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: March 31, 2015

 

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

 

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 April 24, 2015 there were outstanding 798,026,043 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 Statements of Earnings for the three months ended March 31, 2015 and 2014

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014

4

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014

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

51-53

 

 

 

Exhibit 15

Independent Accountants’ Awareness Letter

54

 

 

 

Exhibit 31.1

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

55

 

 

 

Exhibit 31.2

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

56

 

 

 

Exhibit 32.1

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

57

 

 

 

Exhibit 32.2

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

58

 

 

 

Exhibit 101

Financial statements for the quarter ended March 31, 2015 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

 

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Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.  Condensed Consolidated Financial Statements

 

Southern Copper Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

(in thousands, except per share
amounts)

 

Net sales (including sales to related parties, see Note 7)

 

$

1,274,807

 

$

1,354,383

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

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

 

679,822

 

641,894

 

Selling, general and administrative

 

24,869

 

24,498

 

Depreciation, amortization and depletion

 

116,963

 

110,453

 

Exploration

 

10,288

 

14,611

 

Environmental remediation

 

5,928

 

 

Total operating costs and expenses

 

837,870

 

791,456

 

 

 

 

 

 

 

Operating income

 

436,937

 

562,927

 

 

 

 

 

 

 

Interest expense

 

(64,750

)

(65,140

)

Capitalized interest

 

38,850

 

24,603

 

Other income (expense)

 

(3,764

)

(4,206

)

Interest income

 

2,847

 

4,537

 

Income before income taxes

 

410,120

 

522,721

 

 

 

 

 

 

 

Income taxes (including royalty taxes, see Note 4)

 

129,193

 

204,162

 

Net income before equity earnings of affiliate

 

280,927

 

318,559

 

Equity earnings of affiliate, net of income tax

 

2,760

 

6,038

 

 

 

 

 

 

 

Net income

 

283,687

 

324,597

 

 

 

 

 

 

 

Less: Net income attributable to the non-controlling interest

 

1,257

 

1,208

 

 

 

 

 

 

 

Net income attributable to SCC

 

$

282,430

 

$

323,389

 

 

 

 

 

 

 

Per common share amounts attributable to SCC:

 

 

 

 

 

Net earnings - basic and diluted

 

$

0.35

 

$

0.39

 

Dividends paid

 

$

0.10

 

$

0.12

 

Weighted average shares outstanding - basic and diluted

 

805,418

 

833,792

 

 

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

 

3



Table of Contents

 

Southern Copper Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

3 Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

Net income

 

$

283,687

 

$

324,597

 

 

 

 

 

 

 

Other comprehensive income (loss) net of tax:

 

 

 

 

 

- Amortization of actuarial gain net of income tax (2015: $- and 2014: $65)

 

 

(152

)

 

 

 

 

 

 

Total comprehensive income

 

$

283,687

 

$

324,445

 

 

 

 

 

 

 

Comprehensive income attributable to the non-controlling interest

 

$

1,257

 

$

1,208

 

Comprehensive income attributable to SCC

 

$

282,430

 

$

323,237

 

 

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

 

 

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Table of Contents

 

Southern Copper Corporation

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

192,138

 

$

363,970

 

Restricted cash

 

9,112

 

19,456

 

Short-term investments

 

83,820

 

338,589

 

Accounts receivable trade

 

501,195

 

540,245

 

Accounts receivable other (including related parties 2015 - $26,239 and 2014 - $32,835)

 

90,274

 

81,635

 

Inventories

 

842,925

 

836,464

 

Deferred income tax

 

106,276

 

119,510

 

Other current assets

 

176,298

 

189,920

 

Total current assets

 

2,002,038

 

2,489,789

 

 

 

 

 

 

 

Property, net

 

7,545,631

 

7,436,430

 

Leachable material

 

560,956

 

512,718

 

Intangible assets, net

 

109,778

 

109,872

 

Related parties receivable

 

161,244

 

161,244

 

Deferred income tax

 

566,396

 

553,948

 

Equity method investment

 

67,213

 

66,723

 

Other assets

 

234,646

 

221,186

 

Total assets

 

$

11,247,902

 

$

11,551,910

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

200,000

 

$

200,000

 

Short-term debt

 

50,000

 

 

Accounts payable (including related parties 2015 -$14,944 and 2014 - $69,083)

 

470,855

 

549,667

 

Accrued income taxes

 

29,691

 

80,101

 

Deferred income taxes

 

13,360

 

13,360

 

Accrued workers’ participation

 

162,050

 

198,009

 

Accrued interest

 

85,606

 

70,824

 

Other accrued liabilities

 

36,219

 

38,944

 

Total current liabilities

 

1,047,781

 

1,150,905

 

 

 

 

 

 

 

Long-term debt

 

4,006,345

 

4,006,031

 

Deferred income taxes

 

370,947

 

385,545

 

Other liabilities and reserves

 

38,363

 

56,697

 

Asset retirement obligation

 

114,833

 

116,133

 

Total non-current liabilities

 

4,530,488

 

4,564,406

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Common stock

 

8,846

 

8,846

 

Additional paid-in capital

 

3,341,956

 

3,344,669

 

Retained earnings

 

4,548,761

 

4,346,818

 

Accumulated other comprehensive income

 

4,813

 

4,813

 

Treasury stock, at cost, common shares

 

(2,267,944

)

(1,900,686

)

Total Southern Copper Corporation stockholders’ equity

 

5,636,432

 

5,804,460

 

Non-controlling interest

 

33,201

 

32,139

 

Total equity

 

5,669,633

 

5,836,599

 

 

 

 

 

 

 

Total liabilities and equity

 

$

11,247,902

 

$

11, 551,910

 

 

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

 

5



Table of Contents

 

Southern Copper Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

3 Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

283,687

 

$

324,597

 

 

 

 

 

 

 

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

 

 

 

 

 

Depreciation, amortization and depletion

 

116,963

 

110,453

 

Equity earnings of affiliate, net of dividends received

 

(490

)

(3,414

)

(Gain) loss on currency translation effect

 

(10,953

)

(5,688

)

(Benefit) provision for deferred income taxes

 

(24,698

)

(84,320

)

Other, net

 

229

 

 

 

 

 

 

 

 

Change in operating assets and liabilities:

 

 

 

 

 

Decrease (increase) in accounts receivable

 

39,050

 

(10,074

)

(Increase) decrease in inventories

 

(54,699

)

(102,061

)

Increase (decrease) in accounts payable and accrued liabilities

 

(180,571

)

69,313

 

Increase (decrease) in other operating assets and liabilities

 

52,949

 

49,429

 

Net cash provided by operating activities

 

221,467

 

348,235

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Capital investments

 

(245,832

)

(336,928

)

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

 

254,769

 

(64,742

)

Sale of property

 

 

294

 

Net cash provided by (used in) investing activities

 

8,937

 

(401,376

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Debt incurred

 

50,000

 

 

Cash dividends paid to common stockholders

 

(80,486

)

(100,026

)

Repurchase of common shares

 

(370,103

)

(52,479

)

Distributions to non-controlling interest

 

(195

)

(302

)

Net cash used in financing activities

 

(400,784

)

(152,807

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(1,452

)

6,354

 

 

 

 

 

 

 

Net (decrease) in cash and cash equivalents

 

(171,832

)

(199,594

)

Cash and cash equivalents at beginning of period

 

363,970

 

1,672,695

 

Cash and cash equivalents at end of period

 

$

192,138

 

$

1,473,101

 

 

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

 

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Table of Contents

 

Southern Copper Corporation

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 — DESCRIPTION OF THE BUSINESS:

 

The Company is a majority-owned, indirect subsidiary of Grupo Mexico S.A.B. de C.V. (“Grupo Mexico”). At March 31, 2015, Grupo Mexico through its wholly-owned subsidiary Americas Mining Corporation (“AMC”) owned 86.0% of the Company’s capital stock. The condensed consolidated financial statements presented herein consist of the accounts of Southern Copper Corporation (“SCC” or the “Company”), a Delaware corporation, and its subsidiaries. The Company is an integrated producer of copper and other minerals, and operates mining, smelting and refining facilities in Peru and Mexico. The Company conducts its primary operations in Peru through a registered branch (the “Peruvian Branch” or “Branch” or “SPCC Peru Branch”). The Peruvian Branch is not a corporation separate from the Company. The Company’s Mexican operations are conducted through subsidiaries. The Company also conducts exploration activities in Argentina, Chile, Ecuador, Mexico and Peru.

 

In the opinion of the Company, 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 March 31, 2015 and the results of operations, comprehensive income and cash flows for the three months ended March 31, 2015 and 2014. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year. The December 31, 2014 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 (“GAAP”). The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements at December 31, 2014 and notes included in the Company’s 2014 annual report on Form 10-K.

 

NOTE 2 — SHORT-TERM INVESTMENTS:

 

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

 

 

 

At March 31,

 

At December 31,

 

 

 

2015

 

2014

 

Trading securities

 

$

79.1

 

$

333.7

 

Weighted average interest rate

 

1.16

%

0.78

%

 

 

 

 

 

 

Available-for-sale

 

$

4.7

 

$

4.9

 

Weighted average interest rate

 

0.46

%

0.44

%

Total

 

$

83.8

 

$

338.6

 

 

Trading securities consist of bonds issued by public companies and are publicly traded. Each financial instrument is independent of the others. The Company has the intention to sell these bonds in the short-term.

 

Available-for-sale investments consist of securities issued by public companies. Each security is independent of the others and at March 31, 2015 and December 31, 2014, included corporate bonds and asset and mortgage backed obligations. As of March 31, 2015 and December 31, 2014, 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.

 

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Table of Contents

 

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

 

 

 

Three months ended
March 31,

 

 

 

2015

 

2014

 

Trading:

 

 

 

 

 

Interest earned

 

$

0.3

 

$

1.4

 

Unrealized gain (loss) at the end of the period

 

$

2.8

 

$

2.2

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

Interest earned

 

(*)

 

(*)

 

Investment redeemed

 

$

0.2

 

$

 

 


(*) Less than $0.1 million.

 

NOTE 3 - INVENTORIES:

 

Inventories were as follows:

 

(in millions)

 

At March 31,
2015

 

At December 31,
2014

 

 

 

 

 

 

 

Inventory, current:

 

 

 

 

 

Metals at average cost:

 

 

 

 

 

Finished goods

 

$

89.1

 

$

84.6

 

Work-in-process

 

440.8

 

450.5

 

Supplies at average cost:

 

313.0

 

301.4

 

Total current inventory

 

$

842.9

 

$

836.5

 

 

 

 

 

 

 

Inventory, long-term:

 

 

 

 

 

Leach stockpiles

 

$

561.0

 

$

512.7

 

 

In the first quarter 2015 and 2014 total leaching costs capitalized as long-term inventory of leachable material amounted to $104.6 million and $86.1 million, respectively. Leachable material inventories recognized in cost of sales amounted to $50.6 million and $39.2 million for the first quarter 2015 and 2014, respectively.

 

NOTE 4 — INCOME TAXES:

 

The income tax provision and the effective income tax rate for the first quarter 2015 and 2014 were as follows ($ in millions):

 

 

 

2015

 

2014

 

Income tax provision

 

$

129.2

 

$

204.2

 

Effective income tax rate

 

31.5

%

39.1

%

 

These provisions include income taxes for Peru, Mexico and the United States. The decrease in the effective tax rate for the first quarter of 2015 from the same period in the prior year is primarily due to a decrease in earnings, causing a reduction in the Peruvian special mining tax and the Mexican royalty tax, thereby reducing the first quarter effective rate by approximately 2.6%. Additionally, a reduction of forecasted dividends from Minera Mexico reduced the first quarter 2015 effective rate by 1.3%.

 

Components of income tax provision for the first quarter of 2015 and 2014 include the following ($ in million):

 

 

 

2015

 

2014

 

Statutory income tax provision

 

$

111.2

 

$

166.6

 

Peruvian royalty

 

0.5

 

1.6

 

Mexican royalty

 

13.7

 

24.0

 

Peruvian special mining tax

 

3.8

 

12.0

 

Total income tax provision

 

$

129.2

 

$

204.2

 

 

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Table of Contents

 

Peruvian royalty and special mining tax: In 2011, the Peruvian congress approved an amendment to the mining royalty charge. The new mining royalty charge is based on operating income margins with graduated rates ranging from 1% to 12% of operating profits, with a minimum royalty charge assessed at 1% of net sales. If the operating income margin is 10% or less, the royalty charge is 1% and for each 5% increment in the operating income margin, the royalty charge rate increases by 0.75%, up to a maximum of 12%. The minimum royalty charge assessed at 1% of net sales is recorded as cost of sales and those amounts assessed against operating income are included in the income tax provision. The Company has accrued $5.7 million and $7.7 million of royalty charge in the first quarter 2015 and 2014, respectively, of which $0.5 million and $1.6 million, respectively, were included in income taxes.

 

Also in 2011, the Peruvian government enacted a special mining tax. This tax is based on operating income and its rate ranges from 2% to 8.4%. It begins at 2% for operating income margin up to 10% and increases by 0.4% of operating income for each additional 5% of operating income until 85% of operating income is reached. The Company has accrued $3.8 million and $12.0 million of special mining tax as part of the income tax provision for the first quarter 2015 and 2014, respectively.

 

Mexican mining royalty: In December 2013, the Mexican government enacted a new law which, among other things, established a mining royalty charge of 7.5% on taxable EBITDA earnings before taxes as defined by Mexican tax regulations and an additional royalty charge of 0.5% on the net sales value over gross income from sales of gold, silver and platinum. The Company has accrued $13.7 and $24.0 million of royalty taxes as part of the income tax provision for the first quarter 2015 and 2014, respectively.  In the first quarter of 2015, the Company has paid $56.3 million for year 2014 mining royalty.

 

Income tax rate:

 

In 2014, the Peruvian government enacted tax law changes to both the income tax and dividend tax rates that became effective on January 1, 2015. The rate in effect for 2014 was 30%, with a 4.1% dividend tax rate. The new rates are as follows:

 

Year

 

Income Tax Rate

 

Dividend Tax Rate

 

2015- 2016

 

28

%

6.8

%

2017- 2018

 

27

%

8.0

%

2019 and later

 

26

%

9.3

%

 

Accounting for uncertainty in income taxes: In the first quarter 2015, there were no changes in the Company’s uncertain tax positions.

 

NOTE 5 — PROVISIONALLY PRICED SALES:

 

At March 31, 2015, the Company has recorded provisionally priced sales of copper at average forward prices per pound, and molybdenum at the March 31, 2015 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 March 31, 2015:

 

 

 

Sales volume
(million lbs.)

 

Priced at
(per pound)

 

Month of settlement

 

Copper

 

60.9

 

$

2.75

 

From April 2015 to May 2015

 

Molybdenum

 

10.3

 

$

8.28

 

From April 2015 to July 2015

 

 

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 6 - 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, the Company is required to provide annual guarantees over the estimated life of the mines, based on a present value approach, and to furnish the funds for the asset retirement obligation. This law requires a review of closing plans every five years. Currently and for the near-term future, the Company has pledged the value of its Lima office complex as support for this obligation. The accepted value of the Lima office building, for this purpose, is $27.8 million. Through March 2015, the Company has provided guarantees of $17.9 million. The closure cost recognized for this liability includes the cost, as outlined in its closure plans, of dismantling the Toquepala and Cuajone concentrators, the smelter and refinery in Ilo, and the shops and auxiliary facilities at the three units.

 

In 2010, the Company announced to the Mexican federal environmental authorities its closure plans for the copper smelter plant at San Luis Potosi. The Company initiated a program for plant demolition and soil remediation $62.4 million, of which the Company has spent $51.1 million through March 31, 2015. Plant demolition and construction of a confinement area at the south of the property were completed in 2012 and the Company expects to complete soil remediation and the construction of a second confinement area during the second quarter of 2015. The Company expects that once the site is remediated, a decision will be made on whether sell or develop the property.

 

The overall cost recognized for mining closure in Mexico includes the estimated costs of dismantling concentrators, smelter and refinery plants, shops and other facilities.

 

The following table summarizes the asset retirement obligation activity for the three months ended March 31, 2015 and 2014 (in millions):

 

 

 

2015

 

2014

 

Balance as of January 1

 

$

116.1

 

$

124.8

 

Changes in estimates

 

 

26.7

 

Additions

 

 

 

Payments

 

(4.2

)

(1.5

)

Accretion expense

 

2.9

 

2.0

 

Balance as of March 31,

 

$

114.8

 

$

152.0

 

 

NOTE 7 — RELATED PARTY TRANSACTIONS:

 

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.

 

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

 

 

 

At March 31,
2015

 

At December 31,
2014

 

Related parties receivable current:

 

 

 

 

 

Asarco LLC

 

$

0.8

 

$

 

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

 

0.4

 

0.2

 

Grupo Mexico

 

0.8

 

0.7

 

Mexico Generadora de Energia S. de R.L. (“MGE”)

 

24.1

 

31.9

 

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

 

0.1

 

 

 

 

$

26.2

 

$

32.8

 

 

 

 

 

 

 

Related parties receivable non-current:

 

 

 

 

 

MGE

 

$

161.2

 

$

161.2

 

 

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At March 31,
2015

 

At December 31,
2014

 

Related parties payable:

 

 

 

 

 

Asarco LLC

 

$

 

$

13.8

 

Breaker S.A. de C.V. and affiliates (“Breaker”)

 

0.2

 

0.7

 

Eolica El Retiro, S.A.P.I. de C.V.

 

0.2

 

1.6

 

Ferrocarril Mexicano S.A. de C.V.

 

0.5

 

1.8

 

Grupo Mexico

 

5.9

 

2.8

 

Higher Technology S.A.C.

 

 

0.2

 

MGE

 

4.7

 

45.2

 

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

 

2.0

 

1.7

 

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

 

1.4

 

1.3

 

 

 

$

14.9

 

$

69.1

 

 

Purchase and sale activity:

 

Grupo Mexico and affiliates:

 

The following table summarizes the purchase and sale activities with Grupo Mexico and its affiliates in the three months ended March 31, 2015 and 2014 (in millions):

 

 

 

2015

 

2014

 

Purchase activity

 

 

 

 

 

Asarco LLC

 

$

7.7

 

$

15.1

 

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

 

0.3

 

1.2

 

Eolica El Retiro, S.A.P.I. de C.V.

 

3.9

 

 

Ferrocarril Mexicano S.A de C.V.

 

3.3

 

5.3

 

Grupo Mexico

 

 

3.4

 

 

3.5

 

MGE

 

37.8

 

48.9

 

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

 

10.6

 

47.2

 

Total Purchases

 

$

67.0

 

$

121.2

 

 

 

 

 

 

 

Sales activity

 

 

 

 

 

Asarco LLC

 

$

35.9

 

$

 

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

 

0.1

 

0.1

 

MGE

 

22.2

 

24.3

 

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

 

0.2

 

0.2

 

Total Sales

 

$

58.4

 

$

24.6

 

 

Grupo Mexico, the 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 and expects to continue requiring these 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 Proyectos y Desarrollo S.A. de C.V. and its affiliates, and for drilling services provided by Compania Perforadora Mexico S.A.P.I. de C.V. All of these companies are subsidiaries of Grupo Mexico.

 

The Company’s Mexican operations purchased scrap and other residual copper mineral from Asarco, and power from MGE. Both companies are subsidiaries of Grupo Mexico.

 

In 2005, the Company organized MGE, as a subsidiary of Minera Mexico, for the construction of two power plants to supply power to the Company’s Mexican operations. In May 2010, the Company’s Mexican operations granted a $350 million line of credit to MGE for the construction of the power plants. That line of credit was due on December 31, 2012 and carried an interest rate of 4.4%. In the first quarter of 2012, Controladora de Infraestructura Energetica Mexico, S. A. de C. V., an indirect subsidiary of Grupo Mexico, acquired 99.999% of MGE through a capital subscription of 1,928.6 million of Mexican pesos (approximately $150 million), reducing Minera Mexico’s participation to less than 0.001%. As consequence of this change in control, MGE became an indirect subsidiary of Grupo Mexico. Additionally, at the same time, MGE paid $150 million to the Company’s Mexican operations partially reducing the total debt. At December 31, 2012, the outstanding balance of $184.0 million was restructured as subordinated debt of MGE with an interest rate of 5.75%. MGE will repay its debt to the Company using a percentage of its profits until such time as the debt is satisfied. At March 31, 2015 the remaining balance of the debt

 

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was $161.2 million and was recorded as non-current related party receivable on the condensed consolidated balance sheet. Related to this loan the Company recorded interest income of $2.3 million in the first quarter of 2015 and 2014, respectively.

 

In 2012, the Company signed a power purchase agreement with MGE, whereby MGE will supply some of the Company’s Mexican operations with power through 2032. MGE completed construction of its first power plant in June 2013 and the second plant, in the second quarter of 2014. MGE has the authorization for interconnection with the Mexican electrical system to start operations in the second plant. MGE began supplying power to the Company in December 2013. It is expected that MGE will supply a portion of its power output to third-party energy users. See also Note 9 “Commitments and Contingencies — Other commitments”.

 

On August 4, 2014, Mexico Generadora de Energia Eolica S. de R.L. de C.V, an indirect subsidiary of Grupo Mexico, located in Oaxaca, Mexico; acquired Eolica el Retiro. Eolica el Retiro is a windfarm that has 37 wind turbines. This company started operations in January 2014 and started to sell power to IMMSA and other subsidiaries of Grupo Mexico in the third quarter of 2014.

 

The Company sold copper cathodes, rod and anodes, as well as sulfuric acid, silver, gold and lime to Asarco. In addition, the Company received fees for building rental and maintenance services provided to Mexico Proyectos y Desarrollos, S.A. de C.V. and its affiliates and to Perforadora Mexico S.A.P.I de C.V., and for natural gas and services provided to MGE, all subsidiaries of Grupo Mexico.

 

Companies with relationships to the controlling group:

 

The following table summarizes the purchase and sales activities with other Larrea family companies in the three months ended March 31, 2015 and 2014 (in millions):

 

Mextransport:

 

2015

 

2014

 

 

 

 

 

 

 

Purchase activity

 

$

0.1

 

$

0.6

 

 

 

 

 

 

 

Sales activity

 

$

0.1

 

$

0.1

 

 

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.

 

Companies with relationships to SCC executive officers:

 

The following table summarizes the purchase activities with companies with relationships to SCC executive officers in the three months ended March 31, 2015 and 2014 (in millions):

 

 

 

2015

 

2014

 

Breaker

 

$

0.3

 

$

0.9

 

Higher Technology S.A.C.

 

0.3

 

0.3

 

Sempertrans and affiliates

 

0.2

 

0.3

 

Servicios y Fabricaciones Mecanicas S.A.C.

 

0.2

 

0.3

 

Total purchases

 

$

1.0

 

$

1.8

 

 

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

 

The Company purchased industrial material from Sempertrans and its affiliates, which employs Mr. Alejandro Gonzalez 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; and from Breaker Peru S.A.C., a company in which Mr. Jorge Gonzalez, son-in-law and Mr. Carlos Gonzalez, son of SCC’s Chief Executive Officer have a proprietary interest.

 

Equity Investment in Affiliate: The Company has a 44.2% participation in Compania Minera Coimolache S.A. (“Coimolache”), which it accounts for on the equity method. Coimolache owns Tantahuatay, a gold mine located in the northern

 

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part of Peru. To support the cost of the development of Tantahuatay, the Company loaned $56.6 million to Coimolache. The repayment of this loan was completed in August 2014.

 

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

 

NOTE 8 — BENEFIT PLANS:

 

Post retirement defined benefit plan:

 

The Company has two noncontributory defined benefit pension plans covering former salaried employees in the United States and certain former expatriate employees in Peru. Effective October 31, 2000, the Board of Directors amended the qualified pension plan to suspend the accrual of benefits.

 

In October 2014, the Society of Actuaries (SOA) issued new mortality tables based on a comprehensive study of private retirement plans. Effective December 31, 2014, the Company elected to update the mortality assumption to the new SOA tables.

 

In addition, the Company’s Mexican subsidiaries have a defined contribution pension plan for salaried employees and a non-contributory defined benefit pension plan for union employees.

 

The components of net periodic benefit costs for the three months ended March 31, 2015 and 2014 are as follows (in millions):

 

 

 

2015

 

2014

 

Service cost

 

$

0.2

 

$

0.3

 

Interest cost

 

0.2

 

0.3

 

Expected return on plan assets

 

(0.7

)

(0.9

)

Amortization of net actuarial loss

 

(*

)

(0.2

)

Amortization of net loss/(gain)

 

(*

)

(*)

 

Net periodic benefit costs

 

$

(0.3

)

$

(0.5

)

 


(*) amount is lower than $0.1 million

 

Post-retirement Health care plan:

 

Peru: The Company adopted a post-retirement health care plan for retired salaried employees eligible for Medicare in 1996. The Company manages the plan and is currently providing health benefits to retirees. The plan is accounted for in accordance with ASC 715 “Compensation retirement benefits”.

 

Mexico: Through 2007, the Buenavista unit provided health care services free of charge to employees and retired unionized employees and their families through its own hospital at the Buenavista unit. In 2011, the Company signed an agreement with the Secretary of Health of the State of Sonora to provide these services to its retired workers and their families. The new workers of Buenavista del Cobre will receive health services from the Mexican Institute of Social Security as is the case for all Mexican workers.

 

The components of net periodic benefit cost for the three months ended March 31, 2015 and 2014 are as follows (in millions):

 

 

 

2015

 

2014

 

Interest cost

 

$

0.3

 

$

0.3

 

Amortization of net loss (gain)

 

(0.1

)

(*)

 

Amortization of prior service cost (credit)

 

(*)

 

(*)

 

Net periodic benefit cost

 

$

0.2

 

$

0.3

 

 


(*) amount is lower than $0.1 million

 

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NOTE 9 — 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 others, 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 investments in the three months ended March 31, 2015 and 2014 were as follows (in millions):

 

 

 

2015

 

2014

 

Peruvian operations

 

$

18.9

 

$

18.3

 

Mexican operations

 

3.2

 

6.4

 

 

 

$

22.1

 

$

24.7

 

 

Peruvian operations: The Company’s operations are subject to applicable Peruvian environmental laws and regulations. The Peruvian government, through the Ministry of Environment (“MINAM”) conducts annual audits of the Company’s Peruvian mining and metallurgical operations. Through these environmental audits, matters related to environmental obligation, compliance with legal requirements, atmospheric emissions, effluent monitoring and waste management 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 assurances for future closure and reclamation. 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 6 “Asset retirement obligation,” for further discussion of this matter.

 

In 2008, the Peruvian government enacted environmental regulations establishing more stringent air quality standards (“AQS”) for daily sulfur dioxide (“SO2”) emissions for the Peruvian territory. These regulations, as amended in 2013, recognize distinct zones/areas, as atmospheric basins. Those areas with a mean 24-hour SO2 concentration equal or less than 20 micrograms per cubic meter (“ug/m3”) are required to develop programs to maintain this level of compliance. Those areas or cities exceeding the mean 24-hour SO2 concentration of 20 ug/m3 will be required to establish an action plan to address this problem and are required to achieve the 20 ug/m3 AQS in the future. Meanwhile they are required to achieve mean 24-hour AQS equal to 80 ug/m3 of SO2. MINAM has established three atmospheric basins that require further attention to comply with 80ug/m3 of SO2. The Ilo basin is one of these three areas and the Company’s smelter and refinery are part of the area. A supreme decree issued on April 8, 2014, indicates that the Company should review its compliance with these regulations and develop a modification plan to reach compliance. The Company continues working with an environmental technical study group, established by a MINAM resolution to identify air quality issues and develop plans to comply with the pertinent regulations.

 

In 2013, the Peruvian government enacted new soil environmental quality standards (“SQS”) applicable to any existing facility or project that generates or could generate risk of soil contamination in its area of operation or influence. In March 2014, MINAM issued a supreme decree which establishes additional provisions for the gradual implementation of SQS. Under this rule the Company has twelve months to identify contaminated sites in and around its facilities and present a report of identified contaminated sites. If such sites exist, the Company must submit a decontamination plan for approval within 24 months from the date it is notified by the authority. This decontamination plan shall include remediation actions, a schedule and compliance deadlines. Also, under this rule, if deemed necessary, the Company may request a one year extension, given sound justification. Soil confirmation tests must be carried out after completion of decontamination actions (within the approved schedule) and results must be presented to the authorities within 30 days after receiving such results. Non-compliance with this obligation or with decontamination goals will carry penalties, although no specific sanctions have yet been established. During compliance schedule, companies cannot be penalized for non-compliance with the SQS. In the fourth quarter of 2014, the Company selected the consultant to carry out soil samplings, studies and other requirements of the rules. These studies were completed in the first quarter of 2015 and submitted to MINEM. The Company is awaiting response from MINEM.

 

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

 

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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.

 

In 2011, the General Law was amended, giving an individual or entity the ability to contest administrative acts, including environmental authorizations, permits or concessions granted, without the need to demonstrate the actual existence of harm to the environment, natural resources, flora, fauna or human health, because it will be sufficient to argue that the harm may be caused. In addition, in 2011, amendments to the Civil Federal Procedures Code (“CFPC”) were enacted. These amendments establish three categories of collective actions by means of which 30 or more people claiming injury derived from environmental, consumer protection, financial services and economic competition issues will be considered to be sufficient in order to have a legitimate interest to seek through a civil procedure restitution or economic compensation or suspension of the activities from which the alleged injury derived. The amendments to the CFPC may result in more litigation, with plaintiffs seeking remedies, including suspension of the activities alleged to cause harm.

 

In 2013, the Environmental Liability Federal Law was enacted. The law 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), criminal responsibilities as well as monetary fines.

 

On August 6, 2014, an accidental spill of approximately 40,000 cubic meters of copper sulfate solution occurred at a leaching pond that was under construction ten kilometers away from the mine of Buenavista del Cobre, S.A. de C.V. (“BVC”) a subsidiary of the Company. The accident was caused by a rock collapse that affected the system’s pumping station and by a construction defect in the seal of a pipe in the leaching system containment dam, a part of the new SX-EW III plant. This solution reached the Bacanuchi river, a tributary of the Sonora River. All the necessary immediate actions were taken in order to contain the spill, and to comply with all the legal requirements.

 

The National Water Commission (Comision Nacional del Agua “CONAGUA”), the Federal Commission for the Protection against Sanitary Risks (Comisión Federal para la Protección de Riesgos Sanitarios “COFEPRIS”) and PROFEPA initiated administrative proceedings regarding the spill to determine possible environmental and health damages.

 

On August 19, 2014, PROFEPA, as part of the administrative proceeding initiated after the spill, announced the filing of a criminal complaint against BVC in order to determine, in such a case, the responsibility for the environmental damages. The criminal complaint filed by PROFEPA against BVC is in the procedural stages. The Company is vigorously defending against it.

 

On September 15, 2014, BVC executed an administrative agreement with PROFEPA, providing for the presentation to the Mexican Ministry of Environment and Natural Resources (Secretaria de Medio Ambiente y Recursos Naturales “SEMARNAT”) of a remedial action plan, the remediation program was submitted to SEMARNAT on November 27, 2014 and approved on January 6, 2015. This program will be developed in five zones along the rivers. As of March 31, 2015, work on zone one of the remediation program was completed; studies of the zones two through four have been completed and a program for each particular zone will be submitted to SEMARNAT for approval.

 

The Company also created a trust with Nacional Financiera S.N.C., a Mexican development bank, acting as a Trustee to serve as a vehicle to support environmental remedial actions in connection with the spill, to comply with the remedial action plan and to compensate for damages caused to persons adversely affected by the spill.  The Company committed up to two billion Mexican pesos (approximately $150 million) of which approximately one billion Mexican pesos have already been contributed. A technical committee of the trust was created with representatives from the federal government, the Company and specialists assisted by a team of environmental experts to ensure the proper use of the funds. Along with the administrative agreement executed with PROFEPA, the trust serves as an alternative mechanism for dispute resolution to mitigate public and private litigation risks.

 

Independently of the execution of the administrative agreement with PROFEPA and the creation of the above mentioned trust, since the first day of the copper solution spill, the Company has taken actions to remediate the sites. On August 29, 2014, the Company hired more than 1,200 workers and environmental specialists to clean the river.

 

In addition, the Company developed a service program for the residents of the Sonora River Region, considering (i) water distribution provision, and infrastructure development within the affected region, (ii) the expansion of the current Community Development program to communities further downstream that were affected and previously not within the scope of the Company´s program, (iii) attention to local farmers and producers in coordination with the Federal Agriculture, Livestock,

 

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Rural Development, Fisheries, and Alimentations Ministry in order to revamp and promote the activities of local farmers and producers, (iv) the implementation of sustainable productive projects at each affected site, as well as (v) the establishment of service desks to attend specific cases.

 

On March 2, 2015 as a result of four administrative proceedings, PROFEPA imposed administrative fines to BVC for an aggregate amount of 23.5 million Mexican pesos (approximately $1.7 million). Other authorities may impose additional sanctions or fines, including the cost of clean-up and remediation of the sites, as well as economic compensation to people who provide evidence that they suffered direct damages from the spill.

 

The Company has also been served with three collective action lawsuits seeking damages for injuries related to the spill. The Company considers that those lawsuits are without merit and is vigorously defending against them.

 

As of March 31, 2015, BVC estimated the contingent liability at $97.3 million, of which $16.4 million was paid prior to the establishment of the trust, and approximately one billion Mexican pesos (approximately $74.9 million) was deposited in the trust. These funds have been available and have been used to compensate claims as they have arisen. This deposit was classified as restricted cash and was recorded as an operating expense in the Company’s results.

 

The Company does not expect that legal proceedings resulting from the spill, individually or in the aggregate, would have a material effect on its financial position or results of operations.

 

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 investments.

 

Litigation matters:

 

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, pursuant to a former Peruvian mandated profit sharing law.

 

The labor share litigation is based on claims of former employees for ownership of labor shares that the plaintiffs state that the Branch did not issue during the 1970s until 1979 under such former Peruvian mandated profit sharing law. 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”. Due to a past period of high inflation between 1985 and 1990, one billion of old soles is equivalent to today’s one nuevo sol.

 

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After lengthy proceedings before the civil courts in Peru on September 19, 2001, on appeal by 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 (the “2000 appeal”).

 

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 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 prior decisions. On appeal by the Peruvian Branch the Superior Court affirmed the lower court’s decisions regarding the nullity of the 2009 Supreme Court decision and the precautionary measure. As a result, the nullity of the precautionary measure became final and is not appealable. However, the nullity of the 2009 Supreme Court decision was appealed by the Branch before the Constitutional Court. On April 10, 2014, the Constitutional Court denied the Company’s appeal and affirmed the lower court’s decision. In view of this, SCC’s Peruvian Branch continues to analyze the manner in which the competent lower court will enforce the Supreme Court’s decision and its financial impact.

 

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: (1) Armando Cornejo Flores and others v. SCC’s Peruvian Branch (filed May 10, 2006); (2) Alejandro Zapata Mamani and others v. SCC’s Peruvian Branch (filed June 27, 2008); (3) Edgardo Garcia Ataucuri, in representation of 216 of SCC’s Peruvian Branch former workers, v. SCC’s Peruvian Branch (filed May 2011); (4) Juan Guillermo Oporto Carpio v. SCC’s Peruvian Branch (filed August 2011); (5) Rene Mercado Caballero v. SCC’s Peruvian Branch (filed November 2011); (6) Enrique Salazar Alvarez and others v. SCC’s Peruvian Branch (filed December 2011); (7) Jesus Mamani Chura and others v. SCC’s Peruvian Branch (filed March 2012); (8) Armando Cornejo Flores, in representation of 37 of SCC’s Peruvian Branch former workers v. SCC’s Peruvian Branch (filed March 2012), (9) Porfirio Ochochoque Mamani and others v. SCC’s Peruvian Branch (filed July 2012); (10) Alfonso Claudio Flores Jimenez and others v. SCC’s Peruvian Branch (filed July 2013); (11) Micaela Laura Alvarez de Vargas and others v. SCC’s Peruvian Branch (filed August 2013) and (12) Edgardo García Ataucuri in representation of 104 of SCC´s Peruvian Branch former workers (filed March 2015). 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.

 

The “Virgen Maria” Mining Concessions of the Tia Maria Mining Project

 

The Tia Maria project includes various mining concessions, totaling 32,989.64 hectares. One of the concessions is the “Virgen Maria” mining concession totaling 943.72 hectares or 2.9% of the total mining concessions.

 

Related to the “Virgen Maria” mining concessions, the Company is party to the following lawsuits:

 

a)             Exploraciones de Concesiones Metalicas S.A.C. (“Excomet”): In August 2009, a lawsuit was filed against SCC’s Branch by the former stockholders of Excomet. The plaintiffs allege that the acquisition of Excomet’s shares by the Branch is null and void because the $2 million purchase price paid by the Branch for the shares of Excomet was not fairly negotiated by the plaintiffs and the Branch. In 2005, the Branch acquired the shares of Excomet after lengthy negotiations with the plaintiffs, and after the plaintiffs, which were all the stockholders of Excomet, approved the transaction in a general stockholders’ meeting. Excomet was at the time owner of the “Virgen Maria” mining concession. In October 2011, the civil court dismissed

 

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the case on the grounds that the claim had been barred by the statute of limitations. On appeal by the plaintiffs, the superior court reversed the lower court’s decision and remanded it to the lower court for further proceedings. As of March 31, 2015, the case remains pending resolution without further developments.

 

b)             Sociedad Minera de Responsabilidad Limitada Virgen Maria de Arequipa (“SMRL Virgen Maria”): In August 2010, a lawsuit was filed against SCC’s Branch and others by SMRL Virgen Maria, a company which until July 2003 owned the mining concession Virgen Maria. SMRL Virgen Maria sold this mining concession in July 2003 to Excomet (see a) above). The plaintiff alleges that the sale of the mining concession Virgen Maria to Excomet is null and void because the persons who attended the shareholders’ meeting of SMRL Virgen Maria, at which the purchase was agreed upon, were not the real owners of the shares. The plaintiff is also pursuing the nullity of all the subsequent acts regarding the mining property (acquisition of the shares of Excomet by SCC’s Branch, noted above, and the sale of this concession to SCC’s Branch by Excomet). In October 2011, the civil court dismissed the case on the grounds that the claim had been barred by the statute of limitations. Upon appeal by the plaintiffs, the superior court remanded the proceedings to the lower court, ordering the issuance of a new decision. On June 25, 2013, the lower court dismissed the case due to procedural defects. Upon appeal by the plaintiff, on December 2, 2013 the Superior Court reversed the lower court’s decision due to procedural defects and ordered the issuance of a new resolution. In July 2014, once again the lower court dismissed the case on the grounds that the claim had barred by the statute of limitations. The plaintiff appealed this resolution before the Superior Court. On December 30, 2014, the Superior Court affirmed the lower court’s decision.  The plaintiff filed an extraordinary appeal before the Supreme Court. As of March 31, 2015, the case remains pending resolution without further developments.

 

c)              Omar Nunez Melgar: In May 2011, Mr. Omar Nunez Melgar commenced a lawsuit against the Peruvian Mining and Metallurgical Institute and MINEM challenging the denial of his request of a new mining concession that conflicted with SCC’s Branch’s Virgen Maria mining concession. SCC’s Branch has been made a party to the proceedings as the owner of the Virgen Maria concession. SCC’s Branch has answered the complaint and denied the validity of the claim. In March 2015, the Civil Court dismissed the case. The plaintiff may appeal before the Supreme Court.

 

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

 

Special Regional Pasto Grande Project (“Pasto Grande Project”)

 

In the last quarter of 2012, the Pasto Grande Project, an entity of the Regional Government of Moquegua, filed a lawsuit against SCC’s Peruvian Branch alleging property rights over a certain area used by the Peruvian Branch and seeking the demolition of the tailings dam where SCC’s Peruvian Branch has deposited its tailings from the Toquepala and Cuajone operations since 1995. The Peruvian Branch has had title to use the area in question since 1960 and has constructed and operated the tailing dams also with proper governmental authorization, since 1995. SCC’s Peruvian Branch asserts that the lawsuit is without merit and is vigorously defending against the lawsuit. Upon a motion filed by the Peruvian Branch, the lower court has included the MINEM as a defendant in this lawsuit. MINEM has answered the complaint and denied the validity of the claim. As of March 31, 2015, the case remains pending resolution without further developments.

 

Labor matters:

 

Peruvian operations: Approximately 70% of the Company’s 4,546 Peruvian employees were unionized at March 31, 2015. There are seven separate unions, three of them at each major production area that represent the majority of our workers; and four smaller unions that represent the balance of workers. Our collective bargaining agreements with all of these unions will expire in the second half of 2015. We expect to begin negotiations for new agreements in the second quarter of 2015.

 

Mexican operations: In recent years, the Mexican operations have experienced a positive improvement of their labor environment, as its workers, opted to change their affiliation from the Sindicato Nacional de Trabajadores Mineros, Metalurgicos y Similares de la Republica Mexicana (the “National Mining Union”) led by Napoleon Gomez Urrutia to other less politicized unions.

 

However, the workers of the San Martin and Taxco mines, who are still under the National Mining Union, have been on strike since July 2007. On December 10, 2009, a federal court confirmed the legality of the San Martin strike. In order to recover the control of the San Martin mine and resume operations, the Company filed a court petition on January 27, 2011 requesting that the court, among other things, define the termination payment for each unionized worker. The court denied the petition alleging that, according to federal labor law, the union was the only legitimate party to file such petition. On appeal by the Company, on May 13, 2011, the Mexican federal tribunal accepted the petition. In July 2011, the National Mining Union appealed the favorable court decision before the Supreme Court. On November 7, 2012, the Supreme Court affirmed the decision of the federal tribunal. The Company filed a new proceeding before the labor court on the basis of the Supreme Court decision, which

 

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recognized the right of the labor court to define responsibility for the strike and the termination payment for each unionized worker. A favorable decision of the labor court in this new proceeding would have the effect of terminating the protracted strike at San Martin. As of March 31, 2015, the case remains pending resolution without further developments.

 

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 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. After several legal proceedings on January 25, 2013, the Company filed a new proceeding before the labor court. On June 16, 2014, the labor court denied the petition of the Company. The resolution issued by the labor court was challenged by the Company before a federal court. Considering the above decision of the Supreme Court, there could be grounds for a favorable decision to end the protracted strike at the Taxco Unit. As of March 31, 2015, the case remains pending resolution.

 

It is expected that operations at these mines will remain suspended until these labor issues are resolved.

 

In view of these lengthy strikes, the Company has reviewed the carrying value of the San Martin and Taxco mines to ascertain whether impairment exists. The Company concluded that there is a non-material impairment of the assets located at these mines.

 

Other legal matters:

 

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 commitments:

 

Peruvian Operations

 

Tia Maria:

 

On August 1, 2014, the Company received the final approval of Tia Maria´s EIA. The project has experienced a delay pending the resolution of certain differences with community groups. The Peruvian government has been promoting the creation of a development dialogue roundtable for the resolution of these differences, which has initiated activities on April 14, 2015. The Company believes that this mechanism will help expedite the pending construction permits for the project. The project budget is $1.4 billion, of which $354.0 million has been expended through March 31, 2015. When completed, Tia Maria is expected to produce 120,000 tons of copper cathodes per year.

 

In connection with the Tia Maria project, in 2014 the Company established an S/.100 million fund (approximately $33 million) for the benefit of social and infrastructure improvements in the neighboring communities to Tia Maria.

 

Toquepala Concentrator Expansion:

 

In April 2015, the construction permit for the Toquepala expansion project was approved by the MINEM. The project budget is $1.2 billion, of which $348.6 million has been expended through March 31, 2015. When completed, this expansion project is expected to increase annual production capacity by 100,000 tons of copper and 3,100 tons of molybdenum.

 

In connection with this project, the Company has committed to fund various social and infrastructure improvement projects in Toquepala’s neighboring communities. The total amount committed for these purposes is S/.445.0 million (approximately $143 million).

 

Power purchase agreements

 

·                  Enersur: In 1997, SCC signed a power purchase agreement with an independent power company, Enersur S.A. under which SCC agreed to purchase all of its power needs for its current Peruvian operations from Enersur for twenty years, through April 2017.

 

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·                  Electroperu S.A.: In June 2014, the Company signed a power purchase agreement for 120 megawatt (“MW”) with the state power company Electroperu S.A., under which Electroperu S.A. will supply energy for the Peruvian operations for twenty years starting on April 17, 2017 and ending on April 30, 2037.

 

·                  Kallpa Generacion S.A. (“Kallpa”): In July 2014, the Company signed a power purchase agreement for 120MW with Kallpa, an independent Israeli owned power company, under which Kallpa will supply energy for the Peruvian operations for ten years starting on April 17, 2017 and ending on April 30, 2027.

 

Mexican operations

 

Power purchase agreement - MGE

 

MGE, a subsidiary of Grupo Mexico, has completed the construction of the two power plants in Mexico designed to supply power to some of the Company’s Mexican operations. It is expected that MGE will supply approximately 12% of its power output to third-party energy users. These plants are natural gas-fired combined cycle power generating units, with a net total capacity of 516.2 megawatts. In 2012, the Company signed a power purchase agreement with MGE through 2032. The first plant was completed in June 2013 and the second, in the second quarter of 2014. MGE has the authorization for the interconnection with the Mexican electrical system to start operations at the second plant. The first plant began to supply power to the Company in December 2013, and the second plant is ready to supply once the demand in the mine requires it.

 

Commitment for Capital projects

 

As of March 31, 2015, the Company has committed approximately $464 million for the development of its capital investment projects at its Mexican operations.

 

Tax contingency matters:

 

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

 

NOTE 10 — SEGMENT AND RELATED INFORMATION:

 

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

 

The three reportable segments identified are groups of mines, each of which constitute an operating segment, with similar economic characteristics, type of products, processes and support facilities, similar regulatory environments, similar employee bargaining contracts and similar currency risks. In addition, each mine within the individual group earns 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 Senior Management on the segment basis. Senior Management of the Company focus 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:

 

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Three Months Ended March 31, 2015

(in millions)

 

 

 

Mexican
Open-Pit

 

Mexican

IMMSA Unit

 

Peruvian
Operations

 

Corporate, other
and eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales outside of segments

 

$

664.2

 

$

90.3

 

$

520.3

 

 

$

1,274.8

 

Intersegment sales

 

 

18.9

 

 

$

(18.9

)

 

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

 

299.2

 

89.9

 

303.0

 

(12.3

)

679.8

 

Selling, general and administrative

 

9.4

 

4.0

 

10.3

 

1.2

 

24.9

 

Depreciation, amortization and depletion

 

54.1

 

7.7

 

53.0

 

2.2

 

117.0

 

Exploration

 

0.8

 

2.3

 

2.7

 

4.5

 

10.3

 

Environmental remediation

 

5.9

 

 

 

 

5.9

 

Operating income

 

$

294.8

 

$

5.3

 

$

151.3

 

$

(14.5

)

436.9

 

Less:

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

 

 

 

 

 

 

 

(23.1

)

Other income (expense)

 

 

 

 

 

 

 

 

 

(3.7

)

Income taxes

 

 

 

 

 

 

 

 

 

(129.2

)

Equity earnings of affiliate

 

 

 

 

 

 

 

 

 

2.8

 

Non-controlling interest

 

 

 

 

 

 

 

 

 

(1.3

)

Net income attributable to SCC

 

 

 

 

 

 

 

 

 

$

282.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital investment

 

$

184.7

 

$

6.6

 

$

53.2

 

$

1.3

 

$

245.8

 

Property, net

 

$

4,502.6

 

$

388.3

 

$

2,560.4

 

$

94.3

 

$

7,545.6

 

Total assets

 

$

7,569.8

 

$

890.6

 

$

3,647.1

 

$

(859.6

)

$

11,247.9

 

 

Three Months Ended March 31, 2014

(in millions)

 

 

 

Mexican
Open-Pit

 

Mexican
IMMSA Unit

 

Peruvian
Operations

 

Corporate, other
and eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales outside of segments

 

$

648.2

 

$

95.9

 

$

610.3

 

 

$

1,354.4

 

Intersegment sales

 

 

 

24.4

 

 

 

$

(24.4

)

 

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

 

229.5

 

84.4

 

323.1

 

4.9

 

641.9

 

Selling, general and administrative

 

8.7

 

3.7

 

11.2

 

0.9

 

24.5

 

Depreciation, amortization and depletion

 

54.7

 

7.8

 

47.2

 

0.8

 

110.5

 

Exploration

 

0.9

 

5.0

 

1.9

 

6.8

 

14.6

 

Operating income

 

$

354.4

 

$

19.4

 

$

226.9

 

$

(37.8

)

562.9

 

Less:

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

 

 

 

 

 

 

 

(36.0

)

Other income (expense)

 

 

 

 

 

 

 

 

 

(4.2

)

Income taxes

 

 

 

 

 

 

 

 

 

(204.1

)

Equity earnings of affiliate

 

 

 

 

 

 

 

 

 

6.0

 

Non-controlling interest

 

 

 

 

 

 

 

 

 

(1.2

)

Net income attributable to SCC

 

 

 

 

 

 

 

 

 

$

323.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital investment

 

$

267.7

 

$

9.0

 

$

57.8

 

$

2.4

 

$

336.9

 

Property, net

 

$

3,764.7

 

$

380.8

 

$

2,454.2

 

$

85.8

 

$

6,685.5

 

Total assets

 

$

6,314.9

 

$

863.0

 

$

3,428.5

 

$

658.3

 

$

11,264.7

 

 

NOTE 11 — STOCKHOLDERS’EQUITY:

 

Treasury Stock:

 

Activity in treasury stock in the three-month period ended March 31, 2015 and 2014 is as follows (in millions):

 

 

 

2015

 

2014

 

Southern Copper common shares

 

 

 

 

 

Balance as of January 1,

 

$

1,693.5

 

$

1,011.0

 

Purchase of shares

 

370.1

 

52.5

 

Balance as of March 31,

 

2,063.6

 

1,063.5

 

 

 

 

 

 

 

Parent Company (Grupo Mexico) common shares

 

 

 

 

 

Balance as of January 1,

 

207.2

 

205.6

 

Other activity, including dividend, interest and currency translation effect

 

(2.9

)

6.3

 

Balance as of March 31,

 

204.3

 

211.9

 

 

 

 

 

 

 

Treasury stock balance as of March 31,

 

$

2,267.9

 

$

1,275.4

 

 

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Southern Copper Common Shares:

 

At March 31, 2015 and 2014, there were in treasury 85,058,843 and 51,152,615 SCC’s common shares, respectively.

 

SCC share repurchase program:

 

In 2008, the Company’s Board of Directors (“BOD”) authorized a $500 million share repurchase program that has since been increased by the BOD and is currently authorized to $3 billion. Pursuant to this program, the Company purchased common stock as shown in the table below. These shares are available for general corporate purposes. The Company may purchase additional shares of its common stock from time to time, based on market conditions and other factors. This repurchase program has no expiration date and may be modified or discontinued at any time.

 

 

 

 

 

 

 

 

 

Total Number of

 

Maximum Number

 

 

 

 

 

 

 

 

 

Average

 

Shares

 

of Shares that May

 

 

 

 

 

 

 

Total Number

 

Price

 

Purchased as

 

Yet Be Purchased

 

 

 

Period

 

of Shares

 

Paid per

 

Part of Publicly

 

Under the Plan

 

Total Cost

 

From

 

To

 

Purchased

 

Share

 

Announced Plan

 

@ $29.18 (*)

 

($ in millions)

 

2008

 

2012

 

46,914,486

 

$

18.72

 

46,914,486

 

 

 

$

878.1

 

2013

 

 

 

10,245,000

 

27.47

 

57,159,486

 

 

 

281.4

 

2014

 

 

 

22,711,428

 

30.06

 

79,870,914

 

 

 

682.8

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

01/01/15

 

01/31/15

 

5,927,154

 

27.12

 

85,798,068

 

 

 

160.7

 

02/01/15

 

02/28/15

 

2,590,076

 

29.45

 

88,388,144

 

 

 

76.3

 

03/01/15

 

03/31/15

 

4,563,649

 

29.16

 

92,951,793

 

 

 

133.1

 

Total first quarter

 

 

 

13,080,879

 

29.29

 

 

 

 

 

370.1

 

 

 

 

 

 

 

 

 

 

 

26,992,079

 

 

 

Total purchased

 

 

 

92,951,793

 

$

23.80

 

 

 

 

 

$

2,212.4

 

 


(*) NYSE closing price of SCC common shares at March 31, 2015.

 

As a result of the repurchase of shares of SCC’s common stock, Grupo Mexico’s direct and indirect ownership was 86.0% as of March 31, 2015.

 

Parent Company common shares:

 

At March 31, 2015 and 2014 there were in treasury 94,325,311 and 72,814,824 of Grupo Mexico’s common shares, respectively.

 

Employee Stock Purchase Plan:

 

2007 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 one share for every ten 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 or involuntary resignation/termination of the employee, the Company will pay to the employee the fair market sales price at the date of resignation/termination 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 a decreasing schedule specified in the plan.

 

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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.

 

The stock based compensation expense for the first quarter 2015 and 2014 and the unrecognized compensation expense as of March 31, 2015 and 2014 under the Employee Stock Purchase Plan were as follows (in millions):

 

 

 

2015

 

2014

 

Stock based compensation expense

 

$

 

$

0.5

 

Unrecognized compensation expense

 

$

 

$

1.6

 

 

The following table presents the stock award activity of the Employee Stock Purchase Plan for the three months ended March 31, 2015 and 2014:

 

 

 

Shares

 

Unit Weighted Average
Grant Date Fair Value

 

Outstanding shares at January 1, 2015

 

4,298,612

 

$

1.16

 

Granted

 

 

 

Exercised

 

 

 

Forfeited

 

(3,660,945

)

$

1.16

 

Outstanding shares at March 31, 2015

 

637,667

 

$

1.16

 

 

 

 

 

 

 

Outstanding shares at January 1, 2014

 

4,449,599

 

$

1.16

 

Granted

 

 

 

Exercised

 

(40,632

)

$

1.16

 

Forfeited

 

 

 

Outstanding shares at March 31, 2014

 

4,408,967

 

$

1.16

 

 

2010 Plan: During 2010, the Company offered to eligible employees a 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 this Stock Purchase Plan are similar to the terms of the prior Employee Stock Purchase Plan.

 

The stock based compensation expense for the first quarter 2015 and 2014 and the unrecognized compensation expense under this plan were as follows (in millions):

 

 

 

2015

 

2014

 

Stock based compensation expense

 

$

0.1

 

$

0.1

 

Unrecognized compensation expense

 

$

2.0

 

$

2.5

 

 

The unrecognized compensation expense under this plan is expected to be recognized over the remaining three year and nine month period.

 

The following table presents the stock award activity of this plan for the three months ended March 31, 2015 and 2014:

 

 

 

Shares

 

Unit Weighted Average
Grant Date Fair Value

 

 

 

 

 

 

 

Outstanding shares at January 1, 2015

 

2,287,891

 

$

2.05

 

Granted

 

 

 

Exercised

 

 

 

Forfeited

 

 

 

Outstanding shares at March 31, 2015

 

2,287,891

 

$

2.05

 

 

 

 

 

 

 

Outstanding shares at January 1, 2014

 

3,012,464

 

$

2.05

 

Granted

 

 

 

Exercised

 

(249,446

)

$

2.05

 

Forfeited

 

 

 

Outstanding shares at March 31, 2014

 

2,763,018

 

$

2.05

 

 

23



Table of Contents

 

2015 Plan: In January 2015, the Company offered to eligible employees a new stock purchase plan (the “New Employee Stock Purchase Plan”) through a trust that acquires series B of shares of Grupo Mexico stock for sale to its employees, and employees of subsidiaries, and certain affiliated companies.

 

The purchase price was established at 38.44 Mexican pesos (approximately $2.63) for the initial subscription, which expires on January 2023. 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. Any future subscription will be at the average market price at the date of acquisition or the grant date.

 

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.

 

 

 

% Deducted

 

If the resignation occurs during:

 

 

 

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 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.

 

 

 

% Deducted

 

If the termination occurs during:

 

 

 

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 three months ended March 31, 2015, there was no stock based compensation under this plan.

 

NOTE 12 — NON-CONTROLLING INTEREST

 

The following table presents the non-controlling interest activity for the three months ended March 31, 2015 and 2014:

 

 

 

2015

 

2014

 

Balance as of January 1,

 

$

32.1

 

$

28.2

 

Net earnings

 

1.3

 

1.2

 

Dividend paid

 

(0.2

)

(0.3

)

Other

 

 

(0.1

)

Balance as of March 31,

 

$

33.2

 

$

29.0

 

 

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Table of Contents

 

NOTE 13 — FINANCIAL INSTRUMENTS:

 

Subtopic 820-10 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 820-10 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, 2015 and December 31, 2014 (in millions):

 

 

 

At March 31, 2015

 

At December 31, 2014

 

 

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

Liabilities:

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

4,206.3

 

$

4,411.4

 

$

4,206.0

 

$

4,369.6

 

 

Long-term debt is carried at amortized cost and its estimated fair value is based on quoted market prices classified as Level 1 in the fair value hierarchy except for the case of the Yankee bonds and the 6.375% senior unsecured notes due date July 2015 which qualify as Level 2 in the fair value hierarchy as they are based on quoted priced in market that are not active.

 

Fair values of assets and liabilities measured at fair value on a recurring basis were calculated as follows as of March 31, 2015 and December 31, 2014 (in millions):

 

Fair Value at Measurement Date Using:

 

Description

 

Fair Value
as of

March 31,
2015

 

Quoted prices in
active markets for
identical assets

(Level 1)

 

Significant other
observable
inputs

(Level 2)

 

Significant
unobservable
inputs

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Short term investment:

 

 

 

 

 

 

 

 

 

- Trading securities

 

$

79.1

 

$

79.1

 

 

$

 

- Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

Corporate bonds

 

0.3

 

 

$

0.3

 

 

Asset backed securities

 

 

 

 

 

Mortgage backed securities

 

4.4

 

 

4.4

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable:

 

 

 

 

 

 

 

 

 

- Embedded derivatives - Not classified as hedges:

 

 

 

 

 

 

 

 

 

Provisionally priced sales:

 

 

 

 

 

 

 

 

 

Copper

 

167.4

 

167.4

 

 

 

Molybdenum

 

85.1

 

85.1

 

 

 

Total

 

$

336.3

 

$

331.6

 

$

4.7

 

$

 

 

25



Table of Contents

 

Fair Value at Measurement Date Using:

 

Description

 

Fair Value
as of

December
31, 2014

 

Quoted prices in
active markets for
identical assets

(Level 1)

 

Significant other
observable inputs

(Level 2)

 

Significant
unobservable
inputs

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Short term investment:

 

 

 

 

 

 

 

 

 

- Trading securities

 

$

333.7

 

$

333.7

 

 

$

 

- Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

Corporate bonds

 

0.3

 

 

$

0.3

 

 

Asset backed securities

 

 

 

 

 

Mortgage backed securities

 

4.6

 

 

4.6

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable:

 

 

 

 

 

 

 

 

 

- Embedded derivatives - Not classified as hedges:

 

 

 

 

 

 

 

 

 

Provisionally priced sales:

 

 

 

 

 

 

 

 

 

Copper

 

202.2

 

202.2

 

 

 

Molybdenum

 

105.5

 

105.5

 

 

 

Total

 

$

646.3

 

$

641.4

 

$

4.9

 

$

 

 

The Company’s short-term trading securities investments are classified as Level 1 because they are valued using quoted prices of the same securities as they consist of bonds issued by public companies and publicly traded. The Company’s short-term available-for-sale investments are classified as Level 2 because they are valued using quoted prices for similar investments.

 

The Company’s accounts receivables associated with provisionally priced copper sales are valued using quoted market prices based on the forward price on the LME or on the COMEX. Such value is classified within Level 1 of the fair value hierarchy. Molybdenum prices are established by reference to the publication Platt’s Metals Week and are considered Level 1 in the fair value hierarchy.

 

NOTE 14 — SUBSEQUENT EVENTS:

 

Financing:

 

On April 20, 2015, the Company issued $2.0 billion of fixed-rate senior unsecured notes. This debt was issued in two tranches, $500 million due 2025 at an annual interest rate of 3.875% and $1.5 billion due 2045 at an annual interest rate of 5.875%. These notes will be general unsecured obligations of the Company and will rank equally with all of its existing and future unsecured and unsubordinated debt. Net proceeds will be used for general corporate purposes, including the financing of the Company´s capital expenditure program.

 

Dividends:

 

On April 23, 2015, the Board of Directors authorized a dividend of $0.10 per share payable on May 27, 2015 to shareholders of record at the close of business on May 13, 2015.

 

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Table of Contents

 

Part I

 

Item 2.  MANAGEMENT’S 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 condensed 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, 2014.

 

EXECUTIVE OVERVIEW

 

Business: Our business is primarily the production and sale of copper. In the process of producing copper, a number of valuable metallurgical by-products are recovered, which we also produce and sell. Market forces outside of our control largely determine the sale prices for our products. Our management, therefore, focuses on value creation through copper production, cost control, production enhancement and maintaining a prudent capital structure to remain profitable. We endeavor to achieve these goals through capital spending programs, exploration efforts and cost reduction programs. Our aim is to remain profitable during periods of low copper prices and to maximize financial performance in periods of high copper prices.

 

We are one of the world’s largest copper mining companies in terms of production and sales with our principal operations in Peru and Mexico. We also have active ongoing exploration programs in Chile, Argentina and Ecuador. In addition to copper, we produce significant amounts of other metals, either as a by-product of the copper process or in a number of dedicated mining facilities in Mexico.

 

Outlook: Various key factors will affect our outcome. These include, but are not limited to, some of the following:

 

·                  Changes in copper, molybdenum, silver and zinc prices: In the first quarter of 2015, the average LME copper price was $2.64 per pound and the average COMEX copper price was $2.66 per pound, about 17.2% and 17.9% lower than in the first quarter of 2014, respectively. During the first quarter of 2015 per pound LME spot copper prices ranged from $2.45 to $2.86. Average molybdenum and silver prices in the first quarter of 2015 decreased 15.3% and 18.4%, respectively, while average zinc prices increased 2.2% when compared to the average prices in the first quarter of 2014.

 

·                  Sales structure: In the first quarter of 2015, approximately 77.0% of our revenue came from the sale of copper, 7.0% from molybdenum, 4.0% from silver, 5.0% from zinc and 7.0% from various other products, including gold, sulfuric acid and other materials.

 

·                  Copper: Regarding the copper market, we believe short term copper demand is consistently improving. For this year, we expect that the U.S. and Western Europe will pull worldwide copper demand. In the case of Europe, higher demand will come from export oriented industries favored by the weak Euro. For China, we expect total copper consumption growth to be at about 4%, driven by the automotive industry and plans to expand electric grid investments. However, these positive developments will be limited by the Chinese housing markets slowdown.

 

On the supply side as we have expressed in the past, we believe that several structural factors will continue to affect supply from new projects and existing operations, as well as scrap production.

 

We note a significant reduction in the expected surplus for the market in 2015. A year ago, the expectation for 2015 was a surplus in the range of 500,000 to 700,000 tons. Currently, we believe this surplus has decreased to a market in slight deficit or with a small surplus of about 200,000 tons, a minor amount when considering refined copper demand is expected to be over 22 million tons for the year.

 

Due to the noted factors, as well as delays in project startups, technical problems, labor unrest, excess taxation and other difficulties we believe the market will trend to a deficit, putting pressure on prices as we move through 2015.

 

We want to emphasize that prices at current levels are not sufficient to promote the necessary future supply growth, thereby improving the strong long term fundamentals of our industry.

 

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Table of Contents

 

·                  Molybdenum: Our most significant by-product, represented 7.1% of our sales in the first quarter of 2015. In this quarter we saw a price deterioration for molybdenum consistent with our outlook of a 10% worldwide supply growth in 2015 coming from our Buenavista operation as well as Sierra Gorda, Toromocho and Caserones, among other projects.

 

Demand for molybdenum will be affected in 2015 by lower demand for special alloys coming from the oil drilling industry. This will add to the noted difficulties. Even though the current scenario for molybdenum prices is not positive, it is important to note that about 50% of this metal supply comes from primary or dedicated molybdenum mines, which have a cash cost  in the range of $9 to $12 dollars per pound. This creates a natural barrier for the molybdenum market to adjust production volume and thereby protect low cost secondary molybdenum producers such as SCC.

 

·                  Silver: Represented 4.4% of our sales in the first quarter of 2015 and it is currently our third most significant by-product. We believe that silver prices will have support due to its industrial uses as well as being perceived as a value shelter in times of economic uncertainty.

 

·                  Zinc: Represented 4.6% of our sales in the first quarter of 2015 and currently is our second most significant by-product. We also believe that zinc has very good long term fundamentals due to its significant industrial consumption and expected mine production shutdowns. In the last 12 months, zinc inventories have consistently decreased, improving these market’s fundamentals. We are expecting an increasing price scenario for zinc in the next few years.

 

·                  Production: For 2015, improvements in operational practices and capital investments will reduce costs and increase the Company’s copper and molybdenum production. We plan to produce 782,300 tons of copper, which will set a new record for SCC copper production.

 

For this guidance we are considering that our Buenavista operation will produce 344,700 tons. Of those, a total of 163,300 tons will come from our new projects. The SX-EW III plant will contribute with 102,300 tons and the new concentrator at Buenavista will add 61,000 tons.

 

We expect to produce 21,500 tons of molybdenum in 2015, 7% lower than our 2014 production, this variance will be a result of lower ore grades and recoveries at our operations.

 

In 2015, we also expect to produce 12.7 million ounces of silver and produce 86,200 tons of zinc, an increase of almost 20,000 tons of zinc compared to 2014.

 

·            Cost: Our operating costs and expenses for the first quarter 2015 and 2014 were as follows:

 

 

 

 

 

 

 

Variance

 

 

 

2015

 

2014

 

Value

 

%

 

Operating costs and expenses ($ in millions)

 

$

837.9

 

$

791.5

 

$

46.4

 

5.9

%

 

The increase was mainly due to higher cost of sales at our Mexican operations due principally to the increased volume of copper sales; higher depreciation, amortization and depletion at our Peruvian operations; and $5.9 million for an environmental remediation provision at Buenavista.

 

·          Capital Investments: In the first quarter 2015, we spent $245.8 million on capital investments, 27.0% lower than in the first quarter 2014, and represented 87.0% of net income. We continue with the development of our investment program to increase copper production capacity by approximately 89% from our 2013 production level of 617,000 tons to 1,165,000 tons by 2018.

 

·            Financing:  On April 20, 2015, we issued $2.0 billion in fixed-rate senior unsecured notes. The notes were issued in two tranches, $500 million due in 2025 at an annual interest rate of 3.875% and $1.5 billion due in 2045 at an annual interest rate of 5.875%. Proceeds will be used for our investment program. In addition, our Company debt profile (approximately 23 years) is the longest of the world mining industry. We believe the terms of this financing reflect the market recognition of our financial strength and stability as well as our leadership position as one of the industry´s best low cost copper producers, our geographical diversity, vertical integration and strong ore reserve position.

 

KEY MATTERS:

 

We discuss below several matters that we believe are important to understand our results of operations and financial condition. These matters include, (i) our earnings, (ii) our production, (iii) our “operating cash costs” as a measure of our performance,

 

28



Table of Contents

 

(iv) metal prices, (v) business segments, (vi) the effect of inflation and other local currency issues, and (vii) our capital investment and exploration program.

 

Earnings: The table below highlights key financial and operational data of our Company for the three months ended March 31, 2015 and 2014 (in millions, except per share amounts):

 

 

 

2015

 

2014

 

Variance

 

Net sales

 

$

1,274.8

 

$

1,354.4

 

$

(79.6

)

Operating income

 

$

436.9

 

$

562.9

 

$

(126.0

)

Net income attributable to SCC

 

$

282.4

 

$