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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x

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

 

For the fiscal year ended: December 31, 2009

 

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.)

 

11811 North Tatum Blvd. Suite 2500, Phoenix, AZ

 

85028

(Address of principal executive offices)

 

(Zip code)

 

Registrant’s telephone number, including area code:  (602) 494-5328

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:

 

Name of each exchange on which registered:

Common Stock, par value $0.01 per share

 

New York Stock Exchange

 

 

Lima Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes x  No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No x

 

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 Web site, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to This Form 10-K.  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 the 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 January 31, 2010, there were of record 850,000,000 shares of Common Stock, par value $0.01 per share, outstanding.

 

The aggregate market value of the shares of Common Stock (based upon the closing price at June 30, 2009 as reported on the New York Stock Exchange - Composite Transactions) of Southern Copper Corporation held by non affiliates was approximately $3,475 million.

 

PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE:

 

Part III:

 

Proxy statement for 2010 Annual Meeting of Stockholders

 

 

 

Part IV:

 

Exhibit Index is on Page 183 through 184

 

 

 



Table of Contents

 

Southern Copper Corporation (“SCC”)

 

INDEX TO FORM 10-K

 

 

 

Page No.

PART I.

 

 

 

 

 

Item 1

Business

4-18

 

 

 

Item 1A

Risk factors

19-30

 

 

 

Item 1B

Unresolved Staff Comments

30

 

 

 

Item 2

Properties

31-72

 

 

 

Item 3

Legal Proceedings

73

 

 

 

Item 4

Submission of Matters to a Vote of Security Holders

74

 

 

 

 

Executive Officers of the Registrant

 

 

 

 

PART II.

 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

75-77

 

 

 

Item 6.

Selected Financial Data

78-79

 

 

 

Item 7.

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

80-109

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

110-113

 

 

 

Item 8.

Financial Statements and Supplementary Data

114-178

 

 

 

Item 9.

Changes in and Disagreements with Accountant on Accounting and Financial Disclosure

179

 

 

 

Item 9A.

Controls and Procedures

179-181

 

 

 

Item 9B.

Other Information

181

 

 

 

 

 

 

PART III.

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

182

 

 

 

Item 11.

Executive Compensation

182

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

182

 

 

 

Item 13.

Certain Relationships and Related Transactions and Director Independence.

182

 

 

 

Item 14.

Principal Accounting Fees and Services

182

 

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PART IV.

 

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

183-185

 

 

 

 

Signatures

186

 

 

 

 

Supplemental information.

187-188

 

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PART I.

 

ITEM 1. BUSINESS

 

THE COMPANY

 

Southern Copper Corporation (SCC” or the “Company”) is one of the largest integrated copper producers in the world.  We produce copper, molybdenum, zinc and silver.  All of our mining, smelting and refining facilities are located in Peru and in Mexico and we conduct exploration activities in those countries and Chile.  See Item 2 “Properties - Review of Operations” for maps of our principal mines, smelting facilities and refineries.  Our operations make us one of the largest mining companies in Peru and also in Mexico.  We believe we have the largest copper reserves in the world.  We were incorporated in Delaware in 1952 and have conducted copper mining operations since 1960.  Since 1996, our Common Stock is listed on both the New York and Lima Stock Exchanges.

 

Our Peruvian copper operations involve mining, milling and flotation of copper ore to produce copper concentrates and molybdenum concentrates; the smelting of copper concentrates to produce anode copper; and the refining of anode copper to produce copper cathodes.  As part of this production process, we also produce significant amounts of molybdenum concentrate and refined silver.  We also produce refined copper using SX/EW technology.  We operate the Toquepala and Cuajone mines high in the Andes Mountains, approximately 860 kilometers southeast of the city of Lima, Peru.  We also operate a smelter and refinery west of the Toquepala and Cuajone mines in the coastal city of Ilo, Peru.

 

Our Mexican operations are conducted through our subsidiary, Minera Mexico S.A. de C.V. (“Minera Mexico”), which we acquired in 2005.  Minera Mexico engages primarily in the mining and processing of copper, molybdenum, zinc, silver, gold and lead.  Minera Mexico operates through subsidiaries that are grouped into three separate units.  Mexicana de Cobre S.A. de C.V. (together with its subsidiaries, the “Mexcobre Unit”) operates La Caridad, an open-pit copper mine, a copper ore concentrator, a SX/EW plant, a smelter, refinery and a rod plant.  Mexicana de Cananea S.A. de C.V. (together with its subsidiaries, the “Cananea Unit”) operates Cananea, an open-pit copper mine, which is located at the site of one of the world’s largest copper ore deposits, a copper concentrator and two SX/EW plants.  Industrial Minera Mexico, S.A. de C.V. and Minerales Metalicos del Norte, S.A. (together with its subsidiaries, the “IMMSA Unit”) operate five underground mines that produce zinc, lead, copper, silver and gold, a coal mine and several industrial processing facilities for zinc and copper.

 

We utilize modern/state of the art mining and processing methods, including global positioning systems and computerized mining operations.  Our operations have a high level of vertical integration that allows us to manage the entire production process, from the mining of the ore to the production of refined copper and other products and most related transport and logistics functions, using our own facilities, employees and equipment.

 

The sales prices for our products are largely determined by market forces outside of our control. Our management, therefore, focuses on cost control and production enhancement to remain profitable.  We endeavor to achieve these goals through capital spending programs, exploration efforts and cost reduction programs.  Our focus is on seeking to remain profitable during periods of low copper prices and maximizing results in periods of high copper prices.  For additional information on the sale prices of the metals we produce, please see “Metal prices” in this item 1.

 

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Currency Information:

 

Unless stated otherwise, all our financial information is presented in U.S. dollars and any reference herein to “U.S. dollars”, “dollars”, or “$” are to U.S. dollars; references to “S/.”, “nuevo sol” or “nuevos soles”, are to Peruvian nuevos soles; and references to “peso”, “pesos”, or “Ps.”, are to Mexican pesos.

 

Unit Information:

 

Unless otherwise noted, all tonnages are in metric tons.  To convert to short tons, multiply by 1.102.  All ounces are troy ounces.  All distances are in kilometers.  To convert to miles, multiply by 0.621.  To convert hectares to acres, multiply by 2.47.

 

ORGANIZATIONAL STRUCTURE

 

The following chart describes our organizational structure, starting with our controlling stockholders, as of December 31, 2009.  For clarity of presentation, the chart identifies only our main subsidiaries and eliminates intermediate holding companies.

 

 

We are a majority-owned, indirect subsidiary of Grupo Mexico S.A.B. de C.V. (“Grupo Mexico”).  Through its wholly-owned subsidiaries, Grupo Mexico as of December 31, 2009 owns 80.0% of our capital stock. Grupo Mexico’s principal business is to act as a holding company for shares of other corporations engaged in the mining, processing, purchase and sale of minerals and other products and railway and other related services.

 

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We conduct our operations in Peru through a registered branch (the “SPCC Peru Branch”, “Branch” or “Peruvian Branch”).  The SPCC Peru Branch comprises substantially all of our assets and liabilities associated with our copper operations in Peru.  The SPCC Peru Branch is not a corporation separate from us and, therefore, obligations of SPCC Peru Branch are direct obligations of SCC and vice-versa.  It is, however, an establishment, registered pursuant to Peruvian law, through which we hold assets, incur liabilities and conduct operations in Peru.  Although it has neither its own capital nor liability separate from us, it is deemed to have equity capital for purposes of determining the economic interests of holders of our investment shares, (See Note 13 “Non-controlling interest” of our consolidated financial statements).

 

On April 1, 2005, we acquired Minera Mexico, the largest mining company in Mexico on a stand-alone basis, from Americas Mining Corporation (“AMC”), a subsidiary of Grupo Mexico, our controlling stockholder.  Minera Mexico is a holding company and all of its operations are conducted through subsidiaries that are grouped into three units: (i) the Mexcobre Unit (ii) the Cananea Unit and (iii) the IMMSA Unit.  We own 99.95% of Minera Mexico.

 

In 2008 and 2009, pursuant to the $500 million share repurchase program authorized by the Company’s Board of Directors in 2008, the Company purchased 33.4 million shares of its Common Stock at a cost of $456.6 million.  These shares will be available for general corporate purposes.  The Company may purchase additional shares 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.

 

REPUBLIC OF PERU AND MEXICO

 

Our revenues are derived primarily from our operations in Peru and Mexico.  Risks related to the Company’s operations in both countries include those associated with economic and political conditions, effects of currency fluctuations and inflation, effects of government regulations and the geographic concentration of the Company’s operations.

 

AVAILABLE INFORMATION

 

We file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission (“SEC”).  You may read and copy any document we file at the SEC’s Public Reference Room at 100 F Street, Washington, D.C. 20549.  Please call the SEC at 1-800-SEC-0330 for information on the Public Reference Room.  The SEC maintains a web-site that contains annual, quarterly and current reports, proxy statements and other information that issuers (including Southern Copper Corporation) file electronically with the SEC.  The SEC’s web-site is www.sec.gov.

 

Our Internet address is www.southerncoppercorp.com.  Commencing with the Form 8-K dated March 14, 2003, we have made available free of charge on this internet address our annual, quarterly and current reports, as soon as reasonably practical after we electronically file such material with, or furnish it to, the SEC.  Our web page includes the Corporate Governance guidelines and the charters of our most significant Board Committees.  However, the information found on our website is not part of this or any other report.

 

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CAUTIONARY STATEMENT

 

Forward-looking statements in this report and in other Company statements include statements regarding expected commencement dates of mining or metal production operations, projected quantities of future metal production, anticipated production rates, operating efficiencies, costs and expenditures, including taxes, as well as projected demand or supply for the Company’s products.  Actual results could differ materially depending upon factors including the risks and uncertainties relating to general U.S. and international economic and political conditions, the cyclical and volatile prices of copper, other commodities and supplies, including fuel and electricity, availability of materials, insurance coverage, equipment, required permits or approvals and financing, the occurrence of unusual weather or operating conditions, lower than expected ore grades, water and geological problems, the failure of equipment or processes to operate in accordance with specifications, failure to obtain financial assurance to meet closure and remediation obligations, labor relations, litigation and environmental risks, as well as political and economic risk associated with foreign operations.  Results of operations are directly affected by metals prices on commodity exchanges, which can be volatile.

 

Additional business information follows:

 

COPPER BUSINESS

 

Copper is the world’s third most widely used metal and an important component in the world’s infrastructure.  Copper has unique chemical and physical properties, including high electrical conductivity and resistance to corrosion, as well as excellent malleability and ductility that has made it a superior material for use in the electrical energy, telecommunications, building construction, transportation and industrial machinery businesses.  Copper is also an important metal in non-electrical applications such as plumbing and roofing and, when alloyed with zinc to form brass, in many industrial and consumer applications.

 

Copper industry fundamentals, including copper demand, price levels and stocks, strengthened in late 2003 and copper prices continued to improve into the third quarter of 2008, from the 15-year price lows set during 2002.  Late in the third quarter of 2008 the price of copper, as well as the price of other commodities, suffered a brief temporary decline as a consequence of the world financial crisis reaching price lows of $1.30 per pound in the 4th quarter of 2008.  However, in 2009 the copper price improved closing the year at $3.33 per pound and as of February 19, 2010, the LME and COMEX per pound copper prices were $3.26 and $3.36, respectively.

 

BUSINESS REPORTING SEGMENTS:

 

Company management views Southern Copper as having three reportable segments and manages on the basis of these segments.

 

The three segments identified are groups of individual mines, each of which constitutes an operating segment, with similar economic characteristics, type of products, processes and support facilities, 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.

 

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Intersegment sales are based on arm’s-length prices at the time of sale. These may not be reflective of actual prices realized by the Company due to various factors, including additional processing, timing of sales to outside customers and transportation cost.  Added to the segment information is information regarding the Company’s sales.  The segments identified by the Company are:

 

1.               Peruvian operations include the Toquepala and Cuajone mine complexes and the smelting and refining plants, industrial railroad and port facilities which service both mines. Sales of its products are recorded as revenue of our Peruvian mines. The Peruvian operations produce copper, with production of by-product molybdenum, silver and other material.

 

2.               Mexican open-pit operations, which include La Caridad and Cananea mine complexes and the smelting and refining plants and support facilities which service both mines.  Sales of its products are recorded as revenue of our Mexican mines.  The Mexican open-pit operations produce copper, with production of by-products of molybdenum, silver and other material.

 

3.               Mexican underground mining operations include five underground mines that produce zinc, copper, silver and gold, a coal mine which produces coal and coke, and several industrial processing facilities for zinc, copper and silver.  This group is identified as the IMMSA Unit and sales of its products are recorded as revenue of the IMMSA Unit.

 

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

 

Segment information is included in Item 2 “Properties”, under the captions — “Metal production by segments” and “Ore Reserves.”  More information on business segment and segment financial information are included in Note 20 “Segment and Related Information” of our consolidated financial statements.

 

CAPITAL EXPANSION PROGRAM

 

For a description of our capital expansion program see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” — “Capital Expansion Program.”

 

EXPLORATION ACTIVITIES

 

We are engaged in ongoing extensive exploration to locate additional ore bodies in Peru, Mexico and Chile.  We also conduct exploration in the areas of our current mining operations.  We invested $24.6 million on exploration programs in 2009, $37.0 million in 2008 and $40.2 million in 2007 and we expect to spend approximately $20.6 million in exploration expenditures in 2010.

 

Currently in Peru, we have direct control of 182,447 hectares of mineral rights.  In Mexico, we currently hold 368,182 hectares of exploration concessions.  We also currently hold 35,958 hectares of exploration concessions in Chile.

 

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Peru

 

Los Chancas.  The Los Chancas project, located in the department of Apurimac in southern Peru, is a copper and molybdenum porphyry deposit.

 

As a result of the pre-feasibility studies and after the preliminary design of the pit, estimates show 355 million tons of mineralized material with a copper content of 0.62%, 0.05% of molybdenum and 0.039 grams of gold per ton.  In 2009, 40,244 meters of diamond drilling were performed as part of the complementary studies geared to define the deposit’s ore reserves. In 2010, geotechnical studies will continue as part of the feasibility study.

 

Tantahuatay.  The Tantahuatay project is located in the department of Cajamarca in northern Peru.  The 2009 feasibility studies were oriented to evaluate the possibility of gold recovery from the upper part of the deposit, where a deposit of 27.1 million tons of mineralized material with an average silver content of 13.0 grams per ton and 0.89 grams of gold per ton were estimated.  In 2009, the environmental impact assessment was completed and approved by the Peruvian authorities.  In addition, we obtained the construction license for the mine and industrial complex.  We expect to start the construction of the project by the end of 2010 or early in 2011.  We have a 44.25% participation in the project.

 

Other Peruvian Prospects

 

In 2009, we continued with exploration near the Tia Maria district as well as regional exploration in the southern part of Peru.

 

For 2010 we are developing a program of approximately 21,000 meters of diamond drilling for some of our projects including at Cobrecancha, a copper and gold prospect, located in the central coast of Peru, at los Huallas, a copper and molybdenum prospect located in the Ayacucho region, and at Clara, a copper and gold prospect located in the Arequipa region.  We will also continue with the exploration program on already defined projects in Tacna and Arequipa, as well as with programs in different mineralized strips in Peru.

 

Mexico

 

In addition to exploratory drilling programs at existing mines, we are currently conducting exploration to locate mineral deposits at various other sites in Mexico.  The following are some of the more significant exploration projects:

 

El Arco.  The El Arco site is located in the state of Baja California in Mexico.  Previous exploration at the site indicate a deposit of approximately 846 million tons of mineralized material with average copper grades of 0.51% and 0.14 grams of gold as sulfide per ton, and 170 million tons of leachable mineralized materials with average copper grades of 0.35%.  In 2009, we identified a water source for the leaching operation.  Four production wells were tested and determined a potential water resource of approximately 200 liters per second in the area.  Also six diamond drill holes have been drilled to a depth of 2,640 meters in 2009. The 2008 and 2009 drilling program indicates mineralized material, with 0.50% - 0.70% average copper grades, extending 270 meters below the previously known mineralization.

 

Angangueo.  The Angangueo site is located in the state of Michoacan in Mexico.  A deposit of 13 million tons of mineralized material has been identified with diamond drilling.  Testing indicates that the deposit contains mineralized material containing 0.16 grams of gold and 262 grams of silver per ton, and is comprised of 0.79% lead, 0.97% copper and 3.5% zinc.  During 2005, we received the approval for our environmental

 

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impact study and we are in the process of obtaining land use approval.  During 2009, we continued negotiating with the State of Michoacan, Mexico to purchase various properties essential to our operations.  A prefeasibility study, commissioned in 2009, indicated that the Angangueo project needs to upgrade the Descubridora vein with more drilling.  Subsequent simulation work has indicated that Angangueo may be an economical project.

 

Buenavista.  The Buenavista site is located in the state of Sonora, Mexico, adjacent to the Cananea ore body.  Drilling and metallurgical studies have shown that the site contains approximately 36 million tons of mineralized material containing 29 grams of silver, 0.69% of copper and 3.3% of zinc per ton.  A new “scoping level” study indicates that Buenavista may be an economical deposit.  During 2007, 2,100 meters were drilled to upgrade the mineralized material and to acquire material for metallurgical testing.  Results confirmed the previous geologic interpretation of the mineralized areas.  Due to labor strike at the Cananea mine no work was performed in 2008 or 2009.

 

Carbon Coahuila.  In Coahuila, an intensive exploration program of diamond drilling has identified two additional areas, Esperanza with a potential for more than 30 million tons of “in place” mineralized coal and Guayacan with a potential for 15 million tons of “in place” mineralized coal, that could be used for a future coal-fired power plant.  During 2007 along with 5,767 meters of drilling, 23 million tons of mineralized coal resources were identified at our Nueva Rosita No. 16 concession.  Due to budget constraints, exploration work on this project was deferred in 2008 and part of 2009 and as a result, only 6,338 meters were drilled during 2009 to define mineralized material for an open-pit mine in the area.

 

The Chalchihuites.  The Chalchihuites site is located in the State of Zacatecas.  It is a replacement deposit with mixed oxides and sulfides of lead, copper, zinc and silver.  A drilling program, in the late nineties, defined 16 million tons of mineralized material containing 95 grams of silver, 0.36% lead, 0.69% copper and 3.08% zinc per ton.  Preliminary metallurgical testing indicates a leaching precipitating-flotation recovery process that can be applied to this ore.  In 2009, we started a prefeasibility study, which is expected to be completed by the end of 2010.

 

Pilares.  In 2008, we bought Freeport-McMoran’s 49% interest in Minera Pilares, S.A. de C.V. (“Minera Pilares”), giving us 100% ownership.  Minera Pilares is located in the state of Sonora, ten kilometers from the town of Nacozari de Garcia and six straight line kilometers from our La Caridad mine.  The work to clear and prepare the access to the Porvenir tunnel started at the end of 2008.  Calculations using Mine-Sight software indicated 52.9 million tons of mineralized material, with 0.92% copper content.  Because all previous mineralized material calculation was based on rotary drilling, a diamond drilling program of 9,509 meters was performed in 2009.  A new mineralized material calculation, based on this drilling, will be undertaken in 2010. A “heavy medium” metallurgical test was also conducted on core from this drilling.  Preliminary results indicate that preconcentration by this method may be feasible for the Pilares ore. We expect to complete the results of this testing by the second half of 2010.

 

Sierra de Lobos.  This project is located southwest of the city of Leon, Guanajuato.  Our target is to identify a copper and zinc deposit with mineralized material with average grades between 0.5% and 1.0% copper and between 5% and 7% zinc including a small contribution of gold and silver.  In 2008, 1,636 meters were drilled.  Results confirm the presence of copper and zinc mineralization, but an economical deposit has not yet been identified.  Due to the changes in our investment program priorities no work was performed in 2009.  We expect to continue work on this project in 2010.

 

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Chile

 

El Salado.  The El Salado prospect is located in northern Chile (Atacama area) and it corresponds to an ore body with copper and gold in veins.  In 2009 a diamond drilling program totaling 3,387 meters was completed; with this program we have concluded the exploration stage and during 2010 we will evaluate the results to determine what our next steps are for this prospect.

 

Resguardo de la Costa. During 2009 we continued with the exploration of El Resguardo de la Costa prospect (copper-gold in veins) located also in the Atacama area and completed 1,378 meters of diamond drilling; with this program we have concluded the exploration stage and during 2010 we will evaluate the results in order to determine how to proceed with this prospect.

 

Ticnamar. The Ticnamar prospect, located in northern Chile, has been explored as a deposit with copper-molybdenum porphyric veins. In 2009, 3,671 meters of diamond drilling were completed.  For 2010 we have budgeted 5,000 meters of diamond drilling.

 

Other Chilean Prospects.  For 2010 a drilling program of 11,500 meters has been planned for the following prospects located in northern Chile: Catanave (epithermal gold- silver veins), Santa Marta (porphyric copper-molybdenum veins) and San Benito (porphyric copper-molybdenum veins).

 

PRINCIPAL PRODUCTS AND MARKETS

 

The principal uses of copper are in the building and construction industry, electrical and electronic products and, to a lesser extent, industrial machinery and equipment, consumer products and the automotive and transportation industries.  Molybdenum is used to toughen alloy steels and soften tungsten alloy and is also used in fertilizers, dyes, enamels and reagents.  Silver is used for photographic, electrical and electronic products and, to a lesser extent, brazing alloys and solder, jewelry, coinage, silverware and catalysts.  Zinc is primarily used as a coating on iron and steel to protect against corrosion.  It is also used to make die cast parts, in the manufacturing of batteries and in the form of sheets for architectural purposes.

 

Our marketing strategy and annual sales planning emphasize developing and maintaining long-term customer relationships, and thus acquiring annual or other long-term contracts for the sale of our products is a high priority.  Approximately 80% of our metal production for the year 2009, 2008 and 2007, was sold under annual or longer-term contracts.  Sales prices are determined based on prevailing commodity prices for the quotation period according to the terms of the contract.

 

We focus on the ultimate end-user customers as opposed to selling on the spot market or to trading companies.  In addition, we devote significant marketing effort to diversifying our sales both by region and by customer base.  We strive to provide superior customer service, including just-in-time deliveries of our products.  Our ability to consistently fulfill customer demand is supported by our substantial production capacity.

 

For additional information on sales please see Revenue recognition on Note 2 “Summary of significant accounting policies” and Note 20 “Segment and related information” of our consolidated financial statements.

 

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METALS PRICES

 

Prices for our products are principally a function of supply and demand and, except for molybdenum, are established on the Commodities Exchange, or COMEX, in New York and the London Metal Exchange or LME, the two most important metal exchanges in the world.  Prices for our molybdenum products are established by reference to the publication Platt’s Metals Week.  Our contract prices also reflect any negotiated premiums and the costs of freight and other factors.  From time to time, we have entered into hedging transactions to provide partial protection against future decreases in the market price of metals and we may do so under certain market conditions.  We entered into copper derivative contracts in 2008 and 2007.  During 2009 we did not enter into any copper or zinc derivative contracts and, at present, we do not have any copper or zinc swap contracts outstanding for 2010.  For a further discussion of derivative instruments see Item 7A “Quantitative and Qualitative Discussion about Market Risk”.  For a further discussion of our products market prices, please see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” — “Metal Prices”.

 

The table below shows the high, low and average COMEX and LME copper prices during the last 15 years:

 

 

 

Copper (COMEX)

 

Copper (LME)

 

Year

 

High

 

Low

 

Average

 

High

 

Low

 

Average

 

1995

 

1.44

 

1.30

 

1.37

 

1.47

 

1.23

 

1.33

 

1996

 

1.31

 

0.86

 

1.06

 

1.29

 

0.83

 

1.04

 

1997

 

1.23

 

0.76

 

1.04

 

1.23

 

0.77

 

1.03

 

1998

 

0.86

 

0.64

 

0.75

 

0.85

 

0.65

 

0.75

 

1999

 

0.85

 

0.61

 

0.72

 

0.84

 

0.61

 

0.71

 

2000

 

0.93

 

0.74

 

0.84

 

0.91

 

0.73

 

0.82

 

2001

 

0.87

 

0.60

 

0.73

 

0.83

 

0.60

 

0.72

 

2002

 

0.78

 

0.65

 

0.72

 

0.77

 

0.64

 

0.71

 

2003

 

1.04

 

0.71

 

0.81

 

1.05

 

0.70

 

0.81

 

2004

 

1.54

 

1.06

 

1.29

 

1.49

 

1.06

 

1.30

 

2005

 

2.28

 

1.40

 

1.68

 

2.11

 

1.39

 

1.67

 

2006

 

4.08

 

2.13

 

3.10

 

3.99

 

2.06

 

3.05

 

2007

 

3.75

 

2.40

 

3.23

 

3.77

 

2.37

 

3.23

 

2008

 

4.08

 

1.25

 

3.13

 

4.08

 

1.26

 

3.16

 

2009-1st Q

 

1.85

 

1.38

 

1.57

 

1.85

 

1.38

 

1.55

 

2009-2nd Q

 

2.44

 

1.85

 

2.15

 

2.39

 

1.80

 

2.12

 

2009-3rd Q

 

2.95

 

2.15

 

2.66

 

2.94

 

2.19

 

2.65

 

2009-4th Q

 

3.33

 

2.67

 

3.03

 

3.33

 

2.66

 

3.02

 

2009

 

3.33

 

1.38

 

2.35

 

3.33

 

1.38

 

2.34

 

 

The per pound COMEX copper price during the last 5, 10 and 15 year periods averaged $2.70, $1.79 and $1.52, respectively.  The per pound LME copper price during the last 5, 10 and 15 year periods averaged $2.69, $1.78 and $1.51, respectively.

 

At February 19, 2010, the COMEX and LME copper prices were $3.36 and $3.26 per pound, respectively.

 

The table below shows the high, low and average market prices for our three principal by-products during the last 15 years:

 

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Zinc(LME)

 

Silver (COMEX)

 

Molybdenum (Dealer Oxide
Platt’s Metals Week)

 

Year

 

High

 

Low

 

Average

 

High

 

Low

 

Average

 

High

 

Low

 

Average

 

1995

 

0.52

 

0.44

 

0.47

 

6.10

 

4.38

 

5.19

 

16.50

 

4.25

 

8.08

 

1996

 

0.48

 

0.45

 

0.47

 

5.82

 

4.67

 

5.18

 

5.25

 

3.13

 

3.79

 

1997

 

0.80

 

0.47

 

0.60

 

6.31

 

4.16

 

4.87

 

4.75

 

3.59

 

4.31

 

1998

 

0.52

 

0.42

 

0.46

 

7.26

 

4.61

 

5.53

 

4.48

 

2.10

 

3.42

 

1999

 

0.56

 

0.41

 

0.49

 

5.76

 

4.87

 

5.22

 

2.80

 

2.52

 

2.66

 

2000

 

0.58

 

0.46

 

0.51

 

5.55

 

4.56

 

4.97

 

2.92

 

2.19

 

2.56

 

2001

 

0.48

 

0.33

 

0.40

 

4.81

 

4.03

 

4.36

 

2.58

 

2.19

 

2.35

 

2002

 

0.38

 

0.33

 

0.35

 

5.11

 

4.22

 

4.60

 

7.90

 

2.43

 

3.76

 

2003

 

0.46

 

0.34

 

0.38

 

5.98

 

4.35

 

4.89

 

7.60

 

3.28

 

5.29

 

2004

 

0.58

 

0.43

 

0.48

 

8.21

 

5.51

 

6.68

 

32.38

 

7.35

 

16.20

 

2005

 

0.87

 

0.53

 

0.63

 

9.00

 

6.43

 

7.32

 

39.25

 

25.00

 

31.99

 

2006

 

2.10

 

0.87

 

1.49

 

14.85

 

8.82

 

11.54

 

28.20

 

21.00

 

24.75

 

2007

 

1.93

 

1.00

 

1.47

 

15.50

 

11.47

 

13.39

 

33.75

 

24.50

 

30.19

 

2008

 

1.28

 

0.47

 

0.85

 

20.69

 

8.80

 

14.97

 

33.88

 

8.75

 

28.42

 

2009-1st Q

 

0.59

 

0.48

 

0.53

 

14.49

 

10.42

 

12.63

 

9.50

 

8.13

 

8.94

 

2009-2nd Q

 

0.76

 

0.57

 

0.67

 

15.95

 

11.79

 

13.75

 

10.60

 

7.83

 

9.10

 

2009-3rd Q

 

0.86

 

0.66

 

0.77

 

17.24

 

12.64

 

14.76

 

18.00

 

10.80

 

14.49

 

2009-4th Q

 

1.17

 

0.84

 

1.00

 

19.30

 

16.21

 

17.56

 

13.25

 

10.75

 

11.57

 

2009

 

1.17

 

0.48

 

0.75

 

19.30

 

10.42

 

14.67

 

18.00

 

7.83

 

11.03

 

 

The per pound LME zinc price during the last 5, 10 and 15 year periods averaged $1.04, $0.73 and $0.65, respectively.  The per ounce COMEX silver price during the last 5, 10 and 15 year periods averaged $12.38, $8.74 and $7.56, respectively.  The per pound Platt’s Metals Week Dealer Oxide molybdenum price during the last 5, 10 and 15 year periods averaged $25.28, $15.65 and $11.92, respectively.

 

At February 19, 2010 the LME zinc price was $1.03 per pound, the COMEX silver price was $16.41 per ounce and the Platt’s Metals Week Dealer Oxide molybdenum price was $15.75 per pound.

 

COMPETITIVE CONDITIONS

 

Competition in the copper market is primarily on a price and service basis, with price being the most important consideration when supplies of copper are ample.  The Company’s products compete with other materials, including aluminum and plastics.  For additional information, see “Item 1A – “Risk factors – The copper mining is highly competitive.”

 

EMPLOYEES

 

As of December 31, 2009, we had 11,523 employees, approximately 71.2% of whom are covered by labor agreements with ten different labor unions.  During the last several years, we have experienced strikes or other labor disruptions that have had an adverse impact on our operations and operating results.  Our Cananea, Taxco and San Martin mines in Mexico have been on strike since July 2007.

 

Peru

 

Approximately 62% of our Peruvian labor force was unionized at December 31, 2009, represented by eight separate unions.  Three of these unions, one at each major production area, represent the majority of the Company’s workers.  The collective bargaining agreements with these unions expire in February 2010.  The Company commenced negotiations with them on February 5, 2010.  Additionally, there are five

 

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smaller unions representing the balance of the unionized workers.  Collective bargaining agreements for these smaller unions are in effect through November 2012.

 

During 2009 no additional strikes occured.  In 2008, strikes in support of a mining federation strike occurred at the Company’s operating areas, during which operations were close to normal.

 

Employees of the Toquepala and Cuajone units reside in townsites, where we have built 2,513 houses and apartments and 1,186 houses and apartments, respectively.  In 1998, company housing at our Ilo unit, was sold to workers at nominal prices.  We still hold 90 houses at Ilo for staff personnel.  Housing, together with maintenance and utility services, is provided at minimal cost to most of our employees.  Our townsite and housing complexes include schools, medical facilities, churches, social clubs, shopping, banking and other services.

 

Mexico

 

Approximately 76% of the Mexican labor force was unionized at December 31, 2009, represented by two separate unions.  Under Mexican law, the terms of employment for unionized workers are set forth in collective bargaining agreements.  Typically Mexican companies negotiate the salary provisions of collective bargaining agreements with the labor unions annually and negotiate other benefits every two years.  The Company conducts negotiations separately at each mining complex and each processing plant.

 

In the last eight years the Cananea mine has experienced nine labor stoppages.  The Company has tried unsuccessfully to resolve the current labor stoppage that obstructs production at Cananea.  In the second quarter 2008, the Board of Directors offered all Cananea employees a severance payment in accordance with the collective bargaining agreement and applicable law.  This was offered in order to award the employees a significant severance payment that allows them to choose the labor alternative that is best for each of them.  During 2008, under this plan a group of employees was terminated at a cost to the Company of $15.2 million, which was recorded in cost of sales on the consolidated statement of earnings.  There were no termination payments made in 2009.  In accordance with FASB Codification topic 712-10-25, the Company has estimated a liability of $35.1 million, which was recorded on the consolidated balance sheet.

 

Due to the lengthy work stoppage the Company has performed an impairment analysis on the assets at the Cananea mine.  The Company has determined through its impairment analysis that no impairment exists as of December 31, 2009.  Should estimates of future copper and molybdenum prices decrease significantly, such determination could change.  During 2009, the Company continued to provide periodic maintenance to the assets.

 

On February 11, 2010 a Mexican Federal Labor court ruled that the damages caused to the Cananea mine by the neglect and sabotage of striking workers since the commencement of the labor stopagges in July 2007 resulted in force majeure, thus providing legal basis for the termination of individual and unionized employees by the Company.  The Company expects due compliance of the referred ruling by the relevant federal and state authorities and looks forward to recovering control of the Cananea mine.

 

Additionally, the Taxco and San Martin mines have been on strike since July 2007.  It is expected that operations at these mines will remain suspended until these labor issues are resolved. On December 10, 2009 a federal tribunal confirmed the legality of the San Martin strike.

 

Employees of the Mexcobre and Cananea Units reside in townsites at La Caridad and Cananea, where we have built approximately 2,000 houses and apartments and 275 houses and apartments, respectively.  Most of the employees of the IMMSA Unit reside on the

 

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grounds of the mining or processing complexes in which they work and where we have built approximately 900 houses and apartments.  Housing, together with maintenance and utility services, is provided at minimal cost to most of our employees.  Our townsites and housing complexes include educational and, in some units, medical facilities, churches, social clubs, shopping centers, banking and other services.  At the Cananea Unit, health care is provided free of charge to employees, retired unionized employees and their families.

 

FUEL, ELECTRICITY AND WATER SUPPLIES

 

The principal raw materials used in our operations are fuels (including fuel oil to power boilers and generators, natural gas for metallurgical processes at our Mexican operations and diesel fuel for mining equipment), electricity and water.  We believe that supplies of fuel, electricity and water are readily available.  Although the prices of these raw materials may fluctuate beyond our control, we focus our efforts to reduce these costs through cost and energy saving measures.

 

Peru

 

In Peru, electric power for our operating facilities is generated by two thermal electric plants owned and operated by Enersur S.A., an independent power company (“Enersur”), a diesel and waste heat boilers plant located adjacent to the Ilo smelter and a coal plant located south of Ilo.  Power generation capacity for Peruvian operations is currently 344 megawatts.  In addition, we have nine megawatts of power generation capacity from two small hydro-generating installations at Cuajone.  Power is distributed over a 224-kilometer closed loop transmission circuit.  We obtain fuel in Peru primarily from a local producer.

 

In 1997, we sold our Ilo power plant to Enersur.  In connection with the sale, a power purchase agreement was also completed under which we agreed to purchase all of our power needs for our Peruvian operations from Enersur for twenty years, commencing in 1997.  In 2003 the agreement was amended releasing Enersur from its obligation to construct additional capacity to meet our increased electricity requirements and changing the power tariff as called for in the original agreement.

 

In 2009, we signed a Memorandum of Understanding (“MOU”) with Enersur regarding its power supply agreement.  The MOU contains new economic terms that we believe better reflect current economic conditions in the power industry and in Peru.  We expect to obtain savings in our future power costs.  The new economic conditions agreed in the MOU have been applied by Enersur to its invoices to us since May 2009.  Additionally, the MOU includes an option for providing power for the Tia Maria project.  The MOU also established a time frame in which Enersur and the Company must negotiate in good faith to settle certain pending issues, including agreeing on a power purchase agreement for the Tia Maria Project.  If the parties do not settle such pending issues, SCC will be free to negotiate with third parties.  However, the Company could lose the economic benefit negotiated in the MOU.

 

In Peru, we have water rights or licenses for up to 1,950 liters per second from well fields at Huaitire, Vizcachas and Titijones aquifers and also surface water from the Suches lake and two small water courses, namely Quebrada Honda and Quebrada Tacalaya, which together are sufficient to supply the needs of our two operating units at Toquepala and Cuajone.  At Ilo, we have desalinization plants that produce water for industrial and domestic use that we believe are sufficient for our current and projected needs.

 

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Mexico

 

Besides electric energy, the principal raw materials used in our operations are fuels.  Natural gas is used for metallurgical processes, to power furnaces, converters, casting wheels, boilers and electric generators.  Fuel oil is a backup for all these uses.  Also at our operations we use diesel oil for mining equipment.  Fuel, electricity and water supplies are readily available.  The prices of these materials may fluctuate beyond our control since the only supplier is the Mexican government. We therefore focus our efforts to reduce these costs through cost and energy saving measures.

 

In Mexico, fuel is purchased directly from Petroleos Mexicanos, (“PEMEX”), the state oil monopoly.  Electricity for our Mexican operations, which is used as the main energy source at our mining complexes, is purchased from the Comision Federal de Electricidad, the Federal Electricity Commission, or CFE, the state’s electrical power producer.  In addition, we recover some energy from waste heat boilers at the La Caridad smelter.  Accordingly, a significant portion of our operating costs in Mexico are dependent upon the pricing policies of PEMEX and CFE, which reflect government policy as well as international market prices for crude oil, natural gas and conditions in the refinery markets.  Mexcobre imports natural gas from the U.S. through its pipeline (between Douglas, Arizona and Nacozari, Sonora).  This permits us to import natural gas from the United States at market prices and thereby reduce operating costs.  A contract with PEMEX provides us with the option of using a monthly fixed price for a portion of our natural gas purchases.

 

In the last three years we entered into gas swap contracts to protect part of our gas consumption as follows:

 

 

 

2009

 

2008

 

2007

 

Gas volume (MMBTUs)

 

184,000

 

460,000

 

900,000

 

Fixed price

 

$

3.6350

 

$

8.2175

 

$

7.5250

 

Loss (in millions)

 

$

 

$

0.9

 

$

0.9

 

 

The losses obtained were included in the production cost.  At December 31, 2009, we did not hold any open gas swap contracts.

 

In December 2005, we announced our plans for a 450 megawatt coal power generation plant in the state of Sonora, Mexico to supply our facilities.  In 2007, we reformulated this project to increase the plant capacity to 600 megawatt.  During 2008 and 2009, we continued with the feasibility study for this plant.

 

In Mexico, water is a national property and industries not connected to a public services water supply must obtain a water concession from Comision Nacional del Agua (the “National Water Commission”, or “CNA”).  Water usage fees are established in the Ley Federal de Derechos (the Federal Law on Water Rights), which distinguishes several availability zones with different fees per unit of volume according to each zone.  All of our operations have one or several water concessions and, with the exception of Mexicana de Cobre, pump out the required water from one or several wells.  Mexicana de Cobre pumps water from the La Angostura dam, which is close to the mine and plants.  At our Cananea facility, we maintain our own wells and pay the CNA for water measured by usage.  Water conservation committees have been established in each plant in order to conserve and recycle water.  Water usage fees are updated on a yearly basis and have been increasing in recent years.

 

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Table of Contents

 

ENVIRONMENTAL MATTERS

 

For a discussion of environmental matters reference is made to the information contained under the caption “Environmental matters” in Note 14 “Commitments and contingencies” of the consolidated financial statements.

 

MINING RIGHTS AND CONCESSIONS

 

Peru

 

We have 243,891 hectares in concessions from the Peruvian government for our exploration, exploitation, extraction and/or production operations, distributed among our various sites as follows:

 

 

 

Toquepala

 

Cuajone

 

Ilo

 

Other

 

Total

 

 

 

(hectares)

 

Plants

 

300

 

456

 

420

 

 

1,176

 

Operations

 

26,848

 

27,801

 

5,619

 

 

60,268

 

Exploration

 

3,900

 

6,400

 

4,600

 

167,547

 

182,447

 

Total

 

31,048

 

34,657

 

10,639

 

167,547

 

243,891

 

 

We believe that our Peruvian concessions are in full force and in effect under applicable Peruvian laws and that we are in compliance with all material terms and requirements applicable to these concessions.  The concessions have indefinite terms, subject to our payment of concession fees of up to $3.00 per hectare annually for the mining concessions and a fee based on nominal capacity for the processing concessions.  Fees paid during 2009, 2008 and 2007 were approximately $1.1 million, $1.8 million and $1.4 million, respectively.  We have two types of mining concessions in Peru: metallic and non-metallic concessions.  We also have water concessions for well fields at Huaitire, Titijones and Vizcachas and surface water rights from the Suches Lake, which together are sufficient to supply the needs of our Toquepala and Cuajone operating units.

 

In June 2004, the Peruvian Congress enacted legislation imposing a royalty charge to be paid by mining companies in favor of the regional governments and communities where mining resources are located.  Under this law, we are subject to a 1% to 3% charge, based on sales, applicable to the value of the concentrates produced in our Toquepala and Cuajone mines.  We made provisions of $43.7 million, $53.9 million and $62.8 million in 2009, 2008 and 2007 respectively, for this charge.  These provisions are included in cost of sales (exclusive of depreciation, amortization and depletion) on the consolidated statement of earnings.

 

Mexico

 

In Mexico we have approximately 365,931 hectares in concessions from the Mexican government for our exploration and exploitation activities as outlined in the table below.

 

 

 

Underground
Mines

 

La Caridad

 

Cananea

 

Projects

 

Total

 

 

 

(hectares)

 

Mine concessions

 

88,323

 

98,687

 

22,317

 

156,604

 

365,931

 

 

We believe that our Mexican concessions are in full force and in effect under applicable Mexican laws and that we are in compliance with all material terms and requirements applicable to these concessions.  Under Mexican law, mineral resources

 

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Table of Contents

 

belong to the Mexican nation and a concession from the Mexican federal government is required to explore or mine mineral reserves.  Mining concessions have a 50-year term that can be renewed for another 50 years.  Holding fees for mining concessions can be from $0.4 to $8.5 per hectare depending on the beginning date of the mining concession.  Fees paid during 2009, 2008 and 2007 were approximately $2.5 million, $2.5 million and $2.2 million, respectively.  In addition, all of our operating units in Mexico have water concessions that are in full force and effect.  We generally own the land to which our Mexican concessions relate, although ownership is not required in order to explore or mine a concession.  We also own all of the processing facilities of our Mexican operations and the land on which they are constructed.

 

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Table of Contents

 

ITEM 1A. RISK FACTORS:

 

Every investor or potential investor in Southern Copper Corporation should carefully consider the following risk factors.

 

General Risks Relating to Our Business

 

Our financial performance is highly dependent on the price of copper and the other metals we produce.

 

Our financial performance is significantly affected by the market prices of the metals that we produce, particularly the market prices of copper, molybdenum, zinc and silver.  Historically, prices of the metals we produce have been subject to wide fluctuations and are affected by numerous factors beyond our control, including international economic and political conditions, levels of supply and demand, the availability and costs of substitutes, inventory levels maintained by users, actions of participants in the commodities markets and currency exchange rates.  In addition, the market prices of copper and certain other metals have on occasion been subject to rapid short-term changes.

 

During the last 15-year period the yearly average price of copper per pound on the COMEX ranged from a low $0.72 in 1999 and 2002, to a high $3.23 in 2007.  In 2009 the COMEX copper price increased from a quarterly low of $1.57 per pound in the first quarter to a quarterly high of $3.03 per pound in the fourth quarter and closed the year at $3.33 per pound.  The LME copper prices during these periods, while slightly different, closely paralleled the COMEX prices.  Molybdenum, zinc and silver during the same 15-year period showed average highs and lows as follows: molybdenum $2.35 per pound, low in 2001 and $31.99 per pound, high in 2005; zinc $0.35 per pound, low in 2002 and $1.49 per pound, high in 2006; and silver $4.36 per ounce, low in 2001 and $14.97 per ounce high in 2008.

 

We cannot predict whether metals prices will rise or fall in the future.  Further declines in metals prices and, in particular, copper or molybdenum prices, will have an adverse impact on our results of operations and financial condition, and we might, in very adverse market conditions, consider curtailing or modifying certain of our mining and processing operations.

 

Changes in the level of demand for our products could adversely affect our product sales.

 

Our revenue is dependent on the level of industrial and consumer demand for the concentrates and refined and semi-refined metal products we sell.  Changes in technology, industrial processes and consumer habits may affect the level of that demand to the extent that changes increase or decrease the need for our metal products.  A change in demand, including any change resulting from economic slow-downs or recessions, could impact our results of operations and financial condition.

 

Our actual reserves may not conform to our current estimates of our ore deposits and we depend on our ability to replenish ore reserves for our long-term viability.

 

There is a degree of uncertainty attributable to the calculation of reserves.  Until reserves are actually mined and processed, the quantity of ore and grades must be considered as estimates only.  The proven and probable ore reserves data included in this report are estimates prepared by us based on evaluation methods generally used in the mining industry.  We may be required in the future to revise our reserves estimates based on our actual production.  We cannot assure you that our actual

 

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reserves conform to geological, metallurgical or other expectations or that the estimated volume and grade of ore will be recovered.  Market prices of our metals, increased production costs, reduced recovery rates, short-term operating factors, royalty taxes and other factors may render proven and probable reserves uneconomic to exploit and may result in revisions of reserves data from time to time.  Reserves data are not indicative of future results of operations.  Our reserves are depleted as we mine. We depend on our ability to replenish our ore reserves for our long-term viability.  We use several strategies to replenish and increase our ore reserves, including exploration and investment in properties located near our existing mine sites and investing in technology that could extend the life of a mine by allowing us to cost-effectively process ore types that were previously considered uneconomic.  Acquisitions may also contribute to increased ore reserves and we review potential acquisition opportunities on a regular basis.  However, we cannot assure you that we will be able to continue with our strategy to replenish reserves indefinitively.

 

Our business requires levels of capital expenditures which we may not be able to maintain.

 

Our business is capital intensive.  Specifically, the exploration and exploitation of copper and other metal reserves, mining, smelting and refining costs, the maintenance of machinery and equipment and compliance with laws and regulations require significant capital expenditures.  We must continue to invest capital to maintain or to increase the amount of copper reserves that we exploit and the amount of copper and other metals we produce.  We cannot assure you that we will be able to maintain our production levels to generate sufficient cash, or that we have access to sufficient financing to continue our exploration, exploitation and refining activities at or above present levels.

 

Restrictive covenants in the agreements governing our indebtedness and the indebtedness of our Minera Mexico subsidiary may restrict our ability to pursue our business strategies.

 

Our financing instruments and those of our Minera Mexico subsidiary include financial and other restrictive covenants that, among other things, limit our and Minera Mexico’s abilities to incur additional debt and sell assets.  If either we or our Minera Mexico subsidiary do not comply with these obligations, we could be in default under the applicable agreements which, if not addressed or waived, could require repayment of the indebtedness immediately.  Our Minera Mexico subsidiary is further limited by the terms of its outstanding notes, which also restrict the Company’s applicable incurrence of debt and liens.  In addition, future credit facilities may contain limitations on our incurrence of additional debt and liens, on our ability to dispose of assets, or on our ability to pay dividends to our Common Stock holders.

 

Applicable law restricts the payment of dividends from our Minera Mexico subsidiary to us.

 

Minera Mexico is a Mexican company and, as such, may pay dividends only out of net income that has been approved by the shareholders.  Shareholders must also approve the actual dividend payment, after mandatory legal reserves have been created and losses for prior fiscal years have been satisfied.  As a result, these legal constraints may limit the ability of our Minera Mexico subsidiary to pay dividends to us, which in turn, may have an impact on our ability to service debt.

 

Through 2009, our management set aside $1.8 billion of unremitted earnings of its Mexican subsidiary, Minera Mexico, as appropriated retained earnings.  It is our intention to indefinitely invest these funds in Mexico.  These amounts are earmarked for the Company’s Mexican expansion program.

 

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Our operations are subject to risks, some of which are not insurable.

 

The business of mining, smelting and refining copper, zinc and other metals is subject to a number of risks and hazards, including industrial accidents, labor disputes, unusual or unexpected geological conditions, changes in the regulatory environment, environmental hazards and weather and other natural phenomena, such as earthquakes.  Such occurrences could result in damage to, or destruction of, mining operations resulting in monetary losses and possible legal liability.  In particular, surface and underground mining and related processing activities present inherent risks of injury to personnel and damage to equipment.  We maintain insurance against many of these and other risks, which may not provide adequate coverage in certain circumstances.  Insurance against certain risks, including certain liabilities for environmental damage or hazards as a result of exploration and production, is not generally available to us or other companies within the mining industry.  Nevertheless recent environmental legal initiatives have considered future regulations regarding environmental damage insurance.  In case such regulations come into force, we will have to analyze the need to obtain such insurance.  We do not have, and do not intend to obtain, political risk insurance.  These or other uninsured events may adversely affect our financial condition and results of operations.

 

Deliveries under our copper sales agreements can be suspended or cancelled by our customers in certain cases.

 

Under each of our copper sales agreements, we or our customers may suspend or cancel delivery of copper during a period of force majeure.  Events of force majeure under these agreements include acts of nature, labor strikes, fires, floods, wars, transportation delays, government actions or other events that are beyond the control of the parties.  Any suspension or cancellation by our customers of deliveries under our copper or other sales contracts that are not replaced by deliveries under new contracts or sales on the spot market would reduce our cash flow and could adversely affect our financial condition and results of operations.

 

The copper mining industry is highly competitive.

 

We face competition from other copper mining and producing companies around the world.  We cannot assure you that competition from lower cost producers will not adversely affect us in the future.

 

In addition, mines have limited lives and, as a result, we must periodically seek to replace and expand our reserves by acquiring new properties.  Significant competition exists to acquire properties producing or capable of producing copper and other metals.

 

The mining industry has experienced significant consolidation in recent years, including consolidation among some of our main competitors, as a result of which an increased percentage of copper production is from companies that also produce other products and may, consequently, be more diversified than we are.  We cannot assure you that the result of current or further consolidation in the industry will not adversely affect us.

 

Potential changes to international trade agreements, trade concessions or other political and economic arrangements may benefit copper producers operating in countries other than Peru and Mexico, where our mining operations are currently located.  We cannot assure you that we will be able to compete on the basis of price or other factors with companies that in the future may benefit from favorable trading or other arrangements.

 

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Interruptions of energy supply or increases in energy costs and other production costs may adversely affect our results of operations.

 

We require substantial amounts of fuel oil, electricity and other resources for our operations.  Fuel, gas and power costs constitute approximately 36% of our total 2009 production cost.  We rely upon third parties for our supply of the energy resources consumed in our operations.  The prices for and availability of energy resources may be subject to change or curtailment, respectively, due to, among other things, new laws or regulations, imposition of new taxes or tariffs, interruptions in production by suppliers, worldwide price levels and market conditions.  In recent years the price of oil has risen dramatically due to a variety of factors.  Disruptions in energy supply or increases in costs of energy resources or increases of other production costs could have a material adverse effect on our financial condition and results of operations.

 

Shortages of water supply, critical parts, equipment and skilled labor may adversely affect our operations and development projects

 

Our mining operations require significant quantities of water for mining, ore processing and related support facilities.  Although each operation currently has sufficient water rights to cover its operational demands, the loss of some or all water rights for any of our mines or operations, in whole or in part, or shortages of water to which we have rights could require us to curtail or shut down mining production and could prevent us from pursuing expansion opportunities.  Additionally, we have not yet secured adequate water rights to support all of our announced expansion projects, and our inability to secure those rights could prevent us from pursuing some of those opportunities. In addition, future shortages of critical parts, equipment and skilled labor could adversely affect our operations and development projects.

 

Our results and financial condition are affected by global and local market conditions.

 

We are subject to the risks arising from adverse changes in domestic and global economic and political conditions.  Our industry is cyclical by nature and fluctuates with economic cycles, including the current global economic recession.

 

If the world-wide financial and economic crisis continues or intensifies, it could have an impact on our business and our financial condition.  We cannot predict if the administrative and legislative actions taken in the United States and elsewhere in the world to address this situation will be successful in reducing the severity or duration of the recession.  The continuation or intensification of the global economic recession and credit crisis in the financial markets may prompt banks to limit or deny lending to us or to our customers, which may have an adverse effect on our liquidity and on our ability to carry out our announced capital investment programs.  Additionally, the continuation or intensification of the global economic recession and credit crisis may prompt our customers to slow down or reduce the purchase of our products.  We may experience longer sales cycles, difficulty in collecting sales proceeds, and lower prices for our products.  A change in the demand of our products could impact our results of operations and financial condition.  We cannot provide any assurance that any of these events will not have a material adverse effect on market conditions, prices of our securities, our ability to obtain financing, and our results of operations and financial condition.

 

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Environmental, health and safety laws, regulatory response to climate change, and other regulations may increase our costs of doing business, restrict our operations or result in operational delays.

 

Our exploration, mining, milling, smelting and refining activities are subject to a number of Peruvian and Mexican laws and regulations, including environmental laws and regulations, as well as certain industry technical standards.  Additional matters subject to regulation include, but are not limited to, concession fees, transportation, production, water use and discharge, power use and generation, use and storage of explosives, surface rights, housing and other facilities for workers, reclamation, taxation, labor standards, mine safety and occupational health.

 

Environmental regulations in Peru and Mexico have become increasingly stringent over the last decade and we have been required to dedicate more time and money to compliance and remediation activities.  Furthermore, Mexican authorities have become more rigorous and strict in enforcing Mexican environmental laws.  We expect additional laws and regulations will be enacted over time with respect to environmental matters.

 

Recently, Peruvian environmental laws have been enacted imposing closure and remediation obligations on the mining industry.  Additionally, future changes to environmental laws and regulations could increase the extent of reclamation and remediation work required to be performed by us.  Any such increases in future costs could materially impact the amounts charged to operations for reclamation and remediation. We further discuss these obligations in our Note 10 “Asset Retirement Obligation” to our consolidated financial statements.  Moreover, our Mexican operations are also subject to the environmental agreement entered into by Mexico, the United States and Canada in connection with the North American Free Trade Agreement. We believe our operations are in compliance with all environmental laws and regulations within the areas we operate.

 

Regulatory response to climate change, restrictions, caps, taxes, or other controls on emissions of greenhouse gasses, including on emissions from the combustion of carbon-based fuels, could significantly increase our operating costs. Restrictions on emissions could also affect our customers.  A number of governments or governmental bodies have introduced or are contemplating regulatory changes in response to the potential impacts of climate change.  These regulatory initiatives will be either voluntary or mandatory and may impact our operations directly or through our suppliers or customers.

 

The potential physical impacts of climate change on our operations are highly uncertain, and would be particular to the geographic circumstances. These may include changes in rainfall patterns, water shortages, changing sea levels, changing storm patterns and intensities, and changing temperatures. These effects may adversely impact the cost, production and financial performance of our operations.

 

The development of more stringent environmental protection programs in Peru and Mexico and in relevant trade agreements could impose constraints and additional costs on our operations and require us to make significant capital expenditures in the future.  We cannot assure you that future legislative, regulatory or trade developments will not have an adverse effect on our business, properties, operating results, financial condition or prospects.

 

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Our metals exploration efforts are highly speculative in nature and may be unsuccessful.

 

Metals exploration is highly speculative in nature, involves many risks and is frequently unsuccessful.  Once mineralization is discovered, it may take a number of years from the initial phases of drilling before production is possible, during which time the economic feasibility of production may change.  Substantial expenditures are required to establish proven and probable ore reserves through drilling, to determine metallurgical processes to extract the metals from the ore and, in the case of new properties, to construct mining and processing facilities.  We cannot assure you that our exploration programs will result in the expansion or replacement of current production with new proven and probable ore reserves.

 

Development projects have no operating history upon which to base estimates of proven and probable ore reserves and estimates of future cash operating costs.  Estimates are, to a large extent, based upon the interpretation of geological data obtained from drill holes and other sampling techniques, and feasibility studies that derive estimates of cash operating costs based upon anticipated tonnage and grades of ore to be mined and processed, the configuration of the ore body, expected recovery rates of the mineral from the ore, comparable facility and equipment operating costs, anticipated climatic conditions and other factors.  As a result, actual cash operating costs and economic returns based upon development of proven and probable ore reserves may differ significantly from those originally estimated.  Moreover, significant decreases in actual or expected prices may mean reserves, once found, will be uneconomical to produce.

 

Our profits may be negatively affected by currency exchange rate fluctuations.

 

The U.S. dollar is our functional currency and our revenues are primarily denominated in U.S. dollars.  However, portions of our operating costs are denominated in Peruvian nuevos soles and Mexican pesos.  Accordingly, when inflation in Peru or Mexico increases without a corresponding devaluation of the nuevo sol or the Mexican peso our financial position, results of operations and cash flows could be adversely affected.  To manage the volatility related to the risk of currency rate fluctuations, we may enter into forward exchange contracts.  We cannot assure you, however, that currency fluctuations will not have an impact on our financial condition and results of operations.

 

Our assets, earnings and cash flows are influenced by various currencies due to the geographic diversity of our sales and the countries in which we operate.  As some of our costs are incurred in currencies other than our functional currency, the U.S. dollar, fluctuations in currency exchange rates may have a significant impact on our financial results.  These costs principally include electricity, labor, maintenance, local contractors and fuel.  For the year ended December 31, 2009, a substantial portion of our costs were denominated in a currency other than U.S. dollar.  Operating costs are influenced by the currencies of the countries where our mines and processing plants are located and also by those currencies in which the costs of equipment and services are determined.  The Peruvian nuevo sol, the Mexican peso and the U.S. dollar are the currencies which most influence our costs.

 

Further, in the past there has been a strong correlation between copper prices and the exchange rate of the U.S. dollar.  A strengthening of the U.S. dollar may therefore be accompanied by lower copper prices, which would negatively affect our financial condition and results of operations.

 

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We may be adversely affected by challenges relating to slope stability.

 

Our open-pit mines get deeper as we mine them, presenting certain geotechnical challenges including the possibility of slope failure.  If we are required to decrease pit slope angles or provide additional road access to prevent such a failure, our stated reserves could be negatively affected.  Further, hydrological conditions relating to pit slopes, renewal of material displaced by slope failures and increased stripping requirements could also negatively affect our stated reserves.  We have taken actions in order to maintain slope stability, but we cannot assure you that we will not have to take additional action in the future or that our actions taken to date will be sufficient.  Unexpected failure or additional requirements to prevent slope failure may negatively affect our results of operations and financial condition, as well as have the effect of diminishing our stated ore reserves.

 

We may be adversely affected by labor disputes.

 

In the last several years we have experienced a number of strikes or other labor disruptions that have had an adverse impact on our operations and operating results.  As of December 31, 2009, unions represented approximately 71% of our workforce.

 

In recent years our Cananea mine has experienced a number of labor stoppages.  Since July 30, 2007 the mine has been on strike which continues into 2010.

 

Related to the Cananea strike, on January 7, 2009 the judge of the fifth district on labor matters annulled a decision favorable to the Company.  The Company filed a request for a review of this ruling before an appellate federal court, which declared the strike legal on March 19, 2009.  On March 20, 2009 the Company notified the Mexican Federal Labor Court of the termination of all the individual labor contracts of the Cananea workers, including the collective bargaining agreement with the Union.  This decision was based upon a finding by the Mexican mining authorities that confirmed that the Cananea mine was in a force majeure situation since it was unable to operate due to severe damages caused by striking workers.  On April 14, 2009, the Mexican Federal Labor Court issued a resolution approving the termination of Cananea’s labor relationships with individual and unionized employees, as well as the termination of its collective bargaining agreement with its employees and with the National Mining and Metal Workers Union.  This ruling has been challenged before federal tribunals.  Most of individual challenges by unionized workers have been resolved by a federal tribunal, dismissing their complaint.  The case presented by the National Mining and Metal Workers Union is pending before a federal tribunal.

 

The Company, the State of Sonora and the Mexican federal government are working to restore the necessary legal and safety conditions to resume operations at Cananea.  On February 11, 2010 a Mexican Federal Labor court ruled that the damages caused to the Cananea mine by the neglect and sabotage of striking workers since the commencement of the labor stopagges in July 2007 resulted in force majeure, thus providing legal basis for the termination of individual and unionized employees by the Company.  The Company expects due compliance of the referred ruling by the relevant federal and state authorities and looks forward to recovering control of the Cananea mine.

 

Due to the lengthy work stoppage the Company has performed an impairment analysis on the assets at the Cananea mine.  The Company has determined through its impairment analysis that no impairment exists as of December 31, 2009.  Should estimates of future copper and molybdenum prices decrease significantly, such determination could change. During 2009, the Company continued providing periodic maintenance to the assets.

 

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Additionally, our Taxco and San Martin mines have been on strike since July 2007.  It is expected that operations at these mines will remain suspended until these labor issues are resolved.  On December 10, 2009 a federal tribunal confirmed the legality of the San Martin strike.

 

We cannot assure you when these strikes will be settled, or that in the future we will not experience strikes or other labor related work stoppages that could have a material adverse effect on our financial condition and results of operations.

 

Our new mining or metal production projects may be subject to additional costs due to community actions and other factors

 

Our exploration, mining, milling, smelting and refining activities are subject to Peruvian and Mexican laws and regulations, including environmental laws and regulations, as well as certain industry technical standards.  As in any other country, environmental regulations in Peru and Mexico have become increasingly stringent over the last decades.  In accordance with mining regulations in the countries where we operate, we have to submit an environmental impact assessment (“EIA”) for all our new mining projects or expansions of existing mining operations and/or facilities.  The EIA is then discussed at various open hearings with the local communities, where they have the opportunity to voice their opinion and/or concerns.  In Peru, the Ministry of Energy and Mines (“MEM”) usually requires the mining companies to address the questions of the communities.  The MEM is the entity that approves the EIA and the execution of mining projects.

 

The Tia Maria project located in the Peruvian region of Arequipa, is expected to produce about 260 million pounds of SX-EW copper cathodes per year.  The approved budget for the project is $934 million.  Through December 31, 2009, $280 million has been invested in this project.

 

At the last public hearing in August 2009, some of the local communities in the surrounding area of the Tia Maria project have opposed the use of underground water for the project alleging that it could cause a shortage of water supply for the farmers in the local communities and other potential impacts.  We are working with the local communities and the Peruvian authorities to respond to the communities concerns on the project and ensure that our Tia Maria mining project complies with all environmental regulations and other legal requirements in Peru.  Under Peruvian law, the Company has to submit again its proposal at a third and final public hearing.  This hearing scheduled to take place on February 15, 2010 has been postponed and the Company is working with the MEM to reschedule the hearing.  After this, the MEM will have jurisdiction to approve the EIA or not. Construction is delayed pending this approval.

 

We are confident that we will continue with the Tia Maria project.  However, this project, or any other project which we may undertake in the future, may be subject to additional costs or delays due to local community actions or other factors.

 

We are controlled by Grupo Mexico, which exercises control over our affairs and policies and whose interests may be different from yours.

 

Grupo Mexico owns indirectly 80% of our capital stock.  Certain of our and Minera Mexico’s officers and directors are also officers of Grupo Mexico.  We cannot assure you that the interests of Grupo Mexico will not conflict with ours.

 

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Grupo Mexico has the ability to determine the outcome of substantially all matters submitted for a vote to our stockholders and thus exercises control over our business policies and affairs, including the following:

·                  the composition of our Board of Directors and, as a result, any determinations of our Board with respect to our business direction and policy, including the appointment and removal of our officers;

·                  determinations with respect to mergers and other business combinations, including those that may result in a change of control;

·                  whether dividends are paid or other distributions are made and the amount of any dividends or other distributions;

·                  sales and dispositions of our assets; and

·                  the amount of debt financing that we incur.

 

Grupo Mexico reported that under its reorganization plan for Asarco, LLC (“Asarco”), it had secured financing of $1.5 billion. We cannot assure you that this increased financial obligation of our parent will not result in our parent corporation attempting to obtain increased dividends or other funding from us.

 

In addition, we and Minera Mexico have in the past engaged in, and expect to continue to engage in, transactions with Grupo Mexico and its other affiliates which are related party transactions and may present conflicts of interest.  For additional information regarding the share ownership of, and our relationships with, Grupo Mexico and its affiliates, see Note 19 “Related Party Transactions.”

 

We may not continue to pay a significant amount of our net income as cash dividends on our Common Stock in the future.

 

We have distributed a significant amount of our net income as dividends since 1996.  Our dividend practice is subject to change at the discretion of our Board of Directors at any time.  The amount that we pay in dividends is subject to a number of factors, including our results of operations, financial condition, cash requirements, tax considerations, future prospects, legal restrictions, contractual restrictions in credit agreements, limitations imposed by the government of Peru, Mexico or other countries where we have significant operations and other factors that our Board of Directors may deem relevant.  In light of our expansion program and the current global economic conditions, it is possible that future dividend distributions will be reduced from the levels of recent years.

 

Risks Associated with Doing Business in Peru and Mexico

 

There is uncertainty as to the termination and renewal of our mining concessions.

 

Under the laws of Peru and Mexico, mineral resources belong to the state and government concessions are required in both countries to explore for or exploit mineral reserves.  In Peru, our mineral rights derive from concessions from the Peruvian Ministry of Energy and Mines for our exploration, exploitation, extraction and/or production operations.  In Mexico, our mineral rights derive from concessions granted, on a discretionary basis, by the Ministry of Economy, pursuant to the Mining Law and regulations thereunder.

 

Mining concessions in both Peru and Mexico may be terminated if the obligations of the concessionaire are not satisfied.  In Peru, we are obligated to pay certain fees for our mining concession.  In Mexico, we are obligated, among other things, to explore or exploit the relevant concession, to pay any relevant fees, to comply with all

 

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environmental and safety standards, to provide information to the Ministry of Economy and to allow inspections by the Ministry of Economy.  Any termination or unfavorable modification of the terms of one or more of our concessions, or failure to obtain renewals of such concessions subject to renewal or extensions, could have a material adverse effect on our financial condition and prospects.

 

Peruvian economic and political conditions may have an adverse impact on our business.

 

A significant part of our operations are conducted in Peru.  Accordingly, our business, financial condition or results of operations could be affected by changes in economic or other policies of the Peruvian government or other political, regulatory or economic developments in Peru.  During the past several decades, Peru has had a history of political instability that has included military coups and a succession of regimes with differing policies and programs.  Past governments have frequently intervened in the nation’s economy and social structure.  Among other actions, past governments have imposed controls on prices, exchange rates and local and foreign investment as well as limitations on imports, have restricted the ability of companies to dismiss employees, have expropriated private sector assets (including mining companies), have prohibited the remittance of profits to foreign investors.

 

For further discussion of contributions that the Company agreed to make to support the development of Peru and Peruvian legislation imposing royalty charges on mining companies, see “Regional Development Contribution” and “Royalty Charge” in our Note 14 “Commitments and Contingencies” to our consolidated financial statements.

 

Terrorism in Peru was a risk in the 1980s and 1990s due to the presence of Sendero Luminoso’s, or Shining path and the Movimiento Revolucionario Tupac Amaru’s or Tupac Amaru Revolutionary Movement political activities.   In the past decade (2000s) a few isolated terrorist incidents, mainly related to drug activities, have occurred in rural areas where drugs are processed.

 

Because we have significant operations in Peru, we cannot provide any assurance that political developments and economic conditions in Peru and/or terrorist activity will not have a material adverse effect on market conditions, prices of our securities, our ability to obtain financing, and our results of operations and financial condition.

 

Mexican economic and political conditions may have an adverse impact on our business.

 

A significant part of our operations are based in Mexico. In the past, Mexico has experienced both prolonged periods of weak economic conditions and dramatic deterioration in economic conditions, characterized by exchange rate instability and significant devaluation of the peso, increased inflation, high domestic interest rates, a substantial outflow of capital, negative economic growth, reduced consumer purchasing power and high unemployment.  An economic crisis occurred in 1995 in the context of a series of internal disruptions and political events including a large current account deficit, civil unrest in the southern state of Chiapas, the assassination of two prominent political figures, a substantial outflow of capital and a significant devaluation of the peso.

 

Because we have significant operations in Mexico, we cannot provide any assurance that political developments and economic conditions in Mexico will not have a material adverse effect on market conditions, prices of our securities, our ability to obtain financing, and our results of operations and financial condition.

 

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Peruvian inflation, reduced economic growth and fluctuations in the nuevo sol exchange rate may adversely affect our financial condition and results of operations.

 

Over the past several decades, Peru has experienced periods of high inflation, slow or negative economic growth and substantial currency devaluation.  The inflation rate in Peru, as measured by the Indice de Precios al Consumidor (Consumer Price Index) and published by the Instituto Nacional de Estadistica e Informatica, (National Institute of Statistics and Informatics), has fallen from a high of 7,649.7% in 1990 to 0.2% in 2009.  The Peruvian currency has been devalued numerous times during the last 20 years.  The devaluation rate has decreased from a high of 4,019.3% in 1990 to a revaluation of 8.0% in 2009.  Our revenues are primarily denominated in U.S. dollars and our operating expenses are partly denominated in U.S. dollars.  If inflation in Peru were to increase without a corresponding devaluation of the nuevo sol relative to the U.S. dollar, our financial position and results of operations, and the market price of our Common Stock, could be affected.  Although the Peruvian government’s economic policy reduced inflation and the Peruvian economy has experienced significant growth in recent years, we cannot assure you that inflation will not increase from its current level or that such growth will continue in the future at similar rates or at all.

 

Among the economic circumstances that could lead to a devaluation of the nuevo sol is the decline of Peruvian foreign reserves to inadequate levels.  However, Peru’s foreign reserves at December 31, 2009, were $33.1 billion as compared to $31.2 billion and $27.7 billion at December 31, 2008 and 2007, respectively.  We cannot assure that Peru will be able to maintain adequate foreign reserves to meet its foreign currency denominated obligations or that Peru will not devalue its currency should its foreign reserves decline.

 

Mexican inflation, restrictive exchange control policies and fluctuations in the peso exchange rate may adversely affect our financial condition and results of operations.

 

Although all of our Mexican operations’ sales of metals are priced and invoiced in U.S. dollars, a substantial portion of our Mexican operations’ cost of sales are denominated in pesos.  Accordingly, when inflation in Mexico increases without a corresponding devaluation of the peso, as it did in 2000, 2001 and 2002, the net income generated by our Mexican operations is adversely affected.

 

The annual inflation rate in Mexico was 3.6% in 2009, 6.5% in 2008 and 3.8% in 2007.  The Bank of Mexico has publicly announced a target of 5% inflation for 2010.  At the same time, the peso has been subject in the past to significant devaluation, which may not have been proportionate to the inflation rate and may not be proportionate to the inflation rate in the future.  The value of the peso increased by 3.5% in 2009, decreased by 24.5% in 2008 and increased by 0.1% in 2007.

 

While the Mexican government does not currently restrict the ability of Mexican companies or individuals to convert pesos into dollars or other currencies, in the future, the Mexican government could impose a restrictive exchange control policy, as it has done in the past.  We cannot assure you that the Mexican government will maintain its current policies with regard to the peso or that the peso’s value will not fluctuate significantly in the future.  The imposition of such exchange control policies could impair Minera Mexico’s ability to obtain imported goods and to meet its U.S. dollar-denominated obligations and could have an adverse effect on our business and financial condition.

 

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Developments in other emerging market countries and in the United States may adversely affect the prices of our Common Stock and our debt securities.

 

The market value of securities of companies with significant operations in Peru and Mexico is, to varying degrees, affected by economic and market conditions in other emerging market countries.  Although economic conditions in such countries may differ significantly from economic conditions in Peru or Mexico, as the case may be, investors’ reactions to developments in any of these other countries may have an adverse effect on the market value or trading price of the securities, including debt securities, of issuers that have significant operations in Peru or Mexico.

 

In addition, in recent years economic conditions in Mexico have increasingly become correlated to U.S. economic conditions.  Therefore, adverse economic conditions in the United States could also have a significant adverse effect on Mexican economic conditions, including the price of our Common Stock or debt securities.

 

We cannot assure you that the market value or trading prices of our Common Stock and debt securities, will not be adversely affected by events in the United States or elsewhere, including in emerging market countries.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None

 

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ITEM 2. PROPERTIES

 

We were incorporated in Delaware in 1952.  Our corporate offices in the United States are located at 11811 North Tatum Blvd. Suite 2500, Phoenix, Arizona 85028.  Our telephone number in Phoenix, Arizona is (602) 494-5328.  Our corporate offices in Mexico are located in Mexico City and our corporate offices in Peru are located in Lima.  Our website is www.southerncoppercorp.com.  We believe that our existing properties are in good condition and suitable for the conduct of our business.

 

REVIEW OF OPERATIONS

 

The following maps set forth the locations of our principal mines, smelting facilities and refineries.  We operate open-pit copper mines in the southern part of Peru — at Toquepala and Cuajone — and in Mexico, principally at La Caridad and Cananea.  We also operate five underground mines that produce zinc, copper, silver and gold, as well as a coal mine and a coke oven.

 

 

EXTRACTION, SMELTING AND REFINING PROCESSES

Our operations include open-pit and underground mining, concentrating, copper smelting, copper refining, copper rod production, solvent extraction/electrowinning (SX/EW), zinc refining, sulfuric acid production, molybdenum concentrate production and silver and gold refining.  The extraction and production process are summarized below.

 

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OPEN-PIT MINING

In an open-pit mine, the production process begins at the mine pit, where waste rock, leaching ore and copper ore are drilled and blasted and then loaded onto diesel-electric trucks by electric shovels.  Waste is hauled to dump areas and leaching ore is hauled to leaching dumps.  The ore to be milled is transported to the primary crushers.

 

UNDERGROUND MINING

In an underground mine, the production process begins at the stopes, where copper, zinc and lead veins are drilled and blasted and the ore is hauled to the underground crusher station.  The crushed ore is then hoisted to the surface for processing.

 

CONCENTRATING

The copper ore with a copper grade over 0.4% from the primary crusher or the copper, zinc and lead-bearing ore from the underground mines is transported to a concentrator plant where gyratory crushers break the ore into sizes no larger than three-quarters of an inch.  The ore is then sent to a mill section where it is ground to the consistency of fine powder.  The finely ground ore is mixed with water and chemical reagents and pumped as a slurry to the flotation separator where it is mixed with certain chemicals.  In the flotation separator, reagents solution and air pumped into the flotation cells cause the minerals to separate from the waste rock and bubble to the surface where they are collected and dried.

 

If the bulk concentrated copper contains molybdenum it is first processed in a molybdenum plant as described below under “Molybdenum Production.”

 

COPPER SMELTING

Copper concentrates are transported to a smelter, where they are smelted using a furnace, converter and anode furnace to produce either copper blister (which is in the form of cakes with air pockets) or copper anodes (which are cleaned of air pockets).  At the smelter, the concentrates are mixed with flux (a chemical substance intentionally included for high temperature processing) and then sent to reverberatory furnaces producing copper matte and slag (a mixture of iron and other impurities).  Copper matte contains approximately 65% copper.  Copper matte is then sent to the converters, where the material is oxidized in two steps: (i) the iron sulfides in the matte are oxidized with silica, producing slag that is returned to the reverberatory furnaces, and (ii) the copper contained in the matte sulfides is then oxidized to produce copper that, after casting, is called blister copper, containing approximately 98% to 99% copper, or anodes, containing approximately 99.7% copper.  Some of the blister and anode production is sold to customers and the remainder is sent to the refinery.

 

COPPER REFINING

Anodes are suspended in tanks containing sulfuric acid and copper sulfate.  A weak electrical current is passed through the anodes and chemical solution and the dissolved copper is deposited on very thin starting sheets to produce copper cathodes containing approximately 99.99% copper.  During this process, silver, gold and other metals (for example, palladium, platinum and selenium), along with other impurities, settle on the bottom of the tank (anodic slime).  This anodic slime is processed at a precious metal plant where selenium, silver and gold are recovered.

 

COPPER ROD PLANT

To produce copper rod, copper cathodes are first smelted in a furnace and then dosified in a casting machine.  The dosified copper is then extruded and passed through a cooling system that begins solidification of copper into a 60´50 millimeter copper bar.  The resulting copper bar is gradually stretched in a rolling mill to achieve the desired diameter.  The rolled bar is then cooled and sprayed with wax as a preservation agent and collected into a rod coil that is compacted and sent to market.

 

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SOLVENT EXTRACTION/ELECTROWINNING (SX/EW)

An alternative to the conventional concentrator/smelter/refinery process is the leaching and SX/EW process.  During the SX/EW process, certain types of low-grade ore with a copper grade under 0.4% are leached with sulfuric acid to allow copper content recovery.  The acid and copper solution is then agitated with a solvent that contains chemical additives that attract copper ions.  As the solvent is lighter than water, it floats to the surface carrying with it the copper content.  The solvent is then separated using an acid solution, freeing the copper.  The acid solution containing the copper is then moved to electrolytic extraction tanks to produce copper cathodes.  Refined copper can be produced more economically (though over a longer period) and from lower grade ore using the SX/EW process instead of the traditional concentrating, smelting and refining process.

 

MOLYBDENUM PRODUCTION

Molybdenum is recovered from copper-molybdenum concentrates produced at the concentrator.  The copper-molybdenum concentrate is first treated with a thickener until it becomes slurry with 60% solids.  The slurry is then agitated in a chemical and water solution and pumped to the flotation separator.  The separator creates a froth that carries molybdenum to the surface but not the copper mineral (which is later filtered to produce copper concentrates containing approximately 27% copper).  The molybdenum froth is skimmed off, filtered and dried to produce molybdenum concentrates of approximately 58% contained molybdenum.

 

ZINC REFINING

Metallic zinc is produced through electrolysis using zinc concentrates and zinc oxides.  Sulfur is eliminated from the concentrates by roasting and the zinc oxide is dissolved in sulfuric acid solution to eliminate solid impurities.  The purified zinc sulfide solution is treated by electrolysis to produce refined zinc and to separate silver and gold, which are recovered as concentrates.

 

SULFURIC ACID PRODUCTION

Sulfur dioxide gases are produced in the copper smelting and zinc roasting processes.  As a part of our environmental preservation program, we treat the sulfur dioxide emissions at two of our Mexican plants and at Peruvian processing facilities to produce sulfuric acid, some of which is, in turn, used for the copper leaching process, with the rest sold to mining and fertilizer companies located principally in Mexico, Peru, United States, Chile and other countries.

 

SILVER AND GOLD REFINING

Silver and gold are recovered from copper, zinc and lead concentrates in the smelters and refineries, and from slimes through electrolytic refining.

 

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KEY PRODUCTION CAPACITY DATA:

 

All production facilities are owned by the Company.  The following table sets forth as of December 31, 2009, the locations of production facilities by reportable segment, the processes used, as well as the key production and capacity data for each location:

 

Facility Name

 

Location

 

Process

 

Nominal
Capacity (1)

 

2009
Production

 

2009
Capacity
Use

 

 

 

 

 

 

 

 

 

 

 

PERUVIAN OPEN-PIT UNIT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mining Operations

 

 

 

 

 

 

 

 

Cuajone Open-pit Mine

 

Cuajone (Peru)

 

Copper ore milling and recovery, copper and molybdenum concentrate production

 

87.0 ktpd – Milling

 

83.0 ktpd

 

95.4%

Toquepala Open-pit Mine

 

Toquepala (Peru)

 

Copper ore milling and recovery, copper and molybdenum concentrate production

 

60.0 ktpd – Milling

 

60.4 ktpd

 

100.0%

Toquepala SX-EW Plant

 

Toquepala (Peru)

 

Leaching, solvent extraction and cathode electro winning

 

56.0 ktpy – Refined

 

38.0 ktpy

 

67.9%

Processing Operations

 

 

 

 

 

 

 

 

Ilo Copper Smelter

 

Ilo (Peru)

 

Copper smelting, blister, anodes production

 

1,200.0 ktpy – Concentrate feed

 

1,127.5 ktpy

 

94.0%

Ilo Copper Refinery

 

Ilo (Peru)

 

Copper refining

 

280 ktpy – Refined cathodes

 

262.2 ktpy

 

93.6%

Ilo Acid Plants

 

Ilo (Peru)

 

Sulfuric Acid

 

1,050 ktpy - Sulfuric acid

 

1,077.0 ktpy

 

102.6%

Ilo Precious Metals Refinery

 

Ilo (Peru)

 

Slime recovery & processing, gold & silver refining

 

320 tpy

 

349 tpy

 

109.1%

 

 

 

 

 

 

 

 

 

 

 

MEXICAN OPEN-PIT UNIT

 

 

 

 

 

 

 

 

Cananea Open-Pit Mine (2)

 

Sonora (Mexico)

 

Copper Ore milling & recovery, copper concentrate production

 

76.7 ktpd – Milling

 

 

Cananea SX-EW I, II Plants (2)

 

Sonora (Mexico)

 

Leaching, solvent extraction & refined cathode electrowinning

 

54.8 ktpy (combined)

 

 

La Caridad Open-Pit Mine

 

Sonora (Mexico)

 

Copper ore milling & recovery, copper & molybdenum concentrate production

 

90.0 ktpd – Milling

 

90.7 ktpd

 

100.8%

La Caridad SX-EW Plant

 

Sonora (Mexico)

 

Leaching, solvent extraction & cathode electro winning

 

21.9 ktpy – Refined

 

23.2 ktpy

 

105.9%

Processing Operations

 

 

 

 

 

 

 

 

La Caridad Copper Smelter (3)

 

Sonora (Mexico)

 

Concentrate smelting, anode production

 

1,000 ktpy – Concentrate feed

 

466.0 ktpy

 

46.6%

La Caridad Copper Refinery (3)

 

Sonora (Mexico)

 

Copper refining

 

300 ktpy Copper cathode

 

117.1 ktpy

 

39.0%

La Caridad Copper Rod Plant (3)

 

Sonora (Mexico)

 

Copper rod production

 

150 ktpy Copper rod

 

60.1 ktpy

 

40.1%

La Caridad Precious Metals Refinery (3)

 

Sonora (Mexico)

 

Slime recovery & processing, gold & silver refining

 

2.8 ktpy – Slime

 

0.7 ktpy

 

25%

 

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Table of Contents

 

La Caridad Sulfuric Acid Plant (3)

 

Sonora (Mexico)

 

Sulfuric acid

 

1,565.5 ktpy – Sulfuric acid

 

485.7 ktpy

 

31.0%

 

 

 

 

 

 

 

 

 

 

 

IMMSA UNIT

 

 

 

 

 

 

 

 

 

 

Underground Mines

 

 

 

 

 

 

 

 

 

 

Charcas

 

San Luis Potosi (Mexico)

 

Copper, zinc, lead milling, recovery & concentrate production

 

1,460 ktpy - Milled ore

 

1,161.9 ktpy

 

79.6%

San Martin (2)

 

Zacatecas (Mexico)

 

Lead, zinc, copper & silver mining, milling recovery & concentrate production

 

1,606 ktpy - Milled ore

 

 

Santa Barbara

 

Chihuahua (Mexico)

 

Lead, copper and zinc mining & concentrates production

 

2,190 ktpy - Milled ore

 

1,542.1 ktpy

 

70.4%

Santa Eulalia

 

Chihuahua (Mexico)

 

Lead & zinc mining and milling recovery & concentrate production

 

547.5 ktpy - Milled ore

 

306.2 ktpy

 

55.9%

Taxco (2)

 

Guerrero (Mexico)

 

Lead, zinc silver & gold mining recovery & concentrate production

 

730 ktpy - Milled ore

 

 

Nueva Rosita Coal & Coke Complex(4)

 

Coahuila (Mexico)

 

Clean coal production

 

900 ktpy clean coal
100 ktpy coke

 

106.2 ktpy
70.4 ktpy

 

11.8%
70.4%

Processing Operations

 

 

 

 

 

 

 

 

San Luis Potosi Copper Smelter

 

San Luis Potosi (Mexico)

 

Concentrate smelting, blister production

 

60 ktpy concentrate feed
24.0 ktpy blister production

 

19.9 ktpy
20.0 ktpy

 

33.2%
83.3%

San Luis Potosí Zinc Refinery

 

San Luis Potosi (Mexico)

 

Zinc concentrates refining

 

105.0 ktpy zinc cathode

 

98.7 ktpy

 

94.0%

San Luis Potosi Sulfuric Acid Plant

 

San Luis Potosi (Mexico)

 

Sulfuric acid

 

180.0 ktpy sulfuric acid

 

174.6 ktpy

 

97.0%

 


ktpd = thousands of tons per day

ktpy = thousands of tons per year

Tpy = tons per year

 

(1)                      Our estimates of actual capacity contemplating normal operating conditions with allowance for normal downtime for repairs and maintenance and based on the average metal content for the relevant period.

(2)                      During 2009, there was no production at the Cananea, Taxco and San Martin mines, due to strikes.

(3)                      The 2009 capacity utilization at the La Caridad processing facilities was reduced by the lack of materials from the Cananea mine, which was on strike.

(4)                      At December 31, 2009, the coal reserves for the Nueva Rosita coal plant were 99,507,000 tons with average sulfur content of 1.1% and a BTU content of 8,491 per pound.

 

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PROPERTY BOOK VALUE

 

At December 31, 2009, net book values of property are as follows (in millions):

 

Peruvian operations:

 

 

 

Cuajone

 

$

427.6

 

Toquepala

 

563.7

 

Tia Maria project

 

280.0

 

Ilo and other support facilities

 

641.9

 

Property in progress

 

113.1

 

Total

 

$

2,026.3

 

 

 

 

 

Mexican open-pit operations:

 

 

 

Cananea

 

$

533.7

 

La Caridad

 

1,056.6

 

Property in progress and other facilities

 

25.5

 

Total

 

$

1,615.8

 

 

 

 

 

Mexican IMMSA Unit:

 

 

 

San Luis Potosi

 

$

38.1

 

Zinc electrolytic refinery

 

67.8

 

Charcas

 

16.3

 

San Martin

 

30.9

 

Santa Barbara

 

61.8

 

Taxco

 

5.5

 

Santa Eulalia

 

15.0

 

Nueva Rosita

 

21.7

 

Property in progress and other facilities

 

21.3

 

Total

 

$

278.4

 

 

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Table of Contents

 

SUMMARY OPERATING DATA

 

The following table sets out certain operating data underlying our financial and operating information for each of the periods indicated.

 

 

 

Year Ended December 31,

 

 

 

2009

 

2008

 

2007

 

COPPER (thousand pounds):

 

 

 

 

 

 

 

Mined

 

 

 

 

 

 

 

Peru open-pit

 

 

 

 

 

 

 

Toquepala

 

280,263

 

251,651

 

310,560

 

Cuajone

 

416,562

 

432,249

 

401,498

 

SX-EW Toquepala

 

83,691

 

85,537

 

80,844

 

 

 

 

 

 

 

 

 

Mexico open-pit

 

 

 

 

 

 

 

La Caridad

 

225,975

 

213,691

 

225,443

 

Cananea

 

 

13,591

 

140,896

 

SX-EW La Caridad

 

51,182

 

48,422

 

50,072

 

SX-EW Cananea

 

 

20,811

 

76,265

 

 

 

 

 

 

 

 

 

IMMSA Unit

 

12,396

 

11,949

 

19,961

 

Total Mined

 

1,070,069

 

1,077,901

 

1,305,539

 

 

 

 

 

 

 

 

 

Smelted

 

 

 

 

 

 

 

Peru open-pit

 

 

 

 

 

 

 

Blister Ilo

 

19,270

 

 

20,466

 

Anodes Ilo

 

742,475

 

675,903

 

511,906

 

 

 

 

 

 

 

 

 

Mexico open-pit

 

 

 

 

 

 

 

Anodes La Caridad

 

307,880

 

379,000

 

446,894

 

 

 

 

 

 

 

 

 

IMMSA Unit

 

 

 

 

 

 

 

Blister IMMSA

 

43,903

 

41,881

 

45,894

 

Total Smelted

 

1,113,528

 

1,096,784

 

1,025,160

 

 

 

 

 

 

 

 

 

Refined

 

 

 

 

 

 

 

Peru Open-pit

 

 

 

 

 

 

 

Cathodes Ilo

 

578,096

 

548,381

 

393,297

 

SX-EW Toquepala

 

83,690

 

88,511

 

88,920

 

 

 

 

 

 

 

 

 

Mexico Open-pit

 

 

 

 

 

 

 

Cathodes La Caridad

 

258,233

 

309,366

 

382,152

 

SX-EW La Caridad

 

51,182

 

48,422

 

50,072

 

SX-EW Cananea

 

 

20,811

 

76,265

 

Total Refined

 

971,201

 

1,015,491

 

990,706

 

 

 

 

 

 

 

 

 

Rod Mexico Open-pit

 

 

 

 

 

 

 

La Caridad

 

132,435

 

168,172

 

212,978

 

Total Rod

 

132,435

 

168,172

 

212,978

 

 

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Table of Contents

 

SILVER (thousand ounces)

 

 

 

 

 

 

 

Mined

 

 

 

 

 

 

 

Peru Open-pit

 

 

 

 

 

 

 

Toquepala

 

1,788

 

1,591

 

2,047

 

Cuajone

 

2,584

 

2,482

 

2,219

 

 

 

 

 

 

 

 

 

Mexico Open-pit

 

 

 

 

 

 

 

La Caridad

 

2,052

 

1,796

 

1,893

 

Cananea

 

 

81

 

798

 

 

 

 

 

 

 

 

 

IMMSA Unit

 

6,778

 

6,366

 

8,272

 

Total Mined

 

13,202

 

12,316

 

15,229

 

 

 

 

 

 

 

 

 

Refined

 

 

 

 

 

 

 

Peru Open-pit — Ilo

 

3,270

 

2,971

 

2,657

 

Mexico Open-pit — La Caridad

 

6,505

 

4,386

 

3,539

 

IMMSA Unit

 

3,314

 

3,484

 

3,805

 

Total Refined

 

13,089

 

10,841

 

10,001

 

 

 

 

 

 

 

 

 

MOLYBDENUM (thousand pounds)

 

 

 

 

 

 

 

Mined

 

 

 

 

 

 

 

Toquepala

 

7,932

 

10,289

 

13,730

 

Cuajone

 

11,669

 

9,793

 

8,424

 

La Caridad

 

21,597

 

16,052

 

13,578

 

Total Mined

 

41,198

 

36,134

 

35,732

 

 

 

 

 

 

 

 

 

ZINC (thousand pounds)

 

 

 

 

 

 

 

Mined IMMSA

 

243,456

 

235,718

 

266,787

 

Refined IMMSA

 

217,570

 

210,365

 

200,105

 

 

SLOPE STABILITY:

 

Peruvian Operations

 

The Toquepala and Cuajone pits are approximately 825 meters and 800 meters deep, respectively, under the present mine plan configuration both pits will reach a depth of 1,200 meters.  The deepening pit presents us with a number of geotechnical challenges.  Perhaps the foremost concern is the possibility of slope failure, a possibility that all open-pit mines face.  In order to maintain slope stability, in the past we have decreased pit slope angles, installed additional or duplicate haul road access, and increased stripping requirements.  We have also responded to hydrological conditions and removed material displaced by a slope failure.  There is no assurance that we will not have to take these or other actions in the future, any of which may negatively affect our results of operations and financial condition, as well as have the effect of diminishing our stated ore reserves.  To meet the geotechnical challenges relating to slope stability of the open-pit mines, we have taken the following steps:

 

In the late 1990’s we hosted round table meetings in Vancouver, B.C. with a group of recognized slope stability and open-pit mining specialists.  The agenda for these meetings was principally a review of pit design for mines with greater than 700 meter depth.  The discussions included practices for monitoring, data collection and blasting processes.

 

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Based on the concepts defined at the Vancouver meetings, we initiated slope stability studies to define the mining of reserves by optimum design.  These studies were performed by outside consultants and included slope stability appraisals, evaluation of the numerical modeling, slope performance and inter-ramp angle design and evaluation of hydrological conditions.

 

The studies were completed in 2000 and we believe we implemented the study recommendations.  One of the major changes implemented was slope angle reduction at both mines, Toquepala by an average of five degrees and Cuajone by an average of seven degrees.  Although this increased the waste included in the mineable reserve calculation, it also improved the stability of the pits.

 

In the Toquepala mine in 2007 we installed 20 meter wide geotechnical berms every 10 benches.  We believe this will further strengthen the stability of the Toquepala pit.

 

Since 1998, a wall depressurization program has been in place in both pits.  This consists of a horizontal drilling program, which improves drainage thereby reducing saturation and increasing wall stability.  Additionally, a new blasting control program was put in place, implementing vibration monitoring and blasting designs of low punctual energy.  Also a new slope monitoring system was implemented using reflection prisms, deformation inclinometers and piezometers for water level control, as well as real-time robotic monitoring equipment.

 

In 2009 some programs of oriented and conventional geotechnical drilling were executed in the Toquepala mine, including inclined and vertical drills, totaling 2,296 meters.

 

To increase the possibility of mining in the event of a slide, we have provided for two ramps of extraction for each open-pit mine.

 

While these measures cannot guarantee that a slope failure will not occur, we believe that our mining practices are sound and that the steps taken and the ongoing reviews performed are a prudent methodology for open-pit mining.

 

Mexican operations

 

In 2004, our 15-year mine plan study for the La Caridad mine was awarded to an independent consulting firm to conduct a geotechnical evaluation.  The purpose of the plan was to develop a program of optimum bench design and inter-ramp slope angles for the open-pit.  A number of recommendations and observations were presented by the consultants.  These included a recommendation of a maximum average bench face angle of 72 degrees.  Additionally, single benching was recommended for the upper sections of the west, south and east walls of the main pit.  Likewise, double benching was recommended for the lower levels of the main pit and single benching for the upper slope segments that consist of either alluvial material, mine waste dumps or mineralized stockpile material.  Alternatively, slopes in these types of materials, may be designed with an overall 37 degree slope.  We are currently reviewing these recommendations, but since final pit limits have not been yet established at La Caridad, all current pit walls are effectively working slopes.  Geostructural and geotechnical data collected at the open-pit mine from cell-mapping and oriented-core drilling databases provided the basis for the geotechnical evaluation and recommendations.  We are also collecting new information related to geotechnical data from the latest drilling in 2009.

 

A geotechnical evaluation, of the Cananea 15-year pit slope design, was prepared by an independent mine consulting firm.  Results of the study included slope design angles by sectors as well as recommendations related to slope stability.  Currently, the mine

 

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Table of Contents

 

is in the second phase of a geohydrological study.  This is a follow-up study of a phase 1 open-pit dewatering assessment completed by independent water management consultants in 2004.  A third phase of the study, which addresses pit dewatering design, and drilling of peripheral monitoring boreholes and dewatering test wells, will follow and is expected to be completed in 2010.  The recommendations proposed by the consulting firms in Phases 1 and 2, have been implemented.

 

METAL PRODUCTION BY SEGMENTS

 

Set forth below are descriptions of the operations and other information relating to the operations included in each of our three segments.

 

PERUVIAN OPERATIONS

 

Our Peruvian segment operations include the Cuajone and Toquepala mine complexes and the smelting and refining plants, industrial railroad which links Ilo, Toquepala and Cuajone and port facilities.

 

Following is a map indicating the approximate location of, and access to, our Cuajone and Toquepala mine complexes as well as our Ilo processing facilities:

 

GRAPHIC

 

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Table of Contents

 

Cuajone

 

Our Cuajone operations consist of an open-pit copper mine and a concentrator located in southern Peru, 30 kilometers from the city of Moquegua and 840 kilometers from Lima.  Access to the Cuajone property is by plane from Lima to Tacna (1:20 hours) and then by highway to Moquegua and Cuajone (3:30 hours).  The concentrator has a milling capacity of 87,000 tons per day.  Overburden removal commenced in 1970 and ore production commenced in 1976.  Our Cuajone operations utilize a conventional open-pit mining method to collect copper ore for further processing in our concentrator.

 

The table below sets forth 2009, 2008 and 2007 production information for our Cuajone operations:

 

 

 

 

 

2009

 

2008

 

2007

 

Mine annual operating days

 

 

 

365

 

366

 

365

 

Total material mined

 

(kt)

 

117,939

 

118,054

 

116,438

 

Total ore mined

 

(kt)

 

32,030

 

30,217

 

28,310

 

Copper grade

 

(%)

 

0.677

 

0.751

 

0.755

 

Molybdenum grade

 

(%)

 

0.023

 

0.022

 

0.022

 

Leach material mined (1)

 

(kt)

 

11

 

 

 

Leach material grade

 

(%)

 

0.515

 

 

 

Stripping ratio

 

(x)

 

2.68

 

2.91

 

3.11

 

Total material milled

 

(kt)

 

32,049

 

30,250

 

28,352

 

Copper recovery

 

(%)

 

87.06

 

86.38

 

85.10

 

Molybdenum recovery

 

(%)

 

72.5

 

66.2

 

61.1

 

Copper concentrate

 

(kt)

 

718.9

 

759.1

 

706.7

 

Molybdenum concentrate

 

(kt)

 

9.6

 

8.1

 

7.0

 

Copper concentrates average grade

 

(%)

 

26.28

 

25.83

 

25.77

 

Molybdenum concentrate average grade

 

(%)

 

55.06

 

54.89

 

54.57

 

Copper in concentrate

 

(kt)

 

188.95

 

196.1

 

182.1

 

Molybdenum in concentrate

 

(kt)

 

5.3

 

4.4

 

3.8

 

 


Key:

kt = thousand tons

 

x = ratio obtained dividing waste plus leachable material by ore mined

 

(1) No oxide material was mined in 2008 and 2007.

 

Copper and molybdenum grades are referred to as total copper grade and total molybdenum grade, respectively.

 

Major Cuajone mine equipment includes eleven 290-ton capacity trucks, twenty 218-ton capacity trucks and seven 231-ton capacity trucks, three 56-cubic yard capacity shovels, one 73-cubic yard shovel, one 42-cubic yard shovel (estimated use in 2010 is 10%), one 33-cubic yard capacity front loader, four electric drills and one on standby.  Auxiliary equipment: seven wheel bulldozers, seven Caterpillar bulldozers, two 988 CAT front loaders, one 966 CAT front loader and three motorgraders.  We continuously improve and renovate our equipment.

 

Geology

 

The Cuajone porphyry copper deposit is located on the western slopes of Cordillera Occidental, in the southern-most Andes Mountains of Peru.  The deposit is part of a mineral district that contains two additional known deposits, Toquepala and Quellaveco.  The copper mineralization at Cuajone is typical of porphyry copper deposits.

 

The Cuajone deposit is located approximately 28 kilometers from the Toquepala deposit and is part of the Toquepala Group dated 60 to 100 million years (Upper Cretaceous to Lower Tertiary).  The Cuajone lithology includes volcanic rocks from Cretaceous to

 

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Table of Contents

 

Quaternary.  There are 32 rock types including, pre-mineral rocks, balsaltic andesite, porphyritic rhyolite, Toquepala dolerite and intrusive rocks, including diorite, porphyritic latite, breccias and dikes.  In addition, the following post-mineral rocks are present, the Huaylillas formation which appears in the south-southeast side of the deposit and has been formed by conglomerates, tuffs, traquites and agglomerates.  These formations date 17 to 23 million years and are found in the Toquepala Group as discordance.  The Chuntacala formation which dates 9 to 14 million years and is formed by conglomerates, flows, tuffs and agglomerates placed gradually in some cases and in discordance in others.  Also Quaternary deposits are found in the rivers, creeks and hills.  The mineralogy is simple with regular grade distribution and vertically funnel-shaped.  Ore minerals include chalcopyrite (CuFeS2), chalcosine (Cu2S) and molybdenite (MoS2) with occasional galena, tetraedrite and enargite as non economical ore.

 

Mine exploration

 

Exploration activities during the drill campaign in 2009 are as follows:

 

Studies

 

Meters

 

Holes

 

Notes

 

Infill drilling

 

2,169

 

17

 

To obtain additional information to improve confidence in our block model.

 

Geotechnical holes

 

1,651

 

5

 

To improve geotechnical information

 

Total

 

3,820

 

22

 

 

 

 

Concentrator

 

Our Cuajone operations use state-of-the-art computer monitoring systems at the concentrator, the crushing plant and the flotation circuit in order to coordinate inflows and optimize operations.  Material with a copper grade over 0.40% is loaded onto rail cars and sent to the milling circuit, where giant rotating crushers reduce the size of the rocks to approximately one-half of an inch.  The ore is then sent to the ball mills, which grind it to the consistency of fine powder.  The finely ground powder is agitated in a water and reagents solution and is then transported to flotation cells.  Air is pumped into the cells to produce foam for floating the copper and molybdenum minerals, but splitting waste material called tailings.  This copper-molybdenum bulk concentrate then is treated by inverse flotation where molybdenum is floated and copper is depressed.  The copper concentrate is shipped by rail to the smelter at Ilo and the molybdenum concentrate is packaged for shipment to customers.  Sulfides under 0.40% copper are considered waste.

 

Tailings are sent to thickeners where water is recovered.  The remaining tailings are sent to the Quebrada Honda dam, our principal tailings storage facility.

 

Major Cuajone concentrator plant equipment includes: one primary crusher, three secondary crushers, seven tertiary crushers, eleven primary ball mills, four ball mills for re-grinding rougher concentrate; one vertical mill for re-grinding rougher concentrate; thirty 100 cubic feet cells for rougher flotation; four 160 cubic feet cells for rougher flotation; five 60 cubic feet cells for cleaner scavenger; six 1350 cubic feet cells for cleaner scavenger; fourteen 300 cubic feet cells for cleaner scavenger; eight column cells; one Larox filter press and one FLS Smith filter press; two thickeners for copper-molybdenum and copper concentrates; three tailings thickeners; one high-rate tailings thickener and six pumps for recycling reclaimed water.

 

A major mill expansion was completed in 1999 and the eleventh primary mill was put in operation in January 2008.  We believe the plant’s equipment is in good physical condition and currently in operation.

 

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Table of Contents

 

Toquepala

 

Our Toquepala operations consist of an open-pit copper mine and a concentrator.  We also refine copper at the SX/EW facility through a leaching process.  Toquepala is located in southern Peru, 30 kilometers from Cuajone and 870 kilometers from Lima.  Access is by plane from Lima to the city of Tacna (1:20 hours) and then by the Pan-American highway to Camiara (1:20 hours) and by road to Toquepala (1 hour).  The concentrator has a milling capacity of 60,000 tons per day.  The SX/EW facility has a production capacity of 56,000 tons per year of LME grade A copper cathodes.  Overburden removal commenced in 1957 and ore production commenced in 1960.  Our Toquepala operations utilize a conventional open-pit mining method to collect copper ore for further processing in our concentrator.

 

The table below sets forth 2009, 2008 and 2007 production information for our Toquepala operations:

 

 

 

 

 

2009

 

2008

 

2007

 

Mine annual operating days

 

 

 

365

 

366

 

365

 

Total material mined

 

(kt)

 

149,287

 

131,646

 

130,267

 

Total ore mined

 

(kt)

 

21,685

 

21,356

 

20,889

 

Copper grade

 

(%)

 

0.655

 

0.608

 

0.759

 

Molybdenum grade

 

(%)

 

0.028

 

0.036

 

0.046

 

Leach material mined

 

(kt)

 

86,692

 

74,286

 

90,521

 

Leach material grade

 

(%)

 

0.223

 

0.226

 

0.235

 

Estimated leach recovery

 

(%)

 

25.61

 

26.34

 

26.89

 

SX/EW cathode production (from SCC material)

 

(kt)

 

38.0

 

38.8

 

36.7

 

Third parties copper sulfate processed

 

(kt)

 

 

5.6

 

15.2

 

Average copper grade on copper sulfate

 

(%)

 

 

23.88

 

24.16

 

SX/EW cathode production from third parties

 

(kt)

 

 

1.3

 

3.7

 

Stripping ratio

 

(x)

 

5.88

 

5.16

 

5.24

 

Total material milled

 

(kt)

 

21,700

 

21,328

 

20,906

 

Copper recovery

 

(%)

 

89.44

 

88.03

 

88.78

 

Molybdenum recovery

 

(%)

 

60.2

 

60.93

 

64.39

 

Copper concentrate

 

(kt)

 

466.4

 

419.7

 

521.9

 

Molybdenum concentrate

 

(kt)

 

6.6

 

8.5

 

11.4

 

Copper concentrate average grade

 

(%)

 

27.3

 

27.20

 

26.99

 

Molybdenum concentrate average grade

 

(%)

 

54.54

 

54.91

 

54.60

 

Copper in concentrate

 

(kt)

 

127.1

 

114.1

 

140.9

 

Molybdenum in concentrate

 

(kt)

 

3.6

 

4.7

 

6.2

 

 


Key:

kt = thousand tons

 

x = ratio obtained dividing waste plus leachable material by ore mined.

 

Copper and molybdenum grades are referred to as total copper grade and total molybdenum grade, respectively.

 

Major mine equipment at Toquepala includes twenty-six 290-ton capacity trucks, five 231-ton capacity trucks, eighteen 218-ton capacity trucks, one 60-cubic yard capacity shovel, three 56 cubic-yard capacity shovels, three 73-cubic yard capacity shovels, one 20-ton capacity shovel, six electric rotary drills, one Down the Hole (DTH) drill for pre-split and one front-end loader with a capacity of 37 tons.

 

We continuously improve and renovate our equipment.  In 2009, we put into operation one electric rotary drill, three 73-cubic yard capacity shovels and seven new Komatsu 930E 290-ton capacity trucks with improved haul efficiency.

 

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Geology

 

The Toquepala porphyry copper deposit is located on the western slopes of Cordillera Occidental, in the southern-most Andes Mountains of Peru.  The deposit is part of a mineral district that contains two additional known deposits, Cuajone and Quellaveco.

 

The Toquepala deposit is in the southern region of Peru, located on the western slope of the Andes mountain range, approximately 120 kilometers from the border with Chile.  This region extends into Chile and is home to many of the worlds most significant known copper deposits.  The deposit is in a territory with intrusive and eruptive activities of rhyolitic and andesitic rocks which are 70 million years old (Cretaceous-Tertiary) and which created a series of volcanic lava.  The lava is composed of rhiolites, andesites and volcanic agglomerates with a western dip and at an altitude of 1,500 meters.  These series are known as the Toquepala Group.  Subsequently, different intrusive activities occurred which broke and smelted the rocks of the Toquepala Group.  These intrusive activities resulted in diorites, granodiorites and dikes of porphyric dacite.  Toquepala has a simple mineralogy with regular copper grade distribution.  Economic ore is found as disseminated sulfurs throughout the deposit as veinlets, replenishing empty places or as small aggregates.  Ore minerals include chalcopyrite (CuFeS2), chalcosine (Cu2S) and molybdenite (MoS2).  A secondary enrichment zone is also found with thicknesses between 0 and 150 meters.

 

Mine Exploration

 

Exploration activities during the drill campaign in 2009 are as follows:

 

Studies

 

Meters

 

Holes

 

Notes

 

Infill and lateral body delimitation (leach and ore of Phase II)

 

14,710

 

27

 

To obtain additional information to improve confidence in the block model.

 

To define depth and location of potential surfaces of fault.

 

2,296

 

13

 

Holes were performed for better understanding the behavior of the Micalao fault system.

 

Total

 

17,006

 

40

 

 

 

 

Concentrator

 

Our Toquepala concentrator operations use state-of-the-art computer monitoring systems in order to coordinate inflows and optimize operations.  Material with a copper grade over 0.40% is loaded onto rail cars and sent to the crushing circuit, where rotating crushers reduce the size of the rocks by approximately 85%, to less than one-half of an inch.  The ore is then sent to the rod and ball mills, which grind it in a mix with water to the consistency of fine powder.  The finely ground powder mixed with water is then transported to flotation cells.  Air is pumped into the cells producing a froth, which carries the copper mineral to the surface but not the waste rock, or tailings.  The bulk concentrate with sufficient molybdenum content is processed to recover molybdenum by inverse flotation.  This final copper concentrate with a content of approximately 27.5% of copper is filtered in order to get 8.5% moisture.  Concentrates are then shipped by rail to the smelter at Ilo.

 

Tailings are sent to thickeners where water is recovered.  The remaining tailings are sent to the Quebrada Honda dam, our principal tailings storage facility.

 

Major concentrator plant equipment at Toquepala include one primary crusher, three secondary crushers, six tertiary crushers, eight rod mills, thirty-three ball mills, one distributed control system, one expert grinding system, forty-two flotation cells, fifteen column cells, seventy-two Agitair 1.13 cubic meter cells, two Larox pressure

 

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filters, five middling thickeners, two conventional tailings thickeners, three high-rate tailings thickeners, one tripper car, one track tractor and a recycled water pipe line.

 

SX/EW Plant

 

The SX/EW facility at Toquepala produces grade A LME electrowon copper cathodes of 99.999% purity from solutions obtained by leaching low-grade ore stored at the Toquepala and Cuajone mines.  The leach plant commenced operations in 1995 with a design capacity of 35,629 tons per year of copper cathodes.  In 1999 the capacity was expanded to 56,000 tons per year.

 

Copper oxides from Cuajone with a copper grade higher than 0.343%, with an acid solubility index higher than 20% and a cyanide solubility index higher than 50% are leached.  In Toquepala, the leach material cutoff grade is 0.081% and therefore material with a total copper grade between 0.081% and 0.40% are leached.

 

Major equipment at the Cuajone SX plant includes one primary jaw crusher and one secondary cone crusher with a capacity of 390 tons per hour.  In addition, the plant has one agglomeration mill, one front end loader and three 109-ton capacity trucks for hauling to the leach dumps.  Copper in solution produced in Cuajone is sent to Toquepala through an eight-inch pipe laid alongside the Cuajone-Toquepala railroad track.

 

Major equipment at the Toquepala plant includes three spray systems and five pregnant solution (PLS) ponds, each with its own pumping system to send the solution to the SX/EW plant.  The plant also has three lines of SX, each with a nominal capacity of 1,068 cubic meters per hour of pregnant solution and 162 electrowinning cells.

 

Plant and equipment are supported by a maintenance plan and a quality management system to assure good physical condition and high availability.  The SX/EW plant management quality system (including leaching operations) has been audited periodically since 2002 by an external audit company, and found to be in compliance with the requirements of the ISO 9001-2000 standard.

 

Processing Facilities - Ilo

 

Our Ilo smelter and refinery complex is located in the southern part of Peru, 17 kilometers north of the city of Ilo, 121 kilometers from Toquepala, 147 kilometers from Cuajone, and 1,240 kilometers from the city of Lima.  Access is by plane from Lima to Tacna (1:20 hours) and then by highway to the city of Ilo (two hours).  Additionally, we maintain a port facility in Ilo, from which we ship our product and receive supplies.  Product shipped and supplies received are moved between Toquepala, Cuajone and Ilo on our industrial railroad.

 

Smelter

 

Our Ilo smelter produces copper anodes for the refinery we operate as part of the same facility.  Copper produced by the smelter exceeds the refinery’s capacity and the excess is sold to other refineries around the world.  The nominal installed capacity of the smelter is 1,200,000 tons of concentrate per year.

 

Copper concentrates from Toquepala and Cuajone are transported by railroad to the smelter, where they are smelted using an ISASMELT furnace, converters and anode furnaces to produce copper anodes with 99.7% copper.  At the smelter, the concentrates are mixed with flux and other material and sent to the ISASMELT furnace producing a mixture of copper matte and slag which is tapped through a taphole to either of two

 

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rotary holding furnaces, where these smelted phases will be separated.  Copper matte contains approximately 62% copper.  Copper matte is then sent to the four Pierce Smith converters, where the material is oxidized in two steps: (1) the iron sulfides in the matte are oxidized with oxygen enriched air and silica is added producing slag that is sent to the slag cleaning furnaces, and (2) the copper contained in the matte sulfides is then oxidized to produce blister copper, containing approximately 99.3% copper.  The blister copper is refined in two anode furnaces by oxidation to remove sulfur with compressed air injected into the bath.  Finally, the oxygen content of the molten copper is adjusted by reduction with injection of liquefied petroleum gas with steam into the bath.  Anodes, containing approximately 99.7% copper are cast in two casting wheels.

 

The table below sets forth 2009, 2008 and 2007 production and sales information for our Ilo smelter plant:

 

 

 

 

 

2009

 

2008

 

2007

 

Concentrate smelted

 

(kt)

 

1,127

 

1,003

 

846

 

Average copper recovery

 

(%)

 

97.4

%

97.10

%

96.59

%

Blister production

 

kt

 

8.8

 

 

9.3

 

Average blister grade

 

(%)

 

99.407

%

 

99.369

%

Anode production

 

(kt)

 

337.7

 

307.5

 

232.9

 

Average anode grade

 

(%)

 

99.721

%

99.704

%

99.698

%

Sulfuric acid produced

 

(kt)

 

1,077

 

959

 

771

 

Blister sales

 

(kt)

 

11.7

 

 

9.3

 

Anode sales

 

(kt)

 

17.7

 

10.0

 

14.1

 

Average blister sales price

 

($/lb)

 

2.49

 

 

3.20

 

Average anode sales price

 

($/lb)

 

2.38

 

1.84

 

2.87

 

 


Key:

kt = thousand tons

 

The off gases from the smelter are treated to recover over 92% of the incoming sulfur received in the concentrates producing 98.5% sulfuric acid.  The gas stream from the smelter with 11.34% SO2 is split between two plants: The No. 1 acid plant (single absorption/single contact) and the No. 2 plant (double absorption/double contact).  Approximately, 16% of the acid produced is used at our facilities with the balance sold to third parties. We anticipate that our internal usage will be over 80% when the Tia Maria project begins operation.

 

The smelter also has two oxygen plants.  Plant No. 1, with 254 tons per day of production capacity and Plant No.2, with 1,045 tons per day of capacity.

 

In addition, the smelter includes a seawater intake system, two desalinization plants to provide water for the process, an electric substation and a new system of centralized controls using advanced computer technology.

 

Refinery

 

The refinery consists of a receiving and preparing anode facility, an electrolytic plant, a precious metal plant and a number of ancillary installations.  The refinery is producing grade A copper cathode of 99.998% purity.  The nominal capacity is 280,000 tons per year.  Anodic slimes are recovered from the refining process and then sent to the precious metals facility to produce refined silver, refined gold and commercial grade selenium.

 

Anodes are suspended in tanks containing an aqueous solution of sulfuric acid and copper sulfate.  A low voltage but high amperage electrical current is passed through the anodes, chemical solution and cathodes, in order to dissolve copper which is

 

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deposited on initially very thin starting sheets increasing its thickness to produce high grade copper cathodes containing at least 99.99% copper.  During this process, silver, gold and other metals, including palladium, platinum and selenium, along with other impurities, settle on the bottom of the tank in form of anodic slime.  This anodic slime is processed in a precious metal plant where silver, gold and selenium are recovered.

 

The table below sets forth 2009, 2008 and 2007 production and sales information for our Ilo refinery and precious metals plants:

 

 

 

 

 

2009

 

2008

 

2007

 

Cathodes produced

 

(kt)

 

262.2

 

248.7

 

178.4

 

Average copper grade

 

(%)

 

99.998

%

99.986

%

99.998

%

Refined silver produced

 

(000 Kg)

 

101.7

 

92.4

 

82.7

 

Refined gold produced

 

(kg)

 

342.0

 

152.9

 

296.0

 

Commercial grade selenium produced

 

(t)

 

56.0

 

44.2

 

35.4

 

Average cathodes sales price

 

($/lb)

 

2.31

 

2.95

 

3.20

 

Average silver sales price

 

($/oz)

 

13.87

 

14.20

 

12.30

 

Average gold sales price

 

($/oz)

 

941.18

 

833.59

 

692.29

 

 


Key:

kt = thousand tons

 

Major equipment at the refinery includes one electrolytic plant, with 926 commercial cells, fifty-two starting sheet cells, sixteen primary liberator cells, twenty-four secondary liberator cells, an anodic slime treatment circuit (includes leaching and centrifugation), and an electrolytic bleeding off system by railroad to Toquepala’s leaching plants.

 

Main equipment at the precious metals plant includes one selenium reactor, one tilting Copella furnace, twenty-four silver electrorefining cells including an induction furnace for shots and silver ingots production and one hydrometallurgical system for gold recovery.

 

The refinery also has these facilities:

 

(1)                  Production control: Provides sampling and sampling preparation for samples coming from the operating units as well as SX/EW, smelter and external services.

(2)                  Laboratory: Provides sample analysis services throughout the Company, including the analysis of final products like copper cathodes, electrowon cathodes, copper concentrates and oil analysis.

(3)                  Maintenance: Responsible for maintenance of all equipment involved in the process.

(4)                  Auxiliary facilities: Includes one desalinization plant to produce fresh water and a Babcock boiler to produce steam used in the refinery, one Gonella boiler and two stand-by KMH boilers.

 

Other facilities in Ilo are a coquina plant with a production capacity of 200,000 tons per year of seashells and a lime plant with a capacity of 80,000 tons per year.  We also operate an industrial railroad to haul production and supplies between Toquepala, Cuajone and Ilo.

 

The industrial railroad’s main equipment includes fifteen locomotives of different types including 4000HP EMD’s SD70, 3000HP EMD’s GP40-3, 2250HP GE U23B and others.  The rolling stock has approximately 502 cars of different types and capacities, including ore concentrate cars, gondolas, flat cars, dump cars, boxcars, tank cars and others.  The track runs in a single 214 kilometer standard gauge line and supports a 30-ton axle load.  The total length of the track system is around 257 kilometers including main yards and sidings.

 

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The infrastructure includes 27 kilometers of track under tunnels and one concrete bridge.  The industrial railroad includes a car repair shop which is responsible for maintenance and repair of the car fleet.  Annual tonnage transported is approximately 5.5 million metric tons.

 

MEXICAN OPERATIONS

 

Following is a map indicating the approximate locations of our Mexican mines and processing facilities:

 

 

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MEXICAN OPEN-PIT SEGMENT

 

Our Mexican open-pit segment operations combines two units of Minera Mexico, Mexcobre and Mexcananea, which includes La Caridad and Cananea mine complexes and smelting and refining plants and support facilities which service both complexes.

 

Following is a map indicating the approximate location of, and access to, our Mexican open-pit mine complexes as well as our processing facilities:

 

 

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Cananea

 

Except for very brief periods, Cananea has been on strike since July 2007. Please see the Company efforts and the current developments of the strike in Note 14 “Commitments and contingencies” to our consolidated financial statements.

 

The Cananea mining unit operates an open-pit copper mine, a concentrator and two SX/EW plants.  It is located 100 air-kilometers northwest of La Caridad and 40 kilometers south of the Arizona U.S.-Mexican border.  It lies on the outskirts of the Cananea townsite.  Cananea is connected by paved highways to the border city of Agua Prieta to the northeast, to the town of Nacozari in the southeast, and to the town of Imuris to the west.  Cananea is also connected by railway to Agua Prieta and Nogales.  A municipal airport is located approximately 20 kilometers to the northeast of Cananea.

 

The concentrator has a nominal milling capacity of 76,700 tons per day.  The SX/EW facility has a cathode production capacity of 54,750 tons per year.  The Cananea ore body is considered one of the world’s largest porphyry copper deposits.  Cananea is the oldest continuously operated copper mine in North America, with operations dating back to 1899.  High grade ore deposits in the district were mined exclusively using underground methods.  The Anaconda Company acquired the property in 1917.  In the early 1940s Anaconda started developing the first open-pit in Cananea.  In 1990, through a public auction procedure, Minera Mexico acquired 100% of the Cananea mining assets for $475 million.  Cananea is currently applying conventional open-pit mining methods to extract copper ore for further processing in the concentrator.  Two leach ore crushers and the corresponding belt conveying systems are used to convey the leachable material to the heaps.  Likewise, run-off mine leachable ore is hauled by trucks to the leach dumps.

 

The following table shows 2009, 2008 and 2007 production information for Cananea:

 

 

 

 

 

2009

 

2008

 

2007

 

Mine annual operating days (1)

 

 

 

 

88

 

211

 

Total material mined

 

(kt)

 

 

4,820

 

74,672

 

Total ore mined

 

(kt)

 

 

1,271

 

12,545

 

Copper grade

 

(%)

 

 

0.628

 

0.630

 

Leach material mined

 

(kt)

 

 

2,965

 

39,198

 

Leach material grade

 

(%)

 

 

0.285

 

0.272

 

Estimated leach recovery

 

(%)

 

 

65.5

 

65.5

 

SX/EW cathode production

 

(kt)

 

 

9.4

 

34.6

 

Stripping ratio

 

(x)

 

 

2.79

 

4.95

 

Total material milled

 

(kt)

 

 

1,233

 

12,571

 

Copper concentrate

 

(kt)

 

 

24.5

 

229.8

 

Copper concentrate average grade

 

(%)

 

 

25.14

 

27.81

 

Copper in concentrate

 

(kt)

 

 

6.2

 

63.9

 

Copper recovery

 

(%)

 

 

79.65

 

81.22

 

 


Key:kt = thousand tons

x  = ratio obtained dividing waste plus leachable material by ore mined.

The copper grade is total grade.

 

(1)          The following table summarizes the estimated production losses at our Cananea mine due to the strike:

 

 

 

2009

 

2008

 

2007

 

Days of strike

 

365

 

278

 

154

 

Estimated strike production loss (tons):

 

 

 

 

 

 

 

Copper in concentrates

 

120

 

129

 

55

 

SX/EW cathode production

 

56

 

59

 

24

 

 

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Major Cananea mine equipment includes 44 trucks for ore hauling with individual capacities ranging from 240 to 360 tons, eight shovels with individual capacities ranging from 30 to 70 cubic yards, and mine auxiliary equipment including, seven drillers, five front loaders, five motor graders and twenty-four tractors.

 

Geology

 

The Cananea mining district lies on the southern cordilleran orogen, which extends from southern Mexico to northwestern United States.  It also falls within the Basin and Range metallogenic province.  Geological and structural features in the district are representative of large, disseminated type, porphyry copper deposits.  A calcareous sedimentary sequence of lower Paleozoic age, lithologically correlated with a similar section in southeastern Arizona, uncomformably overlies Precambrian granite basement.  The entire section was covered by volcanic rocks of Mesozoic age and later intruded by deep seated granodiorite batholith of Tertiary age, with further quartz monzonite porphyry differentiates of Laramide age.

 

Mineralization in the district is extensive covering a surface area of approximately 30 square kilometers.  An early pegmatitic stage associated with bornite-chalcopyrite-molybdenite assemblage was followed by a widespread flooding of hydrothermal solutions with quartz- pyrite-chalcopyrite.  A pervasive quartz-sericite alteration is evident throughout the district’s igneous rock fabric.

 

An extensive and economically important zone of supergene enrichment, with disseminated and stockworks of chalcocite (Cu2S), developed below the iron oxide capping.  This zone coincides with the topography and has an average thickness of 300 meters.  A mixed zone of secondary and primary sulfides underlay the chalcocite blanket.  The hypogene mineralization, principally chalcopyrite, (CuFeS2), extensively underlies the orebody.  Molybdenite occurs throughout the deposit and the content tends to increase with depth.

 

The Cananea copper porphyry is considered world-class and unique.  The deepest exploration results in the core of the deposit have confirmed significant increase in copper grades.  Similar porphyry copper deposits usually contain lower grades at depth. The district is also unique for the occurrence of high-grade breccia pipes, occurring in clusters following the trend of the district.

 

Current dimensions of the mineralized ore body are 5x3 kilometers, and projects to more than 1 kilometer at depth.  Considering the geological and economic potential of the Cananea porphyry copper deposit, it is expected that the operation can support a sizeable increase in copper production capacity.

 

Mine Exploration

 

Due to Cananea’s illegal work stoppage, there were no exploration programs developed during 2008 and 2009.  Assuming settlement of the work stoppage, the core drilling program in the areas adjacent to the deposit will be continued in 2010 in order to define areas where leach and waste will be deposited.

 

Concentrator

 

Cananea uses state-of-the-art computer monitoring systems at the concentrator, the crushing plant and the flotation circuit in order to coordinate inflows and optimize operations.  Material with a copper grade over 0.38% is loaded onto trucks and sent to the milling circuit, where giant rotating crushers reduce the size of the ore to approximately one-half of an inch.  The ore is then sent to the ball and bar mills, which grind it to the consistency of fine powder.  The finely ground powder is

 

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agitated in a water and reagents solution and is then transported to flotation cells.  Air is pumped into the cells producing a froth, which carries the copper mineral to the surface but not the waste rock, or tailings.  Recovered copper, with the consistency of froth, is filtered and dried to produce copper concentrates with an average copper content of approximately 28%.  Concentrates are then shipped by rail to the smelter at La Caridad.

 

The Cananea concentrator plant, with a milling capacity of 76,700 tons per day, consists of two primary crushers, four secondary crushers, ten tertiary crushers, ten primary mills, an expert control system, five mills for re-grinding, 103 primary flotation cells, ten column cells, seventy exhaustion flotation cells, seven thickeners and three ceramic filters.  In addition, the facility has 48 wells and a pumping station for fresh water supply, a tailings dam and a reclaimed water pumping station.

 

SX/EW Plant

 

The Cananea Unit operates a leaching facility and two SX/EW plants.  All copper ore with a grade lower than the mill cut-off grade of 0.38%, but higher than 0.25% copper, is delivered to the leach dumps.  A cycle of leaching and resting occurs for approximately five years to achieve a 62.5% recovery in the run-of-mine dumps and three years for the crushed leach material to achieve a 73% recovery.

 

The Cananea Unit currently maintains 21.0 million cubic meters of pregnant leach solution in inventory with a concentration of approximately 1.82 grams of copper per liter.

 

Major equipment at I and II SX-EW plants includes two crushing systems (No.1 and No.2).  Crushing system No. 1 has a capacity of 32,000 tons per day and includes an apron feeder, a conveyor belt feeder, eight conveyor belt systems and a distributor car.  Crushing system No. 2 has a capacity of 48,000 tons per day and includes one crusher, a conveyor belt feeder, four conveyor belts and a distributing car.  There are three irrigation systems for the dumps and eleven dams for the pregnant leach solution (PLS).  Plant I has four solvent extraction tanks with a nominal capacity of 16,000 liters per minute of PLS and 52 electrowinning cells and has a daily production capacity of 30 tons of copper cathodes with 99.999% purity.  Plant II has five trains of solvent extraction with a nominal capacity of 55,000 liters per minute of PLS and 216 cells distributed in two bays and has a daily production capacity of 120 tons of copper cathodes with 99.9% purity.

 

We intend to increase the Cananea Unit’s production of copper cathodes with a new SX/EW plant, (SXEW III) with an annual capacity of 33,000 tons.  The plant would produce copper cathodes of ASTM grade 1 or LME grade A.  The project includes the installation of storage for deliverables required for operation of the plant and the installation of an emergency power plant and a fire protection system.  Due to the ongoing strike at Cananea, this project has been put on hold until we satisfactorily resolve the labor issue.

 

La Caridad

 

The La Caridad complex includes an open-pit mine, concentrator, smelter, copper refinery, precious metals refinery, rod plant, SX/EW plant, lime plant and two sulfuric acid plants.

 

La Caridad mine and mill are located about 23 kilometers southeast of the town of Nacozari de Garcia in northeastern Sonora.  Nacozari is about 264 kilometers northeast of the Sonora state capital of Hermosillo and 121 kilometers south of the U.S.-Mexico

 

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border.  Nacozari is connected by paved highway with Hermosillo and Agua Prieta and by rail with the international port of Guaymas, and the Mexican and United States rail systems.  An airstrip with a reported runway length of 2,500 meters is located 36 kilometers north of Nacozari, less than one kilometer away from the La Caridad copper smelter and refinery.  The smelter and the sulfuric acid plants, as well as the refineries and rod plant, are located approximately 24 kilometers from the mine.  Access is by paved highway and by railroad.

 

The concent