
| Operating income                                                       |       | $                                                                                     | 1,099.0    |   | $ | 221.5 |   | $ | 1,540.3 |   | $ | 5.6 |   | $ | 2,866.4 |   |
| Less:                                                                  |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                                                                  |       |   |   |   |   |   |   | (18.4 | ) |
| Loss on derivative instruments                                         |       |                                                                                  |       |   |   |   |   |   |   | (73.7 | ) |
| Other income (expense)                                                 |       |                                                                                  |       |   |   |   |   |   |   | 20.0 |   |
| Income taxes                                                           |       |                                                                                  |       |   |   |   |   |   |   | (881.2 | ) |
| Minority interest                                                      |       |                                                                                  |       |   |   |   |   |   |   | (7.6 | ) |
| Net earnings                                                           |       |                                                                                  |       |   |   |   |   |   |   | $ | 1,905.5 |   |
|                                                                   |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Capital expenditure                                                    |       | $                                                                                     | 102.1      |   | $ | 16.8 |   | $ | 104.9 |   | $ | 27.3 |   | $ | 251.1 |   |
| Property, net                                                          |       | $                                                                                     | 1,604.2    |   | $ | 245.7 |   | $ | 1,662.4 |   | $ | 70.2 |   | $ | 3,582.5 |   |
| Total assets                                                           |       | $                                                                                     | 3,400.7    |   | $ | 647.4 |   | $ | 3,383.7 |   | $ | (682.5 | ) | $ | 6,749.3 |   |

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

 

30

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Salesvalue per segment:

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

 

 
| ** ** | ** ** | **Three Months Ended September 30, 2006  (in millions)** | ** ** |
|------------|------------|----------------------------------------------------------------------------------------|------------|
| ** ** | ** ** | **Mexican  Open Pit**                                                             | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|       |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Copper     |       | $                                                                                      | 422.9      |   | $ | 42.7 |   | $ | 764.5 |   | $ | (115.3 | ) | $ | 1,114.8 |   |
| Molybdenum |       | 3.0                                                                                    |       | — |   | 108.9 |   | — |   | 111.9 |   |
| Other      |       | 28.6                                                                                   |       | 146.6 |   | 44.6 |   | (34.3 | ) | 185.5 |   |
| Total      |       | $                                                                                      | 454.5      |   | $ | 189.3 |   | $ | 918.0 |   | $ | (149.6 | ) | $ | 1,412.2 |   |

 

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

 

 
| ** ** | ** ** | **Nine Months Ended September 30, 2006  (in millions)** | ** ** |
|------------|------------|---------------------------------------------------------------------------------------|------------|
| ** ** | ** ** | **Mexican  Open Pit**                                                            | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|       |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Copper     |       | $                                                                                     | 1,215.6    |   | $ | 100.3 |   | $ | 1,887.6 |   | $ | (263.6 | ) | $ | 2,939.9 |   |
| Molybdenum |       | 38.7                                                                                  |       | — |   | 334.7 |   | — |   | 373.4 |   |
| Other      |       | 85.3                                                                                  |       | 384.5 |   | 98.2 |   | (71.0 | ) | 497.0 |   |
| Total      |       | $                                                                                     | 1,339.6    |   | $ | 484.8 |   | $ | 2,320.5 |   | $ | (334.6 | ) | $ | 3,810.3 |   |

 

31

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Geographicbreakdown of Southern Copper’s sales is as follows:

 
| ** **                                | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **(in millions)**                               | ** ** |
| ** **                                | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| United States                             |       | $                                                    | 455.4      |                                                | $          | 494.0 |   | $ | 1,359.4 |   | $ | 1,355.8 |   |
| Europe                                    |       | 467.2                                                |       | 424.3                                               |       | 1,093.9 |   | 1,182.1 |   |
| Mexico                                    |       | 237.2                                                |       | 245.2                                               |       | 971.7 |   | 776.4 |   |
| Peru                                      |       | 50.7                                                 |       | 18.4                                                |       | 103.1 |   | 73.9 |   |
| Latin America (excluding Mexico and Peru) |       | 327.4                                                |       | 159.7                                               |       | 762.9 |   | 449.2 |   |
| Australia                                 |       | —                                               |       | 1.0                                                 |       | — |   | 1.0 |   |
| Asia                                      |       | 68.8                                                 |       | 99.9                                                |       | 497.2 |   | 260.1 |   |
| Derivative instruments                    |       | (0.3                                                 | )          | (30.3                                               | )          | 3.0 |   | (288.2 | ) |
| Total                                     |       | $                                                    | 1,606.4    |                                                | $          | 1,412.2 |   | $ | 4,791.2 |   | $ | 3,810.3 |   |

 

MajorCustomer Segment Information:

 

Forthe nine months ended September 30, 2007, the Company had revenue from twocopper customers of the Mexican and Peruvian operations, which amounted to 21.8%of total revenue; revenues from one of these customers amounted to 14.0% oftotal revenue. In addition, the Company had revenue from two molybdenumcustomers of the Peruvian and Mexican operations, which amounted to 13.0% oftotal revenues; these customers represent 80.0% of the Company’s molybdenumsales value.

 

Forthe nine months ended September 30, 2006, the Company had revenue from twocopper customers of the Mexican and Peruvian operations, which amounted to17.7% of total revenue; revenues from one of these customers amounted to 12.5%of total revenue. In addition, the Company had revenue from two molybdenumcustomers of the Peruvian and Mexican operations, which amounted to 6.1% oftotal revenues; these customers represent 67.0% of the Company’s molybdenumsales value.

 

O.            Impact of New Accounting standards:

 

InFebruary 2007 the FASB published SFAS No. 159, *“The FairValue Option for Financial Assets and Financial liabilities”.*ThisStatement permits entities to choose to measure many financial instruments andcertain other items at fair value that are not currently required to bemeasured at fair value. The objective is to improve financial reporting byproviding entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions. This Statement is expectedto expand the use of fair value measurement, which is consistent with the Board’slong-term measurement objectives for accounting for financial instruments.

 

This Statement alsoestablishes presentation and disclosure requirements designed to facilitatecomparisons between entities that choose different measurement attributes forsimilar types of assets and liabilities. This Statement does not affect anyexisting accounting literature that requires certain assets and liabilities tobe carried at fair value. This Statement does not establish requirements forrecognizing and measuring dividend income, interest income, or interest expense.This Statement does not eliminate disclosure requirements included in otheraccounting standards, including requirements for disclosures about fair valuemeasurements included in FASB Statements No. 157, *Fair Value Measurements,*and No. 107, *Disclosures about Fair Value of FinancialInstruments.*

 

32

----

 

SFAS  No. 159 will be effective for all thecompanies after the beginning of a reporting entity’s first fiscal year thatbegins after November 15, 2007. The Company is currently evaluating the impactof this statement will have on its financial position or results of operations.

 

InSeptember 2006 the FASB published SFAS No. 157 “Fair Value Measurements”, whichprovides enhanced guidance for using fair value to measure assets andliabilities. SFAS No. 157 establishes a common definition of fair valueprovides a framework for measuring fair value under U.S. GAAP and expandsdisclosure requirements about fair value measurements. SFAS No. 157 is effectivefor financial statements issued in fiscal years beginning after November 15,2007, and interim periods within those fiscal years. We are currentlyevaluating the impact, if any; the adoption of SFAS No. 157 will have on ourfinancial reporting and disclosures.

 

P.              Stockholders Equity:

 

Treasury Stock:

 

Activity in treasury stock in the nine month periodended September 30, 2007 is as follows (in millions):

 
| Southern Copper common shares                                       |   |   |   |
|---------------------------------------------------------------------|--------|--------|--------|
| Balance as of December 31, 2006                                     |   | $      | 4.4    |   |
| Purchase of shares                                                  |   | — |   |
| Used for corporate purposes                                         |   | (0.1   | )      |
| Balance as of September 30, 2007                                    |   | 4.3    |   |
|                                                                |   |   |   |
| Parent Company (Grupo Mexico) common shares                         |   |   |   |
| Balance as of December 31, 2006                                     |   | 92.6   |   |
| Other activity, including interest and  currency translation effect |   | 26.5   |   |
| Balance as of September 30, 2007                                    |   | 119.1  |   |
|                                                                |   |   |   |
| Treasury stock balance as of September 30,  2007                    |   | $      | 123.4  |   |

 

In the first nine months of 2007, the Companydistributed 4,400 shares of Southern Copper to directors under the Directors’Stock Award Plan.

 

Inthe first nine months of 2007 the Company awarded 4.7 million shares of GrupoMexico under the employee stock purchase plan.

 

Directors Stock Award Plan:

 

The Company established a stock award compensationplan for certain directors who are not compensated as employees of the Company.Under this plan, participants will receive 400 shares of common stock uponelection and 400 additional shares following each annual meeting ofstockholders thereafter. 200,000 shares of Southern Copper common stock havebeen reserved for this plan. At September 30, 2007 and 2006, 72,000 and 67,200shares, respectively, have been granted under this plan. The fair value of theaward is measured each year at the date of the grant. For the nine months endedSeptember 30, 2007 and 2006, the stock based compensation expense under thisplan equaled $0.4 million and $0.3 million, respectively.

 

EmployeeStock Purchase Plan:

 

InJanuary 2007, the Company offered to eligible employees a stock purchase plan(the “Employee Stock Purchase Plan”) through a trust that acquires shares ofGrupo 

 

33

----

 

Mexicostock for sale to its employees, and employees of subsidiaries, and certainaffiliated companies. The purchase price is established at the approximate fairmarket value on the grant date. Every two years employees will be able toacquire title to 50% of the shares paid in the previous two years. Theemployees will pay for shares purchased through monthly payroll deductions overthe eight year period of the plan. At the end of the eight year period, theCompany will grant the participant a bonus of 1 share for every 10 sharespurchased by the employee.

 

IfGrupo Mexico pays dividends on shares during the eight year period, theparticipants will be entitled to receive the dividend in cash for all sharesthat have been fully purchased and paid as of the date that the dividend ispaid. If the participant has only partially paid for shares, the entitleddividends will be used to reduce the remaining liability owed for purchasedshares.

 

Inthe case of voluntary resignation of the employee, the Company will pay to theemployee the difference between the fair market value of the shares at the dateof termination of employment, and the purchase price. When the fair marketvalue of the shares is higher than the purchase price, the Company will apply adeduction over the amount to be paid to the employee based on the followingschedule.

 

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

 

Inthe case of involuntary termination of the employee, the Company will pay tothe employee the difference between the fair market value of the shares at thedate of termination of employment, and the purchase price. When the fair marketvalue of the shares is higher than the purchase price, the Company will apply adeduction over the amount to be paid to the employee based on the followingschedule.

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

 

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

 

For the nine months ended September 30, 2007, thestock based compensation expenses under this plan was $1.5 million. As ofSeptember 30, 2007, there was $15.5 million of unrecognized compensationexpenses under this plan, which is expected to be recognized over a period of 8years.

 

The following table presents the stock awardactivity for the nine months ended September 30, 2007:

 

34

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| ** **                               | ** ** | **Shares** | ** ** | **Unit Weighted  Average Grant  Date Fair Value** | ** ** |
|------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------|------------|
| Outstanding shares at January 1, 2007    |       | —     |       | —                                                                |       |
| Granted                                  |       | 4,714,698  |       | $                                                                     | 3.50       |   |
| Exercised                                |       | —     |       | —                                                                |       |
| Forfeited                                |       | —     |       | —                                                                |       |
| Outstanding shares at September 30, 2007 |       | 4,714,698  |       | $                                                                     | 3.50       |   |

 

Executive Stock Purchase Plan:

 

Grupo Mexico also offers a stock purchase plan forcertain members of its executive management and the executive management of itssubsidiaries and certain affiliated companies. Under this plan, participantswill receive incentive cash bonuses which are used to purchase up to 750,000shares of Grupo Mexico over an eight year period. The fair value of the awardis estimated on the date of grant and is recognized as compensation expenseover a weighted average requisite service period of eight years. The Companyrecorded $0.5 million, net of tax, in compensation expense in the first ninemonths of 2007. As of September 30, 2007, there was $3.2 million ofunrecognized compensation cost, related to this plan, which is expected to berecognized over a weighted average period of eight years.

 

The following table presents the stock awardactivity for the nine months ended September 30, 2007:

 
| ** **                               | ** ** | **Shares** | ** ** | **Unit Weighted  Average Grant  Date Fair Value** | ** ** |
|------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------|------------|
| Outstanding shares at January 1, 2007    |       | 750,000    |       | $                                                                     | 2.30       |   |
| Granted                                  |       | —     |       |                                                                  |       |
| Exercised                                |       | (217,500   | )          | 2.30                                                                  |       |
| Forfeited                                |       | —     |       |                                                                  |       |
| Outstanding shares at September 30, 2007 |       | 532,500    |       | $                                                                     | 2.30       |   |

 

Q.            Subsequent events:

 

OnOctober 18, 2007 the Board of Directors approved a quarterly dividend of $2.00per share, totaling $588.9 million, to be paid on November 27, 2007 toshareholders of record as of November 7, 2007.

 

35

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Part I Item 2 and 3.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

EXECUTIVEOVERVIEW

 

Ourbusiness is primarily the production and sale of copper. In the process ofproducing copper, a number of valuable metallurgical by-products are recovered,such as molybdenum, zinc, silver, lead and gold, which we also produce and sell.Market forces outside of our control largely determine the sales prices for ourproducts. Our management, therefore, focuses on copper production cost control,production enhancement and maintaining a prudent and conservative capitalstructure to improve profitability. We believe we achieve these goals throughcapital spending programs, exploration efforts and cost reduction programs. Ouraim is to remain profitable during periods of low copper prices and to maximizefinancial performance in periods of high copper prices.

 

Our net income andearnings per share for the three months ended September 30, 2007 and 2006 were$627.8 million and $2.13 per share and $521.6 million and $1.77 per share,respectively. Net income and earnings per share for the nine months endedSeptember 30, 2007 and 2006 were $1,905.5 million and $6.47 per share and were$1,382.4 million and $4.69 per share, respectively. The increase in netearnings in the third quarter period was due principally to the higher salesvolume and the higher sales price for molybdenum. The increase in net earningsin the nine month period of 2007 was favorably impacted by higher prices forcopper and all of our principal byproducts, as well as, higher copper andmolybdenum sales volume. Also losses on copper and zinc derivates, included innet sales, amounted to $288.0 million and $0.2 million, respectively, in the2006 nine-month period, the comparable 2007 period included a gain on copperderivatives of $3.0 million. In addition, the nine months ended September 30,2007, included a loss on derivative instruments of $73.7 million, principallyrelated to losses on marketable securities. Strike activity at some of ourMexican operations reduced sales volumes in 2007 and 2006. However, we believethat this strike activity in 2007 will not result in an impairment of ourassets.

 

Wediscuss below several matters that we believe are important to understand ourresults of operations and financial condition. These matters include, (i) our “operatingcash costs” as a measure of our performance, (ii) metal prices, (iii) businesssegments, (iv) the effects of inflation and other local currency issues, (v)our expansion and modernization program and (vi) our community relations andenvironmental protection programs. This discussion should be read inconjunction with the management discussion and analysis of financial conditionand results of operations at December 31, 2006 included in the Company’s 2006annual report on Form 10-K.

 

OperatingCash Costs: Anoverall benchmark used by us and a common industry metric to measureperformance is operating cash costs per pound of copper produced. Operatingcash cost is a non-GAAP measure that does not have a standardized meaning andmay not be comparable to similarly titled measures provided by other companies.A reconciliation of our operating cash cost per pound to the cost of sales(including depreciation, amortization and depletion) as presented in thestatement of earnings, is presented under the subheading “Non-GAAP InformationReconciliation”, below. We have defined operating cash cost per pound as costof sales (including depreciation, amortization and depletion); plus selling,general and administrative charges, treatment and refining charges; lessbyproducts revenue and sales premiums, depreciation, amortization anddepletion, workers’ participation and other miscellaneous charges, the Peruvianroyalty charge and the change in inventory levels; divided by total pounds ofcopper produced and purchased by us. In our calculation of operating cash costper pound of copper produced, we credit against our costs the

 

36

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revenuesfrom the sale of byproducts, principally molybdenum, zinc and silver and thepremiums over market price that we receive on copper sales. We account for thebyproduct revenue in this way because we consider our principal business to bethe production and sale of copper. We believe that our Company is viewed by theinvestment community as a copper company, and is valued, in large part, by theinvestment community’s view of the copper market and our ability to producecopper at a reasonable cost. We also include copper sales premiums as a credit,as these amounts are in excess of published copper prices. The increase inrecent years in the price of molybdenum has had a significant effect on ourtraditional calculation of cash cost and its comparability between periods. Accordingly,we present cash costs with and without crediting the byproducts revenuesagainst our costs.

 

Weexclude from our calculation of operating cash cost depreciation, amortizationand depletion, which are considered non-cash expenses. Exploration isconsidered a discretionary expenditure and is also excluded. Workers’participation provisions are determined on the basis of pre-tax earnings andare also excluded. Additionally excluded from operating cash cost are items ofa non-recurring nature, and the Peruvian royalty.

 

Ouroperating cash costs per pound, as defined, are presented in the table below,for the three and nine months ended September 30, 2007 and 2006. We presentcash costs with and without the inclusion of by-product revenues.

 
| ** **                                                                        | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                        | ** ** | **(in cents per pound)**              | ** ** |
| Cash cost per pound of copper produced and  purchased                             |       | (18.2                                                | )          | 38.2                                                |       | (13.8 | ) | 32.9 |   |
| Cash cost per pound of copper produced and  purchased without by-products revenue |       | 155.1                                                |       | 142.2                                               |       | 135.3 |   | 135.4 |   |

 

Asseen on the chart above, our per pound cash cost for the third quarter and ninemonths of 2007 when calculated with by-products revenue is a credit of 18.2cents and 13.8 cents, respectively, compared with a cost of 38.2 cents and 32.9cents in the third quarter and nine months of 2006, respectively. The increasein the byproducts credit in both 2007 periods was due to higher prices formolybdenum and silver, as well as the higher production and sale of molybdenumin both periods. The increased molybdenum production was the result of higherore grades and recoveries at our Peruvian mines and increased production at LaCaridad in Mexico, which was disrupted by strikes in 2006. Zinc production,however, was lower in both 2007 periods when compared to the 2006 periods, dueto strikes in the Taxco and San Martin mines in Mexico and lower throughput andore grades in Charcas. See page 41 for the average metal prices for theseperiods.

 

Ourcash cost, excluding by-product revenues, was higher by 12.9 cents per pound inthe third quarter of 2007 than the comparable 2006 period and is mainly due tothe lower copper production at Cananea due to the work stoppage that began onJuly 30, 2007 and continues in the fourth quarter.

 

MetalPrices. Theprofitability of our operations is dependent on, and our financial performanceis significantly affected by, the international market prices for the productswe produce, especially for copper, molybdenum, zinc and silver. Metals priceshistorically 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

 

37

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producersand others and, to a lesser degree, inventory carrying costs and currencyexchange rates. In addition, the market prices of certain metals have onoccasion been subject to rapid short-term changes due to speculativeactivities.

 

Weare subject to market risks arising from the volatility of copper and othermetal prices. Assuming that expected metal production and sales are achieved,that tax rates are unchanged, giving no effect to potential hedging programs,metal price sensitivity factors would indicate the following change inestimated 2007 earnings resulting from metal price changes:

 
| ** **                                                     | ** ** | **Copper** | ** ** | **Molybdenum** | ** ** | **Zinc** | ** ** | **Silver** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|----------------|------------|----------|------------|------------|------------|
| Change in metal prices (per pound, except  silver - per ounce) |       | $          | 0.01       |           | $          | 1.00     |       | $          | 0.01       |   | $ | 1.00 |   |
| Annual change in net earnings (in millions)                    |       | $          | 7.9        |           | $          | 20.2     |       | $          | 1.7        |   | $ | 10.5 |   |

 

Businesssegments.

 

OurCompany operates in a single industry, the copper industry. With theacquisition of Minera Mexico in April 2005, we determined that to effectivelymanage our business we needed to focus on three segments. These segments areour Peruvian operations, our Mexican open-pit operations and our Mexicanunderground operations, known as our IMMSA unit. Our Peruvian operationsinclude the Toquepala and Cuajone mine complexes and the smelting and refiningplants, industrial railroad and port facilities which service both mines. OurMexican open-pit operations include La Caridad and Cananea mine complexes, thesmelting and refining plants and support facilities which service both mines. OurIMMSA unit includes five underground mines that produce zinc, lead, copper,silver and gold, a coal and coke mine, and several industrial processingfacilities for zinc, copper and silver.

 

Segmentinformation is included in our review of “Results of Operations” and also inNote N of our Condensed Consolidated Financial Statements.

 

Inflationand Devaluation of the Peruvian Nuevo Sol and the Mexican Peso. Our functional currency is the U.S. dollar.Portions of our operating costs are denominated in Peruvian nuevos soles andMexican pesos. Since our revenues are primarily denominated in U.S. dollars,when inflation/deflation in Peru or Mexico is not offset by a change in theexchange rate of the nuevo sol or the peso, respectively, to the dollar, ourfinancial position, results of operations and cash flows could be adverselyaffected in our wage adjustments. In addition, the dollar value of our netmonetary assets denominated in nuevos soles or pesos can be affected bydevaluation of the nuevo sol or the peso, resulting in a remeasurement loss inour financial statements.

 

Forthe three and nine months ended September 30, 2007 and 2006, inflation anddevaluation rates were as follows:

 
| ** **                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Peru:                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Inflation rate                                      |       | 1.2                                                  | %          | 0.0                                                 | %          | 3.0 | % | 1.4 | % |
| Nuevo sol/dollar (appreciation) /  devaluation rate |       | (2.6                                                 | )%         | (0.3                                                | )%         | (3.4 | )% | (5.3 | )% |
|                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Mexico:                                             |       |                                                 |       |                                                |       |   |   |   |   |
| Inflation rate                                      |       | 1.6                                                  | %          | 1.8                                                 | %          | 2.2 | % | 2.5 | % |
| Peso/dollar (appreciation) / devaluation  rate      |       | 1.2                                                  | %          | (3.1                                                | )%         | 0.4 | % | 3.2 | % |

 

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Expansionand Modernization Program.

 

TheIlo smelter modernization project was completed in January 2007. Xstrata, theIsasmelt technology supplier, noted that the ramp up of this facility by SCChas been a world class accomplishment for a brownfield smelter modernization.There are still some unresolved technical issues that needed to be workedthrough before the performance test can be completed and we can receive thenecessary warranties from our two major contractors. The concentrate throughputduring September was 92,560 and a daily smelting record was reached onSeptember 30, with 3,825 tons of concentrates smelted. Also, the sulfur captureduring the third quarter was over the 92% required by Peruvian regulations. Additionally,the Company’s crushing and conveying project at the Toquepala mine is in fullproduction. The primary crusher and associated overland conveying system arefully operational. This overland conveying system has allowed us to move 58.4million tons of material to the dams. The sedimentation, PLS and storm waterretention dams and associated facilities at Toquepala are in operation sinceJuly, 2007.

 

Asa result of the unstable labor situation at some of our Mexican properties, ourBoard of Directors have decided to suspend indefinitely previously announcedexpansion projects at the Cananea and Guaymas (Sonora), Mexico, consisting ofthe following projects: the Cananea SX/EW III, the Cananea concentratorexpansion, the Cananea molybdenum circuit, the Buena Vista mine, the newCananea concentrator, and the Guaymas smelter and refinery. These projects hada total investment budget of $2,256 million.

 

Additionally,the Company’s Board of Directors approved a new investment program to replacethe suspended projects by authorizing the development of the following projectsin Peru: the Tia Maria SX/EW copper project, the Toquepala concentratorexpansion, the Cuajone concentrator expansion crusher conveyor for leachproject, the Ilo smelter expansion and the Ilo copper refinery expansion, witha total investment of $2,108 million. This investment will permit the Companyto increase its copper production by 270,000 tons per year by 2011, whichrepresents 39% of the current production level. In January 2007, the Company hadconsidered a plan to develop these projects at a later date, as a second stageof its investment plan.

 

Regardingthe Company’s exploration activities, the pre-feasibility study at Los Chancas,a copper-molybdenum property in southern Peru was finished and is underevaluation in order to define the next step. Additionally, a feasibility studyfor Tia Maria, a copper oxide deposit in the department of Arequipa, Peru isalmost completed and will be analyzed. The Environmental Impact Assessment(EIA) for this project is underway. In addition to these Peruvian properties,we are planning to develop our Mexican properties at El Arco in Baja Californiaand Angangueo in Michoacan.

 

Communityrelations and environmental protection programs

 

Becauseof the physical nature of mining activities, we find it imperative in ourbusiness to work in harmony with our neighbors and the environment. Accordingly,our Company works to build and maintain a mutually beneficial relationship inthe Mexican and Peruvian communities in which it operates. We co-participatewith the local governments in the development of projects for improvingeducation, health care, schools and secondary infrastructure, health programs,cultural and sports activities. We provide education to 3,713 students in ourschools and we have established a program, with a trust, that funds more than200 scholarships in Mexico and Peru. In 2007, we will invest $27 million insocial programs.

 

Wehave environmental protection programs in each of our operating units, inconformity with the environmental legislation and we have implemented anenvironmental management system to meet the requirements of the ISO-14001. InMexico, SEMARNAT, the governmental

 

39

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environmentalagency, has awarded the “Certificate of Clean Industry” to five of ouroperating facilities that have complied with the environmental audits: SantaBarbara mines, Chihuahua; SXEW plant, precious metal plant and the rod plant,Sonora; and the gas pipeline. Our Peruvian operations have completed the10-year environmental program known as the “PAMA” with a total investment of$580 million. Our Mexican subsidiary is a leader company in Mexico’sreforestation program and maintains and operates three tree nurseries with acapacity of 1,731,000 trees per year.

 

ACCOUNTINGESTIMATES

 

Ourdiscussion and analysis of financial condition and results of operations arebased on our condensed consolidated financial statements, which have beenprepared in accordance with US GAAP. Preparation of these condensedconsolidated financial statements requires our management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during thereporting periods. Management makes its best estimate of the ultimate outcomefor these items based on historical trends and other information available whenthe financial statements are prepared. Changes in estimates are recognized inaccordance with the accounting rules for the estimate, which is typically inthe period when new information becomes available to management. Areas wherethe nature of the estimate makes it reasonably possible that actual resultscould materially differ from amounts estimated include: ore reserves, revenuerecognition, 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, tax positions, fair value of financial instruments and inventoryobsolescence. We base our estimates on historical experience and on variousother assumptions that are believed to be reasonable under the circumstances. Actualresults may differ from these estimates under different assumptions orconditions.

 

RESULTSOF OPERATIONS

 

Thefollowing highlights key financial and operating results for three and ninemonths ended September 30, 2007 and 2006:

 
| ** **                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                  | ** ** | **(dollars in millions)**                  | ** ** |
| ** **                                  | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Statement of Earnings Data                  |       |                                                 |       |                                                |       |   |   |   |   |
|                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Net sales                                   |       | $                                                    | 1,606.4    |                                                | $          | 1,412.2 |   | $ | 4,791.2 |   | $ | 3,810.3 |   |
| Operating costs and expenses                |       | (672.6                                               | )          | (607.7                                              | )          | (1,924.8 | ) | (1,724.2 | ) |
| Operating income                            |       | 933.8                                                |       | 804.5                                               |       | 2,866.4 |   | 2,086.1 |   |
| Non-operating income (expense)              |       | (6.7                                                 | )          | (8.2                                                | )          | (72.1 | ) | (17.4 | ) |
| Earnings before taxes and minority interest |       | 927.1                                                |       | 796.3                                               |       | 2,794.3 |   | 2,068.7 |   |
| Income taxes                                |       | (296.1                                               | )          | (271.9                                              | )          | (881.2 | ) | (679.7 | ) |
| Minority interest                           |       | (3.2                                                 | )          | (2.8                                                | )          | (7.6 | ) | (6.6 | ) |
| Net earnings                                |       | $                                                    | 627.8      |                                                | $          | 521.6 |   | $ | 1,905.5 |   | $ | 1,382.4 |   |

 

Mine copper productionamounted to 303.9 million pounds in the third quarter of 2007, a decrease of2.4% compared with the third quarter of 2006. This decrease amounting to 7.6million pounds, included 11.0 million pounds from the Mexican open pitoperations, 

 

40

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2.4 million pounds from theMexican underground mines and an increase of 5.8 million pounds from thePeruvian open pit mines.

 

The decrease of 11.0 millionpounds in production from the Mexican open-pit mines included 53.7 millionpounds from the Cananea mine net of an increase of 42.7 million pounds from theLa Caridad mine. The decrease at the Cananea mine was result of a work stoppagethat began on July 30, 2007 and continued into the fourth quarter, while the LaCaridad mine operated at normal capacity. In 2006, the Cananea mine operated atnormal capacity while La Caridad mine was on a work stoppage through July 26,2006. The decrease of 2.4 million pounds at the Mexican underground mines wasdue to the work stoppage at the San Martin mine. The increased production atthe Peruvian mines came principally from the Cuajone mine, which increased by5.0 million pounds, and was the result of higher ore grades and from a 2.3million pound increase in the SX/EW production, principally due to the processingof copper sulfate purchased from third parties, partially reduced by a decreaseof 1.5 million pound in the production from the Toquepala mine, the result oflower ore grades.

 

Molybdenum productionincreased to 9.7 million pounds in the third quarter of 2007 from 5.1 millionpounds in the third quarter of 2006. This increase in production was the resultof 2.4 million pounds of higher strike-free production at La Caridad and anincrease of 2.2 million pounds in the production from our Peruvian operationsdue to higher grades and recoveries in both mines.

 

Mine zinc productiondecreased 16.5 million pounds in the third quarter of 2007 to 64.6 millionpounds compared with 81.1 million pounds in the third quarter of 2006. This20.3% decrease in production was due to the work stoppages at San Martin andTaxco mines and lower throughput and ore grade in Charcas.

 

Thetable below outlines the average metal prices during the three and nine monthsperiods ended September 30, 2007 and 2006:

 

AverageMetal Prices

 
| ** **                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **% Change** | ** ** | **2007** | ** ** | **2006** | ** ** | **% Change** | ** ** |
| Copper ($ per pound - LME)   |       | $                                                    | 3.50       |                                                | $          | 3.48 |   | 0.6 |   | $ | 3.22 |   | $ | 3.00 |   | 7.3 |   |
| Copper ($ per pound - COMEX) |       | $                                                    | 3.48       |                                                | $          | 3.54 |   | (1.7 | ) | $ | 3.21 |   | $ | 3.06 |   | 4.9 |   |
| Molybdenum ($ per pound)     |       | $                                                    | 31.33      |                                                | $          | 25.94 |   | 20.8 |   | $ | 29.19 |   | $ | 24.13 |   | 21.0 |   |
| Zinc ($ per pound - LME)     |       | $                                                    | 1.46       |                                                | $          | 1.53 |   | (4.6 | ) | $ | 1.56 |   | $ | 1.35 |   | 15.6 |   |
| Silver ($ per ounce - COMEX) |       | $                                                    | 12.70      |                                                | $          | 11.65 |   | 9.0 |   | $ | 13.11 |   | $ | 11.19 |   | 17.2 |   |

 

NetSales. Net sales inthe third quarter of 2007 increased $194.2 million to $1,606.4 million from$1,412.2 million in the comparable period in 2006. The increase in net sales inthe third quarter was the result of higher molybdenum and silver prices andhigher molybdenum sales volume. Net sales in the first nine months of 2007increased $980.9 million to $4,791.2 million from $3,810.3 million in thecomparable period in 2006. The increase in net sales in the nine month periodwas the result of higher metal prices and higher copper and molybdenum salesvolumes. Net sales also include a loss of $0.3 million and a gain of $3.0million on copper derivative instruments in the third quarter and nine monthsof 2007, respectively. Loss on copper and zinc derivative instruments decreasednet sales by $30.3 million and $288.2 million in the third quarter and thefirst nine months of 2006, respectively.

 

Thetable below presents information regarding the volume of our copper sales bysegment for the three and nine months ended September 30, 2007 and 2006:

 

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CopperSales (million pounds):

 
| ** **               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **               | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Copper:                  |       |                                                 |       |                                                |       |   |   |   |   |
| Peruvian operations      |       | 219.9                                                |       | 225.1                                               |       | 640.8 |   | 620.6 |   |
| Mexican open-pit         |       | 105.9                                                |       | 116.0                                               |       | 437.5 |   | 420.5 |   |
| Mexican IMMSA unit       |       | 7.6                                                  |       | 9.4                                                 |       | 24.5 |   | 28.4 |   |
| Intersegment elimination |       | (18.2                                                | )          | (31.7                                               | )          | (64.9 | ) | (87.5 | ) |
| Total copper sales       |       | 315.2                                                |       | 318.8                                               |       | 1,037.9 |   | 982.0 |   |

 

Thetable below presents information regarding the volume of sales by segment ofour significant by-products for the three and nine months ended September 30,2007 and 2006:

 

By-productSales:

 
| ** **                                                                                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in million pounds except silver - in million ounces)** | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Peruvian operations                                                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Molybdenum contained in concentrates                                                              |       | 6.6                                                  |       | 4.3                                                 |       | 15.9 |   | 15.2 |   |
| Zinc - refined and in concentrate                                                                 |       | 8.9                                                  |       | 15.9                                                |       | 32.1 |   | 26.4 |   |
| Silver                                                                                            |       | 1.5                                                  |       | 1.2                                                 |       | 3.6 |   | 4.1 |   |
|                                                                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Mexican open-pit                                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Molybdenum contained in concentrates                                                              |       | 2.5                                                  |       | 0.1                                                 |       | 10.3 |   | 1.7 |   |
| Zinc - refined and in concentrate (1)                                                             |       | —                                               |       | 6.0                                                 |       | — |   | 15.4 |   |
| Silver                                                                                            |       | 0.8                                                  |       | 0.8                                                 |       | 2.9 |   | 3.4 |   |
|                                                                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Mexican IMMSA unit                                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Zinc - refined and in concentrate                                                                 |       | 57.3                                                 |       | 63.7                                                |       | 191.3 |   | 198.0 |   |
| Silver                                                                                            |       | 2.8                                                  |       | 3.1                                                 |       | 8.5 |   | 9.0 |   |
|                                                                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Intersegment elimination                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Zinc - refined and in concentrate                                                                 |       | (8.4                                                 | )          | (19.4                                               | )          | (30.0 | ) | (33.4 | ) |
| Silver                                                                                            |       | (0.2                                                 | )          | (0.2                                                | )          | (0.7 | ) | (1.9 | ) |
|                                                                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Total by-product sales                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Molybdenum contained in concentrates                                                              |       | 9.1                                                  |       | 4.4                                                 |       | 26.2 |   | 16.9 |   |
| Zinc - refined and in concentrate                                                                 |       | 57.8                                                 |       | 66.2                                                |       | 193.4 |   | 206.4 |   |
| Silver                                                                                            |       | 4.9                                                  |       | 4.9                                                 |       | 14.3 |   | 14.6 |   |

 

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(1) Through 2006, the Mexicanopen pit operations purchased zinc products from IMMSA for resale to itscustomers. This practice was discontinued in 2006 and IMMSA’s zinc sales wereeither to their customers or to the Peruvian segment, who in turn resold totheir customers.

 

AtSeptember 30, 2007, the Company has recorded provisionally priced sales of204.7 million pounds of copper, at an average forward price of $3.64 per pound.Also the Company has recorded provisionally priced sales of 6.1 million poundsof molybdenum at the September 30, 2007 market price of $31.35 per pound. Thesesales are subject to final pricing based on the average monthly LME or COMEXcopper prices and Dealer Oxide molybdenum prices in the future month ofsettlement, which will occur largely in the next seven months.

 

42

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Managementbelieves that the final pricing of these sales will not have a material effecton the Company’s financial position or results of operations.

 

OperatingCosts and Expenses. Operatingcosts and expenses were $672.6 million in the third quarter of 2007 comparedwith $607.7 million in the third quarter of 2006. The increase of $64.9 millionwas principally due to higher cost of sales (exclusive of depreciation, amortizationand depletion) and higher depreciation, amortization and depletion.

 

Costof sales (exclusive of depreciation, amortization and depletion) for the threemonths ended September 30, 2007 was $559.8 million compared with $509.2 millionin the comparable 2006 period. The increase in cost of sales of $50.6 millionin the third quarter 2007 was principally due to $56.3 million of higherproduction cost due to increase in power, fuel, tires and material repairoffset by $66.6 million of lower metal purchased from third parties.Additionally, cost of sales was higher due to $17.9 million of higher workers’participation, $21.4 million of inventory consumption and $8.2 million ofhigher freight and shipping expenses, mainly due to the sale of copperconcentrates.

 

Operatingcosts and expenses were $1,924.8 million in the first nine months of 2007compared with $1,724.2 million in the first nine months of 2006. Cost of sales(exclusive of depreciation, amortization and depletion) for the nine monthsended September 30, 2007 was $1,588.8 million compared with $1,438.0 million inthe comparable 2006 period.

 

Theincrease in cost of sales in the nine-month 2007 period is principally due to$124.5 million of higher production cost as a consequence of the higher strike-freeproduction at our La Caridad operations offset by a reduction of $158.3 millionin purchases of copper concentrates on the open market made in 2006 due to thestrike activities. Other factors increasing cost of sales include an increasein workers’ participation of $55.2 million, an exchange loss of $10.1 millionmainly due to the appreciation of the Mexican peso, a consumption of initialinventory of $54.7 million and $30.8 million of higher freight and shippingexpenses, mainly due to the sale of copper concentrates.

 

Depreciation,amortization and depletion for the three months and nine months ended September30, 2007, were $81.5 million and $240.1 million, respectively compared with$67.8 million and $198.9 million in the comparable periods of 2006. Theincreases of $13.7 million and $41.2 million are mainly attributable to higherdepreciation in our Peruvian operations due to the start-up of the modernizedIlo smelter and higher amortization of capitalized leachable material in ourMexican open pit operations.

 

Non-OperatingIncome (Expense):Interest expense in the third quarter and the first nine months of 2007 wereapproximately 1.3% lower and 11.2% higher, respectively, than the comparable2006 periods. These variations are mainly result of the changes in average debtlevels between the periods.

 

Interestincome was $23.5 million and $63.5 million in the third quarter and first ninemonths of 2007, compared to $10.8 million and $34.5 million in the thirdquarter and first nine months of 2006. These increases were principally theresult of higher cash balances in the periods and higher rates of interestearned.

 

Thegain on derivative instruments was $3.0 million in the third quarter and a lossof $73.7 million in the first nine months of 2007. These amounts consist of thefollowing (in millions):

 

43

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| ** **                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Gain (loss) on marketable securities (1)                      |       | $                                                    | 1.6        |                                                | $          | — |   | $ | (79.9 | ) | $ | — |   |
| Loss on dual currency notes                                   |       | —                                               |       | —                                              |       | (1.3 | ) | — |   |
| Gain on exchange rate derivatives, U.S. dollar / Mexican peso |       | 1.4                                                  |       | —                                              |       | 7.5 |   | — |   |
| Net loss                                                      |       | $                                                    | 3.0        |                                                | $          | — |   | $ | (73.7 | ) | $ | — |   |

 

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(1)          Theamount of the realized loss was $43.2 million on investments of $60.0 millionwhich matured in June 2007; the unrealized portion is $48.3 million. Theseunrealized losses are recorded in other accounts payable in the condensedconsolidated balance sheet. A loss on these investments of $11.6 million wasrecorded in the fourth quarter 2006 results.

 

Foradditional information please see Note C, Marketable securities and Note H,Derivative instruments to the Condensed Consolidated Financial Statements.

 

Otherincome (expense) was an expense of $5.7 million and an income of $20.0 millionin the third quarter and first nine months of 2007, respectively, compared toincomes of $5.3 million and $12.8 million in the third quarter and first ninemonths of 2006. The decrease in the third quarter of 2007 was principally dueto $6.2 million of the Peruvian contribution to the regional development. Theincrease in the nine months period was due to lower consultant fees and lowercost of disposal of assets.

 

Incometaxes: The income taxfor the nine months ended September 30, 2007 and 2006 was $881.2 million and$679.7 million, respectively. These amounts include income taxes for Peru,Mexico and the United States. The effective tax rates for the 2007 and 2006periods are 31.5% and 32.9%, respectively. A decrease of 1% in the statutoryMexican tax rate contributed to the decrease in the 2007 effective income taxrate. In addition, a tax inflation adjustment and the effect of currencyconversion adjustment in our Mexican operations also contributed to thereduction in the effective tax rate.

 

OnOctober 1, 2007, the Mexican government enacted a new law, which generallytakes effect on January 1, 2008. The law introduces a flat tax, which replacesMexico’s asset tax and will apply to taxpaying entities along with Mexico’sregular income tax. This new law will not generate additional current taxliabilities unless our Mexican subsidiaries report annual net loss positions. Forpurposes of deferred tax accounting under FAS No. 109, we will calculate theimpact of this new law in the fourth quarter of 2007 and record the effect, ifany, in our fourth quarter financial statements.

 

SegmentResults Analysis

 

PeruvianOpen Pit Operations

 

Thefollowing table sets forth net sales, operating cost and expenses and operatingincome for our Peruvian open pit operations segment, for the three and ninemonths ended September 30, 2007 and 2006:

 
| ** **                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                   | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                   | ** ** | **(in millions)**                               | ** ** |
| Net sales                    |       | $                                                    | 1,028.8    |                                                | $          | 918.0 |   | $ | 2,698.8 |   | $ | 2,320.5 |   |
| Operating costs and expenses |       | (414.3                                               | )          | (376.4                                              | )          | (1,158.5 | ) | (995.3 | ) |
| Operating income             |       | $                                                    | 614.5      |                                                | $          | 541.6 |   | $ | 1,540.3 |   | $ | 1,325.2 |   |

 

44

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Netsales in the third quarter 2007 increased $110.8 million to $1,028.8 millionfrom $918.0 million in the comparable period of 2006. The increase in net salesis principally the result of higher molybdenum price and sales volume due tohigher production. Net sales in the first nine months of 2007 increased $378.3million to $2,698.8 million from $2,320.5 million in the first nine months of2006. The increase in net sales is principally the result of higher metalsprices and higher copper, zinc and molybdenum sales volume. The third quarterand first nine months periods of 2007 include a loss on copper derivatives of$0.2 million and a gain of $1.5 million, respectively, compared with losses of$29.8 million and $168.2 million in the third quarter and first nine months of2006.

 

Operatingcosts and expenses in the third quarter of 2007 increased by $37.9 million to$414.3 million from 376.4 million in the first nine months of 2006, principallydue to higher cost of sales and higher depreciation, amortization and depletion.Cost of sales (exclusive of depreciation, amortization and depletion) for thethree months ended September 30, 2007 was $373.8 million compared to $343.9million in the same period of 2006. The increase in cost of sales includesprincipally, $12.2 million of higher production cost due to increases insalaries, power, explosives, tires and other operating material offset by $17.1million of lower metal purchased mainly rod and zinc from our Mexicanoperations. Cost of sales also increased by $9.3 million of higher workers’participation, $8.0 million of higher freight and shipping expenses, duelargely to the sale of concentrates; $5.7 million of exchange loss due toappreciation of the nuevo sol and $9.9 million of inventory consumption.Depreciation, amortization and depletion for the three months ended September30, 2007 was $27.4 million compared to $21.1 million in the same period of2006. The increase of $6.3 million in depreciation, amortization and depletionis due to the depreciation of the newly completed Ilo smelter modernization projectand the depreciation of other new investments.

 

Operatingcosts and expenses in the first nine months of 2007 increased by $163.2 millionto $1,158.5 million from $995.3 million in the first nine months of 2006,principally due to higher cost of sales and higher depreciation, amortizationand depletion. Cost of sales (exclusive of depreciation, amortization anddepletion) for the nine months ended September 30, 2007 was $1,036.2 millioncompared to $898.1 million in the same period of 2006. The increase of $138.1million in cost of sales includes mainly $60.0 million of higher metalspurchased mainly to our Mexican operations, $18.4 million of higher productioncost due to increases in salaries, power and other operating material, $18.4million of higher workers’ participation, $10.6 million of inventoryconsumption and $29.3 million of higher freight and shipping expenses due tothe sale of concentrates. The increase of $19.5 million in depreciation,amortization and depletion is due the depreciation of the newly completed Ilosmelter modernization project and the depreciation of other new capitaladditions.

 

MexicanOpen Pit Operations

 

Thefollowing table sets forth net sales, operating cost and expenses and operatingincome for our Mexican open pit operations segment for the three and ninemonths periods ended September 30, 2007 and 2006:

 
| ** **                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                   | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                   | ** ** | **(in millions)**                               | ** ** |
| Net sales                    |       | $                                                    | 481.3      |                                                | $          | 454.5 |   | $ | 1,831.2 |   | $ | 1,339.6 |   |
| Operating costs and expenses |       | (224.0                                               | )          | (288.3                                              | )          | (732.2 | ) | (766.7 | ) |
| Operating income             |       | $                                                    | 257.3      |                                                | $          | 166.2 |   | $ | 1,099.0 |   | $ | 572.9 |   |

 

45

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Netsales in the third quarter of 2007 increased $26.8 million to $481.3 millionfrom $454.5 million in the third quarter of 2006. Net sales in the first ninemonths of 2007 increased $491.6 million to $1,831.2 million from $1,339.6million in the first nine months of 2006. The increase in net sales in bothperiods is mainly due to higher metal prices. In addition, net sales in thethird quarter and nine months of 2007 were improved by higher molybdenum salesvolume due to a free-strike production at La Caridad mine, the nine monthperiod also was improved for higher copper sales value which was reduced in thethird quarter due to a strike at Cananea mine, which began on July 30, 2007 andcontinues into the fourth quarter of 2007. In addition, the net sales for the2007 third quarter includes a loss on copper derivative of $0.2 millioncompared with a loss on copper and zinc derivatives of $0.2 million and $0.2million, respectively, in the third quarter of 2006 and the nine months of 2007included a gain on copper derivatives of $1.5 million compared with a loss ofcopper and zinc derivatives of $119.8 million and $0.2 million, respectively,in the comparable period of 2006.

 

Operatingcosts and expenses in the third quarter of 2007 decreased by $64.3 million to$224.0 million from $288.3 million in the third quarter of 2006, principallydue to lower cost of sales. Cost of sales (exclusive of depreciation,amortization and depletion) decreased $68.7 million to $171.3 million from$240.0 million in 2006. The decrease in cost of sales was mainly due to thedecrease of $117.2 million of copper purchased from third parties; net of $45.7million of higher production cost mainly in power, fuel, tires, explosives andoperating material and $10.8 million of higher workers’ participation.

 

Operatingcosts and expenses in the first nine months of 2007 decreased by $34.5 millionto $732.2 million from $766.7 million in the nine months of 2006, mainly due to$55.7 million of lower cost of sales (exclusive of depreciation, amortizationand depletion) and $14.4 million of higher depreciation, amortization anddepletion. Cost of sales (exclusive of depreciation, amortization anddepletion) decreased $55.7 million to $569.0 million from $624.7 million in2006. The decrease in cost of sales was principally due to $258.9 million oflower metal purchased from third parties, partially offset by higher productioncost of $85.9 million due to a strike-free production in the first half of theyear, $71.9 million of inventory consumption and $32.1 million of higherworkers’ participation. The increase in depreciation, amortization anddepletion is mainly due to the amortization of capitalized leach material.

 

MexicanUnderground Operations (IMMSA)

 

Thefollowing table sets forth net sales, operating cost and expenses and operatingincome for our IMMSA segment, for the three and nine months periods endedSeptember 30, 2007 and 2006:

 
| ** **                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                   | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                   | ** ** | **(in millions)**                               | ** ** |
| Net sales                    |       | $                                                    | 178.5      |                                                | $          | 189.3 |   | $ | 542.8 |   | $ | 484.8 |   |
| Operating costs and expenses |       | (114.7                                               | )          | (112.4                                              | )          | (321.3 | ) | (300.2 | ) |
| Operating income             |       | $                                                    | 63.8       |                                                | $          | 76.9 |   | $ | 221.5 |   | $ | 184.6 |   |

 

Netsales in the third quarter 2007 decreased $10.8 million to $178.5 million from$189.3 million in the comparable period of 2006. Net sales in the first ninemonths of 2007 increased $58.0 million to $542.8 million from $484.8 million inthe comparable period. The decrease in net sales in the third quarter 2007 wascaused by the strikes at San Martin and Taxco mines which lowered 2007 third quarteroutput and sales. The increase in net sales in the nine month period wasprincipally due to higher market prices despite the lower sales volume.

 

46

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Operatingcosts and expenses in the third quarter of 2007 increased by $2.3 million to$114.7 million from $112.4 million in the third quarter of 2006. This increaseis principally related to an increase in depreciation, amortization anddepletion due to the accelerated depreciation of the processing plant equipmentat Pasta de Conchos over the remaining estimated production period of themineral located in the open pit.

 

Operatingcosts and expenses in the first nine months of 2007 increased by $21.1 millionto $321.3 million from $300.2 million in the first nine months of 2006. Thisincrease was principally due to higher cost of sales (exclusive ofdepreciation, amortization and depletion) and higher depreciation, amortizationand depletion. Cost of sales (exclusive of depreciation, amortization and depletion)increased $10.0 million in the first nine months of 2007 from the first ninemonths of 2006 mainly due to $7.1 million of higher production and sales ofmined metal and $2.0 million of exchange loss due to the appreciation ofMexican peso. Depreciation amortization and depletion increased by $6.5 milliondue to the accelerated depreciation of the processing plant equipment at Pastade Conchos over the remaining estimated production period of the minerallocated in the open pit.

 

IntersegmentEliminations and Adjustments

 

Thenet sales, operating costs and expenses and operating income displayed abovewill not be directly equal to amounts in our condensed consolidated statementof earnings because the adjustments of intersegment operating revenues and expensesmust be taken into account. Please see Note N of the condensed consolidatedfinancial statements.

 

CASHFLOW

 

Thefollowing table shows the cash flow for the three and nine months endedSeptember 30, 2007 and 2006:

 
| ** **                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                  | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                  | ** ** | **(in millions)**                               | ** ** |
| Net cash provided from operating activities |       | $                                                    | 728.3      |                                                | $          | 522.6 |   | $ | 1,926.0 |   | $ | 1,093.0 |   |
| Net cash used for investment activities     |       | $                                                    | (65.7      | )                                                   | $          | (101.9 | ) | $ | (333.4 | ) | $ | (330.6 | ) |
| Net cash used for financing activities      |       | $                                                    | (473.4     | )                                                   | $          | (290.9 | ) | $ | (1,423.6 | ) | $ | (744.9 | ) |

 

ThirdQuarter:  Net cash provided by operating activities was$728.3 million in the third quarter of 2007, compared with $522.6 million inthe 2006 period. The increase of $205.7 million was due to an increase in netearnings of $106.3 million mainly due to higher molybdenum and silver pricesand higher molybdenum sales volume; $ 37.5 million of lower capitalizedleachable material due to the work stoppage at the Cananea mine; $13.8 millionhigher depreciation, amortization and depletion due to the capitalization ofthe Ilo smelter modernization project and the amortization of capitalizedleachable material and $42.8 million of decrease in working capital mainly dueto the increase in workers’ participation and income tax provision due tohigher earnings.

 

Netcash used in investing activities was $65.7 million in the third quarter of2007 compared with $101.9 million in the third quarter of 2006 and included$72.1 million for capital expenditures and $6.2 million received on theredemption of bonds with a face value of $20.0 million. The capitalexpenditures included investments at our Peruvian operations of $24.5 millionwhich included $12.7 million for four Komatzu trucks, $2.7 million for a newball mill at the Cuajone concentrator, $4.4 million for

 

47

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thetailing disposal project, $1.9 million for the new PLS dams at Huanaqueraproject and $2.8 million for various other replacement expenditures. Inaddition, we spent $47.6 million for replacement assets at our Mexicanoperations, including, $9.6 million for the leachable ore crushing,transportation and stacking system project at Cananea, $3.4 million for the gashandling system in the smelter at La Caridad, $1.8 million for the PLS dams andleaching system at Cananea, $25.0 million for various other replacementexpenditures at our Mexican open pit operations, $7.3 million for our IMMSAunit and $0.5 million for our Mexican corporate office. In the third quarter of2006, cash used for investment activities was $101.9 million; this amountincludes capital spending of $102.3 million, $30.9 million of which was spentin the Ilo smelter modernization project, $24.6 million for other replacementexpenditures in Peru and $46.8 million for replacement expenditures at ourMexican operations, $34.1 million of which was for replacement equipment at ourMexican open pit operations and $12.7 million for our IMMSA unit.

 

Netcash used in financing activities in the third quarter of 2007 was $473.4million, compared with $290.9 million in the third quarter of 2006. The thirdquarter of 2007 includes a dividend distribution of $471.1 million. The thirdquarter of 2006 includes a dividend distribution of $294.5 million and therepurchase by our Mexican operation of $2.0 million of Yankee bonds.

 

NineMonths:  Net cash provided by operating activities was$1,926.0 million in the first nine months of 2007 compared with $1,093.0million in the same period of 2006. The increase of $833.0 million wasprincipally due to $523.1 million of higher earnings due to higher metal pricesand higher copper and molybdenum sales volumes; $41.3 million of higherdepreciation, amortization and depletion due to the capitalization of the Ilosmelter modernization project and the amortization of capitalized leachablematerial and $122.0 million of decrease in working capital mainly due to theincrease in workers’ participation and income tax provision due to higherearnings. The nine months of 2007 includes an adjustment of earnings of $43.2million due to a realized loss on the sale of marketable securities which ispresented in investing activities and $48.3 million of an unrealized loss on anembedded derivative related to investment in marketable securities (see Note C)net of $1.6 million of an unrealized gain on exchange rate derivatives (seeNote H).

 

Netcash used in investing activities was $333.4 million in the first nine monthsof 2007 compared with $330.6 million in the first nine months of 2006, and inthe 2007 period included $251.1 million for capital expenditures, $100.0million for the purchase of marketable securities, less $16.8 million receivedon the redemption of marketable securities. The capital expenditures includedinvestments at our Peruvian operations of $104.9 million, including, $21.0million for the Ilo smelter modernization project, $13.5 million for fourKomatzu trucks, $3.9 million for a new ball mill at the Cuajone concentrator,$10.8 million for the tailing disposal project, $9.0 million for the new PLSdams at Huanaquera project and $46.7 million for various other replacementexpenditures. In addition, we spent $146.2 million for replacement assets atour Mexican operations, including, $10.6 million of which for the leachable orecrushing, transportation and stacking system project at Cananea, $4.1 millionfor the PLS dams and leaching system project at Cananea, $9.6 million for thegas handling system in the smelter at La Caridad and $77.8 million for variousother replacement expenditures at our Mexican open pit operations, $16.8million at our IMMSA unit and $27.3 million for our Mexican corporate office. Inthe first nine months of 2006, cash used for investing activities was $330.6million; this amount includes capital spending of $333.0 million, $117.2million of which was spent on the Ilo smelter modernization project, $61.4million for other replacement expenditures in Peru and $154.4 million forreplacement expenditures for our Mexican operations, of which $122.1 millionwas for our Mexican open pit operations and $32.3 million for our IMMSA unit.

 

Netcash used in financing activities in the first nine months of 2007 was $1,423.6million, compared with $744.9 million in the first nine months of 2006. Thefirst nine

 

48

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monthsof 2007 include a dividend distribution of $1,413.4 million and a debt paymentof $5.0 million. The first nine months of 2006 include a dividend distributionof $1,104.2 million and net debt incurred of $365.7 million.

 

LIQUIDITYAND CAPITAL RESOURCES

 

OnAugust 1, 2007, the Company paid a quarterly dividend of $1.60 per share,totaling $471.1 million. On October 18, 2007, the Board of Directors approved aquarterly dividend of $2.00 per share, totaling $588.9 million, to be paid onNovember 27, 2007, to shareholders of record as of November 7, 2007.

 

OnOctober 3, 2007, we liquidated $300 million of the marketable securitiesinvestments and received $276.4 million. As of September 30, 2007, the loss wasrecorded as unrealized loss on derivative instruments. Additionally, as part ofthis transaction, we redeemed $68.6 million of our series B Yankee bonds, for$85.2 million. The excess paid over the face value of the bonds, of $16.6million will be recorded in the fourth quarter of 2007 as loss on repurchase ofdebt.

 

Weexpect that we will meet our cash requirements for 2007 and beyond frominternally generated funds, cash on hand and from additional external financing,if required. At September 30, 2007 the Company’s debt as a percentage of totalcapitalization (the total of debt, minority interest and stockholders’ equity)was 26.9% as compared with 29.3% at December 31, 2006. At September 30, 2007,the Company’s cash and cash equivalent amounted to $1,195.2 million compared to$1,022.8 million at December 31, 2006.

 

NON-GAAPINFORMATION RECONCILIATION

 

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

 
| ** **                                                                 | ** ** | **Three Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                                                 | ** ** | **$  million**                                       | ** ** | **¢ per  pound** | ** ** | **$  million** | ** ** | **¢ per  pound** | ** ** |
| CASH COST                                                                  |       |                                                 |       |   |   |   |   |   |   |
| Cost of sales (including depreciation,  amortization and depletion) - GAAP |       | $                                                    | 641.4      |   | 222.9 |   | $ | 577.0 |   | 171.0 |   |
| Add:                                                                       |       |                                                 |       |   |   |   |   |   |   |
| Selling, general and administrative  expenses                              |       | 23.6                                                 |       | 8.2 |   | 25.2 |   | 7.5 |   |
| Treatment and refining charges                                             |       | 11.7                                                 |       | 4.1 |   | 12.1 |   | 3.6 |   |
| Less:                                                                      |       |                                                 |       |   |   |   |   |   |   |
| By-products revenue                                                        |       | (498.5                                               | )          | (173.3 | ) | (350.8 | ) | (104.0 | ) |
| Depreciation, amortization and depletion                                   |       | (81.5                                                | )          | (28.3 | ) | (67.7 | ) | (20.1 | ) |
| Workers’ participation                                                |       | (84.9                                                | )          | (29.5 | ) | (66.8 | ) | (19.8 | ) |
| Royalty charge and other                                                   |       | (45.5                                                | )          | (15.8 | ) | (2.9 | ) | (0.8 | ) |
| Inventory change                                                           |       | (18.8                                                | )          | (6.5 | ) | 2.7 |   | 0.8 |   |
| Operating cash cost                                                        |       | (52.5                                                | )          | (18.2 | ) | 128.8 |   | 38.2 |   |
|                                                                       |       |                                                 |       |   |   |   |   |   |   |
| Add by-product revenue                                                     |       | 498.5                                                |       | 173.3 |   | 350.8 |   | 104.0 |   |
|                                                                       |       |                                                 |       |   |   |   |   |   |   |
| Operating cash cost, without by-product  revenue                           |       | $                                                    | 446.0      |   | 155.1 |   | $ | 479.6 |   | 142.2 |   |
|                                                                       |       |                                                 |       |   |   |   |   |   |   |
| Total pounds of copper produced and  purchased (in millions)               |       | 287.7                                                |       |   |   | 337.4 |   |   |   |

 

49

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| ** **                                                                 | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| ** **                                                                 | ** ** | **$   Million**                                | ** ** | **¢ per  pound** | ** ** | **$   million** | ** ** | **¢ per  pound** | ** ** |
| CASH COST                                                                  |       |                                                |       |   |   |   |   |   |   |
| Cost of sales (including depreciation,  amortization and depletion) - GAAP |       | $                                                   | 1,828.9    |   | 180.5 |   | $ | 1,636.8 |   | 165.4 |   |
| Add:                                                                       |       |                                                |       |   |   |   |   |   |   |
| Selling, general and administrative  expenses                              |       | 73.3                                                |       | 7.2 |   | 72.5 |   | 7.3 |   |
| Treatment and refining charges                                             |       | 47.2                                                |       | 4.7 |   | 28.8 |   | 2.9 |   |
| Less:                                                                      |       |                                                |       |   |   |   |   |   |   |
| By-products revenue                                                        |       | (1,511.0                                            | )          | (149.1 | ) | (1,014.6 | ) | (102.5 | ) |
| Depreciation, amortization and depletion                                   |       | (240.1                                              | )          | (23.7 | ) | (198.8 | ) | (20.1 | ) |
| Workers’ participation                                                |       | (258.0                                              | )          | (25.5 | ) | (202.8 | ) | (20.5 | ) |
| Royalty charge and other                                                   |       | (87.9                                               | )          | (8.6 | ) | (58.6 | ) | (5.9 | ) |
| Inventory change                                                           |       | 7.6                                                 |       | 0.7 |   | 62.4 |   | 6.3 |   |
| Operating cash cost                                                        |       | (140.0                                              | )          | (13.8 | ) | 325.7 |   | 32.9 |   |
|                                                                       |       |                                                |       |   |   |   |   |   |   |
| Add by-product revenue                                                     |       | 1,511.0                                             |       | 149.1 |   | 1,014.6 |   | 102.5 |   |
|                                                                       |       |                                                |       |   |   |   |   |   |   |
| Operating cash cost, without by-product  revenue                           |       | $                                                   | 1,371.0    |   | 135.3 |   | $ | 1,340.3 |   | 135.4 |   |
|                                                                       |       |                                                |       |   |   |   |   |   |   |
| Total pounds of copper produced and  purchased (in millions)               |       | 1,013.5                                             |       |   |   | 989.4 |   |   |   |

 

Impactof New Accounting Standards

 

Pleasesee note O to our condensed consolidated financial statements.

 

Quantitativeand Qualitative Disclosure about Market Risk

 

Aportion of our outstanding debt bears interest at variable rates andaccordingly is sensitive to changes in interest rates. Interest rate changeswould also result in gains or losses in the market value of our fixed rate debtportfolio due to differences in market interest rates and the rates at theinception of the debt agreements. Based upon our indebtedness at December 31,2006, a change in interest rates of one percent (or 100 basis points) wouldimpact net income and cash flows by $0.7 million annually.

 

Weare also exposed to market risk associated with changes in foreign currencyexchange rates as certain costs incurred are in currencies other than ourfunctional currency. To manage the volatility related to the risk, we may enterinto forward exchange contracts, currency swaps or other currency hedgingarrangements. We have only had limited involvement with derivative instrumentsand do not use them for trading purposes.

 

Weare subject to market risks arising from the volatility of copper and othermetal prices. Assuming that expected metal production and sales are achieved,that tax rates are unchanged, and giving no effects to potential hedgingprograms metal price sensitivity factors would indicate estimated change in netearnings resulting from metal price changes in 2007 as provided in the tablebelow.

 
| ** **                                                         | ** ** | **Copper** | ** ** | **Molybdenum** | ** ** | **Zinc** | ** ** | **Silver** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|----------|------------|------------|------------|
| Change in metal prices (per pound except silver  – per ounce) |       | $          | 0.01       |           | $          | 1.00     |       | $          | 0.01       |   | $ | 1.00 |   |
| Change in net earnings (in millions)                               |       | $          | 7.9        |           | $          | 20.2     |       | $          | 1.7        |   | $ | 10.5 |   |

 

50

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Weoccasionally uses derivative instruments to manage our exposure to market riskfrom changes in commodity prices, interest rate and exchange rate riskexposures and to enhance return on assets. We generally do not enter intoderivative contracts unless it anticipates a future activity that is likely tooccur that will result in exposing us to market risk.

 

Copper and zincderivatives:

 

From time to time weenter into derivative instruments to protect a fixed copper, or zinc price fora portion of our metal sales.

 

In2007 and 2006 we entered into copper collar and swaps contracts to protect aportion of our 2007 and 2006 sales of copper production. Related to thesettlement of these copper swap contracts we recorded losses of $0.3 millionand a loss of $30.1 million in the third quarter of 2007 and 2006,respectively, and a gain of $3.0 million and a loss of $288.0 million in thenine months period of 2007 and 2006, respectively. These gains and losses wererecorded in net sales in the condensed consolidated statement of earnings.

 

Inthe third quarter of 2006 we entered into a zinc swap contract to protect aportion of the sale of zinc concentrates purchased during the recovery from afire at the San Luis Potosi zinc refinery. Related to the settlement of thiscontract we recorded in the third quarter 2006, a loss of $0.2 million whichwas recorded in net sales in the condensed consolidated statement of earnings.We did not hold any zinc derivative contracts at the end of September 2007.

 

AtSeptember 30, 2007 we have copper collar contracts to protect 73.1 millionpounds of copper production for the October – December 2007 period at weightedaverage minimum and maximum LME prices of $3.20 per pound and $4.07 per pound,respectively. If the price falls below the minimum LME price, we will be in again position. If the price exceeds the maximum LME price, we will be in a lossposition.

 

Gasswaps:

 

In2006 and 2007 we entered into gas swap contracts to protect part of our gasconsumption as follows:

 
| ** **               | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **               | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Gas volume (MMBTUs)      |       | —                           |       | 920,000                         |       | 900,000 |   | 2,730,000 |   |
| Fixed Price              |       | —                           |       | 4.2668                          |       | 7.5250 |   | 4.2668 |   |
| Gain (loss) (in million) |       | —                           |       | $                               | 1.3        |   | $ | (0.9 | ) | $ | 4.9 |   |
|                          |            |                                  |            |                                 |            |  |  |  |  |  |  |  |

 

Thegains (losses) obtained were included in the production cost. At September 30,2007, we did not hold any open gas swap contract.

 

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

 

Becausemore than 85% of our sales collections in Mexico are in US dollars and many ofour costs are in Mexican pesos, during 2006 we entered into zero-costderivative contracts with the purpose of protecting, within a range, against anappreciation of the Mexican peso to the US dollar. In these contracts if theexchange rate settles at or below the barrier, we do not sell US dollars, ifthe exchange rate settles above the barrier price established in the contractwe sell US dollars at the strike price established in the contract.

 

51

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Inthe third quarter and first nine months of 2007 the exercise of these zero-costderivative contracts resulted in gains of $1.9 million and $6.0 million,respectively, which were recorded as gain on derivative instruments in thecondensed consolidated statement of earnings.

 

AtSeptember 30, 2007 we held the following exchange rate derivative operations:

 
| **Notional Amount  (millions)** | ** ** | **Due Date, Weekly  expiration during** | ** **       | **Strike Price  (Mexican  Pesos/U.S.  Dollars)** | ** ** | **Barrier Price  (Mexican  Pesos/U.S.  Dollars)** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------|------------------|-------------------------------------------------------|------------|--------------------------------------------------------|------------|
| $ 24.0                          |       |                                                   | 4th Quarter 2007 |                                                  | 11.35      |                                                   | 10.65      |   |
| $ 24.0                          |       |                                                   | 4th Quarter 2007 |                                                  | 11.65      |                                                   | 11.35      |   |
| $ 28.0                          |       |                                                   | 1st Quarter 2008 |                                                  | 11.60      |                                                   | 11.28      |   |
| $ 28.0                          |       |                                                   | 1st Quarter 2008 |                                                  | 11.28      |                                                   | 10.70      |   |

 

AtSeptember 30, 2007, the fair value of the above listed exchange rate derivativecontracts is a gain of $1.6 million which was recorded as gain on derivativeinstruments in the condensed consolidate statement of earnings. Each notionalamount includes a group of weekly transactions that have the same strike andbarrier price.

 

Dual currency notes:

 

In2007 we invested $560.0 million in dual currency notes which provided an abovemarket interest return subject to a barrier range of the Mexican peso/US dollarexchange rates. These investments matured in the first and second quarters of2007. Related to these investments, in the second quarter of 2007 we realizedan exchange loss of $1.3 million, which was recorded as a loss on derivativeinstruments in the condensed consolidated statement of earnings.

 

Weearned no interest income in the third quarter of 2007 and earned interestincome of $2.1 million in the first nine months of 2007 which was recorded asinterest income in the condensed consolidated statement of earnings.

 

Therewere no open positions at September 30, 2007.

 

Marketable Securities:

 

Commencing in 2006 webegan making short term investments (90 days to 1 year) in leveraged, indexedinstruments. The marketable securities were as follows (in millions):

 
| **Investment**                                                                                                                                                                                            | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| 3-month note, issued December 12, 2006 with  extensions every 3 months up to a maximum of 12 months, with an interest rate  of 7%, established by a pool of Mexican and Peruvian bond issues.             |       | $                            | 100.0      |                        | $          | 100.0 |   |
| 3-month note, issued December 12, 2006 with  extensions every 3 months up to a maximum of 13 months and 5 days, with an  interest rate of 7%, established by a pool of Mexican and Peruvian bond  issues. |       | 100.0                        |       | 100.0                       |       |
| 3-month note, issued January 19, 2007 with  extensions every 3 months up to a maximum of 12 months, with an interest rate  of 7.25%, established by a pool of Mexican and Peruvian bond issues.           |       | 100.0                        |       | —                      |       |
|                                                                                                                                                                                                           |            |                              |            |                             |            |  |  |

 

52

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| 180-day note, maturing June 12, 2007 with  an interest rate of 6%, with barrier range of $37.669 and $69.957 of SCC  stock price, NYSE symbol PCU.     |   | — |   | 40.0   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|
| 180-day note, maturing June 28, 2007 with  an interest rate of 6%, with barrier range of $38.738 and $71.942 of SCC  stock price, NYSE symbol PCU.     |   | — |   | 20.0   |   |
| 300-day note, maturing December 24, 2007  with an interest rate of 3.6%, with barrier range of $50.00 and $75.00 of SCC  stock price, NYSE symbol PCU. |   | 20.0   |   | 20.0   |   |
|                                                                                                                                                   |   | $      | 320.0  |   | $      | 280.0 |   |
|                                                                                                                                                        |        |        |        |        |        |  |  |

 

Someof these investment instruments are indexed to SCC common stock prices whileothers are leveraged and indexed to certain bond pools. Both types ofinstruments could cause the principal of the investment to be reduced if theestablished ranges are breached. Since the notes are not principal protected wemay lose part or all of the initial investment. These instruments have beendeemed to contain embedded derivatives and have been subject to valuation usinga binomial model.

 

Relatedto these marketable securities, we have recorded a gain of $1.6 million and aloss of $79.9 million in the 2007 third quarter and the first nine months of2007, respectively. In addition, we recorded a loss on these marketablesecurities of $11.6 million in the fourth quarter of 2006. The realized amountof these losses was $13.8 million and $43.2 million for the third quarter of2007 and the first nine months of 2007, respectively. The losses on thesemarketable securities are recorded as loss on derivative instruments in thecondensed consolidated statement of earnings. The unrealized portion of the lossof $48.3 million, at September 30, 2007 is recorded in accounts payable.

 

OnOctober 3, 2007, we liquidated $300 million of the marketable securitiesinvestments and received $276.4 million. As of September 30, 2007, the loss wasrecorded as unrealized loss on derivative instruments.

 

Inthe three and nine months ended September 30, 2007 we earned interest of $5.6million and $18.0 million on these investments, respectively, which wererecorded in interest income in the condensed consolidated statement ofearnings.

 

CautionaryStatement:

 

Forward-lookingstatements in this report and in other Company statements include statementsregarding expected commencement dates of mining or metal production operations,projected quantities of future metal production, anticipated production rates,operating efficiencies, costs and expenditures as well as projected demand orsupply for the Company’s products. Actual results could differ materiallydepending upon factors including the risks and uncertainties relating to generalU.S. and international economic and political conditions, the cyclical andvolatile prices of copper, other commodities and supplies, including fuel andelectricity, availability of materials, insurance coverage, equipment, requiredpermits or approvals and financing, the occurrence of unusual weather oroperating 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.

 

53

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Item 4. Controls and Procedures

 

EVALUATIONOF DISCLOSURE CONTROLS AND PROCEDURES

 

Asof September 30, 2007, the Company conducted an evaluation under thesupervision and with the participation of the Company’s Disclosure Committeeand the Company’s management, including the Chief Executive Officer and ChiefFinancial Officer, of the effectiveness and the design and operation of theCompany’s disclosure controls and procedures. Based on that evaluation, theChief Executive Officer and the Chief Financial Officer have concluded that theCompany’s disclosure controls and procedures are effective as of September 30,2007, to ensure that information required to be disclosed in reports filed orsubmitted under the Exchange Act is:

 

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

 

2.                                       accumulated and communicated to management,including the Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure.

 

CHANGESIN INTERNAL CONTROLS OVER FINANCIAL REPORTING

 

Therewas no change in the Company’s internal controls over financial reporting (assuch term is defined in Rules 13a-15(f) and 15d-15(f) under the SecuritiesExchange Act of 1934, as amended) that occurred during the quarter endedSeptember 30, 2007 that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal controls over financial reporting.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Tothe Board of Directors and Shareholders of Southern Copper Corporation:

 

Wehave reviewed the accompanying consolidated condensed balance sheet of SouthernCopper Corporation and its subsidiaries as of September 30, 2007, and therelated consolidated condensed statements of earnings for the nine-monthperiods ended September 30, 2007 and September 30, 2006 and the consolidatedcondensed statement of cash flows for the nine month periods ended September30, 2007 and September 30, 2006. These interim financial statements are theresponsibility of the Company’s management.

 

Weconducted our review in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). A review of interim financialinformation consists principally of applying analytical procedures and makinginquiries of persons responsible for financial and accounting matters. It issubstantially less in scope than an audit conducted in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theobjective of which is the expression of an opinion regarding the financialstatements taken as a whole. Accordingly, we do not express such an opinion.

 

Basedon our review, we are not aware of any material modifications that should bemade to the accompanying consolidated condensed interim financial statementsfor them to be in conformity with accounting principles generally accepted inthe United States of America.

 

Wepreviously audited in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheet asof December 31, 2006 and the related consolidated statement of earnings,changes in stockholders ́ equity and of cash flows for the year then ended (notpresented herein), and in our report dated February 28, 2007 we expressed anunqualified opinion on those consolidated financial statements. In our opinion,the information set forth in the accompanying consolidated condensed balancesheet as of December 31, 2006, is fairly stated in all material respects inrelation to the consolidated balance sheet from which it has been derived.

 

PricewaterhouseCoopers

 

México,D.F.

 

October31, 2007

 

55

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PART II – OTHER INFORMATION

 

Item 1. – Legal Procedures

 

Theinformation provided in Note M to the condensed consolidated financialstatements contained in Part I of this Form 10-Q, is incorporated herein byreference.

 

Item 1a.   Risk Factors

 

Setforth below are certain changes from the risk factors previously disclosed inSCC’s Form 10-K for the year ended December 31, 2006 filed on March 1, 2007with the Securities and Exchange Commission.

 

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

 

OnApril 28, 2007 the workers of a newly unified workers union at our Peruviansmelter in Ilo initiated a strike to demand better wages and benefits. Inaddition, on April 30, 2007 Peru’s largest mining union launched a nationwidestrike to demand better job benefits. The workers at our two Peruvian minesjoined the nationwide miners’ strike and also supported the unified Ilo union. Thelabor minister declared the strike inappropriate and the workers returned towork after five days when the nationwide strike was resolved by the government.The workers received guarantees from the government over working conditions andcontracts. Also, SCC signed a general agreement indicating the terms underwhich the review of the unified union contracts would take place.

 

OnJune 23, 2007 the unionized workers at some of our Peruvian operationsinitiated a strike demanding better wages and benefits. At the request of thePeruvian labor authorities, the workers returned to work after five days torestart negotiations with the Company.

 

InJune and July of 2007, five of the eight unions at the Company’s Peruvianoperations signed collective bargaining agreements expiring in 2013. On October2, 2007, the workers of Ilo, Toquepala and Cuajone belonging to the threeunions did not signed the July 11, 2007 agreements, began a strike demandinghigher wages and benefits. After eight days of strike, the workers returned towork when union leaders and the Company signed a settlement pact giving thePeruvian labor ministry the authority to settle the final conditions. OnOctober 26, 2007, the Peruvian labor ministry issued its final pronouncement,settling the open issues with these three unions.

 

Duringthis brief strikes the Company continued normal operations with the support ofstaff and administrative personnel and contractors. However, we cannot assureyou that we will not experience strikes or other labor-related work stoppagesin the future that could have a material adverse effect on our financialcondition and results of operations.

 

SinceJuly 30, 2007, our Mexican mines of Cananea, Taxco and San Martin have ceasedoperations due to work stoppages promoted by a minority group of the union workers.Even though the labor authorities declared these stoppages illegal, operationshave not yet resumed at the mines. Proceedings in this regards are currently inprocess in Mexican federal courts.

 

56

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Item 6. – Exhibits

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

 

57

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PART II – OTHER INFORMATION

 

SIGNATURES

 

Pursuantto the requirements 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 COPPER CORPORATION(Registrant) |
|-------------------|-----------------------------------------|
|              |                                    |
|              |                                    |
|              | /s/ Oscar Gonzalez Rocha                |
|              | Oscar Gonzalez Rocha                    |
|              | President and Chief Executive Officer   |
|              |                                    |
| October  31, 2007 |                                    |
|              |                                    |
|              |                                    |
|              | /s/ Jose N. Chirinos                    |
|              | Jose N. Chirinos                        |
|              | Comptroller and Chief Financial Officer |
|              |                                    |
| October  31, 2007 |                                    |

 

58

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SOUTHERN COPPER CORPORATION

List of Exhibits

 

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

 

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