UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2011
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-14066
SOUTHERN COPPER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware |
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13-3849074 |
(State or other jurisdiction of incorporation or |
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(I.R.S. Employer Identification No.) |
11811 North Tatum Blvd. Suite 2500 Phoenix, AZ |
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85028 |
(Address of principal executive offices) |
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(Zip Code) |
Registrants telephone number, including area code: (602) 494-5328
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
As of April 30, 2011 there were outstanding 850,000,000 shares of Southern Copper Corporation common stock, par value $0.01 per share.
Southern Copper Corporation (SCC)
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Condensed Consolidated Statement of Earnings for the three months ended March 31, 2011 and 2010 |
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3 |
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4 | |
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Condensed Consolidated Balance Sheet as of March 31, 2011 and December 31, 2010 |
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5 |
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Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2011 and 2010 |
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6 |
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7-30 | |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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31-47 | |
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48-51 | ||
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52 | ||
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53 | |
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54 | ||
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54-55 | ||
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56-58 | ||
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59 | |
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60-62 | |
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Exhibit 15 |
Independent Accountants Awareness Letter |
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Exhibit 31.1 |
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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Exhibit 31.2 |
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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Exhibit 32.1 |
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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Exhibit 32.2 |
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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Exhibit 101 |
Financial statements for the quarter ended March 31, 2011 Formatted in XBRL: (i) the Condensed Consolidated Statement of Earnings, (ii) the Condensed Consolidated Statement of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheet, (iv) the Condensed Consolidated Statement of Cash Flows, and (v) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text. |
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Submitted electronically with this report |
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Southern Copper Corporation
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
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3 Months Ended |
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March 31, |
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2011 |
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2010 |
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(in thousands, except |
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Net sales |
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$ |
1,602,019 |
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$ |
1,219,405 |
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Operating costs and expenses: |
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Cost of sales (exclusive of depreciation, amortization and depletion shown separately below) |
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736,860 |
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510,983 |
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Selling, general and administrative |
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24,572 |
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21,718 |
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Depreciation, amortization and depletion |
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70,644 |
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69,468 |
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Exploration |
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7,218 |
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8,465 |
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Total operating costs and expenses |
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839,294 |
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610,634 |
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Operating income |
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762,725 |
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608,771 |
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Interest expense |
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(47,564 |
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(23,788 |
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Capitalized interest |
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936 |
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Loss on debt prepayment |
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(1,360 |
) |
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Other income (expense) |
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780 |
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1,433 |
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Interest income |
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2,711 |
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2,052 |
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Income before income taxes |
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718,228 |
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588,468 |
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Income taxes |
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238,081 |
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203,241 |
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Net income |
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480,147 |
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385,227 |
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Less: Net income attributable to the non-controlling interest |
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1,771 |
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1,983 |
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Net income attributable to SCC |
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$ |
478,376 |
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$ |
383,244 |
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Per common share amounts attributable to SCC: |
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Net earnings - basic and diluted |
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$ |
0.56 |
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$ |
0.45 |
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Dividends paid to SCC common shareholders |
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$ |
0.58 |
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$ |
0.43 |
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Weighted average shares outstanding - basic and diluted |
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850,000 |
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850,000 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Southern Copper Corporation
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
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3 Months Ended |
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March 31, |
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2011 |
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2010 |
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(in thousands) |
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Net income |
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$ |
480,147 |
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$ |
385,227 |
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Other comprehensive income (loss) net of tax: |
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Derivative instruments classified as cash flow hedge: |
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Unrealized gain for the period |
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43,779 |
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Less: |
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Reclassification adjustment for losses included in net income |
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21,948 |
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Unrealized loss on derivative instruments classified as cash flow hedges |
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65,727 |
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Comprehensive income |
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$ |
545,874 |
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$ |
385,227 |
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Comprehensive income attributable to the non-controlling interest |
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$ |
1,949 |
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$ |
1,983 |
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Comprehensive income attributable to SCC |
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$ |
543,925 |
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$ |
383,244 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Southern Copper Corporation
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
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March 31, |
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December 31, |
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2011 |
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2010 |
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(in thousands) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
1,973,297 |
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$ |
2,192,677 |
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Short-term investments |
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220,710 |
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76,209 |
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Accounts receivable trade |
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597,403 |
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671,745 |
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Accounts receivable other (including affiliates 2011 - $4,606 and 2010 - $32,700) |
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76,252 |
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76,284 |
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Inventories |
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628,990 |
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540,988 |
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Deferred income tax |
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77,067 |
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63,935 |
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Other current assets |
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95,125 |
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117,170 |
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Total current assets |
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3,668,844 |
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3,739,008 |
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Property, net |
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4,095,098 |
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4,094,993 |
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Long-term leach stockpiles |
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43,327 |
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29,668 |
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Intangible assets, net |
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111,835 |
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112,352 |
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Deferred income tax |
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78,755 |
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43,900 |
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Other assets |
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126,769 |
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108,098 |
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Total assets |
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$ |
8,124,628 |
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$ |
8,128,019 |
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LIABILITIES |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
10,000 |
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$ |
10,000 |
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Accounts payable |
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591,076 |
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558,661 |
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Accrued income taxes |
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204,760 |
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266,241 |
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Due to affiliated companies |
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4,893 |
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4,665 |
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Accrued workers participation |
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166,948 |
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222,432 |
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Accrued interest |
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62,554 |
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60,062 |
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Other accrued liabilities |
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24,678 |
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16,957 |
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Total current liabilities |
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1,064,909 |
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1,139,018 |
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Long-term debt |
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2,745,293 |
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2,750,401 |
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Deferred income taxes |
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139,416 |
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113,232 |
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Non-current taxes payable |
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77,830 |
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77,830 |
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Other liabilities and reserves |
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75,598 |
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78,070 |
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Asset retirement obligation |
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59,921 |
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59,059 |
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Total non-current liabilities |
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3,098,058 |
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3,078,592 |
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Commitments and contingencies (Note 12) |
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STOCKHOLDERS EQUITY |
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Common stock |
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8,846 |
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8,846 |
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Additional paid-in capital |
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1,043,351 |
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1,034,764 |
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Retained earnings |
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3,581,354 |
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3,595,983 |
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Accumulated other comprehensive loss |
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(60,696 |
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(126,423 |
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Treasury stock |
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(630,644 |
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(622,722 |
) | ||
Total SCC stockholders equity |
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3,942,211 |
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3,890,448 |
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Non-controlling interest |
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19,450 |
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19,961 |
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Total equity |
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3,961,661 |
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3,910,409 |
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Total liabilities and equity |
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$ |
8,124,628 |
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$ |
8,128,019 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Southern Copper Corporation
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
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3 Months Ended |
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March 31, |
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2011 |
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2010 |
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(in thousands) |
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OPERATING ACTIVITIES |
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Net income |
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$ |
480,147 |
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$ |
385,227 |
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Adjustments to reconcile net earnings to net cash provided from operating activities: |
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Depreciation, amortization and depletion |
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70,644 |
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69,468 |
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Remeasurement loss (income) |
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8,179 |
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8,364 |
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Provision (benefit) for deferred income taxes |
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(37,743 |
) |
5,853 |
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Gain on sale of property |
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(718 |
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(1,603 |
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Gain on sale of short-term investment |
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(275 |
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(519 |
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Cash provided from (used for) operating assets and liabilities: |
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Accounts receivable |
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74,374 |
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(57,353 |
) | ||
Inventories |
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(88,002 |
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(10,876 |
) | ||
Accounts payable and accrued liabilities |
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(24,254 |
) |
(106,606 |
) | ||
Other operating assets and liabilities |
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32,720 |
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15,284 |
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Net cash provided from operating activities |
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515,072 |
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307,239 |
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INVESTING ACTIVITIES |
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Capital expenditures |
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(72,989 |
) |
(75,363 |
) | ||
(Purchase of) proceeds from short-term investments, net |
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(144,629 |
) |
3,387 |
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Payments to development stage properties accounted for as equity method investments |
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(11,318 |
) |
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Sale of property |
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723 |
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4,809 |
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Net cash used for investing activities |
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(228,213 |
) |
(67,167 |
) | ||
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FINANCING ACTIVITIES |
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Debt repaid |
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(5,250 |
) |
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Loss on debt prepayment |
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(1,360 |
) |
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Dividends paid to common stockholders |
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(493,004 |
) |
(365,498 |
) | ||
Distributions to non-controlling interest |
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(2,193 |
) |
(1,149 |
) | ||
Other |
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142 |
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75 |
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Net cash used for financing activities |
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(501,665 |
) |
(366,572 |
) | ||
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Effect of exchange rate changes on cash and cash equivalents |
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(4,574 |
) |
6,158 |
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Decrease in cash and cash equivalents |
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(219,380 |
) |
(120,342 |
) | ||
Cash and cash equivalents, at beginning of period |
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2,192,677 |
|
772,306 |
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Cash and cash equivalents, at end of period |
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$ |
1,973,297 |
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$ |
651,964 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Southern Copper Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 DESCRIPTION OF THE BUSINESS:
In the opinion of Southern Copper Corporation, (the Company, Southern Copper or SCC), the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to state fairly the Companys financial position as of March 31, 2011 and the results of operations, comprehensive income and cash flows for the three months ended March 31, 2011 and 2010. The results of operations for the three months ended March 31, 2011 and 2010 are not necessarily indicative of the results to be expected for the full year. The December 31, 2010 balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements at December 31, 2010 and notes included in the Companys 2010 annual report on Form 10-K.
NOTE 2 AMCs BUSINESS COMBINATION PROPOSAL:
On July 22, 2010, the Company received a non-binding proposal from its parent company, Americas Mining Corporation (AMC), offering to effect an all-stock business combination of Southern Copper and AMC, the parent company of ASARCO LLC (Asarco), in which all stockholders of Southern Copper would receive 1.237 common shares of AMC in exchange for each share of SCC. Under the proposal presented by AMC, the stock of AMC would be registered and listed on the New York, Mexico and the Lima Stock Exchanges. Once the listing and registration of the AMC shares are completed, SCCs shares would be delisted from the exchanges.
In August 2010, the Company formed a special committee of independent directors to evaluate AMCs proposal. The special committee has engaged independent legal, financial and technical advisors to assist in the evaluation. There is no specific deadline to complete this evaluation.
NOTE 3 SHORT-TERM INVESTMENTS:
Short-term investments were as follows ($ in millions):
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March 31, |
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December 31, |
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2011 |
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2010 |
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Trading securities |
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$ |
211.7 |
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$ |
66.9 |
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Weighted average interest rate |
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1.00 |
% |
1.14 |
% | ||
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Available for sale |
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9.0 |
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9.3 |
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Weighted average interest rate |
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1.06 |
% |
1.01 |
% | ||
Total |
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$ |
220.7 |
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$ |
76.2 |
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Trading securities: consist of bonds issued by public companies. 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 March 31, 2011, included corporate bonds and asset and mortgage backed obligations. As of March 31, 2011 and December 31,
2010, 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 condensed 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 condensed consolidated statement of earnings.
The following table summarizes the activity of these investments by category (in millions):
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First quarter ended |
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2011 |
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2010 |
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Trading: |
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Interest earned |
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$ |
0.9 |
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$ |
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Available for sale: |
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Interest earned |
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(* |
) |
(* |
) | ||
Investment redeemed |
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$ |
0.4 |
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$ |
3.3 |
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(*) Less than $0.1 million.
NOTE 4 - INVENTORIES:
Inventories were as follows:
(in millions) |
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March 31, |
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December 31, |
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Inventory, current: |
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Metals at lower of average cost or market: |
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Finished goods |
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$ |
103.3 |
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$ |
67.9 |
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Work-in-process |
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280.1 |
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227.6 |
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Supplies at average cost |
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245.6 |
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245.5 |
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Total current inventory |
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$ |
629.0 |
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$ |
541.0 |
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Inventory, long-term |
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Long-term leach stockpiles |
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$ |
43.3 |
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$ |
29.7 |
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LONG-TERM INVENTORY:
In prior years the Company capitalized the production cost of materials with low copper content, or leachable material, at the Buenavista mine in Mexico. In the first quarter of 2011, the Company extended this practice of recognizing inventories for costs associated with leaching activities at the La Caridad mine in Mexico and the Toquepala and Cuajone mines in Peru in order to conform to evolving mine production plans at these mines. As a result of changing market conditions and mining processes, mineral extraction through leaching has become integral to the mining operations carried out at La Caridad, Toquepala and Cuajone. Accordingly, the process and sale of mineral content in leaching dumps is reasonably assured and the costs associated with leaching activities at such mines are now recognized as inventories. As the production cycle of the leaching process is significantly longer than standard mine production, 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 recovery percentages of each mine).
The Company has recognized long-term inventory of leachable material of $25.2 million in the first quarter 2011, which is recorded in Long-term leach stockpiles on the condensed consolidated balance sheet. Also the current portion of the leachable material at March 31, 2011 and at December 31, 2010 has been reclassified to inventory (current assets) on the condensed consolidated balance sheet.
NOTE 5 INCOME TAXES:
The income tax provision and the effective income tax rate for the first quarter 2011 and 2010 were as follows ($ in millions):
|
|
2011 |
|
2010 |
| ||
Income tax provision |
|
$ |
238.1 |
|
$ |
203.2 |
|
Effective income tax rate |
|
33.1 |
% |
34.5 |
% | ||
These provisions include income taxes for Peru, Mexico and the United States. The provision for income taxes was based on our effective tax rate of 33.1% for the first quarter of 2011 as compared to 34.5% in the first quarter 2010. The decrease in the effective tax rate for the first quarter of 2011 is due to an increase in earnings from our Mexican operations that are taxed at 30% as compared to the Peruvian earnings that are taxed at 35%.
As of March 27, 2009, Grupo Mexico S.A.B. de C.V. (Grupo Mexico), through its wholly-owned subsidiary, AMC, became the beneficial owner of 80% of SCCs common stock. As a result of this new level of ownership, beginning March 27, 2009 SCCs operating results are included in the AMC consolidated U.S federal income tax return. In addition to now holding an 80% 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. The Company has initiated discussions with AMC to put in place a tax sharing agreement in order to establish this allocation as well as other procedures and policies necessary for an equitable management of U.S. federal income tax matters. SCC provides current and deferred income taxes, as if it were a separate filer.
Accounting for Uncertainty in Income Taxes:
The Company files tax returns in Peru, the United States and in Mexico. These tax returns are examined by the tax authorities of those countries.
It is reasonably possible that during the next 12 months there could be a decrease of approximately $30 to $50 million in the Companys unrecognized tax benefits (UTBs) due to expected activity from tax examinations and audits by the tax authorities.
NOTE 6 PROVISIONALLY PRICED SALES:
At March 31, 2011, the Company has recorded provisionally priced sales of copper at average forward prices per pound, and molybdenum at the March 31, 2011 market price per pound. These sales are subject to final pricing based on the average monthly London Metal Exchange, or LME, or New York Commodities Exchange, or COMEX, copper prices and Dealer Oxide molybdenum prices in the future month of settlement.
Following are the provisionally priced copper and molybdenum sales outstanding at March 31, 2011:
Copper |
|
Priced at |
|
Month of |
| |
50.0 |
|
$ |
4.28 |
|
April 2011 |
|
33.4 |
|
4.28 |
|
May 2011 |
| |
0.5 |
|
4.28 |
|
June 2011 |
| |
83.9 |
|
$ |
4.28 |
|
|
|
Molybdenum |
|
Priced at |
|
Month of |
| |
2.9 |
|
$ |
16.65 |
|
April 2011 |
|
2.9 |
|
16.65 |
|
May 2011 |
| |
2.3 |
|
16.65 |
|
June 2011 |
| |
8.1 |
|
$ |
16.65 |
|
|
|
Management believes that the final pricing of these sales will not have a material effect on the Companys financial position or results of operations.
NOTE 7 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 derivatives, exchange rate derivatives 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 swaps:
In the last quarter of 2010 the Company entered into copper swaps and zero cost collar derivative contracts to reduce price volatility and to protect the sales value of a portion of its 2011 and first quarter 2012 copper sales 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 condensed consolidated statement of earnings and included in operating activities on the condensed consolidated statement of cash flows.
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 minimus.
The following table summarizes the copper derivative activity related to copper sales transactions realized in the first quarter 2011 (the Company held no copper derivatives for the first quarter of 2010):
|
|
2011 |
| |
Zero cost collar contracts: |
|
|
| |
Pounds (in millions) |
|
105.8 |
| |
Average LME cap price |
|
$ |
4.84 |
|
Average LME floor price |
|
$ |
3.02 |
|
|
|
|
| |
Swap contracts: |
|
|
| |
Pounds (in millions) |
|
119.6 |
| |
Weighted average COMEX price |
|
$ |
4.08 |
|
|
|
|
| |
Realized loss on copper derivatives (gross)(in millions) |
|
$ |
(35.8 |
) |
As of March 31, 2011 the Company held copper derivative contracts to protect a portion of its copper sales for the remaining nine months of 2011 and the first quarter 2012, as follows:
|
|
2011 |
|
1st Quarter |
| ||
Zero cost collar contracts: |
|
|
|
|
| ||
Pounds (in millions) |
|
317.5 |
|
46.3 |
| ||
Average LME cap price |
|
$ |
4.84 |
|
$ |
5.18 |
|
Average LME floor price |
|
$ |
3.02 |
|
$ |
3.50 |
|
Estimated % of copper sales covered |
|
30 |
% |
13 |
% | ||
Unrealized loss recognized in other comprehensive income (net of income taxes of $10.4 million and $0.3 million, respectively) (in millions) |
|
$ |
18.6 |
|
$ |
0.4 |
|
|
|
|
|
|
| ||
Swap contracts: |
|
|
|
|
| ||
Pounds (in millions) |
|
337.3 |
|
|
| ||
Weighted average COMEX price |
|
$ |
4.08 |
|
|
| |
Estimated % of copper sales covered |
|
32 |
% |
|
| ||
Unrealized loss recognized in other comprehensive income net of income taxes of $22.9 million (in millions) |
|
$ |
40.8 |
|
|
|
Transactions under these metal price protection programs are accounted for as cash flow hedges under ASC 815-15 Derivatives and Hedging-embedded derivatives (formerly SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities) 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, if realized, is reclassified to net sales in the condensed consolidated statements of earnings.
NOTE 8 - 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 Companys closure plans have been approved by the Peruvian Ministry of Energy and Mines (MINEM). As part of the closure plans, commencing in January 2010 the Company is required to provide annual installments of $2.6 million over a 34 year period to guarantee the availability of funds to meet this obligation. Therefore, as of January 2011 the Company has made installments on the guarantee of $5.2 million, in the form of a lien on its Lima office building. The accepted value of the Lima office building, for this purpose, is $17 million.
The closure cost recognized for this liability includes the cost as outlined in its closure plans, which includes the physical, geochemical and hydrological stabilization of the mine pits and dumps as well as the tailings facility, the dismantling and demolition of the Toquepala and Cuajone concentrators, the smelter and refinery in Ilo, and the shops and auxiliary facilities at the three operating areas.
The following table summarizes the asset retirement obligation activity for the three months ended March 31, 2011 and 2010 (in millions):
|
|
2011 |
|
2010 |
| ||
Balance as of January 1 |
|
$ |
59.1 |
|
$ |
48.9 |
|
Changes in estimates |
|
|
|
|
| ||
Additions |
|
|
|
|
| ||
Accretion expense |
|
0.8 |
|
0.8 |
| ||
Balance as of March 31, |
|
$ |
59.9 |
|
$ |
49.7 |
|
NOTE 9 RELATED PARTY TRANSACTIONS:
Receivable and payable balances with affiliated companies are shown below (in millions):
|
|
As of |
| ||||
|
|
March 31, 2011 |
|
December 31, 2010 |
| ||
Affiliate receivable: |
|
|
|
|
| ||
Grupo Mexico S.A.B de C.V. and affiliates |
|
$ |
0.8 |
|
$ |
32.7 |
|
Asarco LLC. |
|
3.8 |
|
|
| ||
|
|
$ |
4.6 |
|
$ |
32.7 |
|
Affiliate payable: |
|
|
|
|
| ||
Grupo Mexico S.A.B. de C.V. and affiliates |
|
$ |
2.6 |
|
$ |
2.3 |
|
Ferrocarril Mexicano S.A. de C.V. |
|
1.4 |
|
0.1 |
| ||
Mexico Transportes Aereos S.A de C.V. |
|
0.4 |
|
0.4 |
| ||
Mexico Proyectos y Desarrollos S.A de C.V. and affiliates |
|
|
|
0.9 |
| ||
Consorcio Tricobre |
|
|
|
0.5 |
| ||
Higher Technology S.A.C. |
|
|
|
0.1 |
| ||
Breaker S.A. de C.V |
|
0.1 |
|
0.3 |
| ||
Pigoba S.A. de C.V |
|
|
|
0.1 |
| ||
Sempertrans France Belting Tech |
|
0.2 |
|
|
| ||
Other |
|
0.2 |
|
|
| ||
|
|
$ |
4.9 |
|
$ |
4.7 |
|
The Company has entered into certain transactions in the ordinary course of business with parties that are controlling shareholders or their affiliates. These transactions include the lease of office space, air transportation and construction services and products and services relating to mining and refining. The Company lends and borrows funds among affiliates for acquisitions and other corporate purposes. These financial transactions bear interest and are subject to review and approval by senior management, as are all related party transactions. It is the Companys policy that the Audit Committee of the Board of Directors shall review all related party transactions. The Company is prohibited from entering or continuing a material related party transaction that has not been reviewed and approved or ratified by the Audit Committee.
Purchase Activity:
The following table summarizes the purchase activity with related parties in the three months ended March 31, 2011 and 2010 (in millions):
|
|
As of March 31, |
| ||||
|
|
2011 |
|
2010 |
| ||
Grupo Mexico and affiliates: |
|
|
|
|
| ||
Grupo Mexico Servicios S.A de C.V |
|
$ |
3.5 |
|
$ |
3.5 |
|
Asarco LLC. |
|
7.7 |
|
|
| ||
Ferrocarril Mexicano S.A de C.V. |
|
0.5 |
|
1.1 |
| ||
Mexico Constructora Industrial S.A. de C.V. |
|
7.1 |
|
5.9 |
| ||
Cia Perforadora Mexico S.A.P.I. de C.V and affiliates |
|
0.1 |
|
|
| ||
|
|
|
|
|
| ||
Other Larrea family companies: |
|
|
|
|
| ||
Mexico Compañia de Productos Automotrices S.A. de C.V. |
|
0.2 |
|
0.1 |
| ||
Mexico Transportes Aereos S.A. de C.V. |
|
0.7 |
|
0.5 |
| ||
|
|
|
|
|
| ||
Companies with relationships to SCC executive officers families: |
|
|
|
|
| ||
Higher Technology S.A.C. |
|
0.3 |
|
0.8 |
| ||
Servicios y Fabricaciones Mecanicas S.A.C. |
|
0.1 |
|
0.1 |
| ||
Sempertrans France Belting Technology |
|
0.2 |
|
0.3 |
| ||
PIGOBA S.A. de C.V. |
|
0.1 |
|
0.1 |
| ||
Breaker S.A. de C.V. |
|
1.1 |
|
0.2 |
| ||
Total purchased |
|
$ |
21.6 |
|
$ |
12.6 |
|
Grupo Mexico, the Companys ultimate parent and the majority indirect stockholder of the Company, and its affiliates provide various services to the Company. These services are 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 Servicios S.A de C.V., a subsidiary of Grupo Mexico for these services. The Company expects to continue to pay for these services in the future.
The Companys Mexican operations paid fees for freight services provided by Ferrocarril Mexicano S.A de C.V., for construction services provided by Mexico Constructora Industrial and its affiliates and for drilling services provided by Perforadora Mexico S.A.P.I. de C.V., both these companies are subsidiaries of Grupo Mexico.
The Larrea family controls a majority of the capital stock of Grupo Mexico, and has extensive interests in other businesses, including oil drilling services, construction, aviation, and real estate. The Company engages in certain transactions in the ordinary course of business with other entities controlled by the Larrea family relating to mining and refining services, the lease of office space, sale of vehicles and air transportation and construction services. In connection with this, the Company paid fees for maintenance services and sale of vehicles provided by México Compañia de Productos Automotrices, S.A. de C.V., a company controlled by the Larrea family.
Additionally, in 2007, the Companys Mexican subsidiaries provided guaranties for two loans obtained by Mexico Transportes Aereos, S.A. de C.V. (MexTransport), a company controlled by the Larrea family, from Bank of Nova Scotia in Mexico. Conditions and balance as of March 31, 2011 are as follows:
|
|
Loan Open |
|
Original loan balance (in millions) |
|
$8.5 |
|
Maturity |
|
August 2013 |
|
Interest rate |
|
Libor + 0.15% |
|
Remaining balance at March 31, 2011 (in millions) |
|
$3.2 |
|
MexTransport provides aviation services to the Companys Mexican operations. The guaranty provided to MexTransport is backed up by the transport services provided by MexTransport to the Companys Mexican subsidiaries. If MexTransport defaults on the loan, SCCs subsidiaries would have to satisfy the guaranty and repay to the bank the remaining balances, plus interest. The Company paid fees to MexTransport for aviation services.
The Company purchased industrial materials from Higher Technology S.A.C in which Mr. Carlos Gonzalez has a proprietary interest. Also the Company paid fees for maintenance services provided by Servicios y Fabricaciones Mecanicas S.A.C., a company in which Mr. Carlos Gonzalez has a proprietary interest. Mr. Carlos Gonzalez is the son of SCCs Chief Executive Officer.
The Company purchased 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 SCCs 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 SCCs Chief Executive Officer, has a proprietary interest.
Sales Activity:
In the first quarter of 2011, the Company sold copper cathodes and rod to Asarco.
The following table summarizes the sales activity with related parties in the first quarter of 2011 (in millions):
Asarco LLC. |
|
$ |
17.9 |
|
Total |
|
$ |
17.9 |
|
It is anticipated that in the future the Company will enter into similar transactions with these same parties.
NOTE 10 FINANCING:
In February 2011, the Company repurchased $5.2 million of the Series B Yankee bonds at a premium of $1.4 million which is included in the condensed consolidated statement of earnings on the line loss on debt prepayment.
NOTE 11 BENEFIT PLANS:
SCC Defined Benefit Pension Plans
The components of the net periodic benefit costs for the three months ended March 31, 2011 and 2010 are as follows (in millions):
|
|
2011 |
|
2010 |
| ||
Interest cost |
|
$ |
0.1 |
|
$ |
0.2 |
|
Expected return on plan assets |
|
(0.2 |
) |
(0.2 |
) | ||
Amortization of net loss (gain) |
|
(* |
) |
(* |
) | ||
Net periodic benefit costs |
|
$ |
(* |
) |
$ |
(* |
) |
(*) amount is lower than $0.1 million
SCC Post-retirement Health Care Plan
The components of the net periodic benefit costs for the post-retirement health care plan for the three months ended March 31, 2011 and 2010 are individually, and in total, less than $0.1 million.
Minera Mexico Pension Plans
The components of the net periodic benefit costs for the three months ended March 31, 2011 and 2010 are as follows (in millions):
|
|
2011 |
|
2010 |
| ||
|
|
|
|
|
| ||
Interest cost |
|
$ |
0.2 |
|
$ |
0.4 |
|
Service cost |
|
0.3 |
|
0.5 |
| ||
Expected return on plan assets |
|
(0.8 |
) |
(0.7 |
) | ||
Amortization of transition assets, net |
|
(* |
) |
(* |
) | ||
Amortization of net actuarial loss |
|
(0.4 |
) |
(0.2 |
) | ||
Amortization of prior services cost |
|
(* |
) |
(* |
) | ||
Net periodic benefit cost |
|
$ |
(0.8 |
) |
$ |
(* |
) |
(*) amount is lower than $0.1 million
Minera Mexico Post-retirement Health Care Plan
The components of the net periodic benefit cost for the three months ended March 31, 2011 and 2010 are as follows (in millions):
|
|
2011 |
|
2010 |
| ||
|
|
|
|
|
| ||
Interest cost |
|
$ |
0.9 |
|
$ |
1.1 |
|
Service cost |
|
(* |
) |
0.1 |
| ||
Amortization of net loss (gain) |
|
(* |
) |
(* |
) | ||
Amortization of transition obligation |
|
0.4 |
|
0.3 |
| ||
Net periodic benefit cost |
|
$ |
1.3 |
|
$ |
1.5 |
|
(*) amount is lower than $0.1 million
NOTE 12 COMMITMENTS AND CONTINGENCIES:
Environmental matters:
The Company has instituted extensive environmental conservation programs at its mining facilities in Peru and Mexico. The Companys environmental programs include, among other features, water recovery systems to conserve water and minimize impact on nearby streams, reforestation programs to stabilize the surface of the tailings dams and the implementation of scrubbing technology in the mines to reduce dust emissions.
Environmental capital expenditures in the three months ended March 31, 2011 and 2010 were as follows (in millions):
|
|
2011 |
|
2010 |
| ||
Peruvian operations |
|
$ |
0.1 |
|
$ |
1.1 |
|
Mexican operations |
|
2.5 |
|
3.9 |
| ||
|
|
$ |
2.6 |
|
$ |
5.0 |
|
Peruvian operations
The Companys operations are subject to applicable Peruvian environmental laws and regulations. The Peruvian government, through the Environmental Ministry conducts annual audits of the Companys Peruvian mining and metallurgical operations. Through these environmental audits, matters related to environmental commitments, compliance with legal requirements, atmospheric emissions, and effluent monitoring are reviewed. The Company believes that it is in material compliance with applicable Peruvian environmental laws and regulations.
Peruvian law requires that companies in the mining industry provide for future closure and remediation. In accordance with the requirements of this law the Companys 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 8, Asset retirement obligation, for further discussion of this matter.
Mexican operations
The Companys operations are subject to applicable Mexican federal, state and municipal environmental laws, to Mexican official standards, and to regulations for the protection of the environment, including regulations relating to water supply, water quality, air quality, noise levels and hazardous and solid waste.
The principal legislation applicable to the Companys 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.
Mexican environmental regulations have become increasingly stringent in recent years, and this trend is likely to continue and has been influenced by the environmental treaty entered into by Mexico, the United States and Canada in connection with NAFTA in 1999.
In relation the aforementioned, 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.
Another initiative that has not entered into force, but is being analyzed by the Chamber of Deputies is the one related to amendments to the Civil Federal Procedures Code (CFPC). This initiative consists of establishing 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 initiative is expected to be approved by the Chamber of Deputies this year and the related provisions to enter into force six months
afterward. The amendments to the CFPC may result in more litigation with plaintiffs seeking remedies, including suspension of the activities alleged to cause harm.
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 has initiated a program for plant demolition and soil remediation with a budget of $35.7 million, of which the Company has spent $9.7 million through March 31, 2011. The Company expects to remediate the site and promote an urban development to generate a net gain in the disposal of the property.
Although the Company believes that all of its facilities are in material compliance with applicable environmental, mining and other laws and regulations, the Company cannot assure that the above mentioned or future laws and regulations would not have a material adverse effect on the Companys business, properties, result of operations, financial condition or prospects. However, the Companys management does not believe that continued compliance with the federal environmental law or Mexican state environmental laws will have a material adverse effect on the Companys business, properties, result of operations, financial condition or prospects or will result in material capital expenditures.
Litigation matters:
Peruvian operations
Garcia Ataucuri and Others against SCCs Peruvian Branch:
In April 1996, the Branch was served with a complaint filed in Peru by approximately 800 former employees seeking the delivery of a substantial number of its labor shares (acciones laborales) plus dividends on such shares, to be issued in a proportional way to each former employee in accordance with their time of employment with SCCs Peruvian Branch.
The labor share litigation is based on claims of former employees for ownership of labor shares issued during the 1970s until 1979 under a former Peruvian mandated profit sharing system. In 1971, the Peruvian government enacted legislation providing that 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 the mining industry organization, was set at 5.5% of pre-tax profits and was delivered in the form of labor shares to individual workers. The cash portion was set at 4.0% of pre-tax earnings and continued to be delivered to individual employees. In 1992 the workers participation was set at 8%, with 100% payable in cash and the equity participation was eliminated from the law.
In 1995, the labor shares were exchanged for common stock of the Company and approximately 80.8% of the issued labor shares were exchanged. After that, from time to time the Company has purchased labor shares on the open market. The remaining net 0.71% is included in the condensed consolidated balance sheet under the caption Non-controlling interest.
In relation to the issuance of labor shares by the Branch in Peru, the Branch is a defendant in the following lawsuits:
1) The Garcia Ataucuri litigation seeks the delivery of 38,763,806.80 labor shares (acciones laborales), now investment shares (acciones de inversion) (or nuevos soles (S/.) 3,876,380,679.56), plus dividends on such shares. After lengthy proceedings before the civil courts in Peru on September 19, 2001, on appeal from the Branch, 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 Branchs 2000 appeal.
In May 2009, the Supreme Court rejected the 2000 appeal of the Branch affirming the adverse decision of the appellate civil court and lower civil court. While the Supreme Court has ordered SCCs Peruvian Branch to deliver the labor shares and dividends, it has clearly stated that SCCs Peruvian Branch may prove, by all legal means, its assertion that the labor shares and dividends were distributed to the former employees in accordance with the profit sharing law then in effect, an assertion which SCCs Peruvian Branch continues to make.
On June 9, 2009, SCCs Peruvian Branch filed an extraordinary appeal before a civil court in Peru seeking the nullity of the 2009 Supreme Court decision and other protective measures. The civil court has now rendered a favorable decision suspending the enforcement of the Supreme Court decision, for the reasons indicated above and other reasons. 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) The May 10, 2006 Cornejo Flores and others vs. SCCs Peruvian Branch litigation, seeks the same number of labor shares as in the Garcia Ataucuri case, plus interest, labor shares resulting from capital increases made by the Branch in 1980 for the amount of the workers participation of S/.17,246,009,907.20, equivalent to 172,460,099.72 labor shares, and dividends. On May 23, 2006, the Branch answered this new complaint denying the validity of the claim. As of March 31, 2011, the case remained open with no new developments.
3) The June 27, 2008 Alejandro Zapata Mamani and others vs. SCCs Peruvian Branch litigation seeks the same number of labor shares as in the Garcia Ataucuri case, plus interest, labor shares resulting from capital increases and dividends. The Branch answered this new complaint, denying the validity of the claim. As of March 31, 2011, the case remained open with no new developments.
4) The January 2009 Arenas Rodriguez and others represented by Mr. Cornejo Flores- vs. SCCs Peruvian Branch litigation seeks the same number of labor shares as in the Garcia Ataucuri case, plus interest, labor shares resulting from capital increases and dividends. The Branch answered this complaint, denying the validity of the claim. In August 2010, the Civil Court dismissed the case due to procedural defects. The plaintiffs appealed the Civil Courts resolution before the Superior Court. As of March 31, 2011, resolution of this appeal was pending.
The Company asserts that the labor shares were distributed to the former employees in accordance with the profit sharing law then in effect. The Company has not made a provision for these lawsuits because it believes that it has meritorious defenses to the claims asserted in the complaints. Additionally, the amount of this contingency cannot be reasonably estimated by management at this time.
Exploraciones de Concesiones Metalicas S.A.C.:
In August 2009, a lawsuit was filed against SCCs Branch by the former stockholders of Exploraciones de Concesiones Metalicas S.A.C. (Excomet). The plaintiffs allege that the acquisition of Excomets 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 of the stockholders of Excomet, approved the transaction in a general stockholders meeting. Excomet was at the time owner of a mining concession which
forms part of the Tia Maria project. As of March 31, 2011, this case remained open with no new developments.
Sociedad Minera de Responsabilidad Limitada Virgen Maria de Arequipa (SMRL Virgen Maria):
In August 2010, a lawsuit was filed against SCCs Branch and others by SMRL Virgen Maria, a company which until July 2003 owned the mining concession Virgen Maria, which forms part of the Tia Maria project. SMRL Virgen Maria sold this mining concession in July 2003 to Excomet (see above noted case).
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 SCCs Branch, noted above, and the sale of the concession to SCCs Branch by Excomet). As of March 31, 2011, the case remained open with no new developments.
The Company asserts that the lawsuits are without merit and is vigorously defending against these lawsuits.
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. Plaintiffs can appeal the order to the Federal Circuit Court of Appeals. As of March 31, 2011, the case remained open with no new developments.
Labor matters:
In recent years the Company has experienced a number of strikes or other labor disruptions that have had an adverse impact on its operations and operating results.
Peruvian Operations
Approximately 62% of the Companys Peruvian labor force was unionized at March 31, 2011, and was represented by eight separate unions. Three of these unions, one at each major production area, represent the majority of the Companys workers. In September 2010, the Company reached a new three-year collective bargaining agreement with these three unions. This agreement includes, among other things, a 5% annual salary increase and a signing bonus of approximately $6,700 for each of the workers (approximately 2,000). In addition, this agreement provides for a productivity bonus program for the departments that reach certain goals. Also, there are five smaller unions, representing the balance of workers. Collective bargaining agreements for these smaller unions are in force through November 2012.
During the first quarter of 2011 and 2010 there were no strikes.
Mexican operations
Approximately 73% of the Mexican labor force was unionized at March 31, 2011 and was represented by two separate unions. Under Mexican law, the terms of employment for unionized workers is set forth in collective bargaining agreements. Mexican companies negotiate the salary provisions of collective bargaining agreements with the labor unions annually and negotiate other benefits every two years. The Company conducts negotiations separately at each mining complex and each processing plant.
In the last years the Buenavista mine experienced several labor stoppages. The latest labor stoppage started in July 2007 and finished in June 2010. In 2008, the Board of Directors offered all Buenavista employees a severance payment in accordance with the collective bargaining agreement and applicable law. At March 31, 2011 the Company maintains a provision of $3.4 million of pending payments to a group of approximately 829 workers who have rejected acceptance of the severance termination payment. The Company began the rehabilitation and reconstruction of the Buenavista mine during the second half of 2010 which is now operating at full capacity. The Company expects to complete its optimization processes and increase the concentrator´s recovery to full copper production in the second quarter of 2011. Through March 31, 2011, the Company has spent $112.6 million on repairs, of this $54.4 million were capitalized and $58.2 million were charged to operating cost. In the first quarter of 2011, the Company charged $22.3 million to operating cost.
Additionally, the San Martin and Taxco mines have been on strike since July 2007. On December 10, 2009, a federal tribunal confirmed the legality of the San Martin strike. 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 to search for reserves at the Taxco mine. If sustained, this ruling will also have the effect of terminating the protracted strike at the Taxco unit. The mining union has presented an appeal of the labor court ruling before federal tribunals. As of March 31, 2011 the resolution of this appeal was pending.
Other legal matters:
Class actions:
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). On January 31, 2005, the three actions - Lemon Bay, LLP v. American Mining-Corporation, et al., Civil Action No. 961-N, Therault Trust v. Luis Palomino Bonilla, et al., and Southern Peru Copper Corporation et al., Civil Action No. 969-N, and James Sousa v. Southern Peru Copper Corporation, et al., Civil Action No. 978-N were consolidated into one action, caption. In re Southern Peru Copper Corporation Shareholder Derivative Litigation, Consol. Civil Action No. 961-N; the complaint filed by Lemon Bay was designated as the operative complaint in the consolidated lawsuit. The consolidated action purports to be brought on behalf of the Company and its common stockholders; the defendants in the consolidated action are AMC, German Larrea Mota-Velasco, Genaro Larrea Mota-Velasco, Oscar Gonzalez Rocha, Emilio Carrillo Gamboa, Jaime Fernando Collazo Gonzalez, Xavier Garcia de Quevedo Topete, Armando Ortega Gomez and Juan Rebolledo Gout (together, the AMC Defendants), Carlos Ruiz Sacristan, Harold S. Handelsman, Gilberto Perezalonso Cifuentes, and Luis Miguel Palomino Bonilla (together, the Special Committee Defendants). The consolidated complaint alleges, among other things, that the Transaction was the
result of breaches of fiduciary duties by the Companys directors and was not entirely fair to the Company and its minority stockholders. Fact discovery closed in early 2010 and expert discovery closed on June 18, 2010. On June 30, 2010, the plaintiff moved for partial summary judgment. On August 10, 2010, the AMC Defendants and the Special Committee Defendants filed separate cross-motions for summary judgment. On December 21, 2010, the Court denied the plaintiffs motion and the AMC Defendants cross-motion, but granted the Special Committee Defendants motion, dismissing the Special Committee Defendants from the action. As of the date of this filing, the case is expected to go to trial in June 2011.
The complaint seeks, among other things, a preliminary and permanent injunction to enjoin the Transaction, the award of damages to the plaintiff and the class, and such other relief that the court deems equitable, including interest, attorneys and experts fees and costs. The defendants believe that the lawsuit is without merit and are vigorously defending against the action.
Four purported class action derivative lawsuits have been filed in the Delaware Court of Chancery (Oklahoma Firefighters Pension & Retirement System et al. v. SCC et al., Gary Martin et al. v. SCC et al., Thomas Griffin et al. v. SCC et al., and Sheet Metal Workers Pension Plan of Northern California et al. v. SCC et al.) from August 2010 to October 2010 relating to the proposed combination of the Company with AMC, the parent company of Asarco. The complaints name SCC, its current and certain former directors, AMC and Grupo Mexico as defendants. Two of the actions also name Asarco as a defendant. The actions purport to be brought on behalf of the Companys common stockholders. A previously reported complaint filed in the Superior Court of Arizona, City of North Miami Beach Police Officers and Firefighters Retirement Plan et al. v. SCC et al., has been voluntarily dismissed.
The complaints allege, among other things, that the proposed transaction would result in breaches of fiduciary duties by the defendants and is not entirely fair to the Company and its minority stockholders. The complaints seek, among other things, a preliminary and permanent injunction to enjoin the transaction, the award of damages to the plaintiffs and the class, and such other relief that the court deems equitable, including interest, attorneys and experts fees and costs. On January 25, 2011, the Oklahoma Firefighters and Sheet Metal Workers plaintiffs filed an amended and joint motion to consolidate and have Firefighters counsel appointed lead counsel. Plaintiffs also moved to stay the Martin and Griffin actions. The Sheet Metal plaintiffs have withdrawn their prior motion to consolidate in connection with the new motion. Oral argument on all plaintiffs motions and cross-motions to stay or consolidate and appoint lead counsel is scheduled for May 5, 2011.
The Firefighters plaintiffs also moved for leave to file an amended complaint to add or supplement factual allegations concerning the summary judgment ruling in the Lemon Bay action described above. On April 1, 2011, the plaintiffs motion was granted.
The defendants believe that these lawsuits are without merit and are vigorously defending against the actions.
The Company is involved in various other legal proceedings incidental to its operations, but the Company does not believe that decisions adverse to it in any such proceedings, individually or in the aggregate, would have a material adverse effect on its financial position or results of operations. Additionally, the Company does not believe that the outcome of the purported class action derivative lawsuits would have a material adverse effect on its financial position or results of operations. While the defendants, including Grupo Mexico and its affiliates, believe that the claims in the purported class action derivative lawsuits are without merit, the Company cannot assure you that these or future claims, if successful, will not have an adverse effect on Grupo Mexico, AMC or the Company.
Other commitments:
Royalty charge
The Companys Peruvian operations are subject to a royalty charge to a 1% to 3% royalty based on sales and calculated on the value of the concentrates and SXEW copper produced at the Toquepala and Cuajone mines. The Company made provisions for this charge in the first quarter of 2011 and 2010, as follows (in millions):
|
|
2011 |
|
2010 |
| ||
Royalty charge |
|
$ |
14.7 |
|
$ |
12.9 |
|
These provisions are included in Cost of sales (exclusive of depreciation, amortization and depletion) in the condensed consolidated statement of earnings.
Power purchase agreement
In 1997, SCC sold its Ilo power plant to an independent power company, Enersur. In connection with the sale, a power purchase agreement was also completed under which SCC agreed to purchase all of its power needs for its Peruvian operations from Enersur for twenty years, commencing in 1997. In 2003, the agreement was amended, releasing Enersur from its obligation to construct additional capacity to meet the Companys increased electricity requirements and changing the power tariff as called for in the original agreement.
The Company has recently signed a Memorandum of Understanding (MOU) with Enersur regarding its power supply agreement. The MOU contains new economic terms that the Company believes better reflect current economic conditions in the power industry and in Peru. The Company expects to obtain savings in its future power costs. The new economic conditions agreed 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. During 2011, the Company continued its negotiations with Enersur in order to obtain a final agreement for the Tia Maria project, see note 17 Tia Maria project.
Tax contingency matters:
Tax contingencies are provided for under ASC 740-10-50-15 Uncertain tax positions (see Note 5, Income taxes).
NOTE 13 SEGMENT AND RELATED INFORMATION:
Company management views Southern Copper as having three operating segments and manages on the basis of these segments. The 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.
Financial information is regularly prepared for each of the three segments and the results of the Companys operations are regularly reported to the Chief Operating Officer on the segment basis. The Chief Operating Officer of the Company focuses on operating income and on total assets as measures of performance to evaluate different segments and to make decisions to allocate resources to the reported segments. These are common measures in the mining industry.
Financial information relating to Southern Coppers segments is as follows:
|
|
Three Months Ended March 31, 2011 |
| |||||||||||||
|
|
(in millions) |
| |||||||||||||
|
|
Mexican |
|
Mexican |
|
Peruvian |
|
Corporate, |
|
Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net sales outside of segments |
|
$ |
669.8 |
|
$ |
111.1 |
|
$ |
821.1 |
|
$ |
|
|
$ |
1,602.0 |
|
Intersegment sales |
|
|
|
31.4 |
|
|
|
(31.4 |
) |
|
| |||||
Cost of sales (exclusive of depreciation, amortization and depletion) |
|
231.1 |
|
67.6 |
|
437.5 |
|
0.7 |
|
736.9 |
| |||||
Selling, general and administrative |
|
8.2 |
|
3.5 |
|
12.3 |
|
0.6 |
|
24.6 |
| |||||
Depreciation, amortization and depletion |
|
30.7 |
|
6.3 |
|
34.2 |
|
(0.6 |
) |
70.6 |
| |||||
Exploration |
|
0.6 |
|
3.8 |
|
2.8 |
|
|
|
7.2 |
| |||||
Operating income |
|
$ |
399.2 |
|
$ |
61.3 |
|
$ |
334.3 |
|
$ |
(32.1 |
) |
762.7 |
| |
Less: |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest, net |
|
|
|
|
|
|
|
|
|
(43.8 |
) | |||||
Loss on debt prepayment |
|
|
|
|
|
|
|
|
|
(1.4 |
) | |||||
Other income (expense) |
|
|
|
|
|
|
|
|
|
0.8 |
| |||||
Income taxes |
|
|
|
|
|
|
|
|
|
(238.1 |
) | |||||
Non-controlling interest |
|
|
|
|
|
|
|
|
|
(1.8 |
) | |||||
Net income attributable to SCC |
|
|
|
|
|
|
|
|
|
$ |
478.4 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Capital expenditure |
|
$ |
44.8 |
|
$ |
7.8 |
|
$ |
18.9 |
|
$ |
1.5 |
|
$ |
73.0 |
|
Property, net |
|
$ |
1,600.3 |
|
$ |
294.5 |
|
$ |
2,149.5 |
|
$ |
50.8 |
|
$ |
4,095.1 |
|
Total assets |
|
$ |
2,725.9 |
|
$ |
740.6 |
|
$ |
2,932.4 |
|
$ |
1,725.7 |
|
$ |
8,124.6 |
|
|
|
Three Months Ended March 31, 2010 |
| |||||||||||||
|
|
(in millions) |
| |||||||||||||
|
|
Mexican |
|
Mexican |
|
Peruvian |
|
Corporate, |
|
Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net sales outside of segments |
|
$ |
378.4 |
|
$ |
91.2 |
|
$ |
721.8 |
|
$ |
28.0 |
|
$ |
1,219.4 |
|
Intersegment sales |
|
21.2 |
|
51.7 |
|
|
|
(72.9 |
) |
|
| |||||
Cost of sales (exclusive of depreciation, amortization and depletion) |
|
177.9 |
|
91.3 |
|
283.4 |
|
(41.6 |
) |
511.0 |
| |||||
Selling, general and administrative |
|
7.4 |
|
3.2 |
|
10.5 |
|
0.6 |
|
21.7 |
| |||||
Depreciation, amortization and depletion |
|
29.8 |
|
5.9 |
|
32.9 |
|
0.8 |
|
69.4 |
| |||||
Exploration |
|
1.2 |
|
3.6 |
|
3.7 |
|
|
|
8.5 |
| |||||
Operating income |
|
$ |
183.3 |
|
$ |
38.9 |
|
$ |
391.3 |
|
$ |
(4.7 |
) |
608.8 |
| |
Less: |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest, net |
|
|
|
|
|
|
|
|
|
(21.8 |
) | |||||
Other income (expense) |
|
|
|
|
|
|
|
|
|
1.4 |
| |||||
Income taxes |
|
|
|
|
|
|
|
|
|
(203.2 |
) | |||||
Non-controlling interest |
|
|
|
|
|
|
|
|
|
(2.0 |
) | |||||
Net income attributable to SCC |
|
|
|
|
|
|
|
|
|
$ |
383.2 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Capital expenditure |
|
$ |
12.2 |
|
$ |
5.9 |
|
$ |
57.2 |
|
$ |
0.1 |
|
$ |
75.4 |
|
Property, net |
|
$ |
1,586.6 |
|
$ |
275.2 |
|
$ |
2,050.3 |
|
$ |
61.5 |
|
$ |
3,973.6 |
|
Total assets |
|
$ |
2,394.5 |
|
$ |
696.6 |
|
$ |
2,873.2 |
|
$ |
36.3 |
|
$ |
6,000.6 |
|
NOTE 14 STOCKHOLDERS´EQUITY:
Treasury Stock:
Activity in treasury stock in the three-month period ended March 31, 2011 and 2010 is as follows (in millions):
|
|
2011 |
|
2010 |
| ||
Southern Copper common shares |
|
|
|
|
| ||
Balance as of January 1, |
|
$ |
461.0 |
|
$ |
460.7 |
|
Purchase of shares |
|
|
|
|
| ||
Used for corporate purposes |
|
|
|
|
| ||
Balance as of March 31, |
|
461.0 |
|
460.7 |
| ||
|
|
|
|
|
| ||
Parent Company (Grupo Mexico) common shares |
|
|
|
|
| ||
Balance as of January 1, |
|
161.7 |
|
142.7 |
| ||
Other activity, including dividend, interest and currency translation effect |
|
7.9 |
|
8.7 |
| ||
Balance as of March 31, |
|
169.6 |
|
151.4 |
| ||
|
|
|
|
|
| ||
Treasury stock balance as of March 31, |
|
$ |
630.6 |
|
$ |
612.1 |
|
Parent Company common share:
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: |
|
% Deducted |
|
1st year after the grant date |
|
90 |
% |
2nd year after the grant date |
|
80 |
% |
3rd year after the grant date |
|
70 |
% |
4th year after the grant date |
|
60 |
% |
5th year after the grant date |
|
50 |
% |
6th year after the grant date |
|
40 |
% |
7th year after the grant date |
|
20 |
% |
In the case of involuntary termination of the employee, the Company will pay to the employee the 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:
If the termination occurs during: |
|
% Deducted |
|
1st year after the grant date |
|
100 |
% |
2nd year after the grant date |
|
95 |
% |
3rd year after the grant date |
|
90 |
% |
4th year after the grant date |
|
80 |
% |
5th year after the grant date |
|
70 |
% |
6th year after the grant date |
|
60 |
% |
7th year after the grant date |
|
50 |
% |
In case of retirement or death of the employee, the Company will render the buyer or his legal beneficiary, the fair market sales value as of the date of retirement or death of the shares effectively paid, net of costs and taxes.
For the first quarter 2011 and 2010, the stock based compensation expense under the Employee Stock Purchase Plan was $0.5 million in both periods. As of March 31, 2011, there was $8.0 million of unrecognized compensation expense under this plan, which is expected to be recognized over the remaining three year and nine month period.
The following table presents the stock award activity of the Employee Stock Purchase Plan for the three months ended March 31, 2011 and 2010:
|
|
Shares |
|
Unit Weighted Average |
| |
|
|
|
|
|
| |
Outstanding shares at January 1, 2010 |
|
11,556,625 |
|
$ |
1.16 |
|
Granted |
|
|
|
|
| |
Exercised |
|
|
|
|
| |
Forfeited |
|
(89,869 |
) |
1.16 |
| |
Outstanding shares at March 31, 2010 |
|
11,466,756 |
|
$ |
1.16 |
|
|
|
|
|
|
| |
Outstanding shares at January 1, 2011 |
|
10,920,693 |
|
$ |
1.16 |
|
Granted |
|
|
|
|
| |
Exercised |
|
(2,800,805 |
) |
1.16 |
| |
Forfeited |
|
|
|
|
| |
Outstanding shares at March 31, 2011 |
|
8,119,888 |
|
$ |
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.
For the first quarter 2011 the stock based compensation expense under the New Employee Stock Purchase Plan was $0.1 million. At March 31, 2011, there was $4.2 million of unrecognized compensation expense under this plan, which is expected to be recognized over the remaining seven year and nine month period.
The following table presents the stock award activity of the New Employee Stock Purchase Plan for the three months ended March 31, 2011:
|
|
Shares |
|
Unit Weighted Average |
| |
|
|
|
|
|
| |
Outstanding shares at January 1, 2011 |
|
3,901,901 |
|
$ |
2.05 |
|
Granted |
|
|
|
|
| |
Exercised |
|
|
|
|
| |
Forfeited |
|
|
|
|
| |
Outstanding shares at March 31, 2011 |
|
3,901,901 |
|
$ |
2.05 |
|
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 NON-CONTROLLING INTEREST
The following table presents the non-controlling interest activity for the three months ended March 31, 2011 and 2010:
|
|
2011 |
|
2010 |
| ||
Balance as of January 1, |
|
$ |
20.0 |
|
$ |
18.0 |
|
Net earnings |
|
1.8 |
|
2.0 |
| ||
Dividend paid |
|
(2.2 |
) |
(1.1 |
) | ||
Other |
|
(0.1 |
) |
(0.1 |
) | ||
Balance as of March 31, |
|
$ |
19.5 |
|
$ |
18.8 |
|
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 condensed consolidated balance sheet as of March 31, 2011 and December 31, 2010 (in millions):
|
|
As of March 31, 2011 |
|
As of December 31, 2010 |
| ||||||||
|
|
Carrying |
|
Fair Value |
|
Carrying |
|
Fair Value |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Long-term debt |
|
$ |
2,781.2 |
|
$ |
2,905.6 |
|
$ |
2,786.4 |
|
$ |
2,982.7 |
|
Fair value for long term debt 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 9%, which is the Companys weighted average cost of capital.
Fair values of assets and liabilities measured at fair value on a recurring basis were calculated as follows as of March 31, 2011 and December 31, 2010:
|
|
Fair Value at Measurement Date Using: |
| ||||||||||
Description |
|
Fair |
|
Quoted prices |
|
Significant |
|
Significant |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Short term investment: |
|
|
|
|
|
|
|
|
| ||||
- Trading securities |
|
$ |
211.7 |
|
$ |
211.7 |
|
|
|
|
| ||
- Available for sale debt securities: |
|
|
|
|
|
|
|
|
| ||||
Corporate bonds |
|
0.5 |
|
|
|
$ |
0.5 |
|
|
| |||
Asset backed obligations |
|
0.2 |
|
|
|
0.2 |
|
|
| ||||
Mortgage backed securities |
|
8.3 |
|
|
|
7.1 |
|
$ |
1.2 |
| |||
|
|
|
|
|
|
|
|
|
| ||||
Accounts receivable: |
|
|
|
|
|
|
|
|
| ||||
- Derivatives - Not classified as hedges: |
|
|
|
|
|
|
|
|
| ||||
Provisionally priced sales: |
|
|
|
|
|
|
|
|
| ||||
Copper |
|
(6.4 |
) |
(6.4 |
) |
|
|
|
| ||||
Molybdenum |
|
(4.7 |
) |
(4.7 |
) |
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Other current liabilities: |
|
|
|
|
|
|
|
|
| ||||
Liability derivatives - Classified as cash flow hedges: |
|
|
|
|
|
|
|
|
| ||||
Swap |
|
(63.7 |
) |
|
|
(63.7 |
) |
|
| ||||
Zero cost collar |
|
(29.7 |
) |
|
|
(29.7 |
) |
|
| ||||
Total |
|
$ |
116.2 |
|
$ |
200.6 |
|
$ |
(85.6 |
) |
$ |
1.2 |
|
|
|
Fair Value at Measurement Date Using: |
| ||||||||||
Description |
|
Fair |
|
Quoted prices |
|
Significant |
|
Significant |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Short term investment: |
|
|
|
|
|
|
|
|
| ||||
- Trading securities |
|
$ |
66.9 |
|
$ |
66.9 |
|
|
|
|
| ||
- Available for sale debt securities: |
|
|
|
|
|
|
|
|
| ||||
Corporate bonds |
|
0.4 |
|
|
|
$ |
0.4 |
|
|
| |||
Asset backed obligations |
|
0.3 |
|
|
|
0.3 |
|
|
| ||||
Mortgage backed securities |
|
8.6 |
|
|
|
7.4 |
|
$ |
1.2 |
| |||
|
|
|
|
|
|
|
|
|
| ||||
Accounts receivable: |
|
|
|
|
|
|
|
|
| ||||
- Derivatives - Not classified as hedges: |
|
|
|
|
|
|
|
|
| ||||
Provisionally priced sales: |
|
|
|
|
|
|
|
|
| ||||
Copper |
|
4.8 |
|
4.8 |
|
|
|
|
| ||||
Molybdenum |
|
7.3 |
|
7.3 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Other current liabilities: |
|
|
|
|
|
|
|
|
| ||||
Liability derivatives - Classified as cash flow hedges: |
|
|
|
|
|
|
|
|
| ||||
Swap |
|
(124.4 |
) |
|
|
(124.4 |
) |
|
| ||||
Zero cost collar |
|
(72.6 |
) |
|
|
(72.6 |
) |
|
| ||||
Total |
|
$ |
(108.7 |
) |
$ |
79.0 |
|
$ |
(188.9 |
) |
$ |
1.2 |
|
The Company classifies investments within Level 3 of the valuation hierarchy in certain cases where there is limited activity or less observable inputs to the valuation. Investments classified within Level 3 as of March 31, 2011 and December 31, 2010 include mortgage-backed securities. These investments are valued by the funds management advisor taking into consideration different factors and methodologies considered appropriate in the circumstance. Factors can include the following or a combination of the following, observed transactions, broker quotes, cash flow analysis, vendor prices and other factors as appropriate.
Derivatives are valued using internal 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. The Company generally classifies these instruments within Level 1 of the valuation hierarchy. Such derivatives at March 31, 2011 and December 31, 2010, include copper swaps and zero cost collar.
The Companys accounts receivables associated with provisionally priced copper sales of copper are valued using quoted market prices based on the forward price on the London Metal Exchange (LME) or on the Commodities Exchange (COMEX) in New York. Such value is classified within Level 1 of the fair value hierarchy. Molybdenum prices are established by reference to the publication Platts Metals Week and are considered Level 1 in the fair value hierarchy.
The table below sets forth a summary of changes in the fair value of the Companys Level 3 short-term investments (corporate bond, asset backed obligations, and mortgage backed securities) for the first quarter 2011 and 2010.
|
|
3 months ended March 31, 2011 |
| ||||||||
|
|
Available for sale debt securities: |
|
|
| ||||||
|
|
Corporate |
|
Asset backed |
|
Mortgage |
|
Total |
| ||
Balance as of January 1, |
|
|
|
|
|
$ |
1.2 |
|
$ |
1.2 |
|
Unrealized gain (loss) |
|
|
|
|
|
|
|
|
| ||
Purchases |
|
|
|
|
|
|
|
|
| ||
Sales |
|
|
|
|
|
|
|
|
| ||
Issuance |
|
|
|
|
|
|
|
|
| ||
settlements |
|
|
|
|
|
|
|
|
| ||
Transfers in/out of Level 3 |
|
|
|
|
|
|
|
|
| ||
Balance as of March 31, |
|
|
|
|
|
$ |
1.2 |
|
$ |
1.2 |
|
|
|
3 months ended March 31, 2010 |
| |||||||||
|
|
Available for sale debt securities: |
|
|
| |||||||
|
|
Corporate |
|
Asset |
|
Mortgage |
|
Total |
| |||
Balance as of January 1, |
|
$ |
1.7 |
|
|
|
$ |
1.4 |
|
$ |
3.1 |
|
Unrealized gain (loss) |
|
|
|
|
|
|
|
|
| |||
Purchases |
|
|
|
|
|
|
|
|
| |||
Sales |
|
(1.2 |
) |
|
|
|
|
(1.2 |
) | |||
Issuance |
|
|
|
|
|
|
|
|
| |||
settlements |
|
|
|
|
|
|
|
|
| |||
Transfers in/out of Level 3 |
|
0.1 |
|
|
|
(1.4 |
) |
(1.3 |
) | |||
Balance as of March 31, |
|
$ |
0.6 |
|
|
|
$ |
|
|
$ |
0.6 |
|
The unrealized gains (losses) were included in other income in the condensed consolidated statement of earnings for the quarter ended March 31, 2011 and 2010.
NOTE 17 TIA MARIA PROJECT:
In light of recent protests and disruptions carried out by a small group of activists who allege, among other things, that the Tia Maria project will result in severe environmental contamination and the diversion of water resources that have been committed for agricultural use, the Peruvian government issued a resolution suspending the process of approval of the Tia Maria Environmental Impact Assessment (EIA). The Company believes that the Peruvian governments actions are without legal merit and that such actions may have been motivated to a large extent by political considerations, given the elections that are currently taking place in Peru, and that in no way it limits or modifies the Company rights to the property or the investments made up-to-date. In due time, the Company will readdress the status of the Tia Maria project with the government but will let a prudent time elapse because of the current political situation in Peru. As soon as it is practical, the Company will provide to the mining authorities its answers to all the observations submitted by the concerned parties as part of the EIA approval process, as is required by the applicable regulations issued by MINEM with respect to the EIA process. The Company is confident that with this technical information any and all concerns that the authorities might have will be duly addressed. The SXEW leaching technologies and processes to be employed at the Tia Maria facility have been widely developed in Peru and other countries and have been demonstrated to comply with environmental regulations and not to pollute the air, the soil or the water.
The Tia Maria project comprises a total investment of approximately $1,000 million, of which $434.7 million has been invested through March 31, 2011 mainly in mine and leach equipment and the required studies.
The Company is confident that it will complete the Tia Maria project and will begin copper mining and production activities once the legal process is completed. However, the Company may incur in additional expenses depending on the nature and timing of final decisions taken by the Peruvian government on this matter. However, management is currently unable to estimate any loss, if any, as most of the equipment of Tia Maria may be used at other operations of the Company.
NOTE 18 SUBSEQUENT EVENTS:
Dividends:
On April 13, 2011, the Board of Directors authorized a quarterly dividend of 56 cents per share payable on May 18, 2011, to SCC shareholders of record at the close of business on May 4, 2011.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information that management believes is relevant to an assessment and understanding of the consolidated financial condition and results of operations of Southern Copper Corporation and its subsidiaries (collectively, SCC, the Company, our, and we). This item should be read in conjunction with our interim unaudited Condensed Consolidated Financial Statements and the notes thereto included in this quarterly report. Additionally, the following discussion and analysis should be read in conjunction with the Management Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements included in Part II of our annual report on Form 10-K for the year ended December 31, 2010.
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 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 worlds 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 we have started exploration activities in Argentina. 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. In first quarter 2011 approximately 76% of our revenues came from the sale of copper, 9% from molybdenum, 6% from silver and 9% from various other products, including zinc, gold and other materials.
We believe that our greatest strength lies in our copper ore reserves, which at December 31, 2010 totaled 59.7 million tons of contained copper, calculated at a copper price of $1.80 per pound. In terms of copper reserves, we believe we hold the worlds largest reserve position.
One of our other key strengths is our cost competitiveness and efficiency which is evidenced by our first quarter 2011 operating cash cost of 24.3 cents per pound; one of the lowest in the industry.
Our other significant strengths include our asset quality and our prudent financial policies, which are reflected in our financial performance.
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. Copper and molybdenum represented 76% and 9%, respectively, of our sales in the first quarter 2011. Average copper price was $4.38 per pound in the first quarter of 2011 about 33.5% higher than in the first
quarter of 2010. Average molybdenum, silver and zinc prices in the first quarter of 2011 increased 8.9%, 87.7% and 4.8%, respectively, over average prices in the first quarter of 2010.
· We maintain our 2011 production guidance of 630,000 tons of copper, which includes 5.7% of copper purchased from third parties and copper production from the Buenavista mine, which is operating at full capacity starting April 2011.
· For the second half of 2011, we expect a significant increase in ore grade at the Cuajone mine, which will offset the lower production of the first quarter. Copper mine production in the first quarter of 2011 decreased 5% compared with the fourth quarter of 2010 due to expected lower ore grades mainly at the Cuajone mine.
· We expect molybdenum production in 2011 to be about 17,000 tons, a decrease from 2010 production due to a 9% decrease in production at our Peruvian mines because of a temporary decrease in ore grades.
· For 2011 we are estimating a zinc production of 97,100 tons and a silver production of 13.0 million ounces.
· In the first quarter 2011, we spent $73.0 million on capital expenditures and we will continue with our capital investment projects at the Buenavista mine, as well as at the Toquepala and Cuajone expansions.
· As a result of violent disruptions in the Islay area the Peruvian government has put on hold our Tia Maria project and has rejected the EIA for the project. See Tia Maria project, below.
Copper Overview: We maintain our positive outlook for the market fundamentals of this metal. On the demand side, a worldwide growth in the range of 4 to 5% for 2011 is expected, that will not be matched by new copper production, estimated to grow 3% in 2011. At the end of last year, several analysts believed the market was heading towards a deficit of 400,000 to 600,000 tons for 2011 that should sustain copper prices.
At this point we believe the market is adequately supplied considering inventory levels of the Shanghai, LME and Comex warehouses, off warehouse material and the contribution of scrap copper, a product that is more plentiful when copper prices are attractive.
Earnings: Copper prices continued to improve during the first quarter of 2011. Prices for other metals have also improved during this period. During the first quarter of 2011 per pound LME spot copper prices ranged from $4.07 to $4.60 and averaged $4.38, as compared to an average of $3.28 in the first quarter 2010. While in the near term the outlook for copper could be volatile we believe that the copper market outlook remains strong for the next few years. Limited supplies from existing mines, the absence in the near term of any major new development projects and increasing demand from Asia, we believe, supports this outlook. The LME spot price for copper closed at $4.26 per pound on March 31, 2011.
First quarter 2011 sales of $1,602 million and net earnings attributable to SCC of $478 million reflects the continuing recovery of copper prices and prices of our other metal products, as well as Company-wide productivity improvements which have increased our production and sales. This allows us to continue with our capital projects to increase production levels and improve our profitability.
The table below highlights key financial and operational data for our Company for the three months ended March 31, 2011 and 2010: