Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: September 30, 2012

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                 to                

 

Commission File Number: 1-14066

 

SOUTHERN COPPER CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

13-3849074

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

1440 East Missouri Avenue, Suite 160, Phoenix, AZ

 

85014

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (602) 264-1375

 

 

(Former name, former address and former fiscal year, if change since last report)

 

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

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

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

 

As of October 25, 2012 there were outstanding 845,550,550 shares of Southern Copper Corporation common stock, par value $0.01 per share.

 

 

 



Table of Contents

 

Southern Copper Corporation (“SCC”)

 

INDEX TO FORM 10-Q

 

 

 

 

Page No.

 

 

 

 

Part I.  Financial Information:

 

 

 

 

 

 

Item. 1

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Statement of Earnings for the three and nine months ended September 30, 2012 and 2011

 

3

 

 

 

 

 

Condensed Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011

 

4

 

 

 

 

 

Condensed Consolidated Balance Sheet as of September 30, 2012 and December 31, 2011

 

5

 

 

 

 

 

Condensed Consolidated Statement of Cash Flows for the three and nine months ended September 30, 2012 and 2011

 

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7-26

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

27-42

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

 

43-44

 

 

 

 

Item 4.

Controls and procedures

 

45

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

46

 

 

 

 

Part II. Other Information:

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

47

 

 

 

 

Item 1A.

Risk factors

 

47

 

 

 

 

Item 2.

Unregistered Sale of Equity Securities and Use of Proceeds

 

47

 

 

 

 

Item 4.

Mine Safety Disclosures

 

47

 

 

 

 

Item 6.

Exhibits

 

48-49

 

 

 

 

 

Signatures

 

50

 

 

 

 

 

List of Exhibits

 

51-52

 

 

 

 

Exhibit 15

Independent Accountants’ Awareness Letter

 

53

 

 

 

 

Exhibit 31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

54

 

 

 

 

Exhibit 31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

55

 

 

 

 

Exhibit 32.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

56

 

 

 

 

Exhibit 32.2

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

57

 

 

 

 

Exhibit 101

Financial statements for the three and nine months ended September 30, 2012 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 in detail.

 

Submitted electronically with this report

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.  Condensed Consolidated Financial Statements

 

Southern Copper Corporation

 

CONDENSED CONSOLIDATED STATEMENT OF EARNINGS

(Unaudited)

 

 

 

3 Months Ended

 

9 Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Net sales (including sales to related parties, see note 9)

 

$

1,552,379

 

$

1,745,906

 

$

5,018,191

 

$

5,149,423

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of sales (exclusive of depreciation, amortization and depletion shown separately below)

 

670,861

 

677,258

 

2,060,664

 

2,110,095

 

Selling, general and administrative

 

23,758

 

24,376

 

74,551

 

74,692

 

Legal fees related to damage award (Note 2)

 

316,233

 

 

316,233

 

 

Depreciation, amortization and depletion

 

81,283

 

72,506

 

236,655

 

216,048

 

Exploration

 

12,470

 

9,675

 

33,795

 

25,040

 

Total operating costs and expenses

 

1,104,605

 

783,815

 

2,721,898

 

2,425,875

 

Operating income

 

447,774

 

962,091

 

2,296,293

 

2,723,548

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(48,458

)

(48,506

)

(143,042

)

(144,367

)

Capitalized interest

 

18,827

 

1,742

 

24,889

 

4,035

 

Gain on short-term investment

 

4,435

 

 

9,918

 

 

Gain on sale of investment

 

 

 

18,200

 

 

Other income (expense)

 

(908

)

(1,374

)

968

 

4,774

 

Interest income

 

3,828

 

3,614

 

11,238

 

9,859

 

Income before income taxes

 

425,498

 

917,567

 

2,218,464

 

2,597,849

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

219,802

 

252,507

 

848,544

 

792,523

 

Net income before equity earnings of affiliate

 

205,696

 

665,060

 

1,369,920

 

1,805,326

 

Equity earnings of affiliate

 

13,565

 

 

38,239

 

 

Net income

 

219,261

 

665,060

 

1,408,159

 

1,805,326

 

Less: Net income attributable to the non-controlling interest

 

1,395

 

2,021

 

5,316

 

5,874

 

Net income attributable to SCC

 

$

217,866

 

$

663,039

 

$

1,402,843

 

$

1,799,452

 

 

 

 

 

 

 

 

 

 

 

Per common share amounts attributable to SCC:

 

 

 

 

 

 

 

 

 

Net income - basic and diluted

 

$

0.26

 

$

0.78

 

$

1.65

 

$

2.10

 

Dividends paid

 

$

0.24

 

$

0.61

 

$

1.31

 

$

1.74

 

Weighted average common shares outstanding - basic and diluted

 

848,419

 

852,250

 

849,283

 

856,222

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3



Table of Contents

 

Southern Copper Corporation

 

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

3 Months Ended

 

9 Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in thousands)

 

Net income

 

$

219,261

 

$

665,060

 

$

1,408,159

 

$

1,805,326

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) net of tax:

 

 

 

 

 

 

 

 

 

Derivative instruments classified as cash flow hedge:

 

 

 

 

 

 

 

 

 

Decrease in accumulated unrealized loss (gain) in prior period

 

 

49,172

 

(5,447

)

111,000

 

Unrealized gain in the period

 

 

41,375

 

 

41,375

 

Add:

 

 

 

 

 

 

 

 

 

Realized (gain) loss included in net income

 

 

(12,684

)

 

14,528

 

Unrealized net gain (loss) on derivative instruments classified as cash flow hedges

 

 

77,863

 

(5,447

)

166,903

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

219,261

 

$

742,923

 

$

1,402,712

 

$

1,972,229

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to the non-controlling interest

 

$

1,395

 

$

2,346

 

$

5,338

 

$

6,451

 

Comprehensive income attributable to SCC

 

$

217,866

 

$

740,577

 

$

1,397,374

 

$

1,965,778

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4



Table of Contents

 

Southern Copper Corporation

 

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,157,805

 

$

848,118

 

Short-term investments

 

379,702

 

521,955

 

Accounts receivable trade

 

529,786

 

695,104

 

Accounts receivable other

 

50,739

 

30,176

 

Accounts receivable related parties

 

179,988

 

158,301

 

Damage award receivable (Note 2)

 

2,108,221

 

 

Inventories

 

646,419

 

651,896

 

Deferred income tax

 

83,796

 

88,797

 

Other current assets

 

153,079

 

107,156

 

Total current assets

 

5,289,535

 

3,101,503

 

 

 

 

 

 

 

Property, net

 

4,856,167

 

4,419,885

 

Leachable material, net

 

217,943

 

122,985

 

Intangible assets, net

 

109,444

 

110,436

 

Deferred income tax

 

168,874

 

145,251

 

Other assets

 

199,808

 

162,641

 

Total assets

 

$

10,841,771

 

$

8,062,701

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

10,000

 

$

10,000

 

Accounts payable (including related parties 2012 -$10,047 and 2011 - $4,392)

 

427,479

 

443,132

 

Accrued legal fees related to damage award (Note 2)

 

316,233

 

 

Accrued income taxes

 

 

182,491

 

Deferred income tax

 

39,860

 

39,860

 

Accrued workers’ participation

 

213,910

 

245,139

 

Accrued interest

 

63,009

 

59,906

 

Other accrued liabilities

 

33,392

 

12,349

 

Total current liabilities

 

1,103,883

 

992,877

 

 

 

 

 

 

 

Long-term debt

 

2,731,195

 

2,735,732

 

Deferred income taxes

 

219,097

 

125,191

 

Non-current taxes payable

 

67,524

 

66,982

 

Other liabilities and reserves

 

54,436

 

43,665

 

Asset retirement obligation

 

64,554

 

61,971

 

Total non-current liabilities

 

3,136,806

 

3,033,541

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Common stock

 

8,846

 

8,846

 

Additional paid-in capital

 

3,319,058

 

1,039,382

 

Retained earnings

 

4,144,424

 

3,852,054

 

Accumulated other comprehensive income

 

7,427

 

12,874

 

Treasury stock, at cost, common shares

 

(902,612

)

(897,852

)

Total Southern Copper Corporation stockholders’ equity

 

6,577,143

 

4,015,304

 

Non-controlling interest

 

23,939

 

20,979

 

Total equity

 

6,601,082

 

4,036,283

 

 

 

 

 

 

 

Total liabilities and equity

 

$

10,841,771

 

$

8,062,701

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5



Table of Contents

 

Southern Copper Corporation

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

 

 

3 Months Ended

 

9 Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in thousands)

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

Net income

 

$

219,261

 

$

665,060

 

$

1,408,159

 

$

1,805,326

 

Adjustments to reconcile net earnings to net cash provided from operating activities:

 

 

 

 

 

 

 

 

 

Depreciation, amortization and depletion

 

81,283

 

72,506

 

236,655

 

216,048

 

Equity earnings of affiliate, net of dividends received

 

2,654

 

 

(14,285

)

 

Loss (income) on currency translation effect

 

3,358

 

(8,931

)

(3,302

)

(3,278

)

Provision (benefit) for deferred income taxes

 

56,808

 

(81,687

)

76,116

 

(98,189

)

Gain on sale of investment

 

 

 

(18,200

)

 

Gain on sale of property

 

5,108

 

(305

)

4,050

 

(6,715

)

Cash provided from (used for) operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

60,008

 

72,194

 

123,068

 

(59,767

)

Inventories

 

(56,581

)

(4,718

)

(89,481

)

(73,166

)

Accounts payable and accrued liabilities

 

345,506

 

189,075

 

111,006

 

(252,137

)

Other operating assets and liabilities

 

(55,285

)

(25,213

)

(74,192

)

67,645

 

Net cash provided from operating activities

 

662,120

 

877,981

 

1,759,594

 

1,595,767

 

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(258,224

)

(153,394

)

(665,944

)

(337,038

)

Proceeds from (purchase of) short-term investments, net

 

(5,946

)

(310,280

)

142,253

 

(459,643

)

Payments to development stage properties accounted for as equity method investments

 

 

(8,504

)

 

(24,415

)

Sale of investment

 

 

 

18,200

 

 

Sale of property

 

93

 

1,424

 

5,373

 

10,279

 

Other

 

 

(9,741

)

 

(9,741

)

Net cash used for investing activities

 

(264,077

)

(480,495

)

(500,118

)

(820,558

)

 

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

Debt repaid

 

 

 

(5,000

)

(10,250

)

Dividends paid to common stockholders

 

(203,723

)

(522,649

)

(813,883

)

(1,491,653

)

Distributions to non-controlling interest

 

(533

)

(1,350

)

(2,253

)

(4,955

)

Repurchase of common shares

 

(99,185

)

(110,290

)

(132,369

)

(258,358

)

Other

 

154

 

1,505

 

758

 

1,001

 

Net cash used for financing activities

 

(303,287

)

(632,784

)

(952,747

)

(1,764,215

)

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(16,322

)

24,592

 

2,958

 

39,464

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

78,434

 

(210,706

)

309,687

 

(949,542

)

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, at beginning of period

 

1,079,371

 

1,453,841

 

848,118

 

2,192,677

 

Cash and cash equivalents, at end of period

 

$

1,157,805

 

$

1,243,135

 

$

1,157,805

 

$

1,243,135

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6



Table of Contents

 

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” or “SCC”), the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to state fairly the Company’s financial position as of September 30, 2012 and the results of operations, comprehensive income and cash flows for the three and nine months ended September 30, 2012 and 2011.  The results of operations for the three and nine months ended September 30, 2012 and 2011 are not necessarily indicative of the results to be expected for the full year.  The December 31, 2011 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 (U.S. GAAP).  The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements at December 31, 2011 and notes included in the Company’s 2011 annual report on Form 10-K.

 

NOTE 2 —SCC SHAREHOLDER DERIVATIVE LAWSUIT:

 

Three purported class action derivative lawsuits were filed in the Delaware Court of Chancery (New Castle County) late in December 2004 and early January 2005 relating to the proposed merger transaction between the Company and Minera Mexico, S.A. de C.V. (the “Transaction”), which was completed effective April 1, 2005. On January 31, 2005, the three actions were consolidated into one action and the complaint filed by Lemon Bay was designated as the operative complaint in the consolidated lawsuit. The consolidated action purports to be brought on behalf of the Company and its common stockholders. The defendants in the consolidated action were Americas Mining Corporation (“AMC”)  and SCC’s directors.  The Company was a nominal defendant.  The consolidated complaint alleges, among other things, that the Transaction was the result of breaches of fiduciary duties by the Company’s directors and was entirely unfair to the Company and its minority stockholders.

 

On October 14, 2011, the Court issued an opinion on this action finding that SCC had paid AMC too much stock consideration in the Transaction. The Court issued a revised final order and judgment on December 29, 2011. The Court decided that the Award, in the amount of $1,347 million plus $684.6 million of pre-judgment interest, was payable by AMC with cash, or with the return of a number of shares of SCC equal in value to award, or by SCC cancelling an equivalent number of shares owned by AMC, or by any combination thereof, so long as the total was equivalent to the amount of the judgment plus accrued post-judgment interest (post-judgment interest accrued from October 15, 2011). The Court also awarded attorneys’ fees and expenses in the amount of $304.7 million, or 15% of the judgment, plus post-judgment interest, payable by SCC out of the award and not from existing SCC’s cash.

 

On January 20, 2012, AMC and the other defendants appealed the Court’s decisions. On the same date, SCC appealed the Court’s decision related to the award of attorneys’ fees and expenses. On May 3, 2012, the Court accepted the security provided by AMC and granted a stay of the judgment pending final resolution of the appeal.  On August 27, 2012, the Delaware Supreme Court affirmed the lower court’s decision.  On September 21, 2012, the Delaware Supreme Court rejected the rehearing motion filed by AMC and ordered AMC to follow the Court’s decision. On October 9, 2012, AMC paid to the Company $2,108.2 million and the Company paid $316.2 million of legal fees and expenses to the plaintiff’s attorneys. The effect of this award has been recorded in the Company’s third quarter 2012 results. The $2,108.2 million awarded to the Company has been included in the capital accounts with a corresponding receivable recorded on the balance sheet.  Additionally, the Company has recorded an expense of $316.2 million in its 2012 third quarter results for the legal fees related to this award and has recorded a liability on its balance sheet for this obligation.

 

7



Table of Contents

 

NOTE 3 — SHORT-TERM INVESTMENTS:

 

Short-term investments were as follows ($ in millions):

 

 

 

At September 30,
2012

 

At December 31,
2011

 

 

 

 

 

 

 

Trading securities

 

$

373.0

 

$

514.6

 

Weighted average interest rate

 

1.00

%

1.37

%

 

 

 

 

 

 

Available for sale

 

$

6.7

 

$

7.3

 

Weighted average interest rate

 

0.51

%

0.58

%

Total

 

$

379.7

 

$

521.9

 

 

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 at September 30, 2012 and December 31, 2011, included corporate bonds and asset and mortgage backed obligations.  As of September 30, 2012 and December 31, 2011, gross unrealized gains and losses on available for sale securities were not material.

 

Related to these investments the Company earned interest, which was recorded as interest income in the 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 gain on short-term investment in the condensed consolidated statement of earnings.

 

The following table summarizes the activity of these investments by category (in millions):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Trading securities:

 

 

 

 

 

 

 

 

 

Interest earned

 

$

0.9

 

$

1.2

 

$

2.5

 

$

2.9

 

Unrealized gain (loss)

 

3.7

 

(1.1

)

8.8

 

(1.9

)

 

 

 

 

 

 

 

 

 

 

Available for sale:

 

 

 

 

 

 

 

 

 

Interest earned

 

(*)

 

(*)

 

(*)

 

(*)

 

Investment redeemed

 

$

0.2

 

$

0.9

 

$

1.4

 

$

1.7

 

 


(*) Less than $0.1 million

 

NOTE 4 - INVENTORIES:

 

Inventories were as follows:

 

(in millions)

 

At September 30,
2012

 

At December 31,
2011

 

Inventory, current:

 

 

 

 

 

Metals at lower of average cost or market:

 

 

 

 

 

Finished goods

 

$

97.6

 

$

93.3

 

Work-in-process

 

276.7

 

296.1

 

Supplies at average cost

 

272.1

 

262.5

 

Total current inventory

 

$

646.4

 

$

651.9

 

 

 

 

 

 

 

Inventory, long-term

 

 

 

 

 

Long-term leach stockpiles

 

$

217.9

 

$

123.0

 

 

During the nine months ended September 30, 2012 and 2011 total leaching costs capitalized as long-term inventory of leachable material amounted to $157.3 million and $87.1 million, respectively. Long-term leaching inventories recognized as cost of sales amounted to $52.5 million and $33.6 million for the nine months ended September 30, 2012 and 2011, respectively.

 

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NOTE 5 — INCOME TAXES:

 

The income tax provision and the effective income tax rate for the nine months of 2012 and 2011 were as follows ($ in millions):

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Income tax provision

 

$

848.5

 

$

792.5

 

Effective income tax rate

 

38.2

%

30.5

%

 

These provisions include income taxes for Peru, Mexico and the United States. The increase in the effective tax rate in the nine months of 2012 from the tax rate in the 2011 period is principally caused by the legal fees related to the AMC damage award, which increased the effective rate for the nine month 2012 period by 4.7%, see Note 2.  In addition, the rate was also increased by the new special mining tax in Peru, see below.

 

For United States federal income tax reporting the operating results of SCC are included in the AMC U.S. federal income tax return.  In accordance with paragraph 30-27 of ASC 740-10-30, current and deferred taxes are allocated to members of the AMC group as if each were a separate taxpayer.  SCC provides current and deferred income taxes as if it was a separate filer.

 

Special Mining Tax

 

In September 2011, the Peruvian government enacted a new tax for the mining industry.  This tax is based on operating income and its rate ranges from 2% to 8.4%. It begins at 2% for operating income of up to 10% of sales and increases by 0.4% of operating income for each additional 5% of operating income until 85% of operating income is reached.  The Company has accrued $40.5 million for the special mining tax and is included as part of the income tax provision for the nine months of 2012.

 

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 an increase of approximately $30 to $50 million in the Company’s unrecognized tax benefits due to expected activity from tax examinations and audits by the tax authorities.

 

NOTE 6 — PROVISIONALLY PRICED SALES:

 

At September 30, 2012, the Company has recorded provisionally priced sales of copper at average forward prices per pound, and molybdenum at the September 30, 2012 market price per pound.  These sales are subject to final pricing based on the average monthly London Metal Exchange (“LME”) or New York Commodities Exchange (“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 September 30, 2012:

 

Copper
(million lbs.)

 

Priced at
(per pound)

 

Month of
Settlement

 

11.2

 

$

3.727

 

October 2012

 

3.3

 

3.724

 

November 2012

 

14.5

 

$

3.727

 

 

 

 

Molybdenum
(million lbs.)

 

Priced at
(per pound)

 

Month of
 Settlement

 

3.3

 

$

11.65

 

October 2012

 

3.1

 

11.65

 

November 2012

 

2.3

 

11.65

 

December 2012

 

8.7

 

$

11.65

 

 

 

 

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

 

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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 commodity price 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 hedges:

 

In 2011, the Company entered into copper swaps and zero cost collar derivative contracts to reduce price volatility and to protect its sales value as shown below. These transactions meet the requirements of hedge accounting.  The realized gains and losses from these derivatives were recorded in net sales on the condensed consolidated statement of earnings and included in operating activities on the condensed consolidated statement of cash flow.

 

The following table summarizes the copper derivative activity related to copper sales transactions realized in the third quarter and nine months of 2012 and 2011, respectively:

 

 

 

Third quarter

 

Nine months

 

 

 

2012

 

2011

 

2012

 

2011

 

Zero cost collar contracts:

 

 

 

 

 

 

 

 

 

Pounds (in millions)

 

 

105.8

 

46.3

 

317.5

 

Average LME cap price

 

 

$

4.84

 

$

5.18

 

$

4.84

 

Average LME floor price

 

 

$

3.02

 

$

3.50

 

$

3.02

 

 

 

 

 

 

 

 

 

 

 

Swap contracts:

 

 

 

 

 

 

 

 

Pounds (in millions)

 

 

99.2

 

 

331.2

 

Weighted average COMEX price

 

 

$

4.08

 

 

$

4.08

 

 

 

 

 

 

 

 

 

 

 

Realized gain (loss) on copper derivatives (in millions) (*)

 

 

$

20.7

 

 

$

(23.7

)

 


(*) Realized gains and losses in 2011 include a gain of $23.9 million recognized in the third quarter resulting from the unwinding of copper swap positions.

 

The hedge instruments are based on LME copper prices.  The Company performed statistical analysis on the difference between the average monthly copper price on the LME and the COMEX exchanges and determined that the correlation coefficient is greater than 0.999.  Based on this analysis, the Company considers that the LME underlying price matches its sales priced at COMEX prices.  These cash flow hedge relationships qualify as critical matched terms hedge relationships and as a result have no ineffectiveness.  The Company performs periodic quantitative assessments to confirm that the relationship was highly effective and that the ineffectiveness was de minimis.

 

During the third quarter of 2012 and as of September 30, 2012, the Company did not hold copper derivative contracts.

 

Transactions under these metal price protection programs are accounted for as cash flow hedges under ASC 815-30 “Derivatives and Hedging-Cash Flow Hedges” as they meet the requirements for this treatment and are adjusted to fair market value based on the metal prices as of the last day of the respective reporting period with the gain or loss recorded in other comprehensive income until settlement, at which time the gain or loss, 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 Company’s closure plans were 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 guarantees of $2.6 million over a 34 year period to furnish the funds for the asset retirement obligation.  In the near-term future the Company has pledged the value of its Lima office complex as support for this obligation.  The accepted value of the

 

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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, of dismantling the Toquepala and Cuajone concentrators, the smelter and refinery in Ilo, and the shops and auxiliary facilities at the three units, including the Ilo marine trestle.

 

The following table summarizes the asset retirement obligation activity for the nine months ended September 30, 2012 and 2011 (in millions):

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Balance as of January 1

 

$

62.0

 

$

59.1

 

Changes in estimates

 

 

 

 

Additions

 

 

 

 

Accretion expense

 

2.6

 

2.5

 

Balance as of September 30,

 

$

64.6

 

$

61.6

 

 

NOTE 9 — RELATED PARTY TRANSACTIONS:

 

Receivable and payable balances with related parties are shown below (in millions):

 

 

 

As of

 

 

 

September 30,
 2012

 

December 31,
2011

 

Affiliate receivable:

 

 

 

 

 

Grupo Mexico, S.A.B de C.V. (“Grupo Mexico”) and affiliates

 

$

0.8

 

$

0.7

 

Mexico Generadora de Energia S.A. de C.V.

 

 

178.2

 

 

156.3

 

Asarco LLC (“Asarco”)

 

 

0.2

 

Compania Perforadora Mexico, S.A.P.I. de C.V.

 

0.5

 

0.1

 

Mexico Proyectos y Desarrollos, S.A de C.V. and affiliates

 

0.5

 

1.0

 

 

 

$

180.0

 

$

158.3

 

Affiliate payable:

 

 

 

 

 

Grupo Mexico and affiliates

 

$

1.5

 

$

2.0

 

Asarco

 

6.0

 

 

Higher Technology S.A.C.

 

0.2

 

0.1

 

Breaker S.A. de C.V

 

0.1

 

0.2

 

Exploraciones Mineras del Peru S.A.C.

 

 

 

0.3

 

Mexico Transportes Aereos, S.A. de C.V. (“Mextransport”)

 

0.2

 

0.5

 

Ferrocarril Mexicano, S.A. de C.V.

 

2.1

 

1.3

 

 

 

$

10.1

 

$

4.4

 

 

The Company has entered into certain transactions in the ordinary course of business with parties that are controlling shareholders or their affiliates.  These transactions include the lease of office space, air transportation and construction services and products and services related to mining and refining.  The Company lends and borrows funds among affiliates for acquisitions and other corporate purposes.  These financial transactions bear interest and are subject to review and approval by senior management, as are all related party transactions.  It is the Company’s policy that the Audit Committee of the Board of Directors shall review all related party transactions.  The Company is prohibited from entering or continuing a material related party transaction that has not been reviewed and approved or ratified by the Audit Committee.

 

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Purchase Activity:

 

The following table summarizes the purchase activity with related parties in the nine months ended September 30, 2012 and 2011 (in millions):

 

 

 

Nine months ended
September 30,

 

 

 

2012

 

2011

 

Grupo Mexico and affiliates:

 

 

 

 

 

Grupo Mexico

 

$

10.5

 

$

10.4

 

Asarco

 

33.0

 

17.2

 

Ferrocarril Mexicano, S.A de C.V.

 

10.7

 

8.9

 

Compania Perforadora Mexico, S.A.P.I. de C.V and affiliates

 

2.2

 

0.5

 

Consorcio Tricobre

 

 

0.5

 

Mexico Proyectos y Desarrollos, S.A. de C.V. and affiliates

 

37.2

 

23.7

 

 

 

 

 

 

 

Other Larrea family companies:

 

 

 

 

 

Mexico Compania de Productos Automotrices, S.A. de C.V.

 

 

0.2

 

Mextransport

 

2.0

 

1.9

 

 

 

 

 

 

 

Companies with relationships to SCC executive officers families:

 

 

 

 

 

Higher Technology S.A.C.

 

2.3

 

1.6

 

Servicios y Fabricaciones Mecanicas S.A.C.

 

0.1

 

0.5

 

Sempertrans France Belting Technology

 

0.1

 

0.2

 

PIGOBA, S.A. de C.V.

 

0.5

 

0.2

 

Breaker, S.A. de C.V.

 

1.8

 

4.4

 

Total purchased

 

$

100.4

 

$

70.2

 

 

Grupo Mexico, the Company’s ultimate parent and the majority indirect stockholder of the Company, and its affiliates provide various services to the Company.  These services are primarily related to accounting, legal, tax, financial, treasury, human resources, price risk assessment and hedging, purchasing, procurement and logistics, sales and administrative and other support services.  The Company pays Grupo Mexico for these services.  The Company expects to continue to pay for these services in the future.

 

The Company’s 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 Compania Perforadora Mexico S.A.P.I. de C.V. These three companies are subsidiaries of Grupo Mexico.

 

In the nine months of 2012, the Company’s Peruvian operations paid fees for engineering and consulting services provided by Exploraciones Mineras del Peru S.A.C., a Peruvian company in which Grupo Mexico Servicios de Ingenieria, S.A. de C.V and Mexico Proyectos y Desarrollos, S.A. de C. V. has 99.97% and 0.03% participation, respectively. Both companies are subsidiaries of Grupo Mexico.

 

In May 2010, the Company’s Mexican operations granted a $350 million line of Credit to Mexico Generadora de Energia S.A. de C.V., a power generating subsidiary of Grupo Mexico, for the construction of a power plant. Conditions and balance at September 30, 2012 are as follows (dollars in millions):

 

 

 

Loan Open

 

Line of credit

 

$

350.0

 

Maturity

 

December 31, 2012

 

Average interest rate

 

4.18

%

Remaining balance at September 30, 2012

 

$

178.2

 

 

The Larrea family controls a majority of the capital stock of Grupo Mexico, and has extensive interests in other businesses, including aviation and real estate.  The Company engages in certain transactions in the ordinary course of business with other entities controlled by the Larrea family relating to the lease of office space and air transportation. In connection with this, the Company paid fees for maintenance services and sale of vehicles provided by Mexico Compania de Productos Automotrices, S.A. de C.V., a company controlled by the Larrea family and which is currently in liquidation.

 

Additionally, in 2007, the Company’s Mexican subsidiaries provided guaranties for two loans obtained by Mextransport, a company controlled by the Larrea family, from Bank of Nova Scotia in Mexico. One of these loans has been repaid and the remaining loan requires semi-annual repayments. Conditions and balance as of September 30, 2012 are as follows:

 

 

 

Loan Open

 

Original loan balance (in millions)

 

$

8.5

 

Maturity

 

August 2013

 

Interest rate

 

Libor + 0.15

%

Remaining balance at September 30, 2012 (in millions)

 

$

1.3

 

 

Mextransport provides aviation services to the Company’s Mexican operations.  The guaranty provided to Mextransport is backed up by the transport services provided by Mextransport to the Company’s Mexican subsidiaries.

 

The Company purchased industrial materials from Higher Technology S.A.C. and paid fees for maintenance services provided by Servicios y Fabricaciones Mecanicas S.A.C.  Mr. Carlos Gonzalez, the son of SCC’s Chief Executive Officer, has a proprietary interest in these companies.

 

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The Company purchased industrial material from Sempertrans France Belting Technology, in which Mr. Alejandro Gonzalez is employed as a sales representative.  Also, the Company purchased industrial material from PIGOBA, S.A. de C.V., a company in which Mr. Alejandro Gonzalez has a proprietary interest.  Mr. Alejandro Gonzalez is the son of SCC’s Chief Executive Officer.

 

The Company purchased industrial material and services from Breaker, S.A. de C.V., a company in which Mr. Jorge Gonzalez, son-in-law of SCC’s Chief Executive Officer, has a proprietary interest.

 

Sales Activity:

 

The Company sold copper cathodes, rod and anodes, as well as sulfuric acid, silver, gold and lime to Asarco.  In addition, the Company received fees for building rental and maintenance services provided to Mexico Proyectos y Desarrollos, S.A. de C.V. and its affiliates, a subsidiary of Grupo Mexico, and from Mextransport, a company of the Larrea family.

 

The following table summarizes the sales and other revenue activity in the three and nine months ended September 30, 2012 and 2011 (in millions):

 

 

 

3 Months Ended
September 30,

 

9 Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Asarco

 

$

11.5

 

$

16.3

 

$

22.9

 

$

68.8

 

Mexico Proyectos y Desarrollos, S.A. de C.V.

 

0.1

 

0.1

 

0.3

 

0.4

 

Compania Perforadora Mexico, S.A.P.I. de C.V and affiliates

 

0.2

 

(*)

 

0.2

 

0.1

 

Mextransport

 

0.1

 

 

0.9

 

 

Total

 

$

11.9

 

$

16.4

 

$

24.3

 

$

69.3

 

 


(*) amount is lower than $0.1 million

 

It is anticipated that in the future the Company will enter into similar transactions with these same parties.

 

NOTE 10- BENEFIT PLANS:

 

SCC Defined Benefit Pension Plans

 

The components of the net periodic benefit costs for the nine months ended September 30, 2012 and 2011 are as follows (in millions):

 

 

 

2012

 

2011

 

Interest cost

 

$

0.4

 

$

0.4

 

Expected return on plan assets

 

(0.5

)

(0.5

)

Amortization of net loss (gain)

 

0.1

 

0.1

 

Net periodic benefit costs

 

$

 

$

 

 

SCC Post-retirement Health Care Plan

 

The components of the net periodic benefit costs for the post-retirement health care plan for the nine months ended September 30, 2012 and 2011 are individually, and in total, less than $0.1 million.

 

Minera Mexico Pension Plans

 

The components of the net periodic benefit costs for the nine months ended September 30, 2012 and 2011 are as follows (in millions):

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Interest cost

 

$

0.5

 

$

0.5

 

Service cost

 

0.7

 

0.8

 

Expected return on plan assets

 

(2.2

)

(2.5

)

Amortization of transition assets, net

 

 

(0.1

)

Amortization of net actuarial loss

 

(0.6

)

(1.1

)

Amortization of prior services cost

 

 

 

Net periodic benefit cost

 

$

(1.6

)

$

(2.4

)

 

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Table of Contents

 

Minera Mexico Post-retirement Health Care Plan

 

The components of the net periodic cost for the nine months ended September 30, 2012 and 2011 are as follows (in millions):

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Interest cost

 

$

1.1

 

$

2.8

 

Service cost

 

 

 

Amortization of net loss (gain)

 

(0.2

)

 

Amortization of transition obligation

 

 

1.1

 

Net periodic benefit cost

 

$

0.9

 

$

3.9

 

 

NOTE 11 — COMMITMENTS AND CONTINGENCIES:

 

Environmental matters:

 

The Company has instituted extensive environmental conservation programs at its mining facilities in Peru and Mexico.  The Company’s environmental programs include, among other features, water recovery systems to conserve water and minimize impact on nearby streams, reforestation programs to stabilize the surface of the tailings dams and the implementation of scrubbing technology in the mines to reduce dust emissions.

 

Environmental capital expenditures in the nine months ended September 30, 2012 and 2011 were as follows (in millions):

 

 

 

2012

 

2011

 

Peruvian operations

 

$

3.0

 

$

1.7

 

Mexican operations

 

13.8

 

7.7

 

 

 

$

16.8

 

$

9.4

 

 

Peruvian operations: The Company’s operations are subject to applicable Peruvian environmental laws and regulations.  The Peruvian government, through the Environmental Ministry conducts annual audits of the Company’s Peruvian mining and metallurgical operations.  Through these environmental audits, matters related to environmental commitments, compliance with legal requirements, atmospheric emissions, and effluent monitoring are reviewed.  The Company believes that it is in material compliance with applicable Peruvian environmental laws and regulations.

 

Peruvian law requires that companies in the mining industry provide for future closure and remediation.  In accordance with the requirements of this law the Company’s closure plans were approved by MINEM.  As part of the closure plans, the Company is providing guarantees to ensure that sufficient funds will be available for the asset retirement obligation.  See Note 8, “Asset retirement obligation,” for further discussion of this matter.

 

Mexican operations: The Company’s operations are subject to applicable Mexican federal, state and municipal environmental laws, to Mexican official standards, and to regulations for the protection of the environment, including regulations relating to water supply, water quality, air quality, noise levels and hazardous and solid waste.

 

The principal legislation applicable to the Company’s Mexican operations is the Federal General Law of Ecological Balance and Environmental Protection (the “General Law”), which is enforced by the Federal Bureau of Environmental Protection (“PROFEPA”).  PROFEPA monitors compliance with environmental legislation and enforces Mexican environmental laws, regulations and official standards.  PROFEPA may initiate administrative proceedings against companies that violate environmental laws, which in the most extreme cases may result in the temporary or permanent closing of non-complying facilities, the revocation of operating licenses and/or other sanctions or fines.  Also, according to the federal criminal code, PROFEPA must inform corresponding authorities regarding environmental non-compliance.

 

On January 28, 2011, Article 180 of the General Law was amended.  This amendment, gives an individual or entity the ability to contest administrative acts, including environmental authorizations, permits or concessions granted, without the need to demonstrate the actual existence of harm to the environment, natural resources, flora, fauna or human health, because it will be sufficient to argue that the harm may be caused.

 

In addition, on August 30, 2011, amendments to the Civil Federal Procedures Code (“CFPC”) were published in the Official Gazette and are now in force.  These amendments establish three categories of collective actions, by means of which 30 or more people

 

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claiming injury derived from environmental, consumer protection, financial services and economic competition issues will be considered to be sufficient in order to have a legitimate interest to seek through a civil procedure restitution or economic compensation or suspension of the activities from which the alleged injury derived.  The amendments to the CFPC may result in more litigation, with plaintiffs seeking remedies, including suspension of the activities alleged to cause harm.

 

On December 5, 2011, the Mexican Senate Chamber approved the Environmental Liability Federal Law, which establishes general guidelines in order to determine which environmental actions will be considered to cause environmental harm that will give rise to administrative responsibilities (remediation or compensations) and criminal responsibilities. Also economic fines could be established. This initiative has been returned to lower chamber for discussion and voting.  The law will be in force once approved by the lower chamber and signed by the President.

 

In March 2010, the Company announced to the Mexican federal environmental authorities the closure of the copper smelter plant at San Luis Potosi.  The Company has initiated a program for plant demolition and soil remediation with a budget of $35.7 million, of which the Company has spent $30.9 million through September 30, 2012.  The program is expected to be completed by the end of 2013.  The Company expects that once the site is remediated, the Company will be able to promote an urban development to generate a net gain on the disposal of the property.

 

The Company believes that all of its facilities in Peru and Mexico are in material compliance with applicable environmental, mining and other laws and regulations.

 

The Company also believes that continued compliance with environmental laws of Mexico and Peru will not have a material adverse effect on the Company’s business, properties, result of operations, financial condition or prospects and will not result in material capital expenditures.

 

Litigation matters:

 

Peruvian operations

 

Garcia Ataucuri and Others against SCC’s Peruvian Branch:

 

In April 1996, the Branch was served with a complaint filed in Peru by Mr. Garcia Ataucuri and approximately 900 former employees seeking the delivery of a substantial number of “labor shares” (acciones laborales) plus dividends on such shares, to be issued to each former employee in proportion to their time of employment with SCC’s Peruvian Branch.

 

The labor share litigation is based on claims of former employees for ownership of a portion of the labor shares that the plaintiffs state that the Branch did not issue during the 1970s until 1979 under a former Peruvian mandated profit sharing system.  In 1971, the Peruvian government enacted legislation providing that mining workers would have a 10% participation in the pre-tax profits of their employing enterprises.  This participation was distributed 40% in cash and 60% in an equity interest of the enterprise.  In 1978, the equity portion, which was originally delivered to a mining industry workers’ organization, was set at 5.5% of pre-tax profits and was delivered, mainly in the form of “labor shares” to individual workers.  The cash portion was set at 4.0% of pre-tax earnings and was delivered to individual employees also in proportion to their time of employment with the Branch.  In 1992, the workers’ participation was set at 8%, with 100% payable in cash and the equity participation was eliminated from the law.

 

In relation to the issuance of “labor shares” by the Branch in Peru, the Branch is a defendant in the following lawsuits:

 

1)              Mr. Garcia Ataucuri seeks delivery, to himself and each of the approximately 900 former employees of the Peruvian Branch, of the 3,876,380,679.65 old soles or 38,763,806.80 “labor shares” (acciones laborales), as required by Decree Law 22333 (a former profit sharing law), to be issued proportionally to each former employee in accordance with the time of employment of such employee with SCC’s Branch in Peru, plus dividends on such shares.  The 38,763,806.80 labor shares sought in the complaint, with a face value of 100.00 old soles each, represent 100% of the labor shares issued by the Branch during the 1970s until 1979 for all of its employees during that period.  The plaintiffs do not represent 100% of the Branch´s eligible employees during that period.

 

It should be noted that the lawsuit refers to a prior Peruvian currency called “sol de oro” or old soles, which was later changed to the “inti”, and then into today´s “nuevo sol”.  One billion of old soles is equivalent to today’s one nuevo sol.

 

After lengthy proceedings before the civil courts in Peru on September 19, 2001, on appeal from the Branch (the 2000 appeal), the Peruvian Supreme Court annulled the proceedings noting that the civil courts lacked jurisdiction and that the matter had to be decided by a labor court.

 

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In October 2007, in a separate proceeding initiated by the plaintiffs, the Peruvian Constitutional Court nullified the September 19, 2001 Peruvian Supreme Court decision and ordered the Supreme Court to decide again on the merits of the case accepting or denying the Branch’s 2000 appeal.

 

In May 2009, the Supreme Court rejected the 2000 appeal of the Branch affirming the adverse decision of the appellate civil court and lower civil court.  While the Supreme Court has ordered SCC’s Peruvian Branch to deliver the labor shares and dividends, it has clearly stated that SCC’s Peruvian Branch may prove, by all legal means, its assertion that the labor shares and dividends were distributed to the former employees in accordance with the profit sharing law then in effect, an assertion which SCC’s Peruvian Branch continues to make.  None of the court decisions state the manner by which the Branch must comply with the delivery of such labor shares or make a liquidation of the amount to be paid for past dividends and interest, if any.

 

On June 9, 2009, SCC’s Peruvian Branch filed a proceeding of relief before a civil court in Peru seeking the nullity of the 2009 Supreme Court decision and, in a separate proceeding, a request for a precautionary measure.  The civil court rendered a favorable decision on the nullity and the precautionary measure, suspending the enforcement of the Supreme Court decision, for the reasons indicated above and other reasons.  In February 2012, the Branch was notified that the civil court had reversed its decision regarding the nullity.  The precautionary measure is still in effect.  The Peruvian Branch has appealed the unfavorable decision before the superior court.  In view of this, and the recent civil court decision, SCC´s Peruvian Branch continues to analyze the manner in which the Supreme Court decision may be enforced and what financial impact, if any, said decision may have.

 

2)              In addition, there are filed against SCC’s Branch the following lawsuits, involving approximately 800 plaintiffs, which seek the same number of labor shares as in the Garcia Ataucuri case, plus interest, labor shares resulting from capital increases and dividends: Armando Cornejo Flores and others v. SCC’s Peruvian Branch (filed May 10, 2006); Alejandro Zapata Mamani and others v. SCC’s Peruvian Branch (filed June 27, 2008); Arenas Rodriguez and others, represented by Mr. Cornejo Flores, v. SCC’s Peruvian Branch (filed January 2009); Eduardo Chujutalli v. SCC’s Peruvian Branch (filed May 2011); Edgardo Garcia Ataucuri, in representation of 216 of SCC’s Peruvian Branch former workers, v. SCC’s Peruvian Branch (filed May 2011); Silvestre Macedo Condori v. SCC’s Peruvian Branch (filed June 2011); Juan Guillermo Oporto Carpio v. SCC’s Peruvian Branch (filed August 2011); Rene Mercado Caballero v. SCC’s Peruvian Branch (filed November 2011); Enrique Salazar Alvarez and others v. SCC’s Peruvian Branch (filed December 2011); Indalecio Carlos Perez Cano and others v. SCC Peruvian Branch (filed March 2012);  Jesús Mamani Chura and others v. SCC’s Peruvian Branch (filed March, 2012); Armando Cornejo Flores, in representation of 37 of SCC’s Peruvian Branch former workers v. SCC’s Peruvian Branch (filed March, 2012) and Porfirio Ochochoque Mamani and others v. SCC´s Peruvian Branch (filed July, 2012). SCC’s Peruvian Branch has answered the complaints and denied the validity of the claims.

 

SCC’s Peruvian Branch asserts that the labor shares were distributed to the former employees in accordance with the profit sharing law then in effect.  The Peruvian Branch has not made a provision for these lawsuits because it believes that it has meritorious defenses to the claims asserted in the complaints.  Additionally, the amount of this contingency cannot be reasonably estimated by management at this time.

 

Exploraciones de Concesiones Metalicas S.A.C. (“Excomet”):

 

In August 2009, a lawsuit was filed against SCC’s Branch by the former stockholders of Excomet.  The plaintiffs allege that the acquisition of Excomet’s shares by the Branch is null and void because the $2 million purchase price paid by the Branch for the shares of Excomet was not fairly negotiated by the plaintiffs and the Branch.  In 2005, the Branch acquired the shares of Excomet after lengthy negotiations with the plaintiffs, and after the plaintiffs, which were all 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.  In October 2011, the civil court dismissed the case on the grounds that the claim had been barred by the statute of limitations.  The plaintiff has appealed this decision before the superior court.  At September 30, 2012, resolution of the appeal was pending.

 

Sociedad Minera de Responsabilidad Limitada Virgen Maria de Arequipa (SMRL Virgen Maria):

 

In August 2010, a lawsuit was filed against SCC’s Branch and others by SMRL Virgen Maria, a company which until July 2003 owned the mining concession Virgen Maria, 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

 

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shares of Excomet by SCC’s Branch, noted above, and the sale of the concession to SCC’s Branch by Excomet). On October, 2011, the civil court dismissed the case on the grounds that the claim had been barred by the statute of limitations.  The plaintiff has appealed this decision before the superior court.  At September 30, 2012, resolution of the appeal was pending.

 

Omar Nunez Melgar:

 

In May 2011, Mr. Omar Nunez Melgar commenced a lawsuit against the Peruvian Mining and Metallurgical Institute (“INGEMMET”) and the MINEM challenging the denial of Mr. Nunez’s concession request that conflicted with SCC’s Branch’s Virgen Maria concession, which forms part of the Tia Maria concession.  SCC’s Branch has been made a party to the proceedings as the owner of the Virgen Maria concession.  SCC’s Branch has answered the complaint and denied the validity of the claim.  As of September 30, 2012, this case remains open with no further developments.

 

The Company asserts that the lawsuits are without merit and is vigorously defending against these lawsuits.

 

Mexican Operations

 

Pasta de Conchos Accident:

 

On February 19, 2010, three widows of miners, who perished in the 2006 Pasta de Conchos accident, filed a complaint for damages in the United States District Court for the District of Arizona against the defendants, Grupo Mexico, AMC and SCC.  The plaintiffs allege that the defendants’ purported failure to maintain a safe working environment at the mine amounted to a violation of several laws and treaties.  The Company considers that the court does not have subject-matter jurisdiction over the plaintiffs’ claims and will defend itself vigorously.  On April 13, 2010, the Company filed a motion to dismiss the plaintiffs’ complaint.  On March 29, 2011, the District Court for the District of Arizona dismissed the case for lack of subject-matter jurisdiction.  On April 5, 2011, the plaintiffs filed a notice of appeal in this case.  At September 30, 2012, resolution of the appeal was pending.

 

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.

 

The San Martin and Taxco mines in Mexico have been on strike since July 2007.  On December 10, 2009, a federal court confirmed the legality of the San Martin strike.  In order to recover the control of the San Martin mine and resume operations, on January 27, 2011, the Company filed a court petition requesting that the court, among other things, define the termination payment for each unionized worker.  The court denied the petition alleging that according to federal labor law, the union was the only legitimate party to file such petition.  On appeal by the Company, on May 13, 2011, the Mexican federal tribunal accepted the petition of the Company.  In July 2011, the union appealed the favorable court decision before the Supreme Court.  At September 30, 2012, resolution of the appeal was pending.

 

In July 2012, Minera Krypton, a Mexican mining company, not affiliated with Grupo Mexico or the Company, hired 130 workers for the rehabilitation of its mining unit at Chalchihuites, Zacatecas.  Most of those workers are or were workers of the San Martin mine who in order to work for Minera Krypton joined a new union called, “Confederación Revolucionaria de Obreros y Campesinos”, which on August 31, 2012 filed a petition with the labor authorities to replace the existing union at the San Martin mine.  On September 1, 2012, the workers affiliated with this new union took over the San Martin mine evicting the workers on strike.  Several hearings have taken place during September 2012 with the federal labor authorities and it is expected than in October 2012 there will be a recount of workers to establish which union will hold the collective agreement through a free and legal vote of the workers.  The Company expects that with the resolution of which union represents the workers, the Company will then be able to resolve the strike and to restore operations at the mine.

 

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 appealed the labor court ruling before a federal court.  In September 2011, the federal court accepted the union’s appeal and requested that the federal labor court review the procedure and take into account all the evidence to issue a new resolution.  On January 3, 2012, the federal labor court again issued a new resolution, approving the termination of the collective bargaining agreement and

 

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all the individual labor contracts of the workers affiliated with the Mexican mining union at the Taxco mine. On January 25, 2012, the mining union appealed the resolution before the federal court.  On June 14, 2012, the federal court accepted the union’s appeal and requested the federal labor court to issue a new resolution, taking into account all evidence submitted by the parties.  On August 6, 2012, the federal labor court issued a new decision disapproving the termination of the collective bargaining agreement and the individual labor contracts of the workers affiliated with the Mexican mining union at the Taxco mine. On August 29, 2012, the Company filed a proceeding seeking relief from the decision before a federal court. At September 30, 2012, resolution of the relief proceeding was pending.

 

Other legal matters:

 

Class actions:

 

For the resolution of the three purported class action derivative lawsuits filed in the Delaware Court of Chancery (New Castle County) late in December 2004 and early January 2005 relating to the proposed merger transaction between the Company and Minera Mexico, S.A. de C.V., which was completed effective April 1, 2005, see Note 2- SCC Shareholder Derivative Lawsuit.

 

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

 

Other Contingencies:

 

Tia Maria:

 

Tia Maria, an over $1.0 billion Peruvian investment project, was suspended by governmental action in April 2011 in light of protests and disruptions carried out by a small group of activists who alleged, among other things, that the project would result in severe environmental contamination and the diversion of agricultural water resources.

 

The Company has decided to prepare a new environmental impact assessment (“EIA”) study that we believe will take into account local community concerns, new government guidance and observations from the United Nations agency hired by MINEM for this purpose. The Company considers that this new EIA process will alleviate all the concerns previously raised by the Tia Maria project’s neighboring communities, provide them with an independent source of information and reaffirm the validity of the Company’s assessment of the project. The Company is confident that this initiative will have a positive effect on its stakeholders and will allow the Company to obtain the approval for the development of the 120,000 ton annual production copper project. As a consequence, and contingent upon receiving all required governmental approvals in the time frame provided for in the law, the mining operations for the project have been rescheduled to start-up in 2015.  No assurances can be given as to the specific timing of each such approval.

 

The Company has legal and valid title to the Tia Maria mining concessions and the over-lapping surface land in the area. None of above noted activities have in any way challenged, revoked, impaired or annulled the Company´s legal rights to the Tia Maria mining concessions and/or the over-lapping surface land titles acquired in the past. All the Company’s property rights on these areas are in full force.

 

In view of the suspension of this project, the Company has reviewed the carrying value of this asset to ascertain whether impairment exists. Total spending on the project, through September 30, 2012, is $487.6 million. As the project is currently on hold, some of the equipment has been transferred to other Company operations in Mexico and Peru.  Should the Tia Maria project not be restarted, the Company is confident that most of the project equipment will continue to be used productively, through reassignment to other mine locations operated by the Company. At September 30, 2012, equipment transferred to other Company operations totaled $175.8 million.  The Company believes that an impairment loss, if any, will not be material.

 

Other commitments:

 

Power purchase agreement

 

In 1997, SCC sold its Ilo power plant to an independent power company, Enersur S.A. (“Enersur”). In connection with the sale, a power purchase agreement (“PPA”)  was also completed under which SCC agreed to purchase all of its power needs for its current Peruvian operations from Enersur for twenty years, commencing in 1997.

 

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The Company signed in 2009 a Memorandum of Understanding (“MOU”) with Enersur regarding its PPA. The MOU contains new economic terms that the Company believes better reflects current economic conditions of the power industry in Peru. The new economic conditions agreed to in the MOU have been applied by Enersur to its invoices to the Company since May 2009. Additionally, the MOU includes an option for providing power for the Tia Maria project.  However, due to the delay at the Tia Maria project the final agreement was put on hold, see caption “Tia Maria” above.

 

Tax contingency matters:

 

Tax contingencies are provided for under ASC 740-10-50-15 Uncertain tax position (see Note 4, “Income taxes”).

 

NOTE 12 — SEGMENT AND RELATED INFORMATION:

 

Company management views Southern Copper as having three reportable segments and manages on the basis of these segments.  The reportable segments identified by the Company are: the Peruvian operations, the Mexican open-pit operations and the Mexican underground mining operations segment identified as the IMMSA unit.

 

The three reportable segments identified are groups of mines, each of which constitute an operating segment, with similar economic characteristics, type of products, processes and support facilities, similar regulatory environments, similar employee bargaining contracts and similar currency risks. In addition, each mine within the individual group earns revenues from similar type of customers for their products and services and each group incurs expenses independently, including commercial transactions between groups.

 

Financial information is regularly prepared for each of the three segments and the results of the Company’s operations are regularly reported to the Chief Operating Officer on the segment basis.  The Chief Operating Officer of the Company focuses on operating income and on total assets as measures of performance to evaluate different segments and to make decisions to allocate resources to the reported segments.  These are common measures in the mining industry.

 

Financial information relating to Southern Copper’s segments is as follows:

 

 

 

Three Months Ended September 30, 2012

 

 

 

(in millions)

 

 

 

Mexican
Open-pit

 

Mexican
IMMSA
Unit

 

Peruvian
Operations

 

Corporate, other
and eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales outside of segments

 

$

784.7

 

$

86.6

 

$

681.1

 

 

$

1,552.4

 

Intersegment sales

 

 

22.4

 

 

$

(22.4

)

 

Cost of sales (exclusive of depreciation, amortization and depletion)

 

294.5

 

60.7

 

341.4

 

(25.7

)

670.9

 

Selling, general and administrative

 

8.4

 

3.6

 

11.0

 

0.7

 

23.7

 

Legal fees related to damage award

 

 

 

 

316.2

 

316.2

 

Depreciation, amortization and depletion

 

36.9

 

6.3

 

40.1

 

(2.0

)

81.3

 

Exploration

 

1.0

 

8.3

 

3.2

 

 

12.5

 

Operating income

 

$

443.9

 

$

30.1

 

$

285.4

 

$

(311.6

)

447.8

 

Less:

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

 

 

 

 

 

 

 

(25.8

)

Gain (loss) on short term investment

 

 

 

 

 

 

 

 

 

4.4

 

Gain on sale of investment

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

(0.9

)

Income taxes

 

 

 

 

 

 

 

 

 

(219.8

)

Equity earnings of affiliate

 

 

 

 

 

 

 

 

 

13.6

 

Non-controlling interest

 

 

 

 

 

 

 

 

 

(1.4

)

Net income attributable to SCC

 

 

 

 

 

 

 

 

 

$

217.9

 

Capital expenditure

 

$

133.7

 

$

12.4

 

$

70.1

 

$

42.0

 

$

258.2

 

Property, net

 

$

2,244.6

 

$

341.2

 

$

2,146.8

 

$

123.6

 

$

4,856.2

 

Total assets

 

$

4,082.3

 

$

807.5

 

$

3,184.3

 

$

2,767.7

 

$

10,841.8

 

 

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Three Months Ended September 30, 2011

 

 

 

(in millions)

 

 

 

Mexican
Open-pit

 

Mexican
IMMSA
Unit

 

Peruvian
Operations

 

Corporate, other
and eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales outside of segments

 

$

858.5

 

$

107.9

 

$

779.5

 

 

$

1,745.9

 

Intersegment sales

 

 

 

31.9

 

 

 

$

(31.9

)

 

Cost of sales (exclusive of depreciation, amortization and depletion)

 

307.5

 

87.3

 

334.4

 

(52.0

)

677.2

 

Selling, general and administrative

 

8.3

 

3.6

 

11.6

 

0.9

 

24.4

 

Depreciation, amortization and depletion

 

37.7

 

6.3

 

35.0

 

(6.5

)

72.5

 

Exploration

 

0.9

 

5.5

 

3.3

 

 

9.7

 

Operating income

 

$

504.1

 

$

37.1

 

$

395.2

 

$

25.7

 

962.1

 

Less:

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

 

 

 

 

 

 

 

(43.2

)

Other income (expense)

 

 

 

 

 

 

 

 

 

(1.4

)

Income taxes

 

 

 

 

 

 

 

 

 

(252.5

)

Non-controlling interest

 

 

 

 

 

 

 

 

 

(2.0

)

Net income attributable to SCC

 

 

 

 

 

 

 

 

 

$

663.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditure

 

$

112.0

 

$

10.0

 

$

31.4

 

$

 

$

153.4

 

Property, net

 

$

1,711.7

 

$

309.9

 

$

2,145.9

 

$

52.3

 

$

4,219.8

 

Total assets

 

$

3,125.5

 

$

746.9

 

$

2,970.2

 

$

1,157.0

 

$

7,999.6

 

 

 

 

 

Nine Months Ended September 30, 2012

 

 

 

(in millions)

 

 

 

Mexican
Open-pit

 

Mexican
IMMSA
Unit

 

Peruvian
Operations

 

Corporate, other
and eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales outside of segments

 

$

2,483.3

 

$

281.3

 

$

2,253.6

 

 

$

5,018.2

 

Intersegment sales

 

 

97.8

 

 

$

(97.8

)

 

Cost of sales (exclusive of depreciation, amortization and depletion)

 

926.2

 

206.1

 

1,033.3

 

(104.9

)

2,060.7

 

Selling, general and administrative

 

25.5

 

10.8

 

35.6

 

2.6

 

74.5

 

Legal fees related to damage award

 

 

 

 

316.2

 

316.2

 

Depreciation, amortization and depletion

 

106.2

 

18.9

 

118.1

 

(6.5

)

236.7

 

Exploration

 

4.2

 

21.2

 

8.4

 

 

33.8

 

Operating income

 

$

1,421.2

 

$

122.1

 

$

1,058.2

 

$

(305.2

)

2,296.3

 

Less:

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

 

 

 

 

 

 

 

(106.9

)

Gain on short term investment

 

 

 

 

 

 

 

 

 

9.9

 

Gain on sale of investment

 

 

 

 

 

 

 

 

 

18.2

 

Other income (expense)

 

 

 

 

 

 

 

 

 

0.9

 

Income taxes

 

 

 

 

 

 

 

 

 

(848.5

)

Equity earnings of affiliate

 

 

 

 

 

 

 

 

 

38.2

 

Non-controlling interest

 

 

 

 

 

 

 

 

 

(5.3

)

Net income attributable to SCC

 

 

 

 

 

 

 

 

 

$

1,402.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditure

 

$

537.0

 

$

40.5

 

$

158.3

 

$

(69.8

)

$

666.0

 

Property, net

 

$

2,244.6

 

$

341.2

 

$

2,146.8

 

$

123.6

 

$

4,856.2

 

Total assets

 

$

4,082.3

 

$

807.5

 

$

3,184.3

 

$

2,767.7

 

$

10,841.8

 

 

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Nine Months Ended September 30, 2011

 

 

 

(in millions)

 

 

 

Mexican
Open-pit

 

Mexican
 IMMSA Unit

 

Peruvian
Operations

 

Corporate, other
and eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales outside of segments

 

$

2,429.1

 

$

327.0

 

$

2,393.3

 

 

$

5,149.4

 

Intersegment sales

 

 

98.8

 

 

$

(98.8

)

 

Cost of sales (exclusive of depreciation, amortization and depletion)

 

835.1

 

230.9

 

1,134.7

 

(90.6

)

2,110.1

 

Selling, general and administrative

 

25.1

 

10.8

 

35.7

 

3.1

 

74.7

 

Depreciation, amortization and depletion

 

101.2

 

18.5

 

104.0

 

(7.7

)

216.0

 

Exploration

 

2.3

 

14.1

 

8.6

 

 

25.0

 

Operating income

 

$

1,465.4

 

$

151.5

 

$

1,110.3

 

$

(3.6

)

2,723.6

 

Less:

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

 

 

 

 

 

 

 

(130.5

)

Other income (expense)

 

 

 

 

 

 

 

 

 

4.8

 

Income taxes

 

 

 

 

 

 

 

 

 

(792.5

)

Non-controlling interest

 

 

 

 

 

 

 

 

 

(5.9

)

Net income attributable to SCC

 

 

 

 

 

 

 

 

 

$

1,799.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditure

 

$

217.5

 

$

26.3

 

$

92.1

 

$

1.1

 

$

337.0

 

Property, net

 

$

1,711.7

 

$

309.9

 

$

2,145.9

 

$

52.3

 

$

4,219.8

 

Total assets

 

$

3,125.5

 

$

746.9

 

$

2,970.2

 

$

1,157.0

 

$

7,999.6

 

 

NOTE 13 — STOCKHOLDERS´EQUITY:

 

Treasury Stock:

 

Activity in treasury stock in the nine-month period ended September 30, 2012 and 2011 is as follows (in millions):

 

 

 

2012

 

2011

 

Southern Copper common shares

 

 

 

 

 

Balance as of January 1,

 

$

734.1

 

$

461.0

 

Purchase of shares

 

132.4

 

258.3

 

Stock dividend