|TEV||32,960||TEV/EBIT||14||TTM 2019-09-30, in MM, except price, ratios|
|Part Iii: Proxy Statement for 2021 Annual Meeting of Stockholderspart Iv: Exhibit Index Is on Page 171 Through 173|
|Item 1. Business|
|Item 1A. Risk Factors|
|Item 1B. Unresolved Staff Comments|
|Item 2. Properties|
|Item 3. Legal Proceedings|
|Item 4. Mine Safety Disclosure|
|Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities|
|Item 6. Selected Financial Data|
|Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations|
|Item 7A. Quantitative and Qualitative Disclosures About Market Risk|
|Item 8. Financial Statements and Supplemental Data|
|Note 1 - Description of The Business:|
|Note 2 - Summary of Significant Accounting Policies:|
|Note 3 - Short - Term Investments:|
|Note 4 - Inventories:|
|Note 5 - Property:|
|Note 6 - Intangible Assets:|
|Note 7 - Income Taxes:|
|Note 8 - Workers' Participation:|
|Note 9 - Leases:|
|Note 10 - Asset Retirement Obligation:|
|Note 11 - Financing:|
|Note 12 - Benefit Plans:|
|Note 13 - Commitments and Contingencies:|
|Note 14 - Stockholders' Equity|
|Note 15 - Fair Value Measurement:|
|Note 16 - Concentration of Risk:|
|Note 17 - Related Party Transactions:|
|Note 18 - Segment and Related Information:|
|Note 19 - Subsequent Events:|
|Item 9. Changes in and Disagreements with Accountant on Accounting and Financial Disclosure|
|Item 9A. Controls and Procedures|
|Item 9B. Other Information|
|Item 10, 11, 12, 13 and 14|
|Item 15. Exhibits, Financial Statements, Schedule.|
|Balance Sheet||Income Statement||Cash Flow|
Rev, G Profit, Net Income
Ops, Inv, Fin
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended:
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
(Address of principal executive offices)
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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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.
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 ◻
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Accelerated filer ◻
Non-accelerated filer ◻
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
At February 24, 2021, there were of record
The aggregate market value of the shares of common stock (based upon the closing price at June 30, 2020 as reported on the New York Stock Exchange-Composite Transactions) of Southern Copper Corporation held by non-affiliates was approximately $
PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE:
Proxy statement for 2021 Annual Meeting of Stockholders
Exhibit Index is on Page 171 through 173
Southern Copper Corporation (“SCC”)
INDEX TO FORM 10-K
3 - 13
13 - 24
24 - 24
64 - 66
67 - 68
69 - 97
98 - 99
100 - 162
163 - 165
166 - 167
166 - 167
166 - 167
166 - 167
166 - 167
168 - 170
171 - 173
ITEM 1. BUSINESS
We believe Southern Copper Corporation (“SCC”, “Southern Copper” or the “Company”) is one of the largest integrated copper producers in the world. Our major production includes copper, molybdenum, zinc and silver. All of our mining, smelting and refining facilities are located in Peru and Mexico and we conduct exploration activities in those countries and in Argentina, Chile and Ecuador. See Item 2 “Properties—Review of Operations” for maps of our principal mines, smelting facilities and refineries. The considerable scale of our operations makes us one of the largest mining companies in Peru and 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 has been 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 blister and 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 sulfuric acid. Our precious metals plant at the Ilo refinery produces refined silver, gold, and other materials. Additionally, we produce refined copper using solvent extraction/electrowinning technology (“SX-EW”). We operate the Toquepala and Cuajone open-pit 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 “La Caridad” unit) operates La Caridad, an open-pit copper mine, a copper ore concentrator, a SX-EW plant, a smelter, refinery and a rod plant. The La Caridad refinery has a precious metals plant that produces refined silver, gold and other materials. Operadora de Minas e Instalaciones Mineras, S.A de C.V. (the “Buenavista unit”) operates Buenavista, an open-pit copper mine, which is located on the site of one of the world’s largest copper ore deposits, two copper concentrators and two operating SX-EW plants. Industrial Minera Mexico, S.A. de C.V. (together with its subsidiaries, the “IMMSA unit”) operates five underground mines that produce zinc, lead, copper, silver and gold, and a zinc refinery.
We utilize modern, state of the art mining and processing methods, including global positioning systems and computerized mining processes. Our operations have a high level of vertical integration, which allows us to use our facilities, employees and equipment to manage the entire production process, including ore mining and production of refined copper rod and other products, and to execute most associated transport and logistics functions.
The sales prices for our products are largely determined by market forces beyond 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 remaining 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.
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 “sol,” “soles” or “S/”, signify Peruvian soles; and references to “peso,” “pesos,” or “Ps.,” represent Mexican pesos.
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.
The following chart describes our organizational structure, starting with our controlling stockholders, as of December 31, 2020. For clarity purposes, 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”). As of December 31, 2020, Grupo Mexico, through its wholly-owned subsidiary Americas Mining Corporation (“AMC”), owned 88.9% of our capital stock. Grupo Mexico’s principal business is to act as a holding company for the shares of other corporations engaged in the mining, processing, purchase and sale of minerals and other products and in the provision of railway and other related services.
We conduct our operations in Peru through a registered branch (the “SPCC Peru Branch”, “Branch” or “Peruvian Branch”). The SPCC Peru Branch comprises virtually all of our assets and liabilities associated with our copper operations in Peru. The SPCC Peru Branch does not constitute a corporation that is separate from SCC, and, as such, the obligations of the SPCC Peru Branch are direct obligations of SCC and vice-versa. The SPCC Peru Branch is, however, registered as a branch of a foreign company pursuant to Peruvian law and through this entity, we hold assets, incur liabilities and conduct operations in Peru. Although the SPCC Peru Branch has no capital or liability that is separate from that held or applicable to SCC, the SPCC Peru Branch is deemed to have equity capital for purposes of determining the economic interests of holders of our investment shares (See Note 14 “Stockholders´ Equity” of the consolidated financial statements).
In April 2005, we acquired Minera Mexico, 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 La Caridad unit (ii) the Buenavista unit and (iii) the IMMSA unit. We own 99.96% of Minera Mexico.
In 2008, our Board of Directors (“BOD”) authorized a $500 million share repurchase program that has since been increased by the BOD and is currently authorized to $3 billion. Pursuant to this program, through December 31, 2020 we have purchased 119.5 million shares of our common stock at a cost of $2.9 billion. These shares are available for general corporate purposes. We 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 our operations in both countries include those associated with economic and political conditions, the effects of currency fluctuations and inflation, the effects of government regulations and the geographic concentration of our operations.
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 NE, Washington, D.C. 20549. The SEC maintains a website 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 website is www.sec.gov.
Our website is www.southerncoppercorp.com. The first document on the list of materials available on this website is Form 8-K, dated March 14, 2003. We offer, free of charge, downloads of our annual, quarterly and current reports, as soon as they can be reasonably made available following electronic or physical filing with the SEC. Our website also includes the Company’s Corporate Governance guidelines and the charters of our main Board Committees. However, the information found on our website is not part of this or any other report.
Forward-looking statements in this report and in other Company statements include information 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 certain 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, the 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 metal prices on commodity exchanges, which can be volatile.
Additional business information follows:
Copper is an important component in the world’s infrastructure chain. It is the third most widely used metal, after iron and aluminum. Copper has unique chemical and physical properties, including high ductility; malleability; thermal and electrical conductivity; and resistance to corrosion, and as such, is considered a prime material for use in electrical and electronic products, including components for power transmission and generation, which accounts for about three quarters of copper global use, and for telecommunications, building construction, transportation and industrial machinery. Copper is also an important metal in non-electrical applications such as plumbing and roofing and, when alloyed with zinc to form brass, is used in many industrial and consumer applications.
Copper is an internationally traded commodity whose prices are mainly determined by the major metal exchanges, the Commodities Exchange, or “COMEX,” in New York and the London Metal Exchange or “LME,” in London. Copper is usually found in nature in association with sulfur. Pure copper metal is generally produced in a multi-stage process, beginning with the mining and concentrating of low-grade ores containing copper sulfide minerals, and followed by smelting and electrolytic refining to produce a pure copper cathode. An increasingly larger share of copper is being produced from acid leaching of oxidized ores. Copper is one of the oldest metals known to man and has contributed significantly to the development of civilization.
BUSINESS REPORTING SEGMENTS:
Our management divides Southern Copper into three reportable segments and manages each as a separate segment.
The three segments identified are groups of individual mines, each of which constitutes an operating segment with similar economic characteristics, product types, processes and support facilities, regulatory environments, employee bargaining contracts and currency risks. In addition, each mine within the individual group earns revenues from similar types of customers for their products and services and each group incurs expenses independently, including commercial transactions between groups.
Inter-segment 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. Information regarding the Company’s sales is included in the segment data. The segments identified by the Company are:
|1.||Peruvian operations, which include the Toquepala and Cuajone mine complexes and the smelting and refining plants, including a precious metals plant, industrial railroad and port facilities that service both mines. Sales of its products are recorded as revenue from our Peruvian mines. The Peruvian operations produce copper, by-products of molybdenum, silver and other materials.|
|2.||Mexican open-pit operations, which include the La Caridad and Buenavista mine complexes and the smelting and refining plants, including a precious metals plant and a copper rod plant and support facilities that 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 materials.|
|3.||Mexican underground mining operations, which include five underground mines that produce zinc, copper, lead, silver and gold; and a zinc refinery. This group is identified as the IMMSA unit and sales of its products are recorded as revenue from the IMMSA unit.|
Financial information is periodically prepared for each of the three segments and the results are reported to the Chief Operating Decision Maker (“CODM”) on a segment basis. The CODM 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 is included in Note 18 “Segment and Related Information” of the consolidated financial statements.
CAPITAL INVESTMENT PROGRAM AND EXPLORATION ACTIVITIES
For a description of our capital investment program, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Investment Program” and for our exploration activities, see Item 2 “Properties—Explorations Activities.”
PRINCIPAL PRODUCTS AND MARKETS
Copper is primarily used in the building and construction industries; in the power generation and transmission industry; and in the electrical and electronic products; and, to a lesser extent, in industrial machinery and equipment; consumer products; and in 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, in 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 to manufacture batteries and to form sheets for architectural purposes.
Our marketing strategy and annual sales planning emphasize developing and maintaining long-term customer relationships. As such, acquiring annual or other long-term contracts for the sale of our products is a high priority. Generally, 80% to 90% of our metal production is sold under annual or longer-term contracts. Sales prices are determined based on the prevailing commodity prices for the quotation period according to the terms of the contract.
We focus on end-user customers as opposed to selling on the spot market or to trading companies. In addition, we devote significant marketing efforts to diversifying our sales both by region and customer base. We also strive to provide superior customer service, including timely deliveries of our products. Our ability to consistently fulfill customer demand is underpinned by our substantial production capacity.
For additional information on sales please see “Revenue recognition” in Note 2 “Summary of Significant Accounting Policies” and Note 18 “Segment and Related Information” of the consolidated financial statements.
Prices for our products are principally a function of supply and demand and, with the exception of molybdenum, are established on COMEX and LME. 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. 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 per pound copper prices during the last 10 years:
The per pound COMEX copper price during the last 5 and 10 year periods averaged $2.69 and $3.00, respectively. The per pound LME copper price during the last 5 and 10 year periods averaged $2.70 and $3.00, respectively.
The table below shows the high, low and average prices per pound with the exception of silver, which is priced per ounce. The market prices for our three principal by-products over the last 10 years are as follows:
The per ounce COMEX silver price during the last 5 and 10 year periods averaged $17.31 and $21.15, respectively. The per pound Platt’s Metals Week Dealer Oxide molybdenum price during the last 5 and 10 year periods averaged $9.25 and $10.23, respectively. The per pound LME zinc price during the last 5 and 10 year periods averaged $1.15 and $1.04, respectively.
Competition in the copper market is based primarily on price and service basis, with price being the most important factor when supplies of copper are ample. Our products compete with other materials, including aluminum and plastics. For additional information, see Item 1A “Risk Factors—The copper mining industry is highly competitive.”
HUMAN CAPITAL RESOURCES
As of December 31, 2020, we had 13,777 employees, approximately 71% of whom are unionized and represented by nine different labor unions. We believe that the labor environment in our operations in Mexico and Peru is favorable, which has allowed us to increase productivity as we advance the goals of our capital expansion program.
As a large integrated copper producer, we have a wide range of employees, including management professionals, technicians, engineers, and production employees. In Peru and Mexico we provide a wide variety of opportunities for professional growth for all employees with trainings and on-the-job experience. As of December 31, 2020, approximately 6.5% of our total workforce was female.
The Company seeks to create value for its employees to ensure that their working experience is optimal. Various efforts are made on this front, including promoting a safe and collaborative work environment and culture and ensuring employees continue to be engaged with the Company’s values and principles. We believe that this generates the bases for shared values and improves our employer brand for existing and future employees. We also focus on attracting and retaining employees by providing compensation and benefit packages that are competitive within the applicable market, taking into account the location of the position, responsibilities and compensation requirements in the countries where we operate. Our compensation practices consider many factors, including individual performance and responsibilities; years of service; elements of compensation mandated by Peruvian and Mexican law; future challenges and objectives; contributions to the future success of our Company; the employee’s total compensation and our financial performance. We may also look at the compensation levels of comparable companies.
In 2020, in response to COVID-19, we incurred $27.6 million in COVID-19 related production costs, which included protective equipment and labor costs to support employees where operations were impacted; expanding, where possible, options for remote work; and enhancing safety protocols. For additional information, refer to Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 1 “Description of the Business, COVID-19 Pandemic” to the consolidated financial statements.
In terms of corporate culture, the Company is committed to the continuous growth and development of its employees and surrounding communities. Through values such as creativity, honesty, equality and respect, we ensure that our employees are aligned with the same principles and work ethics, which in turn results in a standardized culture across the Company. The Company also seeks to promote goal-oriented principles to obtain results that positively affect our main stakeholders and communities and which focus on innovation, human growth and wellbeing, environmental care, and forward thinking.
We deploy several talent attraction programs, which entail leveraging organizational relations; establishing links with national and regional institutions of higher learning in the countries where we operate; and participating in job fairs. We also have a careers page and use several local and international job boards to publish openings.
We offer professional internship programs to attract students before they graduate from universities or centers for vocational training. Additionally, we believe that we are a first-choice employer in the countries where we operate. This reflects our efforts to strengthen relationships with our stakeholders, including employees, and engage in community development. We have transparent selection processes and are committed to upholding principles for Human Rights and Diversity, Inclusion and Non-Discrimination.
All our employees receive initial training and opportunities for continuous development throughout their careers, which favors talent retention. We also prioritize recruiting from our ranks and 60% of our vacant positions, on average, are filled by current employees looking to make career moves.
Voluntary turnover indicators in all of the countries in which we operate remain at single digits year-over-year. We believe that this is proof that our employees have a strong desire to continue working with us.
In addition, we conduct a biannual Employee Opinion Survey to measure employees’ perceptions of the Company to take actions that will increase employee engagement. We have decided to measure the factors that affect our organizational climate, which entails assessing how people perceive of the environment inside the organization, and how internal and/or external factors generate impact, and focuses on culture, which reflects the aggregate of behaviors, experiences, habits, practices, values, procedures and policies inside the organization.
All employees, both unionized and non-unionized, are invited to participate in all of our human talent initiatives. This reflects our belief that it is in the Company’s best interest to listen to all of our people and create an open communications channel. We apply surveys every two years and approximately 70% of our employees participate. This number far exceeds that registered by other companies that apply similar surveys.
We measure the employee engagement level with 18 sub-factors, which are grouped into two major sets of factors: loyalty and satisfaction. The first factor represents the degree to which an individual identifies with the organization and its business goals, whereas the second reflects the individual’s degree of satisfaction with his/her working conditions and draws a line between satisfaction levels and performance at work.
The average of these factors indicates the level of engagement on a scale of 1 to 5 (a Likert scale). In 2017, we had an engagement rating of 3.71 and in 2019, our rating was situated at 3.77. This represents a 1.6% improvement from 2017 to 2019.
We have adopted a corporate social responsibility policy that is designed to integrate the Company´s operations with local communities in areas influenced by our operations. This policy focuses on creating permanent and positive relationships to generate optimal social conditions and promote sustainable development in the area. We continue to make significant expenditures for community programs. For additional information on our community programs, refer to Corporate Social Responsibility under Note 13 “Commitments and contingencies” to the consolidated financial statements.
66% of the Company’s 4,739 Peruvian employees were unionized as of December 31, 2020. Currently, there are six separate unions, one large union and five small unions. In June 2018, the Company signed a three-year collective bargaining agreement with one of the smaller unions. This agreement includes, among other things, annual salary increases of 5% for each year starting September 2018, and a signing bonus of S/45,000 (approximately $13,600) which was recorded as labor expense. In August 2018, the Company signed a three-year collective bargaining agreement with three additional unions. This agreement includes, among other things, annual salary increases of 5% for each year starting December 2018, and a signing bonus of S/45,000 (approximately $13,600) which was recorded as labor expense. In March 2019, the Company resolved pending issues through arbitration with one additional union. The arbitral award included annual salary increases of 5% for each year starting September 2018 and a signing bonus of S/45,000 (approximately $13,600), which was recorded as a labor expense in the first quarter of 2019.
In May 2019, arbitration resolved pending issues with the remaining union. The arbitral award included a salary increase of 5.5% beginning in September 2018 and a bonus of S/16,000 (approximately $4,800) for the one-year agreement, which was recorded as a labor expense in the second quarter of 2019. In November 2019, the Company signed a collective bargaining agreement for three years with the same union. This agreement included, among other things, a salary increase of 5% for each year starting in September 2019 and a bonus of S/45,000 (approximately $13,300), which was recorded as labor expenses in the fourth quarter of 2019.
Employees of the Toquepala and Cuajone units reside in townsites, where we have built 3,700 houses and apartments. We also have 90 houses in 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 and recreational facilities. We also provide shopping, banking and other services at the townsites.
74% of our 8,962 Mexican employees were unionized as of December 31, 2020 and are represented by three separate unions. Under Mexican law, the terms of employment for unionized workers are set forth in collective bargaining agreements. Mexican companies negotiate the salary provisions of collective bargaining agreements with the labor unions on an annual basis and negotiate other benefits every two years. We conduct negotiations separately at each mining complex and each processing plant.
Our Taxco mine in Mexico has been on strike since July 2007. For a discussion of labor matters, refer to the information contained under the caption “Labor matters” in Note 13 “Commitments and Contingencies” of the consolidated financial statements.
Employees of La Caridad and Buenavista units reside in townsites at Nacozari and Cananea, where we have built approximately 1,800 houses and apartments. Most of the employees of the IMMSA unit reside on the grounds of the mining or processing complexes where they work. We have built 356 houses and apartments on these sites. 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 medical facilities, churches, social clubs, shopping centers, banking and other services. Through 2007, the Buenavista unit provided health care services to employees and retired unionized employees and their families through its own on-site hospital. In 2010, the Company signed an agreement with the Secretary of Health of the State of Sonora to provide these services to its retired workers and their families. The new workers of Buenavista receive health services through the Mexican Institute of Social Security as is the case for all Mexican workers.
FUEL, ELECTRICITY AND WATER SUPPLIES
The principal raw materials used in our operations are fuel, gas, electricity and water. We use natural gas to power boilers as well as generators and for metallurgical processes at our Mexican operations and utilize diesel fuel to power mining equipment. We believe that sufficient sources of fuel, electricity and water are readily available. Fluctuations
may occur in the prices of these raw materials that are beyond our control; as such, we focus our efforts on reducing costs through cost and energy-saving measures.
Energy generates the main cost in mining, so concern for its conservation and efficient usage is critical. We have energy management committees at most of our mines, which meet periodically to discuss consumption and to develop measures directed at saving energy. Also, alternative sources are being analyzed at the corporate level, including both traditional and renewable energy sources. This approach has helped us to develop a culture of energy conservation directed at ensuring the sustainability of our operations.
Fuel: In Peru, we obtain fuel primarily from local companies. The Company believes that adequate supplies of fuel are available in Peru.
Electricity: In June 2014, we entered into a power purchase agreement for 120 megawatt (“MW”) with the state company Electroperu S.A., which began supplying energy to our Peruvian operations for a twenty-year period that started on April 17, 2017. In July 2014, we entered into a power purchase agreement for 120MW with a private power generator Kallpa Generacion S.A. (“Kallpa”), which began supplying energy to our Peruvian operations for a ten-year period that started on April 17, 2017. In May 2016, we signed an additional power purchase agreement for a maximum of 80MW with Kallpa, under which Kallpa will supply energy to the operations related to the Toquepala expansion and to other minor projects for a period starting on May 1, 2017 and ending after ten years of commercial operations at the Toquepala Expansion or until April 30, 2029; whichever occurs first. We feel confident that additional power can be obtained from the Peruvian national grid, should the need arise.
Additionally, 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, which is connected to the Peruvian network.
Water: We have water rights or licenses for up to 1,950 liters per second from well fields at the Huaitire, Vizcachas and Titijones aquifers and surface water rights from Lake Suches and two small water sources, Quebrada Honda and Quebrada Tacalaya. We believe these water sources are sufficient to supply the needs of our operating units at Toquepala and Cuajone, including the Toquepala expansion. In Ilo, we have two desalination plants that produce water for industrial use and domestic consumption that we believe will produce sufficient water for both current and projected needs.
Fuel: In Mexico, since 2018, we have purchased fuel from Petroleos Mexicanos (“PEMEX”), the state producer, and from private suppliers.
The La Caridad unit imports natural gas from the United States through its pipeline (between Douglas, Arizona and Nacozari, Sonora). This allows us to import natural gas at market prices and thereby reduce operating costs. Several contracts with PEMEX and the United States provide us with the option of using a monthly or daily fixed prices for our natural gas purchases.
Natural gas is used for metallurgical processes and to power furnaces, converters, casting wheels, boilers and electric generators. Diesel oil is a backup method for all these uses. We use diesel oil to power mining equipment at our operations.
Electricity: Electricity is used as the main energy source at our mining complexes. We purchase most of our electricity from Mexico Generadora de Energia S. de R. L. (“MGE”), a subsidiary of Grupo Mexico which has two power plants designed to supply power to La Caridad and Buenavista units. MGE supplies 2.3% of its power output to third party energy users. These plants are natural gas-fired combined cycle power generating units, with a net total capacity of 516.2 megawatts. In 2012, we entered into a power supply agreement with MGE that will last until 2032. The first plant was
completed in 2013 and the second in the second quarter of 2014. The first plant began to supply power to the Company in December 2013, and the second plant in June 2015.
We also purchase electricity from the Comision Federal de Electricidad (the Federal Electricity Commission or the “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 is dependent upon the pricing policies of CFE and PEMEX, which are affected by political and regulatory environments, international market prices for crude oil and natural gas; and conditions in the refinery markets.
Some IMMSA mining operations also purchase electricity from Eolica el Retiro, S.A.P.I de C.V. (“Eolica”), a windfarm energy producer that is an indirect subsidiary of Grupo Mexico. In August 2013, IMMSA and other of the Company’s mining operations entered into a purchase agreement and in late 2014 started to purchase electricity from Eolica. Due to the nature of the production process there is not a fixed power capacity contracted. In 2020, total purchases were approximately 12.1 million kilowatt hours.
Water: In Mexico, water is deemed public property and industries that are not connected to a public service water supply must obtain a water concession from Comision Nacional del Agua (the National Water Commission or the “CNA”). Water usage fees are established in the Ley Federal de Derechos (the Federal Rights Law), which distinguishes several availability zones with different fees per unit of volume according to each zone, with the exception of Mexicana de Cobre. All of our operations have one or several water concessions and pump out the required water from wells. Mexicana de Cobre pumps water from the La Angostura dam, which is close to the mine and plants. At our Buenavista facility, we maintain our own wells and pay the CNA for water usage. Water conservation committees have been established at each plant to conserve and recycle water. Water usage fees are updated on a yearly basis and have been on the rise in recent years.
LEGAL AND REGULATORY MATTERS
In 2019 and 2020, no legal, environmental, labor or tax regulations came into effect that required the Company to incur material costs of compliance, had material adverse effects on the Company’s operations, or affected normal execution of the Company’s projects. Additionally, we believe that all our facilities in Peru and Mexico are in material compliance with applicable environmental, mining and other applicable laws and regulations.
For a discussion of environmental and labor matters, reference is made to the information contained in Note 13 “Commitments and Contingencies” of the consolidated financial statements. For more information on tax matters, refer to Note 7 “Income taxes” of the consolidated financial statements.
MINING RIGHTS AND CONCESSIONS
We have 150,321 hectares in concessions from the Peruvian government for our exploration, exploitation, extraction and production operations, at various sites, as follows:
We believe that our Peruvian concessions are in full force and effect under applicable Peruvian laws and as such, comply with all material terms and requirements applicable to said 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 2020, 2019 and 2018, were approximately
$1.4 million, $1.8 million and $1.5 million, respectively. We have two types of mining concessions in Peru: metallic and non-metallic concessions.
In 2011, the Peruvian Congress approved an amendment to the mining royalty charge. The new mining royalty charge is based on operating income margins with graduated rates ranging from 1% to 12% of operating profits; the minimum royalty charge is equivalent to 1% of net sales. If the operating income margin is 10% or less, the royalty charge is 1% and for each 5% increment in the operating income margin, the royalty charge rate increases by 0.75%, up to a maximum of 12%. In 2020, 2019 and 2018, we made provisions of $60.6 million, $42.3 million and $32.9 million, respectively.
At the same time the Peruvian Congress amended the mining royalty charge, it enacted a new tax for the mining industry. This tax is also based on operating income and its rates range from 2% to 8.4%. For additional information see Note 7 “Income Taxes” to the consolidated financial statements.
In Mexico we have 503,104 hectares in concessions from the Mexican government for our exploration and exploitation activities as outlined on the table below:
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 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 $0.36 to $7.92 per hectare depending on the start date of the mining concession. Fees paid during 2020, 2019 and 2018 were approximately $6.6 million, $7.1 million and $6.3 million, respectively. In addition, all of our operating units in Mexico have water concessions that are in full force and effect. Although ownership is not required in order to explore or mine a concession, we generally own the land related to our Mexican concessions. We also own all of the processing facilities of our Mexican operations and the land on which they are built.
In December 2013, the Mexican government enacted a new law which, among other things, established a mining royalty charge of 7.5% on earnings before taxes as defined by Mexican tax regulations and an additional royalty charge of 0.5% over gross income from sales of gold, silver and platinum. These charges were effective January 2014 and are deductible for income tax purposes.
ITEM 1A. RISK FACTORS
Every investor or potential investor in Southern Copper Corporation should carefully consider the following risk factors.
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, these prices 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. In 2020, the COVID-19 pandemic and consequent negative impact on the global economy created significant volatility in the financial markets, including the copper market.
Over the last three years, approximately 81% of our revenues came from the sale of copper; 7% from molybdenum; 5% from silver; and 4% from zinc. Please see the distribution of our revenues per product on Item 8 “Financial Statements and Supplementary Data” Note 18 “Segment and Related Information—Sales value per segment” on page 157.
See also historical average price of our products on Item 1 Business caption “Metals prices”.
We cannot predict if metals prices will rise or fall in the future. Future declines in metals prices, and for copper in particular, will have an adverse impact on our results of operations and financial condition. Under very adverse market conditions, we might consider curtailing or modifying some of our mining and processing operations.
Our business requires levels of capital investments that 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 investments. We must continue to invest capital to maintain or 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 at levels that generate sufficient cash, or that we will 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 fails to comply with these obligations, we could be in default under the applicable agreements. This situation, if not addressed or waived, could require immediate repayment of debt obligations. 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 capacity to incur additional debt and liens; dispose of assets; or pay dividends to our common stockholders.
We may not 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 the results of our operations; our 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. Depending on our capital investment program and global economic conditions, it is possible that future dividend distributions will fall below levels seen in recent years.
Our ability to recognize the benefits of deferred tax assets is dependent on future cash flows and taxable income.
Through 2020, the Company recognized the expected future tax benefit from deferred tax assets when the tax benefit was considered more likely than not to be realized. Assessing the recoverability of deferred tax assets requires management to make significant estimates related to expectations of future taxable income and existing tax laws. There can be no assurance that the Company will be able to recognize the expected future benefits of deferred tax assets; this inability could have a material adverse effect on the Company’s results of operations.
Our actual reserves may not conform to our current estimates of our ore deposits and our long-term viability depends on our ability to replenish ore reserves.
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 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 charges 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 increasing 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 indefinitely.
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, weather and other natural phenomena, such as seismic activity, wall failures and rock slides in our open-pit mines, structural collapses of our underground mines or tailings impoundments, and lower than expected ore grades or recovery rates. The Company’s operations may also be affected by mudslides and flash floods caused by torrential rains.
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, loss of life and damage to equipment.
The waste rock and tailings produced in our mining operations represent our largest volume of waste material. Managing the volume of waste rock and tailings presents significant environmental, safety and engineering challenges and risks. We maintain large tailings impoundments containing sand of ground rock, moistened with water, which are effectively large dams that must be engineered, built and monitored to assure structural stability and avoid leakages or structural collapse. Defects, errors and failures at tailings dams and in other impoundments at any of our mining operations could cause severe property and environmental damage and loss of life. The importance of careful design, management and monitoring of large impoundments was emphasized in recent years by large scale tailings dam failures at unaffiliated mines, which caused extensive property and environmental damage and resulted in the loss of life. For more information regarding our tailing dams, please see Item 2 “Properties—Slope Stability—Tailing Dams.”
We maintain insurance against many of these and other risks, which under certain circumstances may not provide adequate coverage. 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 contemplate requirements for environmental damage insurance. If these regulations come into force, we will have to analyze the need to obtain said insurance. We do not have, and do not intend to obtain, political risk insurance. We cannot assure you that these and other uninsured events will not have an adverse effect on our business, properties, operating results, financial condition or prospects.
Changes in the demand level for our products and copper sales agreements could adversely affect our revenues.
Our financial results may be affected by fluctuations in demand for the refined, semi-refined metal products and concentrates we sell at both the industrial and consumer level, and may also be affected by changes in the global economy, including economic upturns and downturns of differing magnitudes. Changes in technology, industrial processes, concerns over weaknesses in the global economy and consumer habits may affect the level of demand to the extent that those increase or decrease the need for our metal products. Our revenues may also be adversely affected by events of force majeure that could have a negative impact on our sales agreements. These events include acts of nature, labor strikes, fires, floods, wars, transportation delays, government actions or other events that are beyond the control of the parties to the agreement.
Interruptions of energy supply or increases in energy, fuel and gas costs, shortages of water supply, critical parts, equipment, skilled labor and other production costs may adversely affect our results of operations.
We require substantial amounts of fuel oil, electricity, water and other resources for our operations. Fuel, gas and power costs constituted approximately 28% of our total production cost in 2020 and 2019, and 29% in 2018. We rely upon third parties for our supply of the energy resources consumed in our operations so that prices for and availability of energy resources may be subject to change or curtailment due to, among other things, new laws or regulations; imposition of new taxes or tariffs; interruptions in production by suppliers; and variations in global prices or market conditions. Regarding water consumption, 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 relative to the water to which we have rights could require us to curtail or shut down mining production and could prevent us from pursuing expansion opportunities. In addition, future shortages of critical parts, equipment and skilled labor could adversely affect our operations and development projects.
Our Company is subject to health and safety laws that may restrict our operations, result in operational delays or increase our operating costs and adversely affect our financial results of operations.
We are required to comply with occupational health and safety laws and regulations in Peru and Mexico where our operations are subject to periodic inspections by the relevant governmental authorities. These laws and regulations govern, among others, health and safety workplace conditions, including high risk labor and the handling, storage and disposal of chemical and other hazardous substances. We believe our operations comply in all material respects with applicable health and safety laws and regulations in the countries in which we operate. Compliance with these laws and regulations and with new or existing regulations that may be applicable to us in the future could increase our operating costs and adversely affect our financial results of operations and cash flows.
Our objective is to preserve the health and safety of our workforce by implementing occupational health and training programs and safety incentives at our operations that meet all regulatory requirements and enhance employee performance. Despite the Company’s efforts, we are not exempt from accidents. These are reported to Mexican and Peruvian authorities as required. Regarding non-fatal accidents, in the last three years, the Company’s Dart rate (rate to measure workplace injuries severe enough to warrant Day Away from work, job Restrictions and/or job Transfers) was much lower than the MSHA Dart rate (the MSHA Dart rate is published by the U.S.’s Mine Safety and Health Administration, and is used as an industry benchmark).
In 2020 and 2018, no fatalities were reported at our operations in Mexico or Peru. Unfortunately, in 2019, we reported four fatalities in Mexico and Peru. The amounts paid to the Mexican and Peruvian authorities for reportable accidents had no adverse effects on our results. Under Mexican and Peruvian law penalties and fines for safety violations are generally monetary, but in certain cases may lead to the temporary or permanent shutdown of the affected facility or the suspension or revocation of permits or licenses. Additionally, violations of security and safety laws and regulations at our Peruvian operations can be considered criminal and punishable by a sentence of up to 10 years of prison.
Our metals exploration efforts are highly speculative in nature and may be unsuccessful.
Metals exploration is highly speculative in nature. It involves many risks and is frequently unsuccessful. Once mineralization is discovered, it may take a number of years from the initial phases of drilling until production is possible, during which time the economic feasibility of production may change. Substantial expenditures must be made to determine proven and probable ore reserves; this requires drilling to establish the metallurgical processes that will be needed 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 expansion or replacement of current production with new proven and probable ore reserves.
Development projects have no operating history upon which we can 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 on feasibility studies that generate 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.
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. Furthermore, 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 take 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 slope failures, or additional requirements to prevent slope failures, may negatively affect our results of operations and financial condition and may diminish 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, 2020, unions represented approximately 71% of our workforce. Currently, we have labor agreements in effect for our Mexican and Peruvian operations.
Our Taxco mine in Mexico has been on strike since July 2007. It is expected that operations at this mine will remain suspended until these labor issues are resolved. In addition, workers at the San Martin mine were on strike from July 2007 to August 2018. After eleven years of an illegal stoppage, we resumed control of the San Martin mine in August 2018. The San Martin facilities deteriorated during this period and we undertook a major renovation in order to restart operations during the second quarter of 2019, with an estimated capital budget of $97.7 million. For additional information, see Item 2, “Properties—Mexican IMMSA Unit—San Martin and Taxco”, and Note 13, “Commitments and Contingencies—Labor matters”, to the consolidated financial statements.
We cannot assure you when the pending strike 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 mining or metal production projects may be subject to additional costs due to community actions and other factors.
In recent years, worldwide mining activity has been pressured by neighboring communities for financial commitments to fund social benefit programs and infrastructure improvements. Our projects in Peru are not exempt from these pressures. Our Tia Maria project in Peru has experienced delays while trying to resolve issues with community groups.
It appears that in the Peruvian mining environment, it is becoming increasingly important to obtain acceptance from local communities for projects in their areas. This may entail demands for substantial investments in community infrastructure and upgrades that must be met in order to proceed with the mining projects.
We are confident that we will move forward with the Tia Maria project. However, we cannot assure you when and that we will incur no additional costs for community infrastructure and upgrades to obtain approval from the communities for current or future mining projects.
In addition, a number of collective action lawsuits and civil action lawsuits have been filed against the Company in Mexico through both federal courts and state courts in Sonora. A number of constitutional lawsuits have also been filed against various government authorities and against the Company. These lawsuits are seeking damages and demand remediation actions to restore the environment. The Company believes that it is not possible to determine the extent of the damages sought and believes the lawsuits are without merit. However, the Company cannot offer any assurances that the outcome of these lawsuits will not have adverse effects on the Company.
Environmental regulation, 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, and 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 had to dedicate more time and money to compliance and remediation activities. Furthermore, the Mexican authorities have become more rigorous and stricter in enforcing Mexican environmental laws. We expect additional laws and regulations will be enacted over time with respect to environmental matters.
Please refer to Note 13 “Commitments and Contingencies—Environmental matters” of our financial statements for further information on this subject.
The potential physical impacts of climate change on our operations are highly uncertain and depend on the geographic location of our facilities. These may include changes in rainfall patterns, water shortages, changes in sea levels, storm patterns and intensities, and temperatures. These effects may adversely impact the cost, production and financial performance of our operations.
We monitor fluctuations in weather patterns in the areas where we operate. Aligned with government efforts, we are working to measure our carbon footprint to reduce our operations’ contributions to greenhouse gases. We also evaluate our water demand, as weather changes may result in increases or decreases that affect our needs.
Efforts to comply with more stringent environmental protection programs in Peru and Mexico and with relevant trade agreements could impose constraints on and imply additional costs for our operations; consequently, we may need to make significant investments in this regard in the future. We cannot assure you that current or future legislative, regulatory or trade developments will not have adverse effects on our business, properties, operating results, financial condition or prospects.
Our mining and metal production projects may expose us to new risks.
Our Company is in the midst of a large expansion program, which may expose us to additional risks in terms of industrial accidents. While we believe our contractors employ safety standards and other procedures to ensure these projects are completed with proper governance, it is possible that increased activity at our sites could cause environmental accidents or endanger human life.
Our business depends upon information technology systems that may be adversely affected by disruptions, damage, failure and risks associated with implementation and integration.
Our operations depend upon information technology systems that may be subject to disruption, damage or failure from different sources, including, without limitation, installation of malicious software, computer viruses, security breaches, cyber-attacks and defects in design. In recent years, cybersecurity incidents have increased in frequency and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and the corruption of data. In 2020, we experienced no material cybersecurity breaches in our systems.
However, given the unpredictability of the timing, nature and scope of information technology disruptions, we could potentially be subject to manipulation or improper use of our systems and networks, operational delays, situations that compromise confidential or otherwise protected information, destruction or corruption of data, security breaches, or financial losses from remedial actions, any of which could have a material adverse effect on the cash flows, competitive position, financial condition or results of our operations.
Applicable law restricts the payment of dividends from our Minera Mexico subsidiary to us.
Our subsidiary, Minera Mexico, is a Mexican company and, as such, may pay dividends only out of net income that has been approved by 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. These legal constraints may limit the ability of Minera Mexico to pay dividends to us, which in turn, may have an impact on our ability to pay stockholder dividends or to service debt.
Global and local market conditions, including the high competitiveness in the copper mining industry, may adversely affect our profitability.
Our industry is cyclical in nature and fluctuates with economic cycles. Therefore, we are subject to the risks arising from adverse changes in domestic and global economic and political conditions, such as lower levels of consumer and corporate confidence, lower business investment, higher unemployment, reduced income and asset values in many areas, currency volatility and limited availability of credit and access to capital. Additionally, we face competition from other copper mining and producing companies around the world. Along these lines, significant competition exists to acquire properties that produce or are capable of producing copper and other metals, and some of our main competitors have consolidated, which makes them more diversified than we are.
We cannot assure you that changes in market conditions, including competition, will not adversely affect our ability to compete in the future on the basis of price or other factors with companies that may benefit from future favorable trading or other arrangements.
We are controlled by Grupo Mexico, which exercises control over our affairs and policies and whose interests may be different from yours.
At December 31, 2020, Grupo Mexico owned indirectly 88.9% of our capital stock. Some of our officers and directors, and those of Minera Mexico, are also directors and/or officers of Grupo Mexico and/or of its affiliates. We cannot assure you that the interests of Grupo Mexico will not conflict with those of our minority stockholders.
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;|
|●||the amount of debt financing that we incur; and|
|●||the approval of capital projects.|
We cannot assure you that an increase in the financial obligations of Grupo Mexico or AMC, which may be attributable to financing or to other reasons, will not result in a scenario in which our parent corporations obtain loans, increase dividends or receive other funding from us.
In addition, we have in the past engaged in, and expect to continue engaging in, transactions with Grupo Mexico and its other affiliates that 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 17 “Related Party Transactions” to the consolidated financial statements.
Unanticipated litigation or negative developments in pending litigation or with respect to other contingencies may adversely affect our financial condition and results of operations.
We are currently, and may in the future become, subject to litigation, arbitration or other legal proceedings with other parties. If rulings are against the Company, these legal proceedings, or others that could be brought against us in the future, may adversely affect our financial position or prospects. For further detailed discussion of pending litigation, please see Note 13 “Commitment and Contingencies—Litigation matters” of the consolidated financial statements.
Developments in the United States, Europe and emerging market countries may adversely affect the Company business, our common stock price and our debt securities.
The business and market value of securities of companies with significant operations in Peru and Mexico is, to varying degrees, affected by the economic policies and market conditions in the United States, Europe and emerging market countries. Although economic policies and conditions in these countries may significantly differ from policies and conditions in Peru or Mexico, the business community’s reactions to developments in any of these countries may adversely affect the Company business or the market value or trading price of securities, including debt securities, of issuers that have significant operations in Peru or Mexico.
In addition, in recent years economic conditions in Mexico have shown increased correlation to U.S. economic conditions. Therefore, changes in economic policies and conditions in the United States could also have a significant adverse effect on Mexican economic conditions, affecting our business, the price of our common stock or debt securities. In 2017, the United States, Canada and Mexico began a discussion to update the North American Free Trade Agreement (“NAFTA”). In September 2018, the three countries reached an agreement on a new trade deal, which will be known as the United States—Mexico—Canada Agreement (“USMCA”). In June 2019, Mexico’s senate ratified the UMSCA. In December 2019, the three countries agreed to a new review of its regional trade pact, also concluding that the USMCA would replace NAFTA. On January 29, 2020, the U.S. ratified the USMCA and its President signed the USMCA into law. On July 1, 2020, the USMCA came into effect.
Although recent developments in the U.S. have reduced political instability, lifted consumer confidence and boosted the U.S. stock market, it is unclear if the U.S. government will enact new policies with regard to China that will reduce or eliminate trade tensions between the two countries. Despite being the COVID-19 pandemic epicenter, China began 2021 with a relatively optimistic economic growth outlook. A slowing in China’s economic growth and copper demand and continued trade tensions between the U.S. and China could result in lower copper prices which could have a material
adverse impact on our business and results of operations. The adoption and expansion of