**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**2007**

**First Quarter**

**FORM 10-Q**

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

**THE SECURITIES EXCHANGE ACT OF 1934**

| **For Quarter Ended March 31, 2007** |   | **Commission  file number 1-14066** |
|--------------------------------------|--------|-------------------------------------|

 

**SOUTHERN COPPER 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)           |
|                                                                       |       |                 |
| **(602)  494-5328**Registrant’s telephone number, including area code |

 

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

As of April 30, 2007 there were outstanding294,465,250 shares of Southern Copper Corporation common stock, par value $0.01per share.

 

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Southern CopperCorporation

INDEX TO FORM 10-Q
|                                                          | ** **                                                                                   | **Page No.** |
|----------------------------------------------------------|----------------------------------------------------------------------------------------------|--------------|
|                                                     |                                                                                         |         |
| Part  I. Financial Information:                          |                                                                                         |         |
|                                                     |                                                                                         |         |
| Item 1.                                                  | Condensed  Consolidated Financial Statements  (unaudited)                                    |         |
|                                                     |                                                                                         |         |
|                                                     | Condensed Consolidated Statement of Earnings  three months ended March 31, 2007 and 2006     | 3            |
|                                                     |                                                                                         |         |
|                                                     | Condensed Consolidated Balance Sheet  March 31, 2007 and December 31, 2006                   | 4            |
|                                                     |                                                                                         |         |
|                                                     | Condensed Consolidated Statement of Cash Flows  three months ended March 31, 2007 and 2006   | 5-6          |
|                                                     |                                                                                         |         |
|                                                     | Notes to Condensed Consolidated Financial Statements                                         | 7-28         |
|                                                     |                                                                                         |         |
| Item 1a                                                  | Risk factors                                                                                 | 29           |
|                                                     |                                                                                         |         |
| Items 2 and  3.                                          | Management’s  Discussion and Analysis of  Financial Condition and Results of Operations | 30-41        |
|                                                     |                                                                                         |         |
| Item 4.                                                  | Controls and  Procedures                                                                     | 42           |
|                                                     |                                                                                         |         |
| Report of Independent Registered Public Accounting  Firm | 43                                                                                           |
|                                                     |                                                                                         |         |
|                                                     |                                                                                         |         |
| Part II. Other  Information:                             |                                                                                         |         |
|                                                     |                                                                                         |         |
| Item 1.                                                  | Legal Proceedings                                                                            | 44           |
|                                                     |                                                                                         |         |
| Item 4.                                                  | Submission of  Matters to a Vote of Security Holders                                         | 44           |
|                                                     |                                                                                         |         |
| Item  6.                                                 | Exhibits                                                                                     | 45           |
|                                                     |                                                                                         |         |
| Signatures                                               |                                                                                         | 46           |
|                                                     |                                                                                         |         |
| Exhibit 3.2                                              | By-laws as amended  on April 26, 2007                                                        |         |
|                                                     |                                                                                         |         |
| Exhibit 31.1                                             | — Certification Pursuant  to Section 302 of the  Sarbanes-Oxley Act of 2002             |         |
|                                                     |                                                                                         |         |
| Exhibit 31.2                                             | — Certification Pursuant  to Section 302 of the  Sarbanes-Oxley Act of 2002             |         |
|                                                     |                                                                                         |         |
| Exhibit 32.1                                             | — Certification Pursuant  to Section 906 of the  Sarbanes-Oxley Act of 2002             |         |
|                                                     |                                                                                         |         |
| Exhibit 32.2                                             | — Certification Pursuant  to Section 906 of the  Sarbanes-Oxley Act of 2002             |         |
|                                                          |                                                                                              |              |  |

 

2

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Part I — FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

Southern CopperCorporation

CONDENSEDCONSOLIDATED STATEMENT OF EARNINGS

(Unaudited)
| ** **                                                                                     | ** ** | **3 Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                     | ** ** | **March 31,**           | ** ** |
| ** **                                                                                     | ** ** | **2007**                     | ** ** | **2006** | ** ** |
| ** **                                                                                     | ** ** | **(in thousands)**      | ** ** |
|                                                                                           |       |                         |       |   |   |
| Net sales                                                                                      |       | $                            | 1,358,337  |   | $ | 1,121,291 |   |
|                                                                                           |       |                         |       |   |   |
| Operating costs and  expenses:                                                                 |       |                         |       |   |   |
| Cost of sales  (exclusive of depreciation, amortization and depletion shown separately  below) |       | 466,645                      |       | 406,944 |   |
| Selling, general  and administrative                                                           |       | 23,799                       |       | 24,016 |   |
| Depreciation,  amortization and depletion                                                      |       | 74,098                       |       | 53,103 |   |
| Exploration                                                                                    |       | 6,418                        |       | 4,573 |   |
| Total operating  costs and expenses                                                            |       | 570,960                      |       | 488,636 |   |
|                                                                                           |       |                         |       |   |   |
| Operating income                                                                               |       | 787,377                      |       | 632,655 |   |
|                                                                                           |       |                         |       |   |   |
| Interest expense                                                                               |       | (29,806                      | )          | (22,907 | ) |
| Capitalized interest                                                                           |       | 4,966                        |       | 5,095 |   |
| Loss on derivative  instruments                                                                |       | (21,180                      | )          | — |   |
| Other income (expense)                                                                         |       | 20,662                       |       | (978 | ) |
| Interest income                                                                                |       | 21,928                       |       | 9,305 |   |
|                                                                                           |       |                         |       |   |   |
| Earnings before income  taxes and minority interest                                            |       | 783,947                      |       | 623,170 |   |
|                                                                                           |       |                         |       |   |   |
| Income taxes                                                                                   |       | 230,674                      |       | 199,872 |   |
| Minority interest                                                                              |       | 1,591                        |       | 1,723 |   |
|                                                                                           |       |                         |       |   |   |
| Net earnings                                                                                   |       | $                            | 551,682    |   | $ | 421,575 |   |
|                                                                                           |       |                         |       |   |   |
| Per common share  amounts:                                                                     |       |                         |       |   |   |
| Net earnings basic and  diluted                                                                |       | $                            | 1.874      |   | $ | 1.432 |   |
| Dividends paid                                                                                 |       | $                            | 1.700      |   | $ | 1.375 |   |
| Weighted average common shares outstanding (basic and diluted)                                 |       | 294,461                      |       | 294,456 |   |

 

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

3

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SouthernCopper Corporation

CONDENSEDCONSOLIDATED BALANCE SHEET

(Unaudited)
| ** **                                                                                     | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                                     | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **                                                                                     | ** ** | **(in thousands)** | ** ** |
| ASSETS                                                                                         |       |                    |       |                  |       |
| Current assets:                                                                                |       |                    |       |                  |       |
| Cash and cash equivalents                                                                      |       | $                       | 888,850    |                  | $          | 1,022,778 |   |
| Marketable securities                                                                          |       | 380,000                 |       | 280,000               |       |
| Accounts receivable trade:                                                                     |       |                    |       |                  |       |
| Non affiliates, less allowance for doubtful accounts  (2007 — $5,916; 2006 — $5,948) |       | 464,586                 |       | 560,227               |       |
| Affiliates                                                                                     |       | 3,315                   |       | 2,630                 |       |
| Accounts  receivable — other                                                              |       | 34,800                  |       | 43,569                |       |
| Inventories                                                                                    |       | 456,636                 |       | 413,652               |       |
| Deferred income  tax — current portion                                                    |       | 41,373                  |       | 65,638                |       |
| Prepaid and  other current assets                                                              |       | 65,842                  |       | 54,383                |       |
| Total current assets                                                                           |       | 2,335,402               |       | 2,442,877             |       |
|                                                                                           |       |                    |       |                  |       |
| Property, net                                                                                  |       | 3,555,408               |       | 3,538,295             |       |
| Leachable  material, net                                                                       |       | 240,968                 |       | 231,516               |       |
| Intangible  assets, net                                                                        |       | 117,542                 |       | 118,107               |       |
| Deferred income  tax — non-current                                                        |       | —                  |       | 14,549                |       |
| Other assets,  net                                                                             |       | 34,133                  |       | 31,070                |       |
| Total Assets                                                                                   |       | $                       | 6,283,453  |                  | $          | 6,376,414 |   |
|                                                                                           |       |                    |       |                  |       |
| LIABILITIES                                                                                    |       |                    |       |                  |       |
| Current  liabilities:                                                                          |       |                    |       |                  |       |
| Current portion of long-term debt                                                              |       | $                       | 10,000     |                  | $          | 10,000 |   |
| Accounts payable                                                                               |       | 292,983                 |       | 271,064               |       |
| Accrued income taxes                                                                           |       | 119,389                 |       | 226,047               |       |
| Due to affiliated companies                                                                    |       | 4,552                   |       | 3,581                 |       |
| Accrued workers’ participation                                                            |       | 232,234                 |       | 299,892               |       |
| Accrued interest                                                                               |       | 21,894                  |       | 37,140                |       |
| Other accrued liabilities                                                                      |       | 19,500                  |       | _11,847               |       |
| Total current liabilities                                                                      |       | 700,552                 |       | 859,571               |       |
|                                                                                           |       |                    |       |                  |       |
| Long-term debt                                                                                 |       | 1,518,172               |       | 1,518,111             |       |
| Deferred income  taxes                                                                         |       | 184,251                 |       | 194,759               |       |
| Non current  taxes payable                                                                     |       | 38,948                  |       | —                |       |
| Other  liabilities                                                                             |       | 115,481                 |       | 111,196               |       |
| Asset retirement  obligation                                                                   |       | 12,424                  |       | 12,183                |       |
| Total non-current liabilities                                                                  |       | 1,869,276               |       | 1,836,249             |       |
|                                                                                           |       |                    |       |                  |       |
| Commitments and  Contingencies (Note L)                                                        |       |                    |       |                  |       |
|                                                                                           |       |                    |       |                  |       |
| MINORITY  INTEREST                                                                             |       | 13,796                  |       | 13,989                |       |
|                                                                                           |       |                    |       |                  |       |
| STOCKHOLDERS’  EQUITY                                                                     |       |                    |       |                  |       |
| Common stock                                                                                   |       | 2,949                   |       | 2,949                 |       |
| Additional  paid-in capital                                                                    |       | 772,693                 |       | 772,693               |       |
| Retained  earnings                                                                             |       | 3,057,914               |       | 3,010,307             |       |
| Other accumulated  comprehensive loss                                                          |       | (23,288                 | )          | (22,332               | )          |
| Treasury stock                                                                                 |       | (110,439                | )          | (97,012               | )          |
| Total Stockholders’ Equity                                                                |       | 3,699,829               |       | 3,666,605             |       |
|                                                                                           |       |                    |       |                  |       |
| Total  Liabilities, Minority Interest and Stockholders’ Equity                            |       | $                       | 6,283,453  |                  | $          | 6,376,414 |   |

 

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

4

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Southern CopperCorporation

CONDENSEDCONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)
| ** **                                                                             | ** ** | **3 Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                             | ** ** | **2007**                                     | ** ** | **2006** | ** ** |
| ** **                                                                             | ** ** | **(in thousands)**                      | ** ** |
|                                                                                   |       |                                         |       |   |   |
| OPERATING  ACTIVITIES                                                                  |       |                                         |       |   |   |
|                                                                                   |
| Net earnings                                                                           |       | $                                            | 551,682    |   | $ | 421,575 |   |
| Adjustments to reconcile net earnings to net cash  provided from operating activities: |       |                                         |       |   |   |
| Depreciation, amortization and depletion                                               |       | 74,098                                       |       | 53,103 |   |
| Capitalized leachable material                                                         |       | (20,461                                      | )          | —   |   |
| Remeasurement loss (income)                                                            |       | (4,682                                       | )          | 572 |   |
| Provision for deferred income taxes                                                    |       | 20,246                                       |       | 19,712 |   |
| Loss (gain) on sale of property                                                        |       | (623                                         | )          | — |   |
| Unrealized loss on derivative instruments                                              |       | 22,688                                       |       | — |   |
| Minority interest                                                                      |       | 1,591                                        |       | 1,723 |   |
| Cash provided from (used for) operating assets and  liabilities:                       |       |                                         |       |   |   |
| Accounts receivable                                                                    |       | 81,034                                       |       | 24,364 |   |
| Inventories                                                                            |       | (42,984                                      | )          | (40,303 | ) |
| Accounts payable and accrued liabilities                                               |       | (245,439                                     | )          | (78,820 | ) |
| Other operating assets and liabilities                                                 |       | 111,447                                      |       | 35,731 |   |
| Net cash  provided from operating activities                                           |       | 548,597                                      |       | 437,657 |   |
|                                                                                   |       |                                         |       |   |   |
| INVESTING  ACTIVITIES                                                                  |       |                                         |       |   |   |
| Capital expenditures                                                                   |       | (85,030                                      | )          | (143,117 | ) |
| Purchase of marketable securities                                                      |       | (100,000                                     | )          | — |   |
| Other                                                                                  |       | 560                                          |       | (1,811 | ) |
| Sales of property                                                                      |       | 611                                          |       | — |   |
| Net cash used  for investing activities                                                |       | (183,859                                     | )          | (144,928 | ) |
|                                                                                   |       |                                         |       |   |   |
| FINANCING  ACTIVITIES                                                                  |       |                                         |       |   |   |
| Dividends paid to common stockholders                                                  |       | (500,584                                     | )          | (404,877 | ) |
| Distributions to minority interest                                                     |       | (1,759                                       | )          | (2,985 | ) |
| Other                                                                                  |       | 61                                           |       | 658 |   |
| Net cash used  for financing activities                                                |       | (502,282                                     | )          | (407,204 | ) |
|                                                                                   |       |                                         |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                          |       | 3,616                                        |       | 14,099 |   |
|                                                                                   |       |                                         |       |   |   |
| Decrease in cash  and cash equivalents                                                 |       | (133,928                                     | )          | (100,376 | ) |
| Cash and cash  equivalents, at beginning of period                                     |       | 1,022,778                                    |       | 876,003 |   |
|                                                                                   |       |                                         |       |   |   |
| Cash and cash  equivalents, at end of period                                           |       | $                                            | 888,850    |   | $ | 775,627 |   |

 

5

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| ** **                                                                          | ** ** | **3 Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                          | ** ** | **2007**                                     | ** ** | **2006** | ** ** |
| ** **                                                                          | ** ** | **(in thousands)**                      | ** ** |
| Supplemental  disclosure of cash flow information, cash paid during the period for: |       |                                         |       |   |   |
| Interest                                                                            |       | $                                            | 6,486      |   | $ | 19,415 |   |
| Income taxes                                                                        |       | $                                            | 264,511    |   | $ | 148,424 |   |
| Workers  participation                                                              |       | $                                            | 171,436    |   | $ | 96,840 |   |

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

6

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Southern CopperCorporation

NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A.           Inthe opinion of Southern Copper Corporation, (the “Company”, “Southern Copper”or “SCC”), the accompanying unaudited condensed consolidated financial statementscontain all adjustments (consisting only of normal recurring adjustments)necessary to present fairly the Company’s financial position as of March 31,2007 and the results of operations and cash flows for the three months endedMarch 31 2007 and 2006.  The condensedconsolidated financial statements for the three month periods ended March 31,2007 and 2006 have been subjected to a review by PricewaterhouseCoopers, theCompany’s independent registered public accounting firm, whose report dated May9, 2007, is presented on page 43.  Theresults of operations for the three months ended March 31, 2007 and 2006 arenot necessarily indicative of the results to be expected for the full year.  The December 31, 2006 balance sheet data wasderived from audited financial statements, but does not include all disclosuresrequired by accounting principles generally accepted in the United States ofAmerica.  The accompanying condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements at December 31, 2006 and notes included inthe Company’s 2006 annual report on Form 10-K.

B.             Change inAccounting Principle — Adoption of FIN 48:

FinancialAccounting Standards Board (FASB) Interpretation No. 48 “Accounting for Uncertaintyin Income Taxes”, (FIN 48) was issued in July 2006 and interprets FASBStatement of Financial Accounting Standards (SFAS) No. 109.  FIN 48 replaces SFAS No.5 with respect toaccounting for all tax positions, both certain and uncertain.  FIN 48 became effective for the Company onJanuary 1, 2007 and prescribes a comphrehensive model for the recognition,measurement, financial statement presentation and disclosure of uncertain taxpositions taken or expected to be taken in a tax return.  FIN 48 provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure and transition.

TheCompany classifies income tax-related interest and penalties as income taxes inthe financial statements.

Thetotal amount of unrecognized tax benefits as of the January 1, 2007 date ofadoption of FIN 48 was $32.0 million. This amount related entirely to U.S. income tax matters.  The Company has no unrecognized Peruvian orMexican tax benefits.  The cumulativeeffect of the implementation of FIN 48 on retained earnings was a net reductionof $3.5 million.  There were no materialchanges to the amount of unrecognized tax benefits during the quarter endedMarch 31, 2007.

Theamount of unrecognized tax benefits that, if recognized, would affect theeffective tax rate was $25.4 million at adoption and did not materially changeby March 31, 2007.

Asof the January 1, 2007 adoption of FIN 48, the Company’s liability foruncertain tax positions included accrued interest of $13.9 million.  The liability included no accrued penaltiesbecause management expects no penalties to apply to the resolution of any ofits uncertain tax positions.  The amountof increase in accrued interest during the quarter ended March 31, 2007 was notmaterial.

Varioustax positions are currently under review by the U.S. Internal Revenue Service (“IRS”)Appeals Office.  It is not likely thatthis review will result in a cash payment within twelve months of March 31,2007.

Suchpositions include the determination of appropriate depreciation periods forfixed assets, the capitalization of costs to the copper inventory inherent in 

7

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leachabledumps, and depletion deductions.

Asof the January 1, 2007 adoption of FIN 48, management did not expect that afinal resolution of the IRS review would result in a significant change in theCompany’s liability.  The Company’sreasonable expectations about future resolutions of uncertain items did notmaterially change during the quarter ended March 31, 2007.

Thefollowing tax years remain open to examination and adjustment by the Company’sthree major tax jurisdictions:
|        | Peru:   |   | 1997 and all following years |
|--------|---------|--------|------------------------------|
|   | U.S.:   |   | 1997 and all following years |
|   | Mexico: |   | 2001 and all following years |

 

C.             MarketableSecurities:

Reverse barrier notes:

Commencing in 2006 the Company began making short terminvestments (90 days to 1 year).  Theinvestments initially contained interest rates above the prevailing marketrates. At March 31, 2007 the Company holds $380 million in investments of thesetypes, as follows (in millions):
| **Investment**                                                                                                                                                                                                      | ** ** | **Investment  Book Value** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| 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%, a barrier range is established by a pool of Mexican and Peruvian bond  issues.   |       | $                               | 200.0      |   |
| 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%, a barrier range is 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                            |       |
|                                                                                                                                                                                                                |       | $                               | 380.0      |   |

Inthe first quarter of 2007 the Company earned $6.0 million on these investments,which were recorded in interest income on the condensed consolidated statementof earnings.

Certain of these investments are indexed to SCC commonstock while others are indexed to certain bond pools.  Both types of indexation clauses could causethe principal of the investment to be reduced if the established ranges arebreached.  Since the notes are not principalprotected the Company may lose part or all of the initial investment.  These indexation clauses have been deemed tobe bifurcated embedded derivatives and have been subject to valuation using abinomial model.  At March 31, 2007,valuing the embedded derivatives at fair value resulted in a liability of $34.3million.  This liability has beenincluded in other accounts payable and the increment of the liability in thefirst quarter of 2007 of $22.7 million is recorded as loss on derivativeinstruments on the condensed consolidated statement of earnings.

8

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D.            Inventorieswere as follows:

(inmillions)
| ** **                                  | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Metals at lower  of average cost or market: |       |                     |       |                        |       |
| Finished goods                              |       | $                        | 89.5       |                        | $          | 116.1 |   |
| Work-in-process                             |       | 181.4                    |       | 121.9                       |       |
| Supplies at  average cost                   |       | 185.7                    |       | 175.7                       |       |
| Total inventories                           |       | $                        | 456.6      |                        | $          | 413.7 |   |

E.   IncomeTaxes:

The Company’s income tax provision for the three months ended March 31,2007 and 2006 was $230.7 million and $199.9 million, respectively.  These provisions include income taxes forPeru, Mexico and the United States.  Theeffective tax rates for the 2007 and 2006 periods are 29.4% and 32.1%,respectively. A decrease of 1% in the statutory Mexican tax rate contributed tothe decrease in the 2007 effective income tax rate. In addition, a taxinflation adjustment and the effect of currency conversion adjustment in ourMexican operations also contributed to the reduction in the effective tax rate.

F.   ProvisionallyPriced Sales:

At March 31, 2007, the Company has recorded provisionally priced salesof 83.4 million pounds of copper, at an average forward price of $3.11 perpound.  Also the Company has recordedprovisionally priced sales of 3.7 million pounds of molybdenum at thequarter-end market price of $28.13 per pound. These sales are subject to final pricing based on the average monthlyLME or COMEX copper prices and Dealer Oxide molybdenum prices in the futuremonths of settlement.

Following are the provisionally priced copper andmolybdenum sales outstanding at March 31, 2007:
| **Copper  (million lbs.)** | ** ** | ** ** | **Priced at** | ** **     | **Month of  Settlement** | ** ** |
|---------------------------------|------------|------------|--------------------|----------------|-------------------------------|------------|
| 20.0                            |       | 3.132164   |               | April 2007     |                          |
| 6.4                             |       | 3.134586   |               | May 2007       |                          |
| 17.3                            |       | 3.114370   |               | June 2007      |                          |
| 17.3                            |       | 3.099400   |               | August 2007    |                          |
| 11.0                            |       | 3.085340   |               | September 2007 |                          |
| 11.4                            |       |       | 3.069010           |           | October 2007                  |       |
| 83.4                            |       |       | 3.107073           |           | Total                         |       |
|                                 |            |            |                    |                |                               |            |  |

 
| **Molybdenum  (million lbs.)** | ** ** | ** ** | ** ** | **Priced at** | ** **     | **Month of  Settlement** | ** ** |
|-------------------------------------|------------|------------|------------|--------------------|----------------|-------------------------------|------------|
| 1.7                                 |       | 28.125000  |       | April 2007    |           |
| 1.2                                 |       | 28.125000  |       | May 2007      |           |
| 0.8                                 |       |       | 28.125000  |               | June 2007 |                          |
| 3.7                                 |       |       | 28.125000  |               | Total          |                          |
|                                     |            |            |            |                    |                |                               |            |  |

 

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

G.  DerivativeInstruments:

The Company occasionally uses derivative instruments to manage itsexposure to market risk from changes in commodity prices and interest rate riskexposure.  The Company does not enterinto derivative contracts unless it anticipates a future activity that islikely to occur that will result in exposing the Company to market risk.

9

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Copperand zinc derivatives:

Fromtime to time the Company has entered into derivative instruments to protect afixed copper, or zinc price for a portion of our metal sales.  The Company did not hold any copper or zincswaps in the 2007 and 2006 first quarters.

During April 2007, the Company entered into coppercollar contracts to protect 8.4 million pounds of copper production for each ofthe months, June 2007 through December 2007 at weighted average minimum andmaximum prices of $3.18 per pound and $4.04 per pound, respectively, for eachof the months.

Gas swaps:

The Company established long swap contracts for900,000 MMBTUs with a fixed price of $7.525 in the first quarter of 2007 and900,000 of MMBTUs with a fixed price of $4.2668 per MMBTU in the first quarterof 2006.  In this respect, the Companyrecorded a loss of $0.9 million and a gain of $2.3 million, in the firstquarter of 2007 and 2006, respectively, which were charged/(credited) to theproduction cost.  At March 31, 2007, wedo not hold any open gas swap contract.

Exchange rate derivatives, U.S. dollar / Mexican peso contracts:

Because more than 85% of our sales collections in Mexico are in USdollars and many of our costs are in Mexican pesos, during 2006 the Companyentered into zero-cost derivative contracts with the purpose of protecting,within a range, against an appreciation of the Mexican peso to the US dollar.  In these contracts if the exchange ratesettles at or below the barrier, the Company does not sell US dollars, if theexchange rate settles above the barrier price established in the contract theCompany sells US dollars at the strike price established in the contract.

In the first quarter of 2007 the exercise of these zero-cost derivativecontracts resulted in a gain of $1.5 million, which was recorded as a gain onderivative instruments on the condensed consolidated statement of earnings.

At March 31, 2007 the Company held the following exchange ratederivative operations:
| **Notional Amount   (millions)** | ** ** | **Due Date, Weekly  expiration during** | ** ** | **Strike Price  (Mexican   Pesos/U.S.   Dollars)** | ** ** | **Barrier Price   (Mexican   Pesos/U.S.   Dollars)** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| $52.0                                      |       | 3rd Quarter 2007                                       |       | 11.15                                                             |       | 10.675                                                                   |       |
| $52.0                                      |       | 3rd Quarter 2007                                       |       | 11.52                                                             |       | 11.15                                                                    |       |
| $52.0                                      |       | 3rd Quarter 2007                                       |       | 11.90                                                             |       | 11.54                                                                    |       |
| $72.0                                      |       | 4th Quarter 2007                                       |       | 11.35                                                             |       | 10.65                                                                    |       |
| $72.0                                      |       | 4th Quarter 2007                                       |       | 11.65                                                             |       | 11.35                                                                    |       |
| $80.0                                      |       | 1st Quarter 2008                                       |       | 11.60                                                             |       | 11.28                                                                    |       |
| $80.0                                      |       | 1st Quarter 2008                                       |       | 11.28                                                             |       | 10.70                                                                    |       |

At March 31, 2007, the fair value of the above listedexchange rate derivative contracts is $0.1 million.  The notional amounts are comprised on thereintransactions that have the same strike and barrier price.

Dual currency notes:

In the first quarter of 2007 the Company invested$120.0 million in dual currency notes which provided an above market interestreturn subject to a barrier range of the Mexican peso/US dollar exchangerates.  These investments matured in thefirst quarter 2007 and the Company recorded interest income of $0.5 million.

Additionally, the Company holds embedded derivatives which aredescribed in note C “marketable securities.”

 

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H.  Asset RetirementObligation:

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 withthe law a conceptual mine closure plan, without costs, was submitted to thePeruvian Ministry of Energy and Mines (“MEM”) in August 2006.  The plan is subject to review by MEM for 45days.  After the MEM review the Companywill have 90 days to prepare and resubmit the mine closure plan, includingcosts, which will then be subject to MEM approval and open to public discussionand comment in the area of the Company operations.  The Company is still awaiting MEM’s initialreview.  The Company has made anestimated provision for this liability in its financial statements, butbelieves that this estimate should be viewed with caution, pending finalapproval of the mine closure plan, expected later in 2007.

The closure cost recognized for this liability includes the estimatedcost required at the Peruvian operations, based on the Company’s experience andincludes cost at the Ilo smelter, the tailing disposal, dismantling of theToquepala and Cuajone concentrators, shops and auxiliary services.  In this regard we recorded an additionalasset retirement liability in 2005 of $5.2 million for this law and increasednet property by $4.6 million.

The following table summarizes the asset retirement obligation activityfor the first quarter 2007 and 2006 (in millions):
| ** **                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Balance as of  January 1,        |       | $        | 12.2       |     | $          | 11.2 |   |
| Additions,  changes in estimates |       | —   |       | —   |       |
| Accretion  expense               |       | 0.2      |       | 0.3      |       |
| Balance as of March 31,          |       | $        | 12.4       |     | $          | 11.5 |   |

I.    RelatedParty Transactions:

Receivable and payable balances with affiliated companies are shownbelow (in millions):
| ** **                                                  | ** ** | **As of**               | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                  | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
| Affiliate  receivable:                                      |       |                         |       |   |   |
| Mexico Proyectos  y Desarro1los S.A. de C.V. and affiliates |       | $                            | 3.3        |   | $ | 2.6 |   |
| Total                                                       |       | $                            | 3.3        |   | $ | 2.6 |   |
|                                                        |       |                         |       |   |   |
| Affiliate  payable:                                         |       |                         |       |   |   |
| Grupo Mexico  S.A. de C.V. and affiliates                   |       | $                            | 2.1        |   | $ | 0.4 |   |
| Ferrocarril  Mexicano, S.A. de C.V.                         |       | 2.4                          |       | 3.2 |   |
| Total                                                       |       | $                            | 4.5        |   | $ | 3.6 |   |

The Company has entered into certain transactions in the ordinary courseof business with parties that are controlling shareholders or theiraffiliates.  These transactions includethe lease of office space, air transportation and construction services andproducts and services relating to mining and refining.  The Company lends and borrows funds amongaffiliates for acquisitions and other corporate purposes.  These financial transactions bear interestand are subject to review and approval by senior management, as are all relatedparty transactions.  It is our policythat the Audit Committee of the Board of Directors shall review all relatedparty 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.

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Grupo Mexico, the Company’s ultimate parent and the majority indirectstockholder of the Company, and its affiliates provide various services to theCompany.  These activities wereprincipally related to accounting, legal, tax, financial, treasury, human resources,price risk assessment and hedging, purchasing, procurement and logistics, salesand administrative and other support services. Grupo Mexico is paid for these support services.  The total amount paid by the Company to GrupoMexico for such services in the first quarter of 2007 and 2006 was $3.5million. The Company expects to continue to pay for these services goingforward in an amount of $13.8 million per year.

The Company’s Mexican operations paid $4.1 million and $4.9 million inthe first quarter of 2007 and 2006, respectively, for freight services providedby Ferrocarril Mexicano, S.A. de C.V., an indirect subsidiary of Grupo Mexico.

In addition, the Company’s Mexican operations paid $2.7 million and $7.8million in the first quarter of 2007 and 2006, respectively, for constructionservices provided by Mexico Constructora Industrial S.A. de C.V., an indirectsubsidiary of Grupo Mexico.

The Larrea family controls a majority of the capital stock of GrupoMexico, and has extensive interests in other businesses, including oil drillingservices, construction and real estate. The Company engages in certain transactions in the ordinary course ofbusiness with other entities controlled by the Larrea family relating to miningand refining services, the lease of office space, and air transportation andconstruction services.  In connectionwith this, the Company paid fees of $1.0 million and $0.5 million in the firstquarter of 2007 and 2006, respectively for maintenance services provided byMexico Compañia de Productos Automotrices S.A. de C.V., a company controlled bythe Larrea family.  Additionally,in the third quarter of 2006 our Mexican subsidiary provided a short-terminterest bearing loan of $10.6 million to Mexico Transportes Aereos, S.A. deC.V. (“MexTransport”) for the purchase of an airplane which was paid in thefirst quarter of 2007.  Our Mexicansubsidiaries have provided a guaranty for a new temporary $10.6 millionloan, secured by MexTransport.  MexTransport,a company controlled by the Larrea family, provides aviation services to ourMexican operations.

The Company purchased $1.3 million in the first quarter of 2007 and 2006of industrial material from companies in which Mr. Carlos Gonzalez has aproprietary interest.  Mr. CarlosGonzalez is the son of SCC’s Chief Executive Officer.  In addition, the Company purchased $0.1million in the first quarter of 2007 and 2006 of industrial material fromcompanies in which Mr. Alejandro Gonzalez is employed as a sales representative.  Mr. Alejandro Gonzalez is the son of SCC’sChief Executive Officer.

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

J.   EmployeeBenefit Plans:

SCC Defined Benefit Pension Plan—

The components of the net periodic benefit costs forthe quarter ended March 31, are as follows ($ in millions):
| ** **                      | ** ** | **2007** | ** ** | **2006(1)** | ** ** |
|---------------------------------|------------|----------|------------|-------------|------------|
|                            |       |     |       |        |       |
| Interest cost                   |       | $        | 0.2        |        | $          | 0.2 |   |
| Expected return  on plan assets |       | (0.1     | )          | (0.1        | )          |
| Amortization of  net loss       |       | —   |       | —      |       |
| Net periodic benefit  cost      |       | $        | 0.1        |        | $          | 0.1 |   |

----

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

SCC Post-retirement Health Care Plan—

The components of the net period benefit costs for thepost-retirement health care 

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plan for the quarter ended March 31, 2007 and 2006 areindividually and in total less than $0.1 million.

Minera Mexico Defined Benefit Pension Plans—

The components of the net periodic benefit costs forthe quarter ended March 31, are as follows ($ in millions):
| ** **                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
|                            |       |     |       |     |       |
| Interest cost                   |       | $        | 0.5        |     | $          | 0.5 |   |
| Service cost                    |       | 0.5      |       | 0.5      |       |
| Expected return  of plan assets |       | (0.5     | )          | (0.5     | )          |
| Net periodic benefit  cost      |       | $        | 0.5        |     | $          | 0.5 |   |

Minera Mexico Post-retirement Health Care Plan—

The components of the net periodic cost for thequarters ended March 31, 2007 and 2006 are as follows ($ in millions):
| ** **                 | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
|                       |       |     |       |     |       |
| Interest cost              |       | $        | 0.6        |     | $          | 0.6 |   |
| Service cost               |       | 0.1      |       | 0.1      |       |
| Net periodic benefit  cost |       | $        | 0.7        |     | $          | 0.7 |   |

K.  ComprehensiveIncome:
| ** **                                     | ** ** | **Three months ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **March 31,**               | ** ** |
| ** **                                     | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Net income                                     |       | $                                | 551,682    |   | $ | 421,575 |   |
| Other  comprehensive income (loss) net of tax: |       |                             |       |   |   |
| (Realized) unrealized gain on investment       |       | (956)                            |       | 1,101 |   |
| Comprehensive income                           |       | $                                | 550,726    |   | $ | 422,676 |   |

L.   Commitmentsand Contingencies:

Peruvian Operations

Regional development contribution:

On December 28, 2006, the Company’s Peruvian branch signed a contractwith the Peruvian government that commits the Company to make annual(five-year) contributions for the regional development of Peru.  This has been in response to an appeal by thenew president of Peru to the mining industry. The Company, as well as the mining industry, has responded positively tohelp with this cause.  The programsenvisioned will focus initially on nutrition for young children and expectantmothers, education and health services. 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 theagreement, the contribution from 2006 earnings must be segregated from theBranch resources as of April 30, 2007. For such purpose, the money was deposited with a separate entity, named “AsociaciónCivil Ayuda del Cobre” which will disburse the funds for the approvedinvestments in accordance with the agreement. The following four years’ contributions could increase or decreasedepending on copper prices. If the copper price drops below $1.79 per pound thecontribution will cease.   The Companymade a provision of $1.9 million in the first quarter of 2007 based on Peruvianearnings for this contribution.

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Royalty charge:

In June 2004, the Peruvian Congress enacted legislation imposing aroyalty charge to be paid by mining companies in favor of the regionalgovernments and communities where mining resources are located.  Under this law, the Company is subject to a1% to 3% royalty, based on sales, applicable to the value of the concentratesproduced in our Toquepala and Cuajone mines. The Company made provisions of $10.1 million and $8.3 million in thefirst quarter of 2007 and 2006, respectively, for this royalty.  These provisions are included in “Cost ofsales (exclusive of depreciation, amortization and depletion)” on the condensedconsolidated statement of earnings.

In 2005, a Constitutional Tribunal ruled the law constitutional andadditionally stated that the royalty charge applies to all concessions held inthe mining industry, implying that those entities with tax stability contractsare subject to this charge.  In 1996, theCompany entered into a tax stability contract with the Peruvian government (a “Guaranteeand Promotional Measures for Investment Contract”), relating to our solventextraction and electrowinning (“SX/EW”) production, which agreement  purports to, among other things, fix taxrates and other charges relating to such production.  The Company believes that the ConstitutionalTribunal’s interpretation relating to entities with tax stability contracts isincorrect and intends to protest the imposition of the royalty charge on SX/EWproduction, when and if assessed. Provisions made by the Company for the royalty charge do not includeapproximately $15.7 million of additional potential liability relating to itsSX/EW production from June 30, 2004 through March 31, 2007.

Power purchase agreement:

In 1997, SCC sold its Ilo power plant to an independent power company,Enersur S.A. (“Enersur”).  In connectionwith the sale, a power purchase agreement was also completed under which SCCagreed to purchase all of its power needs for its Peruvian operations fromEnersur for twenty years, commencing in 1997.

In 2003 the agreement was amended releasing Enersur from its obligationto construct additional capacity to meet the Company’s increased electricityrequirements.  SCC believes it cansatisfy the need for increased electricity requirements from other sources,including local power providers.

Environmental matters:

The Company has instituted extensive environmental conservation programsat its mining facilities in Peru and Mexico. The Company’s environmental programs include water recovery systems toconserve water and minimize impact on nearby streams, reforestation programs tostabilize the surfaces of the tailings dams and the implementation of scrubbingtechnology in the mines to reduce dust emissions.

Peruvian operations:

The Company’s operations are subject to applicable Peruvianenvironmental laws and regulations.  ThePeruvian government, through its Ministerio de Energia y Minas (the Ministry ofEnergy and Mines, or “MEM”) conducts annual audits of the Company’s Peruvianmining and metallurgical operations. Through these environmental audits, matters related to environmentalcommitments, compliance with legal requirements, atmospheric emissions andeffluent monitoring are reviewed.  TheCompany believes that it is in material compliance with applicable Peruvianenvironmental laws and regulations.

In accordance with Peruvian regulations, in 1996 SCC submitted itsPrograma de Adecuación y Manejo Ambiental (the Environmental Compliance andManagement Program, known by its Spanish acronym, PAMA) to the MEM. Athird-party environmental audit was conducted in order to elaborate thePAMA.  The PAMA applied to all currentoperations that did not have an approved environmental impact study at thetime.  SCC’s PAMA was approved in January1997 and contained 34 mitigation measures and projects necessary to (1) bringthe existing operations into compliance with the environmental standardsestablished by the MEM and (2) identify areas impacted by operations that wereno 

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longer active and needed to be reclaimed.  By the end of 2006, 32 of these projects werecompleted, including all PAMA commitments related to the Company’s operationsin Cuajone and Toquepala.

The two pending PAMA projects were related to the Ilo smelteroperations.  The primary areas ofenvironmental concern were the smelter reverberatory slag eroded from slagdeposits up until 1994, and atmospheric emissions from the Ilo smelter.  PAMA commitments related to the slagremediation program and the smelter modernization project were both completedby January 31, 2007.  With the completionof these projects SCC fulfilled its environmental commitments under the PAMA.

With the smelter modernization project, the Company increased sulfurcapture over the 92% requirement established by the PAMA. The new smelter isexpected to maintain production at current levels.  The Company has, however, encountered somedelays in getting to full capacity and as a consequence the Company has soldsome concentrates in the first quarter of 2007. As of March 31, 2007, smelter production reached 80% of capacity and theCompany anticipates reaching full capacity in the second quarter of 2007.

A new stationary 17-meter high smelting furnace (IsaSmelt), with anominal capacity to treat 165 tons of copper concentrate per hour has beeninstalled as part of the modernization project. The furnace uses Isa technology which is proven throughout theworld.  Additionally, two rotary holdingfurnaces (RHF) have been installed to separate the slag.  The matte (62% copper) from the RHF is thensent to Pierce-Smith converters to produce 99.3% pure copper.  Two 400-ton anode furnaces receive the copperfrom the converters and with the use of two casting wheels 99.7% pure copperanodes are produced.  Since January 2006,when the anode furnaces entered operation, blister copper production has beenbasically replaced by anode copper.

As part of the smelter modernization project a new 1000-ton per dayoxygen plant as well as a new 800,000 tons per year sulfuric acid plant, two desalinationplants, and two effluent treatment plants have been constructed.

Spending on this project through March 2007 was $561.1 million (whichincludes $59.8 million of capitalized interest).

In 2003, the Peruvian Congress published a new law announcing futureclosure and remediation obligations for the mining industry.  The law was amended in 2004 and again in2005.  The current modificationestablishes that mining companies must submit their mine closure plans withinone year of publication of final regulations. In August 2005 final regulations were published and the Companyinitiated the preparation of the required mine closure plan.  This plan, in its final form, will includethe estimated cost required for the Peruvian operations, including cost at theIlo smelter and refinery, tailings disposal, and the dismantling of theToquepala and Cuajone concentrators, shops and auxiliary services.

As the law requires that the mine closure plan be prepared by anindependent consulting entity, the Company engaged Walsh Peru S.A., a Peruviansubsidiary of Walsh Environmental Scientists and Engineers, Inc. (Boulder,Colorado), and the Mines Group Inc (Reno, Nevada) independent consultingentities to prepare the mine closure plan. The conceptual plan, without costs, was submitted to MEM in August 2006and is subject to review by MEM for 45 days. After the MEM review (which is still pending) the Company will have 90days to prepare and resubmit the mine closure plan, including costs, which isthen subject to approval by MEM and open to public discussion and comment inthe area of Company operations. Additionally, the law requires companies to provide financial guaranteesto insure that remediation programs are completed.  The Company believes the liability for theseasset retirement obligations cannot currently be precisely measured, orestimated, until the Company has completed its final mine closure plan and isreasonably confident that it will be approved by MEM in most material respects.  However, the Company has made a preliminaryestimate of this liability and has recorded such amount in its financialstatements.  As of March 31, 2007, theCompany has recorded $5.9 million for this liability.  The Company believes that this estimateshould be viewed with caution, pending final approval of its mine closure plan,expected in 2007.

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For the Company’s Peruvian operations, environmental capitalexpenditures were $11.7 million and $63.3 million in the first quarter of 2007and 2006, respectively.

Mexican operations:

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

The principal legislation applicable to the Company’s Mexican operationsis the federal Ley General del Equilibrio Ecologico y la Proteccion al Ambiente(the “General Law of Ecological Balance and Environmental Protection, or theEnvironmental Law”), which is enforced by the Procuraduria Federal deProteccion al Ambiente (“Federal Bureau of Environmental Protection or thePROFEPA”).  The PROFEPA monitorscompliance with environmental legislation and enforces Mexican environmentallaws, regulations and official standards. PROFEPA may initiate administrative proceedings against companies thatviolate environmental laws, which in the most egregious cases may result in thetemporary or permanent closing of non-complying facilities, the revocation ofoperating licenses and/or other sanctions or fines.  Also, according to the Codigo Penal Federal(Federal Criminal Code), the PROFEPA must inform corresponding authoritiesregarding environmental non-compliance.

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

Due to the proximity of certain facilities of Minera Mexico to urbancenters, the authorities may implement certain measures that may impact orrestrain the operation of such facilities.

For the Company’s Mexican operations, environmental capital expenditureswere $4.1 million and $0.8 million in the first quarter of 2007 and 2006,respectively.  We expect to spendapproximately $3.9 million for environmental capital expenditures in theremaining three quarters of 2007.

Litigation matters:

Peruvian operations:

Garcia-Ataucuri and Others vs. SCC: In April 1996, the Company was served with a complaint filed in Peru byapproximately 800 former employees seeking the delivery of a substantial numberof “labor shares” (acciones laborales) of its Peruvian Branch plus dividends onsuch shares, to be issued in a proportional way to each former employee inaccordance with their time of work with SCC’s Branch in Peru.

The Company conducts its operations in Peru through a registeredBranch.  Although the Branch has neithercapital nor liability separate from that of the Company, under Peruvian law itis deemed to have an equity capital for purposes of determining the economicinterest of the holders of the labor shares. The labor share litigation is based on claims of former employees forownership of labor shares issued during the 1970s until 1989 under a formerPeruvian mandated profit sharing system. In 1971, the 

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Peruvian Government enacted legislation providing that workers in themining industry would participate in the pre-tax profits of the enterprises forwhich they worked at a rate of 10%.  Thisparticipation was distributed 40% in cash and 60% as an equity interest in theenterprise. Under the law, the equity participation was originally delivered tothe “Mining Community”, an organization representing all workers.  The cash portion was distributed to theworkers after the close of the year.  Theaccrual for this participation was (and continues to be) a current liability ofthe Company, until paid.  In 1978, thelaw was amended and the equity distribution was calculated at 5.5% of pre-taxprofits and was made to individual workers of the enterprise in the form of “laborshares” to be issued in Peru by the Peruvian Branch of SCC.  These labor shares represented an equityinterest in the enterprise.  In addition,according to the 1978 law, the equity participations previously distributed tothe “Mining Community” were returned to the Company and redistributed in theform of labor shares to the individual employees or former employees.  The cash participation was adjusted to 4.0%of pre-tax earnings and continued to be distributed to employees following theclose of the year.  Effective in 1992,the law was amended to its present status, and the workers’ participation inpre-tax profits was set at 8%, with 100% payable in cash.  The equity participation component waseliminated from the law.

In 1995, the Company offered to exchange new common shares of the Companyfor the labor shares issued under the prior Peruvian law.  Approximately 80.8% of the issued laborshares were exchanged for the Company’s common shares, greatly reducing theminority interest on the Company’s balance sheet.  What remains of the workers’ equityparticipation is now included in the consolidated balance sheet under thecaption “Minority Interest”.

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

1) As stated above, in April 1996, the Company was served with acomplaint filed in Peru by approximately 800 former employees, (García Ataucuriand others vs. SCC), seeking the delivery of 38,763,806.80 “labor shares”(acciones laborales) (or S/. 3,876,380,679.56), as required by Law # 22333, tobe issued in a proportional way to each former employee or worker in accordancewith their time of work with SCC’s Branch in Peru, plus dividends on suchshares.  This amount corresponds to thetotal number of labor shares for all of the Company’s Peruvian workers, and thecomplaint is seeking to have labor shares issued to the plaintiffsproportionally to each in accordance with their time of work with the Company,plus dividends on such labor shares.  InDecember 1999, a civil court of first instance of Lima decided against theCompany, ordering the delivery of the labor shares and dividends to theplaintiffs.  The Company appealed thisdecision in January 2000.  On October 10,2000, the Superior Court of Lima affirmed the lower court’s decision, which hadbeen adverse to the Company.  On appealby the Company, the Peruvian Supreme Court annulled the proceeding noting thatthe civil courts lacked jurisdiction and that the matter had to be decided by alabor court. On March 8, 2002, Mr. García Ataucuri restated the claim to complywith Peruvian labor law and procedure requirements, and increased the number ofplaintiffs to approximately 958 ex-workers. The lower labor judge dismissed the lawsuit in January 2005.  In March 2005, the plaintiffs appealed to theLima Labor Superior Court.  The SuperiorCourt annulled the appeal due to procedural defects and remanded the case tothe lower court for further proceedings. The lower court is considering motions of certain plaintiffs to reinstatethe appeal.  If the lower court grantsthe motions, the Company believes that the appeal would proceed only for thelimited number of plaintiffs that have cured the procedural defects.

2) Additionally, on May 10, 2006, the Company was served with a newcomplaint filed in Peru, this time by 44 former employees, (Cornejo Flores andothers vs. SCC), of the Company seeking delivery of (1) labor shares (or sharesof whatever other current legal denomination)corresponding to years 1971 toDecember 31,1977 (we understand the plaintiffs are seeking the same38,763,806.80 labor shares mentioned in the prior 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 Company answered this new complaint, denying thevalidity of the claim.

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Previous Case:

The two above mentioned cases, are similar to a concluded lawsuit filedby 127 former employees on July 15, 1996, also represented by Mr. GarciaAtaucuri, which sought the issuance and delivery of 38,763,806.80 labor sharesplus dividends and S/.1,118,439,980.23 representing labor share capitalincreases made by the Branch.  InDecember 1999, the lower court dismissed the complaint against theCompany.  Plaintiffs appealed this decisionin January 2000 before the Superior Court. In August 2000 the Superior Court affirmed the lower court decision andthe plaintiffs filed an appeal before the Supreme Court.  In June 2002 the Supreme Court dismissed theappeal and as a consequence the Superior Court decision became final.

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

The Company asserts that the claims are without merit and that the laborshares were distributed to the former employees in accordance with the profitsharing law then in effect.  We do notbelieve that an unfavorable outcome is reasonably possible.  The Company has not made a provision forthese lawsuits because it believes that it has meritorious defenses to theclaims asserted in the complaints.

Mineria Integral S.A.C.:

In January 2007, the Company was served with a complaint filed in Peruby Mineria Integral S.A.C.  The complaintalleges that the Company has trespassed on certain mining rights of theplaintiff and seeks that the Company desist from the trespass and paycompensation in the amount of $49,139,476. The Company believes that this lawsuit is without merit and is vigorouslydefending itself against this action.

Class actions

Three purported class action derivative lawsuits have been filed in theDelaware Court of Chancery (New Castle County) late in December 2004 and earlyJanuary 2005 relating to the acquisition of Minera Mexico by SCC.  On January 31, 2005, the three actions LemonBay, LLP v. Americas Mining Corporation, et al., Civil Action No. 961-N,Therault Trust v. Luis Palomino Bonilla, et al., and Southern Copper Corporation,et al., Civil Action No. 969-N, and James Sousa v. Southern Copper Corporation,et al., Civil Action No. 978-N were consolidated into one action titled, In reSouthern Copper Corporation Shareholder Derivative Litigation, Consol.  C. A. No. 961-N and the complaint filed inLemon Bay was designated as the operative complaint in the consolidatedlawsuit.  The consolidated actionpurports to be brought on behalf of the Company’s common stockholders.

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

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

Mexican operations—

The Mexican Geological Services (MGS) Royalties:

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In August 2002, MGS (formerly named Council of Mineral Resources (“COREMI”))filed with the Third Federal District Judge in Civil Matters, an actiondemanding from Mexcobre the payment of royalties since 1997.  In December 2005, Mexcobre signed anagreement with MGS.  Under the terms ofthis agreement the parties established a new procedure to calculate the royaltypayments applicable for 2005 and the following years, and the Company paid inJanuary 2006, $6.9 million of royalties for 2005 and $8.5 million as payment onaccount of royalties from the third quarter 1997 through the last quarter of2004.  We estimate that the payment madeon January 11, 2006 will cover 100% of the royalty payments required for 2005and prior periods.  On January 22, 2007the Third Federal District Judge issued a ruling regarding the payment relatedto the period from the third quarter of 1997 through the fourth quarter of2004.  This ruling was appealed by bothparties in February 2007.  The Companybelieves that the payment made on account for this period is correct.

On an ongoing basis the Company will be required to pay a 1% royalty onLa Caridad’s copper production value after deduction of treatment and refiningcharges and certain other carrying costs.

San Luis Potosi Facilities:

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

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

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

 First, against the municipalityof San Luis Potosi, requesting the annulment of the authorization and licensesgranted to Desarrolladora Intersaba S.A. de C.V. to develop “Villa Magna”within the zinc plant’s safeguard and buffer zone; and

Second, filed before SEMARNAT a request for a declaration of a safeguardand buffer zone surrounding IMMSA’s zinc plant.

The first action was resolved by denying IMMSA’s interest on August 23,2006 by a Federal Court.  IMMSA submittedon September 21, 2006 its last appeal before the Supreme Court of Justice. InFebruary 2007, this court ruled against IMMSA’s interests.

IMMSA believes that, while this outcome was adverse to its interests,the construction of the “Villa Magna” housing and commercial development willnot, in itself, affect the operations of IMMSA’s zinc plant.

Desarrolladora Intersaba, S.A. de C.V. has filed a lawsuit againstIMMSA, requesting payment of damages in the amount of approximately $11.0million supposedly caused by IMMSA, during these proceedings.  IMMSA intends to vigorously defend againstthis lawsuit.

In addition to the foregoing, IMMSA has initiated a series of legal andadministrative procedures against the Municipality of San Luis Potosi due toits refusal to issue IMMSA’s use of land permit in respect to its zincplant.  The Municipality has refused togrant such license based on the argument that IMMSA has failed to submit, aspart of the application process, a “manifestación de impacto ambiental”(environmental impact assessment).  IMMSAbelieves that the environmental impact assessment is not required because IMMSAwill not undertake construction activities. The trial judge has ordered the Municipality to continue the analysis ofIMMSA’s request to issue the “licencia de uso de suelo” (land use permit).  The municipality has refused to issue theland use permit.  IMMSA has filed arequest for relief against such resolution to compel the court to issue theland use permit.

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Tax contingency matters—

The Company is regularly audited by the federal, state and foreign taxauthorities both in the United States and internationally.  The amount of unrecognized tax benefitsresulting from uncertain tax positions has been developed in consultation withlegal and tax counsel and in accordance with the requirements of FIN 48, whichwas adopted effective January 1, 2007, see Note B above.

U.S. Internal Revenue Service (IRS)

IRS audits can result in proposed assessments.  In 2002, the IRS issued a preliminary Noticeof Proposed Adjustment for the years 1994 through 1996.  In 2003, the Company settled thesedifferences with the IRS and made a payment of $4.4 million, includinginterest.  Generally, the years 1994through 1996 are now closed to further adjustment.

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

On October 5, 2005 the Company filed a formal protest with the IRS toappeal the proposed changes with respect to the TAM conclusion, as well asother items of adjustment proposed by the IRS field audit group.  These other adjustments include themethodology of capitalizing interest, the determination of useful lives fordepreciable property, the calculation of deductible and creditable Peruviantaxes and the established service fee between the Company and relatedparties.  Discussions with the AppealsOffice representatives have begun and the parties have agreed to workingthrough the protested issues and concluding the appeals process by December 31,2007.

Peruvian operations:

In Peru the Superintendencia Nacional de Administracion Tributaria (“SUNAT”),the Peruvian Tax Administration, regularly audits the Company.  These audits can result in proposedassessments.

In 2002, the Company received assessments and penalties from SUNAT forfiscal years 1996 through 1999, in which several deductions taken weredisallowed.  After appeal, the Companysettled many of the issues with SUNAT in 2003. However, the portion of the assessment related to the disallowance offinancial expenses is still pending resolution. In addition, the Company has not recognized a liability for penaltiesand interest related to the portion of the assessments settled in 2003 or forthe pending assessment related to financial expenses, as it considers that theyare not applicable.  The status of thesepending issues as well 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 $3.4 million, which was issued in July 2003.  This deposit is recorded in other assets onthe condensed consolidated balance sheet. The Company was not required to issue a deposit for the

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appealof the assessments and rulings with respect to any other year.  In February 2004, the Peruvian tax courtdenied the Company’s appeal. Consequently, in April 2004, the Company filed a lawsuit against thePeruvian tax court and SUNAT before the Superior Court of Peru.  In September 2005, the Superior Courtdeclared the Company’s claim valid. SUNAT appealed this decision to the Peruvian Supreme Court in Lima.  In December 2006, the Peruvian Supreme Courtconfirmed the opinion of the lower court that declared valid SPCC’s claim.  SUNAT has not appealed this decisionand in March 2007 issued a resolution in favor of SPCC’s claim. The Company isawaiting the refund of $3.4 million plus interest.

b)Year 1997:  With regard to the penaltyissued by SUNAT related to fiscal year 1997, in November 2002 the Peruvian taxcourt indicated that the penalty needed to be modified and declared thepreviously issued penalty null. Consequently, SUNAT issued a new penalty in December 2003.  This penalty had been protested beforeSUNAT.  The Company’s appeal before thePeruvian tax court related to the assessments (pertaining to the deduction ofcertain financial expense) for fiscal year 1997 was denied.  In May 2003, the Company filed a lawsuitbefore the superior court against SUNAT and the Peruvian tax court, seeking thereversal of the ruling of the tax court. In July 2005 the Superior Court decided in favor of the Company andremanded the case to SUNAT for a new pronouncement.  SUNAT has appealed the court’s decision tothe Peruvian Supreme Court in Lima.  InDecember 2006, the Supreme Court declared null the lower court’s opinion andremanded the case back to the lower court for final resolution. SUNATmay appeal this decision.

In March 2007 the lower court declared null the original resolutionsissued by SUNAT and the tax court, and found in SPCC’s favor, and ordered SUNATto accept the 1997 interest deduction. SUNAT may appeal this decision. This decision, if it is affirmed on appeal, is very important for SPCCas assessments related to the years 1998 through 2001 are based on SUNAT’sdisallowance of similar interest expense deductions.

c) Years 1998 and 1999: SUNAT has not ruled on the portion of the 1998and 1999 assessment related to the financial deductions.  However, in August 2006, SUNAT ruled on other1998/1999 issues related to payment of commissions to certain financialinstitutions.  The ruling resolved oneissue in favor of the Company and other issues against the Company.  The Company has appealed before the Peruviantax court the portion of the claim decided against the Company.

d) Years 2000 and 2001: In December 2004 and January 2005, the Companyreceived assessments and penalties from SUNAT for the fiscal years 2000 and2001, in which certain deductions taken by the Company were disallowed.  SUNAT has objected to the Company’s method ofdeducting vacation pay accruals in 2000, a deduction in 2000 for a fixed assetwrite-off, as well as certain other deductions in both years.  The Company has appealed these assessmentsand resolution is still pending. Additionally, the Company received penalties and assessments from SUNATrelating to treatment of foreign exchange differences for 2000 and 2001.  The Company has appealed these assessmentsand resolution is still pending.

In June 2006, a tax court decision was published with regards to anothercompany, which states that profits related to foreign exchange differences neednot be included in calculations for monthly advance tax payments.  The tax court has indicated that thisdecision is applicable to all future cases that are similar. As such, theCompany expects that the portion of the 2000/2001 tax assessment related toforeign exchange difference will be removed from the assessment.

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

e) Year 2002: In December 2006, the Company received assessments andpenalties from SUNAT for the fiscal years 2002 in which income tax rate appliedto services received by the Company and deductions taken by the Company weredisallowed.  In February 2007, theCompany appealed these SUNAT assessments.

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Mexican Operations:

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

a) Year 1995: In March 2001, SAT issued an assessment related to 1995tax year, disallowing certain deductions related to the Company’s housing andlocal travel expenses.  The Company hasappealed this assessment. The tax courts ruled against the Company.  In March 2007, SAT made the final liquidationof 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 SATissued an assessment against MM claiming that MM understated asset value usedin the determination of asset tax.  Inaddition, SAT claimed that MM improperly reduced their consolidated resultsthrough the consolidation of two subsidiaries.

MM believes that the SAT assessment is not legal.  Accordingly, in July 2005, MM filed a NullityMotion with the Metropolitan Regional Tax Court, Exchequer division, againstthe assessment, which is currently at the stage of submission of expert anddocumentary evidence.

Labor matters:

During 2006, there were a number of work stoppages at some of theCompany’s Mexican operations.  While someof these work stoppages were of a short-term nature with little or noproduction loss, others have been more disruptive.  A strike at the La Caridad copper mine inSonora began in the first quarter of 2006 and ended in July 2006.  A strike at the San Martin polymetalliccomplex in Zacatecas commenced in the first quarter of 2006 and ended in May2006.  Workers at the Cananea copper minewent on a strike on June 1, 2006 returning to work six weeks later on July 17,2006.  These work stoppages were declaredillegal by the Mexican authorities.  OnJune 9, 2006, the Company announced the closing of the La Caridad mine aspicketing workers made it impossible to continue operations.  As a result of these strikes, the Companydeclared “force majeure” on certain of its June and July copper contracts.  On July 14, 2006, with the approval of aLabor Court, 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 reopened the La Caridad mine and in the fourthquarter of 2006 restored production to 100% capacity.

In recent years the Company has experienced a number of strikes or otherlabor disruptions that have had an adverse impact on its operations andoperating results.  In Peru on August 31,2004, unionized workers at the mining units in Toquepala and Cuajone initiatedstrike and sought additional wage increases based on high metal prices.  The strike ended after twelve days.  Collective bargaining agreements with theCompany’s nine Peruvian labor unions expire in 2007.

On April 28, 2007 the workers of a newly unified workers union at ourPeruvian smelter in Ilo initiated a strike to demand better wages andbenefits.  In addition, on April 30, 2007Peru’s largest mining union launched a nationwide strike to demand better job benefits.  The workers at our two Peruvian mines joinedthe nationwide miners’ strike and also supported the unified Ilo union.  The labor minister declared the strikeinappropriate and the workers returned to work after 5 days when the nationwidestrike was resolved by the government. The workers received guarantees from the government over workingconditions and contracts.  Also, SPCCsigned a general agreement indicating the terms under which the review of theunified union contracts will take place.

During this brief strike the Company continued normal operations withthe support of staff and administrative personnel and contractors.

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However, we cannot assure you that we will not experience strikes orother labor-related work stoppages in the future that could have a materialadverse effect on our financial condition and results of operations.

Mine accident:

On February 19, 2006 an explosion occurred at the IMMSA unit’s Pasta deConchos coal mine, located in San Juan de Sabinas, Coahuila, Mexico. Immediately,IMMSA along with neighboring industry initiated a rescue effort.  Federal and local governmental help andsupport was received.  As a result of theaccident eight miners were injured and 65 perished.

Both the Coahuila Public District Attorney (Procurador de Justicia) andthe Federal Attorney Office (Procuraduria Federal de la Republica) initiatedinvestigations to establish the causes of the accident and the responsibleparty.  A local judge at San Juan deSabinas ordered five mine officials to stand trial for the accident.  On April 16, 2007 the judge terminated thecase due to the indemnification for damages to the families of thevictims.  Recovery efforts have stoppeddue to increased hazards and potential health risks for the recovery workers.

Other legal matters:

The Company is involved in various other legal proceedings incidental toits operations, but the Company does not believe that decisions adverse to itin any such proceedings individually or in the aggregate would have a materialadverse effect on its financial position or results of operations.

Our direct and indirect parent corporations, including AMC and GrupoMexico, have from time to time been named parties in various litigationsinvolving Asarco.  In August 2002 theU.S. Department of Justice brought a claim alleging fraudulent conveyance inconnection with AMC’s then-proposed purchase of SCC from Asarco.  That action was settled pursuant to a ConsentDecree dated February 2, 2003.  Theconsent decree is binding solely on the U.S. government.  In March 2003, AMC purchased its interest inSCC from Asarco.  In October 2004, AMC,Grupo Mexico, Mexicana de Cobre and other parties, not including SCC, werenamed in a lawsuit filed in New York State court in connection with allegedasbestos liabilities, which lawsuit claims, among other matters, that AMC’spurchase of SCC from Asarco should be voided as a fraudulent conveyance.  The lawsuit filed in New York State court wasstayed as a result of the August 9, 2005 Chapter 11 bankruptcy filing byAsarco, as described below.  On February2, 2007 a complaint was filed by Asarco, the debtor in possession, allegingmany of the matters previously claimed in the New York State lawsuit, includingthat AMC’s purchase of SCC from Asarco should be voided as a fraudulentconveyance.  While Grupo Mexico and itsaffiliates believe that these claims are without merit, we cannot assure youthat these or future claims, if successful, will not have an adverse effect onthe Company’s parent corporation or the Company.  Any increase in the financial obligations ofthe Company’s parent corporation, as a result of matters related to Asarco orotherwise could, among other effects; result in the Company’s parentcorporation attempting to obtain increased dividends or other funding from theCompany.  In 2005, certain subsidiariesof Asarco filed bankruptcy petitions in connection with alleged asbestosliabilities.  In July 2005, the unionizedworkers of Asarco commenced a work stoppage. As a result of various factors, including the above-mentioned workstoppage, on August 9, 2005 Asarco filed a voluntary petition for relief underChapter 11 of the U.S. Bankruptcy Code before the U.S. Bankruptcy Court inCorpus Christi, Texas.  Asarco’sbankruptcy case is being joined with the bankruptcy cases of itssubsidiaries.  Asarco’s bankruptcy couldresult in additional claims being filed against Grupo Mexico and itssubsidiaries, including SCC, Minera Mexico or its subsidiaries.

M. Segment andRelated Information:

TheCompany operates in a single industry, namely mining copper.  Prior to the April 1, 2005 acquisition ofMinera Mexico, the Company determined that its operations in Peru fell withinone segment.  With the acquisition ofMinera Mexico the Company 

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continuesto operate principally in one industry, the mining of copper.  However, because of the demands of managingoperations in two countries, effective April 1, 2005, Company management viewsthe new Southern Copper as having three operating segments and manages on thebasis of these segments.  Additionally,in mining copper the Company produces a number of metal by-products, mostimportant of which are molybdenum, silver and zinc.  The significant increase in the price ofmolybdenum over the past two years has had an important impact on the Company’searnings.  Nevertheless, the Companycontinues to manage its operations on the basis of the three coppersegments.  Added to the segmentinformation is information regarding the Company’s molybdenum sales.  The segments identified by the Company are:

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

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

3.               Mexicanunderground mining operations, which includes five underground mines thatproduce zinc, copper, silver and gold, a coal and coke mine, and severalindustrial processing facilities for zinc and copper.  This group is identified as the IMMSA Unit.

The Chief Operating Officer of the Company focuses onoperating income as measure of performance to evaluate different segments, andto make decisions to allocate resources to the reported segments.

Financial information relating to the Company’ssegments is as follows:
| ** **                                                             | ** ** | **Three Months Ended March 31, 2007** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                                         | ** ** |
| ** **                                                             | ** ** | **Mexican  Open Pit**                                     | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate  and other  Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                   |       |                                                           |       |   |   |   |   |   |   |   |   |
| Net sales  outside of segments                                         |       | $                                                              | 513.7      |   | $ | 128.5 |   | $ | 716.1 |   | — |   | $ | 1,358.3 |   |
| Intersegment  sales                                                    |       | 69.7                                                           |       | 22.2 |   | — |   | $ | (91.9 | ) | — |   |
| Cost of sales  (exclusive of depreciation, amortization and depletion) |       | 188.3                                                          |       | 64.6 |   | 304.3 |   | (90.6 | ) | 466.6 |   |
| Selling, general  and administrative expense                           |       | 10.4                                                           |       | 5.5 |   | 10.0 |   | (2.1 | ) | 23.8 |   |
| Depreciation,  amortization and depletion                              |       | 43.0                                                           |       | 7.8 |   | 23.3 |   | — |   | 74.1 |   |
| Exploration                                                            |       | 0.8                                                            |       | 1.9 |   | 3.7 |   | — |   | 6.4 |   |
| Operating Income                                                       |       | $                                                              | 340.9      |   | $ | 70.9 |   | $ | 374.8 |   | $ | 0.8 |   | 787.4 |   |
| Less:                                                                  |       |                                                           |       |   |   |   |   |   |   |   |   |
| Interest expense, net                                                  |       |                                                           |       |   |   |   |   |   |   | (2.9 | ) |
| Loss on  derivative instruments                                        |       |                                                           |       |   |   |   |   |   |   | (21.2 | ) |
| Other income (expense)                                                 |       |                                                           |       |   |   |   |   |   |   | 20.7 |   |
| Taxes on income                                                        |       |                                                           |       |   |   |   |   |   |   | (230.7 | ) |
| Minority interest                                                      |       |                                                           |       |   |   |   |   |   |   | (1.6 | ) |
| Net earnings                                                           |       |                                                           |       |   |   |   |   |   |   | $ | 551.7 |   |
|                                                                   |       |                                                           |       |   |   |   |   |   |   |   |   |
| Capital  expenditure                                                   |       | $                                                              | 20.4       |   | $ | 6.7 |   | $ | 31.4 |   | $ | 26.5 |   | $ | 85.0 |   |
| Property, net                                                          |       | $                                                              | 1,576.4    |   | $ | 266.2 |   | $ | 1,645.6 |   | $ | 67.2 |   | $ | 3,555.4 |   |
| Total assets                                                           |       | $                                                              | 2,873.1    |   | $ | 709.7 |   | $ | 2,991.9 |   | $ | (291.2 | ) | $ | 6,283.5 |   |

 

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

 

Salesvalue per segment:
| ** **             | ** ** | **Three months ended March 31, 2007** | ** ** |
|------------------------|------------|----------------------------------------------------------------|------------|
| **(in millions)** | ** ** | **Mexican  Open Pit**                                     | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|                   |       |                                                           |       |   |   |   |   |   |   |   |   |
| Copper                 |       | $                                                              | 458.0      |   | $ | 15.1 |   | $ | 558.7 |   | $ | (68.1 | ) | $ | 963.7 |   |
| Molybdenum             |       | 98.9                                                           |       | — |   | 113.3 |   | — |   | 212.2 |   |
| Other                  |       | 26.4                                                           |       | 135.6 |   | 44.1 |   | (23.7 | ) | 182.4 |   |
| Total                  |       | $                                                              | 583.3      |   | $ | 150.7 |   | $ | 716.1 |   | $ | (91.8 | ) | $ | 1,358.3 |   |

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

 

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Thegeographic breakdown of Southern Copper’s sales is as follows:
| ** **                                | ** ** | **Three months  Ended March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| (in millions)                             |       |                                             |       |   |   |
| United States                             |       | $                                                | 432.1      |   | $ | 391.7 |   |
| Europe                                    |       | 216.0                                            |       | 264.4 |   |
| Mexico                                    |       | 260.5                                            |       | 254.4 |   |
| Peru                                      |       | 21.5                                             |       | 25.3 |   |
| Latin America, excluding  Mexico and Peru |       | 185.9                                            |       | 118.2 |   |
| Asia                                      |       | 242.3                                            |       | 67.3 |   |
| Total                                     |       | $                                                | 1,358.3    |   | $ | 1,121.3 |   |

 

Major Customer Segment Information:

Forthe three months ended March 31, 2007, the Company has revenues from a coppercustomer of the Mexican and Peruvian operations, which amounts to 14.6% oftotal revenue.
| N. | Impact of New  Accounting Standards: |
|----|--------------------------------------|

 

In March 2006 the FASB published SFAS No. 159, *“The FairValue Option for Financial Assets and Financial liabilities”.*  This Statement permits entities to choose tomeasure many financial instruments and certain other items at fair value thatare not currently required to be measured at fair value.  The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.  This Statement is expected to expand the useof fair value measurement, which is consistent with the Board’s long-termmeasurement objectives for accounting for financial instruments.

This Statement alsoestablishes presentation and disclosure requirements designed to facilitatecomparisons between entities that choose different measurement attributes for similartypes of assets and liabilities.  ThisStatement does not affect any existing accounting literature that requirescertain assets and liabilities to be carried at fair value.  This Statement does not establishrequirements for recognizing and measuring dividend income, interest income, orinterest expense.  This Statement doesnot eliminate disclosure requirements included in other accounting standards,including requirements for disclosures about fair value measurements includedin FASB Statements No. 157, *Fair ValueMeasurements,*and No. 107, *Disclosuresabout Fair Value of Financial Instruments.*

SFAS 159 will be effective for all the Companies after the beginning ofa reporting entity’s first fiscal year that begins after November 15,2007.  The Company is currentlyevaluating the impact of this statement will have on its financial position orresults of operations.
| O. | Stockholders Equity: |
|----|----------------------|

 

Directors Stock AwardPlan:

The Company established anon-vested stock award compensation plan for certain directors who are notcompensated as employees of the Company. Under this plan, participants will receive 400 shares of common stockupon election and 400 additional shares following each annual meeting ofstockholders thereafter.  200,000 sharesof Southern Copper common stock have been reserved for this plan.  At March 31, 2007 and 2006, 67,600 and 62,400shares, respectively, have been granted under this plan.  The fair value of the award is measured eachyear at the date of the grant.

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Employee Stock Purchase Plan:

In January 2007, the Company offered to eligibleemployees a stock purchase plan (the “Employee Stock Purchase Plan”) through atrust that acquires shares of Grupo Mexico stock for sale to its employees, andemployees of its subsidiaries, and certain affiliated companies.  The purchase price is established at theapproximate fair market value on the grant date.  Every two years employees will be able topurchase 50% of the shares paid in the previous two years.  The employees will pay for shares purchasedthrough monthly payroll deductions over the eight year period of the plan.  At the end of the eight year period, theCompany will grant the participant a bonus of 1 share for every 10 shares purchasedby the employee.

If Grupo Mexico pays dividends on shares during theeight year period, the participants will be entitled to receive the dividend incash for all shares that have been fully purchased and paid as of the date thatthe dividend is paid.  If the participanthas only partially paid for shares, the entitled dividends will be used toreduce the remaining liability owed for purchased shares.

In the case of voluntary resignation of the employee,the Company will pay to the employee the difference between the fair marketvalue of the shares at the date of termination of employment, and the purchaseprice.  When the fair market value of theshares is higher than the purchase price, the Company will apply a deductionover the amount to be paid to the employee based on the following schedule.
| If the resignation occurs during: | ** ** | **% Deducted** | ** ** |
|-------------------------------------------------------|------------|---------------------|------------|
| 1st year after  the grant date                        |       |                | 90         | % |   |
| 2nd year after  the grant date                        |       |                | 80         | % |   |
| 3rd year after  the grant date                        |       |                | 70         | % |   |
| 4th year after  the grant date                        |       |                | 60         | % |   |
| 5th year after  the grant date                        |       |                | 50         | % |   |
| 6th year after  the grant date                        |       |                | 40         | % |   |
| 7th year after the  grant date                        |       |                | 20         | % |   |

 

In the case of involuntary termination of theemployee, the Company will pay to the employee the difference between the fairmarket value of the shares at the date of termination of employment, and thepurchase 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 ordeath of the employee, the Company will render the buyer or his legal beneficiary,the shares effectively paid as of the date of retirement or death.

For the three monthsended March 31, 2007, the stock based compensation expense under this plan was$0.6 million.  As of March 31, 2007,there was $17.0 million of unrecognized compensation expense under this planwhich is expected to be recognized over a period of 8 years.

Executive Stock PurchasePlan:

Group Mexico also offersa stock purchase plan for certain members of its executive management and theexecutive management of its subsidiaries and certain affiliated companies.Under this plan, participants will receive incentive cash bonuses which areused to purchase up to 750,000 shares of Grupo Mexico over a nine year period.The fair value of the award is estimated on the date of grant and is recognizedas compensation expense over a weighted average requisite service period ofeight years. The Company recorded $0.5 million, net of tax, in compensationexpense in the 

27

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first quarter of 2007. Asof March 31, 2007, there was $3.2 million of unrecognized compensation cost,related to this plan, which is expected to be recognized over a weightedaverage period of eight years.

The following tablepresents the stock award activity for the three months ended March 31, 2007 ($in million):
| ** **                             | ** ** | **Shares** | ** ** | **Weighted Average  Grant Date Fair  Value** | ** ** |
|----------------------------------------|------------|------------|------------|-------------------------------------------------------------|------------|
| Outstanding  shares at January 1, 2007 |       | 750,000    |       | $                                                           | 2.7        |   |
| Granted                                |       | —     |       | —                                                      |       |
| Exercised                              |       | (67,500    | )          | (0.3                                                        | )          |
| Forfeited                              |       | —     |       | —                                                      |       |
| Outstanding shares at  March 31, 2007  |       | 682,500    |       | $                                                           | 2.4        |   |

 
| P. | Subsequent events: |
|----|--------------------|

 

On April 26, 2007 the Board of Directors approved a quarterly dividendof $1.50 per share, totaling $441.7 million, to be paid on June 1, 2007 toshareholders of record as of May 16, 2007.

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Part I Item1a.  Risk Factors

Set forth below arecertain changes from the risk factors previously disclosed in SCC’s annualreport on Form 10-K for the year ended December 31, 2006 filed on March 1, 2007with the Securities and Exchange Commission.

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

On April 28, 2007 theworkers of a newly unified workers union at our Peruvian smelter in Iloinitiated a strike to demand better wages and benefits.  In addition, on April 30, 2007 Peru’s largestmining union launched a nationwide strike to demand better job benefits.  The workers at our two Peruvian mines joinedthe nationwide miners’ strike and also supported the unified Ilo union.  The labor minister declared the strikeinappropriate and the workers returned to work after 5 days when the nationwidestrike was resolved by the government. The workers received guarantees from the government over workingconditions and contracts.  Also, SPCCsigned a general agreement indicating the terms under which the review of theunified union contracts will take place.

During this brief strikethe Company continued normal operations with the support of staff andadministrative personnel and contractors. However, we cannot assure you that wewill not experience strikes or other labor-related work stoppages in the futurethat could have a material adverse effect on our financial condition andresults of operations.

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Item2.

MANAGEMENT’S DISCUSSIONAND ANALYSIS OF

FINANCIALCONDITION AND RESULTS OF OPERATIONS

EXECUTIVEOVERVIEW

Ourbusiness is primarily the production and sale of copper.  In the process of producing copper, a numberof valuable metallurgical byproducts are recovered, such as molybdenum, zinc,silver, lead and gold, which we also produce and sell.  Market forces outside of our control largelydetermine the sales prices for our products. Our management, therefore, focuses on copper production cost control,production enhancement and prudent and conservative capital structure toimprove profitability.  We believe weachieve these goals through capital spending programs, exploration efforts andcost reduction programs.  Our aim is toremain profitable during periods of low copper prices and to maximize financialperformance in periods of high copper prices.

Ournet income and earnings per share for the three months ended March 31, 2007were $551.7 million and $1.87 per share and for the three months ended 2006were $421.6 million and $1.43 per share, and were favorably impacted by higherprices for copper and all of our significant byproducts.  Additionally, higher copper sales volumesimproved the 2007 first quarter as compared to the first quarter of 2006.  Strike activity at some of our Mexicanoperations in 2006, including the first quarter, reduced sales volumes.  We completed the Ilo smelter modernizationearly in the first quarter of 2007 and are currently eliminating some glitchesin the process to reach maximum production. As of March 31, 2007 we are at 80% capacity and expect to reach fullcapacity in the second quarter of 2007. In the meantime, we are selling some copper concentrates.

We discuss below severalmatters that we believe are important to understand our results of operationsand financial condition.  These mattersinclude, (i) our “operating cash costs” as a measure of our performance, (ii)metal prices, (iii) business segments, (iv) the effects of inflation and otherlocal currency issues and (v) our expansion and modernization program.

Operating Cash Costs:An overall benchmark used by us and a common industry metric to measure performanceis operating cash costs per pound of copper produced.  Operating cash cost is a non-GAAP measurethat does not have a standardized meaning and may not be comparable tosimilarly titled measures provided by other companies.  A reconciliation of our operating cash costper pound to the cost of sales (including depreciation, amortization anddepletion) as presented in the statement of earnings, is presented under thesubheading “Non-GAAP Information Reconciliation”, below.  We have defined operating cash cost per poundas cost of sales (including depreciation, amortization and depletion); plusselling, general and administrative charges, treatment and refining charges;less byproducts revenue and sales premiums, depreciation amortization anddepletion, worker’s participation and other miscellaneous charges, the Peruvianroyalty charge and the change in inventory levels; divided by total pounds ofcopper produced and purchased by us.  Inour calculation of operating cash cost per pound of copper produced, we creditagainst our costs the revenues from the sale of byproducts, principallymolybdenum, zinc and silver and the premiums over market price that we receiveon copper sales.  We account for thebyproduct revenue in this way because we consider our principal business to bethe production and sale of copper.  Webelieve that our Company is viewed by the investment community as a coppercompany, and is valued, in large part, by the investment community’s view ofthe copper market and our ability to produce copper at a reasonable cost.  We also include copper sales premiums as acredit, as these amounts are in excess of published copper prices.  The increase in recent years in the price ofmolybdenum has had a significant effect on our traditional calculation of cashcost and its comparability between periods. Accordingly, we present cash costs with and without crediting thebyproducts revenues against our costs.

We exclude from ourcalculation of operating cash cost depreciation, amortization and 

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depletion, which areconsidered non-cash expenses. Exploration is considered a discretionary expenditure and is alsoexcluded.  Worker’s participationprovisions are determined on the basis of pre-tax earnings and are alsoexcluded.  Additionally excluded from operatingcash cost are items of a non-recurring nature and the Peruvian royalty charge.

Our operating cash costsper pound, as defined, are presented in the table below for the three monthsended March 31, 2007 and 2006.  Wepresent cash costs with and without the inclusion of byproduct revenues.
|                                                                                            | ** ** | **Three Months,  Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| ** **                                                                                 | ** ** | **(in cents per pound)**           | ** ** |
|                                                                                       |       |                                              |       |   |   |
| Operating cash  cost per pound of copper produced and purchased                            |       | 4.7                                               |       | 21.3 |   |
| Operating cash cost per  pound of copper produced and purchased without byproducts revenue |       | 123.1                                             |       | 116.7 |   |

 

As seen on the chartabove, our cash cost for the first quarter of 2007 when calculated withbyproducts revenue is 4.7 cents compared with 21.3 cents per pound in the firstquarter of 2006.  The increase inbyproducts credit was due to higher molybdenum, zinc and silver prices.  The price of molybdenum in the first quarterof 2007 averaged $25.81 per pound, as compared to $22.25 per pound in thecomparable 2006 period.  The price of zincand silver in the first quarter of 2007 was 53.9% and 37.0% higher,respectively, than in the first quarter of 2006.  The impact of the molybdenum and zinc creditwas by far the largest effect.  In thefirst quarter of 2007, molybdenum and zinc revenue were credits of 57.6 centsper pound and 31.7 cents per pound as compared to 38.7 cents per pound and 25.5cents per pound in the first quarter of 2006.

Our cash cost, excludingbyproduct revenues, was higher by 6.4 cents in the first quarter of 2007.  In addition, our copper production, includingpurchased metal, in 2007 was higher by approximately 20.7 million pounds, dueto higher production from our mines of 24.5 million pounds, including 14.6million pounds from the Mexican open pit operations, 8.5 million pounds fromthe Peruvian open pit mines and 1.4 million pounds from the Mexican undergroundmines.

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

We are subject to marketrisks arising from the volatility of copper and other metal prices.  Assuming that expected metal production andsales are achieved, that tax rates are unchanged, giving no effect to potentialhedging programs, metal price sensitivity factors would indicate the followingchange in estimated 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)                        |       | $          | 8.5        |           | $          | 17.8     |       | $          | 1.6        |   | $ | 10.3 |   |

 

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Business segments.

Our Company operates in asingle industry, the copper industry. With the acquisition of Minera Mexico in April 2005, we determined thatto effectively manage our business we needed to focus on three segments.  These segments are our Peruvian operations,our Mexican open-pit operations and our Mexican underground operations, knownas our IMMSA unit.  Our Peruvianoperations include the Toquepala and Cuajone mine complexes and the smeltingand refining plants, industrial railroad and port facilities which service bothmines.  Our Mexican open-pit operationsinclude La Caridad and Cananea mine complexes, the smelting and refining plantsand support facilities which service both mines.  Our IMMSA unit includes five undergroundmines that produce zinc, lead, copper, silver and gold, a coal and coke mine,and several industrial processing facilities for zinc, copper and silver.

Segment information isincluded in our review of “Results of Operations” and also in Note M of ourConsolidated Financial Statements.

Inflation and Devaluationof the Peruvian Nuevo Sol and the Mexican Peso.  Our functional currency is the U.S.dollar.  Portions of our operating costsare denominated in Peruvian nuevos soles and Mexican pesos.  Since our revenues are primarily denominatedin U.S. dollars, when inflation/deflation in Peru or Mexico is not offset by achange in the exchange rate of the nuevo sol or the peso, to the dollar, ourfinancial position, results of operations and cash flows could be adverselyaffected to the extent that the inflation/devaluation effects are passed on tous by our suppliers or reflected 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 months ended March 31, 2007 and 2006, inflation and devaluation rateswere as follows:
|                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|
| **Peru:**                                         | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Peruvian  inflation rate                          |       | 0.6                                              | %          | 1.5 | % |
| Nuevo sol/dollar  (appreciation)/devaluation rate |       | (0.4                                             | )%         | (2.1 | )% |

 
|                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|
| **Mexico:**                                  | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Mexican  inflation rate                      |       | 1.0                                              | %          | 0.9 | % |
| Peso/dollar (appreciation)/devaluation  rate |       | 1.6                                              | %          | 2.2 | % |

 

Expansion andModernization program:  The Ilo smelter modernization project wascompleted on January 31, 2007.  While theenvironmental aspects of the smelter are operating as required, we haveencountered some delays in getting the smelter to full capacity and as aconsequence we have been selling some concentrates.  As of March 31, 2007, smelter productionreached 80% of capacity and we anticipate reaching full capacity in the secondquarter of 2007.  With the completion ofthis project we have fulfilled our total obligation under the PAMA.  Investment for all commitments under the PAMAwas over $600 million.

Additionally, ourcrushing and conveying project at the Toquepala mine is in fullproduction.  The primary crusher andassociated overland conveying system are fully operational; construction of theoperating ramp had placed 41.8 millions tons of material and will be completedin the second quarter of 2007.  Theproject is 99.8% complete.  We willconstruct a new SX/EW plant at the Cananea mine with a 33,000 mtpycapacity.  Proposals for an engineering,procurement and construction management contract have been received and arebeing analyzed. In conjunction with this project, we are developing a crushingand conveying system project with a 15 million mtpy capacity.

Regarding the expansionprojects at the Cananea mine, the concentrator expansion is under a technicaland economic evaluation.  The expandedconcentrator would add 33,000 

32

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tons of copper contentproduction and would begin production in the year 2009.  In parallel, due to improving molybdenumgrades, we also plan to build a molybdenum plant to produce concentrates withapproximately 4,000 tons of molybdenum content.

Regarding the Company’sexploration activities, the pre-feasibility study at Los Chancas, acopper-molybdenum property in southern Peru is in progress and we expect it tobe completed in the second quarter of 2007. Additionally, we have contracted a consulting firm to prepare afeasibility study for Tia Maria, a copper deposit in the department ofArequipa, Peru.  This study should becompleted by the third quarter of 2007.

ACCOUNTING ESTIMATES

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

RESULTS OF OPERATIONS

The following highlightskey financial and operating results for the three-months ended March 31, 2007and 2006.
| ** **                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **March 31,**               | ** ** |
| ** **                                   | ** ** | **(in millions)**           | ** ** |
| ** **                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Statement of Earnings Data**               | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                         |       |                             |       |   |   |
| Net sales                                    |       | $                                | 1,358.3    |   | $ | 1,121.3 |   |
| Operating costs and  expenses                |       | (570.9                           | )          | (488.6 | ) |
| Operating income                             |       | 787.4                            |       | 632.7 |   |
| Non-operating income  (expense)              |       | (3.5                             | )          | (9.5 | ) |
| Earnings before taxes  and minority Interest |       | 783.9                            |       | 623.2 |   |
| Taxes on income                              |       | (230.7                           | )          | (199.9 | ) |
| Minority interest                            |       | (1.5                             | )          | (1.7 | ) |
| Net earnings                                 |       | $                                | 551.7      |   | $ | 421.6 |   |

 

Mine copper productionamounted to 378.4 million pounds in the first quarter of 2007, an increase of6.9% compared with the first quarter of 2006. This increase of 24.5 million pounds included 14.6 million pounds fromthe Mexican open pit operations, 8.5 million pounds from the Peruvian open pitmines and 1.4 million pounds from the Mexican underground mines.

The increase of 14.6million pounds in production from the Mexican open-pit mines included 9.1 millionpounds from the La Caridad mine and 5.5 million pounds from the Cananeamine.  The increase at La Caridad wasfrom an increase in throughput, the 2006 

33

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production was reduced byan illegal work stoppage, which began in the first quarter of 2006 and lastedinto the third quarter, and an increase in mill recovery.  This increase was reduced somewhat by adecrease in ore grade.  The increase of5.5 million pounds at the Cananea mine was the result of higher ore grades andhigher PLS grades.  The increasedproduction at the Peruvian mines came from the Cuajone mine, which increased by9.9 million pounds, and was the result of higher ore grades in the 2007 period.Production at Toquepala, the other Peruvian mine, decreased by 1.7 millionpounds primarily due to lower mill recoveries as a result of treating ore withhigher oxide content.  Additionally,Peruvian SX/EW production increased by 0.3 million pounds due to higher PLSgrades.

The increase of 1.4million pounds at the Mexican underground mines was due principally to anincrease of 1.0 million pounds at the San Martin mine.  In the first quarter of 2006 production atthe San Martin mine was reduced due to an illegal work stoppage.

Molybdenum productionincreased to 8.1 million pounds in the first quarter of 2007 from 7.6 millionpounds in the first quarter of 2006. This 6.6% increase in production was the result of an increase of 1.8million pounds in the Mexican production, due to higher ore grades at the LaCaridad mine net of a decrease of 1.3 million pounds in Peruvian operations dueto lower grade and recovery in the Toquepala mine.

Mine zinc productiondecreased 5.0 million pounds in the first quarter of 2007 to 71.3 millionpounds compared with 76.3 million the first quarter of 2006. This 6.6% decreasein production was due to lower ore grade and recovery.

The table below outlinesthe average metal prices during the three months periods ended March 31, 2007and 2006.

Average Metals Prices
|                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                         | ** ** | **2006** | ** ** | **%Change** | ** ** |
| Copper ($ per  pound — LME)   |       | $                                                | 2.69       |   | $ | 2.24 |   | 20.1 |   |
| Copper ($ per  pound — COMEX) |       | $                                                | 2.70       |   | $ | 2.25 |   | 20.0 |   |
| Molybdenum ($ per  pound)          |       | $                                                | 25.81      |   | $ | 22.25 |   | 16.0 |   |
| Zinc ($ per  pound — LME)     |       | $                                                | 1.57       |   | $ | 1.02 |   | 53.9 |   |
| Silver ($ per ounce —  COMEX) |       | $                                                | 13.29      |   | $ | 9.70 |   | 37.0 |   |

 

Net Sales:Net sales in the first quarter of 2007 increased $237.0 million to $1,358.3million from $1,121.3 million in the comparable period in 2006.  The increase in net sales was principally theresult of higher copper prices, and to a lesser extent higher molybdenum, zincand silver prices as well as 9.7% increase in copper sales volume.  Partially reducing the increase was thedownward adjustment to sales in the first quarter of 2007 of $44.3 million torecord the decrease in value of the year-end 2006 provisionally priced coppersales.  At December 31, 2006, 169.9million pounds of copper were recorded at average provisional price of $2.87per pound, copper prices in the first quarter 2007 were about 16 to 17 centsper pound lower.

The table below presentsinformation regarding the volume of our copper sales by segment for the threemonths ended March 31, 2007 and 2006.

Copper Sales (millionpounds):
| ** **                | ** ** | **Three Months Ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **March 31,**               | ** ** |
| ** **                | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Copper:                   |       |                             |       |   |   |
| Peruvian operations       |       | 211.0                            |       | 187.1 |   |
| Mexican Open-pit          |       | 173.5                            |       | 174.5 |   |
| Mexican IMMSA unit        |       | 7.2                              |       | 9.7 |   |
| Inter segment elimination |       | (25.2                            | )          | (37.3 | ) |
| Total copper sales        |       | 366.5                            |       | 334.0 |   |

 

The table below presents information regarding the volume of sales by segment of our 

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significant byproducts for the three months ended March 31, 2007 and 2006.

Byproduct Sales 
| **(million pounds except silver — in million ounces)** | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Peruvian operations                                                                            |       |                                             |       |   |   |
| Molybdenum  contained in concentrate                                                           |       | 4.2                                              |       | 5.7 |   |
| Zinc—refined and  in concentrate                                                          |       | 11.4                                             |       | 10.5 |   |
| Silver                                                                                         |       | 1.4                                              |       | 1.6 |   |
|                                                                                           |       |                                             |       |   |   |
| Mexican Open-pit                                                                               |       |                                             |       |   |   |
| Molybdenum  contained in concentrate                                                           |       | 3.8                                              |       | 1.6 |   |
| Zinc—refined and  in concentrate (1)                                                      |       | —                                           |       | 9.5 |   |
| Silver                                                                                         |       | 1.0                                              |       | 1.4 |   |
|                                                                                           |       |                                             |       |   |   |
| Mexican IMMSA unit                                                                             |       |                                             |       |   |   |
| Zinc—refined and  in concentrate                                                          |       | 64.2                                             |       | 73.7 |   |
| Silver                                                                                         |       | 2.2                                              |       | 2.9 |   |
|                                                                                           |       |                                             |       |   |   |
| Intersegment  elimination                                                                      |       |                                             |       |   |   |
| Zinc—refined and  in concentrate                                                          |       | (10.0                                            | )          | (14.0 | ) |
| Silver                                                                                         |       | (0.2                                             | )          | (1.1 | ) |
|                                                                                           |       |                                             |       |   |   |
| Total byproduct sales                                                                          |       |                                             |       |   |   |
| Molybdenum  contained in concentrate                                                           |       | 8.0                                              |       | 7.3 |   |
| Zinc—refined and  in concentrate                                                          |       | 65.6                                             |       | 79.7 |   |
| Silver                                                                                         |       | 4.4                                              |       | 4.8 |   |

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(1) In the first quarterof 2006, the Mexican open pit purchased zinc products from IMMSA for resale toits customers, there were no zinc purchases in the first quarter of 2007.

At March 31, 2007, theCompany has recorded provisionally priced sales of 83.4 million pounds ofcopper, at an average forward price of $3.11 per pound.  Also the Company has recorded provisionallypriced sales of 3.7 million pounds of molybdenum at an average price of $28.13per pound.  These sales are subject tofinal pricing based on the average monthly LME or COMEX copper prices andDealer Oxide molybdenum prices in the future month of settlement, which willoccur in the next six months of 2007.

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

Operating Costs andExpenses: Operating costs and expenses were $570.9 million inthe first quarter of 2007 compared with $488.6 million in the first quarter of2006.  Cost of sales (exclusive ofdepreciation, amortization and depletion) for the three months ended March 31,2007 was $466.6 million compared with $406.9 million in the comparable 2006period.  The increase in cost of sales isattributable to an increase of $10.3 million in power cost, $9.5 million inworkers participation, $21.0 million in metals purchased from third parties,$11.3 million of sales expenses and $2.4 million of mining royalties partiallyoffset by an increase of $20.5 million of capitalized leachable material fromthe Cananea Mine.

Selling andadministrative expenses for the first quarter of 2007 were $23.8 millioncompared with $24.0 million in the first quarter of 2006.

Depreciation,amortization and depletion for the first quarter of 2007 were $74.1 millioncompared with $53.1 million in the first quarter of 2006.  The 2007 amount includes an increase of $16.2million of amortization of capitalized leachable material.

Non-operating income andexpenses: In the three months ended March 31, 2007 werecorded a loss on derivative instrument of $21.2 million. This amount includesa loss on marketable securities of $22.7 million net of a gain on exchange ratederivatives 

35

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Mexican peso/US dollar of$1.5 million.  See notes C and G to ourcondensed consolidated financial statements for more information on theseprograms.

Other income (expense) inthe first quarter of 2007 was income of $20.7 million compared with an expenseof $1.0 million in the first quarter of 2006. The increase of $21.7 million isprincipally due to $13.8 million of dividends received from Grupo Mexicorelated to the shares maintained in treasury stock.

Interest income was $21.9million in the first quarter of 2007 compared to $9.3 million in the firstquarter of 2006.  This increase wasprincipally the result of higher cash balances in the period.

Taxes on Income:  Taxes on income for the first quarter endedMarch 31, 2007, was $230.7 million compared with $199.9 million for the same periodof 2006.  The increase was principallydue to higher earnings in 2007.  Theeffective tax rate for the three months ended March 31, 2007, was 29.4%compared to 32.1% for the same period in 2006. 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.

Segment Results Analysis

Peruvian Open PitOperations
| ** **                    | ** ** | **Three Months ended** | ** ** | **Change** | ** ** |
|-------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                    | ** ** | **March 31,**               | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Value** | ** ** | **%** | ** ** |
| ** **                    | ** ** | **(in millions)**           | ** ** | ** ** | ** ** | ** ** | ** ** |
|                          |       |                             |       |       |       |   |   |   |   |
| Net sales                     |       | $                                | 716.1      |       | $          | 615.8 |   | $ | 100.3 |   | 16.3 | % |
| Operating costs and  expenses |       | (341.3                           | )          | (299.0     | )          | (42.3 | ) | 14.1 | % |
| Operating income              |       | $                                | 374.8      |       | $          | 316.8 |   | $ | 58.0 |   | 18.3 | % |

 

Net sales in the firstquarter 2007 increased $100.3 million to $716.3 million from $615.8 million inthe comparable period of 2006.  Theincrease in net sales is principally the result of higher copper prices in thefirst quarter of 2007. Copper sales volume increased in 2007 due to higherproduction.  Molybdenum sales volume,however, decreased in the 2007 period, due to lower production.

Operating cost andexpenses in the first quarter of 2007 increased by $42.3 million to $341.3million from $299.0 million in the first quarter of 2006, principally due tohigher cost of sales.  Cost of sales(exclusive of depreciation, amortization and depletion) for the three months endedMarch 31, 2007 was $304.3 million compared to $267.5 million in the same periodof 2006.  The increase in cost of salesincludes $22.4 million of higher value of metals purchased, $3.5 million ofhigher power cost, $5.0 million of higher workers’ participation and $1.9million of higher mining royalties.

Mexican Open PitOperations
| ** **                    | ** ** | **Three Months ended** | ** ** | **Change** | ** ** |
|-------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                    | ** ** | **March 31,**               | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Value** | ** ** | **%** | ** ** |
| ** **                    | ** ** | **(in millions)**           | ** ** | ** ** | ** ** | ** ** | ** ** |
|                          |       |                             |       |       |       |   |   |   |   |
| Net sales                     |       | $                                | 583.4      |       | $          | 484.8 |   | $ | 98.6 |   | 20.3 | % |
| Operating costs and  expenses |       | (242.5                           | )          | (218.9     | )          | (23.6 | ) | 10.8 | % |
| Operating income              |       | $                                | 340.9      |       | $          | 265.9 |   | $ | 75.0 |   | 28.2 | % |

 

Net sales in the firstquarter of 2007 increased $98.6 million to $583.4 million from $484.8 millionin the first quarter of 2006.  Theincrease in net sales is principally

36

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result of higher copperand silver prices partially offset by lower zinc sales volume.

Operating cost andexpenses in the first quarter of 2007 increased by $23.6 million to $242.5million from $218.9 million in the first quarter of 2006, principally due tohigher depreciation, amortization and depletion.  An increase of $16.3 million in depreciation,amortization and depletion was principally due to the amortization ofcapitalized leachable material.

Mexican UndergroundOperations (IMMSA)
| ** **                    | ** ** | **Three Months ended** | ** ** | **Change** | ** ** |
|-------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                    | ** ** | **March 31,**               | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Value** | ** ** | **%** | ** ** |
| ** **                    | ** ** | **(in millions)**           | ** ** | ** ** | ** ** | ** ** | ** ** |
|                          |       |                             |       |       |       |   |   |   |   |
| Net sales                     |       | $                                | 150.7      |       | $          | 133.7 |   | $ | 17.0 |   | 12.7 | % |
| Operating costs and  expenses |       | (79.8                            | )          | (87.3      | )          | 7.5 |   | 8.6 | % |
| Operating income              |       | $                                | 70.9       |       | $          | 46.4 |   | $ | 24.5 |   | 52.8 | % |

Net sales in the first quarter 2007 increased $17.0million to $150.7 million from $133.7 million in the comparable period of2006.  The increase in net sales wasprincipally the result of higher zinc prices, which increased by 53.9% reducedsomewhat by a 14% decrease in volume of zinc sales.  Operating cost and expenses in the firstquarter of 2007 decreased by $7.5 million to $79.8 million from $87.3 millionin the first quarter of 2006.  Cost ofsales (exclusive of depreciation, amortization and depletion) decreased $10.3million to $64.6 million in the first quarter of 2007 from $74.9 million in thefirst quarter of 2006.  The decrease incost of sales includes $20.7 million of increase in inventories due to shippingdelays, partially offset by $7.2 million of higher value of metals purchased tothird parties.

Intersegment Eliminationsand Adjustments

The net sales, operatingcosts and expenses and operating income displayed above will not be directlyequal to amounts in our condensed consolidated statement of earnings becausethe adjustments of intersegment operating revenues and expenses must be takeninto account.  Please see Note M of thefinancial statements.

**CASH FLOW**

The following table showsthe cash flow for the three months ended March 31, 2007 and 2006.
| ** **                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **March 31,**               | ** ** |
| ** **                                   | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                   | ** ** | **(in millions)**           | ** ** |
| Net cash  provided from operating activities |       | $                                | 548.6      |   | $ | 437.7 |   |
| Net cash used  for investing activities      |       | $                                | (183.9     | ) | $ | (144.9 | ) |
| Net cash used for  financing activities      |       | $                                | (502.3     | ) | $ | (407.2 | ) |

Net cash provided by operating activities was $548.6million in the first quarter of 2007, compared with $437.7 million in the 2006period.  The increase of $110.9 millionwas principally due to higher earnings which represent the 100.6% and 96.3% ofthe cash provided by operating activities in the first quarter of 2007 and2006, respectively.

Net cash used ininvesting activities was $183.9 million in the first quarter of 2007 comparedwith $144.9 million in the first quarter of 2006 and included $85.0 million forcapital expenditures.  The capitalexpenditures included $31.4 million of investments at our Peruvian operations,$11.7 million of which for the Ilo smelter modernization project, $4.9 millionfor the new PLS dam project and $14.8 million for various other replacementexpenditures.  In addition, we spent$27.1 million for replacement assets at our Mexican operations, $20.4 millionof which belongs to our Mexican open pit operations and $6.7 million in our IMMSAunit.  The $20.4 million of capital expendituresin our Mexican open pit operations includes $2.8 million in La 

37

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Caridad smelter project,$1.8 million in the Cananea concentrator and $2.0 million in the Cananaea SX-EWplant.  Also in the first quarter of2007, we purchased offices (approximately eight floors) in a building in MexicoCity for $26.5 million. The first quarter of 2007 includes the purchase of $100million of investment in marketable securities. In the first quarter of 2006,cash used for investing activities was $144.9 million; this amount includescapital spending of $143.1 million, of which $63.3 million was used in the Ilosmelter modernization project, $21.2 million from other replacementexpenditures in Peru and $58.6 million from replacement expenditure in Mexico.

Netcash used in financing activities in the first quarter of 2007 was $502.3million, compared with $407.2 million in the first quarter of 2006.  The first quarter of 2007 includes a dividenddistribution of $500.5 million, compared with a distribution of $404.9 millionin the first quarter of 2006.

LIQUIDITY AND CAPITAL RESOURCES

On March 2, 2007, theCompany paid a quarterly dividend of $1.70 per share, totaling $500.6million.  On April 26, 2007 the Board ofDirectors approved a quarterly dividend of $1.50 per share, totaling $441.7million, to be paid on June 1, 2007 to shareholders of record as of May 16,2007.

We expect that we willmeet our cash requirements for 2007 and beyond from internally generated funds,cash on hand and from additional external financing if required.

At March 31, 2007 theCompany’s debt as a percentage of total capitalization (the total of debt,minority interest and stockholders equity) was 29.2% as compared with 29.3% atDecember 31, 2006.  At March 31, 2007,the Company’s cash and cash equivalent and marketable securities amounted to$1,268.9 million compared to $1,302.8 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  March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                                                      | ** ** | **$  million**                                   | ** ** | **¢ per  pound** | ** ** | **$  million** | ** ** | **¢ per  pound** | ** ** |
| Cost of sales  (including depreciation, amortization and depletion) — GAAP |       | $                                                | 540.7      |   | 146.0 |   | $ | 460.0 |   | 131.6 |   |
| Add:                                                                            |       |                                             |       |   |   |   |   |   |   |
| Selling, general  and administrative expenses                                   |       | 23.8                                             |       | 6.4 |   | 24.0 |   | 6.9 |   |
| Treatment and  refining charges                                                 |       | 19.0                                             |       | 5.1 |   | 12.2 |   | 3.5 |   |
| Less:                                                                           |       |                                             |       |   |   |   |   |   |   |
| Byproducts  revenue (1)                                                         |       | (438.5                                           | )          | (118.4 | ) | (333.4 | ) | (95.4 | ) |
| Depreciation,  amortization and depletion                                       |       | (74.1                                            | )          | (20.0 | ) | (53.1 | ) | (15.2 | ) |
| Workers’ participation                                                     |       | (71.1                                            | )          | (19.2 | ) | (61.6 | ) | (17.6 | ) |
| Royalty charge  and other                                                       |       | (15.6                                            | )          | (4.1 | ) | (7.8 | ) | (2.3 | ) |
| Inventory change                                                                |       | 33.0                                             |       | 8.9 |   | 34.2 |   | 9.8 |   |
| **Operating  cash cost**                                                        | ** ** | **17.2**                                         | ** ** | **4.7** | ** ** | **74.5** | ** ** | **21.3** | ** ** |
|                                                                            |       |                                             |       |   |   |   |   |   |   |
| Add byproduct  revenue                                                          |       | 438.5                                            |       | 118.4 |   | 333.4 |   | 95.4 |   |
|                                                                            |       |                                             |       |   |   |   |   |   |   |
| **Operating  cash cost, without byproduct revenue**                             | ** ** | **$**                                            | **455.7**  | ** ** | **123.1** | ** ** | **$** | **407.9** | ** ** | **116.7** | ** ** |
|                                                                            |       |                                             |       |   |   |   |   |   |   |
| Total pounds of copper  produced and purchased (in millions)                    |       |                                             |       | 370.3 |   |   |   | 349.6 |   |

----

(1)             Includesnet byproduct sales revenue and premiums on sales of refined products.

 

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Impact of New AccountingStandards

Please see note N to ourcondensed consolidated financial statements.

Quantitative andQualitative Disclosure about Market Risk

A portion of our outstanding debt bears interest at variable rates andaccordingly is sensitive to changes in interest rates.  Interest rate changes would also result ingains or losses in the market value of our fixed rate debt portfolio due todifferences in market interest rates and the rates at the inception of the debtagreements.  Based upon our indebtednessat December 31, 2006, a change in interest rates of one percent (or 100 basispoints) would impact net income and cash flows by $0.7 million annually.

We are also exposed to market risk associated with changes in foreigncurrency exchange rates as certain costs incurred are in currencies other thanour functional currency.  To manage thevolatility related to the risk, we may enter into forward exchange contracts,currency swaps or other currency hedging arrangements.  We have only had limited involvement withderivative instruments and do not use them for trading purposes.

We are subject to market risks arising from the volatility of copper andother metal prices. Assuming that expected metal production and sales areachieved, that tax rates are unchanged, and giving no effects to potentialhedging programs metal price sensitivity factors would indicate estimatedchange in net earnings resulting from metal price changes in 2007 as providedin the table below.
| ** **                                                         | ** ** | **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)                              |       | $          | 8.5        |           | $          | 17.8     |       | $          | 1.6        |   | $ | 10.3 |   |

The Company occasionally uses derivative instrumentsto manage our exposure to market risk from changes in commodity prices,interest rate and exchange rate risk exposures and to enhance return onassets.  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 zinc derivatives:

From time to time weenter into derivative instruments to protect a fixed copper, or zinc price fora portion of our metal sales. We did not hold any copper or zinc swaps in the2007 and 2006 first quarters.

During April 2007, theCompany entered into copper collar contracts to protect 8.4 million pounds ofcopper production for each of the months, June 2007 through December 2007 atweighted average minimum and maximum prices of $3.18 per pound and $4.04 perpound, respectively, for each of the months.

Gas swaps:

TheCompany established long swap contracts for 900 million MMBTUs with a fixedprice of $7.525 in the first quarter of 2007 and 900 million of MMBTUs with afixed price of $4.2668 per MMBTU in the first quarter of 2006.  In this respect, the Company recorded a lossof $0.9 million and a gain of $2.3 million, in the first quarter of 2007 and2006,

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respectively,which were charged/(credited) to the production cost.  At March 31, 2007, we do not hold any opengas swap contract.

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

Because more than 85% ofour sales collections in Mexico are in US dollars and many of our costs are inMexican pesos, during 2006 the Company entered into zero-cost derivativescontracts 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, the Company does not sell dollars,if the exchange rate settles above the barrier price established in thecontract the Company sells dollars at the strike price established in thecontract.

In the first quarter of2007 the exercise of these zero-cost derivative contracts resulted in a gain of$1.5 million, which was recorded as a gain on derivative instruments on the condensedconsolidated statement of earnings.

At March 31, 2007 we heldthe 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)** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| $52.0                                    |       | 3rd Quarter 2007                                       |       | 11.15                                                 |       | 10.675                                                         |       |
| $52.0                                    |       | 3rd Quarter 2007                                       |       | 11.52                                                 |       | 11.15                                                          |       |
| $52.0                                    |       | 3rd Quarter 2007                                       |       | 11.90                                                 |       | 11.54                                                          |       |
| $72.0                                    |       | 4th Quarter 2007                                       |       | 11.35                                                 |       | 10.65                                                          |       |
| $72.0                                    |       | 4th Quarter 2007                                       |       | 11.65                                                 |       | 11.35                                                          |       |
| $80.0                                    |       | 1st Quarter 2008                                       |       | 11.60                                                 |       | 11.28                                                          |       |
| $80.0                                    |       | 1st Quarter 2008                                       |       | 11.28                                                 |       | 10.70                                                          |       |

At March 31, 2007, the fair value of the above listedexchange rate derivative contracts is $0.1 million.  The notional amounts are comprised on thereintransactions that have the same strike and Barrier price.

Marketable Securities — Reverse barriernotes:

Commencing in 2006the Company began making short term investments (90 days to 1 year).  The investments initially contained interestrates above the prevailing market rates. At March 31, 2007 the Company holds$380 million in investments of these types, as follows (in millions):
| **Investment**                                                                                                                                                                                                      | ** ** | **Book  Value** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|
| 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%, a barrier range is established by a pool  of Mexican and Peruvian bond issues.   |       | $               | 200.0      |   |
| 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%, a barrier range is 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            |       |
|                                                                                                                                                                                                                |       | $               | 380.0      |   |

In the first quarter of 2007 theCompany earned $6.0 million on these investments, which were recorded ininterest income on the condensed consolidated statement of earnings.

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Certain of theseinvestments are indexed to SCC common stock while others are indexed to certainbond pools.  Both types of indexationclauses could cause the principal of the investment to be reduced if theestablished ranges are breached.  Sincethe notes are not principal protected the Company may lose part or all of theinitial investment.  These indexationclauses have been deemed to be bifurcated embedded derivatives and have beensubject to valuation using a binomial model. At March 31, 2007, valuing the embedded derivatives at fair valueresulted in a liability of $34.3 million. This liability has been included in other accounts payable and theincrement of the liability in the first quarter of 2007 of $22.7 million isrecorded as loss on derivative instruments on the condensed consolidatedstatement of earnings.

Dual currency notes:

Additionally, in the first quarter of 2007 the Companyinvested $120.0 million in dual currency notes which provided an above marketinterest return subject to a barrier range of the Mexican peso/US dollarexchange rates.  These investmentsmatured in the first quarter 2007 and the Company recorded interest income of$0.5 million.

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 or supplyfor the Company’s products.  Actualresults could differ materially depending upon factors including the risks anduncertainties relating to general U.S. and international economic and politicalconditions, the cyclical and volatile prices of copper, other commodities andsupplies, including fuel and electricity, availability of materials, insurancecoverage, equipment, required permits or approvals and financing, theoccurrence of unusual weather or operating conditions, lower than expected oregrades, water and geological problems, the failure of equipment or processes tooperate in accordance with specifications, failure to obtain financialassurance to meet closure and remediation obligations, labor relations,litigation and environmental risks as well as political and economic riskassociated with foreign operations. Results of operations are directly affectedby metal prices on commodity exchanges that can be volatile.

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Item 4. Controls andProcedures

EVALUATION OF DISCLOSURECONTROLS AND PROCEDURES

Asof March 31, 2007, the Company carried out an evaluation, under the supervisionand with the participation of the Company’s Disclosure Committee and theCompany’s management, including the Chief Executive Officer and the ChiefFinancial Officer, of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures (as such term is defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, asamended).  Based upon that evaluation,the Chief Executive Officer and the Chief Financial Officer concluded that theCompany’s disclosure controls and procedures are effective in timely alertingthem to material information relating to the Company (including itsconsolidated subsidiaries) required to be included in the Company’s periodicSEC filings.

CHANGES IN INTERNALCONTROLS OVER FINANCIAL REPORTING

There was no change inthe Company’s internal controls over financial reporting (as such term isdefined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of1934, as amended) that occurred during the quarter ended March 31, 2007 thathas materially affected, or is reasonably likely to materially affect, theCompany’s internal controls over financial reporting.

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REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of SouthernCopper Corporation:

We have reviewed theaccompanying consolidated condensed balance sheet of Southern CopperCorporation and its subsidiaries as of March 31, 2007, and the relatedconsolidated condensed statements of earnings for the three-month periods endedMarch 31, 2007 and March 31, 2006 and the consolidated condensed statement ofcash flows for the three month periods ended March 31, 2007 and March 31, 2006.These interim financial statements are the responsibility of the Company’smanagement.

We conducted our reviewin accordance with the standards of the Public Company Accounting OversightBoard (United States).  A review ofinterim financial information consists principally of applying analyticalprocedures and making inquiries of persons responsible for financial andaccounting matters.  It is substantiallyless in scope than an audit conducted in accordance with the standards of thePublic Company Accounting Oversight Board (United States), the objective ofwhich is the expression of an opinion regarding the financial statements takenas a whole.  Accordingly, we do notexpress such an opinion.

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

We previously audited inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheet as of December 31, 2006 and therelated consolidated statement of earnings, changes in stockholders ́ equity andof cash flows for the year then ended (not presented herein), and in our reportdated February 28, 2007 we expressed an unqualified opinion on thoseconsolidated financial statements.  Inour opinion, the information set forth in the accompanying consolidatedcondensed balance sheet as of December 31, 2006, is fairly stated in allmaterial respects in relation to the consolidated balance sheet from which ithas been derived.

PricewaterhouseCoopers

México, D.F.

May 9, 2007

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Part II — OTHERINFORMATION

Item 1. — Legal Proceedings

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

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

The annual meeting ofstockholders of the Company was held on Thursday, April 26, 2007, at whichshareholders of record at the close of business on March 23, 2007 (the “recorddate”) were entitled to vote at the annual meeting.

At the annual meeting,the holders of Common Stock were asked to elect 14 directors.

All of the fourteenpersons nominated as directors of the Corporation to represent the CommonStockholders were elected and each of the director nominees received thefollowing votes:
| ** **                       | ** ** | **For**     | ** ** | **Withheld** | ** ** |
|----------------------------------|------------|-------------|------------|--------------|------------|
| German Larrea  Mota-Velasco      |       | 254,735,913 |       | 17,232,092   |       |
| Emilio Carrillo  Gamboa          |       | 251,802,276 |       | 20,165,729   |       |
| Alfredo Casar Perez              |       | 271,555,224 |       | 412,781      |       |
| Jaime Fernando  Collazo Gonzalez |       | 254,804,028 |       | 17,163,977   |       |
| Xavier Garcia de  Quevedo Topete |       | 254,836,709 |       | 17,131,296   |       |
| J. Eduardo  Gonzalez Felix       |       | 254,431,367 |       | 17,536,638   |       |
| Oscar Gonzalez  Rocha            |       | 271,159,536 |       | 808,469      |       |
| Harold S. Handelsman             |       | 251,452,832 |       | 20,515,173   |       |
| Genaro Larrea  Mota-Velasco      |       | 252,980,059 |       | 18,987,946   |       |
| Armando Ortega  Gomez            |       | 251,910,529 |       | 20,057,476   |       |
| Luis Miguel  Palomino Bonilla    |       | 254,837,463 |       | 17,130,542   |       |
| Gilberto  Perezalonso Cifuentes  |       | 252,232,592 |       | 19,735,413   |       |
| Juan Rebolledo  Gout             |       | 271,588,942 |       | 379,063      |       |
| Carlos Ruiz Sacristan            |       | 271,616,661 |       | 351,344      |       |

The stockholders approved the amendment to the by-lawsto eliminate provisions that have been made extraneous or inconsistent with theCertificate of Incorporation as a result of the elimination of our Class ACommon Stock made on May 19, 2005 when all Class A Common Stock converted on ashare-by-share basis into newly-issued shares of Common Stock. The proposalreceived 271,687,230 votes, representing the affirmative vote of 92.27% of thevoting power of all shares of Common Stock entitled to vote on the proposal.

The stockholders approved and ratified the selectionof PricewaterhouseCoopers S.C. as independent accountants for calendar year2007. The proposal received the following votes:
| ** **   | ** ** | **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|--------------|------------|-------------|------------|-------------|------------|-------------|------------|
|         |       |        |       |        |       |        |       |
| Common Stock |       | 271,451,710 |       | 389,254     |       | 127,041     |       |
|         |       |        |       |        |       |        |       |

Other Business:

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

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Item 6.  Exhibits
| Exhibit No. | ** ** | **Description of Exhibit**                                                                                                                                                      |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2         |       | By-laws as amended on April 26, 2007                                                                                                                                            |
| 31.1        |       | Certification Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                        |
| 31.2        |       | Certification Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                        |
| 32.1        |       | Certification Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. This document is being  furnished in accordance with SEC Release No. 33-8238. |
| 32.2        |       | Certification Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. This document is being  furnished in accordance with SEC Release No. 33-8238. |

 

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Part II — OTHERINFORMATION

SIGNATURES

Pursuantto the requirement of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                   |   | SOUTHERN COPPER  CORPORATION           |
|-------------------|--------|----------------------------------------|
|              |   | (Registrant)                           |
|              |   |                                   |
|              |   |                                   |
|              |   |                                   |
|              |   |                                   |
|              |   | /s/ Oscar Gonzalez Rocha               |
|              |   | Oscar Gonzalez  Rocha                  |
| Date: May 9, 2007 |   | President and  Chief Executive Officer |
|              |   |                                   |
|              |   |                                   |
|              |   |                                   |
|              |   |                                   |
|              |   | /s/ J. Eduardo Gonzalez Felix          |
|              |   | J. Eduardo  Gonzalez Felix             |
|              |   | Vice President,  Finance and Chief     |
| Date: May 9, 2007 |   | Financial  Officer                     |

 

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