Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

 
| **x**                               | ** **         | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------|--------------------|---------------------------------------------------------------------------------------------------------|
| ** **                          | ** **         | ** **                                                                                              |
| **For  the quarterly period ended** | **JUNE  30, 2008** |
| ** **                          | ** **         | ** **                                                                                              |
| **or**                              |
| ** **                          | ** **         | ** **                                                                                              |
| **o**                               | ** **         | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                          | ** **         | ** **                                                                                              |
| **For  the transition period from** | **to**             |
| ** **                          | ** **         | ** **                                                                                              |
| **Commission  File Number:**        | **1-14066**        |
|                                     |                    |                                                                                                         |  |  |  |

 

**SOUTHERNCOPPER CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **13-3849074**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or  organization) |       | (I.R.S. Employer Identification No.) |
|                                                            |       |                                 |
| **11811 North Tatum Blvd. Suite 2500 Phoenix,  AZ**        | ** ** | **85028**                            |
| Address of principal executive offices)                         |       | (Zip Code)                           |

 

**(602) 494-5328**

Registrant’s telephone number, including area code

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), 
| and  (2) has been subject to such filing requirements for the past 90 days. |   | x  Yes | o  No |
|----------------------------------------------------------------------------------|--------|-------------|------------|

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

| Large accelerated filer x                      |   | Accelerated filer o          |
|------------------------------------------------|--------|-----------------------------------|
| Non-accelerated filer o                        |   | Smaller reporting  company o |
| (Do not check if a smaller  reporting company) |   |                              |

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

 

Asof July 31, 2008 there were outstanding 883,410,150 shares of SouthernCopper Corporation common stock, par value $0.01 per share.

 

 

 

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Table of Contents

 

Southern Copper Corporation

 

INDEX TO FORM 10-Q

 
| ** **                                               | ** **                                                                                                      | **Page No.** |
|----------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------|-------------------|
| Part I.  Financial Information:                |                                                                                                            |
|                                                     |                                                                                                            |              |
| Item. 1                                                  | Condensed Consolidated  Financial Statements (unaudited)                                                        |              |
|                                                     |                                                                                                            |              |
|                                                     | Condensed  Consolidated Statement of Earnings for the three and six months ended  June 30, 2008 and 2007   | 3                 |
|                                                     |                                                                                                            |              |
|                                                     | Condensed  Consolidated Balance Sheet June 30, 2008 and December 31, 2007                             | 4                 |
|                                                     |                                                                                                            |              |
|                                                     | Condensed  Consolidated Statement of Cash Flows for the three and six months ended  June 30, 2008 and 2007 | 5-6               |
|                                                     |                                                                                                            |              |
|                                                     | Notes to Condensed Consolidated Financial Statements                                                            | 7-30              |
|                                                     |                                                                                                            |              |
| Item 2.                                                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                     | 31-46             |
|                                                     |                                                                                                            |              |
| Item 3.                                                  | Quantitative  and Qualitative Disclosure about Market Risk                                                      | 47-49             |
|                                                     |                                                                                                            |              |
| Item 4.                                                  | Controls and  Procedures                                                                                        | 50                |
|                                                     |                                                                                                            |              |
| Report of Independent Registered Public Accounting  Firm | 51                                                                                                              |
|                                                     |                                                                                                            |              |
| Part II.  Other Information:                        |                                                                                                            |
|                                                     |                                                                                                            |              |
| Item 1.                                                  | Legal Proceedings                                                                                               | 52                |
|                                                     |                                                                                                            |              |
| Item 1A.                                                 | Risk factors                                                                                                    | 52                |
|                                                     |                                                                                                            |              |
| Item 4.                                                  | Submission  of Matters to a Vote of Security Holders                                                            | 53                |
|                                                     |                                                                                                            |              |
| Item 6.                                                  | Exhibits                                                                                                        | 54                |
|                                                     |                                                                                                            |              |
|                                                     | Signatures                                                                                                      | 55                |
|                                                     |                                                                                                            |              |
|                                                     | List of  Exhibits                                                                                               | 56                |
|                                                     |                                                                                                            |              |
| Exhibit 3.1                                         | Certificate  of Amendment of Amended and Restated Certificate of Incorporation                                  | 1                 |
|                                                     |                                                                                                            |              |
| Exhibit 15                                          | Independent  Accountants’ Awareness Letter                                                                 | 1                 |
|                                                     |                                                                                                            |              |
| Exhibit 31.1                                        | Certification  Pursuant to Section 302 of theSarbanes-Oxley Act of 2002                                    | 1-2               |
|                                                     |                                                                                                            |              |
| Exhibit 31.2                                        | Certification  Pursuant to Section 302 of theSarbanes-Oxley Act of 2002                                    | 1-2               |
|                                                     |                                                                                                            |              |
| Exhibit 32.1                                        | Certification  Pursuant to Section 906 of theSarbanes-Oxley Act of 2002                                    | 1                 |
|                                                     |                                                                                                            |              |
| Exhibit 32.2                                        | Certification  Pursuant to Section 906 of theSarbanes-Oxley Act of 2002                                    | 1                 |

 

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Part I – FINANCIALINFORMATION

 

Item1.  Condensed Consolidated FinancialStatements

 

Southern Copper Corporation

 

CONDENSED CONSOLIDATEDSTATEMENT OF EARNINGS

(Unaudited)

 
| ** **                                                                                    | ** ** | **3 Months Ended** | ** ** | **6 Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                    | ** ** | **June 30,**            | ** ** | **June 30,**            | ** ** |
| ** **                                                                                    | ** ** | **2008**                     | ** ** | **2007**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                                    | ** ** | **(in thousands)**      | ** ** |
| Net sales                                                                                     |       | $                            | 1,461,796  |                         | $          | 1,826,462 |   | $ | 2,961,002 |   | $ | 3,184,799 |   |
|                                                                                          |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
| Operating costs and expenses:                                                                 |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
| Cost of sales (exclusive of depreciation,  amortization and depletion shown separately below) |       | 550,458                      |       | 562,334                      |       | 1,071,047 |   | 1,028,979 |   |
| Selling, general and administrative                                                           |       | 26,726                       |       | 25,907                       |       | 51,381 |   | 49,706 |   |
| Depreciation, amortization and depletion                                                      |       | 83,199                       |       | 84,466                       |       | 164,395 |   | 158,564 |   |
| Exploration                                                                                   |       | 8,996                        |       | 8,553                        |       | 17,052 |   | 14,971 |   |
| Total operating costs and expenses                                                            |       | 669,379                      |       | 681,260                      |       | 1,303,875 |   | 1,252,220 |   |
|                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Operating income                                                                              |       | 792,417                      |       | 1,145,202                    |       | 1,657,127 |   | 1,932,579 |   |
|                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Interest expense                                                                              |       | (27,487                      | )          | (30,982                      | )          | (56,415 | ) | (60,788 | ) |
| Capitalized interest                                                                          |       | 1,441                        |       | 1,477                        |       | 2,529 |   | 6,443 |   |
| Gain (loss) on derivative instruments                                                         |       | (1,487                       | )          | (55,512                      | )          | 1,440 |   | (76,692 | ) |
| Other income (expense)                                                                        |       | 3,146                        |       | 5,010                        |       | (354 | ) | 25,672 |   |
| Interest income                                                                               |       | 12,181                       |       | 18,076                       |       | 29,596 |   | 40,004 |   |
| Earnings before income taxes and minority  interest                                           |       | 780,211                      |       | 1,083,271                    |       | 1,633,923 |   | 1,867,218 |   |
|                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Income taxes                                                                                  |       | 228,892                      |       | 354,416                      |       | 514,914 |   | 585,090 |   |
| Minority interest                                                                             |       | 2,852                        |       | 2,893                        |       | 5,559 |   | 4,484 |   |
|                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Net earnings                                                                                  |       | $                            | 548,467    |                         | $          | 725,962 |   | $ | 1,113,450 |   | $ | 1,277,644 |   |
|                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Per common share amounts:                                                                     |       |                         |       |                         |       |   |   |   |   |
| Net earnings basic and diluted                                                                |       | $                            | 0.62       |                         | $          | 0.82 |   | $ | 1.26 |   | $ | 1.45 |   |
| Dividends paid                                                                                |       | $                            | 0.57       |                         | $          | 0.50 |   | $ | 1.03 |   | $ | 1.07 |   |
| Weighted average common shares outstanding  (basic and diluted)                               |       | 883,401                      |       | 883,392                      |       | 883,399 |   | 883,388 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements. All the shares and per share amounts forprior periods have been restated to reflect the common stock split. See note P.

 

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Southern Copper Corporation

 

CONDENSED CONSOLIDATEDBALANCE SHEET

(Unaudited)

 
| ** **                                                                                      | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                                      | ** ** | **2008**                | ** ** | **2007**              | ** ** |
| ** **                                                                                      | ** ** | **(in thousands)** | ** ** |
| ASSETS                                                                                          |       |                    |       |                  |       |
| Current assets:                                                                                 |       |                    |       |                  |       |
| Cash and cash equivalents                                                                       |       | $                       | 1,150,259  |                  | $          | 1,409,272 |   |
| Short-term investments                                                                          |       | 97,515                  |       | 117,903               |       |
| Accounts receivable trade, less allowance  for doubtful accounts (2008 - $4,553; 2007 - $4,585) |       | 513,262                 |       | 385,611               |       |
| Accounts receivable other (including  affiliates 2008 - $1,381; 2007 - $1,644)                  |       | 27,527                  |       | 77,167                |       |
| Inventories                                                                                     |       | 491,578                 |       | 448,283               |       |
| Deferred income tax - current portion                                                           |       | 51,242                  |       | 72,303                |       |
| Other current assets                                                                            |       | 100,161                 |       | 124,970               |       |
| Total current assets                                                                            |       | 2,431,544               |       | 2,635,509             |       |
|                                                                                            |       |                    |       |                  |       |
| Property, net                                                                                   |       | 3,618,852               |       | 3,568,311             |       |
| Leachable material, net                                                                         |       | 186,770                 |       | 220,243               |       |
| Intangible assets, net                                                                          |       | 114,946                 |       | 115,802               |       |
| Other assets, net                                                                               |       | 53,025                  |       | 40,693                |       |
| Total Assets                                                                                    |       | $                       | 6,405,137  |                  | $          | 6,580,558 |   |
|                                                                                            |       |                    |       |                  |       |
| LIABILITIES                                                                                     |       |                    |       |                  |       |
| Current liabilities:                                                                            |       |                    |       |                  |       |
| Current portion of long-term debt                                                               |       | $                       | 10,000     |                  | $          | 160,000 |   |
| Accounts payable                                                                                |       | 267,344                 |       | 255,070               |       |
| Accrued income taxes                                                                            |       | 62,518                  |       | 132,175               |       |
| Due to affiliated companies                                                                     |       | 9,105                   |       | 3,870                 |       |
| Accrued workers’ participation                                                             |       | 151,851                 |       | 313,251               |       |
| Interest                                                                                        |       | 31,854                  |       | 37,325                |       |
| Other accrued liabilities                                                                       |       | 36,331                  |       | 25,499                |       |
| Total current liabilities                                                                       |       | 569,003                 |       | 927,190               |       |
|                                                                                            |       |                    |       |                  |       |
| Long-term debt                                                                                  |       | 1,284,850               |       | 1,289,754             |       |
| Deferred income taxes                                                                           |       | 193,594                 |       | 219,501               |       |
| Non-current taxes payable                                                                       |       | 161,216                 |       | 154,721               |       |
| Other liabilities and reserves                                                                  |       | 116,320                 |       | 111,442               |       |
| Asset retirement obligation                                                                     |       | 14,251                  |       | 13,145                |       |
| Total non-current liabilities                                                                   |       | 1,770,231               |       | 1,788,563             |       |
|                                                                                            |       |                    |       |                  |       |
| Commitments and Contingencies (Note M)                                                          |       |                    |       |                  |       |
|                                                                                            |       |                    |       |                  |       |
| MINORITY INTEREST                                                                               |       | 15,780                  |       | 16,685                |       |
|                                                                                            |       |                    |       |                  |       |
| STOCKHOLDERS’ EQUITY                                                                       |       |                    |       |                  |       |
| Common stock                                                                                    |       | 8,846                   |       | 8,846                 |       |
| Additional paid-in capital                                                                      |       | 856,701                 |       | 819,646               |       |
| Retained earnings                                                                               |       | 3,421,295               |       | 3,220,857             |       |
| Accumulated other comprehensive loss                                                            |       | (26,545                 | )          | (26,554               | )          |
| Treasury stock                                                                                  |       | (210,174                | )          | (174,675              | )          |
| Total Stockholders’ Equity                                                                 |       | 4,050,123               |       | 3,848,120             |       |
|                                                                                            |       |                    |       |                  |       |
| Total Liabilities, Minority Interest and Stockholders’  Equity                             |       | $                       | 6,405,137  |                  | $          | 6,580,558 |   |

 

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

 

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Southern Copper Corporation

 

CONDENSED CONSOLIDATEDSTATEMENT OF CASH FLOWS

(Unaudited)

 
| ** **                                                                             | ** ** | **3 Months Ended  June 30,** | ** ** | **6 Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                             | ** ** | **2008**                                    | ** ** | **2007**                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                             | ** ** | **(in thousands)**                     | ** ** |
| OPERATING ACTIVITIES                                                              | ** ** | ** **                                  | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                   |       |                                        |       |                                        |       |   |   |   |   |
| Net earnings                                                                           |       | $                                           | 548,467    |                                        | $          | 725,962 |   | $ | 1,113,450 |   | $ | 1,277,644 |   |
| Adjustments to reconcile net earnings to  net cash provided from operating activities: |       |                                        |       |                                        |       |   |   |   |   |
| Depreciation, amortization and depletion                                               |       | 83,199                                      |       | 84,466                                      |       | 164,395 |   | 158,564 |   |
| Capitalized leachable material                                                         |       | —                                      |       | (19,568                                     | )          | (2,246 | ) | (40,029 | ) |
| Loss on currency translation effect                                                    |       | 3,430                                       |       | 5,249                                       |       | 22,031 |   | 567 |   |
| Provision for deferred income taxes                                                    |       | 23,322                                      |       | 38,094                                      |       | (14,730 | ) | 58,340 |   |
| Loss on sale of short-term investment                                                  |       | —                                      |       | 29,388                                      |       | — |   | 29,388 |   |
| Unrealized loss on derivative instruments                                              |       | 10,336                                      |       | 36,929                                      |       | 2,099 |   | 59,617 |   |
| Minority interest                                                                      |       | 2,852                                       |       | 2,893                                       |       | 5,559 |   | 4,484 |   |
|                                                                                   |       |                                        |       |                                        |       |   |   |   |   |
| Cash provided from (used for) operating  assets and liabilities:                       |       |                                        |       |                                        |       |   |   |   |   |
| Accounts receivable                                                                    |       | 45,070                                      |       | (95,037                                     | )          | (85,755 | ) | (14,003 | ) |
| Inventories                                                                            |       | (36,267                                     | )          | (14,566                                     | )          | (43,295 | ) | (57,550 | ) |
| Accounts payable and accrued liabilities                                               |       | (222,604                                    | )          | (109,965                                    | )          | (200,754 | ) | (294,872 | ) |
| Other operating assets and liabilities                                                 |       | (53,040                                     | )          | (34,971                                     | )          | (52,687 | ) | 15,611 |   |
| Net cash provided by operating activities                                              |       | 404,765                                     |       | 648,874                                     |       | 908,067 |   | 1,197,761 |   |
|                                                                                   |       |                                        |       |                                        |       |   |   |   |   |
| INVESTING ACTIVITIES                                                                   |       |                                        |       |                                        |       |   |   |   |   |
| Capital expenditures                                                                   |       | (130,876                                    | )          | (93,962                                     | )          | (180,770 | ) | (178,992 | ) |
| Purchase of short-term investments                                                     |       | —                                      |       | —                                      |       | — |   | (100,000 | ) |
| Net proceeds from sale of short-term  investments                                      |       | 15,163                                      |       | 10,612                                      |       | 20,388 |   | 10,612 |   |
| Other                                                                                  |       | 5,097                                       |       | (145                                        | )          | 4,280 |   | 736 |   |
| Net cash used for investing activities                                                 |       | (110,616                                    | )          | (83,495                                     | )          | (156,102 | ) | (267,644 | ) |
|                                                                                   |       |                                        |       |                                        |       |   |   |   |   |
| FINANCING ACTIVITIES                                                                   |       |                                        |       |                                        |       |   |   |   |   |
| Debt repaid                                                                            |       | (155,025                                    | )          | (5,000                                      | )          | (155,025 | ) | (5,000 | ) |
| Dividends paid to common stockholders                                                  |       | (500,592                                    | )          | (441,683                                    | )          | (912,894 | ) | (942,267 | ) |
| Distributions to minority interest                                                     |       | (3,576                                      | )          | (1,405                                      | )          | (6,736 | ) | (3,164 | ) |
| Other                                                                                  |       | 733                                         |       | 216                                         |       | 794 |   | 277 |   |
| Net cash used for financing activities                                                 |       | (658,460                                    | )          | (447,872                                    | )          | (1,073,861 | ) | (950,154 | ) |
|                                                                                   |       |                                        |       |                                        |       |   |   |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                          |       | 41,789                                      |       | 7,257                                       |       | 62,883 |   | 10,873 |   |
|                                                                                   |       |                                        |       |                                        |       |   |   |   |   |
| (Decrease) increase in cash and cash  equivalents                                      |       | (322,522                                    | )          | 124,764                                     |       | (259,013 | ) | (9,164 | ) |
| Cash and cash equivalents, at beginning of  period                                     |       | 1,472,781                                   |       | 888,850                                     |       | 1,409,272 |   | 1,022,778 |   |
| Cash and cash equivalents, at end of period                                            |       | $                                           | 1,150,259  |                                        | $          | 1,013,614 |   | $ | 1,150,259 |   | $ | 1,013,614 |   |

 

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| ** **                                        | ** ** | ** ** | ** ** | **3 Months Ended  June 30,** | ** ** | **6 Months Ended  June 30,** | ** ** |
|---------------------------------------------------|------------|------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | **2008**                                    | ** ** | **2007**                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                        | ** ** | ** ** | ** ** | **(in thousands)**                     | ** ** |
| Supplemental disclosure of cash flow  information |       |       |       |                                        |       |                                        |       |   |   |   |   |
| Cash paid during the period for:                  |       |       |       |                                        |       |                                        |       |   |   |   |   |
| Interest                                          |       |       |       | $                                           | 11,311     |                                        | $          | 15,019 |   | $ | 64,016 |   | $ | 65,380 |   |
| Income taxes                                      |       |       |       | $                                           | 332,149    |                                        | $          | 296,822 |   | $ | 548,343 |   | $ | 561,333 |   |
| Workers participation                             |       |       |       | $                                           | 174,209    |                                        | $          | 127,415 |   | $ | 290,039 |   | $ | 298,851 |   |
|                                              |       |       |       |                                        |       |                                        |       |   |   |   |   |
| Non  cash transactions:                           |       |       |       |                                        |       |                                        |       |   |   |   |   |
| Common  stock split:                              |       |       |       |                                        |       |                                        |       |   |   |   |   |
| Increase  in Common stock                         |       | $          | 5,897      |                                        |       |                                        |       |   |   |   |   |   |
| Decrease  in Additional paid-in capital           |       | $          | 5,897      |                                        |       |                                        |       |   |   |   |   |   |

 

Theaccompanying notes are an integral part of these condensed consolidated financialstatements.

 

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Southern Copper Corporation

 

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

A.           In the opinion of Southern CopperCorporation, (the “Company”, “Southern Copper” or “SCC”), the accompanyingunaudited condensed consolidated financial statements contain all adjustments(consisting only of normal recurring adjustments) necessary to present fairlythe Company’s financial position as of June 30, 2008 and the results ofoperations and cash flows for the three and six months ended June 30, 2008and 2007.  The condensed consolidatedfinancial statements for the three and six months ended June 30, 2008 and2007 have been subject to a review by PricewaterhouseCoopers, the Company’sindependent registered public accounting firm, whose report dated August 1,2008, is presented on page 51.  Theresults of operations for the three and six months ended June 30, 2008 and2007 are not necessarily indicative of the results to be expected for the fullyear.  The December 31, 2007 balancesheet data was derived from audited financial statements, but does not includeall disclosures required by generally accepted accounting principles in theUnited States of America.  Theaccompanying condensed consolidated financial statements should be read inconjunction with the consolidated combined financial statements at December 31,2007 and notes included in the Company’s 2007 annual report on Form 10-K.

 

B.             Adoption ofNew Accounting Standards:

 

InFebruary 2007, the FASB issued SFAS No. 159, The Fair Value Optionfor Financial Assets and Financial Liabilities (“SFAS No. 159”).  SFAS No. 159 permits companies, at theirelection, to measure specified financial instruments and warranty and insurancecontracts at fair value on a contract-by-contract basis, with changes in fairvalue recognized in earnings each reporting period.  The election, called the “fair value option,”will enable some companies to reduce the volatility in reported earnings causedby measuring related assets and liabilities differently, and it is easier thanusing the complex hedge-accounting requirements in SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”),to achieve similar results.  Subsequentchanges in fair value for designated items will be required to be reported inearnings in the current period.  SFAS No. 159is effective for financial statements issued for fiscal years beginning after November 15,2007 and therefore became effective for the Company as of January 1,2008.  The Company has not elected tomeasure any eligible items at fair value. Accordingly, the adoption of SFAS No. 159 has not impacted theCompany’s results of operations and financial position.

 

InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements” (“SFAS No. 157”), which defines fair value, establishes aframework for measuring fair value in accordance with generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  SFAS No. 157 does notrequire any new fair value measurements; rather, it applies under otheraccounting pronouncements that require or permit fair value measurements.  The provisions of SFAS No. 157 are to beapplied prospectively as of the beginning of the fiscal year in which it isinitially applied, with any transition adjustment recognized as acumulative-effect adjustment to the opening balance of retained earnings.  The provisions of SFAS No. 157 wereadopted by the Company on January 1, 2008 and do not have any effect onits overall financial position or results of operations.  All fair value adjustments at June 30,2008 represent assets measured at fair value on a recurring basis.  Fair values as of June 30, 2008 werecalculated as follows (in million):

 

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| ** **                            | ** ** | **Balance at  June 30,  2008** | ** ** | **Quoted Prices  in Active  Markets for  Identical  Assets** | ** ** | **Significant  Other  Observable  Inputs** | ** ** | **Significant  unobservable  inputs** | ** ** |
|---------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------|------------|
| ** **                            | ** ** | ** **                               | ** ** | **(Level 1)**                                                          | ** ** | **(Level 2)**                         | ** ** | **(Level 3)**                    | ** ** |
| Short-term Investments                |       | $                                        | 97.5       |                                                                        | $          | 97.5                                       |       | —                                |       | — |   |
| Derivative Instruments:               |       |                                     |       |                                                                        |       |                                       |       |                                  |       |
| Exchange rate derivative, dollar/peso |       | (0.1                                     | )          | —                                                                      |       | (0.1                                       | )          | —                                |       |
| Copper derivative                     |       | (2.0                                     | )          | —                                                                      |       | (2.0                                       | )          | —                                |       |
| Total                                 |       | $                                        | 95.4       |                                                                        | $          | 97.5                                       |       | $                                     | (2.1       | ) | — |   |
|                                       |            |                                          |            |                                                                             |            |                                            |            |                                       |            |  |  |  |

 

C.             Short-termInvestments:

 

Thebalance of short-term investments was as follows (in millions):

 
| ** **                                                                                                       | ** ** | **As of**              | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **Investments**                                                                                                  | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
| Short-term investments in securities issued  by public companies with a weighted average interest rate of 2.72%. |       | $                           | 97.5       |   | $ | 117.9 |   |
|                                                                                                                  |            |                             |            |  |  |  |  |

 

Short-term investments in securities consist of trading securitiesissued by public companies.  Eachsecurity is independent of the others.

 

In the second quarter and six months of 2008, theCompany earned interest of $1.4 million and $2.3 million, respectively, relatedto these investments which were recorded as interest income in the condensedconsolidated statement of earnings.  Inaddition, in the second quarter and first six months of 2008, the Companyredeemed $14.8 million and $20.1 million, respectively, of these investments.

 

At June 30, 2008 the mark to market adjustmentof these investments was $2.1 million which was recorded as interest expense inthe condensed consolidated statement of earnings.

 

D.            Inventories were as follows:

 
| **(in millions)**                     | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Metals at lower of average cost or market: |       |                    |       |                        |       |
| Finished goods                             |       | $                       | 65.2       |                        | $          | 65.7 |   |
| Work-in-process                            |       | 181.6                   |       | 140.7                       |       |
| Supplies at average cost                   |       | 244.8                   |       | 241.9                       |       |
| Total inventories                          |       | $                       | 491.6      |                        | $          | 448.3 |   |

 

E.              Financing

 

OnApril 1, 2008, the Company paid $150.0 million of the remaining balance ofits series A Yankee bonds.  With thispayment the series A Yankee bonds were fully repaid.  In both June 2008 and 2007, the Companypaid $5.0 million of its Mitsui loan.

 

F.              Income taxes:

 

Theincome tax for the six months ended June 30, 2008 and 2007 were $514.9million and $585.1 million, respectively. These provisions include income taxes 

 

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forPeru, Mexico and the United States. The effective tax rates for the 2008 and2007 periods are 31.5% and 31.3%, respectively. The estimated annual effective tax rate for 2008 is 32.5%, compared with34.7% in 2007.  The decrease in theestimated annual effective tax rate is largely due to the incremental U.S. taxon dividend income in 2007.  The dividendincome was eliminated in financial consolidation (book income) but was taxablein the U.S. at the difference between the 35% U.S. statutory rate and the foreigntax credit rate of 28% on the dividend. In addition, the variability in the dollar relative to the Mexican pesoand the Peruvian nuevo sol caused a decrease in the estimated effective taxrate.  In addition, the inclusion of losscarryforwards of some of Minera Mexico’s subsidiaries in the Mexican taxcalculation also contributed to the rate decrease.

 

OnOctober 1, 2007, the Mexican government enacted a new tax law, which tookeffect on January 1, 2008.  The lawintroduced a flat tax, which replaced Mexico’s asset tax and applies totaxpaying entities along with Mexico’s regular income tax.  In general Mexican companies are subject topaying the greater of the flat tax or the income tax; the application of this rule resultedin a provision in the first six months of 2008 based upon the regular incometax calculation.  This tax law change didnot have an effect on the Company’s first six months 2008 deferred taxposition.

 

Theflat tax is calculated by applying a 16.5% tax rate in 2008, a 17% tax rate in2009, and a 17.5% tax rate in 2010 and the following years.  Although the flat tax is defined as minimumtax it has a wider taxable base as many of the tax deductions allowed forincome tax purposes are not allowed for the flat tax.

 

FINNo. 48 - Accounting for Uncertainty in Income Taxes.

 

Therewere no material changes in the unrecognized tax benefits in the first sixmonths of 2008.

 

G.             Provisionally Priced Sales:

 

AtJune 30, 2008, the Company has recorded provisionally priced sales of 96.7million pounds of copper, at an average forward price of $3.90 per pound.  Also the Company has recorded provisionallypriced sales of 3.5 million pounds of molybdenum at the June 30, 2008market price of $33.35 per pound.  Thesesales are subject to final pricing based on the average monthly LME or COMEXcopper prices and Dealer Oxide molybdenum prices in the future month ofsettlement.

 

Followingare the provisionally priced copper and molybdenum sales outstanding at June 30,2008:

 
| **Copper   (million lbs.)** | ** ** | **Priced at** | ** ** | **Month of   Settlement** | ** ** |
|-----------------------------|------------|---------------|------------|---------------------------|------------|
| 64.2                        |       | 3.911940      |       | July 2008            |       |
| 12.6                        |       | 3.890245      |       | August 2008          |       |
| 12.5                        |       | 3.873624      |       | September 2008       |       |
| 7.4                         |       | 3.859014      |       | October 2008         |       |
| 96.7                        |       | 3.900108      |       |                      |       |

 
| **Molybdenum   (million lbs.)** | ** ** | **Priced at** | ** ** | **Month of   Settlement** | ** ** |
|---------------------------------|------------|---------------|------------|---------------------------|------------|
| 1.7                             |       | 33.350000     |       | July 2008            |       |
| 1.5                             |       | 33.350000     |       | August 2008          |       |
| 0.3                             |       | 33.350000     |       | September 2008       |       |
| 3.5                             |       | 33.350000     |       |                      |       |

 

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

 

H.            Derivative Instruments

 

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

 

Copperderivatives:

 

Fromtime to time the Company has entered into derivative instruments to protect afixed copper, or zinc price for a portion of its metal sales.

 

In the first six months of 2008, the Company entered into copper collarand swap contracts to protect a portion of its 2008 sales of copperproduction.  As a result, the Companyrecorded a gain of $10.6 million in the second quarter and first six months of2008 compared with a gain of $1.3 million in the second quarter and first sixmonths of 2007.  Related to the fairvalue of these copper derivative contracts the Company recorded an unrealizedloss of $2.0 million at the end of June 2008 and a gain of $2.1 million atthe end of June 2007.  Theselosses/gains were recorded in net sales in the condensed consolidated statementof earnings.

 

At June 30, 2008 the Company has copper collar contracts toprotect 132.3 million pounds of copper production for the July-December 2008period at weighted average minimum and maximum LME prices of $3.40 per poundand $4.23 per pound, respectively.  Ifthe LME price falls below the minimum price, the Company will be paid thedifference between the minimum price and the actual price.  If the LME price exceeds the maximum price,the Company will pay the difference between the maximum price and the actualprice.  In addition, the Company hascopper swap contracts to protect 61.6 million pounds of copper production forthe July-August 2008 period at an average COMEX price of $3.86 per pound.

 

Gasswaps:

 

Inthe first quarter of 2007 the Company entered into a gas swap contract toprotect part of its gas consumption for 900,000 MMBTUs with a fixed price of$7.525.  Related to the settlement ofthis gas swap contract the Company recorded a loss of $0.9 million in the firstquarter of 2007 which was charged to production cost.  The Company did not hold any gas swapderivatives in the first six months of 2008.

 

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

 

Becausemore than 85% of the Company’s sales collections in Mexico are in US dollarsand many of its costs are in Mexican pesos, the Company entered into zero-costderivative contracts with the purpose of protecting, within a range, against anappreciation of the Mexican peso to the US dollar.

 

AtJune 30, 2008 the Company held two types of exchange rate derivativecontracts:

 

Inthe first type of exchange rate derivative contract, if the exchange ratesettles at or below the barrier price, the Company does not sell US dollars, ifthe exchange rate settles above the barrier price and below the strike priceestablished in the contract, the Company sells the notional amount of USdollars 

 

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settlingin the week at the strike price. If the exchange rate settles above the strikeprice established in the contract, the Company sells double the notional amountof US dollars settling in the week at the strike price established in thecontract. At June 30, 2008, the Company held the following contracts ofthis type:

 
| **Notional  Amount  (millions)** | ** ** | **Underlying  amount  (millions)** | ** ** | **Due Date, Weekly  expiration during** | ** ** | **Strike Price  (Mexican  Pesos/U.S.  Dollars)** | ** ** | **Barrier Price  (Mexican Pesos/  U.S. Dollars)** | ** ** |
|----------------------------------|------------|------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| $                                | 30.0       |                               | $          | 1.3                                               |       | 4th Quarter 2008                                      |       | 11.32                                                            |       | 10.60 |   |
| $                                | 45.0       |                               | $          | 1.3                                               |       | 1st Quarter 2009                                      |       | 11.25                                                            |       | 10.60 |   |

 

Inthe second type of exchange rate derivative contract, if the exchange rate isless than or equal to the strike price, the Company sells US dollars in anamount equal to the underlying amount for the 14 day period at the strikeprice. The difference between the strike price and the market exchange rate isconsidered a gain to the Company.  Thetotal accumulated gain over the life of the contract cannot exceed 200 centsper dollar transacted. If the exchange rate is above the strike price, theCompany sells dollars in an amount equal to 2 times the underlying amount forthe 14 days period at the strike price and the loss does not reduce theaccumulated gain. At June 30, 2008, the Company held the followingcontracts of this type:

 
| **Notional  Amount  (millions)** | ** ** | **Underlying  amount  (millions)** | ** ** | **Due Date, 14 days expiration between** | ** ** | **Strike Price  (Mexican Pesos /  U.S. Dollars)** | ** ** |
|----------------------------------|------------|------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| $                                | 22.5       |                               | $          | 2.5                                                               |       | July 16, 2008 and November 5,  2008                         |       | 10.85 |   |
| $                                | 42.5       |                               | $          | 2.5                                                               |       | December 3, 2008 and July 1, 2009                           |       | 10.55 |   |
| $                                | 25.0       |                               | $          | 1.0                                                               |       | June 18, 2008 and June 3, 2009                              |       | 10.95 |   |

 

Inthe second quarter and first six months of 2008 the exercise of some of thesezero-cost derivative contracts resulted in gains of $0.4 million and $1.5million, respectively, compared with gains of $2.6 million and $4.1 million inthe second quarter and first six months of 2007, respectively, which wererecorded as gain on derivative instruments in the condensed consolidatedstatement of earnings.

 

AtJune 30, 2008, the fair value of the above listed exchange rate derivativecontracts is a loss of $0.1 million which was recorded as Gain (loss) onderivative instruments in the condensed consolidated statement ofearnings.  Each notional amount includesa group of weekly transactions that have the same strike and barrier price.

 

The$53.0 million exchange derivative contract held at December 31, 2007 wascancelled in the first quarter 2008 and the Company recognized a gain of $0.3million, which is included in the $4.1 million noted above.

 

I.                 Asset Retirement Obligation:

 

The Company maintains an estimated asset retirement obligation for itsmining properties in Peru, as required by the Peruvian Mine Closure Law.  In accordance with the law, a conceptual mineclosure plan, without costs, was submitted to the Peruvian Ministry of Energyand Mines (“MEM”) in August 2006. While the plan was subject to a MEM review in 45 days, the Company didnot receive the MEM response until November 2007.  The Company responded to MEM’s review in March 2008.  In June 2008, the MEM requestedadditional information regarding the closure plan.  The Company has complied with this request inJuly 2008.  The Company responsewill then be subject to approval by MEM and open to public discussion andcomment 

 

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in the area of Company operations. However, as of June 30, 2008, the Company has made an estimatedprovision of $7.6 million for this liability in its financial statements, butbelieves that this estimate should be viewed with caution, pending final approvalof the mine closure plan.

 

The closure cost recognized for this liability includes the estimatedcost required at the Peruvian operations, based on the Company’s experience,and includes cost at the Ilo smelter, the tailing disposal, and dismantling theToquepala and Cuajone concentrators, and the shops and auxiliaryfacilities.  In the second quarter of2008, the Company recorded an additional asset retirement liability of $0.7million based on the new Mine Closure Plan submitted to MEM.

 

The following table summarizes the asset retirement obligation activityfor the first six months of 2008 and 2007 (in millions):

 
| ** **                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Balance as of January 1    |       | $        | 13.1       |     | $          | 12.2 |   |
| Additions, changes in estimates |       | 0.7      |       | —   |       |
| Accretion expense               |       | 0.5      |       | 0.5      |       |
| Balance as of June 30,     |       | $        | 14.3       |     | $          | 12.7 |   |

 

J.                Related Party Transactions:

 

Receivable and payable balances with affiliated companies are shownbelow (in millions):

 
| ** **                                  | ** ** | **As of**              | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **June 30, 2008** | ** ** | **December 31****, 2007** | ** ** |
| ** **                                  | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Affiliate receivable:                       |       |                        |       |   |   |
| Grupo Mexico  S.A.B de C.V. and affiliates  |       | $                           | 0.8        |   | $ | 1.5 |   |
| Ferrocarril  Mexicano, S.A. de C.V.         |       | 0.3                         |       | — |   |
| Other                                       |       | 0.3                         |       | 0.1 |   |
|                                        |       | $                           | 1.4        |   | $ | 1.6 |   |
| Affiliate payable:                          |       |                        |       |   |   |
| Grupo Mexico  S.A.B. de C.V. and affiliates |       | $                           | 9.1        |   | $ | 3.0 |   |
| Ferrocarril  Mexicano, S.A. de C.V.         |       | —                      |       | 0.9 |   |
|                                        |       | $                           | 9.1        |   | $ | 3.9 |   |

 

TheCompany has entered into certain transactions in the ordinary course ofbusiness with parties that are controlling shareholders or theiraffiliates.  These transactions includethe lease of office space, air transportation and construction services andproducts and services relating to mining and refining.  The Company lends and borrows funds amongaffiliates for acquisitions and other corporate purposes.  These financial transactions bear interestand are subject to review and approval by senior management, as are all relatedparty transactions.  It is our policythat the Audit Committee of the Board of Directors shall review all relatedparty transactions.  The Company isprohibited from entering or continuing a material related party transactionthat has not been reviewed and approved or ratified by the Audit Committee.

 

GrupoMexico, the Company’s ultimate parent and the majority indirect stockholder ofthe Company, and its affiliates provide various services to the Company.  These services are principally related toaccounting, legal, tax, financial, treasury, human resources, price riskassessment and hedging, purchasing, procurement and logistics, sales andadministrative and other support services. The Company pays to Grupo Mexico Servicios S.A de C.V., a subsidiary ofGrupo Mexico for these services.  Thetotal amount paid by the Company for such services in the first six months of 

 

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2008and 2007 was $6.9 million.  The Companyexpects to continue to pay for these services in the future.

 

TheCompany’s Mexican operations paid fees of $4.8 million and $7.0 million in thefirst six months of 2008 and 2007, respectively, primarily for freight servicesprovided by Ferrocarril Mexicano, S.A. de C.V., a subsidiary of Grupo Mexico.

 

Inaddition, the Company’s Mexican operations paid $5.5 million and $7.1 mi1lionin the first six months of 2008 and 2007, respectively, for constructionservices provided by Mexico Constructora Industrial S.A. de C.V., an indirectsubsidiary of Grupo Mexico.

 

TheLarrea family controls a majority of the capital stock of Grupo Mexico, and hasextensive interests in other businesses, including oil drilling services,construction, aviation, and real estate. The Company engages in certain transactions in the ordinary course ofbusiness with other entities controlled by the Larrea family relating to miningand refining services, the lease of office space, sale of vehicles and airtransportation and construction services. In connection with this, the Company paid fees of $1.1 million and $1.4million in the first six months of 2008 and 2007, respectively, for maintenanceservices and sale of vehicles provided by Mexico Compañia de ProductosAutomotrices, S.A. de C.V., a company controlled by the Larrea family.  Additionally, our Mexican subsidiaries haveprovided a guaranty for a $10.8 million loan obtained by Mexico TransportesAereos, S.A. de C.V. (“MexTransport”). MexTransport, a company controlled by the Larrea family, providesaviation services to our Mexican operations. The guaranty provided to MexTransport is backed up by the transportservices provided by MexTransport to the Company’s Mexican subsidiaries.  The Company paid fees of $1.6 million and$0.4 million in the first six months of 2008 and 2007, respectively, toMexTransport for aviation services.

 

TheCompany purchased $2.6 million in both first six months of 2008 and 2007 ofindustrial materials from Higher Technology S.A.C in which Mr. CarlosGonzalez, son of SCC’s Chief Executive Officer, has a proprietaryinterest.  The Company paid fees of $0.5million and $0.3 million in the first six months of 2008 and 2007,respectively, for maintenance services provided by Servicios y FabricacionesMecanicas S.A.C., a company in which Mr. Carlos Gonzalez has a proprietaryinterest.

 

TheCompany purchased $0.7 million and $0.5 million in the first six months of 2008and 2007, respectively, of industrial material from Sempertrans France BeltingTechnology, in which Mr. Alejandro Gonzalez, son of SCC’s Chief ExecutiveOfficer, is employed as a sales representative. Also, the Company purchased $0.3 million and $0.1 million in the firstsix months of 2008 and 2007, respectively, of industrial material from PIGOBA,S.A. de C.V., a company in which Mr. Alejandro Gonzalez has a proprietaryinterest.

 

TheCompany purchased $1.6 million and $2.3 million in the first six months of 2008and 2007, respectively, of industrial material and services from Breaker, S.A.de C.V., a company in which Mr. Jorge Gonzalez, son-in-law of SCC’s ChiefExecutive Officer, has a proprietary interest.

 

It is anticipated that in the future the Company will enter intosimilar transactions with the same parties.

 

K.            Employee Benefit Plan:

 

SCC Defined Benefit Pension Plan-

 

The components of the net periodic benefit costs for the six monthsended June 30 are as follows ($ in millions):

 

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| ** **                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Interest cost                  |       | $        | 0.4        |     | $          | 0.3 |   |
| Expected return on plan assets |       | (0.3     | )          | (0.3     | )          |
| Net periodic benefit cost      |       | $        | 0.1        |     | $          | — |   |
|                                |            |          |            |          |            |  |  |  |  |

 

SCCPost-retirement Health Care Plan-

 

Thecomponents of the net periodic benefit costs for the post-retirement healthcare plan for the six months ended June 30, 2008 and 2007 areindividually, and in total, less than $0.1 million.

 

MineraMexico Pension Plans-

 

Thecomponents of the net periodic benefit costs for the six months ended June 30,2008 and 2007 are as follows ($ in millions):

 
| ** **                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Interest cost                  |       | $        | 1.0        |     | $          | 0.9 |   |
| Service cost                   |       | 1.2      |       | 1.0      |       |
| Expected return on plan assets |       | (1.5     | )          | (1.0     | )          |
| Net periodic benefit cost      |       | $        | 0.7        |     | $          | 0.9 |   |

 

Minera Mexico Post-retirement Health Care Plan-

 

The components of the net periodic cost for the six months ended June 30,2008 and 2007 are as follows ($ in millions):

 
| ** **                | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
|                      |       |     |       |     |       |
| Interest cost             |       | $        | 0.8        |     | $          | 1.2 |   |
| Service cost              |       | 0.1      |       | 0.2      |       |
| Net periodic benefit cost |       | $        | 0.9        |     | $          | 1.4 |   |

 

L.              Comprehensive Income (in millions):

 
| ** **                                     | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                     | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                     | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income                                     |       | $                                | 548.5      |                           | $          | 726.0 |   | $ | 1,113.5 |   | $ | 1,277.6 |   |
| Other comprehensive income (loss) net of  tax: |       |                             |       |                           |       |   |   |   |   |
| Unrealized gain (loss) on investments          |       | —                           |       | —                         |       | — |   | (1.0 | ) |
| Comprehensive income                           |       | $                                | 548.5      |                           | $          | 726.0 |   | $ | 1,113.5 |   | $ | 1,276.6 |   |

 

The unrealized loss on investmentactivity in the 2007 period was related to an investment in a Mexicanconstruction company which was sold in 2007. This investment was accounted for as an available for-sale investment.

 

M.         Commitments and Contingencies

 

Environmental matters:

 

The Company has institutedextensive environmental conservation programs at its mining facilities in Peruand Mexico.  The Company’s environmentalprograms include, 

 

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among other things, waterrecovery systems to conserve water and minimize impact on nearby streams,reforestation programs to stabilize the surfaces of the tailings dams, and theimplementation of scrubbing technology in the mines to reduce dust emissions.

 

Peruvian operations

 

The Company’s operations aresubject to applicable Peruvian environmental laws and regulations.  The Peruvian government, through the MEMconducts annual audits of the Company’s Peruvian mining and metallurgicaloperations.  Through these environmentalaudits, matters related to environmental commitments, compliance with legalrequirements, atmospheric emissions, and effluent monitoring are reviewed.  The Company believes that it is in materialcompliance with applicable Peruvian environmental laws and regulations.

 

In the first quarter of2007, with the completion of the Ilo smelter modernization, the Companycompleted a 10-year environmental program agreed to with the Peruviangovernment in 1997.  This program appliedto all of the Company’s Peruvian operations and contained 34 mitigationmeasures and projects necessary to (1) bring the existing operations intocompliance with the environmental standards established by the MEM and (2) identifyareas impacted by operations that were no longer active and needed to bereclaimed.

 

In2003 the Peruvian congress published a new law announcing future closure andremediation obligations for the mining industry.  In August 2006 and March 2008, inaccordance with this law and its amendments the Company prepared and submittedto MEM a closure plan.  In June 2008,the MEM requested additional information regarding the closure plan.  The Company has complied with this request inJuly 2008.  The Company responsewill then be subject to approval by MEM and open to public discussion andcomment in the area of Company operations. See note I “Asset Retirement Obligation” for further disclosure of thismatter.

 

For the Company’s Peruvianoperations, environmental capital expenditures were $3.0 million and $21.2million in the first six months of 2008, and 2007, respectively.  The Company expects to spend approximately$14.1 million for environmental capital expenditures in 2008.

 

Mexican operations:

 

The Company’s operations aresubject to applicable Mexican federal, state and municipal environmental laws,to Mexican official standards, and to regulations for the protection of theenvironment, including regulations relating to water supply, water quality, airquality, noise levels and hazardous and solid waste.  Some of these laws and regulations arerelevant to legal proceedings pertaining to the Company’s San Luis Potosicopper facilities.

 

The principal legislationapplicable to the Company’s Mexican operations is the Federal General Law ofEcological Balance and Environmental Protection, which is enforced by theFederal Bureau of Environmental Protection (“PROFEPA”).  PROFEPA monitors compliance withenvironmental legislation and enforces Mexican environmental laws, regulationsand official standards.  PROFEPA mayinitiate administrative proceedings against companies that violateenvironmental laws, which in the most extreme cases may result in the temporaryor permanent closing of non-complying facilities, the revocation of operatinglicenses and/or other sanctions or fines. Also, according to the Federal Criminal Code,PROFEPA must inform corresponding authoritiesregarding environmental non-compliance.

 

Mexican environmentalregulations have become increasingly stringent over the last decade, and thistrend is likely to continue and has been influenced by the environmental treatyentered into by Mexico, United States and Canada in connection with NAFTA in1999.  However, the Company’s managementdoes not believe that continued

 

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compliance with the federal environmental law or Mexican stateenvironmental laws will have a material adverse effect on the Company’sbusiness, properties, results of operations, financial condition or prospectsor will result in material capital expenditures.  Although the Company believes that all of itsfacilities are in material compliance with applicable environmental, mining andother laws and regulations, the Company cannot assure that future laws andregulations would not have a material adverse effect on the Company’s business,properties, results of operations, financial condition or prospects.

 

Due to the proximity ofcertain facilities of Minera Mexico to urban centers, the authorities mayimplement certain measures that may impact or restrain the operation of suchfacilities.

 

For the Company’s Mexicanoperations, environmental capital expenditures were $4.2 million and $12.8million in the first six months of 2008 and 2007, respectively. Approximately,$45.2 million has been budgeted for environmental capital expenditures in 2008.

 

Litigation matters:

 

Peruvian operations

 

Garcia-Ataucuri and Othersagainst SCC:  In April 1996, theCompany was served with a complaint filed in Peru by approximately 800 formeremployees seeking the delivery of a substantial number of “labor shares”(acciones laborales) of its Peruvian Branch plus dividends on such shares, tobe issued in a proportional way to each former employee in accordance withtheir time of work with SCC’s Peruvian Branch.

 

The Company conducts itsoperations in Peru through a registered Branch. Although the Peruvian Branch has neither capital nor liability separatefrom that of the Company, under Peruvian law it is deemed to have an equitycapital for purposes of determining the economic interest of the holders of thelabor shares.  The labor share litigationis based on claims of former employees for ownership of labor shares issuedduring the 1970s until 1989 under a former Peruvian mandated profit sharingsystem. In 1971, the Peruvian government enacted legislation providing thatworkers in the mining industry would participate in the pre-tax profits of theenterprises for which they worked at a rate of 10%.  This participation was distributed 40% incash and 60% as an equity interest in the enterprise.  Under the law, the equity participation wasoriginally delivered to the “Mining Community”, an organization representingall workers.  The cash portion wasdistributed to the workers after the close of the year.  The accrual for this participation was (andcontinues to be) a current liability of the Company, until paid.  In 1978, the law was amended and the equitydistribution was calculated at 5.5% of pre-tax profits and was made toindividual workers of the enterprise in the form of “labor shares” to be issuedin Peru by the Peruvian Branch of SCC. These labor shares represented an equity interest in theenterprise.  In addition, according tothe 1978 law, the equity participations previously distributed to the “MiningCommunity” were returned to the Company and redistributed in the form of laborshares to the individual employees or former employees.  The cash participation was adjusted to 4.0%of pre-tax earnings and continued to be distributed to employees following theclose of the year.  Effective in 1992,the law was amended to its present status, and the workers’ participation inpre-tax profits was set at 8%, with 100% payable in cash.  The equity participation component waseliminated from the law.

 

In 1995, the Company offeredto exchange new common shares of the Company for the labor shares issued underthe prior Peruvian law.  Approximately80.8% of the issued labor shares were exchanged for the Company’s commonshares, greatly reducing the minority interest on the Company’s balancesheet.  What remains of the workers’equity 

 

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participation is nowincluded on the consolidated balance sheet under the caption “Minorityinterest.”

 

In relation to the issuanceof “labor shares” by the Branch in Peru, the Company is a defendant in thefollowing lawsuits:

 

1)              As stated above, in April 1996, theCompany was served with a complaint filed in Peru by approximately 800 formeremployees, (Garcia Ataucuri and others vs. SCC), seeking the delivery of38,763,806.80 “labor shares” (acciones laborales), now “investment shares”(acciones de inversion) (or S/. 3,876,380,679.56), as required by Law # 22333,to be issued in a proportional way to each former employee or worker inaccordance with their time of work with SCC’s Branch in Peru, plus dividends onsuch shares.  In 2000 SCC appealed anadverse decision of an appellate civil court, affirming a decision of a lowercivil court, to the Peruvian Supreme Court. On September 19, 2001, the Peruvian Supreme Court annulled theproceedings noting that the civil courts lacked jurisdiction and that thematter had to be decided by a labor court. On March 8, 2002, Mr. García Ataucuri restated the claim tocomply with Peruvian labor law and procedural requirements, and increased thenumber of plaintiffs to approximately 958 ex-workers.  In January 2005, the lower labor judgedismissed the lawsuit on procedural grounds without deciding on the merits ofthe case.  In March 2005, theplaintiffs appealed this decision but the appellate court dismissed the appealdue to procedural defects and remanded the case to the lower labor court forfurther proceedings.  The lower laborcourt, on motions from the plaintiffs, reinstated the appeal of the dismissalof the case of seven plaintiffs that had cured the procedural defects.  As of June 30, 2008, the case remainsopen with no further new developments. The labor court has temporarily lost jurisdiction over this case untilthe Supreme Court decides on the Constitutional Tribunal’s decision describedbelow.

 

InOctober 2007, in a separate proceeding initiated by Mr. GarcíaAtaucuri against the justices of the Peruvian Supreme Court, the PeruvianConstitutional Court nullified the Peruvian Supreme Court decision issued on September 19,2001 because it had violated Mr. Garcia-Ataucuri’s constitutional dueprocess rights by obliging him and the other plaintiffs to commence a newproceeding before the labor courts when they had litigated against the Companyin civil courts for over 10 years.  ThePeruvian Constitutional Court ordered the Supreme Court to decide again on themerits of the case accepting or denying the Company’s 2000 appeal.

 

Althoughthe Company was not formally a party to the Garcia Ataucuri proceedings beforethe Peruvian Constitutional Court, the nullity of the favorable decision of theSupreme Court, issued on September 19, 2001, is final and cannot beappealed by the Company.

 

Itis uncertain how the Peruvian Supreme Court will decide on the Company’s 2000appeal and the merits of the case in view of the decision of the PeruvianConstitutional Court.

 

2)              On May 10, 2006, the Company was servedwith a second complaint filed in Peru, this time by 44 former employees,(Cornejo Flores and others vs. SCC), seeking delivery of (1) labor shares(or shares of whatever other current legal denomination) corresponding to years1971 to December 31, 1977 (the plaintiffs are seeking the same38,763,806.80 labor shares mentioned in the prior lawsuit), that should havebeen issued in accordance with Law # 22333, plus interest and (2) labor sharesresulting from capital increases made by the Branch in 1980 “ for the amount ofthe workers’ participation of S/.17,246,009,907.20, equivalent to172,460,099.72 labor shares”, plus dividends. On May 23, 2006, the Company answered this new complaint, denyingthe validity of the claim.  As of June 30,2008 the case remains in the discovery stage.

 

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3)              Additionally, on June 27, 2008, theCompany was served with a new complaint filed in Peru, this time by 82 formeremployees, (Alejandro Zapata Mamani and others vs. SPCC), seeking delivery oflabor shares (or shares of whatever other current legal denomination) correspondingto years 1971 to December 31, 1977 (the plaintiffs are seeking thesame 38,763,806.80 labor shares mentioned in the two previous labor sharelawsuits), that should have been issued in accordance with Law # 22333, plusinterest, and labor shares resulting from capital increases, plusdividends.  The Company answered this newcomplaint, denying the validity of the claim.

 

The Company asserts that theclaims are without merit and that the labor shares were distributed to theformer employees in accordance with the profit sharing law then in effect.  The Company does not believe that anunfavorable outcome is reasonably possible. The Company has not made a provision for these lawsuits because itbelieves that it has meritorious defenses to the claims asserted in thecomplaints.

 

Mineria Integral S.A.C.: In January 2007,the Company was served with three claims filed in Peru by Mineria IntegralS.A.C.  The claims allege that theCompany has trespassed on certain mining rights of the plaintiff, in Ilo, Departmentof Moquegua, and seek that the Company desist from the trespass and paycompensation in the amount of $49.1 million. The Company believes that these administrative procedures are withoutmerit and is vigorously defending itself against these actions.

 

Mexican operations -

 

The Mexican GeologicalServices (“MGS”) Royalties: In August 2002, MGS (formerly named Council ofMineral Resources (“COREMI”)) filed with the Third Federal District Judge inCivil Matters, an action demanding from Mexcobre (La Caridad) the payment ofroyalties since 1997.  In December 2005,Mexcobre signed an agreement with MGS. Under the terms of this agreement the parties established a newprocedure to calculate the royalty payments applicable for 2005 and thefollowing years, and the Company paid in January 2006, $6.9 million ofroyalties for 2005 and $8.5 million as payment on account of royalties from thethird quarter 1997 through the last quarter of 2004.  The Company estimates that the payment madeon January 11, 2006 will cover 100% of the royalty payments required for2004 and prior periods.  On January 22,2007 the Third Federal District Judge issued a ruling regarding the paymentrelated to the period from the third quarter of 1997 through the fourth quarterof 2004.  This ruling was appealed byboth parties in February 2007.  Theappeal was lost by the Company in October 2007.  The Company filed a protective action (*Amparo*) before the First Unitary Tribunal of the FirstCircuit.  The Company believes that thepayment made on account for this period is correct.  On an ongoing basis the Company is requiredto pay a 1% royalty on La Caridad’s copper production value after deduction oftreatment and refining charges and certain other carrying costs.

 

San Luis Potosi Facilities:The municipality of San Luis Potosi has granted Desarrolladora Intersaba, S.A.de C.V. (“Intersaba”), licenses for use of land and construction of housingand/or commercial zones in the former *Ejido Capulines*zone, where some residential projects like “Villa Magna” and other newresidential projects are being developed within an area that IMMSA’s RiskAnalysis, which was approved by SEMARNAT (the federal environmental authority),has secured as a safeguard and buffer zone due to IMMSA’s use of anhydrousammonia gas.

 

Based on the foregoing,IMMSA has initiated two different actions regarding this matter.  First, against the municipality of San LuisPotosi, requesting the annulment of all the authorizations and licenses grantedwithin the zinc plant’s safeguard and buffer zone, and second, filed beforeSEMARNAT for the declaration of a safeguard and buffer zone surrounding IMMSA’szinc plant.

 

In August 2006, theaction regarding the annulment of Villa Magna licenses was decided by a federalappeals court, which denied IMMSA’s request. In September 2006, 

 

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IMMSA submitted its finalappeal to the Supreme Court of Justice and in February 2007, the courtruled against IMMSA.

 

IMMSA believes that whilethis outcome was adverse to its interests, the construction of the “Villa Magna”housing and commercial development will not, in itself, affect the operationsof IMMSA’s zinc plant.

 

Intersaba has filed alawsuit against IMMSA, requesting payment of damages in the amount ofapproximately $11.0 million supposedly caused by IMMSA during theseproceedings.  IMMSA has vigorously takenall necessary steps to defend against this lawsuit.  A decision is expected in the near future.

 

Also, new lawsuits werefiled by IMMSA against the Municipality of San Luis Potosi challenging the newlicenses granted in the safeguard area.

 

In addition to theforegoing, IMMSA has initiated a series of legal and administrative proceduresagainst the Municipality of San Luis Potosi due to its refusal to issue IMMSA’suse of land permit (licencia de uso de suelo) in respect to its zincplant.  A federal judge ruled that IMMSA’suse of land permit should be granted. The municipal authorities are evaluating how to comply with the ruling.

 

Finally, Ejido Capulines, anagricultural community, filed a protective action (Amparo) against IMMSA’s riskanalysis authorization granted by SEMARNAT. As previously indicated, this authorization provides the safeguard andbuffer zone around the San Luis facilities. IMMSA has taken all necessary stepsto defend against the action.

 

Labor matters:

 

In recent years the Companyhas experienced a number of strikes or other labor disruptions that have had anadverse impact on its operations and operating results.

 

Peruvian Operations

 

Collective bargainingagreements with the Company’s Peruvian labor unions expired in early 2007.  A number of strikes were initiated by theCompany’s labor unions, demanding wage increases and better benefits.  In addition, some of the unions went onstrike in support of national union strikes. These strikes were generally of a brief nature and the Company was ableto continue normal operations with the support of staff and administrativepersonnel and contractors.  Newcollective bargaining agreements, for periods ranging from three to six yearswere signed by the end of third quarter 2007 with all of the Company’s Peruvianunions.

 

Mexican operations -

 

In the last seven years theCananea mine has experienced more than nine labor stoppages totaling morethan 450 days of inactivity.  Beginningon July 30, 2007, our Cananea mine in Mexico started a work stoppage.  On January 11, 2008 the Mexican FederalLabor Court declared the Cananea strike illegal and ordered the workers toreturn to work within 24 hours.  Thismatter is under appeal upon the Company’s action and will be solved by aFederal Upper Court.  The workerspartially returned to work and the Company resumed operations.  However, on April 11, 2008 the workersrestarted the labor stoppage and shut down production.  The Company has tried unsuccessfully toresolve the current labor stoppage that obstructs production at Cananea,hence in the second quarter 2008, the Board of Directors decided to offer allemployees a severance payment in accordance with the collective bargainingagreement and applicable law.  This wasoffered in order to award the employees a significant severance payment thatallows them to choose the labor alternative that is best for each of them.  During the second quarter of 2008, a group ofemployees was liquidated at a cost to the Company of $10.8 million, which wasrecorded in cost of sales on the condensed 

 

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consolidated statement ofearnings.  The Company anticipates thatadditional liquidations will occur in the second half of 2008.  In accordance with SFAS No. 112, theCompany has estimated a liability of $52.0 million which have been recorded onthe condensed consolidated balance sheet. It is expected that production at Cananea will remain suspended untilthese labor issues are resolved.

 

Additionally, our Taxco andSan Martin mines have been on strike since July 2007.  It is expected that operations at these mineswill remain suspended until these labor issues are resolved.  However, the Company believes that the strikeactivity will not result in an impairment of assets.

 

Other legal matters

 

Class actions:  Three purported class action derivativelawsuits have been filed in the Delaware Court of Chancery (New Castle County)late in December 2004 and early January 2005 relating to theacquisition of Minera Mexico by SCC.  On January 31,2005, the three actions Lemon Bay, LLP v. Americas Mining Corporation, et al.,Civil Action No. 961-N, Therault Trust v. Luis Palomino Bonilla, et al.,and Southern Copper Corporation, et al., Civil Action No. 969-N, and JamesSousa v. Southern Copper Corporation, et al., Civil Action No. 978-N wereconsolidated into one action titled, In re Southern Copper CorporationShareholder Derivative Litigation, Consol. C. A. No. 961-N and the complaint filed 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 acquisition of Minera Mexico is theresult of breaches of fiduciary duties by the Company’s directors and is notentirely fair to the Company and its minority stockholders.  The consolidated complaint seeks, among otherthings, a preliminary and permanent injunction to enjoin the acquisition, theaward of damages to the class, the award of damages to the Company and suchother relief that the court deems equitable, including interest, attorneys’ andexperts’ fees and costs.  The defendantsbelieve that this lawsuit is without merit and are vigorously defendingthemselves against the action.

 

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

 

The Company is involved invarious other legal proceedings incidental to its operations, but the Companydoes not believe that decisions adverse to it in any such proceedingsindividually or in the aggregate would have a material adverse effect on itsfinancial position or results of operations.

 

The Company’s direct andindirect parent corporations, including AMC and Grupo Mexico, have from time totime been named parties in various litigation involving Asarco LLC (“Asarco”).  In August 2002 the U.S. Department ofJustice brought a claim alleging fraudulent conveyance in connection with AMC’sthen-proposed purchase of SCC from a subsidiary of Asarco.  That action was settled pursuant to a ConsentDecree dated February 2, 2003.  In March 2003,AMC purchased its interest in SCC from Asarco. In October 2004, AMC, Grupo Mexico, Mexicana de Cobre and otherparties, not includingSCC,were named in a lawsuit filed in New York State court in connection withalleged asbestos liabilities, which lawsuit claims, among other matters, thatAMC’s purchase of SCC from Asarco should be voided as a fraudulentconveyance.  The lawsuit filed in NewYork State court was stayed as a result of the August 2005 Chapter 11bankruptcy filing by Asarco, as described below.  However, on November 16, 2007, thislawsuit after being removed to federal court was transferred to the UnitedStates District Court for the Southern District of Texas in Brownsville, Texas,for resolution in conjunction with a new lawsuit filed by Asarco, the debtor inpossession, as described below.  On February 2,2007 a complaint was filed by Asarco, the debtor in possession, 

 

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alleging many of the matterspreviously claimed in the New York State lawsuit, including that AMC’s purchaseof SCC from Asarco should be voided as a fraudulent conveyance.  In June 2008 the lawsuit was concludedin Brownsville, Texas.  A decision isexpected in the near future.  While GrupoMexico and its affiliates believe that these claims are without merit, theCompany cannot assure you that these or future claims, if successful, will nothave an adverse effect on the Company’s parent corporation or the Company.  Any increase in the financial obligations ofthe Company’s parent corporation, as a result of matters related to Asarco orotherwise could, among other effects, result in the Company’s parentcorporation attempting to obtain increased dividends or other funding from theCompany.  In 2005, certain subsidiariesof Asarco filed bankruptcy petitions in connection with alleged asbestosliabilities.  In July 2005, theunionized workers of Asarco commenced a work stoppage.  As a result of various factors, including theabove-mentioned work stoppage, in August 2005 Asarco filed a voluntarypetition for relief under Chapter 11 of the U.S. Bankruptcy Code before theU.S. Bankruptcy Court in Corpus Christi, Texas. Asarco’s bankruptcy case is being joined with the bankruptcy cases ofits subsidiaries.  Asarco’s bankruptcycould result in additional claims being filed against Grupo Mexico and itssubsidiaries, including SCC, Minera Mexico or its subsidiaries.

 

Other:

 

Regionaldevelopment contribution

 

In December 2006, theCompany’s Peruvian Branch signed a contract with the Peruvian governmentcommitting the Company to annual contributions for five years to support theregional development of Peru.  This wasin response to an appeal by the president of Peru to the mining industry.  The contributions are being used for socialbenefit programs.  In 2008 and 2007, theCompany made a contribution of $17.9 million and $16.1 million, calculatedbased on 2007 and 2006 Peruvian earnings after income tax, respectively.  These contributions were deposited with aseparate entity, Copper Assistance Civil Association (Asociacion Civil Ayudadel Cobre) which will make disbursements for approved investments in accordancewith the agreement.  The following years’contributions could increase or decrease depending on copper prices.  The commitment of the Branch is for a totalof 1.25% of its annual earnings, after Peruvian income tax.  If the copper price drops below $1.79 perpound the contribution will cease.  Inthe first six months of 2008 the Company made a provision of $7.7 million basedon Peruvian Branch earnings.

 

Royalty charge

 

In June 2004, thePeruvian Congress enacted legislation imposing a royalty charge to be paid bymining companies.  Under this law, theCompany is subject to a 1% to 3% royalty, based on sales, applicable to thevalue of the concentrates produced in our Toquepala and Cuajone mines.  The Company made provisions of $33.3 million,and $27.2 million in the first six months of 2008 and 2007, respectively, forthis royalty.  These provisions areincluded in “Cost of sales (exclusive of depreciation, amortization anddepletion)” in the condensed consolidated statement of earnings.

 

Power purchase agreement

 

In 1997, SCC sold its Ilopower plant to an independent power company, Enersur S.A. (“Enersur”).  In connection with the sale, a power purchaseagreement was also completed under which SCC agreed to purchase all of itspower needs for its Peruvian operations from Enersur for twenty years,commencing in 1997.  In 2003 theagreement was amended releasing Enersur from its obligation to constructadditional capacity to meet the Company’s increased electricityrequirements.  SCC believes it cansatisfy the need for increased electricity requirements from other sources,including local power providers.

 

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Tax contingency matters:

 

Tax contingencies areprovided for under FIN No 48 (see Note F “Income Taxes.”)

 

N.            Segment and Related Information:

 

Company management views Southern Copper as having three operatingsegments and manages on the basis of these segments.  The significant increase in the price ofmolybdenum in recent years has had an important impact on the Company’searnings.  Nevertheless, the Companycontinues to manage its operations on the basis of the three coppersegments.  Each of its segments reportindependently to the Chief Operating Officer and he focuses on operating incomeas a measure of performance to evaluate different segments, and to makedecisions to allocate resources to the reported segments.

 

Thethree segments identified are groups of mines with similar economiccharacteristics, type of products, processes and support facilities, similarregulatory environments, similar employee bargaining contracts and similarcurrency risks.  In addition, each minewithin the individual group earns revenues from similar type of customers fortheir products and services and each group incurs expenses independently,including commercial transactions between groups.

 

Intersegment sales are based on arms-length prices at the time ofsale.  These may not be reflective ofactual prices realized by the Company due to various factors, includingadditional processing, timing of sales to outside customers and transportationcost.  Added to the segment informationis information regarding the Company’s molybdenum sales.  The segments identified by the Company are:

 

1.               Peruvian operations, which includes theToquepala and Cuajone mine complexes and the smelting and refining plants,industrial railroad and port facilities which service both mines.

 

2.               Mexican open pit operations, which includesLa Caridad and Cananea mine complexes and the smelting and refining plants andsupport facilities which service both mines.

 

3.               Mexican underground mining operations, whichincludes five underground mines that produce zinc, copper, silver and gold, acoal mine  which produces coal and coke,and several industrial processing facilities for zinc and copper.  This group is identified as the IMMSA unit.

 

ThePeruvian operations include two open pit copper mines whose mineral output istransported by rail to Ilo, Peru where it is processed at the Company’s Ilosmelter and refinery, without distinguishing between the products of the twomines.  The resulting product, anodes andrefined copper, are then shipped to customers throughout the world.  These shipments are recorded as revenue ofthe Company’s Peruvian mines.

 

TheMexican open pit segment includes two copper mines whose mineral output isprocessed in the same smelter and refinery without distinguishing between theproducts of the two mines.  The resultantproduct, anodes and refined copper, are then shipped to customers throughoutthe world.  These shipments are recordedas revenues of the Company’s Mexican open pit mines.

 

TheCompany has determined that it is necessary to classify the Peruvian Open Pitoperations as a separate operating segment from the Mexican Open Pit operationsdue to the very distinct regulatory and political environments in which theyoperate.  The Company’s Chief OperatingOfficer must consider the operations in each country separately when analyzingresults of the Company and making key decisions.  The open 

 

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pitmines in Peru must comply with stricter environmental rules and mustcontinually deal with a political climate that has a very distinct vision ofthe mining industry as compared to Mexico. In addition, the collective bargaining agreement contracts arenegotiated very distinctly in each of the two countries.  These key differences result in the Companytaking varying decisions with regards to the two countries.

 

TheIMMSA segment includes five mines whose minerals are processed in the samesmelter and refinery.  This segment alsoincludes a coal underground mine.  Salesof product from this segment are recorded as revenues of the Company’s IMMSAunit.  While the Mexican undergroundmines are subject to a very similar regulatory environment of the Mexican openpit mines, the nature of the products and processes of the two Mexicanoperations vary distinctly.  Thesedifferences cause the Company’s Chief Operating Officer to take a verydifferent approach when analyzing results and making decisions regarding thetwo Mexican operations.

 

Financialinformation is regularly prepared for each of the three segments and theresults of the Company’s operations are regularly reported to the ChiefOperating Officer on the segment basis. The Chief Operating Officer of the Company focuses on operating incomeand on total assets as measures of performance to evaluate different segmentsand to make decisions to allocate resources to the reported segments.  These are common measures in the miningindustry.

 

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

 
| ** **                                                             | ** ** | **Three Months Ended June 30, 2008** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                                        | ** ** |
| ** **                                                             | ** ** | **Mexican  Open Pit**                                    | ** ** | **Mexican  IMMSA  Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate and  other  Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales outside of segments                                          |       | $                                                             | 433.8      |   | $ | 125.4 |   | $ | 902.6 |   | $ | — |   | $ | 1,461.8 |   |
| Intersegment sales                                                     |       | 33.9                                                          |       | 37.7 |   | — |   | (71.6 | ) | — |   |
| Cost of sales (exclusive of depreciation,  amortization and depletion) |       | 200.6                                                         |       | 109.0 |   | 312.2 |   | (71.3 | ) | 550.5 |   |
| Selling, general and administrative                                    |       | 9.6                                                           |       | 4.8 |   | 11.1 |   | 1.2 |   | 26.7 |   |
| Depreciation, amortization and depletion                               |       | 47.4                                                          |       | 8.0 |   | 28.1 |   | (0.3 | ) | 83.2 |   |
| Exploration                                                            |       | 1.0                                                           |       | 2.2 |   | 5.8 |   | — |   | 9.0 |   |
| Operating income                                                       |       | $                                                             | 209.1      |   | $ | 39.1 |   | $ | 545.4 |   | $ | (1.2 | ) | 792.4 |   |
| Less:                                                                  |       |                                                          |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                                          |       |   |   |   |   |   |   | (13.8 | ) |
| Loss on derivative instruments                                         |       |                                                          |       |   |   |   |   |   |   | (1.5 | ) |
| Other income (expense)                                                 |       |                                                          |       |   |   |   |   |   |   | 3.1 |   |
| Income taxes                                                           |       |                                                          |       |   |   |   |   |   |   | (228.9 | ) |
| Minority interest                                                      |       |                                                          |       |   |   |   |   |   |   | (2.8 | ) |
| Net earnings                                                           |       |                                                          |       |   |   |   |   |   |   | $ | 548.5 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Capital expenditure                                                    |       | $                                                             | 54.7       |   | $ | 12.4 |   | $ | 63.1 |   | $ | 0.7 |   | $ | 130.9 |   |
| Property, net                                                          |       | $                                                             | 1,622.5    |   | $ | 254.0 |   | $ | 1,678.9 |   | $ | 63.5 |   | $ | 3,618.9 |   |
| Total assets                                                           |       | $                                                             | 3,026.2    |   | $ | 695.7 |   | $ | 2,970.0 |   | $ | (286.8 | ) | $ | 6,405.1 |   |

 

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| ** **                                                             | ** ** | **Three Months Ended June 30, 2007** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                                        | ** ** |
| ** **                                                             | ** ** | **Mexican  Open Pit**                                    | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate  and other  Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net sales outside of segments                                          |       | $                                                             | 688.3      |   | $ | 184.3 |   | $ | 953.9 |   | $ | — |   | $ | 1,826.5 |   |
| Intersegment sales                                                     |       | 78.2                                                          |       | 29.3 |   | — |   | (107.5 | ) | — |   |
| Cost of sales (exclusive of depreciation,  amortization and depletion) |       | 209.4                                                         |       | 107.5 |   | 358.1 |   | (112.7 | ) | 562.3 |   |
| Selling, general and administrative expense                            |       | 10.5                                                          |       | 7.3 |   | 10.1 |   | (2.0 | ) | 25.9 |   |
| Depreciation, amortization and depletion                               |       | 44.0                                                          |       | 9.9 |   | 30.0 |   | 0.6 |   | 84.5 |   |
| Exploration                                                            |       | 1.8                                                           |       | 2.1 |   | 4.7 |   | — |   | 8.6 |   |
| Operating income                                                       |       | $                                                             | 500.8      |   | $ | 86.8 |   | $ | 551.0 |   | $ | 6.6 |   | 1,145.2 |   |
| Less:                                                                  |       |                                                          |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                                          |       |   |   |   |   |   |   | (11.4 | ) |
| Loss on derivative instruments                                         |       |                                                          |       |   |   |   |   |   |   | (55.5 | ) |
| Other income (expense)                                                 |       |                                                          |       |   |   |   |   |   |   | 5.0 |   |
| Income taxes                                                           |       |                                                          |       |   |   |   |   |   |   | (354.4 | ) |
| Minority interest                                                      |       |                                                          |       |   |   |   |   |   |   | (2.9 | ) |
| Net earnings                                                           |       |                                                          |       |   |   |   |   |   |   | $ | 726.0 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Capital expenditure                                                    |       | $                                                             | 41.9       |   | $ | 2.8 |   | $ | 49.0 |   | $ | 0.3 |   | $ | 94.0 |   |
| Property, net                                                          |       | $                                                             | 1,585.7    |   | $ | 259.2 |   | $ | 1,665.0 |   | $ | 68.6 |   | $ | 3,578.5 |   |
| Total assets                                                           |       | $                                                             | 3,239.9    |   | $ | 712.7 |   | $ | 3,134.3 |   | $ | (557.6 | ) | $ | 6,529.3 |   |

 
| ** **                                                             | ** ** | **Six Months Ended June 30, 2008** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                                      | ** ** |
| ** **                                                             | ** ** | **Mexican  Open Pit**                                  | ** ** | **Mexican  IMMSA  Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate and  other  Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales outside of segments                                          |       | $                                                           | 877.7      |   | $ | 259.2 |   | $ | 1,824.1 |   | $ | — |   | $ | 2,961.0 |   |
| Intersegment sales                                                     |       | 60.1                                                        |       | 66.0 |   | — |   | (126.1 | ) | — |   |
| Cost of sales (exclusive of depreciation,  amortization and depletion) |       | 384.0                                                       |       | 194.6 |   | 619.2 |   | (126.8 | ) | 1,071.0 |   |
| Selling, general and administrative                                    |       | 18.5                                                        |       | 11.2 |   | 21.4 |   | 0.3 |   | 51.4 |   |
| Depreciation, amortization and depletion                               |       | 92.6                                                        |       | 16.0 |   | 56.4 |   | (0.6 | ) | 164.4 |   |
| Exploration                                                            |       | 2.9                                                         |       | 4.1 |   | 10.1 |   | — |   | 17.1 |   |
| Operating income                                                       |       | $                                                           | 439.8      |   | $ | 99.3 |   | $ | 1,117.0 |   | $ | 1.0 |   | 1,657.1 |   |
| Less:                                                                  |       |                                                        |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                                        |       |   |   |   |   |   |   | (24.2 | ) |
| Gain on derivative instruments                                         |       |                                                        |       |   |   |   |   |   |   | 1.4 |   |
| Other income (expense)                                                 |       |                                                        |       |   |   |   |   |   |   | (0.4 | ) |
| Income taxes                                                           |       |                                                        |       |   |   |   |   |   |   | (514.9 | ) |
| Minority interest                                                      |       |                                                        |       |   |   |   |   |   |   | (5.5 | ) |
| Net earnings                                                           |       |                                                        |       |   |   |   |   |   |   | $ | 1,113.5 |   |
|                                                                   |       |                                                        |       |   |   |   |   |   |   |   |   |
| Capital expenditure                                                    |       | $                                                           | 78.0       |   | $ | 19.3 |   | $ | 81.4 |   | $ | 2.1 |   | $ | 180.8 |   |
| Property, net                                                          |       | $                                                           | 1,622.5    |   | $ | 254.0 |   | $ | 1,678.9 |   | $ | 63.5 |   | $ | 3,618.9 |   |
| Total assets                                                           |       | $                                                           | 3,026.2    |   | $ | 695.7 |   | $ | 2,970.0 |   | $ | (286.8 | ) | $ | 6,405.1 |   |

 

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| ** **                                                             | ** ** | **Six Months Ended June 30, 2007** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                                      | ** ** |
| ** **                                                             | ** ** | **Mexican  Open Pit**                                  | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate  and other  Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                   |       |                                                        |       |   |   |   |   |   |   |   |   |
| Net sales outside of segments                                          |       | $                                                           | 1,202.0    |   | $ | 312.8 |   | $ | 1,670.0 |   | $ | — |   | $ | 3,184.8 |   |
| Intersegment sales                                                     |       | 147.9                                                       |       | 51.5 |   | — |   | (199.4 | ) | — |   |
| Cost of sales (exclusive of depreciation,  amortization and depletion) |       | 397.7                                                       |       | 172.1 |   | 662.4 |   | (203.2 | ) | 1,029.0 |   |
| Selling, general and administrative expense                            |       | 20.9                                                        |       | 12.8 |   | 20.1 |   | (4.1 | ) | 49.7 |   |
| Depreciation, amortization and depletion                               |       | 87.0                                                        |       | 17.7 |   | 53.3 |   | 0.5 |   | 158.5 |   |
| Exploration                                                            |       | 2.6                                                         |       | 4.0 |   | 8.4 |   | — |   | 15.0 |   |
| Operating income                                                       |       | $                                                           | 841.7      |   | $ | 157.7 |   | $ | 925.8 |   | $ | 7.4 |   | 1,932.6 |   |
| Less:                                                                  |       |                                                        |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                                        |       |   |   |   |   |   |   | (14.4 | ) |
| Loss on derivative instruments                                         |       |                                                        |       |   |   |   |   |   |   | (76.7 | ) |
| Other income (expense)                                                 |       |                                                        |       |   |   |   |   |   |   | 25.7 |   |
| Income taxes                                                           |       |                                                        |       |   |   |   |   |   |   | (585.1 | ) |
| Minority interest                                                      |       |                                                        |       |   |   |   |   |   |   | (4.5 | ) |
| Net earnings                                                           |       |                                                        |       |   |   |   |   |   |   | $ | 1,277.6 |   |
|                                                                   |       |                                                        |       |   |   |   |   |   |   |   |   |
| Capital expenditure                                                    |       | $                                                           | 62.3       |   | $ | 9.5 |   | $ | 80.4 |   | $ | 26.8 |   | $ | 179.0 |   |
| Property, net                                                          |       | $                                                           | 1,585.7    |   | $ | 259.2 |   | $ | 1,665.0 |   | $ | 68.6 |   | $ | 3,578.5 |   |
| Total assets                                                           |       | $                                                           | 3,239.9    |   | $ | 712.7 |   | $ | 3,134.3 |   | $ | (557.6 | ) | $ | 6,529.3 |   |

 

Salesvalue per segment:

 
| ** ** | ** ** | **Three Months Ended June 30, 2008** | ** ** |
|------------|------------|---------------------------------------------------------------|------------|
| ** ** | ** ** | **(in millions)**                                        | ** ** |
| ** ** | ** ** | **Mexican  Open Pit**                                    | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|       |       |                                                          |       |   |   |   |   |   |   |   |   |
| Copper     |       | $                                                             | 312.9      |   | $ | 33.0 |   | $ | 705.8 |   | $ | (42.1 | ) | $ | 1,009.6 |   |
| Molybdenum |       | 117.5                                                         |       | — |   | 149.0 |   | — |   | 266.5 |   |
| Other      |       | 37.3                                                          |       | 130.1 |   | 47.8 |   | (29.5 | ) | 185.7 |   |
| Total      |       | $                                                             | 467.7      |   | $ | 163.1 |   | $ | 902.6 |   | $ | (71.6 | ) | $ | 1,461.8 |   |

 
| ** ** | ** ** | **Three Months Ended June 30, 2007** | ** ** |
|------------|------------|---------------------------------------------------------------|------------|
| ** ** | ** ** | **(in millions)**                                        | ** ** |
| ** ** | ** ** | **Mexican  Open Pit**                                    | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|       |       |                                                          |       |   |   |   |   |   |   |   |   |
| Copper     |       | $                                                             | 607.3      |   | $ | 36.1 |   | $ | 749.3 |   | $ | (79.2 | ) | $ | 1,313.5 |   |
| Molybdenum |       | 129.1                                                         |       | — |   | 161.3 |   | — |   | 290.4 |   |
| Other      |       | 30.1                                                          |       | 177.5 |   | 43.3 |   | (28.3 | ) | 222.6 |   |
| Total      |       | $                                                             | 766.5      |   | $ | 213.6 |   | $ | 953.9 |   | $ | (107.5 | ) | $ | 1,826.5 |   |

 

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| ** ** | ** ** | **Six Months Ended June 30, 2008** | ** ** |
|------------|------------|-------------------------------------------------------------|------------|
| ** ** | ** ** | **(in millions)**                                      | ** ** |
| ** ** | ** ** | **Mexican  Open Pit**                                  | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|       |       |                                                        |       |   |   |   |   |   |   |   |   |
| Copper     |       | $                                                           | 627.9      |   | $ | 60.9 |   | $ | 1,434.2 |   | $ | (72.3 | ) | $ | 2,050.7 |   |
| Molybdenum |       | 243.2                                                       |       | — |   | 305.9 |   | — |   | 549.1 |   |
| Other      |       | 66.7                                                        |       | 264.2 |   | 84.0 |   | (53.7 | ) | 361.2 |   |
| Total      |       | $                                                           | 937.8      |   | $ | 325.1 |   | $ | 1,824.1 |   | $ | (126.0 | ) | $ | 2,961.0 |   |

 
| ** ** | ** ** | **Six Months Ended June 30, 2007** | ** ** |
|------------|------------|-------------------------------------------------------------|------------|
| ** ** | ** ** | **(in millions)**                                      | ** ** |
| ** ** | ** ** | **Mexican  Open Pit**                                  | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|       |       |                                                        |       |   |   |   |   |   |   |   |   |
| Copper     |       | $                                                           | 1,065.3    |   | $ | 51.2 |   | $ | 1,308.0 |   | $ | (147.3 | ) | $ | 2,277.2 |   |
| Molybdenum |       | 228.0                                                       |       | — |   | 274.6 |   | — |   | 502.6 |   |
| Other      |       | 56.6                                                        |       | 313.1 |   | 87.4 |   | (52.1 | ) | 405.0 |   |
| Total      |       | $                                                           | 1,349.9    |   | $ | 364.3 |   | $ | 1,670.0 |   | $ | (199.4 | ) | $ | 3,184.8 |   |

 

The geographic breakdownof the Company’s sales is as follows (in millions):

 
| ** **                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| United States                             |       | $                                               | 350.8      |                                          | $          | 472.0 |   | $ | 765.1 |   | $ | 904.0 |   |
| Europe                                    |       | 361.2                                           |       | 410.6                                         |       | 721.6 |   | 626.6 |   |
| Mexico                                    |       | 350.8                                           |       | 474.0                                         |       | 670.3 |   | 734.6 |   |
| Peru                                      |       | 38.9                                            |       | 31.0                                          |       | 78.2 |   | 52.4 |   |
| Latin America (excluding Mexico and Peru) |       | 273.5                                           |       | 249.6                                         |       | 554.7 |   | 435.5 |   |
| Asia                                      |       | 84.4                                            |       | 186.0                                         |       | 162.5 |   | 428.4 |   |
| Derivative instruments                    |       | 2.2                                             |       | 3.3                                           |       | 8.6 |   | 3.3 |   |
| Total                                     |       | $                                               | 1,461.8    |                                          | $          | 1,826.5 |   | $ | 2,961.0 |   | $ | 3,184.8 |   |

 

Major Customer SegmentInformation:

 

For the six months ended June 30,2008, the Company had revenues from two copper customers of the Mexican andPeruvian operations, which amounted to 16.4% of total revenue; revenues fromone of these customers amounted to 11.2% of total revenue.  In addition, the Company had revenues fromtwo molybdenum customers of the Peruvian and Mexican operations, which amountedto 15.2% of total revenues; revenues from one of these customers amounted to8.8% of total revenue, these customers represent 81.8% of the Company’smolybdenum sales revenue.

 

For the six months ended June 30,2007, the Company had revenue from two copper customers of the Mexican andPeruvian operations, which amounted to 24.1% of total revenue; revenues fromone of these customers amounted to 14.6% of total revenue.  In addition, the Company had revenue from twomolybdenum customers of the Peruvian and Mexican operations, which amounted to13.1% of total revenues; these customers represent 82.9% of the Company’smolybdenum sales revenue.

 

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O.            Impact of New Accounting Standards:

 

InMay 2008, the Financial Accounting Standards Board (FASB) issued FASBStatement No. 162, “The Hierarchy of Generally Accepted AccountingPrinciples.”  This Statement identifiesthe sources of accounting principles and the framework for selecting theprinciples to be used in the preparation of financial statements ofnongovernmental entities that are presented in conformity with generallyaccepted accounting principles in the United States.  This Statement is effective 60 days followingthe SEC’s approval of the Public Company Accounting Oversight Board amendmentsto AU Section 411, “The Meaning of Present Fairly in Conformity WithGenerally Accepted Accounting Principles.” The Company does not expect any material impact on its financialposition and results of operations with the adoption of this statement.

 

On March 19, 2008 The Financial Accounting Standards Board (FASB)issued FASB Statement No. 161, “Disclosures about Derivative Instrumentsand Hedging Activities.”  The newstandard is intended to improve financial reporting about derivativeinstruments and hedging activities by requiring enhanced disclosures to enableinvestors to better understand their effects on an entity’s financial position,financial performance, and cash flows. This statement is effective for financial statements issued for fiscalyears and interim periods beginning after November 15, 2008.  The Company is currently analyzing the effectthat this statement will have on its financial position and results ofoperations.

 

In December 2007, the FASB published SFAS No. 160 “NonControlling Interests in Consolidated Financial Statements” - an amendment ofARB No. 51.  This statementaddresses the reporting of minority interests in the results of the parent andprovides direction for the recording of such interests in the financialstatements.  It also provides guidancefor the recording of various transactions related to the minority interests, aswell as certain disclosure requirements.

 

SFAS No. 160 will be effective for fiscal years, and interimperiods after December 15, 2008, earlier adoption is prohibited and shallbe applied prospectively.  Thepresentation and disclosure requirements shall be applied retrospectively forall periods presented.  The Company willadopt this pronouncement on January 1, 2009.

 

The adoption of this statement will cause some changes to our Company’spresentation of financial results and our statement of position.  However, these changes are not expected to beof a material nature.

 

In December 2007, the FASB published SFAS No. 141-R, whichreplaces SFAS No. 141, “Business Combinations.”  This statement improves the reporting ofinformation about a business combination and its effects. This statementestablishes principles and requirements for how the acquirer will recognize andmeasure the identifiable assets acquired, the liabilities assumed, and anynon-controlling interest in the acquisition. Also, the statement determines the recognition and measurement ofgoodwill acquired in the business combination or a gain from a bargainpurchase, and finally, determines the disclosure requirements to enable usersof the financial statements to evaluate the nature and financial effects of thebusiness combination.

 

SFAS No 141-R will be effective for all business combinations with anacquisition date on or after the beginning of the first annual reporting periodafter December 15, 2008, earlier adoption is prohibited.  The Company will adopt this pronouncement on January 1,2009.

 

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P.              Stockholders’ Equity:

 

Common stock:

 

On June 19, 2008 theExecutive Committee of the Board of Directors declared a three-for-one split ofthe Company’s outstanding common stock. On July 10, 2008 common shareholders of record at the close ofbusiness on June 30, 2008, received two additional shares of common stockfor every share owned.  The Company’scommon stock began trading at its post-split price on July 10, 2008.  The split increased the number of sharesoutstanding to 883,410,150 from 294,470,050. The stock split has been recorded in our six month 2008 financialstatements.  All share and per shareamounts have been retroactively adjusted to reflect the stock split.

 

Treasury Stock:

 

Activity in treasury stock in the three month periodended June 30, 2008 is as follows (in millions):

 
| Southern Copper common shares                                                 |   |   |   |
|-------------------------------------------------------------------------------|--------|--------|--------|
| Balance as of December 31, 2007                                          |   | $      | 4.4    |   |
| Purchase of shares                                                            |   | — |   |
| Used for corporate purposes                                                   |   | (0.1   | )      |
| Balance as of June 30, 2008                                              |   | $      | 4.3    |   |
|                                                                          |   |   |   |
| Parent Company (Grupo Mexico) common shares                                   |   |   |   |
| Balance as of December 31, 2007                                          |   | 170.3  |   |
| Other activity, including dividend, interest and currency translation  effect |   | 35.6   |   |
| Balance as of June 30, 2008                                              |   | $      | 205.9  |   |
|                                                                          |   |   |   |
| Treasury stock balance as of June 30, 2008                               |   | $      | 210.2  |   |

 

In the first six monthsof 2008 the Company distributed 13,200 shares of Southern Copper (4,400 sharesprior to the stock split) to directors under the Directors’ Stock Award Plan.In the first six months of 2008 the Company did not award any share of GrupoMexico under the employee stock purchase plan.

 

On June 19, 2008 Grupo Mexico announced athree-for-one split of their outstanding common stock which was effective on June 30,2008. Accordingly all share amounts on the Employee and Executive StockPurchase Plans have been retroactively adjusted to reflect the stock split.

 

Directors’ Stock Award Plan:

 

The Company established a stock award compensationplan for certain directors who are not compensated as employees of theCompany.  Under this plan, participantswill receive 1,200 shares (400 shares before the stock split) of common stockupon election and 1,200 additional shares following each annual meeting ofstockholders thereafter.  600,000 sharesof Southern Copper common stock have been reserved for this plan.  As of June 30, 2008 and 2007, 229,200and 214,800 shares, respectively, have been granted under this plan.  The fair value of the award is measured eachyear at the date of the grant.  For thefirst six months of 2008 and 2007, the stock based compensation expense underthis plan equaled $0.5 million and $0.3 million, respectively.

 

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Employee StockPurchase Plan:

 

In January 2007,the Company offered to eligible employees a stock purchase plan (the “EmployeeStock Purchase Plan”) through a trust that acquires shares of Grupo Mexicostock for sale to its employees, and employees of subsidiaries, and certainaffiliated companies.  The purchase priceis established at the approximate fair market value on the grant date.  Every two years employees will be able toacquire title to 50% of the shares paid in the previous two years.  The employees will pay for shares purchasedthrough monthly payroll deductions over the eight year period of the plan.  At the end of the eight year period, theCompany will grant the participant a bonus of 1 share for every 10 sharespurchased by the employee.

 

If Grupo Mexicopays dividends on shares during the eight year period, the participants will beentitled to receive the dividend in cash for all shares that have been fullypurchased and paid as of the date that the dividend is paid.  If the participant has only partially paidfor shares, the entitled dividends will be used to reduce the remainingliability owed for purchased shares.

 

In the case ofvoluntary resignation of the employee, the Company will pay to the employee thepurchase price applying a deduction over the amount to be paid to the employeebased on the following schedule.

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

 

In the case ofinvoluntary termination of the employee, the Company will pay to the employeethe difference between the fair market value of the shares at the date oftermination of employment, and the purchase price.  When the fair market value of the shares ishigher than the purchase price, the Company will apply a deduction over theamount to be paid to the employee based on the following schedule.

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

 

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

 

For the six months ended June 30, 2008 and 2007,the stock based compensation expense under this plan was $1.0 million in bothperiods.  As of June 30, 2008, therewas $13.8 million of unrecognized compensation expense under this plan, whichis expected to be recognized over the remaining period.

 

The following table presents the stock award activityfor the six months ended June 30, 2008 and 2007:

 

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| ** **                                 | ** ** | **Shares** | ** ** | **Unit Weighted Average  Grant Date Fair Value** | ** ** |
|--------------------------------------------|------------|------------|------------|---------------------------------------------------------------------------|------------|
| Outstanding shares at January 1, 2008 |       | 14,504,151 |       | $                                                                         | 1.17       |   |
| Granted                                    |       | —     |       | —                                                                    |       |
| Exercised                                  |       | —     |       | —                                                                    |       |
| Forfeited                                  |       | —     |       | —                                                                    |       |
| Outstanding shares at June 30, 2008        |       | 14,504,151 |       | $                                                                         | 1.17       |   |
|                                       |       |       |       |                                                                      |       |
| Outstanding shares at January 1, 2007 |       | —     |       | —                                                                    |       |
| Granted                                    |       | 14,144,094 |       | $                                                                         | 1.17       |   |
| Exercised                                  |       | —     |       | —                                                                    |       |
| Forfeited                                  |       | —     |       | —                                                                    |       |
| Outstanding shares at June 30, 2007        |       | 14,144,094 |       | $                                                                         | 1.17       |   |

 

Executive Stock Purchase Plan:

 

Grupo Mexico also offers a stock purchase plan forcertain members of its executive management and the executive management of itssubsidiaries and certain affiliated companies. Under this plan, participants will receive incentive cash bonuses whichare used to purchase up to 2,250,000 (750,000 before the stock split) shares ofGrupo Mexico over an eight year period. The fair value of the award is estimated on the date of grant and isrecognized as compensation expense over a weighted average requisite serviceperiod of eight years.  The Companyrecorded $0.2 million and $0.5 million, net of tax, in compensation expense inthe first quarter of 2008 and 2007, respectively.  As of June 30, 2008, there was $3.0million of unrecognized compensation cost, related to this plan, which isexpected to be recognized over the remaining period.

 

The following table presents the stock award activityfor the six months ended June 30, 2008 and 2007:

 
| ** **                                 | ** ** | **Shares** | ** ** | **Unit Weighted  Average Grant  Date Fair Value** | ** ** |
|--------------------------------------------|------------|------------|------------|------------------------------------------------------------------|------------|
| Outstanding shares at January 1, 2008 |       | 1,372,500  |       | $                                                                | 0.77       |   |
| Granted                                    |       |       |       |                                                             |       |
| Exercised                                  |       | (270,000   | )          | $                                                                | 0.77       |   |
| Forfeited                                  |       | —     |       |                                                             |       |
| Outstanding shares at June 30, 2008   |       | 1,102,500  |       | $                                                                | 0.77       |   |
|                                       |       |       |       |                                                             |       |
| Outstanding shares at January 1, 2007 |       | 2,250,000  |       | $                                                                | 0.77       |   |
| Granted                                    |       |       |       |                                                             |       |
| Exercised                                  |       | (202,500   | )          | $                                                                | 0.77       |   |
| Forfeited                                  |       | —     |       |                                                             |       |
| Outstanding shares at June 30, 2007   |       | 2,047,500  |       | $                                                                | 0.77       |   |

 

Q.            Subsequent events:

 

On July 31, 2008,the Board of Directors approved a quarterly dividend of $0.57 per share, to bepaid on September 5, 2008 to shareholders of record as of August 20,2008.

 

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Part I

 

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

EXECUTIVE OVERVIEW

 

Our business is primarilythe production and sale of copper.  Inthe process of producing copper, a number of valuable metallurgical by-productsare recovered, such as molybdenum, zinc, silver, lead and gold, which we alsoproduce and sell.  Additionally, with thecompletion of the Ilo smelter modernization we are producing a substantialamount of sulfuric acid for sale to customers. Market forces outside of our control largely determine the sales pricesfor our products.  Our management,therefore, focuses on copper production cost control, production enhancementand maintaining a prudent and conservative capital structure to improveprofitability.  We believe we achievethese goals through capital spending programs, exploration efforts and costreduction programs.  Our aim is to remainprofitable during periods of low copper prices and to maximize financialperformance in periods of high copper prices.

 

Ournet income and earnings per share for the three months ended June 30, 2008were $548.5 million and $0.62 per share and for the three months ended June 30,2007 were $726.0 million and $0.82 per share. Net income and earnings per share for the six months ended June 30,2008 were $1,113.5 million and $1.26 per share and for the six months ended June 30,2007 were $1,277.6 million and $1.45 per share. The decrease in net earnings inboth periods of 2008 was mainly due to the Cananea strike, which has reducedproduction volume in 2008, partially offset by the higher sales price for mostof our metals.

 

As is true with industryworld-wide, we find we are under significant cost pressure for most of themajor components of our cost.  Theincrease in fuel prices has had a considerable effect on our power costs.  We are studying various options to help uscontrol the impact of this cost on our operations.  In Mexico we are evaluating the possibilityof working with an independent power producer, who would build and operate acoal-fired 600 megawatt power plant to supply our operating needs and be ableto accommodate future demands. Additionally, in Peru we are evaluating various options to secureadditional power required by our expansion program. We believe that our currentoperations, coupled with the projects that are scheduled to come on line in thefollowing years, may bring us additional economies of scale and thereby allowus to help contain our unit costs.

 

Mine copper productionamounted to 258.5 million pounds in the second quarter 2008, a decrease of 90.2million pounds compared with the second quarter 2007.  The decrease in production is mainly due tothe Cananea strike and to a lesser extent lower ore grade at Toquepala.

 

We have tried,unsuccessfully, to resolve the current labor stoppage that obstructsproduction at Cananea.  During the secondquarter of 2008, a group of employees was liquidated at a cost to us of $10.8million, which was recorded in cost of sales on our condensed consolidatedstatement of earnings.  We anticipatethat additional liquidations will occur in the second half of 2008.  In accordance with SFAS No. 112, we haveestimated a liability of $52.0 million which have been recorded in ourcondensed consolidated balance sheet.  Itis expected that production at Cananea will remain suspended until these laborissues are resolved.

 

Our net earnings in thefirst half of 2008 were also affected by $33.9 million of fixed costs thatcontinue to be incurred during the strike and $4.3 million of rehabilitationcosts related to the Cananea strike.

 

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Additionally, ourTaxco and San Martin mines have been on strike since July 2007.  It is expected that operations at these mineswill remain suspended until these labor issues are resolved.  However, we believe that the strike activitywill not result in an impairment of our assets.

 

Mine zinc productionamounted to 60.8 million pounds in the second quarter 2008, a 17.4% decreasefrom the second quarter 2007.  Refinedzinc production in the second quarter 2008 was 54.0 million pounds, 27.8%higher than in the second quarter 2007 due to the recovery of full capacity atthe San Luis Potosi refinery.

 

Capital expenditurestotaled $130.9 million and $180.8 million for the second quarter and first sixmonths of 2008, respectively. Projected capital expenditure and explorationspending for the year 2008 approximate $480.0 million, and include investmentsin the Tia Maria greenfield project in Peru and the projects to expand capacityat Toquepala and Cuajone.

 

We discuss below severalmatters that we believe are important to understand our results of operationsand financial condition.  These mattersinclude, (i) our “operating cash costs” as a measure of our performance, (ii) metalprices, (iii) business segments, (iv) the effect of inflation andother local currency issues, and (v) our expansion and modernizationprogram and environmental protection programs. This discussion should be read in conjunction with the managementdiscussion and analysis of financial condition and results of operations at December 31,2007 included in the Company’s 2007 annual report on Form 10-K.

 

Operating Cash Costs: An overall benchmark used by us and acommon industry metric to measure performance is operating cash costs per poundof copper produced.  Operating cash costis a non-GAAP measure that does not have a standardized definition and may notbe comparable to similarly titled measures provided by other companies.  A reconciliation of our operating cash costper pound to the cost of sales (exclusive of depreciation, amortization anddepletion) as presented in the statement of earnings, is presented under thesubheading “Non-GAAP Information Reconciliation,” below.  We have defined operating cash cost per poundas cost of sales (exclusive of depreciation, amortization and depletion); plusselling, general and administrative charges, treatment and refining charges;less by-products revenue and sales premiums, workers’ participation and other miscellaneouscharges, the mine royalty charges and the change in inventory levels; dividedby total pounds of copper produced and purchased by us.  In our calculation of operating cash cost perpound of copper produced, we credit against our costs the revenues from thesale of by-products, principally molybdenum, zinc and silver and the premiumsover market price that we receive on copper sales.  We account for the by-product revenues inthis way because we consider our principal business to be the production andsale of copper.  We believe that ourCompany is viewed by the investment community as a copper company, and isvalued, in large part, by the investment community’s view of the copper marketand our ability to produce copper at a reasonable cost.  We also include copper sales premiums as acredit, as these amounts are in excess of published copper prices.  The increase in recent years in the price ofmolybdenum has had a significant effect on our traditional calculation of cashcost and its comparability between periods. Accordingly, we present cash costs with and without crediting theby-products revenues against our costs.

 

We exclude from ourcalculation of operating cash cost depreciation, amortization and depletion,which are considered non-cash expenses. Exploration is considered a discretionary expenditure and is alsoexcluded.  Workers’ participationprovisions are determined on the basis of pre-tax earnings and are alsoexcluded.  Additionally, excluded fromoperating cash cost are items of a non-recurring nature, the mine royaltycharges and the regional development contribution made from Peruvian earnings.

 

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Our operating cash costsper pound, as defined, are presented in the table below, for the three and sixmonths ended June 30, 2008 and 2007. We present cash costs with and without the inclusion of by-productrevenues.

 
| ** **                                                                        | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                        | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                        | ** ** | **(cents per pound)**                 | ** ** | **(cents per pound)**               | ** ** |
| Cash cost per pound of copper produced and purchased                              |       | 6.2                                             |       | (21.8                                         | )          | (3.3 | ) | (5.6 | ) |
| Cash cost per pound of copper produced and purchased without  by-products revenue |       | 185.3                                           |       | 132.9                                         |       | 167.3 |   | 127.9 |   |

 

As seen on the chartabove, our per pound cash cost for the second quarter and six months of 2008when calculated with by-products revenue are a cost of 6.2 cents per pound anda credit of 3.3 cents per pound, respectively, compared with credits of 21.8cents per pound and 5.6 cents per pound in the second quarter and six months of2007, respectively.  The increase in theby-products credit in the 2008 periods was due to higher molybdenum prices andhigher molybdenum sales volume in the six month period.  The increased molybdenum production in thesix month period was the result of higher average recoveries at our mines.

 

Our cash cost, excludingby-product revenues, were higher by 52.4 cents per pound and 39.4 cents perpound in the second quarter and six first months of 2008 than the comparable2007 periods and is mainly due to higher power and fuel cost as well as thelower copper production at Cananea due to the ongoing strike.

 

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

 

We are subject to marketrisks arising from the volatility of copper and other metal prices.  Assuming that expected metal production andsales are achieved, that tax rates are unchanged, giving no effect to hedging programs,metal price sensitivity factors would indicate the following change inestimated 2008 earnings resulting from metal price changes:

 
| ** **                                                    | ** ** | **Copper** | ** ** | **Molybdenum** | ** ** | **Zinc** | ** ** | **Silver** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|----------------|------------|----------|------------|------------|------------|
| Change in metal prices (per pound, except Silver - per ounce) |       | $          | 0.01       |           | $          | 1.00     |       | $          | 0.01       |   | $ | 1.00 |   |
| Annual change in net earnings (in millions)                   |       | $          | 6.2        |           | $          | 20.3     |       | $          | 1.1        |   | $ | 7.1 |   |

 

Business segments.

 

Our Company operates in asingle industry, the copper industry.  Weoperate our business in three segments. These segments are our Peruvian operations, our Mexican open-pitoperations and our Mexican underground operations, known as our IMMSAunit.  Our Peruvian operations includethe Toquepala and Cuajone mine complexes and the smelting and refining plants,industrial railroad and port facilities which service both mines.  Our Mexican open-pit operations include LaCaridad and Cananea mine 

 

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complexes, the smeltingand refining plants and support facilities which service both mines.  Our IMMSA unit includes five undergroundmines that produce zinc, lead, copper, silver and gold, a coal and coke mine,and several industrial processing facilities for zinc, copper and silver.

 

Segment information isincluded in our review of “Results of Operations” and also in Note N of ourcondensed consolidated financial statements.

 

Inflation and Devaluationof the Peruvian Nuevo Sol and the Mexican Peso.

 

Our functional currencyis the U.S. dollar.  Portions of ouroperating costs are denominated in Peruvian nuevos soles and Mexicanpesos.  Since our revenues are primarilydenominated in U.S. dollars, when inflation/deflation in Peru or Mexico is notoffset by a change in the exchange rate of the nuevo sol or the peso,respectively, to the dollar, our financial position, results of operations andcash flows could be adversely affected to the extent that theinflation/devaluation effects are passed onto us by our suppliers or reflectedin our wage adjustments.  In addition,the dollar value of our net monetary assets denominated in nuevos soles orpesos can be affected by devaluation of the nuevo sol or the peso, resulting ina remeasurement loss in our financial statements.  Recent inflation and devaluation rates areprovided in the table below.  For thethree and six months ended June 30, 2008 and 2007, inflation anddevaluation rates were as follows:

 
| ** **                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                         | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Peru:                                              |       |                                            |       |                                          |       |   |   |   |   |
| Peruvian inflation rate                            |       | 1.3                                             | %          | 1.2                                           | %          | 3.5 | % | 1.8 | % |
| Nuevo sol/dollar (appreciation) / devaluation rate |       | 8.1                                             | %          | (0.5                                          | )%         | (1.0 | )% | (0.9 | )% |
|                                               |       |                                            |       |                                          |       |   |   |   |   |
| Mexico:                                            |       |                                            |       |                                          |       |   |   |   |   |
| Mexican inflation rate                             |       | 0.5                                             | %          | (0.4                                          | )%         | 2.0 | % | 0.6 | % |
| Peso/dollar (appreciation) / devaluation rate      |       | (3.9                                            | )%         | (2.3                                          | )%         | (5.4 | )% | (0.8 | )% |

 

Capital Expansion Program.

 

During the secondquarter of 2008, we continued to focus our efforts on the $2.1 billioninvestment program at our Peruvian operations. When finished, by year 2011, weexpect these projects to increase our annual copper production by 270,000 tons,an increase of 39% over the current production capacity.

 

Investment in theTia Maria project is underway. As of June 2008, we have committed $540.0million in purchase orders and contracts for the acquisition of majorequipment.  This includes $389.0 millioncommitted at a fixed price to avoid cost escalation in the capital budget.

 

The Toquepala andCuajone expansion projects are also underway. For the Toquepala project, we have committed $56.1 million to purchasetwo 73 cubic yard shovels, two mine drills and four 320 ton trucks. We havesigned a contract for the feasibility study, basic and detailed engineering andprocurement support. The environmental impact assessment is also underway whichwe expect to be completed by November 2009.

 

For the Cuajoneproject, we have committed $31.6 million to purchase a 73 cubic yard shovel, amine drill and three 320 ton trucks. We have signed a contract for a 

 

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feasibility studyand will be continuing with the engineering and procurement process.  The environmental impact assessment is alsounderway.

 

Also, subject tothe satisfactory resolution of various issues and the acquisition of thenecessary governmental permits, we plan to invest approximately $1.2 billion inthe Los Chancas project, a copper-molybdenum property in Apurimac, in thesouthern part of Peru.  This is inaddition to the $2.1 billion previously announced for our other Peruvianprojects.  We expect this project willincrease our annual copper production by 80,000 tons by the year 2013.  We expect to start the bidding process forfeasibility studies by the end of the third quarter.

 

Ilo SmelterModernization:  This project wascompleted in January 2007 and has allowed us to increase sulfur captureover the 92% requirement established in our agreement with the Peruvian government.  The new smelter maintains production atcurrent levels.  Performance tests arepending completion for the Isasmelt furnace with Xstrata and acid plant withChemetics.  These are expected to becompleted in the next few months.  Thefacility is currently operating at full capacity and we expect to smelt 1.1million tons of concentrates in 2008.

 

Tailings disposal atQuebrada Honda: This project will increase the height of the existing QuebradaHonda Dam to impound future tailings from the Toquepala and Cuajone mills.  The procurement of the main equipment, withlong fabrication lead-time continues and part of the material has beenreceived.  Construction of the main civilworks and some access roads for the main and lateral dams has been completed.  The first stage of this project will be underdevelopment until 2012.  The total costof this project is estimated to be $66.0 million, with $19.8 million expendedthrough June 30, 2008 and $12.1 million committed.

 

Cananea: The are twomajor Cananea projects, an SX/EW plant to increase cathode production by 33,000tons and a crusher and conveyor system for leach material; these projects havebeen temporarily suspended until the resolution of the labor problems atCananea.

 

El Arco: A feasibilitystudy has been initiated and is expected to be completed before the year-end2008.  We are currently estimating aninvestment of $1.8 billon to produce approximately 190,000 tons of copper peryear.  Production could start four yearsafter approval of the project by our Board of Directors.

 

Angangueo: Exploration onthis polymetallic deposit with precious metals in the Mexican state ofMichoacan, is also progressing with the development of a feasibilitystudy.  The environmental impactassessment was authorized, and we are in the process of obtaining governmentalpermits.

 

The above informationabout potential projects are estimates only. We cannot make any assurance that we will undertake any of theseprojects or that the information noted is accurate.

 

ACCOUNTING ESTIMATES

 

Our discussion andanalysis of financial condition and results of operations are based on ourcondensed consolidated financial statements, which have been prepared inaccordance with US GAAP.  Preparation ofthese condensed consolidated financial statements requires our management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements, and the reported amounts of revenues and expensesduring the reporting periods.  Managementmakes its best estimate of the ultimate outcome for these items based onhistorical trends and other information available when the financial statementsare prepared.  Changes in estimates are recognizedin accordance with the accounting rules for the estimate, which is

 

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typicallyin the period when new information becomes available to management.  Areas where the nature of the estimate makesit reasonably possible that actual results could materially differ from amountsestimated include: ore reserves, revenue recognition, estimated mine strippingratios, leachable material and related amortization, the estimated useful livesof fixed assets, asset retirement obligations, litigation and contingencies,valuation allowances for deferred tax assets, tax positions, fair value offinancial instruments and inventory obsolescence.  We base our estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances.  Actual resultsmay differ from these estimates under different assumptions or conditions.

 

RESULTS OF OPERATIONS

 

The following highlightskey financial and operating results for three and six months ended June 30,2008 and 2007 (in millions):

 
| ** **                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **Statement of Earnings Data:**     | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                               |       |                                            |       |                                          |       |   |   |   |   |
| Net sales                                          |       | $                                               | 1,461.8    |                                          | $          | 1,826.5 |   | $ | 2,961.0 |   | $ | 3,184.8 |   |
| Operating costs and expenses                       |       | (669.4                                          | )          | (681.3                                        | )          | (1,303.9 | ) | (1,252.2 | ) |
| Operating income                                   |       | 792.4                                           |       | 1,145.2                                       |       | 1,657.1 |   | 1,932.6 |   |
| Non-operating income (expense)                     |       | (12.2                                           | )          | (61.9                                         | )          | (23.2 | ) | (65.4 | ) |
| Earnings before income taxes and minority interest |       | 780.2                                           |       | 1,083.3                                       |       | 1,633.9 |   | 1,867.2 |   |
| Income taxes                                       |       | (228.9                                          | )          | (354.4                                        | )          | (514.9 | ) | (585.1 | ) |
| Minority interest                                  |       | (2.8                                            | )          | (2.9                                          | )          | (5.5 | ) | (4.5 | ) |
| Net earnings                                       |       | $                                               | 548.5      |                                          | $          | 726.0 |   | $ | 1,113.5 |   | $ | 1,277.6 |   |

 

Mine copper production amounted to 258.5 millionpounds in the second quarter of 2008 compared with 348.7 million pounds in thesecond quarter of 2007, a decrease of 25.9%. This decrease amounting to 90.2 million pounds, included 84.2 millionpounds from the Mexican open pit operations, 3.6 million pounds from theMexican underground mines and 2.4 million pounds from the Peruvian open pitmines.

 

The decrease of 84.2 million pounds in the Mexicanopen-pit mines production included 77.3 million pounds from the Cananea mineand 6.9 million pounds from the La Caridad mine.  The decrease in production at the Cananeamine was due to the effect of its strike. The decrease at La Caridad mine is due to lower ore and pregnant leachsolution (“PLS”) grades.  The decrease of3.6 million pounds at the Mexican underground mines was due to the work stoppage atthe San Martin mine.  The decrease in thePeruvian mines came from the Toquepala mine, which decreased by 13.7 millionpounds, and was the result of lower ore grades and recoveries, partially offsetby an increase of 9.7 million pounds from the Cuajone mine due to higher ore gradesand recoveries and an increase of 1.6 million pounds from the Toquepala SX/EWplant due to higher PLS grade.

 

Mine zinc production decreased 12.8 million pounds inthe second quarter of 2008 to 60.8 million pounds compared with 73.6 millionpounds in the second quarter of 2007. This 17.4% decrease in production was due to the work stoppages atthe San Martin and Taxco mines, which started on July 30, 2007 andcontinue to date.

 

Average Metal Prices

 

The table below outlinesthe average metal prices during the three and six month periods ended June 30,2008 and 2007:

 

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| ** **                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **% Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **% Change** | ** ** |
| Copper ($ per pound - LME)   |       | $                                               | 3.83       |                                          | $          | 3.47 |   | 10.4 | % | $ | 3.68 |   | $ | 3.08 |   | 19.5 | % |
| Copper ($ per pound - COMEX) |       | $                                               | 3.80       |                                          | $          | 3.46 |   | 9.8 | % | $ | 3.67 |   | $ | 3.08 |   | 19.2 | % |
| Molybdenum ($ per pound)     |       | $                                               | 32.76      |                                          | $          | 30.41 |   | 7.7 | % | $ | 32.89 |   | $ | 28.11 |   | 17.0 | % |
| Zinc ($ per pound - LME)     |       | $                                               | 0.96       |                                          | $          | 1.66 |   | (42.2 | )% | $ | 1.03 |   | $ | 1.61 |   | (36.0 | )% |
| Silver ($ per ounce - COMEX) |       | $                                               | 17.17      |                                          | $          | 13.32 |   | 28.9 | % | $ | 17.39 |   | $ | 13.31 |   | 30.7 | % |

 

Net Sales. Net sales in the second quarter and first six months of 2008 decreasedby $364.7 million and $223.8 million, respectively, compared to the secondquarter and first six months of 2007. These 20.0% and 7.0% decreases,respectively, were principally due to lower sales volume resulting from theCananea mine strike, partially offset by higher prices for most of our metals.Net sales in the second quarter and first six months of 2008 also include gainson copper derivative of $2.2 million and $8.6 million, respectively, comparedto a gain of $3.3 million in both 2007 comparable periods.

 

The table below presentsinformation regarding the volume of our copper sales by segment for the threeand six months ended June 30, 2008 and 2007:

 

Copper Sales(million pounds):

 
| ** **               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **               | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Copper:                  |       |                                            |       |                                          |       |   |   |   |   |
| Peruvian operations      |       | 179.3                                           |       | 209.9                                         |       | 365.1 |   | 420.9 |   |
| Mexican open-pit         |       | 77.7                                            |       | 158.2                                         |       | 162.8 |   | 331.6 |   |
| Mexican IMMSA unit       |       | 9.2                                             |       | 9.7                                           |       | 18.6 |   | 16.9 |   |
| Intersegment elimination |       | (12.3                                           | )          | (21.6                                         | )          | (21.8 | ) | (46.7 | ) |
| Total copper sales       |       | 253.9                                           |       | 356.2                                         |       | 524.7 |   | 722.7 |   |

 

The table below presentsinformation regarding the volume of sales by segment of our significantby-products for the three and six months ended June 30, 2008 and 2007:

 

By-product Sales:

 
| ** **                                                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in million pounds except silver - in  million ounces)** | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Peruvian operations                                                                           |       |                                            |       |                                          |       |   |   |   |   |
| Molybdenum contained in concentrates                                                          |       | 4.8                                             |       | 5.1                                           |       | 9.8 |   | 9.3 |   |
| Zinc - refined and in concentrate                                                             |       | 4.2                                             |       | 11.8                                          |       | 9.4 |   | 23.2 |   |
| Silver                                                                                        |       | 0.9                                             |       | 0.8                                           |       | 1.7 |   | 2.2 |   |
|                                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Mexican open-pit                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Molybdenum contained in concentrates                                                          |       | 3.8                                             |       | 4.0                                           |       | 7.7 |   | 7.8 |   |
| Zinc - refined and in concentrate (1)                                                         |       | —                                          |       | —                                        |       | — |   | — |   |
| Silver                                                                                        |       | 0.9                                             |       | 1.1                                           |       | 1.7 |   | 2.1 |   |

 

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| Mexican IMMSA unit         |   |   |   |   |   |   |   |   |   |
|--------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Zinc - refined and in concentrate    |   | 54.8   |   | 69.8   |   | 106.0  |   | 134.0  |   |
| Silver                               |   | 2.3    |   | 3.4    |   | 4.3    |   | 5.7    |   |
|                                 |   |   |   |   |   |   |   |   |   |
| Intersegment elimination             |   |   |   |   |   |   |   |   |   |
| Zinc - refined and in concentrate    |   | (4.8   | )      | (11.5  | )      | (8.7   | )      | (21.6  | )      |
| Silver                               |   | (0.7   | )      | (0.2   | )      | (1.3   | )      | (0.5   | )      |
|                                 |   |   |   |   |   |   |   |   |   |
| Total by-product sales               |   |   |   |   |   |   |   |   |   |
| Molybdenum contained in concentrates |   | 8.6    |   | 9.1    |   | 17.5   |   | 17.1   |   |
| Zinc - refined and in concentrate    |   | 54.2   |   | 70.1   |   | 106.7  |   | 135.6  |   |
| Silver                               |   | 3.4    |   | 5.1    |   | 6.4    |   | 9.5    |   |

 

At June 30, 2008,the Company has recorded provisionally priced sales of 96.7 million pounds ofcopper, at an average forward price of $3.90 per pound.  Also the Company has recorded provisionallypriced sales of 3.5 million pounds of molybdenum at the June 30, 2008market price of $33.35 per pound.  Thesesales are subject to final pricing based on the average monthly LME or COMEXcopper prices and Dealer Oxide molybdenum prices in the future month ofsettlement, which will occur largely in the next four months.

 

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

 

Operating Costs andExpenses.

 

Three months: Operating costs and expenses were $669.4million in the second quarter of 2008 compared with $681.3 million in thesecond quarter of 2007.  The decrease of$11.9 million was principally due to lower cost of sales (exclusive ofdepreciation, amortization and depletion).

 

Cost of sales (exclusiveof depreciation, amortization and depletion) for the three months ended June 30,2008 was $550.5 million compared with $562.3 million in the comparable 2007period.  The second quarter 2008 decreasein cost of sales of $11.8 million was primarily attributable to the following:1) $27.2 million of lower workers’ participation, largely as a result of thestrikes at Cananea and some of our other Mexican facilities and 2) a decreaseof $9.8 million of sales expenses related to product mix.  In 2007 we sold a greater quantity of copperin concentrate form which increased our shipping costs.  Increasing our cost of sales was the higherpower cost at our Peruvian operations, which increased second quarter 2008 costby $27.7 million. The average unit cost for our power consumption increased by61% in 2008, as escalation factors in our power purchase agreement increasedwith the higher cost of coal and other fuels. Other factors, including $10.8 million of severance payments and $19.2million of fixed costs that continue to be incurred during the strike at someof our Mexican mines, inventory usage and the cost of labor and supplies, alsoimpacted the change in cost between the second quarters of 2008 and 2007.

 

Six months: Operating costs and expenses were$1,303.9 million in the first six months of 2008 compared with $1,252.2 millionin the first six months of 2007.  Theincrease of $51.7 million was principally due to $42.0 million of lower cost ofsales (exclusive of depreciation, amortization and depletion), $5.8 million ofhigher depreciation, amortization and depletion and $2.1 million of higher explorationexpense.

 

Cost of sales (exclusiveof depreciation, amortization and depletion) for the first six months ended June 30,2008 was $1,071.0 million compared with $1,029.0 million in the comparable 2007period.  The increase in cost of sales of$42.0 million in the first six months of 2008 was primarily attributable to thefollowing 1) higher fuel and power 

 

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costs of $38.6 million,mostly related to our Peruvian operations, 2) higher labor costs and otherproduction costs of $14.6 million and 3) a larger currency translation loss of$21.3 million, largely related to the strengthening in value of the Mexican peso.  Decreasing our six month 2008 cost of salesinclude 1) a decrease of $29.4 million in workers’ participation, attributableto the strikes at some of our Mexican operations and 2) lower sales expenses of$23.4 million, principally at our Peruvian operations due to product mix and atour Mexican operations due to strikes. In addition, other factors effecting the change in cost of sales in thetwo six month periods include, $10.8 million of severance payments and $39.1million of fixed costs that continue to be incurred during the strike at someof our Mexican mines, inventory usage and other items such as mining royalties.

 

Depreciation,amortization and depletion for the first six months ended June 30, 2008,were $164.4 million compared with $158.6 million in the comparable period of2007.  The increase of $5.8 million isprincipally due to higher amortization of capitalized leach material.

 

Exploration expense forthe first six months ended June 30, 2008 was $17.1 million compared with$15.0 million in the comparable period of 2007. This increase of $2.1 millionwas mainly due to $1.0 million for feasibility studies of the Tia Mariaproject, $0.7 million for other exploration projects at our Peruvian operationsand $0.4 million of higher exploration cost at our Mexican open pitoperations.  Expenditures at our TiaMaria project are expensed until the completion of the feasibility study whichdetermines a probable future benefit.

 

Non-Operating Income(Expense):Interest expense in the second quarter and first six months of 2008 wereapproximately 11.3% and 7.2% lower than the comparable 2007 periods.  This variance is mainly the result of thechanges in average debt levels in the periods.

 

Interest income was $12.2million and $29.6 million in the second quarter and the first six months of2008, compared to $18.1 million and $40.0 million in the comparable periods of2007.  These decreases were principallythe result of lower average of interest rates earned.

 

The (loss) gain onderivative instruments were $(1.5) million and $1.4 million in the secondquarter and first six months of 2008, respectively, compared with losses of$55.5 million and $76.7 million in the second quarter and first six months of2007, respectively.  These amountsconsist of the following (in millions):

 
| ** **                                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                                        | ** ** | **2007**                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Loss on short-term investments                              |       | $                                               | —     |                                            | $          | (58.9 | ) | $ | — |   | $ | (81.6 | ) |
| Gain on exchange rate derivatives, US dollar / Mexican peso |       | (1.5                                            | )          | 4.7                                             |       | 1.4 |   | 6.2 |   |
| Dual currency notes                                         |       | —                                          |       | (1.3                                            | )          | — |   | (1.3 | ) |
| Net gain (loss)                                             |       | $                                               | (1.5       | )                                               | $          | (55.5 | ) | $ | 1.4 |   | $ | (76.7 | ) |

 

For additionalinformation please see Note H “Derivative instruments” to the condensedconsolidated financial statements.

 

Other income (expense)was an income of $3.1 million in the second quarter of 2008 compared to incomeof $5.0 million in the second quarter of 2007. The decrease of $1.9 million in the second quarter of 2008 wasprincipally due to $10.6 million of lower dividends received from Grupo Mexicopartially reduced by the recording of a tax refund from the Peruvian governmentof $4.0 million, previously expensed, a $1.5 million 

 

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positive adjustment tothe Peruvian operations provision for mining royalties and to an increase of$4.5 million in other income of our Mexican operations, related to the sale ofassets and other.

 

Other income (expense)was an expense of $0.4 million in the first six months of 2008 compared to anincome of $25.7 million in the first six months of 2007.  The decrease in the first six months of 2008was principally due to $25.0 million of lower dividends received from Grupo Mexico,$1.2 million of a higher contribution to the Peruvian regional development fundand $4.2 million of lower miscellaneous income at our Mexican operations,related to the sale of assets and other. These decreases in income were reduced by $2.6 million related to thesale of an airplane from our Peruvian operations.

 

Income taxes: The income tax for the six months endedJune 30, 2008 and 2007 were $514.9 million and $585.1 million,respectively.  These provisions includeincome taxes for Peru, Mexico and the United States. The effective tax ratesfor the 2008 and 2007 periods are 31.5% and 31.3%, respectively.  The estimated annual effective tax rate for2008 is 32.5%, compared with 34.7% in 2007. The decrease in the estimated annual effective tax rate is largely dueto the incremental U.S. tax on dividend income in 2007.  The dividend income was eliminated infinancial consolidation (book income) but was taxable in the U.S. at thedifference between the 35% U.S. statutory rate and the foreign tax credit rateof 28% on the dividend.  In addition, thevariability in the dollar relative to the Mexican peso and the Peruvian nuevosol caused a decrease in the estimated effective tax rate.  In addition, the inclusion of losscarryforwards of some of Minera Mexico’s subsidiaries in the Mexican taxcalculation also contributed to the rate decrease.

 

On October 1, 2007,the Mexican government enacted a new tax law, which took effect on January 1,2008.  The law introduced a flat tax,which replaced Mexico’s asset tax and applies to taxpaying entities along withMexico’s regular income tax.  In generalMexican companies are subject to paying the greater of the flat tax or theincome tax; the application of this rule resulted in a provision in thefirst six months of 2008 based upon the regular income tax calculation.  This tax law change did not have an effect onthe Company’s first six months 2008 deferred tax position.

 

The flat tax iscalculated by applying a 16.5% tax rate in 2008, a 17% tax rate in 2009, and a17.5% tax rate in 2010 and the following years. Although the flat tax is defined as minimum tax it has a wider taxablebase as many of the tax deductions allowed for income tax purposes are notallowed for the flat tax.

 

Segment ResultsAnalysis

 

Peruvian Open PitOperations

 

The following table setsforth net sales, operating cost and expenses and operating income for ourPeruvian open pit operations segment, for the three and six months periodsended June 30, 2008 and 2007:

 
| ** **                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                    |       | $                                               | 902.6      |                                          | $          | 953.9 |   | $ | 1,824.1 |   | $ | 1,670.0 |   |
| Operating costs and expenses |       | (357.2                                          | )          | (402.9                                        | )          | (707.1 | ) | (744.2 | ) |
| Operating income             |       | $                                               | 545.4      |                                          | $          | 551.0 |   | $ | 1,117.0 |   | $ | 925.8 |   |

 

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Three months: Net sales in the second quarter of 2008 decreased by $51.3 million, to$902.6 million in the second quarter of 2008 compared with $953.9 million inthe second quarter of 2007. This decrease in net sales was the result of lowercopper, molybdenum and zinc sales volume, partially offset by an increase incopper and molybdenum prices. The lower copper sales volume was a result oflower production mainly at the Toquepala mine due to lower ore grades.  The lower molybdenum sales volume was aresult of lower production at both mines due to lower molybdenum grades mainlyat the Cuajone mine. The lower zinc sales volume was due to lower purchasesfrom IMMSA due to the strikes at the San Martin and Taxco mines.

 

Operating costs andexpenses in the second quarter of 2008 decreased by $45.7 million to $357.2million from $402.9 million in the second quarter of 2007, principally due tolower cost of sales (excluding depreciation, amortization and depletion).  Cost of sales (exclusive of depreciation,amortization and depletion) for the three months ended June 30, 2008 was$312.2 million compared to $358.1 million in the same period of 2007.  The principal elements of cost of sales,creating this change, include the following, $80.2 million of lower metalpurchases mainly from IMMSA due to strikes at some of its mines, and $18.3million of a temporary inventory build-up, partially offset by $56.1 million ofhigher production cost in 2008. The increase in production cost includesincreases of $10.3 million in salaries due to the new labor agreements and theappreciation of the Nuevo sol, $35.6 million in power and fuel cost mainly forthe escalation factor of the increase in cost of coal and other fuels and $10.2million in explosives, tires and other operating material.

 

Six months: Net sales in the six months ended June 30,2008 increased by $154.1 million to $1,824.1 million from $1,670.0 million inthe first six months of 2007. The increase in net sales in the 2008 period wasa result of higher copper and molybdenum sales due to higher prices as well ashigher molybdenum sales volume. The increase in molybdenum sales volume was principallythe result of improved recoveries at both mines.  The increase in net sales value is also due,to a certain extent, to a change in copper product mix. In the first six monthsof 2008, we sold higher refined copper in place of concentrates, as a result ofthe Ilo smelter operating at full capacity in the 2008 period.  Net sales in the first six months of 2008also includes a loss on copper derivative instruments of $1.3 million comparedwith a gain on copper derivative instruments of $1.6 million in the same periodof 2007.

 

Operating costs andexpenses in the first six months of 2008 decreased by $37.1 million to $707.1million from $744.2 million in the first six months of 2007, principally due tolower cost of sales and higher depreciation, amortization and depletion.  Cost of sales (exclusive of depreciation,amortization and depletion) for the six months ended June 30, 2008 was$619.2 million compared to $662.4 million in the same period of 2007.  The decrease of $43.2 million between thefirst six months of 2008 and 2007, is mainly due to $162.2 million of lowermetal purchased mainly from IMMSA, partially offset by higher production costin 2008 of $110.6 million, which includes increases of $23.8 million insalaries, $61.6 million of fuel and power, and $25.2 million of explosives,tires and other operating material.

 

Mexican Open PitOperations

 

The following table setsforth net sales, operating cost and expenses and operating income for ourMexican open pit operations segment for the three and six months ended June 30,2008 and 2007:

 

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| ** **                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                    |       | $                                               | 467.7      |                                          | $          | 766.5 |   | $ | 937.8 |   | $ | 1,349.9 |   |
| Operating costs and expenses |       | (258.6                                          | )          | (265.7                                        | )          | (498.0 | ) | (508.2 | ) |
| Operating income             |       | $                                               | 209.1      |                                          | $          | 500.8 |   | $ | 439.8 |   | $ | 841.7 |   |

 

Net sales in the secondquarter and first six months of 2008 decreased by $298.8 million and $412.1million, respectively, compared with the same periods of 2007. The decrease wasprincipally the effect of the lower production and sale of copper, molybdenumand silver from the Cananea mine due to the strike.

 

Operating costs andexpenses in the second quarter of 2008 decreased by $7.1 million to $258.6million from $265.7 million in the second quarter of 2007, principally due tolower cost of sales.  Cost of sales(exclusive of depreciation, amortization and depletion) decreased $8.8 millionto $200.6 million from $209.4 million in 2007. The decrease in cost of sales was mainly due to lower sales expenses of$3.5 million and an inventory build-up of $4.6 million due to the strike.

 

Operating costs andexpenses in the first six months of 2008 decreased by $10.2 million to $498.0million from $508.2 million in the same period of 2007, principally due tolower cost of sales of $13.7 million and lower selling, general andadministrative expenses of $2.4 million partially offset by higherdepreciation, amortization and depletion of $5.6 million.

 

Cost of sales (exclusiveof depreciation, amortization and depletion) in the first six months of 2008decreased $13.7 million to $384.0 million from $397.7 million in 2007.  The principal elements of cost of sales,creating the change between the first six months of 2008 and 2007, include thefollowing, 1) $38.1 million of lower workers participation and 2) $18.6 millionof inventory build-up, partially offset by $45.8 million of higher metalspurchases.  These changes in costs wereprimarily attributable to a decrease in production as a result of the Cananeastrike.

 

Selling, general andadministrative cost in the first six months of 2008 decreased by $2.4 millionto $18.5 million from $20.9 million in the first six months of 2007 and wasmainly due to the strike at the Cananea mine.

 

Depreciation,amortization and depletion in the first six months of 2008 increased by $5.6million to $92.6 million from $87.0 million in the first six months of 2007,and was principally due to higher amortization of capitalized leachablematerial.

 

MexicanUnderground Operations (IMMSA)

 

The following table setsforth net sales, operating cost and expenses and operating income for our IMMSAsegment, for the three month and six month periods ended June 30, 2008 and2007:

 
| ** **                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                        | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                    |       | $                                               | 163.1      |                                                | $          | 213.6 |   | $ | 325.2 |   | $ | 364.3 |   |
| Operating costs and expenses |       | (124.0                                          | )          | (126.8                                              | )          | (225.9 | ) | (206.6 | ) |
| Operating income             |       | $                                               | 39.1       |                                                | $          | 86.8 |   | $ | 99.3 |   | $ | 157.7 |   |

 

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Net sales in the secondquarter and first six months of 2008 decreased by $50.5 million and $ 39.1million compared with the same periods of 2007. These decreases in net sales in the second quarter and first six monthsof 2008 were principally due to lower sales volume of zinc and silver in bothperiods and also lower copper sales volume in the second quarter of 2008.  These volume decreases are due to the strikesat the San Martin and Taxco mines and were partially offset by higher copperand silver prices.  Zinc prices alsodecreased in both 2008 periods compared to the 2007 periods.

 

Operating costs andexpenses in the second quarter of 2008 decreased by $2.8 million to $124.0million compared with $126.8 million in the second quarter of 2007. Thisdecrease was principally due to lower selling, general and administrativeexpenses.  Selling, general andadministrative expenses decreased $2.5 million in the second quarter 2008 to$4.8 million in the second quarter 2008 from $7.3 million in the second quarter2007.  The decrease in selling, generaland administrative expenses was mainly due to the strike at San Martin andTaxco.

 

Operating cost andexpenses in the first six months of 2008, increased by $19.3 million to $225.9million from $206.6 million in the first six months of 2007. This increase wasprincipally due to higher cost of sales. Cost of sales (excluding depreciation,amortization and depletion) increased by $22.5 million to $194.6 million from$172.1 million in the first six months of 2007. The increase in cost of sales ismainly due to $42.4 million of higher metal purchases, partially offset by$27.6 million of insurance reimbursement and repair expenses incurred in 2007related to the Nueva Rosita coal plant.

 

Intersegment Eliminationsand Adjustments

 

The net sales, operatingcosts and cost and expenses and operating income displayed above will not bedirectly equal to amounts in our condensed consolidated statement of earningsbecause the adjustments of intersegment operating revenues and expenses must betaken into account.  Please see Note N ofthe condensed consolidated financial statements.

 

CASH FLOW

 

The following table showsthe cash flow for the three and six months ended June 30, 2008 and 2007.

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                  | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                  | ** ** | **(in millions)**           | ** ** |
| Net cash provided from operating activities |       | $                                | 404.8      |                           | $          | 648.9 |   | $ | 908.1 |   | $ | 1,197.8 |   |
| Net cash used for investing activities      |       | $                                | (110.6     | )                              | $          | (83.5 | ) | $ | (156.1 | ) | $ | (267.6 | ) |
| Net cash used for financing activities      |       | $                                | (658.5     | )                              | $          | (447.9 | ) | $ | (1,073.9 | ) | $ | (950.2 | ) |

 

Three months:

 

Net cash provided byoperating activities was $404.8 million in the second quarter of 2008, comparedwith $648.9 million in the 2007 period. The decrease of $244.1 million in thesecond quarter of 2008 cash provided from operating activities was largely dueto the reduction of $177.5 million in net earnings. This reduction in earningswas primarily due to the Cananea strike.

 

In the second quarter2008, our earnings were $548.5 million, approximately 135.5% of the netoperating cash flow.  Significant itemsdeducted from, or added to arrive to 

 

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operating cash flowincluded, depreciation amortization and depletion of $83.2 million and $23.3million of deferred income tax, which positively increased operating cashflow.  Additionally, an increase inworking capital decreased operating cash flow by $266.8 million.

 

In the second quarter2007, our earnings were $726.0 million, approximately 111.9% of the netoperating cash flow.  Significant itemsdeducted from, or added to arrive to operating cash flow included, depreciationamortization and depletion of $84.5 million, $38.1 million of deferred incometax, $36.9 million of unrealized loss on derivative instruments and $29.4million of loss in short term investment, which positively increased operatingcash flow, and $19.6 million of capitalized leachable material, which loweredour cash flow.  Additionally, an increasein working capital decreased operating cash flow by $254.5 million.

 

Net cash used ininvesting activities was $110.6 million in the second quarter of 2008 andincluded $130.9 million for capital expenditures.  The capital expenditures included $63.1million of investments at our Peruvian operations, $43.3 million for theToquepala and Cuajone expansion, $3.9 million for the primary crusher at theToquepala concentrator, $1.7 million for the tailings disposal at QuebradaHonda and $14.2 million for various other replacement expenditures.  In addition, we spent $67.8 million forreplacement assets at our Mexican operations, $54.7 million of which pertainsto our Mexican open pit operations, $12.4 million to our IMMSA unit and $0.7million to the Mexican administrative office. The second quarter 2008 cash frominvesting activities also includes $15.2 million from the redemption ofshort-term investments.

 

In the second quarter of2007, net cash used for investing activities was $83.5 million and included$94.0 million for capital expenditures, less $10.6 million received on theredemption of bonds with a face value of $40.0 million.  The capital expenditures included investmentsat our Peruvian operations of $9.3 million for the Ilo smelter modernizationproject and $39.7 million for various other replacement expenditures.  In addition, we spent $45.0 million forreplacement assets at our Mexican operations, of which $41.9 million was forour Mexican open pit operations, $2.8 million for our IMMSA unit and $0.3million for our Mexican corporate office.

 

Netcash used in financing activities in the second quarter of 2008 was $658.5million, compared with $447.9 million in the second quarter of 2007.  The second quarter of 2008 includes adividend distribution of $500.6 million, compared with a distribution of $441.7million in the first quarter of 2007.

 

Six months:

 

In the first six monthsof 2008, our earnings were $1,113.5 million, approximately 122.6% of the netoperating cash flow.  Significant itemsdeducted from, or added to arrive to operating cash flow included, depreciationamortization and depletion of $164.4 million and $22.0 million of loss incurrency translation, which positively increased operating cash flow and $14.7million of deferred income tax, which lowered our cash flow.  Additionally, an increase in working capitaldecreased operating cash flow by $382.5 million.

 

In the first six monthsof 2007, our earnings were $1,277.6 million, approximately 106.7% of the netoperating cash flow.  Significant itemsdeducted from, or added to arrive to operating cash flow included, depreciationamortization and depletion of $158.6 million, $58.3 million of deferred incometax, $59.6 million of unrealized loss on derivative instruments and $29.4million of loss in short term investment, which positively increased operatingcash flow and $40.0 million of capitalized leachable material, which loweredour cash flow.  Additionally, an increasein working capital decreased operating cash flow by $350.8 million.

 

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Net cash used ininvesting activities was $156.1 million in the first six months of 2008 andincluded $180.8 million for capital expenditures.  The capital expenditures included $81.4million of investments at our Peruvian operations, $43.3 million for theToquepala and Cuajone expansion, $6.3 million for the primary crusher at theToquepala concentrator, $3.4 million for the tailings disposal at QuebradaHonda and $28.4 million for various other replacement expenditures.  In addition, we spent $99.4 million forreplacement assets at our Mexican operations, $78.0 million of which pertainsto our Mexican open pit operations, $19.3 million to our IMMSA unit and $2.1million to the Mexican administrative office.

 

Netcash used in investing activities was $267.6 million in the first six months of2007 and included $179.0 million for capital expenditures, $100.0 million forthe purchase of marketable securities, less $10.6 million received on theredemption of marketable securities.  Thecapital expenditures included investments at our Peruvian operations of $21.1million for the Ilo smelter modernization project and $59.3 million for variousother replacement expenditures.  Inaddition, we spent $98.6 million for replacement assets at our Mexicanoperations, of which $62.3 million was at our Mexican open pit operations, $9.5million at our IMMSA unit and $26.8 million for our Mexican corporate office.

 

Netcash used in financing activities in the first six months of 2008 was $1,073.9million, compared with $950.2 million in the same period of 2007.  The first six months of 2008 includes adividend distribution of $912.9 million, compared with a distribution of $942.3million in the same period of 2007.

 

LIQUIDITYAND CAPITAL RESOURCES

 

OnJune 3, 2008, we paid a quarterly dividend of $0.57 per share, totaling$500.6 million.  On July 31, 2008,the Board of Directors approved a quarterly dividend of $0.57 per share, to bepaid on September 5, 2008 to shareholders of record as of August 20,2008.

 

On April 1, 2008 wepaid $150.0 million of the remaining balance of its series A Yankee bonds.  With this payment, the series A Yankee bondswere fully repaid.

 

We expect that we willmeet our cash requirements for 2008 and beyond from internally generated funds,cash on hand and from additional external financing, if required.  At June 30, 2008, our debt as apercentage of total capitalization (the total of debt, minority interest andstockholders’ equity) was 24.2% as compared with 27.3% at December 31,2007.  At June 30, 2008, our cashand cash equivalents amounted to $1,150.3 million compared to $1,409.3 millionat December 31, 2007.

 

NON-GAAP INFORMATIONRECONCILIATION

 

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

 

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| ** **                                                                 | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                                                                 | ** ** | **$  million**                                      | ** ** | **¢ per  pound** | ** ** | **$  million** | ** ** | **¢ per  pound** | ** ** |
| Cost of sales (exclusive depreciation, amortization and depletion) -  GAAP |       | $                                                   | 550.4      |   | 207.8 |   | $ | 562.4 |   | 158.2 |   |
| Add:                                                                       |       |                                                |       |   |   |   |   |   |   |
| Selling, general and administrative expenses                               |       | 26.7                                                |       | 10.1 |   | 25.9 |   | 7.3 |   |
| Treatment and refining charges                                             |       | 25.6                                                |       | 9.7 |   | 16.5 |   | 4.6 |   |
| Less:                                                                      |       |                                                |       |   |   |   |   |   |   |
| By-products revenue (1)                                                    |       | (474.4                                              | )          | (179.1 | ) | (549.9 | ) | (154.7 | ) |
| Workers’ participation                                                |       | (74.2                                               | )          | (28.0 | ) | (101.7 | ) | (28.6 | ) |
| Royalty charge and other                                                   |       | (67.4                                               | )          | (25.5 | ) | (24.2 | ) | (6.7 | ) |
| Inventory change                                                           |       | 29.7                                                |       | 11.2 |   | (6.6 | ) | (1.9 | ) |
| **Operating cash cost**                                                    | ** ** | **$**                                               | **16.4**   | ** ** | **6.2** | ** ** | **$** | **(77.6** | **)** | **(21.8** | **)** |
|                                                                       |       |                                                |       |   |   |   |   |   |   |
| Add by-product revenue                                                     |       | 474.4                                               |       | 179.1 |   | 549.9 |   | 154.7 |   |
|                                                                       |       |                                                |       |   |   |   |   |   |   |
| Operating cash cost, without by-product revenue                            |       | $                                                   | 490.8      |   | 185.3 |   | $ | 472.3 |   | 132.9 |   |
|                                                                       |       |                                                |       |   |   |   |   |   |   |
| Total pounds of copper produced and purchased (in millions)                |       | 264.9                                               |       |   |   | 355.5 |   |   |   |

 

----

(1)                           Includes net by-product sales revenue andpremiums on sales of refined products.

 
| ** **                                                                    | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| ** **                                                                    | ** ** | **$  million**                                    | ** ** | **¢ per  pound** | ** ** | **$ million** | ** ** | **¢ per  pound** | ** ** |
| Cost of sales (exclusive of depreciation, amortization and depletion)  - GAAP |       | $                                                 | 1,071.0    |   | 192.5 |   | $ | 1,029.0 |   | 141.8 |   |
| Add:                                                                          |       |                                              |       |   |   |   |   |   |   |
| Selling, general and administrative expenses                                  |       | 51.4                                              |       | 9.2 |   | 49.7 |   | 6.8 |   |
| Treatment and refining charges                                                |       | 31.3                                              |       | 5.6 |   | 35.5 |   | 4.9 |   |
| Less:                                                                         |       |                                              |       |   |   |   |   |   |   |
| By-products revenue (1)                                                       |       | (949.2                                            | )          | (170.6 | ) | (968.6 | ) | (133.5 | ) |
| Workers’ participation                                                   |       | (143.4                                            | )          | (25.8 | ) | (173.1 | ) | (23.8 | ) |
| Royalty charge and other                                                      |       | (120.0                                            | )          | (21.5 | ) | (39.4 | ) | (5.4 | ) |
| Inventory change                                                              |       | 40.4                                              |       | 7.3 |   | 26.4 |   | 3.6 |   |
| **Operating cash cost**                                                       | ** ** | **$**                                             | **(18.5**  | **)** | **(3.3** | **)** | **$** | **(40.5** | **)** | **(5.6** | **)** |
|                                                                          |       |                                              |       |   |   |   |   |   |   |
| Add by-product revenue                                                        |       | 949.2                                             |       | 170.6 |   | 968.6 |   | 133.5 |   |
|                                                                          |       |                                              |       |   |   |   |   |   |   |
| Operating cash cost, without by-product revenue                               |       | $                                                 | 930.7      |   | 167.3 |   | $ | 928.1 |   | 127.9 |   |
|                                                                          |       |                                              |       |   |   |   |   |   |   |
| Total pounds of copper produced and purchased (in millions)                   |       | 556.3                                             |       |   |   | 725.8 |   |   |   |

 

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(1)   Includes net by-product sales revenue and premiums onsales of refined products.

 

Impact of NewAccounting Standards

 

Pleasesee note O to our condensed consolidated financial statements.

 

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Item 3. Quantitative andQualitative Disclosure about Market Risk

 

A portion of ouroutstanding debt bears interest at variable rates and accordingly is sensitiveto changes in interest rates.  Interestrate changes would also result in gains or losses in the market value of ourfixed rate debt portfolio due to differences in market interest rates and therates at the inception of the debt agreements. Based upon our indebtedness at June 30, 2008, a change in interestrates of one percent (or 100 basis points) would impact net income and cashflows by $0.6 million annually.

 

On July 14, 2008,Standard & Poor’s upgraded Peru’s foreign currency debt rating to investmentgrade.  This rating improvement, and theone made by Fitch in April 2008, clearly indicates the consistent progressof Peru, a mining friendly country.

 

We are also exposed tomarket risk associated with changes in foreign currency exchange rates ascertain costs incurred are in currencies other than our functionalcurrency.  To manage the volatilityrelated to the risk, we may enter into forward exchange contracts, currencyswaps or other currency hedging arrangements.

 

We are subject to marketrisks arising from the volatility of copper and other metal prices.  Assuming that expected metal production andsales are achieved, that tax rates are unchanged, and giving no effects topotential hedging programs metal price sensitivity factors would indicateestimated change in net earnings resulting from metal price changes in 2008 asprovided in the table below.

 
| ** **                                                   | ** ** | **Copper** | ** ** | **Molybdenum** | ** ** | **Zinc** | ** ** | **Silver** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|----------------|------------|----------|------------|------------|------------|
| Change in metal prices (per pound except silver - per ounce) |       | $          | 0.01       |           | $          | 1.00     |       | $          | 0.01       |   | $ | 1.00 |   |
| Change in net earnings (in millions)                         |       | $          | 6.2        |           | $          | 20.3     |       | $          | 1.1        |   | $ | 7.1 |   |

 

We occasionally usederivative instruments to manage our exposure to market risk from changes incommodity prices, interest rate and exchange rate risk exposures and to enhancereturn on assets.  We generally do notenter into derivative contracts unless we anticipate a future activity that islikely to occur that will result in exposing us to market risk.

 

Copperderivatives:

 

Fromtime to time we have entered into derivative instruments to protect a fixedcopper, or zinc price for a portion of our metal sales.

 

In the first six monthsof 2008, we entered into copper collar and swap contracts to protect a portionof our 2008 sales of copper production. As a result, we recorded a gain of $10.6 million in the second quarterand first six months of 2008 compared with a gain of $1.3 million in the secondquarter and first six months of 2007. Related to the fair value of these copper derivative contracts we recordedan unrealized loss of $2.0 million at the end of June 2008 and a gain of$2.1 million at the end of June 2007. These losses gains were recorded in net sales in the condensedconsolidated statement of earnings.

 

At June 30, 2008 wehave copper collar contracts to protect 132.3 million pounds of copperproduction for the July-December 2008 period at weighted average minimumand maximum LME prices of $3.40 per pound and $4.23 per pound,respectively.  If the LME price fallsbelow the minimum price, we will be paid the difference between the minimumprice and the actual price.  If the LMEprice exceeds the maximum price, we will pay the difference between the maximumprice and the actual price.  In addition,we have copper swap contracts to protect 61.6 million pounds of copperproduction for the July-August 2008 period at an average COMEX price of$3.86 per pound.

 

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Gas swaps:

 

In the first quarter of2007 we entered into gas swap contract to protect part of our gas consumptionfor 900,000 MMBTUs with a fixed price of $7.525.  Related to the settlement of this gas swapcontract we recorded a loss of $0.9 million in the first quarter of 2007 whichwas charged to production cost.  In thefirst quarter of 2008 we did not hold any gas swap derivative.

 

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

 

Because more than 85% ofour sales collections in Mexico are in US dollars and many of its costs are inMexican pesos, we entered into zero-cost derivative contracts with the purposeof protecting, within a range, against an appreciation of the Mexican peso tothe US dollar.

 

At June 30, 2008, weheld two types of exchange rate derivative contracts:

 

In the first type ofexchange rate derivative contract, if the exchange rate settles at or below thebarrier price, we do not sell US dollars, if the exchange rate settles abovethe barrier price and below the strike price established in the contract, wesell the notional amount of US dollars settling in the week at the strikeprice. If the exchange rate settles above the strike price established in thecontract, we sell double the notional amount of US dollars settling in the weekat the strike price established in the contract. At June 30, 2008, we heldthe following contracts of this type:

 
| **Notional  Amount  (millions)** | ** ** | **Underlying  amount  (millions)** | ** ** | **Due Date, Weekly  expiration  during** | ** ** | **Strike Price  (Mexican  Pesos/U.S.  Dollars)** | ** ** | **Barrier Price  (Mexican Pesos/  U.S. Dollars)** | ** ** |
|----------------------------------|------------|------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| $                                | 30.0       |                               | $          | 1.3                                                |       | 4th Quarter 2008                                      |       | 11.32                                                            |       | 10.60 |   |
| $                                | 45.0       |                               | $          | 1.3                                                |       | 1st Quarter 2009                                      |       | 11.25                                                            |       | 10.60 |   |

 

In the second type ofexchange rate derivative contract, if the exchange rate is less than or equalto the strike price, we sell US dollars in an amount equal to the underlyingamount for the 14 day period at the strike price. The difference between thestrike price and the market exchange rate is considered a gain for us.  The total accumulated gain over the life ofthe contract cannot exceed 200 cents per dollar transacted. If the exchangerate is above the strike price, we sell dollars in an amount equal to 2 timesthe underlying amount for the 14 day period at the strike price and the lossdoes not reduce the accumulated gain.  AtJune 30, 2008, we held the following contracts of this type:

 
| **Notional  amount********(millions)** | ** ** | **Underlying  amount  (millions)** | ** ** | **Due Date, 14 days expiration between** | ** ** | **Strike price  (Mexican Pesos /  U.S. Dollars)** | ** ** |
|----------------------------------------|------------|------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| $                                      | 22.5       |                               | $          | 2.5                                                               |       | July 16, 2008 and  November 5, 2008                         |       | 10.85 |   |
| $                                      | 42.5       |                               | $          | 2.5                                                               |       | December 3, 2008  and July 1, 2009                          |       | 10.55 |   |
| $                                      | 25.0       |                               | $          | 1.0                                                               |       | June 18, 2008 and  June 3, 2009                             |       | 10.95 |   |

 

In the second quarter andfirst six months of 2008 the exercise of some of these zero-cost derivativecontracts resulted in gains of $0.4 million and $1.5 million, respectively,compared with gains of $2.6 million and $4.1 million in the second quarter andfirst six months of 2007, respectively, which were recorded as gain onderivative instruments in the condensed consolidated statement of earnings.

 

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At June 30, 2008,the fair value of the above listed exchange rate derivative contracts is a lossof $0.1 million which was recorded as Gain (loss) on derivative instruments inthe condensed consolidated statement of earnings.  Each notional amount includes a group ofweekly transactions that have the same strike and barrier price.

 

The $53.0 million exchangederivative contract held at December 31, 2007 was cancelled in the firstquarter 2008 and we recognized a gain of $0.3 million, which is included in the$4.1 million noted above.

 

Short-termInvestment:

 

Thebalance of short-term investments was as follows (in millions):

 
| ** **                                                                                                      | ** ** | **As of  June 30,** | ** ** | **As of  December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| **Investment**                                                                                                  | ** ** | **2008**                      | ** ** | **2007**                          | ** ** |
| Short-term investment in securities issued by public companies with a  weighted average interest rate of 2.72%. |       | $                             | 97.5       |                              | $          | 117.9 |   |
|                                                                                                                 |            |                               |            |                                   |            |  |  |

 

Short-terminvestments in securities consist of trading securities issued by publiccompanies.  Each security is independentof the others.

 

In the second quarter andsix months of 2008, we earned interest of $1.4 million and $2.3 million,respectively, related to these investments which were recorded as interestincome in the condensed consolidated statement of earnings.  In addition, in the second quarter and firstsix months of 2008, we redeemed $14.8 million and $20.1 million, respectively,of these investments.

 

At June 30, 2008 themark to market adjustment of these investments was $2.1 million which wasrecorded as interest expense in the condensed consolidated statement ofearnings.

 

CautionaryStatement:

 

Forward-lookingstatements in this report and in other Company statements include statementsregarding expected commencement dates of mining or metal production operations,projected quantities of future metal production, anticipated production rates,operating efficiencies, costs and expenditures as well as projected demand orsupply for the Company’s products. Actual results could differ materially depending upon factors includingthe risks and uncertainties relating to general U.S. and international economicand political conditions, the cyclical and volatile prices of copper, other commoditiesand supplies, including fuel and electricity, availability of materials,insurance coverage, equipment, required permits or approvals and financing, theoccurrence of unusual weather or operating conditions, lower than expected oregrades, water and geological problems, the failure of equipment or processes tooperate in accordance with specifications, failure to obtain financialassurance to meet closure and remediation obligations, labor relations,litigation and environmental risks as well as political and economic riskassociated with foreign operations. Results of operations are directly affected by metal prices on commodityexchanges that can be volatile.

 

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Item 4.  Controls and Procedures

 

EVALUATION OFDISCLOSURE CONTROLS AND PROCEDURES

 

As of June 30, 2008,the Company conducted an evaluation under the supervision and with theparticipation of the Company’s Disclosure Committee and the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,of the effectiveness and the design and operation of the Company’s disclosurecontrols and procedures.  Based on thatevaluation, the Chief Executive Officer and the Chief Financial Officer haveconcluded that the Company’s disclosure controls and procedures are effectiveas of June 30, 2008, to ensure that information required to be disclosedin reports filed or submitted under the Exchange Act is:

 

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

 

2.                                       accumulated and communicated tomanagement, including the Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure.

 

CHANGES ININTERNAL CONTROLS OVER FINANCIAL REPORTING

 

There was no change inthe Company’s internal controls over financial reporting (as such term isdefined in Rules 13a-15(f) and 15d-15(f) under the SecuritiesExchange Act of 1934, as amended) that occurred during the quarter ended June 30,2008 that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal controls over financial reporting.

 

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Report of IndependentRegistered Public Accounting Firm

 

To the Board of Directorsand Shareholders of Southern Copper Corporation:

 

We have reviewed theaccompanying condensed consolidated balance sheet of Southern CopperCorporation and its subsidiaries as of June 30, 2008, and the relatedcondensed consolidated statements of earnings for each of the six-month periodsended June 30, 2008 and June 30, 2007 and the condensed consolidatedstatement of cash flows for the six-month periods ended June 30, 2008 and June 30,2007.  These interim financial statementsare the responsibility of the Company’s management.

 

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

 

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

 

We previously audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheet as of December 31, 2007,and the related consolidated statement of earnings, changes in stockholders’equity, and of cash flows for the year then ended (not presented herein), andin our report dated February 29, 2008, we expressed an unqualified opinionon those consolidated financial statements. In our opinion, the information set forth in the accompanying condensedconsolidated balance sheet as of December 31, 2007, is fairly stated inall material respects in relation to the consolidated balance sheet from whichit has been derived.

 

Mexico, D.F.

August 1, 2008

 

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PART II - OTHERINFORMATION

 

Item 1. - LegalProcedures

 

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

 

Item 1A.  Risk Factors

 

Set forth below arecertain changes from the risk factors previously disclosed in SCC’s Form 10-Kfor the year ended December 31, 2007 filed on February 29, 2008 withthe Securities and Exchange Commission.

 

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

 

In the last sevenyears the Cananea mine has experienced more than nine labor stoppages totalingmore than 450 days of inactivity. Beginning on July 30, 2007, our Cananea mine in Mexico started awork stoppage.  On January 11, 2008the Mexican Federal Labor Court declared the Cananea strike illegal and orderedthe workers to return to work within 24 hours. This ruling was challenged before a Federal judge who upheld the union’scase on February 14, 2008.  Thismatter is under appeal by the Company and will be resolved by a Federal UpperCourt.  The workers partially returned towork and the Company resumed operations. However, on April 11, 2008 the workers restarted the labor stoppage andshut down production.  The Company hastried unsuccessfully to resolve the current labor stoppage that obstructsproduction at Cananea, hence in the second quarter 2008, the Board of Directorsdecided to offer all employees a severance payment in accordance with thecollective bargaining agreement and applicable law.  This was offered in order to award theemployees a significant severance payment that allows them to choose the laboralternative that is best for each of them. During the second quarter 2008, a group of employees was liquidated at acost to the Company of $10.8 million, which was recorded in cost of sales on ourcondensed consolidated statement of earnings. The Company anticipates that additional liquidations will occur in thesecond half of 2008.  Therefore, inaccordance with FAS No. 112, at June 30, 2008, the Company maintainsan additional severance liability of $52.0 million, which has been recorded inour condensed consolidated balance sheet. It is expected that production at Cananea will remain suspended untilthese labor issues are resolved.

 

Also on July 302007, our Taxco and San Martin mines went on strike.  It is expected that operations at these mineswill remain suspended until these labor issues are resolved.

 

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Item4. - Submissionof Matters to a Vote of Security Holders

 

The annual meeting ofstockholders of the Company was held on Wednesday, May 28, 2008, at whichshareholders of record at the close of business on May 5, 2008 (the “recorddate”) were entitled to vote at the annual meeting.

 

At the annual meeting,the holders of Common Stock were asked to elect 14 directors.  All of the fourteen persons nominated asdirectors of the Corporation to represent the Common Stockholders were electedand each of the director nominees received the following votes:

 
| ** **                      | ** ** | **Number of Shares** | ** ** |
|---------------------------------|------------|--------------------------------|------------|
| **Name**                        | ** ** | **For**                        | ** ** | **Withheld** | ** ** |
| German Larrea Mota-Velasco      |       | 253,634,543                    |       | 16,712,906 |   |
| Oscar Gonzalez Rocha            |       | 253,890,022                    |       | 16,457,427 |   |
| Emilio Carrillo Gamboa          |       | 254,917,047                    |       | 15,430,402 |   |
| Alfredo Casar Perez             |       | 257,516,663                    |       | 12,830,786 |   |
| Alberto de la Parra Zavala      |       | 257,615,653                    |       | 12,731,796 |   |
| Xavier Garcia de Quevedo Topete |       | 253,961,756                    |       | 16,385,693 |   |
| Harold S. Handelsman            |       | 265,802,956                    |       | 4,544,493 |   |
| Genaro Larrea Mota-Velasco      |       | 257,835,201                    |       | 12,512,248 |   |
| Armando Ortega Gomez            |       | 258,262,240                    |       | 12,085,209 |   |
| Daniel Muniz Quintanilla        |       | 258,266,012                    |       | 12,081,437 |   |
| Luis Miguel Palomino Bonilla    |       | 265,819,420                    |       | 4,528,029 |   |
| Gilberto Perezalonso Cifuentes  |       | 265,499,946                    |       | 4,847,503 |   |
| Juan Rebolledo Gout             |       | 258,317,705                    |       | 12,029,744 |   |
| Carlos Ruiz Sacristan           |       | 265,548,263                    |       | 4,799,186 |   |

 

The stockholdersapproved the amendment to our Amended and Restated Certificate ofIncorporation, as amended, to increase the number of shares of Common Stockwhich we are authorized to issue from 320,000,000 shares to 2,000,000,000shares. The proposal received 250,584,167 votes, representing the affirmativevote of 85.10% of the voting power of all shares of Common Stock entitled tovote on the proposal.  The proposal alsoreceived 19,217,981 votes against and 545,300 abstentions.

 

The stockholders approvedand ratified the selection of PricewaterhouseCoopers S.C. as independentaccountants for calendar year 2008. The proposal received the following votes:

 
| ** **   | ** ** | **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|--------------|------------|-------------|------------|-------------|------------|-------------|------------|
|         |       |        |       |        |       |        |       |
| Common Stock |       | 268,717,211 |       | 1,142,296   |       | 487,942     |       |

 

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

 

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Item 6. - Exhibits

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                             |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                             |
| 3.1                  |       | Certificate of  Amendment of Amended and Restated Certificate of Incorporation                                                                                                                   |
|                 |       |                                                                                                                                                                                             |
| 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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PART II - OTHER INFORMATION

 

SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|               | SOUTHERN COPPER  CORPORATION                         |
|--------------------|------------------------------------------------------|
|               | (Registrant)                                         |
|               |                                                 |
|               |                                                 |
|               | /s/ Oscar  Gonzalez Rocha                            |
|               |      Oscar  Gonzalez Rocha       |
|               | President and  Chief Executive Officer               |
|               |                                                 |
| July 31, 2008 |                                                 |
|               |                                                 |
|               |                                                 |
|               | /s/ Genaro  Guerrero                                 |
|               |      Genaro Guerrero             |
|               | Vice President  Finance and Chief  Financial Officer |
|               |                                                 |
| July 31, 2008 |                                                 |

 

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SOUTHERN COPPER CORPORATION

List of Exhibits

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                             |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                             |
| 3.1                  |       | Certificate of  Amendment of Amended and Restated Certificate of Incorporation                                                                                                                   |
|                 |       |                                                                                                                                                                                             |
| 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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