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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2012
OR
(cid:134) 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
(State or other jurisdiction of incorporation or organization)
13-3849074
(I.R.S. Employer Identification No.)
1440 East Missouri Avenue Suite 160 Phoenix, AZ
(Address of principal executive offices)
85014
(Zip code)
Registrant’s telephone number, including area code: (602) 264-1375
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Common stock, par value $0.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Name of each exchange on which registered:
New York Stock Exchange
Lima Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ⌧
No (cid:134)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:134)
No ⌧
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 Yes ⌧ No (cid:134)
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 ⌧ No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:134)
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer ⌧
Non-accelerated filer (cid:134)
Accelerated filer (cid:134)
Smaller reporting company (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:134) No ⌧
At January 31, 2013, there were of record 845,550,550 shares of common stock, par value $0.01 per share, outstanding.
The aggregate market value of the shares of common stock (based upon the closing price at June 30, 2012 as reported on the New
York Stock Exchange - Composite Transactions) of Southern Copper Corporation held by non affiliates was approximately $5,091.0
million.
PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE:
Part III:
Part IV:
Proxy statement for 2013 Annual Meeting of Stockholders
Exhibit Index is on Page 161 through 163
Table of Contents
Southern Copper Corporation (“SCC”)
INDEX TO FORM 10-K
PART I.
Item 1
Item 1A
Item 1B
Item 2
Item 3
PART II.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Business
Risk factors
Unresolved Staff Comments
Properties
Legal Proceedings
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountant on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain Relationships and Related Transactions and Director Independence.
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Signatures
Supplemental information.
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Page No.
3-14
15-24
24
25-66
66
67-69
70-71
72-96
97-99
100-150
151
151-152
153
153-154
153
153
153
153
155-158
159
160-169
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ITEM 1. BUSINESS
PART I.
THE COMPANY
Southern Copper Corporation (“SCC”, “Southern Copper” or the “Company”) is one of the largest integrated copper producers in the
world. We produce copper, molybdenum, zinc and silver. All of our mining, smelting and refining facilities are located in Peru and
Mexico and we conduct exploration activities in those countries and in Argentina, Chile and Ecuador. See Item 2 “Properties -
Review of Operations” for maps of our principal mines, smelting facilities and refineries. Our operations make us one of the largest
mining companies in Peru and also in Mexico. We believe we have the largest copper reserves in the world. We were incorporated in
Delaware in 1952 and have conducted copper mining operations since 1960. Since 1996, our common stock has been listed on both
the New York and Lima Stock Exchanges.
Our Peruvian copper operations involve mining, milling and flotation of copper ore to produce copper concentrates and molybdenum
concentrates; the smelting of copper concentrates to produce anode copper; and the refining of anode copper to produce copper
cathodes. As part of this production process, we also produce significant amounts of molybdenum concentrate and refined silver.
Additionally, we produce refined copper using SXEW technology. We operate the Toquepala and Cuajone mines high in the Andes
Mountains, approximately 860 kilometers southeast of the city of Lima, Peru. We also operate a smelter and refinery west of the
Toquepala and Cuajone mines in the coastal city of Ilo, Peru.
Our Mexican operations are conducted through our subsidiary, Minera Mexico S.A. de C.V. (“Minera Mexico”), which we acquired in
2005. Minera Mexico engages primarily in the mining and processing of copper, molybdenum, zinc, silver, gold and lead. Minera
Mexico operates through subsidiaries that are grouped into three separate units. Mexicana de Cobre S.A. de C.V. (together with its
subsidiaries, the “La Caridad unit”) operates La Caridad, an open-pit copper mine, a copper ore concentrator, a SXEW plant, a
smelter, refinery and a rod plant. Since July 2011, Operadora de Minas e Instalaciones Mineras S.A de C.V. ( the “Buenavista unit”)
operates Buenavista, formerly named Cananea, an open-pit copper mine, which is located at the site of one of the world’s largest
copper ore deposits, a copper concentrator and two SXEW plants. The Buenavista mine was operated from December 11, 2010 to
July 2011 by Buenavista del Cobre S.A. de C.V. and before December 11, 2010 by Mexicana de Cananea S.A. de C.V. Industrial
Minera Mexico, S.A. de C.V. (together with its subsidiaries, the “IMMSA unit”) operates five underground mines that produce zinc,
lead, copper, silver and gold, a coal mine and a zinc refinery.
We utilize modern, state of the art mining and processing methods, including global positioning systems and computerized mining
operations. Our operations have a high level of vertical integration that allows us to manage the entire production process, from the
mining of the ore to the production of refined copper and other products and most related transport and logistics functions, using our
own facilities, employees and equipment.
The sales prices for our products are largely determined by market forces outside of our control. Our management, therefore, focuses
on cost control and production enhancement to remain profitable. We endeavor to achieve these goals through capital spending
programs, exploration efforts and cost reduction programs. Our focus is on seeking to remain profitable during periods of low copper
prices and maximizing results in periods of high copper prices. For additional information on the sale prices of the metals we produce,
please see “Metal Prices” in this Item 1.
Currency Information:
Unless stated otherwise, all our financial information is presented in U.S. dollars and any reference herein to “U.S. dollars”, “dollars”,
or “$” are to U.S. dollars; references to “S/.”, “nuevo sol” or “nuevos soles”, are to Peruvian nuevos soles; and references to “peso”,
“pesos”, or “Ps.”, are to Mexican pesos.
Unit Information:
Unless otherwise noted, all tonnages are in metric tons. To convert to short tons, multiply by 1.102. All ounces are troy ounces. All
distances are in kilometers. To convert to miles, multiply by 0.621. To convert hectares to acres, multiply by 2.47.
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ORGANIZATIONAL STRUCTURE
The following chart describes our organizational structure, starting with our controlling stockholders, as of December 31, 2012. For
clarity of presentation, the chart identifies only our main subsidiaries and eliminates intermediate holding companies.
We are a majority-owned, indirect subsidiary of Grupo Mexico S.A.B. de C.V. (“Grupo Mexico”). Through its wholly-owned
subsidiaries, Grupo Mexico as of December 31, 2012 owned 81.3% of our capital stock. Grupo Mexico’s principal business is to act
as a holding company for shares of other corporations engaged in the mining, processing, purchase and sale of minerals and other
products and railway and other related services.
We conduct our operations in Peru through a registered branch (the “SPCC Peru Branch”, “Branch” or “Peruvian Branch”). The
SPCC Peru Branch comprises substantially all of our assets and liabilities associated with our copper operations in Peru. The SPCC
Peru Branch is not a corporation separate from us and, therefore, obligations of SPCC Peru Branch are direct obligations of SCC and
vice-versa. It is, however, an establishment, registered pursuant to Peruvian law, through which we hold assets, incur liabilities and
conduct operations in Peru. Although it has neither its own capital nor liability separate from us, it is deemed to have equity capital
for purposes of determining the economic interests of holders of our investment shares, (See Note 12 “Non-Controlling Interest” of
our consolidated financial statements).
On April 1, 2005, we acquired Minera Mexico, the largest mining company in Mexico on a stand-alone basis, from Americas Mining
Corporation (“AMC”), a subsidiary of Grupo Mexico, our controlling stockholder. Minera Mexico is a holding company and all of its
operations are conducted through subsidiaries that are grouped into three units: (i) the La Caridad unit (ii) the Buenavista unit and
(iii) the IMMSA unit. We own 99.95% of Minera Mexico.
In 2011, our Board of Directors increased from $500 million to $1 billion the share repurchase program authorized in 2008. Pursuant
to this program, through December 31, 2012 we have purchased 46.9 million shares of our common stock at a cost of $878.1 million.
These shares are available for general corporate purposes. We may purchase additional shares from time
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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.
REPUBLIC OF PERU AND MEXICO
Our revenues are derived primarily from our operations in Peru and Mexico. Risks related to our operations in both countries include
those associated with economic and political conditions, effects of currency fluctuations and inflation, effects of government
regulations and the geographic concentration of our operations.
AVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange
Commission (“SEC”). You may read and copy any document we file at the SEC’s Public Reference Room at 100 F Street NE,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the Public Reference Room. The SEC
maintains a website that contains annual, quarterly and current reports, proxy statements and other information that issuers (including
Southern Copper Corporation) file electronically with the SEC. The SEC’s website is www.sec.gov.
Our Internet address is www.southerncoppercorp.com. Commencing with the Form 8-K dated March 14, 2003, we have made
available free of charge on this internet address our annual, quarterly and current reports, as soon as reasonably practical after we
electronically file such material with, or furnish it to, the SEC. Our website includes the Corporate Governance guidelines and the
charters of our most significant Board Committees. However, the information found on our website is not part of this or any other
report.
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, including taxes, as well as projected demand or supply for the Company’s products. Actual
results could differ materially depending upon certain 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, the availability of 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 metals prices on commodity exchanges, which can be volatile.
Additional business information follows:
COPPER BUSINESS
Copper is the world’s third most widely used metal, after iron and aluminum, and an important component in the world’s
infrastructure. Copper has unique chemical and physical properties, including high ductility, malleability, and thermal and electrical
conductivity, and resistance to corrosion that has made it a superior material for use in electrical and electronic products, including
power transmission and generation, which accounts for about three quarters of its global copper use, telecommunications, building
construction, transportation and industrial machinery businesses. Copper is also an important metal in non-electrical applications such
as plumbing and roofing and, when alloyed with zinc to form brass, in many industrial and consumer applications.
Copper is an internationally traded commodity with prices principally determined by the major metal exchanges, the Commodities
Exchange, or “COMEX”, in New York and the London Metal Exchange or “LME.” Copper is usually found in nature in association
with sulfur. Pure copper metal is generally produced from a multistage process, beginning with the
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mining and concentrating of low-grade ores containing copper sulfide minerals, and followed by smelting and electrolytic refining to
produce a pure copper cathode. An increasing share of copper is produced from acid leaching of oxidized ores. Copper is one of the
oldest metals ever used and has been one of the important materials in the development of civilization.
BUSINESS REPORTING SEGMENTS:
Our management views Southern Copper as having three reportable segments and manages it on the basis of these segments.
The three segments identified are groups of individual mines, each of which constitutes an operating segment with similar economic
characteristics, type of products, processes and support facilities, regulatory environments, employee bargaining contracts and
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.
Inter-segment sales are based on arm’s-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 Company’s sales. The segments identified by the Company are:
1. Peruvian operations, which include the Toquepala and Cuajone mine complexes and the smelting and refining plants, industrial
railroad and port facilities which service both mines. Sales of its products are recorded as revenue of our Peruvian mines. The
Peruvian operations produce copper, with production of by-products of molybdenum, silver and other material.
2. Mexican open-pit operations, which include the La Caridad and Buenavista mine complexes and the smelting and refining plants
and support facilities which service both mines. Sales of its products are recorded as revenue of our Mexican mines. The
Mexican open-pit operations produce copper, with production of by-products of molybdenum, silver and other material.
3. Mexican underground mining operations, which include five underground mines that produce zinc, copper, silver and gold, a coal
mine which produces coal and coke, and a zinc refinery. This group is identified as the IMMSA unit and sales of its products are
recorded as revenue of the IMMSA unit.
Financial information is regularly prepared for each of the three segments and the results are reported to the Chief Operating Officer
on a segment basis. The Chief Operating Officer 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.
Segment information is included in Item 2 “Properties,” under the captions — “Metal Production by Segments” and “Ore Reserves.”
More information on business segment and segment financial information is included in Note 19 “Segment and Related Information”
of our consolidated financial statements.
CAPITAL INVESTMENT PROGRAM
For a description of our capital investment program, see Item 7 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” — “Capital Investment Program.”
EXPLORATION ACTIVITIES
We are engaged in ongoing extensive exploration to locate additional ore bodies in Peru, Mexico, Argentina, Ecuador and Chile. We
also conduct exploration in the areas of our current mining operations. We invested $47.9 million in exploration programs in 2012,
$37.5 million in 2011 and $34.3 million in 2010 and we expect to spend approximately $39.2 million in exploration programs in 2013.
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Currently, we have direct control of 80,512 and 123,293 hectares of exploration concessions in Peru and in Mexico, respectively. We
also currently hold 100,383 hectares, 35,958 hectares and 2,544 hectares of exploration concessions in Argentina, Chile and Ecuador,
respectively.
Peru
Los Chancas. This project, located in the department of Apurimac in southern Peru, is a copper and molybdenum porphyry deposit.
During 2012, we initiated a feasibility study, which we expect to complete in the second quarter of 2013. As a result of progress made
in the feasibility study, current estimates indicate 545 million tons of mineralized material with a copper content of 0.59%,
molybdenum content of 0.04% and 0.039 grams of gold per ton and 181 million tons of mineralized leachable material with a total
copper content of 0.357%. We expect to initiate an environmental impact study for the project in the fourth quarter of 2013.
Other Peruvian Prospects. As part of the 2012 exploration program, we performed regional exploration and completed a program of
3,990 meters of diamond drilling at the El Penon project (copper-gold porphyry system) located in northern Peru. We are currently
evaluating the results of the drilling program. Also, we concluded an exploration program of 12,541 meters of diamond drilling
around our current operating areas.
In 2012, after evaluation of the drilling program results performed in 2011, we decided not to proceed further with the Huallas and
Clara projects.
For 2013, we plan diamond drilling programs of 20,000 meters principally for two projects: Cerrillos in the department of Moquegua
and Montonero in the department of Arequipa, where we are seeking to define copper porphyry systems. In addition, we are planning
to develop a diamond drilling program of 10,000 meters around our operating units.
We will continue with the regional exploration program at several other Peruvian mineralized zones.
Mexico
In addition to exploratory drilling programs at existing mines, we are currently conducting exploration to locate mineral deposits at
various other sites in Mexico. The following are some of the more significant exploration projects:
El Arco. El Arco is a world class copper deposit in the central part of the Baja California peninsula. In 2010, we concluded the
feasibility study and an investment of $56.4 million was approved for land acquisition required for the project. This project, when
developed, is expected to produce 190,000 tons of copper and 105,000 ounces of gold annually. Please see “Capital Investment
Programs” under Item 7 for further information.
Buenavista-Zinc. The Buenavista-Zinc site is located in the state of Sonora, Mexico and forms part of the Buenavista ore body.
Drilling and metallurgical studies have shown that the zinc-copper deposit contains approximately 36 million tons of mineralized
material containing 29 grams of silver per ton, 0.69% copper and 3.3% zinc. A new “scoping level” study indicates that Buenavista-
Zinc may be an economic deposit. In 2011, 11,956 meters of diamond drilling were executed to confirm grade and acquire
geotechnical information. In 2012, the Buenavista-Zinc mine plan was integrated with the overall mine plan of the Buenavista pit and
we began the final metallurgical testing, which we expect to complete in 2013.
Carbon Coahuila. In Coahuila, an intensive exploration program of diamond drilling has identified two additional areas, Esperanza
with a potential for more than 30 million tons of “in place” mineralized coal and Guayacan with a potential for 15 million tons of “in
place” mineralized coal, that could be used for a future coal-fired power plant. In 2010 and 2011, 1,213 and 2,640 meters of diamond
drilling, respectively, were completed at the Rosita pit area and as a result, 10,100 tons and 178,000 tons of mineralized coal,
respectively, were added to the mineralized material estimates for this open-pit project. In addition in 2012, 3,793 meters of drilling
were completed at the La Conquista, Nueva Rosita and La Lavadora pits. In 2013, we will continue with diamond drilling programs.
The Chalchihuites. The Chalchihuites site is located in the state of Zacatecas. It is a replacement deposit with mixed oxides and
sulfides of lead, copper, zinc and silver. A drilling program, in the late 1990s, defined 16 million tons of mineralized material
containing 95 grams of silver per ton, and lead content of 0.36%, copper content of, 0.69% and zinc content of 3.08%. Preliminary
metallurgical testing indicates that a leaching precipitating-flotation recovery process can be applied to this ore. In 2009, we started a
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prefeasibility study. In 2010 and 2011, we added several claims and performed a 9,386 meter drilling program that indicated at least
seven million tons of mineralized material containing 97.9 grams of silver, 0.41% lead, 0.52% copper and 2.53% zinc. We expect to
obtain all permits needed for the project and to complete the prefeasibility study by the end of 2013.
Sierra de Lobos. This project is located southwest of the city of Leon, Guanajuato. Drilling in 2008 confirmed the presence of copper
and zinc mineralization, but an economic deposit has not yet been identified. The project was on hold between 2010 and 2011 due to
the changes in our investment program priorities. In 2012, we obtained all permits needed and started drilling activities. In 2013, we
plan a diamond drilling program of 8,000 meters.
Chile
Ticnamar. In 2012, after the evaluation of the drilling program results, we decided not to pursue this project.
Catanave. Located in northern Chile (Arica), Catanave belongs to a mineralized epithermal system of gold and silver. In 2010, the
environmental impact study was approved. During 2011 and 2012, 2,189 and 1,900 meters of diamond drilling, respectively, were
completed. A further drilling program of 4,000 meters is planned for 2013.
Santa Marta. Located in the Atacama region, Santa Marta is being explored for copper and molybdenum porphyry. During 2012,
2011 and 2010, we diamond drilled 4,006 meters, 2,837 meters and 3,318 meters, respectively, showing promising results.
Preliminary results identified mineralized material containing 0.1% to 0.2% of copper. In 2013, we will evaluate the results to decide
the future of the project.
San Benito. Located in the Atacama region, San Benito was explored for copper and molybdenum porphyry. In 2010, a diamond
drilling program of 3,241 meters was completed. This prospect continues on hold, pending further evaluation.
El Salado. A copper-gold prospect located in the Atacama region, northern Chile is being explored for copper and molybdenum
porphyry. During 2012, we began a conceptual engineering study of the project, which is expected to be completed in the first quarter
of 2013. In the last quarter of 2012, we began a 25,000 meter diamond drilling program with 6,755 meters drilled and expect to
complete it in 2013.
Resguardo de la Costa. A copper-gold prospect located in northern Chile (Atacama area). This prospect continues on hold, pending
further evaluation.
Other Chilean Prospects. For 2013, we plan to continue with a regional exploration program oriented to locate systems, mainly of
porphyritics of copper and molybdenum.
Ecuador
In 2011, we started exploration activities in Ecuador.
Chaucha: the Ruta del Cobre (“Copper Road”) project is located south of Guayaquil. The mineralization is characteristic of a copper-
molybdenum porphyry system. During 2012, we carried out the administrative work necessary to obtain all the permits required for
the development of a 10,000 meter diamond drilling program which will allow us to evaluate the deposit.
Argentina
In the last quarter of 2011, we started exploration activities in Argentina. During 2012, we carried out exploration mainly at the
Cochicos project, located in the Neuquen Province, where mineralization for an epithermal gold and silver system is expected. For
2013, we plan to carry out exploration on the Cochilco, Colipile and Mayal projects, where mineralization for porphyry copper and
molybdenum is expected. We also expect to start exploration on the Cerro Sementa project, located in the Salta Province, where
mineralization for porphyry copper and molybdenum is expected.
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PRINCIPAL PRODUCTS AND MARKETS
The principal uses of copper are in the building and construction industry, electrical and electronic products and, to a lesser extent,
industrial machinery and equipment, consumer products and the automotive and transportation industries. Molybdenum is used to
toughen alloy steels and soften tungsten alloy and is also used in fertilizers, dyes, enamels and reagents. Silver is used for
photographic, electrical and electronic products and, to a lesser extent, brazing alloys and solder, jewelry, coinage, silverware and
catalysts. Zinc is primarily used as a coating on iron and steel to protect against corrosion. It is also used to make die cast parts, in the
manufacturing of batteries and in the form of sheets for architectural purposes.
Our marketing strategy and annual sales planning emphasize developing and maintaining long-term customer relationships, and thus
acquiring annual or other long-term contracts for the sale of our products is a high priority. Approximately 80% of our metal
production for the years 2012, 2011 and 2010, was sold under annual or longer-term contracts. Sales prices are determined based on
prevailing commodity prices for the quotation period according to the terms of the contract.
We focus on the ultimate end-user customers as opposed to selling on the spot market or to trading companies. In addition, we devote
significant marketing effort to diversifying our sales both by region and by customer base. We strive to provide superior customer
service, including timely deliveries of our products. Our ability to consistently fulfill customer demand is supported by our substantial
production capacity.
For additional information on sales please see, “Revenue recognition” in Note 2 “Summary of Significant Accounting Policies” and
Note 19 “Segment and Related Information” of our consolidated financial statements.
METALS PRICES
Prices for our products are principally a function of supply and demand and, except for molybdenum, are established on COMEX and
LME, the two most important metal exchanges in the world. Prices for our molybdenum products are established by reference to the
publication Platt’s Metals Week. Our contract prices also reflect any negotiated premiums and the costs of freight and other factors.
From time to time, we have entered into hedging transactions to provide partial protection against future decreases in the market price
of metals and we may do so under certain market conditions. We entered into copper derivative contracts for the first quarter of 2012
and the years 2011 and 2010. For a further discussion of derivative instruments, see Item 7A “Quantitative and Qualitative
Disclosures about Market Risk.” For a further discussion of our products market prices, please see Item 7 “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” — “Metal Prices.”
The table below shows the high, low and average COMEX and LME copper prices during the last 15 years:
Year
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012-1st Q
2012-2nd Q
2012-3rd Q
2012-4th Q
2012
High
Copper (COMEX)
Low
Average
High
Copper (LME)
Low
Average
0.86
0.85
0.93
0.87
0.78
1.04
1.54
2.28
4.08
3.75
4.08
3.33
4.44
4.62
3.97
3.92
3.85
3.81
3.97
0.64
0.61
0.74
0.60
0.65
0.71
1.06
1.40
2.13
2.40
1.25
1.38
2.76
3.05
3.41
3.28
3.29
3.44
3.28
9
0.75
0.72
0.84
0.73
0.72
0.81
1.29
1.68
3.10
3.23
3.13
2.35
3.43
4.01
3.78
3.55
3.53
3.60
3.61
0.85
0.84
0.91
0.83
0.77
1.05
1.49
2.11
3.99
3.77
4.08
3.33
4.42
4.60
3.93
3.89
3.81
3.78
3.93
0.65
0.61
0.73
0.60
0.64
0.70
1.06
1.39
2.06
2.37
1.26
1.38
2.76
3.08
3.39
3.29
3.32
3.42
3.29
0.75
0.71
0.82
0.72
0.71
0.81
1.30
1.67
3.05
3.23
3.16
2.34
3.42
4.00
3.77
3.57
3.50
3.59
3.61
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The per pound COMEX copper price during the last 5, 10 and 15 year periods averaged $3.31, $2.66 and $2.03 respectively. The per
pound LME copper price during the last 5, 10 and 15 year periods averaged $3.31, $2.66 and $2.02, respectively.
The table below shows the high, low and average market prices for our three principal by-products during the last 15 years:
Zinc(LME)
Low
Average
Silver (COMEX)
Low
Average
High
Molybdenum (Dealer Oxide Platt’s
Metals Week)
Low
Average
High
Year
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
High
0.52
0.56
0.58
0.48
0.38
0.46
0.58
0.87
2.10
1.93
1.28
1.17
1.14
1.15
0.42
0.41
0.46
0.33
0.33
0.34
0.43
0.53
0.87
1.00
0.47
0.48
0.72
0.79
0.46
0.49
0.51
0.40
0.35
0.38
0.48
0.63
1.49
1.47
0.85
0.75
0.98
0.99
2012-1st Q
2012-2nd Q
2012-3rd Q
2012-4th Q
2012
0.99
0.93
0.95
0.95
0.99
0.83
0.80
0.80
0.81
0.80
0.92
0.87
0.86
0.89
0.88
7.26
5.76
5.55
4.81
5.11
5.98
8.21
9.00
14.85
15.50
20.69
19.30
30.91
48.58
37.14
33.25
34.72
35.04
37.14
4.61
4.87
4.56
4.03
4.22
4.35
5.51
6.43
8.82
11.47
8.80
10.42
14.82
26.81
28.65
26.25
26.79
29.61
26.25
5.53
5.22
4.97
4.36
4.60
4.89
6.68
7.32
11.54
13.39
14.97
14.67
20.18
35.18
4.48
2.80
2.92
2.58
7.90
7.60
32.38
39.25
28.20
33.75
33.88
18.00
18.60
17.88
32.69
29.45
30.05
32.56
31.19
14.80
14.23
12.95
11.60
14.80
2.10
2.52
2.19
2.19
2.43
3.28
7.35
25.00
21.00
24.50
8.75
7.83
11.75
12.70
13.45
13.13
10.90
10.90
10.90
3.42
2.66
2.56
2.35
3.76
5.29
16.20
31.99
24.75
30.19
28.42
10.91
15.60
15.33
14.10
13.65
11.67
11.05
12.62
The per pound LME zinc price during the last 5, 10 and 15 year periods averaged $0.89, $0.89 and $0.74, respectively. The per ounce
COMEX silver price during the last 5, 10 and 15 year periods averaged $23.24, $16.00 and $12.31, respectively. The per pound
Platt’s Metals Week Dealer Oxide molybdenum price during the last 5, 10 and 15 year periods averaged $16.58, $19.13 and $13.74,
respectively.
COMPETITIVE CONDITIONS
Competition in the copper market is primarily on a price and service basis, with price being the most important consideration when
supplies of copper are ample. Our products compete with other materials, including aluminum and plastics. For additional
information, see “Item 1A Risk Factors — The copper mining industry is highly competitive.”
EMPLOYEES
As of December 31, 2012, we had 12,085 employees, approximately 69% of whom are covered by labor agreements with eleven
different labor unions. During the last several years, we have experienced strikes or other labor disruptions that have had an adverse
impact on our operations and operating results. Our Taxco and San Martin mines in Mexico have been on strike since July 2007, our
Buenavista mine was on strike from July 2007 through June 6, 2010.
Peru
Approximately 63% of our 4,566 Peruvian employees were unionized at December 31, 2012, represented by eight separate unions.
Three of these unions, one at each major production area, represent 2,202 workers. Also, there are five smaller unions, representing
the balance of workers. We conducted negotiations with the eight unions whose collective bargaining agreements expired in 2012.
During the first two months of 2013, we have signed three-year agreements with all the unions. The agreements include, among other
things, annual salary increases of 6.5%, 5% and 5% for each of the three years, respectively, for all workers.
There were no strikes during 2011 and 2010. On December 24 and 25, 2012 the three major unions held a two-day illegal work
stoppage which did not have a material impact on production.
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Employees of the Toquepala and Cuajone units reside in townsites, where we have built 3,700 houses and apartments. We also have
90 houses at Ilo for staff personnel. Housing, together with maintenance and utility services, is provided at minimal cost to most of
our employees. Our townsite and housing complexes include schools, medical facilities, churches, social clubs and recreational
facilities. We also provide shopping, banking and other services at the townsites.
Mexico
Approximately 73% of our 7,474 Mexican workers were unionized at December 31, 2012, represented by three 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. We conduct negotiations separately at each mining complex and each processing plant.
In recent years, the Mexican operations have experienced a positive improvement of their labor environment, as our workers, in a free
decision, opted to change their affiliation from the Sindicato Nacional de Trabajadores Mineros, Metalúrgicos y Similares de la
Republica Mexicana (National Union of Mine and Metal Workers and Similar Activities of the Mexican Republic or the “National
Mining Union”) to other unions. In 2006, workers of our Mexicana del Cobre mining complex and IMMSA joined the Sindicato
Nacional de Trabajadores de la Exploración, Explotación y Beneficio de Minas en la Republica Mexicana, (National Union of
Workers Engaged in Exploration, Exploitation and Processing of Mines in the Mexican Republic ), and the Mexicana del Cobre
metallurgical workers joined the Sindicato de Trabajadores de la Industria Minero Metalurgica (Union of Workers of the Mine and
Metals Industry or the “CTM”). Finally, in 2011 our Buenavista del Cobre workers joined the CTM. This positive labor environment
allows us to increase our productivity and to develop our capital expansion programs.
The workers of the San Martin and Taxco mines, still under the National Mining Union, have been on strike since July 2007. On
December 10, 2009, a federal court confirmed the legality of the San Martin strike. In order to recover the control of the San Martin
mine and resume operations, on January 27, 2011, we filed a court petition requesting that the court, among other things define the
termination payment for each unionized worker. The court denied the petition alleging that, according to federal labor law, the union
was the only legitimate party to file such petition. On appeal by us, on May 13, 2011, the Mexican federal tribunal accepted the
petition. In July 2011, the National Mining Union appealed the favorable court decision before the Supreme Court. On November 7,
2012, the Supreme Court affirmed the decision of the federal tribunal. We filed a new proceeding before the labor court on the basis
of the Supreme Court decision, which recognized the right of the labor court to define responsibility for the strike and the termination
payment for each unionized worker. A favorable decision of the labor court in this new proceeding would have the effect of
terminating the protracted strike at San Martin.
In July 2012, Minera Krypton, a Mexican mining company, not affiliated with Grupo Mexico or the Company, hired 130 workers for
the rehabilitation of its mining unit at Chalchihuites, Zacatecas. Most of these workers, which are or were workers of the San Martin
mine, in order to work for Minera Krypton joined a new union called, the Sindicato de Trabajadores de la Industria Minera y
Similares de la Republica Mexicana (Union of Workers of the Mine and Metals Industry and Similar Activities of the Mexican
Republic or the “Union of Mexican Mine and Metal Workers”). On August 31, 2012, the Union of Mexican Mine and Metal Workers
filed a petition with the labor authorities to replace the existing union at the San Martin mine. On September 1, 2012, the workers
affiliated with the Union of Mexican Mine and Metal Workers took over the San Martin mine evicting the workers on strike. Several
hearings took place during September 2012 with the federal labor authorities. On October 12, 2012, the federal labor court ordered
and enforced a recount in order to establish which union will hold the collective bargaining agreement. The Union of Mexican Mine
and Metal Workers lost the recount. The result of the recount was challenged by the Union of Mexican Mine and Metal Workers and
is pending resolution.
In the case of the Taxco mine, following the workers refusal to allow exploration of new reserves, we commenced litigation seeking to
terminate the labor relationship with workers of the Taxco mine (including the related collective bargaining agreement). On
September 1, 2010, the federal labor court issued a ruling approving the termination of the collective bargaining agreement and all the
individual labor contracts of the workers affiliated with the Mexican mining union at the Taxco mine. The ruling was based upon the
resistance of the mining union to allow us search for reserves at the Taxco mine. The mining union appealed the labor court ruling
before a federal court. In September 2011, the federal court accepted the union’s appeal and requested that the federal labor court
review the procedure and take into account all the evidence to issue a
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new resolution. On January 3, 2012, the federal labor court issued a new resolution, approving the termination of the collective
bargaining agreement and all the individual labor contracts of the workers affiliated with the National Mining Union at the Taxco
mine. On January 25, 2012, the National Mining Union appealed the resolution before the federal court. On June 14, 2012, the
federal court accepted the union’s appeal and requested that the federal labor court issue a new resolution, taking into account all the
evidence submitted by the parties. On August 6, 2012, the federal labor court issued a new decision disapproving the termination of
the collective bargaining agreement and the individual labor contracts of the workers affiliated with the National Mining Union at the
Taxco mine. On August 29, 2012, we filed a proceeding seeking relief from the decision before a federal court. As of December 31,
2012, resolution of the relief proceeding was pending.
It is expected that operations at these mines will remain suspended until these labor issues are resolved.
Employees of the La Caridad and Buenavista units reside in townsites at La Caridad and Buenavista, where we have built
approximately 2,000 houses and apartments and 275 houses and apartments, respectively. Most of the employees of the IMMSA unit
reside on the grounds of the mining or processing complexes in which they work and where we have built approximately 900 houses
and apartments. Housing, together with maintenance and utility services, is provided at minimal cost to most of our employees. Our
townsites and housing complexes include educational and, in some units, medical facilities, churches, social clubs, shopping centers,
banking and other services. Through 2007, the Buenavista unit (at that time Cananea) provided health care services free of charge to
employees and retired unionized employees and their families through its own hospital at the Buenavista unit. In 2011, the Company
signed an agreement with the Secretary of Health of the State of Sonora to continue providing these services to its retired workers and
their families. The new workers of Buenavista del Cobre will receive health services from the Mexican Institute of Social Security as
is the case for all Mexican workers.
FUEL, ELECTRICITY AND WATER SUPPLIES
The principal raw materials used in our operations are fuels, electricity and water. We use natural gas to power boilers and generators
and for metallurgical processes at our Mexican operations and diesel fuel for mining equipment. We believe that supplies of fuel,
electricity and water are readily available. Although the prices of these raw materials may fluctuate beyond our control, we focus our
efforts to reduce these costs through cost and energy saving measures.
Peru
In Peru, electric power for our operating facilities is generated by two thermal electric plants owned and operated by Enersur S.A., an
independent power company (“Enersur”), a diesel and waste heat boilers plant located adjacent to the Ilo smelter and a coal plant
located south of Ilo. Power generation capacity for Peruvian operations is currently 344 megawatts. Enersur is building three new
power units, with a total capacity of 564 megawatt, close to the current coal plant, which will provide additional power reserves in the
south of Peru. Enersur has a legal commitment to put in services these three new units no later than September 2013.
In addition, we have nine megawatts of power generation capacity from two small hydro-generating installations at Cuajone. Power is
distributed over a 224-kilometer closed loop transmission circuit, which is interconnected with the Peruvian network.
In 1997, we sold our Ilo power plant to Enersur. In connection with the sale, a power purchase agreement was also completed under
which we agreed to purchase all of our power needs for our 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 our increased
electricity requirements and changing the power tariff as called for in the original agreement.
In 2009, we signed a Memorandum of Understanding (“MOU”) with Enersur regarding its power supply agreement. The MOU
contains new economic terms that we believe better reflect current economic conditions in the power industry and in Peru. The new
economic conditions agreed in the MOU have been applied by Enersur to its invoices to us since May 2009. Additionally, the MOU
includes an option for providing power for the Tia Maria project. The MOU also established a time frame during which Enersur and
we must negotiate in good faith to settle certain pending issues, including agreeing on a power purchase agreement for the Tia Maria
project. During 2010 and 2011, we continued our negotiation with Enersur but negotiations are currently suspended due to the delay
of the Tia Maria project. See “Other Legal Matters -Tia Maria” in Note 13 “Commitment and Contingencies” to our consolidated
financial statements for further information.
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In Peru, we obtain fuel primarily from a local producer. We have water rights or licenses for up to 1,950 liters per second from well
fields at the Huaitire, Vizcachas and Titijones aquifers and also surface water from the Suches lake and two small water courses,
namely Quebrada Honda and Quebrada Tacalaya, which together are sufficient to supply the needs of our two operating units at
Toquepala and Cuajone. At Ilo, we have desalinization plants that produce water for industrial and domestic use that we believe are
sufficient for our current and projected needs.
Mexico
Besides electric energy, the principal raw materials used in our operations are fuels. Natural gas is used for metallurgical processes, to
power furnaces, converters, casting wheels, boilers and electric generators. Diesel oil is a backup for all these uses. Also at our
operations we use diesel oil for mining equipment. Fuel, electricity and water supplies are readily available. The prices of these
materials may fluctuate beyond our control since the only supplier has been the Mexican government. We therefore focus our efforts
to reduce these costs through cost and energy saving measures.
Mexico Generadora de Energía S. de R. L., (“MGE”), an indirect subsidiary of Grupo Mexico, is constructing two power plants to
supply energy to part of the Company’s Mexican operations. These plants are natural gas-fired combined cycle power generating
units, with a net total capacity of 516.2 megawatts. It is expected that MGE will complete the first plant in 2013 and the second in
2014.
In Mexico, fuel is purchased directly from Petroleos Mexicanos, (“PEMEX”), the state oil monopoly. Electricity for our Mexican
operations, which is used as the main energy source at our mining complexes, is purchased from the Comision Federal de
Electricidad, the Federal Electricity Commission, or CFE, the state’s electrical power producer. In addition, we recover some energy
from waste heat boilers at the La Caridad smelter. Accordingly, a significant portion of our operating costs in Mexico are dependent
upon the pricing policies of PEMEX and CFE, which reflect government policy, as well as international market prices for crude oil,
natural gas and conditions in the refinery markets.
The La Caridad unit imports natural gas from the United States through its pipeline (between Douglas, Arizona and Nacozari,
Sonora). This permits us to import natural gas from the United States at market prices and thereby reduce operating costs. Several
contracts with PEMEX and the United States provide us with the option of using a monthly fixed price or daily fixed prices for our
natural gas purchases.
From time to time we enter into gas swap contracts to protect part of our gas consumption. The gain or losses obtained are included in
the production cost. We have not held any gas swap contract in the past three years, nor do we hold any for 2013.
Energy is the principal cost in mining, therefore the concern for its conservation and efficient usage is very relevant. We have an
energy management committee at most of our mines. The committees meet periodically to discuss consumptions and to develop
measures directed at saving energy. Also, alternative sources are being analyzed at the corporate level, both from traditional and
renewable energy sources. This has helped us develop a culture of energy conservation directed at the sustainability of our operations.
In Mexico, water is a national property and industries not connected to a public services water supply must obtain a water concession
from Comision Nacional del Agua (the “National Water Commission,” or “CNA”). Water usage fees are established in the Ley
Federal de Derechos (the Federal Law of Rights), which distinguishes several availability zones with different fees per unit of volume
according to each zone. All of our operations have one or several water concessions and, with the exception of Mexicana de Cobre,
pump out the required water from one or several wells. Mexicana de Cobre pumps water from the La Angostura dam, which is close
to the mine and plants. At our Buenavista facility, we maintain our own wells and pay the CNA for water usage. Water conservation
committees have been established in each plant in order to conserve and recycle water. Water usage fees are updated on a yearly basis
and have been increasing in recent years.
ENVIRONMENTAL MATTERS
For a discussion of environmental matters reference is made to the information contained under the caption “Environmental matters”
in Note 13 “Commitments and Contingencies” of the consolidated financial statements.
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MINING RIGHTS AND CONCESSIONS
Peru
We have 167,606 hectares in concessions from the Peruvian government for our exploration, exploitation, extraction and/or
production operations, distributed among our various sites as follows:
Plants
Operations
Exploration
Total
Toquepala
Cuajone
300
22,549
—
22,849
456
23,690
—
24,146
Ilo
(hectares)
421
4,619
—
5,040
Other
—
35,059
80,512
115,571
Total
1,177
85,917
80,512
167,606
We believe that our Peruvian concessions are in full force and in effect under applicable Peruvian laws and that we are in compliance
with all material terms and requirements applicable to these concessions. The concessions have indefinite terms, subject to our
payment of concession fees of up to $3.00 per hectare annually for the mining concessions and a fee based on nominal capacity for the
processing concessions. Fees paid during 2012, 2011 and 2010, were approximately $1.3 million, $1.2 million and $1.1 million,
respectively. We have two types of mining concessions in Peru: metallic and non-metallic concessions. We also have water
concessions for well fields at Huaitire, Titijones and Vizcachas and surface water rights from the Suches Lake, which together are
sufficient to supply the needs of our Toquepala and Cuajone operating units.
In 2004, the Peruvian Congress enacted legislation imposing a royalty charge to be paid by mining companies in favor of the regional
governments and communities where mining resources are located. Under this law, we were subject to a 1% to 3% charge, based on
sales, and calculated on the value of the concentrates produced at our Toquepala and Cuajone mines. We made provisions of $52.5
million and $65.5 million in 2011 and 2010, respectively, for this charge.
In September 2011, the Peruvian Congress approved an amendment to the mining royalty charge. The new mining royalty charge is
based on operating income margins with graduated rates ranging from 1% to 12%, with a minimum royalty charge assessed at 1% of
net sales. If the operating income margin is 10% or less, the royalty charge is 1% and for each 5% increment in the operating income
margin, the royalty charge rate increases by 0.75%, up to a maximum of 12%. In 2012 and 2011, we made provisions of $51.0 million
and $19.3 million, respectively, for this charge.
At the same time the Peruvian Congress amended the mining royalty charge, it enacted a new tax for the mining industry. This tax is
also based on operating income and its rates range from 2% to 8.4%. For additional information see Note 7 “Income Taxes” to the
consolidated financial statements.
Mexico
In Mexico we have approximately 479,767 hectares in concessions from the Mexican government for our exploration and exploitation
activities as outlined in the table below.
Mine concessions
168,812
104,872
IMMSA
La Caridad
Buenavista
(hectares)
82,790
Projects
Total
123,293
479,767
We believe that our Mexican concessions are in full force and in effect under applicable Mexican laws and that we are in compliance
with all material terms and requirements applicable to these concessions. Under Mexican law, mineral resources belong to the
Mexican nation and a concession from the Mexican federal government is required to explore or mine mineral reserves. Mining
concessions have a 50-year term that can be renewed for another 50 years. Holding fees for mining concessions can be from $0.4 to
$9.5 per hectare depending on the beginning date of the mining concession. Fees paid during 2012, 2011 and 2010 were
approximately $4.5 million, $3.5 million and $2.9 million, respectively. In addition, all of our operating units in Mexico have water
concessions that are in full force and effect. We generally own the land to which our Mexican concessions relate, although ownership
is not required in order to explore or mine a concession. We also own all of the processing facilities of our Mexican operations and
the land on which they are constructed.
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ITEM 1A. RISK FACTORS:
Every investor or potential investor in Southern Copper Corporation should carefully consider the following risk factors.
General Risks Relating to Our Business
Our financial performance is highly dependent on the price of copper and the other metals we produce.
Our financial performance is significantly affected by the market prices of the metals that we produce, particularly the market prices
of copper, molybdenum, zinc and silver. Historically, these prices have been subject to wide fluctuations and are affected by
numerous factors beyond our control, including international economic and political conditions, levels of supply and demand, the
availability and costs of substitutes, inventory levels maintained by users, actions of participants in the commodities markets and
currency exchange rates. In addition, the market prices of copper and certain other metals have on occasion been subject to rapid
short-term changes.
The table below provides the sales value of our products as a percentage of our total net sales value.
Product
Copper
Molybdenum
Silver
Zinc
Other by-products
2012
Year Ended December 31,
2011
2010
77.0%
6.8%
7.4%
2.9%
5.9%
76.7%
8.0%
7.2%
3.1%
5.0%
72.7%
13.3%
6.0%
4.1%
3.9%
See also historical average price of our products on Item 1 Business caption “Metals prices.”
We cannot predict whether metals prices will rise or fall in the future. Future declines in metals prices and, in particular, copper or
molybdenum prices, will have an adverse impact on our results of operations and financial condition, and we might, in very adverse
market conditions, consider curtailing or modifying certain of our mining and processing operations.
Changes in the level of demand for our products could adversely affect our product sales.
Our revenue is dependent on the level of industrial and consumer demand for the concentrates and refined and semi-refined metal
products we sell. Changes in technology, industrial processes and consumer habits may affect the level of that demand to the extent
that changes increase or decrease the need for our metal products. A change in demand, including any change resulting from
economic slow-downs or recessions, could impact our results of operations and financial condition.
Our actual reserves may not conform to our current estimates of our ore deposits and we depend on our ability to replenish ore
reserves for our long-term viability.
There is a degree of uncertainty attributable to the calculation of reserves. Until reserves are actually mined and processed, the
quantity of ore and grades must be considered as estimates only. The proven and probable ore reserves data included in this report are
estimates prepared by us based on evaluation methods generally used in the mining industry. We may be required in the future to
revise our reserves estimates based on our actual production. We cannot assure you that our actual reserves conform to geological,
metallurgical or other expectations or that the estimated volume and grade of ore will be recovered. Market prices of our metals,
increased production costs, reduced recovery rates, short-term operating factors, royalty charges and other factors may render proven
and probable reserves uneconomic to exploit and may result in revisions of reserves data from time to time. Reserves data are not
indicative of future results of operations. Our reserves are depleted as we mine. We depend on our ability to replenish our ore
reserves for our long-term viability. We use several strategies to replenish and increase our ore reserves, including exploration and
investment in properties located near our existing mine sites and investing in technology that could extend the life of a mine by
allowing us to cost-effectively process ore types that were previously considered uneconomic. Acquisitions may also contribute to
increase ore reserves and we review potential acquisition opportunities on a regular basis. However, we cannot assure you that we
will be able to continue with our strategy to replenish reserves indefinitely.
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Our business requires levels of capital expenditures which we may not be able to maintain.
Our business is capital intensive. Specifically, the exploration and exploitation of copper and other metal reserves, mining, smelting
and refining costs, the maintenance of machinery and equipment and compliance with laws and regulations require significant capital
expenditures. We must continue to invest capital to maintain or to increase the amount of copper reserves that we exploit and the
amount of copper and other metals we produce. We cannot assure you that we will be able to maintain our production levels to
generate sufficient cash, or that we have access to sufficient financing to continue our exploration, exploitation and refining activities
at or above present levels.
Restrictive covenants in the agreements governing our indebtedness and the indebtedness of our Minera Mexico subsidiary may
restrict our ability to pursue our business strategies.
Our financing instruments and those of our Minera Mexico subsidiary include financial and other restrictive covenants that, among
other things, limit our and Minera Mexico’s abilities to incur additional debt and sell assets. If either we or our Minera Mexico
subsidiary do not comply with these obligations, we could be in default under the applicable agreements which, if not addressed or
waived, could require repayment of the indebtedness immediately. Our Minera Mexico subsidiary is further limited by the terms of its
outstanding notes, which also restrict the Company’s applicable incurrence of debt and liens. In addition, future credit facilities may
contain limitations on our incurrence of additional debt and liens, on our ability to dispose of assets, or on our ability to pay dividends
to our common stockholders.
Applicable law restricts the payment of dividends from our Minera Mexico subsidiary to us.
Our subsidiary, Minera Mexico, is a Mexican company and, as such, may pay dividends only out of net income that has been
approved by the shareholders. Shareholders must also approve the actual dividend payment, after mandatory legal reserves have been
created and losses for prior fiscal years have been satisfied. As a result, these legal constraints may limit the ability of Minera Mexico
to pay dividends to us, which in turn, may have an impact on our ability to pay stockholder dividends or to service debt.
Our operations are subject to risks, some of which are not insurable.
The business of mining, smelting and refining copper, zinc and other metals is subject to a number of risks and hazards, including
industrial accidents, labor disputes, unusual or unexpected geological conditions, changes in the regulatory environment,
environmental hazards and weather and other natural phenomena, including earthquakes. Such occurrences could result in damage to,
or destruction of, mining operations resulting in monetary losses and possible legal liability. In particular, surface and underground
mining and related processing activities present inherent risks of injury to personnel and damage to equipment. We maintain
insurance against many of these and other risks, which may not provide adequate coverage in certain circumstances. Insurance against
certain risks, including certain liabilities for environmental damage or hazards as a result of exploration and production, is not
generally available to us or other companies within the mining industry. Nevertheless recent environmental legal initiatives have
considered future regulations regarding environmental damage insurance. In case such regulations come into force, we will have to
analyze the need to obtain such insurance. We do not have, and do not intend to obtain, political risk insurance. These or other
uninsured events may adversely affect our financial condition and results of operations.
Deliveries under our copper sales agreements can be suspended or cancelled by our customers in certain cases.
Under our sales agreements, we or our customers may suspend or cancel delivery of copper during a period of force majeure. Events
of force majeure under these agreements include acts of nature, labor strikes, fires, floods, wars, transportation delays, government
actions or other events that are beyond the control of the parties. Any suspension or cancellation by our customers of deliveries under
our sales contracts that are not replaced by deliveries under new contracts or sales on the spot market would reduce our cash flow and
could adversely affect our financial condition and results of operations.
The copper mining industry is highly competitive.
We face competition from other copper mining and producing companies around the world. We cannot assure you that competition
will not adversely affect us in the future.
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In addition, mines have limited lives and, as a result, we must periodically seek to replace and expand our reserves by acquiring new
properties. Significant competition exists to acquire properties producing or capable of producing copper and other metals.
The mining industry has experienced significant consolidation in recent years, including consolidation among some of our main
competitors, as a result of which an increased percentage of copper production is from companies that also produce other products and
may, consequently, be more diversified than we are. We cannot assure you that the result of current or future consolidation in the
industry will not adversely affect us.
Potential changes to international trade agreements, trade concessions or other political and economic arrangements may benefit
copper producers operating in countries other than Peru and Mexico, where our mining operations are currently located. We cannot
assure you that we will be able to compete on the basis of price or other factors with companies that in the future may benefit from
favorable trading or other arrangements.
Interruptions of energy supply or increases in energy costs and other production costs may adversely affect our results of
operations.
We require substantial amounts of fuel oil, electricity and other resources for our operations. Fuel, gas and power costs constituted
approximately 34.8% and 37.0% of our total production cost in 2012 and 2011, respectively. We rely upon third parties for our supply
of the energy resources consumed in our operations. The prices for and availability of energy resources may be subject to change or
curtailment, respectively, due to, among other things, new laws or regulations, imposition of new taxes or tariffs, interruptions in
production by suppliers, worldwide price levels and market conditions. Disruptions in energy supply or increases in costs of energy
resources or increases of other production costs could have a material adverse effect on our financial condition and results of
operations.
Shortages of water supply, critical parts, equipment and skilled labor may adversely affect our operations and development
projects.
Our mining operations require significant quantities of water for mining, ore processing and related support facilities. Although each
operation currently has sufficient water rights to cover its operational demands, the loss of some or all water rights for any of our
mines or operations, in whole or in part, or shortages of water to which we have rights could require us to curtail or shut down mining
production and could prevent us from pursuing expansion opportunities. Additionally, we have not yet secured adequate water rights
to support all of our announced expansion projects, and our inability to secure those rights could prevent us from pursuing some of
those opportunities. In addition, future shortages of critical parts, equipment and skilled labor could adversely affect our operations
and development projects.
Our results and financial condition are affected by global and local market conditions.
We are subject to the risks arising from adverse changes in domestic and global economic and political conditions. Our industry is
cyclical by nature and fluctuates with economic cycles, including the current global economic instability.
The weakness in the global economy has been marked by, among other adverse factors, lower levels of consumer and corporate
confidence, decreased business investment and consumer spending, increased unemployment, reduced income and asset values in
many areas, currency volatility and limited availability of credit and access to capital.
If the United States and the world-wide economic recovery continues to be weak or deteriorates or if Chinese economic growth
weakens, it could have an impact on our business and our financial condition. We cannot predict if the administrative and legislative
actions taken in the United States and elsewhere in the world to address this situation will be successful in reducing the severity or
duration of the economic instability. The continuation or intensification of the slow global economic recovery and the sovereign debt
crisis in Europe or elsewhere may prompt banks to limit or deny lending to us or to our customers, which may have an adverse effect
on our liquidity and on our ability to carry out our announced capital investment programs. Additionally, concerns over the slow
recovery in the United States and elsewhere in the world may prompt our customers to slow down or reduce the purchase of our
products. We may experience longer sales cycles, difficulty in collecting sales proceeds, and lower prices for our products. A change
in the demand of our products could impact our results of operations and financial condition. We cannot provide any assurance that
any of these events will not
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have a material adverse effect on market conditions, prices of our securities, our ability to obtain financing, and our results of
operations and financial condition.
Environmental, health and safety laws, regulatory response to climate change, and other regulations may increase our costs of
doing business, restrict our operations or result in operational delays.
Our exploration, mining, milling, smelting and refining activities are subject to a number of Peruvian and Mexican laws and
regulations, including environmental laws and regulations, as well as certain industry technical standards. Additional matters subject
to regulation include, but are not limited to, concession fees, transportation, production, water use and discharge, power use and
generation, use and storage of explosives, surface rights, housing and other facilities for workers, reclamation, taxation, labor
standards, mine safety and occupational health.
We are required to comply with occupational health and safety laws and regulations in Peru and Mexico where our operations are
subject to periodic inspections by the relevant governmental authorities. These laws and regulations govern, among others, health and
safety work place conditions, including high risk labor and the handling, storage and disposal of chemical and other hazardous
substances. We believe our operations are in compliance in all material respects with applicable health and safety laws and
regulations in the countries in which we operate. Compliance with these laws and regulations and new or existing regulations that
may be applicable to us in the future could increase our operating costs and adversely affect our financial results of operations and
cash flows.
We regularly monitor occupational health and safety performance and compliance through programs, reports and activities at our
operations. Accidents are reported to Mexican and Peruvian authorities as required. In 2012, we had three fatalities in Mexico, three
contractor employees and three fatalities in Peru, two Company employees and one contractor employee. In 2011, we had one fatality
in Mexico, one contractor employee, and three fatalities in Peru, two Company employees and one contractor employee. The amounts
paid to the Mexican and Peruvian authorities for reportable accidents did not have a material impact on our results. Under Mexican
and Peruvian law penalties and fines for safety violations are generally monetary, but in certain cases may lead to the temporary or
permanent shutdown of the affected facility or the suspension or revocation of permits or licenses. In 2012 and 2011, we were not
subject to material penalties or sanctions and we did not experience any shutdowns of our work areas. Also, violation of security and
safety laws and regulations in our Peruvian operations can be considered a crime, with penalties of up to 10 years of prison.
Environmental regulations in Peru and Mexico have become increasingly stringent over the last decade and we have been required to
dedicate more time and money to compliance and remediation activities. Furthermore, Mexican authorities have become more
rigorous and strict in enforcing Mexican environmental laws. We expect additional laws and regulations will be enacted over time
with respect to environmental matters.
The principal legislation applicable to the Company’s Mexican operations is the Federal General Law of Ecological Balance and
Environmental Protection (the “General Law”), 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.
On January 28, 2011, Article 180 of the General Law was amended. This amendment, gives an individual or entity the ability to
contest administrative acts, including environmental authorizations, permits or concessions granted, without the need to demonstrate
the actual existence of harm to the environment, natural resources, flora, fauna or human health, because it will be sufficient to argue
that the harm may be caused.
As a result of the amendment, more legal actions supported or sponsored by non-governmental groups, interested in halting projects,
and not necessarily in protecting the rights of affected communities may be filed against companies operating in all industrial sectors,
including the mining sector.
In addition, on August 30, 2011, amendments to the Civil Federal Procedures Code (“CFPC”) were published in the Official Gazette
and are now in force. These amendments establish three categories of collective actions, by means of which 30 or more people
claiming injury derived from environmental, consumer protection, financial services and economic competition issues will be
considered to be sufficient in order to have a legitimate interest to seek through a civil procedure restitution or
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economic compensation or suspension of the activities from which the alleged injury derived. The amendments to the CFPC may
result in more litigation, with plaintiffs seeking remedies, including suspension of the activities alleged to cause harm.
On December 5, 2011, the Mexican Senate Chamber approved the Environmental Liability Federal Law, which establishes general
guidelines in order to determine which environmental actions will be considered to cause environmental harm that will give rise to
administrative responsibilities (remediation or compensations) and criminal responsibilities. Also economic fines could be established.
This initiative has been returned to the lower chamber for discussion and voting. The law will be in force once approved by the lower
chamber and signed by the President.
In 2003 and 2005, Peruvian environmental laws imposing closure and remediation obligations on the mining industry were enacted.
Additionally, future changes to environmental laws and regulations could increase the extent of reclamation and remediation work
required to be performed by us. Any such increases in future costs could materially impact the amounts charged to operations for
reclamation and remediation. In 2012, we decided to recognize an estimated asset retirement obligation for our mining properties in
Mexico as part of our environmental commitment. Even though, there is currently no enacted law, statute, ordinance, or written or
oral contract requiring us to carry out mine closure and environmental remediation activities, we considered that a constructive
obligation presently exists based on, among other things, the remediation experience from the closure of the San Luis Potosi smelter in
2010. We further discuss these obligations in our Note 9 “Asset Retirement Obligation” to our consolidated financial statements.
Moreover, our Mexican operations are also subject to the environmental agreement entered into by Mexico, the United States and
Canada in connection with the North American Free Trade Agreement. This agreement, as well as new international treaties
regarding human rights, contains environmental provisions and initiatives. We believe our operations are in material compliance with
all environmental laws and regulations within the areas we operate.
Regulatory response to climate change, restrictions, caps, taxes, or other controls on emissions of greenhouse gasses, including on
emissions from the combustion of carbon-based fuels, could significantly increase our operating costs. Restrictions on emissions
could also affect our customers. A number of governments or governmental bodies have introduced or are contemplating regulatory
changes in response to the potential impacts of climate change. These regulatory initiatives will be either voluntary or mandatory and
may impact our operations directly or through our suppliers or customers.
The potential physical impacts of climate change on our operations are highly uncertain, and would be particular to the geographic
circumstances of our facilities. These may include changes in rainfall patterns, water shortages, changing sea levels, changing storm
patterns and intensities, and changing temperatures. These effects may adversely impact the cost, production and financial
performance of our operations.
The development of more stringent environmental protection programs in Peru and Mexico and in relevant trade agreements could
impose constraints and additional costs on our operations and require us to make significant capital expenditures in the future. We
cannot assure you that current or future legislative, regulatory or trade developments will not have an adverse effect on our business,
properties, operating results, financial condition or prospects.
Our metals exploration efforts are highly speculative in nature and may be unsuccessful.
Metals exploration is highly speculative in nature, involves many risks and is frequently unsuccessful. Once mineralization is
discovered, it may take a number of years from the initial phases of drilling before production is possible, during which time the
economic feasibility of production may change. Substantial expenditures are required to establish proven and probable ore reserves
through drilling, to determine metallurgical processes to extract the metals from the ore and, in the case of new properties, to construct
mining and processing facilities. We cannot assure you that our exploration programs will result in the expansion or replacement of
current production with new proven and probable ore reserves.
Development projects have no operating history upon which to base estimates of proven and probable ore reserves and estimates of
future cash operating costs. Estimates are, to a large extent, based upon the interpretation of geological data obtained from drill holes
and other sampling techniques, and feasibility studies that derive estimates of cash operating costs based upon anticipated tonnage and
grades of ore to be mined and processed, the configuration of the ore body, expected recovery rates of the mineral from the ore,
comparable facility and equipment operating costs, anticipated climatic conditions and other factors. As a result, actual cash operating
costs and economic returns based upon development of
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proven and probable ore reserves may differ significantly from those originally estimated. Moreover, significant decreases in actual or
expected prices may mean reserves, once found, will be uneconomical to produce.
Our profits may be negatively affected by currency exchange rate fluctuations.
The U.S. dollar is our functional currency and our revenues are primarily denominated in U.S. dollars. However, portions of our
operating costs are denominated in Peruvian nuevos soles and Mexican pesos. Accordingly, when inflation in Peru or Mexico
increases without a corresponding devaluation of the nuevo sol or the Mexican peso our financial position, results of operations and
cash flows could be adversely affected. To manage the volatility related to the risk of currency rate fluctuations, we may enter into
forward exchange contracts. We cannot assure you, however, that currency fluctuations will not have an impact on our financial
condition and results of operations.
Our assets, earnings and cash flows are influenced by various currencies due to the geographic diversity of our sales and the countries
in which we operate. As some of our costs are incurred in currencies other than our functional currency, the U.S. dollar, fluctuations
in currency exchange rates may have a significant impact on our financial results. These costs principally include electricity, labor,
maintenance, local contractors and fuel. For the year ended December 31, 2012, a substantial portion of our costs were denominated
in a currency other than U.S. dollars. Operating costs are influenced by the currencies of the countries where our mines and
processing plants are located and also by those currencies in which the costs of equipment and services are determined. The Peruvian
nuevo sol, the Mexican peso and the U.S. dollar are the currencies which most influence our costs.
Further, in the past there has been a strong correlation between copper prices and the exchange rate of the U.S. dollar. A
strengthening of the U.S. dollar may therefore be accompanied by lower copper prices, which would negatively affect our financial
condition and results of operations.
We may be adversely affected by challenges relating to slope stability.
Our open-pit mines get deeper as we mine them, presenting certain geotechnical challenges including the possibility of slope failure.
If we are required to decrease pit slope angles or provide additional road access to prevent such a failure, our stated reserves could be
negatively affected. Further, hydrological conditions relating to pit slopes, renewal of material displaced by slope failures and
increased stripping requirements could also negatively affect our stated reserves. We have taken actions in order to maintain slope
stability, but we cannot assure you that we will not have to take additional action in the future or that our actions taken to date will be
sufficient. Unexpected failure or additional requirements to prevent slope failure may negatively affect our results of operations and
financial condition, as well as have the effect of diminishing our stated ore reserves.
We may be adversely affected by labor disputes.
In the last several years we have experienced a number of strikes or other labor disruptions that have had an adverse impact on our
operations and operating results. As of December 31, 2012, unions represented approximately 69% of our workforce. Currently, we
have labor agreements in effect for our Mexican operations. At our Peruvian operations, collective bargaining agreements with the
eight unions expired in 2012. During 2012, we started negotiations with all the eight unions. During the first two months of 2013, we
have signed three-year agreements with all the unions. The agreements include, among other things, annual salary increases of 6.5%,
5% and 5% for each of the three years, respectively, for all workers.
In June 2010, a work stoppage at our Buenavista mine was finally resolved after a period of three years. The mine property was
rehabilitated and production was fully restored in the second quarter of 2011.
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.
We cannot assure you when these strikes will be settled, or that in the future we will not experience strikes or other labor related work
stoppages that could have a material adverse effect on our financial condition and results of operations.
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Our new mining or metal production projects may be subject to additional costs due to community actions and other factors.
Our exploration, mining, milling, smelting and refining activities are subject to Peruvian and Mexican laws and regulations, including
environmental laws and regulations, as well as certain industry technical standards. As in any other country, environmental
regulations in Peru and Mexico have become increasingly stringent over the last decades. In accordance with mining regulations in
the countries where we operate, we have to submit an environmental impact assessment (“EIA”) for all our new mining projects or
expansions of existing mining operations and/or facilities. The EIA is then discussed at various open hearings with the local
communities, where they have the opportunity to voice their opinion and/or concerns. In Peru, the Ministry of Energy and Mines
(“MINEM”) usually requires the mining companies to address the questions of the stakeholders. MINEM is the entity that approves
the EIA and the execution of mining projects. In December 2012, the Servicio Nacional de Certificacion Ambiental para Inversiones
Sostenible (“SENACE”) was created, and this governmental organization is in the process to assume responsibility to approve all
EIA’s related to the exploitation and processing phases.
Tia Maria, a Peruvian investment project of over $1.0 billion was suspended by governmental action in April 2011 in light of protests
and disruptions carried out by a small group of activists who alleged, among other things, that the project would result in severe
environmental contamination and the diversion of agricultural water resources.
We are preparing a new EIA study which we believe will take into account local community concerns and new government guidance.
We consider that this new EIA process will alleviate all the concerns previously raised by the Tia Maria project’s neighboring
communities, provide them with an independent source of information and reaffirm the validity of the Company’s assessment of the
project. We are confident that this initiative will have a positive effect on our stakeholders and will allow us to obtain the approval for
the development of the 120,000 ton annual production copper project.
We have legal and valid title to the Tia Maria mining concessions and the over-lapping surface land in the area. None of above noted
activities have in any way challenged, revoked, impaired or annulled our legal rights to the Tia Maria mining concessions and/or the
over-lapping surface land titles acquired in the past. All our property rights on these areas are in full force.
Toquepala concentrator expansion: As a result of protests from some community groups the approval process for the EIA of this
project has been delayed. These groups raised concerns related to water usage and pollution. As a result of these issues, the Peruvian
government during 2012 started discussions with the local communities and the regional authorities to resolve this impasse. We
participated also in a working group with the local and regional authorities and communities to define Company support for their
social and community programs. On February 8, 2013, we reached a final agreement with the province of Candarave, one of the three
provinces neighboring our Toquepala unit, which commits us to funding S/.255 million (approximately $98 million) for community
development projects in the province. This agreement is contingent upon receiving approval for the project. We expect to continue
working with the Candarave province and the other two provinces neighboring Toquepala to resolve all open issues during 2013.
The project will not use additional fresh water and therefore will not affect the availability of this resource for community or
agricultural use. In fact, water currently used by the Company comes from deep wells drilled into the Capulline formation aquifer and
does not take water from the population and agricultural communities of Tacna and Moquegua.
As we indicated above for the Toquepala expansion project, it appears that it is becoming a part of the Peruvian mining environment,
that in order to obtain acceptance from local communities for projects in their localities, demands for substantial investments in
community infrastructure and upgrades must be met in order to proceed with the mining projects. We cannot assure that we will not
continue to incur additional costs for community infrastructure and upgrades in order to obtain the approval of current or future
mining projects.
We are confident that we will continue with the Tia Maria and the Toquepala projects. However, these projects, or any other project
which we may undertake in the future, may be subject to additional costs as a result of delays due to actions by members of the local
community or other factors.
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We are controlled by Grupo Mexico, which exercises control over our affairs and policies and whose interests may be different
from yours.
At December 31, 2012, Grupo Mexico owned indirectly 81.3% of our capital stock. Certain of our and Minera Mexico’s officers and
directors are also directors and/or officers of Grupo Mexico and/or of its affiliates. We cannot assure you that the interests of Grupo
Mexico will not conflict with ours.
Grupo Mexico has the ability to determine the outcome of substantially all matters submitted for a vote to our stockholders and thus
exercises control over our business policies and affairs, including the following:
• the composition of our Board of Directors and, as a result, any determinations of our Board with respect to our business direction
and policy, including the appointment and removal of our officers;
• determinations with respect to mergers and other business combinations, including those that may result in a change of control;
• whether dividends are paid or other distributions are made and the amount of any dividends or other distributions;
• sales and dispositions of our assets; and
• the amount of debt financing that we incur.
We cannot assure you that increased financial obligations of Grupo Mexico or AMC resulting from financings or for other reasons
will not result in our parent corporations obtaining loans, increased dividends or other funding from us.
In addition, we have in the past engaged in, and expect to continue to engage in, transactions with Grupo Mexico and its other
affiliates which are related party transactions and may present conflicts of interest. For additional information regarding the share
ownership of, and our relationships with, Grupo Mexico and its affiliates, see Note 18 “Related Party Transactions.”
We may not continue to pay a significant amount of our net income as cash dividends on our common stock in the future.
We have distributed a significant amount of our net income as dividends since 1996. Our dividend practice is subject to change at the
discretion of our Board of Directors at any time. The amount that we pay in dividends is subject to a number of factors, including our
results of operations, financial condition, cash requirements, tax considerations, future prospects, legal restrictions, contractual
restrictions in credit agreements, limitations imposed by the government of Peru, Mexico or other countries where we have significant
operations and other factors that our Board of Directors may deem relevant. In light of our capital investment program and the current
global economic conditions, it is possible that future dividend distributions will be reduced from the levels of recent years.
International Risks
We are a company with substantial assets located outside of the United States. We conduct production operations in Peru and Mexico
and exploration activities in these countries as well as in Chile, Argentina and Ecuador. Accordingly, in addition to the usual risks
associated with conducting business in foreign countries, our business may be adversely affected by political, economic and social
uncertainties in each of these countries. Such risks include possible expropriation or nationalization of property, confiscatory taxes or
royalties, possible foreign exchange controls, changes in the national policy toward foreign investors, etc.
Our insurance does not cover most losses caused by the above described risks. Consequently, our production, development and
exploration activities in these countries could be substantially affected by factors beyond our control, some of which could materially
and adversely affect our financial position or results of operations.
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Risks Associated with Doing Business in Peru and Mexico
There is uncertainty as to the termination and renewal of our mining concessions.
Under the laws of Peru and Mexico, mineral resources belong to the state and government concessions are required in both countries
to explore for or exploit mineral reserves. In Peru, our mineral rights derive from concessions from the Peruvian Ministry of Energy
and Mines for our exploration, exploitation, extraction and/or production operations. In Mexico, our mineral rights derive from
concessions granted, on a discretionary basis, by the Ministry of Economy, pursuant to the Mexican mining law and regulations
thereunder.
Mining concessions in both Peru and Mexico may be terminated if the obligations of the concessionaire are not satisfied. In Peru, we
are obligated to pay certain fees for our mining concession. In Mexico, we are obligated, among other things, to explore or exploit the
relevant concession, to pay any relevant fees, to comply with all environmental and safety standards, to provide information to the
Ministry of Economy and to allow inspections by the Ministry of Economy. Any termination or unfavorable modification of the terms
of one or more of our concessions, or failure to obtain renewals of such concessions subject to renewal or extensions, could have a
material adverse effect on our financial condition and prospects.
Peruvian economic and political conditions may have an adverse impact on our business.
A significant part of our operations are conducted in Peru. Accordingly, our business, financial condition or results of operations
could be affected by changes in economic or other policies of the Peruvian government or other political, regulatory or economic
developments in Peru. During the past several decades, Peru has had a history of political instability that has included military coups
and a succession of regimes with differing policies and programs. Past governments have frequently intervened in the nation’s
economy and social structure. Among other actions, past governments have imposed controls on prices, exchange rates and local and
foreign investments, as well as limitations on imports, have restricted the ability of companies to dismiss employees, have
expropriated private sector assets (including mining companies) and have prohibited the remittance of profits to foreign investors.
In the last 10 years Peru has had political and social stability. The Peruvian government’s economic policies reduced inflation and the
Peruvian economy has experienced significant growth in recent years. In October 2010, Peru had regional and mayoral elections and
in June 2011 Peru elected a new president.
Because we have significant operations in Peru, we cannot provide any assurance that political developments and economic conditions
in Peru and/or other factors will not have a material adverse effect on market conditions, prices of our securities, our ability to obtain
financing, and our results of operations and financial condition.
Mexican economic and political conditions, as well as drug-related violence, may have an adverse impact on our business.
The Mexican economy is highly sensitive to economic developments in the United States, mainly because of its high level of exports
to the United States market. The global financial crisis and the subsequent downturn in the United States economy caused real gross
domestic product in Mexico to fall 6.6% in 2009. Mexico’s policy measures in response to the crisis and its prior economic
performance have helped the economy begin a recovery. Gross domestic product grew by 3.8% and 5% in 2012 and 2011,
respectively, and is projected to grow by at least 3.5% in 2013. Other possible risks are increases in taxes on the mining sector or
higher royalties. As has occurred in other metal producing countries, the mining industry may be perceived as a source of additional
fiscal revenue.
Regarding the political situation in Mexico, security institutions are under significant stress, as a result of drug-related violence. This
situation creates potential risks especially for transportation of minerals and finished products, which affect a small part of our
production. However, drug-related violence has had a limited impact on our operations as it has tended to concentrate outside our
areas of production. If this were to change, the risk to our operations might increase.
On July 1, 2012, voters elected a new president and members of the chambers of deputies and senators in Mexico for a six-year
period.
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Because we have significant operations in Mexico, we cannot provide any assurance that political developments and economic
conditions, as well as drug-related violence, in Mexico will not have a material adverse effect on market conditions, prices of our
securities, our ability to obtain financing, and our results of operations and financial condition.
Peruvian inflation and fluctuations in the nuevo sol exchange rate may adversely affect our financial condition and results of
operations.
Over the past several years, Peru has experienced one of its best economic periods. In Peru economic conditions have improved
significantly in the last years. Inflation in 2012, 2011 and 2010 was 2.6%, 4.8% and 2.1%, respectively. The value of the nuevo sol
has appreciated against the U.S. dollar, 5.4% in 2012, 4.0% in 2011 and 2.8% in 2010. Our revenues are primarily denominated in
U.S. dollars and our operating expenses are partly denominated in U.S. dollars. If inflation in Peru were to increase without a
corresponding depreciation of the nuevo sol relative to the U.S. dollar, our financial position and results of operations, and the market
price of our common stock, could be affected. Although the Peruvian government’s economic policy reduced inflation and the
economy has experienced significant growth in recent years, we cannot assure you that inflation will not increase from its current level
or that such growth will continue in the future at similar rates or at all. Additionally the global financial economic crisis, could
negatively affect the Peruvian economy.
Mexican inflation, restrictive exchange control policies and fluctuations in the peso exchange rate may adversely affect our
financial condition and results of operations.
Although all of our Mexican operations’ sales of metals are priced and invoiced in U.S. dollars, a substantial portion of our Mexican
operations’ cost of sales are denominated in pesos. Accordingly, when inflation in Mexico increases without a corresponding
depreciation of the peso the net income generated by our Mexican operations is adversely affected. The annual inflation rate in
Mexico was 3.6% in 2012, 3.8% in 2011 and 4.4% in 2010. The Bank of Mexico has publicly announced a target of 3.8% inflation
for 2013.
At the same time, the peso has been subject in the past to significant volatility, which may not have been proportionate to the inflation
rate and may not be proportionate to the inflation rate in the future. The value of the peso decreased by 6.9% in 2012, decreased by
13.1% in 2011, and increased by 5.4% in 2010.
The Mexican government does not currently restrict the ability of Mexican companies or individuals to convert pesos into dollars or
other currencies. While we do not expect the Mexican government to impose any restriction or exchange control policies in the
future, it is an area we closely monitor. We cannot assure you the Mexican government will maintain its current policies with regard
to the peso or that the peso’s value will not fluctuate significantly in the future. The imposition of exchange control policies could
impair Minera Mexico’s ability to obtain imported goods and to meet its U.S. dollar-denominated obligations and could have an
adverse effect on our business and financial condition.
Developments in other emerging market countries and in the United States may adversely affect the prices of our common stock
and our debt securities.
The market value of securities of companies with significant operations in Peru and Mexico is, to varying degrees, affected by
economic and market conditions in other emerging market countries. Although economic conditions in such countries may differ
significantly from economic conditions in Peru or Mexico, as the case may be, investors’ reactions to developments in any of these
other countries may have an adverse effect on the market value or trading price of the securities, including debt securities, of issuers
that have significant operations in Peru or Mexico.
In addition, in recent years economic conditions in Mexico have increasingly become correlated to U.S. economic conditions.
Therefore, adverse economic conditions in the United States could also have a significant adverse effect on Mexican economic
conditions, including the price of our common stock or debt securities.
We cannot assure you that the market value or trading prices of our common stock and debt securities, will not be adversely affected
by events in the United States or elsewhere, including in emerging market countries.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
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ITEM 2. PROPERTIES
We were incorporated in Delaware in 1952. Our corporate offices in the United States are located at 1440 East Missouri Avenue
Suite 160, Phoenix, Arizona 85014. Our Phoenix telephone number is (602) 264-1375. Our corporate offices in Mexico are located
in Mexico City and our corporate offices in Peru are located in Lima. Our website is www.southerncoppercorp.com. We believe that
our existing properties are in good condition and suitable for the conduct of our business.
REVIEW OF OPERATIONS
The following maps set forth the locations of our principal mines, smelting facilities and refineries. We operate open-pit copper mines
in the southern part of Peru — at Toquepala and Cuajone — and in Mexico, principally at La Caridad and Buenavista. We also
operate five underground mines that produce zinc, copper, silver and gold, as well as a coal mine and a coke oven.
EXTRACTION, SMELTING AND REFINING PROCESSES
Our operations include open-pit and underground mining, concentrating, copper smelting, copper refining, copper rod production,
solvent extraction/electrowinning (SXEW), zinc refining, sulfuric acid production, molybdenum concentrate production and silver and
gold refining. The extraction and production process are summarized below.
OPEN-PIT MINING
In an open-pit mine, the production process begins at the mine pit, where waste rock, leaching ore and copper ore are drilled and
blasted and then loaded onto diesel-electric trucks by electric shovels. Waste is hauled to dump areas and leaching ore is hauled to
leaching dumps. The ore to be milled is transported to the primary crushers.
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UNDERGROUND MINING
In an underground mine, the production process begins at the stopes, where copper, zinc and lead veins are drilled and blasted and the
ore is hauled to the underground crusher station. The crushed ore is then hoisted to the surface for processing.
CONCENTRATING
The copper ore with a copper grade over 0.4% from the primary crusher or the copper, zinc and lead-bearing ore from the
underground mines is transported to a concentrator plant where gyratory crushers break the ore into sizes no larger than three-quarter
of an inch. The ore is then sent to a mill section where it is ground to the consistency of fine powder. The finely ground ore is mixed
with water and chemical reagents and pumped as a slurry to the flotation separator where it is mixed with certain chemicals. In the
flotation separator, reagent solutions and air pumped into the flotation cells cause the minerals to separate from the waste rock and
bubble to the surface where they are collected and dried.
If the bulk concentrated copper contains molybdenum it is first processed in a molybdenum plant as described below under
“Molybdenum Production.”
COPPER SMELTING
Copper concentrates are transported to a smelter, where they are smelted using a furnace, converter and anode furnace to produce
either blister copper (which is in the form of cakes with air pockets) or copper anodes (which are cleaned of air pockets). At the
smelter, the concentrates are mixed with flux (a chemical substance intentionally included for high temperature processing) and then
sent to reverberatory furnaces producing copper matte and slag (a mixture of iron and other impurities). Copper matte contains
approximately 65% copper. Copper matte is then sent to the converters, where the material is oxidized in two steps: (i) the iron
sulfides in the matte are oxidized with silica, producing slag that is returned to the reverberatory furnaces, and (ii) the copper
contained in the matte sulfides is then oxidized to produce copper that, after casting, is called blister copper, containing approximately
98% to 99% copper, or anodes, containing approximately 99.7% copper. Some of the blister and anode production is sold to
customers and the remainder is sent to the refinery.
COPPER REFINING
Anodes are suspended in tanks containing sulfuric acid and copper sulfate. A weak electrical current is passed through the anodes and
chemical solution and the dissolved copper is deposited on very thin starting sheets to produce copper cathodes containing
approximately 99.99% copper. During this process, silver, gold and other metals (for example, palladium, platinum and selenium),
along with other impurities, settle on the bottom of the tank (anodic slime). This anodic slime is processed at a precious metal plant
where selenium, silver and gold are recovered.
COPPER ROD PLANT
To produce copper rod, copper cathodes are first smelted in a furnace and then dosified in a casting machine. The dosified copper is
then extruded and passed through a cooling system that begins solidification of copper into a 60×50 millimeter copper bar. The
resulting copper bar is gradually stretched in a rolling mill to achieve the desired diameter. The rolled bar is then cooled and sprayed
with wax as a preservation agent and collected into a rod coil that is compacted and sent to market.
SOLVENT EXTRACTION/ELECTROWINNING (SXEW)
An alternative to the conventional concentrator/smelter/refinery process is the leaching and SXEW process. During the SXEW
process, certain types of low-grade ore with a copper grade under 0.4% are leached with sulfuric acid to allow copper content
recovery. The acid and copper solution is then agitated with a solvent that contains chemical additives that attract copper ions. As the
solvent is lighter than water, it floats to the surface carrying with it the copper content. The solvent is then separated using an acid
solution, freeing the copper. The acid solution containing the copper is then moved to electrolytic extraction tanks to produce copper
cathodes. Refined copper can be produced more economically (though over a longer period) and from lower grade ore using the
SXEW process instead of the traditional concentrating, smelting and refining process.
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MOLYBDENUM PRODUCTION
Molybdenum is recovered from copper-molybdenum concentrates produced at the concentrator. The copper-molybdenum concentrate
is first treated with a thickener until it becomes slurry with 60% solids. The slurry is then agitated in a chemical and water solution
and pumped to the flotation separator. The separator creates a froth that carries molybdenum to the surface but not the copper mineral
(which is later filtered to produce copper concentrates containing approximately 27% copper). The molybdenum froth is skimmed off,
filtered and dried to produce molybdenum concentrates of approximately 58% contained molybdenum.
ZINC REFINING
Metallic zinc is produced through electrolysis using zinc concentrates and zinc oxides. Sulfur is eliminated from the concentrates by
roasting and the zinc oxide is dissolved in sulfuric acid solution to eliminate solid impurities. The purified zinc sulfide solution is
treated by electrolysis to produce refined zinc and to separate silver and gold, which are recovered as concentrates.
SULFURIC ACID PRODUCTION
Sulfur dioxide gases are produced in the copper smelting and zinc roasting processes. As a part of our environmental preservation
program, we treat the sulfur dioxide emissions at two of our Mexican plants and at Peruvian processing facilities to produce sulfuric
acid, some of which is, in turn, used for the copper leaching process, with the rest sold to mining and fertilizer companies located
principally in Mexico, Peru, United States, Chile and other countries.
SILVER AND GOLD REFINING
Silver and gold are recovered from copper, zinc and lead concentrates in the smelters and refineries, and from slimes through
electrolytic refining.
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Table of Contents
KEY PRODUCTION CAPACITY DATA:
All production facilities are owned by us. The following table sets forth as of December 31, 2012, the locations of production
facilities by reportable segment, the processes used, as well as the key production and capacity data for each location:
Facility Name
Location
Process
Nominal
Capacity (1)
2012
Production
2012
Capacity
Use
PERUVIAN OPEN-PIT
UNIT
Mining Operations
Cuajone open-pit mine
Toquepala open-pit mine
Toquepala SXEW plant
Processing Operations
Ilo copper smelter
Ilo copper refinery
Ilo acid plants
Cuajone (Peru)
Toquepala
(Peru)
Toquepala
(Peru)
Ilo (Peru)
Ilo (Peru)
Ilo (Peru)
Ilo precious metals refinery
Ilo (Peru)
MEXICAN OPEN-PIT
UNIT
Mining Operations
Buenavista open-pit mine
Buenavista SXEW I, II plants
La Caridad open-pit mine
La Caridad SXEW plant
Processing Operations
La Caridad copper smelter
La Caridad copper refinery
La Caridad copper rod plant
La Caridad precious metals
refinery
La Caridad sulfuric acid plant
IMMSA UNIT
Underground mines
Charcas
San Martin (2)
Sonora
(Mexico)
Sonora
(Mexico)
Sonora
(Mexico)
Sonora
(Mexico)
Sonora
(Mexico)
Sonora
(Mexico)
Sonora
(Mexico)
Sonora
(Mexico)
Sonora
(Mexico)
Copper ore milling and
recovery, copper and
molybdenum concentrate
production
Copper ore milling and
recovery, copper and
molybdenum concentrate
production
Leaching, solvent
extraction and cathode
electrowinning
Copper smelting, blister,
anodes production
Copper refining
Sulfuric acid
Slime recovery &
processing, gold & silver
refining
Copper ore milling &
recovery, copper
concentrate production
Leaching, solvent
extraction & refined
cathode electrowinning
Copper ore milling &
recovery, copper &
molybdenum concentrate
production
Leaching, solvent
extraction & cathode
electrowinning
87.0 ktpd — ore
milled
80.0 ktpd
91.9%
60.0 ktpd — ore
milled
56.0 ktpy — refined
57.5 ktpd
95.5%
32.2 ktpy
57.5%
1,200.0 ktpy —
concentrate feed
280 ktpy — refined
cathodes
1,050 ktpy -
sulfuric acid
320 tpy
996.6 ktpy
215.7 ktpy
968.7 ktpy
274.4tpy
83.0%
77.0%
92.3%
85.8%
76.7 ktpd —
milling
54.8 ktpy
(combined)
91.0 ktpd —
milling
70.4 ktpd
91.7%
66.1 ktpy
120.6%
91.4 ktpd
100.4%
21.9 ktpy — refined
22.8 ktpy
104.0%
Concentrate smelting,
anode production
Copper refining
Copper rod production
1,000 ktpy —
concentrate feed
300 ktpy copper
cathode
150 ktpy copper rod
904.3 ktpy
213.7 ktpy
120.8 ktpy
1.8 ktpy - slime
1.1 ktpy
90.4%
71.2%
80.5%
59.8%
Slime recovery &
processing, gold & silver
refining
Sulfuric acid
1,565.5 ktpy —
sulfuric acid
887.8 ktpy
56.7%
1,460 ktpy — ore
milled
1,606 ktpy — ore
milled
1,164.0 ktpy
79.7%
—
San Luis Potosi
(Mexico)
Zacatecas
(Mexico)
Copper, zinc, lead
milling, recovery &
concentrate production
Lead, zinc, copper &
silver mining, milling
recovery & concentrate
production
28
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Santa Barbara
Santa Eulalia (3)
Taxco (2)
Chihuahua
(Mexico)
Chihuahua
(Mexico)
Guerrero
(Mexico)
Nueva Rosita coal & coke
complex(4)
Coahuila
(Mexico)
Lead, copper and zinc
mining & concentrates
production
Lead & zinc mining and
milling recovery &
concentrate production
Lead, zinc silver & gold
mining recovery &
concentrate production
Clean coal production
2,190 ktpy — ore
milled
547.5 ktpy - ore
milled
730 ktpy - ore
milled
1,590.0 ktpy
72.6%
154.0 ktpy
28.1%
—
900 ktpy clean coal
100 ktpy coke
148 ktpy
91.2 ktpy
Processing Operations
San Luis Potosí zinc refinery
San Luis Potosi sulfuric acid
plant
San Luis Potosi
(Mexico)
San Luis Potosi
(Mexico)
Zinc concentrates
refining
Sulfuric acid
105.0 ktpy zinc
cathode
180.0 ktpy sulfuric
acid
93.5 ktpy
159.1 ktpy
ktpd = thousands of tons per day
ktpy = thousands of tons per year
Tpy = tons per year
(1) Our estimates of actual capacity contemplating normal operating conditions with allowance for normal downtime for
repairs and maintenance and based on the average metal content for the relevant period.
(2) During 2012, there was no production at the Taxco and San Martin mines due to strikes.
(3) Production at Santa Eulalia was reduced due to flooding problems. Production was restored by the end of 2012.
(4) At December 31, 2012, the coal reserves for the Nueva Rosita coal plant were 100.6 million tons with average sulfur
content of 1.1% and a BTU content of 8,503 per pound.
29
16.4
91.2
%
%
89.0%
88.4%
Table of Contents
PROPERTY BOOK VALUE
At December 31, 2012, net book values of property are as follows (in millions):
Peruvian operations:
Cuajone
Toquepala
Tia Maria project
Ilo and other support facilities
Property in progress
Total
Mexican open-pit operations:
Buenavista
La Caridad
Property in progress
Mexicana del Arco
Total
Mexican IMMSA unit:
San Luis Potosi
Zinc electrolytic refinery
Charcas
San Martin
Santa Barbara
Taxco
Santa Eulalia
Nueva Rosita
Property in progress and other facilities
Total
Mexican administrative offices
Total Southern Copper Corporation
$
$
$
$
$
$
$
$
491.4
609.5
304.1
579.7
246.7
2,231.4
929.0
1,008.1
467.2
40.6
2,444.9
32.8
77.5
41.5
28.6
73.4
4.5
36.1
21.1
35.4
350.9
129.5
5,156.7
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SUMMARY OPERATING DATA
The following table sets out certain operating data underlying our financial and operating information for each of the periods
indicated.
COPPER (thousand pounds):
Mined
Peru open-pit
Toquepala
Cuajone
SXEW Toquepala
Mexico open-pit
La Caridad
Buenavista
SXEW La Caridad
SXEW Buenavista
IMMSA unit
Total Mined
Smelted
Peru open-pit
Blister Ilo
Anodes Ilo
Mexico open-pit
Anodes La Caridad
IMMSA unit
Blister IMMSA
Total Smelted
Refined
Peru Open-pit
Cathodes Ilo
SXEW Toquepala
Mexico Open-pit
Cathodes La Caridad
SXEW La Caridad
SXEW Buenavista
Total Refined
Rod Mexico Open-pit - La Caridad
SILVER (thousand ounces)
Mined
Peru Open-pit
Toquepala
Cuajone
Mexico Open-pit
La Caridad
Buenavista
IMMSA unit
Total Mined
Refined
Peru Open-pit — Ilo
Mexico Open-pit — La Caridad
IMMSA unit
Total Refined
MOLYBDENUM (thousand pounds)
Mined
Toquepala
Cuajone
La Caridad
Total Mined
ZINC (thousand pounds)
Mined IMMSA
Refined IMMSA
2012
Year Ended December 31,
2011
2010
264,794
350,079
70,976
215,715
295,345
50,284
145,734
265,390
308,956
77,872
197,927
242,832
52,587
137,440
289,947
363,692
83,640
209,154
—
50,403
45,626
12,915
1,405,842
12,189
1,295,193
12,507
1,054,969
72,407
584,694
—
744,747
—
688,894
575,277
510,766
256,913
—
1,232,378
—
1,255,513
1,958
947,765
475,452
70,976
575,391
77,872
471,193
50,284
145,734
1,213,639
266,298
411,933
52,587
137,440
1,255,223
237,933
1,689
2,117
1,891
1,972
5,974
13,643
2,881
8,622
2,365
13,868
9,850
6,307
24,181
40,338
1,707
1,918
1,776
1,464
5,866
12,731
3,152
6,913
2,524
12,589
11,823
6,144
22,973
40,940
563,281
83,640
186,563
50,404
45,626
929,514
126,246
1,801
2,451
1,845
—
6,549
12,646
3,466
6,097
3,680
13,243
10,644
11,594
22,998
45,236
198,160
206,225
184,763
200,332
218,685
209,598
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Table of Contents
SLOPE STABILITY:
Peruvian Operations
The Toquepala and Cuajone pits are approximately 825 meters and 900 meters deep, respectively. Under the present mine plan
configuration the Toquepala pit will reach a depth of 1,635 meters and the Cuajone pit will reach a depth of 1,290 meters. The
deepening pits present us with a number of geotechnical challenges. Perhaps the foremost concern is the possibility of slope failure, a
possibility that all open-pit mines face. In order to maintain slope stability, in the past we have decreased pit slope angles, installed
additional or duplicate haul road access, and increased stripping requirements. We have also responded to hydrological conditions and
removed material displaced by slope failures. To meet the geotechnical challenges relating to slope stability of the open-pit mines, we
have taken the following steps:
In the late 1990s we hosted round table meetings in Vancouver, B.C. with a group of recognized slope stability and open-pit mining
specialists. The agenda for these meetings was principally a review of pit design for mines with greater than 700 meter depth. The
discussions included practices for monitoring, data collection and blasting processes.
Based on the concepts defined at the Vancouver meetings, we initiated slope stability studies to define the mining of reserves by
optimum design. These studies were performed by outside consultants and included slope stability appraisals, evaluation of the
numerical modeling, slope performance and inter-ramp angle design and evaluation of hydrological conditions.
The studies were completed in 2000 and we believe we implemented the study recommendations. One of the major changes
implemented was slope angle reduction at both mines, Toquepala by an average of five degrees and Cuajone by an average of seven
degrees. Although this increased the waste included in the mineable reserve calculation, it also improved the stability of the pits.
In the Toquepala mine in 2007 we installed 20 meter wide geotechnical berms every 10 benches. We believe this will further
strengthen the stability of the Toquepala pit.
Since 1998, a wall depressurization program has been in place in both pits. This consists of a horizontal drilling program, which
improves drainage thereby reducing saturation and increasing wall stability. Additionally, a new blasting control program was put in
place, implementing vibration monitoring and blasting designs of low punctual energy. Also a new slope monitoring system was
implemented using reflection prisms, deformation inclinometers and piezometers for water level control, as well as real-time robotic
monitoring equipment. In February 2012, a monitoring slope radar system was put in place at the Cuajone mine. This system
improves the reliability of instrumentation, the information quality for assessing the behavior of the slopes and anticipates the risks of
instability.
In 2011, a program of oriented and conventional geotechnical drilling was executed at the Toquepala mine, totaling 5,250 meters. At
the Cuajone mine, 2,314 meters of a horizontal geotechnical drilling program was carried out for slope drainage. In October 2012, we
started a 24,480 meter program of oriented and conventional geotechnical drilling which is expected to be completed by the end of the
first quarter 2013. This program will update the geotechnical study for the new 15 years mine development plan (2014-2028).
To increase the possibility of mining in the event of a slide, we have provided for two ramps of extraction for each open-pit mine. On
March 2012, SRK Consulting Chile concluded the geotechnical study of the current slope and mining plans for 2012 and 2013 with
recommendations to improve the slope stability.
While these measures cannot guarantee that a slope failure will not occur, we believe that our mining practices are sound and that the
steps taken and the ongoing reviews performed are a prudent methodology for open-pit mining.
Mexican operations
In 2004, our 15-year mine plan study for the La Caridad mine was awarded to an independent consulting firm to conduct a
geotechnical evaluation. The purpose of the plan was to develop a program of optimum bench design and inter-ramp slope angles for
the open-pit. A number of recommendations and observations were presented by the consultants. These included a recommendation
of a maximum average bench face angle of 72 degrees. Additionally, single benching was recommended
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Table of Contents
for the upper sections of the west, south and east walls of the main pit. Likewise, double benching was recommended for the lower
levels of the main pit and single benching for the upper slope segments that consist of either alluvial material, mine waste dumps or
mineralized stockpile material. Alternatively, slopes in these types of materials, may be designed with an overall 37 degree slope.
The geoestructural and geotechnical parameters recommended were applied in the pit design for the new life of the mine plan for La
Caridad mine prepared in 2010. This mine plan replaced the 15-year mine plan prepared in 2004. However, since final pit limits have
not been yet established at La Caridad, all current pit walls are effectively working slopes. Geostructural and geotechnical data
collected at the open-pit mine from cell-mapping and oriented-core drilling databases provided the basis for the geotechnical
evaluation and recommendations. We continue to collect new information related to geotechnical data and other geology features in
order to ensure the structural security and also to improve the geotechnical data base for future studies
At the Buenavista mine, we are following the recommendations of a geotechnical evaluation of design slope for the 15-year pit plan.
This evaluation was prepared by an independent mine consulting firm. This evaluation included the determination of optimum pit
slope design angles and bench design parameters for the proposed mine plan. The objective of the study was: 1) to determine
optimum inter-ramp slope angles and bench design parameters for the 15-year plan and 2) to identify and analyze any potential major
instability that could adversely impact mine operation. In 2012, we installed a radar system to monitor the walls of the mine.
The following recommendations were made for the Buenavista mine: inter-ramp slope design angles for the 15-year pit plan, for all of
the 21 design sectors, defined on a rock-fabric-based catch bench analysis, using double bench, can range from 48° and 55°, and the
inter-ramp slope angles are based on geometries that resulted from the back-break analysis using 80% reliability of achieving the
required 7.5 meter catch bench width for a single bench configuration and 10.6 meter catch bench width for a double bench
configuration. Preliminary observations suggest the 15-year pit walls may be relative free-draining, the back-break analysis assumed
depressurized conditions of mine benches, and the inter-ramp stability analysis were performed for both, saturated and depressurized
conditions.
A pit dewatering/depressurization plan for the Buenavista mine was also recommended to address the issues of open-pit drainage,
dewatering plan and future slope depressurization. Phase I of the geohydrological study was completed by an independent consultant.
The analysis included a preliminary assessment and work plan implementations.
In 2011, five wells for extraction and monitoring were drilled close to the mine. Also, we began a drilling program to monitor possible
water filtration beyond the limits of the open-pit mine. All the information obtained from these well drilling programs has been
analyzed and included in the hydrologic model. The open-pit dewatering program from the bottom benches also continued during
2012 with a drilling program of 3,797 meters in several monitoring wells in order to allow us to continue with the current mining plan.
33
Table of Contents
METAL PRODUCTION BY SEGMENTS
Set forth below are descriptions of the operations and other information relating to the operations included in each of our three
segments.
PERUVIAN OPERATIONS
Our Peruvian segment operations include the Cuajone and Toquepala mine complexes and the smelting and refining plants, industrial
railroad which links Ilo, Toquepala and Cuajone and the port facilities.
Following is a map indicating the approximate location of, and access to, our Cuajone and Toquepala mine complexes, as well as our
Ilo processing facilities:
Cuajone
Our Cuajone operations consist of an open-pit copper mine and a concentrator located in southern Peru, 30 kilometers from the city of
Moquegua and 840 kilometers from Lima. Access to the Cuajone property is by plane from Lima to Tacna (1:20 hours) and then by
highway to Moquegua and Cuajone (3:30 hours). The concentrator has a milling capacity of 87,000 tons per day. Overburden
removal commenced in 1970 and ore production commenced in 1976. Our Cuajone operations utilize a conventional open-pit mining
method to collect copper ore for further processing at the concentrator.
The table below sets forth 2012, 2011 and 2010 production information for our Cuajone operations:
Mine annual operating days
Mine
Total ore mined
Copper grade
Leach material mined
Leach material grade
Stripping ratio
Total material mined
2012
2011
2010
366
28,708
0.653
554
0.538
4.37
154,091
365
29,073
0.578
3,096
0.551
3.82
140,108
365
31,461
0.598
10
0.519
3.01
126,144
(kt)
(%)
(kt)
(%)
(x)
(kt)
34
Table of Contents
Concentrator
Total material milled
Copper recovery
Copper concentrate
Copper in concentrate
Copper concentrates average grade
Molybdenum
Molybdenum grade
Molybdenum recovery
Molybdenum concentrate
Molybdenum concentrate average grade
Molybdenum in concentrate
(kt)
(%)
(kt)
(kt)
(%)
(%)
(%)
(kt)
(%)
(kt)
2012
2011
2010
28,732
84.57
620.7
158.8
25.58
0.014
71.15
5.4
53.42
2.9
28,946
83.69
542.3
140.1
25.84
0.013
73.90
5.2
53.71
2.8
31,419
87.73
620.7
165.0
26.58
0.022
76.78
9.7
54.09
5.3
Key: kt = thousand tons
x = Stripping ratio obtained dividing waste plus leachable material by ore mined.
Copper and molybdenum grades are referred to as total copper grade and total molybdenum grade, respectively.
We continuously improve and renovate our equipment. Major Cuajone mine equipment includes:
• Fifteen 290-ton capacity trucks,
• eighteen 218-ton capacity trucks,
• nine 231-ton capacity trucks,
• seven 360-ton capacity trucks,
• three 56-cubic yard capacity shovels,
• two 73-cubic yard shovels,
• one 42-cubic yard shovel,
• one 33-cubic yard capacity front loader,
• one 50-cubic yard capacity front loader,
• six electric drills, and
• three diesel drills for pre-splitting.
Auxiliary equipment includes:
• Eight wheel bulldozers,
• eleven Caterpillar bulldozers,
• two 988 CAT front loaders,
• three 966 CAT front loaders, and
• five motorgraders.
Geology
The Cuajone porphyry copper deposit is located on the western slopes of Cordillera Occidental, in the southern-most Andes
Mountains of Peru. The deposit is part of a mineral district that contains two additional known deposits, Toquepala and Quellaveco.
The copper mineralization at Cuajone is typical of porphyry copper deposits.
The Cuajone deposit is located approximately 28 kilometers from the Toquepala deposit and is part of the Toquepala Group dated 60
to 100 million years (Upper Cretaceous to Lower Tertiary). The Cuajone lithology includes volcanic rocks from Cretaceous to
Quaternary. There are 32 rock types including, pre-mineral rocks, basaltic andesite, porphyritic rhyolite, Toquepala dolerite and
intrusive rocks, including diorite, porphyritic latite, breccias and dikes. In addition, the following post-mineral rocks are present, the
Huaylillas formation which appears in the south-southeast side of the deposit and has been formed by conglomerates, tuffs, traquites
and agglomerates. These formations date 17 to 23 million years and are found in the Toquepala Group as discordance. The
Chuntacala formation which dates 9 to 14 million years and is formed by conglomerates, flows, tuffs and agglomerates placed
gradually in some cases and in discordance in others. Also Quaternary deposits are found in the rivers, creeks and hills. The
mineralogy is simple with regular grade distribution and vertically funnel-shaped. Ore minerals include chalcopyrite (CuFeS ),
2
chalcosine (Cu S) and molybdenite (MoS ) with occasional galena, tetraedrite and enargite as non economical ore.
2
2
35
Table of Contents
Mine exploration
Exploration activities during the drill campaign in 2012 are as follows:
Studies
Infill drilling
Geotechnical holes
Total
Concentrator
Meters
21,335
19,935
41,270
Holes
80
69
149
Notes
To obtain additional information to improve confidence in our block
model.
To improve geotechnical information
Our Cuajone operations use state of the art computer monitoring systems at the concentrator, the crushing plant and the flotation
circuit in order to coordinate inflows and optimize operations. Material with a copper grade over 0.40% is loaded onto rail cars and
sent to the milling circuit, where giant rotating crushers reduce the size of the rocks to approximately one-half of an inch. The ore is
then sent to the ball mills, which grind it to the consistency of fine powder. The finely ground powder is agitated in a water and
reagents solution and is then transported to flotation cells. Air is pumped into the cells to produce foam for floating the copper and
molybdenum minerals, but separating waste material called tailings. This copper-molybdenum bulk concentrate is then treated by
inverse flotation where molybdenum is floated and copper is depressed. The copper concentrate is shipped by rail to the smelter at Ilo
and the molybdenum concentrate is packaged for shipment to customers. Sulfides under 0.40% copper are considered waste.
Tailings are sent to thickeners where water is recovered. The remaining tailings are sent to the Quebrada Honda dam, our principal
tailings storage facility.
Major Cuajone concentrator plant equipment includes:
• One primary crusher,
• three secondary crushers,
• seven tertiary crushers,
• eleven primary ball mills,
• four ball mills for re-grinding rougher concentrate,
• one vertical mill for re-grinding rougher concentrate,
• thirty 100-cubic feet cells for rougher flotation,
• four 160-cubic feet cells for rougher flotation,
• five 60-cubic feet cells for cleaner scavenger,
• six 1,350-cubic feet cells for cleaner scavenger,
• fourteen 300-cubic feet cells for cleaner scavenger,
• eight column cells,
• one Larox filter press,
• one FLS Smith filter press,
• two thickeners for copper-molybdenum and copper concentrates,
• three tailings thickeners,
• one high-rate tailings thickener, and
• six pumps for recycling reclaimed water.
A major mill expansion was completed in 1999 and the eleventh primary mill was put in operation in January 2008. We believe the
plant’s equipment is in good physical condition and suitable for our operations.
Toquepala
Our Toquepala operations consist of an open-pit copper mine and a concentrator. We also refine copper at the SXEW facility through
a leaching process. Toquepala is located in southern Peru, 30 kilometers from Cuajone and 870 kilometers from Lima. Access is by
plane from Lima to the city of Tacna (1:20 hours) and then by the Pan-American highway to Camiara (1:20 hours) and by road to
Toquepala (1 hour). The concentrator has a milling capacity of 60,000 tons per day. The SXEW facility has a production capacity of
56,000 tons per year of LME grade A copper cathodes. Overburden
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removal commenced in 1957 and ore production commenced in 1960. Our Toquepala operations utilize a conventional open-pit
mining method to collect copper ore for further processing in our concentrator.
The table below sets forth 2012, 2011 and 2010 production information for our Toquepala operations:
Mine annual operating days
Mine
Total ore mined
Copper grade
Leach material mined
Leach material grade
Stripping ratio
Total material mined
Concentrator
Total material milled
Copper recovery
Copper concentrate
Copper in concentrate
Copper concentrate average grade
Molybdenum
Molybdenum grade
Molybdenum recovery
Molybdenum concentrate
Molybdenum concentrate average grade
Molybdenum in concentrate
SXEW plant
Estimated leach recovery
SXEW cathode production
(kt)
(%)
(kt)
(%)
(x)
(kt)
(kt)
(%)
(kt)
(kt)
(%)
(%)
(%)
(kt)
(%)
(kt)
(%)
(kt)
2012
366
2011
365
2010
365
20,072
0.658
37,065
0.247
7.67
173,927
21,525
0.619
47,142
0.253
7.24
177,398
21,634
0.678
67,103
0.252
7.29
179,313
20,090
90.86
451.5
120.1
26.60
0.033
66.64
8.2
54.37
4.5
25.56
32.2
21,497
90.46
455.2
120.4
26.45
0.035
70.67
9.8
54.69
5.4
25.33
35.3
21,654
89.58
481.7
131.5
27.30
0.035
64.48
8.9
54.50
4.8
25.26
37.9
Key: kt = thousand tons
x = Stripping ratio obtained dividing waste plus leachable material by ore mined.
Copper and molybdenum grades are referred to as total copper grade and total molybdenum grade, respectively.
We continuously improve and renovate our equipment. Major mine equipment at Toquepala includes:
• Twenty-eight 290-ton capacity trucks,
• thirty-six 218-ton capacity trucks,
• eight 363-ton capacity trucks,
• one 60-cubic yard capacity shovel,
• three 56 cubic-yard capacity shovels,
• three 73-cubic yard capacity shovels,
• one 15-cubic yard capacity shovel,
• eight electric rotary drills,
• two Down the Hole (DTH) drills for pre-split, and
• three front-end loaders with capacities of 28, 23 and 33 cubic-yards.
Geology
The Toquepala porphyry copper deposit is located on the western slopes of Cordillera Occidental, in the southern-most Andes
Mountains of Peru. The deposit is part of a mineral district that contains two additional known deposits, Cuajone and Quellaveco.
The Toquepala deposit is in the southern region of Peru, located on the western slope of the Andes mountain range, approximately 120
kilometers from the border with Chile. This region extends into Chile and is home to many of the world’s most significant known
copper deposits. The deposit is in a territory with intrusive and eruptive activities of rhyolitic and andesitic rocks which are 70 million
years old (Cretaceous-Tertiary) and which created a series of volcanic
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lava. The lava is composed of rhiolites, andesites and volcanic agglomerates with a western dip and at an altitude of 1,500 meters.
These series are known as the Toquepala Group. Subsequently, different intrusive activities occurred which broke and smelted the
rocks of the Toquepala Group. These intrusive activities resulted in diorites, granodiorites and dikes of porphyric dacite. Toquepala
has a simple mineralogy with regular copper grade distribution. Economic ore is found as disseminated sulfurs throughout the deposit
as veinlets, replenishing empty places or as small aggregates. Ore minerals include chalcopyrite (CuFeS2), chalcosine (Cu2S) and
molybdenite (MoS2). A secondary enrichment zone is also found with thicknesses between 0 and 150 meters.
Mine Exploration
Exploration activities during the drill campaign in 2012 are as follows:
Studies
Ore body isolated for phase 3 and 4
Meters
3,450
Holes
8 To confirm the continuity of the ore body.
Notes
We did not carryout geotechnical drilling in 2012.
Concentrator
Our Toquepala concentrator operations use state-of-the-art computer monitoring systems in order to coordinate inflows and optimize
operations. Material with a copper grade over 0.40% is loaded onto rail cars and sent to the crushing circuit, where rotating crushers
reduce the size of the rocks by approximately 85%, to less than one-half of an inch. The ore is then sent to the rod and ball mills,
which grind it in a mix with water to the consistency of fine powder. The finely ground powder mixed with water is then transported
to flotation cells. Air is pumped into the cells producing a froth, which carries the copper mineral to the surface but not the waste
rock, or tailings. The bulk concentrate with sufficient molybdenum content is processed to recover molybdenum by inverse flotation.
This final copper concentrate with a content of approximately 26.5% of copper is filtered in order to reduce moisture to 8.5% or less.
Concentrates are then shipped by rail to the Ilo smelter.
Tailings are sent to thickeners where water is recovered. The remaining tailings are sent to the Quebrada Honda dam, our principal
tailings storage facility.
Major concentrator plant equipment at Toquepala includes:
• One primary crusher,
• three secondary crushers,
• six tertiary crushers,
• eight rod mills,
• twenty-four ball mills,
• one distributed control system (DCS),
• one expert grinding system,
• forty-two collective flotation cells,
• fifteen column cells,
• seventy-two Agitair 1.13 cubic meter cells,
• two Larox pressure filters,
• five middling thickeners,
• two conventional tailings thickeners,
• three high-rate tailings thickeners,
• one tripper car,
• one track tractor, and
• one recycled water pipe line.
The expected useful life of the principal equipment is over 20 years due to our equipment maintenance programs.
SXEW Plant
The SXEW facility at Toquepala produces grade A LME electrowon copper cathodes of 99.999% purity from solutions obtained by
leaching low-grade ore stored at the Toquepala and Cuajone mines. The leach plant commenced operations in
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1995 with a design capacity of 35,629 tons per year of copper cathodes. In 1999, the capacity was expanded to 56,000 tons per year.
Copper oxides from Cuajone with a copper grade higher than 0.218%, with an acid solubility index higher than 46% and a cyanide
solubility index higher than 16% are leached. In Toquepala, the leach material cutoff grade is 0.095% and therefore material with a
total copper grade between 0.095% and 0.40% are leached.
Major equipment at the Cuajone crusher plant includes:
• One primary jaw crusher, and
• one secondary cone crusher with a capacity of 390 tons per hour.
In addition, the Toquepala plant equipment includes:
• one agglomeration mill,
• one front end loader,
• two 445E Dresser trucks of 120-ton capacity, and
• one 830E Komatsu of 240-ton capacity truck for hauling to the leach dumps.
Copper in solution produced at Cuajone is sent to Toquepala through an eight-inch pipe laid alongside the Cuajone-Toquepala railroad
track.
Major equipment at the Toquepala plant includes:
• five pregnant solution (PLS) ponds, each with its own pumping system to send the solution to the SXEW plant.
• three lines of SX, each with a nominal capacity of 1,068 cubic meters per hour of pregnant solution and 162 electrowinning
cells.
Plant and equipment are supported by a maintenance plan and a quality management system to assure good physical condition and
high availability. The SXEW plant management quality system (including leaching operations) has been audited periodically since
2002 by an external audit company, and found to be in compliance with the requirements of the ISO 9001-2008 standard. In 2012, we
obtained the certification OHSAS 18001 of our occupational health and safety system and the ISO14001-2004 for our environmental
standards at the SX-EW plant.
Processing Facilities - Ilo
Our Ilo smelter and refinery complex is located in the southern part of Peru, 17 kilometers north of the city of Ilo, 121 kilometers from
Toquepala, 147 kilometers from Cuajone, and 1,240 kilometers from the city of Lima. Access is by plane from Lima to Tacna (1:20
hours) and then by highway to the city of Ilo (two hours). Additionally, we maintain a port facility in Ilo, from which we ship our
product and receive supplies. Product shipped and supplies received are moved between Toquepala, Cuajone and Ilo on our industrial
railroad.
Smelter
Our Ilo smelter produces copper anodes for the refinery we operate as part of the same facility. Copper produced by the smelter
exceeds the refinery’s capacity and the excess is sold to other refineries around the world. In 2007 we completed a major
modernization of the smelter. The nominal installed capacity of the smelter is 1,200,000 tons of concentrate per year.
Copper concentrates from Toquepala and Cuajone are transported by railroad to the smelter, where they are smelted using an
ISASMELT furnace, converters and anode furnaces to produce copper anodes with 99.7% copper. At the smelter, the concentrates are
mixed with flux and other material and sent to the ISASMELT furnace producing a mixture of copper matte and slag which is tapped
through a taphole to either of two rotary holding furnaces, where these smelted phases will be separated. Copper matte contains
approximately 63% copper. Copper matte is then sent to the four Pierce Smith converters, where the material is oxidized in two steps:
(1) the iron sulfides in the matte are oxidized with oxygen enriched air and silica is added producing slag that is sent to the slag
cleaning furnaces, and (2) the copper contained in the matte sulfides is then oxidized to produce blister copper, containing
approximately 99.3% copper. The blister copper is refined in two anode furnaces by oxidation to remove sulfur with compressed air
injected into the bath. Finally, the oxygen content of the molten copper is adjusted by reduction with injection of liquefied petroleum
gas with steam into the bath. Anodes,
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containing approximately 99.7% copper are cast in two casting wheels. The smelter also can produce blister copper bars, especially
when an anode furnace is in general repair.
Major equipment at the Ilo smelter includes:
• one Isasmelt furnace,
• two rotary holding furnaces,
• four Pierce-Smith converters,
• two slag cleaning furnaces,
• two anodes furnaces,
• one casting twin-wheel,
• one blister holding furnace,
• one casting blister wheel,
• one waste heat boiler,
• one superheated steam, and
• three electrostatic precipitators.
The table below sets forth 2012, 2011 and 2010 production and sales information for our Ilo smelter plant:
Smelter
Concentrate smelted
Average copper recovery
Blister production
Average blister grade
Anode production
Average anode grade
Sulfuric acid produced
Sales data:
Blister sales
Anode sales
Average blister sales price
Average anode sales price
Average sulfuric acid price
Key: kt = thousand tons
2012
2011
2010
996.6
97.7%
33.1
99.34%
265.9
99.73%
968.7
32.84
2.51
3.48
3.93
133.98
1,094.2
97.6%
—
—
338.7
99.74%
1,061.6
—
10.4
—
3.64
98.40
998
97.8%
—
—
313.4
99.72%
963
—
12.5
—
3.34
56.16
(kt)
(%)
kt
(%)
(kt)
(%)
(kt)
(kt)
(kt)
($/lb)
($/lb)
($/ton)
The off gases from the smelter are treated to recover over 92% of the incoming sulfur received in the concentrates producing 98.5%
sulfuric acid. The gas stream from the smelter with 11.34% SO is split between two plants: The No. 1 acid plant (single
absorption/single contact) and the No. 2 plant (double absorption/double contact). Approximately, 16% of the acid produced is used
at our facilities with the balance sold to third parties. We anticipate that our internal usage will be over 80% when the Tia Maria
project begins operation.
2
The smelter also has two oxygen plants. Plant No. 1, with 272 tons per day of production capacity and Plant No.2, with 1,045 tons per
day of capacity.
In addition, the smelter includes:
• one seawater intake system,
• two desalinization plants to provide water for the process,
• one electric substation, and
• one centralized control using advanced computer technology.
In 2010, the Ilo smelter marine trestle started operation. This facility allows us to offload directly to offshore ships the sulfuric acid
produced, avoiding hauling cargo through the city of Ilo. The 500 meter long marine trestle is the last part of the Ilo smelter
modernization project. Currently all overseas shipments of sulfuric acid are being made using the marine trestle.
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Refinery
The Ilo refinery consists of an electrolytic plant, a precious metal plant and a number of ancillary installations. The refinery is
producing grade A copper cathode of 99.998% purity. The nominal capacity is 280,000 tons per year. Anodic slimes are recovered
from the refining process and then sent to the precious metals facility to produce refined silver, refined gold and commercial grade
selenium.
Anodes are suspended in tanks containing an aqueous solution of sulfuric acid and copper sulfate. A low voltage but high amperage
electrical current is passed through the anodes, chemical solution and cathodes, in order to dissolve copper which is deposited on
initially very thin starting sheets increasing its thickness to produce high grade copper cathodes containing at least 99.99% copper.
During this process, silver, gold and other metals, including palladium, platinum and selenium, along with other impurities, settle on
the bottom of the tank in the form of anodic slime. This anodic slime is processed in a precious metal plant where silver, gold and
selenium are recovered.
The table below sets forth 2012, 2011 and 2010 production and sales information for our Ilo refinery and precious metals plants:
Refinery
Cathodes produced
Average copper grade
Refined silver produced
Refined gold produced
Commercial grade selenium produced
Sales data:
Average cathodes sales price
Average silver sales price
Average gold sales price
(kt)
(%)
(000 Kg)
(kg)
(tons)
($/lb)
($/oz)
($/oz)
2012
2011
2010
215.7
99.998%
89.6
184.2
41.5
261.0
99.998%
98.1
363.1
53.7
255.5
99.998%
107.8
418.2
59.0
3.67
30.76
1,663.91
3.92
35.10
1,579.97
3.38
19.69
1,211.14
Key: kt = thousand tons
Major equipment at the refinery includes:
• one electrolytic plant, with 926 commercial cells,
• fifty-two starting sheet cells,
• sixteen primary liberator cells,
• twenty-four secondary liberator cells,
• one anodic slime treatment circuit (includes leaching and centrifugation), and
• one electrolytic bleeding-off system by railroad to Toquepala’s leaching plants.
Main equipment at the precious metals plant includes:
• one selenium reactor and system to produce commercial grade selenium powder,
• one Wenmec anodic slime roaster reactor,
• one tilting Copella furnace,
• twenty-six silver electrorefining cells including an induction furnace for shots and silver ingots production, and
• one hydrometallurgical system for gold recovery.
The refinery also has these facilities:
(1) Production control: Provides sampling and sampling preparation for samples coming from the operating units, as well as
SXEW, smelter and external services.
(2) Laboratory: Provides sample analysis services throughout the Company, including the analysis of final products like copper
cathodes, electrowon cathodes, copper concentrates and oil analysis.
(3) Maintenance: Responsible for maintenance of all equipment involved in the process.
(4) Auxiliary facilities: Includes one desalinization plant to produce 1,000 cubic meters per day fresh water and a Gonella boiler to
produce steam used in the refinery, one Babcock boiler used as spare and two stand-by KMH boilers.
Other facilities in Ilo are a coquina plant with a production capacity of 200,000 tons per year of seashells and a lime plant with a
capacity of 80,000 tons per year. We also operate an industrial railroad to haul production and supplies between Toquepala, Cuajone
and Ilo.
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The industrial railroad’s main equipment includes fifteen locomotives of different types including 4000HP EMD’s SD70, 3000HP
EMD’s GP40-3, 2250HP GE U23B and others. The rolling stock has approximately 496 cars of different types and capacities,
including ore concentrate cars, gondolas, flat cars, dump cars, boxcars, tank cars and others. The track runs in a single 214 kilometer
standard gauge line and supports a 30-ton axle load. The total length of the track system is around 257 kilometers including main
yards and sidings.
The infrastructure includes 27 kilometers of track under tunnels and one concrete bridge. The industrial railroad includes a car repair
shop which is responsible for maintenance and repair of the car fleet. Annual tonnage transported is approximately 5.1 million tons.
MEXICAN OPERATIONS
Following is a map indicating the approximate locations of our Mexican mines and processing facilities:
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MEXICAN OPEN-PIT SEGMENT
Our Mexican open-pit segment operations combines two units of Minera Mexico, La Caridad and Buenavista, which includes La
Caridad and Buenavista mine complexes and smelting and refining plants and support facilities, which service both complexes.
Following is a map indicating the approximate location of, and access to, our Mexican open-pit mine complexes, as well as our
processing facilities:
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Buenavista
The Buenavista mining unit operates an open-pit copper mine, a concentrator and two SXEW plants. It is located 100 air-kilometers
northwest of La Caridad and 40 kilometers south of the Arizona U.S.-Mexican border. It lies on the outskirts of the city of Cananea.
Buenavista is connected by paved highways to the border city of Agua Prieta to the northeast, to the town of Nacozari in the southeast,
and to the town of Imuris to the west. Buenavista is also connected by railway to Agua Prieta and Nogales. A municipal airport is
located approximately 20 kilometers to the northeast of Buenavista.
Except for very brief periods, Buenavista was on strike from July 2007 through June 2010. Restoration of mine and plants started in
the third quarter of 2010 and was completed in 2011. SXEW production was restored to full capacity by the fourth quarter of 2010
and concentrator production reached full capacity in the second quarter of 2011.
We have started a major capital investment program at Buenavista , which includes a new SXEW plant with a planned annual capacity
of 120,000 tons of copper, a concentrator expansion with an increase in production capacity of 188,000 tons per year and two
molybdenum plants with a combined annual capacity of 4,600 tons. This investment program is underway and we expect to complete
it in two phases, the first in 2014 with an increase in annual production of 120,000 tons and the second phase in 2015 with a further
increase in annual copper production of 188,000 tons. With these investments, total production capacity at Buenavista will reach
488,000 tons of copper.
The concentrator has a nominal milling capacity of 76,700 tons per day. The SXEW facility has a cathode production capacity of
54,750 tons per year. The Buenavista ore body is considered one of the world’s largest porphyry copper deposits. Buenavista is the
oldest continuously operated copper mine in North America, with operations dating back to 1899. High grade ore deposits in the
district were mined exclusively using underground methods. The Anaconda Company acquired the property in 1917. In the early
1940s Anaconda started developing the first open-pit in Buenavista. In 1990, through a public auction procedure, Minera Mexico
acquired 100% of the Buenavista mining assets for $475 million. Buenavista is currently applying conventional open-pit mining
methods to extract copper ore for further processing in the concentrator. Two leach ore crushers and the corresponding belt conveying
systems are used to convey the leachable material to the heaps. Likewise, run-off mine leachable ore is hauled by trucks to the leach
dumps.
The following table shows 2012, 2011 and 2010 production information for Buenavista:
Mine annual operating days
Mine:
Total ore mined
Copper grade
Leach material mined
Leach material grade
Stripping ratio
Total material mined
Concentrator:
Total material milled
Copper recovery
Copper concentrate
Copper in concentrate
Copper concentrate average grade
SXEW plant
Estimated leach recovery
SXEW cathode production
(kt)
(%)
(kt)
(%)
(x)
(kt)
(kt)
(%)
(kt)
(kt)
(%)
(%)
(kt)
2012
366
25,763
0.632
66,241
0.275
4.86
150,871
25,748
82.30
511.6
134.0
26.18
53.29
66.1
2011
2010
365
22,444
0.623
47,399
0.299
3.38
98,306
21,972
80.44
410.0
110.1
26.86
53.39
62.3
169
656
0.587
3,860
0.226
8.81
6,439
—
—
—
—
—
52.72
20.7
Key: kt = thousand tons
x = Stripping ratio obtained dividing waste plus leachable material by ore mined.
The copper grade is total grade.
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Major Buenavista mine equipment includes:
• Thirty seven 400-ton-capacity trucks,
• thirteen 320-ton-capacity trucks,
• thirteen 240-ton-capacity trucks,
• five 40,000- gallon-capacity tanker trucks,
• one 27-cubic-yard-capacity shovel,
• one 36-cubic-yard- capacity shovel,
• two 40-cubic-yard- capacity shovels,
• one 42-cubic-yard- capacity shovel,
• one 56-cubic-yard- capacity shovel,
• two 64-cubic-yard- capacity shovels,
• two 70-cubic-yard- capacity shovels.
• Mine auxiliary equipment including:
• ten drillers,
• five front loaders,
• five motor graders, and
• twenty-four tractors.
Geology
The Buenavista mining district lies on the southern cordilleran orogen, which extends from southern Mexico to northwestern United
States. It also falls within the Basin and Range metallogenic province. Geological and structural features in the district are
representative of large, disseminated type, porphyry copper deposits. A calcareous sedimentary sequence of lower Paleozoic age,
lithologically correlated with a similar section in southeastern Arizona, uncomformably overlies Precambrian granite basement. The
entire section was covered by volcanic rocks of Mesozoic age and later intruded by deep seated granodiorite batholith of Tertiary age,
with further quartz monzonite porphyry differentiates of Laramide age.
Mineralization in the district is extensive covering a surface area of approximately 30 square kilometers. An early pegmatitic stage
associated with bornite-chalcopyrite-molybdenite assemblage was followed by a widespread flooding of hydrothermal solutions with
quartz- pyrite-chalcopyrite. A pervasive quartz-sericite alteration is evident throughout the district’s igneous rock fabric.
An extensive and economically important zone of supergene enrichment, with disseminated and stockworks of chalcocite (Cu S),
developed below the iron oxide capping. This zone coincides with the topography and has an average thickness of 300 meters. A
mixed zone of secondary and primary sulfides underlay the chalcocite blanket. The hypogene mineralization, principally chalcopyrite,
(CuFeS ), extensively underlies the orebody. Molybdenite occurs throughout the deposit and the content tends to increase with depth.
2
2
The Buenavista copper porphyry is considered world-class and unique. The deepest exploration results in the core of the deposit have
confirmed significant increase in copper grades. Similar porphyry copper deposits usually contain lower grades at depth. The district
is also unique for the occurrence of high-grade breccia pipes, occurring in clusters following the trend of the district.
Current dimensions of the mineralized ore body are 5x3 kilometers, and projects to more than 1 kilometer at depth. Considering the
geological and economic potential of the Buenavista porphyry copper deposit, it is expected that the operation can support a sizeable
increase in copper production capacity.
Mine Exploration
Due to Buenavista’s illegal work stoppage, there were no exploration programs developed in 2010 and 2009. In 2011, we resumed
exploration activities. In-fill core drilling was conducted at the Buenavista zinc-copper-silver deposit, including directional drilling for
geotechnical purposes. A deep drilling campaign was initiated in 2011 to explore the extent of the deposit at depth, drilling a total of
3,860 meters in 2012. For short-term mine planning, 6,652 meters were drilled to
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confirm copper grade and metallurgical recoveries. Also, in 2011, a condemnation drilling program was initiated to define areas for
future infrastructure, as well as areas where leach and waste dumps will be deposited. A total of 28,369 meters of core drilling were
completed in 2011. A geohydrology program was initiated in 2011 to explore the possibility of groundwater sources within the mine
limits, and a total of 29,750 meters of diamond drilling were drilled in 2012. In addition, 3,797 meters were drilled for water
monitoring wells. For 2013, additional diamond drilling is planned to define, upgrade, and develop more reserves.
Concentrator
Buenavista uses state-of-the-art computer monitoring systems at the concentrator, the crushing plant and the flotation circuit in order
to coordinate inflows and optimize operations. Material with a copper grade over 0.38% is loaded onto trucks and sent to the milling
circuit, where giant rotating crushers reduce the size of the ore to approximately one-half of an inch. The ore is then sent to the ball
and bar mills, which grind it to the consistency of fine powder. The finely ground powder is agitated in a water and reagents solution
and is then transported to flotation cells. Air is pumped into the cells producing a froth, which carries the copper mineral to the
surface but not the waste rock, or tailings. Recovered copper, with the consistency of froth, is filtered and dried to produce copper
concentrates with an average copper content of approximately 27%. Concentrates are then shipped by rail to the smelter at La
Caridad.
The Buenavista concentrator plant, with a milling capacity of 76,700 tons per day, consists of:
• Two primary crushers,
• four secondary crushers,
• ten tertiary crushers,
• ten primary mills,
• one expert control system,
• five mills for re-grinding,
• 103 primary flotation cells,
• ten column cells,
• seventy scavenger flotation cells,
• seven thickeners, and
• three ceramic filters.
In addition, the facility has:
• 48 wells and two pumping stations for fresh water supply,
• one tailings dam, and
• one reclaimed water pumping station.
As part of the expansion program for this unit, we are constructing a molybdenum plant which is expected to be completed by the end
of the first quarter of 2013 and have an annual production of 2,000 tons of molybdenum contained in concentrate.
SXEW Plant
The Buenavista unit operates a leaching facility and two SXEW plants. All copper ore with a grade lower than the mill cut-off grade
of 0.38%, but higher than 0.25%, is delivered to the leach dumps. A cycle of leaching and resting occurs for approximately five years
in the run-of-mine dumps and three years for the crushed leach material.
The Buenavista unit currently maintains 21.8 million cubic meters of pregnant leach solution in inventory with a concentration of
approximately 1.95 grams of copper per liter.
Major equipment at the SXEW I and II plants includes: two crushing systems (No.1 and No.2). Crushing system No. 1 has a capacity
of 32,000 tons per day and includes:
• One apron feeder,
• one conveyor belt feeder,
• eight conveyor belt systems, and
• one distributing bar.
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Crushing system No. 2 has a capacity of 48,000 tons per day and includes:
• One crusher,
• one conveyor belt feeder,
• four conveyor belts, and
• one distributing bar.
There are three irrigation systems for the dumps and eleven dams for the pregnant leach solution (PLS). Plant I has four solvent
extraction tanks with a nominal capacity of 16,000 liters per minute of PLS and 52 electrowinning cells and has a daily production
capacity of 30 tons of copper cathodes with 99.999% purity. Plant II has five trains of solvent extraction with a nominal capacity of
55,000 liters per minute of PLS and 216 cells distributed in two bays and has a daily production capacity of 120 tons of copper
cathodes with 99.9% purity.
As mentioned above we intend to increase the Buenavista unit’s production of copper cathodes with a new SXEW plant, (SXEW III)
with an annual capacity of 120,000 tons. The plant would produce copper cathodes of ASTM grade 1 or LME grade A. Please see
“Capital investment program” under Item 7 for further information.
La Caridad
The La Caridad complex includes an open-pit mine, concentrator, smelter, copper refinery, precious metals refinery, rod plant, SXEW
plant, lime plant and two sulfuric acid plants.
La Caridad mine and mill are located about 23 kilometers southeast of the town of Nacozari in northeastern Sonora. Nacozari is about
264 kilometers northeast of the Sonora state capital of Hermosillo and 121 kilometers south of the U.S.-Mexico border. Nacozari is
connected by paved highway with Hermosillo and Agua Prieta and by rail with the international port of Guaymas, and the Mexican
and United States rail systems. An airstrip with a reported runway length of 2,500 meters is located 36 kilometers north of Nacozari,
less than one kilometer away from the La Caridad copper smelter and refinery. The smelter and the sulfuric acid plants, as well as the
refineries and rod plant, are located approximately 24 kilometers from the mine. Access is by paved highway and by railroad.
The concentrator began operations in 1979, the molybdenum plant was added in 1982, the smelter in 1986, the first sulfuric acid plant
in 1988, the SXEW plant in 1995, the second sulfuric acid plant in 1997, the copper refinery in 1997, the rod plant in 1998, the
precious metals refinery in 1999, and the dust and effluents plant in 2012.
The table below sets forth 2012, 2011 and 2010 production information for La Caridad:
Mine annual operating days
Mine
Total ore mined
Copper grade
Leach material mined
Leach material grade
Stripping ratio
Total material mined
Concentrator
Total material milled
Copper recovery
Copper concentrate
Copper in concentrate
Copper concentrate average grade
(kt)
(%)
(kt)
(%)
(x)
(kt)
(kt)
(%)
(kt)
(kt)
(%)
2012
2011
2010
365
33,556
0.344
34,848
0.224
1.58
86,632
33,434
85.06
461.5
97.8
21.20
365
33,185
0.329
32,333
0.235
1.54
84,266
33,201
82.19
458.8
89.8
19.57
365
33,344
0.350
29,463
0.208
1.52
84,163
33,196
81.59
431.2
94.9
22.00
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Molybdenum
Molybdenum grade
Molybdenum recovery
Molybdenum concentrate
Molybdenum concentrate average grade
Molybdenum in concentrate
SXEW plant
Estimated leach recovery
SXEW cathode production
(%)
(%)
(kt)
(%)
(kt)
(%)
(kt)
2012
2011
2010
0.043
76.44
20.3
54.09
11.0
39.20
22.8
0.046
68.81
19.5
53.49
10.4
39.99
23.9
0.045
70.20
19.2
54.27
10.4
40.90
22.9
Key: kt = thousand tons
x = Stripping ratio obtained dividing waste plus leachable material by ore mined
The copper and molybdenum grade are total grade.
Major mine equipment includes:
• Twenty-four 240 ton-capacity trucks
• three 360 ton-capacity trucks, and,
• six 43 cubic-yard-capacity shovels
Loading and auxiliary equipment includes:
• Six drillers,
• five front loaders,
• three motorgraders, and
• nineteen tractors.
Geology
The La Caridad deposit is a typical porphyry copper and molybdenum deposit as seen also in the southwestern basin of United States.
The La Caridad mine uses a conventional open-pit mining method. The ore body is at the top of a mountain, which gives La Caridad
the advantage of a relative low waste-stripping ratio, natural pit drainage and relative short haul for both ore and waste. The mining
method involves drilling, blasting, loading and haulage of ore mill and waste to the primary crushers and the leach materials and waste
to dumps, respectively.
La Caridad deposit is located in northeastern Sonora, Mexico. The deposit is situated near the crest of the Sierra Juriquipa, about 23
kilometers southeast of the town of Nacozari, Sonora, Mexico. The Sierra Juriquipa rises to elevations of around 2,000 meters in the
vicinity of La Caridad and is one of the many north-trending mountain ranges in Sonora that form a southern extension of the basin
and range province.
The La Caridad porphyry copper-molybdenum deposit occurs exclusively in felsic to intermediate intrusive igneous rocks and
associated breccias. Host rocks include diorite and granodiorite. These rocks are intruded by a quartz monzonite porphyry stock and
by numerous breccia masses, which contain fragments of all the older rock types.
Supergene enrichment, consisting of completes to partial chalcosite (Cu S) replacement of chalcopyrite (CuFeS ). The zone of
supergene enrichment occurs as a flat and tabular blanket with an average diameter of 1,700 meters and thickness generally between 0
and 90 meters.
2
2
Economic ore is found as disseminated sulfurs within the central part of the deposit. Sulfide-filled breccia cavities are most abundant
in the intrusive breccia. This breccia-cavity mineralization occurs as sulfide aggregates which have crystallized in the spaces
separating breccia clasts. Near the margins of the deposit, mineralization occurs almost exclusively in veinlets. Ore minerals include
chalcopyrite (CuFeS2), chalcosite (Cu S) and molybdenite (MoS ).
2
2
48
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Mine Exploration
The La Caridad ore body has been mined for over 30 years. The extent of the model area is approximately 6,000 meters by 4,000
meters with elevation ranging from 750 to 1,800 meters.
Sixteen drilling campaigns have been conducted on the property since 1968. These campaigns drilled a total of 3,317 drill holes:
1,154 were diamond drill holes and 2,163 were reverse circulation. We have also drilled some hammer and percussion drill holes. A
total of 634,080 meters have been drilled through December 2011.
In 2008, La Caridad finished a large exploration program of 50,000 meters. The target was to reach to the 900 level in order to reduce
the drilling space and to define the copper and molybdenum mineralization continuity and also carry out metallurgical testing for the
flotation and leaching processes. There was no exploration program between 2009 and 2011.
In 2012, we drilled 10,000 meters and further defined the extent of the copper and molybdenum mineralization. For 2013, we have not
planned an additional exploration program.
Concentrator
La Caridad uses state-of-the-art computer monitoring systems at the concentrator, the crushing plant and the flotation circuit in order
to coordinate inflows and optimize operations. The concentrator has a current capacity of 90,000 tons of ore per day.
Ore extracted from the mine with a copper grade over 0.30% is sent to the concentrator and is processed into copper concentrates and
molybdenum concentrates. The copper concentrates are sent to the smelter and the molybdenum concentrate is sold to a Mexican
customer. The molybdenum recovery plant has a capacity of 2,000 tons per day of copper-molybdenum concentrates. The lime plant
has a capacity of 340 tons of finished product per day.
La Caridad concentrator plant equipment includes:
• Two primary crushers,
• six secondary crushers,
• twelve tertiary crushers,
• twelve ball mills,
• one master milling control system,
• 140 primary flotation cells,
• four re-grinding mills,
• 96 cleaning flotation cells,
• twelve thickeners, and
• eight drum filters.
SXEW Plant
Approximately 663.3 million tons of leaching ore with an average grade of approximately 0.247% copper have been extracted from
the La Caridad open-pit mine and deposited in leaching dumps from May 1995 to December 31, 2012. All copper ore with a grade
lower than the mill cut-off grade 0.30%, but higher than 0.15% copper, is delivered to the leaching dumps. In 1995, we completed the
construction of a SXEW facility at La Caridad that has allowed processing of this ore and certain leach ore reserves that were not
mined and has resulted in a reduction in our copper production costs. The SXEW facility has an annual capacity of 21,900 tons of
copper cathodes.
The La Caridad SX-EW plant has:
• Nine irrigation systems for the dumps,
• two PLS dams, and
• one container of heads that permits the combination of the solutions of both dams and which feeds the SXEW plant with a
more homogenous concentration.
The plant has three trains of solvent extraction with a nominal capacity of 2,070 cubic meters per hour and 94 electrowinning cells
distributed in one single electrolytic bay. The plant has a daily production capacity of 62 tons of copper cathodes with 99.999%
purity.
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Table of Contents
Processing Facilities — La Caridad
Our La Caridad complex includes a smelter, an electrolytic copper refinery, a precious metal refinery and a copper rod plant. The
distance between this complex and the La Caridad mine is approximately 24 kilometers.
Smelter
Copper concentrates from Buenavista, Santa Barbara, Charcas and La Caridad are transported by rail and truck to the La Caridad
smelter where they are processed and cast into copper anodes of 99.2% purity. Sulfur dioxide off-gases collected from the flash
furnace, the El Teniente converter and conventional converters are processed into sulfuric acid, at two sulfuric acid plants.
Approximately 2% to 3% of this acid is used by our SXEW plants and the balance is sold to third parties.
Almost all of the anodes produced in the smelter are sent to the La Caridad copper refinery. The actual installed capacity of the
smelter is 1,000,000 tons per year, a capacity that is sufficient to treat all the concentrates of La Caridad and Buenavista, and starting
in 2010, the concentrates from the IMMSA mines, as we closed the San Luis Potosi smelter. The smelter includes:
• One flash type concentrates drier,
• one steam drier,
• one flash furnace,
• one El Teniente modified converter furnace,
• two electric slag-cleaning furnaces,
• three Pierce-Smith converters,
• three raffinate furnaces, and
• two casting wheels.
The anode production capacity is 300,000 tons per year.
Refinery
La Caridad includes an electrolytic copper refinery that uses permanent cathode technology. The installed capacity of the refinery is
300,000 tons per year. The refinery consists of an anode plant with a preparation area, an electrolytic plant with an electrolytic cell
house with 1,115 cells and 32 liberator cells, two cathode stripping machines, an anode washing machine, a slime treatment plant and
a number of ancillary installations. The refinery is producing grade A copper cathode of 99.99% purity. Anodic slimes are recovered
from the refining process and sent to the slimes treatment plant where additional copper is extracted. The slimes are then filtered,
packed and shipped to the La Caridad precious metals refinery to produce silver and gold.
The operations of the precious metal refinery begin with the reception of slime from silver concentrates, which are dried in a steam
dryer. After this, the dried slime is smelted and a gold and silver alloy is obtained, which is known as dore. The precious metal
refinery plant has a hydrometallurgical stage and a pyrometallurgical stage, besides a steam dryer, dore casting system, Kaldo furnace,
20 electrolytic cells in the silver refinery, one induction furnace for fine silver, one silver ingot casting system and two reactors for
obtaining fine gold. The process ends with the refining of the gold and silver alloy.We also recover commercial selenium from the gas
produced by the Kaldo furnace process.
Copper Rod Plant
A rod plant at the La Caridad complex was completed in 1998 and reached its full annual operating capacity of 150,000 tons in 1999.
The plant is producing eight millimeter copper rods with a purity of 99.99%. The rod plant includes:
• One vertical furnace,
• one retention furnace,
• one molding machine,
• one laminating machine,
• one coiling machine, and
• one coil compacter.
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Other facilities include:
• One lime plant with a capacity of 132,000 tons per year,
• one sulfuric acid plant with a capacity of 2,625 tons per day,
• one sulfuric acid plant with a capacity of 2,135 tons per day,
• three oxygen plants, each with a production capacity of 275 tons per day,
• one power turbo generator with a 11.5 megawatt capacity, and
• one power turbo generator with a 25 megawatt capacity.
One of the turbo generators uses residual heat from the flash furnace.
In 2012, we started operating a dust and effluent plant with a treatment capacity of 3,100 tons per year which will produce 720 tons of
copper by-products and 11,000 tons of lead per year. This plant is designed to reduce dust emissions from La Caridad metallurgical
complex.
The table below sets forth 2012, 2011 and 2010 production information for the La Caridad processing facilities:
Smelter
Total copper concentrate smelted
Anode copper production
Average copper content in anode
Average smelter recovery
Sulfuric acid production
Refinery
Refined cathode production
Refined silver production
Refined gold production
Rod Plant
Copper rod production
Sales data:
Average realized price copper rod
Average premium copper rod
Average realized price gold
Average realized price silver
Average realized price sulfuric acid
Key: kt = thousand tons
Kg = kilograms
(kt)
(kt)
(%)
(%)
(kt)
(kt)
(000 kg)
(Kg)
(kt)
($ per lb)
($ per lb)
($ per ounce)
($ per ounce)
($ per ton)
51
2012
2011
2010
904.3
263.0
99.22
97.4
887.8
213.7
268.2
1,426.7
120.8
3.72
0.12
1,666.66
31.17
105.40
832.3
233.8
99.09
97.0
819.0
186.9
215.0
996.1
107.9
3.98
0.11
1,584.71
34.94
90.60
416.7
117.6
99.06
98.7
441.5
84.6
189.6
845.7
57.3
3.45
0.12
1,220.07
20.11
29.16
Table of Contents
MEXICAN IMMSA UNIT
Our IMMSA unit (underground mining poly-metallic division) operates five underground mining complexes situated in central and
northern Mexico and produces zinc, lead, copper, silver and gold, and has a coal mine. These complexes include industrial processing
facilities for zinc, lead, copper and silver. All of IMMSA’s mining facilities employ exploitation systems and conventional
equipment. We believe that all the plants and equipment are in satisfactory operating condition. IMMSA’s principal mining facilities
include Charcas, Santa Barbara, San Martin, Santa Eulalia and Taxco.
The table below sets forth 2012, 2011 and 2010 production information for our Mexican IMMSA unit:
Average annual operating days(*)
Total material mined and milled
Zinc average ore grade
Zinc concentrate produced
Zinc concentrate average grade
Zinc average recovery
Lead average ore grade
Lead concentrate produced
Lead concentrate average grade
Lead average recovery
Copper average ore grade
Copper concentrate produced
Copper concentrate average grade
Copper average recovery
(kt)
(%)
(kt)
(%)
(%)
(%)
(kt)
(%)
(%)
(%)
(kt)
(%)
(%)
2012
2011
2010
299
2,907
3.49
167.0
53.84
88.48
0.86
35.3
56.52
79.80
0.40
19.7
29.70
50.62
318
2,831
3.59
151.5
55.32
82.55
0.88
34.7
54.20
75.43
0.38
18.2
30.35
51.24
313
2,894
3.77
179.8
55.16
90.86
0.86
36.5
55.44
81.65
0.39
18.4
30.77
49.80
kt = thousand tons
(*) Weighted average annual operating days based on total material mined and milled in the five mines: Charcas, San Martin,
Taxco, Santa Barbara, and Santa Eulalia.
Charcas
The Charcas mining complex is located 111 kilometers north of the city of San Luis Potosi in the State of San Luis Potosi, Mexico.
Charcas is connected to the state capital by a paved highway of 130 kilometers. 14 kilometers from the southeast of the Charcas
complex is the “Los Charcos” railroad station which connects with the Mexico-Laredo railway. Also, a paved road connects Charcas
to the city of Matehuala via a federal highway and begins at the northeast of the Charcas townsite. The complex includes three
underground mines (San Bartolo, Rey-Reina and La Aurora) and one flotation plant that produces zinc, lead and copper concentrates,
with significant amounts of silver. The Charcas mining district was discovered in 1573 and operations in the 20th century began in
1911. The Charcas mine is characterized by low operating costs and good quality ores and is situated near the zinc refinery. The
Charcas mine is now Mexico’s largest producer of zinc.
The Charcas complex’s equipment includes:
• Twenty jumbo drilling tools,
• twenty scoop trams for mucking and loading,
• fourteen trucks,
• two locomotives for internal ore haulage, and
• three hoists.
In addition, the mill has:
• One primary crusher,
• one secondary crusher,
• two tertiary crushers,
• four mills, and
• three flotation circuits.
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Geology
The Charcas mining district occupies the east-central part of the Mexican Central Mesa and is part of the Sierra Madre metallogenic
province. Geological history starts in the Superior Triasic, where sandy clay sediments were deposited argilloarenaceous. Due to
emersion in the beginning of the Jurassic Superior, the sediments suffered intense erosion, settling on continental sediments. This
sequence was affected by tectonic effort, which folded and failed on this rock package. Later the positioning of intrusive rocks
originated fractures, which gave way to positioning of mineral deposits. The site’s paragenesis suggests two stages of mineralization.
First minerals are rich in silver, lead and zinc, with abundant calcite and small quantities of quartz chalcopyrite. Second, there is a
link of copper and silver, where the characteristic minerals are chalcopyrite, lead ore with silver content, pyrite and scarce sphalerite.
Economic ore is found as replacement sulfurs in carbonates host rock. The ore mineralogy is comprised predominantly of calcopyrite
(CuFeS ), sphalerite (ZnS), galena (PbS) and silver minerals as diaphorite (Pb Ag Sb S ).
3 8
3
2
2
Mine exploration
In 2012, at Charcas, 19,068 meters of diamond drilling were executed from underground stations and 26,979 meters from the surface.
With this drilling, 1,452,895 tons were added to the reserve base in 2012. Additional drilling surface program of 30,000 meters is
planned in 2013.
The table below sets forth 2012, 2011 and 2010 production information for our Charcas mine:
Annual operating days
Total material mined and milled
Zinc average ore grade
Zinc concentrate produced
Zinc concentrate average grade
Zinc average recovery
Lead average ore grade
Lead concentrate produced
Lead concentrate average grade
Lead average recovery
Copper average ore grade
Copper concentrate produced
Copper concentrate average grade
Copper average recovery
kt = thousand tons
(kt)
(%)
(kt)
(%)
(%)
(%)
(kt)
(%)
(%)
(%)
(kt)
(%)
(%)
2012
2011
2010
319
1,164
4.4
93.2
53.89
97.50
0.3
3.7
40.50
50.30
0.27
4.7
27.54
41.57
324
1,124
4.8
93.6
56.25
97.01
0.4
5.4
50.10
65.38
0.24
3.7
29.70
40.34
324
1,165
5.1
101.8
56.78
97.29
0.4
6.8
48.15
69.55
0.23
3.1
30.26
35.09
The Charcas mine uses the hydraulic cut-and-fill method and the room-and-pillar mining method with descending benches. The
broken ore is hauled to the underground crusher station. The crushed ore is then hoisted to the surface for processing in the flotation
plant to produce lead, zinc and copper concentrates. The capacity of the flotation plant is 4,100 tons of ore per day. The lead
concentrate produced at Charcas is treated at a third party refinery in Mexico. The zinc concentrates are treated at our San Luis Potosi
zinc refinery and the copper concentrates are treated at our La Caridad smelter.
Santa Barbara
The Santa Barbara mining complex is located approximately 26 kilometers southwest of the city of Hidalgo del Parral in southern
Chihuahua, Mexico. The area can be reached via paved road from Hidalgo del Parral, a city on a federal highway. Chihuahua, the
state capital is located 250 kilometers north of the Santa Barbara complex. Additionally, El Paso on the Texas border is located 600
kilometers north of Santa Barbara. Santa Barbara includes three main underground mines (San Diego, Segovedad and Tecolotes) and
a flotation plant and produces lead, copper and zinc concentrates, with significant amounts of silver. Gold-bearing veins were
discovered in the Santa Barbara district as early as 1536. Mining activities in the 20th century began in 1913.
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Table of Contents
The mining operations at Santa Barbara are more diverse and complex than any of the other mines in our Mexican operations, with
veins that aggregate approximately 21 kilometers in length. Each of the three underground mines has several shafts and crushers.
Due to the variable characteristics of the ore bodies, four types of mining methods are used: shrinkage stoping, long-hole drilled open
stoping, cut-and-fill stoping and horizontal bench stoping. The ore, once crushed, is processed in the flotation plant to produce
concentrates. The flotation plant has a capacity of 5,700 tons of ore per day. The lead concentrate produced is treated at a third party
refinery in Mexico. The copper concentrates are treated at our La Caridad smelter and the zinc concentrates are either treated at the
San Luis Potosi zinc refinery or exported.
The major mine equipment at Santa Barbara includes:
• Twenty-one jumbo drilling tools,
• one Simba drilling tool,
• forty-three scoop trams,
• fourteen trucks for internal ore haulage,
• eleven locomotives for internal ore haulage,
• four locomotives for surface haulage,
• seven trucks for external haulage, and
• six hoists.
For treating the ore, there are:
• Six primary jaw crushers,
• one secondary crusher,
• two tertiary crushers,
• three mills, and
• three flotation circuits.
The concentrator plant has a milling capacity of 5,800 tons of ore per day.
Geology
The majority of the production from the district comes from quartz veins within faults and fractures. The north to northwestern
trending vein is up to several kilometers long, dips steeply to the west and is 0.5 to 30 meters wide. Ore shoots up to several hundred
meters in length, extends to at least 900 meters below the surface and is separated from other ore by 0.5 to 1 meter of barren quartz
vein. Metal zoning occurs in some veins, with zinc and lead content generally decreasing with depth and copper increasing with
depth. Three main systems of veins exist inside the district, represented by the veins Coyote, Segovedad Novedad and Coyote Seca
Palmar. In addition to the main veins, there are many smaller sub-parallels to branching ore bearing veins. Economic ore minerals
include sphalerite (ZnS), marmatite (ZnFeS), galena (PbS), chalcopyrite (CuFeS ) and tetrahedrite (CuFe Sb S ). Gangue minerals
include quartz (SiO ), pyrite (FeS ), magnetite (Fe O ), pirrotite (Fe +S), arsenopyrite (FeAsS) and fluorite (CaF ).
4 13
12
2
4
2
2
2
2
2
The Santa Barbara district has mineralization to indicate that it will continue to be a significant producer of lead, copper and zinc for
decades. The full potential of the district has not yet been defined, but the area seems to justify an increase in exploration.
Mine Exploration:
At Santa Barbara, 13,074 meters were drilled from underground stations and 50,867 meters from the surface in 2012. With this
drilling 6,964,423 tons were added to the reserve base in 2012. For 2013, 47,000 meters of surface diamond drilling are planned.
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Table of Contents
The table below sets forth 2012, 2011 and 2010 production information for our Santa Barbara mines:
Annual operating days
Total material mined and milled
Zinc average ore grade
Zinc concentrate produced
Zinc concentrate average grade
Zinc average recovery
Lead average ore grade
Lead concentrate produced
Lead concentrate average grade
Lead average recovery
Copper average ore grade
Copper concentrate produced
Copper concentrate average grade
Copper average recovery
(kt)
(%)
(kt)
(%)
(%)
(%)
(kt)
(%)
(%)
(%)
(kt)
(%)
(%)
kt = thousand tons
San Martin
2012
2011
2010
322
1,590
2.41
60.5
54.29
85.7
1.18
27.6
59.64
87.82
0.52
15.0
30.39
55.07
321
1,553
2.33
57.7
53.85
85.9
1.07
24.3
58.91
86.20
0.51
14.6
30.51
56.13
321
1,578
2.53
63.7
53.99
86.1
1.02
24.3
56.53
85.29
0.54
15.3
30.87
55.57
San Martin has been on strike since July 2007. Please see Note 13 “Commitments and Contingencies” to our consolidated financial
statements.
The San Martin mining complex is located in the municipality of Sombrerete in the western part of the state of Zacatecas, Mexico,
approximately 101 kilometers southeast of the city of Durango and nine kilometers east of the Durango State boundary. Access to the
property is via a federal highway between the cities of Durango and Zacatecas. A paved six kilometer road connects the mine and
town of San Martin with the highway. The city of Sombrerete is about 16 kilometers east of the property. The complex includes an
underground mine and a flotation plant and produces lead, copper and zinc concentrates, with significant amounts of silver. The
mining district in which the San Martin mine is located was discovered in 1555. Mining operations in the 20th century began in
1949. San Martin lies in the Mesa Central between the Sierra Madre Occidental and the Sierra Madre Oriental.
The horizontal cut-and-fill mining method is used at the San Martin mine. The broken ore is hauled to the underground crusher
station. The ore is then brought to the surface and fed to the flotation plant to produce concentrates. The flotation plant has a total
capacity of 4,400 tons of ore per day. The lead concentrate is treated at a third party refinery in Mexico. The copper concentrate was
treated at our San Luis Potosi copper smelter and the zinc concentrate is either treated at the San Luis Potosi zinc refinery or exported.
The major mine equipment at San Martin includes:
• Eight jumbo drilling tools,
• thirteen scoop trams,
• nine trucks, and
• three hoists.
For treating the ore, there are:
• Two primary jaw crushers,
• two secondary crushers,
• one tertiary crusher,
• two mills, and
• three flotation circuits.
The concentrator plant has a mill capacity of 4,400 tons of ore per day.
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Geology
San Martin lies in the Central Mesa between two major geologic provinces, Sierra Madre Occidental and Sierra Madre Oriental. The
main sedimentary rock-formation in the San Martin district is the Upper Cretaceous Age Cuesta del Cura limestone. The formation is
an interlayered sequence of shallow marine limestone and black chert, and it is overlain by Indura formation which outcrops at the
foot of the topographic heights of the Cuesta del Cura formation. It consists mainly of alternating shales and fine-grained clayed
limestones in ten to thirty centimeter thick layers.
The district’s most important mineral deposits are replacement veins and bodies generated in the skarn by Cerro de la Gloria
granodiorite intrusion. An extensive zone of skarn west of the intrusive hosts, the San Marcial, Ibarra and Gallo-Gallina main ore
veins, which appear at the surface for distances of up to 1,000 meters, with thicknesses of 40 centimeters to four meters, paralleling
the intrusive contact. In the central part of the deposit there is a horizontal zoning with respect to the contact of the intrusive with high
values of silver and copper. In the top of the deposit there is mostly lead and zinc. In the northeast/east over concentric structures to
the intrusive there is an increment of lead, zinc and silver in the skarn. Economic ore is found as replacement ore bodies between the
main veins as massive and disseminated sulfides with widths from eight meters up to 200 meters. These bodies consist mostly of
chalcopyrite (CuFeS ), sphalerite (ZnS), galena (PbS), bornite (Cu FeS ), tetrahedrite (CuFe Sb S ), native silver (Ag), pyrrite (FeS),
5
arsenopyrite (FeAsS) and stibnite (Sb S ). Molybdenum and tungsten are found in little portions in the skarn near the contact
associated with the calcite.
4 13
2 3
12
4
2
Mine Exploration
There was no mine exploration drilling in the three years ending December 31, 2012 because the San Martin mine was on strike.
There was no production at the San Martin mine in the three years ending December 31, 2012. The following table summarizes the
estimated production losses at our San Martin mine due to the strike:
Days of strike
Estimated strike production loss (tons):
Zinc in concentrates
Lead in concentrates
Copper in concentrates
Santa Eulalia
2012
2011
2010
365
10,264
500
4,360
365
10,264
500
4,360
365
10,264
500
4,360
The mining district of Santa Eulalia is located in the central part of the state of Chihuahua, Mexico, approximately 26 kilometers east
of the city of Chihuahua. This district covers approximately 48 square kilometers and is divided into three fields: east field, central
field and west field. The west field and the east field, in which the principal mines of the complex are found, are separated by six
kilometers. The Buena Tierra mine is located in the west field and the San Antonio mine is located in the east field. The mining
district was discovered in 1590, although exploitation did not formally begin until 1870.
The district of Santa Eulalia is connected to the city of Chihuahua by a paved road (highway no. 45), at a distance of ten kilometers
there is a paved detour to Aquiles Serdan and Francisco Portillo (also known as Santo Domingo) where the Company’s offices and the
Buena Tierra mine are located. Access to the Buena Tierra mine and San Antonio mine is via an 11 kilometer unpaved road.
The Santa Eulalia mine suspended operations from October 2000 to December 2004, during which time rehabilitation work was
completed at the San Antonio shaft and pipes were installed to expand the pumping capacity to 10,500 gallons per minute. In
January 2005, operations were restarted. In May 2010, the Santa Eulalia mine suspended operations due to a flooding in the area
brought on by the failure of a dike caused by excess water pressure. In 2011, the rehabilitation work was interrupted by a second
flooding which required us to extend the pumping work. The pumping work was completed in 2012 allowing us to restore production.
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Table of Contents
The flotation plant, at which lead and zinc concentrates are produced, has a capacity of 1,500 tons of ore per day. The lead
concentrate is treated at a third party refinery, and the zinc concentrate is treated at our San Luis Potosi refinery.
Major mine equipment at the Santa Eulalia mine includes:
• Five Jumbo drilling tools,
• eleven scoop trams for mucking and loading,
• two trucks, and
• two hoists.
For treating the ore, there are:
• Two primary crushers,
• one secondary crusher,
• one tertiary crusher,
• two mill crushers,
• one mill, and
• two flotation circuits.
The concentrator plant has a milling capacity of 1,450 tons of ore per day.
Geology
Santa Eulalia is the largest of a number of similar districts that lie along the intersection of the Laramide-aged Mexican Thrust Belt
and the Tertiary volcanic plateau of the Sierra Madre Occidental. Deposits throughout the belt occur in a thick Jurassic-Cretaceous
carbonate succession that overlies Paleozoic or older crust.
The main sedimentary rock in the Santa Eulalia district is the Lower Cretaceous Limestone. These are irregularly covered by volcanic
sedimentary conglomerates that are overlaid by volcanic rocks of the tertiary and alluvial material of the Quaternary Age.
In the Santa Eulalia mining district a thickness of 500 meters of sedimentary rocks is known to exist which consists of the following
formations: 1) Formation Lagrima (limestone fossils); 2) Formation Glen Rose (limestone blue and at its base a black limestone
appears); and 3) Formation Cuchillo (limestone with shale). Dikes and sills of riolite composition and sills of diabase also exist.
In the district there are several systems of fractures and faults associated with the emplacement of felsitic and maphic intrusives. The
most important controller of the ore bodies are the north-south fractures.
The mineralization corresponds in its majority to ore skarns — silicoaluminates of calcium, iron and manganese with variable
quantities of lead, zinc, copper and iron sulfides, located in the planes of crossings in the interstices of the silicates. Economic ore is
found as replacement in the Limestone Glen Rose in the contact with dikes and sills and replacements in diabase sills. The
mineralogy is comprised predominantly of sphalerite (ZnS), galena (PbS) and small quantities of pyrargyrite (Ag SbS ).
3
3
Mine Exploration
At Santa Eulalia, in 2012, 4,695 meters were drilled from underground stations and 14,467 meters from the surface. With this drilling,
170,000 tons were added to the reserve base in 2012. In 2013, an additional diamond drilling program of 18,000 meters is planned.
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Table of Contents
The table below sets forth 2012, 2011 and 2010 production information for our Santa Eulalia mine:
Annual operating days
Total material mined and milled
Zinc average ore grade
Zinc concentrate produced
Zinc concentrate average grade
Zinc average recovery
Lead average ore grade
Lead concentrate produced
Lead concentrate average grade
Lead average recovery
(kt)
(%)
(kt)
(%)
(%)
(%)
(kt)
(%)
(%)
2012
2011
2010
257
154.3
5.95
13.3
51.46
74.63
2.08
4.0
49.96
61.47
217
154.3
7.15
0.1
35.03
0.34
2.72
5.0
35.80
42.74
150
150.3
6.54
14.3
48.86
71.28
2.64
5.4
56.70
81.26
kt = thousand tons
Taxco
Taxco has been on strike since July 2007. Please see Note 13 “Commitments and Contingencies” to our consolidated financial
statements.
The Taxco mining complex is located on the outskirts of the city of Taxco in the northern part of the state of Guerrero, Mexico,
approximately 71 kilometers from the city of Cuernavaca, Morelos, where access through the highway to the complex is possible.
The complex includes several underground mines (San Antonio, Guerrero and Remedios) and a flotation plant and produces lead and
zinc concentrates, with some amounts of gold and silver. The mining district in which the Taxco mines are located was discovered in
1519. Mining activities in the 20th century commenced in 1918. The Taxco district lies in the northern part of the Balsas-Mexcala
basin adjacent to the Paleozoic Taxco-Zitacuaro Massif.
We employ shrinkage, cut-and-fill and the room and pillar mining methods at the Taxco mines. The flotation plant has a capacity of
2,000 tons of ore per day. The lead concentrate is treated at a third party refinery in Mexico. The zinc concentrate is either treated at
the San Luis Potosi zinc refinery or exported.
The major mine equipment at the Taxco complex includes:
• Four Jumbo drilling tools,
• ten scoop trams for mucking and loading,
• five trucks for internal ore haulage,
• three locomotives for internal ore haulage, and
• three hoists.
For treating the ore, there are:
• Two primary crushers,
• one secondary crusher,
• two tertiary crushers,
• three mills, and
• two flotation circuits.
The concentrator plant has a milling capacity of 2,000 tons of ore per day.
Geology
The Taxco district is stratigraphically formed of rocks from Jurassic to recent periods, which are described below, with emphasis on
the mineralization control characteristics. The Taxco schist is composed of a series of schists and fylites, most likely from a volcanic-
sedimentary sequence of tufa and limonites. They represent a sequence of metamorphological arch and its age has been defined as
Jurassic Medium. The Morelos formation from the Upper Cretaceous age (Apian-Turonian) lies on a discordant form over Taxco
schist and its contact is several times marked by a clay zone (mylonites) and breccia, which implies a shifting of this unit over the
schist (packs). The Mezcala formation is constituted by a sequence of shale
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Table of Contents
and sandstone with some inter-stratified layers of limestone. Its base is calcarean. Its top tends to be rich in clay with thin limestone
layers. The Balsas group is constituted by conglomerates and is sandy on its base, rests in discordance form on an erosioned surface
from the Mexcala formation. The Tilzapotla Ryolite is the newest rock, which emerged in the district before the alluvial deposit. It is
formed of flux, breccia, tuffaceous, ignimbrites and vitrophyrre of ryolite composition.
There are four types of ore deposits found in Taxco district. In order of importance they are as follows: fissure-filling veins,
replacement veins, blanket-like replacement bodies (so called “mantos”), stock works and brecciate chimneys. The three first ones are
intimately related and they were formed in the same era, although in different stages.
The veins reach up to two kilometers in length with a variable potency of thirty centimeters up to eight meters, which is the case of
copper veins at the mines of Guerrero, Hueyapa and Palo Amarillo at the San Antonio mine; the Remedios mine has among other
veins, El Muerto and El Cristo one kilometer long and five meters in average potency.
3
Economic ore is found in the deposit in veins. Ore mineral include argentiferous galena (PbS), sphalerite (ZnS), pyrargyrite
(Ag SbS ), and other sulfosalts, and replacement “mantos.” The most mineralized zones are in the vicinity of the veins with the
limestone. The mineralization is more intensive in the base of the limestone and consists of sphalerite (ZnS), galena (PbS), pyrite
(FeS) and magnetite (FeOFe O ).
2
3
3
Mine Exploration
There was no mine exploration drilling in the three years ending December 31, 2012 at the Taxco mine.
There was no production at the Taxco mine in the three years ending December 31, 2012. The following table summarizes the
estimated production losses at our Taxco mine due to the strike:
Days of strike
Estimated strike production loss (tons):
Zinc in concentrates
Lead in concentrates
Processing Facilities - San Luis Potosi
2012
2011
2010
365
13,270
2,225
365
13,270
2,225
366
13,270
2,225
Our San Luis Potosi electrolytic zinc refinery is located in the city of San Luis Potosi, in the state of San Luis Potosi, Mexico. The
San Luis Potosi copper smelter is adjacent to the refinery. The city of San Luis Potosi is connected to our refinery and smelter by a
major highway.
Smelter
Our San Luis copper smelter was closed in 2010, and copper concentrates previously smelted at this plant are now sent to La Caridad
for smelting. We have initiated a program for plant demolition and soil remediation with a budget of $35.7 million, of which we have
spent $31.6 million at December 31, 2012. Plant demolition and construction of a confinement area at the south of the property were
completed in 2012 and we expect to complete soil remediation and the construction of a second confinement by the end of 2013. We
will deposit in the confinement areas metallurgical and other waste material resulting from plant demolition. The program also
includes the construction of a recreational park, a plant nursery to improve the environmental culture, and a logistic center for raw
material and finished goods from the San Luis Potosi zinc plant, which we expect will improve the flow of traffic in the west of the
city. We expect that once the site is remediated, we will be able to promote an urban development to generate a net gain on the
disposal of the property.
Zinc Refinery
The San Luis Potosi electrolytic zinc refinery was built in 1982. It was designed to produce 105,000 tons of refined zinc per year by
treating up to 200,000 tons of zinc concentrate from our own mines, principally Charcas, which is located 113 kilometers from the
refinery. The refinery produces special high grade zinc (99.995% zinc), high grade zinc (over 99.9% zinc) and zinc-based alloys with
aluminum, lead, copper or magnesium in varying quantities and sizes depending on market demand. Refined silver and gold
production is obtained from tolling services provided by a third party mining company.
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Table of Contents
The electrolytic zinc refinery’s major equipment includes:
• One roaster with 85 square meters of roasting area,
• one steam recovery boiler, and
• one acid plant.
There is a calcine processing area with five leaching stages: neutral, hot acid, intermediate acid, acid, purified fourth and jarosite, as
well as two stages for solution purifying. Additionally, the equipment includes:
• One cell house with two electrowinning circuits to finally obtain metallic zinc,
• one alloy and molding area with two induction furnaces and four molding systems, two of them with chains to produce 25
kilogram ingots, and
• two casting wheels to manufacture one ton jumbo pieces.
The table below sets forth 2012, 2011 and 2010 production information for our San Luis Potosi zinc refinery:
Total zinc concentrate treated
Refined zinc produced
Sulfuric acid produced
Refined silver produced
Refined gold produced
Refined cadmium produced
Average refinery recovery
Average realized price refined zinc
Average realized price zinc concentrate
Average realized price silver
kt = thousand tons
Nueva Rosita Coal and Coke Complex
(kt)
(kt)
(kt)
(kt)
(k)
(kt)
(%)
($ per lb)
($ per lb)
($ per oz)
2012
2011
2010
173.2
93.5
159.1
15.6
14.7
0.6
95.4
95.0
—
31.29
174.8
90.9
158.0
13.7
14.2
0.6
95.2
1.05
—
35.08
184.0
95.7
166.7
10.2
6.8
0.6
95.7
1.03
—
22.4
The Nueva Rosita coal and coke complex began operations in 1924 and is located in the state of Coahuila, Mexico on the outskirts of
the city of Nueva Rosita near the Texas border. It includes a) an underground coal mine, which has been closed as a result of an
accident in 2006; b) an open-pit mine with a yearly capacity of approximately 350,000 tons of coal; c) a coal washing plant completed
in 1998 with a capacity of 900,000 tons per year that produces clean coal of a higher quality; and d) a re-engineered and modernized
21 oven coke facility capable of producing 100,000 tons of coke per year (metallurgical, nut and fine) of which, 95,000 tons are
metallurgical coke. There is also a by-product plant to clean the coke gas oven in which tar, ammonium sulfate and light crude oil are
recovered. There are also two boilers, which produce 80,000 pounds of steam that is used in the by-products plant. The re-
engineering and modernization of 21 ovens was completed in April 2006. We believe the plant’s equipment is in good physical
condition and suitable for our operations.
Coke production is sold to Peñoles and other Mexican consumers in northern Mexico. We sold 69,638 tons and 82,014 tons of
metallurgical coke in 2012 and 2011, respectively. We expect to sell 77,900 tons of metallurgical coke in 2013.
The table below sets forth 2012, 2011 and 2010 production information for our Nueva Rosita coal and coke complex:
Coal mined — open-pit
Average BTU content
Average percent sulfur
Clean coal produced
Coke tonnage produced
Average realized price - Coal
Average realized price - Arsenic clean
coal
Average realized price - Coke
kt = thousand tons
2012
2011
2010
325.3
9,000
1.50
148.2
91.2
38.1
—
318.7
238.5
9,400
1.00
103.9
84.4
29.8
56.14
292.6
240.5
9,200
1.80
125.6
72.9
39.0
165
262.8
(kt)
BTU/Lb
%
(kt)
(kt)
($ per ton)
($ per ton)
($ per ton)
60
Table of Contents
ORE RESERVES
Ore reserves are those estimated quantities of proven and probable material that may be economically mined and processed for
extraction of their mineral content, at the time of the reserve determination. “Proven” (measured) reserves are reserves for which
(a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; (b) grade and/or quality are
computed from the results of detailed samplings; and (c) the sites for inspection, sampling and measurement are spaced so closely and
the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established.
“Probable” (indicated) reserves are reserves for which quantity and grade and/or quality are computed from information similar to that
used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less
adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume
continuity between points of observation. “Mineralized material,” on the other hand, is a mineralized body that has been delineated by
appropriately spaced drilling and/or underground sampling to support the reported tonnage and average grade of metal(s). Such a
deposit does not qualify as a reserve until legal and economic feasibility are concluded based upon a comprehensive evaluation of unit
costs, grade, recoveries and other material factors.
Our proven and probable ore reserve estimates are based on engineering evaluations of assay values derived from the sampling of drill
holes and other openings. We believe that the samplings taken are spaced at intervals sufficiently close enough and the geological
characteristics of the deposits are sufficiently well defined to render the estimates reliable. The ore reserves estimates include
assessments of the resource, mining and metallurgy, as well as economic, marketing, legal, environmental, governmental, social and
other necessary considerations.
Our Peruvian operations, including the Toquepala and Cuajone reserves, are classified into proven (measured), probable (indicated)
and possible (inferred) categories based on a RCB Index (Relative Confidence Bound Index) that measures our level of geologic
knowledge and confidence in each block. The RCB index is a measure of relative confidence in the block grade estimate. This
approach combines the local variability of the composites used to krig a block with the kriging variance and incorporates the use of
confidence intervals in measuring uncertainty of the block estimates relative to each other. The final resource classification is then
based on the distribution of these RCB values for blocks above 0.05% copper. It is the distribution that is used to find the breaks
between proven/probable and probable/possible.
Our Mexican operations, including the Buenavista and La Caridad reserves, are calculated using a mathematical block model and
applying the MineSight software system. The estimated grades per block are classified as proven and probable. These grades are
calculated applying a three-dimensional interpolation procedure and the inverse distance squared. Likewise, the quadrant method or
spherical search is implemented in order to limit the number of composites that will affect the block’s interpolated value. The
composites data is derived from the geological exploration of the ore body. In order to classify the individual blocks in the model, a
thorough geostatistical variogram analysis is conducted, taking into consideration the principal characteristics of the deposit. Based
on this block model classification, and with the implementation of the Lerch-Grossman algorithm, and the MineSight Pit Optimizer
procedure, mineable reserves are determined. The calculated proven and probable reserves include those blocks that are economically
feasible to mine by open-pit method within a particular mine design.
For the IMMSA unit, the basis for reserve estimations are sampling of mining operations and drilling exploration, geographical and
topographic surveys, tracking down all the foregoing in the corresponding maps, measurement, calculation and interpretation based on
the maps and reports from the mines, the mills and/or smelters. Mineral reserves are mineral stock which is estimated for extraction,
to exploit if necessary, to sell or utilize economically, all or in part, taking into consideration the quotations, subsidies, costs,
availability of treatment plants and other conditions which we estimate will prevail in the period for which reserves are being
calculated. The reserves are divided into proven (85% reliable or more according to statistical studies) and probable (70-80% reliable
or more according to statistical studies) categories according to their level of reliability and availability. In order to comply with SEC
regulations, proven reserves is a classification that can only be used for such mineral found on top of the last level of the mine (either
mineral up to 15 meters below the last level or below the first 15 meters only with sufficient drilling (25 or 30 meters between each
drill)).
Annually our engineering department reviews in detail the reserve computations. In addition, our engineering department reviews the
computation when changes in assumptions occur. Changes can occur for price or cost assumptions, results in field drilling or new
geotechnical parameters. We also engage third party consultants to review mine planning procedures.
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Table of Contents
Pursuant to SEC guidance, the reserves information in this report are calculated using average metals prices over the most recent three
years unless otherwise stated. We refer to these three-year average metals prices as “current prices.” Our current prices for copper are
calculated using prices quoted by COMEX, and our current prices for molybdenum are calculated according to Platt’s Metals Week.
Unless otherwise stated, reserves estimates in this report use $3.68 per pound for copper and $14.52 per pound for molybdenum, both
current prices as of December 31, 2012. The current prices for copper and molybdenum were $3.26 and $13.95 as of December 31,
2011 and $2.97 and $18.59 as of December 31, 2010, respectively.
For internal ore reserve estimation, our management uses long-term metal price assumptions for copper and molybdenum, which are
intended to approximate average prices over the long term. At December 31, 2010, these price assumptions were $1.80 per pound for
copper and $11.00 per pound for molybdenum. At December 31, 2011, we changed our price assumption to reflect the changes in
market trends to $2.00 per pound of copper and $12.00 per pound of molybdenum. These prices continued at December 31, 2012. For
other forecast and planning purposes, particularly related to merger and acquisition activities, our management considers various other
price scenarios. The use of these other price assumptions does not affect the preparation of our financial statements.
For the years 2012, 2011 and 2010, we have used reserves estimates based on current average prices as of the most recent year then
ended to determine amortization of mine development and intangible assets.
We periodically reevaluate estimates of our ore reserves, which represent our estimate as to the amount of unmined copper remaining
in our existing mine locations that can be produced and sold at a profit. These estimates are based on engineering evaluations derived
from samples of drill holes and other openings, combined with assumptions about copper market prices and production costs at each
of our mines.
The persons responsible for ore reserve calculations are as follows:
Peruvian open-pit:
Cuajone mine — Joel Peña, Senior Mine Engineer
Toquepala mine — Javier Aymachoque, Senior Mine Engineer
Tia Maria project:
Javier Salazar — Mine Engineer Manager - Special projects
Mexican open-pit:
La Caridad Mine - Marco A. Figueroa, Engineering and Mine Planning Superintendent
Buenavista mine — Jesus Molinares, Engineering and Mine Planning Superintendent
IMMSA unit:
Santa Barbara - Jorge M. Espinosa, Planning and Control Superintendent
Charcas — Juan Jose Aguilar, Planning and Control Superintendent
Santa Eulalia — Mario Ramirez Oviedo, Chief of Geology
Taxco - Marco A. Gonzalez, Chief of Geology
San Martin - Maria I. Carrillo, Chief Engineer
El Arco project:
Jesus Molinares, Engineering and Mine Planning Superintendent
Angangueo project:
Marco Antonio Rivera, Underground Mines Planning Manager
For more information regarding our reserve estimates, please see Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” — “Critical Accounting Policies and Estimates” — “Ore Reserves.”
62
Table of Contents
Ore Reserves Estimated at Current Prices:
The table below details our estimated proven and probable copper and molybdenum reserves at December 31, 2012.
PERUVIAN OPEN-PIT
UNIT
Cuajone Mine Toquepala Buenavista
Mine (1)
MEXICAN OPEN-PIT UNIT
La Caridad
Mine (1)
Mine (1)
(1)
TOTAL OPEN-
PIT MINES
MEXICAN
IMMSA
UNIT (2) Tia Maria El Arco
DEVELOPMENT PROJECTS
Angangueo
Mineral Reserves
Metal prices:
Copper ($/lb.)
Molybdenum ($/lb.)
Cut-off grade
Proven
Sulfide ore reserves (kt)
Average grade:
Copper
Molybdenum
Lead
Zinc
Leachable material (kt)
Leachable material grade
Probable
Sulfide ore reserves (kt)
Average grade:
Copper
Molybdenum
Lead
Zinc
Leachable material (kt)
Leachable material grade
Total
Sulfide ore reserves (kt)
Average grade:
Copper
Molybdenum
Lead
Zinc
Leachable material (kt)
Leachable material grade
Waste (kt)
Total material (kt)
Stripping ratio
Leachable material
Reserves in stock (kt)
Average copper grade
In pit reserves:
Proven (kt)
Average copper grade
Probable (kt)
Average copper grade
Total leachable reserves (kt)
Average copper grade
Copper contained in ore
reserves in pit(kt) (3)
3.68
14.52
0.141%
1,048,913
3.68
14.52
0.157%
2,712,955
3.68
14.52
0.125%
3.68
14.52
0.100%
3.68
14.52
0.126%
4,328,123
3,768,819
11,858,810
0.567%
0.019%
0.509%
0.027%
0.408%
0.007%
8,424
0.553%
403,881
0.146%
1,441,700
0.140%
0.223%
0.028%
3,694
0.245%
0.386%
0.019%
1,857,699
0.143%
1,236,122
658,519
1,791,799
881,847
4,568,287
0.400%
0.016%
0.314%
0.009%
0.365%
0.006%
0.182%
0.027%
0.332%
0.013%
5,972
0.373%
1,071,452
0.110%
538,895
0.121%
71,194
0.218%
1,687,513
0.119%
2,285,035
3,371,474
6,119,922
4,650,666
16,427,097
0.476%
0.017%
0.471%
0.023%
0.395%
0.007%
0.215%
0.027%
0.371%
0.017%
3.68
3.68
16,971
0.450%
1.140%
2.720%
30,948
0.490%
0.770%
3.010%
47,919
0.476%
0.901%
2.907%
3.68
3.68
14.52
0.115%
965,228
1,531
0.448%
0.007%
1.690%
0.430%
2.630%
202,824
0.342%
198,966
0.399%
842,865
5,112
0.296%
0.005%
1.300%
0.440%
2.630%
487,111
0.386%
136,231
0.192%
1,808,093
6,643
0.377%
0.006%
1.390%
0.438%
2.630%
6,643
14,396
0.478%
6,315,646
8,615,077
2.77
1,475,333
0.120%
11,169,630
16,016,437
3.75
1,980,594
0.135%
6,771,549
14,872,065
1.43
74,888
0.219%
2,886,800
7,612,354
0.64
3,545,211
0.132%
27,143,625
47,115,933
1.87
689,935
335,197
0.373%
0.315%
47,919
833,783
1,523,718
1,207,460
3,350,750
0.85
18,619
0.492%
1,252,791
0.153%
825,051
0.131%
663,316
0.244%
2,759,777
0.170%
8,424
0.553%
5,972
0.373%
33,016
0.486%
10,946
403,881
0.146%
1,071,452
0.110%
2,728,124
0.135%
17,650
1,441,700
0.140%
538,895
0.121%
2,805,645
0.134%
3,694
0.245%
71,194
0.218%
738,204
0.241%
1,857,699
0.143%
1,687,513
0.119%
6,304,989
0.149%
202,824
0.342%
487,111
0.386%
689,935
0.373%
198,966
0.399%
136,231
0.192%
335,197
0.315%
26,847
10,163
65,606
228
2,573
7,872
92
kt = Thousand tons
(1) The Cuajone, Toquepala, Buenavista and La Caridad concentrator recoveries calculated for these reserves were 84.6%, 90.9%, 81.0%, and 80.8%, respectively, obtained by using
(2) The IMMSA unit includes the Charcas, Santa Barbara, San Martin, Santa Eulalia and Taxco mines. Zinc and lead contained in ore reserves are as follows:
recovery formulas according to the different milling capacity and geo-metallurgical zones.
(in thousand tons)
Zinc
Lead
Proven
Probable
461.6
193.5
931.5
238.3
Total
1,393.1
431.8
(3) Copper contained in ore reserves for open-pit mines is (i) the product of sulfide ore reserves and the average copper grade proven plus (ii) the product of sulfide ore reserves and the
average copper grade probable plus (iii) the product of in-pit leachable reserves and the average copper grade. Copper contained in ore reserves for underground mines is the product
of sulfide ore reserves and the average copper grade.
63
Table of Contents
Metal Price Sensitivity :
In preparing the sensitivity analysis, we recalculated our reserves based on the assumption that current average metal prices were 20%
higher and 20% lower, respectively, than the actual current average prices for year-end 2012. Reserve results of this sensitivity
analysis are not proportional to the increase or decrease in metal price assumptions.
Mineral Reserves
Metal prices:
Copper ($/lb.)
Molybdenum ($/lb.)
Cut-off grade
Proven
Sulfide ore reserves (kt)
Average grade:
Copper
Molybdenum
Lead
Zinc
Leachable material (kt)
Leachable material grade
Probable
Sulfide ore reserves (kt)
Average grade:
Copper
Molybdenum
Lead
Zinc
Leachable material (kt)
Leachable material grade
Total
Sulfide ore reserves (kt)
Average grade:
Copper
Molybdenum
Lead
Zinc
Leachable material (kt)
Leachable material grade
Waste (kt)
Total material (kt)
Stripping ratio
Leachable material
Reserves in stock (kt)
Average copper grade
In pit reserves:
Proven (kt)
Average copper grade
Probable (kt)
Average copper grade
Total leachable reserves
(kt)
Average copper grade
Copper contained in ore
reserves in pit(kt) (1)
INCREASE — 20%
DECREASE — 20%
Open-Pit Mines
IMMSA
Development
Projects
Open-Pit Mines
IMMSA
Development
Projects
4.42
17.42
0.107%
4.42
4.42
17.42
0.094%
2.95
11.61
0.157%
2.95
2.95
11.61
0.149%
12,527,966
17,143
971,228
10,814,901
16,453
958,117
0.376%
0.018%
1,475,309
0.126%
0.460%
1.130%
2.700%
0.448%
0.007%
0.420%
2.650%
0.400%
0.020%
0.470%
1.160%
2.730%
402,761
0.370%
2,358,257
0.170%
0.453%
0.007%
0.440%
2.610%
400,319
0.371%
5,091,465
31,383
890,762
3,833,725
29,416
771,751
0.318%
0.013%
1,584,799
0.105%
0.490%
0.770%
2.990%
0.292%
0.005%
0.430%
2.630%
0.352%
0.014%
0.510%
0.780%
3.040%
635,530
0.339%
1,752,941
0.140%
0.320%
0.006%
0.440%
2.610%
613,306
0.347%
17,619,430
48,525
1,861,990
14,648,626
45,869
1,729,868
0.359%
0.017%
3,060,109
0.115%
28,708,256
49,387,796
1.80
2,759,777
0.170%
1,475,309
0.126%
1,584,799
0.105%
5,819,886
0.141%
0.479%
0.897%
2.888%
0.373%
0.006%
0.428%
2.635%
0.387%
0.019%
1,038,292
0.351%
2,163,516
5,063,798
1.72
4,111,198
0.157%
24,478,569
43,238,393
1.95
48,525
0.496%
0.916%
2.929%
45,869
0.393%
0.006%
0.410%
2.610%
1,013,625
0.356%
1,862,985
4,606,478
1.66
2,759,777
0.170%
402,761
0.370%
635,530
0.339%
2,358,257
0.170%
1,752,941
0.140%
1,038,292
0.351%
6,870,976
0.163%
400,319
0.371%
613,306
0.347%
1,013,625
0.356%
66,858
232
10,606
63,191
228
10,429
(1) Copper contained in ore reserves for open-pit mines is (i) the product of sulfide ore reserves and the average copper grade proven
plus (ii) the product of sulfide ore reserves and the average copper grade probable plus (iii) the product of in-pit leachable
reserves and the average copper grade. Copper contained in ore reserves for underground mines is the product of sulfide ore
reserves and the average copper grade.
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Table of Contents
Internal Ore Reserves Estimates:
The table below details our proven and probable copper and molybdenum reserves as of December 31, 2012, estimated based on long-
term price assumptions of $2.00 for copper and $12.00 for molybdenum.
PERUVIAN OPEN-PIT UNIT
Cuajone
Mine
Toquepala
Mine
MEXICAN OPEN-PIT
UNIT
TOTAL
Buenavista
Mine
La Caridad OPEN-PIT
Mine
MINES
MEXICAN
IMMSA UNIT
(1)
DEVELOPMENT PROJECTS
Tia Maria El Arco
Angangueo
Mineral Reserves
Metal prices:
Copper ($/lb.)
Molybdenum ($/lb.)
Cut-off grade
Proven
Sulfide ore reserves(kt)
Average grade:
Copper
Molybdenum
Lead
Zinc
Leachable material (kt)
Leachable material grade
Probable
Sulfide ore reserves(kt)
Average grade:
Copper
Molybdenum
Lead
Zinc
Leachable material (kt)
Leachable material grade
Total
Sulfide ore reserves(kt)
Average grade:
Copper
Molybdenum
Lead
Zinc
Leachable material (kt)
Leachable material grade
Waste (kt)
Total material (kt)
Stripping ratio
Leachable material
Reserves in stock (kt)
Average copper grade
In-pit reserves:
Proven (kt)
Average copper grade
Probable(kt)
Average copper grade
Total leachable reserves
Average copper grade
Copper contained in ore
reserves (kt) (2)
2.00
12.00
0.182%
912,086
0.584%
0.020%
7,929
0.570%
952,568
0.416%
0.017%
5,089
0.390%
1,864,654
0.498%
0.018%
13,019
0.500%
4,939,159
6,816,832
2.66
18,619
0.492%
7,929
0.570%
5,089
0.390%
31,638
0.495%
9,351
2.00
12.00
0.223%
2.00
12.00
0.277%
2.00
12.00
0.201%
2.00
12.00
0.226%
2,126,533
2,107,884
2,588,386
7,734,889
0.562%
0.033%
0.566%
0.009%
0.257%
0.027%
0.464%
0.023%
843,570
0.203%
2,418,440
0.231%
280,623
0.131%
3,550,562
0.218%
241,622
787,575
419,571
2,401,336
0.368%
0.012%
0.517%
0.008%
0.211%
0.027%
0.408%
0.015%
1,134,580
0.149%
684,460
0.206%
116,242
0.201%
1,940,371
0.173%
2,368,155
2,895,459
3,007,957
10,136,225
0.542%
0.030%
0.553%
0.008%
0.251%
0.027%
0.451%
0.021%
1,978,150
3,102,900
0.172%
0.226%
396,865
0.152%
5,490,934
0.202%
9,347,675
13,693,980
4.78
5,274,390
11,272,749
2.89
2,039,531
5,444,353
0.81
21,600,755
37,227,914
2.67
1,252,791
0.153%
825,051
0.131%
663,316
0.244%
2,759,777
0.170%
843,570
0.203%
1,134,580
0.149%
2,418,440
0.231%
684,460
0.206%
280,623
0.131%
116,242
0.201%
3,550,562
0.218%
1,940,371
0.173%
3,230,941
3,927,951
1,060,181
8,250,711
0.165%
0.206%
0.210%
0.191%
2.00
2.00
2.00
12.00
0.255%
2.00
926,870
1,383
14,548
0.490%
1.230%
2.890%
26,286
0.540%
0.800%
3.120%
40,834
0.522%
0.953%
3.038%
40,834
0.462%
0.007%
194,816
0.347%
198,966
0.399%
1.850%
0.450%
2.520%
621,107
4,676
0.348%
0.006%
463,464
0.393%
132,636
0.197%
1.410%
0.450%
2.580%
1,547,977
6,058
0.416%
0.007%
658,279
0.380%
636,404
1,294,683
331,602
0.318%
1,022,209
2,901,788
0.87
1.510%
0.450%
2.566%
6,058
194,816
0.347%
463,464
0.393%
658,279
0.380%
2,501
198,966
0.399%
132,636
0.197%
331,602
0.318%
7,494
91
16,238
23,024
8,153
56,766
213
(kt) = Thousand tons
(1) The IMMSA unit includes the Charcas, Santa Barbara, San Martin, Santa Eulalia and Taxco mines. Zinc and lead contained in ore reserves are as follows:
(in thousand tons)
Zinc
Lead
Proven
Probable
420.4
178.9
820.1
210.3
Total
1,240.5
389.2
(2) Copper contained in ore reserves for open-pit mines is (i) the product of sulfide ore reserves and the average copper grade plus (ii) the product of in-pit leachable reserves and the
average grade of copper. Copper contained in ore reserves for underground mines is the product of sulfide ore reserves and the average copper grade.
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OVERVIEW OF BLOCK MODEL RECONCILIATION PROCESS
We apply the following block model to mill reconciliation procedure.
The following stages are identified at the Cuajone, Toquepala, Buenavista and La Caridad mines:
1. The mine geologists gather the necessary monthly statistical data from our information system (“SRP”), which provides ore
tons milled and ore grades in the concentrator.
2. Mined areas are topographically determined and related boundaries are built.
3. Using the “interactive planner” option in our mining software (Minesight), ore tons and grades are calculated inside mined
areas over the block model. At this point the current cut-off grade is considered.
4. In the final stage, accumulated tons mined, weighted average grade for ore material and leach is compared with data coming
from our SRP system.
Tonnage and grade reconciliation for 2012 are as follows:
Mine
Cuajone
Toquepala
Buenavista
La Caridad
Long Range Model
Mill
Variance
Tons
(thousands)
28,941
18,719
26,646
34,059
% Copper
Tons
(thousands)
% Copper
Tons
(thousands)
% Copper
0.673
0.643
0.643
0.350
28,708
20,072
25,763
33,556
0.653
0.658
0.632
0.344
233
(1,353)
883
503
0.020
(0.015)
0.011
0.006
If the estimation error appears greater than 3%, a detailed evaluation is done to review the differences, which normally could result in
more in-fill drilling, in order to better understand the geological characteristics (grade, rock type, mineralization and alteration) and
the spacing of drill holes which are considered in the ore body zone.
AVERAGE DRILL-HOLE SPACING
The following is the average drill-hole spacing for proven and probable sulfide reserves as of December 31, 2012:
Cuajone
Toquepala
Buenavista
La Caridad
ITEM 3. LEGAL PROCEEDINGS
Proven
(average spacing in meters)
Probable
78.99
78.32
53.18
46.52
121.97
116.31
102.46
104.71
Reference is made to the information under the caption “Litigation Matters” in the consolidated financial statement Note 13
“Commitments and contingencies.”
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Table of Contents
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
SCC COMMON STOCK:
SCC’s common stock is traded on the New York Stock Exchange (“NYSE”) and the Lima Stock Exchange (“BVL”). Effective
February 17, 2010, SCC’s common stock symbol changed from PCU to SCCO on both the NYSE and the BVL. At December 31,
2012, there were 1,048 holders of record of our common stock. The Company’s common stock commenced trading on NYSE and
BVL in 1996.
DIVIDEND AND STOCK MARKET PRICES:
The table below sets forth the cash dividends paid per share of capital stock and the high and low stock prices on both the NYSE and
the BVL for the periods indicated.
Quarters
Dividend per Share (1)
Stock market Price
NYSE:
High
Low
BVL:
High
Low
1st
2nd
2012
3rd
4th
Year
1st
2nd
2011
3rd
4th
Year
$ 0.54 $ 0.53 $ 0.24 $ 2.75 $ 4.06 $ 0.57 $ 0.55 $ 0.61 $ 0.70 $ 2.43
$ 36.12 $ 33.28 $ 36.92 $ 38.94 $ 38.94 $ 49.59 $ 40.49 $ 36.59 $ 32.77 $ 49.59
$ 30.74 $ 28.16 $ 30.51 $ 33.28 $ 28.16 $ 38.65 $ 30.72 $ 24.99 $ 23.99 $ 23.99
$ 36.20 $ 33.30 $ 36.80 $ 38.68 $ 38.68 $ 49.80 $ 40.50 $ 36.50 $ 32.85 $ 49.80
$ 30.73 $ 28.20 $ 30.50 $ 33.80 $ 28.20 $ 38.70 $ 30.80 $ 24.96 $ 23.81 $ 23.81
(1) Dividend paid in the first quarter of 2012 includes a cash dividend of $0.19 and a stock dividend of $0.35. 2011 dividend per
share have been adjusted accordingly.
On January 24, 2013, the Board of Directors authorized a cash dividend of $0.24 per share of common stock paid on February 26,
2013, to shareholders of record at the close of business on February 13, 2013.
For a description of limitations on our ability to make dividend distributions, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations — “Liquidity and Capital Resources” and Note 10 “Financing” to our consolidated
financial statements.
DIRECTORS’ STOCK AWARD PLAN
The following table sets forth certain information related to our shares held as treasury stock for the Directors stock award plan at
December 31, 2012:
Equity Compensation Plan Information
Plan Category
Directors’ stock award plan
Number of securities to be
issued upon exercise of
outstanding options
(a)
N/A
Weighted-average exercise
price of
outstanding options
(b)
N/A
Number of securities
remaining available
for future issuance
(c)
314,400
For additional information see Note 14 — “Stockholders Equity” — “Directors’ Stock Award Plan.”
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SCC COMMON STOCK REPURCHASE PLAN:
In 2008, the Company´s Board of Directors authorized a $500 million share repurchase program. On July 28, 2011, the Board of
Directors approved an increase of the SCC share repurchase program, from $500 million to $1.0 billion. Pursuant to this program, the
Company purchased common stock as shown in the table below. These shares are available for general corporate purposes. The
Company may purchase additional shares of its common stock 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.
Period
To
Total Number
of Shares
Purchased
Average
Price
Paid per
Share
Cumulative
Number of
Shares
Purchased
28,510,150
4,912,000
15,600
9,034,400
278,486
500,000
370,000
100,000
2,763,850
430,000
4,442,336
46,914,486
13.49
14.64
29.69
30.29
30.23
28.57
28.33
32.47
34.71
34.83
33.17
18.72
28,510,150
33,422,150
33,437,750
42,472,150
42,750,636
43,250,636
43,620,636
43,720,636
46,484,486
46,914,486
Maximum
Number of Shares
that May Yet Be
Purchased Under
the Plan
@ $37.86(1)
Total Cost
($ in
millions)
$
384.7
71.9
0.5
273.7
8.4
14.3
10.5
3.2
95.9
15.0
147.3
3,220,925
$
878.1
From
2008:
08/11/08
2009:
01/12/09
2010:
05/05/10
2011:
05/01/11
2012:
04/10/12
05/30/12
06/01/12
08/01/12
09/01/12
10/01/12
12/31/08
09/30/09
10/14/10
12/31/11
04/23/12
05/31/12
06/30/12
08/31/12
09/30/12
10/31/12
Total purchased
(1) NYSE price at December 31, 2012
As a result of the repurchase of shares of SCC’s common stock, Grupo Mexico’s direct and indirect ownership was 81.3% as of
December 31, 2012 and 80.9% at December 31, 2011.
SHAREHOLDER RETURN PERFORMANCE PRESENTATION
Set forth below is a line graph comparing the yearly change in the cumulative total returns on the Company’s common stock against
cumulative total return on the S&P 500 Stock Index and the S&P Metals and Mining Select Industry Index, for the five year period
ending December 31, 2012. The chart below analyzes the total return on SCC’s common stock for the period commencing
December 31, 2007 and ending December 31, 2012, compared with the total return of the S&P 500 and the S&P Metals and Mining
Select Industry Index for the same five-year period.
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Table of Contents
Comparison of Five Year Cumulative Total Return *
SCC Stock, S&P 500 Index and S&P Metals and Mining Select Industry Index **
* Total return assumes reinvestment of dividends
** The comparison assumes $100 invested on December 31, 2007
In 2008, SCC´s stock had a negative return of 50.65%, compared with negative returns of 38.49% and 60.02% for the S&P 500 and
for S&P Metals and Mining Select Industry Index. In 2009, SCC´s stock had a positive return of 108.54%, compared with positive
returns of 23.45% and 85.59% for the S&P 500 and for S&P Metals and Mining Select Industry Index, respectively. In 2010, SCC’s
stock had a positive return of 55.85%, compared with positive returns of 12.78% and 33.20% for the S&P 500 and the S&P Metals
and Mining Industry Index, respectively. In 2011, SCC´s stock had a negative return of 33.12%, compared to a 0.00% return for the
S&P 500 and a negative return of 28.81% for the S&P Metals and Mining Industry Index. In 2012 SCC´s stock had a positive return
of 39.30%, compared to a positive return of 13.41% for the S&P 500 Index and 11.30% for the S&P Metals and Mining Industries
Index.
The foregoing Performance Graph and related information shall not be deemed “soliciting material” or “filed” with the SEC or subject
to Section 18 of the Securities Exchange Act of 1934, as amended, nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the
Company specifically incorporates it by reference into such filing.
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Table of Contents
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SELECTED FINANCIAL AND STATISTICAL DATA
The selected historical financial data presented below as of and for the five years ended December 31, 2012, includes certain
information that has been derived from our consolidated financial statements. The selected financial data should be read in
conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the
consolidated financial statements and notes thereto.
(In millions, except per share
amounts, stock and financial
ratios)
Statement of Earnings Data
Net sales
Operating income
Net income
Net income attributable to:
Non-controlling interest
Southern Copper Corporation
Per share amounts: (1)
Earnings basic and diluted
Dividends paid
Balance Sheet Data
Cash and cash equivalents
Total assets
Total long-term debt, including
current portion
Total liabilities
Total equity
$
$
$
$
2012
6,669.3
3,108.9
1,941.4
6.7
1,934.6
2.28
4.06
2012
$
2,459.5
10,383.7
4,213.9
5,594.6
4,789.1
$
$
$
$
$
$
$
Years Ended December 31,
2010
2011
2009
6,818.7
3,625.4
2,344.3
7.9
2,336.4
2.73
2.43
$
$
$
$
5,149.5
2,604.2
1,562.7
8.7
1,554.0
1.81
1.66
2011
As of December 31,
2010
848.1
8,062.7
2,745.7
4,026.4
4,036.3
$
$
2,192.7
8,128.0
2,760.4
4,217.6
3,910.4
$
$
$
$
$
$
2008
4,850.8
2,201.9
1,414.5
7.9
1,406.6
3,734.3 $
1,485.1
934.6
5.2
929.4 $
1.08 $
0.44 $
1.58
1.92
2009
2008
772.3 $
6,058.2
1,280.3
2,164.6
3,893.7 $
716.7
5,764.3
1,290.0
2,368.9
3,395.4
2008
Statement of Cash Flows
2012
2011
Years Ended December 31,
2010
2009
$
Net income
Depreciation, amortization and depletion
Cash provided from operating activities
Capital expenditures
Debt repaid
Debt incurred
Dividends paid to common stockholders
SCC common shares buyback
SCC shareholder derivative lawsuit
Increase (decrease) in cash and cash
equivalents
$
1,941.4 $
325.7
2,004.0
(1,051.9)
(10.0)
1,477.5
(3,140.0)
(147.3)
2,108.2
2,344.3 $
288.1
2,079.9
(612.9)
(15.3)
—
(2,080.4)
(273.7)
—
1,562.7 $
281.7
1,920.7
(408.7)
(10.0)
1,489.7
(1,428.0)
(0.5)
—
934.6 $
273.6
963.2
(414.8)
(10.0)
—
(376.0)
(71.9)
—
1,414.5
260.9
1,728.3
(524.4)
(160.0)
—
(1,710.8)
(384.7)
—
1,611.4 $
(1,344.6) $
1,420.4 $
55.6 $
(692.5)
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Table of Contents
Capital Stock (1)
Common shares outstanding — basic and
diluted (in thousands)
NYSE Price — high
NYSE Price — low
Book value per share
P/E ratio
Financial Ratios
Gross margin(2)
Operating income margin(3)
Net margin(4)
Current assets to current liabilities
Net debt(5)/total capitalization(6)
Ratio of earnings to fixed charges(7)
2012
2011
Years Ended December 31,
2010
2009
$
$
845,551
849,978
858,998
38.94 $
28.16 $
5.64
16.60
49.59 $
23.99 $
4.77
11.04
48.84 $
26.19 $
4.58
26.94
858,998
36.40 $
12.74 $
4.56
30.44
2008
864,286
41.34
9.19
3.96
10.14
2012
2011
Years Ended December 31,
2010
2009
2008
53.60%
46.60%
29.00%
5.00
26.80%
15.7x
55.30%
53.20%
34.30%
3.11
32.00%
18.8x
53.20%
50.60%
30.20%
3.28
12.70%
15.5x
42.70%
39.80%
24.90%
3.04
11.50%
15.1x
48.00%
45.40%
29.00%
2.17
14.40%
20.8x
(1) Per share amounts reflect earnings and dividends of Southern Copper Corporation. Numbers of shares and values per share have
been adjusted to reflect the 2008 stock split and the effect of the 9.0 million shares paid as stock dividend on February 28, 2012.
(2) Represents net sales less cost of sales (including depreciation, amortization and depletion), divided by net sales as a percentage.
(3) Represents operating income divided by sales as a percentage.
(4) Represents net income divided by net sales as a percentage.
(5) Net debt is defined as total debt minus cash and cash equivalents balance. Please see Item 7. Management Discussion and
Analysis of Financial Condition and Results of Operations, “Financing Section.”
(6) Represents net debt divided by net debt plus equity.
(7) Represents earnings divided by fixed charges. Earnings are defined as earnings before income taxes, non-controlling interest
and cumulative effect of change in accounting principle, plus fixed charges and amortization of interest capitalized, less interest
capitalized. Fixed charges are defined as the sum of interest expense and interest capitalized, plus amortized premiums,
discounts and capitalized expenses related to indebtedness.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE SUMMARY
This Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to and should be read together
with our Audited Consolidated Financial Statements as of and for each of the years in the three-year period ended December 31,
2012. Therefore, unless otherwise noted, the discussion below of our financial condition and results of operations is for Southern
Copper Corporation and its subsidiaries (collectively, “SCC,” the” Company,” “our,” and “we”) on a consolidated basis for all
periods. Our financial results may not be indicative of our future results.
This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections
about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in the
forward-looking statements as a result of a number of factors. See Item 1 “Business” - “Cautionary Statement.”
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, which we also produce and sell. Market forces outside of our control largely determine the
sale prices for our products. Our management, therefore, focuses on value creation through copper production, cost control,
production enhancement and maintaining a prudent capital structure to remain profitable. We endeavor to 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.
We are one of the world’s largest copper mining companies in terms of production and sales with our principal operations in Peru and
Mexico. We also have an active ongoing exploration program in Chile and in 2011 we started exploration activities in Argentina and
Ecuador. In addition to copper we produce significant amounts of other metals, either as a by-product of the copper process or in a
number of dedicated mining facilities in Mexico.
Net sales value in 2012 of $6.7 billion was only 2.2% lower than 2011 sales, which were the highest in our Company´s history even
though the average copper price in 2012 was 10% lower and the prices for all our major by-products were lower, as well. This
accomplishment was due to production increases in copper, silver and zinc. Net income decreased by about 17% as a result of the
lower prices and the one time court ordered legal fee payment of $316.2 million. Without the deduction for these legal fees, 2012 net
earnings would have been $2.3 billion a decrease of 3.7% from our record year of 2011. Our Buenavista mine, which is enjoying a
stable work environment, reached a new production record of 200,070 tons of copper. In 2012, we invested $1,051.9 million in capital
programs along with $48 million in our exploration efforts. We believe this commitment to growth will continue to benefit our
Company, our investors, our neighboring communities, and the countries in which we operate.
We believe we hold the world’s largest copper reserve position. Our copper ore reserves, at December 31, 2012, totaled 67.1 million
tons of contained copper, calculated at a copper price of $2.00 per pound (as of December 31, 2012, the LME and COMEX copper
price was $3.59 and $3.64, respectively), as follows:
Copper contained in ore reserves
Mexican open-pit
Peruvian operations
IMMSA
Development projects
Total
Thousand tons
31,177
25,589
213
10,086
67,065
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Outlook: Various key factors will affect our outcome. These include, but are not limited to, some of the following:
• Changes in copper and molybdenum prices: The average LME and COMEX copper price was $3.61 per pound in 2012, about
10% lower than in 2011. Average silver and zinc prices in 2012 decreased about 11% and molybdenum decreased about 18%
compared to 2011.
• Sales structure: In the last three years approximately 75.7% of our revenues came from the sale of copper, 9.0% from
molybdenum, 7.0% from silver and 8.3% from various other products, including zinc, sulfuric acid, gold and other materials.
• Metal markets: During the fourth quarter 2012 metal markets continued to be driven by the negative macroeconomic events that
affected consumer expectations, the more significant being Europe’s debt crisis, the “fiscal cliff” that affected the U.S. economy
and the slowdown of China’s economy. 2012 was also a transition year, with administration changes or elections in several key
countries, including China and the United States.
We believe the copper market fundamentals are sound, however, demand has been affected by macroeconomic factors and the
economic slowdown noted in the previous paragraph. At present, we perceive a more positive environment as some of these
matters have been solved or are perceived to have a more positive outlook from now on.
In China, after several monetary easing measures were taken in the second half of 2012, some analysts expect growth in Chinese
copper demand of approximately 8.5%, for 2013, better than the 5% growth estimated for 2012. According to them, China
represented 41% of the world demand in 2012. The expected strong growth in China and other emerging economies should give
support to the copper market in 2013.
In the United States demand appears to be stronger as consumer confidence has increased and the economy is recovering. This
has been reinforced by positive news related to housing and employment that seem to have offset concerns related to the fiscal
balance. Even though the United States represents today about 8% of the world demand for refined copper, the recovery of its
economy is key to copper demand since the United States is the most important secondary copper consumer, affecting copper
demand in other economies. Finally, after a severe 2012, where European demand is estimated to have decreased by
approximately 7%, there are signs indicating a copper demand increase of 2%. It should be mentioned that Europe now represents
approximately 19% of the world demand for refined copper.
On the supply side, we understand that several structural factors, such as labor stoppages, technical problems and other issues are
still affecting copper supply, which we believe will very likely result in weak supply growth in 2013, even though we will see
several projects coming into operation by year-end or in 2014. We believe SCC is positioned to take advantage of this unsettled
situation, through our investment program of organic growth, aimed at increasing production from our current capacity of
640,000 tons to 1.2 million tons by 2017.
• Molybdenum: we saw a 2.6% molybdenum demand growth in 2012, which helped to reduce the surplus of supply to demand
from approximately 8% to 6%. We expect that in 2013 the balance between supply and demand will continue reducing the market
surplus, thereby improving molybdenum prices in the near future.
• Silver: we believe that silver prices will have strong support due to its industrial uses as well as being perceived as a value shelter
in times of economic uncertainty.
• Zinc: we also believe that zinc has very good long term fundamentals due to its significant industrial consumption; however,
inventories are currently at a relatively high level, which tends to maintain a relatively weak zinc price.
• Production: For 2013, we are currently expecting a copper production of 650,000 tons of which approximately 10,000 tons would
be from third party copper. We expect molybdenum production in 2013 to be about 19,800 tons including approximately 1,700
tons from our new molybdenum plant at Buenavista. Additionaly, in 2013 we expect to produce and sell 16.3 million ounces of
silver and produce 99,100 tons of zinc.
• Capital Expenditures: Capital expenditures were a record of $1,051.9 million for 2012, 71.6% higher than in 2011. The increase
reflects our strong commitment to the Company’s expansion programs at Buenavista and other properties. In
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2012, $615.6 million was invested in our Buenavista projects. In 2013 we will continue our investment program to increase
copper production capacity by approximately 84% by 2017, from 640,000 tons to 1.2 million tons.
SCC shareholder derivative lawsuit: On October 9, 2012, we received from AMC, our majority shareholder, $2.1 billion in
satisfaction of the judgment issued pursuant to the decision of the Court of Chancery of Delaware, which concluded that we paid an
excessive price to AMC in the 2005 merger between the Company and Minera Mexico, S.A. de C.V. From the aforementioned sum
received from AMC, we paid $316.2 million to the plaintiff’s attorneys to satisfy the court ordered award of attorneys’ fees and
expenses. The effect of these transactions was recorded in our 2012 results. The payment of $316.2 million attorney´s fees was
recorded as an operating expense and the receipt of $2.1 billion was recorded in equity as additional paid-in capital.
Financing: On November 8, 2012, we issued $1.5 billion of fixed-rate unsecured notes with a discount of $22.5 million, which is
being amortized over the term of the related debt. This debt was issued in two tranches, $300 million due in 2022 at an annual interest
rate of 3.5% and $1.2 billion due in 2042 at an annual interest rate of 5.25%. Net proceeds are being used for general corporate
purposes, including the financing of our capital expenditure program.
Changes in credit risk: On December 3, 2012 Fitch Ratings upgraded the Company’s unsecured debt ratings from BBB to BBB+.
Additionally, Standard & Poor’s Ratings Services and Moody’s Investor Services aligned and confirmed SCC debt rating by assigning
‘BBB’ and Baa2, respectively, to the new notes issued.
Tantahuatay: The Tantahuatay mine is located in Cajamarca, in northern Peru. Production started in August 2011 and the mine
produced 140,262 ounces of gold and 914,241 ounces of silver in 2012. For 2013, the current plan is to produce 116,300 ounces of
gold and 476,000 ounces of silver. We hold a 44.2% interest in this mine. In 2012, we have recognized $48.7 million in earnings (see
caption Equity earnings of affiliate, on our Statement of Earnings) for our share of the net income of the mine.
Peru labor negotiations: We conducted negotiations with eight Peruvian unions whose collective bargaining agreements expired in
2012. During the first two months of 2013, we have signed three-year agreements with all the unions.The agreements include, among
other things, annual salary increases of 6.5%, 5% and 5% for each of the three years, respectively, for all workers.
There were no strikes during 2011 and 2010. On December 24 and 25, 2012, the three major unions held a two-day illegal work
stoppage which did not have a material impact on production.
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) earnings, (ii) production, (iii) “operating cash costs” as a measure of our performance, (iv) metal prices,
(v) business segments, (vi) the effect of inflation and other local currency issues, and (vii) our capital investment and exploration
program.
Earnings: The table below highlights key financial and operational data of our Company for the three years ended December 31,
2012:
Net sales (in millions)
Net income attributable to SCC (in
millions)
Earnings per share
Dividends per share
Average LME copper price
Pounds of copper sold (in millions)
$
$
$
$
$
2012
2011
2010
6,669
1,935
2.28
4.06
3.61
1,415
$
$
$
$
$
6,819
2,336
2.73
2.43
4.00
1,320
$
$
$
$
$
5,150
1,554
1.81
1.66
3.42
1,106
Prices for copper and all our major by-products were lower in 2012 and we absorbed a charge of $316.2 million in 2012 for legal fees
paid in connection with the SCC shareholder derivative litigation. Because of higher production and sales volume of our metals we
were able to record good results for 2012, with net earnings of $1.9 billion.
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Production: The table below highlights, mine production data of our Company for the three years ended December 31, 2012:
Copper (in million pounds)
Molybdenum (in million pounds)
Zinc (in million pounds)
Silver (in million ounces)
2012 compared with 2011:
2012
2011
1,406
40
198
14
1,295
41
185
13
2010
1,055
45
219
13
Mined copper in 2012 increased 111 million pounds, compared to 2011 production. The 8.5% increase was due to higher production
at our Mexican mines and includes an additional 60.8 million pounds at the Buenavista mine, which had record production in 2012,
15.5 million pounds at the La Caridad mine, and 41.1 million pounds of higher production at the Cuajone mine. These increases in
production were the result of higher ore grades and recoveries, and were partially offset by lower production at the Toquepala mine,
whose production decreased by 2.2% mainly due to lower PLS copper grade and volume processed at the SXEW plant.
Molybdenum production decreased slightly in 2012, compared with 2011, due primarily to 2.0 million pounds of lower production at
the Toquepala mine, as a result of lower ore grades and recoveries, offset by 1.2 million pounds and 0.2 million pounds of higher
production at La Caridad mine and Cuajone mine, respectively.
Zinc mine production, which comes from our IMMSA unit in Mexico, increased by 13.4 million pounds in 2012, 7.3% higher than in
2011, mainly as a result of higher recoveries and the production recovery at the Santa Eulalia mine after the flooding problems of prior
years were resolved.
Our silver production increased 7.2% in 2012, principally due to higher production at the Buenavista mine and the Cuajone mine,
offset somewhat by lower production at some of our other mines.
2011 compared with 2010:
Mined copper in 2011 increased 240 million pounds or 22.8% over the 2010 production principally due to higher production at our
Buenavista mine. The Buenavista mine restored full capacity in the second quarter of 2011 and increased production by 335 million
pounds. Decreases at our Peruvian mines of 85 million pounds, largely from lower ore grade at the Cuajone mine and a decrease of 10
million pounds at La Caridad mine, due to lower grades and recoveries, partially offset the increase from Buenavista.
Molybdenum production decreased by approximately 4 million pounds in 2011, 9.5% lower than in 2010, due primarily to 5.5 million
pounds of lower production at the Cuajone mine, partially offset by 1.2 million of higher production at the Toquepala mine both due to
changes in recoveries, and lower ore grades at Cuajone mine.
Zinc mine production, which comes from our IMMSA unit in Mexico decreased by 34 million pounds in 2011, 15.5% lower than in
2010, principally due to no production at the Santa Eulalia mine, as a result of a flooding caused by heavy rains, and decreases in
production at the Santa Barbara and Charcas mines of 19 million pounds mainly due to lower ore grades.
Our silver production increased slightly in 2011, principally due to higher production at the Buenavista mine mostly offset by lower
production at some of our other mines.
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 consolidated statement of earnings is
presented under the subheading, “Non-GAAP Information Reconciliation,” on page 96.
We have defined operating cash cost per pound as cost of sales (exclusive of depreciation, amortization and depletion), less the cost of
purchased concentrates, plus selling, general and administrative charges, treatment and refining charges, net
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revenue (loss) on sale of metal purchased from third parties and by-product revenues, and sales premiums; less workers’ participation
and other miscellaneous charges, including the Peruvian royalty charge, the special mining tax and the change in inventory levels;
divided by total pounds of copper produced by our own mines. 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: molybdenum, zinc, silver, gold and other minor by-
products 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 community’s 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 the prices of silver
and zinc, have 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-product revenues against our costs.
We exclude the cost of purchases of third party copper material. From time to time we purchase copper concentrates on the open
market in order to maximize the use of our metallurgical facilities or to take advantage of an attractive market situation. We view
these purchases on an incremental basis and measure the results incrementally. We find that the inclusion of these purchases with our
own production often creates a distortion in our unit cost. Accordingly, we include only the net effect of these purchases as a by-
product credit, so that only the net revenue or loss from the transaction is included in the calculation. We believe this will allow others
to see a truer presentation of our cash cost, which we consider is one of the lowest of copper producing companies of similar size.
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 costs are items of a
non-recurring nature and the mining royalty charge and special mining tax.
Our operating cash costs per pound, as defined, are presented in the table below for the three years ended December 31, 2012.
(Dollars per pound)
Operating cash cost per pound of
copper produced without by-
products revenue
Add: by-product revenues
Operating cash cost per pound of
copper produced
2012
Year
2011
2010
Variance
2012-2011
2011-2010
$
$
$
1.796
$
(1.083) $
1.759
$
(1.242) $
1.620
$
(1.340) $
0.713
$
0.517
$
0.280
$
0.037 $
0.159 $
0.196 $
0.139
0.098
0.237
2012 compared with 2011:
As seen on the chart above, operating cash cost per pound of copper before by-product credits was 3.7 cents per pound higher than in
2011, an increase of 2.1%, mainly due to increases in fuel and power cost. Operating cash cost per pound, net of by-product credits,
was 19.6 cents per pound higher than in 2011, largely as a result of lower prices for our major by-products, which decreased between
11% and 18% in the period.
2011 compared with 2010:
Our cash cost per pound , excluding by-product revenues, was higher by 13.9 cents per pound in 2011, compared with 2010,
principally due to higher production cost, mainly power and fuel cost due to increased market prices, labor due to salary increases and
repair costs, partially offset by the higher production from the Buenavista mine.
Our cash cost per pound for 2011 when calculated with by-product revenues was 51.7 cents per pound, compared with 28.0 cents per
pound in 2010. The increase was due to some cost inflation, mainly fuel and power and lower by-product credit largely due to lower
molybdenum sales volume and price.
Metal Prices: The profitability of our operations is dependent on, and our financial performance is influenced by, the international
market prices for the products we produce, especially for copper, molybdenum, zinc and silver. Metal prices
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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 occasion been subject to rapid short-term
changes due to financial investments.
We are subject to market risks arising from the volatility of copper and other metals 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 2013 net income attributable to SCC resulting from metal price changes:
Change in metal prices (per pound except silver — per
ounce)
Change in net earnings (in millions)
Copper
Molybdenum
Zinc
Silver
$
$
0.01 $
8.0 $
1.00 $
25.7 $
0.01 $
1.3 $
1.00
9.6
Business Segments: We view our Company as having three operating segments and manage it on the basis of these segments. These
segments are (1) our 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 molybdenum, silver and other material. Our Mexican open-pit operations include La Caridad and the Buenavista mine
complexes and 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 19 “Segment and related information” of
our consolidated financial statements.
Inflation and Exchange Rate Effect 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/exchange rate 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 exchange rate variances of the nuevo
sol or the peso, resulting in a re-measurement gain or loss in our financial statements. Recent inflation and exchange rate variances
are provided in the table below:
Peru
Mexico
Peruvian inflation rate
Nuevo sol/dollar appreciation /
(devaluation) rate
Mexican inflation rate
Peso/dollar appreciation / (devaluation) rate
2012
Years Ended December 31,
2011
2010
2.6%
5.4%
3.6%
6.9%
4.8%
4.0%
3.8%
(13.1)%
2.1%
2.8%
4.4%
5.4%
Capital Investment Program
We made capital expenditures of $1,051.9 million, $612.9 million and $408.7 million in 2012, 2011 and 2010, respectively. In
general, the capital expenditures and investment projects described below are intended to increase production and/or decrease costs.
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The table below sets forth our capital expenditures for the three years ended December 31, 2012 (in millions):
Peruvian projects:
Tia Maria — Arequipa
Toquepala expansion projects
Cuajone expansion projects
Tailings disposal — Quebrada Honda dam
Ilo smelter modernization (including marine
trestle)
Ilo power transmission substation
Sub-total projects
Maintenance and replacement
Total Peruvian expenditures
Mexican projects:
Buenavista mine expansion
New Buenavista concentrator
Buenavista projects infrastructure
Buenavista SXEW plant III
Buenavista crusher and conveyors system for
leach material, phase III
Buenavista molybdenum plant
Buenavista mine and facilities rehabilitation
El Arco feasibility study, land and water rights
La Caridad tailings dam — internal dikes
Santa Eulalia pumping system
Angangueo
Sub-total projects
Maintenance and replacement
Total Mexican expenditures
2012
2011
2010
$
$
$
$
7.8
32.7
52.0
1.3
—
11.9
105.7
152.2
257.9
216.3
149.0
69.1
138.3
16.1
17.0
—
1.5
—
4.9
3.6
615.8
178.2
794.0
1.6 $
76.0
38.9
0.7
—
9.8
127.0
78.5
205.5
97.4 $
7.7
9.0
6.5
13.6
1.2
96.7
9.4
—
9.6
6.5
257.6
149.8
407.4
Total capital expenditures
$
1,051.9
$
612.9
$
152.5
32.8
18.8
3.3
1.6
—
209.0
55.2
264.2
—
—
—
—
—
35.0
14.1
4.3
3.2
—
56.6
87.9
144.5
408.7
We are committed to continuing the growth of our Company. In 2013, we will continue our investment program aimed at increasing
copper production capacity by approximately 84% from 640,000 tons to 1.2 million tons by 2017. We have budgeted $1.8 billion in
spending for the year. Spending in Mexico is estimated to be $1.4 billion, including approximately $1.0 billion for our Buenavista
projects, and $0.4 billion in Peru. These investments are part of our five-year capital investment program to increase production of
copper and molybdenum. Capital spending plans will continue to be reviewed and adjusted in response to changes in the economy or
market conditions.
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:
Toquepala projects: Through December 31, 2012, we have spent $231.8 million on the Toquepala projects. These expenses include
mine equipment used for the initial stripping of the mine expansion , the initial construction work and planning to build a new crusher
and a conveyor belt system to replace rail hauling and other costs. The expenses are designed to allow for future savings. The projects
include the increase in milling capacity of the Toquepala concentrator from 60,000 tons per day to 120,000 tons, which should
increase annual production by 100,000 tons of copper and 3,100 tons of molybdenum. As a result of protests from some community
groups the approval process for the EIA of this project has been delayed. These groups raised concerns related to water usage and
pollution. As a result of these issues the Peruvian government has started discussions with the local communities and the regional
authorities to resolve this impasse. On February 8, 2013, we reached a final agreement with the province of Candarave, one of the
three provinces neighboring our Toquepala unit, which commits us to funding S/.255 million (approximately $98 million) for
development projects in the province. This agreement is contingent upon receiving approval for the project. We expect to continue
working with the Candarave province and the other two provinces neighboring Toquepala to resolve all open issues during 2013.
Assuming we receive approval of the EIA on a timely basis, project completion is scheduled for the first half of 2015.
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Cuajone projects: Through December 31, 2012, we have spent $136.6 million on two projects related to this unit’s production plans:
the Variable Cut-off Ore Grade project and the HPGR project. Current production is showing the initial benefits of the variable cut-
off project. We expect that both projects will be at full capacity by the second half of 2013. When finished, the project will increase
average copper production by 22,000 tons per year.
Tailings disposal at Quebrada Honda: This project increases the height of the existing Quebrada Honda dam to impound future tailings
from the Toquepala and Cuajone mills and will extend the expected life of this tailings facility by 25 years. The first stage and
construction of the drainage system for the lateral dam are finished. We are preparing bidding documents for the second stage that
includes engineering and procurement to improve and increase the dam’s embankment. The project has a total budgeted cost of $66.0
million with $49.0 million expended through December 31, 2012.
Tia Maria project: We continue to work on a new EIA study that will address recent government guidance on these studies, in order to
reach an agreement that is mutually satisfactory to all parties. We expect to submit it to the authorities during the first half of 2013.
We are also working with our stakeholders in order to develop a social program for the benefit of the local communities. We are
confident that this initiative will have a positive effect on our stakeholders and will allow us to obtain approval for the development of
the 120,000 ton annual production copper project. As a consequence, we are rescheduling the project start up to the second quarter of
2016. Additionally, some of the equipment already purchased was assigned to our operations at Buenavista, Toquepala, and Cuajone.
Mexican operations:
Buenavista Projects: We continue the development of our $2.8 billion investment program at this unit which will allow us to increase
its production capacity by approximately 170%. The table below contains a summary of the program’s progress:
Project
New concentrator with molybdenum circuit
Mine equipment 2011-2015
SXEW III
Quebalix III
Molybdenum plant
Overall progress
Estimated start-up
36.1% First half 2015
51.6%
38.5% First half 2014
99.7% First quarter 2013
87.1% First quarter 2013
The new concentrator with molybdenum circuit project includes a concentrator with an estimated annual production capacity of
188,000 tons of copper, and a 1,850 tons capacity molybdenum plant. The project also is estimated to produce annually 2.3 million
ounces of silver and 21,000 ounces of gold. The total capital budget of the project is $1,383.6 million.
Through December 31, 2012, we have received two of eight shovels, 37 of 56 trucks and seven of eight drills. All acquired units are
currently in operation. The total capital budget of the mine equipment project is $504.8 million.
The SXEW III project is moving forward. Plant equipment from Tia Maria has been transported to Mexico and will allow us to
increase the annual plant capacity from 88,000 tons to 120,000 tons. The total capital budget of the project is $444.0 million.
The final testing of the Quebalix project concluded in February 2013, and the project is scheduled to start operations by the end of the
first quarter 2013. This project consists of a crushing, conveying and spreading system that improves the SXEW copper production by
increasing recovery and reducing hauling cost and the required time to extract copper from mineral.
The construction of a molybdenum plant for the current concentrator is also moving forward. The final testing of the plant is
scheduled to start by the end of the first quarter of 2013. It is expected to have an annual average production of 2,000 tons of
molybdenum.
Angangueo: The project is moving forward as scheduled to develop this underground polymetallic deposit in Michoacan, Mexico.
With an estimated investment of $174.7 million, Angangueo includes a concentrator plant which will have an estimated average
annual metal content production of 10,400 tons of copper and 7,000 tons of zinc in the first seven years. Over the life of the mine,
average annual concentrate production is expected to contain 2.4 million ounces of silver and 1,500 ounces of gold. The project is
scheduled to begin production in the first half of 2015.
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Pilares project: In 2008, we acquired 100% ownership of Pilares, with the intention of operating it as an open-pit facility. In 2011, the
Board of Directors approved the development of the Pilares mine, with a budget of $136.3 million. Current mineralized material is
estimated at 43.4 million tons with 0.789% of copper sulfide content and 0.077% copper oxide. We expect to increase copper
production by 40,000 tons per year by sending mineral from the Pilares site to our La Caridad concentrator. Pilares is currently on
hold while we solve a “right of way” issue with the local community.
El Arco: El Arco is a world class copper deposit in the central part of the Baja California peninsula, with ore reserves over 1.5 billion
tons with an ore grade of 0.416% and 0.14 grams of gold per ton. In 2010, we concluded the feasibility study and an investment of
$56.4 million was approved for land acquisition required for the project. This project, when developed, is expected to produce 190,000
tons of copper and 105,000 ounces of gold annually. In 2013, we will continue to invest in land acquisition required for the project.
Exploration projects: We have a number of exploration projects that we may develop in the future. We are currently involved in active
exploration activities in Peru, Mexico, Chile and more recently in Ecuador and Argentina. For more information regarding our
exploration activities, please see “Exploration Activities” in part I, Item 1. Business.
We have a number of projects that we may develop in the future. We evaluate new projects on the basis of our long-term corporate
objectives, expected return on investment, environmental concerns, required investment and estimated production, among other
considerations. All capital spending plans will continue to be reviewed and adjusted to respond to changes in the economy or market
conditions.
The above information is based on estimates only. We cannot make any assurance that we will undertake any of these projects or that
the information noted is accurate.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are discussed in Note 2“Summary of Significant Accounting Policies”, of the Notes to
Consolidated Financial Statements, included in Item 8, “Financial Statements and Supplementary Data” of this Annual Report.
Our discussion and analysis of financial condition and results of operations, as well as quantitative and qualitative disclosures about
market risks, are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP.
Preparation of these 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 period. We make our 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 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 we believe to be reasonable under the circumstances.
Actual results may differ from these estimates under different assumptions or conditions.
Ore Reserves: For internal ore reserve estimation, we use metal price assumptions of $2.00 per pound for copper and $12.00 per
pound for molybdenum. These prices are intended to conservatively approximate average prices over the long term.
However, pursuant to SEC guidance, the reserve information in this report is calculated using average metals prices over the most
recent three years, except as otherwise stated. We refer to these three-year average metals prices as “current average prices.” Our
current average prices for copper are calculated using prices quoted by COMEX, and our current average prices for molybdenum are
calculated using prices published in Platt’s Metals Week. Unless otherwise stated, reserves estimates in this report use the following
average prices for copper and molybdenum as of December 31:
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Copper ($ per pound)
Molybdenum ($ per pound)
$
$
3.68
14.52
$
$
3.26
13.95
$
$
2012
2011
2010
2.97
18.59
Certain financial information is based on reserve estimates calculated on the basis of current average prices. These include
amortization of intangible assets and mine development. Variations in ore reserve calculations from changes in metal price
assumptions generally do not create material changes to our financial results. However, significant decreases in metal prices could
adversely affect our earnings by causing, among other things, asset impairment charges, please see “Assets impairment” below. A
20% increase or decrease in three-year average copper prices, for mineral reserves estimation, which is a reasonable possibility, would
not affect our statement of earnings as the amount of reserves will not change significantly. Please see Item 2- Properties - caption
“Ore reserves.”
Long-term inventory - Leachable Material:
The leaching process is an integral part of to the mining operations carried out at our open-pit mines. We capitalize the production cost
of leachable material at our Toquepala, La Caridad and Buenavista mines recognizing it as inventory. The estimates of recoverable
mineral content contained in the leaching dumps are supported by engineering studies. As the production cycle of the leaching
process is significantly longer than the conventional process of concentrating, smelting and electrolytic refining, we include on our
balance sheet, current leach inventory (as part of work-in-process inventories) and long-term leach inventory. The cost attributed to
the leach material is charged to cost of sales generally over a five-year period (the average estimated recovery period based on the
recovery percentages of each mine). However, change in the five year-cycle generally would not have a material impact on our
financial results as our production is largely from non-leach material.
Asset Retirement Obligation: Our mining and exploration activities are subject to various laws and regulations governing the
protection of the environment. Accounting for reclamation and remediation obligations requires management to make estimates
unique to each mining operation of the future costs we will incur to complete the reclamation and remediation work required to
comply with existing laws and regulations. These estimates are based in part on our inflation and credit rate assumptions. Actual
costs incurred in future periods could differ from amounts estimated. Additionally, future changes to environmental laws and
regulations could increase the extent of reclamation and remediation work required to be performed by us. Any such increases in
future costs could materially impact the amounts charged to operations for reclamation and remediation.
Asset retirement obligations are further discussed in Note 9 “Asset Retirement Obligation” to our consolidated financial statements
included herein.
Revenue Recognition: For certain of our sales of copper and molybdenum products, customer contracts allow for pricing based on a
month subsequent to shipping, in most cases within the following three months and in few cases perhaps a few further months. In
such cases, revenue is recorded at a provisional price at the time of shipment. The provisionally priced copper sales are adjusted to
reflect forward LME or COMEX copper prices at the end of each month until a final adjustment is made to the price of the shipments
upon settlement with customers pursuant to the terms of the contract. In the case of molybdenum sales, for which there are no
published forward prices, the provisionally priced sales are adjusted to reflect the market prices at the end of each month until a final
adjustment is made to the price of the shipments upon settlement with customers pursuant to the terms of the contract. (See details in
“Provisionally Priced Sales” under this Item 7).
Derivative Instruments: We utilize certain types of derivative financial instruments to enhance our ability to manage risks that exist as
part of our ongoing business operations and to enhance our return on Company assets. Derivative contracts are reflected as assets or
liabilities in the balance sheet at their fair value. The estimated fair value of the derivatives is based on market and/or dealer
quotations and in certain cases valuation modeling. From time to time we have entered into copper and zinc swap contracts to protect
a fixed copper and zinc price for portions of our metal sales, hedging contracts to fix fuel prices for a portion of our production costs,
interest rate swap agreements to hedge the interest rate risk exposure on certain of our bank obligations with variable interest rates and
currency swap arrangements to ensure Mexican peso/ U.S. dollar conversion rates. Realized and unrealized gains and losses related to
economic hedges that do not qualify for hedge accounting are recognized in the consolidated statement of earnings as follows: copper
and zinc derivatives are included in net sales, gain and losses related to fuel costs are included in cost of sales and all other are
included in “Gain (loss) on
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derivative instruments.” Changes in the fair value of copper derivatives that are designated as a cash flow hedges are deferred in
accumulated other comprehensive income and are recognized in sales as the hedged copper sales occur.
Income Taxes: In preparing our consolidated financial statements, we recognize income taxes in each of the jurisdictions in which we
operate. For each jurisdiction, we calculate the actual amount currently payable or receivable, as well as deferred tax assets and
liabilities attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in rate is recognized through the income tax provision in the period that the change is enacted.
A valuation allowance is provided for those deferred tax assets for which it is more likely than not that the related benefits will not be
realized. In determining the amount of the valuation allowance, we consider estimated future taxable income, as well as feasible tax
planning strategies in each jurisdiction. If we determine that we will not realize all or a portion of our deferred tax assets, we will
increase our valuation allowance with a charge to income tax expense. Conversely, if we determine that we will ultimately be able to
realize all or a portion of the related benefits for which a valuation allowance has been provided, all or a portion of the related
valuation allowance will be reduced with a credit to income tax expense.
Our Company’s operations involve dealing with uncertainties and judgments in the application of complex tax regulations in multiple
jurisdictions. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various
jurisdictions and resolution of disputes arising from federal, state, and international tax audits. We recognize potential liabilities and
record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the
extent to which, additional taxes will be due. We follow the guidance of ASC 740 “Income Tax” to record these liabilities. (See Note
7 “Income Taxes” of the consolidated financial statements for additional information). We adjust these reserves in light of changing
facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a
payment that is materially different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less
than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less
than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine
the liabilities are no longer necessary. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax
expense.
Asset Impairments: We evaluate our long-term assets when events or changes in economic circumstances indicate that the carrying
amount of such assets may not be recoverable. Our evaluations are based on business plans that are prepared using a time horizon that
is reflective of our expectations of metal prices over our business cycle. We are currently using a long-term average copper price of
$3.00 per pound of copper and an average molybdenum price of $12.00 per pound, reflective of the current price environment, for our
impairment tests. The results of our impairment sensitivity analysis, which included a stress test using a copper price assumption of
$1.50 per pound and a molybdenum price assumption of $10.00 per pound showed projected discounted cash flows in excess of the
carrying amounts of long-lived assets by margins ranging from 2.17 to 7.40 times such carrying amount.
In recent years our assumptions for long-term average prices resulted in stricter evaluations for impairment analysis than using the
three year average prices for copper and molybdenum prices. Should this situation reverse in the future with three year average prices
below the long-term price assumption, we would assess the need to use the three year average prices in our evaluations. We use an
estimate of the future undiscounted net cash flows of the related asset or asset group over the remaining life to measure whether the
assets are recoverable and measure any impairment by reference to fair value.
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PROVISIONALLY PRICED SALES
The following are the provisionally priced copper and molybdenum sales outstanding at December 31, 2012, 2011 and 2010:
Provisionally Priced Sales
Copper
Millions of pounds
Priced at average of (per pound)
Molybdenum
Millions of pounds
Priced at average of (per pound)
2012
2011
2010
$
$
19.7
3.59
8.8
11.60
$
$
64.3
3.44
10.3
13.35
$
$
13.8
4.38
9.1
16.40
Provisional sales adjustments included in accounts receivable and net sales at December 31, 2012, 2011 and 2010 were as follows:
Provisional Sales Adjustments
Copper
Molybdenum
Total
2012
2011
(in millions)
2.9
3.7
6.6
$
$
$
1.4
(3.4)
(2.0) $
$
$
2010
4.8
7.3
12.1
Management believes that the final pricing of these sales will not have a material effect on our financial position or results of
operations.
RESULTS OF OPERATIONS
The following table highlights key financial results for each of the years in the three-year period ended December 31, 2012.
Statement of Earnings Data
Net sales
Cost of sales (exclusive of depreciation,
amortization and depletion)
Selling, general and administrative
Depreciation, amortization and depletion
Exploration
Legal fees related to the SCC shareholders
derivative lawsuit
Operating income
Interest expense, net
Interest income
Other (expense) income
Income taxes
Equity earnings of affiliate
Income attributable to non-controlling interest
Income attributable to SCC
$
2012
2011
(in millions)
2010
$
6,669.3
$
6,818.7
$
5,149.5
(2,769.3)
(101.3)
(325.7)
(47.9)
(316.2)
3,108.9
(172.4)
15.2
21.8
(1,080.9)
48.7
(6.7)
1,934.6
(2,763.2)
(104.5)
(288.1)
(37.5)
—
3,625.4
(186.6)
13.8
(4.0)
(1,104.3)
—
(7.9)
$
2,336.4
$
(2,129.0)
(100.3)
(281.7)
(34.3)
—
2,604.2
(160.5)
7.8
(20.7)
(868.1)
—
(8.7)
1,554.0
The table below outlines the average published market metals prices for our metals for each of the years in the three year period ended
December 31, 2012:
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AVERAGE MARKET METALS PRICES
Copper price ($ per pound - LME)
Copper price ($ per pound - COMEX)
Molybdenum price ($ per pound)(1)
Zinc price ($ per pound — LME)
Silver price ($ per ounce - COMEX)
2012
2011
2010
3.61 $
3.61 $
12.62 $
0.88 $
31.19 $
4.00 $
4.01 $
15.33 $
0.99 $
35.18 $
3.42
3.43
15.60
0.98
20.18
$
$
$
$
$
(1) Platt’s Metals Week Dealer Oxide.
SEGMENT SALES INFORMATION
% Change
2011 to 2012
(9.8)%
(10.0)%
(17.7)%
(11.1)%
(11.3)%
2010 to 2011
17.0%
16.9%
(1.7)%
1.0%
74.3%
The following table presents the volume of sales by segment of copper and our significant by-products, for each of the years in the
three year period ended December 31, 2012:
Copper Sales (million pounds)
Peruvian operations
Mexican open-pit
Mexican IMMSA unit
Other and intersegment elimination
Total copper sales
By-product Sales (million pounds, except silver -
million ounces)
Peruvian operations:
Molybdenum contained in concentrate
Silver
Mexican open-pit operations:
Molybdenum contained in concentrate
Silver
IMMSA unit
Zinc-refined and in concentrate
Silver
Other and intersegment elimination
Zinc
Silver
Total by-product sales
Molybdenum contained in concentrate
Zinc-refined and in concentrate
Silver
2012
2011
2010
703.0
711.6
18.8
(18.8)
1,414.6
694.6
626.0
15.4
(15.5)
1,320.5
792.4
311.7
23.0
(21.0)
1,106.1
2012
2011
2010
16.1
3.8
24.1
9.1
205.9
5.5
—
(2.1)
40.2
205.9
16.3
18.0
3.5
23.1
7.1
199.9
5.2
—
(1.6)
41.1
199.9
14.2
22.3
4.5
22.9
7.1
206.7
7.0
0.5
(3.2)
45.2
207.2
15.4
Results of Operations for the Year Ended December 31, 2012 Compared with Year Ended December 31, 2011.
Net sales
Net sales in 2012 were $6,669.3 million, compared with a record $6,818.7 million in 2011, a decrease of $149.4 million. The decrease
was principally the result of lower metal prices. Net sales in 2011 include a gain of $13.5 million on copper hedges.
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The table below presents information regarding the volume of our copper sales products for the years 2012 and 2011.
Copper Sales (million pounds)
Refined
Blister
Anode
Concentrates and other
SXEW
Rod
Total
2012
2011
719.9
72.4
5.5
132.3
218.8
265.7
1,414.6
795.8
—
23.0
41.7
218.0
242.0
1,320.5
Copper made up 77.0% of net sales in 2012, compared with 76.7% in 2011. Sales of by-products in 2012 totaled $1,532.4 million,
compared with $1,589.2 million in 2011, a decrease of 3.6%. The decrease of $56.8 million is attributable to lower metals prices for
all of our major by-products somewhat reduced by increased volume of silver and zinc sales.
The table below provides the sales of our by-products as a percentage of our total net sales.
By-product Sales as a percentage of total net sales
Molybdenum
Silver
Zinc
Other by-products
Total
Year Ended December 31,
2011
2012
6.8%
7.4%
2.9%
5.9%
23.0%
8.0%
7.2%
3.1%
5.0%
23.3%
Cost of sales (exclusive of depreciation, amortization and depletion)
Our cost of sales (exclusive of depreciation, amortization and depletion) in 2012 was $2,769.3 million, compared with $2,763.2
million in 2011, an increase of $6.1 million. Please see details on segment operating income information.
Legal fees related to the SCC shareholder derivative lawsuit
On October 9, 2012, we received from AMC, our majority shareholder, $2.1 billion in satisfaction of the judgment issued pursuant to
the decision of the Court of Chancery of Delaware which concluded that we paid an excessive price to AMC in the 2005 merger
between the Company and Minera Mexico, S.A. de C.V. From the aforementioned sum received from AMC, we paid $316.2 million
to the plaintiff’s attorneys to satisfy the award of attorneys’ fees and expenses.
Depreciation, amortization and depletion
Depreciation, amortization and depletion in 2012 was $325.7 million, compared with $288.1 million in 2011, an increase of $37.6
million. The increase was mainly due to the acquisition of mine and other equipment for our Mexican and Peruvian operations.
Interest expense, net
Net interest expense in 2012 was $172.4 million, compared with $186.6 million in 2011, a decrease of $14.2 million. Total interest,
however increased by $9.4 million in 2012 as a result of the new debt issued in November 2012. Capitalized interest in 2012
increased by $23.5 million, principally due to the Buenavista capital investment program.
Other income (expense)
Other income (expense) was an income of $21.8 million in 2012, compared with an expense of $4.0 million in 2011. The $25.8
million increase in other income in 2012 includes:
• $18.2 million gain on sale of our shares of Compañia Internacional Minera, a Mexican mining company in which we had a minority
participation, and.
• $10.6 million of net gain on short-term investment due to an increase in mark to market value.
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Income taxes
Income taxes in 2012 were $1,080.9 million and include $1,042.2 million of Peruvian and Mexican income taxes and $38.7 million
for U.S. federal and state income taxes. Income taxes in 2011 were $1,104.3 million and include $1,152.4 million of Peruvian and
Mexican income taxes and a benefit of $48.1 million for U.S. federal and state income taxes. U.S. income taxes are primarily
attributable to investment income and limitations placed on the use of available tax credits (both foreign tax credits and the minimum
tax credit).
The effective tax rate for 2012 was 36.3%, compared with 32.0% in 2011. The increase in the rate is primarily due to $316.2 million
of a one-time payment of legal fees related to the SCC shareholder derivative lawsuit, which is being treated as a non-deductible
expense.
Equity earnings of affiliate
In 2012, we have recognized $48.7 million of equity earnings of affiliate, from our 44.2% interest in the Tantahuatay mine. In
addition during 2012 we received cash dividends from this affiliate of $18.2 million.
Net Income attributable to the non-controlling interest
Net income attributable to the non-controlling interest in 2012 was $6.7 million, compared with $7.9 million in 2011, a decrease of
$1.2 million or 15.2%. This decrease is the result of lower earnings at our Peruvian operations.
Net income attributable to SCC
Our net income attributable to SCC in 2012 was $1,934.6 million, compared with $2,336.4 million in 2011, a decrease of $401.8
million. Net income attributable to SCC decreased mainly as a result of the decrease in metal prices and other factors described
above.
Segment Operating Income Information — 2012 vs.2011:
Peruvian Open-pit Operations
Net sales
Operating costs and expenses
Operating income
$
$
2012
2,952.3
(1,603.9)
1,348.4
$
$
2011
3,186.5
(1,644.4)
1,542.1
$
$
Value
(234.2)
40.5
(193.7)
Change
%
(7.3)%
(2.5)%
(12.6)%
Net sales at our Peruvian operations in 2012 were $2,952.3 million, compared with $3,186.5 million in 2011, a decrease of $234.2
million. This decrease was primarily due to the decrease in the price of copper and of our major by-products. The LME copper price
was 9.8% lower in 2012 (the majority of the copper sales of our Peruvian operations are priced on the LME) and the molybdenum and
silver prices were 17.7% and 11.3% lower, respectively. Net sales in 2011 also included a gain on copper hedge derivatives of $6.9
million.
Operating costs and expenses at our Peruvian operations in 2012 were $1,603.9 million, compared with $1,644.2 million in 2011, a
decrease of $40.5 million, principally due to $60.5 million of lower cost of sales (exclusive of depreciation, amortization and
depletion), partially offset by $19.7 million of higher depreciation, amortization and depletion. Cost of sales (exclusive of
depreciation, amortization and depletion) was $1,380.5 million in 2012, compared with $1,441.0 million in 2011. The decrease of
$60.5 million was primarily the result of:
• $ 287.4 million of lower cost of concentrates purchased from third parties, partially offset by,
• $ 38.1 million of higher fuel and power cost,
• $ 15.8 million of higher labor cost,
• $ 98.9 million of higher operating and repair material cost, and
• $ 57.8 million of higher inventory consumption.
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Mexican Open-pit Operations
Net sales
Operating costs and expenses
Operating income
$
$
2012
3,338.5
(1,413.4)
1,925.1
$
$
2011
3,212.1
(1,287.0)
1,925.1
$
Value
126.4
(126.4)
—
Change
%
3.9%
9.8%
—
Net sales at our Mexican open-pit operations in 2012 were $3,338.5 million, compared with $3,212.1 million in 2011, an increase of
$126.4 million. This increase is largely the result of higher copper sales volume from Buenavista, which had a production record of
441.0 million pounds of copper, partially offset by lower prices for copper and for our principal by-products. Net sales in 2011 also
included a gain on copper hedge derivatives of $6.6 million. There were no gains or losses on copper derivatives in 2012.
Operating costs and expenses at our Mexican open-pit operations in 2012 were $1,413.4 million, compared with $1,287.0 million in
2011, an increase of $126.4 million. The increase was the result of higher cost of sales (exclusive of depreciation, amortization and
depletion) in 2012 of $112.4 million. Cost of sales (exclusive of depreciation, amortization and depletion) was $1,228.2 million in
2012, compared with $1,115.8 million in 2011. The increase was primarily due to:
• $127.2 million of higher production cost, including fuel, power and labor costs,
• $ 21.9 million for higher workers’ participation due to the increase in earnings.
• $ 48.1 million of currency translation effect due to the appreciation of the Mexican peso.
• $ 42.7 million of higher inventory consumption, partially offset by,
• $(53.0) million of higher leachable material capitalization and
• $(76.9) million of 2011 restoration cost and other costs.
IMMSA unit
Net sales
Operating costs and expenses
Operating income
$
$
2012
2011
Value
Change
%
513.6
(360.4)
153.2
$
$
546.2
(370.5)
175.7
$
$
(32.6)
10.1
(22.5)
(6.0)%
(2.7)%
(12.8)%
Net sales at our IMMSA unit in 2012 were $513.6 million, compared with $546.2 million in 2011, a decrease of $32.6 million. The
decrease of $32.6 million was due to lower metal prices of zinc and silver, partially offset by higher zinc sales volume mainly from the
Santa Eulalia mine which restored production after resolving its prior years flooding problems.
Operating costs and expenses at our IMMSA unit were $360.4 million in 2012, compared with $370.5 million in 2011, a decrease of
$10.1 million. This decrease was primarily the result of $16.9 million of lower cost of sales (exclusive of depreciation, amortization
and depletion) net of $6.2 million of higher exploration expenses.
Intersegment Eliminations and Adjustments
The net sales, operating costs and expenses and operating income discussed above will not be directly equal to amounts in our
consolidated statement of earnings because the adjustments of intersegment operating revenues and expenses must be taken into
account. Please see Note 19 “Segment and Related Information” of our consolidated financial statements.
Results of Operations for the Year Ended December 31, 2011 Compared with Year Ended December 31, 2010.
Net sales
Net sales in 2011 were a record $6,818.7 million, compared with $5,149.5 million in 2010, an increase of $1,669.2 million. The
increase was principally the result of higher copper sales volume from Buenavista production which restored full capacity in the
second quarter of 2011 and higher copper, silver and zinc prices. The increase in metal prices was the result of improvements in the
global economy and the demand and supply balance. Net sales in 2011 include a gain of $13.5 million on copper hedges, compared
with a loss of $41.9 million in 2010.
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The table below presents information regarding the volume of our copper sales products for the years 2011 and 2010.
Copper Sales (million pounds)
Refined
Blister
Anode
Concentrates and other
SXEW
Rod
Total
2011
2010
795.8
—
23.0
41.7
218.0
242.0
1,320.5
637.2
—
38.6
135.2
167.4
127.7
1,106.1
Copper made up 76.7% of net sales in 2011, compared with 72.7% in 2010. Sales of by-products in 2011 totaled $1,589.2 million,
compared with $1,403.7 million in 2010, an increase of 13.2%. The increase of $185.5 million is principally attributable to higher
silver price which increased 74.3% from $20.18 per ounce to $35.18 per ounce in 2011.
The table below provides the sales of our by-products as a percentage of our total net sales.
By-product Sales as a percentage of total net sales
Molybdenum
Silver
Zinc
Other by-products
Total
Years Ended December 31,
2010
2011
8.0%
7.2%
3.1%
5.0%
23.3%
13.3%
6.0%
4.1%
3.9%
27.3%
Cost of sales (exclusive of depreciation, amortization and depletion)
Our cost of sales (exclusive of depreciation, amortization and depletion) in 2011 was $2,763.2 million, compared with $2,129.0
million in 2010, an increase of $634.2 million, or 29.8%. The increase in cost of sales was principally attributable to the restoration of
our Buenavista property to full production, the higher amount and cost of third-party concentrates used in 2011 and the increase in
cost of fuel, power and operating and repair material. These increases were partially offset by an increase in leach material inventory
of $160.3 million in 2011. Buenavista’s production cost increased by $268.7 million in 2011, in part caused by the repair expense to
reestablish the operation, an increase of $9.3 million over 2010 and the balance due to the operational cost. The cost of third-party
concentrates increased by $279.8 million over 2010, as 51,319 tons were purchased in 2011, an increase of 26,730 tons from 2010
principally at our Peruvian operations, additionally, the 2011 cost of the purchased concentrates was higher due to the higher copper
price in 2011. Fuel and power cost, excluding Buenavista’s consumption, increased by $93.3 million in 2011.
Interest expense, net
Net interest expense in 2011 was $186.6 million, compared with $160.5 million in 2010, an increase of $26.1 million. Interest
expense increased in 2011 as a result of a full year interest expense on the $1.5 billion in fixed-rate unsecured notes issued in
April 2010 and an increase in the rate of the Mitsui loan. Capitalized interest was $5.9 million and $7.5 million in 2011 and 2010,
respectively.
Interest income
Interest income in 2011 was $13.8 million, compared with $7.8 million in 2010, an increase of $6.0 million. Our interest income
increased as a result of higher average interest rates on investments.
Other income (expense)
Other income (expense) was an expense of $4.0 million in 2011, compared with an expense of $20.7 million in 2010. The $16.7
million decrease in other expenses in 2011 includes: 1) $14.8 million for a contribution to the regional development at our Peruvian
operations in 2010, there was no contribution in 2011 as the obligation expired in 2010, 2)
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$6.9 million of higher income from scrap sales in 2011, 3) $4.7 million gain on net sales value of non-operating assets, in 2011,
partially offset by 4) $8.3 million of loss on short term investments.
Income taxes
Income taxes in 2011 were $1,104.3 million and include $1,152.4 million of Peruvian and Mexican income taxes and a benefit of
$48.1 million for U.S. federal and state income taxes. Income taxes in 2010 were $868.1 million and include $838.3 million of
Peruvian and Mexican income taxes and $29.8 million for U.S. federal and state income taxes. U.S. income taxes are primarily
attributable to investment income and limitations placed on the use of available tax credits (both foreign tax credits and the minimum
tax credit).
The effective tax rate for 2011 was 32.0%, compared with 35.7% in 2010. The decrease in the rate is primarily due to the recognition
of additional foreign tax credits reported and the increase in the allowable amount of percentage depletion claimed in the current and
prior years. The benefit provided by additional foreign tax credit and percentage depletion were partially offset by the 2011 accrual
of U.S. tax on unremitted earnings of the Mexican subsidiaries.
Net Income attributable to the non-controlling interest
Net income attributable to the non-controlling interest in 2011 was $7.9 million, compared with $8.7 million in 2010, a decrease of
$0.8 million or 8.4%. This decrease is the result of lower earnings at our Peruvian operations.
Net income attributable to SCC
Our net income attributable to SCC in 2011 was $2,336.4 million, compared with $1,554.0 million in 2010, an increase of $782.4
million. Net income attributable to SCC increased largely as a result of the restoration of production at the Buenavista mine and
higher metal prices and other factors described above.
Segment Operating Income Information — 2011 vs.2010:
Peruvian Open-pit Operations
Net sales
Operating costs and expenses
Operating income
2011
3,186.5 $
(1,644.4)
1,542.1
$
2010
3,125.9 $
(1,406.2)
1,719.7
$
$
$
Change
%
Value
60.6
(238.2)
(177.6)
1.9%
(16.9)%
(10.3)%
Net sales at our Peruvian operations in 2011 were $3,186.5 million, compared with $3,125.9 million in 2010, an increase of $60.6
million. This increase was primarily due to the increase in metal prices. The LME copper price was 17.0% higher in 2011 (the
majority of the copper sales of our Peruvian operations are priced on the LME) and the silver price was 74.3% higher. The price
increases were offset by the lower sales volume of copper, molybdenum and silver which reduced our sales by approximately $422.3
million. 694.6 million pounds of copper were sold in 2011 compared with 792.4 million pounds of copper in 2010 as a result of lower
production largely due to lower ore grade at the Cuajone mine.
Net sales in 2011 also include a gain on copper hedge derivatives of $6.9 million while in 2010, net sales include a loss on copper
hedge derivatives of $27.7 million.
Operating costs and expenses at our Peruvian operations in 2011 were $1,644.4 million, compared with $1,406.2 million in 2010, an
increase of $238.2 million principally due to higher cost of sales (exclusive of depreciation, amortization and depletion). Cost of sales
(exclusive of depreciation, amortization and depletion) was $1,441.0 million in 2011, compared with $1,206.2 million in 2010. The
increase of $234.8 million was primarily the result of 1) $139.5 million of higher production cost principally due to $66.7 million of
higher cost of fuel and power due to increases in market prices, $16.7 million of higher labor cost, and $56.1 million of higher
operating and repair cost mainly due to repairs at our Ilo smelter
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plant, 2) $186.1 million for the higher cost of concentrates purchased from third parties, partially offset by 3) $42.6 million of lower
workers’ participation due to a lower taxable income and 4) $42.9 million of leachable material inventory.
Mexican Open-pit Operations.
Net sales
Operating costs and expenses
Operating income
2011
3,212.1 $
(1,287.0)
1,925.1 $
2010
1,648.5 $
(910.5)
738.0 $
Value
1,563.6
(376.5)
1,187.1
$
$
Change
%
94.8%
(41.4)%
160.9%
Net sales at our Mexican open-pit operations in 2011 were $3,212.1million, compared with $1,648.5 million in 2010, an increase of
$1,563.6 million. This increase is largely the result of higher copper sales volume from Buenavista production, which restored full
capacity in the second quarter of 2011 and represented approximately $1,079.3 million of higher sales, and higher copper and silver
prices.
Net sales in 2011 also include a gain on copper hedge derivatives of $6.6 million while in 2010, net sales included a loss on copper
hedge derivatives of $14.3 million.
Operating costs and expenses at our Mexican open-pit operations in 2011 were $1,287.0 million, compared with $910.5 million in
2010, an increase of $376.5 million. The increase was the result of higher cost of sales (exclusive of depreciation, amortization and
depletion) in 2011 of $364.1 million. Cost of sales (exclusive of depreciation, amortization and depletion) was $1,115.8 million in
2011, compared with $751.7 million in 2010. The increase was primarily due to 1) $337.9 million of higher production cost also due
to the full restoration of the Buenavista production, 2) $74.2 million for the higher cost of metal purchased and 3) $55.7 million for
higher workers’ participation due to the increase in earnings. These increases were partially offset by $117.4 million of capitalization
of leachable material.
IMMSA unit.
Net sales
Operating costs and expenses
Operating income
2011
2010
Value
Change
%
$
$
546.2 $
(370.5)
175.7
$
512.7 $
(359.0)
153.7
$
33.5
(11.5)
22.0
6.5%
(3.2)%
14.3%
Net sales at our IMMSA unit in 2011 were $546.2 million, compared with $512.7 million in 2010, an increase of $33.5 million. The
increase of $33.5 million was due to higher metal prices of zinc and silver
Operating costs and expenses at our IMMSA unit were $370.5 million in 2011, compared with $359.0 million in 2010, an increase of
$11.5 million. This increase was primarily the result of $1.9 million of higher cost of sales (exclusive of depreciation, amortization
and depletion), $6.5 million of higher exploration expenses, $1.8 million of higher depreciation, amortization and depletion and $1.3
million of higher selling, general and administrative expenses.
Intersegment Eliminations and Adjustments
The net sales, operating costs and expenses and operating income discussed above will not be directly equal to amounts in our
consolidated statement of earnings because the adjustments of intersegment operating revenues and expenses must be taken into
account. Please see Note 19 “Segment and Related Information” of our consolidated financial statements.
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LIQUIDITY AND CAPITAL RESOURCES
The following discussion relates to our liquidity and capital resources for each of the years in the three year period ended
December 31, 2012.
Liquidity
The following table shows the cash flow for the three year period ended December 31, 2012 (in millions):
Net cash provided from operating activities
Net cash used for investing activities
Net cash provided from (used for) financing activities
$
$
$
2012
2,004.0 $
(668.6) $
278.1 $
2011
2,079.9 $
(1,092.9) $
(2,375.0) $
2010
1,920.7
(473.8)
36.6
The 2012, 2011 and 2010 increases (decreases) in cash from working capital includes (in millions):
Accounts receivable
Inventories
Accounts payable and accrued liabilities
Other operating assets and liabilities
Total
$
$
2012
2011
2010
(14.7) $
(180.7)
(135.7)
34.1
(297.0) $
(135.6) $
(194.5)
(136.9)
55.1
(411.9) $
(308.1)
(7.3)
541.0
(121.4)
104.2
Net cash provided from operating activities:
2012
In 2012, net income was $1,941.4 million, approximately 96.9% of the net operating cash flow. Significant items added to or
(deducted from) to arrive at operating cash flow included depreciation, amortization and depletion of $325.7 million and $55.8 million
of a deferred income tax, which were added back to net income in determining operating cash flow, and $18.2 million of a gain on
sale of investment, which was deducted from net income in determining operating cash flow.
In addition, in 2012 an increase in working capital decreased operating cash flow by $297.0 million, as detailed above. The increase in
inventories of $180.7 million includes an increase of $157.0 million in capitalized leachable material and $31.8 million of higher
supplies inventory. The decrease in accounts payable and accrued liabilities was mainly due to higher income tax payments.
2011
In 2011, net income was $2,344.3 million, approximately 112.7% of the net operating cash flow. Significant items added to or
(deducted from) to arrive at operating cash flow included depreciation, amortization and depletion of $288.1 million which was added
back to net income in determining operating cash flow, and $117.9 million of a deferred income tax benefit, which was deducted from
net income in determining operating cash flow.
In addition, in 2011 an increase in working capital decreased operating cash flow by $411.9 million. The increase in accounts
receivable value was principally due to higher sales volume resulting from the restoration of the Buenavista mine production. The
increase in inventories of $194.5 million includes an increase of $118.8 million in capitalized leachable material, $25.4 million in
finished goods inventory, principally due to shipping delays and $43.1 million of higher work-in process inventory, principally due to
the restoration of the Buenavista mine. The decrease in accounts payable and accrued liabilities was mainly due to payments to
suppliers and income tax payments.
2010
In 2010, net income was $1,562.7 million, approximately 81.4% of the net operating cash flow. Significant items added to or
(deducted from) to arrive at operating cash flow included depreciation, amortization and depletion of $281.7 million, which was added
back to net income in determining operating cash flow, and $40.4 million of a deferred income tax benefit, which was deducted from
net income in determining operating cash flow.
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In addition, in 2010 a decrease in working capital increased operating cash flow by $104.2 million. The increase in accounts
receivable value was principally due to higher metal prices at the end of 2010, compared with 2009. The LME and COMEX copper
prices increased by over 46.0% in 2010, compared with 2009, and molybdenum, zinc and silver increased by 43.0%, 30.7% and
37.6%, respectively. The increase in inventories of $7.3 million includes an increase of $12.4 million in finished goods inventory,
principally due to shipping delays at our Mexican operations and $40.7 million of higher work-in process inventory, principally due to
scheduled repairs at our smelter facilities partially offset by higher consumption of leachable material inventory. The increase in
accounts payable and accrued liabilities was mainly due to an increase in workers’ participation and income tax provision due to the
higher earnings. Other operating assets and liabilities in 2010 were a use of cash of $121.4 million, which was caused principally by
an increase of $51.6 million in the long term income tax provision.
Net cash used for investing activities:
2012: Net cash used for investing activities in 2012 included $1,051.9 million for capital expenditures, $152.4 million for the purchase
of short-term investments and $37.6 million for a loan to an affiliated company, less $540.1 million of proceeds on the sales of short-
term investments, $18.2 million from the sale of investment and $15.1 million of proceeds from the sale of inactive properties. The
capital expenditures included $257.9 million of investments at our Peruvian operations, $32.7 million for the Toquepala expansion
projects, $52.0 million for the Cuajone expansion projects and $173.2 million for various other replacement expenditures. In addition,
we spent $794.0 million for investments at our Mexican operations, $216.3 million for the Buenavista mine expansion, $149.0 million
for the new Buenavista concentrator, $138.3 million for the SXEW III plant, $56 million at our IMMSA unit and $234.4 for various
other replacement expenditures.
2011: Net cash used for investing activities in 2011 included $612.9 million for capital expenditures, $449.5 million net purchase of
short-term investment, and $33.3 million for our share of the investment in the development of the Tantahuatay gold project, less
$12.6 million of proceeds from the sale of inactive properties. The capital expenditures included $205.5 million of investments at our
Peruvian operations, $76.0 million for the Toquepala concentrator expansion, $38.9 million for the Cuajone concentrator expansion
and $90.6 million for various other replacement expenditures. In addition, we spent $407.4 million for investments at our Mexican
operations, $97.4 million for the Buenavista mine expansion, $96.7 million for the Buenavista mine rehabilitation, $13.6 million for
the Buenavista crusher and conveyors system, Quebalix III, $48.9 million at our IMMSA unit and $150.8 for various other
replacement expenditures.
2010: Net cash used for investing activities in 2010 included $408.7 million for capital expenditures, $66.9 million for the purchase of
bonds classified as trading securities, and $21.5 million for our share of the investment in the development of the Tantahuatay gold
project, less $14.7 million of proceeds from the sale of short-term investments and $8.7 million of proceeds from the sale of inactive
properties of our Mexican operations. The capital expenditures included $264.2 million of investments at our Peruvian operations,
$152.5 million for the Tia Maria project, $32.8 million for the Toquepala concentrator expansion, $18.8 million for the Cuajone
concentrator expansion and $60.9 million for various other replacement expenditures. In addition, we spent $137.0 million for
replacement assets at our Mexican operations, $109.8 million of which was at our Mexican open-pit operations, $29.8 million at our
IMMSA unit and $4.9 million for other corporate projects, including at our administrative office in Mexico City.
Net cash provided from (used for) financing activities:
2012: Net cash provided from financing activities was $278.1 million and included $1,477.5 million from the issuance of new debt,
$2,108.2 million from the payment related to the SCC shareholder derivative lawsuit, reduced by a dividend distribution of $3,140.0
million, $147.3 million for the repurchase of 4.4 million shares of our common stock, a debt repayment of $10 million, and a $3.6
million distribution to our non-controlling interest investors.
2011: Net cash used for financing activities was $2,375.0 million and included a dividend distribution of $2,080.4 million, $273.7
million for the repurchase of 9 million shares of our common stock, a debt repayment of $15.3 million and $6.9 million for the
distribution to our non-controlling interest investors.
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2010: Net cash provided from financing activities was $36.6 million and included $1,480.8 million from the issuance of fixed-rate
unsecured notes, net of debt issuance cost of $8.8 million, less a dividend distribution of $1,428.0 million, a debt repayment of $10.0
million and distributions to our non-controlling interest investors of $6.5 million.
Other Liquidity Considerations
We expect that we will meet our cash requirements for 2013 and beyond from cash on hand and internally generated funds. In
addition, we believe that we will be able to access additional external financing on reasonable terms, if required.
Share repurchase program: In 2008, our Board of Directors authorized a $500 million share repurchase program. In 2011, the Board
approved an increase of the SCC share repurchase program, from $500 million to $1.0 billion. Since the inception of the program we
have purchased 46.9 million shares of our common stock at a cost of $878.1 million. These shares will be available for general
corporate purposes. We may purchase additional shares of our common stock 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. For further details
please see Item 5 - SCC common stock repurchase plan.
Dividend: On January 24, 2013, the Board of Directors authorized a cash dividend of $0.24 per share of common stock paid on
February 26, 2013, to shareholders of record at the close of business on February 13, 2013.
SCC shareholder derivative lawsuit: On October 9, 2012, we received from AMC, our majority shareholder, $2.1 billion in
satisfaction of the judgment issued pursuant to the decision of the Court of Chancery of Delaware which concluded that we paid an
excessive price to AMC in the 2005 merger between the Company and Minera Mexico, S.A. de C.V. From the aforementioned sum
received from AMC, we paid $316.2 million to the plaintiff’s attorneys to satisfy the award of attorneys’ fees and expenses. The effect
of these transactions was recorded in our 2012 results.
FINANCING
On November 8, 2012, we issued $1.5 billion of fixed-rate unsecured notes with a discount of $22.5 million, which is being amortized
over the term of the related debt. This debt was issued in two tranches, $300 million due in 2022 at an annual interest rate of 3.5% and
$1.2 billion due in 2042 at an annual interest rate of 5.25%. Net proceeds will be used for general corporate purposes, including the
financing of our capital expenditure program.
Our total debt at December 31, 2012 was $4,213.9 million, compared with $2,745.7 million at December 31, 2011, net of the
unamortized discount of notes issued under par of $47.3 million and $25.4 million at December 31, 2012 and 2011, respectively. The
increase in total debt during 2012 was due to the issuance of $1.5 billion of fixed-rate unsecured notes that was reduced by the
scheduled $10 million payment on the Mitsui loan.
The ratio of debt to total capitalization was 46.8% at December 31, 2012, compared to 40.5% at December 31, 2011. Also the ratio of
net debt to net capitalization was 26.8% at December 31, 2012, compared with 32.0% at December 31, 2011.
We define net debt as total debt, including current maturities, minus cash and cash equivalents. We believe that net debt is useful to
investors as a measure of our financial position. We define net capitalization as the sum of net debt and equity. We use the net debt to
net capitalization ratio as measure of our indebtedness position and to determine how much debt can we take in addition to the use of
the equity and the balance sheet in general. We define total capitalization as the sum of the carrying values of our total debt, including
current maturities, and equity. A reconciliation of our net debt to net capitalization and total debt to total capitalization as included in
the consolidated balance sheet is presented under the sub heading “Non-GAAP Information Reconciliation,” below.
Please see Note 10 “Financing” for a discussion about the covenants requirements related to our long-term debt.
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Changes in credit risk:
On December 3, 2012 Fitch Ratings upgraded the Company’s unsecured debt ratings from BBB to BBB+. Additionally, Standard &
Poor’s Ratings Services and Moody’s Investor Services aligned and confirmed SCC debt rating by assigning ‘BBB’ and Baa2,
respectively, to the new notes issued.
Capital investment programs
A discussion of our capital investment programs is an important part of understanding our liquidity and capital resources. We expect
to meet the cash requirements for these capital expenditures from cash on hand, internally generated funds and from additional
external financing if required. For information regarding our capital expenditure programs, please see the discussion under the caption
“Capital Investment Program” under this Item 7.
CONTRACTUAL OBLIGATIONS
The following table summarizes our significant contractual obligations as of December 31, 2012:
Long-term debt
Interest on debt
Uncertain tax position(a)
Workers’ participation
Pension and post-retirement
obligations
Asset retirement obligation
Purchase obligations:
Commitment to purchase
energy
Capital expenditure projects
Total
Total
2013
2014
Payments due by Period
2015
(dollars in millions)
2016
2017
2018 and
Thereafter
$ 4,261.1 $
5,988.3
214.9
251.7
44.9
118.2
10.0
261.7
251.7
11.2
—
261.9
$
200.0
256.3
$
$
—
249.1 $
—
248.9
$
4,051.1
4,710.4
3.2
3.4
3.4
3.6
20.1
118.2
1,185.6
621.0
$ 12,685.7
200.6
461.9
$ 1,197.1
$
208.6
159.1
632.8
$
288.0
—
747.7
$
360.4
—
612.9
$
128.0
—
380.5
$
—
—
8,899.8
(a) The above table does not include any future payment related to uncertain tax position liabilities because there is often a high
degree of uncertainty regarding the timing of future cash outflows. As of December 31, 2012 the liability recognized by the
Company is $214.9 million and is included as non-current liability in the consolidated balance sheet.
Long-term debt payments do not include the debt discount valuation account of $47.3 million.
Interest on debt is calculated at rates in effect at December 31, 2012. As almost all our debt is at fixed rates, future expenditures will
not change significantly due to rate changes. Please refer to Note 10 “Financing” of our consolidated financial statements for a
description of our long-term debt arrangements and credit facilities.
Workers’ participation is currently calculated based on Peruvian Branch and Mexican pre-tax earnings. In Peru, the provision for
workers’ participation is calculated at 8% of pre-tax earnings. The current portion of this participation, which is accrued during the
year, is based on the Peruvian Branch’s taxable income and is largely distributed to workers following determination of final results
for the year. Amounts in excess of 18 times a worker’s salary is distributed to governmental bodies. In Mexico, workers’
participation is determined using the guidelines established in the Mexican income tax law at a rate of 10% of pre-tax earnings as
adjusted by the tax law.
Pension and post retirement obligations include the benefits expected to be paid under our pension and post-retirement benefit plans.
Please refer to Note 11 “Benefit Plans” of our consolidated financial statements.
Asset retirement obligations include the aggregate amount of the closure and remediation costs of our Peruvian mines and facilities to
be paid under the mine closure plans approved by MINEM and the closure and remediation costs of our Mexican operations. See
Note 9 “Asset Retirement Obligation.”
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We have a commitment to purchase power for our Peruvian operations from Enersur through April 2017. Amounts indicated on the
above table are based on our long-term estimated power costs, which are subject to change as energy generation costs change and our
forecasted power requirements through the life of the agreements change.
Capital expenditure projects include committed purchase orders and executed contracts principally for our Peruvian projects of the
Toquepala and Cuajone concentrator expansions, as well as our Mexican projects at the Buenavista mine.
NON-GAAP INFORMATION RECONCILIATION
Operating cash cost:
Following is a reconciliation of “Operating Cash Cost” (see page 76) to cost of sales (exclusive of depreciation, amortization and
depletion) as reported in our consolidated statement of earnings, in millions of dollars and dollars per pound in the table below:
Cost of sales (exclusive of depreciation,
amortization and depletion)
Add:
Selling, general and administrative
Treatment and refining charges
By-product revenue (1)
Net revenue on sale of metal purchased from
third parties
Less:
Workers’ participation
Cost of metals purchased from third parties
Royalty charge and other, net
Inventory change
Operating Cash Cost
Less by-product revenue and net revenue on
sale of metal purchased from third parties
Operating Cash Cost, without by-product
revenue and net revenue on sale of metal
purchased from third parties
Total pounds of copper produced (in millions)
2012
$ million
$ per pound
$ million
2011
$ per pound
2010
$ million
$ per pound
$ 2,769.2
$
2.010
$
2,763.2
$
2.194 $ 2,129.0
$
2.048
101.3
53.0
(1,472.3)
0.074
0.038
(1.069)
104.5
46.0
(1,538.9)
(18.8)
(0.014)
(25.0)
(268.6)
(241.9)
(88.0)
148.8
982.7
$
(0.195)
(0.176)
(0.063)
0.108
0.713
$
(245.7)
(560.4)
(85.3)
192.2
650.6
$
$
0.083
0.037
(1.222)
(0.020)
100.3
55.8
(1,380.0)
0.096
0.054
(1.327)
(13.2)
(0.013)
(0.195)
(0.445)
(0.068)
0.153
0.517 $
(232.1)
(280.6)
(99.8)
11.5
290.9
$
(0.223)
(0.270)
(0.096)
0.011
0.280
1,491.1
1.083
1,563.9
1.242
1,393.2
1.340
$ 2,473.8
1,377.4
$
1.796
$
2,214.5
1,259.5
$
1.759
$ 1,684.1
1,039.8
$
1.620
(1) Includes net by-product sales revenue and premiums on sales of refined products.
Net debt to net capitalization:
Net debt to net capitalization as of December 31, 2012 and 2011 is as follows:
Total debt
Cash and cash equivalent balance
Net debt
Net capitalization:
Net debt
Equity
Net capitalization
2012
4,213.9
(2,459.5)
1,754.4
1,754.4
4,789.1
6,543.5
$
$
$
$
2011
2,745.7
(848.1)
1,897.6
1,897.6
4,036.3
5,933.9
Net debt/net capitalization (*)
26.8%
32.0%
(*) Represents net debt divided by net capitalization.
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Debt to total capitalization:
Debt to total capitalization as of December 31, 2012 and 2011 is as follows:
Total debt
Capitalization
Debt
Equity
Total capitalization
Debt/total capitalization (*)
(*) Represents debt divided by total capitalization.
96
$
$
2012
2011
4,213.9
$
2,745.7
4,213.9
4,789.1
9,003.0
$
2,745.7
4,036.3
6,782.0
46.8%
40.5%
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 estimated changes in net earnings resulting from metal price changes in 2013 as provided in the table below:
Change in metal prices (per pound except silver —
per ounce)
Annual change in net income attributable to SCC
(in millions)
$
$
0.01 $
8.0 $
1.00 $
25.7 $
0.01 $
1.3 $
1.0
9.6
Copper
Molybdenum
Zinc
Silver
Foreign currency exchange rate risk:
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/exchange rate 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 exchange rate variances of the nuevo sol or the peso, resulting in a re-measurement gain or loss in our financial
statements. Recent inflation and exchange rate variances are provided in the table below:
Peru
Mexico
Peruvian inflation rate
Nuevo sol/dollar appreciation / (devaluation) rate
Mexican inflation rate
Peso/dollar appreciation / (devaluation) rate
2012
Years Ended December 31,
2011
2010
2.6%
5.4%
3.6%
6.9%
4.8%
4.0%
3.8%
(13.1)%
2.1%
2.8%
4.4%
5.4%
Change in monetary position:
Assuming an exchange rate change of 10% at December 31, 2012, we estimate our net monetary position in Peruvian nuevo sol and
Mexican pesos would increase (decrease) our operating income as follows:
Appreciation of 10% in exchange rate of U.S. dollar vs. nuevo sol
Devaluation of 10% in exchange rate of U.S. dollar vs. nuevo sol
Appreciation of 10% in exchange rate of U.S. dollar vs. Mexican peso
Devaluation of 10% in exchange rate of U.S. dollar vs. Mexican peso
Effect in net
earnings
($ in millions)
$
$
$
$
2.5
(3.0)
34.6
(28.3)
The net monetary position is net of those assets and liabilities that are nuevo sol or peso denominated at December 31, 2012.
Interest rate 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. There have been no material changes in our interest rate risk at
December 31, 2012. As most of our debt is at fixed rates, a change in interest rates of 1% would not have a material impact on our
cash flows.
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Derivative instruments:
As part of our risk management policy, we occasionally use derivative instruments to (i) safeguard corporate assets, (ii) insure the
value of our future revenue stream and (iii) lessen the impact of unforeseen market swings on our sales revenues. To comply with
these objectives we, from time to time, enter into commodities prices derivatives, interest rate derivatives, exchange rate derivatives
and other instruments. We do not enter into derivative contracts unless we anticipate a future activity that is likely to occur that will
result in exposure to market risk.
Copper hedges:
In 2011, we entered into copper swaps and zero cost collar derivative contracts to reduce price volatility and to protect our sales value
as shown below. These transactions meet the requirements of hedge accounting. The realized gains and losses from these derivatives
were recorded in net sales on the consolidated statement of earnings and included in operating activities on the consolidated statement
of cash flows. At December 31, 2012 we did not hold any copper hedge positions.
Short-term investments:
Short-term investments were as follows ($ in millions):
Trading securities
Weighted average interest rate
Available—for- sale
Weighted average interest rate
Total
At December 31,
2011
2012
$
$
$
127.8 $
1.87%
6.5 $
0.43%
$
134.3
514.6
1.37%
7.3
0.58%
521.9
Trading securities consist of bonds issued by public companies and publicly traded. Each financial instrument is independent of the
others. We have the intention to sell these bonds in the short-term.
Available-for-sale investments consist of securities issued by public companies. Each security is independent of the others and, as of
December 31, 2012, included corporate bonds and asset and mortgage backed obligations. At December 31, 2012 and 2011, gross
unrealized gains and losses on available-for-sale securities were not material.
Related to these investments we earned interest, which was recorded as interest income in the consolidated statement of earnings.
Also, we redeemed some of these securities and recognized gains (losses) due to changes in fair value, which were recorded as other
income (expense) in the consolidated statement of earnings.
The following table summarizes the activity of these investments by category (in millions):
Trading:
Interest earned
Unrealized gain (loss) at December 31,
Available-for-sale:
Interest earned
Investment redeemed
Years ended December 31,
2011
2012
$
$
$
$
3.1
2.4
0.1
1.9
$
$
$
$
6.0
(7.6)
0.1
2.1
At December 31, 2012 and 2011, contractual maturities of our available-for-sale debt securities are as follows (in millions):
One year or less
Maturing after one year through five years
Maturing after five years through ten years
Due after 10 years
Total debt securities
98
2012
2011
$
$
0.4
—
—
6.1
6.5
$
$
0.5
—
0.6
6.2
7.3
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IMPACT OF NEW ACCOUNTING STANDARDS
In 2012 the FASB issued the following Accounting Standard Updates (“ASU”) to the FASB Accounting Standards Codification (the
“ASC”).
ASU No. 2012-02: On July 27, 2012, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2012-02, “Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” This update
simplifies the guidance for testing the impairment of indefinite-lived intangible assets other than goodwill. The amendments allow an
organization the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment
test. If the Company elects to perform a qualitative assessment, it is no longer required to calculate the fair value of an indefinite-lived
intangible asset unless the organization determines, based on a qualitative assessment, that it is “more likely than not” that the asset is
impaired.
This update eliminates the prior requirement to test impairment on at least an annual basis by comparing the fair value of the asset
with its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeded its fair value, an impairment loss was
recognized in an amount equal to the difference.
The amendments in this update are effective for annual and interim impairment tests performed for fiscal years beginning after
September 15, 2012, with early adoption permitted. We will adopt it for future impairment analysis.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Southern Copper Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF EARNINGS
For the years ended December 31,
(in thousands, except for per share amounts)
Net sales (including sales to related parties of $23.5 million, $68.8 million
and $43.5 million, in 2012, 2011 and 2010, respectively)
Operating cost and expenses:
2012
2011
2010
$
6,669,266
$
6,818,721
$
5,149,500
Cost of sales (exclusive of depreciation, amortization and depletion shown
separately below)
Selling, general and administrative
Depreciation, amortization and depletion
Exploration
Legal fees related to SCC shareholder derivative lawsuit (Note 14)
Total operating costs and expenses
Operating income
Interest expense
Capitalized interest
Gain on short-term investment
Gain on sale of investment
Other (expense) income
Interest income
Income before income taxes
Income taxes
Net income before equity earnings of affiliate
Equity earnings of affiliate, net of income tax
Net income
2,769,233
101,297
325,743
47,877
316,233
3,560,383
2,763,152
104,473
288,138
37,535
—
3,193,298
2,128,999
100,287
281,697
34,313
—
2,545,296
3,108,883
3,625,423
2,604,204
(201,785)
29,380
10,623
18,200
(6,990)
15,231
(192,340)
5,851
—
—
(4,043)
13,797
(167,949)
7,462
—
—
(20,737)
7,800
2,973,542
3,448,688
2,430,780
1,080,872
1,892,670
48,702
1,941,372
1,104,335
2,344,353
—
2,344,353
868,071
1,562,709
—
1,562,709
Less: Net income attributable to the non-controlling interest
6,740
7,929
8,658
Net income attributable to SCC
Per common share amounts attributable to SCC (1):
Net earnings — basic and diluted
Dividends paid
$
$
$
1,934,632
$
2,336,424
$
1,554,051
2.28
4.06
$
$
2.73
2.43
$
$
1.81
1.66
Weighted average shares outstanding — basic and diluted
848,346
854,649
858,998
(1) Number of shares and per share amounts have been retroactively adjusted in the financial statements to reflect the effect of the 9.0
million shares paid as stock dividend on February 28, 2012.
The accompanying notes are an integral part of these consolidated financial statements.
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Southern Copper Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
COMPREHENSIVE INCOME:
Net income
Other comprehensive income (loss) net of tax:
- Decrease (increase) in pension and other post-retirement benefits (net of
income tax of $(1.5) million, $4.7 million and $6.7 million)
Derivative instruments classified as cash flow hedge:
- Decrease in prior period accumulated unrealized (gain) loss (net of
income taxes of $3.5 million and $(71.4) million in 2012 and 2011,
respectively)
- Unrealized gain (loss) of the period (net of income tax of $(3.5) million
and $71.4 million, in 2012 and 2011, respectively)
- Unrealized net gain on derivative instruments classified as cash flow hedges
Total other comprehensive gain (loss)
Total comprehensive income
2012
2011
(in thousands)
2010
$
1,941,372
$
2,344,353
$
1,562,709
(3,394)
8,310
12,179
(5,452)
—
(5,452)
(8,846)
125,562
5,452
131,014
(125,562)
(125,562)
139,324
(113,383)
1,932,526
2,483,677
1,449,326
Comprehensive income attributable to the non-controlling interest
Comprehensive income attributable to SCC
6,736
1,925,790
$
7,956
2,475,721
$
8,637
1,440,689
$
The accompanying notes are an integral part of these consolidated financial statements.
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Southern Copper Corporation
and Subsidiaries
CONSOLIDATED BALANCE SHEET
At December 31, (in thousands)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable trade
Accounts receivable other (including related parties 2012- $2,337 and 2011 - $1,988)
Inventories
Deferred income tax
Other current assets
Total current assets
Property, net
Leachable material, net
Intangible assets, net
Related parties receivable
Deferred income tax
Other assets
Total assets
LIABILITIES
Current liabilities:
Current portion of long-term debt
Accounts payable (including related parties 2012- $20,310 and 2011 - $4,392)
Accrued income taxes
Deferred income tax
Accrued workers’ participation
Accrued interest
Other accrued liabilities
Total current liabilities
Long-term debt
Deferred income taxes
Non-current taxes payable
Other liabilities and reserves
Asset retirement obligation
Total non-current liabilities
Commitments and contingencies (Note 13)
STOCKHOLDER’S EQUITY
Common stock par value $0.01; shares authorized: 2012 and 2011 2,000,000 shares issued:
2012 and 2011 — 884,596
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock, at cost, common shares
Total Southern Copper Corporation stockholders’ equity
Non-controlling interest
Total equity
Total liabilities and equity
The accompanying notes are an integral part of these consolidated financial statements.
102
2012
2011
$
$
$
$
2,459,488
134,298
669,333
82,636
682,749
103,193
156,262
4,287,959
5,156,731
262,795
109,300
183,950
205,939
177,075
$ 10,383,749
$
10,000
475,566
12,198
—
266,571
70,582
22,218
857,135
4,203,863
141,426
214,934
59,065
118,226
4,737,514
848,118
521,955
695,104
188,477
636,032
88,797
106,856
3,085,339
4,429,906
128,828
110,436
—
145,251
162,941
8,062,701
10,000
443,132
182,491
39,860
245,139
59,906
12,349
992,877
2,735,732
125,191
66,982
43,665
61,971
3,033,541
8,846
3,320,927
2,350,126
4,032
(918,791)
4,765,140
23,960
4,789,100
8,846
1,039,382
3,852,054
12,874
(897,852)
4,015,304
20,979
4,036,283
$ 10,383,749
$
8,062,701
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For the years ended December 31,
(in thousands)
OPERATING ACTIVITIES
Net income
Southern Copper Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
Adjustments to reconcile net earnings to net cash provided from operating
activities:
Depreciation, amortization and depletion
Equity earnings of affiliate, net of dividends received
Loss (gain) on currency translation effect
Provision (benefit) for deferred income taxes
Gain on sale of investment
Loss (gain) on sale of property
(Gain) loss on short-term investments
Cash provided from (used for) operating assets and liabilities:
Accounts receivable
Inventories
Accounts payable and accrued liabilities
Other operating assets and liabilities
Net cash provided from operating activities
INVESTING ACTIVITIES
Capital expenditures
Purchase of short-term investments
Proceeds on sale of short-term investment
Investment in affiliated companies
Proceeds on sale of investment
Loan granted to related parties
Sale of property
Other
Net cash used for investing activities
FINANCING ACTIVITIES
Debt repaid
Debt incurred
SCC common shares buyback
Capitalization of debt issuance cost
Dividends paid to common stockholders
SCC shareholder derivative lawsuit
Distributions to non-controlling interest
Other
Net cash provided from (used for) financing activities
2012
2011
2010
$
1,941,372
$
2,344,353
$
1,562,709
325,743
(12,358)
15,174
55,807
(18,200)
4,050
(10,623)
(14,739)
(180,684)
(135,742)
34,162
2,003,962
(1,051,900)
(152,441)
540,098
—
18,200
(37,599)
15,072
—
(668,570)
(10,000)
1,477,455
(147,344)
(7,685)
(3,139,971)
2,108,221
(3,613)
1,035
278,098
288,138
—
(19,263)
(117,946)
—
(7,311)
3,781
(135,552)
(194,484)
(136,897)
55,094
2,079,913
(612,905)
(532,188)
82,663
(33,276)
—
—
12,575
(9,741)
(1,092,872)
(15,250)
—
(273,690)
—
(2,080,353)
—
(6,885)
1,153
(2,375,025)
281,697
—
13,585
(40,426)
—
—
(1,020)
(308,079)
(7,272)
540,955
(121,438)
1,920,711
(408,734)
(66, 914)
14,673
(21,467)
—
—
8,671
—
(473,771)
(10,000)
1,489,674
(463)
(8,831)
(1,427,998)
—
(6,495)
723
36,610
Effect of exchange rate changes on cash and cash equivalents
(2,120)
43,425
(63,179)
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, at beginning of year
1,611,370
848,118
(1,344,559)
2,192,677
1,420,371
772,306
Cash and cash equivalents, at end of year
$
2,459,488
$
848,118
$
2,192,677
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Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest
Income taxes
Workers’ participation
Supplemental schedule of non-cash operating, investing and financing
activities:
Decrease in pension and other post-retirement benefits
Unrealized gain (loss) on cash flow hedge derivative instruments recognized
in other comprehensive income (net of taxes)
Loan granted to related parties
Other accounts receivable
2012
2011
(in thousands)
2010
$
$
$
$
$
$
$
189,217
1,140,352
256,042
$
$
$
189,940
1,234,453
241,420
(3,394) $
$
—
146,351
(146,351)
8,310
5,417
—
—
$
$
$
$
$
142,210
600,371
155,440
12,179
(125,535)
—
—
The accompanying notes are an integral part of these consolidated financial statements.
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For years ended December 31,
(in thousands)
Southern Copper Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
2012
2011
2010
TOTAL EQUITY, beginning of year
$
4,036,283
$
3,910,409
$
3,893,654
STOCKHOLDERS’ EQUITY, beginning of year
4,015,304
3,890,448
3,875,628
CAPITAL STOCK:
Balance at beginning and end of year:
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year
SCC shareholder derivative lawsuit
Common stock dividend distribution
Other activity of the period
Balance at end of year
TREASURY STOCK:
Southern Copper common shares
Balance at beginning of the year
Share repurchase program
Common stock distribution, per share $0.35
Used for corporate purposes
Balance at end of period
Parent Company common shares
Balance at beginning of year
Other activity, including dividend, interest and currency translation
effect
Balance at end of year
Treasury stock balance at end of year
RETAINED EARNINGS:
Balance at beginning of year
2010 - $1.66
Balance at end of year
Net earnings
Dividends paid, common stock, per share, 2012 - $3.71 2011 — $2.43,
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of year
Other comprehensive income (loss)
Balance at end of year
8,846
8,846
8,846
1,039,382
2,108,221
145,132
28,192
3,320,927
1,034,764
—
—
4,618
1,039,382
1,013,326
—
—
21,438
1,034,764
(734,123)
(147,344)
151,457
245
(729,765)
(460,967)
(273,690)
—
534
(734,123)
(460,712)
(463)
—
208
(460,967)
(163,729)
(161,755)
(142,701)
(25,297)
(189,026)
(1,974)
(163,729)
(19,054)
(161,755)
(918,791)
(897,852)
(622,722)
3,852,054
1,934,632
3,595,983
2,336,424
3,469,930
1,554,051
(3,436,560)
2,350,126
(2,080,353)
3,852,054
(1,427,998)
3,595,983
12,874
(8,842)
4,032
(126,423)
139,297
12,874
(13,061)
(113,362)
(126,423)
STOCKHOLDERS’ EQUITY, end of year
4,765,140
4,015,304
3,890,448
NON-CONTROLLING INTEREST, beginning of year
Net earnings
Dividends paid
Other activity
NON-CONTROLLING INTEREST, end of year
20,979
6,740
(3,613)
(146)
23,960
19,961
7,929
(6,885)
(26)
20,979
18,026
8,658
(6,495)
(228)
19,961
TOTAL EQUITY, end of year
$
4,789,100
$
4,036,283
$
3,910,409
The accompanying notes are an integral part of these consolidated financial statements.
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SOUTHERN COPPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-DESCRIPTION OF THE BUSINESS:
The consolidated financial statements presented herein consist of the accounts of Southern Copper Corporation (“SCC” or the
“Company”), a Delaware Corporation, and its subsidiaries. The Company is an integrated producer of copper and other minerals, and
operates mining, smelting and refining facilities in Peru and Mexico. The Company conducts its primary operations in Peru through a
registered branch (the “Peruvian Branch” or “Branch” or “SPCC Peru Branch”). The Peruvian Branch is not a corporation separate
from the Company. The Company’s Mexican operations are conducted through subsidiaries.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation—
The consolidated financial statements include the accounts of subsidiaries of which the Company has voting control, in accordance
with Accounting Standards Codification 810 Consolidation. Such financial statements are prepared in accordance with accounting
principles generally accepted in the United States (“U.S. GAAP”).
Use of estimates—
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such
estimates and assumptions include the carrying value of ore reserves that are the basis for future cash flow estimates and amortization
calculations; environmental, reclamation, closure and retirement obligations; estimates of recoverable copper in mill and leach
stockpiles; asset impairments (including estimates of future cash flows); bad debts; inventory obsolescence; deferred and current
income tax; valuation allowances for deferred tax assets; reserves for contingencies and litigation; and fair value of financial
instruments. Management bases its estimates on the Company’s historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Actual results could differ from those estimates.
Revenue recognition—
Substantially all of the Company’s copper is sold under annual or other longer-term contracts.
Revenue is recognized when title passes to the customer. The passing of title is based on terms of the contract, generally upon
shipment. Copper revenue is determined based on the monthly average of prevailing commodity prices according to the terms of the
contracts. The Company provides allowances for doubtful accounts based upon historical bad debt and claims experience and
periodic evaluation of specific customer accounts.
For certain of the Company’s sales of copper and molybdenum products, customer contracts allow for pricing based on a month
subsequent to shipping, in most cases within the following three months and occasionally in some cases a few additional months. In
such cases, revenue is recorded at a provisional price at the time of shipment. The provisionally priced copper sales are adjusted to
reflect forward LME or COMEX copper prices at the end of each month until a final adjustment is made to the price of the shipments
upon settlement with customers pursuant to the terms of the contract. In the case of molybdenum sales, for which there are no
published forward prices, the provisionally priced sales are adjusted to reflect the market prices at the end of each month until a final
adjustment is made to the price of the shipments upon settlement with customers pursuant to the terms of the contract.
These provisional pricing arrangements are accounted for separately from the contract as an embedded derivative instrument under
ASC 815-30 “Derivatives and Hedging — Cash Flow Hedges.” The Company sells copper in concentrate, anode, blister and refined
form at industry standard commercial terms. Net sales include the invoiced value and
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corresponding fair value adjustment of the related forward contract of copper, zinc, silver, molybdenum, acid and other metals.
Shipping and handling fees and costs—
Amounts billed to customers for shipping and handling are classified as sales. Amounts incurred for shipping and handling are
included in cost of sales (exclusive of depreciation, amortization and depletion).
Cash and cash equivalents—
Cash and cash equivalents include bank deposits, certificates of deposit and short-term investment funds with original maturities of
three months or less at the date of purchase. The carrying value of cash and cash equivalents approximates fair value.
Short-term investments—
The Company accounts for short-term investments in accordance with ASC 320-10 “Investments Debt and Equity Securities —
Recognition.” The Company determines the appropriate classification of all short-term investments as held-to-maturity, available-for-
sale or trading at the time of purchase and re-evaluates such classifications as of each balance sheet date. Unrealized gains and losses
on available-for-sale investments, net of taxes, are reported as a component of accumulated other comprehensive income (loss) in
stockholders’ equity, unless such loss is deemed to be other than temporary.
Inventories—
Metal inventories, consisting of work—in-process and finished goods, are carried at the lower of average cost or market. Costs
incurred in the production of metal inventories exclude general and administrative costs.
Work-in-process inventories represent materials that are in the process of being converted into a saleable product. Conversion
processes vary depending on the nature of the copper ore and the specific mining operation. For sulfide ores, processing includes
milling and concentrating and results in the production of copper and molybdenum concentrates.
Finished goods include saleable products (e.g., copper concentrates, copper anodes, copper cathodes, copper rod, molybdenum
concentrate and other metallurgical products).
Supplies inventories are carried at the lower of average cost less a reserve for obsolescence or market.
Long-term inventory - Leachable material—
The leaching process is an integral part of the mining operations carried out at the Company’s open-pit mines. The Company
capitalizes the production cost of leachable material at its Toquepala, La Caridad and Buenavista mines recognizing it as inventory.
The estimates of recoverable mineral content contained in the leaching dumps are supported by engineering studies. As the
production cycle of the leaching process is significantly longer than the conventional process of concentrating, smelting and
electrolytic refining, the Company includes on its balance sheet, current leach inventory (included in work-in-process inventories) and
long-term leach inventory. The cost attributed to the leach material is charged to cost of sales generally over a five-year period (the
average estimated recovery period based on the historical recovery percentages of each mine).
Property—
Property is recorded at acquisition cost, net of accumulated depreciation and amortization. Cost includes major expenditures for
improvements and replacements, which extend useful lives or increase capacity and interest costs associated with significant capital
additions. Maintenance, repairs, normal development costs at existing mines, and gains or losses on assets retired or sold are reflected
in earnings as incurred.
Buildings and equipment are depreciated on the straight-line method over estimated lives from five to 40 years or the estimated life of
the mine if shorter.
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Mine development —
Mine development includes primarily the cost of acquiring land rights to an exploitable ore body, pre-production stripping costs at
new mines that are commercially exploitable, costs associated with bringing new mineral properties into production, and removal of
overburden to prepare unique and identifiable areas outside the current mining area for such future production. Mine development
costs are amortized on a unit of production basis over the remaining life of the mines.
There is a diversity of practices in the mining industry in the treatment of drilling and other related costs to delineate new ore
reserves. The Company follows the practices outlined in the next two paragraphs in its treatment of drilling and related costs.
Drilling and other associated costs incurred in the Company’s efforts to delineate new resources, whether near-mine or Greenfield are
expensed as incurred. These costs are classified as mineral exploration costs. Once the Company determines through feasibility
studies that proven and probable reserves exist and that the drilling and other associated costs embody a probable future benefit that
involves a capacity, singly or in combination with other assets, to contribute directly or indirectly to future net cash inflow, then the
costs are classified as mine development costs. These mine development costs incurred prospectively to develop the property are
capitalized as incurred, until the commencement of production, and are amortized using the units of production method over estimated
life of the ore body. During the production stage, drilling and other related costs incurred to maintain production are included in
production cost in the period in which they are incurred.
Drilling and other related costs incurred in the Company’s efforts to delineate a major expansion of reserves at an existing production
property are expensed as incurred. Once the Company determines through feasibility studies that proven and probable incremental
reserves exist and that the drilling and other associated costs embody a probable future benefit that involves a capacity, singly or in
combination with other assets, to contribute directly or indirectly to future net cash inflow, then the costs are classified as mine
development costs. These incremental mine development costs are capitalized as incurred, until the commencement of production and
amortized using the units of production method over the estimated life of the ore body. A major expansion of reserves is one that
increases total reserves at a property by approximately 10%.
For the years ended December 31, 2012, 2011 and 2010, the Company did not capitalize any drilling and related costs. The net
balance of capitalized mine development costs at December 31, 2012 and 2011, were $37.9 million and $39.8 million, respectively.
Asset retirement obligations (reclamation and remediation costs)—
The fair value of a liability for asset retirement obligations is recognized in the period in which the liability is incurred. The liability is
measured at fair value and is adjusted to its present value in subsequent periods as accretion expense is recorded. The corresponding
asset retirement costs are capitalized as part of the carrying value of the related long-lived assets and depreciated over the asset’s
useful life.
Intangible assets—
Intangible assets include primarily the excess amount paid over the book value for investment shares and mining and engineering
development studies. Intangible assets are carried at acquisition costs, net of accumulated amortization and are amortized principally
on a unit of production basis over the estimated remaining life of the mines. Intangible assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
Debt issuance costs—
Debt issuance costs, which are included in other assets, are amortized using the interest method over the term of the related debt.
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Ore reserves—
The Company periodically reevaluates estimates of its ore reserves, which represent the Company’s estimate as to the amount of
unmined copper remaining in its existing mine locations that can be produced and sold at a profit. Such estimates are based on
engineering evaluations derived from samples of drill holes and other openings, combined with assumptions about copper market
prices and production costs at each of the respective mines.
The Company updates its estimate of ore reserves at the beginning of each year. In this calculation the Company uses current metal
prices which are defined as the average metal price over the preceding three years. The current price per pound of copper, as defined,
was $3.68, $3.26 and $2.97 at the end of 2012, 2011 and 2010, respectively. The ore reserve estimates are used to determine the
amortization of mine development and intangible assets.
Once the Company determines through feasibility studies that proven and probable reserves exist and that the drilling and other
associated costs embody a probable future benefit that involves a capacity, singly or in combination with other assets, to contribute
directly or indirectly to future net cash inflow, then the costs are classified as mine development costs and the Company discloses the
related ore reserves.
Exploration—
Tangible and intangible costs incurred in the search for mineral properties are charged against earnings when incurred.
Income taxes—
Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences
between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their
reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized and settled
as prescribed in ASC 740 “Income tax.” As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes. Deferred income tax assets are reduced by any benefits that, in the opinion of management,
are more likely not to be realized.
The Company classifies income tax-related interest and penalties as income taxes in the financial statements.
The Company’s operations involve dealing with uncertainties and judgments in the application of complex tax regulations in multiple
jurisdictions. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various
jurisdictions and resolution of disputes arising from federal, state, and international tax audits. The Company recognizes potential
liabilities and records tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on its estimate of
whether, and the extent to which, additional taxes will be due. The Company follows the guidance of ASC 740 “Income Tax” to
record these liabilities. (See Note 7 “Income taxes” of the consolidated financial statements for additional information). The
Company adjusts these reserves in light of changing facts and circumstances; however, due to the complexity of some of these
uncertainties, the ultimate resolution may result in a payment that is materially different from the Company’s current estimate of the
tax liabilities. If its estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would
result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result
in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary. The Company
recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Foreign exchange—
The Company’s functional currency is the U.S. dollar. As required by local law, both the Peruvian Branch and Minera Mexico
maintain their books of accounts in Peruvian nuevos soles and Mexican pesos, respectively.
Foreign currency assets and liabilities are remeasured into U.S. dollars at current exchange rates except for non-monetary items such
as inventory, property, intangible assets and other assets which are remeasured at historical exchange rates. Revenues and expenses
are generally translated at actual exchange rates in effect during the period, except for those items
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related to balance sheet amounts that are remeasured at historical exchange rates. Gains and losses from foreign currency
remeasurement are included in earnings of the period.
Gains and (losses) resulting from foreign currency transactions are included in “Cost of sales (exclusive of depreciation, amortization
and depletion).”
Derivative instruments—
The Company utilizes certain types of derivative financial instruments to enhance its ability to manage risks that exist as part of its
ongoing business operations and to enhance its return on Company assets. Derivative contracts are reflected as assets or liabilities in
the balance sheet at their fair value. The estimated fair value of the derivatives is based on market and/or dealer quotations and in
certain cases valuation modeling. From time to time the Company has entered into copper and zinc swap contracts to protect a fixed
copper and zinc price for portions of its metal sales, hedging contracts to fix power prices for a portion of its production costs, interest
rate swap agreements to hedge the interest rate risk exposure on certain of its bank obligations with variable interest rates and currency
swap arrangements to ensure Mexican peso/ U.S. dollar conversion rates. Gains and losses related to copper and zinc hedges are
included in net sales, gain and losses related to power costs are included in cost of sales, all other gains and losses on derivative
contracts are included in “Gain (loss) on derivative contracts” in the consolidated statement of earnings.
The Company assesses the effectiveness of the derivative contracts periodically using either regression analysis or the dollar offset
approach, both retrospectively and prospectively, to determine whether the hedging instruments have been highly effective in
offsetting changes in fair value of the hedged items.
Unrealized gains (losses) on cash flow derivatives that meet the requirements of hedge accounting are included in “other
comprehensive income” in the consolidated balance sheet until settlement.
Asset impairments -
The Company evaluates long-term assets when events or changes in economic circumstances indicate that the carrying amount of such
assets may not be recoverable. These evaluations are based on business plans that are prepared using a time horizon that is reflective
of the Company’s expectations of metal prices over its business cycle. The Company is currently using a long-term average copper
price of $3.00 per pound of copper and an average molybdenum price of $12.00 per pound, reflective of the current price
environment, for impairment tests. The results of its impairment tests using these long-term copper and molybdenum prices show no
impairment in the carrying value of their assets.
In recent years its assumptions for long-term average prices resulted in stricter evaluations for impairment analysis than would the
higher three year average prices for copper and molybdenum prices. Should this situation reverse in the future with three year average
prices below the long-term price assumption, the Company would assess the need to use the three year average prices in its
evaluations. The Company uses an estimate of the future undiscounted net cash flows of the related asset or asset group over the
remaining life to measure whether the assets are recoverable and measures any impairment by reference to fair value.
Other comprehensive income—
Comprehensive income represents changes in equity during a period, except those resulting from investments by owners and
distributions to owners. During the fiscal years ended December 31, 2012, 2011 and 2010, the components of “other comprehensive
income (loss)” were the unrealized gain (loss) on cash flow hedge derivative instruments, the unrecognized gain (loss) on employee
benefit obligations and realized gain (loss) included in net income.
Business segments-
Company management views Southern Copper as having three reportable segments and manages it on the basis of these segments.
The segments identified by the Company are: 1) the Peruvian operations, which include the two open-pit copper mines in Peru and the
plants and services supporting such mines, 2) the Mexican open-pit copper mines, which include La Caridad and Buenavista mine
complexes and their supporting facilities and 3) the Mexican underground mining operations, which include five underground mines
that produce zinc, copper, silver and gold, a coal mine and a zinc refinery.
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The Chief Operating Officer of the Company focuses on operating income as measure of performance to evaluate different segments,
and to make decisions to allocate resources to the reported segments.
NOTE 3- SHORT-TERM INVESTMENTS:
Short-term investments were as follows ($ in millions):
Trading securities
Weighted average interest rate
Available-for-sale
Weighted average interest rate
Total
At December 31,
2012
2011
127.8
1.87%
$
6.5
0.43%
134.3
$
514.6
1.37%
7.3
0.58%
521.9
$
$
Trading securities: consist of bonds issued by public companies and publicly traded. Each financial instrument is independent of the
others. The Company has the intention to sell these bonds in the short-term.
Available-for-sale investments consist of securities issued by public companies. Each security is independent of the others and, as of
December 31, 2012, included corporate bonds and asset and mortgage backed obligations. As of December 31, 2012 and 2011, gross
unrealized gains and losses on available-for-sale securities were not material.
Related to these investments the Company earned interest, which was recorded as interest income in the consolidated statement of
earnings. Also the Company redeemed some of these securities and recognized gains (losses) due to changes in fair value, which were
recorded as other income (expense) in the consolidated statement of earnings.
The following table summarizes the activity of these investments by category (in millions):
Trading:
Interest earned
Unrealized gain (loss) at December 31,
Available-for-sale:
Interest earned
Investment redeemed
Years ended December 31,
2011
2012
$
$
$
$
3.1
2.4
0.1
1.9
$
$
$
$
6.0
(7.6)
0.1
2.1
At December 31, 2012 and 2011, contractual maturities of the available-for-sale debt securities are as follows (in millions):
One year or less
Maturing after one year through five years
Maturing after five years through ten years
Due after 10 years
Total debt securities
$
$
2012
2011
0.4 $
—
—
6.1
6.5
$
0.5
—
0.6
6.2
7.3
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NOTE 4-INVENTORIES:
(in millions)
Inventory, current:
Metals at lower of average cost or market:
Finished goods
Work-in-process
Supplies at average cost
Total current inventory
Inventory, long-term:
Long-term leach stockpiles
As of December 31,
2012
2011
$
$
$
101.1
297.4
284.2
682.7
262.8
$
$
$
93.3
290.3
252.4
636.0
128.8
Total leaching costs capitalized as long-term inventory of leachable material amounted to $225.5 million and $168.0 million in 2012
and 2011, respectively. Long-term leaching inventories recognized as cost of sales amounted to $68.5 million, $49.2 million and $41.5
million in 2012, 2011 and 2010, respectively.
NOTE 5-PROPERTY:
(in millions)
Buildings and equipment
Construction in progress
Mine development
Land, other than mineral
Total property
Accumulated depreciation, amortization and depletion
Total property, net
As of December 31,
2012
2011
7,497.3
1,617.6
250.7
46.7
9,412.3
(4,255.6)
5,156.7
$
$
6,921.8
1,197.8
250.7
46.4
8,416.7
(3,986.8)
4,429.9
$
$
Depreciation and depletion expense for the years ended December 31, 2012, 2011 and 2010, amounted to $323.5 million, $286.0
million and $279.6 million, respectively.
NOTE 6-INTANGIBLE ASSETS:
(in millions)
Mining concessions
Mine engineering and development studies
Software
Accumulated amortization
Goodwill
Intangible assets, net
As of December 31,
2012
$
$
121.2 $
6.0
8.9
136.1
(43.8)
17.0
109.3
$
2011
121.2
6.0
7.8
135.0
(41.6)
17.0
110.4
Amortization of intangibles in the last three years and estimated amortization are as follows (in millions):
Amortization expense:
2012
2011
2010
Estimated amortization expense:
2013-2017
Average annual
$
$
$
$
$
2.2
2.1
2.1
10.9
2.2
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The goodwill was generated in 1997 as a result of purchasing a third party interest in the Buenavista mine.
NOTE 7-INCOME TAXES:
The components of the provision for income taxes are as follows:
(in millions)
U.S. federal and state:
Current
Deferred
Uncertain tax positions
Foreign (Peru and Mexico):
Current
Deferred
$
(0.1) $
2012
Years ended December 31,
2011
2010
(108.6)
147.4
38.7
1,025.1
17.1
1,042.2
1,080.9
$
(2.4) $
(45.3)
(0.4)
(48.1)
1,238.7
(86.3)
1,152.4
1,104.3
$
(11.2)
6.2
34.8
29.8
843.5
(5.2)
838.3
868.1
Total provision for income taxes
$
The source of income is as follows:
(in millions)
Earnings by location:
U.S.
Foreign
Peru
Mexico
For the years ended December 31,
2011
2010
2012
$
(0.1) $
(1.1) $
(1.0)
846.0
2,127.6
2,973.6
1,351.9
2,097.9
3,449.8
1,544.7
887.1
2,431.8
Earnings before taxes on income
$
2,973.5
$
3,448.7
$
2,430.8
The reconciliation of the statutory income tax rate to the effective tax rate is as follows (in percentage points):
Expected tax
Effect of income taxed at a rate other than the statutory rate
Percentage depletion
Other permanent differences
Peru tax on net income deemed distributed
Special mining tax
Mexican tax on dividends
Increase (decrease) in unrecognized tax benefits for uncertain tax
positions
Repatriated foreign earnings
Amounts (over) / under provided in prior years
Other
Effective income tax rate
113
For the years ended December 31,
2011
2010
2012
30.0%
1.6
(4.2)
3.7
1.3
1.6
—
5.0
(1.7)
(0.6)
(0.4)
36.3%
30.0%
4.3
(4.0)
1.2
1.3
0.5
—
—
2.1
(3.5)
0.1
32.0%
30.0%
5.3
(4.3)
1.8
2.0
—
0.4
4.6
—
(4.5)
0.4
35.7%
Table of Contents
The Company files income tax returns in three jurisdictions, Peru, Mexico and the United States. For the three years presented above
the statutory income tax rates for Peru and Mexico were 30% and 35% for the United States. The expected rate used above is the
statutory tax rate for Peru and Mexico. The Mexican rate is scheduled to decrease to 29% in 2014, and to 28% in 2015 and future
years.
The Company uses the Peruvian and Mexican income tax rate of 30% for this tax rate reconciliation because it is the largest
component of tax expense for each of the three years presented. For all of the years presented, both the Peruvian branch and Minera
Mexico filed separate tax returns in their respective tax jurisdictions. Although the tax rules and regulations imposed in the separate
tax jurisdictions may vary significantly, similar permanent items exist, such as items which are nondeductible or nontaxable. Some
permanent differences relate specifically to SCC such as the allowance in the United States for percentage depletion. SCC’s taxable
income for the fiscal years 2010 through 2012, were included in the U.S. federal income tax return of AMC, its parent company; see
U.S. tax matters, below. For financial reporting and presentation purposes SCC is providing current and deferred income taxes, as if it
remains a separate U.S. tax filer apart from AMC.
Deferred taxes include the U.S., Peruvian and Mexican tax effects of the following types of temporary differences and carryforwards:
(in millions)
Assets:
Inventories
Trade receivables
Capitalized exploration expenses
U.S. foreign tax credit carryforward
U.S tax effect of Peruvian deferred tax liability
Reserves
Mexican tax loss carryforward
Labor share buyback
Other
Total deferred tax assets
Liabilities:
Property, plant and equipment
Deferred charges
Mexican tax on consolidated dividends
Outside basis difference
Metal hedging
Other
Total deferred tax liabilities
As of December 31,
2012
2011
$
23.6 $
—
24.4
202.3
33.4
77.5
26.9
30.0
32.6
450.7
(125.0)
(81.6)
(34.6)
(41.3)
—
(0.5)
(283.0)
23.2
18.1
31.9
174.4
3.7
69.7
35.7
30.1
14.0
400.8
(166.2)
(35.3)
(32.6)
(91.6)
(4.0)
(2.1)
(331.8)
69.0
Total net deferred tax assets / (liabilities)
$
167.7
$
U.S. Tax Matters—
In 2011, $27.8 million of capital loss carryovers expired unutilized. In 2012, $0.9 million of capital loss carryover was utilized and
$1.3 million expired. The Company had a full valuation allowance on the capital loss carryforwards.
As of December 31, 2012, the Company considers its ownership of the stock of Minera Mexico to be essentially permanent in
duration. The excess of the amount for financial reporting over the tax basis of the investment in this stock is estimated to be at least
$2.6 billion.
The Company has provided a deferred tax liability of $41.3 million as of December 31, 2012 for the U.S. income tax effects of $425
million of foreign earnings that may potentially be repatriated in the future from Minera Mexico.
At December 31, 2012, there were $202.3 million of foreign tax credits available for carryback or carryforward. These credits have
limited carryback and carryforward periods and can only be used to reduce U.S. income tax on foreign earnings included in the annual
U.S. consolidated income tax return. There were no other U.S. tax credits at December 31, 2012.
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As of March 27, 2009, Grupo Mexico, through its wholly-owned subsidiary, AMC, became the beneficial owner of 80% of SCC’s
common stock. As a result of this new level of ownership, beginning March 27, 2009, SCC’s operating results are included in the
AMC consolidated U.S. federal income tax return. In addition to holding an 81.3% interest in SCC, AMC also owns 100% of Asarco
and its subsidiaries. In accordance with paragraph 30-27 of ASC 740-10-30, it is expected that current and deferred taxes will be
allocated to members of the AMC group as if each were a separate taxpayer. SCC provides current and deferred income taxes, as if it
were filing a separate income tax return.
Peruvian Tax Matters—
The Company obtains income tax credits in Peru for value-added taxes paid in connection with the purchase of capital equipment and
other goods and services, employed in its operations and records these credits as a prepaid expense. Under current Peruvian law, the
Company is entitled to use the credits against its Peruvian income tax liability or to receive a refund. The carrying value of these
Peruvian tax credits approximates their net realizable value.
Special Mining tax: In September 2011, the Peruvian government enacted a new tax for the mining industry. This tax is based on
operating income and its rate ranges from 2% to 8.4%. It begins at 2% for operating income margin up to 10% and increases by 0.4%
of operating income for each additional 5% of operating income until 85% of operating income is reached. The Company made
provision for this tax of $49.6 million and $16.4 million in 2012 and 2011, respectively. These provisions are included as “income
taxes” in the consolidated statement of earnings.
Mexican Tax Matters—
In 2009, Mexico enacted new rules related to the income tax law. The new rules eliminated an indefinite deferral period for the
payment of taxes assessed on dividends paid in excess of the tax basis retained earnings accounts that are distributed among entities of
a consolidated tax group, and the offsetting net operating losses (NOL´s) incurred by one entity against the profits of another entity,
until the occurrence of certain events, such as the dissolution of the tax consolidation regime. In 2009, the Company recognized the
additional liability caused by this change and is amortizing the required catch-up over a five-year period ending in 2014. At
December 31, 2012, the deferred balance to be paid is approximately 300 million pesos (approximately $27 million), of which $18
million will be paid in 2013 and $9 million in 2014.
The Mexican statutory income tax rate is 30% and is scheduled to decrease to 29% in 2014, and to 28% in 2015 and future years.
Mexican companies are subject to a dual tax system comprised of regular income tax and a corporate flat tax that was enacted in
2007. The rate under the corporate flat tax law is 17.5%. Mexican companies pay the greater of the corporate flat tax or regular
income tax and determine its deferred income taxes based on the tax regime it expects to be subject to in the future. Based on earnings
projections, the Company believes it will be subject to regular income tax for the foreseeable future and has calculated its temporary
differences and deferred taxes based on the regular income tax law.
Accounting for Uncertainty in Income Taxes-
The total amount of unrecognized tax benefits in 2012, 2011 and 2010, was as follows (in millions):
Unrecognized tax benefits, opening balance
Gross increases — tax positions in prior period
Gross decreases — tax positions in prior period
Gross increases — current-period tax positions
2012
2011
2010
$
70.6 $
75.7 $
39.7
0.2
110.7
150.6
21.6
(26.8)
0.1
(5.1)
70.6
$
30.7
46.3
(1.8)
0.5
45.0
75.7
Unrecognized tax benefits, ending balance
$
221.2 $
The overall increase in the 2012 unrecognized tax benefit of $150.6 million relates primarily to the deduction of permanent items such
as depletion, legal fees and decrease in foreign tax credits.
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The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $221.2 million at December 31,
2012 and $70.6 million at December 31, 2011. These amounts relate entirely to U.S. income tax matters. The Company has no
unrecognized Peruvian or Mexican tax benefits.
As of December 31, 2012 and 2011, the Company’s liability for uncertain tax positions included no amount for accrued interest and
penalties due to the excess foreign tax credits. At December 31, 2010, the Company’s liability for uncertain tax positions included
accrued interest and penalties of $8.0 million.
The following tax years remain open to examination and adjustment in the Company’s three major tax jurisdictions:
Peru:
U.S.:
Mexico:
2008 up to 2011 (the year 2008 is scheduled to be examined in 2013).
2008 and all future years
2004 and all future years
Management does not expect that any of the open years will result in a cash payment within the upcoming twelve months ending
December 31, 2013. The Company’s reasonable expectations about future resolutions of uncertain items did not materially change
during the year ended December 31, 2012.
In the second quarter of 2011, the Company reached agreement with the IRS and settled tax years 2005, 2006, and 2007. In the fourth
quarter of 2011, the IRS commenced its U.S. federal income tax audit of the Company for the years 2008 through 2010.
NOTE 8-WORKERS’ PARTICIPATION:
The Company’s operations in Peru and Mexico are subject to statutory workers’ participation.
In Peru, the provision for workers’ participation is calculated at 8% of pre-tax earnings. The current portion of this participation,
which is accrued during the year, is based on Peruvian Branch’s taxable income and is distributed to workers following determination
of final results for the year. The annual amount payable to an individual worker is capped at the worker’s salary for an 18 month
period. Amounts determined in excess of the 18 months of worker’s salary is no longer made as a payment to the worker and is levied
first for the benefit of the “Fondo Nacional de Capacitacion Laboral y de Promocion del Empleo” (National Workers’ Training and
Employment Promotion Fund) until this entity receives from all employers in its region an amount equivalent to 2,200 Peruvian
taxable units (approximately $3.2 million in 2012). Any remaining excess is levied as payment for the benefit of the regional
governments. These levies fund worker training, employment promotion, road infrastructure and other government programs.
In Mexico, workers’ participation is determined using the guidelines established in the Mexican income tax law at a rate of 10% of
pre-tax earnings as adjusted by the tax law.
The provision for workers’ participation is allocated to “Cost of sales (exclusive of depreciation, amortization and depletion)” and to
“selling, general and administrative” in the consolidated statement of earnings, proportional to the number of workers in the
production and administrative areas, respectively. Workers’ participation expense for the three years ended December 31, 2012 was
as follows (in millions):
Current
Deferred
2012
2011
263.1
14.3
277.4
$
$
274.7
(18.0)
256.7
$
$
2010
233.6
10.7
244.3
$
$
NOTE 9-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’s closure plans were approved by MINEM. As part of
the closure plans, commencing in January 2010 and, as amended in 2012, the Company is required to provide annual guarantees over
the estimated life of the mines, based on a present value approach, and to furnish the
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funds for the asset retirement obligation. This law requires a first review after three years and then successive reviews every five
years. Currently and for the near-term future, the Company has pledged the value of its Lima office complex as support for this
obligation. The accepted value of the Lima office building, for this purpose, is $17 million. Through January 2013, the Company has
provided guarantees of $10.5 million. The closure cost recognized for this liability includes the cost, as outlined in its closure plans,
of dismantling the Toquepala and Cuajone concentrators, the smelter and refinery in Ilo, and the shops and auxiliary facilities at the
three units. In 2010, the closure plan for the new Ilo marine trestle was added to the asset retirement obligation. In the last quarter of
2012, the Company submitted updates to the closure plans for Toquepala, Cuajone and Ilo according with the requirement of the Mine
Closure Law. As a result of these revised plans, the Company has adjusted its asset retirement obligation as shown in the table below.
In 2012, the Company decided to recognize an estimated asset retirement obligation for its mining properties in Mexico as part of its
environmental commitment. Even though, there is currently no enacted law, statute, ordinance, or written or oral contract requiring
the Company to carry out mine closure and environmental remediation activities, the Company considered that a constructive
obligation presently exists based on, among other things, the remediation experience caused by the closure of the San Luis Potosi
smelter in 2010. Consequentely, according to ASC- 410-20 on December 31, 2012 the Company recorded an asset retirement
obligation of $25.1 million and increased net property by $20.3 million. The overall cost recognized for mining closure includes the
estimated costs of dismantling concentrators, smelter and refinery plants, shops and other facilities.
The following table summarizes the asset retirement obligation activity for the two years ended December 31, 2012 and 2011 (in
millions):
Balance as of January 1
Changes in estimates
Additions
Closure payments
Accretion expense
Balance as of December 31,
NOTE 10-FINANCING:
Long-term debt:
2012
2011
$
$
62.0 $
27.4
25.1
(0.3)
4.0
118.2
$
59.1
—
—
(0.5)
3.4
62.0
(in millions)
1.763% Mitsui credit agreement due 2013 (Japanese LIBO rate plus 1.25% (2.02% at
December 31, 2011))
6.375% Notes due 2015 ($200 million face amount, less unamortized discount of $0.4 million
and $0.6 million at December 31, 2012 and 2011, respectively)
5.375% Notes due 2020 ($400 million face amount, less unamortized discount of $1.6 million
and $1.9 million at December 31,2012 and 2011, respectively)
3.50% Notes due 2022 ($300 million face amount, less unamortized discount of $1.0 million at
December 31, 2012)
9.25% Yankee bonds—Series B due 2028
7.50% Notes due 2035 ($1,000 million face amount, less unamortized discount of $14.7 million
and $14.9 million at December 31, 2012 and 2011, respectively)
6.75% Notes due 2040 ($1,100 million face amount, less unamortized discount of $8.0 million
and $8.0 million at December 31,2012 and 2011, respectively)
5.25% Notes due 2042 ($1,200 million face amount, less unamortized discount of $21.5 million
at December 31, 2012)
Total debt
Less, current portion
Total long-term debt
117
As of December 31,
2012
$
10.0
$
199.6
398.4
299.0
51.1
985.3
2011
20.0
199.4
398.1
—
51.1
985.1
1,092.0
1,092.0
1,178.5
4,213.9
(10.0)
4,203.9
$
—
2,745.7
(10.0)
2,735.7
$
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The bonds, referred above as “Yankee bonds”, contain a covenant requiring Minera Mexico to maintain a ratio of EBITDA to interest
expense of not less than 2.5 to 1.0 as such terms are defined by the facility. At December 31, 2012, Minera Mexico was in compliance
with this covenant.
The Mitsui credit agreement is collateralized by pledges of receivables on 31,000 tons of copper per year. The Mitsui agreement
requires the Company to maintain a minimum stockholders’ equity of $750 million and a specific ratio of debt to equity. Reduction of
Grupo Mexico’s direct or indirect voting interest in the Company to less than a majority would constitute an event of default under the
Mitsui agreement. At December 31, 2012, the Company was in compliance with these covenants.
In July 2005, the Company issued $200 million 6.375% Notes due 2015 at a discount of $1.1 million and $600 million 7.5% Notes
due 2035, at a discount of $5.3 million. The notes are senior unsecured obligations of the Company. The Company capitalized $8.8
million of costs associated with this facility and its unamortized balance is included in “Other assets”, non-current on the consolidated
balance sheet. The net proceeds from the issuance and sale of the notes were principally used to repay outstanding indebtedness of the
Company and the balance was used for general corporate purposes. The indentures relating to the notes contain certain covenants,
including limitations on liens, limitations on sale and leaseback transactions, rights of the holders of the notes upon the occurrence of a
change of control triggering event, limitations on subsidiary indebtedness and limitations on consolidations, mergers, sales or
conveyances. Certain of these covenants cease to be applicable before the notes mature if the issuer obtains an investment grade
rating.
On May 9, 2006, the Company issued an additional $400 million 7.5% notes due 2035. These notes are in addition to the $600
million of existing 7.5% notes due 2035 that were issued in July 2005. The current transaction was issued at a spread of +240 basis
points over the 30-year U.S. Treasury bond. The original issue in July 2005 was issued at a spread of +315 basis points over the 30-
year U.S. Treasury bond. The notes were issued at a discount of $10.8 million. The Company capitalized $3.2 million of cost
associated with this facility and its unamortized balance is included in non-current “Other assets, net” on the consolidated balance
sheet. The Company used proceeds from the May 2006 issuance for its expansion programs.
The notes issued in July 2005 and the new notes issued in May 2006 are treated as a single series of notes under the indenture,
including for purposes of covenants, waivers and amendments. The Company has registered these notes under the Securities Act of
1933, as amended.
On April 16, 2010, the Company issued $1.5 billion of fixed-rate unsecured notes with a discount of $10.3 million, which is being
amortized over the term of the related debt. Net proceeds were used for general corporate purposes, including the financing of the
Company’s capital expenditure program. The $1.5 billion fixed-rate senior unsecured notes were issued in two tranches, $400 million
due in 2020 at an annual interest rate of 5.375% and $1.1 billion due in 2040 at an annual interest rate of 6.75%. Interest on the notes
will be paid semi-annually in arrears. The notes will constitute the Company’s general unsecured obligations and the series of notes
will rank pari passu with each other and will rank pari passu in right of payment with all of the Company’s other existing and future
unsecured and unsubordinated indebtedness. Also, related to these notes the Company has deferred $8.2 million of costs associated
with the issuance of this facility, which its unamortized balance is included in “Other assets” non-current in the consolidated balance
sheet and is being amortized as interest expense over the life of the loans.
In connection with the transaction, on April 16, 2010, the Company entered into a base indenture with Wells Fargo Bank, National
Association, as trustee, as well as a first supplemental indenture and a second supplemental indenture which provide for the issuance,
and set forth the terms of, the two tranches of notes described above. The indentures contain covenants that limit the Company’s
ability to, among other things, incur certain liens securing indebtedness, engage in certain sale and leaseback transactions, and enter
into certain consolidations, mergers, conveyances, transfers or leases of all or substantially all the Company’s assets.
On November 8, 2012, the Company issued $1.5 billion of fixed-rate unsecured notes with a discount of $22.5 million, which is being
amortized over the term of the related debt. Net proceeds will be used for general corporate purposes,
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including the financing of the Company’s capital expenditure program. The $1.5 billion fixed-rate senior unsecured notes were issued
in two tranches, $300 million due in 2022 at an annual interest rate of 3.5% and $1.2 billion due in 2042 at an annual interest rate of
5.25%. Interest on the notes will be paid semi-annually in arrears. The notes will constitute the Company’s general unsecured
obligations and the series of notes will rank pari passu with each other and will rank pari passu in right of payment with all of the
Company’s other existing and future unsecured and unsubordinated indebtedness. Also, related to these notes the Company has
deferred $7.7 million of costs associated with the issuance of this facility, with the unamortized balance included in “Other assets”
non-current in the consolidated balance sheet and is being amortized as interest expense over the life of the loans.
Pursuant to the April 16, 2010 base indenture between the Company and Wells Fargo Bank, National Association, as trustee, the
Company and the trustee entered into supplemental indentures, which provide for the issuance, and set forth the terms of, the 2022
Notes and 2042 Notes, respectively. The supplemental indentures contain covenants that limit the Company’s ability to, among other
things, incur certain liens securing indebtedness, engage in certain sale and leaseback transactions, and enter into certain
consolidations, mergers, conveyances, transfers or leases of all or substantially all the Company’s assets.
The Company has registered the 2010 and 2012 notes under the Securities Act of 1933, as amended. The Company may issue
additional debt from time to time pursuant to the base indenture.
If the Company experiences a Change of Control Triggering Event (as defined in the indentures governing the 2005, 2006, 2010 and
2012 notes), the Company must offer to repurchase the notes at a purchase price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any. A Change of Control Trigger Event means a Change of Control (as defined) and a rating decline
(as defined), that is, if the rating of the notes, by at least one of the rating agencies shall be decreased by one or more gradations.
At December 31, 2012, the Company was in compliance with the covenants of the 2005, 2006, 2010 and 2012 notes.
Aggregate maturities of the outstanding borrowings at December 31, 2012, are as follows:
Years
2013
2014
2015
2016
2017
Thereafter
Total
Principal Due (*)
(in millions)
10.0
—
200.0
—
—
4,051.2
4,261.2
$
$
(*)Total debt maturities do not include the debt discount valuation account of $47.3 million.
At December 31, 2012 and 2011, other assets included $5.1 million and $5.2 million, respectively, held in escrow accounts as required
by the Mitsui’s loan agreement. The funds are released from escrow as scheduled loan repayments are made.
At December 31, 2012 and 2011, the balance of capitalized debt issuance costs was $25.9 million and $18.8 million, respectively.
Amortization charged to interest expense was $1.3 million, $0.5 million and $0.4 million in 2012, 2011 and 2010, respectively.
NOTE 11-BENEFIT PLANS:
Post retirement defined benefit plan:
The Company has two noncontributory defined benefit pension plans covering former salaried employees in the United States and
certain former employees in Peru. Effective October 31, 2000, the Board of Directors amended the qualified pension plan to suspend
the accrual of benefits.
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In addition, our Mexican subsidiaries have a defined contribution benefit pension plan for salaried employees and a noncontributory
defined benefit pension plan for union employees. These plans are in addition to benefits granted by the Mexican Institute of Social
Security.
The components of net periodic benefit costs calculated in accordance with ASC 715 “Compensation retirement benefits,” using
December 31 as a measurement date, consist of the following:
(in millions)
Service cost
Interest cost
Expected return on plan assets
Amortization of transition assets, net
Amortization of net actuarial loss
Amortization of net loss/(gain)
Amortization of prior service cost/
(credit)
Settlement / curtailment
Net periodic benefit cost
2012
$
Years ended December 31,
2011
2010
$
1.0
1.1
(3.6)
—
(0.8)
0.1
—
—
$
0.9
1.2
(3.5)
(0.1)
(1.3)
0.1
—
—
$
(2.2) $
(2.7) $
2.1
2.2
(3.7)
—
(1.0)
0.1
0.2
(19.0)
(19.1)
The change in benefit obligation and plan assets and a reconciliation of funded status are as follows:
(in millions)
Change in benefit obligation:
Projected benefit obligation at beginning of year
Service cost
Interest cost
Actuarial gain census
Benefits paid
Actuarial (gain)/loss
Actuarial gain assumption changes
Inflation adjustment
Projected benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Currency exchange rate adjustment
Fair value of plan assets at end of year
Funded status at end of year:
ASC-715 amounts recognized in statement of financial position consists of:
Non-current assets
Total
ASC-715 amounts recognized in accumulated other comprehensive income
(net of income tax) consists of:
Net loss (gain)
Total
120
$
$
$
$
$
$
$
$
$
As of December 31,
2012
2011
25.2
0.9
1.2
0.2
(1.9)
(0.4)
1.3
(1.3)
25.2
62.9
—
(0.5)
(1.2)
(5.4)
55.8
30.6
30.6
30.6
(3.9)
(3.9)
25.2 $
1.0
1.1
(0.1)
(2.0)
1.0
0.8
0.9
27.9
$
55.8 $
4.9
(0.6)
(1.1)
2.9
61.9
$
34.0
$
34.0 $
$
34.0
(3.6) $
(3.6) $
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The following table summarizes the changes in accumulated other comprehensive income for the years ended December 31, related to
the defined benefit pension plan, net of income tax:
(in millions)
Reconciliation of accumulated other comprehensive income:
Accumulated other comprehensive income at beginning of plan year
Net loss/(gain)amortized during the year
Net loss/(gain)occurring during the year
Currency exchange rate adjustment
Net adjustment to accumulated other comprehensive income
Accumulated other comprehensive income at end of plan year
2012
2011
$
$
(3.9) $
0.2
0.6
(0.5)
0.3
(3.6) $
(8.8)
0.7
2.9
1.3
4.9
(3.9)
The following table summarizes the amounts in accumulative other comprehensive income amortized and recognized as a component
of net periodic benefit cost in 2012 and 2011, net of income tax:
(in millions)
Net loss / (gain)
Amortization of net (loss) gain
Total amortization expenses
$
$
2012
2011
0.6
0.2
0.8
$
$
2.9
0.7
3.6
The assumptions used to determine the pension obligation and seniority premiums as of year-end and the net cost in the ensuing year
are:
Peruvian operations
Discount rate
Expected long-term rate of return on plan asset
Rate of increase in future compensation level
Mexican operations (*)
Discount rate
Expected long-term rate of return on plan asset
Rate of increase in future compensation level
2012
2011
3.35%
4.50%
N/A
3.95%
4.50%
N/A
2012
2011
6.50%
6.50%
4.00%
7.50%
7.50%
4.50%
2010
5.00%
4.50%
N/A
2010
7.50%
7.50%
4.00%
(*)These rates are based on Mexican pesos as pension obligations are denominated in pesos.
The scheduled maturities of the benefits expected to be paid in each of the next five years, and thereafter, are as follows:
Years
2013
2014
2015
2016
2017
2018 to 2022
Total
Expected
Benefit Payments
(in millions)
$
$
9.6
1.6
1.7
1.6
1.6
8.4
24.5
Peruvian operations
The Company’s funding policy is to contribute amounts to the qualified pension plan sufficient to meet the minimum funding
requirements set forth in the Employee Retirement Income Security Act of 1974, as amended plus such additional amounts as the
Company may determine to be appropriate. Plan assets are invested in stock and bond funds.
Plan assets are invested in a group annuity contract (the “Contract”) with Metropolitan Life Insurance Company (“MetLife”). The
Contract invests in units of the State Street Global Advisors Institutional Liquid Reserves Money Fund (the “Money Fund”), and the
MetLife Broad Market Bond Fund (the “Bond Fund”) managed by BlackRock, Inc. (“BlackRock”).
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The Money Fund seeks to maximize current income to the extent consistent with preservation of capital and liquidity and the
maintenance of a stable $1.00 per share net asset value, by investing in U.S. Dollar-denominated money market securities. The Bond
Fund seeks to outperform the Barclays Capital U.S. Aggregate Bond Index, net of fees, over a full market cycle. The Bond Fund
invests in publicly traded, investment grade securities with a target duration within one and a half years of the Barclays Capital U.S.
Aggregate Bond Index.
The investment allocation decisions within the Funds, as reported to the Company by MetLife effective December 31, 2012, were as
follows:
The Money Fund invests in a broad range of money market instruments. These include, among other things: U.S. Government
securities, including U.S. Treasury bills, notes, and bonds and securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities; certificates of deposits and time deposits of U.S. and foreign banks; commercial paper and other high quality
obligations of U.S. or foreign companies; asset-backed securities, including asset-backed commercial paper; and repurchase
agreements. These instruments bear fixed, variable or floating rates of interest and may be zero-coupon securities. The Money Fund
also invests in shares of other money market funds, including funds advised by the Fund’s investment adviser. Under normal market
conditions, the Money Fund intends to invest more than 25% of its total assets in bank obligations.
With respect to the Bond Fund, its interest rate/yield curve position moved from modestly short to neutral duration during the year.
The Bond Fund was modestly underweight in the front-end of the curve, while overweight in the 7-year to 10-year part of the curve.
Within Treasuries/Agencies, BlackRock is overweight to Treasuries on a duration-adjusted basis as BlackRock continues to expect
heightened spread volatility and poor liquidity in the near term. Within Mortgages, BlackRock reduced exposure to Agency
mortgages on strong performance and ended the year 2% to 3% underweight versus the benchmark. The Bond Fund has an
underweight position largely concentrated in the 30-year 4% coupon, and is modestly overweight in the 30-year 4.5% coupon. The
Bond Fund moved from very overweight in 3% and 3.5% coupons to a neutral position. The Bond Fund maintained its allocation to
non-agency Residential Mortgage-Backed Securities (RMBS) with attractive loss-adjusted yields.
Within the Commercial Mortgage-Backed Securities (CMBS) sector, BlackRock maintained a small overweight position to CMBS.
The Bond Fund continues to favor an overweight to shorter average life, super-senior, seasoned bonds. BlackRock has reduced
exposure to AM grades in favor of A4 grades (super-senior) after significant spread compression between the two classes. Within
Credit, BlackRock remains underweight on Investment Grade Credit, primarily low beta industrials. The Bond Fund is modestly
reducing its U.S. Financials position back to neutral, and will look for opportunities to add European Financials. BlackRock continues
to add select industrials via the new issue market as concession levels remain relatively high. BlackRock remains slightly overweight
in utilities given attractive carry, the defensive nature of the sector, and attractive idiosyncratic opportunities. BlackRock is
underweight Non-Corporate Credit and Taxable Municipals versus the benchmark.
Within the Asset-Backed Securities (ABS) sector, BlackRock maintains its allocation given strong front-end carry. BlackRock
continues to hold subprime autos, including subordinate classes that offer attractive spread pickup versus senior classes. Within the
remaining sub-sectors, BlackRock favors Retail Credit Cards, Federal Family Education Loan Program student loans and dollar
denominated senior UK RMBS.
The Company’s policy for determining asset mix-targets includes periodic consultation with recognized third party investment
consultants. The expected long-term rate of return on plan assets is updated periodically, taking into consideration asset allocations,
historical returns and the current economic environment. Based on these factors the Company expects its assets will earn an average
of 4.5% per annum assuming its long-term mix will be consistent with its current mix and an assumed discount rate of 3.95%. The
fair value of plan assets is impacted by general market conditions. If actual returns on plan assets vary from the expected returns,
actual results could differ.
Mexican operations
Minera Mexico’s policy for determining asset mix targets includes periodic consultation with recognized third party investment
consultants. The expected long-term rate of return on plan assets is updated periodically, taking into consideration assets allocations,
historical returns and the current economic environment. The fair value of plan assets is
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impacted by general market conditions. If actual returns on plan assets vary from the expected returns, actual results could differ.
The plan assets are managed by three financial institutions, Scotiabank Inverlat S.A., Banco Santander and IXE Banco, S.A. 27% of
the funds are invested in Mexican government securities, including treasury certificates and development bonds of the Mexican
government. The remaining 73% is invested in common shares of Grupo Mexico.
The plan assets are invested without restriction in active markets that are accessible when required and are therefore considered as
level 1, in accordance with ASC 820.
These plans accounted for approximately 30% of benefit obligations. The following table represents the asset mix of the investment
portfolio as of December 31:
Asset category:
Equity securities
Treasury bills
2012
2011
73%
27%
100%
74%
26%
100%
The amount of contributions that the Company expects to pay to the plan during 2012 is $8.6 million, which includes $3.4 million of
pending payments to former Buenavista workers.
Post-retirement Health Care Plan
Peru: The Company adopted the post-retirement health care plan for retired salaried employees eligible for Medicare on May 1, 1996.
The plan is unfunded.
Effective October 31, 2000, the health care plan for retirees was terminated and the Company informed retirees that they would be
covered by the then in effect post-retirement health care plan of Asarco, a former shareholder of the Company and a subsidiary of
Grupo Mexico, which offered substantially the same benefits and required the same contributions. Asarco is no longer managing the
plan. The Company has assumed management of the plan and is currently providing health benefits to retirees. The plan is accounted
for in accordance with ASC 715 “Compensation retirement benefits.”
Mexico: Through 2007, the Buenavista unit provided health care services free of charge to employees and retired unionized
employees and their families through its own hospital at the Buenavista unit. In 2011, the Company signed an agreement with the
Secretary of Health of the State of Sonora to provide these services to its retired workers and their families at a lower cost for the
Company but still free of charge to the retired workers. As a result of the cost savings, the plan value and the cost of the net periodic
benefits have been reduced and are included in the activity in the following tables.
The components of net period benefit costs are as follows:
(in millions)
Service cost
Interest cost
Amortization of transition obligation
Amortization of net loss/(gain)
Amortization of prior service cost/ (credit)
Net periodic benefit cost
Years ended December 31,
2011
2012
2010
—
1.5
—
—
(0.3)
1.2
$
$
— $
3.3
1.3
—
(10.0)
(5.4) $
0.4
4.4
1.5
0.1
—
6.4
$
$
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The change in benefit obligation and a reconciliation of funded status are as follows:
(in millions)
Change in benefit obligation:
Projected benefit obligation at beginning of year
Interest cost
Amendments
Actuarial loss/ (gain) — claims cost
Benefits paid
Actuarial (gain)/loss
Actuarial gain assumption changes
Inflation adjustment
Projected benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Employer contributions
Benefits paid
Fair value of plan assets at end of year
Funded status at end of year:
ASC-715 amounts recognized in statement of financial position consists of:
Current liabilities
Non-current liabilities
Total
ASC-715 amounts recognized in accumulated other comprehensive income
(net of income tax) consists of:
Net loss (gain)
Prior service cost (credit)
Total
$
$
$
$
$
$
$
$
$
As of December 31,
2012
2011
51.4
3.3
(24.2)
—
(1.4)
(3.3)
0.2
(5.7)
20.3
—
0.1
(0.1)
—
20.3 $
1.5
—
(0.2)
(1.5)
5.6
0.1
1.4
27.2
$
— $
0.1
(0.1)
—
$
(27.2) $
(20.3)
(0.1) $
(27.1)
(27.2) $
(0.2) $
(0.1)
(0.3) $
(0.1)
(20.2)
(20.3)
(3.4)
(0.1)
(3.5)
The following table summarizes the changes in accumulated other comprehensive income for the years ended December 31, related to
the post-retirement health care plan, net of income tax:
(in millions)
Reconciliation of accumulated other comprehensive income:
Accumulated other comprehensive income at beginning of plan year
Prior services cost amortized during the year
Net loss/(gain)occurring during the year
Amortization of transition obligation
Prior service cost (credit)
Currency exchange rate adjustment
Net adjustment to accumulated other comprehensive income
As of December 31,
2012
$
(3.5) $
—
3.3
0.2
—
(0.3)
3.2
2011
8.6
6.0
(1.9)
(0.8)
(14.5)
(0.9)
(12.1)
(3.5)
Accumulated other comprehensive income at end of plan year
$
(0.3) $
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The following table summarizes the amounts in accumulative other comprehensive income amortized and recognized as a component
of net periodic benefit cost in 2012 and 2011, net of income tax:
(in millions)
Net loss / (gain)
Amortization of transition obligation
Amortization of prior services cost (credit)
Total amortization expenses
As of December 31,
2011
2012
3.3
0.2
—
3.5
$
$
$
$
(1.9)
(0.8)
(14.5)
(17.2)
The discount rates used in the calculation of other post-retirement benefits and cost as of December 31 were:
Peruvian operations
Discount rate
Mexican operations
Weighted average discount rate
2012
2011
3.35%
3.95%
2012
2011
6.50%
7.50%
2010
5.00%
2010
7.50%
The benefits expected to be paid in each of the next five years, and thereafter, are as follows:
Year
2013
2014
2015
2016
2017
2018 to 2022
Total
Expected
Benefit Payments
(in millions)
$
$
1.6
1.6
1.7
1.8
2.0
11.7
20.4
Peruvian operations
For measurement purposes, a 6.2% annual rate of increase in the per capita cost of covered health care benefits was assumed for
2012. The rate is assumed to decrease gradually to 4.6%.
Assumed health care cost trend rates can have a significant effect on amounts reported for health care plans. However, because of the
size of the Company’s plan, a one percentage-point change in assumed health care trend rate would not have a significant effect.
Mexican operations
For measurement purposes, a 4.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2012
and remains at that level thereafter.
An increase in other benefit cost trend rates have a significant effect on the amount of the reported obligations, as well as component
cost of the other benefit plan. One percentage-point change in assumed other benefits cost trend rates would have the following
effects:
(in millions)
Effect on total service and interest cost components
Effect on the post-retirement benefit obligation
$
$
125
One Percentage Point
Increase
Decrease
(0.8)
(22.7)
1.5 $
28.6 $
Table of Contents
NOTE 12-NON-CONTROLLING INTEREST:
For all the years presented, in the consolidated statement of earnings the income attributable to non-controlling interest is based on the
earnings of the Company’s Peruvian Branch.
The non-controlling interest of the Company’s Peruvian Branch is for investment shares, formerly named labor shares. These shares
were generated by legislation in place in Peru from the 1970s through 1991; such legislation provided for the participation of mining
workers in the profits of the enterprises for which they worked. This participation was divided between equity and cash. The
investment shares included in the non-controlling interest on the balance sheet are the still outstanding equity distributions made to the
Peruvian Branch’s employees.
In prior years the Company acquired some Peruvian investment shares in exchange for newly issued common shares of the Company
and through purchases at market value. These acquisitions were accounted for as purchases of non-controlling interests. The excess
paid over the carrying value was assigned to intangible assets and is being amortized based on production. As a result of these
acquisitions, the remaining investment shareholders hold a 0.71% interest in the Peruvian Branch and are entitled to a pro rata
participation in the cash distributions made by the Peruvian Branch. The shares are recorded as a non-controlling interest in the
Company’s financial statements.
NOTE 13-COMMITMENTS AND CONTINGENCIES:
Environmental matters:
The Company has instituted extensive environmental conservation programs at its mining facilities in Peru and Mexico. The
Company’s 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.
Environmental capital expenditures in years 2012, 2011 and 2010, were as follows (in millions):
Peruvian operations
Mexican operations
Total
2012
2011
2010
$
$
3.4
20.7
24.1
$
$
2.5
11.5
14.0
$
$
6.4
10.2
16.6
Peruvian operations: The Company’s operations are subject to applicable Peruvian environmental laws and regulations. The Peruvian
government, through the Environmental Ministry conducts annual audits of the Company’s 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.
Peruvian law requires that companies in the mining industry provide for future closure and remediation. In accordance with the
requirements of this law the Company’s closure plans were approved by MINEM. As part of the closure plans, the Company is
providing guarantees to ensure that sufficient funds will be available for the asset retirement obligation. See Note 9, “Asset retirement
obligation,” for further discussion of this matter.
Mexican operations: The Company’s 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.
The principal legislation applicable to the Company’s Mexican operations is the Federal General Law of Ecological Balance and
Environmental Protection (the “General Law”), 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
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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.
On January 28, 2011, Article 180 of the General Law was amended. This amendment, gives an individual or entity the ability to
contest administrative acts, including environmental authorizations, permits or concessions granted, without the need to demonstrate
the actual existence of harm to the environment, natural resources, flora, fauna or human health, because it will be sufficient to argue
that the harm may be caused.
In addition in 2011, amendments to the Civil Federal Procedures Code (“CFPC”) were published in the Official Gazette and are now
in force. These amendments establish three categories of collective actions, by means of which 30 or more people claiming injury
derived from environmental, consumer protection, financial services and economic competition issues will be considered to be
sufficient in order to have a legitimate interest to seek through a civil procedure restitution or economic compensation or suspension of
the activities from which the alleged injury derived. The amendments to the CFPC may result in more litigation, with plaintiffs
seeking remedies, including suspension of the activities alleged to cause harm.
On December 5, 2011, the Mexican Senate Chamber approved the Environmental Liability Federal Law, which establishes general
guidelines in order to determine which environmental actions will be considered to cause environmental harm that will give rise to
administrative responsibilities (remediation or compensations) and criminal responsibilities. Also economic fines could be established.
This initiative has been returned to the lower chamber for discussion and voting. The law will be in force once approved by the lower
chamber and signed by the President.
In March 2010, the Company announced to the Mexican federal environmental authorities the closure of the copper smelter plant at
San Luis Potosi. The Company initiated a program for plant demolition and soil remediation with a budget of $35.7 million, of which
the Company has spent $31.6 million through December 31, 2012. Plant demolition and construction of a confinement area at the
south of the property were completed in 2012 and the Company expects to complete soil remediation and the construction of a second
confinement by the end of 2013. We will deposit in the confinement areas metallurgical and other waste material resulting from plant
demolition. The program also includes the construction of a recreational park, a plant nursery to improve the environmental culture,
and a logistic center for raw material and finished goods from the San Luis Potosi zinc plant, which the Company expects will
improve the flow of traffic in the west of the city. The Company expects that once the site is remediated, the Company will be able to
promote an urban development to generate a net gain on the disposal of the property.
The Company believes that all of its facilities in Peru and Mexico are in material compliance with applicable environmental, mining
and other laws and regulations.
The Company also believes that continued compliance with environmental laws of Mexico and Peru will not have a material adverse
effect on the Company’s business, properties, result of operations, financial condition or prospects and will not result in material
capital expenditures.
Litigation matters:
Peruvian operations
Garcia Ataucuri and Others against SCC’s Peruvian Branch:
In April 1996, the Branch was served with a complaint filed in Peru by Mr. Garcia Ataucuri and approximately 900 former employees
seeking the delivery of a substantial number of “labor shares” (acciones laborales) plus dividends on such shares, to be issued to each
former employee in proportion to their time of employment with SCC’s Peruvian Branch.
The labor share litigation is based on claims of former employees for ownership of labor shares that the plaintiffs state that the Branch
did not issue during the 1970s until 1979 under a former Peruvian mandated profit sharing system. In 1971, the Peruvian government
enacted legislation providing that mining workers would have a 10% participation in the pre-tax profits of their employing enterprises.
This participation was distributed 40% in cash and 60% in an equity interest of the enterprise. In 1978, the equity portion, which was
originally delivered to a mining industry workers’ organization, was set at 5.5% of pre-tax profits and was delivered, mainly in the
form of “labor shares” to individual workers. The cash portion was set at 4.0% of pre-tax earnings and was delivered to individual
employees also in proportion to their time of employment
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with the Branch. In 1992, the workers’ participation was set at 8%, with 100% payable in cash and the equity participation was
eliminated from the law.
In relation to the issuance of “labor shares” by the Branch in Peru, the Branch is a defendant in the following lawsuits:
1) Mr. Garcia Ataucuri seeks delivery, to himself and each of the approximately 900 former employees of the Peruvian Branch, of
the 3,876,380,679.65 old soles or 38,763,806.80 “labor shares” (acciones laborales), as required by Decree Law 22333 (a former
profit sharing law), to be issued proportionally to each former employee in accordance with the time of employment of such
employee with SCC’s Branch in Peru, plus dividends on such shares. The 38,763,806.80 labor shares sought in the complaint,
with a face value of 100.00 old soles each, represent 100% of the labor shares issued by the Branch during the 1970s until 1979
for all of its employees during that period. The plaintiffs do not represent 100% of the Branch´s eligible employees during that
period.
It should be noted that the lawsuit refers to a prior Peruvian currency called “sol de oro” or old soles, which was later changed to
the “inti”, and then into today´s “nuevo sol.” One billion of old soles is equivalent to today’s one nuevo sol.
After lengthy proceedings before the civil courts in Peru on September 19, 2001, on appeal from the Branch (the 2000 appeal),
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.
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 Branch’s 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 SCC’s Peruvian Branch to deliver the labor shares and dividends, it
has clearly stated that SCC’s 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 SCC’s
Peruvian Branch continues to make. None of the court decisions state the manner by which the Branch must comply with the
delivery of such labor shares or make a liquidation of the amount to be paid for past dividends and interest, if any.
On June 9, 2009, SCC’s Peruvian Branch filed a proceeding of relief before a civil court in Peru seeking the nullity of the 2009
Supreme Court decision and, in a separate proceeding, a request for a precautionary measure. The civil court rendered a favorable
decision on the nullity and the precautionary measure, suspending the enforcement of the Supreme Court decision, for the reasons
indicated above and other reasons. In February 2012, the Branch was notified that the civil court had reversed its decision
regarding the nullity. The precautionary measure is still in effect. The Peruvian Branch has appealed the unfavorable decision
before the superior court. In view of this, and the recent civil court decision, SCC´s Peruvian Branch continues to analyze the
manner in which the Supreme Court decision may be enforced and what financial impact, if any, said decision may have.
2) In addition, there are filed against SCC’s Branch the following lawsuits, involving approximately 800 plaintiffs, which seek the
same number of labor shares as in the Garcia Ataucuri case, plus interest, labor shares resulting from capital increases and
dividends: Armando Cornejo Flores and others v. SCC’s Peruvian Branch (filed May 10, 2006); Alejandro Zapata Mamani and
others v. SCC’s Peruvian Branch (filed June 27, 2008); Arenas Rodriguez and others, represented by Mr. Cornejo Flores, v.
SCC’s Peruvian Branch (filed January 2009); Eduardo Chujutalli v. SCC’s Peruvian Branch (filed May 2011); Edgardo Garcia
Ataucuri, in representation of 216 of SCC’s Peruvian Branch former workers, v. SCC’s Peruvian Branch (filed May 2011);
Silvestre Macedo Condori v. SCC’s Peruvian Branch (filed June 2011); Juan Guillermo Oporto Carpio v. SCC’s Peruvian Branch
(filed August 2011); Rene Mercado Caballero v. SCC’s Peruvian Branch (filed November 2011); Enrique Salazar Alvarez and
others v. SCC’s Peruvian Branch (filed December 2011); Indalecio Carlos Perez Cano and others v. SCC Peruvian Branch (filed
March 2012); Jesús Mamani Chura and others v. SCC’s Peruvian Branch (filed March, 2012); Armando Cornejo Flores, in
representation of 37 of SCC’s Peruvian Branch former workers v. SCC’s Peruvian Branch (filed March, 2012) and Porfirio
Ochochoque Mamani and others v. SCC´s Peruvian Branch (filed July, 2012). SCC’s Peruvian Branch has answered the
complaints and denied the validity of the claims.
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SCC’s Peruvian Branch asserts that the labor shares were distributed to the former employees in accordance with the profit sharing
law then in effect. The Peruvian Branch has not made a provision for these lawsuits because it believes that it has meritorious defenses
to the claims asserted in the complaints. Additionally, the amount of this contingency cannot be reasonably estimated by management
at this time.
The “Virgen Maria” Mining Concessions of the Tía Maria Mining Project
The Tia Maria project includes various mining concessions, totaling 32,989.64 hectares. One of the concessions is the “Virgen María”
mining concession totaling 943.72 hectares, or 2.9% of the total.
Related to the “Virgen María” mining concessions, the Company is party to the following lawsuits:
a) Exploraciones de Concesiones Metalicas S.A.C. (“Excomet”): In August 2009, a lawsuit was filed against SCC’s Branch by the
former stockholders of Excomet. The plaintiffs allege that the acquisition of Excomet’s shares by the Branch is null and void because
the $2 million purchase price paid by the Branch for the shares of Excomet was not fairly negotiated by the plaintiffs and the Branch.
In 2005, the Branch acquired the shares of Excomet after lengthy negotiations with the plaintiffs, and after the plaintiffs, which were
all the stockholders of Excomet, approved the transaction in a general stockholders’ meeting. Excomet was at the time owner of the
“Virgen Maria” mining concession. In October 2011, the civil court dismissed the case on the grounds that the claim had been barred
by the statute of limitations. Upon appeal by the plaintiffs, the superior court reversed the lower court decision. At December 31,
2012, the case is pending resolution.
b) Sociedad Minera de Responsabilidad Limitada Virgen Maria de Arequipa (SMRL Virgen Maria): In August 2010, a lawsuit was
filed against SCC’s Branch and others by SMRL Virgen Maria, a company which until July 2003 owned the mining concession
Virgen Maria. SMRL Virgen Maria sold this mining concession in July 2003 to Excomet (see a) above). The plaintiff alleges that
the sale of the mining concession Virgen Maria to Excomet is null and void because the persons who attended the shareholders’
meeting of SMRL Virgen Maria, at which the purchase was agreed upon, were not the real owners of the shares. The plaintiff is also
pursuing the nullity of all the subsequent acts regarding the mining property (acquisition of the shares of Excomet by SCC’s Branch,
noted above, and the sale of this concession to SCC’s Branch by Excomet). On October, 2011, the civil court dismissed the case on
the grounds that the claim had been barred by the statute of limitations. Upon appeal by the plaintiffs, the superior court remanded the
proceedings to the lower court, ordering the issuance of a new decision. At December 31, 2012, the case is pending resolution.
c) Omar Nuñez Melgar: In May 2011, Mr. Omar Nuñez Melgar commenced a lawsuit against the Peruvian Mining and
Metallurgical Institute (“INGEMMET”) and MINEM challenging the denial of his request of a new mining concession that conflicted
with SCC’s Branch’s Virgen Maria mining concession. SCC’s Branch has been made a party to the proceedings as the owner of the
Virgen Maria concession. SCC’s Branch has answered the complaint and denied the validity of the claim. As of December 31, 2012,
this case remains open with no further developments.
The Company asserts that the lawsuits are without merit and is vigorously defending against these lawsuits.
Special Regional Pasto Grande Project (“Pasto Grande Project”)
In the last quarter of 2012, the Pasto Grande Project, an entity of the Regional Government of Moquegua, filed a lawsuit against
SCC’s Peruvian Branch alleging property rights over a certain area used by the Peruvian Branch and seeking the demolition of the
tailings dam where SCC’s Peruvian Branch has deposited its tailings from the Toquepala and Cuajone operations since 1995. The
Peruvian Branch has had title to use the area in question since 1960 and has constructed and operated the tailing dams with proper
governmental authorization, since 1995. SCC’s Peruvian Branch asserts that the lawsuit is without merit and is vigorously defending
against the lawsuit.
Mexican Operations
Pasta de Conchos Accident:
On February 19, 2010, three widows of miners, who perished in the 2006 Pasta de Conchos accident, filed a complaint for damages in
the United States District Court for the District of Arizona against the defendants, Grupo Mexico, AMC and SCC. The plaintiffs allege
that the defendants’ purported failure to maintain a safe working environment at the mine amounted to a violation of several laws and
treaties. The Company considers that the court does not have subject-matter jurisdiction over the plaintiffs’ claims and will defend
itself vigorously. On April 13, 2010, the Company filed a motion to dismiss the plaintiffs’ complaint. On March 29, 2011, the District
Court for the District of Arizona dismissed the case for lack of subject-matter jurisdiction. On April 5, 2011, the plaintiffs filed a
notice of appeal in this case. On November 7, 2012, the United States Court of Appeals for the Ninth Circuit affirmed the decision of
the Unites States District Court of the District of Arizona, which had dismissed in its entirety the case for lack of subject-matter
jurisdiction. The plaintiffs can seek review of the decision before the Supreme Court.
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Labor matters:
Peru
Approximately 63% of the Company’s 4,566 Peruvian employees were unionized at December 31, 2012, represented by eight separate
unions. Three of these unions, one at each major production area, represent 2,202 workers. Also, there are five smaller unions,
representing the balance of workers. The Company conducted negotiations with the eight unions whose collective bargaining
agreements expired in 2012. During the first two months of 2013, the Company has signed three-year agreements with all the unions.
The agreements include, among other things, annual salary increases of 6.5%, 5% and 5% for each of the three years, respectively, for
all workers.
There were no strikes during 2011 and 2010. On December 24 and 25, 2012 the three major unions held a two-day illegal work
stoppage which did not have a material impact on production.
Mexico
In recent years, the Mexican operations have experienced a positive improvement of their labor environment, as our workers, in a free
decision, opted to change their affiliation from the Sindicato Nacional de Trabajadores Mineros, Metalúrgicos y Similares de la
Republica Mexicana (National Union of Mine and Metal Workers and Similar Activities of the Mexican Republic or the “National
Mining Union”) to other unions. In 2006, workers of our Mexicana del Cobre mining complex and IMMSA joined the Sindicato
Nacional de Trabajadores de la Exploración, Explotación y Beneficio de Minas en la Republica Mexicana, (National Union of
Workers Engaged in Exploration, Exploitation and Processing of Mines in the Mexican Republic ), and the Mexicana del Cobre
metallurgical workers joined the Sindicato de Trabajadores de la Industria Minero Metalurgica (Union of Workers of the Mine and
Metals Industry or the “CTM”). Finally, in 2011 our Buenavista del Cobre workers joined the CTM. This positive labor environment
allows us to increase our productivity and to develop our capital expansion programs.
The workers of the San Martin and Taxco mines, still under the National Mining Union, have been on strike since July 2007. On
December 10, 2009, a federal court confirmed the legality of the San Martin strike. In order to recover the control of the San Martin
mine and resume operations, on January 27, 2011, the Company filed a court petition requesting that the court, among other things
define the termination payment for each unionized worker. The court denied the petition alleging that, according to federal labor law,
the union was the only legitimate party to file such petition. On appeal by the Company, on May 13, 2011, the Mexican federal
tribunal accepted the petition. In July 2011, the National Mining Union appealed the favorable court decision before the Supreme
Court. On November 7, 2012, the Supreme Court affirmed the decision of the federal tribunal. The Company filed a new proceeding
before the labor court on the basis of the Supreme Court decision, which recognized the right of the labor court to define responsibility
for the strike and the termination payment for each unionized worker. A favorable decision of the labor court in this new proceeding
would have the effect of terminating the protracted strike at San Martin.
In July 2012, Minera Krypton, a Mexican mining company, not affiliated with Grupo Mexico or the Company, hired 130 workers for
the rehabilitation of its mining unit at Chalchihuites, Zacatecas. Most of these workers, which are or were workers of the San Martin
mine, in order to work for Minera Krypton joined a new union called, the Sindicato de Trabajadores de la Industria Minera y
Similares de la Republica Mexicana (Union of Workers of the Mine and Metals Industry and Similar Activities of the Mexican
Republic or the “Union of Mexican Mine and Metal Workers”). On August, 31 2012, the Union of Mexican Mine and Metal Workers
filed a petition with the labor authorities to replace the existing union at the San Martin mine. On September 1, 2012, the workers
affiliated with the Union of Mexican Mine and Metal Workers took over the San Martin mine evicting the workers on strike. Several
hearings took place during September 2012 with the federal labor authorities. On October 12, 2012, the federal labor court ordered
and enforced a recount in order to establish which union will hold the collective bargaining agreement. The Union of Mexican Mine
and Metal Workers lost the recount. The result of the recount was challenged by the Union of Mexican Mine and Metal Workers and
is pending resolution.
In the case of the Taxco mine, following the workers refusal to allow exploration of new reserves, the Company commenced litigation
seeking to terminate the labor relationship with workers of the Taxco mine (including the related collective bargaining agreement).
On September 1, 2010, the federal labor court issued a ruling approving the termination of the collective bargaining agreement and all
the individual labor contracts of the workers affiliated with the Mexican mining union at the Taxco mine. The ruling was based upon
the resistance of the mining union to allow the Company search for reserves at
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the Taxco mine. The mining union appealed the labor court ruling before a federal court. In September 2011, the federal court
accepted the union’s appeal and requested that the federal labor court review the procedure and take into account all the evidence to
issue a new resolution. On January 3, 2012, the federal labor court issued a new resolution, approving the termination of the collective
bargaining agreement and all the individual labor contracts of the workers affiliated with the National Mining Union at the Taxco
mine. On January 25, 2012, the National Mining Union appealed the resolution before the federal court. On June 14, 2012, the
federal court accepted the union’s appeal and requested that the federal labor court issue a new resolution, taking into account all the
evidence submitted by the parties. On August 6, 2012, the federal labor court issued a new decision disapproving the termination of
the collective bargaining agreement and the individual labor contracts of the workers affiliated with the National Mining Union at the
Taxco mine. On August 29, 2012, the Company filed a proceeding seeking relief from the decision before a federal court. As of
December 31, 2012, resolution of the relief proceeding was pending.
It is expected that operations at these mines will remain suspended until these labor issues are resolved.
Other legal matters:
Class actions
For the resolution of the three purported class action derivative lawsuits, filed in the Delaware Court of Chancery (New Castle
County) late in December 2004 and early January 2005 relating to the proposed merger transaction between the Company and Minera
Mexico, S.A. de C.V., which was completed effective April 1, 2005. (see Note 14 “Stockholders’ Equity”).
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 effect on its financial position
or results of operations.
Other Contingencies:
Tia Maria:
Tia Maria, an over $1.0 billion Peruvian investment project, was suspended by governmental action in April 2011 in light of protests
and disruptions carried out by a small group of activists who alleged, among other things, that the project would result in severe
environmental contamination and the diversion of agricultural water resources.
The Company is preparing a new EIA study that we believe will take into account local community concerns and new government
guidance. The Company considers that this new EIA process will alleviate all the concerns previously raised by the Tia Maria
project’s neighboring communities, provide them with an independent source of information and reaffirm the validity of the
Company’s assessment of the project. The Company is confident that this initiative will have a positive effect on its stakeholders and
will allow the Company to obtain the approval for the development of the 120,000 ton annual production copper project. In view of
the delays, the mining operations for the project have been rescheduled to start-up in 2016, contingent upon receiving all required
governmental approvals in the time frame provided by law. No assurances can be given as to the specific timing of each such
approval.
The Company has legal and valid title to the Tia Maria mining concessions and the over-lapping surface land in the area. None of
above noted activities have in any way challenged, revoked, impaired or annulled the Company´s legal rights to the Tia Maria mining
concessions and/or the over-lapping surface land titles acquired in the past. All the Company’s property rights on these areas are in
full force.
In view of the suspension of this project, the Company has reviewed the carrying value of this asset to ascertain whether impairment
exists. Total spending on the project, through December 31, 2012, was $480.7 million of which $176.7 million of Tia Maria
equipment has been reassigned to other Company operations. As the project is currently on hold, some of the equipment has been
transferred to other Company operations in Mexico and Peru. Should the Tia Maria project not be restarted, the Company is confident
that most of the project equipment will continue to be used productively, through
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reassignment to other mine locations operated by the Company. The Company believes that an impairment loss, if any, will not be
material.
Other commitments:
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 (“PPA”) was also completed under which SCC agreed to purchase all of its power needs for its current
Peruvian operations from Enersur for twenty years, commencing in 1997.
The Company signed in 2009 a Memorandum of Understanding (“MOU”) with Enersur regarding its PPA. The MOU contains new
economic terms that the Company believes better reflects current economic conditions in the power industry in Peru. The new
economic conditions agreed to 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. However, due to the delay at the Tia Maria
project the final agreement was put on hold, see caption “Tia Maria” above.
Tax contingency matters:
Tax contingencies are provided for under ASC 740-10-50-15 Uncertain tax position (see Note 7, “Income taxes”).
NOTE 14-STOCKHOLDERS’ EQUITY
Delaware Court Decision Related to SCC Shareholder Derivative Lawsuit:
Three purported class action derivative lawsuits were filed in the Delaware Court of Chancery (New Castle County) late in
December 2004 and early January 2005 relating to the proposed merger transaction between the Company and Minera Mexico, S.A.
de C.V. (the “Transaction”), which was completed effective April 1, 2005. On January 31, 2005, the three actions were consolidated
into one action and the complaint filed by Lemon Bay was designated as the operative complaint in the consolidated lawsuit. The
consolidated action purported to be brought on behalf of the Company and its common stockholders. The defendants in the
consolidated action were AMC and SCC’s directors. The Company was a nominal defendant. The consolidated complaint alleged,
among other things, that the Transaction was the result of breaches of fiduciary duties by the Company’s directors and was entirely
unfair to the Company and its minority stockholders.
On October 9, 2012 the Company received from AMC, our majority shareholder, $2,108.2 million in satisfaction of the judgment
issued pursuant to the decision of the Court of Chancery of Delaware, which concluded that we paid an excesive price to AMC in the
2005 merger between the Company and Minera Mexico, S.A. de C.V. From the aforementioned sum received from AMC, the
Company paid $316.2 million of legal fees and expenses to the plaintiff’s attorneys to satisfy the court ordered award of attorneys’
fees and expenses. The effect of this award was recorded in the Company’s 2012 results. The $2,108.2 million awarded to the
Company was included in the capital accounts (additional paid-in capital) on the balance sheet. Additionally, the Company recorded
an operating expense of $316.2 million in its 2012 results for the legal fees related to this award.
Treasury Stock:
Activity in treasury stock in the years 2012 and 2011 was as follows (in millions):
Southern Copper common shares
Balance as of January 1,
Purchase of shares
Stock dividend distribution
Used for corporate purposes
Balance as of December 31,
Parent Company (Grupo Mexico) common shares
Balance as of January 1,
Other activity, including dividend, interest and currency translation effect
Balance as of December 31,
2012
2011
$
734.1 $
147.3
(151.4)
(0.2)
729.8
163.7
25.3
189.0
Treasury stock balance as of December 31,
$
918.8
$
132
461.0
273.6
—
(0.5)
734.1
161.7
2.0
163.7
897.8
Table of Contents
SCC shares of common stock in treasury:
At December 31, 2012 and 2011, treasury stock holds 39,045,536 shares and 43,616,086 shares of SCC’s common stock, respectively
with a cost of $729.8 million and $734.1 million, respectively. The shares of SCC’s common stock held in treasury are used for
general corporate purposes.
SCC share repurchase program:
In 2008, the Company´s Board of Directors authorized a $500 million share repurchase program. On July 28, 2011, the Board of
Directors approved an increase of the SCC share repurchase program from $500 million to $1.0 billion. Pursuant to this program, the
Company purchased common stock as shown in the table below. These shares are available for general corporate purposes. The
Company may purchase additional shares of its common stock 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.
From
2008:
08/11/08
2009:
01/12/09
2010:
05/05/10
2011:
05/01/11
2012:
04/10/12
05/30/12
06/01/12
08/01/12
09/01/12
10/01/12
Total purchased
Period
To
Total Number
of Shares
Purchased
Average
Price
Paid per
Share
Cumulative
Number of
Shares
Purchased
12/31/08
09/30/09
10/14/10
12/31/11
04/23/12
05/31/12
06/30/12
08/31/12
09/30/12
10/31/12
28,510,150
13.49
28,510,150
4,912,000
14.64
33,422,150
15,600
29.69
33,437,750
9,034,400
30.29
42,472,150
278,486
500,000
370,000
100,000
2,763,850
430,000
4,442,336
46,914,486
42,750,636
43,250,636
43,620,636
43,720,636
46,484,486
46,914,486
30.23
28.57
28.33
32.47
34.71
34.83
33.17
18.72
Maximum
Number of Shares
that May Yet Be
Purchased Under
the Plan
@ $37.86(1)
Total Cost
($ in
millions)
$
384.7
71.9
0.5
273.7
8.4
14.3
10.5
3.2
95.9
15.0
147.3
878.1
3,220,925 $
(1) NYSE price at December 31, 2012
As a result of the repurchase of shares of SCC’s common stock, Grupo Mexico’s direct and indirect ownership was 81.3% as of
December 31, 2012 and 80.9% at December 31, 2011.
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
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shares following each annual meeting of stockholders thereafter. 600,000 shares of Southern Copper common stock have been
reserved for this plan. The fair value of the award is measured each year at the date of the grant.
The activity of this plan for the years ended December 31, 2012 and 2011 was as follows:
Total SCC shares reserved for the plan
Total shares granted at January 1,
Granted in the period
Total shares granted at December 31,
Remaining shares reserved
Parent Company common shares:
2012
600,000
(271,200)
(14,400)
(285,600)
2011
600,000
(256,800)
(14,400)
(271,200)
314,400
328,800
At December 31, 2012 and 2011, there were in treasury 80,674,702 and 84,606,069 of Grupo Mexico’s common shares, respectively.
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, 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 fair market sales price at the date of
resignation of the fully paid shares, net of costs and taxes. When the fair market sales 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 resignation occurs during:
1st year after the grant date
2nd year after the grant date
3rd year after the grant date
4th year after the grant date
5th year after the grant date
6th year after the grant date
7th year after the grant date
% Deducted
90%
80%
70%
60%
50%
40%
20%
In the case of involuntary termination of the employee, the Company will pay to the employee the fair market sales price at the date of
termination of employment of the fully paid shares, net of costs and taxes. 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:
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If the termination occurs during:
1st year after the grant date
2nd year after the grant date
3rd year after the grant date
4th year after the grant date
5th year after the grant date
6th year after the grant date
7th year after the grant date
% Deducted
100%
95%
90%
80%
70%
60%
50%
In case of retirement or death of the employee, the Company will render the buyer or his legal beneficiary, the fair market sales value
as of the date of retirement or death of the shares effectively paid, net of costs and taxes.
For each of the years ended December 31, 2012, 2011 and 2010, the stock based compensation expense under the Employee Stock
Purchase Plan was $2.1 million. As of December 31, 2012, there was $4.2 million of unrecognized compensation expense under this
plan, which is expected to be recognized over the remaining two year period.
The following table presents the stock award activity of the Employee Stock Purchase Plan for the years ended December 31, 2012
and 2011:
Outstanding shares at January 1, 2012
Granted
Exercised
Forfeited
Granted
Exercised
Forfeited
Outstanding shares at December 31, 2012
Outstanding shares at January 1, 2011
Outstanding shares at December 31, 2011
Shares
7,270,341 $
—
(220,430)
(94,339)
6,955,572
10,920,693 $
—
(3,402,855)
(247,497)
7,270,341
$
Unit Weighted Average
Grant Date Fair Value
1.16
—
1.16
1.16
1.16
1.16
—
1.16
1.16
1.16
During 2010, the Company offered to eligible employees a new stock purchase plan (the “New Employee Stock Purchase Plan”)
through a trust that acquires series B shares of Grupo Mexico stock for sale to its employees, employees of subsidiaries, and certain
affiliated companies. The purchase price was established at 26.51 Mexican pesos (approximately $2.05) for the initial subscription.
The terms of the New Employee Stock Purchase Plan are similar to the terms of the Employee Stock Purchase Plan.
At December 31, 2012, there was $3.2 million of unrecognized compensation expense under this plan, which is expected to be
recognized over the remaining six year period.
The following table presents the stock award activity of the New Employee Stock Purchase Plan for the years ended December 31,
2012 and 2011:
Outstanding shares at January 1, 2012
Granted
Exercised
Forfeited
Granted
Exercised
Forfeited
Outstanding shares at December 31, 2012
Outstanding shares at January 1, 2011
Outstanding shares at December 31, 2011
Shares
3,807,146 $
—
(772,850)
(89,554)
2,944,742
3,901,901 $
51,923
—
(146,678)
3,807,146
$
Unit Weighted Average
Grant Date Fair Value
2.05
—
2.05
2.05
2.05
2.05
2.05
—
2.05
2.05
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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 shares of Grupo Mexico which are deposited in a trust.
NOTE 15-DERIVATIVE INSTRUMENTS:
As part of its risk management policy, the Company occasionally uses derivative instruments to (i) safeguard the corporate assets;
(ii) insure the value of its future revenue stream, and (iii) lessen the impact of unforeseen market swings of its sales revenues. To
comply with these objectives the Company, from time to time, enters into commodities prices derivatives, interest rate derivative,
exchange rate derivative and other instruments. 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 hedges:
In 2011, the Company entered into copper swaps and zero cost collar derivative contracts to reduce price volatility and to protect its
sales value as shown below. These transactions meet the requirements of hedge accounting. The realized gains and losses from these
derivatives were recorded in net sales on the consolidated statement of earnings and included in operating activities on the
consolidated statement of cash flows.
The following table summarizes the copper derivative activity related to copper sales transactions realized in 2012 and 2011:
Zero cost collar contracts:
Pounds (in millions)
Average LME cap price
Average LME floor price
Swap contracts:
Pounds (in millions)
Weighted average COMEX price
Realized gain (loss) on copper derivatives
$
$
2012
2011
46.3
5.18
3.50
—
—
—
$
$
$
$
423.3
3.63
2.27
390.8
3.46
13.5
The hedge instruments are based on LME copper prices. The Company performed statistical analysis on the difference between the
average monthly copper price on the LME and the COMEX exchanges and determined that the correlation coefficient is greater than
0.999. Based on this analysis the Company considers that the LME underlying price matches its sales priced at COMEX prices.
These cash flow hedge relationships qualify as critical matched terms hedge relationships and as a result have no ineffectiveness. The
Company performs periodic quantitative assessments to confirm that the relationship was highly effective and that the ineffectiveness
was de minimis.
As of December 31, 2012, the Company did not hold copper derivative contracts.
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Transactions under these metal price protection programs are accounted for as cash flow hedges under ASC 815-30 “Derivatives and
Hedging-Cash Flow Hedges” as they meet the requirements for this treatment and are adjusted to fair market value based on the metal
prices as of the last day of the respective reporting period with the gain or loss recorded in other comprehensive income until
settlement, at which time the gain or loss is reclassified to net sales in the consolidated statements of earnings.
Please see additional disclosure about fair value on Note 16-”Financial instruments” below.
NOTE 16-FINANCIAL INSTRUMENTS:
Subtopic 810-10 of ASC “Fair value measurement and disclosures — Overall” 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 Subtopic 810-10 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 consolidated balance sheet as of
December 31, 2012 (in millions):
Liabilities:
Long-term debt
Balance at December 31, 2012
Carrying Value
Fair Value
$
4,213.9
$
4,870.6
Long-term debt is carried at amortized cost and its estimated fair value is based on quoted market prices classified as Level 1 in the
fair value hierarchy. The Mitsui loan is based on the present value of the cash flow discounted at 10%, which is the Company’s
weighted average cost of capital.
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Fair values of assets and liabilities measured at fair value on a recurring basis were calculated as of December 31, 2012 and 2011, as
follows (in millions):
Description
Assets:
Short term investment:
- Trading securities
- Available-for-sale debt securities:
Corporate bonds
Asset backed securities
Mortgage backed securities
Fair Value
as of
December
31, 2012
Fair Value at Measurement Date Using:
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
$
127.8 $
127.8
0.4
0.1
6.0
$
0.4
0.1
6.0
Accounts receivable:
- Derivatives — classified as cash flow
hedges:
Zero cost collar
- Derivatives - Not classified as hedges:
Provisionally priced sales:
Copper
Molybdenum
Total
Description
Assets:
Short term investment:
- Trading securities
- Available-for-sale debt securities:
Corporate bonds
Mortgage backed securities
Accounts receivable:
- Derivatives — classified as cash flow
hedges:
Zero cost collar
- Derivatives - Not classified as hedges:
Provisionally priced sales:
Copper
Molybdenum
Total
70.8
102.9
308.0
$
70.8
102.9
301.5
$
$
—
6.5
$
—
—
Fair Value
as of
December
31, 2011
Fair Value at Measurement Date Using:
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
$
514.6 $
514.6
0.5
6.8
8.9
$
0.5
6.8
8.9
221.5
138.1
890.4
$
221.5
138.1
874.2
$
$
—
16.2
$
—
—
The Company’s short-term trading securities investments are classified as Level 1 because they are valued using quoted prices of the
same securities as they consist of bonds issued by public companies and publicly traded. The Company’s short-term available-for-sale
investments are classified as Level 2 because they are valued using quoted prices for similar investments.
Derivatives are valued using financial models that use as their basis readily observable market inputs, such as time value, forward
interest rates, volatility factors, and current and forward market prices for foreign exchange rates and a set of probabilities. The
Company generally classifies these instruments within Level 2 of the valuation hierarchy. Such derivatives at December 31, 2011,
included zero cost collars.
The Company’s accounts receivable associated with provisionally priced copper sales are valued using quoted market prices based on
the forward price on the LME or on the COMEX. Such value is classified within Level 1 of the fair value
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hierarchy. Molybdenum prices are established by reference to the publication Platt’s Metals Week and are considered Level 1 in the
fair value hierarchy.
NOTE 17-CONCENTRATION OF RISK:
The Company operates four open-pit copper mines, five underground poly-metallic mines, two smelters and eight refineries in Peru
and Mexico and substantially all of its assets are located in these countries. There can be no assurances that the Company’s operations
and assets that are subject to the jurisdiction of the governments of Peru and Mexico will not be adversely affected by future actions of
such governments. Much of the Company’s products are exported from Peru and Mexico to customers principally in the United
States, Europe, Asia and South America.
Financial instruments, which potentially subject the Company to a concentration of credit risk, consist primarily of cash and cash
equivalents, short-term investments and trade accounts receivable.
The Company invests or maintains available cash with various banks, principally in the United States, Mexico, Europe and Peru, or in
commercial papers of highly-rated companies. As part of its cash management process, the Company regularly monitors the relative
credit standing of these institutions. At December 31, 2012, SCC had invested its cash and cash equivalents as follows:
Country
United States
Peru
Mexico
Europe
% of total cash (1)
% invested in one
institution
69.7%
5.4%
1.4%
23.5%
32.6%
63.5%
36.5%
100.0%
(1) 99.2% of the Company’s cash is in U.S. dollars.
During the normal course of business, the Company provides credit to its customers. Although the receivables resulting from these
transactions are not collateralized, the Company has not experienced significant problems with the collection of receivables.
The Company is exposed to credit loss in cases where the financial institutions with which it has entered into derivative transactions
(commodity, foreign exchange and currency/interest rate swaps) are unable to pay when they owe funds as a result of protection
agreements with them. To minimize the risk of such losses, the Company only uses highly-rated financial institutions that meet
certain requirements. The Company also periodically reviews the creditworthiness of these institutions to ensure that they are
maintaining their ratings. The Company does not anticipate that any of the financial institutions will default on their obligations.
The Company’s largest customers as percentage of accounts receivable and total sales were as follows:
Accounts receivable trade as of December 31,
Five largest customers
Largest customer
Total sales in year
Five largest customers
Largest customer
2012
2011
2010
40.0%
10.4%
28.8%
7.4%
35.9%
10.8%
28.7%
7.3%
49.1%
16.3%
29.6%
9.9%
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NOTE 18-RELATED PARTY TRANSACTIONS:
Receivable and payable balances with related parties are shown below (in millions):
Related parties receivable current:
Grupo Mexico, S.A.B de C.V. and affiliates
Asarco LLC
Compania Perforadora Mexico S.A.P.I. de C.V.
Mexico Proyectos y Desarrollos, S.A. de C.V. and affiliates
Related parties receivable non-current:
Mexico Generadora de Energia S.de R.L. (“MGE”)
Related parties payable:
Grupo Mexico S.A.B. de C.V. and affiliates
Asarco LLC
Higher Technology S.A.C.
Breaker, S.A. de C.V
Mexico Transportes Aereos S.A. de C.V. (“Mextransport”)
Mexico Proyectos y Desarrollos, S.A. de C.V. and affiliates
Ferrocarril Mexicano S.A. de C.V.
$
$
$
$
$
As of December 31,
2012
2011
0.7
0.2
0.1
1.0
2.0
—
2.0
0.1
0.2
0.5
0.3
1.3
4.4
1.8 $
—
0.5
—
2.3
$
184.0
$
— $
15.3
0.2
—
0.1
2.1
2.6
20.3
$
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 related 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 Company’s 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.
Purchase activity:
The following table summarizes the purchase activity with related parties in 2012, 2011 and 2010 (in millions):
Grupo Mexico and affiliates:
Grupo Mexico S.A B. de C.V
Ferrocarril Mexicano, S.A de C.V.
Mexico Proyectos y Desarrollos, S.A. de C.V. and
affiliates
Compania Perforadora Mexico S.A.P.I. de C.V.
Consorcio Tricobre
Consorcio CESEL — CONSUTEC
Asarco LLC
Other Larrea family companies:
Mexico Compania de Productos Automotrices, S.A. de
C.V.
Mextransport
Cadena Mexicana de Exhibicion S.A. de C.V.
Companies with relationships to SCC executive
officers’ families:
Higher Technology S.A.C.
Servicios y Fabricaciones Mecanicas S.A.C.
Sempertrans France Belting Technology
PIGOBA, S.A. de C.V.
Breaker, S.A. de C.V.
Total purchased
2012
2011
2010
$
13.9 $
13.9
13.9 $
11.6
49.5
2.2
—
—
58.6
—
2.7
—
34.4
1.8
0.5
3.3
23.4
0.2
2.8
—
3.1
0.2
0.3
0.8
2.3
147.5
$
1.9
0.6
0.2
0.2
5.3
100.1
$
$
140
10.9
3.5
29.0
0.2
5.3
—
6.6
2.3
3.0
0.2
2.8
0.2
0.4
0.6
1.5
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Grupo Mexico, the Company’s ultimate parent and the majority indirect stockholder of the Company, and its affiliates provide various
services to the Company. These services are primarily 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 for these services. The Company expects to continue to pay for these services in the future.
In addition, during 2010 the Company made donations of $0.8 million to Fundacion Grupo Mexico, an organization dedicated to
promoting social and economic development of the communities close to the Company’s Mexican operations.
The Company’s Mexican operations paid fees for freight services provided by Ferrocarril Mexicano, S.A de C.V. and for drilling
services provided by Compania Perforadora Mexico S.A.P.I. de C.V., both subsidiaries of Grupo Mexico.
The Company’s Mexican operations purchased from Asarco, a subsidiary of Grupo Mexico, scrap and other residual copper mineral.
Also, in the second quarter of 2010 the Company recovered from Asarco $7.7 million related to a previously written-off net accounts
receivable position. This recovery was recorded in the consolidated statement of earnings as follows: $5.0 million in cost of sales,
$1.6 million in other income and $1.1 million as interest income.
The Company’s Mexican operations paid fees for construction services provided by Mexico Constructora Industrial and its affiliates
and in 2011, the Company’s Peruvian operations paid fees for engineering and consulting services provided by Exploraciones Mineras
del Peru S.A.C., a Peruvian company in which Grupo Mexico Servicios de Ingenieria, S.A. de C.V has a 99.97%. The three
companies are subsidiaries of Mexico Proyectos y Desarrollos, S.A. de C.V. a direct subsidiary of Grupo Mexico.
In 2005, the Company organized MGE, as a subsidiary of Minera Mexico, for the construction of two power plants to supply power to
the Company’s Mexican operations. In May 2010, the Company’s Mexican operations granted a $350 million line of credit to MGE
for the construction of the power plants. That line of credit was due on December 31, 2012 and carried an interest rate of 4.18%. In
the first quarter of 2012, Controladora de Infraestructura Energetica Mexico, S. A. de C. V., an indirect subsidiary of Grupo Mexico,
acquired 99.999% of MGE through a capital subscription of 1,928.6 million of Mexican pesos (approximately $150 million), reducing
Minera Mexico’s participation to less than 0.001%. As consequence, of this change in control MGE became an indirect subsidiary of
Grupo Mexico. Additionally, at the same time, MGE paid $150 million to the Company’s Mexican operations partially reducing the
total debt. At December 31, 2012, the outstanding balance of $184.0 million was restructured as subordinated debt of MGE. The
$184.0 million includes $37.6 million drawn on the line of credit in 2012 and $146.4 million drawn through December 31, 2011. It is
expected that MGE will complete the construction of the first power plant in 2013 and the second in 2014. MGE will repay its debt to
the Company using a percentage of its profits until such time as the debt is satisfied.
The Company’s Peruvian operations paid fees for engineering and consulting services provided by Consorcio Tricobre and Consorcio
CESEL-CONSUTEC. Both are Peruvian consortiums in which Servicios de Ingenieria Consultec, S.A. de C. V., a subsidiary of
Grupo Mexico, had a 42.7% and 50% participation, respectively. These consortiums were dissolved in 2011.
The Larrea family controls a majority of the capital stock of Grupo Mexico, and has extensive interests in other businesses, including
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 the lease of office space and air transportation. In connection with this, the Company paid fees for
maintenance services and sale of vehicles provided by Mexico Compania de Productos Automotrices, S.A. de C.V., a company
controlled by the Larrea family liquidated in 2011.
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Additionally, in 2007, the Company’s Mexican subsidiaries provided guaranties for two loans obtained by MexTransport, a company
controlled by the Larrea family, from Bank of Nova Scotia in Mexico. One of these loans has been repaid and the remaining loan
requires semi-annual repayments. Conditions and balance as of December 31, 2012 are as follows:
Original loan balance (in millions)
Maturity
Interest rate
Remaining balance at December 31, 2012 (in millions)
Loan Open
$8.5
August 2013
Libor + 0.15%
$1.3
MexTransport provides aviation services to the Company’s Mexican operations. The guaranty provided to MexTransport is backed up
by the transport services provided by MexTransport to the Company’s Mexican subsidiaries.
In 2010, the Company purchased publicity services from Cadena Mexicana de Exhibicion S.A. de C.V., a subsidiary of Grupo
Cinemex, a company controlled by the Larrea family.
The Company purchased industrial materials from Higher Technology S.A.C., and paid fees for maintenance services provided by
Servicios y Fabricaciones Mecanicas S.A.C. Mr. Carlos Gonzalez, the son of SCC’s Chief Executive Officer, has a proprietary interest
in these companies.
The Company purchased industrial material from Sempertrans France Belting Technology, in which Mr. Alejandro Gonzalez is
employed as a sales representative. Also, the Company purchased 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 SCC’s Chief Executive Officer.
The Company purchased industrial material and services from Breaker, S.A. de C.V., a company in which Mr. Jorge Gonzalez, son-
in-law of SCC’s Chief Executive Officer, has a proprietary interest.
Sales activity:
The Company sold copper cathodes, rod and anodes, as well as sulfuric acid, silver, gold and lime to Asarco. In addition, the
Company received fees for building rental and maintenance services provided to Mexico Proyectos y Desarrollos, S.A. de C.V. and its
affiliates, and to Perforadora Mexico S.A.P.I de C.V., both subsidiaries of Grupo Mexico and to Mextransport, a Company controlled
by the Larrea family.
The following table summarizes the sales and other revenue activity with related parties in 2012 and 2011 (in millions).
Asarco
Mexico Proyectos y Desarrollos, S.A. de
C.V. and affiliates
Perforadora Mexico S.A. de C.V.
Mextransport
Total
2012
2011
23.5
$
68.8
$
2010
0.5
—
0.9
24.9
$
0.5
0.2
—
69.5
$
43.5
0.5
0.2
—
44.2
$
$
It is anticipated that in the future the Company will enter into similar transactions with these same parties.
NOTE 19-SEGMENT AND RELATED INFORMATION:
Company management views Southern Copper as having three reportable segments and manages it on the basis of these segments.
The reportable segments identified by the Company are: the Peruvian operations, the Mexican open-pit operations and the Mexican
underground mining operations segment identified as the IMMSA unit.
The three reportable segments identified are groups of mines, each of which constitute an operating segment, 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
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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 Company’s sales. The segments identified by the Company are:
1. Peruvian operations, which include the Toquepala and Cuajone mine complexes and the smelting and refining plants,
industrial railroad and port facilities which service both mines. The Peruvian operations produce copper, with production
of by-products of molybdenum, silver and other material.
2. Mexican open-pit operations, which include La Caridad and Buenavista mine complexes and the smelting and refining
plants and support facilities which service both mines. The Mexican open-pit operations produce copper, with production
of by-products of molybdenum, silver and other material.
3. Mexican underground mining operations, which include five underground mines that produce zinc, copper, silver and
gold, a coal mine which produces coal and coke, and a zinc refinery. 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 Company’s Ilo 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 Company’s 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 Company’s Mexican open-pit mines.
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 Company’s
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 differently in each of the countries. These key differences result in the Company taking varying decisions
with regards to open-pit operations in the two countries.
The IMMSA segment includes five mines whose minerals are processed in the same refinery. This segment also includes an
underground coal mine. Sales of product from this segment are recorded as revenues of the Company’s IMMSA unit. While the
Mexican underground mines are subject to a very similar regulatory environment of the Mexican open-pit mines, the nature of the
products and processes of two Mexican operations vary distinctly. These differences cause the Company’s 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 Company’s 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.
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Financial information relating to Company’s segments is as follows:
Year Ended December 31, 2012
(in millions)
Mexican
Open-pit
Mexican
IMMSA Unit
Peruvian
Operations
Corporate
and other
eliminations
Total
Consolidated
Net sales outside of segments
Intersegment sales
Cost of sales (exclusive of depreciation,
amortization and depletion)
Selling, general and administrative
Depreciation, amortization and depletion
Legal fees related to the SCC shareholder
$
3,338.5
$
1,228.2
34.4
145.6
378.5
135.1
292.4
14.6
25.2
1,380.5
48.6
160.3
$
2,952.3 $
—
(135.1)
$
5.2
1,925.1
$
28.2
153.2
$
14.5
1,348.4 $
$
derivative lawsuit
Exploration
Operating income
Less:
Interest, net
Gain on short term investment
Gain on sale of investment
Other income (expense)
Income taxes
Equity earnings of affiliate
Non-controlling interest
Income attributable to SCC
Capital expenditures
Property, net
Total assets
Net sales outside of segments
Intersegment sales
Cost of sales (exclusive of depreciation,
amortization and depletion)
Selling, general and Administrative
Depreciation, amortization and depletion
Exploration
Operating income
Less:
Interest, net
Other income (expense)
Income taxes
Non-controlling interest
Income attributable to SCC
6,669.3
—
2,769.3
101.3
325.7
316.2
47.9
3,108.9
(157.2)
10.6
18.2
(7.0)
(1,080.9)
48.7
(6.7)
1,934.6
(131.8)
3.7
(5.4)
316.2
—
(317.8)
$
6,818.7
—
2,763.2
104.5
288.1
37.5
3,625.4
(172.8)
(4.0)
(1,104.3)
(7.9)
2,336.4
612.9
4,429.9
8,062.7
$
$
$
$
$
$
$
804.4
2,444.9
4,241.4
$
$
$
56.0
350.9
873.1
$
$
$
257.9 $
2,231.4 $
3,353.0 $
(66.4) $
129.5
$
$
1,916.2
1,051.9
5,156.7
10,383.7
Year Ended December 31, 2011
(in millions)
Mexican
Open-pit
Mexican
IMMSA Unit
Peruvian
Operations
Corporate
and other
eliminations
Total
Consolidated
$
3,212.1
—
$
1,115.8
34.1
133.6
3.5
1,925.1
$
$
420.1
126.1
309.3
14.7
24.5
22.0
175.7
$
$
3,186.5 $
—
1,441.0
50.8
140.6
12.0
1,542.1 $
— $
(126.1)
(102.9)
4.9
(10.6)
—
(17.5)
Capital expenditures
Property, net
Total assets
$
$
$
357.6
1,827.2
3,471.6
$
$
$
48.7
320.1
743.4
$
$
$
205.5 $
2,225.9 $
3,164.0 $
1.1
56.7
683.7
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Table of Contents
Net sales outside of segments
Intersegment sales
Cost of sales (exclusive of depreciation,
amortization and depletion)
Selling, general and administrative
Depreciation, amortization and depletion
Exploration
Operating income
Less:
Interest, net
Other income (expense)
Income taxes
Non-controlling interest
Income attributable to SCC
Capital expenditures
Property, net
Total assets
SALES VALUE PER SEGMENT:
Year Ended December 31, 2010
(in millions)
Mexican
Open-pit
Mexican
IMMSA
Unit
Peruvian
Operations
Corporate
and other
eliminations
Total
Consolidated
$
1,618.7
29.8
$
366.7
146.0
$
751.7
31.5
122.1
5.2
738.0
$
307.4
13.4
22.7
15.5
153.7
$
$
3,125.9 $
—
1,206.2
52.4
134.0
13.6
1,719.7 $
38.2
(175.8)
$
(136.3)
3.0
2.9
—
(7.2)
$
$
$
109.8
1,583.5
2,510.4
$
$
$
29.8
296.3
747.7
$
$
$
264.2 $
2,164.7 $
3,430.9 $
4.9
50.5
1,439.0
$
$
$
$
5,149.5
—
2,129.0
100.3
281.7
34.3
2,604.2
(152.7)
(20.7)
(868.1)
(8.7)
1,554.0
408.7
4,095.0
8,128.0
(in millions)
Copper
Molybdenum
Silver
Zinc
Other
Total
(in millions)
Copper
Molybdenum
Silver
Zinc
Other
Total
(in millions)
Copper
Molybdenum
Silver
Zinc
Other
Total
Mexican
Open-pit
Mexican
IMMSA Unit
Peruvian
Operations
Corporate, Other
& Eliminations
Year Ended December 31, 2012
62.3
—
161.5
195.9
93.9
513.6
$
$
2,532.0
179.2
113.6
—
127.5
2,952.3
$
$
(62.3) $
—
(60.3)
—
(12.5)
(135.1) $
Total
Consolidated
5,136.9
450.5
495.3
195.9
390.7
6,669.3
Year Ended December 31, 2011
Mexican
IMMSA Unit
Peruvian
Operations
Corporate, Other
& Eliminations
Total
Consolidated
57.2
—
184.2
209.8
95.0
546.2
$
$
2,720.0
233.3
121.2
—
112.0
3,186.5
$
$
(57.2) $
—
(61.1)
—
(7.8)
(126.1) $
5,229.6
544.1
492.4
209.8
342.8
6,818.7
Year Ended December 31, 2010
Mexican
IMMSA Unit
Peruvian
Operations
Corporate, Other
& Eliminations
Total
Consolidated
68.9
—
140.4
211.7
91.7
512.7
$
$
2,649.7
322.1
86.6
—
67.5
3,125.9
$
$
145
(61.5) $
—
(61.8)
0.8
(15.1)
(137.6) $
3,745.8
683.4
307.7
212.5
200.1
5,149.5
$
$
$
$
$
$
2,604.9
271.3
280.5
—
181.8
3,338.5
Mexican
Open-pit
2,509.6
310.8
248.1
—
143.6
3,212.1
Mexican
Open-pit
1,088.7
361.3
142.5
—
56.0
1,648.5
$
$
$
$
$
$
Table of Contents
NET SALES AND GEOGRAPHICAL INFORMATION:
Net sales to respective countries were as follows:
(in millions)
United States
Europe
Mexico
Peru
Brazil
Chile
Latin America, other
Asia
Derivative instruments
Total
2012
Years Ended December 31,
2011
2010
$
$
1,567.4
1,365.1
1,676.4
296.2
449.0
443.5
108.3
763.4
—
6,669.3
$
$
2,103.7
1,292.1
1,269.3
261.7
598.5
515.8
101.2
662.9
13.5
6,818.7
$
$
1,281.3
1,066.6
872.4
315.8
446.6
503.0
167.2
538.5
(41.9)
5,149.5
PROVISIONAL SALES PRICE:
At December 31, 2012, the Company has recorded provisionally priced sales of copper at average forward prices per pound, and
molybdenum at the year-end market price per pound. These sales are subject to final pricing based on the average monthly LME and
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 December 31, 2012:
Pounds
of copper
(millions)
19.7
19.7
Pounds
of molybdenum
(millions)
3.0
3.1
2.6
0.1
8.8
Priced at
Month of settlement
January 2013
3.59
3.59 Total
Market price
Month of settlement
January 2013
February 2013
11.60
11.60
11.60 March 2013
11.60 April 2013
11.60 Total
Provisional sales price adjustments included in accounts receivable and net sales were as follows at December, 31 (in millions):
Copper
Molybdenum
Total
As of December 31,
2012
2011
$
$
2.9
3.7
6.6
$
$
1.4
(3.4)
(2.0)
Management believes that the final pricing of these sales will not have a material effect on the Company’s financial position or results
of operations.
LONG-TERM SALES CONTRACTS:
The following are the significant outstanding long-term contracts:
Under the terms of a sales contract with Mitsui & Co. Ltd. (“Mitsui”), the Company is required to supply Mitsui with 48,000 tons of
copper cathodes annually through 2013. If the shipment destination is Asia, the pricing of the cathodes is based
146
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upon the LME monthly average settlement price. However, if the destination of shipments is the United States, the pricing of the
cathodes is based upon the COMEX monthly average settlement price. In either case a producer premium will be included which is
agreed upon annually based on world market terms. 90,000 tons related to a prior contract (period 1994-2000) will be supplied as
follows: 48,000 in 2014 and 42,000 in 2015.
Under the terms of a sales contract with Molibdenos y Metales, S.A., SPCC Peru Branch is required to supply 24,800 tons of
molybdenum concentrates from 2013 through 2015. This contract may be extended for one more calendar year during each
October to maintain a three year period unless either party decides to terminate the agreement. The sale price of the molybdenum
concentrates is based on the monthly average of the high and low Metals Week Dealer Oxide quotation. The roasting charge
deduction is agreed based on international market terms.
Under the terms of a sales contract with Molymex, S.A. de C.V., Minera Mexico is required to supply at least the 85% of its
molybdenum concentrates production from 2012 through 2015. The sale price of the molybdenum concentrate is based on the
monthly average of the high and low Metals Week Dealer Oxide quotation. The roasting charge deduction is negotiated based on
international market terms.
NOTE 20-QUARTERLY DATA (unaudited)
(in millions, except per share data)
1st
2nd
2012
3rd
4th
Year
Net sales
Gross profit
Operating income
Net income
Net income attributable to SCC
Per share amounts attributable to SCC:
Net earnings basic and diluted
Dividend per share (1)
Net sales
Gross profit
Operating income
Net income
Net income attributable to SCC
Per share amounts attributable to SCC (2):
Net earnings basic and diluted
Dividend per share
$ 1,805.9 $ 1,659.9 $ 1,552.4 $ 1,651.1 $ 6,669.3
853.4 $ 3,574.3
812.6 $ 3,108.9
533.2 $ 1,941.4
531.8 $ 1,934.6
$ 1,007.1 $
972.9 $
623.6 $
621.4 $
913.6 $
875.6 $
565.3 $
563.5 $
800.2 $
447.8 $
219.3 $
217.9 $
$
$
$
$
$
0.73 $
0.54 $
0.66 $
0.53 $
0.26 $
0.24 $
0.63 $
2.75 $
2.28
4.06
1st
2nd
2011
3rd
$ 1,602.0 $ 1,801.5 $ 1,745.9 $ 1,669.3 $ 6,818.7
944.2 $ 3,767.4
901.9 $ 3,625.4
539.1 $ 2,344.4
536.9 $ 2,336.4
794.5 $ 1,032.6 $
998.7 $
762.7 $
660.1 $
480.1 $
658.0 $
478.4 $
996.1 $
962.1 $
665.1 $
663.1 $
4th
Year
$
$
$
$
$
$
0.56 $
0.57 $
0.77 $
0.55 $
0.78 $
0.61 $
0.62 $
0.70 $
2.73
2.43
(1) Dividend paid in the first quarter of 2012 include a cash dividend of $0.19 and a stock dividend of $0.35.
(2) Per share amounts have been retroactively adjusted to reflect the first quarter 2012 stock dividend.
NOTE 21—SUBSEQUENT EVENTS
DIVIDENDS:
On January 24, 2013, the Board of Directors authorized a dividend of $0.24 per share paid on February 26, 2013, to shareholders of
record at the close of business on February 13, 2013.
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OTHER COMPANY INFORMATION:
ANNUAL MEETING
The annual stockholders meeting of Southern Copper Corporation will be held on Thursday, April 25, 2013, at 9:00 am, Mexico City
time, at Edificio Parque Reforma, Campos Eliseos No. 400, 9th Floor, Colonia Lomas de Chapultepec, Mexico City, Mexico.
TRANSFER AGENT, REGISTRAR AND STOCKHOLDERS’ SERVICES
Computershare
480 Washington Boulevard
Jersey City, NJ 07310-1900
Phone: (866)230-0172
DIVIDEND REINVESTMENT PROGRAM
SCC stockholders can have their dividends automatically reinvested in SCC common shares. SCC pays all administrative and
brokerage fees. This plan is administered by Computershare. For more information, contact Computershare at (866)230-0172.
STOCK EXCHANGE LISTING
The principal markets for SCC’s common stock are the NYSE and the Lima Stock Exchange. SCC’s common stock symbol is SCCO
on both the NYSE and the Lima Stock Exchange.
OTHER SECURITIES
The Branch in Peru has issued, in accordance with Peruvian Law, “investment shares” (formerly named labor shares) that are quoted
on the Lima Stock Exchange under symbols SPCCPI1 and SPCCPI2. Transfer Agent, registrar and stockholders services are provided
by Banco de Credito del Peru, Avenida Centenario 156, La Molina, Lima 12, Peru.
Telephone (51-1)313-2478, Fax (51-1)313-2556.
OTHER CORPORATE INFORMATION
For other information on the Company or to obtain, free of charge, additional copies of the Annual Report on Form 10-K, contact the
Investor Relations Department at:
1440 East Missouri Avenue, Suite 160 Phoenix, Az. 85014, USA
Telephone: (602)264-1375
SOUTHERN COPPER CORPORATION
USA
1440 E Missouri Ave, Suite 160
Phoenix, AZ 85014, U. S. A.
Phone: (602) 264-1375
Fax: (602) 264-1397
Mexico
Campos Eliseos N° 400
Colonia Lomas de Chapultepec
Delegación Miguel Hidalgo
C.P. 11000 - MEXICO
Phone: (5255) 1103-5000
Fax: (5255) 1103-5567
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Peru
Av. Caminos del Inca 171
Urb. Chacarilla del Estanque
Santiago de Surco
Lima 33 — PERU
Phone: (511) 512-0440
Fax: (511) 512-0492
Website: www.southerncoppercorp.com
Email address: southerncopper@southernperu.com.pe
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Southern Copper Corporation:
We have audited the accompanying consolidated balance sheets of Southern Copper Corporation and subsidiaries (the “Company”) as
of December 31, 2012 and 2011, and the related consolidated statements of earnings, comprehensive income, equity, and cash flows
for each of the three years in the period ended December 31, 2012. Our audit also included the financial statement schedules listed in
the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Southern Copper
Corporation and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 27, 2013 expressed an unqualified opinion on the Company’s internal control over financial reporting.
Galaz, Yamazaki, Ruiz Urquiza S.C.
Member of Deloitte Touche Tohmatsu Limited
C.P.C. Arturo Vargas Arellano
Mexico City, Mexico
February 27, 2013
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Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNT ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
As of December 31, 2012, the Company conducted an evaluation under the supervision and with the participation of the Company’s
Disclosure Committee and the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness and the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Chief
Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective
as of December 31, 2012, 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 SEC’s 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 CONTROL OVER FINANCIAL REPORTING
There was no change in the Company’s internal control 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 December 31, 2012 that has
materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the Company. Under the supervision and with the participation of management, including the
Company’s principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its
internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organization of the Treadway Commission. Based on the evaluation made under this framework, management concluded
that as of December 31, 2012 such internal control over financial reporting is effective.
Because of its inherent limitations, internal control over financial reporting, may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Our internal control over financial reporting as of December 31, 2012, has been audited by Galaz, Yamazaki, Ruiz Urquiza, S.C.
Member of Deloitte Touche Tohmatsu Limited, an independent registered public accounting firm, as stated in their report which is
provided below.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
To the Board of Directors and Stockholders of Southern Copper Corporation:
We have audited the internal control over financial reporting of Southern Copper Corporation and subsidiaries (the “Company”) as of
December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying “Management’s Report on Internal Control over Financial Reporting” appearing in Item 9A. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal
executive and principal financial officers, or persons performing similar functions, and effected by the Company’s Board of Directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to
the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2012 of the Company
and our report dated February 27, 2013 expressed an unqualified opinion on those financial statements and financial statement
schedules.
Galaz, Yamazaki, Ruiz Urquiza S.C.
Member of Deloitte Touche Tohmatsu Limited
C.P.C. Arturo Vargas Arellano
Mexico City, Mexico
February 27, 2013
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ITEM 9B. OTHER INFORMATION
None.
ITEM 10,11,12, 13 AND 14
PART III
Set forth below are the executive officers of the Company, their ages as of January 31, 2013 and their positions.
EXECUTIVE OFFICERS OF THE REGISTRANT
Age
59
Name
German Larrea Mota
Velasco
Oscar Gonzalez Rocha
Xavier Garcia de
Quevedo Topete
Genaro Guerrero Diaz
Mercado
54
Raul Jacob Ruisanchez
Vidal Muhech Dip
72
Remigio Martinez Muller 69
74
66
53
Chairman of the Board and Director
Position
President, Chief Executive Officer and Director
Chief Operating Officer and Director of SCC, President and Chief Executive Officer
of Southern Copper Minera Mexico
Vice President, Finance and Chief Financial Officer
Comptroller
Vice President, Projects
Vice President, Explorations
German Larrea Mota-Velasco has served as our Chairman of the Board since December 1999, Chief Executive Officer from
December 1999 to October 2004 and as a member of our Board of Directors since November 1999. He has been Chairman of the
board of directors, President and Chief Executive Officer of Grupo Mexico (holding) since 1994. Mr. Larrea has been Chairman of
the board of directors and Chief Executive Officer of Grupo Ferroviario Mexicano S.A. de C.V (railroad company) since 1997.
Mr. Larrea was previously Executive Vice Chairman of Grupo Mexico and has been a member of the board of directors since 1981.
He is also Chairman of the board of directors and Chief Executive Officer of Empresarios Industriales de Mexico, S.A. de C.V.
(holding) and Fondo Inmobiliario (real estate company), since 1992. He founded Grupo Impresa, a printing and publishing company
in 1978, remaining as the Chairman and Chief Executive Officer until 1989 when the company was sold. He is also a director of
Banco Nacional de Mexico, S.A. (Citigroup), which forms part of Grupo Financiero Banamex, S.A. de C.V. since 1992, Consejo
Mexicano de Hombres de Negocios, and Grupo Televisa, S.A.B. since 1999.
Oscar Gonzalez Rocha has served as our President since December 1999 and our President and Chief Executive Officer since
October 21, 2004. He has been our Director since November 1999. Previously, he was our President and General Director and Chief
Operating Officer from December 1999 to October 20, 2004. He has been a director of Grupo Mexico since 2002. He has been the
Chief Executive Officer and a director of Asarco since August 2010. Previously he was General Director of Mexicana de Cobre, S.A.
de C.V. from 1986 to 1999 and of Buenavista del Cobre S.A. de C.V. (formerly Mexicana de Cananea, S.A. de C.V.) from 1990 to
1999. He was an alternate director of Grupo Mexico from 1988 to April 2002.
Xavier Garcia de Quevedo Topete has served as President of Minera Mexico since September 2001 and President and Chief
Executive Officer of Southern Copper Minera Mexico and our Chief Operating Officer since April 12, 2005. He also served as a
member of our Board of Directors since November 1999. He has been the President and Chief Executive Officer of AMC since
September 7, 2007. From December 2009 to June 2010, he was Chairman and Chief Executive Officer of Asarco. He was previously
President of Asarco from November 1999 to September 2001. Mr. Garcia de Quevedo initiated his professional career in 1969 with
Grupo Mexico. He was President of Grupo Ferroviario Mexicano, S.A. de C.V. and of Ferrocarril Mexicano, S.A. de C.V. from
December 1997 to December 1999, and General Director of Exploration and Development of Grupo Mexico from 1994 to 1997. He
has been a director of Grupo Mexico since April 2002. He was also Vice President of Grupo Condumex S.A. de C.V. for eight years.
Mr. Garcia de Quevedo was the Chairman of the Mining Chamber of Mexico from November 2006 to August 2009.
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Genaro Guerrero Diaz-Mercado has served as our Vice President, Finance and Chief Financial Officer since January 2, 2008.
Mr. Guerrero has held various Treasury and financial positions with Grupo Mexico and certain of its affiliates and subsidiaries since
1992. On August 1, 2000, Mr. Guerrero was transferred to Asarco, a subsidiary of Grupo Mexico. He was the Vice President
Finance, Chief Financial Officer and Treasurer of Asarco until May 3, 2006. Mr. Guerrero held a key financial role with Southern
Peru Limited, a subsidiary of the Company, until December 31, 2007.
Raul Jacob Ruisanchez has served as our Comptroller since October 27, 2011. He has held various positions focused primarily in
financial planning, corporate finance, investor relations and project evaluation with the Company since 1992. In September 2011, he
was appointed Director of Controller and Finance of the Company’s Peruvian Branch and Vice President and Chief Financial Officer
of Southern Peru Limited, one of our subsidiaries. In 2010, Mr. Jacob was considered by Institutional Investor among the top three
investor relations executives of Latin America. He is currently a member of the consulting board of the MBA program (Finance) of
the Universidad del Pacífico in Lima, Peru. Until March of 2010, he was President of the Strategic Studies Center of IPAE, an
entrepreneurial association. Between 2004 and 2006, he was the President of the Finance Affairs Committee of the American
Chamber of Commerce of Peru.
Vidal Muhech Dip has served as our Vice President, Projects since April 25, 2002. He has been Corporate Director of Engineering
and Construction of Grupo Mexico since April 1995. Previously, he was Director of Engineering and Construction of Industrial
Minera Mexico S.A. de C.V. from 1985 to 1995.
Remigio Martinez Muller has served as our Vice President, Exploration since April 2002. He has been Corporate Director of
Exploration of Grupo Mexico since 2002. From 1990 to 2001, he was Director of Exploration of Mexicana de Cobre, S.A. de C.V.
Mr. Martinez has held several other managerial positions within Grupo Mexico and its predecessor, Asarco Mexicana.
Information in response to the additional disclosure requirements specified by Part III, Items 10, 11, 12, 13 and 14 will be included in
a definitive proxy statement, which will be filed pursuant to Regulation 14A of the 1934 Securities Exchange Act, as amended, prior
to April 25, 2013, or will be provided by amendment to this Form 10-K, also to be filed no later than April 30, 2013.
The information contained in such definitive proxy statement is incorporated herein by reference, excluding the information under the
caption “Compensation Committee Report,” which shall not be deemed filed.
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PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES.
The following documents are filed as part of this report:
1. Financial Statements
The following financial statements of Southern Copper Corporation and its subsidiaries are included at the indicated pages of the
document as stated below:
Consolidated statement of earnings for the years ended December 31, 2012, 2011 and 2010
Consolidated statement of comprehensive income for the years ended December 31, 2012, 2011 and 2010
Consolidated balance sheet at December 31, 2012 and 2011
Consolidated statement of cash flows for the years ended December 31, 2012, 2011 and 2010
Consolidated statement of changes in equity for the years ended December 31, 2012, 2011 and 2010
Notes to the consolidated financial statements
Reports of Independent Registered Public Accounting Firm
Form 10-K
Pages
100
101
102
103-104
105
106-147
150
2. Exhibits:
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
(a) Amended and Restated Certificate of Incorporation, filed on October 11, 2005.
(b) Certificate of Amendment of Amended and Restated Certificate of Incorporation dated May 2, 2006.
(c) Certificate of Amendment of Amended and Restated Certificate of Incorporation dated May 28, 2008.
By-Laws, as last amended on January 27, 2011.
Indenture governing $200 million 6.375% Notes due 2015, by and among Southern Copper Corporation, The
Bank of New York and The Bank of New York (Luxembourg) S.A.
(a) Indenture governing $600 million 7.500% Notes due 2035, by and among Southern Copper Corporation,
The Bank of New York and The Bank of New York (Luxembourg) S.A.
(b) Indenture governing $400 million 7.500% Notes due 2035, by and among Southern Copper Corporation,
The Bank of New York, and The Bank of New York (Luxembourg) S.A.
Form of 6.375% Note (included in Exhibit 4.1).
Form of New 7.500% Note (included in Exhibit 4.2(a)).
Form of New 7.500% Note (included in Exhibit 4.2(b)).
Indenture, dated as of April 16, 2010, between Southern Copper Corporation and Wells Fargo Bank, National
Association, as trustee, pursuant to which $400 million of 5.375% Notes due 2020 and $1.1 billion of 6.750%
Notes due 2040 were issued.
First Supplemental Indenture, dated as of April 16, 2010, between Southern Copper Corporation and Wells
Fargo Bank, National Association, as trustee, pursuant to which the 5.375% Notes due 2020 were issued.
155
Table of Contents
4.8
4.9
4.10
4.11
4.12
4.13
4.14
10.2
10.3
10.4
12.1
14.0
21.1
23.1
31.1
31.2
32.1
32.2
Second Supplemental Indenture, dated as of April 16, 2010, between Southern Copper Corporation and Wells
Fargo Bank, National Association, as trustee, pursuant to which the 6.750% Notes due 2040 were issued.
Form of 5.375% Notes due 2020.
Form of 6.750% Notes due 2040.
Third Supplemental Indenture, dated as of November 8, 2012, between Southern Copper Corporation and Wells
Fargo Bank, National Association, as trustee, pursuant to which the 3.500% Notes due 2022 were issued.
Fourth Supplemental Indenture, dated as of November 8, 2012, between Southern Copper Corporation and
Wells Fargo Bank, National Association, as trustee, pursuant to which the 5.250% Notes due 2042 were issued.
Form of 3.500% Notes due 2022.
Form of 5.250% Notes due 2042.
Form of Directors’ Stock Award Plan of the Company.
Service Agreement entered into by the Company with a subsidiary of Grupo Mexico S.A.B. de C.V., assigned
upon the same terms and conditions to Grupo Mexico S.A.B. de C.V. in February 2004.
Agreement and Plan of Merger, dated as of October 21, 2004, by and among Southern Copper Corporation,
SCC Merger Sub, Inc., Americas Sales Company, Inc., Americas Mining Corporation and Minera Mexico S.A.
de C.V.
Computation of financial ratios.
Code of Business Conduct and Ethics adopted by the Board of Directors on May 8, 2003 and amended by the
Board of Directors on October 21, 2004.
Subsidiaries of the Company.
Consent of Registered Public Accounting Firm (Galaz, Yamazaki, Ruiz Urquiza, S.C., Member of Deloitte
Touche Tohmatsu, Limited).
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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. 33-8328.
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. 33-8328.
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.DEF XBRL Taxonomy Extension Definition Linkbase Document (submitted electronically with this
156
Table of Contents
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).
The exhibit listed as 10.2 is the management contract or compensatory plan or arrangement required to be filed pursuant to Item 15
(b) of Form 10-K.
Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language):
(i) the Consolidated Statement of Earnings for the years ended December 31, 2012, 2011 and 2010; (ii) the Consolidated Statement of
Comprehensive Income for the years ended December 31, 2012, 2011 and 2010; (iii) the Consolidated Balance Sheet at
December 31, 2012 and 2011; (iv) the Consolidated Statement of Cash Flows for the years ended December 31, 2012, 2011 and
2010; (v) the Consolidates Statement of changes in equity for the years ended December 31, 2012, 2011 and 2010, and (vi) the Notes
to Consolidated Financial Statements tagged in detail. 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.
157
Table of Contents
3. Schedule II
Valuation and Qualifying Accounts and Reserves (in millions):
Reserve deducted in balance sheet
to which applicable:
Accounts Receivable:
2012
2011
2010
Notes issued under par:
2012
2011
2010
Deferred Tax Assets:
2012
2011
2010
Balance at
beginning of
period
Charged to
costs and
expenses
Additions
Additions
Deduction/
Application
Balance at
end of period
—
—
4.6
25.4
25.9
16.1
2.2
30.0
30.5
—
—
—
0.5
0.5
0.5
158
—
—
—
22.4
10.3
—
—
4.6
—
—
—
2.2
27.8
0.5
—
—
—
47.3
25.4
25.9
—
2.2
30.0
Table of Contents
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly
caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
SOUTHERN COPPER CORPORATION
(Registrant)
By:
/s/Oscar Gonzalez Rocha
Oscar Gonzalez Rocha
President and Chief Executive Officer
Date: February 27, 2013
Pursuant to requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ German Larrea Mota-Velasco
German Larrea Mota-Velasco
/s/ Oscar Gonzalez Rocha
Oscar Gonzalez Rocha
/s/ Genaro Guerrero
Genaro Guerrero
/s/ Raul Jacob Ruisanchez
Raul Jacob Ruisanchez
/s/ German Larrea Mota-Velasco
German Larrea Mota-Velasco
/s/ Emilio Carrillo Gamboa
Emilio Carrillo Gamboa
/s/ Alfredo Casar Perez
Alfredo Casar Perez
/s/ Luis Castelazo Morales
Luis Castelazo Morales
/s/ Enrique Castillo Sanchez Mejorada
Enrique Castillo Sanchez Mejorada
/s/ Xavier Garcia de Quevedo
Xavier Garcia de Quevedo
Date: February 27, 2013
Chairman of the Board, and Director
President, Chief Executive Officer and Director
Vice President, Finance, Chief Financial Officer
(principal Financial Officer)
Comptroller (Principal Accounting Officer)
DIRECTORS
/s/ Oscar Gonzalez Rocha
Oscar Gonzalez Rocha
/s/ Daniel Muniz Quintanilla
Daniel Muniz Quintanilla
/s/ L. Miguel Palomino Bonilla
L. Miguel Palomino Bonilla
/s/ Gilberto Perezalonso Cifuentes
Gilberto Perezalonso Cifuentes
/s/ Juan Rebolledo Gout
Juan Rebolledo Gout
/s/ Carlos Ruiz Sacristan
Carlos Ruiz Sacristan
159
Table of Contents
Sequential
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
Supplemental information
Southern Copper Corporation
Exhibit Index
Document Description
Page
Number
(a) Amended and Restated Certificate of Incorporation, filed on October 11, 2005. (Filed as Exhibit 3.1
to the Company’s Quarterly Report on Form 10-Q for the third quarter of 2005 and incorporated
herein by reference).
(b) Certificate of Amendment of Amended and Restated Certificate of Incorporation dated May 2, 2006.
(Filed as Exhibit 3.1 to Registration Statement on Form S-4, File No. 333-135170, filed on June 20,
2006 and incorporated herein by reference).
(c) Certificate of Amendment of Amended and Restated Certificate of Incorporation dated May 28,
2008. (Filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the second quarter
of 2008 and incorporated herein by reference).
By-Laws, as last amended on January 27, 2011. (Filed as Exhibit 3.2 to the Company´s 2010 Annual
Report on Form 10-K incorporated herein by reference).
Indenture governing $200 million 6.375% Notes due 2015, by and among Southern Copper Corporation,
The Bank of New York and The Bank of New York (Luxembourg) S.A. (Filed as Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed on August 1, 2005 and incorporated by reference).
(a) Indenture governing $600 million 7.500% Notes due 2035, by and among Southern Copper
Corporation, The Bank of New York and The Bank of New York (Luxembourg) S.A. (Filed as
Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 1, 2005 and incorporated
herein by reference).
(b) Indenture governing $400 million 7.500% Notes due 2035, by and between Southern Copper
Corporation, The Bank of New York, and The Bank of New York (Luxembourg) S.A. (Filed as
Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 1, 2005 and incorporated
herein by reference).
Form of 6.375% Note (included in exhibit 4.1).
Form of New 7.500% Note (included in Exhibit 4.2(a)).
Form of New 7.500% Note (included in Exhibit 4.2(b))
Indenture, dated as of April 16, 2010, between Southern Copper Corporation and Wells Fargo Bank,
National Association, as trustee, pursuant to which $400 million of 5,375% Notes due 2020 and $1.1
billion of 6.750% Notes due 2040 were issued. (Filed as Exhibit 4.1 to the Company’s Current Report on
Form 8-K filed on April 19, 2010 and incorporated herein by reference).
First Supplemental Indenture dated as of April 16, 2010, between Southern Copper Corporation and
Wells Fargo Bank, National Association, as trustee, pursuant to which the 5.375% Notes due 2020 were
issued (Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on April 19, 2010 and
incorporated herein by reference).
Second Supplemental Indenture, dated as of April 16, 2010, between Southern Copper Corporation and
Wells Fargo Bank, National Association, as trustee, pursuant to which the 6.750% Notes due 2040 were
issued. (Filed as an Exhibit to the Company’s Current
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4.9
4.10
4.11
4.12
4.13
4.14
10.2
10.3
10.4
12.1
14.0
21.1
23.1
31.1
31.2
32.1
32.2
Report on Form 8-K filed on April 19, 2010 and incorporated herein by reference).
Form of 5.375% Notes due 2020. (Filed as an Exhibit to the Company’s Current Report on Form 8-K
filed on April 19, 2010 and incorporated herein by reference).
Form of 6.750% Notes due 2040. (Filed as an Exhibit to the Company’s Current Report on Form 8-K
filed on April 19, 2010 and incorporated herein by reference).
Third Supplemental Indenture dated as of November 8, 2012, between Southern Copper Corporation and
Wells Fargo Bank, National Association, as trustee, pursuant to which the 3.500% Notes due 2022 were
issued (Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on November 9, 2012
and incorporated herein by reference).
Fourth Supplemental Indenture, dated as of November 8, 2012, between Southern Copper Corporation
and Wells Fargo Bank, National Association, as trustee, pursuant to which the 5.250% Notes due 2042
were issued. (Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on November 9,
2012 and incorporated herein by reference).
Form of 3.500% Notes due 2022. (Filed as an Exhibit to the Company’s Current Report on Form 8-K
filed on November 9, 2012 and incorporated herein by reference).
Form of 5.250% Notes due 2042. (Filed as an Exhibit to the Company’s Current Report on Form 8-K
filed on November 9, 2012 and incorporated herein by reference).
Form of Directors’ Stock Award Plan of the Company. (Filed as Exhibit 10.4 to the Company’s 2005
Annual Report on Form 10-K and incorporated herein by reference).
Service Agreement entered into by the Company with a subsidiary of Grupo Mexico S.A.B. de C.V.,
assigned upon the same terms and conditions to Grupo Mexico S.A.B. de C.V. in February 2004. (Filed
as Exhibit 10.10 to the Company’s 2002 Annual Report on Form 10-K and incorporated herein by
reference).
Agreement and Plan of Merger, dated as of October 21, 2004, by and among Southern Copper
Corporation, SCC Merger Sub, Inc., Americas Sales Company, Inc., Americas Mining Corporation and
Minera Mexico S.A. de C.V. (Filed as an Exhibit to Current Report on Form 8-K filed on October 22,
2004 and incorporated herein by reference).
Computation of financial ratios (filed herewith).
Code of Business Conduct and Ethics adopted by the Board of Directors on May 8, 2003 and amended
on October 21, 2004. (Filed as Exhibit 14 to the Company’s Current Report on Form 8-K filed
October 22, 2004 and incorporated herein by reference).
Subsidiaries of the Company (filed herewith).
Consent of Registered Public Accounting Firm (Galaz, Yamazaki, Ruiz Urquiza, S.C. - Member of
Deloitte Touche Tohmatsu, Limited) (filed herewith).
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
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.
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.,
161
Table of Contents
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.DEF XBRL Taxonomy Extension Definition 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 Consolidated Statement of Earnings for the years ended December 31, 2012, 2011 and 2010; (ii) the Consolidated Statement of
Comprehensive Income for the years ended December 31, 2012, 2011 and 2010; (iii) the Consolidated Balance Sheet at
December 31, 2012 and 2011; (iv) the Consolidated Statement of Cash Flows for the years ended December 31, 2012, 2011 and
2010; (v) the Consolidates Statement of changes in equity for the years ended December 312012, 2011 and 2010, and (vi) the Notes
to Consolidated Financial Statements tagged in detail. 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.
162
SOUTHERN COPPER CORPORATION
COMPUTATION OF FINANCIAL RATIOS
(In millions except ratios)
Exhibit 12.1
2012
2,973.5
$
2011
$
3,448.7
$
2010
2,430.8 $
2009
1,404.4
2008
$
2,093.8
201.8
—
201.8
192.3
1.4
193.7
167.9
—
167.9
99.8
—
99.8
105.9
—
105.9
$
3,175.3
$
3,642.4
$
2,598.7 $
1,504.2
$
2,199.7
15.7
18.8
15.5
15.1
20.8
2012
4,213.9
(2,459.5)
1,754.4
1,754.4
4,789.1
6,543.5
$
$
2011
2,745.7
(848.1)
1,897.6
1,897.6
4,036.3
5,933.9
$
$
$
$
2010
2,760.4 $
(2,192.7)
567.7
2009
1,280.2
(772.3)
507.9
567.7
3,910.4
4,478.1 $
507.9
3,893.7
4,401.6
2008
1,290.0
(716.7)
573.3
573.3
3,395.4
3,968.7
$
$
EARNINGS TO FIXED CHARGES
Earnings before tax,
Fixed charges
Interest expense
(Gain) loss on debt prepayment
Total fixed charges
Earning plus fixed charges
Earnings to fixed charges
NET DEBT TO NET
CAPITALIZATION
Total debt
Cash and cash equivalent balance
Net debt
Net capitalization
Net debt
Equity
Net capitalization
Net debt/net capitalization (*)
26.8%
32.0%
12.7%
11.5%
14.4%
(*) Represents net debt divided by net capitalization
SOUTHERN COPPER CORPORATION
Subsidiaries
(More than 50% ownership)
Name of Company
PARENT:
Registrant:
Americas Mining Corporation (Delaware)
Southern Copper Corporation (Delaware)
Compania Minera Los Tolmos S.A. (Peru)
Southern Peru Limited (Delaware)
Americas Sales Company, Inc. (Delaware)
Minera Mexico, S.A. de C.V. (Mexico)
Buenavista del Cobre, S.A de C.V. (Mexico)
Cobrentas Arrendadora , S.A. de C.V. (Mexico)
Indumirentas Arrendadora, S.A. de C.V. (Mexico)
Industrial Minera Mexico, S.A. de C.V. (Mexico) (*)
Mexcanrentas Arrendadora, S.A. de C.V. (Mexico)
Mexicana de Cobre, S.A. de C.V. (Mexico)
Mexicana del Arco, S.A. de C.V. (Mexico)
Mexico Compania Inmobiliaria, S.A. de C.V. (Mexico)
Minera Mexico Internacional, Inc. (Delaware)
Minerales Metalicos del Norte, S.A.(Mexico) (*)
Operadora de Minas e Instalaciones Mineras, S.A. de C.V.(Mexico)
SDG Mexico Apoyo Administrativo, S.A. de C.V. (Mexico)
Servicios de Apoyo Administrativo, S.A. de C.V. (Mexico)
Exhibit 21.1
Percentage of voting
Securities owned or
other bases of control
97.31
100.00
100.00
99.95
99.99
98.14
99.99
99.99
100.00
98.14
99.99
99.99
100.00
99.99
99.99
90.99
90.99
Not included in this listing are subsidiaries, which would not constitute a significant subsidiary.
(*) Effective February 1, 2012, Minerales Metalicos del Norte S.A was merged with Industrial Minera Mexico S.A. de C.V.
(IMMSA). IMMSA absorbed Minerales Metalicos del Norte S.A.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements No. 333-150982 on Form S-8 and No. 333-165904 on
Form S-3 of our reports dated February 27, 2013 relating to the financial statements and financial statement schedules of Southern
Copper Corporation, and the effectiveness of Southern Copper Corporation’s internal control over financial reporting appearing in this
Annual Report on Form 10-K of Southern Copper Corporation for the year ended December 31, 2012.
Exhibit 23.1
Galaz, Yamazaki, Ruiz Urquiza, S.C.
Member of Deloitte Touche Tohmatsu Limited
C.P.C. Arturo Vargas Arellano
Mexico City, Mexico
February 27, 2013
CERTIFICATION PURSUANT TO
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
I, Oscar Gonzalez Rocha certify that:
1.
2.
3.
4.
I have reviewed this report on Form 10-K of Southern Copper Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15-d-15(f))for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a.
b.
February 27, 2013
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
/s/ Oscar Gonzalez Rocha
Oscar Gonzalez Rocha
President and Chief Executive Officer
CERTIFICATION PURSUANT TO
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
I, Genaro Guerrero, certify that:
1.
2.
3.
4.
I have reviewed this report on Form 10-K of Southern Copper Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a.
b.
February 27, 2013
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
/s/ Genaro Guerrero
Genaro Guerrero
Vice President, Finance and Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Southern Copper Corporation (the “Company”) on Form 10-K for the period ending
December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Oscar Gonzalez
Rocha, President and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
/s/ Oscar Gonzalez Rocha
Oscar Gonzalez Rocha
President and Chief Executive Officer
February 27, 2013
A signed original of this written statement required by section 906 has been provided to Southern Copper Corporation and will be
retained by Southern Copper Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Southern Copper Corporation (the “Company”) on Form 10-K for the period ending
December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Genaro Guerrero, Vice
President, Finance and Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
/s/ Genaro Guerrero
Genaro Guerrero
Vice President, Finance and Chief Financial Officer
February 27, 2013
A signed original of this written statement required by section 906 has been provided to Southern Copper Corporation and will be
retained by Southern Copper Corporation and furnished to the Securities and Exchange Commission or its staff upon request.