Company Quick10K Filing
Quick10K
Southern Copper
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$35.43 773 $27,390
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-04-29 Earnings, Exhibits
8-K 2019-04-25 Shareholder Vote
8-K 2019-04-11 Officers
8-K 2019-02-11 Other Events
8-K 2019-02-11 Earnings, Exhibits
8-K 2018-10-24 Earnings, Exhibits
8-K 2018-10-18 Other Events, Exhibits
8-K 2018-07-24 Earnings, Exhibits
8-K 2018-07-18 Officers
8-K 2018-04-26 Shareholder Vote
8-K 2018-02-21 Other Events
8-K 2018-02-02 Earnings, Exhibits
AMAT Applied Materials 38,870
SWI SolarWinds 5,870
DRH Diamondrock Hospitality 2,150
WAIR Wesco Aircraft Holdings 1,020
TRST Trustco Bank N Y 773
ASPS Altisource Portfolio Solutions 401
NFEC NF Energy Saving 0
JGRI Joshua Gold Resources 0
NULF Nulife Sciences 0
AXPW Axion Power 0
SCCO 2019-03-31
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements
Note 1 - Description of The Business:
Note 2 - Short-Term Investments:
Note 3 - Inventories:
Note 4 - Income Taxes:
Note 5 - Revenue:
Note 6 - Asset Retirement Obligation:
Note 7 - Related Party Transactions:
Note 8 - Benefit Plans:
Note 9 - Commitments and Contingencies:
Note 10 - Segment and Related Information:
Note 11 - Stockholders'Equity:
Note 12 - Fair Value Measurement:
Note 13 - Summary of Significant Accounting Policies:
Note 14 - Leases:
Note 15 - Subsequent Events:
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings:
Item 1A. Risk Factors:
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds:
Item 4. Mine Safety Disclosures:
Item 6. Exhibits
Part II - Other Information
EX-15.0 a19-7251_1ex15d0.htm
EX-31.1 a19-7251_1ex31d1.htm
EX-31.2 a19-7251_1ex31d2.htm
EX-32.1 a19-7251_1ex32d1.htm
EX-32.2 a19-7251_1ex32d2.htm

Southern Copper Earnings 2019-03-31

SCCO 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a19-7251_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended: March 31, 2019

 

or

 

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

 

For the transition period from           to           

 

Commission File Number: 1-14066

 

SOUTHERN COPPER CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

13-3849074

(State or other jurisdiction of incorporation or organization)

 

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

 

1440 East Missouri Avenue Suite 160 Phoenix, AZ

 

85014

(Address of principal executive offices)

 

(Zip Code)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically 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).  Yes x No o

 

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.

 

Large accelerated filer

x

Accelerated filer

o

Non-accelerated filer

o

Smaller reporting company

o

Emerging growth company

o

 

 

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.  o

 

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

 

As of April 26, 2019 there were outstanding 773,044,469 shares of Southern Copper Corporation common stock, par value $0.01 per share.

 

 

 


Table of Contents

 

Southern Copper Corporation (“SCC”)

 

INDEX TO FORM 10-Q

 

 

 

 

 

Page No.

 

 

 

 

 

Part I. Financial Information:

 

 

 

 

 

 

 

Item. 1

 

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Earnings for the three months ended March 31, 2019 and 2018

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018

 

4

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Changes in Equity for the three months ended March 31, 2019 and 2018

 

7

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8-30

 

 

 

 

 

Item 2.

 

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

 

31-44

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosure about Market Risk

 

44-45

 

 

 

 

 

Item 4.

 

Controls and procedures

 

46

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

47

 

 

 

 

 

Part II. Other Information:

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

48

 

 

 

 

 

Item 1A.

 

Risk Factors

 

48

 

 

 

 

 

Item 2.

 

Unregistered Sale of Equity Securities and Use of Proceeds

 

48

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

48

 

 

 

 

 

Item 6.

 

Exhibits

 

49-51

 

 

 

 

 

 

 

List of Exhibits

 

52-54

 

 

 

 

 

 

 

Signatures

 

55

 

 

 

 

 

Exhibit 15

 

Independent Accountants’ Awareness Letter

 

1

 

 

 

 

 

Exhibit 31.1

 

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

 

1

 

 

 

 

 

Exhibit 31.2

 

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

 

1

 

 

 

 

 

Exhibit 32.1

 

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

 

1

 

 

 

 

 

Exhibit 32.2

 

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

 

1

 

2


Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.  Condensed Consolidated Financial Statements

 

Southern Copper Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

2018

 

 

 

(in millions, except per share
amounts)

 

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

 

$

1,753.4

 

$

1,841.1

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

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

 

844.1

 

876.5

 

Selling, general and administrative

 

28.5

 

24.1

 

Depreciation, amortization and depletion

 

181.6

 

162.0

 

Exploration

 

5.5

 

5.2

 

Total operating costs and expenses

 

1,059.7

 

1,067.8

 

 

 

 

 

 

 

Operating income

 

693.7

 

773.3

 

 

 

 

 

 

 

Interest expense

 

(90.1

)

(90.3

)

Capitalized interest

 

12.3

 

21.1

 

Other income (expense)

 

5.4

 

(2.3

)

Interest income

 

3.7

 

2.6

 

Income before income taxes

 

625.0

 

704.4

 

 

 

 

 

 

 

Income taxes (including royalty taxes, see Note 4)

 

237.9

 

236.6

 

Net income before equity earnings of affiliate

 

387.1

 

467.8

 

Equity earnings of affiliate, net of income tax

 

2.1

 

4.1

 

 

 

 

 

 

 

Net income

 

389.2

 

471.9

 

 

 

 

 

 

 

Less: Net income attributable to the non-controlling interest

 

1.0

 

1.2

 

 

 

 

 

 

 

Net income attributable to SCC

 

$

388.2

 

$

470.7

 

 

 

 

 

 

 

Per common share amounts attributable to SCC:

 

 

 

 

 

Net earnings - basic and diluted

 

$

0.50

 

$

0.61

 

Dividends paid

 

$

0.40

 

$

0.30

 

Weighted average shares outstanding - basic and diluted

 

773.0

 

773.0

 

 

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

 

3


Table of Contents

 

Southern Copper Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

2018

 

 

 

(in millions)

 

Net income and comprehensive income

 

$

389.2

 

$

471.9

 

Comprehensive income attributable to the non-controlling interest

 

1.0

 

1.2

 

Comprehensive income attributable to SCC

 

$

388.2

 

$

470.7

 

 

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

 

4


Table of Contents

 

Southern Copper Corporation

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

 

 

(in millions)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

737.0

 

$

844.6

 

Short-term investments

 

213.5

 

213.8

 

Accounts receivable trade

 

876.6

 

822.4

 

Accounts receivable other (including related parties 2019 - $98.2 and 2018 - $101.5)

 

158.8

 

150.2

 

Inventories

 

1,035.6

 

1,032.7

 

Prepaid taxes

 

129.6

 

87.0

 

Other current assets

 

31.3

 

29.3

 

Total current assets

 

3,182.4

 

3,180.0

 

 

 

 

 

 

 

Property and mine development, net

 

9,383.6

 

9,403.8

 

Ore stockpiles on leach pads

 

1,182.0

 

1,177.4

 

Intangible assets, net

 

147.3

 

147.7

 

Right-of-use assets

 

1,092.5

 

 

Deferred income tax

 

367.5

 

400.9

 

Equity method investment

 

104.7

 

103.6

 

Other assets

 

82.6

 

71.4

 

Total assets

 

$

15,542.6

 

$

14,484.8

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable (including related parties 2019 - $66.4 and 2018 - $75.3)

 

$

587.3

 

$

673.4

 

Accrued income taxes

 

118.0

 

232.8

 

Accrued workers’ participation

 

188.2

 

206.7

 

Accrued interest

 

133.1

 

83.9

 

Lease liabilities current

 

65.8

 

 

Other accrued liabilities

 

31.0

 

19.5

 

Total current liabilities

 

1,123.4

 

1,216.3

 

 

 

 

 

 

 

Long-term debt

 

5,960.9

 

5,960.1

 

Lease liabilities

 

1,026.7

 

 

Deferred income taxes

 

206.5

 

202.6

 

Non-current taxes payable

 

207.1

 

207.1

 

Other liabilities and reserves

 

76.6

 

68.2

 

Asset retirement obligation

 

248.6

 

217.7

 

Total non-current liabilities

 

7,726.4

 

6,655.7

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Common stock

 

8.8

 

8.8

 

Additional paid-in capital

 

3,400.4

 

3,393.7

 

Retained earnings

 

6,265.7

 

6,186.9

 

Accumulated other comprehensive income

 

(2.4

)

(2.4

)

Treasury stock, at cost, common shares

 

(3,026.0

)

(3,019.6

)

Total Southern Copper Corporation stockholders’ equity

 

6,646.5

 

6,567.4

 

Non-controlling interest

 

46.3

 

45.4

 

Total equity

 

6,692.8

 

6,612.8

 

 

 

 

 

 

 

Total liabilities and equity

 

$

15,542.6

 

$

14,484.8

 

 

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

 

5


Table of Contents

 

Southern Copper Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

3 Months Ended

 

 

 

March 31,

 

 

 

2019

 

2018

 

 

 

(in millions)

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

389.2

 

$

471.9

 

 

 

 

 

 

 

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

 

 

 

 

 

Depreciation, amortization and depletion

 

181.6

 

162.0

 

Equity earnings of affiliate, net of dividends received

 

(1.1

)

(0.3

)

Loss on foreign currency transaction effect

 

2.3

 

26.4

 

Benefit from deferred income taxes

 

38.9

 

(23.9

)

Other, net

 

3.6

 

(1.2

)

 

 

 

 

 

 

Change in operating assets and liabilities:

 

 

 

 

 

(Increase) decrease in accounts receivable

 

(54.2

)

16.7

 

(Increase) in inventories

 

(7.5

)

(59.4

)

(Decrease) increase in accounts payable and accrued liabilities

 

(132.9

)

83.4

 

(Decrease) increase in other operating assets and liabilities

 

(48.6

)

(25.8

)

Net cash provided by operating activities

 

371.3

 

649.8

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Capital investments

 

(173.1

)

(295.7

)

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

 

0.3

 

(6.0

)

Proceeds from sale of property

 

 

0.3

 

Net cash used in investing activities

 

(172.8

)

(301.4

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Cash dividends paid to common stockholders

 

(309.2

)

(231.9

)

SCC shareholder derivative lawsuit — received from AMC

 

36.5

 

 

SCC shareholder derivative lawsuit — dividend paid

 

(36.5

)

 

Other

 

(0.1

)

(0.9

)

Net cash used in financing activities

 

(309.3

)

(232.8

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

3.2

 

(52.2

)

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(107.6

)

63.4

 

Cash and cash equivalents at beginning of period

 

844.6

 

1,004.8

 

Cash and cash equivalents at end of period

 

$

737.0

 

$

1,068.2

 

 

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

 

6


Table of Contents

 

Southern Copper Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

 

 

 

3 Months Ended
March 31,

 

 

 

2019

 

2018

 

 

 

(in millions)

 

TOTAL EQUITY, beginning of period

 

$

6,612.8

 

$

6,149.4

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY, beginning of period

 

6,567.4

 

6,107.7

 

 

 

 

 

 

 

CAPITAL STOCK:

 

 

 

 

 

Balance at beginning and end of period

 

8.8

 

8.8

 

 

 

 

 

 

 

ADDITIONAL PAID-IN CAPITAL:

 

 

 

 

 

Balance at beginning of period

 

3,393.7

 

3,373.3

 

Other activity of the period

 

6.7

 

6.8

 

Balance at end of period

 

3,400.4

 

3,380.1

 

 

 

 

 

 

 

TREASURY STOCK:

 

 

 

 

 

Southern Copper common shares

 

 

 

 

 

Balance at beginning and end of period

 

(2,768.3

)

(2,768.7

)

 

 

 

 

 

 

Parent Company common shares

 

 

 

 

 

Balance at beginning of period

 

(251.3

)

(232.4

)

Other activity, including dividend, interest and foreign currency transaction effect

 

(6.4

)

(6.5

)

Balance at end of period

 

(257.7

)

(238.9

)

 

 

 

 

 

 

Treasury stock balance at end of period

 

(3,026.0

)

(3,007.6

)

 

 

 

 

 

 

RETAINED EARNINGS:

 

 

 

 

 

Balance at beginning of period

 

6,186.9

 

5,726.2

 

Net earnings

 

388.2

 

470.7

 

Dividends declared and paid, common stock, per share, 2019 - $0.40, 2018 — $0.30

 

(309.2

)

(231.9

)

SCC shareholder derivative lawsuit — received from AMC

 

36.5

 

 

SCC shareholder derivative lawsuit — dividend paid

 

(36.5

)

 

Other activity of the period

 

(0.2

)

 

Balance at end of period

 

6,265.7

 

5,965.0

 

 

 

 

 

 

 

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

Balance at beginning and end of period

 

(2.4

)

0.5

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY, end of period

 

6,646.5

 

6,346.8

 

 

 

 

 

 

 

NON-CONTROLLING INTEREST, beginning of period

 

45.4

 

41.7

 

Net earnings

 

1.0

 

1.2

 

Distributions paid

 

(0.1

)

(0.3

)

NON-CONTROLLING INTEREST, end of period

 

46.3

 

42.6

 

 

 

 

 

 

 

TOTAL EQUITY, end of period

 

$

6,692.8

 

$

6,389.4

 

 

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

 

7


 

Table of Contents

 

Southern Copper Corporation

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 — DESCRIPTION OF THE BUSINESS:

 

The Company is a majority-owned, indirect subsidiary of Grupo Mexico S.A.B. de C.V. (“Grupo Mexico”). At March 31, 2019, Grupo Mexico through its wholly-owned subsidiary Americas Mining Corporation (“AMC”) owned 88.9% of the Company’s capital stock. The condensed consolidated financial statements presented herein consist of the accounts of Southern Copper Corporation (“SCC” or the “Company”), a Delaware corporation, and its subsidiaries. The Company is an integrated producer of copper and other minerals, and operates mining, smelting and refining facilities in Peru and Mexico. The Company conducts its primary operations in Peru through a registered branch (the “Peruvian Branch” or “Branch” or “SPCC Peru Branch”). The Peruvian Branch is not a corporation separate from the Company. The Company’s Mexican operations are conducted through subsidiaries. The Company also conducts exploration activities in Argentina, Chile, Ecuador, Mexico and Peru.

 

In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to state fairly the Company’s financial position as of March 31, 2019 and the results of operations, comprehensive income, cash flows and changes in equity for the three months ended March 31, 2019 and 2018. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the full year. The December 31, 2018 balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America (“GAAP”). The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements at December 31, 2018 and notes included in the Company’s 2018 annual report on Form 10-K.

 

NOTE 2 — SHORT-TERM INVESTMENTS:

 

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

 

 

 

At March 31,

 

At December 31,

 

 

 

2019

 

2018

 

Trading securities

 

$

212.7

 

$

213.1

 

Weighted average interest rate

 

2.5

%

2.2

%

 

 

 

 

 

 

Available-for-sale

 

$

0.8

 

$

0.7

 

Weighted average interest rate

 

0.7

%

0.7

%

Total

 

$

213.5

 

$

213.8

 

 

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

 

Available-for-sale investments consist of securities issued by public companies. Each security is independent of the others and at March 31, 2019 and December 31, 2018, included corporate bonds and asset and mortgage backed obligations. As of March 31, 2019 and December 31, 2018, gross unrealized gains and losses on available-for-sale securities were not material.

 

Related to these investments the Company earned interest, which was recorded as interest income in the condensed consolidated statement of earnings. Also, the Company redeemed some of these securities and recognized gains (losses) due to changes in fair value, which were recorded as other income (expense) in the condensed consolidated statement of earnings.

 

8


Table of Contents

 

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

 

 

 

Three months ended
March 31,

 

 

 

2019

 

2018

 

Trading:

 

 

 

 

 

Interest earned

 

$

0.1

 

$

0.1

 

Unrealized (loss) gain at the end of the period

 

$

(0.1

)

$

(0.1

)

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

Interest earned

 

(*

)

(*

)

Investment redeemed

 

$

 

$

0.1

 

 


(*) Less than $0.1 million.

 

NOTE 3 - INVENTORIES:

 

Inventories were as follows:

 

(in millions)

 

At March 31,
2019

 

At December 31,
2018

 

 

 

 

 

 

 

Inventory, current:

 

 

 

 

 

Metals at average cost:

 

 

 

 

 

Finished goods

 

$

54.1

 

$

69.6

 

Work-in-process

 

250.7

 

256.8

 

Ore stockpiles on leach pads

 

351.7

 

328.0

 

Supplies at average cost:

 

379.1

 

378.3

 

Total current inventory

 

$

1,035.6

 

$

1,032.7

 

 

 

 

 

 

 

Inventory, non-current:

 

 

 

 

 

Ore stockpiles on leach pads

 

$

1,182.0

 

$

1,177.4

 

 

In the first quarter 2019 and 2018, total leaching costs capitalized as non-current inventory of ore stockpiles on leach pads amounted to $122.3 million and $126.5 million, respectively. Leaching inventories recognized in cost of sales amounted to $94.1 million and $79.5 million for the first quarter 2019 and 2018, respectively.

 

NOTE 4 — INCOME TAXES:

 

The income tax provision and the effective income tax rate for the first quarter 2019 and 2018 consisted of ($ in millions):

 

 

 

2019

 

2018

 

Statutory income tax provision

 

$

214.7

 

$

212.3

 

Peruvian royalty

 

0.4

 

1.7

 

Mexican royalty

 

16.7

 

16.1

 

Peruvian special mining tax

 

6.1

 

6.5

 

Income tax provision

 

$

237.9

 

$

236.6

 

 

 

 

 

 

 

Effective income tax rate

 

38.1

%

33.6

%

 

These provisions include income taxes for Peru, Mexico and the United States. In addition, the Mexican royalty, the Peruvian royalty and the Peruvian special mining tax are included in the income tax provision. The increase in the effective tax rate for the first quarter of 2019 from the same period in the prior year is primarily due to the movement in exchange gain or loss from the appreciation in 2019 of the Mexican peso versus the U.S. dollar measured against the devaluation of the Mexican peso in the same period of 2018, and a SAB 118 adjustment to the valuation allowance in the first quarter of 2018, which is not applicable for the first quarter of 2019.

 

Peruvian royalty and special mining tax: The mining royalty charge is based on operating income margins with graduated rates ranging from 1% to 12% of operating profits, with a minimum royalty charge assessed at 1% of net sales. If the operating

 

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income margin is 10% or less, the royalty charge is 1% and for each 5% increment in the operating income margin, the royalty charge rate increases by 0.75%, up to a maximum of 12%. The minimum royalty charge assessed at 1% of net sales is recorded as cost of sales and those amounts assessed against operating income are included in the income tax provision. The Company has accrued $6.0 million and $7.1 million of royalty charge in the first quarter 2019 and 2018, respectively, of which $0.4 million and $1.7 million were included in income taxes in 2019 and 2018, respectively.

 

The special mining tax is based on operating income and its rate ranges from 2% to 8.4%. It begins at 2% for operating income margin up to 10% and increases by 0.4% of operating income for each additional 5% of operating income until 85% of operating income is reached. The Company has accrued $6.1 million and $6.5 million of special mining tax as part of the income tax provision for the first quarter 2019 and 2018, respectively.

 

Mexican mining royalty: Mexico has 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. The Company has accrued $16.7 million and $16.1 million of royalty taxes as part of the income tax provision for the first quarter 2019 and 2018, respectively. In the first quarter of 2019, the Company has paid $85.9 million for year 2018 mining royalty.

 

Accounting for uncertainty in income taxes: In the first quarter of 2019, there were no changes in the Company’s uncertain tax positions.

 

NOTE 5 — REVENUE:

 

On January 1, 2018, the Company adopted FASB Accounting Standards Codification Topic 606 (“ASC 606”), Revenue from Contracts with Customers. Upon adoption by the Company, no cumulative effect adjustment was required to be recognized, as the adoption of the standard did not result in a change to the way the Company recognizes its revenue.

 

The Company’s net sales were $1,753.4 million in the three months ended March 31, 2019, compared to $1,841.1 million in the same period of 2018. The geographic breakdown of the Company’s sales is as follows (in millions):

 

 

 

Three Months Ended March 31, 2019

 

 

 

Mexican
Open-Pit

 

Mexican
IMMSA Unit

 

Peruvian
Operations

 

Corporate &
Elimination

 

Consolidated

 

The Americas:

 

 

 

 

 

 

 

 

 

 

 

Mexico

 

$

351.3

 

$

86.8

 

$

 

$

(19.9

)

$

418.2

 

United States

 

279.0

 

1.4

 

6.7

 

 

287.1

 

Peru

 

1.6

 

 

85.7

 

 

87.3

 

Brazil

 

 

7.2

 

48.3

 

 

55.5

 

Chile

 

1.1

 

 

20.0

 

 

21.1

 

Other American countries

 

12.8

 

0.5

 

1.8

 

 

15.1

 

Europe:

 

 

 

 

 

 

 

 

 

 

 

Switzerland

 

225.4

 

12.0

 

110.4

 

 

347.8

 

Italy

 

29.2

 

5.5

 

47.3

 

 

82.0

 

Spain

 

45.5

 

 

 

 

45.5

 

Other European countries

 

22.9

 

5.8

 

53.9

 

 

82.6

 

Asia:

 

 

 

 

 

 

 

 

 

 

 

Singapore

 

58.5

 

1.8

 

52.6

 

 

112.9

 

Japan

 

9.8

 

 

117.5

 

 

127.3

 

Other Asian countries

 

35.0

 

0.1

 

35.9

 

 

71.0

 

Total

 

$

1,072.1

 

$

121.1

 

$

580.1

 

$

(19.9

)

$

1,753.4

 

 

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Three Months Ended March 31, 2018

 

 

 

Mexican
Open-Pit

 

Mexican
IMMSA Unit

 

Peruvian
Operations

 

Corporate &
Elimination

 

Consolidated

 

The Americas:

 

 

 

 

 

 

 

 

 

 

 

Mexico

 

$

368.8

 

$

111.3

 

$

 

$

(19.6

)

$

460.5

 

United States

 

248.4

 

5.0

 

41.5

 

 

294.9

 

Peru

 

 

 

93.5

 

 

93.5

 

Brazil

 

 

12.6

 

62.9

 

 

75.5

 

Chile

 

 

 

36.0

 

 

36.0

 

Other American countries

 

12.6

 

0.8

 

1.0

 

 

14.4

 

Europe:

 

 

 

 

 

 

 

 

 

 

 

Switzerland

 

82.3

 

9.2

 

43.8

 

 

135.3

 

Italy

 

8.3

 

5.5

 

82.2

 

 

96.0

 

Spain

 

44.5

 

 

 

 

44.5

 

Other European countries

 

51.8

 

4.6

 

25.7

 

 

82.1

 

Asia:

 

 

 

 

 

 

 

 

 

 

 

Singapore

 

143.9

 

 

132.5

 

 

276.4

 

Japan

 

44.2

 

 

115.2

 

 

159.4

 

Other Asian countries

 

63.8

 

0.2

 

8.6

 

 

72.6

 

Total

 

$

1,068.6

 

$

149.2

 

$

642.9

 

$

(19.6

)

$

1,841.1

 

 

The following table presents information regarding the sales value by reporting segment of the Company’s significant products for the three months ended March 31, 2019 and 2018 (in millions):

 

 

 

Three Months Ended March 31, 2019

 

 

 

Mexican
Open-Pit

 

Mexican
IMMSA Unit

 

Peruvian
Operations

 

Corporate &
Elimination

 

Consolidated

 

Copper

 

$

895.1

 

$

11.0

 

$

522.4

 

$

(12.9

)

$

1,415.6

 

Molybdenum

 

90.1

 

 

28.2

 

 

118.3

 

Zinc

 

 

77.1

 

 

(0.4

)

76.7

 

Silver

 

50.4

 

17.3

 

14.9

 

(5.8

)

76.8

 

Other

 

36.5

 

15.7

 

14.6

 

(0.8

)

66.0

 

Total

 

$

1,072.1

 

$

121.1

 

$

580.1

 

$

(19.9

)

$

1,753.4

 

 

 

 

Three Months Ended March 31, 2018

 

 

 

Mexican
Open-Pit

 

Mexican
IMMSA Unit

 

Peruvian
Operations

 

Corporate &
Elimination

 

Consolidated

 

Copper

 

$

909.4

 

$

11.2

 

$

564.0

 

$

(11.2

)

$

1,473.4

 

Molybdenum

 

91.0

 

 

45.3

 

 

136.3

 

Zinc

 

 

95.0

 

 

(0.1

)

94.9

 

Silver

 

42.6

 

20.6

 

15.4

 

(7.5

)

71.1

 

Other

 

25.6

 

22.4

 

18.2

 

(0.8

)

65.4

 

Total

 

$

1,068.6

 

$

149.2

 

$

642.9

 

$

(19.6

)

$

1,841.1

 

 

The opening and closing balances of receivables by reporting segment of the Company were as follows (in millions):

 

 

 

Mexican
Open-Pit

 

Mexican
IMMSA Unit

 

Peruvian
Operations

 

Corporate &
Elimination

 

Consolidated

 

As of March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

Trade receivables

 

$

543.9

 

$

54.0

 

$

278.7

 

$

 

$

876.6

 

Related parties

 

89.2

 

 

 

9.0

 

$

98.2

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

Trade receivables

 

$

505.9

 

$

50.5

 

$

266.0

 

$

 

$

822.4

 

Related parties

 

81.6

 

 

 

19.9

 

101.5

 

 

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As of March 31, 2019, the Company has long-term contracts with promises to deliver the following products in 2019:

 

Copper concentrates (in tons)

 

1,090,000

 

Copper cathodes (in tons)

 

48,000

 

Molybdenum concentrates (in tons)

 

24,106

 

Sulfuric acid (in tons)

 

331,620

 

 

Provisionally priced sales:  At March 31, 2019, the Company has recorded provisionally priced sales of copper at average forward prices per pound, and molybdenum at the March 31, 2019 market price per pound. These sales are subject to final pricing based on the average monthly London Metal Exchange (“LME”), or New York Commodities Exchange (“COMEX”), copper prices and Dealer Oxide molybdenum prices in the future month of settlement.

 

Following are the provisionally priced copper and molybdenum sales outstanding at March 31, 2019:

 

 

 

Sales volume
(million lbs.)

 

Priced at
(per pound)

 

Month of settlement

 

Copper

 

105.0

 

$

2.94

 

April through July 2019

 

Molybdenum

 

10.2

 

$

12.13

 

April through June 2019

 

 

The provisional sales price adjustment included in accounts receivable and net sales at March, 31, 2019 includes positive adjustments of $2.8 million and $4.1 million for copper and molybdenum, respectively.

 

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

 

NOTE 6 - ASSET RETIREMENT OBLIGATION:

 

The Company maintains an asset retirement obligation for its mining properties in Peru, as required by the Peruvian Mine Closure Law. In accordance with the requirements of this law the Company’s closure plans were approved by the Peruvian Ministry of Energy and Mines (“MINEM”). As part of the closure plans, the Company is required to provide annual guarantees over the estimated life of the mines, based on a present value approach, and to furnish the funds for the asset retirement obligation. This law requires a review of closing plans every five years. Currently and for the near-term future, the Company has pledged the value of its Lima office complex and a warehouse in Lima as support for this obligation. The accepted values of these facilities, for this purpose, are of $45.3 million. Through March 2019, the Company has provided guarantees of $37.8 million. The closure cost recognized for this liability includes the cost, as outlined in its closure plans, of dismantling the Toquepala and Cuajone concentrators, the Ilo smelter and refinery, and the shops and auxiliary facilities at the three units. In March 2016, MINEM approved the Mining Closure Plan for the Toquepala expansion project. The closure plan for the Tia Maria project was approved in February 2017. The Company, however, has not recorded a retirement obligation for the Tia Maria project as the construction permit has not been received, and work on the project is on hold. The Company believes that under these circumstances the recording of a retirement obligation is not appropriate. In accordance with requirements of Peruvian law, the Company in December 2017 and February 2018, submitted to MINEM revised closure plans for the Cuajone mine and the Ilo facilities respectively. The revised closure plan for the Ilo facility was approved in January 2019 and after comments received from MINEM, the Company submitted a new revised closure plan for the Cuajone mine. As result of these new estimates, in the first quarter of 2019, the Company has increased the asset retirement obligation by $28.1 million.

 

In 2010, the Company announced to the Mexican federal environmental authorities its closure plans for the copper smelter plant at San Luis Potosi. The Company developed a program for plant demolition and soil remediation with a cost of $66.2 million. In 2016, the environmental authorities approved the conclusion of the remediation effort. The Company continues studying the possibilities for this property in order to decide whether to sell or develop the property. The Company has recognized an estimated asset retirement obligation for its mining properties in Mexico as part of its environmental commitment. Even though there is currently no enacted law, statute, ordinance, written or oral contract requiring the Company to carry out mine closure and environmental remediation activities, the Company believes that a constructive obligation presently exists based on the remediation requirements caused by the closure of any facility. The overall cost recognized for mining closure in Mexico includes the estimated costs of dismantling concentrators, smelter and refinery plants, shops and other facilities. During 2018, the Company made a change in the estimate for the asset retirement obligation in its Mexican operations, mainly due to a change in the discount rate used to determine such obligation. The effect of this change was a reduction in the asset retirement obligation of $10.4 million, which was recorded in the second quarter of 2018.

 

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Table of Contents

 

The following table summarizes the asset retirement obligation activity for the three months ended March 31, 2019 and 2018 (in millions):

 

 

 

2019

 

2018

 

Balance as of January 1

 

$

217.7

 

$

222.5

 

Changes in estimates

 

28.1

 

(5.2

)

Payments

 

(0.2

)

 

Accretion expense

 

3.0

 

3.2

 

Balance as of March 31,

 

$

248.6

 

$

220.5

 

 

NOTE 7 — RELATED PARTY TRANSACTIONS:

 

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

 

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

 

 

 

At March 31,

 

At December 31,

 

 

 

2019

 

2018

 

Related parties receivable current:

 

 

 

 

 

Grupo Mexico and affiliates:

 

 

 

 

 

Asarco LLC

 

$

74.6

 

$

74.4

 

AMC

 

 

11.0

 

AMMINCO Apoyo Administrativo, S.A. de C.V. (“AMMINCO”)

 

 

0.2

 

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

 

1.0

 

1.4

 

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

 

0.1

 

0.1

 

Grupo Mexico

 

2.7

 

2.7

 

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

 

18.0

 

10.3

 

Mexico Proyectos y Desarrollos, S.A. de C.V. and affiliates (“MPD”)

 

0.5

 

0.6

 

 

 

 

 

 

 

Related to the controlling group:

 

 

 

 

 

Boutique Bowling de Mexico, S.A. de C.V.

 

0.3

 

0.3

 

Empresarios Industriales de Mexico, S.A. de C.V.

 

0.1

 

 

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

 

0.5

 

0.1

 

Operadora de Cinemas, S.A. de C.V.

 

0.4

 

0.4

 

 

 

$

98.2

 

$

101.5

 

 

 

 

 

 

 

Related parties payable:

 

 

 

 

 

Grupo Mexico and affiliates:

 

 

 

 

 

Asarco LLC

 

$

6.6

 

$

4.1

 

AMMINCO

 

2.4

 

8.0

 

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

 

1.0

 

1.0

 

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

 

7.6

 

6.4

 

Grupo Mexico

 

0.8

 

0.6

 

MGE

 

36.7

 

40.6

 

MPD

 

11.2

 

14.4

 

 

 

 

 

 

 

Related to the controlling group:

 

 

 

 

 

Boutique Bowling de Mexico, S.A. de C.V.

 

0.1

 

0.1

 

Operadora de Cinemas, S.A. de C.V.

 

(*

)

0.1

 

 

 

$

66.4

 

$

75.3

 

 


(*) amount is lower than $0.1 million

 

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Table of Contents

 

Purchase and sale activity:

 

Grupo Mexico and affiliates:

 

The following table summarizes the purchase and sale activities with Grupo Mexico and its affiliates in the three months ended March 31, 2019 and 2018 (in millions):

 

 

 

2019

 

2018

 

Purchase activity

 

 

 

 

 

Asarco LLC

 

$

10.0

 

$

6.8

 

AMMINCO

 

2.4

 

 

Eolica El Retiro

 

0.8

 

0.6

 

Ferrocarril Mexicano, S.A de C.V.

 

10.6

 

10.0

 

Grupo Mexico

 

2.5

 

4.5

 

MGE

 

55.2

 

61.9

 

MPD

 

10.8

 

15.9

 

Total purchases

 

$

92.3

 

$

99.7

 

 

 

 

 

 

 

Sales activity

 

 

 

 

 

Asarco LLC

 

$

2.0

 

$

36.5

 

MGE

 

15.1

 

23.2

 

Total sales

 

$

17.1

 

$

59.7

 

 

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

 

In the first quarter of 2019, the Company made donations of $3.4 million to Fundacion Grupo Mexico A.C., an organization dedicated to promoting the social and economic development of the communities close to the Company’s Mexican operations.

 

In addition, in December 2018, in accordance with the Company´s tax sharing agreement with its parent, the Company´s Peruvian operations advanced $11 million to AMC for the payment of the Company’s portion of the GILTI tax that later was determined not to be necessary. In the first quarter of 2019, this amount was reimbursed to the Company.

 

The Company’s Mexican operations paid fees for freight services provided by Ferrocarril Mexicano, S.A de C.V. and for construction services provided by Mexico Proyectos y Desarrollos, S.A. de C.V. and its affiliates. All of these companies are subsidiaries of Grupo Mexico.

 

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

 

In 2005, the Company organized MGE, as a subsidiary of Minera Mexico, for the construction of two power plants to supply power to the Company’s Mexican operations. In May 2010, the Company’s Mexican operations granted a $350 million line of credit to MGE for the construction of the power plants. That line of credit was due on December 31, 2012 and carried an interest rate of 4.4%. In the first quarter of 2012, an indirect subsidiary of Grupo Mexico, acquired 99.999% of MGE through a capital subscription of 1,928.6 million of Mexican pesos (approximately $150 million), reducing Minera Mexico’s participation to less than 0.001%. As consequence of this change in control, MGE became an indirect subsidiary of Grupo Mexico. Additionally, at the same time, MGE paid $150 million to the Company’s Mexican operations partially reducing the total debt. The remaining balance was repaid in the third quarter of 2016.

 

In 2012, the Company signed a power purchase agreement with MGE, whereby MGE will supply some of the Company’s Mexican operations with power through 2032. MGE has two natural gas-fired combined cycle power generating units, with a net total capacity of 516.2 megawatts and has been supplying power to the Company since December 2013. Currently, MGE is supplying 2.1% of its power output to third-party energy users; compared to 14% at March 31, 2018.

 

In 2014, Mexico Generadora de Energia Eolica, S. de R.L. de C.V, an indirect subsidiary of Grupo Mexico, located in Oaxaca, Mexico, acquired Eolica el Retiro. Eolica el Retiro is a windfarm with 37 wind turbines. This company started operations in January 2014 and started to sell power to Industrial Minera Mexico and subsidiaries (IMMSA) and other subsidiaries of Grupo

 

14


Table of Contents

 

Mexico in the third quarter of 2014. Currently, Eolica el Retiro is supplying approximately 20.9% of its power output to IMMSA.

 

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

 

Companies with relationships to the controlling group:

 

The following table summarizes the purchase and sales activities with other Larrea family companies in the three months ended March 31, 2019 and 2018 (in millions):

 

 

 

2019

 

2018

 

Purchase activity

 

 

 

 

 

Boutique Bowling de Mexico, S.A. de C.V.

 

$

0.1

 

$

0.1

 

Operadora de Cinemas, S.A. de C.V.

 

(*

)

(*

)

Mextransport

 

 

0.2

 

Total purchases

 

$

0.1

 

$

0.3

 

 

 

 

 

 

 

Sales activity

 

 

 

 

 

Boutique Bowling de Mexico, S.A. de C.V.

 

$

(*

)

$

0.1

 

Empresarios Industriales de Mexico, S.A. de C.V.

 

0.1

 

 

Operadora de Cinemas, S.A. de C.V.

 

(*

)

(*

)

Mextransport

 

0.5

 

0.1

 

Total sales

 

$

0.6

 

$

0.2

 

 


(*) amount is lower than $0.1 million

 

The Larrea family controls a majority of the capital stock of Grupo Mexico, and has extensive interests in other businesses, including transportation, real estate and entertainment. The Company engages in certain transactions in the ordinary course of business with other entities controlled by the Larrea family relating to the lease of office space, air transportation and entertainment.

 

The Company’s Mexican operations paid fees for entertainment services provided by Boutique Bowling de Mexico, S.A de C.V. and Operadora de Cinemas, S.A. de C.V. Both companies are controlled by the Larrea family.

 

In addition, the Company received fees for building rental and maintenance provided to Boutique Bowling de Mexico S.A. de C.V., Operadora de Cinemas S.A. de C.V and Mextransport.

 

The Company´s Mexican operations also received fees for surveillance services provided to Empresarios Industriales de Mexico, S.A. de C.V. This is a company controlled by the Larrea family.

 

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

 

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

 

In the first quarter of 2019, the Company did not have purchase or sales activities with companies having relationships with SCC executive officers.

 

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NOTE 8 — BENEFIT PLANS:

 

Post retirement defined benefit plans:

 

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

 

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

 

The components of net periodic benefit costs for the three months ended March 31, 2019 and 2018 are as follows (in millions):

 

 

 

2019

 

2018

 

Service cost

 

$

0.3

 

$

0.3

 

Interest cost

 

0.4

 

0.4

 

Expected return on plan assets

 

(0.8

)

(0.9

)

Amortization of net actuarial loss

 

(*

)

(*

)

Amortization of net loss/(gain)

 

(*

)

(*

)

Net periodic benefit costs

 

$

(0.1

)

$

(0.2

)

 


(*) amount is lower than $0.1 million

 

Post-retirement health care plans:

 

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

 

In Mexico, health services are provided by the Mexican Social Security Institute.

 

The components of net periodic benefit cost for the three months ended March 31, 2019 and 2018 are as follows (in millions):

 

 

 

2019

 

2018

 

Interest cost

 

$

0.2

 

$

0.2

 

Amortization of net loss (gain)

 

(*

)

(*

)

Amortization of prior service cost (credit)

 

(*

)

(*

)

Net periodic benefit cost

 

$

0.2

 

$

0.2

 

 


(*) amount is lower than $0.1 million

 

NOTE 9 — COMMITMENTS AND CONTINGENCIES:

 

Environmental matters:

 

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

 

Environmental capital investments in the three months ended March 31, 2019 and 2018 were as follows (in millions):

 

 

 

2019

 

2018

 

Peruvian operations

 

$

10.2

 

$

6.5

 

Mexican operations

 

9.0

 

19.9

 

 

 

$

19.2

 

$

26.4

 

 

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Peruvian operations: The Company’s operations are subject to applicable Peruvian environmental laws and regulations. The Peruvian government, through the Ministry of Environment (“MINAM”) conducts annual audits of the Company’s Peruvian mining and metallurgical operations. Through these environmental audits, matters related to environmental obligation, compliance with legal requirements, atmospheric emissions, effluent monitoring and waste management are reviewed. The Company believes that it is in material compliance with applicable Peruvian environmental laws and regulations. Peruvian law requires that companies in the mining industry provide assurances for future mine closure and remediation. In accordance with the requirements of this law, the Company’s closure plans were approved by MINEM. See Note 6 “Asset retirement obligation,” for further discussion of this matter.

 

Air Quality Standards (“AQS”): In June 2017, MINAM enacted a supreme decree which defines new AQS for daily sulfur dioxide in the air. The Company believes that these new AQS will allow Peruvian industry to be more competitive with other countries. As of March 31, 2019, the Company maintains a lower daily average level of µg/m3 of SO2, than those required by the new AQS.

 

Soil Environmental Quality Standards (“SQS”): In 2013, the Peruvian government enacted SQS applicable to any existing facility or project that generates or could generate the risk of soil contamination in its area of operation or influence. In March 2014, MINAM issued a supreme decree, which established additional provisions for the gradual implementation of SQS.

 

In accordance with the regulatory requirements, the Company has been working on a characterization phase and a Soil Decontamination Plan (“SDP”) for environmentally impacted sites in each of its operating units (Toquepala, Cuajone, and Ilo) with the assistance of consulting companies. It is estimated that the Toquepala and Cuajone SDP will be presented to the authorities for review and approval at the end of the second quarter of 2019, and the Ilo SDP will be submitted during the third quarter of 2019.

 

While the Company believes that there is a reasonable possibility that a potential loss contingency may exist, it cannot currently reasonably estimate the amount of the contingency. The Company believes that a reasonable determination of the loss will be possible once the characterization study and the SDP are substantially completed and approved, which is expected for 2020. At that time the Company will be in a position to estimate the remediation cost. Furthermore, the Company does not believe that it can estimate a reasonable range of possible costs until the noted studies have substantially progressed and therefore is not able to disclose a range of costs that is meaningful.

 

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

 

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

 

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

 

In 2013, the Environmental Liability Federal Law was enacted. The law establishes general guidelines for actions to be considered to likely cause environmental harm. If a possible determination regarding harm occurs, environmental clean-up and remedial actions sufficient to restore environment to a pre-existing condition should be taken. Under this law, if restoration is not possible, compensation measures should be provided. Criminal penalties and monetary fines can be imposed under this law.

 

On February 2019, the Mexican Supreme Court confirmed the constitutionality of an ecological tax to extractive activities developed in the state of Zacatecas, which taxes the environmental remediation actions, emissions of certain gases to the

 

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atmosphere, emissions of pollutant substances to the soil or water, and waste storage within the state territory. The Company is evaluating the potential impact of this new environmental regulation in its financial position.

 

The Company believes that all of its facilities in Peru and Mexico are in material compliance with applicable environmental, mining and other laws and regulations. The Company also believes that continued compliance with environmental laws of Mexico and Peru will not have a material adverse effect on the Company’s business, properties, result of operations, financial condition or prospects and will not result in material capital investments.

 

Litigation matters:

 

Peruvian operations

 

The Tia Maria Mining Project

 

There are three lawsuits filed against the Peruvian Branch of the Company related to the Tia Maria project. The lawsuits seek (i) to declare null and void the resolution which approved the Environmental Impact Assessment of the project; (ii) the cancellation of the project and the withdrawal of mining activities in the area and (iii) to declare null and void the mining concession application of the Tia Maria project. The lawsuits were filed by Messrs. Jorge Isaac del Carpio Lazo (filed May 22, 2015), Ernesto Mendoza Padilla (filed May 26, 2015) and Juan Alberto Guillen Lopez (filed June 18, 2015).

 

The del Carpio Lazio case was rejected by the court of first instance on November 14, 2016. The plaintiff filed an appeal before the Superior Court on January 3, 2017. On January 9, 2018, the lawyers of both parties presented their respective positions before the Appellate Court. On March 8, 2018, the Appellate Court issued its final decision, which upholds the first instance ruling. On April 27, 2018, the plaintiff filed an extraordinary appeal before the Supreme Court. As of March 31, 2019, the case remains pending resolution.

 

The Mendoza Padilla case was initially rejected by the lower court on July 8, 2015. This ruling was confirmed by the Superior Court on June 14, 2016. On July 12, 2016, the case was appealed before the Constitutional Court. As of March 31, 2019, the case remains pending resolution without further developments.

 

The Guillen Lopez case is currently before the lower court. As of March 31, 2019, the case remains pending resolution without further developments.

 

The Company asserts that these lawsuits are without merit and is vigorously defending against them. The potential contingency amount for these cases cannot be reasonably estimated by management at this time.

 

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

 

In 2012, the Pasto Grande Project, an entity of the Regional Government of Moquegua, filed a lawsuit against SCC’s Peruvian Branch alleging property rights over a certain area used by the Peruvian Branch and seeking the demolition of the tailings dam where SCC’s Peruvian Branch has deposited its tailings from the Toquepala and Cuajone operations since 1995. The Peruvian Branch has had title to use the area in question since 1960 and has constructed and operated the tailings dams with proper governmental authorization, since 1995. Upon a motion filed by the Peruvian Branch, the lower court has included MINEM as a defendant in this lawsuit. MINEM has answered the complaint and denied the validity of the claim. As of March 31, 2019, the case remains pending resolution without further developments. SCC’s Peruvian Branch asserts that the lawsuit is without merit and is vigorously defending against it. The amount of this contingency cannot be reasonably estimated by management at this time.

 

Mexican operations

 

The Accidental Spill at Buenavista Mine of 2014

 

In relation to the 2014 accidental spill of copper sulfate solution that occurred at a leaching pond of the Buenavista mine, the following legal procedures are pending against the Company:

 

On August 19, 2014, PROFEPA, as part of the administrative proceeding initiated after the spill, announced the filing of a criminal complaint against Buenavista del Cobre S.A. de C.V. (“BVC”), a subsidiary of the Company, in order to determine

 

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those responsible for the environmental damages. During the second quarter of 2018, the criminal complaint was dismissed. This decision was appealed and remains pending resolution as of March 31, 2019.

 

Through the first half of 2015, six collective action lawsuits were filed in federal courts in Mexico City and Sonora against two subsidiaries of the Company seeking economic compensation, clean up and remedial activities in order to restore the environment to its pre-existing conditions. Two of the collective action lawsuits have been dismissed by the court. The plaintiffs in the four remaining lawsuits are: Acciones Colectivas de Sinaloa, A.C. which established two collective actions, Defensa Colectiva A.C.; and Ana Luisa Salazar Medina et al. which has been granted a collective action certification. The remaining plaintiffs have requested cautionary measures on the construction of facilities for the monitoring of public health services and the prohibition of the closure of the Río Sonora Trust. As of March 31, 2019, regarding the case of Ana Luisa Salazar Medina et al, the trial date has expired. Since the plaintiffs were notified of the expiration of their claims and did not appeal the resolution, this lawsuit has concluded, without responsibility for Buenavista del Cobre, S.A. de C.V. The other cases remain pending resolution as of March 31, 2019.

 

Similarly, during 2015, eight civil action lawsuits were filed against BVC in the state courts of Sonora seeking damages for alleged injuries and for moral damages as a consequence of the spill. The plaintiffs in the state court lawsuits are: Jose Vicente Arriola Nunez et al; Santana Ruiz Molina et al; Andres Nogales Romero et al; Teodoro Javier Robles et al; Gildardo Vasquez Carvajal et al; Rafael Noriega Souffle et al; Grupo Banamichi Unido de Sonora El Dorado, S.C. de R.L. de C.V; and Marcelino Mercado Cruz. In 2016, three additional civil action lawsuits, claiming similar damages, were filed by Juan Melquicedec Lebaron; Blanca Lidia Valenzuela Rivera et al and Ramona Franco Quijada et al. In 2017, BVC was served with thirty-three additional civil action lawsuits, claiming similar damages. The lawsuits were filed by Francisco Javier Molina Peralta et al; Anacleto Cohen Machini et al; Francisco Rafael Alvarez Ruiz et al; Jose Alberto Martinez Bracamonte et al; Gloria del Carmen Ramirez Duarte et al; Flor Margarita Sabori et al; Blanca Esthela Ruiz Toledo et al; Julio Alfonso Corral Domínguez et al; Maria Eduwiges Bracamonte Villa et al; Francisca Marquez Dominguez et al; Jose Juan Romo Bravo et al; Jose Alfredo Garcia Leyva et al; Gloria Irma Dominguez Perez et al; Maria del Refugio Romero et al; Miguel Rivas Medina et al; Yolanda Valenzuela Garrobo et al; Maria Elena Garcia Leyva et al; Manuel Alfonso Ortiz Valenzuela et al; Francisco Alberto Arvayo Romero et al; Maria del Carmen Villanueva Lopez et al; Manuel Martin Garcia Salazar; Miguel Garcia Arguelles et al; Dora Elena Rodriguez Ochoa et al; Honora Eduwiges Ortiz Rodriguez et al; Francisco Jose Martinez Lopez et al; Maria Eduwiges Lopez Bustamante; Rodolfo Barron Villa et al, Jose Carlos Martinez Fernandez et al, Maria de los Angeles Fabela et al; Rafaela Edith Haro et al; Luz Mercedes Cruz et al; Juan Pedro Montaño et al; and Juana Irma Alday Villa. During the first quarter of 2018, BVC was served with another civil action lawsuit, claiming similar damages. The lawsuit was filed by Alma Angelina Del Cid Rivera et al. During the last quarter of 2018, BVC was served with other three civil action lawsuits, claiming similar damages, such lawsuits were filed by Los Corrales de la Estancia, S.C. de R.L.; Jose Antonio Navarro; Jesus Maria Peña Molina, et al. As of March 31, 2019, these cases remain pending resolution.

 

During 2015, four constitutional lawsuits (juicios de amparo) were filed before Federal Courts against various authorities and against a subsidiary of the Company, arguing; (i) the alleged lack of a waste management program approved by SEMARNAT; (ii) the alleged lack of a remediation plan approved by SEMARNAT with regard to the August 2014 spill; (iii) the alleged lack of community approval regarding the environmental impact authorizations granted by SEMARNAT to one subsidiary of the Company; and (iv) the alleged inactivity of the authorities with regard of the spill in August 2014. The plaintiffs of these lawsuits are: Francisca Garcia Enriquez, et al which established two lawsuits, Francisco Ramon Miranda, et al and Jesus David Lopez Peralta et al. During the third quarter of 2016, four additional constitutional lawsuits, claiming similar damages were filed by Mario Alberto Salcido et al; Maria Elena Heredia Bustamante et al; Martin Eligio Ortiz Gamez et al; and Maria de los Angeles Enriquez Bacame et al. During the third quarter of 2017, BVC was served with another constitutional lawsuit filed by Francisca García Enriquez et al. In 2018, BVC was served with two additional constitutional lawsuits that were filed against SEMARNAT by Norberto Bustamante et al. Regarding the constitutional lawsuit filed by Maria Elena Heredia Bustamante et al; in which it was claimed the lack of community approval regarding the authorization granted by SEMARNAT to build the new BVC tailings dam, on September 5, 2018, the Supreme Court of Justice issued a resolution which established that such authorization was granted to BVC in compliance with the applicable legislation. However, SEMARNAT must carry out a public meeting to inform the community of the technical aspects required to build the dam, potential impacts and prevention measures, with no material effects to BVC’s operations. As of March 31, 2019, the remaining cases are still pending resolution.

 

It is not currently possible to determine the extent of the damages sought in these state and federal lawsuits but the Company considers that these lawsuits are without merit. Accordingly, the Company is vigorously defending against them. Nevertheless, the Company considers that none of the legal proceedings resulting from the spill, individually or in the aggregate, would have a material effect on its financial position or results of operations.

 

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Corporate operations

 

Carla Lacey, on behalf of herself and all other similarly situated stockholders of Southern Copper Corporation, and derivatively on behalf of Southern Copper Corporation

 

As previously reported, a purported class action derivative lawsuit filed in the Delaware Court of Chancery was served on the Company and its Directors in February 2016 relating to the 2012 capitalization of 99.999% of MGE by Controladora de Infraestructura Energetica Mexico, S.A. de C.V., an indirect subsidiary of Grupo Mexico (the “CIEM Capitalization”), the Company’s entry into a power purchase agreement with MGE in 2012 (the “MGE Power Purchase Agreement”), and the 2012 restructuring of a loan from the Company’s Mexican Operations to MGE for the construction of two power plants to supply power to the Company’s Mexican operations (the “MGE Loan Restructuring”). The action purports to be brought on behalf of the Company and its common stockholders. The complaint alleges, among other things, that the CIEM Capitalization, the MGE Power Purchase Agreement and the MGE Loan Restructuring were the result of breaches of fiduciary duties and the Company’s charter.

 

On March 20, 2018, the parties reached an agreement-in-principle to settle the action. On March 23, 2018, the parties informed the Court of the settlement-in-principle to resolve all claims asserted by Plaintiff against Defendants in the action and requested that the Court stay the action in its entirety pending filing by the parties of a stipulation of settlement. The Parties filed the executed stipulation on August 22, 2018. Under the proposed settlement, Grupo Mexico or Americas Mining would pay to the Company $50 million in cash less any attorneys’ fees (including costs) awarded by the Court to Plaintiff’s counsel (the “Net Settlement Amount”) in return for a release of all derivative and direct claims. A settlement hearing was held on November 27, 2018. On December 27, 2018, the Court issued its ruling approving the $50 million settlement. Pursuant to the Court’s ruling, Plaintiff’s counsel was awarded $13.5 million (for attorneys’ fees, expenses, and a $5,000 incentive fee award to plaintiff Carla Lacey). The remaining $36.5 million was distributed via a special dividend on February 21, 2019 to the Company’s public stockholders (other than the director defendants, Grupo Mexico, Americas Mining, or any entity in which Grupo Mexico or Americas Mining has or had a direct or indirect controlling interest) who held shares of common stock of the Company as of February 11, 2019. As result of the payment of the settlement, the claims against the Defendants have been dismissed with prejudice.

 

In April 2019, a derivative lawsuit was filed against the Company, certain of its current and former Directors, and Grupo México in the Delaware Court of Chancery relating to certain construction contracts, contracts for the purchase and sale of minerals, and transportation contracts entered into between the Company’s subsidiaries and subsidiaries of Grupo México. The complaint alleges, among other things, that the construction contracts, the mineral contracts and the transportation contracts were unfair as a result of breaches of fiduciary duties and the Company’s charter. The complaint seeks, among other things, unspecified monetary damages. The complaint and the summons have not yet been served. The Company believes it has a meritorious defense to this action and that the action will not have an adverse effect on its financial position.

 

Labor matters:

 

Peruvian operations: 70% of the Company’s 4,835 Peruvian employees were unionized at March 31, 2019. Currently, there are six separate unions, one large union and five smaller 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 signed an agreement with one additional union. The agreement also includes 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 the first quarter of 2019.

 

As of March 31, 2019, the Company continues negotiations on collective bargaining agreements with one unsigned union.

 

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

 

The workers of the San Martin mine were on strike since July 2007. On February 28, 2018, the striking workers of the San Martín mine of IMMSA held an election to vote on the union that will hold the collective bargaining agreement at the San Martín mine. The Federacion Nacional de Sindicatos Independientes (the National Federation of Independent Unions), won the vote by a majority. Nevertheless, the vote was challenged by the National Mining Union. On June 26, 2018, the Federal Mediation and Arbitration Board issued a ruling recognizing the election results. Due to the agreement between workers and the Company to end the protracted strike, on August 22, 2018, the Federal Mediation and Arbitration Board authorized the restart of operations of the San Martín mine. Such authorization was challenged by the National Mining Union. On April 4, 2019, the Federal Mediation and Arbitration Board recognized again the election results from February 28, 2018; in which the

 

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National Federation of Independent Unions won by a majority. The Company is working on a rehabilitation plan to restart operations at the San Martin mine with a budget of $87 million. At March 31, 2019 the plan is in progress with a total expense of $34.9 million. The Company continues with plans to restore mining operations and expects to restore copper production in the second quarter of 2019.

 

In the case of the Taxco mine, its workers have been on strike since July 2007. After several legal procedures, in August 2015, the Supreme Court decided to assert jurisdiction over the case and to rule on it directly. As of March 31, 2019, the case remains pending resolution without further developments.

 

It is expected that operations at the Taxco mine will remain suspended until the labor issues are resolved. In view of the lengthy strike, the Company has reviewed the carrying value of the Taxco mine to ascertain whether impairment exists. The Company concluded that there is a non-material impairment of the assets located at this mine.

 

Other legal matters:

 

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

 

Other commitments:

 

Peruvian Operations

 

Tia Maria:

 

On August 1, 2014, the Company received the final approval of Tia Maria´s Environmental Impact Assessment (“EIA”). However, the issuance of the project´s construction permit has been delayed due to pressures from anti-mining groups. The Company continues working with community groups in order to resolve open issues concerning the project. The Company is also working jointly with the Peruvian government to obtain the construction license for this 120,000 ton (annual) SX-EW copper greenfield project. The Company expects the license to be issued in the first half of 2019.

 

Tia Maria´s project budget is approximately $1.4 billion, of which $333.3 million has been invested through March 31, 2019. When completed, it is expected to produce 120,000 tons of copper cathodes per year. This project will use state-of-the-art SX-EW technology with the highest international environmental standards. SX-EW facilities are the most environmentally friendly in the industry as they do not require a smelting process and consequently, no emissions are released into the atmosphere. The project will only use seawater, transporting it more than 25 kilometers to 1,000 meters above sea level, and includes a desalinization plant which will be constructed at a cost of $95 million. Consequently, the Tambo river water resources will be used solely for farming and human consumption.

 

The Company expects the project to generate 9,000 jobs (3,600 direct and 5,400 indirect) during the construction phase. When in operation, Tia Maria will directly employ 600 workers and indirectly provide jobs to another 4,200. Through its expected twenty-year life, the project related services will create significant business opportunities in the Arequipa region.

 

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

 

Michiquillay:

 

In June 2018, the Company signed a contract for the acquisition of the Michiquillay copper project in Cajamarca, Peru, at a purchase price of $400 million. Michiquillay is a world class mining project with estimated mineralized material of 1,150 million tons and a copper grade of 0.63%. It is expected to produce 225,000 tons of copper per year (along with by-products of molybdenum, gold and silver) for an initial mine life of more than 25 years.

 

The Company paid $12.5 million at the signing of the contract. The balance of $387.5 million will be paid if the Company decides to develop the project and it is not a present obligation.

 

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Toquepala Concentrator Expansion:

 

In April 2015, the construction permit for the Toquepala expansion project was approved by the MINEM. The project budget is $1,320 million, of which $1,240.9 million has been invested through March 31, 2019. When completed, this project is expected to increase Toquepala’s annual copper production to 258,000 tons in 2019, a 52% production increase, when compared to 2018. The construction of the project was completed and the project began production in the fourth quarter of 2018.  Full production is expected to be reached by the second quarter of 2019.

 

Corporate Social Responsibility:

 

The Company has a corporate social responsibility policy to maintain and promote continuity of its mining operations and obtain the best results. The main objective of this policy is to integrate its operations with the local communities in the areas of influence of its operations by creating a permanent positive relationship with them, in order to develop the optimum social conditions and to promote sustainable development in the area. Accordingly, the Company has made the following commitments:

 

Tacna Region: In connection with the Toquepala concentrator expansion, the Company has committed to fund various social and infrastructure improvement projects in Toquepala’s neighboring communities. The total amount committed for these purposes is S/ 445.0 million (approximately $131.7 million).

 

Moquegua Region: In the Moquegua region, the Company is part of a “development roundtable” in which the local municipal authorities, the community representatives and the Company discuss the social needs and the way the Company could contribute to sustainable development in the region. As part of this, the roundtable is discussing the creation of a Moquegua Region Development Fund for which the Company has offered a contribution of S/ 700 million (approximately $207.2 million). While final funding is not yet settled, the Company has committed to contribute S/ 108.5 million (approximately $32.1 million) in advance, which is being utilized in an educational project and S/ 48.4 million (approximately $14.3 million) for a residual water treatment plant in Ilo, a sea-wall embankment and a fresh water facility at El Algarrobal.

 

In addition, the Company has committed S/ 202.0 million (approximately $59.8 million) for the construction of six infrastructure projects in the Moquegua region under the “social investment for taxes” (obras por impuestos) program which allows the Company to use these amounts as an advance payment of taxes.

 

These commitments are subject to the continuity of the respective mine operations and, as such, are not considered to be present obligations of the Company. Therefore, the Company has not recorded a liability in its condensed consolidated financial statements.

 

Power purchase agreements:

 

·                  Electroperu S.A.: In June 2014, the Company entered into a power purchase agreement for 120 megawatt (“MW”) with the state power company Electroperu S.A., under which Electroperu S.A. began supplying energy for the Peruvian operations for twenty years starting on April 17, 2017.

 

·                  Kallpa Generacion S.A. (“Kallpa”): In July 2014, the Company entered into a power purchase agreement for 120MW with Kallpa, an independent Israeli owned power company, under which Kallpa will supply energy for the Peruvian operations for ten years starting on April 17, 2017 and ending on April 30, 2027. In May 2016, the Company signed an additional power purchase agreement for a maximum of 80MW with Kallpa, under which Kallpa began supplying energy for the Peruvian operations related to the Toquepala Expansion and other minor projects for ten years starting on May 1, 2017 and ending after ten years of commercial operation of the Toquepala Expansion or on April 30, 2029; whichever occurs first.

 

Mexican operations

 

Power purchase agreements:

 

·                  MGE: In 2012, the Company signed a power purchase agreement with MGE, an indirect subsidiary of Grupo Mexico, to supply power to some of the Company’s Mexican operations through 2032. For further information, please see Note 7 “Related party transactions”.

 

·                  Eolica el Retiro S.A.P.I. de C.V.: In 2013, the Company signed a power purchase agreement with Eolica el Retiro, S.A.P.I de C.V. a windfarm energy producer that is an indirect subsidiary of Grupo Mexico, to supply power to some of the Company´s Mexican operations. For further information, please see Note 7 “Related party transactions”.

 

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Corporate operations

 

Commitment for Capital projects:

 

As of March 31, 2019, the Company has committed approximately $177.7 million for the development of its capital investment projects at its operations.

 

Tax contingency matters:

 

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

 

NOTE 10 — SEGMENT AND RELATED INFORMATION:

 

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

 

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

 

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

 

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

 

 

 

Three Months Ended March 31, 2019

 

 

 

(in millions)

 

 

 

Mexican
Open-Pit

 

Mexican
IMMSA Unit

 

Peruvian
Operations

 

Corporate, other
and eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales outside of segments

 

$

1,072.1

 

$

101.2

 

$

580.1

 

 

 

$

1,753.4

 

Intersegment sales

 

 

 

19.9

 

 

 

$

(19.9

)

 

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

 

419.6

 

100.0

 

348.0

 

(23.5

)

844.1

 

Selling, general and administrative

 

16.3

 

1.8

 

9.6

 

0.8

 

28.5

 

Depreciation, amortization and depletion

 

85.0

 

12.9

 

74.9

 

8.8

 

181.6

 

Exploration

 

0.4

 

2.0

 

2.9

 

0.2

 

5.5

 

Operating income

 

$

550.8

 

$

4.4

 

$

144.7

 

$

(6.2

)

693.7

 

Less:

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

 

 

 

 

 

 

 

(74.1

)

Other income (expense)

 

 

 

 

 

 

 

 

 

5.4

 

Income taxes

 

 

 

 

 

 

 

 

 

(237.9

)

Equity earnings of affiliate

 

 

 

 

 

 

 

 

 

2.1

 

Non-controlling interest

 

 

 

 

 

 

 

 

 

(1.0

)

Net income attributable to SCC

 

 

 

 

 

 

 

 

 

$

388.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital investment

 

$

58.6

 

$

25.0

 

$

88.4

 

$

1.1

 

$

173.1

 

Property and mine development, net

 

$

4,780.6

 

$

460.9

 

$

3,798.4

 

$

343.7

 

$

9,383.6

 

Total assets

 

$

8,375.0

 

$

942.2

 

$

4,636.6

 

$

1,588.8

 

$

15,542.6

 

 

23


Table of Contents

 

 

 

Three Months Ended March 31, 2018

 

 

 

(in millions)

 

 

 

Mexican
Open-Pit

 

Mexican
IMMSA Unit

 

Peruvian
Operations

 

Corporate, other
and eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales outside of segments

 

$

1,068.6

 

$

129.6

 

$

642.9

 

 

 

$

1,841.1

 

Intersegment sales

 

 

 

19.6

 

 

 

$

(19.6

)

 

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

 

411.3

 

95.6

 

389.8

 

(20.2

)

876.5

 

Selling, general and administrative

 

11.9

 

2.4

 

9.4

 

0.4

 

24.1

 

Depreciation, amortization and depletion

 

92.5

 

11.0

 

51.8

 

6.7

 

162.0

 

Exploration

 

0.6

 

1.3

 

2.6

 

0.7

 

5.2

 

Operating income

 

$

552.3

 

$

38.9

 

$

189.3

 

$

(7.2

)

773.3

 

Less:

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

 

 

 

 

 

 

 

(66.6

)

Other income (expense)

 

 

 

 

 

 

 

 

 

(2.3

)

Income taxes

 

 

 

 

 

 

 

 

 

(236.6

)

Equity earnings of affiliate

 

 

 

 

 

 

 

 

 

4.1

 

Non-controlling interest

 

 

 

 

 

 

 

 

 

(1.2

)

Net income attributable to SCC

 

 

 

 

 

 

 

 

 

$

470.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital investment

 

$

64.7

 

$

12.6

 

$

216.3

 

$

2.1

 

$

295.7

 

Property and mine development, net

 

$

4,577.4

 

$

434.6

 

$

3,443.5

 

$

663.0

 

$

9,118.5

 

Total assets

 

$

8,338.7

 

$

950.1

 

$

4,382.0

 

$

367.3

 

$

14,038.1

 

 

NOTE 11 — STOCKHOLDERS’EQUITY:

 

Treasury Stock: