Edgar Filing: SOUTHERN COPPER CORP/

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: June 30, 2015

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 July 30, 2015 there were outstanding 797,014,243 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 and six months ended June 30, 2015 and 2014	3

	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015 and 2014	4

	Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014	5

	Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2015 and 2014	6

	Notes to Condensed Consolidated Financial Statements	7-29

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30-48

Item 3.	Quantitative and Qualitative Disclosure about Market Risk	49-50

Item 4.	Controls and procedures	51

	Report of Independent Registered Public Accounting Firm	52

Part II. Other Information:

Item 1.	Legal Proceedings	53

Item 1A.	Risk Factors	53

Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	53

Item 4.	Mine Safety Disclosures	53

Item 6.	Exhibits	54-55

	Signatures	56

	List of Exhibits	57-58

Exhibit 15	Independent Accountants’ Awareness Letter

Exhibit 31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 101	Financial statements for the three and six months ended June 30, 2015 Formatted in XBRL: (i) the Condensed Consolidated Statements of Earnings, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Condensed Consolidated Financial Statements, tagged in detail.	Submitted electronically with this report

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						Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
	(in thousands, except per share amounts)

Net sales (including sales to related parties, see note 9)	$	1,382,923		$	1,487,412		$	2,657,730		$	2,841,795
Operating costs and expenses:
Cost of sales (exclusive of depreciation, amortization and depletion shown separately below)	706,868			726,589			1,386,690			1,368,483
Selling, general and administrative	24,963			25,397			49,832			49,895
Depreciation, amortization and depletion	125,302			116,091			242,265			226,544
Exploration	12,111			22,068			22,399			36,679
Environmental remediation	10,532			—			16,460			—
Total operating costs and expenses	879,776			890,145			1,717,646			1,681,601

Operating income	503,147			597,267			940,084			1,160,194

Interest expense	(86,929		)	(66,075		)	(151,679		)	(131,215		)
Capitalized interest	33,104			29,162			71,954			53,765
Other income (expense)	(1,605		)	(5,779		)	(5,369		)	(9,985		)
Interest income	2,683			3,715			5,530			8,252
Income before income taxes	450,400			558,290			860,520			1,081,011

Income taxes (including royalty taxes see note 5):	157,042			225,769			286,235			429,931
Net income before equity earnings of affiliate	293,358			332,521			574,285			651,080
Equity earnings of affiliate, net of income tax	2,655			5,861			5,415			11,899

Net income	296,013			338,382			579,700			662,979

Less: Net income attributable to the non-controlling interest	1,299			1,129			2,556			2,337

Net income attributable to SCC	$	294,714		$	337,253		$	577,144		$	660,642

Per common share amounts attributable to SCC:
Net income - basic and diluted	$	0.37		$	0.40		$	0.72		$	0.79
Dividends paid	$	0.10		$	0.10		$	0.20		$	0.22
Weighted average common shares outstanding - basic and diluted	798,168			833,353			801,773			833,571

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

Table of Contents

Southern Copper Corporation

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
	(in thousands)
Net income	$	296,013		$	338,382		$	579,700		$	662,979

Other comprehensive income (loss) net of tax: - Amortization of actuarial gain net of income tax of (for the three months ended June 30, 2015: $() and 2014: $43 and for the six months ended June 30, 2015: $() and 2014: $145)	(*		)	(65		)	(*		)	(217		)

Total comprehensive income	$	296,013		$	338,317		$	579,700		$	662,762

Comprehensive income attributable to the non-controlling interest	$	1,299		$	1,129		$	2,556		$	2,337
Comprehensive income attributable to SCC	$	294,714		$	337,188		$	577 144		$	660,425

(*) amount is lower than $0.1 million

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

Table of Contents

Southern Copper Corporation

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30,			December 31,
	2015			2014
	(in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	1,572,343		$	363,970
Restricted cash	7,375			19,456
Short-term investments	573,353			338,589
Accounts receivable trade	481,119			540,245
Accounts receivable other (including related parties 2015 - $29,759 and 2014 - $32,835)	100,660			81,635
Inventories	826,468			836,464
Deferred income tax	129,080			119,510
Other current assets	173,058			189,920
Total current assets	3,863,456			2,489,789

Property, net	7,691,669			7,436,430
Leachable material	630,674			512,718
Intangible assets, net	125,246			123,554
Related parties receivable	161,244			161,244
Deferred income tax	605,241			553,948
Equity method investment	68,872			66,723
Other assets	202,217			182,336
Total assets	$	13,348,619		$	11,526,742

LIABILITIES
Current liabilities:
Current portion of long-term debt	$	200,000		$	200,000
Accounts payable (including related parties 2015 -$31,870 and 2014 - $69,083)	548,851			549,667
Accrued income taxes	42,511			80,101
Deferred income taxes	13,360			13,360
Accrued workers’ participation	88,015			198,009
Accrued interest	85,030			70,824
Other accrued liabilities	37,741			38,944
Total current liabilities	1,015,508			1,150,905

Long-term debt	5,952,219			3,980,863
Deferred income taxes	384,606			385,545
Other liabilities and reserves	41,479			56,697
Asset retirement obligation	113,087			116,133
Total non-current liabilities	6,491,391			4,539,238

Commitments and contingencies (Note 11)

STOCKHOLDERS’ EQUITY
Common stock	8,846			8,846
Additional paid-in capital	3,342,515			3,344,669
Retained earnings	4,763,671			4,346,818
Accumulated other comprehensive income	4,813			4,813
Treasury stock, at cost, common shares	(2,312,401		)	(1,900,686		)
Total Southern Copper Corporation stockholders’ equity	5,807,444			5,804,460
Non-controlling interest	34,276			32,139
Total equity	5,841,720			5,836,599

Total liabilities and equity	$	13,348,619		$	11,526,742

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

Table of Contents

Southern Copper Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
	(in thousands)
OPERATING ACTIVITIES
Net income	$	296,013		$	338,382		$	579,700		$	662,979
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation, amortization and depletion	125,302			116,091			242,265			226,544
Equity earnings of affiliate, net of dividends received	(1,658		)	(3,583		)	(2,148		)	(6,997		)
Loss (gain) on currency translation effect	(8,285		)	(119		)	(19,238		)	(5,807		)
(Benefit) provision for deferred income taxes	(40,212		)	27,498			(64,910		)	(56,822		)
Other, net	723			279			1,295			552

Change in operating assets and liabilities:
Decrease (increase) in accounts receivable	20,076			(39,843		)	59,126			(49,917		)
Decrease (increase) in inventories	(53,261		)	(58,684		)	(107,960		)	(160,745		)
(Decrease) increase in accounts payable and accrued liabilities	53,343			(27,234		)	(149,304		)	42,079
Decrease (increase) in other operating assets and liabilities	(57,291		)	(19,268		)	(5,637		)	29,888
Net cash provided by operating activities	334,750			333,519			533,189			681,754

INVESTING ACTIVITIES
Capital investments	(284,937		)	(360,106		)	(507,740		)	(697,034		)
Proceeds from (purchase of) short-term investments, net	(489,533		)	(16,873		)	(234,764		)	(81,615		)
Sale of property	2,956			4,587			2,956			4,881
Net cash used in investing activities	(771,514		)	(372,392		)	(739,548		)	(773,768		)

FINANCING ACTIVITIES
Proceeds from issuance of debt	1,995,790			—			2,045,790			—
Repayments of debt	(66,000		)	—			(66,000		)	—
Payments of debt issuance costs	(9,729		)	—			(9,729		)	—
Cash dividends paid to common stockholders	(79,804		)	(83,346		)	(160,290		)	(183,372		)
Distributions to non-controlling interest	(217		)	(197		)	(412		)	(499		)
Repurchase of common shares	(44,461		)	(13,030		)	(414,565		)	(65,509		)
Other	322			249			322			249
Net cash provided by (used in) financing activities	1,795,901			(96,324		)	1,395,116			(249,131		)

Effect of exchange rate changes on cash and cash equivalents	21,068			(2,540		)	19,616			3,814

Increase (decrease) in cash and cash equivalents	1,380,205			(137,737		)	1,208,373			(337,331		)

Cash and cash equivalents, at beginning of period	192,138			1,473,101			363,970			1,672,695
Cash and cash equivalents, at end of period	$	1,572,343		$	1,335,364		$	1,572,343		$	1,335,364

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

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 June 30, 2015, Grupo Mexico through its wholly-owned subsidiary Americas Mining Corporation (“AMC”) owned 86.1% 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 June 30, 2015 and the results of operations, comprehensive income and cash flows for the three and six months ended June 30, 2015 and 2014. The results of operations for the three and six months ended June 30, 2015 and 2014 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 — CHANGE IN ACCOUNTING PRINCIPLE:

In April 2015, the FASB (“Financial Accounting Standards Board”) issued ASU 2015-03: Interest — Imputation of interest as an amendment of ASC 835-30, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the treatment of a debt discount. The Company implemented this ASU in the second quarter of 2015 as permitted via early adoption and it is applied on a retrospective basis. As a consequence, the December 31, 2014 balance sheet has been modified to reflect this presentation.

This change in accounting principle will result in a more transparent presentation of debt since debt issuance costs are similar to debt discounts and in effect reduce the proceeds of borrowings as well as impact the effective interest rate on the related debt.

	Face amount		Issuance discount			Issuance costs			Carrying value as of June 30, 2015
6.375% Senior unsecured notes due 2015	$	200	$	(0.1	)	(*		)	$	199.9
7.500% Senior unsecured notes due 2035	1,000		(14.0		)	$	(9.2	)	976.8
5.375% Senior unsecured notes due 2020	400		(1.1		)	(1.2		)	397.7
6.750% Senior unsecured notes due 2040	1,100		(7.7		)	(6.2		)	1,086.1
3.500% Senior unsecured notes due 2022	300		(0.8		)	(1.2		)	298.0
5.250% Senior unsecured notes due 2042	1,200		(20.7		)	(6.9		)	1,172.4
9.250% Yankee Bonds due 2028	125		—			—			51.1
3.875% Senior unsecured notes due 2025	500		(2.7		)	(2.0		)	495.3
5.875% Senior unsecured notes due 2045	1,500		(17.5		)	(7.6		)	1,474.9
Total	$	6,325	$	(64.6	)	$	(34.3	)	6,152.2
Less, current portion									(200.0		)
Total long-term debt									$	5,952.2

(*) Less than $0.1 million

Table of Contents

	Face amount		Issuance discount			Carrying value before adoption of ASU 2015-03			Issuance costs			Restated Carrying value as of December 31, 2014
6.375% Senior unsecured notes due 2015	$	200	$	(0.2	)	$	199.8		$	(0.2	)	$	199.6
7.500% Senior unsecured notes due 2035	1,000		(14.2		)	985.8			(9.3		)	976.5
5.375% Senior unsecured notes due 2020	400		(1.2		)	398.8			(1.3		)	397.5
6.750% Senior unsecured notes due 2040	1,100		(7.8		)	1,092.2			(6.2		)	1,086.0
3.500% Senior unsecured notes due 2022	300		(0.8		)	299.2			(1.2		)	298.0
5.250% Senior unsecured notes due 2042	1,200		(20.9		)	1,179.1			(6.9		)	1,172.2
9.250% Yankee Bonds due 2028	125		—			51.1			—			51.1
Total	$	4,325	$	(45.1	)	4,206.0			$	(25.1	)	4,180.9
Less, current portion						(200.0		)				(200.0		)
Total long-term debt						$	4,006.0					$	3,980.9

NOTE 3 — SHORT-TERM INVESTMENTS:

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

	At June 30, 2015			At December 31, 2014
Trading securities	$	569.0		$	333.7
Weighted average interest rate	0.52		%	0.78		%

Available for sale	$	4.3		$	4.9
Weighted average interest rate	0.49		%	0.44		%
Total	$	573.3		$	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 June 30, 2015 and December 31, 2014, included corporate bonds and asset and mortgage backed obligations. As of June 30, 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.

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

	Three months ended						Six months ended
	June 30,						June 30,
	2015			2014			2015			2014
Trading securities:
Interest earned	$	0.2		$	1.1		$	0.5		$	2.5
Unrealized gain (loss) at the end of the period	$	(0.2	)	$	1.7		$	(0.2	)	$	1.7

Available for sale:
Interest earned	(*		)	(*		)	(*		)	(*		)
Investment redeemed	$	0.4		$	0.2		$	0.6		$	0.2

(*) Less than $0.1 million

Table of Contents

NOTE 4 - INVENTORIES:

Inventories were as follows:

(in millions)	At June 30, 2015		At December 31, 2014
Inventory, current:
Metals at average cost:
Finished goods	$	101.7	$	84.6
Work-in-process	427.2		450.5
Supplies at average cost	297.6		301.4
Total current inventory	$	826.5	$	836.5

Inventory, long-term
Leach stockpiles	$	630.7	$	512.7

During the six months ended June 30, 2015 and 2014 total leaching costs capitalized as long-term inventory of leachable material amounted to $232.4 million and $181.2 million, respectively. Leachable material inventories recognized in cost of sales amounted to $114.0 million and $79.5 million for the six months ended June 30, 2015 and 2014, respectively.

NOTE 5 — INCOME TAXES:

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

	2015			2014
Income tax provision	$	286.2		$	429.9
Effective income tax rate	33.3		%	39.8		%

These provisions include income taxes for Peru, Mexico and the United States. Some of the principal reasons for the change in the effective tax rate in the two six-month periods, include the Mexican royalty tax instituted beginning in 2014, and which increased the 2014 rate by approximately 4.6%, the impact on the 2015 rate was 2.6%. In addition, a reduction in dividends from the Company’s Mexican operations decreased the 2015 effective rate by 1.3%. Also, the Peru special mining tax had a positive variance in the 2015 period of 0.5%.

Components of the income tax provision for the six month periods of 2015 and 2014 include the following ($ in millions):

	2015		2014
Statutory income tax provision	$	249.8	$	361.6
Peruvian royalty	2.9		2.1
Mexican royalty	22.3		46.6
Peruvian special mining tax	11.2		19.6
Total income tax provision	$	286.2	$	429.9

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 $13.7 million and $14.4 million of royalty charge in the first six months of 2015 and 2014, respectively, of which $2.9 million and $2.1 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 $11.2 million and $19.6 million of special mining tax as part of the income tax provision for the first six months of 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 earnings before taxes as defined by Mexican tax regulations and an additional royalty charge

Table of Contents

of 0.5% over gross income from sales of gold, silver and platinum. The Company has accrued $22.3 million and $46.6 million of royalty taxes as part of the income tax provision for the first six months of 2015 and 2014, respectively.

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 second quarter and first six months of 2015, there were no changes in the Company’s uncertain tax positions.

NOTE 6 — PROVISIONALLY PRICED SALES:

At June 30, 2015, the Company has recorded provisionally priced sales of copper at average forward prices per pound, and molybdenum at the June 30, 2015 market price per pound. These sales are subject to final pricing based on the average monthly copper prices on the London Metal Exchange (“LME”) or New York Commodities Exchange (“COMEX”) and Dealer Oxide molybdenum prices in the future month of settlement.

Following are the provisionally priced copper and molybdenum sales outstanding at June 30, 2015:

	Sales volume (million lbs.)	Priced at (per pound)		Month of settlement
Copper	123.3	$	2.62	From July 2015 to October 2015
Molybdenum	17.1	$	6.25	From July 2015 to October 2015

During the month of July 2015, the market price of copper and molybdenum decreased. The effect of these changes on sales for the six months of 2015 settling in July 2015 was a reduction of $11.7 million in sales. Additionally, forward prices for copper as of July 24, 2015 also decreased, the effect of this decrease on the six months of 2015 open sales settling after July 2015 would be a further reduction of $10.9 million in sales.

NOTE 7 — LONG-TERM DEBT:

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 investment program. The notes were issued with an underwriters’ discount of $20.2 million. Additionally, issuance costs of $9.6 million associated with these notes were paid and deferred. The unamortized balance of the discount and the costs are presented net of the carrying value of the debt issued and are amortized as interest expense over the life of the loan.

NOTE 8 - ASSET RETIREMENT OBLIGATION:

The Company maintains an estimated asset retirement obligation for its mining properties in Peru, as required by the Peruvian Mine Closure Law. In accordance with the requirements of this law the Company’s closure plans were approved by the Peruvian Ministry of Energy and Mines (“MINEM”). As part of the closure plans, 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 June 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.

Table of Contents

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 with a budget of $62.4 million, of which the Company has spent $58.1 million through June 30, 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 third 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 six months ended June 30, 2015 and 2014 (in millions):

	2015			2014
Balance as of January 1	$	116.1		$	124.8
Changes in estimates	—			26.7
Payments	(11.2		)	(3.6		)
Accretion expense	8.2			3.6
Balance as of June 30,	$	113.1		$	151.5

NOTE 9 — 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 June 30, 2015		At December 31, 2014
Related parties receivable current:
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”)	28.2		31.9
Mexico Proyectos y Desarrollos, S.A. de C.V. and affiliates	0.3		—
	$	29.7	$	32.8

Related parties receivable non-current:
MGE	$	161.2	$	161.2

Related parties payable:
Asarco LLC	$	8.3	$	13.8
Breaker S.A. de C.V. and affiliates (“Breaker”)	0.1		0.7
Eolica El Retiro, S.A.P.I. de C.V.	0.1		1.6
Ferrocarril Mexicano S.A. de C.V.	0.2		1.8
Grupo Mexico	7.4		2.8
Higher Technology S.A.C.	0.3		0.2
Servicios y Fabricaciones Mecanicas S.A.C.	0.1		—
Sempertrans and affiliates	0.2		—
MGE	15.2		45.2
Mexico Proyectos y Desarrollos, S.A. de C.V. and affiliates	—		1.7
Mexico Transportes Aereos S.A. de C.V. (“Mextransport”)	—		1.3
	$	31.9	$	69.1

Table of Contents

Purchase and sale activities:

Grupo Mexico and affiliates:

The following table summarizes the purchase and sale activities with Grupo Mexico and its affiliates in the six months ended June 30, 2015 and 2014 (in millions):

	2015		2014
Purchase activity
Asarco LLC	$	14.7	$	24.6
Compania Perforadora Mexico S.A.P.I. de C.V and affiliates	0.3		1.9
Eolica El Retiro, S.A.P.I. de C.V.	4.8		—
Ferrocarril Mexicano S.A de C.V.	8.2		11.6
Grupo Mexico	6.9		6.9
MGE	62.9		91.7
Mexico Proyectos y Desarrollos, S.A. de C.V. and affiliates	18.6		55.9
Total purchases	$	116.4	$	192.6

Sales activity
Asarco LLC	$	71.1	$	21.7
Compania Perforadora Mexico S.A.P.I. de C.V and affiliates	0.2		0.3
MGE	39.0		48.8
Mexico Proyectos y Desarrollos, S.A. de C.V. and affiliates	0.4		0.4
Total sales	$	110.7	$	71.2

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 services in the future.

The Company’s Mexican operations paid fees for freight services provided by Ferrocarril Mexicano S.A de C.V., for construction services provided by Mexico 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 June 30, 2015 the remaining balance of the debt 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 $4.7 million in the first six months of 2015 and 2014.

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. MGE is supplying a portion of its power output to third-party energy users. See also Note 11 “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

Table of Contents

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 tables summarize the purchase and sales activities with other Larrea family companies in the six months ended June 30, 2015 and 2014 (in millions):

Mextransport:	2015		2014
Purchase activity	$	0.1	$	1.1

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 six months ended June 30, 2015 and 2014 (in millions):

	2015		2014
Breaker	$	0.5	$	3.6
Higher Technology S.A.C.	0.8		0.8
Pigoba S.A. de C.V.	—		0.1
Sempertrans and affiliates	0.3		0.8
Servicios y Fabricaciones Mecanicas S.A.C.	0.4		0.7
Total purchases	$	2.0	$	6.0

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 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 10- 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.

Table of Contents

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 the net periodic benefit costs for the six months ended June 30, 2015 and 2014 are as follows (in millions):

	2015			2014
Service cost	$	0.5		$	0.6
Interest cost	0.5			0.7
Expected return on plan assets	(1.6		)	(1.8		)
Amortization of transition obligation	(0.2		)	(0.2		)
Amortization of net loss/(gain)	0.2			(*		)
Net periodic benefit costs	$	(0.6	)	$	(0.7	)

(*) 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 the net periodic benefit cost for the six months ended June 30, 2015 and 2014 are as follows (in millions):

	2015			2014
Interest cost	$	0.6		$	0.7
Amortization of net loss (gain)	(0.1		)	(0.2		)
Amortization of prior service cost (credit)	(*		)	(*		)
Net periodic benefit cost	$	0.5		$	0.5

(*) amount is lower than $0.1 million

NOTE 11 — COMMITMENTS AND CONTINGENCIES:

Environmental matters:

The Company has instituted extensive environmental conservation programs at its mining facilities in Peru and Mexico. The Company’s environmental programs include, among 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 expenditures in the six months ended June 30, 2015 and 2014 were as follows (in millions):

	2015		2014
Peruvian operations	$	33.1	$	53.9
Mexican operations	6.9		7.5
	$	40.0	$	61.4

Table of Contents

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 8 “Asset retirement obligation,” for further discussion of this matter. In accordance with the requirements of the law, the Company is preparing the closure plan for the Tia Maria project, which will be submitted to MINEM in August 2015.

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 in order to identify activities, goals, deadlines, timetables and mechanisms for the reduction of sulfur dioxide concentrations in the city of Ilo and develop an action plan to comply with the new air quality standard.

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. As of June 30, 2015, 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 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 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

Table of Contents

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 and the Sonora River. All the immediate actions were properly 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 June 30, 2015, work on zone one of the remediation program was completed; studies of zones two through four have been completed and a program for each particular zone was 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 clean the sites. On August 29, 2014, the Company hired contractors to clean the river utilizing more than 1,200 of their workers and environmental specialists.

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, 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 six collective action lawsuits and seven civil actions seeking damages for injuries related to the spill. The Company considers that those lawsuits are without merit and is vigorously defending against them.

During the last half of 2014 and the first half of 2015, six collective action lawsuits were filed in federal courts in Mexico City and Sonora against two subsidiaries of the Company seeking damages for alleged injuries and the repair of environmental impact caused by the spill. The plaintiffs who filed the lawsuits are: Acciones Colectivas de Sinaloa, A.C. (2); Filiberto Navarro Soto et al; Defensa Colectiva A.C.; Ismael Navarro Babuca et al; Ana Luisa Salazar Medina et al. Similarly, during the first half of 2015, four civil action lawsuits were filed against BVC in the state courts of Sonora seeking damages for alleged injuries and for moral damages as a consequence of the spill. The plaintiffs for the state court lawsuits are: José Vicente Arriola Nuñez et al; Santana Ruiz Molina et al; Andres Nogales Romero et al; Teodoro Javier Robles et al. For a description of collective actions in Mexico we refer to the 2011 amendments to the CFPC described above. It is currently not possible to determine the extent of the damages sought in these state and federal lawsuits but the Company considers that these lawsuits are without merit and the Company and its subsidiaries are vigorously defending against them.

The Company reasonably considers that none of the legal proceedings resulting from the spill, individually or in the aggregate, would have a material effect on its financial position or results of operations.

As of June 30, 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.

Table of Contents

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.

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.

Table of Contents

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) Armando Cornejo Flores, in representation of 37 of SCC’s Peruvian Branch former workers v. SCC’s Peruvian Branch (filed March 2012), (8) Porfirio Ochochoque Mamani and others v. SCC’s Peruvian Branch (filed July 2012); (9) Alfonso Claudio Flores Jimenez and others v. SCC’s Peruvian Branch (filed July 2013); (10) Edgardo García Ataucuri in representation of 104 of SCC´s Peruvian Branch former workers (filed March 2015); (11) Nicolas Aurelio Sueros Benavente v. SCC’s Peruvian Branch (filed May 2015) and (12) Victor Raul Marquez Cano v. SCC’s Peruvian Branch (filed June 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 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 June 30, 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

Table of Contents

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 June 30, 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 did not appeal the Court´s decision. The case concluded in favor of the Company.

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 June 30, 2015, the case remains pending resolution without further developments.

Labor matters:

Peruvian operations: Approximately 70% of the Company’s 4,603 Peruvian workers were unionized at June 30, 2015. Currently, there are five separate unions, one main union and four smaller unions. In the second quarter of 2015, two of the main unions, which formerly represented the Ilo and Cuajone workers, and one of the minor union, which formerly represented some Toquepala workers, merged into one new main union. The other four smaller unions represent the balance of workers. The Company’s collective bargaining agreements with all of these unions will expire in the second half of 2015. The Company expects to begin negotiations for new agreements in the third 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 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 June 30, 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

Table of Contents

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 June 30, 2015, the case remains pending resolution without further developments.

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 Environmental Impact Assessment (“EIA”). However, the issuance of the project´s construction permit has been delayed pending the resolution of certain differences with community groups. The Peruvian government has recommended the establishment of a development dialogue roundtable for the resolution of these differences. In response to the communities concerns, the government has taken actions to restore calm in the area and the Company has suspended activities in the Tambo valley to allow for a cooling-off period. In addition, the Company has launched a multi-media public relations campaign in order to explain the project and its significant benefits to nearby communities and other stakeholders. The Company believes that these efforts are bringing positive results. The project budget is $1.4 billion, of which $359.4 million has been expended through June 30, 2015. When completed, Tia Maria is expected to produce 120,000 tons of copper cathodes per year.

In view of the delay in this project, the Company has reviewed the carrying value of this asset to ascertain whether impairment exists. Should the Tia Maria project not be restarted, the Company is confident that most of the project equipment will continue to be used productively, through reassignment to other mine locations operated by the Company. The Company believes that an impairment loss, if any, will not be material.

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 $354.6 million has been expended through June 30, 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.

· 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.

Table of Contents

· 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 began to supply power in June 2015.

Commitment for Capital projects

As of June 30, 2015, the Company has committed approximately $260.8 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 5 “Income taxes”).

NOTE 12 — 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.

Table of Contents

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

	Three Months Ended June 30, 2015
	(in millions)
	Mexican Open-pit		Mexican IMMSA Unit		Peruvian Operations		Corporate, other and eliminations			Consolidated

Net sales outside of segments	$	733.6	$	87.0	$	562.3	—			$	1,382.9
Intersegment sales	—		15.5		—		$	(15.5	)	—
Cost of sales (exclusive of depreciation, amortization and depletion)	299.6		77.6		339.6		(9.9		)	706.9
Selling, general and administrative	11.6		1.5		10.0		1.9			25.0
Depreciation, amortization and depletion	60.4		7.9		57.4		(0.4		)	125.3
Exploration	1.0		2.9		3.6		4.6			12.1
Environmental remediation	10.5		—		—		—			10.5
Operating income	$	350.5	$	12.6	$	151.7	$	(11.7	)	503.1
Less:
Interest, net										(51.1		)
Other income (expense)										(1.5		)
Income taxes										(157.1		)
Equity earnings of affiliate										2.6
Non-controlling interest										(1.3		)
Net income attributable to SCC										$	294.7

Capital expenditure	$	202.2	$	8.8	$	67.3	$	6.6		$	284.9
Property, net	$	4,662.5	$	392.1	$	2,569.1	$	68.0		$	7,691.7
Total assets	$	7,066.2	$	837.1	$	3,646.6	$	1,798.7		$	13,348.6

	Three Months Ended June 30, 2014
	(in millions)
	Mexican Open-pit		Mexican IMMSA Unit		Peruvian Operations		Corporate, other and eliminations			Consolidated

Net sales outside of segments	$	772.1	$	87.7	$	627.6	—			$	1,487.4
Intersegment sales	—		22.5		—		$	(22.5	)	—
Cost of sales (exclusive of depreciation, amortization and depletion)	312.1		83.0		347.1		(15.6		)	726.6
Selling, general and administrative	9.1		3.9		11.2		1.2			25.4
Depreciation, amortization and depletion	54.9		7.8		48.4		5.0			116.1
Exploration	0.8		7.4		5.8		8.1			22.1
Operating income	$	395.2	$	8.1	$	215.1	$	(21.2	)	597.2
Less:
Interest, net										(33.2		)
Other income (expense)										(5.7		)
Income taxes										(225.8		)
Equity earnings of affiliate										5.9
Non-controlling interest										(1.1		)
Net income attributable to SCC										$	337.3

Capital expenditure	$	252.3	$	9.2	$	97.6	$	1.0		$	360.1
Property, net	$	3,918.8	$	379.8	$	2,503.8	$	131.3		$	6,933.7
Total assets	$	5,976.8	$	896.6	$	3,431.3	$	1,203.2		$	11,507.9

Table of Contents

	Six Months Ended June 30, 2015
	(in millions)
	Mexican Open-pit		Mexican IMMSA Unit			Peruvian Operations		Corporate, other and eliminations			Consolidated

Net sales outside of segments	$	1,397.8	$	177.4		$	1,082.5	—			$	2,657.7
Intersegment sales	34.4		$	(34.4	)	—
Cost of sales (exclusive of depreciation, amortization and depletion)	596.4		167.5			642.6		(19.8		)	1,386.7
Selling, general and administrative	20.9		3.4			20.3		5.2			49.8
Depreciation, amortization and depletion	114.5		15.6			110.3		1.8			242.2
Exploration	1.8		5.2			6.3		9.1			22.4
Environmental remediation	16.5		—			—		—			16.5
Operating income	$	647.7	$	20.1		$	303.0	$	(30.7	)	940.1
Less:
Interest, net											(74.2		)
Other income (expense)											(5.4		)
Income taxes											(286.2		)
Equity earnings of affiliate											5.4
Non-controlling interest											(2.6		)
Net income attributable to SCC											$	577.1

Capital expenditure	$	363.9	$	15.4		$	120.5	$	7.9		$	507.7
Property, net	$	4,662.5	$	392.1		$	2,569.1	$	68.0		$	7,691.7
Total assets	$	7,066.2	$	837.1		$	3,646.6	$	1,798.7		$	13,348.6

	Six Months Ended June 30, 2014
	(in millions)
	Mexican Open-pit		Mexican IMMSA Unit			Peruvian Operations		Corporate, other and eliminations			Consolidated

Net sales outside of segments	$	1,420.3	$	183.6		$	1,237.9	—			$	2,841.8
Intersegment sales	—		46.9			—		$	(46.9	)	—
Cost of sales (exclusive of depreciation, amortization and depletion)	541.6		167.4			670.2		(10.7		)	1,368.5
Selling, general and administrative	17.8		7.6			22.4		2.1			49.9
Depreciation, amortization and depletion	109.5		15.6			95.6		5.8			226.5
Exploration	1.7		12.4			7.7		14.9			36.7
Operating income	$	749.7	$	27.5		$	442.0	$	(59.0	)	1,160.2
Less:
Interest, net											(69.3		)
Other income (expense)											(9.9		)
Income taxes											(429.9		)
Equity earnings of affiliate											11.8
Non-controlling interest											(2.3		)
Net income attributable to SCC											$	660.6

Capital expenditure	$	520.0	$	18.2		$	155.4	$	3.4		$	697.0
Property, net	$	3,918.8	$	379.8		$	2,503.8	$	131.3		$	6,933.7
Total assets	$	5,976.8	$	896.6		$	3,431.3	$