**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**2005**

**ThirdQuarter**

**FORM 10-Q**

 

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

**THESECURITIES EXCHANGE ACT OF 1934**

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

 

**SOUTHERN COPPER CORPORATION**

(Exactname of registrant as specified in its charter)

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

 

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

Yes  ý    No  o

 

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

Yes  ý    No  o

 

As of October 31, 2005 there were outstanding 147,228,025 shares ofSouthern Copper Corporation common stock, par value $0.01 per share.

 

 

SouthernCopper Corporation

 

INDEXTO FORM 10-Q

 
| Part  I.  Financial Information: |   |                                                                                                                                                       |
|---------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                  |   |                                                                                                                                                       |   |   |
| Item 1.                               |   | Condensed  Consolidated Combined Financial Statements (unaudited)                                                                                          |   |   |
|                                  |   |                                                                                                                                                       |   |   |
|                                  |   | Condensed Consolidated Combined Statement of Earnings  three months and nine months ended September 30, 2005 and 2004                                      |   |   |
|                                  |   |                                                                                                                                                       |   |   |
|                                  |   | Condensed Consolidated Combined Balance Sheet  September 30, 2005 and December 31, 2004                                                                    |   |   |
|                                  |   |                                                                                                                                                       |   |   |
|                                  |   | Condensed Consolidated Combined Statement of Cash  Flows three months and nine months ended September 30, 2005 and 2004                                    |   |   |
|                                  |   |                                                                                                                                                       |   |   |
|                                  |   | Notes to Condensed Consolidated Combined Financial  Statements                                                                                             |   |   |
|                                  |   |                                                                                                                                                       |   |   |
| Items  2. and 3.                      |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations and  Quantitative and Qualitative Disclosure about Market Risk |   |   |
|                                  |   |                                                                                                                                                       |   |   |
| Item 4.                               |   | Controls and  Procedures                                                                                                                                   |   |   |
|                                  |   |                                                                                                                                                       |   |   |
| Independent  Accountants’ Report |   |                                                                                                                                                       |
|                                  |   |                                                                                                                                                       |   |   |
| Part  II.  Other Information:    |   |                                                                                                                                                       |
|                                  |   |                                                                                                                                                       |   |   |
| Item  1.                              |   | Legal  Procedures                                                                                                                                          |   |   |
|                                  |   |                                                                                                                                                       |   |   |
| Item 4.                               |   | Submission of  Matter to a Vote of Security Holders                                                                                                        |   |   |
|                                  |   |                                                                                                                                                       |   |   |
| Item  6.                              |   | Exhibits                                                                                                                                                   |   |   |
|                                  |   |                                                                                                                                                       |   |   |
| Signatures                            |   |                                                                                                                                                       |
|                                  |   |                                                                                                                                                       |   |   |
| Exhibit  3.1                          |   | Amended  and Restated Articles of Incorporation dated September 20, 2005                                                                                   |   |   |
|                                  |   |                                                                                                                                                       |   |   |
| Exhibit 15                            |   | -  Independent Accountants Awareness Letter                                                                                                                |   |   |
|                                  |   |                                                                                                                                                       |   |   |
| Exhibit  31.1                         |   | -  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                 |   |   |
|                                  |   |                                                                                                                                                       |   |   |
| Exhibit  31.2                         |   | -  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                 |   |   |
|                                  |   |                                                                                                                                                       |   |   |
| Exhibit  32.1                         |   | -  Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                 |   |   |
|                                  |   |                                                                                                                                                       |   |   |
| Exhibit  32.2                         |   | -  Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                 |   |   |

 

 

2

----

 

Part I — FINANCIALINFORMATION

 

Item 1. Condensed Consolidated Combined Financial Statements

 

SouthernCopper Corporation

 

 

CONDENSEDCONSOLIDATED COMBINED STATEMENT OF EARNINGS

(Unaudited)

 
| ** **                                                                                    | ** ** | **3 Months Ended   September 30,**                       | ** ** | **9 Months Ended   September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                    | ** ** | **2005**                                                 | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                    | ** ** | **(dollars in thousands, except for per share amounts)** | ** ** |
| Net sales:                                                                                    |       |                                                     |       |                               |       |   |   |   |   |
| Non affiliates                                                                                |       | $                                                        | 1,027,701  |                               | $          | 713,397 |   | $ | 2,916,652 |   | $ | 1,996,589 |   |
| Affiliates                                                                                    |       | 2,492                                                    |       | 26,136                             |       | 17,628 |   | 67,692 |   |
| Total net sales                                                                               |       | 1,030,193                                                |       | 739,533                            |       | 2,934,280 |   | 2,064,281 |   |
|                                                                                          |       |                                                     |       |                               |       |   |   |   |   |
| Operating costs and  expenses:                                                                |       |                                                     |       |                               |       |   |   |   |   |
| Cost of sales (exclusive of depreciation, amortization and depletion  shown separately below) |       | 382,994                                                  |       | 348,403                            |       | 1,185,669 |   | 922,427 |   |
| Selling, general and administrative                                                           |       | 20,199                                                   |       | 17,259                             |       | 59,202 |   | 51,257 |   |
| Depreciation, amortization and depletion                                                      |       | 74,818                                                   |       | 48,065                             |       | 206,329 |   | 143,365 |   |
| Exploration                                                                                   |       | 6,361                                                    |       | 3,311                              |       | 17,205 |   | 10,547 |   |
| Total operating costs and expenses                                                            |       | 484,372                                                  |       | 417,038                            |       | 1,468,405 |   | 1,127,596 |   |
|                                                                                          |       |                                                     |       |                               |       |   |   |   |   |
| Operating income                                                                              |       | 545,821                                                  |       | 322,495                            |       | 1,465,875 |   | 936,685 |   |
|                                                                                          |       |                                                     |       |                               |       |   |   |   |   |
| Interest expense                                                                              |       | (26,454                                                  | )          | (30,243                            | )          | (71,266 | ) | (93,882 | ) |
| Capitalized interest                                                                          |       | 6,056                                                    |       | 3,069                              |       | 12,316 |   | 7,614 |   |
| Gain (loss) on derivative  instruments                                                        |       | 3,717                                                    |       | —                             |       | (8,404 | ) | — |   |
| Loss on debt prepayments                                                                      |       | (12,530                                                  | )          | —                             |       | (22,629 | ) | — |   |
| Gain on disposal of  property                                                                 |       | —                                                   |       | 20,682                             |       | 2,084 |   | 42,998 |   |
| Other income (expense)                                                                        |       | 1,898                                                    |       | (3,751                             | )          | (1,774 | ) | (6,620 | ) |
| Interest income                                                                               |       | 5,051                                                    |       | 1,655                              |       | 13,541 |   | 5,280 |   |
|                                                                                          |       |                                                     |       |                               |       |   |   |   |   |
| Earnings before taxes on income and minority interest                                         |       | 523,559                                                  |       | 313,907                            |       | 1,389,743 |   | 892,075 |   |
|                                                                                          |       |                                                     |       |                               |       |   |   |   |   |
| Taxes on income                                                                               |       | 152,573                                                  |       | 93,260                             |       | 405,443 |   | 265,183 |   |
| Minority interest                                                                             |       | 1,576                                                    |       | 3,868                              |       | 4,598 |   | 11,597 |   |
|                                                                                          |       |                                                     |       |                               |       |   |   |   |   |
| Net earnings                                                                                  |       | $                                                        | 369,410    |                               | $          | 216,779 |   | $ | 979,702 |   | $ | 615,295 |   |
|                                                                                          |       |                                                     |       |                               |       |   |   |   |   |
| Per common share amounts:                                                                     |       |                                                     |       |                               |       |   |   |   |   |
| Net earnings—basic and diluted                                                           |       | $                                                        | 2.51       |                               | $          | 1.47 |   | $ | 6.65 |   | $ | 4.18 |   |
| Dividends paid                                                                                |       | $                                                        | 1.04       |                               | $          | 0.76 |   | $ | 4.67 |   | $ | 1.57 |   |
| Weighted average common shares outstanding (Basic)                                            |       | 147,228                                                  |       | 147,225                            |       | 147,227 |   | 147,224 |   |
| Weighted average common shares outstanding (Diluted)                                          |       | 147,228                                                  |       | 147,225                            |       | 147,227 |   | 147,224 |   |
|                                                                                               |            |                                                          |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

 

3

----

 

SouthernCopper Corporation

 

CONDENSEDCONSOLIDATED COMBINED BALANCE SHEET

(Unaudited)

 
| ** **                                                         | ** ** | **September 30,  2005**    | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------|------------|------------------------|------------|
| ** **                                                         | ** ** | **(dollars in thousands)** | ** ** |
| ASSETS                                                             |       |                       |       |                   |       |
| Current assets:                                                    |       |                       |       |                   |       |
| Cash and cash equivalents                                          |       | $                          | 766,870    |                   | $          | 710,707 |   |
| Marketable securities                                              |       | —                     |       | 45,267                 |       |
| Accounts receivable trade:                                         |       |                       |       |                   |       |
| Non affiliates                                                     |       | 325,259                    |       | 425,790                |       |
| Affiliates                                                         |       | 4,532                      |       | 15,353                 |       |
| Accounts receivable—other                                     |       | 63,982                     |       | 33,081                 |       |
| Inventories                                                        |       | 384,155                    |       | 352,377                |       |
| Prepaid and other current assets                                   |       | 27,999                     |       | 52,966                 |       |
| Total current assets                                               |       | 1,572,797                  |       | 1,635,541              |       |
|                                                               |       |                       |       |                   |       |
| Net property                                                       |       | 3,186,763                  |       | 3,068,486              |       |
| Capitalized mine  stripping, net                                   |       | 300,819                    |       | 318,116                |       |
| Leachable material, net                                            |       | 180,001                    |       | 134,621                |       |
| Intangible assets, net                                             |       | 121,351                    |       | 123,496                |       |
| Other assets, net                                                  |       | 35,175                     |       | 38,933                 |       |
| Total Assets                                                       |       | $                          | 5,396,906  |                   | $          | 5,319,193 |   |
|                                                               |       |                       |       |                   |       |
| LIABILITIES                                                        |       |                       |       |                   |       |
| Current liabilities:                                               |       |                       |       |                   |       |
| Current portion of long-term debt                                  |       | $                          | 10,000     |                   | $          | 152,314 |   |
| Accounts payable                                                   |       | 154,920                    |       | 142,362                |       |
| Accrued income taxes                                               |       | 206,027                    |       | 293,295                |       |
| Due to affiliated companies                                        |       | 48,705                     |       | 66,524                 |       |
| Deferred income taxes                                              |       | 7,192                      |       | 42,500                 |       |
| Accrued workers’ participation                                |       | 131,960                    |       | 84,245                 |       |
| Other accrued liabilities                                          |       | 29,527                     |       | 180,678                |       |
| Total current liabilities                                          |       | 588,331                    |       | 961,918                |       |
|                                                               |       |                       |       |                   |       |
| Long-term debt                                                     |       | 1,215,249                  |       | 1,177,974              |       |
| Deferred income taxes                                              |       | 267,237                    |       | 243,600                |       |
| Other liabilities                                                  |       | 120,611                    |       | 105,179                |       |
| Asset retirement  obligation                                       |       | 5,924                      |       | 5,643                  |       |
| Total non-current liabilities                                      |       | 1,609,021                  |       | 1,532,396              |       |
|                                                               |       |                       |       |                   |       |
| Commitments and  Contingencies (Note I)                            |       |                       |       |                   |       |
|                                                               |       |                       |       |                   |       |
| MINORITY INTEREST                                                  |       | 11,634                     |       | 11,284                 |       |
|                                                               |       |                       |       |                   |       |
| STOCKHOLDERS’ EQUITY                                          |       |                       |       |                   |       |
| Common stock                                                       |       | 1,474                      |       | 1,474                  |       |
| Additional paid-in capital                                         |       | 726,382                    |       | 728,265                |       |
| Accumulated comprehensive  income                                  |       | 2,464,530                  |       | 2,088,445              |       |
| Treasury stock                                                     |       | (4,466                     | )          | (4,589                 | )          |
| Total Stockholders’ Equity                                    |       | 3,187,920                  |       | 2,813,595              |       |
|                                                               |       |                       |       |                   |       |
| Total Liabilities, Minority Interest and Stockholders’ Equity |       | $                          | 5,396,906  |                   | $          | 5,319,193 |   |
|                                                                    |            |                            |            |                        |            |  |  |  |  |  |

 

The accompanying notes are an integral partof these condensed consolidated combined financial statements.

 

 

4

----

 

SouthernCopper Corporation

 

 

CONDENSEDCONSOLIDATED COMBINED STATEMENT OF CASH FLOWS

(Unaudited)

 
| ** **                                                                             | ** ** | **3 Months Ended  September 30,** | ** ** | **9 Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                                                             | ** ** | **2005**                          | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                             | ** ** | **(dollars in thousands)**        | ** ** |
| OPERATING ACTIVITIES                                                                   |       |                              |       |                              |       |   |   |   |   |
|                                                                                   |       |                              |       |                              |       |   |   |   |   |
| Net earnings                                                                           |       | $                                 | 369,410    |                              | $          | 216,779 |   | $ | 979,702 |   | $ | 615,295 |   |
| Adjustments to reconcile net earnings to net cash provided from  operating activities: |       |                              |       |                              |       |   |   |   |   |
| Depreciation, amortization and depletion                                               |       | 74,818                            |       | 48,065                            |       | 206,329 |   | 143,365 |   |
| Capitalized mine stripping and leachable material                                      |       | (25,353                           | )          | (21,831                           | )          | (77,898 | ) | (65,675 | ) |
| Remeasurement loss (income)                                                            |       | (1,089                            | )          | 8,424                             |       | 10,946 |   | 3,721 |   |
| Provision for deferred income taxes                                                    |       | (51,653                           | )          | 26,766                            |       | (18,217 | ) | 46,685 |   |
| Gain on sale of property                                                               |       | —                            |       | (20,682                           | )          | (2,084 | ) | (42,998 | ) |
| Loss (gain) on derivative instruments                                                  |       | (3,717                            | )          | —                            |       | 8,404 |   | — |   |
| Loss on debt prepayments                                                               |       | 12,530                            |       | —                            |       | 22,629 |   | — |   |
| Minority interest                                                                      |       | 1,576                             |       | 3,868                             |       | 4,598 |   | 11,597 |   |
|                                                                                   |       |                              |       |                              |       |   |   |   |   |
| Cash provided from (used for) operating assets and liabilities:                        |       |                              |       |                              |       |   |   |   |   |
| Accounts receivable                                                                    |       | (85,814                           | )          | (34,675                           | )          | 46,061 |   | (103,482 | ) |
| Inventories                                                                            |       | (15,620                           | )          | (22,930                           | )          | (31,778 | ) | (77,028 | ) |
| Accounts payable and accrued liabilities                                               |       | 261,259                           |       | 89,920                            |       | (42,108 | ) | 171,850 |   |
| Other operating assets and liabilities                                                 |       | (77,994                           | )          | (18,839                           | )          | (113,969 | ) | 8,809 |   |
| Net cash provided from  operating activities                                           |       | 458,353                           |       | 274,865                           |       | 992,615 |   | 712,139 |   |
|                                                                                   |       |                              |       |                              |       |   |   |   |   |
| INVESTING ACTIVITIES                                                                   |       |                              |       |                              |       |   |   |   |   |
| Capital expenditures                                                                   |       | (120,694                          | )          | (59,906                           | )          | (263,311 | ) | (149,138 | ) |
| Purchase of marketable securities                                                      |       | —                            |       | —                            |       | (74,339 | ) | — |   |
| Sales of marketable securities                                                         |       | —                            |       | —                            |       | 119,606 |   | — |   |
| Other                                                                                  |       | 4,699                             |       | 923                               |       | (11,678 | ) | (6,326 | ) |
| Sales of property                                                                      |       | 546                               |       | 20,682                            |       | 1,177 |   | 42,998 |   |
| Net cash used for  investing activities                                                |       | (115,449                          | )          | (38,301                           | )          | (228,545 | ) | (112,466 | ) |
|                                                                                   |       |                              |       |                              |       |   |   |   |   |
| FINANCING ACTIVITIES                                                                   |       |                              |       |                              |       |   |   |   |   |
| Debt repaid                                                                            |       | (680,080                          | )          | (150,461                          | )          | (1,098,685 | ) | (344,251 | ) |
| Debt incurred                                                                          |       | 793,646                           |       | —                            |       | 993,646 |   | — |   |
| Escrow on long-term loans                                                              |       | —                            |       | —                            |       | (311 | ) | (5,241 | ) |
| Dividends paid to common stockholders                                                  |       | (153,556                          | )          | (60,413                           | )          | (603,599 | ) | (125,386 | ) |
| Distributions to minority interest                                                     |       | (650                              | )          | (471                              | )          | (4,159 | ) | (978 | ) |
| Other                                                                                  |       | —                            |       | (6                                | )          | 123 |   | (33 | ) |
| Net cash used for  financing activities                                                |       | (40,640                           | )          | (211,351                          | )          | (712,985 | ) | (475,889 | ) |
|                                                                                   |       |                              |       |                              |       |   |   |   |   |
| Effect of exchange rate changes on cash and cash equivalents                           |       | (6,560                            | )          | (15,811                           | )          | 5,078 |   | (10,972 | ) |
|                                                                                   |       |                              |       |                              |       |   |   |   |   |
| Increase in cash and cash  equivalents                                                 |       | 295,704                           |       | 9,402                             |       | 56,163 |   | 112,812 |   |
| Cash and cash equivalents,  at beginning of period                                     |       | 471,166                           |       | 455,020                           |       | 710,707 |   | 351,610 |   |
|                                                                                   |       |                              |       |                              |       |   |   |   |   |
| Cash and cash equivalents,  at end of period                                           |       | $                                 | 766,870    |                              | $          | 464,422 |   | $ | 766,870 |   | $ | 464,422 |   |

 

 

5

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| ** **                                                                          | ** ** | **3 Months Ended  September 30,** | ** ** | **9 Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                                                          | ** ** | **2005**                          | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                          | ** ** | **(dollars in thousands)**        | ** ** |
| Supplemental disclosure of cash flow information: Cash paid during  the period for: |       |                              |       |                              |       |   |   |   |   |
| Interest                                                                            |       | $                                 | 20,469     |                              | $          | 33,403 |   | $ | 66,274 |   | $ | 88,363 |   |
| Income taxes                                                                        |       | $                                 | 122,624    |                              | $          | 28,381 |   | $ | 569,309 |   | $ | 115,491 |   |
|                                                                                     |            |                                   |            |                                   |            |  |  |  |  |  |  |  |  |  |

 

The accompanying notes arean integral part of these condensed consolidated combined financial statements.

 

 

6

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SouthernCopper Corporation

 

NOTESTO CONDENSED CONSOLIDATED COMBINED FINANCIAL STATEMENTS

(Unaudited)

 

A.           In the opinion of SouthernCopper Corporation, formerly named Southern Peru Copper Corporation, (the “Company”,“Southern Copper” or “SCC”), the accompanying unaudited condensed consolidatedcombined financial statements contain all adjustments (consisting only ofnormal recurring adjustments) necessary to present fairly the Company’sfinancial position as of September 30, 2005 and the results of operations andcash flows for the three months and nine months ended September 30, 2005 and2004.  The condensed consolidatedcombined financial statements for the three months and nine months period endedSeptember 30, 2005 and 2004 have been subjected to a review byPricewaterhouseCoopers, the Company’s independent public auditors whose reportdated October 14, 2005, is presented on page 37.  The results of operations for the threemonths and nine months ended September 30, 2005 and 2004 are not necessarily indicativeof the results to be expected for the full year.  The accompanying condensed consolidatedcombined financial statements should be read in conjunction with the combinedfinancial statements at December 31, 2004 included in the Company’s RegistrationStatement on Form S-3 dated June 6, 2005, as amended and the combined financialstatements included in the Company’s Registration Statement on Form S-4, datedOctober 28, 2005.

 

On April 1, 2005, theCompany acquired Minera México S.A. de C.V. (“MM”) from Americas MiningCorporation (“AMC”), a subsidiary of Grupo México S.A. de C.V., the controllingstockholder of the Company.  The Companyexchanged 67,207,640 newly-issued shares of its common stock for theoutstanding shares of MM’s direct majority stockholder, and MM became a99%-owned subsidiary of the Company.  Asa part of this transaction, the Company paid a special transaction dividend of$100 million to all of its stockholders. Upon completion of the merger, Grupo México increased its indirect beneficialownership of the Company’s capital stock from approximately 54.2% toapproximately 75.1%. The Company now owns 99.95% of Minera Mexico.  The Company is now in the process ofintegrating the two companies that had previously been affiliated but operatedindependently.

 

The April 2005, transactionis accounted for in a manner similar to a pooling of interests, since itinvolves the combination of entities under common control.  Accordingly, all of MM’s historical assetsand liabilities are combined with SCC on a historical cost basis for allperiods prior to April 1, 2005, since they were under common control during allof these periods.  The difference in thevalue of the new shares is recognized in equity. The results of operations,cash flows and balance sheet for periods prior to April 1, 2005, have also beenprepared on a combined basis and intercompany balances and transactions havebeen eliminated.

 

B.             Common Stock:

 

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

 

C.             Inventorieswere as follows:

(in millions)

 
| ** **                                  | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Metals at lower of average  cost or market: |       |                    |       |                   |       |
| Finished goods                              |       | $                       | 33.6       |                   | $          | 22.1 |   |
| Work-in-process                             |       | 208.7                   |       | 187.2                  |       |
| Supplies at average cost                    |       | 141.9                   |       | 143.1                  |       |
| Total inventories                           |       | $                       | 384.2      |                   | $          | 352.4 |   |

 

 

7

----

 

D.    Income Taxes:

 

The Company’s income taxprovision for the nine months ended September 30, 2005 and 2004 was $405.4million and $265.2 million, respectively. These provisions include income taxes for Peru, Mexico and the UnitedStates.  The effective tax rates for the2005 and 2004 periods are 29.2% and 29.7%, respectively.  While these tax rates are comparable,included in the 2005 tax provision is a refund of $43.4 million received by ourMexican subsidiary for asset-based taxes (minimum income tax) paid in prioryears.  Without the benefit of thiscredit the Company’s effective tax rate for the 2005 period would increase to32.3%.  The disparity in the tax rates isthe result of an increase in expenses that are not deductible in computingincome tax for our Mexican operations, substantially all of which is related toa one time non-deductible expense of $31.1 million for workers’ participationresulting from a change in law regarding the basis of calculation.

 

E.              ProvisionallyPriced Sales:

 

At September 30, 2005, theCompany has recorded provisionally priced sales of 95.9 million pounds ofcopper, at an average forward price of $1.76 per pound. Also the Company hasrecorded provisionally priced sales of 8.7 million pounds of molybdenum at thequarter-end market price of $34.00 per pound. These sales are subject to finalpricing based on the average monthly LME or COMEX copper prices and DealerOxide molybdenum prices in the future month of settlement, which will largelyoccur in the fourth quarter of 2005.

 

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

 

| **Copper  (million lbs.)** | ** ** | **Priced at** | ** ** | **Month of Settlement** | ** ** |
|----------------------------|------------|---------------|------------|-------------------------|------------|
| 62.1                       |       | 1.77503       |       | October  2005           |       |
| 19.1                       |       | 1.75012       |       | November  2005          |       |
| 8.1                        |       | 1.71753       |       | December  2005          |       |
| 2.2                        |       | 1.69031       |       | January  2006           |       |
| 4.4                        |       | 1.66355       |       | February  2006          |       |
| 95.9                       |       | 1.75822       |       |                    |       |

 

| **Molybdenum  (million lbs.)** | ** ** | **Priced at** | ** ** | **Month of Settlement** | ** ** |
|--------------------------------|------------|---------------|------------|-------------------------|------------|
| 5.0                            |       | 34.00000      |       | October  2005           |       |
| 2.2                            |       | 34.00000      |       | November  2005          |       |
| 1.4                            |       | 34.00000      |       | December  2005          |       |
| 0.1                            |       | 34.00000      |       | January  2006           |       |
| 8.7                            |       | 34.00000      |       |                    |       |

 

Provisional salesadjustment, including invoices pending of final analysis, booked in accountsreceivable and net sales, were as follows at September 30, 2005:

 

| ** ** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------|------------|----------|------------|----------|------------|
| Copper     |       | $        | 3.9        |     | $          | 25.0 |   |
| Molybdenum |       | 22.7     |       | 13.7     |       |
| Total      |       | $        | 26.6       |     | $          | 38.7 |   |
|            |            |          |            |          |            |  |  |  |  |

 

At October 31, 2005, the market price ofcopper and molybdenum increased(decreased) by $0.14 and $(3.20) per pound,respectively.  Therefore the Company’saccounts receivable as of September 30, 2005, would have decreased by $14.7million, if the Company would have used these market prices in its forwardsales price adjustment.

 

 

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F.              Derivative Instruments:

 

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

 

Copper swaps:

In the first half of 2005, the Companyentered into copper swap contracts to protect a portion of its 2005 copperproduction for future sales at a fixed copper price.  The Company recorded losses of $9.4 millionrelated to these copper swap contracts in the nine month period of 2005.  These losses are recorded as non-operatingitems on the condensed consolidated combined statement of earnings.

 

AtSeptember 30, 2005, the Company did not hold any open copper swaps.

 

Inthe first two weeks of October 2005, the Company entered into copper swapcontracts to protect 63.1 million pounds of copper in October 2005 at prices of$1.90 per pound and $1.879 per pound. These contracts are as follows:

 

| **Pounds  (in millions)** | ** ** | **Period**           | ** ** | **Copper swap  Price (1)** | ** ** |
|---------------------------|------------|----------------------|------------|----------------------------|------------|
| 30.0                      |       | October  7-27, 2005  |       | $1.879  (COMEX)            |       |
| 33.1                      |       | October  11-27, 2005 |       | $1.900  (COMEX)            |       |

 

(1)          SCC willreceive (pay) if the actual average COMEX copper price for period is under(over) swap price on quantity hedged.  Asa result of these transactions, SCC lost $1.7 million which will be recorded inthe fourth quarter of 2005.

 

Interest rate swaps:

In October 2004, MM and Citibank-Banamex entered into an interest rate swap agreement for a notional principal amount of $600 million.  Under this agreement, MM agreed to pay Banamex a fixed rate equivalent to 3.49% and, in exchange, Banamex agreed to pay a variable rate equivalent to 3-month LIBOR.  Payments under the interest rate swap are scheduled to match the interest payment dates of the $600 million Citibank credit facility.  Additionally, in April 2005, the Company entered into a contract to hedge interest rate exposure on $120 million of its $200 million Citibank credit facility.  Under this contract the Company pays fixed rate interest payments at 4.46% and receives a variable rate equivalent to three month LIBOR.  Payments under the interest rate swap are scheduled to match the interest payment dates of the $200 million credit facility.  Both of these loan facilities were repaid and the related swaps were terminated in July 2005.  As a result of this transaction the Company recorded gains of $7.7 million and $5.0 million in the third quarter and first nine months of 2005, respectively.

 

On July 19, 2005 the Company entered into a one day interest rate swap contract on $700 million of its $800 million notes issued.  Under this contract, the Company makes fixed rate interest payments at 4.46% and receives a variable rate equivalent to 5.375% of treasury bonds maturing on February 15, 2031.  As a result of this transaction, the Company recorded a loss of $4.0 million in the condensed consolidated combined statement of earnings for the cost of terminating this transaction.

 

The Company recorded net gains of $3.7 million and $1.0 million related to the interest swap transactions in the third quarter of 2005 and the first nine months of 2005, respectively.  These gains are recorded as non-operating income on the condensed consolidated combined statement of earnings.  At September 30, 2005, the Company did not hold any open interest rate swap contracts.

 

9

 

G.             Debt andCredit Facilities:

 

OnJuly 27, 2005 the Company issued $200 million 6.375% Notes due 2015 and $600million 7.5% Notes due 2035.  The notesare senior unsecured obligations of the Company.  The Company paid $8.8 million of costs relatedto the issuance of these notes.  The netproceeds from the issuance and sale of the notes were used to repay outstandingindebtedness of the Company’s Peruvian and Mexican Operations, under its $200million and $600 million ($480 million outstanding) credit facilities,respectively, and the balance will be used for general corporate purposes,including repayment of additional debt. The Company filed a Registration Statement on Form S-4 with respect tothese Notes on October 28, 2005.  Theindentures relating to the notes contain certain covenants, includinglimitations on liens, limitations on sale and leaseback transactions, rights ofthe holders of the notes upon the occurrence of a change of control triggeringevent, limitations on subsidiary indebtness and limitations on consolidations,mergers, sales or conveyances.  All ofthese limitations and restrictions are subject to a number of significantexceptions, and some of these covenants will cease to be applicable before thenotes mature if the notes attain an investment grade rating.

 

In January 2005, the Company signed a$200 million credit facility with a group of banks led by Citibank, N.A.  In the first quarter of 2005, proceeds ofthis credit facility were used to prepay $170 million of the bonds issued underthe Company’s Peruvian bond program.  InApril 2005 an additional drawdown of $30 million was used to prepay theremaining outstanding bonds.  The Companycapitalized $2.8 million of costs associated with this facility.  The Company paid a prepayment penalty of 1%,or $2.0 million, to the Peruvian bondholders. Additionally, the Company wrote off $2.3 million of previouslycapitalized bond issuance cost.  Bothamounts are included in the condensed consolidated statement of earnings on theline item “Loss on debt prepayments”. On July 28, 2005 this credit facility wasrepaid and the Company wrote off $2.5 million of deferred financing cost.

 

On March 30, 2005, the Company prepaid$120 million of the principal amount outstanding under MM’s $600 millionCitibank credit facility. On July 28, 2005 the remaining balance, $480 million,of this credit facility was repaid. Additionally, the Company wrote off $10.2 million of deferred financialcost, $10.0 million of which was charged in the third quarter of 2005.

 

On May 5, 2005, the Company repurchased$94.6 million of MM’s outstanding senior unsecured bonds (referred to as Yankeebonds).  In connection with this purchasethe Company paid a premium of $5.7 million, which is included in the condensedconsolidated combined statement of earnings on the line “Loss on debtprepayments”.

 

H.    Related Party Transaction:

 

On January 15, 2004, the Company entered into atolling agreement with ASARCO, LLC (“Asarco”), a former shareholder of theCompany and a subsidiary of Grupo Mexico. Under terms of the agreement, in the first quarter of 2004 the Company,through its wholly owned US subsidiary, Southern Peru Limited (“SPL”),commenced delivering to Asarco, at its Amarillo, Texas refinery, coppercathodes for conversion into copper rods, which the Company sells to customersin the United States.  The Company hasagreed to deliver 60,000 tons of copper to the Asarco refinery in 2005 underthe agreement. Deliveries to the Asarco refinery, which are made on a monthlybasis, amounted to approximately 29,500 tons through July 7, 2005.  On July 8, 2005 Asarco declared ForceMajeure, notifying SPL that because of a strike at their facilities, they wouldbe unable to accept shipments from the Company. Accordingly, deliveries to the refinery were suspended and the Companyhas redirected the copper otherwise intended for delivery to the refinery toother customers.  At September 30, 2005the Company did not have copper at the Asarco refinery.  The Company pays Asarco a tolling charge uponits receipt of copper rods.  Thesecharges are based on competitive market terms. Through June 9, 2005 the Company sold a portion of the copper treated byAsarco, approximately $13.7 million, to The Marmon Group — Cerro Wire, astockholder of the Company until June 9, 2005.

 

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As of September 30, 2005our Mexican operation has $2.2 million net of accounts receivable from salesand services provided to Asarco.

 

The Company’s Mexicanoperations have a contract with Ferrocarril Mexicano, S.A. de C.V. (“FerroMex”),a subsidiary of Grupo Mexico, which provides for transportation services.  The Company uses FerroMex’s railroad both toship a portion of its mine production and to carry supplies to its operations.  The Company pays market-based rates for theseservices.  In the nine months endedSeptember 30, 2005 and 2004, the Company recorded charges of $18.9 million and$13.1 million, respectively, for this service.

 

OnOctober 20, 2005, the Company’s board of directors approved the acquisition of6,386,521 shares of Minera Mexico from Grupo Mexico.  The acquired shares represent 0.81833% of theoutstanding shares of Minera Mexico and were purchased at the average closingprice of the last 30 days ended October 19, 2005.  The Company now owns 99.95% of Minera Mexico.

 

I.      Commitments and Contingencies:

 

Commitments:

 

Peruvian Operations

 

Royalty Charge:

 

In June 2004, thePeruvian Congress enacted legislation imposing a royalty charge to be paid bymining companies in favor of the regional governments and communities wheremining resources are located. In November 2004, more than 5,000 Peruviancitizens filed a request to the Peruvian Constitutional Tribunal to have thelaw declared unconstitutional. However, in April 2005, the ConstitutionalTribunal ruled the royalty law to be constitutional and therefore applicable tomining activities in Peru.  On June 28,2005 the court dismissed the lawsuit and the Company has decided not toappeal.  Under the new law, the Companyis subject to a 1% to 3% royalty charge, based on sales, applicable to thevalue of the concentrates produced in the Toquepala and Cuajone mines. TheCompany made provisions of $17.6 million and $26.2 million in 2004 and thefirst nine months of 2005, respectively, for this new royalty charge, whichwent into effect as of June 25, 2004. These provisions were included in cost ofsales (exclusive of depreciation, amortization and depletion) on the Company’scondensed consolidated combined statement of earnings.

 

In addition, theConstitutional Tribunal stated that this charge applied to all concessions heldin the mining industry, implying that those entities with stability contractsare subject to this charge. The Company believes that this interpretation isincorrect and intends to protest the imposition of the royalty charge on itsSX/EW production, which is operating under a tax stability agreement (“Guarantyand Promotional Measures for Investment Contract”).  Provisions made by the Company for theroyalty charge do not include approximately $4.8 million of additionalpotential liability relating to its SX/EW production from June 30, 2004 throughSeptember 30 2005.

 

Power Purchase Agreement:

 

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

 

The Company agreed to amendits power purchase agreement in June 2003, resolving certain issues that arosebetween the parties and reducing power costs for the remaining life of theagreement.  The Company made a one-timecontractual payment of $4.0 million to Enersur S.A. under terms of the newagreement. The new agreement releases Enersur S.A. from the obligation toconstruct additional capacity upon notice to meet the Company’s increasedelectricity requirements from the planned 

 

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expansion and modernization.The Company believes it can satisfy the need for increased electricityrequirements from other sources, including local power providers.

 

Environmental Matters:

 

Peruvian Operations

 

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

 

In accordance with Peruvianregulations, in 1996 the Company submitted its *Programa deAdecuación y Manejo Ambiental*(the Environmental Compliance andManagement Program, known by its Spanish acronym, PAMA) to the MEM.  A third-party environmental audit wasconducted in order to elaborate the PAMA. The PAMA applied to all current operations that did not have an approvedenvironmental impact study at the time. SCC’s PAMA was approved in January 1997 and contains 34 mitigationmeasures and projects necessary to (1) bring the existing operations intocompliance with the environmental standards established by the MEM and (2)identify areas impacted by operations that are no longer active and need to bereclaimed or remediated.  By the end of2004, 31 of these projects were completed, including all PAMA commitmentsrelated to the Company’s operations in Cuajone and Toquepala.  The three pending PAMA projects all relate tothe Ilo smelter operations.  The primaryareas of environmental concern are the smelter reverberatory slag eroded fromslag deposits up until 1994, and atmospheric emissions from the Ilo smelter.

 

The slag remediation programis progressing as scheduled and is expected to be completed by 2007.  With respect to the smelter emissions, thethird phase of the Ilo smelter modernization has started and is scheduled to becompleted by 2007.  In July 2003, theCompany awarded the contract to provide the technology and basic engineeringfor the modernization of the Ilo smelter to Fluor Chile S.A. and Xstrata plc(formerly M.I.M. Holdings Limited).  TheCompany believes that the selected technology complies with the currentenvironmental regulations.  This projectis the Company’s largest short-term capital investment project and is estimatedat $500 million, including $294.3 million expended through September 30,2005.  Beginning in 1995 and continuingwhile this project is under construction, the Company has established anemissions curtailment program that has allowed the Company to comply with theannual sulfur dioxide air quality standard (established by the MEM in 1996) inthe city of Ilo.

 

On October 14, 2003, thePeruvian Congress published a new law announcing future closure and remediationobligations for the mining industry.  Thelaw was amended on May 28, 2004 and again on May 8, 2005.  The current modification establishes thatmining companies submit their mine closure plans within one year of publicationof final regulations.  On August 16, 2005final regulations were published and the Company has initiated the preparationof the required mine closure plan.  As partof the law and the qualifying regulations the Company is also required toengage an independent consulting entity to prepare the mine closure plan.  The final plan, which is required by August2006, is subject to approval by MEM and open to public discussion and commentin the area of Company operations. Additionally, the law requires companies to provide financial guaranteesto insure that remediation programs are completed.  The Company anticipates that this law willincrease its asset retirement obligations and require future expenditures andamortizations over the life of the mine to satisfy its requirements.  The Company believes the liability for theseasset retirement obligations cannot currently be measured, or reasonablyestimated, until the Company has substantially completed its mine closure planand is reasonably confident that it will be approved by MEM in its mostmaterial respects.

 

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The Company foreseessignificant environmental capital expenditures in 2005 and continuing into2006.  During the first nine months of2005, $140.3 million of environmental capital expenditures were made on thesmelter project, from a 2005 budget of $171 million.

 

Mexican Operations

 

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

 

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

 

The Company’s operationsnear the U.S.-Mexican border are also subject to the Agreement on Cooperationfor the Protection and Improvement of the Environment in the Border Area, orthe La Paz Agreement, which was concluded in 1983 between the United States andMexico for the purpose of improving air quality along the border.  The La Paz Agreement establishes sulfurdioxide emissions standards and requires the installation and maintenance ofemission monitoring and record-keeping systems at our smelters in northwesternMexico.  In order to maintain compliancewith sulfur dioxide emissions standards promulgated under the Environmental Lawand the La Paz Agreement, MM shut down the Cananea smelter and operations at Monterreyin December 1999.  Mexican environmentalregulations have become increasingly stringent over the last decade, and thistrend is likely to continue and may be influenced by the environmentalagreement entered into by Mexico, the United States and Canada in connectionwith NAFTA in February 1999.  However,the Company’s management does not believe that continued compliance with theEnvironmental Law or Mexican state environmental laws will have a materialadverse effect on the Company’s business, properties, results of operations,financial condition or prospects or will result in material capitalexpenditures.  Although the Companybelieves that all of its facilities are in material compliance with applicableenvironmental, mining and other laws and regulations, the Company cannot assureyou that stricter enforcement of existing laws and regulations or the adoptionof additional laws and regulations would not have a material adverse effect onthe Company’s business, properties, results of operations, financial conditionor prospects.

 

Due to the proximity ofcertain facilities of our Mexican operations near urban centers, theauthorities may implement certain measures that may impact or restrain theoperation of such facilities.  Anyenforcement action to shut down any such facilities may have an adverse effecton the operating results of the relevant subsidiary.

 

The Company has institutedextensive environmental conservation programs at its mining facilities in Peruand Mexico.  The Company’s environmentalprograms include water recovery systems to conserve water and minimizecontamination of nearby streams, revegetation programs to stabilize thesurfaces of the tailings dams and the implementation of scrubbing technology inthe mines to reduce dust emissions.

 

 

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Litigation Matters:

 

Peruvian Operations

 

1.               Garcia-Ataucuriand Others vs. SCC:  In April 1996, the Company was served with acomplaint filed in Peru by approximately 800 former employees seeking thedelivery of 38,763,806.80 “labor shares” to be issued in a proportional way toeach in accordance with their time of work with SCC, plus dividends.  The Company conducts its operations in Peruthrough a registered Branch. Although the Branch has neither capital norliability separate from that of the Company, under Peruvian law it is deemed tohave an equity capital for purposes of determining the economic interest of theholders of investment shares. The labor shares litigation is based on claims offormer employees for ownership of labor shares issued during the 1970s until1989 under a former Peruvian mandated profit sharing system. We assert that theclaims are meritless and that the labor shares were distributed to the formeremployees in accordance with the then in effect Peruvian profit sharing system.We do not believe that an unfavorable outcome is reasonably possible. In 1971,the Peruvian Government enacted legislation providing that workers in themining industry would participate in the pre-tax profits of the enterprises forwhich they worked at a rate of 10%. This participation was distributed to theworkers with 40% in cash and 60% as an equity interest in the enterprise. Whatremains of the equity participation is now included in the balance sheetcaption “Minority interest.”  Under thelaw, the equity participation was originally delivered to the “Mining Community”,an organization representing all workers. The cash portion was distributed tothe workers after the close of the year. The accrual for this participation was(and continues to be) a current liability of the Company, until paid. In 1978,the law was amended and the equity distribution was calculated at 5.5% ofpre-tax profits and was made to individual workers of the enterprise in theform of labor shares. These labor shares represented an equity interest in theenterprise. In addition, equity participations previously distributed to the “MiningCommunity” were returned to the Company and redistributed in the form of laborshares to individual employees or former employees. The cash participation wasadjusted to 4.5% of pre-tax earnings and continued to be distributed toemployees following the close of the year. Effective in 1992, the law wasamended to its present status. The workers participation in pre-tax profits wasset at 8%, with 100% payable in cash. The equity participation component waseliminated from the law. In 1995, the Company offered to exchange new commonshares of the Company for the labor shares issued under the prior Peruvian law.Approximately 80.8% of the labor shares issued were exchanged for the Company’scommon shares, greatly reducing the Minority interest on the Company’s balancesheet. Since 1995, the Company has periodically purchased labor shares on theopen market. In 1998, labor shares were renamed “investment shares.”  At September 30, 2005, the investment shareinterest in the Company’s Peruvian Branch amounted to 0.71%.

 

Asstated above, in April 1996, the Company was served with a complaint filed inPeru by approximately 800 former employees seeking the delivery of asubstantial number of “labor shares” (now referred to as “investment shares”)of its Peruvian Branch plus dividends on such shares. This amount correspondsto the total number of labor shares for the full Company workers, and thecomplaint is seeking to have such shares issued to the plaintiffs inproportional way to each in accordance with their time of work with theCompany, plus dividends on such shares. In December 1999, a civil court of first instance of Lima decidedagainst the Company, ordering the delivery of the investment shares anddividends to the plaintiffs. The Company appealed this decision in January2000. On October 10, 2000, the Superior Court of Lima affirmed the lower court’sdecision, which had been adverse to the Company. On appeal by the Company, thePeruvian Supreme Court annulled the proceeding noting that the civil courtslacked jurisdiction and that the matter had to be decided by a labor court. The lower court dismissed the lawsuit inJanuary 2005.  The plaintiffs haveappealed to the superior court.

 

The Company has not made a provision for thislawsuit because it believes that it has meritorious defenses to the claimsasserted in the complaint.

 

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2.               In June2004, the Peruvian Congress enacted Law N° 28258, creating a “royalty charge”to be paid by mining companies in favor of the regional governments andcommunities where mining resources are located.

 

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

 

In April 2005, theConstitutional Tribunal ruled the royalty law to be constitutional andtherefore applicable to mining activities in Peru.  The decision issued by the Peruvian ConstitutionalTribunal cannot be appealed and must be observed by lower courts.  On June 28, 2005 the court dismissed thelawsuit and the Company has decided not to appeal.

 

*Class Action*

Three purported class actionderivative lawsuits have been filed in the Delaware Court of Chancery (NewCastle County) late in December 2004 and early January 2005 relating to themerger transaction between the Company and MM, (the “Transaction”). On January31, 2005, the three actions—*Lemon Bay, LLPv. Americas Mining Corporation, et al.,*Civil Action No. 961-N, *Therault Trust v. Luis Palomino Bonilla, et al., andSouthern Copper Corporation, et al.,*Civil Action No. 969-N, and *James Sousa v. Southern Copper Corporation, et al.,*CivilAction No. 978-N—were consolidated into one action titled, *In re Southern Copper Corporation ShareholderDerivative Litigation,*Consol. C.A. No. 961-N and the complaintfiled in *Lemon Bay*was designatedas the operative complaint in the consolidated lawsuit.  The consolidated action purports to bebrought on behalf of the Company’s common stockholders.

 

The consolidated complaintalleges, among other things, that the Transaction is the result of breaches offiduciary duties by the Company’s directors and is not entirely fair to theCompany and its minority stockholders. The consolidated complaint seeks, amongother things, a preliminarily and permanent injunction to enjoin theTransaction, the award of damages to the class, the award of damages to theCompany and such other relief that the court deems equitable, includinginterest, attorneys’ and experts’ fees and costs. The Company believes thatthis lawsuit is without merit and is vigorously defending against this action.

 

The Company does not believethat the aforementioned legal proceedings and tax contingencies mentioned belowwill have a material adverse effect on the financial position or results ofoperations of the Company and its consolidated subsidiaries.

 

Mexican Operations

 

Ejido Land Matter:

In July 1991, the Mexicanagricultural community of Pilares de Nacozari Ejido, or Ejido, commenced anaction in the first federal district court in Sonora, Mexico against theMexican Ministry of Agrarian Reform, or the Ministry.  The action alleged improper expropriation ofapproximately 1,500 hectares of land adjacent to the La Caridad mine on whichcertain of Mexcobre’s (a subsidiary of Minera Mexico) facilities are currentlylocated.  Mexcobre was not named as adefendant in the action although it was included as an interested third partydue to its ownership of the land. Mexcobre bought the land in question in 1976 from the *Banco Nacional de Obras y Servicios Públicos*,which had previously acquired it as a beneficiary of the expropriation by theMinistry in 1973 and has alleged legal and physical impossibility of returningthe land.

 

After two previous rulingsstating that it is impossible to return the land as a means of restitution, athird and final ruling from the Mexican Appellate District Court instructed thedistrict court judge to resolve the legal and material impossibility ofreturning the land as a means of restitution.  The district court 

 

 

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judge ruled that it is onlypartially impossible to physically return the land and ruled that legalimpossibility has not been proved. Mexcobre has filed a complaint (queja) against this ruling. We believethat if the Ejido requests indemnity instead of a return of the land, Mexcobre’sfinancial liability with respect to such compensation would not be material.

 

Coremi Royalties:

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

 

San Luis Potosí Facilities:

The municipality of San LuisPotosí has granted Desarrolladora Intersaba, S.A. de C.V., licenses of use ofland and construction for housing and/or commercial zones in the former EjidoCapulines, where the residential project “Villa Magna” is expected to bedeveloped in the near future.

 

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

 

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

 

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

 

(ii)                  second, against the PROFEPA’s administrativeresolution “advising” (rather than enforcing) the Municipality to acknowledgethe safeguard buffer zone around IMMSA’s zinc refinery as approved by theEnvironmental and Natural Resources Ministry.

 

These actions are awaitingfinal resolutions.  IMMSA believes that,should the outcome of the above mentioned legal proceedings be adverse to IMMSA’sinterests, the construction of the “Villa Magna” housing and commercialdevelopment would not, in itself, affect the operations of IMMSA’s zinc plant.

 

In addition to theforegoing, IMMSA has initiated a series of legal and administrative proceduresagainst the Municipality of San Luis Potosí due to its refusal to issue IMMSA’suse of land permit in respect of its zinc plant.  The Municipality has refused to grant suchlicense based on the argument that IMMSA has failed to submit, as part of theapplication process, *a manifestación deimpacto ambiental* (environmental impact assessment).  IMMSA believes that the environmental impactassessment is not required because IMMSA will not undertake constructionactivities. The trial judge has ordered the Municipality to continue the analysisof IMMSA’s request to issue the *licencia deuso de suelo* (use of land permit). The municipality has refused to issue the land use permit.  IMMSA is considering whether to file and “amparo”or injunctive relief against such resolution to compel the court to issue theland use permit.

 

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*Tax Contingency Matters:*

 

US Internal Revenue Services - IRS

Federal, state and foreigntax authorities regularly audit the Company in the United States andinternationally. These audits can result in proposed assessments. In 2002, theUS Internal Revenue Service (IRS) has issued a preliminary Notice of ProposedAdjustment 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 1994 through 1996 are now closed to furtheradjustment.

 

The IRS is now completingits field audit of the tax years 2000 through 2002 and had previously completedthe field audit work for 1997 through 1999. During the audit of the tax years1997 through 1999, the IRS questioned the Company’s accounting policy fordetermination of useful lives, the calculation of deductible and creditablePeruvian taxes, the methodology of capitalizing interest and the capitalizingof certain costs (drilling, blasting and hauling) into inventory value as itemsfor possible adjustment. In the fourth quarter of 2003, the Company and the IRShad jointly requested technical advice from the IRS National Office to helpresolve the inventory value dispute. In August 2005 the National Office of theIRS responded 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 of 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 mining costs to its leach dumps based onthe weight of material moved, without regard to metal content orrecoverability.  On October 5, 2005 theCompany filed a formal protest with the IRS to appeal the proposed changes withrespect to the TAM conclusion, as well as other items of adjustment proposed bythe IRS field audit group.  These otheradjustments include the methodology of capitalizing interest, the determinationof useful lives for depreciable property, the calculation of deductible andcreditable Peruvian taxes and the established service fee between the Companyand related parties. The Company believes that the positions that it isreporting to the IRS are correct and appropriate.  The Company believes that it has substantialdefenses to the proposed IRS adjustments and that adequate provisions have beenmade so that resolution of any issues raised by the IRS will not have anadverse effect on its financial condition or results of operations. Significantmanagement judgment is required in determining the provision for taxcontingencies. The estimate of the probable cost for resolution of the taxcontingencies has been developed in consultation with legal and tax counsel.The Company does not believe that there is a reasonable likelihood that thereis an exposure to loss in excess of the amounts accrued therefore.

 

Peruvian Operations:

 

In Peru the “SuperintendenciaNacional de Administración Tributaria” (SUNAT), the Peruvian TaxAdministration, regularly audits the Company. These audits can result inproposed assessments.

1)              In year 2002 the Companyreceived assessments and penalties from SUNAT for fiscal years 1996 through1999, in which several deductions taken were disallowed. SUNAT has challengedthe Company’s depreciation method and deduction of other expenses related tocharges incurred outside of Peru from 1996 through 1999, and the deduction ofcertain exchange differences and interest expenses from 1997 through 1999. TheCompany appealed these various assessments and resolution is still pending.

 

In February 2003, thePeruvian tax court confirmed SUNAT’s assessments and penalties with regard todepreciation and deductions of other expenses incurred outside of Peru forfiscal years 1996 and 1997. Consequently, the Company recognized an additional tax and workersparticipation liability for fiscal years 1998 and 1999 on the amounts assessedby SUNAT. Therefore, in 2003 the Company recorded a charge to workers’participation, (included in cost of sales (exclusive of depreciation,amortization and depletion) on the statement of earnings) and income taxexpense of $0.5 million and $4.4 million, respectively. The Company, however,has not recognized a liability for penalties and interest 

 

 

17

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assessed by SUNAT inconnection with the depreciation and other expenses deduction as it considersthey are not applicable. The status of the penalty appeals and other taxcontingencies is as follows:

 

a)                          Year 1996:  With regardto the appeal of the penalty related to fiscal year 1996, the Company wasrequired to issue a letter of credit to SUNAT of $3.4 million, which was issuedin July 2003. This deposit is recorded in other assets on the condensedconsolidated combined balance sheet. The Peruvian tax court denied the Company’sappeal in February 2004.  Consequently,in April 2004, the Company filed a lawsuit against the Peruvian tax court andSUNAT in the superior court of Peru. The Company was not required to issue adeposit for appeal of assessments and rulings with respect to any otheryears.  This lawsuit is still pendingresolution.

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. According to this tax court resolution, SUNATissued a new penalty in December 2003. This penalty and penalties related to fiscal years 1998 and 1999 havebeen protested before SUNAT.  The Company’sappeal before the Peruvian tax court related to the assessments (pertaining tothe deduction of certain interest expense) for fiscal year 1997 was denied. Inthis regard, in May 2003, the Company filed a lawsuit before the superior courtagainst SUNAT and the Peruvian tax court, seeking the reversal of the ruling ofthe tax court. In July, 2005 the Superior Court remanded the case to SUNAT fora new pronouncement. SUNAT has appealed the courts decision to the supremecourt in Lima.

c)                          SUNAT has notruled on the interest deductions for 1998 or 1999.

d)                         The Company hasnot recorded any expense associated with the assessment challenging deductionsof interest expense for the years 1997, 1998, or 1999, nor has the Companyrecorded any expense associated with the assessments for the years 2000 and2001.

e)                          Years 1998 and 1999: The Company’sappeal is still pending resolution by SUNAT.

 

2)              In December 2004 and January2005, the Company received assessments and penalties from SUNAT for the fiscalyears 2000 and 2001, in which certain deductions taken by the Company weredisallowed. SUNAT has objected to the Company’s method of deducting vacationpay accruals in 2000, a deduction in 2000 for a fixed asset write-off, as wellas certain other deductions in both years. The Company has appealed these assessments and resolution is stillpending.  The Company received penaltiesand assessments from SUNAT relating to the treatment of foreign exchangedifferences for 2000 and 2001, which the Company is contesting before SUNAT.

 

MexicanOperations

 

InMay 2005, the Mexican Supreme Court rendered a decision that changed the methodof computing the amount of statutory workers’ profit sharing required to bepaid by some Mexican companies.  TheSupreme Court’s ruling in effect prohibited the application of net operatingloss carryforwards in computing the income used as the base for determining theworkers’ profit sharing amounts.  TheCompany has elected to recognize in its results of operations for the firstnine months of 2005 $31.1 million for workers’ profit sharing related to 2004in addition to the 2005 year-to-date estimate of our potential liability.

 

*Labor Matters*

 

Inthe last several years the Company has experienced a number of strikes or otherlabor disruptions that have had an adverse impact on its operations andoperating results.  For example, in Peruon August 31, 2004, unionized workers at the mining units in Toquepala andCuajone initiated work stoppages and sought additional wage increases based onhigh metal prices.  The strike wasresolved on September 13, 

 

 

18

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2004.  In Mexico, on July 12, 2004, the workers ofMexicana de Cobre site went on strike asking for the review of certaincontractual clauses.  Such a review wasperformed and the workers returned to work 18 days later.  On October 15, 2004, the workers of Mexicanade Cananea, a subsidiary of Minera Mexico, went on strike, followed by theMexicana de Cobre workers.  The strikelasted for six days at Mexicana de Cobre and nine days at Mexicana de Cananea.  In both cases, the operations at the Mexicanmines ceased until the strike was resolved. The Company cannot make assurances that they will not experience strikesor other labor-related work stoppages in the future that could have a materialadverse effect on its financial condition and results of operations.

 

InJuly 2005, the unionized workers of Asarco commenced a work stoppage, whichcould have a material adverse effect on Asarco and its business prospects.  A further deterioration of the financialcondition of Asarco could result in additional claims being filed against GrupoMéxico and its subsidiaries, including Southern Copper Corporation, MineraMéxico or its subsidiaries.  Any increasein the financial obligations of our parent corporations, as a result of mattersrelated to Asarco or otherwise, could, among other matters, result in ourparent corporations attempting to obtain increased dividends or other fundingfrom us.  As a result of various factors,including the work stoppage which commenced in July 2005, on August 9, 2005,Asarco filed a voluntary petition for relief under Chapter 11 of the U.S.Bankruptcy Code before the U.S. Bankruptcy Court of Corpus Cristi, Texas.  Asarco’s bankruptcy case is being joined withthe bankruptcy cases of its subsidiaries. Asarco is in continuing possession of its properties and is operatingand managing its businesses as a debtor in possession.  However, it is impossible to predict how thebankruptcy court will ultimately rule with respect to such petitions and theimpact such rulings will have on Asarco and its subsidiaries.

 

*Other Legal Matters*

 

Our direct and indirect parent corporations,including AMC and Grupo México, have from time to time been named parties invarious litigations involving Asarco.  InMarch 2003, AMC purchased its interest in SCC from Asarco.  In August 2002 the U.S. Department of Justicebrought a claim alleging fraudulent conveyance in connection with Asarco’senvironmental liabilities and AMC’s then-proposed purchase of SCC fromAsarco.  That action was settled pursuantto a Consent Decree dated February 2, 2003.  The consent decree is binding solely on theU.S. government.  In October 2004, AMC,Grupo México, Mexicana de Cobre and other parties, not including SCC, werenamed in a lawsuit filed in New York State court in connection with allegedasbestos liabilities, which lawsuit claims, among other matters, that AMC’spurchase of SCC from Asarco should be voided as a fraudulent conveyance.  While Grupo México and its affiliates believethat these claims are without merit, we cannot assure you that these or futureclaims, if successful, will not have an adverse effect on our parentcorporations or us.  Any increase in thefinancial obligations of our parent corporations, as a result of mattersrelated to Asarco or otherwise, could, among other matters, result in ourparent corporations attempting to obtain increased dividends or other fundingfrom us.  In 2005, certain subsidiariesof Asarco filed bankruptcy petitions in connection with alleged asbestosliabilities.  In July 2005, the unionizedworkers of Asarco commenced a work stoppage, which could have a materialadverse effect on Asarco and its business prospects. A further deterioration ofthe financial condition of Asarco could result in additional claims being filedagainst Grupo México and its subsidiaries, including SCC, Minera México or itssubsidiaries. As a result of various factors, including the work stoppage,which commenced in July 2005, on August 9, 2005, Asarco, filed a voluntarypetition for relief under Chapter 11 of the U.S. Bankruptcy Code before theU.S. Bankruptcy Court of Corpus Christi, Texas. Asarco’s bankruptcy case isbeing joined with the bankruptcy cases of its subsidiaries. Asarco is incontinuing possession of its properties and is operating and managing itsbusinesses as a debtor in possession.

 

Asarco believes that by utilizing the Chapter 11process it can achieve an orderly restructuring of its business and finallyresolve, among other contingencies, its environmental and asbestos claims.However, it is impossible to predict how the 

 

19

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bankruptcy court will ultimately rule with respectto such petitions and the impact such rulings will have on Asarco and itssubsidiaries.

 

J.                CapitalizedMine Stripping:

 

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

 

OnMarch 17, 2005 Emerging Issues Task Force or “EITF” reached a consensus onissue No.04-06, “Accounting for Stripping costs Incurred during Production inthe Mining Industry”, which was ratified by the Financial Accounting StandardBoard or “FASB”, on March 30, 2005 and the subsequent modification to thetransition provision approved by the “EITF” in its June, 2005 meeting.  The consensus stated that stripping costsincurred during the production phase of a mine are variable production coststhat should be included in the cost of the inventory produced (extracted)during the period that the stripping costs are incurred. The Company expects toadopt the guidance on January 1, 2006, with the most significant impact ofadoption being on the capitalized stripping asset net of taxes and on retainedearnings.

 

AtSeptember 30, 2005, the Company had on its balance sheet $300.8 million ofcosts associated with capitalized mine stripping, net, which will be impactedby this consensus.  We anticipate that asignificant portion of this asset will be written off and equity and net incomewould be reduced accordingly.  Inaddition, future-operating income could be negatively impacted to the extentthat costs previously capitalized are expensed at a faster rate than we hadpreviously amortized stripping costs.

 

K.    Segment and Related 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 continues to operate principally in one industry, themining of copper.  However, because ofthe demands of managing operations in two countries, effective April 1, 2005,Company management views the new Southern Copper as having three operatingsegments and manages on the basis of these segments.  Additionally, in mining copper the Companyproduces a number of metal by-products, most important of which are molybdenum,silver and zinc.  The significant increasein the price of molybdenum over the past two years has had an important impacton the Company’s earnings.  Nevertheless,the Company continues to manage its operations on the basis of the three coppersegments.  Added to the segmentinformation is information regarding the Company’s molybdenum sales.  The segments identified by the Company are:

 

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

 

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

 

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 Officerof the Company focuses on operating income as measure of performance toevaluate different segments, and to make decisions to allocate

 

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resources to the reported segments.

 

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

 
| ** **                                                            | ** ** | **Three Months Ended September 30, 2005  (dollars in millions)** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **Mexican  Open Pit**                                            | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian Operations** | ** ** | **Corporate  and other  Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales outside of segments                                         |       | $                                                                | 395.0      |   | $ | 63.4 |   | $ | 571.8 |   | $ | — |   | $ | 1,030.2 |   |
| Intersegment sales                                                    |       | 13.9                                                             |       | 21.6 |   | 7.9 |   | (43.4 | ) | — |   |
| Cost of sales (exclusive of depreciation, amortization and depletion) |       | 160.1                                                            |       | 66.6 |   | 191.3 |   | (35.0 | ) | 383.0 |   |
| Exploration                                                           |       | 0.9                                                              |       | 1.9 |   | 3.6 |   | — |   | 6.4 |   |
| Depreciation, amortization and depletion                              |       | 49.4                                                             |       | 6.1 |   | 19.3 |   | — |   | 74.8 |   |
| Selling, general and administrative expense                           |       | 7.4                                                              |       | 4.0 |   | 8.4 |   | 0.4 |   | 20.2 |   |
| Operating Income                                                      |       | $                                                                | 191.1      |   | $ | 6.4 |   | $ | 357.1 |   | $ | (8.8 | ) | 545.8 |   |
| Less:                                                                 |       |                                                             |       |   |   |   |   |   |   |   |   |
| Interest expense, net                                                 |       |                                                             |       |   |   |   |   |   |   | (15.3 | ) |
| Gain on derivative instruments                                        |       |                                                             |       |   |   |   |   |   |   | 3.7 |   |
| Loss on debt prepayment                                               |       |                                                             |       |   |   |   |   |   |   | (12.5 | ) |
| Other income (expense)                                                |       |                                                             |       |   |   |   |   |   |   | 1.9 |   |
| Taxes on income                                                       |       |                                                             |       |   |   |   |   |   |   | (152.6 | ) |
| Minority interest                                                     |       |                                                             |       |   |   |   |   |   |   | (1.6 | ) |
| Net Earnings                                                          |       |                                                             |       |   |   |   |   |   |   | $ | 369.4 |   |
|                                                                  |       |                                                             |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                  |       | 15.4                                                             |       | 8.9 |   | 96.4 |   | — |   | 120.7 |   |
| Total Assets                                                          |       | $                                                                | 2,366.1    |   | $ | 469.9 |   | $ | 3,194.5 |   | $ | (633.6 | ) | $ | 5,396.9 |   |
|                                                                       |            |                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                            | ** ** | **Three Months Ended September 30, 2004  (dollars in millions)** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **Mexican  Open Pit**                                            | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian Operations** | ** ** | **Corporate  and other  Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales outside of segments                                         |       | $                                                                | 264.1      |   | $ | 47.3 |   | $ | 428.1 |   | $ | — |   | $ | 739.5 |   |
| Intersegment sales                                                    |       | —                                                           |       | 31.1 |   | — |   | (31.1 | ) | — |   |
| Cost of sales (exclusive of depreciation, amortization and depletion) |       | 137.6                                                            |       | 62.8 |   | 188.2 |   | (40.2 | ) | 348.4 |   |
| Exploration                                                           |       | 0.6                                                              |       | 1.2 |   | 1.5 |   | — |   | 3.3 |   |
| Depreciation, amortization and depletion                              |       | 22.2                                                             |       | 5.6 |   | 19.9 |   | 0.4 |   | 48.1 |   |
| Selling, general and administrative expense                           |       | 6.8                                                              |       | 4.8 |   | 6.7 |   | (1.1 | ) | 17.2 |   |
| Operating Income                                                      |       | $                                                                | 96.9       |   | $ | 4.0 |   | $ | 211.8 |   | $ | 9.8 |   | 322.5 |   |
|                                                                  |       |                                                             |       |   |   |   |   |   |   |   |   |
| Less:                                                                 |       |                                                             |       |   |   |   |   |   |   |   |   |
| Interest expense, net                                                 |       |                                                             |       |   |   |   |   |   |   | (25.5 | ) |
| Gain on disposal of property                                          |       |                                                             |       |   |   |   |   |   |   | 20.7 |   |
| Other income (expense)                                                |       |                                                             |       |   |   |   |   |   |   | (3.7 | ) |
| Taxes on income                                                       |       |                                                             |       |   |   |   |   |   |   | (93.3 | ) |
| Minority interest                                                     |       |                                                             |       |   |   |   |   |   |   | (3.9 | ) |
| Net Earnings                                                          |       |                                                             |       |   |   |   |   |   |   | $ | 216.8 |   |
|                                                                  |       |                                                             |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                  |       | 8.5                                                              |       | 3.1 |   | 48.3 |   | — |   | 59.9 |   |
| Total Assets                                                          |       | $                                                                | 3,105.7    |   | $ | 579.6 |   | $ | 2,256.8 |   | $ | (998.6 | ) | $ | 4,943.5 |   |
|                                                                       |            |                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

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| ** **                                                            | ** ** | **Nine Months Ended September 30, 2005  (dollars in millions)** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **Mexican  Open Pit**                                           | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate and other  Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales outside of segments                                         |       | $                                                               | 1,220.7    |   | $ | 176.5 |   | $ | 1,537.1 |   | $ | — |   | $ | 2,934.3 |   |
| Intersegment sales                                                    |       | 88.4                                                            |       | 151.4 |   | 7.9 |   | (247.7 | ) | — |   |
| Cost of sales (exclusive of depreciation, amortization and depletion) |       | 639.6                                                           |       | 255.2 |   | 538.1 |   | (247.2 | ) | 1,185.7 |   |
| Exploration                                                           |       | 3.3                                                             |       | 4.6 |   | 9.3 |   | — |   | 17.2 |   |
| Depreciation, amortization and depletion                              |       | 132.5                                                           |       | 17.4 |   | 56.4 |   | — |   | 206.3 |   |
| Selling, general and administrative expense                           |       | 20.3                                                            |       | 11.6 |   | 25.2 |   | 2.1 |   | 59.2 |   |
| Operating Income                                                      |       | $                                                               | 513.4      |   | $ | 39.1 |   | $ | 916.0 |   | $ | (2.6 | ) | 1,465.9 |   |
|                                                                  |       |                                                            |       |   |   |   |   |   |   |   |   |
| Less:                                                                 |       |                                                            |       |   |   |   |   |   |   |   |   |
| Interest expense, net                                                 |       |                                                            |       |   |   |   |   |   |   | (45.6 | ) |
| Loss on derivative Instruments                                        |       |                                                            |       |   |   |   |   |   |   | (8.4 | ) |
| Loss on debt prepayment                                               |       |                                                            |       |   |   |   |   |   |   | (22.6 | ) |
| Gain on disposal of property                                          |       |                                                            |       |   |   |   |   |   |   | 2.1 |   |
| Other income (expense)                                                |       |                                                            |       |   |   |   |   |   |   | (1.8 | ) |
| Taxes on income                                                       |       |                                                            |       |   |   |   |   |   |   | (405.4 | ) |
| Minority interest                                                     |       |                                                            |       |   |   |   |   |   |   | (4.6 | ) |
| Net Earnings                                                          |       |                                                            |       |   |   |   |   |   |   | $ | 979.7 |   |
|                                                                  |       |                                                            |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                  |       | 41.5                                                            |       | 23.8 |   | 198.0 |   | — |   | 263.3 |   |
| Total Assets                                                          |       | $                                                               | 2,366.1    |   | $ | 469.9 |   | $ | 3,194.5 |   | $ | (633.6 | ) | $ | 5,396.9 |   |

 
| ** **                                                            | ** ** | **Nine Months Ended September 30, 2004  (dollars in millions)** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **Mexican  Open Pit**                                           | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian Operations** | ** ** | **Corporate  and other  Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales outside of segments                                         |       | $                                                               | 830.0      |   | $ | 143.1 |   | $ | 1,091.2 |   | $ | — |   | $ | 2,064.3 |   |
| Intersegment sales                                                    |       | 0.2                                                             |       | 93.2 |   | — |   | (93.4 | ) | — |   |
| Cost of sales (exclusive of depreciation, amortization and depletion) |       | 389.9                                                           |       | 169.8 |   | 465.8 |   | (103.1 | ) | 922.4 |   |
| Exploration                                                           |       | 1.1                                                             |       | 3.3 |   | 6.1 |   | — |   | 10.5 |   |
| Depreciation, amortization and depletion                              |       | 68.0                                                            |       | 16.7 |   | 57.6 |   | 1.1 |   | 143.4 |   |
| Selling, general and administrative expenses                          |       | 18.2                                                            |       | 11.6 |   | 21.0 |   | 0.5 |   | 51.3 |   |
| Operating Income                                                      |       | $                                                               | 353.0      |   | $ | 34.9 |   | $ | 540.7 |   | $ | 8.1 |   | 936.7 |   |
|                                                                  |       |                                                            |       |   |   |   |   |   |   |   |   |
| Less:                                                                 |       |                                                            |       |   |   |   |   |   |   |   |   |
| Interest expense, net                                                 |       |                                                            |       |   |   |   |   |   |   | (81.0 | )  |
| Gain on disposal of property                                          |       |                                                            |       |   |   |   |   |   |   | 43.0 | )  |
| Other income (expense)                                                |       |                                                            |       |   |   |   |   |   |   | (6.6 | )  |
| Taxes on income                                                       |       |                                                            |       |   |   |   |   |   |   | (265.2 | )  |
| Minority interest                                                     |       |                                                            |       |   |   |   |   |   |   | (11.6 | )  |
| Net Earnings                                                          |       |                                                            |       |   |   |   |   |   |   | $ | 615.3 |   |
|                                                                  |       |                                                            |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                  |       | 29.2                                                            |       | 9.9 |   | 110.0 |   | — |   | 149.1 |   |
| Total Assets                                                          |       | $                                                               | 3,105.7    |   | $ | 579.6 |   | $ | 2,256.8 |   | $ | (998.6 | ) | $ | 4,943.5 |   |

 

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Salesvalue per segment:

 
| ** **                | ** ** | **Three months ended September 30, 2005** | ** **            |
|---------------------------|------------|-------------------------------------------|-----------------------|
| **(dollars in millions)** | ** ** | ** **                                | **Mexican  Open Pit** | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
| Copper                    |       | $                                         | 295.3                 |   | $ | 11.7 |   | $ | 384.0 |   | $ | (18.9 | ) | $ | 672.1 |   |
| Molybdenum                |       | 72.5                                      |                  | — |   | 183.8 |   | — |   | 256.3 |   |
| Other                     |       | 41.1                                      |                  | 73.3 |   | 11.9 |   | (24.5 | ) | 101.8 |   |
| Total                     |       | $                                         | 408.9                 |   | $ | 85.0 |   | $ | 579.7 |   | $ | (43.4 | ) | $ | 1,030.2 |   |
|                      |       |                                      |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                      |       | **Three months ended September 30, 2004** |                  |
| **(dollars in millions)** | ** ** |                                      | **Mexican  Open Pit** | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** |   |
| Copper                    |       | $                                         | 207.9                 |   | $ | 13.9 |   | $ | 312.3 |   | $ | (8.5 | ) | $ | 525.6 |   |
| Molybdenum                |       | 24.8                                      |                  | — |   | 104.8 |   | — |   | 129.6 |   |
| Other                     |       | 31.4                                      |                  | 64.5 |   | 11.0 |   | (22.6 | ) | 84.3 |   |
| Total                     |       | $                                         | 264.1                 |   | $ | 78.4 |   | $ | 428.1 |   | $ | (31.1 | ) | $ | 739.5 |   |
|                      |       |                                      |                  |   |   |   |   |   |   |   |   |
|                      |       | **Nine months ended September 30, 2005**  |                  |
| **(dollars in millions)** | ** ** |                                      | **Mexican  Open Pit** | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** |   |
| Copper                    |       | $                                         | 949.7                 |   | $ | 110.8 |   | $ | 952.4 |   | $ | (180.7 | ) | $ | 1,832.2 |   |
| Molybdenum                |       | 225.8                                     |                  | — |   | 563.6 |   | — |   | 789.4 |   |
| Other                     |       | 133.6                                     |                  | 217.1 |   | 29.0 |   | (67.0 | ) | 312.7 |   |
| Total                     |       | $                                         | 1,309.1               |   | $ | 327.9 |   | $ | 1,545.0 |   | $ | (247.7 | ) | $ | 2,934.3 |   |
|                      |       |                                      |                  |   |   |   |   |   |   |   |   |
|                      |       | **Nine months ended September 30, 2004**  |                  |
| **(dollars in millions)** | ** ** |                                      | **Mexican  Open Pit** | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** |   |
| Copper                    |       | $                                         | 661.2                 |   | $ | 53.3 |   | $ | 816.3 |   | $ | (91.4 | ) | $ | 1,439.4 |   |
| Molybdenum                |       | 74.6                                      |                  | — |   | 245.4 |   | — |   | 320.0 |   |
| Other                     |       | 94.4                                      |                  | 183.0 |   | 29.5 |   | (2.0 | ) | 304.9 |   |
| Total                     |       | $                                         | 830.2                 |   | $ | 236.3 |   | $ | 1,091.2 |   | $ | (93.4 | ) | $ | 2,064.3 |   |

 

 

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

 

| ** **                                      | ** ** | **Three Months,  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                                      | ** ** | **2005**                               | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | **(dollars in millions)**              | ** ** |
| United States                                   |       | $316.5                                 |       | $263.7                               |       | $943.2 |   | $745.6 |   |
| Europe                                          |       | 218.9                                  |       | 167.3                                |       | 586.5 |   | 440.6 |   |
| Mexico                                          |       | 228.0                                  |       | 146.7                                |       | 639.3 |   | 438.8 |   |
| Peru                                            |       | 15.8                                   |       | 9.7                                  |       | 47.9 |   | 31.3 |   |
| Latin America, excluding Mexico & Peru |       | 181.9                                  |       | 108.8                                |       | 555.0 |   | 274.9 |   |
| Australia                                       |       | 3.6                                    |       | —                               |       | 3.6 |   | — |   |
| Asia                                            |       | 65.5                                   |       | 43.3                                 |       | 158.8 |   | 133.1 |   |
| Total                                           |       | $1,030.2                               |       | $739.5                               |       | $2,934.3 |   | $2,064.3 |   |

 

Major Customer Segment Information:

 

For the nine months ended September 30, 2005, theCompany has revenues from a copper customer of the Mexican operations, whichamounts to 9.8% of total revenue. Additionally, in the same period a molybdenum customer of the Peruvianoperations has

 

 

23

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made purchases representing 13.8% of total revenue.

 

L.              Impact ofNew Accounting Standards:

 

In March 2005, the FASBissued Interpretation 47, “Accounting for Conditional Asset RetirementObligations” (“FIN 47”).  FIN 47clarifies the term “conditional asset retirement obligation” as used in FASBStatement No. 143, (FAS 143) “Accounting for Asset Retirement Obligations” withregard to existing uncertainties about timing and method of a liabilitysettlement.  FIN 47 requires an entity torecognize a liability if the fair value can be reasonably estimated even thoughthe timing and method of liability settlement may be uncertain.  FIN 47 also clarifies when an entity wouldhave sufficient information to reasonably estimate the fair value of an assetretirement obligation.  The effectivedate of FIN 47 is no later than the end of fiscal years ending after December15, 2005.  The Company is presentlyevaluating the impact of the new interpretation; however, management does notexpect that the adoption will have a material impact on the Company’s resultsof operations or financial position.

 

On March 17, 2005 EmergingIssues Task Force, or EITF, reached a consensus in the issue 04-06, “Accountingfor Stripping costs Incurred during Production in the Mining Industry”, whichwas ratified by the Financial Accounting Standards Board, or FASB, on March 30,2005 and the subsequent modification to the transition provisions approved bythe EITF in its June 15-16, 2005 meeting. The consensus states that stripping costs incurred during the productionphase of a mine are variable production costs that should be included in thecosts of the inventory produced (extracted) during the period that thestripping costs are incurred.  The Companyexpects to adopt the guidance on January 1, 2006, with the most significantimpact of adoption being on the capitalized stripping asset, net of taxes andon retained earnings.

 

In June 2005, the FASBpublished SFAS No. 154, “Accounting changes and Error Corrections a replacementof APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”), which changesthe requirements for the accounting for and reporting of a change in accountingprinciple and redefines restatement as the revising of previously issuedfinancial statements to reflect the correction of an error.  SFAS No. 154 requires retrospectiveapplication to prior periods financial statements of changes in accountingprinciple, unless it is impracticable to determine the period-specific effectsof the cumulative effect of the change.  ThisStatement also carries forward without change the guidance contained in Opinion20 for reporting the correction of an error in previously issued financialstatements and a change in accounting estimate. This Statement does not change the transition provisions of any existingaccounting pronouncement. SFAS No. 154 will be effective for accounting changesand corrections of errors made in fiscal years beginning after December 15,2005.  The Company is evaluating theimpact that this statement may have on its financial position or results ofoperations.

 

In September 2005, FASBratified the consensus reached by the Emerging Issues Task Force (EITF) onIssue N° 04-13, “Accounting for Purchases and Sales of Inventory with the SameCounterparty”.  The consensus concludedthat two or more legally separate exchange transactions with the samecounterparty should be combined and considered as a single arrangement foraccounting purposes, if they are entered into “in contemplation” of oneanother.  The EITF also reached aconsensus that non monetary exchanges of inventory within the same businessshould be recognized at fair value.  Theconsensus reached on EITF Issue N°. 04-13 is effective for new arrangementsentered into, or modifications or renewals of existing arrangements, inreporting periods beginning after March 15, 2006.  The Company is currently determining theimpact of this Issue on its financial reporting and disclosures.

 

 

24

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Part I Items 2 and 3

 

MANAGEMENT’SDISCUSSION AND ANALYSIS OF

FINANCIALCONDITION AND RESULTS OF OPERATIONS

ANDQUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

 

EXECUTIVEOVERVIEW

 

Our business isprimarily the production and sale of copper. In the process of producing copper, a number of valuable metallurgicalbyproducts are recovered, such as molybdenum, zinc, silver, lead and gold,which we also produce and sell.  Marketforces outside of our control largely determine the sales prices for ourproducts.  Our management, therefore,focuses on copper production cost control, production enhancement and prudentand conservative capital structure to improve profitability.  We believe we achieve these goals throughcapital spending programs, exploration efforts and cost reductionprograms.  Our aim is to remainprofitable during periods of low copper prices and to maximize financialperformance in periods of high copper prices.

 

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

 

Operating Cash Costs.  Anoverall benchmark used by us and a common industry metric to measureperformance is operating cash costs per pound of copper produced. Operatingcash cost is a non-GAAP measure that does not have a standardized meaning andmay not be comparable to similarly titled measures provided by other companies.A reconciliation of SCC’s cash cost per pound to the cost of sales (includingdepreciation, amortization and depletion), is presented under the subheading “Non-GAAPInformation Reconciliation”, below.  Wehave defined operating cash cost per pound as cost of sales (includingdepreciation, amortization and depletion); plus selling, general andadministrative charges, treatment and refining charges; less byproductsrevenue, depreciation amortization and depletion, worker’s participation andother miscellaneous charges, Peruvian royalty charge and the change ininventory levels; divided by total pounds of copper produced and purchased bySCC.  In our calculation of operatingcash cost per pound of copper produced we credit against our costs the revenuesfrom the sale of byproducts, principally molybdenum, zinc and silver. Weaccount for this byproduct revenue because we consider our principal businessto be the production and sale of copper. We believe that our Company is viewedby the investment community as a copper company, and is valued, in large part,by the investment community’s view of the copper market and our ability toproduce copper at a reasonable cost. The recent surge in the price ofmolybdenum, however, has had a significant effect on our traditionalcalculation of cash cost and its comparability between periods. Accordingly, wepresent cash costs with and without crediting the byproducts revenues againstour costs.

 

We exclude from our calculation of operatingcash cost depreciation, amortization and depletion, which are considerednon-cash expenses.  Exploration isconsidered a discretionary expenditure and is also excluded.  Worker’s participation provisions aredetermined on the basis of pre-tax earnings and are also excluded.  Additionally excluded from operating cashcost are items of a non-recurring nature, and the portion of our mine strippingcosts that we capitalize.

 

Our operating cash costs per pound, asdefined, are presented in the table below for the three months and nine monthsended September 30, 2005 and 2004.  Wepresent cash costs with and without the inclusion of byproduct revenues below,as the recent increases in the price of molybdenum have significantly affectedour calculation of cash costs.

 

 

25

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| ** **                                                                       | ** ** | **Three Months,  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                               | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                       | ** ** | **(in cents per pound)**               | ** ** | **(in cents per pound)**             | ** ** |
| Cash cost per pound of copper produced and purchased                             |       | (5.6                                   | )          | 31.8                                 |       | (8.1 | ) | 30.4 |   |
| Cash cost per pound of copper produced and purchased without  byproducts revenue |       | 96.1                                   |       | 89.1                                 |       | 97.9 |   | 82.4 |   |

 

 

A reconciliation of the Company’s operatingcash costs per pound to GAAP cost of sales is presented below.

 

As seen on the chart above, our cash cost forthe third quarter and nine months of 2005 when calculated with byproductsrevenue are a credit of 5.6 cents and 8.1 cents per pound, respectively.  The increased byproducts credit was due tohigher molybdenum and zinc prices.  Theprice of molybdenum in the third quarter and nine months of 2005 averaged$30.06 and $31.71 per pound, as compared to $16.47 per pound and $12.89 perpound in the comparable 2004 periods. The principal use of molybdenum is in the steel industry; in recentquarters supply deficits have pushed molybdenum prices to new highs.  The price of zinc in the third quarter andnine months of 2005 was approximately 34.1% and 25.5% higher than in therespective periods of 2004.  The impactof the credit for molybdenum revenue was by far the largest effect.  In the third quarter and nine month periodsof 2005, molybdenum revenue was a credit of 68.7 cents and 71.1 cents,respectively, as compared to 32.3 cents and 27.1 cents in the comparable 2004periods.

 

Our cash cost, excluding byproduct revenues,was higher by 7.0 cents and 15.5 cents in the 2005-third quarter and nine monthperiods, respectively.  The principalreason for this increase in both 2005 periods was the higher fuel and powercost at both our Peruvian and Mexican operations. In addition, in the ninemonth 2005 period, copper production was lower by approximately 70 millionpounds, due largely to a decrease of approximately 83 million pounds at ourPeruvian mines, which includes a 54 million pound decrease at the Cuajone minedue to lower grades.  Our Mexicanoperations produced approximately 13 million pounds more of copper in the ninemonth 2005 period, principally as a result of increased mill throughput at LaCaridad.

 

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

 

We are subject to market risks arising fromthe 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 2005 earnings resulting from metal price changes.

 
| ** **                                   | ** ** | **Copper** | ** ** | **Molybdenum** | ** ** | **Zinc** | ** ** | **Silver** | ** ** |
|----------------------------------------------|------------|------------|------------|----------------|------------|----------|------------|------------|------------|
| Change in metal prices                       |       | $          | 0.01       |           | $          | 1.00     |       | $          | 0.01       |   | $ | 1.00 |   |
| Annual change in net  earnings (in millions) |       | $          | 9.5        |           | $          | 18.3     |       | $          | 1.8        |   | $ | 10.5 |   |

 

 

Minera Mexico Acquisition. On April 1,2005, we acquired Minera Mexico from Americas 

 

26

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Mining Corporation, a subsidiary of GrupoMexico, our controlling stockholder. Minera Mexico is the largest mining company in Mexico and the eleventhlargest copper producer in the world on a stand-alone basis.  On April 1, 2005, we exchanged 67,207,640newly issued shares of our common stock for the outstanding shares of MineraMexico’s direct majority stockholder, and Minera Mexico became our 99.1% ownedsubsidiary.  As a part of thistransaction, on March 1, 2005, we paid a special transaction dividend of $100 millionto all of our stockholders.  Uponcompletion of the merger, Grupo Mexico increased its indirect beneficialownership of our capital stock from approximately 54.2% to approximately 75.1%.  The Company now owns 99.95% of Minera Mexico.

 

With this acquisition, we have increased ourtotal reserves of contained copper by 107%, or 23,199 million tons, based onyear-end 2004 reserves, and have increased our annual copper production by 81%,equivalent to 320,000 tons of copper, based on 2004 production.  We have begun to integrate aspects of ourPeruvian and Mexican facilities and achieve operational synergies.  In August, our Ilo, Peru smelting andrefining complex treated 10,000 tons of Cananea concentrate and avoided theprevailing significantly higher costs for these services in the market.  We are working to achieve additionalsynergistic economies as we further integrate our operations utilizing bestpractices of our Peruvian and Mexican operations.

 

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

 

For the three and ninemonths ended September 30, 2005 and 2004, inflation and devaluation rates wereas follows:

 
| ** **                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Peru:                                     |       |                                  |       |                                 |       |   |   |   |   |
| Peruvian inflation rate                   |       | (0.17%                                | )          | 0.21                                 | %          | 0.85 | % | 3.22 | % |
| New Sol/Dollar (change in  exchange rate) |       | 2.80                                  | %          | (3.74%                               | )          | 1.89 | % | (3.52% | ) |

 
| ** **                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                             | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Mexico:                                |       |                                  |       |                                 |       |   |   |   |   |
| Mexican inflation rate                 |       | 0.9                                   | %          | 1.7                                  | %          | 1.7 | % | 3.4 | % |
| Peso/Dollar (change in  exchange rate) |       | 0.1                                   | %          | 0.0                                  | %          | (3.3% | ) | 1.9 | % |

 

ACCOUNTINGESTIMATES

 

SouthernCopper Corporation’s discussion and analysis of its financial condition andresults of operations, as well as quantitative and qualitative disclosuresabout market risks, are based upon its consolidated combined financialstatements, which have been prepared in accordance with US GAAP.  Preparation of these consolidated combinedfinancial statements requires Southern Copper’s management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during thereporting period.  Management makes itsbest estimate of the ultimate outcome for these items based on historicaltrends and other information available when the financial statements areprepared.  Changes in estimates arerecognized in accordance with the accounting rules for the estimate, 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, capitalized mine strippingand related estimated mine stripping ratios, leachable 

 

27

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materialand related amortization, the estimated useful lives of fixed assets, assetretirement obligations, litigation and contingencies, valuation allowances fordeferred tax assets, fair value of financial instruments and inventoryobsolescence.  The Company bases itsestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances.  Actual results may differ from theseestimates under different assumptions or conditions.

 

RESULTS OF OPERATIONS

 

The following highlights key financial andoperating results for the three-month and nine-month periods ended September30, 2005 and 2004.

 
| ** **                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                  | ** ** | **(dollars in millions)**             | ** ** |
| ** **                                  | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Statement of Earnings Data                  |       |                                  |       |                                 |       |   |   |   |   |
| Net sales                                   |       | $                                     | 1,030.2    |                                 | $          | 739.5 |   | $ | 2,934.3 |   | $ | 2,064.3 |   |
| Operating costs and expenses                |       | (484.4                                | )          | (417.0                               | )          | (1,468.4 | ) | (1,127.6 | ) |
| Operating income                            |       | 545.8                                 |       | 322.5                                |       | 1,465.9 |   | 936.7 |   |
| Non-operating expense                       |       | (22.2                                 | )          | (8.6                                 | )          | (76.2 | ) | (44.6 | ) |
| Earnings before taxes and minority interest |       | 523.6                                 |       | 313.9                                |       | 1,389.7 |   | 892.1 |   |
| Taxes on income                             |       | (152.6                                | )          | (93.3                                | )          | (405.4 | ) | (265.2 | ) |
| Minority interest                           |       | (1.6                                  | )          | (3.8                                 | )          | (4.6 | ) | (11.6 | ) |
| Net earnings                                |       | $                                     | 369.4      |                                 | $          | 216.8 |   | $ | 979.7 |   | $ | 615.3 |   |

 

The table below outlines the average metalprices during the three and nine months periods ended September 30, 2005 and2004.

 

Average Metals Prices

 
| ** **                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                     | ** ** | **2005**                              | ** ** | **2004e**                            | ** ** | **%Change** | ** ** | **2005** | ** ** | **2004** | ** ** | **%Change** | ** ** |
| Copper ($per pound—LME)   |       | $                                     | 1.70       |                                 | $          | 1.29 |   | 32 |   | $ | 1.57 |   | $ | 1.27 |   | 24 |   |
| Copper ($per pound—COMEX) |       | 1.70                                  |       | 1.29                                 |       | 32 |   | 1.57 |   | 1.25 |   | 25 |   |
| Molybdenum ($per pound)        |       | 30.06                                 |       | 16.47                                |       | 83 |   | 31.71 |   | 12.89 |   | 146 |   |
| Zinc ($per pound—LME)     |       | 0.59                                  |       | 0.44                                 |       | 34 |   | 0.59 |   | 0.47 |   | 26 |   |
| Silver ($per ounce—COMEX) |       | 7.07                                  |       | 6.49                                 |       | 9 |   | 7.07 |   | 6.48 |   | 9 |   |
|                                |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Net Sales: Net sales inthe third quarter of 2005 increased $290.7 million to $1,030.2 million from$739.5 million in the comparable period in 2004.  Net sales for the first nine months of 2005increased $870.0 million to $2,934.3 million, compared with $2,064.3 million forthe same period of 2004. The increase in net sales was principally the resultof higher copper and molybdenum prices.

 

The table below presents informationregarding the volume of our copper sales by segment for the three andnine-month periods ended September 30, 2005 and 2004.

 

Copper Sales (tons):

 
| ** **                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Copper:                   |       |                                  |       |                                 |       |   |   |   |   |
| Peruvian operations       |       | 96,766                                |       | 99,687                               |       | 259,382 |   | 278,496 |   |
| Mexican Open-pit          |       | 78,885                                |       | 71,096                               |       | 274,442 |   | 233,631 |   |
| Mexican IMMSA unit        |       | 2,912                                 |       | 4,605                                |       | 36,831 |   | 19,855 |   |
| Inter segment elimination |       | (10,014                               | )          | (2,870                               | )          | (67,569 | ) | (12,823 | ) |
| Total copper sales        |       | 168,549                               |       | 172,518                              |       | 503,086 |   | 519,159 |   |

 

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

 

 

28

 

significant byproducts for the three and nine-month periods ended September 30, 2005 and 2004.

 

Byproduct Sales

 
| ** **                                  | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                                  | ** ** | **2005**                               | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Peruvian operations                         |       |                                   |       |                                  |       |   |   |   |   |
| Molybdenum contained in concentrates (tons) |       | 2,977                                  |       | 2,878                                 |       | 8,273 |   | 7,297 |   |
| Silver (‘000 ounces)                   |       | 1,034                                  |       | 1,162                                 |       | 2,797 |   | 3,263 |   |
|                                        |       |                                   |       |                                  |       |   |   |   |   |
| Mexican Open-pit                            |       |                                   |       |                                  |       |   |   |   |   |
| Molybdenum contained in concentrates (tons) |       | 1,174                                  |       | 663                                   |       | 3,111 |   | 2,672 |   |
| Zinc-refined and in concentrate (tons)      |       | 13,205                                 |       | 11,284                                |       | 35,818 |   | 34,393 |   |
| Silver (‘000 ounces)                   |       | 1,062                                  |       | 1,529                                 |       | 5,651 |   | 5,690 |   |
|                                        |       |                                   |       |                                  |       |   |   |   |   |
| Mexican IMMSA unit                          |       |                                   |       |                                  |       |   |   |   |   |
| Zinc-refined and in concentrate (tons)      |       | 32,790                                 |       | 35,218                                |       | 99,671 |   | 95,699 |   |
| Silver (‘000 ounces)                   |       | 2,387                                  |       | 3,086                                 |       | 8,224 |   | 8,604 |   |
|                                        |       |                                   |       |                                  |       |   |   |   |   |
| Intersegment elimination                    |       |                                   |       |                                  |       |   |   |   |   |
| Zinc-refined and in concentrate (tons)      |       | (14,815                                | )          | (11,157                               | )          | (32,550 | ) | (33,846 | ) |
| Silver (‘000 ounces)                   |       | (167                                   | )          | (875                                  | )          | (2,618 | ) | (2,662 | ) |
|                                        |       |                                   |       |                                  |       |   |   |   |   |
| Total Byproduct sales                       |       |                                   |       |                                  |       |   |   |   |   |
| Molybdenum contained in concentrates (tons) |       | 4,151                                  |       | 3,541                                 |       | 11,384 |   | 9,969 |   |
| Zinc-refined and in concentrate (tons)      |       | 31,180                                 |       | 35,345                                |       | 102,939 |   | 96,246 |   |
| Silver (‘000 ounces)                   |       | 4,316                                  |       | 4,902                                 |       | 14,054 |   | 14,894 |   |

 

At September 30, 2005, the Company hasrecorded provisionally priced sales of 95.9 million pounds of copper, at anaverage forward price of $1.76 per pound. Also the Company has recordedprovisionally priced sales of 8.7 million pounds of molybdenum at an averageprice of $34.00 per pound. These sales are subject to final pricing based onthe average monthly LME or COMEX copper prices and Dealer Oxide molybdenumprices in the future month of settlement, which will occur largely in the lastquarter of 2005.

 

At October 31, 2005, themarket price of the copper and molybdenum increased(decreased) by $0.14 and$(3.20) per pound respectively. Therefore the Company’s accounts receivable as of September 30, 2005would have decreased by $14.7 million, if the Company would have used thesemarket prices in its provisionally priced sales adjustment.

 

Operating Costs and Expenses: Operatingcosts and expenses were $484.4 million in the third quarter of 2005 comparedwith $417.0 million in the third quarter of 2004.  Cost of sales (exclusive of depreciation,amortization and depletion) for the three months ended September 30, 2005 was$383.0 million compared with $348.4 million in the comparable 2004 period.  The increase in cost of sales is attributableto an increase of $13.4 million in the cost of fuel and power, $2.7 million ofmining royalties and an increase of $28.7 million in the provision for workers’participation. The provision for workers participation is accrued at 8% and 10%of pre-tax earnings in our Peruvian and Mexican operations, respectively.

 

For the first nine months of 2005, operatingcost and expenses were $1,468.4 million compared with $1,127.5 million in thesame period of 2004. Cost of sales (exclusive of depreciation, amortization anddepletion) for the 2005 period was $1,185.7 million, compared with $922.4million in the 2004 nine-month period. The cost of sales increase of $263.3million in 2005 was the result of $51.1 million in the cost of power and fuelcosts, $18.3 million of mining royalties, and a $99.4 million increase inworkers’ participation.  Also, includedin the nine month 2005 results, is an adjustment of $31.1 million, related to achange in the base of calculation for the Mexican workers’ participation, see “Liquidityand capital resources” for a discussion of this matter.

 

Non-Operating Income(Expense):  Interestexpense in the third quarter of 2005 and the

 

 

29

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first nine months of 2005 was approximately12.5% and 24.1% lower than the comparable 2004 periods, respectively.  These decreases in the 2005 periods arelargely attributable to reductions in debt levels and lower interest rates.

 

In the three month and nine month periodsended September 30, 2005 we recorded a gain (loss) on derivative instruments of$3.7 million and $(8.4) million, respectively. The third quarter results include a net gain of $3.7 million related toour interest rate swap program.  The nine-monthperiod includes a loss of $9.4 million related to our copper program and a netgain of $1.0 million related to our interest swap program. See note F to ourconsolidated combined financial statements for more information on theseprograms.

 

In the three month and nine month periodsended September 30, 2005 we recorded losses on debt prepayments of $12.5million and $22.6 million, respectively. The third quarter amount includes $12.5 million for the write-off ofdeferred finance cost related to Citibank loans, which were prepaid in July2005.   In addition, the nine monthperiod includes a prepayment penalty of $2.0 million on the retirement of ourPeruvian bonds, a write off of $2.3 million of capitalized bond issuance costand a $5.7 million premium paid on the retirement of a portion of MM’s Yankeebonds.

 

In the third quarter of 2004 and the ninemonths ended September 30, 2004, the Company recorded gains on sales ofproperty of $20.7 million and $43.0 million, respectively.  These gains are from the sale of non-coreproperty of our Mexican operations. Interest income was $5.1 million and $13.5 million for the third quarterand first nine months of 2005, respectively, as compared to $1.7 million and$5.3 million in the respective 2004 periods. These increases were principally the result of higher cash balances inthe 2005 periods.

 

Taxes on Income:  Taxes on income for the third quarter and thenine months ended September 30, 2005, were $152.6 million and $405.4 million,compared with $93.3 million and $265.2 million for the same periods in 2004,respectively.  The increase wasprincipally due to higher earnings in 2005. The effective tax rate for the nine months ended September 30, 2005, was29.2% compared to 29.7% for the same period in 2004.  Included in the 2005 tax provision is a refundof $43.4 million received by our Mexican subsidiary for asset-based taxes(minimum income tax) paid in prior years. Without the benefit of this credit the Company’s effective tax rate forthe 2005 period would increase to 32.3%. The disparity in the tax rates is the result of an increase in expensesthat are not deductible in computing income tax for our Mexican operations,substantially all of which is related to a one time non-deductible expense of$31.1 million for workers’ participation resulting from a change in lawregarding the basis of calculation.

 

Segment Results Analysis

 

Peruvian Open Pit Operations

The following table set forth net sales,operating cost and expenses and operating income for our Peruvian open pitoperations segment, for the three and nine months periods ended September 30,2005 and 2004:

 

| ** **                    | ** ** | **Three Months ended  September 30,** | ** ** | **Nine Months ended  September 30,** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                    | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                    | ** ** | **(dollars in millions)**             | ** ** |
| Net sales                     |       | $                                     | 579.7      |                                 | $          | 428.1 |   | $ | 1,545.0 |   | $ | 1,091.2 |   |
| Operating costs and  expenses |       | (222.6                                | )          | (216.3                               | )          | (629.0 | ) | (550.5 | ) |
| Operating income              |       | $                                     | 357.1      |                                 | $          | 211.8 |   | $ | 916.0 |   | $ | 540.7 |   |

 

Net sales in the third quarter 2005 increased$151.6 million to $579.7 million from $428.1 million in the comparable periodof 2004.  Net sales for the nine monthsended September 30, 2005 increased $453.8 million to $1,545.0 million from$1,091.2 million for the same period of 2004. The increase in net sales is principally result of higher molybdenum andcopper prices in both 2005 periods. Copper sales volume decreased in both 2005 periods, principally as aresult of lower production at our Cuajone mine. 

 

30

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Molybdenum sales volume, however, increasedin both 2005 periods, largely reducing the effect of the decrease in coppersales volume.

 

Operating cost and expenses in the thirdquarter of 2005 increased $6.3 million to $222.6 million from $216.3 million inthe third quarter of 2004, principally due to higher cost of sales andexploration expense. Cost of sales (exclusive of depreciation, amortization anddepletion) for the three months ended September 30, 2005 was $191.3 millioncompared with $188.2 million in the same period of 2004. The increase in costof sales includes $7.4 million of higher fuel and power cost, $11.7 million ofhigher workers participation and $2.7 million of mining royalties net of anexchange gain of $9.5 million. The increase in exploration cost is due to thedrilling and other activities at our Tia Maria project.

 

Operating cost and expenses for the ninemonths ended September 30, 2005 was $629.0 million compared to $550.5 millionin the same period of 2004. Cost of sales (exclusive of depreciation,amortization and depletion) for the nine months ended September 30, 2005 was$538.1 million compared with $465.8 million in the same period of 2004.  The increase in cost of sales includes $29.2million in workers’ participation provision, which is calculated at 8% of thePeruvian operations pre-tax earnings, which increased during this period.  In addition, the 2005 amount includes anincrease of $18.3 million for the Peruvian royalty charge instituted in June2004 and $28.4 million of higher power and fuel costs in 2005.

 

Mexican Open Pit Operations

The following table sets forth net sales,operating cost and expenses and operating income for our Mexican open pitoperations segment for the three and nine months periods ended September 30,2005 and 2004:

 

| ** **                    | ** ** | **Three Months ended  September 30,** | ** ** | **Nine Months ended  September 30,** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                    | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                    | ** ** | **(dollars in millions)**             | ** ** |
| Net sales                     |       | $                                     | 408.9      |                                 | $          | 264.1 |   | $ | 1,309.1 |   | $ | 830.2 |   |
| Operating costs and  expenses |       | (217.8                                | )          | (167.2                               | )          | (795.7 | ) | (477.2 | ) |
| Operating income              |       | $                                     | 191.1      |                                 | $          | 96.9 |   | $ | 513.4 |   | $ | 353.0 |   |
|                               |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |

 

Net sales in the third quarter 2005 increased$144.8 million to $408.9 million from the comparable period of 2004. Net salesfor the nine months ended September 30, 2005 increased $478.9 million to$1,309.1 million from $830.2 million for the same period in 2004. Theincrease in net sales is principally result of higher copper and molybdenumvolume and prices.

 

Operating cost and expenses in the thirdquarter of 2005 increased $50.6 million to $217.8 million from $167.2 millionin the third quarter of 2004, principally due to higher cost of sales anddepreciation, amortization and depletion. Cost of sales (exclusive ofdepreciation, amortization and depletion) increased $22.5 million to $160.1million from $137.6 million in 2004. The increase in cost of sales wasprincipally due to higher production and sales volume, $3.5 million of higherfuel and power cost, $8.8 million of maintenance costs, $4.7 million of highercost of purchased metal and $22.2 million of increased workers’ participation.The increase of $27.2 million in depreciation, amortization and depletion wasprincipally due to the amortization of capitalized mine stripping and leachablecost.

 

Operating costs and expenses for the ninemonths ended September 30, 2005 increased $318.5 million to $795.7 millioncompared to $477.2 million in the same period of 2004 principally due to highercost of sales and depreciation, amortization and depletion. Cost of sales(exclusive of depreciation, amortization and depletion) increased by $249.7million to $639.6 million compared with $389.9 million in 2004. The increase incost of sales is mainly due to higher production and sales volume, $15.4million of higher power and fuel cost, $6.8 million of maintenance costs, $32.7million of higher purchased metals, $11.2 million of exchange loss and $80.8million in increased workers’ participation which includes a charge of $31.1million related to a change in the base of calculation. The increase of $64.5million in depreciation, amortization 

 

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and depletion was principally due to theamortization of capitalized mine stripping and leachable cost.

 

Mexican UndergroundOperations (IMMSA)

The following table set forth net sales,operating cost and expenses and operating income for our IMMSA segment, for thethree and nine months periods ended September 30, 2005 and 2004.

 
| ** **                    | ** ** | **Three Months ended  September 30,** | ** ** | **Nine Months ended  September 30,** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                    | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                    | ** ** | **(dollars in million)**              | ** ** |
| Net sales                     |       | $                                     | 85.0       |                                 | $          | 78.4 |   | $ | 327.9 |   | $ | 236.3 |   |
| Operating costs and  expenses |       | (78.6                                 | )          | (74.4                                | )          | (288.8 | ) | (201.4 | ) |
| Operating income              |       | $                                     | 6.4        |                                 | $          | 4.0 |   | $ | 39.1 |   | $ | 34.9 |   |

 

Net sales in the third quarter 2005 increased$6.6 million to $85.0 million from $78.4 million in the comparable period of2004. Net sales for the nine months ended September 30, 2005 increased $91.6million to $327.9 million from $236.3 million for the same period of 2004. Theincrease in net sales is principally the result of higher copper and zincprices in the three and nine month periods and higher sales volume in the ninemonth period.

 

Operating cost and expenses in the thirdquarter of 2005 increased $4.2 million to $78.6 million from $74.4 million inthe third quarter of 2004. Cost of sales (exclusive of depreciation,amortization and depletion) increased $3.8 million to $66.6 million in thethird quarter of 2005 from $62.8 million in the third quarter of 2004principally due to $2.5 million of higher power and fuel cost, $4.1 million ofcontract operating costs and $1.4 million of higher purchased metals from thirdparties, partially offset by lower workers’ participation.

 

Operating costs and expenses for the ninemonths ended September 30, 2005 increased $87.4 million to $288.8 million from$201.4 million in the same period of 2004. Cost of sales (exclusive ofdepreciation, amortization and depletion) in the nine months ended September30, 2005 increased $85.4 million to $255.2 million from $169.8 million in thesame period of 2004. The increase in cost of sales is mainly due to higherproduction and sales volume, $7.3 million of higher power and fuel costs, $7.9million of contract operating cost and $4.4 million of higher purchased metalspartially offset by $10.7 million of lower workers’ participation.

 

Intersegment Eliminationsand Adjustments

 

The net sales, operating costs and expensesand operating income displayed above will not be directly equal to amounts inour Condensed consolidated combined statement of earnings because theadjustments of intersegment operating revenues and expenses must be taken intoaccount.  Please see Note K of thefinancial statements.

 

CASH FLOW

 

The following table shows the cash flow forthe three and nine-month periods ended September 30, 2005 and 2004.

 
| ** **                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                   | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                   | ** ** | **(dollars in million)**              | ** ** |
| Net cash provided from  operating activities |       | $458.3                                |       | $274.9                               |       | $992.6 |   | $712.1 |   |
| Net cash used for  investing activities      |       | (115.4                                | )          | (38.3                                | )          | (228.5 | ) | (112.4 | ) |
| Net cash used for  financing activities      |       | (40.6                                 | )          | (211.4                               | )          | (713.0 | ) | (475.9 | ) |
| Effect of exchange rate  changes on cash     |       | (6.6                                  | )          | (15.8                                | )          | 5.1 |   | (11.0 | ) |
| Increase in cash and cash  equivalents       |       | $295.7                                |       | $9.4                                 |       | $56.2 |   | $112.8 |   |

 

ThirdQuarter: Net cash provided by operating activities was $458.3 million in the 

 

 

32

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third quarter of 2005,compared with $274.9 million in 2004 period. The increase of $183.4 million was principally due to higher earningsand an increase of $68.4 million in the contribution from changes in operatingassets and liabilities.

 

Net cash used in investing activities was$115.4 million in the third quarter of 2005 compared with $38.3 million in thethird quarter of 2004 and included $120.7 million for capital expenditures. Thecapital expenditures included investments at our Peruvian operations of $75.0million for the Ilo smelter modernization project, $5.8 million for theToquepala leach dump project and $15.6 million for various other replacementexpenditures.  In addition, we spent$24.3 million for replacement assets at our Mexican operations.  In the third quarter of 2004, cash used forinvesting activities was $38.3 million; this amount includes capital spendingof $59.9 million, reduced by proceeds of $20.7 million from the sale ofnon-core property of our Mexican subsidiary.

 

Net cash used infinancing activities in the third quarter of 2005 was $40.6 million, comparedwith $211.4 million in the third quarter of 2004.  The third quarter of 2005 includes a dividenddistribution of $153.6 million, compared with a distribution of $60.4 millionin the third quarter of 2004.  Additionally,in the third quarter of 2005, we issued senior unsecured notes in two series,$200 million at 6.375%, maturing on July 27, 2015 and $600 million at 7.5%,maturing on July 27, 2035.  These noteswere sold at a discount totaling $6.4 million, netting the Company $793.6million in the in the transaction. Proceeds from this debt prepaid the outstanding indebtness of $680million, under the Company’s $200 million and $480 million credit facilities.

 

Nine Months: Net cashprovided by operating activities was $992.6 million in the first nine months of2005, an increase of $280.5 million over the comparable 2004 period.  The increase was principally due to higherearnings of $364.4 million, reduced by an increased use of funds for operatingassets and liabilities.

 

Cash used in investingactivities was $228.5 million in the nine month period ended September 30,2005. This includes $263.3 million of capital expenditures partially offset byproceeds of $45.3 million from the redemption (purchase) of marketablesecurities. The significant capital expenditures included investments at our Peruvianoperations of $140.3 million for the Ilo smelter modernization project, $22.5million for the Toquepala leach dump project and $35.2 million for replacementassets. In addition, capital expenditures included investments at our IMMSAUnit of $9.3 million for the Pasta de Conchos mine development, $4.3 millionfor the Nueva Rosita furnace rehabilitation, $3.6 million for the San Martinmine development and $48.1 million for replacement assets at our two Mexicanoperations.  In the nine months periodended September 30, 2004, cash used for capital expenditures was $149.1million. Additionally, in the 2004 period we received proceeds of $43.0 millionfor the sale of non-core property of our Mexican subsidiary.

 

Cash used in financingactivities for the nine months ended September 30, 2005 was $713.0 million,compared with $475.9 million used in the corresponding period in 2004. The ninemonths ended September 30, 2005, includes dividend distributions of $603.6million, compared with $125.4 million in 2004 and net debt payments of $105.0million compared to $344.3 million in the nine month 2004 period.

 

LIQUIDITY AND CAPITAL RESOURCES

 

OnJuly 27, 2005 the Company issued $200 million 6.375% Notes due 2015 and $600million 7.5% Notes due 2035.  The noteswere issued at a discount of $6.4 million, netting the Company $793.6million.  The Notes are senior unsecuredobligations of Southern Copper.  The netproceeds from the issuance and sale of the Notes were used to repay outstandingindebtedness of Southern Copper and its subsidiary, Minera Mexico, under their$200 million and $600 million ($480 million outstanding) credit facilities,respectively.  In connection with theprepayment of the debt, the Company expensed in the third quarter $12.5 millionof deferred fees associated with this debt. The balance of the new financing will be used for general corporatepurposes, including repayment of additional debt.

 

On August 19, 2005, the Company paid adividend of $1.043 per share, totaling $153.6 million.  On October 21, 2005, the Company announced adividend of $1.70 per share, 

 

 

33

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totaling $250.0 million, payable November 25,2005 to shareholders on record at the close of business of November 10, 2005.

 

InJanuary 2005, SCC signed a $200 million credit facility with a group of banksled by Citibank, N.A.  In the firstquarter of 2005, proceeds of this credit facility were used to prepay $170million of the bonds issued under SCC’s Peruvian bond program.  In April 2005 an additional drawdown of $30million was used to prepay the remaining outstanding bonds.  The Company capitalized $2.8 million of costsassociated with this facility.  The Companypaid a prepayment penalty of 1%, or $2.0 million, to the Peruvian bondholders.  Additionally, the Company wrote off $2.3million of previously capitalized bond issuance cost.  Both amounts are included in the condensedconsolidated combined statement of earnings on the line item “Loss on debtprepayments”. On July 28, 2005 this credit facility was repaid, see above.

 

On March 30, 2005, we prepaid $120 million ofthe principal amount outstanding under MM’s $600 million Citibank creditfacility. On July 28, 2005 the remaining balance, $480 million of this creditfacility was repaid, see above. Additionally, the Company wrote off $10.2million of deferred financing cost.

 

On May 5, 2005, we repurchased $94.6 millionoutstanding Yankee bonds.  In connectionwith this purchase we paid a premium of $5.7 million, which has been charged toearnings under the caption “Loss on debt prepayment”.

 

The Company’s biggestoutstanding capital investment project is the Ilo smelter modernization.  This project will modernize the smelter andbring SCC into compliance with PAMA requirements.  In July 2003, we awarded the contract toprovide the technology and basic engineering for the modernization of the Ilosmelter to Fluor Chile S.A. and Xstrata plc (formerly M.I.M. HoldingLimited).  The project is using theAustralian ISASMELT technology and the Company believes that it will complywith the current environmental regulations. It is estimated that the construction of the project will be completedbefore January 2007, the deadline established by the PAMA.  The new estimated cost of this project is $500million including $294.3 million expended through September 30, 2005.

 

The Company has, on hand, sufficient funds tocontinue this project but significant funds may be necessary for itscompletion.  The Company plans to financeits currently foreseeable liquidity requirements with cash on hand, funds fromoperations and other financing sources.

 

In May 2005, the Mexican Supreme Courtrendered a decision that changed the method of computing the amount ofstatutory worker’s profit sharing required to be paid by some Mexicancompanies, including our Minera México subsidiary.  The Supreme Court’s ruling in effectprohibited the application of net operating loss carryforwards in computing theincome used as the base for determining the workers’ profit sharingamounts.  The Company is currentlyevaluating the possibility of a judicial challenge to this ruling.  Nevertheless, the Company has elected torecognize in its results of operations for the first nine months of 2005 acharge to earnings reflecting preliminary estimates of $31.1 million forworkers’ profit sharing related to 2004 in addition to its year-to-dateestimate or its potential 2005 liability. The 2004 workers’ profit sharing liability estimate may vary insubsequent interim periods as the Company continues to evaluate the basis ofthis calculation.  In addition, theruling may affect the Company’s future results of operations and liquidity tothe extent it pays higher workers’ profit sharing amount.

 

At September 30, 2005 the Company’s debt as apercentage of total capitalization (the total of debt, minority interest andstockholders equity) was 27.7% as compared with 32.0% at December 31,2004.  At September 30, 2005, the Company’scash and marketable securities amounted to $766.9 million compared to $756.0million at December 31, 2004.

 

 

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NON-GAAP INFORMATION RECONCILIATION

 

Reconciliation ofoperating cash cost to GAAP cost of sales in millions of dollars and cents perpound.

 

 
| ** **                                                                      | ** ** | **Three  Months Ended  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                               | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ****                                                                            | ** ** | **$ Million**                     | ** ** | **¢ per  pound**                 | ** ** | **$ Million** | ** ** | **¢ per  pound** | ** ** | **$ Million** | ** ** | **¢ per  pound** | ** ** | **$ Million** | ** ** | **¢ per  pound** | ** ** |
| CASH COST                                                                       |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of sales (including  depreciation, amortization and depletion) — GAAP |       | 457.8                                  |       | 121.9                                 |       | 396.5 |   | 98.4 |   | 1,392.0 |   | 124.6 |   | 1,065.8 |   | 89.7 |   |
| Add:                                                                            |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and  administrative expenses                                   |       | 20.2                                   |       | 5.4                                   |       | 17.3 |   | 4.3 |   | 59.2 |   | 5.3 |   | 51.3 |   | 4.3 |   |
| Treatment and refining charges                                                  |       | 11.2                                   |       | 3.0                                   |       | 9.8 |   | 2.4 |   | 26.6 |   | 2.4 |   | 23.4 |   | 2.0 |   |
| Less:                                                                           |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| By products revenue                                                             |       | (381.9                                 | )          | (101.7                                | )          | (231.0 | ) | (57.3 | ) | (1,183.9 | ) | (106.0 | ) | (618.1 | ) | (52.0 | ) |
| Depreciation,  amortization and depletion                                       |       | (74.8                                  | )          | (19.9                                 | )          | (48.1 | ) | (11.9 | ) | (206.3 | ) | (18.5 | ) | (143.4 | ) | (12.1 | ) |
| Workers participation                                                           |       | (52.8                                  | )          | (14.1                                 | )          | (24.1 | ) | (6.0 | ) | (160.5 | ) | (14.4 | ) | (61.1 | ) | (5.1 | ) |
| Royalty charge and other                                                        |       | (18.7                                  | )          | (5.0                                  | )          | (10.1 | ) | (2.5 | ) | (50.5 | ) | (4.5 | ) | (18.5 | ) | (1.6 | ) |
| Inventory change                                                                |       | 18.1                                   |       | 4.8                                   |       | 17.8 |   | 4.4 |   | 33.0 |   | 3.0 |   | 62.0 |   | 5.2 |   |
| **Operating  cash cost**                                                        | ** ** | **(20.9**                              | **)**      | **(5.6**                              | **)**      | **128.1** | ** ** | **31.8** | ** ** | **(90.4** | **)** | **(8.1** | **)** | **361.4** | ** ** | **30.4** | ** ** |
|                                                                            |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Add by products revenue                                                         |       | 381.9                                  |       | 101.7                                 |       | 231.0 |   | 57.3 |   | 1,183.9 |   | 106.0 |   | 618.1 |   | 52.0 |   |
|                                                                            |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Operating  cash cost, without by products revenue**                           | ** ** | **361.0**                              | ** ** | **96.1**                              | ** ** | **359.1** | ** ** | **89.1** | ** ** | **1,093.5** | ** ** | **97.9** | ** ** | **979.5** | ** ** | **82.4** | ** ** |
|                                                                            |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total pounds of copper  produced and purchased, in million                      |       |                                   |       | 375.5                                 |       |   |   | 403.0 |   |   |   | 1,116.8 |   |   |   | 1,187.6 |   |

 

 

Impactof New Accounting Standards

 

Pleasesee note “L” to our condensed consolidated combined financial statements — page24.

 

CautionaryStatement:

 

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

 

 

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Item4. Controls and Procedures

 

EVALUATION OF DISCLOSURECONTROLS AND PROCEDURES

 

As of September 30,2005, the Company carried out an evaluation, under the supervision and with theparticipation of the Company’s Disclosure Committee and the Company’smanagement, including the Chief Executive Officer and the Chief FinancialOfficer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures (as such term is defined in Rules 13a-15(e)and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the Chief Executive Officer and the Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures areeffective in timely alerting them to material information relating to theCompany (including its consolidated subsidiaries) required to be included inthe Company’s periodic SEC filings.

 

 

CHANGES IN INTERNAL CONTROLSOVER FINANCIAL REPORTING

 

There was no change in the Company’s internalcontrols over financial reporting (as such term is defined in Rules 13a-15(f)and 15d-15(f) under the Securities Exchange Act of 1934, as amended) thatoccurred during the quarter ended September 30, 2005 that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrols over financial reporting.

 

 

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Mexico City, October 14, 2005

 

REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM

 

To the Board of Directors and Shareholders ofSouthern Copper Corporation:

 

We have reviewed the accompanying condensedconsolidated balance sheet of Southern Copper Corporation and subsidiaries asof September 30, 2005 and the related condensed consolidated combinedstatements of earnings and cash flows for each of the three-month andnine-month periods ended September 30, 2005 and 2004. These interimconsolidated combined financial statements are the responsibility of theCompany’s management.

 

We conducted our reviews in accordance withstandards established by the Public Company Accounting Oversight Board (UnitedStates).  A review of interim financialinformation consists principally of applying analytical procedures to financialdata and making inquiries of persons responsible for financial and accountingmatters.  It is substantially less inscope than an audit conducted in accordance with the Public Company AccountingOversight Board, the objective of which is the expression of an opinionregarding the consolidated combined financial statements taken as a whole.  Accordingly, we do not express such anopinion.

 

Based on our reviews we are not aware of anymaterial modifications that should be made to the accompanying consolidatedcombined interim financial statements for them to be in conformity withaccounting principles generally accepted in the United States of America.

 

 

PRICEWATERHOUSECOOPERS

 

 

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Part II - OTHER INFORMATION

 

Item 1 - Legal Procedures

 

The information provided in Note I to theconsolidated combined financial statements contained in Part I of this Form10-Q, is incorporated herein by reference.

 

Item 4. Submission ofMatters to a Vote of Security Holders

 

On or about September 20, 2005 the Company mailed toits stockholders an information statement announcing that the followingcorporate action had been taken pursuant to the recommendation of the Company’sBoard of Directors and with the written consent of the holders of a majority ofthe Company’s outstanding shares of common stock in lieu of a special meetingof the stockholders:

 

1. Amendment of our Restated Certificate ofIncorporation to change our present corporate name to “Southern CopperCorporation”.

 

2. Amendment and restatement of our RestatedCertificate of Incorporation to eliminate extraneous provisions in our RestatedCertificate of Incorporation relating to our formerly outstanding shares ofClass A Common Stock, all of which were converted to Common Stock onMay 19, 2005 and retired.

 

3. Amendment of our Restated Certificate ofIncorporation to change the number of directors of our Corporation from fifteento a number to be fixed from time to time by resolution of a majority of ourBoard of Directors, provided that the number of directors shall not be lessthan six or more than fifteen.

 

On September 20, 2005, Americas Mining Corporation, aDelaware corporation (“AMC”), which directly owns 110,556,589 shares (75.1%) ofthe issued and outstanding shares of our Common Stock, approved the amendmentsby signing a written consent. No further vote of our stockholders was requiredfor the Company to effect the amendments, which became effective on October 11,2005.

 

Item6.            Exhibits

 
| **Exhibit  No.** | ** ** | **Description  of Exhibit**                                                                                                                                                      |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |       | Amended  and Restated Certificate of Incorporation of Southern Peru Copper Corporation  dated September 20, 2005                                                                 |
| 15               |       | Independent  Accountants’ Awareness Letter                                                                                                                                  |
| 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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PartII — OTHER INFORMATION

 

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 González Rocha                        |
|                   |   | Oscar González Rocha                            |
|                   |   | President and Chief  Executive Officer               |
| Date: November 4, 2005 |   |                                                 |
|                   |   |                                                 |
|                   |   | /s/ J. Eduardo González Félix              |
|                   |   | J. Eduardo González Félix                  |
|                   |   | Vice President,  Finance and Chief Financial Officer |
| Date: November 4, 2005 |   |                                                 |

 

 

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