Table of
Contents
UNITED STATES
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, 2009
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
SOUTHERN
COPPER 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)
|
Registrants
telephone number, including area code:
(602) 494-5328
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant 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 has submitted electronically and posted on its corporate
Website, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
x
No
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
x
|
|
Accelerated
filer
o
|
|
|
|
Non-accelerated
filer
o
|
|
Smaller
reporting company
o
|
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
o
No
x
As of July 31, 2009
there were outstanding 850,012,000 shares of Southern Copper Corporation common
stock, par value $0.01 per share.
Table of
Contents
Part I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Southern Copper Corporation
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
|
|
3 Months Ended
|
|
6 Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(in thousands, except per share amounts)
|
|
Net
sales
|
|
$
|
824,509
|
|
$
|
1,461,796
|
|
$
|
1,446,507
|
|
$
|
2,961,002
|
|
|
|
|
|
|
|
|
|
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
Cost
of sales (exclusive of depreciation, amortization and depletion shown
separately below)
|
|
419,476
|
|
550,458
|
|
794,931
|
|
1,071,047
|
|
Selling,
general and administrative
|
|
18,101
|
|
26,726
|
|
36,893
|
|
51,381
|
|
Depreciation,
amortization and depletion
|
|
78,715
|
|
83,199
|
|
156,936
|
|
164,395
|
|
Exploration
|
|
5,021
|
|
8,996
|
|
10,423
|
|
17,052
|
|
Total
operating costs and expenses
|
|
521,313
|
|
669,379
|
|
999,183
|
|
1,303,875
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
303,196
|
|
792,417
|
|
447,324
|
|
1,657,127
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
(25,310
|
)
|
(27,245
|
)
|
(49,276
|
)
|
(54,480
|
)
|
Capitalized
interest
|
|
3,368
|
|
1,441
|
|
5,443
|
|
2,529
|
|
Gain
(loss) on derivative instruments
|
|
6,785
|
|
(1,487
|
)
|
4,181
|
|
921
|
|
Other
income (expense)
|
|
(1,495
|
)
|
2,904
|
|
1,868
|
|
(1,770
|
)
|
Interest
income
|
|
898
|
|
12,181
|
|
5,173
|
|
29,596
|
|
Income
before income taxes
|
|
287,442
|
|
780,211
|
|
414,713
|
|
1,633,923
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
111,413
|
|
228,892
|
|
159,438
|
|
514,914
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
176,029
|
|
551,319
|
|
255,275
|
|
1,119,009
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Net income attributable to the non-controlling interest
|
|
1,061
|
|
2,852
|
|
1,615
|
|
5,559
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to SCC
|
|
$
|
174,968
|
|
$
|
548,467
|
|
$
|
253,660
|
|
$
|
1,113,450
|
|
|
|
|
|
|
|
|
|
|
|
Per
common share amounts:
|
|
|
|
|
|
|
|
|
|
Net
income attributable to SCC - basic and diluted
|
|
$
|
0.21
|
|
$
|
0.62
|
|
$
|
0.30
|
|
$
|
1.26
|
|
Dividends
paid to SCC common shareholders
|
|
$
|
0.04
|
|
$
|
0.57
|
|
$
|
0.16
|
|
$
|
1.04
|
|
Weighted
average common shares outstanding - basic and diluted
|
|
850,008
|
|
883,401
|
|
851,390
|
|
883,399
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
Table of
Contents
Southern Copper Corporation
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
|
|
June 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(in thousands)
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
235,540
|
|
$
|
716,740
|
|
Short-term
investments
|
|
33,890
|
|
62,376
|
|
Accounts
receivable trade, less allowance for doubtful accounts (2009 - $4,813; 2008 -
$4,811)
|
|
315,408
|
|
104,149
|
|
Accounts
receivable other (including affiliates 2009 - $2,473; 2008 - $1,925)
|
|
19,586
|
|
29,439
|
|
Inventories
|
|
456,529
|
|
451,597
|
|
Deferred
income tax
|
|
6,065
|
|
64,711
|
|
Other
current assets
|
|
135,653
|
|
124,681
|
|
Total
current assets
|
|
1,202,671
|
|
1,553,693
|
|
|
|
|
|
|
|
Property,
net
|
|
3,876,384
|
|
3,802,761
|
|
Leachable
material, net
|
|
131,778
|
|
156,294
|
|
Intangible
assets, net
|
|
114,005
|
|
115,059
|
|
Deferred
income tax
|
|
55,901
|
|
83,106
|
|
Other
assets
|
|
61,012
|
|
53,411
|
|
Total
assets
|
|
$
|
5,441,751
|
|
$
|
5,764,324
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
10,000
|
|
$
|
10,000
|
|
Accounts
payable
|
|
279,014
|
|
413,351
|
|
Accrued
income taxes
|
|
|
|
34,378
|
|
Due
to affiliated companies
|
|
9,656
|
|
8,965
|
|
Accrued
workers participation
|
|
42,236
|
|
205,466
|
|
Interest
|
|
38,991
|
|
40,968
|
|
Other
accrued liabilities
|
|
33,682
|
|
24,335
|
|
Total
current liabilities
|
|
413,579
|
|
737,463
|
|
|
|
|
|
|
|
Long-term
debt
|
|
1,275,112
|
|
1,279,972
|
|
Deferred
income taxes
|
|
139,365
|
|
169,342
|
|
Non-current
taxes payable
|
|
72,274
|
|
70,266
|
|
Other
liabilities and reserves
|
|
80,742
|
|
93,875
|
|
Asset
retirement obligation
|
|
18,423
|
|
18,007
|
|
Total
non-current liabilities
|
|
1,585,916
|
|
1,631,462
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note L)
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS
EQUITY
|
|
|
|
|
|
Common
stock
|
|
8,846
|
|
8,846
|
|
Additional
paid-in capital
|
|
1,006,172
|
|
993,826
|
|
Retained
earnings
|
|
3,032,373
|
|
2,916,517
|
|
Accumulated
other comprehensive loss
|
|
(23,423
|
)
|
(23,477
|
)
|
Treasury
stock
|
|
(597,060
|
)
|
(514,453
|
)
|
Total
SCC stockholders equity
|
|
3,426,908
|
|
3,381,259
|
|
Non-controlling
interest
|
|
15,348
|
|
14,140
|
|
Total
equity
|
|
3,442,256
|
|
3,395,399
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$
|
5,441,751
|
|
$
|
5,764,324
|
|
The accompanying notes
are an integral part of these condensed consolidated financial statements
.
4
Table of
Contents
Southern Copper Corporation
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
|
|
3 Months Ended
|
|
6 Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(in thousands)
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to SCC
|
|
$
|
174,968
|
|
$
|
548,467
|
|
$
|
253,660
|
|
$
|
1,113,450
|
|
Adjustments
to reconcile net earnings to net cash provided from operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation,
amortization and depletion
|
|
78,715
|
|
83,199
|
|
156,936
|
|
164,395
|
|
Capitalized
leachable material
|
|
|
|
|
|
|
|
(2,246
|
)
|
(Gain)
loss on currency translation effect
|
|
14,779
|
|
3,430
|
|
13,385
|
|
22,031
|
|
Provision
for deferred income taxes
|
|
34,463
|
|
23,322
|
|
53,390
|
|
(14,730
|
)
|
(Gain)
loss on sale of short-term investment
|
|
(1,612
|
)
|
242
|
|
(2,319
|
)
|
1,935
|
|
Unrealized
(gain) loss on derivative instruments
|
|
(23,639
|
)
|
10,336
|
|
(48,718
|
)
|
2,099
|
|
Non-controlling
interest
|
|
1,061
|
|
2,852
|
|
1,615
|
|
5,559
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided from (used for) operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
(92,192
|
)
|
45,070
|
|
(199,528
|
)
|
(85,755
|
)
|
Inventories
|
|
(7,238
|
)
|
(36,267
|
)
|
(4,932
|
)
|
(43,295
|
)
|
Accounts
payable and accrued liabilities
|
|
(100,703
|
)
|
(222,604
|
)
|
(351,165
|
)
|
(200,754
|
)
|
Other
operating assets and liabilities
|
|
29,073
|
|
(49,269
|
)
|
41,067
|
|
(52,713
|
)
|
Net
cash provided from (used for) operating activities
|
|
107,675
|
|
408,778
|
|
(86,609
|
)
|
909,976
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
(140,488
|
)
|
(130,876
|
)
|
(203,466
|
)
|
(180,770
|
)
|
Net
proceeds from sale of short-term investments
|
|
18,703
|
|
11,150
|
|
30,805
|
|
18,479
|
|
Other
|
|
1,736
|
|
5,097
|
|
1,940
|
|
4,280
|
|
Net
cash used for investing activities
|
|
(120,049
|
)
|
(114,629
|
)
|
(170,721
|
)
|
(158,011
|
)
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Debt
repaid
|
|
(5,000
|
)
|
(155,025
|
)
|
(5,000
|
)
|
(155,025
|
)
|
Dividends
paid to common stockholders
|
|
(38,251
|
)
|
(500,592
|
)
|
(137,806
|
)
|
(912,894
|
)
|
Distributions
to non-controlling interest
|
|
(189
|
)
|
(3,576
|
)
|
(189
|
)
|
(6,736
|
)
|
Repurchase
of common shares
|
|
|
|
|
|
(71,566
|
)
|
|
|
Other
|
|
569
|
|
733
|
|
639
|
|
794
|
|
Net
cash used for financing activities
|
|
(42,871
|
)
|
(658,460
|
)
|
(213,922
|
)
|
(1,073,861
|
)
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
(490
|
)
|
41,789
|
|
(9,948
|
)
|
62,883
|
|
Increase
(decrease) in cash and cash equivalents
|
|
(55,735
|
)
|
(322,522
|
)
|
(481,200
|
)
|
(259,013
|
)
|
Cash
and cash equivalents, at beginning of period
|
|
291,275
|
|
1,472,781
|
|
716,740
|
|
1,409,272
|
|
Cash
and cash equivalents, at end of period
|
|
$
|
235,540
|
|
$
|
1,150,259
|
|
$
|
235,540
|
|
$
|
1,150,259
|
|
The accompanying notes
are an integral part of these condensed consolidated financial statements.
5
Table of
Contents
Southern Copper Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A.
In
the opinion of Southern Copper Corporation, (the Company, Southern Copper
or SCC), the accompanying unaudited condensed consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to state fairly the Companys financial position as of June 30,
2009 and the results of operations and cash flows for the three and six months
ended June 30, 2009 and 2008. The
condensed consolidated financial statements for the three and six months ended June 30,
2009 have been subject to a review by Galaz, Yamazaki, Ruiz Urquiza S.C., a
member firm of Deloitte Touche Tohmatsu, the Companys independent registered
public accounting firm, whose report dated August 3, 2009, is presented on
page 53. The results of operations
for the three and six months ended June 30, 2009 and 2008 are not
necessarily indicative of the results to be expected for the full year. The December 31, 2008 balance sheet data
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles in the United
States of America. The accompanying
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements at December 31, 2008 and notes
included in the Companys 2008 annual report on Form 10-K.
B.
Adoption of
New Accounting Standards:
As of June 30, 2009 the Company adopted the following
pronouncements of the Financial Accounting Standards Board (FASB):
In May 2009, the FASB
issued SFAS 165 Subsequent events to
establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In particular, this Statement sets forth: the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements; the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements and the disclosures that an
entity should make about events or transactions that occurred after the balance
sheet date. This Statement introduces
the concept of financial statements being available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date, that is, whether that date represents the date the financial statements
were issued or were available to be issued.
This SFAS is effective for
interim or annual reporting periods ending after June 15, 2009 and
therefore became effective for the Company as of June 30, 2009. Please see disclosures required in Note Q,
Subsequent events.
In
April 2009, the FASB issued Staff Position (FSP) FAS 107-1 Disclosure
about Fair Value of Financial Instruments to require disclosures about fair
value of financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28 Interim
Financial Reporting, to require those disclosures in summarized financial
information at interim reporting periods.
This FSP applies to all financial instruments within the scope of SFAS
107 and requires disclosing in the body or in the accompanying notes, the fair
value of all financial instruments for which it is practicable to estimate that
value, whether recognized or not recognized in the statement of financial
position. Fair value information
disclosed shall be presented together with the related carrying amount in a
form that makes clear whether the fair value and carrying amount represents
assets or liabilities and how the carrying amount is
6
Table of
Contents
reported
in the statement of financial position.
Also the entity shall disclose the methods and significant assumptions
used to estimate the fair value of financial instruments and shall describe
their changes, if any, in the period.
This FSP is effective for interim reporting periods ending after June 15,
2009 and therefore became effective for the Company as of June 30,
2009. Please see disclosures required in
Note P, Financial instruments.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2 Recognition
and Presentation of Other-than-temporary impairments and FSP FAS 157-4 Determining
Fair Value when the volume and level of activity for the asset or liability
have significantly decreased and identifying transactions that are not orderly. These FASB Staff positions are effective for
interim reporting periods ending after June 15, 2009 and therefore became
effective for the Company as of June 30, 2009 and do not have a material
impact on its financial position or results of operations.
On January 1, 2009 the Company adopted the following
pronouncements of the FASB:
On March 19, 2008 the FASB issued SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities. This new standard improves financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entitys financial position, financial performance, and cash flows. The adoption of this statement has not had a
material effect on the Companys financial position and results of operations.
See disclosures required in Note G, Derivative instruments.
In December 2007, the FASB published SFAS No. 141-R, which
replaces SFAS No. 141, Business Combinations. This statement improves the reporting of
information about a business combination and its effects. This statement establishes principles and
requirements for how the acquirer will recognize and measure the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquisition. Also, the statement
determines the recognition and measurement of goodwill acquired in the business
combination or a gain from a bargain purchase, and finally, determines the
disclosure requirements to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The Company has adopted this pronouncement
and will apply its requirements to future business combinations.
C.
Short-term
Investments:
The
balance of short-term investments was as follows (in millions):
|
|
As of
|
|
Investments
|
|
June 30, 2009
|
|
December 31, 2008
|
|
Short-term investments in securities issued by
public companies with a weighted average interest rate of 0.71% at
June 30, 2009 and 1.85% at December 31, 2008
|
|
$
|
33.9
|
|
$
|
62.4
|
|
|
|
|
|
|
|
|
|
Short-term
investments in securities consist of available for sale securities issued by
public companies. Each security is
independent of the others.
Related
to these investments in the second quarter and first six months of 2009, the
Company earned interest of $0.2 million and $0.6 million, respectively,
compared with $1.0 million and $2.6 million in the same periods of 2008, which
were recorded as interest income in the condensed consolidated statement of
earnings. In addition, in the second
quarter and first six months of 2009, the Company redeemed $18.7 million
7
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and
$30.8 million, respectively, of these investments, compared with $11.2 million
and $18.5 million in the same periods of 2008.
In the
second quarter and first six months of 2009 the Company recorded gains of $1.6
million and $2.3 million, respectively, compared with losses of $0.2 million
and $1.9 million in the second quarter and first six months of 2008,
respectively. These gains/losses were recorded
as other income (expense) in the condensed consolidated statement of earnings.
D.
Inventories were as follows:
(in millions)
|
|
June 30,
2009
|
|
December 31,
2008
|
|
Metals at lower of average cost or market:
|
|
|
|
|
|
Finished goods
|
|
$
|
64.8
|
|
$
|
46.7
|
|
Work-in-process
|
|
135.7
|
|
135.8
|
|
Supplies at average cost
|
|
256.0
|
|
269.1
|
|
Total inventories
|
|
$
|
456.5
|
|
$
|
451.6
|
|
E.
Income taxes:
The income tax provision
for the first six months of 2009 and 2008 were $159.4 million and $514.9
million, respectively. These provisions
include income taxes for Peru, Mexico and the United States. The provision for income taxes was based on
our effective tax rate of 38.4% for the first six months of 2009 as compared to
31.5% during the same period in 2008.
The increase in the effective tax rate for the first half of 2009 is
largely due to the incremental U.S. tax provided on dividend distributions made
by our Mexican subsidiary to the U.S. parent.
This dividend distribution is taxable in the U.S. at the difference
between the 35% U.S. statutory rate and the foreign tax credit rate of 28.5%.
As of March 27,
2009, Grupo Mexico, through its wholly-owned subsidiary, Americas Mining
Corporation (AMC), became the beneficial owner of 80% of SCCs common
stock. As a result of this new level of
ownership, SCC will be included in AMCs consolidated US federal income tax
return commencing from March 27, 2009.
AMC is a holding company and most of the business assets and operations
of AMC belong to ASARCO LLC (Asarco) and its subsidiaries. In accordance with paragraph 40 of FAS No. 109,
it is expected that current and deferred taxes will be allocated to members of
the AMC group as if each were a separate taxpayer. The Company has initiated discussions with
AMC to put in place a tax sharing agreement in order to establish this
allocation as well as other procedures and policies necessary for an equitable
management of US federal income tax matters.
At present, SCC is providing current and deferred 2009 US income taxes,
as if it were still a separate filer. It
is believed that taxes provided on this basis will not be materially different
from the provision necessary once the Company has reached a tax sharing
agreement with AMC.
FIN No. 48
Accounting for Uncertainty in Income Taxes.
There were no material
changes in the unrecognized tax benefits in the first six months of 2009. In the United States, the tax years 2003 and
2004 are currently before the appeals division of the IRS. The tax years 2005, 2006 and 2007 are
currently under IRS field examination, which commenced in November 2008. Management does not expect that any of the
open years will result in a cash payment within the preceding twelve months of June 30,
2010. The Companys reasonable
expectations about future resolutions of uncertain items did not materially
change during the six month period ended June 30, 2009.
8
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F.
Provisionally Priced Sales:
At June 30, 2009, the
Company has recorded provisionally priced sales of 25.4 million pounds of
copper, at an average forward price of $2.25 per pound. Also the Company has recorded provisionally
priced sales of 13.9 million pounds of molybdenum at the June 30, 2009
market price of $10.60 per pound. These
sales are subject to final pricing based on the average monthly LME or COMEX
copper prices and Dealer Oxide molybdenum prices in the future month of
settlement.
Following are the
provisionally priced copper and molybdenum sales outstanding at June 30,
2009:
Copper
(million lbs.)
|
|
Priced at
|
|
Month of
Settlement
|
|
21.9
|
|
2.25
|
|
July 2009
|
|
0.6
|
|
2.27
|
|
August 2009
|
|
0.7
|
|
2.27
|
|
September 2009
|
|
2.2
|
|
2.25
|
|
October 2009
|
|
25.4
|
|
2.25
|
|
|
|
Molybdenum
(million lbs.)
|
|
Priced
at
|
|
Month of
Settlement
|
|
2.8
|
|
10.60
|
|
July 2009
|
|
3.3
|
|
10.60
|
|
August 2009
|
|
2.9
|
|
10.60
|
|
September 2009
|
|
2.7
|
|
10.60
|
|
October 2009
|
|
2.2
|
|
10.60
|
|
November 2009
|
|
13.9
|
|
10.60
|
|
|
|
Management believes that
the final pricing of these sales will not have a material effect on the Companys
financial position or results of operations.
G.
Derivative Instruments
The Company occasionally
uses derivative instruments to manage its exposure to market risk from changes
in commodity prices, interest rate and exchange rate risk exposures and to
enhance return on assets. The Company
does not enter into derivative contracts unless it anticipates a future
activity that is likely to occur that will result in exposing the Company to
market risk.
Copper
derivatives:
From
time to time the Company has entered into derivative contracts to protect a
fixed copper, or zinc price for a portion of its metal sales.
In
the first six months of 2008, the Company entered into copper collar and swap
contracts to protect a portion of its 2008 sales of copper production. As a result, the Company recorded a gain of
$10.6 million in the second quarter and first six months of 2008. Related to the fair value of these copper derivative
contracts the Company recorded a loss of $2.0 million at the end of June 2008. These gains and losses were recorded in net
sales in the condensed consolidated statement of earnings.
The
Company did not hold any copper or zinc derivative contracts in the first six
months of 2009.
Exchange rate
derivatives, U.S. dollar/Mexican Peso contracts:
9
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Because more than 85% of
the Companys sales collections in Mexico are in US dollars and many of its
costs are in Mexican Pesos, the Company entered into zero-cost derivative
contracts with the purpose of protecting, within a range, against an
appreciation of the Mexican Peso to the US dollar.
At June 30, 2009 the
Company held an exchange rate derivative contract with the following
conditions:
If the exchange rate is
less than or equal to the strike price, the Company sells US dollars in an
amount equal to the underlying amount for the expiration period at the strike
price. The difference between the strike
price and the market exchange rate is considered a gain to the Company. The total accumulated gain over the life of
the contract cannot exceed 500 cents per dollar transacted. If the exchange rate is above the strike
price, the Company sells dollars in an amount equal to two times the underlying
amount for the expiration period at the strike price and the loss does not
reduce the accumulated gain.
Notional
Amount (1)
(millions)
|
|
Underlying
amount
(millions)
|
|
Expiration
Period
|
|
Due Date
|
|
Strike Price
(Mexican Pesos/
U.S. Dollars)
|
|
$
|
20.0
|
|
$
|
2.5
|
|
Weekly
|
|
July 3, 2009
through August 21, 2009
|
|
10.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The notional
amount includes a group of weekly transactions that have the same strike price.
At June 30, 2009,
the fair value of this exchange rate derivative contract is a loss of $8.1
million. This loss was recorded in 2008
earnings. In 2009, the fair value of the
exchange derivative contracts improved and gains were recorded in the 2009
earnings, as noted below.
Related to the exchange
rate derivative contracts the Company recorded gains of $6.8 million and $4.2
million in the second quarter and first six months of 2009, compared with a
loss of $1.5 million and a gain of $0.9 million, respectively, in the second
quarter and first six months of 2008.
These gains and losses were recorded as gain (loss) on derivative
instruments in the condensed consolidated statement of earnings and in other
accounts receivable/payable in the condensed consolidated balance sheet.
H.
Asset Retirement Obligation:
The Company
maintains an estimated asset retirement obligation for its mining properties in
Peru, as required by the Peruvian Mine Closure Law. In accordance with the requirements of this
law the Company has prepared and submitted the required closure plans to the
Peruvian Ministry of Energy and Mines (MEM).
These plans have been reviewed by the responsible governmental agency
and have been open to public discussion in the areas of the Companys
operations. In April 2009, the
Company received comments to its closure plan from government agencies
including some related to the costs. The
Company is preparing a response to the comments raised for delivery to the
government in August 2009.
The closure cost
recognized for this liability includes the estimated cost required at the
Peruvian operations, based on the Companys experience, and includes cost at
the Ilo smelter, the tailing disposal, and dismantling the Toquepala and
Cuajone concentrators, and the shops and auxiliary facilities.
As of June 30,
2009, the Company has made an estimated provision of $18.4 million for this
liability in its financial statements, but believes that this estimate should
be viewed with caution, pending final approval of the mine closure plan.
10
Table of
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The following
table summarizes the asset retirement obligation activity for the first six
months of 2009 and 2008 (in millions):
|
|
2009
|
|
2008
|
|
Balance
as of January 1
|
|
$
|
18.0
|
|
$
|
13.1
|
|
Additions,
changes in estimates
|
|
|
|
0.7
|
|
Accretion
expense
|
|
0.4
|
|
0.5
|
|
Balance
as of June 30,
|
|
$
|
18.4
|
|
$
|
14.3
|
|
I.
Related Party Transactions:
Receivable and
payable balances with affiliated companies are shown below (in millions):
|
|
June 30,2009
|
|
December 31
,2008
|
|
Affiliate
receivable:
|
|
|
|
|
|
Grupo Mexico S.A.B de C.V. and affiliates
|
|
$
|
0.8
|
|
$
|
0.8
|
|
Ferrocarril Mexicano S.A. de C.V.
|
|
|
|
0.3
|
|
Mexico Proyectos y Desarrollos S.A. de C.V.
and affiliates
|
|
1.7
|
|
0.8
|
|
|
|
$
|
2.5
|
|
$
|
1.9
|
|
Affiliate
payable:
|
|
|
|
|
|
Grupo Mexico S.A.B. de C.V. and affiliates
|
|
$
|
9.5
|
|
$
|
8.9
|
|
Ferrocarril Mexicano S.A. de C.V.
|
|
0.1
|
|
|
|
|
|
$
|
9.6
|
|
$
|
8.9
|
|
The Company has entered
into certain transactions in the ordinary course of business with parties that
are controlling shareholders or their affiliates. These transactions include the lease of
office space, air transportation and construction services and products and
services relating to mining and refining.
The Company lends and borrows funds among affiliates for acquisitions
and other corporate purposes. These
financial transactions bear interest and are subject to review and approval by
senior management, as are all related party transactions. It is the Companys policy that the Audit
Committee of the Board of Directors shall review all related party
transactions. The Company is prohibited
from entering or continuing a material related party transaction that has not
been reviewed and approved or ratified by the Audit Committee.
Grupo Mexico, the Companys
ultimate parent and the majority indirect stockholder of the Company, and its
affiliates provide various services to the Company. These services are principally related to
accounting, legal, tax, financial, treasury, human resources, price risk
assessment and hedging, purchasing, procurement and logistics, sales and
administrative and other support services.
The Company pays Grupo Mexico Servicios S.A de C.V., a subsidiary of
Grupo Mexico for these services. The
total amount paid by the Company for such services in the first six months of
2009 and 2008 was $3.4 million and $6.9 million, respectively. The Company expects to continue to pay for
these services in the future.
The Companys Mexican
operations paid fees of $10.3 million and $10.3 million in the first six months
of 2009 and 2008, respectively, primarily for freight services and construction
services provided by subsidiaries of Grupo Mexico.
The Larrea family
controls a majority of the capital stock of Grupo Mexico, and has extensive
interests in other businesses, including oil drilling services, construction,
aviation, and real estate. The Company
engages in certain transactions in the ordinary course of business with other
entities controlled by the Larrea family relating to mining and refining
services, the lease of office space, sale of vehicles and air transportation
and construction services. In
11
Table of
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connection with this, the
Company paid fees of $0.1 million and $1.1 million in the first six months of
2009 and 2008, respectively, for maintenance services and sale of vehicles
provided by Mexico Compañia de Productos Automotrices, S.A. de C.V., a company
controlled by the Larrea family.
Additionally, in 2007, our Mexican subsidiaries have provided guaranties
for loans totaling $10.8 million obtained by Mexico Transportes Aereos, S.A. de
C.V. (MexTransport), a company controlled by the Larrea family. These loans mature in 2010 ($2.3 million) and
2013 ($8.4 million). MexTransport
provides aviation services to our Mexican operations. The guaranty provided to MexTransport is
backed up by the transport services provided by MexTransport to the Companys
Mexican subsidiaries. The Company paid
fees of $0.9 million and $1.6 million in the first six months of 2009 and 2008,
respectively, to MexTransport for aviation services.
The Company purchased
$2.1 million and $2.6 million in the first six months of 2009 and 2008,
respectively, of industrial materials from Higher Technology S.A.C in which Mr. Carlos
Gonzalez has a proprietary interest. The
Company paid fees of $0.2 million and $0.5 million in the first six months of
2009 and 2008, respectively, for maintenance services provided by Servicios y
Fabricaciones Mecanicas S.A.C., a company in which Mr. Carlos Gonzalez has
a proprietary interest. Mr. Carlos
Gonzalez is the son of SCCs Chief Executive Officer.
The Company purchased
$0.4 million and $2.6 million in the first six months of 2009 and 2008,
respectively, of industrial material from Sempertrans France Belting
Technology, in which Mr. Alejandro Gonzalez is employed as a sales
representative. Also, the Company purchased
$0.1 million and $0.3 million in the first six months of 2009 and 2008,
respectively, of industrial material from PIGOBA, S.A. de C.V., a company in
which Mr. Alejandro Gonzalez has a proprietary interest. Mr. Alejandro Gonzalez is the son of SCCs
Chief Executive Officer.
The Company purchased
$0.8 million and $1.6 million in the first six months of 2009 and 2008,
respectively, of industrial material and services from Breaker, S.A. de C.V., a
company in which Mr. Jorge Gonzalez, son-in-law of SCCs Chief Executive
Officer, has a proprietary interest.
It is anticipated
that in the future the Company will enter into similar transactions with the
same parties.
J.
Benefit Plans:
SCC Defined
Benefit Pension Plans-
The components of
the net periodic benefit costs for the six months ended June 30 are as
follows (in millions):
|
|
2009
|
|
2008
|
|
Interest
cost
|
|
$
|
0.3
|
|
$
|
0.4
|
|
Expected
return on plan assets
|
|
(0.2
|
)
|
(0.3
|
)
|
Amortization
of net loss (gain)
|
|
(*
|
)
|
(*
|
)
|
Net
periodic benefit costs
|
|
$
|
0.1
|
|
$
|
0.1
|
|
(*) amount is lower than
$0.1 million.
SCC Post-retirement
Health Care Plan-
The components of the net
periodic benefit costs for the post-retirement health care plan for the six
months ended June 30, 2009 and 2008 are individually, and in total, less than
$0.1 million.
12
Table of
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Minera
Mexico Pension Plans-
The components of the net
periodic benefit costs for the six months ended June 30, 2009 and 2008 are
as follows (in millions):
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Interest
cost
|
|
$
|
0.8
|
|
$
|
1.0
|
|
Service
cost
|
|
1.0
|
|
1.2
|
|
Expected
return on plan assets
|
|
(1.2
|
)
|
(1.5
|
)
|
Amortization
of transition assets, net
|
|
(0.2
|
)
|
(*
|
)
|
Amortization
of net actuarial loss
|
|
(*
|
)
|
(*
|
)
|
Amortization
of prior services cost
|
|
(*
|
)
|
(*
|
)
|
Net
periodic benefit cost
|
|
$
|
0.4
|
|
$
|
0.7
|
|
(*) amount is lower than
$0.1 million
Minera Mexico
Post-retirement Health Care Plan-
The components of
the net periodic cost for the six months ended June 30, 2009 and 2008 are
as follows (in millions):
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Interest
cost
|
|
$
|
1.9
|
|
$
|
1.6
|
|
Service
cost
|
|
0.2
|
|
0.2
|
|
Amortization
of net loss (gain)
|
|
0.7
|
|
(*
|
)
|
Amortization
of transition obligation
|
|
0.3
|
|
|
|
Net
periodic benefit cost
|
|
$
|
3.1
|
|
$
|
1.8
|
|
(*) amount is
lower than $0.1 million
K.
Comprehensive Income (in millions):
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net
income
|
|
$
|
176.0
|
|
$
|
551.3
|
|
$
|
255.3
|
|
$
|
1,119.0
|
|
Other
comprehensive income (loss) net of tax:
|
|
|
|
|
|
|
|
|
|
Additional
decrease in liability for employee benefit obligation
|
|
(1.2
|
)
|
|
|
|
|
|
|
Comprehensive
income
|
|
174.8
|
|
551.3
|
|
255.3
|
|
1,119.0
|
|
Comprehensive
income attributable to the non-controlling interest
|
|
1.1
|
|
2.8
|
|
1.6
|
|
5.5
|
|
Comprehensive
income attributable to SCC
|
|
$
|
173.7
|
|
$
|
548.5
|
|
$
|
253.7
|
|
$
|
1,113.5
|
|
L.
Commitments and Contingencies
Environmental
matters:
The Company has instituted extensive environmental
conservation programs at its mining facilities in Peru and Mexico. The Companys environmental programs include,
among other features, water recovery systems to conserve water and minimize
impact on nearby streams, reforestation programs to stabilize the surface of
the tailings dams and the implementation of scrubbing technology in the mines
to reduce dust emissions.
13
Table of
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Peruvian operations
The Companys operations are subject to applicable
Peruvian environmental laws and regulations.
The Peruvian government, through the MEM conducts annual audits of the
Companys Peruvian mining and metallurgical operations. Through these environmental audits, matters
related to environmental commitments, compliance with legal requirements,
atmospheric emissions, and effluent monitoring are reviewed. The Company believes that it is in material
compliance with applicable Peruvian environmental laws and regulations.
In 2003 the
Peruvian congress published a new law announcing future closure and remediation
obligations for the mining industry. In
accordance with the requirements of this law the Company has prepared and
submitted the required closure plans to MEM.
These plans were reviewed by the responsible governmental agency and
were open to public discussion. In April 2009,
the Company received comments from government agencies on the closure plan,
including some related to costs. The
Company is preparing a response to these comments. See Note H, Asset retirement obligation, for
further discussion of this matter.
For the Companys
Peruvian operations, environmental capital expenditures were $3.7 million and
$3.0 million in the first six months of 2009 and 2008, respectively.
Mexican operations
The Companys operations are subject to applicable
Mexican federal, state and municipal environmental laws, to Mexican official
standards, and to regulations for the protection of the environment, including
regulations relating to water supply, water quality, air quality, noise levels
and hazardous and solid waste. Some of
these laws and regulations are relevant to legal proceedings pertaining to the
Companys San Luis Potosi facilities.
The principal legislation applicable to the Companys
Mexican operations is the Federal General Law of Ecological Balance and
Environmental Protection, which is enforced by the Federal Bureau of
Environmental Protection (PROFEPA).
PROFEPA monitors compliance with environmental legislation and enforces
Mexican environmental laws, regulations and official standards. PROFEPA may initiate administrative
proceedings against companies that violate environmental laws, which in the
most extreme cases may result in the temporary or permanent closing of
non-complying facilities, the revocation of operating licenses and/or other
sanctions or fines. Also, according to
the Federal Criminal Code, PROFEPA must inform corresponding authorities
regarding environmental non-compliance.
Mexican environmental regulations have become
increasingly stringent in recent years, and this trend is likely to continue
and has been influenced by the environmental treaty entered into by Mexico,
United States and Canada in connection with NAFTA in 1999. However, the Companys management does not
believe that continued compliance with the federal environmental law or Mexican
state environmental laws will have a material adverse effect on the Companys
business, properties, results of operations, financial condition or prospects
or will result in material capital expenditures. Although the Company believes that all of its
facilities are in material compliance with applicable environmental, mining and
other laws and regulations, the Company cannot assure that future laws and
regulations would not have a material adverse effect on the Companys business,
properties, results of operations, financial condition or prospects.
For the Companys Mexican operations, environmental
capital expenditures were $14.8 million and $4.2 million in the first six
months of 2009 and 2008, respectively.
14
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Litigation matters
:
Peruvian operations
Garcia Ataucuri and Others against SCCs Peruvian
Branch (SCCs Peruvian Branch, Branch or Peruvian Branch): In April 1996, the Branch was served
with a complaint filed in Peru by approximately 800 former employees seeking
the delivery of a substantial number of its labor shares (acciones laborales)
plus dividends on such shares, to be issued in a proportional way to each
former employee in accordance with their time of employment with SCCs Peruvian
Branch.
The Company conducts its operations in Peru through
its Peruvian Branch, a registered branch.
Although the Peruvian Branch has neither capital nor liability separate
from that of the Company, under Peruvian law it is deemed to have an equity
capital for purposes of determining the economic interest of the holders of the
labor shares. The labor share litigation
is based on claims of former employees for ownership of labor shares issued
during the 1970s until 1979 under a former Peruvian mandated profit sharing
system. In 1971, the Peruvian government
enacted legislation providing that workers in the mining industry would participate
in the pre-tax profits of the enterprises for which they worked at a rate of
10%. This participation was distributed
40% in cash and 60% as an equity interest in the enterprise. Under the law, the equity participation was
originally delivered to the Mining Community, an organization representing
all workers in the mining industry. The
cash portion was distributed to the workers after the close of the year. The accrual for this participation was (and
continues to be) a current liability of the Company, until paid. In 1978, the law was amended and the equity
distribution was calculated at 5.5% of pre-tax profits and was made to
individual workers of the enterprise in the form of labor shares to be issued
in Peru by the Peruvian Branch of SCC.
These labor shares represented an equity interest in the
enterprise. In addition, according to
the 1978 law, the equity participations previously distributed to the Mining
Community were returned to the Branch and redistributed in the form of labor
shares to the individual employees or former employees. The cash participation was adjusted to 4.0%
of pre-tax earnings and continued to be distributed to employees following the
close of the year. Effective in 1992,
the law was amended to its present status, and the workers participation in
pre-tax profits was set at 8%, with 100% payable in cash. The equity participation component was
eliminated from the law.
In 1995, the Company offered to exchange new common
shares of the Company for the labor shares issued under the prior Peruvian
law. Approximately 80.8% of the issued
labor shares were exchanged for the Companys common shares, greatly reducing
the minority interest, now called non-controlling interest, on the Companys
balance sheet. What remains of the
workers equity participation is now included on the consolidated balance sheet
under the caption Non-controlling interest.
In relation to the issuance of labor shares by the
Branch in Peru, the Branch is a defendant in the following lawsuits:
1)
As stated above, in April 1996, the Branch was
served with a complaint filed in Peru by approximately 800 former employees,
(Garcia Ataucuri and others vs. SCCs Peruvian Branch), seeking the delivery of
38,763,806.80 labor shares (acciones laborales), now investment shares
(acciones de inversion) (or Nuevos Soles (S/.) 3,876,380,679.56), as required
by Law No. 22333, to be issued in a proportional way to each former
employee or worker in accordance with their time of employment with SCCs Peruvian
Branch, plus dividends on such shares.
In 2000, the Branch appealed an adverse decision of an appellate civil
court, affirming a decision of a lower civil court, to the Peruvian Supreme
Court. On September 19, 2001, the
Peruvian Supreme Court annulled the proceedings noting that the civil courts
lacked jurisdiction and that the matter had to be decided by a labor court.
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In October 2007, in
a separate proceeding initiated by the plaintiffs, the Peruvian Constitutional
Court nullified the September 19, 2001 Peruvian Supreme Court decision and
ordered the Supreme Court to decide again on the merits of the case accepting
or denying the Branchs 2000 appeal.
In May 2009, the
Supreme Court rejected the 2000 appeal of the Branch affirming the adverse
decision of the appellate civil court and lower civil court. While the Supreme Court has ordered SCCs
Peruvian Branch to deliver the labor shares and dividends to the former
employees of SCCs Peruvian Branch it has clearly stated that SCCs Peruvian
Branch may prove, by all legal means, its assertion that the labor shares and
dividends were distributed to the former employees in accordance with the
profit sharing law then in effect, an assertion which SCCs Peruvian Branch
continues to make. In view of this, SCCs
Peruvian Branch is unable to ascertain the manner in which the Supreme Court
decision may be enforced or what financial impact, if any, the said decision
may have.
2)
On May 10, 2006, the Branch was served with a
second complaint filed in Peru, this time by 44 former employees, (Cornejo
Flores and others vs. SCCs Peruvian Branch), seeking delivery of (1) labor
shares (or shares of whatever other current legal denomination) corresponding
to years 1971 to December 31, 1977 (the plaintiffs are seeking the same
38,763,806.80 labor shares mentioned in the prior lawsuit), that should have
been issued in accordance with Law No. 22333, plus interest and (2) labor
shares resulting from capital increases made by the Branch in 1980 for the
amount of the workers participation of S/.17,246,009,907.20, equivalent to
172,460,099.72 labor shares, plus dividends.
On May 23, 2006, the Branch answered this new complaint, denying
the validity of the claim. As of June 30,
2009 the case remains open with no new developments.
3)
On June 27, 2008, the Branch was served with a
new complaint filed in Peru, this time by 82 former employees, (Alejandro
Zapata Mamani and others vs. SCCs Peruvian Branch), seeking delivery of labor
shares (or shares of whatever other current legal denomination) corresponding
to years 1971 to December 31, 1977 (the plaintiffs are seeking the same
38,763,806.80 labor shares mentioned in the two previous labor share lawsuits),
that should have been issued in accordance with Law No. 22333, plus
interest, and labor shares resulting from capital increases, plus
dividends. The Branch answered this new
complaint, denying the validity of the claim.
As of June 30, 2009 the case remains open with no new developments.
4)
Additionally, in January 2009, the Branch was
served with a new complaint filed in Peru, this time by 12 former employees
(Arenas Rodriguez and others represented by Mr. Cornejo Flores- vs SCCs
Peruvian Branch) seeking delivery of labor shares (or shares of whatever other
current legal denomination) corresponding to years 1971 to December 31,
1977 (the plaintiffs are seeking the same 38,763,806.80 labor shares mentioned
in the three previous labor share lawsuits), that should have been issued in
accordance with Law No. 22333, plus interest, and labor shares resulting
from capital increases, plus dividends.
The Branch answered this new complaint, denying the validity of the
claim. As of June 30, 2009 the case
remains open with no new developments.
The Company asserts that
the labor shares were distributed to the former employees in accordance with
the profit sharing law then in effect.
The Company has not made a provision for these lawsuits because it
believes that it has meritorious defenses to the claims asserted in the
complaints.
Mexican operations
The Mexican Geological Services (MGS) Royalties: In August 2002,
MGS (formerly named Council of Mineral Resources (COREMI)) filed with the
Third Federal District Judge in Civil Matters, an action demanding from
Mexcobre (La Caridad) the payment of royalties since 1997. In December 2005, Mexcobre signed an
agreement with MGS. Under
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the terms of this agreement the parties established a
new procedure to calculate the royalty payments applicable for 2005 and the
following years, and the Company paid in January 2006, $6.9 million of
royalties for 2005 and $8.5 million as payment on account of royalties from the
third quarter 1997 through the last quarter of 2004. On January 22, 2007 the Third Federal
District Judge issued a ruling regarding the payment related to the period from
the third quarter of 1997 through the fourth quarter of 2004. This ruling was appealed by both parties in February 2007. The appeal was lost by the Company in October 2007. The Company filed a protective action
(Amparo) before the Ninth Collegiate Civil Tribunal which rendered a negative
ruling on August 27, 2008. The
Company is defending its economic interest in the courts to determine the final
amount to be paid to MGS. On an ongoing
basis the Company is required to pay a 1% royalty on La Caridads copper
production value after deduction of treatment 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 housing and/or commercial zones in
the former Ejido Capulines zone, where some residential projects like Villa
Magna and other new residential projects are being developed within an area
designated as a buffer zone due to IMMSAs use of anhydrous ammonia gas. This designation as a buffer zone was granted
by the risk area of SEMARNAT (the federal environmental authority) within its
approval of IMMSAs risk analysis.
Regarding this situation, a number of actions were
filed, including the following:
1)
Against the municipality of San Luis
Potosi, requesting the annulment of Desarrolladora Intersabas authorizations
and licenses granted within the zinc plants buffer zone.
In August 2006,
the action regarding the annulment of Villa Magna licenses was decided by a
federal appeals court, which denied IMMSAs request. In September 2006, IMMSA submitted its
final appeal to the Supreme Court of Justice and in February 2007, the
court ruled against IMMSA.
IMMSA believes
that even though the outcome was adverse to its interest, the construction of
the Villa Magna housing and commercial development will not affect the
operations of IMMSAs zinc plant by itself.
In 2008, Intersaba
filed a lawsuit against IMMSA, requesting a payment of approximately $0.8
million, due to the damages caused by the IMMSA litigation. In November 2008, a local court ruled in
favor of Intersaba and ordered IMMSA to pay $0.7 million. IMMSA appealed this ruling.
In March 2009,
based on the fact that Intersaba did not present, on a timely basis, accounting
documents necessary to support its damage allegations, a federal judge ruled
that IMMSA did not have to pay Intersaba.
In June 2009 a federal court confirmed the federal judges
ruling. The Company expects that this
will be supported by the local court as Intersaba does not appear to have the
necessary documentation to support its claim.
2)
In addition to the foregoing, IMMSA has
initiated a series of legal and administrative procedures against the
municipality of San Luis Potosi due to its refusal to issue IMMSAs use of land
permit (licencia de uso de suelo) in respect to its zinc plant. A federal judge ruled that IMMSAs use of
land permit should be granted. In February 2009,
the municipal authorities confirmed that local regulations permit IMMSA to use
the land for industrial purposes.
3)
Additionally, Ejido Capulines, an agricultural
community, filed a protective action against IMMSAs risk analysis approved by
SEMARNAT. As previously noted, this
approval determines a buffer zone around the San Luis facilities.
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On November 4,
2008, a federal judge terminated the case and noted that the Ejido Capulines
did not prove any harm caused by IMMSAs risk analysis authorization. In December 2008, the Ejido Capulines
appealed this decision before a federal court.
In May 2009, a federal court ended the litigation by affirming the
federal judges decision against Ejido Capulines.
4)
Also, new lawsuits were filed by IMMSA
against the municipality of San Luis Potosi challenging other licenses granted
in the safeguard area.
IMMSAs annulment
of the licenses was denied by the court.
Nevertheless IMMSA believes that this ruling will not have a material
adverse effect on its operations.
5)
On October 7, 2008, IMMSA filed a
lawsuit against SEMARNAT before the Federal Tax and Administrative Justice
Court seeking the nullity of a July 24, 2008 denial of the Companys
request for a safeguard declaration.
In March 2009,
the Federal Tax and Administrative Justice Court granted IMMSA the nullity from
a SEMARNAT official communication dated July 24, 2008. In March 2009, IMMSA requested from the
court a clarification of the decision.
The Ejidal Commissariat of the Ejido Pilares de
Nacozari, initiated a protective action (Amparo) against the second expropriation
decree (by means of which 2.322 hectares were expropriated for public use),
ignoring the judicial settlement reached with the Company on this matter. The judicial settlement had been ratified in January 2006. The Company will defend the settlement
reached with the Ejido and seek the dismissal of the case.
Pasta de Conchos Accident:
Mrs. Martinez, the wife of a miner, who died in
the Pasta de Conchos accident, initiated a protective action against the
negative ruling issued by the Ministry of Economy denying her request to launch
a procedure to cancel IMMSAs coal concessions, which she argued the accident
should trigger.
The First District Administrative Judge flatly
dismissed the case, but this ruling was later revised by an appeals court. Mrs. Martinez filed a new protective
action against a new ruling issued by the Ministry of Economy. The Company is certain that an accident by
itself cannot trigger a procedure of cancellation of the coal concessions. Although the Company cannot predict the
outcome of the procedures filed by Mrs. Martinez, the Company asserts that
the claims of Mrs. Martinez are without merit and is vigorously defending
against the actions.
Labor matters
:
In recent years the Company has experienced a number
of strikes or other labor disruptions that have had an adverse impact on its
operations and operating results.
Peruvian Operations
Approximately 68%
of the Companys Peruvian labor force was unionized at December 31, 2008,
represented by eight separate unions. Three
of these unions, one at each major production area, represent the majority of
the Companys workers. The collective
bargaining agreements for these unions last through February 2010. Additionally, there are five smaller unions,
representing the balance of workers.
Collective bargaining agreements for this group are in force through November 2012.
From June 30
to July 5, 2008 the three major unions went on strike in support of a
mining federation strike. During this
strike operations were near normal; an
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insignificant
amount of production was lost as work continued with the support of staff and
administrative personnel and with contractors.
Mexican operations
Approximately 75%
of the Mexican labor force was unionized at December 31, 2008, represented
by two separate unions. Under Mexican
law, the terms of employment for unionized workers is set forth in collective
bargaining agreements. Mexican companies
negotiate the salary provisions of collective bargaining agreements with the
labor unions annually and negotiate other benefits every two years. The Company conducts negotiations separately
at each mining complex and each processing plant.
In the last eight years the Cananea mine has
experienced more than nine labor stoppages totaling more than 816 days of
inactivity through June 30, 2009.
Beginning on July 30, 2007, our Cananea mine in Mexico started a
work stoppage which continues into 2009.
On January 11, 2008 the Mexican Federal Labor Court declared the
Cananea strike illegal and ordered the workers to return to work within 24
hours. The workers partially returned to
work and the Company resumed operations.
However, on April 11, 2008 the workers restarted the labor stoppage and
shut down production, based upon a new federal ruling. The Company has tried unsuccessfully to
resolve the current labor stoppage that obstructs production at
Cananea. In the second quarter 2008 the
Board of Directors offered all Cananea employees a severance payment in
accordance with the collective bargaining agreement and applicable law. This was offered in order to award the employees
a significant severance payment that allows them to choose the labor
alternative that is best for each of them.
During 2008, under this plan a group of employees was terminated at a
cost to the Company of $15.2 million, which was recorded in cost of sales on
the consolidated statement of earnings.
There were no termination payments made in the first six months of
2009. In accordance with SFAS No. 112,
the Company has estimated a liability of $35.1 million, which was recorded on
the condensed consolidated balance sheet.
In December 2008, the Mexican Federal Labor Court ruled in favor of
the Company and declared the strike illegal.
The union appealed this decision.
On January 7, 2009 the judge of the fifth district on labor matters
annulled the decision favorable to the Company.
The Company filed a request for a review of this ruling before an
appellate federal court, which declared the strike legal on March 19,
2009. On March 20, 2009 the Company
notified the Mexican Federal Labor Court of the termination of all the
individual labor contracts of the Cananea workers, including the collective
bargaining agreement with the union.
This decision was based upon a finding by the Mexican mining authorities
that confirmed that the Cananea mine was in a force majeure situation since it
was unable to operate due to severe damages caused by third parties. On April 14, 2009, the Mexican Federal
Labor Court issued a resolution approving the termination of Cananeas labor
relationships with individual and unionized employees, as well as the termination
of its collective bargaining agreement with its employees and with the National
Mining and Metal Workers Union. This
ruling has been challenged before federal tribunals and it is expected that it
will be resolved during the month of August.
The Company, the state of Sonora and the Mexican
federal government are working to restore the necessary legal and safety
conditions to resume operations at Cananea.
Due to the lengthy work stoppage the Company has
performed an impairment analysis on the assets at the Cananea mine. The Company has determined through its
impairment analysis that no impairment exists as of June 30, 2009. Should estimates of future copper and
molybdenum prices decrease significantly, such determination could change.
Additionally, the Taxco and San Martin mines have been
on strike since July 2007. It is
expected that operations at these mines will remain suspended until these labor
issues are resolved.
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Other legal matters
:
Class actions:
Three purported class action derivative lawsuits have been filed in the
Delaware Court of Chancery (New Castle County) late in December 2004 and
early January 2005 relating to the acquisition 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 James Sousa v. Southern Copper
Corporation, et al., Civil Action No. 978-N were consolidated into one
action titled, In re Southern Copper Corporation Shareholder Derivative
Litigation, Consol. Civil Action No. 961-N
and the complaint filed in Lemon Bay was designated as the operative complaint
in the consolidated lawsuit. The
consolidated action purports to be brought on behalf of the Companys common
stockholders.
The consolidated complaint alleges, among other
things, that the acquisition of Minera Mexico is the result of breaches of
fiduciary duties by the Companys directors and is not entirely fair to the
Company and its minority stockholders.
The consolidated complaint seeks, among other things, a preliminary and
permanent injunction to enjoin the acquisition, the award of damages to the
class, the award of damages to the Company and such other relief that the court
deems equitable, including interest, attorneys and experts fees and
costs. The defendants believe that this
lawsuit is without merit and are vigorously defending against the action.
The Companys management believes that the outcome of
the aforementioned legal proceeding will not have a material adverse effect on
the Companys financial position or results of operations.
The Company is involved in various other legal
proceedings incidental to its operations, but the Company does not believe that
decisions adverse to it in any such proceedings individually or in the
aggregate would have a material adverse effect on its financial position or
results of operations.
The Companys direct and indirect parent corporations,
including AMC and Grupo Mexico, have from time to time been named parties in
various litigations involving Asarco. In
August 2002 the U.S. Department of Justice brought a claim alleging
fraudulent conveyance in connection with AMCs then-proposed purchase of SCC
from a subsidiary of Asarco. That action
was settled pursuant to a Consent Decree 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 other parties, not including SCC, were
named in a lawsuit filed in New York State court in connection with alleged
asbestos liabilities, which lawsuit claims, among other matters, that AMCs
purchase of SCC from Asarco should be voided as a fraudulent conveyance. The lawsuit filed in New York State court was
stayed as a result of the August 2005 Chapter 11 bankruptcy filing by
Asarco, as described below. However, on November 16,
2007, this lawsuit after being removed to federal court was transferred to the
United States District Court for the Southern District of Texas in Brownsville,
Texas, for resolution in conjunction with a new lawsuit filed by Asarcos
creditors, as described below. On February 2,
2007 a complaint was filed by Asarco on behalf of Asarcos creditors, alleging
many of the matters previously claimed in the New York State lawsuit, including
that AMCs purchase of SCC from Asarco should be voided as a fraudulent
conveyance. In June 2008 the
lawsuit was concluded in Brownsville, Texas.
The constructive fraudulent conveyance claim was dismissed; however the
actual fraud and the aiding and abetting the breach of fiduciary duties counts
were favorable to plaintiffs. On April 15,
2009, the United States District Court for the Southern District of Texas
entered a judgment awarding Asarco certain shares of SCC, which represents
approximately 30.6% of SCCs current outstanding common shares, and an amount
equal to the dividends paid on those shares of common stock of SCC since the
date of their acquisition by AMC, plus interest. Grupo México announced that AMC is appealing
that judgment and enforcement of the judgment has been stayed pending the
appeal.
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In 2005, certain subsidiaries of Asarco filed
bankruptcy petitions in connection with alleged asbestos liabilities. In July 2005, the unionized workers of
Asarco commenced a work stoppage. As a
result of various factors, including the above-mentioned work stoppage, in August 2005
Asarco filed a voluntary petition for relief under Chapter 11 of the U.S.
Bankruptcy Code before the U.S. Bankruptcy Court in Corpus Christi, Texas. Asarcos bankruptcy case is being joined with
the bankruptcy cases of its subsidiaries.
Asarcos bankruptcy could result in additional claims being filed
against Grupo Mexico and its subsidiaries, including SCC, Minera Mexico or its
subsidiaries.
The Company cannot assure you that these or future
claims, if successful, will not have an adverse effect on the Companys parent
corporation or the Company. Any increase
in the financial obligations of the Companys parent corporation, as a result
of matters related to Asarco or otherwise could, among other effects, result in
the Companys parent corporation attempting to obtain increased dividends or
other funding from the Company.
Other commitments
:
Regional development
contribution:
In December 2006, the Companys Peruvian Branch
signed a contract with the Peruvian government committing the Company to make
annual contributions for five years to support the regional development of
Peru. This was in response to an appeal
by the president of Peru to the mining industry. The contributions are being used for social
benefit programs. In 2009, 2008 and
2007, the Company made non-deductible contributions of $12.7 million, $18.9
million and $16.1 million out of 2008, 2007 and 2006 earnings, respectively. These contributions were deposited with a
separate entity, Copper Assistance Civil Association (Asociacion Civil Ayuda
del Cobre) which will make disbursements for approved investments in accordance
with the agreement. Future contributions
could increase or decrease depending on copper prices. The commitment of the Branch is for a total
of 1.25% of its annual earnings, after Peruvian income tax. If the average annual LME copper price is
below $1.79 per pound the contribution will cease. In the first six months of 2009 the Company
made a provision of $2.1 million based on Peruvian Branch earnings.
Royalty charge
In June 2004, the Peruvian Congress enacted
legislation imposing a royalty charge to be paid by mining companies. Under this law, the Company is subject to a
1% to 3% royalty, based on sales, applicable to the value of the concentrates
produced in our Toquepala and Cuajone mines.
The Company made provisions of $13.6 million and $33.3 million in the
first six months of 2009 and 2008, respectively, for this royalty. These provisions are included in Cost of
sales (exclusive of depreciation, amortization and depletion) in the condensed
consolidated statement of earnings.
Power purchase agreement
In 1997, SCC sold its Ilo power plant to an
independent power company, Enersur S.A. (Enersur). In connection with the sale, a power purchase
agreement was also completed under which SCC agreed to purchase all of its
power needs for its Peruvian operations from Enersur for twenty years, commencing
in 1997. In 2003 the agreement was
amended releasing Enersur from its obligation to construct additional capacity
to meet the Companys increased electricity requirements and changing the power
tariff as called for in the original agreement.
The Company estimates that these changes represented a cost savings of
approximately $262 million through June 30, 2009.
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The Company has recently signed a Memorandum of
Understanding (MOU) with Enersur regarding its power supply agreement. The MOU contains new economic terms that the
Company believes better reflect current economic conditions in the power
industry and in Peru. The Company
expects to obtain savings in its future power costs. The new economic conditions agreed in the MOU
have been applied by Enersur to its invoices to the Company since May 2009. Additionally, the MOU includes an option for
providing power for the Tia Maria project.
Tax contingency matters:
Tax contingencies are provided for under FIN No 48
(see Note E, Income taxes).
M.
Segment and Related Information:
Company management
views Southern Copper as having three operating segments and manages on the
basis of these segments. Each of its
segments report independently to the Chief Operating Officer and he focuses on
operating income as a measure of performance to evaluate different segments,
and to make decisions to allocate resources to the reported segments.
The three segments
identified are groups of mines with similar economic characteristics, type of
products, processes and support facilities, similar regulatory environments,
similar employee bargaining contracts and similar currency risks. In addition, each mine within the individual
group earns revenues from similar type of customers for their 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 of sale. These may not be reflective of actual prices
realized by the Company due to various factors, including additional
processing, timing of sales to outside customers and transportation cost. Added to the segment information is
information regarding the Companys sales.
The segments identified by the Company are:
1.
Peruvian operations segment, which
includes the Toquepala and Cuajone mine complexes and the smelting and refining
plants, industrial railroad and port facilities which service both mines.
2.
Mexican open pit operations segment,
which includes La Caridad and Cananea mine complexes and the smelting and
refining plants and support facilities which service both mines.
3.
Mexican underground mining operations
segment, which includes five underground mines that produce zinc, copper,
silver and gold, a coal mine which produces coal and coke, and several
industrial processing facilities for zinc and copper. This group is identified as the IMMSA unit.
The Peruvian operations
include two open pit copper mines whose mineral output is transported by rail
to Ilo, Peru where it is processed at the Companys smelter and refinery,
without distinguishing between the products of the two mines. The resulting product, anodes and refined
copper, are then shipped to customers throughout the world. These shipments are recorded as revenue of
the Companys Peruvian mines.
The Mexican open pit
segment includes two copper mines whose mineral output is processed in the same
smelter and refinery without distinguishing between the products of the two
mines. The resultant product, anodes and
refined copper, are then shipped to customers throughout the world. These shipments are recorded as revenues of
the Companys Mexican open pit mines.
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The Company has
determined that it is necessary to classify the Peruvian open pit operations as
a separate operating segment from the Mexican open pit operations due to the
very distinct regulatory and political environments in which they operate. The Companys Chief Operating Officer must
consider the operations in each country separately when analyzing results of
the Company and making key decisions.
The open pit mines in Peru must comply with stricter environmental rules and
must continually deal with a political climate that has a very distinct vision
of the mining industry as compared to Mexico.
In addition, the collective bargaining agreement contracts are
negotiated very distinctly in each of the two countries. These key differences result in the Company taking
varying decisions with regards to the two countries.
The IMMSA segment includes
five mines whose minerals are processed in the same smelter and refinery. This segment also includes an underground
coal mine. Sales of product from this
segment are recorded as revenues of the Companys IMMSA unit. While the Mexican underground mines are
subject to a very similar regulatory environment as the Mexican open pit mines,
the nature of the products and processes of the two Mexican operations vary
distinctly. These differences cause the
Companys Chief Operating Officer to take a very different approach when
analyzing results and making decisions regarding the two Mexican operations.
Financial information is
regularly prepared for each of the three segments and the results of the
Companys operations are regularly reported to the Chief Operating Officer on
the segment basis. The Chief Operating
Officer of the Company focuses on operating income and on total assets as
measures of performance to evaluate different segments and to make decisions to
allocate resources to the reported segments.
These are common measures in the mining industry.
Financial information
relating to Southern Coppers segments is as follows:
|
|
Three Months Ended June 30, 2009
(in millions)
|
|
|
|
Mexican
Open Pit
|
|
Mexican
IMMSA
Unit
|
|
Peruvian
Operations
|
|
Corporate,
other and
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales outside of segments
|
|
$
|
249.0
|
|
$
|
87.4
|
|
$
|
475.3
|
|
$
|
12.8
|
|
$
|
824.5
|
|
Intersegment sales
|
|
13.4
|
|
33.5
|
|
|
|
(46.9
|
)
|
|
|
Cost of sales (exclusive of depreciation,
amortization and depletion)
|
|
153.6
|
|
77.0
|
|
217.3
|
|
(28.4
|
)
|
419.5
|
|
Selling, general and administrative
|
|
6.6
|
|
2.9
|
|
7.5
|
|
1.1
|
|
18.1
|
|
Depreciation, amortization and depletion
|
|
41.8
|
|
5.8
|
|
30.9
|
|
0.2
|
|
78.7
|
|
Exploration
|
|
0.1
|
|
1.1
|
|
3.8
|
|
|
|
5.0
|
|
Operating income
|
|
$
|
60.3
|
|
$
|
34.1
|
|
$
|
215.8
|
|
$
|
(7.0
|
)
|
303.2
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net
|
|
|
|
|
|
|
|
|
|
(21.0
|
)
|
Gain on derivative instruments
|
|
|
|
|
|
|
|
|
|
6.8
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
(1.5
|
)
|
Income taxes
|
|
|
|
|
|
|
|
|
|
(111.4
|
)
|
Non-controlling interest
|
|
|
|
|
|
|
|
|
|
(1.1
|
)
|
Net income attributable to SCC
|
|
|
|
|
|
|
|
|
|
$
|
175.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditure
|
|
$
|
16.5
|
|
$
|
9.8
|
|
$
|
114.1
|
|
$
|
0.1
|
|
$
|
140.5
|
|
Property, net
|
|
$
|
1,636.8
|
|
$
|
275.0
|
|
$
|
1,922.9
|
|
$
|
41.6
|
|
$
|
3,876.3
|
|
Total assets
|
|
$
|
2,662.0
|
|
$
|
634.9
|
|
$
|
2,457.3
|
|
$
|
(312.4
|
)
|
$
|
5,441.8
|
|
23
Table of
Contents
|
|
Three Months Ended June 30, 2008
(in millions)
|
|
|
|
Mexican
Open Pit
|
|
Mexican
IMMSA
Unit
|
|
Peruvian
Operations
|
|
Corporate,
other and
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales outside of segments
|
|
$
|
433.8
|
|
$
|
125.4
|
|
$
|
864.3
|
|
$
|
38.3
|
|
$
|
1,461.8
|
|
Intersegment sales
|
|
33.9
|
|
37.7
|
|
|
|
(71.6
|
)
|
|
|
Cost of sales (exclusive of depreciation,
amortization and depletion)
|
|
200.6
|
|
110.6
|
|
273.4
|
|
(34.1
|
)
|
550.5
|
|
Selling, general and administrative
|
|
9.6
|
|
4.8
|
|
10.1
|
|
2.2
|
|
26.7
|
|
Depreciation, amortization and depletion
|
|
47.4
|
|
8.1
|
|
27.7
|
|
|
|
83.2
|
|
Exploration
|
|
1.0
|
|
2.2
|
|
5.8
|
|
|
|
9.0
|
|
Operating income
|
|
$
|
209.1
|
|
$
|
37.4
|
|
$
|
547.3
|
|
$
|
(1.4
|
)
|
792.4
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net
|
|
|
|
|
|
|
|
|
|
(13.6
|
)
|
Loss on derivative instruments
|
|
|
|
|
|
|
|
|
|
(1.5
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
2.9
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
(228.9
|
)
|
Non-controlling interest
|
|
|
|
|
|
|
|
|
|
(2.8
|
)
|
Net income attributable to SCC
|
|
|
|
|
|
|
|
|
|
$
|
548.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditure
|
|
$
|
54.7
|
|
$
|
12.4
|
|
$
|
63.1
|
|
$
|
0.7
|
|
$
|
130.9
|
|
Property, net
|
|
$
|
1,622.5
|
|
$
|
254.0
|
|
$
|
1,677.7
|
|
$
|
63.5
|
|
$
|
3,617.7
|
|
Total assets
|
|
$
|
3,026.2
|
|
$
|
695.7
|
|
$
|
2,330.3
|
|
$
|
352.9
|
|
$
|
6,405.1
|
|
|
|
Six Months Ended June 30, 2009
(in millions)
|
|
|
|
Mexican
Open Pit
|
|
Mexican
IMMSA
Unit
|
|
Peruvian
Operations
|
|
Corporate,
other and
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales outside of segments
|
|
$
|
421.3
|
|
$
|
177.7
|
|
$
|
822.1
|
|
$
|
25.4
|
|
$
|
1,446.5
|
|
Intersegment sales
|
|
14.2
|
|
60.7
|
|
|
|
(74.9
|
)
|
|
|
Cost of sales (exclusive of depreciation,
amortization and depletion)
|
|
252.2
|
|
176.4
|
|
416.4
|
|
(50.0
|
)
|
795.0
|
|
Selling, general and administrative
|
|
14.1
|
|
6.2
|
|
14.4
|
|
2.2
|
|
36.9
|
|
Depreciation, amortization and depletion
|
|
83.1
|
|
11.9
|
|
61.1
|
|
0.8
|
|
156.9
|
|
Exploration
|
|
0.8
|
|
2.3
|
|
7.3
|
|
|
|
10.4
|
|
Operating income
|
|
$
|
85.3
|
|
$
|
41.6
|
|
$
|
322.9
|
|
$
|
(2.5
|
)
|
447.3
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net
|
|
|
|
|
|
|
|
|
|
(37.9
|
)
|
Gain on derivative instruments
|
|
|
|
|
|
|
|
|
|
4.2
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
1.2
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
(159.4
|
)
|
Non-controlling interest
|
|
|
|
|
|
|
|
|
|
(1.7
|
)
|
Net income attributable to SCC
|
|
|
|
|
|
|
|
|
|
$
|
253.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditure
|
|
$
|
42.1
|
|
$
|
14.6
|
|
$
|
138.2
|
|
$
|
8.6
|
|
$
|
203.5
|
|
Property, net
|
|
$
|
1,636.8
|
|
$
|
275.0
|
|
$
|
1,922.9
|
|
$
|
41.6
|
|
$
|
3,876.3
|
|
Total assets
|
|
$
|
2,662.0
|
|
$
|
634.9
|
|
$
|
2,457.3
|
|
$
|
(312.4
|
)
|
$
|
5,441.8
|
|
24
Table of
Contents
|
|
Six Months Ended June 30, 2008
(in millions)
|
|
|
|
Mexican
Open Pit
|
|
Mexican
IMMSA
Unit
|
|
Peruvian
Operations
|
|
Corporate,
other and
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales outside of segments
|
|
$
|
877.7
|
|
$
|
259.2
|
|
$
|
1,756.8
|
|
$
|
67.3
|
|
$
|
2,961.0
|
|
Intersegment sales
|
|
60.1
|
|
66.0
|
|
|
|
(126.1
|
)
|
|
|
Cost of sales (exclusive of depreciation,
amortization and depletion)
|
|
384.0
|
|
196.2
|
|
551.8
|
|
(61.0
|
)
|
1,071.0
|
|
Selling, general and administrative
|
|
18.5
|
|
11.2
|
|
20.0
|
|
1.7
|
|
51.4
|
|
Depreciation, amortization and depletion
|
|
92.6
|
|
16.1
|
|
55.7
|
|
|
|
164.4
|
|
Exploration
|
|
2.9
|
|
4.1
|
|
10.1
|
|
|
|
17.1
|
|
Operating income
|
|
$
|
439.8
|
|
$
|
97.6
|
|
$
|
1,119.2
|
|
$
|
0.5
|
|
1,657.1
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net
|
|
|
|
|
|
|
|
|
|
(22.3
|
)
|
Gain on derivative instruments
|
|
|
|
|
|
|
|
|
|
0.9
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
(1.8
|
)
|
Income taxes
|
|
|
|
|
|
|
|
|
|
(514.9
|
)
|
Non-controlling interest
|
|
|
|
|
|
|
|
|
|
(5.5
|
)
|
Net income attributable to SCC
|
|
|
|
|
|
|
|
|
|
$
|
1,113.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditure
|
|
$
|
78.0
|
|
$
|
19.3
|
|
$
|
81.4
|
|
$
|
2.1
|
|
$
|
180.8
|
|
Property, net
|
|
$
|
1,622.5
|
|
$
|
254.0
|
|
$
|
1,677.7
|
|
$
|
63.5
|
|
$
|
3,617.7
|
|
Total assets
|
|
$
|
3,026.2
|
|
$
|
695.7
|
|
$
|
2,330.3
|
|
$
|
352.9
|
|
$
|
6,405.1
|
|
Sales value per segment:
|
|
Three Months Ended June 30, 2009
(in millions)
|
|
|
|
Mexican
Open Pit
|
|
Mexican
IMMSA Unit
|
|
Peruvian
Operations
|
|
Corporate &
Elimination
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper
|
|
$
|
163.5
|
|
$
|
19.4
|
|
$
|
398.0
|
|
$
|
(10.4
|
)
|
$
|
570.5
|
|
Molybdenum
|
|
62.5
|
|
|
|
43.9
|
|
|
|
106.4
|
|
Other
|
|
36.4
|
|
101.5
|
|
33.4
|
|
(23.7
|
)
|
147.6
|
|
Total
|
|
$
|
262.4
|
|
$
|
120.9
|
|
$
|
475.3
|
|
$
|
(34.1
|
)
|
$
|
824.5
|
|
|
|
Three Months Ended June 30, 2008
(in millions)
|
|
|
|
Mexican
Open Pit
|
|
Mexican
IMMSA Unit
|
|
Peruvian
Operations
|
|
Corporate &
Elimination
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper
|
|
$
|
312.9
|
|
$
|
33.0
|
|
$
|
675.9
|
|
$
|
(12.2
|
)
|
$
|
1,009.6
|
|
Molybdenum
|
|
117.5
|
|
|
|
149.0
|
|
|
|
266.5
|
|
Other
|
|
37.3
|
|
130.1
|
|
39.4
|
|
(21.1
|
)
|
185.7
|
|
Total
|
|
$
|
467.7
|
|
$
|
163.1
|
|
$
|
864.3
|
|
$
|
(33.3
|
)
|
$
|
1,461.8
|
|
|
|
Six Months Ended June 30, 2009
(in millions)
|
|
|
|
Mexican
Open Pit
|
|
Mexican
IMMSA Unit
|
|
Peruvian
Operations
|
|
Corporate &
Elimination
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper
|
|
$
|
271.2
|
|
$
|
32.5
|
|
$
|
701.0
|
|
$
|
(5.8
|
)
|
$
|
998.9
|
|
Molybdenum
|
|
99.9
|
|
|
|
65.4
|
|
|
|
165.3
|
|
Other
|
|
64.4
|
|
205.9
|
|
55.7
|
|
(43.7
|
)
|
282.3
|
|
Total
|
|
$
|
435.5
|
|
$
|
238.4
|
|
$
|
822.1
|
|
$
|
(49.5
|
)
|
$
|
1,446.5
|
|
25
Table of
Contents
|
|
Six Months Ended June 30, 2008
(in millions)
|
|
|
|
Mexican
Open Pit
|
|
Mexican
IMMSA Unit
|
|
Peruvian
Operations
|
|
Corporate &
Elimination
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper
|
|
$
|
627.9
|
|
$
|
60.9
|
|
$
|
1,385.7
|
|
$
|
(23.8
|
)
|
$
|
2,050.7
|
|
Molybdenum
|
|
243.2
|
|
|
|
305.9
|
|
|
|
549.1
|
|
Other
|
|
66.7
|
|
264.3
|
|
65.2
|
|
(35.0
|
)
|
361.2
|
|
Total
|
|
$
|
937.8
|
|
$
|
325.2
|
|
$
|
1,756.8
|
|
$
|
(58.8
|
)
|
$
|
2,961.0
|
|
The geographic breakdown
of the Companys sales is as follows (in millions):
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
United
States
|
|
$
|
280.4
|
|
$
|
350.8
|
|
$
|
496.3
|
|
$
|
765.1
|
|
Europe
|
|
158.7
|
|
361.2
|
|
284.3
|
|
721.6
|
|
Mexico
|
|
183.7
|
|
350.8
|
|
318.3
|
|
670.3
|
|
Peru
|
|
26.3
|
|
38.9
|
|
40.8
|
|
78.2
|
|
Latin
America (excluding Mexico and Peru)
|
|
109.0
|
|
273.5
|
|
189.7
|
|
554.7
|
|
Asia
|
|
66.4
|
|
84.4
|
|
117.1
|
|
162.5
|
|
Derivative
instruments
|
|
|
|
2.2
|
|
|
|
8.6
|
|
Total
|
|
$
|
824.5
|
|
$
|
1,461.8
|
|
$
|
1,446.5
|
|
$
|
2,961.0
|
|
Major Customer Segment
Information:
For the six months ended June 30,
2009, the Company had revenues from two copper customers of the Mexican and
Peruvian operations, which amounted to 20.3% of total revenue; revenues from
one of these customers amounted to 12.7% of total revenue. In addition, the Company had revenues from
two molybdenum customers of the Peruvian and Mexican operations, which amounted
to 9.8% of total revenues; revenues from one of these customers amounted to
6.7% of total revenue. These customers
represent 85.8% of the Companys molybdenum sales revenue.
For the six months ended June 30,
2008, the Company had revenues from two copper customers of the Mexican and
Peruvian operations, which amounted to 16.4% of total revenue; revenues from
one of these customers amounted to 11.2% of total revenue. In addition, the Company had revenues from
two molybdenum customers of the Peruvian and Mexican operations, which amounted
to 15.2% of total revenues; revenues from one of these customers amounted to
8.8% of total revenue. These customers
represent 81.8% of the Companys molybdenum sales revenue.
N.
Impact of New Accounting Standards:
On June 29, 2009,
the FASB issued FASB SFAS 168 the
FASB Accounting Standards Codification
TM
and the Hierarchy of generally accepted
Accounting Principles. This last SFAS
replaces SFAS 162 The Hierarchy of Generally Accepted Accounting Principles
and establishes the
FASB
Accounting Standards Codification (Codification) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with GAAP. Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. The Codification will
be effective for interim and annual periods ending on or after September 15,
2009. Under this guidance, the Company
will apply the Codification to its third-quarter interim financial statements.
26
Table of
Contents
Following this statement,
the FASB will not issue new standards in the form of Statements, FASB Staff
positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards
Updates which will not be considered as authoritative in their own right and
will serve only to update the Codification.
O.
Stockholders Equity:
Common stock:
During the first quarter
of 2009 Grupo Mexico, through its wholly owned subsidiary AMC, purchased 4.9
million shares. With this purchase and
the Companys repurchase of its common shares, the indirect ownership of Grupo
Mexico increased to 80% at March 31, 2009 and remains at 80% at June 30,
2009. Please see Note E, Income taxes,
for disclosure about the US federal income tax implications of this increase in
ownership.
Treasury Stock:
Activity in treasury stock in the six month period
ended June 30, 2009 and 2008 is as follows (in millions):
|
|
2009
|
|
2008
|
|
Southern
Copper common shares
|
|
|
|
|
|
Balance
as of January 1,
|
|
$
|
388.9
|
|
$
|
4.4
|
|
Purchase
of shares
|
|
71.6
|
|
|
|
Used
for corporate purposes
|
|
(0.1
|
)
|
(0.1
|
)
|
Balance
as of June 30,
|
|
460.4
|
|
4.3
|
|
|
|
|
|
|
|
Parent
Company (Grupo Mexico) common shares
|
|
|
|
|
|
Balance
as of January 1,
|
|
125.5
|
|
170.3
|
|
Other
activity, including dividend, interest and currency translation effect
|
|
11.2
|
|
35.6
|
|
Balance
as of June 30,
|
|
136.7
|
|
205.9
|
|
|
|
|
|
|
|
Treasury
stock balance as of June 30,
|
|
$
|
597.1
|
|
$
|
210.2
|
|
In the first six months
of 2009 the Company distributed 12,000 shares of Southern Copper to Directors
under the Directors Stock Award Plan.
In the first six months
of 2009 and 2008 the Company awarded 11.8 million shares and 14.5 million
shares of Grupo Mexico, respectively, under the employee stock purchase plan.
SCC share repurchase program:
Pursuant to the $500 million share repurchase program
authorized by the Companys Board of Directors in 2008, in the first quarter of
2009 the Company purchased 4.9 million shares of its common stock at a cost of
$71.6 million. These shares will be
available for general corporate purposes.
The Company may purchase additional shares from time to time, based on
market conditions and other factors.
This repurchase program has no expiration date and may be modified or
discontinued at any time. There was no
purchase of shares in the second quarter of 2009.
The following table summarizes the repurchase program
activity since its inception in 2008:
27
Table of
Contents
Period
|
|
Total Number
of Shares
Purchased
|
|
Average
Price
Paid
per
Share
|
|
Total Number
of Shares
Purchased as
Part of
Publicly
Announced Plan
|
|
Maximum Number
of Shares that
May Yet Be
Purchased Under
the Plan
@ $20.44
|
|
Total Cost
($ in
million)
|
|
From
|
|
To
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
08/11/08
|
|
12/31/08
|
|
28,510,150
|
|
13.49
|
|
28,510,150
|
|
|
|
$
|
384.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter 2009:
|
|
|
|
|
|
|
|
|
|
|
|
01/12/09
|
|
01/31/09
|
|
1,075,000
|
|
15.17
|
|
29,585,150
|
|
|
|
16.3
|
|
02/01/09
|
|
02/28/09
|
|
2,260,350
|
|
13.45
|
|
31,845,500
|
|
|
|
30.4
|
|
03/01/09
|
|
03/27/09
|
|
1,564,650
|
|
15.89
|
|
33,410,150
|
|
|
|
24.9
|
|
Total
|
|
|
|
4,900,000
|
|
14.61
|
|
|
|
|
|
71.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter 2009
|
|
|
|
|
|
|
|
2,141,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
purchased
|
|
33,410,150
|
|
13.66
|
|
|
|
|
|
$
|
456.2
|
|
As a result of the repurchase of SCC common shares and
AMCs purchase of SCC shares, Grupo Mexicos direct and indirect ownership
increased to 80% at March 31, 2009 and remains at 80% at June 30,
2009.
Directors Stock Award Plan:
The Company established a stock award compensation
plan for certain directors who are not compensated as employees of the
Company. Under this plan, participants
will receive 1,200 shares of common stock upon election and 1,200 additional
shares following each annual meeting of stockholders thereafter. 600,000 shares of Southern Copper common
stock have been reserved for this plan.
As of June 30, 2009 the Company has granted 241,200 shares under
this plan which includes 12,000 additional shares granted since June 30,
2008 at which time the cumulative amount of shares granted was 229,200
shares. The fair value of the award is
measured each year at the date of the grant.
Employee Stock
Purchase Plan:
In January 2007,
the Company offered to eligible employees a stock purchase plan (the Employee
Stock Purchase Plan) through a trust that acquires shares of Grupo Mexico
stock for sale to its employees, and employees of subsidiaries, and certain affiliated
companies. The purchase price is
established at the approximate fair market value on the grant date. Every two years employees will be able to
acquire title to 50% of the shares paid in the previous two years. The employees will pay for shares purchased
through monthly payroll deductions over the eight year period of the plan. At the end of the eight year period, the
Company will grant the participant a bonus of 1 share for every 10 shares
purchased by the employee.
If Grupo Mexico
pays dividends on shares during the eight year period, the participants will be
entitled to receive the dividend in cash for all shares that have been fully
purchased and paid as of the date that the dividend is paid. If the participant has only partially paid
for shares, the entitled dividends will be used to reduce the remaining
liability owed for purchased shares.
In the case of
voluntary resignation of the employee, the Company will pay to the employee the
purchase price applying a deduction over the amount to be paid to the employee
based on the following schedule.
28
Table of
Contents
If the resignation occurs
during:
|
|
% Deducted
|
|
1st
year after the grant date
|
|
90
|
%
|
2nd
year after the grant date
|
|
80
|
%
|
3rd
year after the grant date
|
|
70
|
%
|
4th
year after the grant date
|
|
60
|
%
|
5th
year after the grant date
|
|
50
|
%
|
6th
year after the grant date
|
|
40
|
%
|
7th
year after the grant date
|
|
20
|
%
|
In the case of
involuntary termination of the employee, the Company will pay to the employee
the difference between the fair market value of the shares at the date of
termination of employment, and the purchase price. When the fair market value of the shares is
higher than the purchase price, the Company will apply a deduction over the
amount 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, the Company
will render the buyer or his legal beneficiary, the shares effectively paid as
of the date of retirement or death.
For the six months ended June 30, 2009 and 2008,
the stock based compensation expense under this plan was $1.1 million in both
periods. As of June 30, 2009, there
was $11.7 million of unrecognized compensation expense under this plan, which
is expected to be recognized over the remaining five years and nine months
period.
The following table presents the stock award activity
for the six months ended June 30, 2009 and 2008:
|
|
Shares
|
|
Unit Weighted Average
Grant Date Fair Value
|
|
Outstanding
shares at January 1, 2009
|
|
14,577,011
|
|
$
|
1.16
|
|
Granted
|
|
|
|
|
|
Exercised
|
|
(2,605,575
|
)
|
1.16
|
|
Forfeited
|
|
(127,719
|
)
|
1.16
|
|
Outstanding
shares at June 30, 2009
|
|
11,843,717
|
|
$
|
1.16
|
|
|
|
|
|
|
|
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
|
|
Executive Stock Purchase Plan:
Grupo Mexico also offers a stock purchase plan for
certain members of its executive management and the executive management of its
subsidiaries and certain affiliated companies.
Under this plan, participants will receive incentive cash bonuses which
are used to purchase up to 2,250,000 shares of Grupo Mexico over an eight year
period. The fair value of the award is
estimated on the date of grant and is recognized as compensation expense over a
weighted average requisite service period
29
Table of
Contents
of eight years.
The Company recorded $0.1 million and $0.2 million, net of tax, in
compensation expense in the first six months of 2009 and 2008,
respectively. As of June 30, 2009,
there was $1.9 million of unrecognized compensation cost, related to this plan,
which is expected to be recognized over the remaining period.
The following table presents the stock award activity
for the six months ended June 30, 2009 and 2008:
|
|
Shares
|
|
Unit Weighted
Average Grant
Date Fair Value
|
|
Outstanding
shares at January 1, 2009
|
|
697,500
|
|
$
|
0.77
|
|
Granted
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
Outstanding
shares at June 30, 2009
|
|
697,500
|
|
$
|
0.77
|
|
|
|
|
|
|
|
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
|
|
P.
Financial instruments:
SFAS No. 157
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1 measurements) and
the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy
under SFAS No. 157 are described below:
Level 1 - Unadjusted
quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities;
Level 2 - Inputs that are
observable, either directly or indirectly, but do not qualify as Level 1
inputs. (i.e., quoted prices for similar assets or liabilities)
Level 3 - Prices or
valuation techniques that require inputs that are both significant to the fair
value measurement and unobservable (i.e., supported by little or no market
activity).
The carrying amounts of
certain financial instruments, including cash and cash equivalents, accounts
receivable (other than accounts receivable associated with provisionally priced
sales) and accounts payable approximate fair value due to their short
maturities. Consequently, such financial
instruments are not included in the following table that provides information
about the carrying amounts and estimated fair values of other financial
instruments that are not measured at fair value in the condensed consolidated
balance sheet as of June 30, 2009 (in million):
|
|
Balance at June 30, 2009
|
|
|
|
Carrying Value
|
|
Fair Value
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Long-term debt
|
|
$
|
(1,301.4
|
)
|
$
|
(1,187.6
|
)
|
|
|
|
|
|
|
|
|
Fair values of assets and
liabilities measured at fair value on a recurring basis were calculated as
follows:
30
Table of Contents
|
|
|
|
Fair Value at Measurement Date Using:
|
|
|
|
Fair Value
as of
|
|
Quoted prices in
active markets
for identical
assets
|
|
Significant
other
observable
inputs
|
|
Significant
unobservable
inputs
|
|
|
|
06/30/09
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
33.9
|
|
|
|
$
|
29.1
|
|
$
|
4.8
|
|
Provisionally priced sales:
|
|
|
|
|
|
|
|
|
|
Copper
|
|
$
|
0.5
|
|
|
|
$
|
0.5
|
|
|
|
Molybdenum
|
|
$
|
18.6
|
|
|
|
$
|
18.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
(8.1
|
)
|
$
|
(8.1
|
)
|
|
|
|
|
Total
|
|
$
|
44.9
|
|
$
|
(8.1
|
)
|
$
|
48.2
|
|
$
|
4.8
|
|
The table below sets
forth a summary of changes in the fair value of the Companys Level 3
short-term investments (corporate bond, asset backed obligations, and mortgage
backed securities) for the three and six months period ended June 30,
2009.
|
|
Three months
ended
June 30, 2009
|
|
Six months
ended
June 30, 2009
|
|
Balance at beginning of period
|
|
$
|
8.5
|
|
$
|
11.0
|
|
Unrealized gain (loss)
|
|
(0.2
|
)
|
(0.4
|
)
|
Purchases, sales, issuance and settlements (net)
|
|
(3.5
|
)
|
(5.8
|
)
|
Transfers in/out of Level 3
|
|
|
|
|
|
Balance at end of period
|
|
$
|
4.8
|
|
$
|
4.8
|
|
The total amount of unrealized losses for the period
was included in other income in the condensed consolidated statement of
earnings for the six months ended June 30, 2009.
Q.
Subsequent events:
The Company
evaluated subsequent events as of August 3, 2009 which is the date the
financial statements were issued.
Dividends:
On July 15,
2009, the Board of Directors authorized a dividend of 10 cents per share
payable on September 2, 2009, to SCC shareholders of record at the close
of business on August 6, 2009.
31
Table of
Contents
Part I
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides
information that management believes is relevant to an assessment and
understanding of the consolidated financial condition and results of operations
of Southern Copper Corporation and its subsidiaries (collectively, SCC, the
Company, our, and we). This item
should be read in conjunction with our interim unaudited Condensed Consolidated
Financial Statements and the notes thereto included in this quarterly
report. Additionally, the following
discussion and analysis should be read in conjunction with the Management
Discussion and Analysis of Financial Condition and Results of Operations and
the Consolidated Financial Statements included in Part II of our annual
report on Form 10-K for the year ended December 31, 2008
.
EXECUTIVE OVERVIEW
Business
: Our business is primarily the
production and sale of copper. In the
process of producing copper, a number of valuable metallurgical by-products are
recovered, such as molybdenum, zinc, silver, lead and gold, which we also
produce and sell. Market forces outside
of our control largely determine the sales prices for our products. We, therefore, focus on copper production,
cost control, production enhancement and maintaining a prudent capital
structure to remain profitable. We
believe we achieve these goals through capital spending programs, exploration
efforts and cost reduction programs. Our
aim is to remain profitable during periods of low copper prices and to maximize
financial performance in periods of high copper prices.
Earnings:
There has been an improvement in copper
prices during 2009 from the low metal prices that existed in the last quarter
of 2008. The restored demand for copper
by China has contributed to this improvement.
Additionally, the prices of our principal byproducts have improved
during 2009. While there is a certain
amount of metal price volatility in the near term, there is a growing consensus
among industry analysts for a stronger outlook for copper over the next few
years.
Second quarter 2009 net
earnings of $175.0 million at an average LME copper price of $2.12 per pound of
copper, reflects our solid financial performance and that we are maintaining
steady progress during the current market and economic conditions. This allows us to continue with our capital
projects to increase production levels and be ready to improve our
profitability when the copper market and the worlds economy recover.
Production
: Second quarter 2009 copper production
was 1.7% higher than the second quarter of 2008. In addition, we increased our production of
molybdenum mined, by 12.6%, zinc mined and refined, by 0.3% and 5.7%,
respectively, and silver mined and refined, by 9.1% and 32.6%, respectively.
Cananea strike:
Operations at our Cananea, San Martin
and Taxco facilities remained closed during the second quarter of 2009, due to
continuing strike activity. These
strikes began in July 2007, and despite our efforts, remain
unresolved. On April 14, 2009, the
Mexican Federal Labor Court issued a resolution, based on force majeure,
approving the termination of Cananeas labor relationship with individual and
unionized employees, as well as the termination of its collective bargaining
agreement with its employees and with the National Mining and Metal Workers
Union. This ruling has been challenged before federal tribunals and it is
expected that it will be resolved during the month of August.
The Company, the
state of Sonora and the Mexican federal government are working to restore the
necessary legal and safety conditions to resume operations at Cananea.
32
Table of
Contents
Due to the lengthy
work stoppage we have performed an impairment analysis on the assets at
the Cananea mine. We have determined
through our impairment analysis that no impairment exists as of June 30,
2009. Should estimates of future copper
and molybdenum prices decrease significantly, such determination could change.
Reevaluation of capital
expenditures
: We
are continuing with the Tia Maria project using internally generated cash
flow. This project will increase annual
copper production by 120,000 tons and is scheduled to commence operations in
2011. Also we are continuing with the
Toquepala concentrator expansion project which is expected to increase annual
copper output by 100,000 tons by the second half of 2012.
KEY MATTERS:
We discuss below several
matters that we believe are important to understand our results of operations
and financial condition. These matters
include, (i) our operating cash costs as a measure of our performance, (ii) metal
prices, (iii) business segments, (iv) the effect of inflation and
other local currency issues, and (v) our expansion and modernization
program and environmental protection programs.
Operating Cash Costs:
An overall benchmark used by us and a
common industry metric to measure performance is operating cash costs per pound
of copper produced. Operating cash cost
is a non-GAAP measure that does not have a standardized meaning and may not be
comparable to similarly titled measures provided by other companies. A reconciliation of our operating cash cost
per pound to the cost of sales (exclusive of depreciation, amortization and
depletion) as presented in the condensed consolidated statement of earnings, is
presented under the subheading Non-GAAP Information Reconciliation,
below. We have defined operating cash
cost per pound as cost of sales (exclusive of depreciation, amortization and
depletion); plus selling, general and administrative charges, treatment and
refining charges, and by-products revenue and sales premiums; less workers
participation and other miscellaneous charges, including the Peruvian mine
royalty charge and the change in inventory levels; divided by total pounds of
copper produced and purchased by us. In
our calculation of operating cash cost per pound of copper produced, we credit
against our costs the revenues from the sale of by-products, principally
molybdenum, zinc, silver and the premium over market price that we receive on
copper sales. We account for the
by-product revenues in this way because we consider our principal business to
be the production and sale of copper. We
believe that our Company is viewed by the investment community as a copper
company, and is valued, in large part, by the investment communitys view of
the copper market and our ability to produce copper at a reasonable cost. We also include copper sales premiums as a
credit, as these amounts are in excess of published copper prices. The increase in recent years in the price of
molybdenum as well as increases in silver and zinc, has had a significant
effect on our traditional calculation of cash cost and its comparability
between periods. Accordingly, we present
cash costs with and without crediting the by-products revenues against our
costs.
We exclude from our
calculation of operating cash cost depreciation, amortization and depletion,
which are considered non-cash expenses.
Exploration is considered a discretionary expenditure and is also
excluded. Workers participation
provisions are determined on the basis of pre-tax earnings and are also
excluded. Additionally, excluded from
operating cash cost are items of a non-recurring nature and the mine royalty
charges.
Our operating cash costs
per pound, as defined, are presented in the table below, for the three and six
months ended June 30, 2009 and 2008.
We present cash costs with and without the inclusion of by-product
revenues.
33
Table of
Contents
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(cents per pound)
|
|
(cents per pound)
|
|
Cash
cost per pound of copper produced and purchased
|
|
50.9
|
|
5.5
|
|
57.7
|
|
(4.0
|
)
|
Less:
|
|
|
|
|
|
|
|
|
|
By-products
revenue
|
|
99.4
|
|
179.1
|
|
87.5
|
|
170.6
|
|
Cash
cost per pound of copper produced and purchased without by-products revenue
|
|
150.3
|
|
184.6
|
|
145.2
|
|
166.6
|
|
As seen on the chart
above, our per pound cash cost for the second quarter and first six months of
2009 when calculated with by-products revenue are costs of 50.9 cents per pound
and 57.7 cents per pound, respectively, compared with a cost of 5.5 cents per
pound and a credit of 4.0 cents per pound in the second quarter and first six
months of 2008, respectively. The
decrease in the by-products credit in the 2009 periods was principally due to
lower molybdenum, zinc and silver prices.
See average metal prices below.
Increases in the volume of molybdenum, zinc and silver sales in both the
three and six month periods of 2009, partially reduced the price decline.
Our cash cost, excluding
by-product revenues, was lower by 34.3 cents per pound and 21.4 cents per pound
in the second quarter and first six months of 2009 than the comparable 2008
periods due to lower power, fuel and material repair costs partially offset by
the lower copper production at Cananea due to the ongoing strike.
Metal Prices
. The profitability of our operations is
dependent on, and our financial performance is significantly affected by, the
international market prices for the products we produce, especially for copper,
molybdenum, zinc and silver. Metal
prices historically have been subject to wide fluctuations and are affected by
numerous factors beyond our control.
These factors, which affect each commodity to varying degrees, include
international economic and political conditions, levels of supply and demand,
the availability and cost of substitutes, inventory levels maintained by
producers and others and, to a lesser degree, inventory carrying costs and
currency exchange rates. In addition,
the market prices of certain metals have on occasions been subject to rapid
short-term changes due to speculative activities.
We are subject to market
risks arising from the volatility of copper and other metal prices. Assuming that expected metal production and
sales are achieved, that tax rates are unchanged, giving no effect to potential
hedging programs, metal price sensitivity factors would indicate the following
change in estimated 2009 net income attributable to SCC 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 income attributable to SCC (in millions)
|
|
$
|
6.1
|
|
$
|
23.0
|
|
$
|
1.3
|
|
$
|
8.5
|
|
Business Segments
.
We view our Company as
having three operating segments and manage on the basis of these segments. These segments are our (1) Peruvian
operations, (2) our Mexican open-pit operations and (3) our Mexican
underground operations, known as our IMMSA unit. Our Peruvian operations include the Toquepala
and Cuajone mine complexes and the smelting and refining plants, industrial
railroad and port facilities which service both mines. The Peruvian operations produce copper, with
significant by-product production of
34
Table of
Contents
molybdenum, silver and
other material. Our Mexican open-pit
operations include La Caridad and Cananea mine complexes, the smelting and
refining plants and support facilities which service both mines. The Mexican open pit operations produce
copper, with significant by-product production of molybdenum, silver and other
material. Our IMMSA unit includes five
underground mines that produce zinc, lead, copper, silver and gold, a coal mine
which produces coal and coke, and several industrial processing facilities for
zinc, copper and silver.
Segment information is
included in our review of Results of Operations and also in Note M of our
condensed consolidated financial statements.
Inflation and Devaluation
of the Peruvian Nuevo Sol and the Mexican Peso
.
Our functional currency
is the U.S. dollar. Portions of our
operating costs are denominated in Peruvian Nuevos Soles and Mexican
Pesos. Since our revenues are primarily
denominated in U.S. dollars, when inflation/deflation in Peru or Mexico is not
offset by a change in the exchange rate of the Nuevo Sol or the Peso,
respectively, to the dollar, our financial position, results of operations and
cash flows could be adversely affected to the extent that the
inflation/devaluation effects are passed onto us by our suppliers or reflected
in our wage adjustments. In addition,
the dollar value of our net monetary assets denominated in Nuevos Soles or
Pesos can be affected by devaluation of the Nuevo Sol or the Peso, resulting in
a remeasurement loss in our financial statements. Recent inflation and devaluation rates are
provided in the table below for the three and six months ended June 30,
2009 and 2008:
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Peru:
|
|
|
|
|
|
|
|
|
|
Peruvian inflation rate
|
|
(0.4
|
)%
|
1.3
|
%
|
0.0
|
%
|
3.5
|
%
|
Nuevo Sol/dollar devaluation /(appreciation) rate
|
|
(4.8
|
)%
|
8.1
|
%
|
(4.2
|
)%
|
(1.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
Mexico:
|
|
|
|
|
|
|
|
|
|
Mexican inflation rate
|
|
0.2
|
%
|
0.5
|
%
|
1.3
|
%
|
2.0
|
%
|
Peso/dollar devaluation /(appreciation) rate
|
|
(7.9
|
)%
|
(3.9
|
)%
|
(2.5
|
)%
|
(5.4
|
)%
|
Capital Expansion and
Exploration Program
.
We made capital
expenditures of $140.5 million and $203.5 million in the first three and six
months of 2009, respectively, compared with $130.9 million and $180.8 million
in the three and six months of 2008, respectively. In general, the capital expenditures and
projects described below are intended to increase production and/or decrease
costs.
In light of the current
business environment we have suspended many of our capital investments in new
as well as in expansion projects. Set
forth below are descriptions of some of our current expected capital
expenditures. We expect to meet the cash
requirements for these projects from cash on hand, internally generated funds
and from additional external financing, if required.
Peruvian
Operations:
Tia Maria project: This
project, which includes the Tia Maria and La Tapada deposits in the Peruvian
region of Arequipa, is expected to produce about 260 million pounds of SX-EW
copper cathodes per year. The approved
budget for the project is $934 million.
Through June 30, 2009, $187.2 million has been spent on this
project. The basic engineering has been
completed. Current work on the project
includes the development of the detailed engineering, the commencement of
fabrication of the main equipment and the environmental
35
Table of Contents
impact assessment, which
was completed in June 2009 and presented to the Peruvian authorities for
approval.
Toquepala concentrator
expansion: As of the end of June 2009,
we have spent $72.8 million on this project.
Detailed engineering work is scheduled to commence in the third quarter
of this year and the environmental impact study is currently being conducted
and is expected to be completed in the fourth quarter of 2009.
Ilo Smelter
Modernization: A complimentary project
to the Ilo smelter modernization is the construction of a marine trestle to
offload directly to offshore ships the sulfuric acid produced at the
smelter. At June 30, 2009 this
project reached 83.0% completion and is expected to be completed in 2009. The completed project is expected to ease congestion
in our Ilo area.
Tailings disposal at
Quebrada Honda: This project will increase the height of the existing Quebrada
Honda dam to impound future tailings from the Toquepala and Cuajone mills. The procurement of the main equipment and
materials was finished. Construction of
the principle civil, mechanical and electrical installations for the main and
lateral dams has been completed. The
lateral dam was commissioned in December 2008 and the main dam was
commissioned in March 2009.
Progress on the first stage of this project is 99.8% complete, with
final completion expected in the third quarter of 2009. The total cost of this project is estimated
to be $66.0 million, with $41.4 million expended through June 30, 2009.
Mexican operations:
After expending $13.4
million the by-product treatment plant at the La Caridad metallurgical complex
is at 85% completion. The first stage of
the project to treat smelter dusts and effluents, is in operation. Total completion of this facility is planned
for September 2009.
The lime plant at Agua
Prieta, which is 100 kilometers north of the La Caridad mine, has been fully
modernized to comply with environmental regulations and to meet the lime
requirements of the Mexican operations.
A vertical Maerz furnace will reduce the consumption of natural gas to a
third of its current level and cost will be reduced by 45%. The commencement of operations is scheduled
for August 2009, with a total investment of $20.8 million.
Other capital
expenditures:
The El Arco project is a
major copper deposit in the northern part of the Baja California peninsula,
with estimated mineralized resources of over 1.3 billion tons. This project is expected to produce 190,000
tons of copper and 105,000 ounces of gold annually. Based on the approval of
the Board of Directors, we have contracted the basic engineering and are
proceeding with the environmental impact study and land acquisition.
ACCOUNTING ESTIMATES
Our discussion and
analysis of financial condition and results of operations are based on our
condensed consolidated financial statements, which have been prepared in
accordance with US GAAP. Preparation of
these condensed consolidated financial statements requires our management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Management
makes its best estimate of the ultimate outcome for these items based on
historical trends and other information available when the financial statements
are prepared. Changes in estimates
36
Table of Contents
are recognized in
accordance with the accounting rules for the estimate, which is typically
in the period when new information becomes available to management. Areas where the nature of the estimate makes
it reasonably possible that actual results could materially differ from amounts
estimated include: ore reserves, revenue recognition, estimated mine stripping
ratios, leachable material and related amortization, the estimated useful lives
of fixed assets, asset retirement obligations, litigation and contingencies,
valuation allowances for deferred tax assets, tax positions, fair value of
financial instruments and inventory obsolescence. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. Actual results
may differ from these estimates under different assumptions or conditions.
RESULTS OF OPERATIONS
The following highlights
key financial and operating results for the three and six months ended June 30,
2009 and 2008 (in millions):
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net sales
|
|
$
|
824.5
|
|
$
|
1,461.8
|
|
$
|
1,446.5
|
|
$
|
2,961.0
|
|
Operating costs and expenses
|
|
(521.3
|
)
|
(669.4
|
)
|
(999.2
|
)
|
(1,303.9
|
)
|
Operating income
|
|
303.2
|
|
792.4
|
|
447.3
|
|
1,657.1
|
|
Non-operating income (expense)
|
|
(15.8
|
)
|
(12.2
|
)
|
(32.6
|
)
|
(23.2
|
)
|
Income before income taxes
|
|
287.4
|
|
780.2
|
|
414.7
|
|
1,633.9
|
|
Income taxes
|
|
(111.4
|
)
|
(228.9
|
)
|
(159.4
|
)
|
(514.9
|
)
|
Net income attributable to non-controlling interest
|
|
(1.0
|
)
|
(2.8
|
)
|
(1.6
|
)
|
(5.5
|
)
|
Net income attributable to SCC
|
|
$
|
175.0
|
|
$
|
548.5
|
|
$
|
253.7
|
|
$
|
1,113.5
|
|
Mine copper production in
the second quarter of 2009 was higher than planned and increased 1.7% to 263.0
million pounds from 258.5 million pounds in the second quarter of 2008. The increase of 4.5 million pounds was mainly
due to 5.5 million pounds of higher production at the La Caridad mine and 7.1
million pounds at the Toquepala mine, both due to higher ore grades and
recoveries. These increases were
partially offset by 1.2 million pounds of lower production at the Cuajone mine
due to lower ore grade. In addition, the increase was reduced by zero
production at Cananea in the second quarter of 2009. Cananeas second quarter 2008 copper
production was 7.0 million pounds principally of SX/EW cathodes.
In the second quarter of
2009, molybdenum production increased 12.6% to 9.7 million pounds, from 8.6
million pounds in the second quarter of 2008.
This increase was due to 1.7 million pounds higher production from the
La Caridad mine due to higher ore grade and improved recovery and 0.2 million
of higher production from the Cuajone mine due to higher recovery, partially
offset by 0.8 million of lower production at the Toquepala mine, due to lower
ore grade and recovery.
Zinc mine production in
the second quarter of 2009 was 0.3% higher than second quarter of 2008. Charcas and Santa Barbara mines had higher
grades and Santa Eulalia and Charcas mines increased recovery. The refined zinc production was also 5.7%
higher for the same period as a result of the improved performance of the San
Luis Potosi zinc refinery.
Average Metal Prices
The table below outlines
the average metal prices during the three and six months ended June 30,
2009 and 2008:
37
Table of
Contents
|
|
Three Months Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
% Change
|
|
Copper ($ per pound LME)
|
|
$
|
2.12
|
|
$
|
3.83
|
|
(44.6
|
)
|
Copper ($ per pound COMEX)
|
|
$
|
2.15
|
|
$
|
3.80
|
|
(43.4
|
)
|
Molybdenum ($ per pound)
|
|
$
|
9.10
|
|
$
|
32.76
|
|
(72.2
|
)
|
Zinc ($ per pound LME)
|
|
$
|
0.67
|
|
$
|
0.96
|
|
(30.2
|
)
|
Silver ($ per ounce COMEX)
|
|
$
|
13.75
|
|
$
|
17.17
|
|
(19.9
|
)
|
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
% Change
|
|
Copper ($ per pound LME)
|
|
$
|
1.84
|
|
$
|
3.68
|
|
(50.0
|
)
|
Copper ($ per pound COMEX)
|
|
$
|
1.86
|
|
$
|
3.67
|
|
(49.3
|
)
|
Molybdenum ($ per pound)
|
|
$
|
8.93
|
|
$
|
32.89
|
|
(72.8
|
)
|
Zinc ($ per pound LME)
|
|
$
|
0.60
|
|
$
|
1.03
|
|
(41.7
|
)
|
Silver ($ per ounce COMEX)
|
|
$
|
13.19
|
|
$
|
17.39
|
|
(24.2
|
)
|
Net Sales.
Net sales in the second quarter and first six months of 2009 decreased
by $637.3 million and $1,514.5 million, respectively, compared with the same
periods of 2008. These 43.6% and 51.1%
decreases were due to lower metal sales prices partially offset by higher sales
volume of copper and our significant by-products as shown below.
The table below presents
information regarding the volume of our copper sales by segment for the three
and six months ended June 30, 2009 and 2008:
Copper Sales
(million pounds)
:
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Peruvian operations
|
|
194.2
|
|
171.7
|
|
381.1
|
|
352.5
|
|
Mexican open-pit
|
|
72.4
|
|
77.7
|
|
141.2
|
|
162.8
|
|
Mexican IMMSA unit
|
|
8.5
|
|
9.2
|
|
19.2
|
|
18.6
|
|
Other and intersegment elimination
|
|
(4.2
|
)
|
(4.7
|
)
|
(5.4
|
)
|
(9.2
|
)
|
Total
|
|
270.9
|
|
253.9
|
|
536.1
|
|
524.7
|
|
The table below presents
information regarding the volume of sales by segment of our significant
by-products for the three and six months ended June 30, 2009 and 2008:
By-product Sales
:
(in million pounds except
silver in
|
|
Three Months Ended
June 30
|
|
Six Months Ended
June
|
|
million
ounces)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Peruvian
operations
|
|
|
|
|
|
|
|
|
|
Molybdenum
contained in concentrates
|
|
4.2
|
|
4.8
|
|
7.9
|
|
9.8
|
|
Silver
|
|
1.0
|
|
0.9
|
|
2.0
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
open-pit
|
|
|
|
|
|
|
|
|
|
Molybdenum
contained in concentrates
|
|
5.5
|
|
3.8
|
|
10.7
|
|
7.7
|
|
Silver
|
|
1.9
|
|
0.9
|
|
3.1
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
IMMSA unit
|
|
|
|
|
|
|
|
|
|
Zinc
refined and in concentrate
|
|
55.0
|
|
54.8
|
|
113.1
|
|
105.9
|
|
Silver
|
|
2.7
|
|
2.3
|
|
5.7
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
Other
and intersegment elimination
|
|
|
|
|
|
|
|
|
|
Zinc
refined and in concentrate
|
|
0.2
|
|
(0.6
|
)
|
1.2
|
|
0.8
|
|
Silver
|
|
(1.3
|
)
|
(0.7
|
)
|
(2.5
|
)
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
by-product sales
|
|
|
|
|
|
|
|
|
|
Molybdenum
contained in concentrates
|
|
9.7
|
|
8.6
|
|
18.6
|
|
17.5
|
|
Zinc
refined and in concentrate
|
|
55.2
|
|
54.2
|
|
114.3
|
|
106.7
|
|
Silver
|
|
4.3
|
|
3.4
|
|
8.3
|
|
6.4
|
|
38
Table of
Contents
Operating Costs and
Expenses
Three months:
Operating costs and
expenses were $521.3 million in the second quarter of 2009 compared with $669.4
million in the second quarter of 2008.
The decrease of $148.1 million was principally due to lower cost of
sales (exclusive of depreciation, amortization and depletion).
Cost of sales (exclusive
of depreciation, amortization and depletion) for the second quarter 2009 was
$419.5 million compared with $550.5 million in the second quarter 2008. The decrease of $131.0 million was primarily
attributable to the following: 1) $57.7 million of lower workers participation
due to reduced earnings, 2) $55.5 million of lower fuel and power cost as a
result of the lower cost of coal and other fuels used as indices in the
calculation of our power tariff and 3) $23.0 million of lower production costs
principally related to labor and operating and repair material costs.
Six months:
Operating costs and
expenses were $999.2 million in the first six months of 2009 compared with
$1,303.9 million in the first six months of 2008. The decrease of $304.7 million was
principally due to lower cost of sales (exclusive of depreciation, amortization
and depletion).
Cost of sales (exclusive
of depreciation, amortization and depletion) for the first six months 2009 was
$794.9 million compared with $1,071.0 million in first six months of 2008. The decrease of $276.1 million was primarily
attributable to the following: 1) $116.7 million of lower workers participation
due to reduced in earnings, 2) $95.0 million of lower fuel and power cost, as a
result of the lower cost of coal and other fuels used as indices in the
calculation of our power tariff, 3) $46.4 million of lower production costs
principally related to labor and operating and repair material costs, and 4) a
decrease of $17.5 million in the Peruvian mining royalty charge.
Non-Operating Income
(Expense)
:
Interest expense in the second quarter and first six months of 2009 was 7.1%
and 9.6% lower than the comparable 2008 periods. These decreases were principally due to the
lower average debt level in the 2009 periods, which were 6.2% lower than in the
second quarter and first six months of 2008.
Interest income was $0.9
million and $5.2 million in the second quarter and first six months of 2009,
respectively, compared to $12.2 million and $29.6 million in the second quarter
and first six months of 2008. The
decrease was largely the result of lower cash balances. Lower earnings in the 2009 periods as a
result of reduced metal prices, significantly reduced our cash flow.
The gain on derivative
instruments was $6.8 million and $4.2 million in the second quarter and first
six months of 2009, respectively, compared with a (loss) gain of $(1.5) million
and $0.9 million in the second quarter and first six months of 2008. All these amounts were the result of US
dollar/Mexican Peso exchange rate derivative
39
Table of
Contents
activity. Please see details in Note G, Derivative
instruments, of our condensed consolidated financial statements.
Other income (expense)
was an expense of $1.5 million in the second quarter of 2009 compared to an
income of $2.9 million in the second quarter of 2008. This negative turn-around of $4.4 million was
principally the result of a few events, including (1) in the second
quarter of 2008, we received a tax refund from the Peruvian government of $4.0
million, (2) a gain on the sale of inactive properties at our Mexican
operations of $2.8 million in the second quarter of 2008 and (3) as a
result of lower earnings our Peruvian operations accrual for the contribution
to the regional development fund decreased by $2.9 million in the second
quarter of 2009.
Other income (expense)
was income of $1.9 million in the first six months of 2009 compared to an
expense of $1.8 million in the first six months of 2008. This positive turn-around of $3.7 million was
principally the result of a few events, including (1) in the first six
months of 2009, asset disposal write-off decreased by $2.1 million, (2) as
a result of lower earnings our Peruvian operations accrual for the contribution
to the regional development fund decreased by $5.6 million in the first six
months of 2009, and (3) a gain on the sale of inactive properties from our
Mexican operations of $4.4 million in the first six months of 2008.
Income taxes
: The income tax provision for the first
six months of 2009 and 2008 was $159.4 million and $514.9 million,
respectively. These provisions include
income taxes for Peru, Mexico and the United States. The provision for income taxes was based on
our effective tax rate of 38.4% for the first six months of 2009 as compared to
31.5% during the same period in 2008.
The increase in the effective tax rate for the first six months of 2009
is largely due to the incremental U.S. tax provided on dividend distributions
made by our Mexican subsidiary to the U.S. parent. This dividend distribution is taxable in the
U.S. at the difference between the 35% U.S. statutory rate and the foreign tax
credit rate of 28.5%.
As of March 27,
2009, Grupo Mexico, through its wholly-owned subsidiary AMC, became the
beneficial owner of 80% of SCCs common stock.
As a result of this new level of ownership, SCC will be included in AMCs
consolidated US federal income tax return commencing from March 27,
2009. AMC is a holding company and most
of the business assets and operations of AMC belong to Asarco and its
subsidiaries. In accordance with
paragraph 40 of FAS No. 109, it is expected that current and deferred
taxes will be allocated to members of the AMC group as if each were a separate
taxpayer. We have initiated discussions
with AMC to put in place a tax sharing agreement in order to establish this
allocation as well as other procedures and policies necessary for an equitable
management of US federal income tax matters.
At present, SCC is providing current and deferred 2009 US income taxes,
as if it were still a separate filer. It
is believed that taxes provided on this basis will not be materially different
from the provision necessary once we have reached a tax sharing agreement with
AMC.
Segment Results
Analysis
Peruvian Open Pit
Operations
The following table sets
forth net sales, operating cost and expenses and operating income for our
Peruvian open pit operations segment, for the three and six months ended June 30,
2009 and 2008 (in millions):
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net
sales
|
|
$
|
475.3
|
|
$
|
864.3
|
|
$
|
822.1
|
|
$
|
1,756.8
|
|
Operating
costs and expenses
|
|
(259.5
|
)
|
(317.0
|
)
|
(499.2
|
)
|
(637.6
|
)
|
Operating
income
|
|
$
|
215.8
|
|
$
|
547.3
|
|
$
|
322.9
|
|
$
|
1,119.2
|
|
40
Table of
Contents
Three months
:
Net sales in the second
quarter of 2009 decreased by $389.0 million, to $475.3 million from $864.3
million in the second quarter of 2008.
This decrease in net sales was principally the result of lower metal
prices. The increased volume of copper
sales, 22.5 million pounds in the second quarter of 2009, helped to reduce the
sales price decrease.
Operating costs and
expenses in the second quarter of 2009 decreased by $57.5 million to $259.5
million from $317.0 million in the second quarter of 2008, principally due to
$56.1 million of lower cost of sales (exclusive of depreciation, amortization
and depletion).
Cost of sales (exclusive
of depreciation, amortization and depletion) for the second quarter 2009 was
$217.3 million compared to $273.4 million in the second quarter 2008. The principal elements of cost of sales
causing this decrease, include the following, 1) $31.9 million of lower fuel
and power cost due to a decrease in market prices, 2) $48.0 million of lower
workers participation due to lower earnings, 3) partially offset by $19.1
million of higher concentrate purchases from third parties.
Six months
:
Net sales in the first six
months of 2009 decreased by $934.7 million, to $822.1 million from $1,756.8
million in the first six months of 2008.
This decrease in net sales was principally the result of lower metal
prices partially offset by higher volume of copper, molybdenum and silver.
Operating costs and
expenses in the first six months of 2009 decreased by $138.4 million to $499.2
million from $637.6 million in the first six months of 2008, principally due to
$135.4 million of lower cost of sales (exclusive of depreciation, amortization and
depletion).
Cost of sales (exclusive
of depreciation, amortization and depletion) for the first six months of 2009
was $416.4 million compared to $551.8 million in the first six months of
2008. The principal elements of cost of
sales, causing this reduction, include the following, 1) $54.2 million of lower
fuel and power cost due a decrease in market prices, 2) $19.7 million of lower
mining royalties, 3) $86.3 million of lower workers participation both due to
lower earnings, 4) partially offset by $29.1 million of higher concentrate
purchases from third parties.
Mexican Open Pit
Operations
The following table sets
forth net sales, operating cost and expenses and operating income for our
Mexican open pit operations segment for the three and six months ended June 30,
2009 and 2008 (in millions):
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net
sales
|
|
$
|
262.4
|
|
$
|
467.7
|
|
$
|
435.5
|
|
$
|
937.8
|
|
Operating
costs and expenses
|
|
(202.1
|
)
|
(258.6
|
)
|
(350.2
|
)
|
(498.0
|
)
|
Operating
income
|
|
$
|
60.3
|
|
$
|
209.1
|
|
$
|
85.3
|
|
$
|
439.8
|
|
Three months
:
Net sales in the second
quarter of 2009 decreased by $205.3 million, to $262.4 million from $467.7
million in the second quarter of 2008.
The decrease was due to lower metal prices and to a lesser degree to a
reduction in pounds of copper sold of 5.3 million.
41
Table of
Contents
Operating costs and
expenses in the second quarter of 2009 decreased by $56.5 million to $202.1
million from $258.6 million in the second quarter of 2008, principally due to
lower cost of sales. Cost of sales
(exclusive of depreciation, amortization and depletion) decreased $47.0 million
to $153.6 million in the second quarter of 2009 from $200.6 million in the
second quarter of 2008. The decrease in
cost of sales was mainly due to: 1) lower production cost of $27.9 million due
to lower fuel and power costs and the strike at the Cananea mine, 2) $10.8
million of labor termination cost in 2008, and 3) $10.6 million of lower
continuing costs at the Cananea mine related to the strike.
Six months
:
Net sales in the first
six months of 2009 decreased by $502.3 million, to $435.5 million from $937.8
million in the first six months of 2008.
The decrease was due to lower metal prices and lower copper sales
volume.
Operating costs and
expenses in the first six months of 2009 decreased by $147.8 million to $350.2
million from $498.0 million in the first six months of 2008, principally due to
lower cost of sales. Cost of sales
(exclusive of depreciation, amortization and depletion) decreased $131.8
million to $252.2 million from $384.0 million in the first six months of
2008. The decrease in cost of sales was
mainly due to: 1) lower production cost of $51.2 million due to lower fuel
and power costs and the strike at the Cananea mine, 2) $23.8 million
decrease in workers participation due to lower earnings, 3) $12.9 million
of lower metal purchases from third parties, 4) $10.8 million of labor
termination cost in 2008, and 5) $28.4 million of lower continuing cost at the
Cananea mine related to the strike.
Mexican
Underground Operations (IMMSA)
The following table sets
forth net sales, operating cost and expenses and operating income for our IMMSA
segment, for the three and six month periods ended June 30, 2009 and 2008
(in millions):
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net
sales
|
|
$
|
120.9
|
|
$
|
163.1
|
|
$
|
238.4
|
|
$
|
325.2
|
|
Operating
costs and expenses
|
|
(86.8
|
)
|
(125.7
|
)
|
(196.8
|
)
|
(227.6
|
)
|
Operating
income
|
|
$
|
34.1
|
|
$
|
37.4
|
|
$
|
41.6
|
|
$
|
97.6
|
|
Three months
:
Net sales in the second
quarter of 2009 decreased by $42.2 million, to $120.9 million from $163.1
million in the second quarter of 2008.
This decrease in net sales was principally due to lower metal prices
partially offset by higher zinc and silver sales volume. These volume increases were mainly due to
higher ore grades and recoveries at the Santa Eulalia, Santa Barbara and
Charcas mines.
Operating costs and
expenses in the second quarter of 2009 decreased by $38.9 million to $86.8
million from $125.7 million in the second quarter of 2008. This decrease was principally due to lower
cost of sales (exclusive of depreciation, amortization and depletion). Cost of sales (exclusive of depreciation,
amortization and depletion) decreased $33.6 million to $77.0 million from
$110.6 million in 2008. The decrease in
cost of sales was mainly due to 1) $16.7 million of lower fuel and power costs
and the strikes at the San Martin and Taxco mines, 2) $5.1 million of lower
metal purchases from third parties, 3) $1.5 million of lower workers
participation due to lower earnings, and 4) $9.4 million of increased currency
translation gain due to the appreciation of the Mexican Peso.
42
Table of
Contents
Six months
:
Net sales in the first
six months of 2009 decreased by $86.8 million, to $238.4 million from $325.2
million in the first six months of 2008.
This decrease in net sales was principally due to lower metal prices
partially offset by higher copper, zinc and silver sales volume. These volume increases were mainly due to
higher ore grades and recoveries at the Santa Eulalia, Santa Barbara and
Charcas mines.
Operating costs and
expenses in the first six months of 2009 decreased by $30.8 million to $196.8
million from $227.6 million in the first six months of 2008. This decrease was principally due to lower
cost of sales (exclusive of depreciation, amortization and depletion). Cost of sales (exclusive of depreciation,
amortization and depletion) decreased $19.8 million to $176.4 million from
$196.2 million in 2008. The decrease in
cost of sales was mainly due to 1) $29.7 million of lower fuel, power, labor
and other production costs and 2) $5.4 million of lower workers participation,
partially offset by $14.9 million of increased volume cost.
Intersegment Eliminations
and Adjustments
The net sales, operating
costs and expenses and operating income displayed above will not be directly
equal to amounts in our condensed consolidated statement of earnings because
the adjustments of intersegment operating revenues and expenses must be taken
into account. Please see Note M of the
condensed consolidated financial statements.
CASH FLOW
Three months
:
The following table shows
the cash flow for the three months ended June 30, 2009 and 2008 (in
millions):
|
|
Three Months Ended
June 30
|
|
|
|
2009
|
|
2008
|
|
Variance
|
|
Net
cash provided from operating activities
|
|
$
|
107.7
|
|
$
|
408.8
|
|
$
|
(301.1
|
)
|
Net
cash used for investing activities
|
|
$
|
(120.0
|
)
|
$
|
(114.6
|
)
|
$
|
(5.4
|
)
|
Net
cash used for financing activities
|
|
$
|
(42.9
|
)
|
$
|
(658.5
|
)
|
$
|
615.6
|
|
Net cash provided from
operating activities:
The decrease of $301.1
million in the second quarter 2009 cash provided from operating activities from
second quarter 2008 was due to the reduction of $373.5 million in net income
attributable to SCC and a decrease of $19.6 million on adjustments to reconcile
earnings to cash, partially offset by $92.0 million for a decrease in working
capital needs. The reduction in net
income was primarily due to lower metal prices.
The second quarter 2009
and 2008 decrease from working capital includes (in millions):
|
|
Three Months Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
Variance
|
|
Accounts receivable
|
|
$
|
(92.2
|
)
|
$
|
45.0
|
|
$
|
(137.2
|
)
|
Inventories
|
|
(7.2
|
)
|
(36.2
|
)
|
29.0
|
|
Accounts payable and accrued liabilities
|
|
(100.7
|
)
|
(222.6
|
)
|
121.9
|
|
Other operating assets and liabilities
|
|
29.1
|
|
(49.2
|
)
|
78.3
|
|
Total
|
|
$
|
(171.0
|
)
|
$
|
(263.0
|
)
|
$
|
92.0
|
|
43
Table of Contents
In the second quarter
2009, net income attributable to SCC was $175.0 million. Significant items deducted from, or added to,
to arrive to operating cash flow included, depreciation, amortization and
depletion of $78.7 million and $34.5 million of deferred income tax provision,
which increased operating cash flow, and $23.6 million of unrealized gain on
derivative instruments, which decreased operating cash flow.
In addition, in the
second quarter of 2009 an increase in working capital decreased operating cash
flow by $171.0 million. The increase in
accounts receivable value was due to the increased metal prices for most of our
products. During the second quarter of
2009, the LME and COMEX copper price increased 26.2% and 22.8%, respectively,
and molybdenum, zinc and silver increased 30.5%, 19.6% and 4.6%,
respectively. The decrease in accounts
payable and accrued liabilities was mainly due to 1) a $39.5 million decrease
in workers participation, principally due to the payment of the 2008 provision
by our Mexican operations, 2) a $34.5 million decrease in accounts payable and
3) $19.2 million of lower income tax payable as a result of required tax
payments in the second quarter 2009 and lower earnings.
In the second quarter 2008, net income attributable to
SCC was $548.5 million, approximately 134.2% of the net operating cash
flow. Significant items deducted from,
or added to arrive to operating cash flow included, depreciation amortization
and depletion of $83.2 million and $23.3 million of deferred income tax, which
positively increased operating cash flow.
In addition, in the second quarter of 2008 an increase
in working capital decreased operating cash flow by $263.0 million. The major component of this was the reduction
of $222.6 million in accounts payable and accrued liabilities. This reduction includes payments of workers
participation of $290.0 million and income taxes of $548.3 million.
Net cash used for
investing activities:
Net cash used for
investing activities in the second quarter of 2009 included $140.5 million for
capital expenditures. The capital
expenditures included $114.1 million of investments at our Peruvian operations,
$59.7 million for the Tia Maria project, $20.8 million for the Toquepala
expansion project, $2.5 million for the tailings disposal project, $4.1 million
for the Cuajone expansion project, and $27.0 million for various other
replacement expenditures. In addition,
we spent $26.4 million for replacement assets at our Mexican operations, $16.5
million of which was at our Mexican open pit operations, $9.8 million at our
IMMSA unit and $0.1 million for an administrative office in Mexico City. The second quarter 2009 cash from investing
activities also includes proceeds of $18.7 million from the redemption of
short-term investments.
Net cash used for investing activities in the second
quarter of 2008 was $114.6 million and included $130.9 million for capital
expenditures. The capital expenditures
included $63.1 million of investments at our Peruvian operations and $67.8
million for replacement assets at our Mexican operations. The second quarter 2008 cash from investing
activities also includes $11.2 million from the redemption of short-term
investments.
Net cash used for
financing activities:
Net
cash used for financing activities in the second quarter of 2009 was $42.9
million, compared with $658.5 million in the second quarter of 2008. The second quarter of 2009 includes a
dividend distribution of $38.3 million, compared with a distribution of $500.6
million in the second quarter of 2008. In addition, the second quarter of 2008
had a debt repayment of $155.0 million compared with a debt repayment of $5.0
million in the second quarter of 2009.
44
Table of Contents
Six
months
:
The following table shows
the cash flow for the six months ended June 30, 2009 and 2008 (in
millions):
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
Variance
|
|
Net
cash (used for) provided from operating activities
|
|
$
|
(86.6
|
)
|
$
|
910.0
|
|
$
|
(996.6
|
)
|
Net
cash used for investing activities
|
|
$
|
(170.7
|
)
|
$
|
(158.0
|
)
|
$
|
(12.7
|
)
|
Net
cash used for financing activities
|
|
$
|
(213.9
|
)
|
$
|
(1,073.9
|
)
|
$
|
859.9
|
|
Net cash (used for) provided
from operating activities:
The decrease of $996.6
million in the first six months of 2009 cash provided from operating
activities, compared with the first six months of 2008, was due to the
reduction of $859.8 million in net income attributable to SCC, a decrease of
$4.8 million on adjustments to reconcile earnings to cash and $132.0 million of
increased working capital needs. The
reduction in net income was primarily due to lower metal prices.
The first six months of
2009 and 2008 decrease from working capital includes (in millions):
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
Variance
|
|
Accounts receivable
|
|
$
|
(199.5
|
)
|
$
|
(85.8
|
)
|
$
|
(113.8
|
)
|
Inventories
|
|
(4.9
|
)
|
(43.3
|
)
|
38.4
|
|
Accounts payable and accrued liabilities
|
|
(351.2
|
)
|
(200.7
|
)
|
(150.4
|
)
|
Other operating assets and liabilities
|
|
41.0
|
|
(52.7
|
)
|
93.8
|
|
Total
|
|
$
|
(514.6
|
)
|
$
|
(382.5
|
)
|
$
|
(132.0
|
)
|
In the first six months
of 2009, net income attributable to SCC was $253.7 million. Significant items deducted from, or added to
arrive to operating cash flow included, depreciation, amortization and
depletion of $156.9 million and a $53.4 million deferred income tax provision,
which increased operating cash flow, and $48.7 million of unrealized gain on
derivative instruments, which decreased operating cash cost.
In addition, an increase
in working capital decreased operating cash flow by $514.6 million. The increase in accounts receivable value was
due to the higher metal prices for most of our products. The LME copper price increased 50.0% during
the period and molybdenum, silver and zinc increased 72.8%, 24.2% and 41.7%,
respectively. The decrease in accounts
payable and accrued liabilities was mainly due to a $163.2 million decrease in
workers participation, due to the payment of the 2008 provision and lower
accrual in the period, and $134.3 million decrease in accounts payable.
In the first six months of 2008, net income
attributable to SCC was $1,113.5 million, approximately 122.4% of the net
operating cash flow. Significant items
deducted from, or added to arrive to operating cash flow included, depreciation
amortization and depletion of $164.4 million and $22.0 million of loss in
currency translation, which positively increased operating cash flow, and $14.7
million of deferred income tax which lowered our cash flow.
In addition, an increase in working capital decreased
operating cash flow by $382.5 million.
The increase in accounts receivable value was mainly due to higher metal
prices. The decrease in accounts payable
and accrued liabilities was mainly due to workers participation and income tax
payments.
45
Table of Contents
Net
cash used for investing activities:
Net
cash used for investing activities in the first six months of 2009 included
$203.5 million for capital expenditures.
The capital expenditures included $138.2 million of investments at our
Peruvian operations, $69.6 million for the Tia Maria project, $15.4 million for
the Toquepala expansion project, $3.4 million for the tailings disposal
project, $4.8 million for the Cuajone expansion and $45.0 million for various
other replacement expenditures. In
addition, we spent $65.3 million for replacement assets at our Mexican
operations, $42.1 million of which was at our Mexican open pit operations,
$14.6 million at our IMMSA unit and $8.6 million for an administrative office
in Mexico City. For the first six months
of 2009 cash from investing activities also includes proceeds of $30.8 million
from the redemption of short-term investments.
Net
cash used for investing activities in the first six months of 2008 was $158.0
million and included $180.8 million for capital expenditures. The capital expenditures included $81.4
million of investments at our Peruvian operations and $99.4 million for
replacement assets at our Mexican operations, $78.0 million at our Mexican open
pit operations, $19.3 million at our IMMSA unit and $2.1 million at our Mexican
administrative office.
Net
cash used for financing activities:
Net
cash used for financing activities in the first six months of 2009 was $213.9
million, compared with $1,073.9 million in the first six months of 2008. The first six months of 2009 include a
dividend distribution of $137.8 million, compared with a distribution of $912.9
million in the first six months of 2008.
Also, the first six months of 2009 include the purchase of 4.9 million
shares of our common stock at a cost of $71.6 million. In addition, the first six months of 2008 had
a debt repayment of $155.0 million, compared with a debt repayment of $5.0
million in the first six months of 2009.
LIQUIDITY
AND CAPITAL RESOURCES
On June 2, 2009, we
paid a quarterly dividend of 4.5 cents per share, totaling $38.3 million. On July 15, 2009, our Board of Directors
authorized a dividend of 10 cents per share to be paid on September 2,
2009 to SCC shareholders of record at the close of business on August 6,
2009.
In the first
quarter of 2009, pursuant to our $500 million share repurchase program we
purchased 4.9 million shares of our common stock at a cost of $71.6
million. These shares will be available
for general corporate purposes. Also,
during the same period, Grupo Mexico, through its wholly owned subsidiary AMC,
purchased 4.9 million of our common shares.
With these acquisitions Grupo Mexico directly or indirectly owns 80% of
our outstanding shares. Please see Note
E, Income taxes, of our condensed consolidated financial statements regarding
disclosure about the US federal income tax implications of this increase in
ownership.
We
expect that we will meet our cash requirements for 2009 and beyond from cash on
hand, internally generated funds and from additional external financing if
required.
Our
ratio of debt to total capitalization was 27.2% at June 30, 2009, compared
with 27.5% at December 31, 2008.
NON-GAAP INFORMATION
RECONCILIATION
Reconciliation of
operating cash cost to GAAP cost of sales in millions of dollars and cents per
pound.
46
Table of
Contents
|
|
Three Months Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
$ million
|
|
¢ per pound
|
|
$ million
|
|
¢ per pound
|
|
Cost of sales (exclusive of depreciation,
amortization and depletion) GAAP
|
|
$
|
419.4
|
|
154.2
|
|
$
|
550.4
|
|
207.8
|
|
Add:
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
18.1
|
|
6.7
|
|
26.7
|
|
10.1
|
|
Treatment and refining charges
|
|
9.0
|
|
3.3
|
|
8.8
|
|
3.3
|
|
By-products revenue (1)
|
|
(270.3
|
)
|
(99.4
|
)
|
(474.4
|
)
|
(179.1
|
)
|
Less:
|
|
|
|
|
|
|
|
|
|
Workers participation
|
|
(16.5
|
)
|
(6.1
|
)
|
(74.2
|
)
|
(28.0
|
)
|
Royalty charge and other
|
|
(34.1
|
)
|
(12.5
|
)
|
(52.5
|
)
|
(19.8
|
)
|
Inventory change
|
|
12.8
|
|
4.7
|
|
29.7
|
|
11.2
|
|
Operating cash cost
|
|
$
|
138.4
|
|
50.9
|
|
$
|
14.5
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
Add by-product revenue
|
|
270.3
|
|
99.4
|
|
474.4
|
|
179.1
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash cost, without by-product revenue
|
|
$
|
408.7
|
|
150.3
|
|
$
|
488.9
|
|
184.6
|
|
|
|
|
|
|
|
|
|
|
|
Total pounds of copper produced and purchased (in
millions)
|
|
271.9
|
|
|
|
264.9
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
$ million
|
|
¢ per pound
|
|
$ million
|
|
¢ per pound
|
|
Cost of sales (exclusive of depreciation,
amortization and depletion) GAAP
|
|
$
|
794.9
|
|
145.5
|
|
$
|
1,071.0
|
|
192.5
|
|
Add:
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
36.9
|
|
6.8
|
|
51.4
|
|
9.2
|
|
Treatment and refining charges
|
|
14.9
|
|
2.7
|
|
14.5
|
|
2.6
|
|
By-products revenue (1)
|
|
(478.3
|
)
|
(87.5
|
)
|
(949.2
|
)
|
(170.6
|
)
|
Less:
|
|
|
|
|
|
|
|
|
|
Workers participation
|
|
(26.7
|
)
|
(4.9
|
)
|
(143.4
|
)
|
(25.8
|
)
|
Royalty charge and other
|
|
(44.6
|
)
|
(8.2
|
)
|
(106.9
|
)
|
(19.2
|
)
|
Inventory change
|
|
18.1
|
|
3.3
|
|
40.4
|
|
7.3
|
|
Operating cash cost
|
|
$
|
315.2
|
|
57.7
|
|
$
|
(22.2
|
)
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
Add by-product revenue
|
|
478.3
|
|
87.5
|
|
949.2
|
|
170.6
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash cost, without by-product revenue
|
|
$
|
793.5
|
|
145.2
|
|
$
|
927.0
|
|
166.6
|
|
|
|
|
|
|
|
|
|
|
|
Total pounds of copper produced and purchased (in
millions)
|
|
546.5
|
|
|
|
556.3
|
|
|
|
(1)
Includes net by-product sales revenue and
premiums on sales of refined products.
Impact of New
Accounting Standards
Please see Note N to our
condensed consolidated financial statements.
47
Table of Contents
Item 3. Quantitative and
Qualitative Disclosure about Market Risk
A portion of our
outstanding debt bears interest at variable rates and accordingly is sensitive
to changes in interest rates. Interest
rate changes would also result in gains or losses in the market value of our
fixed rate debt portfolio due to differences in market interest rates and the
rates at the inception of the debt agreements.
Based upon our indebtedness at June 30, 2009, a change in interest
rates of one percent (or 100 basis points) would impact net income and cash
flows by $0.5 million annually.
We are also exposed to
market risk associated with changes in foreign currency exchange rates as
certain costs incurred are in currencies other than our functional
currency. To manage the volatility
related to the risk, we may enter into forward exchange contracts, currency
swaps or other currency hedging arrangements.
Inflation and Devaluation
of the Peruvian Nuevo Sol and the Mexican Peso:
Our functional currency
is the U.S. dollar. Portions of our
operating costs are denominated in Peruvian Nuevos Soles and Mexican
Pesos. Since our revenues are primarily
denominated in U.S. dollars, when inflation/deflation in Peru or Mexico is not
offset by a change in the exchange rate of the Nuevo Sol or the Peso,
respectively, to the dollar, our financial position, results of operations and
cash flows could be adversely affected to the extent that the
inflation/devaluation effects are passed on to us by our suppliers or reflected
in our wage adjustments. In addition,
the dollar value of our net monetary assets denominated in Nuevos Soles or
Pesos can be affected by devaluation of the Nuevo Sol or the Peso, resulting in
a remeasurement loss in our financial statements. Recent inflation and devaluation rates are
provided in the table below for the three and six months ended June 30,
2009 and 2008:
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Peru:
|
|
|
|
|
|
|
|
|
|
Peruvian inflation rate
|
|
(0.4
|
)%
|
1.3
|
%
|
0.0
|
%
|
3.5
|
%
|
Nuevo Sol/dollar devaluation/(appreciation) rate
|
|
(4.8
|
)%
|
8.1
|
%
|
(4.2
|
)%
|
(1.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
Mexico:
|
|
|
|
|
|
|
|
|
|
Mexican inflation rate
|
|
0.2
|
%
|
0.5
|
%
|
1.3
|
%
|
2.0
|
%
|
Peso / dollar devaluation/(appreciation) rate
|
|
(7.9
|
)%
|
(3.9
|
)%
|
(2.5
|
)%
|
(5.4
|
)%
|
Change in monetary
position:
Assuming an exchange rate
variance of 10% at June 30, 2009 we estimate our net monetary position in
Peruvian Nuevo Sol and Mexican Peso would increase (decrease) our net earnings
as follows:
Variance
|
|
Effect in net earnings
|
|
|
|
($ in millions)
|
|
Appreciation
of 10% in exchange rate dollar vs. Nuevo Sol
|
|
|
23.8
|
|
|
Devaluation
of 10% in exchange rate dollar vs. Nuevo Sol
|
|
|
(31.3
|
)
|
|
Appreciation
of 10% in exchange rate dollar vs. Mexican Peso
|
|
|
21.9
|
|
|
Devaluation
of 10% in exchange rate dollar vs. Mexican Peso
|
|
|
(17.9
|
)
|
|
Metal price sensitivity:
We are subject to market
risks arising from the volatility of copper and other metal prices. Assuming that expected metal production and
sales are achieved, that tax rates are unchanged, and giving no effects to
potential hedging programs, metal price sensitivity factors would indicate the
following change in estimated 2009 net income attributable to SCC resulting
from metal price changes:
48
Table
of Contents
|
|
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 income attributable to SCC (in millions)
|
|
$
|
6.1
|
|
$
|
23.0
|
|
$
|
1.3
|
|
$
|
8.5
|
|
Provisionally priced
sales:
At June 30, 2009, we
have recorded provisionally priced sales of 25.4 million pounds of copper, at
an average forward price of $2.25 per pound.
Also we have recorded provisionally priced sales of 13.9 million pounds
of molybdenum at the June 30, 2009 market price of $10.60 per pound. These sales are subject to final pricing
based on the average monthly LME or COMEX copper prices and Dealer Oxide
molybdenum prices in the future month of settlement. See Note F to our condensed consolidated
financial statements.
Derivative instruments:
We occasionally use
derivative instruments to manage our exposure to market risk from changes in
commodity prices, interest rate and exchange rate risk exposures and to enhance
return on assets. We generally do not enter
into derivative contracts unless we anticipate a future activity that is likely
to occur that will result in exposing us to market risk.
Copper
derivatives:
From
time to time we have entered into derivative contracts to protect a fixed
copper, or zinc price for a portion of our metal sales.
In
the first six months of 2008, we entered into copper collar and swap contracts
to protect a portion of our 2008 sales of copper production. As a result, we recorded a gain of $10.6
million in the second quarter and first six months of 2008. Related to the fair value of these copper
derivative contracts we recorded a loss of $2.0 million at the end of June 2008. These gains and losses were recorded in net
sales in the condensed consolidated statement of earnings.
We
did not hold any copper or zinc derivative contracts in the first six months of
2009.
Exchange rate
derivatives, U.S. dollar/Mexican Peso contracts:
Because more than 85% of
our sales collections in Mexico are in US dollars and many of our costs are in
Mexican Pesos, we entered into zero-cost derivative contracts with the purpose
of protecting, within a range, against an appreciation of the Mexican Peso to
the US dollar.
At June 30, 2009 we
held one exchange rate derivative contract with the following conditions: If
the exchange rate is less than or equal to the strike price, we sell US dollars
in an amount equal to the underlying amount for the expiration period at the
strike price. The difference between the
strike price and the market exchange rate is considered a gain to us. The total accumulated gain over the life of
the contract cannot exceed 500 cents per dollar transacted. If the exchange rate is above the strike
price, we sell dollars in an amount equal to two times the underlying amount
for the expiration period at the strike price and the loss does not reduce the
accumulated gain.
49
Table of Contents
Notional
Amount (1)
(millions)
|
|
Underlying amount
(millions)
|
|
Expiration
Period
|
|
Due Date
|
|
Strike Price
(Mexican Pesos/
U.S. Dollars)
|
|
$
|
20.0
|
|
$
|
2.5
|
|
Weekly
|
|
July 3, 2009
through August 21, 2009
|
|
10.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The notional
amount includes a group of weekly transactions that have the same strike price.
At June 30, 2009,
the fair value of this exchange rate derivative contract is a loss of $8.1
million. This loss was recorded in 2008
earnings. In 2009, the fair value of the
exchange derivative contracts improved and gains were recorded in the 2009
earnings, as noted below.
Related to the exchange
rate derivative contracts we recorded gains of $6.8 million and $4.2 million in
the second quarter and first six months of 2009, compared with a loss of $1.5
million and a gain of $0.9 million, respectively, in the second quarter and
first six months of 2008. These gains
and losses were recorded as gain (loss) on derivative instruments in the
condensed consolidated statement of earnings and in other accounts receivable /
payable in the condensed consolidated balance sheet.
Short-term
Investment:
The
balance of short-term investments was as follows (in millions):
|
|
As of June 30,
|
|
As of December 31,
|
|
Investment
|
|
2009
|
|
2008
|
|
Short-term investment in securities issued by
public companies with a weighted average interest rate of 0.71% at
June 30, 2009 and 1.85% at December 31, 2008.
|
|
$
|
33.9
|
|
$
|
62.4
|
|
|
|
|
|
|
|
|
|
Short-term investments in
securities consist of available for sale securities issued by public
companies. Each security is independent
of the others.
Related to these
investments in the second quarter and first six months of 2009, we earned
interest of $0.2 million and $0.6 million, respectively, compared with $1.0
million and $2.6 million in the same periods of 2008, which were recorded as
interest income in the condensed consolidated statement of earnings. In addition, in the second quarter and first
six months of 2009, we redeemed $18.7 million and $30.8 million, respectively,
of these investments, compared with $11.2 million and $18.5 million in the same
periods of 2008.
In the second quarter and
first six months of 2009 the Company recorded gains of $1.6 million and $2.3
million, respectively, compared with losses of $0.2 million and $1.9 million in
the second quarter and first six months of 2008, respectively. These gains/losses were recorded as other
income (expense) in the condensed consolidated statement of earnings.
Cautionary
Statement
:
Forward-looking
statements in this report and in other Company statements include statements
regarding expected commencement dates of mining or metal production operations,
projected quantities of future metal production, anticipated production rates,
operating efficiencies, costs and expenditures as well as projected demand or
supply for the Companys products.
Actual results could differ materially depending upon factors including
the risks and uncertainties relating to general U.S. and international economic
and political conditions, the cyclical and volatile prices of copper, other
commodities and supplies, including fuel and electricity, availability of
50
Table of
Contents
materials, insurance
coverage, equipment, required permits or approvals and financing, the
occurrence of unusual weather or operating conditions, lower than expected ore
grades, water and geological problems, the failure of equipment or processes to
operate in accordance with specifications, failure to obtain financial
assurance to meet closure and remediation obligations, labor relations,
litigation and environmental risks as well as political and economic risk
associated with foreign operations.
Results of operations are directly affected by metal prices on commodity
exchanges that can be volatile.
51
Table of
Contents
Item 4. Controls and Procedures
EVALUATION OF
DISCLOSURE CONTROLS AND PROCEDURES
As of June 30, 2009,
the Company conducted an evaluation under the supervision and with the
participation of the Companys Disclosure Committee and the Companys
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness and the design and operation of the Companys disclosure
controls and procedures. Based on that
evaluation, the Chief Executive Officer and the Chief Financial Officer have
concluded that the Companys disclosure controls and procedures are effective
as of June 30, 2009, to ensure that information required to be disclosed
in reports filed or submitted under the Exchange Act is:
1.
recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms, and
2.
accumulated and communicated to
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
CHANGES IN
INTERNAL CONTROLS OVER FINANCIAL REPORTING
There was no change in
the Companys internal controls over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934, as amended) that occurred during the quarter ended June 30,
2009 that has materially affected, or is reasonably likely to materially
affect, the Companys internal controls over financial reporting.
52
Table of
Contents
Report of Independent
Registered Public Accounting Firm
To the Board of Directors
and Shareholders of Southern Copper Corporation:
We have reviewed the
accompanying condensed consolidated interim balance sheet of Southern Copper
Corporation and its subsidiaries as of June 30, 2009, and the related
condensed consolidated interim statements of earnings and cash flows for the
three- and six-month periods then ended.
These interim financial statements are the responsibility of the Companys
management.
We conducted our review
in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of
interim financial information consists principally of applying analytical
procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially
less in scope than an audit conducted in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we
are not aware of any material modifications that should be made to the
accompanying condensed consolidated interim financial statements for them to be
in conformity with accounting principles generally accepted in the United
States of America.
The accompanying
condensed consolidated financial information as of December 31, 2008, and
for the three- and six-month periods ended June 30, 2008, were not audited
or reviewed by us and, accordingly, we do not express an opinion or any other
form of assurance on them.
Galaz, Yamazaki, Ruiz
Urquiza S.C.
Member of Deloitte Touche
Tohmatsu
C.P.C. Arturo Vargas
Arellano
Mexico City, Mexico
August 3, 2009
53
Table of
Contents
PART II OTHER
INFORMATION
Item 1. Legal
Proceedings
The information provided
in Note L to the condensed consolidated financial statements contained in Part I
of this Form 10-Q, is incorporated herein by reference.
Item 1A. Risk Factors:
The following risk
factors contain information that supplement those contained in our Annual
report on Form 10-K for the year ended December 31, 2008 filed with
the SEC on March 2, 2009.
General
Risks Relating to Our Business
We
may be adversely affected by labor disputes.
Related to the
Cananea strike, on January 7, 2009 the judge of the fifth district on
labor matters annulled a decision favorable to the Company. The Company filed a request for a review of
this ruling before an appellate federal court, which declared the strike legal
on March 19, 2009. On March 20,
2009 the Company notified the Mexican Federal Labor Court of the termination of
all the individual labor contracts of the Cananea workers, including the
collective bargaining agreement with the union.
This decision was based upon a finding by the Mexican mining authorities
that confirmed that the Cananea mine was in a force majeure situation; since it
was unable to operate due to severe damages caused by third parties. On April 14, 2009, the Mexican Federal
Labor Court issued a resolution approving the termination of Cananeas labor
relationships with individual and unionized employees, as well as the
termination of its collective bargaining agreement with its employees and with
the National Mining and Metal Workers Union.
This ruling has been challenged before federal tribunals and it is
expected that it will be resolved during the month of August.
The Company, the
state of Sonora and the Mexican federal government are working to restore the
necessary legal and safety conditions to resume operations at Cananea.
Due to the lengthy
work stoppage the Company has performed an impairment analysis on the
assets at the Cananea mine. The Company
continues to provide periodic maintenance to the assets and expect to begin
operations at this mine in the near future.
The Company has determined through its impairment analysis that no
impairment exists as of June 30, 2009.
Should estimates of future copper and molybdenum prices decrease
significantly, such determination could change.
Additionally, our Taxco
and San Martin mines have been on strike since July 2007. It is expected that operations at these mines
will remain suspended until these labor issues are resolved.
Litigation involving Asarco may adversely affect us.
Our direct and indirect
parent corporations, including AMC and Grupo Mexico, have from time to time
been named parties in various litigations involving Asarco.
On April 15, 2009,
the United States District Court for the Southern District of Texas entered a
judgment awarding Asarco certain shares of SCC, which represents approximately
30.6% of SCCs current outstanding common shares, and an amount equal to the
dividends paid on those shares of common stock of SCC since the date of their
acquisition by AMC, plus interest.
54
Table of
Contents
Grupo México announced
that AMC is appealing that judgment and enforcement of the judgment has been
stayed pending the appeal.
The Company cannot assure
you that these or future claims, if successful, will not have an adverse effect
on the Companys parent corporation or the Company. Any increase in the financial obligations of
the Companys parent corporation, as a result of matters related to Asarco or
otherwise could, among other effects, result in the Companys parent
corporation attempting to obtain increased dividends or other funding from the
Company.
AMCs
80% ownership of SCC could result in federal income tax contingencies.
In March 2009, Grupo
Mexico, through its wholly-owned subsidiary, AMC, became the beneficial owner
of 80% of SCCs common stock. As a
result of this new level of ownership, SCC will be included in AMCs
consolidated US federal income tax return commencing from March 2009. AMC is a holding company and most of the
business assets and operations of AMC belong to Asarco and its subsidiaries. The Company has initiated discussions with
AMC to put in place a tax sharing agreement, in order to allocate taxes within
the consolidated group and such other procedures necessary for an equitable
management of US federal income tax matters.
We cannot assure you that
the tax sharing agreement will not have any negative consequences in the
future. Additionally, members of a
consolidated group share with each other joint and several liabilities for
taxes reported by the entire group. This
means that the Internal Revenue Service has the right to collect the entire tax
liability of the group from any member of the group. Thus, SCC could become exposed to full
responsibility for the 2009 federal income taxes and future federal income
taxes of other members of the AMC group.
There could be limitations on the amount of capital carryforwards and
foreign tax credit carryforwards that the SCC group will be able to utilize in
the future. Also, there could be
limitations restricting the computation of allowable foreign tax credits for
SCC. We cannot assure you that future federal
income tax provisions and payments will not exceed what was previously
calculated prior to SCC joining the AMC group.
55
Table of
Contents
Item 6. Exhibits
Exhibit No.
|
|
Description of Exhibit
|
|
|
|
15.
|
|
Independent
Accountants Awareness Letter (filed herewith)
|
|
|
|
31.1
|
|
Certification Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
|
|
|
|
31.2
|
|
Certification Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
|
|
|
|
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.
|
|
|
|
101.INS
|
|
XBRL Instance Document (submitted electronically with this
report)
|
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension
Schema Document (submitted
electronically with this report)
|
|
|
|
101.CAL
|
|
XBRL Taxonomy
Calculation Linkbase Document (submitted
electronically with this report)
|
|
|
|
101.LAB
|
|
XBRL Taxonomy Label
Linkbase Document (submitted
electronically with this report)
|
|
|
|
101.PRE
|
|
XBRL Taxonomy
Presentation Linkbase Document (submitted
electronically with this report)
|
Attached as Exhibit 101
to this report are the following documents formatted in XBRL (Extensible
Business Reporting Language): (i) the Condensed Consolidated Statement of
Earnings for the three and six months ended June 30, 2009 and 2008; (ii) the
Condensed Consolidated Balance Sheet at June 30, 2009 and December 31,
2008; iii) the Condensed Consolidated Statement of Cash Flows for the three and
six months ended June 30, 2009 and 2008; and iv) the Notes to Condensed
Consolidated Financial Statements tagged as blocks of text. Users of this data
are advised pursuant to Rule 406T of Regulation S-T that this interactive
data file is deemed not filed or part of a registration statement or prospectus
for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not
filed for purposes of section 18 of the Securities Exchange Act of 1934, and
otherwise is not subject to liability under these sections.
56
Table of
Contents
PART II OTHER INFORMATION
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
SOUTHERN COPPER
CORPORATION
(Registrant)
|
|
|
|
|
|
/s/ Oscar
Gonzalez Rocha
|
|
Oscar Gonzalez
Rocha
|
|
President and
Chief Executive Officer
|
|
|
August 3, 2009
|
|
|
|
|
|
|
/s/ Genaro
Guerrero
|
|
Genaro Guerrero
|
|
Vice President,
Finance and Chief Financial Officer
|
|
|
August 3, 2009
|
|
57
Table of
Contents
SOUTHERN COPPER CORPORATION
List of Exhibits
Exhibit No.
|
|
Description of Exhibit
|
|
|
|
|
|
|
15.
|
|
Independent
Accountants Awareness Letter (filed herewith)
|
|
|
|
31.1
|
|
Certification Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
|
|
|
|
31.2
|
|
Certification Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
|
|
|
|
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.
|
|
|
|
101.INS
|
|
XBRL Instance Document (submitted electronically with this
report)
|
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension
Schema Document (submitted
electronically with this report)
|
|
|
|
101.CAL
|
|
XBRL Taxonomy
Calculation Linkbase Document (submitted
electronically with this report)
|
|
|
|
101.LAB
|
|
XBRL Taxonomy Label
Linkbase Document (submitted
electronically with this report)
|
|
|
|
101.PRE
|
|
XBRL Taxonomy
Presentation Linkbase Document (submitted
electronically with this report)
|
Attached as Exhibit 101
to this report are the following documents formatted in XBRL (Extensible
Business Reporting Language): (i) the Condensed Consolidated Statement of
Earnings for the three and six months ended June 30, 2009 and 2008; (ii) the
Condensed Consolidated Balance Sheet at June 30, 2009 and December 31,
2008; iii) the Condensed Consolidated Statement of Cash Flows for the three and
six months ended June 30, 2009 and 2008; and iv) the Notes to Condensed
Consolidated Financial Statements tagged as blocks of text. Users of this data
are advised pursuant to Rule 406T of Regulation S-T that this interactive
data file is deemed not filed or part of a registration statement or prospectus
for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not
filed for purposes of section 18 of the Securities Exchange Act of 1934, and
otherwise is not subject to liability under these sections.
58
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