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: September 30, 2018

 

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 October 26, 2018 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 and nine months ended September 30, 2018 and 2017

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017

4

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2018 and 2017

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7-33

 

 

 

Item 2.

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

34-50

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

51-52

 

 

 

Item 4.

Controls and procedures

53

 

 

 

 

Report of Independent Registered Public Accounting Firm

54

 

 

 

Part II. Other Information:

 

 

 

 

Item 1.

Legal Proceedings

55

 

 

 

Item 1A.

Risk Factors

55

 

 

 

Item 2.

Unregistered Sale of Equity Securities and Use of Proceeds

55

 

 

 

Item 4.

Mine Safety Disclosures

55

 

 

 

Item 6.

Exhibits

56-58

 

 

 

 

List of Exhibits

59-61

 

 

 

 

Signatures

62

 

 

 

Exhibit 15

Independent Accountants’ Awareness Letter

 

 

 

 

Exhibit 31.1

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

 

 

 

 

Exhibit 31.2

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

 

 

 

 

Exhibit 32.1

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

 

 

 

 

Exhibit 32.2

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

 

 

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(in millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

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

 

$

1,723.7

 

$

1,676.5

 

$

5,402.1

 

$

4,790.2

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

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

 

824.0

 

781.5

 

2,552.2

 

2,430.2

 

Selling, general and administrative

 

26.4

 

25.0

 

76.7

 

68.6

 

Depreciation, amortization and depletion

 

170.6

 

169.3

 

495.2

 

493.8

 

Exploration

 

6.0

 

8.1

 

20.3

 

18.9

 

Environmental remediation

 

 

 

 

(10.2

)

Total operating costs and expenses

 

1,027.0

 

983.9

 

3,144.4

 

3,001.3

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

696.7

 

692.6

 

2,257.7

 

1,788.9

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(90.1

)

(90.3

)

(270.6

)

(285.1

)

Capitalized interest

 

20.9

 

18.7

 

63.6

 

49.7

 

Other income (expense)

 

(7.6

)

(6.2

)

(13.1

)

1.6

 

Interest income

 

4.4

 

1.8

 

9.8

 

4.0

 

Income before income taxes

 

624.3

 

616.6

 

2,047.4

 

1,559.1

 

 

 

 

 

 

 

 

 

 

 

Income taxes (including royalty taxes, see Note 4)

 

257.9

 

220.1

 

803.6

 

556.6

 

Net income before equity earnings of affiliate

 

366.4

 

396.5

 

1,243.8

 

1,002.5

 

Equity earnings of affiliate, net of income tax

 

4.3

 

6.3

 

9.9

 

16.1

 

 

 

 

 

 

 

 

 

 

 

Net income

 

370.7

 

402.8

 

1,253.7

 

1,018.6

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to the non-controlling interest

 

1.3

 

1.0

 

3.9

 

2.6

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to SCC

 

$

369.4

 

$

401.8

 

$

1,249.8

 

$

1,016.0

 

 

 

 

 

 

 

 

 

 

 

Per common share amounts attributable to SCC:

 

 

 

 

 

 

 

 

 

Net earnings - basic and diluted

 

$

0.48

 

$

0.52

 

$

1.62

 

$

1.31

 

Dividends paid

 

$

0.40

 

$

0.14

 

$

1.00

 

$

0.34

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic and diluted

 

773.0

 

773.0

 

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(in millions)

 

Net income and comprehensive income

 

$

370.7

 

$

402.8

 

$

1,253.7

 

$

1,018.6

 

Comprehensive income attributable to the non-controlling interest

 

1.3

 

1.0

 

3.9

 

2.6

 

Comprehensive income attributable to SCC

 

$

369.4

 

$

401.8

 

$

1,249.8

 

$

1,016.0

 

 

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)

 

 

 

September 30,

 

December 31,

 

 

 

2018

 

2017

 

 

 

(in millions)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

967.3

 

$

1,004.8

 

Short-term investments

 

236.5

 

50.5

 

Accounts receivable trade

 

778.4

 

890.6

 

Accounts receivable other (including related parties 2018 - $90.7 and 2017 - $26.1)

 

164.6

 

85.8

 

Inventories

 

1,007.6

 

1,041.9

 

Prepaid taxes

 

87.6

 

85.5

 

Other current assets

 

31.2

 

11.0

 

Total current assets

 

3,273.2

 

3,170.1

 

 

 

 

 

 

 

Property and mine development, net

 

9,311.8

 

9,099.6

 

Ore stockpiles on leach pads

 

1,143.0

 

977.4

 

Intangible assets, net

 

150.8

 

152.5

 

Deferred income tax

 

181.3

 

164.9

 

Equity method investment

 

103.6

 

99.7

 

Other assets

 

153.0

 

115.9

 

Total assets

 

$

14,316.7

 

$

13,780.1

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable (including related parties 2018 - $79.5 and 2017 - $90.1)

 

$

688.5

 

$

659.8

 

Accrued income taxes

 

187.8

 

226.4

 

Accrued workers’ participation

 

164.6

 

176.9

 

Accrued interest

 

133.1

 

83.9

 

Other accrued liabilities

 

33.9

 

21.3

 

Total current liabilities

 

1,207.9

 

1,168.3

 

 

 

 

 

 

 

Long-term debt

 

5,959.3

 

5,957.1

 

Deferred income taxes

 

37.7

 

38.5

 

Non-current taxes payable

 

207.1

 

207.1

 

Other liabilities and reserves

 

58.4

 

37.2

 

Asset retirement obligation

 

215.8

 

222.5

 

Total non-current liabilities

 

6,478.3

 

6,462.4

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Common stock

 

8.8

 

8.8

 

Additional paid-in capital

 

3,391.8

 

3,373.3

 

Retained earnings

 

6,203.0

 

5,726.2

 

Accumulated other comprehensive income

 

0.5

 

0.5

 

Treasury stock, at cost, common shares

 

(3,018.0

)

(3,001.1

)

Total Southern Copper Corporation stockholders’ equity

 

6,586.1

 

6,107.7

 

Non-controlling interest

 

44.4

 

41.7

 

Total equity

 

6,630.5

 

6,149.4

 

 

 

 

 

 

 

Total liabilities and equity

 

$

14,316.7

 

$

13,780.1

 

 

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

 

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Southern Copper Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(in millions)

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

Net income

 

$

370.7

 

$

402.8

 

$

1,253.7

 

$

1,018.6

 

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

 

 

 

 

 

 

 

 

 

Depreciation, amortization and depletion

 

170.6

 

169.3

 

495.2

 

493.8

 

Equity earnings of affiliate, net of dividends received

 

(3.4

)

(4.3

)

(3.9

)

(8.3

)

Loss (gain) on foreign currency transaction effect

 

4.8

 

(2.0

)

31.2

 

50.8

 

(Benefit) provision for deferred income taxes

 

(2.2

)

(20.9

)

(17.7

)

(61.7

)

Other, net

 

3.5

 

3.6

 

(4.4

)

11.2

 

 

 

 

 

 

 

 

 

 

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Decrease (increase) in accounts receivable

 

34.8

 

(210.1

)

112.3

 

(238.3

)

Decrease (increase) in inventories

 

(43.6

)

(72.3

)

(131.2

)

(120.5

)

Increase (decrease) in accounts payable and accrued liabilities

 

175.1

 

113.9

 

80.5

 

(9.5

)

Decrease (increase) in other operating assets and liabilities

 

22.5

 

56.1

 

(26.8

)

143.9

 

Net cash provided by operating activities

 

732.8

 

436.1

 

1,788.9

 

1,280.0

 

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

Capital investments

 

(282.3

)

(212.7

)

(831.8

)

(710.4

)

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

 

(185.8

)

9.6

 

(186.0

)

20.8

 

Other

 

0.2

 

(0.1

)

(12.0

)

1.0

 

Net cash used in investing activities

 

(467.9

)

(203.2

)

(1,029.8

)

(688.6

)

 

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

Cash dividends paid to common stockholders

 

(309.2

)

(108.2

)

(773.0

)

(262.8

)

Other

 

(0.2

)

(0.2

)

(1.0

)

0.1

 

Net cash used in financing activities

 

(309.4

)

(108.4

)

(774.0

)

(262.7

)

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(20.7

)

(14.7

)

(22.6

)

(76.2

)

 

 

 

 

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

(65.2

)

109.8

 

(37.5

)

252.5

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, at beginning of period

 

1,032.5

 

688.7

 

1,004.8

 

546.0

 

Cash and cash equivalents, at end of period

 

$

967.3

 

$

798.5

 

$

967.3

 

$

798.5

 

 

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

 

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Table of Contents

 

Southern Copper Corporation

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 — DESCRIPTION OF THE BUSINESS:

 

The Company is a majority-owned, indirect subsidiary of Grupo Mexico S.A.B. de C.V. (“Grupo Mexico”). At September 30, 2018, 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”, “Southern Copper” 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 September 30, 2018 and the results of operations, comprehensive income and cash flows for the three and nine months ended September 30, 2018 and 2017. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year. The December 31, 2017 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, 2017 and notes included in the Company’s 2017 annual report on Form 10-K.

 

NOTE 2 — SHORT-TERM INVESTMENTS:

 

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

 

 

 

At September 30,

 

At December 31,

 

 

 

2018

 

2017

 

Trading securities

 

$

235.8

 

$

49.5

 

Weighted average interest rate

 

2.2

%

1.8

%

 

 

 

 

 

 

Available-for-sale

 

$

0.7

 

$

1.0

 

Weighted average interest rate

 

0.7

%

0.7

%

Total

 

$

236.5

 

$

50.5

 

 

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 September 30, 2018 and December 31, 2017, included corporate bonds and asset and mortgage backed obligations. As of September 30, 2018 and December 31, 2017, gross unrealized gains and losses on available-for-sale securities were not material.

 

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

 

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Table of Contents

 

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

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Trading securities:

 

 

 

 

 

 

 

 

 

Interest earned

 

$

0.1

 

$

0.2

 

$

0.2

 

$

0.6

 

Unrealized gain (loss) at the end of the period

 

$

(0.2

)

$

0.1

 

$

(0.2

)

$

0.1

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

Interest earned

 

(*

)

(*

)

(*

)

(*

)

Investment redeemed

 

$

0.1

 

$

0.1

 

$

0.3

 

$

1.1

 

 


(*) Less than $0.1 million.

 

NOTE 3 - INVENTORIES:

 

Inventories were as follows:

 

(in millions)

 

At September 30,
2018

 

At December 31,
2017

 

 

 

 

 

 

 

Inventory, current:

 

 

 

 

 

Metals at average cost:

 

 

 

 

 

Finished goods

 

$

50.7

 

$

48.8

 

Work-in-process

 

269.8

 

308.0

 

Ore stockpiles on leach pads

 

308.9

 

320.9

 

Supplies at average cost:

 

378.2

 

364.2

 

Total current inventory

 

$

1,007.6

 

$

1,041.9

 

 

 

 

 

 

 

Inventory, non-current:

 

 

 

 

 

Ore stockpiles on leach pads

 

$

1,143.0

 

$

977.4

 

 

During the nine months ended September 30, 2018 and 2017 total leaching costs capitalized as non-current inventory of ore stockpiles on leach pads amounted to $393.6 million and $386.4 million, respectively. Leaching inventories recognized in cost of sales amounted to $240.0 million and $246.7 million for the nine months ended September 30, 2018 and 2017, respectively.

 

NOTE 4 — INCOME TAXES:

 

The income tax provision and the effective income tax rate for the nine months of 2018 and 2017 consisted of (in millions):

 

 

 

2018

 

2017

 

Statutory income tax provision

 

$

698.5

 

$

473.0

 

GILTI tax

 

15.2

 

 

Peruvian royalty

 

6.7

 

0.5

 

Mexican royalty

 

60.9

 

67.7

 

Peruvian special mining tax

 

22.3

 

15.4

 

Total income tax provision

 

$

803.6

 

$

556.6

 

 

 

 

 

 

 

Effective income tax rate

 

39.2

%

35.7

%

 

These provisions include income taxes for Peru, Mexico and the United States. In addition, a Mexican royalty tax, a portion of the Peruvian royalty tax and the Peruvian special mining tax are included in the income tax provision. The increase in the effective tax rate for the first nine months of 2018 from the same period in the prior year is primarily due to the Company no longer recording the benefit for 100% of the foreign tax credits generated annually, as well as the effect of the Global Intangible Low Taxed Income (GILTI). Both the GILTI provision and the reduced benefit to the Company for foreign tax credits are the result of the U.S. Tax Cuts and Jobs Act (the “Act”), enacted on December 22, 2017.

 

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Table of Contents

 

The Act includes significant changes to existing U.S. tax laws and creates new complex tax provisions. Some of these provisions are still under legislative review and are subject to change. As of December 31, 2017, the Company recorded provisional impacts of the tax effects related to specific provisions and continues to evaluate and await further IRS guidance on other provisions. During the nine months ended September 30, 2018, no significant adjustments were made to the provisional amounts recorded at December 31, 2017. The Company has not fully completed its analysis of the Act and will continue to assess the impact of the final calculations during the fourth quarter of 2018.

 

The U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Act. The Company has adopted SAB 118. Accordingly, the provisions of the Act deemed most relevant to the Company have been considered in preparation of its condensed consolidated financial statements.

 

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 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 $24.2 million and $15.4 million of royalty charge in the nine months of 2018 and 2017, respectively, of which $6.7 million and $0.5 million were included in income taxes in 2018 and 2017, 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 $22.3 million and $15.4 million of special mining tax as part of the income tax provision for the nine months of 2018 and 2017, 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 $60.9 million and $67.7 million of royalty taxes as part of the income tax provision for the nine months of 2018 and 2017, respectively.

 

Accounting for uncertainty in income taxes: In the nine months of 2018, there were no changes in the Company’s uncertain tax positions.

 

NOTE 5 — REVENUE RECOGNITION:

 

The Company’s net sales were $5,402.1 million in the nine months ended September 30, 2018, compared to $4,790.2 million in the same period of 2017. The geographic breakdown of the Company’s sales is as follows (in millions):

 

 

 

Three Months Ended September 30, 2018

 

 

 

Mexican
Open-Pit

 

Mexican
IMMSA Unit

 

Peruvian
Operations

 

Corporate &
Elimination

 

Consolidated

 

The Americas:

 

 

 

 

 

 

 

 

 

 

 

Mexico

 

$

329.3

 

$

86.4

 

$

 

$

(17.2

)

$

398.5

 

United States

 

263.1

 

0.5

 

40.8

 

 

304.4

 

Peru

 

 

 

92.6

 

 

92.6

 

Brazil

 

 

6.6

 

55.9

 

 

62.5

 

Chile

 

 

 

42.4

 

 

42.4

 

Other American countries

 

15.2

 

0.5

 

 

 

15.7

 

Europe:

 

 

 

 

 

 

 

 

 

 

 

Switzerland

 

141.4

 

6.8

 

31.4

 

 

179.6

 

Italy

 

5.1

 

3.4

 

64.3

 

 

72.8

 

Spain

 

42.0

 

 

 

 

42.0

 

Other European countries

 

74.0

 

2.9

 

24.3

 

 

101.2

 

Asia:

 

 

 

 

 

 

 

 

 

 

 

Singapore

 

104.9

 

 

164.1

 

 

269.0

 

Japan

 

(4.7

)

 

114.0

 

 

109.3

 

Other Asian countries

 

24.8

 

0.2

 

8.7

 

 

33.7

 

Total

 

$

995.1

 

$

107.3

 

$

638.5

 

$

(17.2

)

$

1,723.7

 

 

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Table of Contents

 

 

 

Three Months Ended September 30, 2017

 

 

 

Mexican
Open-Pit

 

Mexican
IMMSA Unit

 

Peruvian
Operations

 

Corporate &
Elimination

 

Consolidated

 

The Americas:

 

 

 

 

 

 

 

 

 

 

 

Mexico

 

$

332.9

 

$

77.2

 

$

2.8

 

$

(16.0

)

$

396.9

 

United States

 

272.3

 

10.1

 

47.5

 

 

329.9

 

Peru

 

 

 

94.5

 

 

94.5

 

Brazil

 

 

5.7

 

52.8

 

 

58.5

 

Chile

 

 

 

26.5

 

 

26.5

 

Other American countries

 

19.4

 

0.7

 

6.6

 

 

26.7

 

Europe:

 

 

 

 

 

 

 

 

 

 

 

Switzerland

 

91.1

 

1.8

 

29.0

 

 

121.9

 

Italy

 

7.9

 

3.7

 

62.3

 

 

73.9

 

Spain

 

34.8

 

 

 

 

34.8

 

Other European countries

 

35.1

 

4.2

 

19.4

 

 

58.7

 

Asia:

 

 

 

 

 

 

 

 

 

 

 

Singapore

 

172.1

 

 

115.4

 

 

287.5

 

Japan

 

35.5

 

 

98.9

 

 

134.4

 

Other Asian countries

 

22.2

 

0.1

 

10.0

 

 

32.3

 

Total

 

$

1,023.3

 

$

103.5

 

$

565.7

 

$

(16.0

)

$

1,676.5

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

Mexican
Open-Pit

 

Mexican
IMMSA Unit

 

Peruvian
Operations

 

Corporate &
Elimination

 

Consolidated

 

The Americas:

 

 

 

 

 

 

 

 

 

 

 

Mexico

 

$

1,026.2

 

$

307.0

 

$

 

$

(55.6

)

$

1,277.6

 

United States

 

782.4

 

6.1

 

139.1

 

 

927.6

 

Peru

 

 

 

292.7

 

 

292.7

 

Brazil

 

 

28.8

 

183.2

 

 

212.0

 

Chile

 

 

 

102.1

 

 

102.1

 

Other American countries

 

41.6

 

2.9

 

1.2

 

 

45.7

 

Europe:

 

 

 

 

 

 

 

 

 

 

 

Switzerland

 

340.4

 

33.9

 

105.8

 

 

480.1

 

Italy

 

18.2

 

16.8

 

224.6

 

 

259.6

 

Spain

 

130.7

 

 

 

 

130.7

 

Other European countries

 

195.7

 

13.4

 

72.4

 

 

281.5

 

Asia:

 

 

 

 

 

 

 

 

 

 

 

Singapore

 

389.0

 

 

443.1

 

 

832.1

 

Japan

 

68.7

 

 

333.2

 

 

401.9

 

Other Asian countries

 

132.0

 

0.7

 

25.8

 

 

158.5

 

Total

 

$

3,124.9

 

$

409.6

 

$

1,923.2

 

$

(55.6

)

$

5,402.1

 

 

10


Table of Contents

 

 

 

Nine Months Ended September 30, 2017

 

 

 

Mexican
Open-Pit

 

Mexican
IMMSA Unit

 

Peruvian
Operations

 

Corporate &
Elimination

 

Consolidated

 

The Americas:

 

 

 

 

 

 

 

 

 

 

 

Mexico

 

$

897.1

 

$

253.2

 

$

5.1

 

$

(54.1

)

$

1,101.3

 

United States

 

733.0

 

33.7

 

105.8

 

 

872.5

 

Peru

 

 

0.8

 

264.4

 

 

265.2

 

Brazil

 

 

29.7

 

142.1

 

 

171.8

 

Chile

 

 

 

77.8

 

 

77.8

 

Other American countries

 

50.5

 

2.4

 

12.9

 

 

65.8

 

Europe:

 

 

 

 

 

 

 

 

 

 

 

Switzerland

 

316.9

 

7.6

 

55.1

 

 

379.6

 

Italy

 

22.2

 

12.1

 

205.7

 

 

240.0

 

Spain

 

100.2

 

 

 

 

100.2

 

Other European countries

 

162.4

 

17.8

 

55.7

 

 

235.9

 

Asia:

 

 

 

 

 

 

 

 

 

 

 

Singapore

 

427.6

 

1.4

 

378.6

 

 

807.6

 

Japan

 

70.0

 

 

281.0

 

 

351.0

 

Other Asian countries

 

95.4

 

0.4

 

25.7

 

 

121.5

 

Total

 

$

2,875.3

 

$

359.1

 

$

1,609.9

 

$

(54.1

)

$

4,790.2

 

 

The following table presents information regarding the sales value by reporting segment of the Company’s significant products for the three and nine months ended September 30, 2018 and 2017 (in millions):

 

 

 

Three Months Ended September 30, 2018

 

 

 

Mexican
Open-Pit

 

Mexican
IMMSA Unit

 

Peruvian
Operations

 

Corporate &
Elimination

 

Consolidated

 

Copper

 

$

840.8

 

$

9.9

 

$

550.8

 

$

(10.0

)

$

1,391.5

 

Molybdenum

 

89.2

 

 

48.4

 

 

137.6

 

Zinc

 

 

63.2

 

 

 

63.2

 

Silver

 

42.5

 

19.0

 

16.8

 

(6.6

)

71.7

 

Other

 

22.6

 

15.2

 

22.5

 

(0.6

)

59.7

 

Total

 

$

995.1

 

$

107.3

 

$

638.5

 

$

(17.2

)

$

1,723.7

 

 

 

 

Three Months Ended September 30, 2017

 

 

 

Mexican
Open-Pit

 

Mexican
IMMSA Unit

 

Peruvian
Operations

 

Corporate &
Elimination

 

Consolidated

 

Copper

 

$

898.9

 

$

9.2

 

$

502.6

 

$

(9.2

)

$

1,401.5

 

Molybdenum

 

57.3

 

 

33.9

 

 

91.2

 

Zinc

 

 

59.8

 

 

0.2

 

60.0

 

Silver

 

42.3

 

16.5

 

17.7

 

(5.8

)

70.7

 

Other

 

24.8

 

18.0

 

11.5

 

(1.2

)

53.1

 

Total

 

$

1,023.3

 

$

103.5

 

$

565.7

 

$

(16.0

)

$

1,676.5

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

Mexican
Open-Pit

 

Mexican
IMMSA Unit

 

Peruvian
Operations

 

Corporate &
Elimination

 

Consolidated

 

Copper

 

$

2,661.9

 

$

37.0

 

$

1,686.7

 

$

(32.2

)

$

4,353.4

 

Molybdenum

 

254.2

 

 

124.3

 

 

378.5

 

Zinc

 

 

253.0

 

 

(0.1

)

252.9

 

Silver

 

133.2

 

63.4

 

50.6

 

(21.2

)

226.0

 

Other

 

75.6

 

56.2

 

61.6

 

(2.1

)

191.3

 

Total

 

$

3,124.9

 

$

409.6

 

$

1,923.2

 

$

(55.6

)

$

5,402.1

 

 

11


Table of Contents

 

 

 

Nine Months Ended September 30, 2017

 

 

 

Mexican
Open-Pit

 

Mexican
IMMSA Unit

 

Peruvian
Operations

 

Corporate &
Elimination

 

Consolidated

 

Copper

 

$

2,515.5

 

$

28.1

 

$

1,428.0

 

$

(28.2

)

$

3,943.4

 

Molybdenum

 

153.9

 

 

97.2

 

 

251.1

 

Zinc

 

 

215.5

 

 

0.2

 

215.7

 

Silver

 

132.7

 

56.4

 

51.6

 

(20.7

)

220.0

 

Other

 

73.2

 

59.1

 

33.1

 

(5.4

)

160.0

 

Total

 

$

2,875.3

 

$

359.1

 

$

1,609.9

 

$

(54.1

)

$

4,790.2

 

 

The following table presents information regarding the opening and closing balances of receivables by reporting segment of the Company for the nine months ended September 30, 2018 (in millions):

 

 

 

Mexican
Open-Pit

 

Mexican
IMMSA Unit

 

Peruvian
Operations

 

Corporate &
Elimination

 

Consolidated

 

As of September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

Trade receivables

 

$

459.7

 

$

47.3

 

$

271.4

 

$

 

$

778.4

 

Related parties

 

81.8

 

 

 

8.9

 

90.7

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

Trade receivables

 

$

556.2

 

$

79.7

 

$

254.7

 

$

 

$

890.6

 

Related parties

 

18.0

 

 

 

8.1

 

26.1

 

 

Provisionally priced sales:  At September 30, 2018, the Company has recorded provisionally priced sales of copper at average forward prices per pound, and molybdenum at the September 30, 2018 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 September 30, 2018:

 

 

 

Sales volume
(million lbs.)

 

Priced at
(per pound)

 

Month of settlement

 

Copper

 

51.3

 

$

2.80

 

October 2018 through January 2019

 

Molybdenum

 

11.4

 

$

11.80

 

October through December 2018

 

 

The provisional sales price adjustment included in accounts receivable and net sales at September 30, 2018 includes positive adjustments of $2.0 million and $0.3 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 as support for this obligation. The accepted value of the Lima office building, for this purpose, is $36.9 million. Through September 2018, the Company has provided guarantees of $32.3 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 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, which at

 

12


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September 30, 2018 are pending approval. As a result of these new estimates, the Company has reduced the asset retirement obligation by $11.6 million in December 2017 and $5.2 million in the first quarter of 2018.

 

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 $10.4 million, which was recorded in the second quarter of 2018.

 

The following table summarizes the asset retirement obligation activity for the nine months ended September 30, 2018 and 2017 (in millions):

 

 

 

2018

 

2017

 

Balance as of January 1

 

$

222.5

 

$

216.5

 

Changes in estimates

 

(15.6

)

 

Payments

 

 

(0.3

)

Accretion expense

 

8.9

 

9.4

 

Balance as of September 30,

 

$

215.8

 

$

225.6

 

 

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 September 30,
2018

 

At December 31,
2017

 

Related parties receivable:

 

 

 

 

 

Grupo Mexico and affiliates:

 

 

 

 

 

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

 

$

11.1

 

$

16.2

 

Asarco LLC

 

74.1

 

4.1

 

Grupo Mexico

 

2.7

 

2.8

 

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

 

1.4

 

1.4

 

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

 

0.5

 

1.1

 

Related to the controlling group:

 

 

 

 

 

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

 

0.2

 

 

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

 

0.4

 

0.3

 

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

 

0.3

 

0.2

 

 

 

$

90.7

 

$

26.1

 

 

13


Table of Contents

 

 

 

At September 30,
2018

 

At December 31,
2017

 

Related parties payable:

 

 

 

 

 

Grupo Mexico and affiliates:

 

 

 

 

 

MGE

 

$

37.3

 

$

38.5

 

Asarco LLC

 

10.4

 

24.2

 

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

 

16.2

 

21.7

 

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

 

7.0

 

2.6

 

Eolica El Retiro, S.A.P.I. de C.V. (“Eolica el Retiro”)

 

0.9

 

0.8

 

Grupo Mexico

 

7.0

 

0.7

 

Related to the controlling group:

 

 

 

 

 

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

 

0.2

 

0.7

 

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

 

0.2

 

0.6

 

Mextransport

 

0.3

 

0.3

 

 

 

$

79.5

 

$

90.1

 

 

Purchase and sale activity:

 

Grupo Mexico and affiliates:

 

The following table summarizes the purchase and sale activities with Grupo Mexico and its affiliates in the nine months ended September 30, 2018 and 2017 (in millions):

 

 

 

2018

 

2017

 

Purchase activity

 

 

 

 

 

Asarco LLC

 

$

30.0

 

$

29.6

 

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

 

2.2

 

2.4

 

Ferrocarril Mexicano, S.A de C.V.

 

33.0

 

34.2

 

Grupo Mexico

 

13.5

 

10.5

 

MGE

 

144.4

 

168.5

 

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

 

63.1

 

92.8

 

Total purchases

 

$

286.2

 

$

338.0

 

 

 

 

 

 

 

Sales activity

 

 

 

 

 

Asarco LLC

 

$

82.8

 

$

94.1

 

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

 

 

0.2

 

Grupo Mexico

 

 

0.1

 

MGE

 

52.3

 

77.8

 

Total sales

 

$

135.1

 

$

172.2

 

 

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

 

In the nine months ended September 30, 2018 the Company made donations of $5.5 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.

 

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

 

14


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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 22% of its power output to third-party energy users; compared to 14% at September 30, 2017.

 

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, a windfarm with 37 wind turbines. This company started operations in January 2014 and started to sell power to Industrial Minera Mexico, S.A. de C.V. and subsidiaries (IMMSA) and other subsidiaries of Grupo Mexico in the third quarter of 2014. Currently, Eolica el Retiro is supplying approximately 17% of its power output to IMMSA; compared to 27% at September 30, 2017.

 

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 nine months ended September 30, 2018 and 2017 (in millions):

 

 

 

2018

 

2017

 

Purchase activity

 

 

 

 

 

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

 

$

0.2

 

$

0.2

 

Mextransport

 

1.1

 

0.4

 

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

 

0.1

 

0.1

 

Total purchases

 

$

1.4

 

$

0.7

 

 

 

 

 

 

 

Sales activity

 

 

 

 

 

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

 

$

0.2

 

$

0.2

 

Mextransport

 

1.2

 

0.3

 

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

 

0.1

 

0.1

 

Total sales

 

$

1.5

 

$

0.6

 

 

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.

 

Mextransport provides aviation services to the Company’s Mexican operations. This is a company 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.

 

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.

 

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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 nine months ended September 30, 2018 and 2017 are as follows (in millions):

 

 

 

2018

 

2017

 

Service cost

 

$

0.8

 

$

0.6

 

Interest cost

 

1.2

 

1.1

 

Expected return on plan assets

 

(2.7

)

(2.3

)

Amortization of prior service cost (credit)

 

0.2

 

0.1

 

Amortization of net loss

 

0.1

 

0.2

 

Net periodic benefit costs

 

$

(0.4

)

$

(0.3

)

 

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 nine months ended September 30, 2018 and 2017 are as follows (in millions):

 

 

 

2018

 

2017

 

Interest cost

 

$

0.7

 

$

0.7

 

Amortization of net loss (gain)

 

(0.2

)

(0.1

)

Amortization of prior service cost (credit)

 

(*

)

(*

)

Net periodic benefit cost

 

$

0.5

 

$

0.6

 

 


(*) 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 nine months ended September 30, 2018 and 2017 were as follows (in millions):

 

 

 

2018

 

2017

 

Peruvian operations

 

$

38.0

 

$

60.5

 

Mexican operations

 

35.3

 

95.1

 

 

 

$

73.3

 

$

155.6

 

 

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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 2008, the Peruvian government enacted environmental regulations establishing AQS for daily sulfur dioxide (“SO2”) in the air for the Peruvian territory. These regulations were amended in 2013 and 2017. In June 2017, MINAM enacted a supreme decree which defines new AQS. The Company believes that these new AQS will allow Peruvian industry to be more competitive with other countries. As of September 30, 2018, 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 establishes additional provisions for the gradual implementation of SQS. Under this rule the Company had twelve months to identify contaminated sites in and around its facilities and present a report of identified contaminated sites. These documents were submitted to MINEM for approval in April 2015, and were fully approved in July 2017. The next step is for the Company to prepare a characterization study to determine the depth, extent and physio-chemical composition of the contaminated areas and define an appropriate remediation plan with a time-frame for completion. In addition, the Company must submit for approval a Soil Decontamination Plan (SDP) within 30 months after being notified by the authority. This SDP must include remediation actions, a schedule and compliance deadlines. Also under this rule, if deemed necessary and given reasonable justification, the Company may request a one year extension for the decontamination plan.

 

Soil confirmation tests must be carried out after completion of decontamination actions (within the approved schedule) and results must be presented to authorities within 30 days after receiving such results. Non-compliance with this obligation or with decontamination goals will carry penalties, although no specific sanctions have been established yet. During compliance with this schedule, companies cannot be penalized for non-compliance with the SQS.

 

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, which is expected for the first quarter of 2020. At that time the Company will be in a position to estimate the remediation cost. Further, 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.

 

Water Quality Standards (“WQS”): In June 2017, MINAM enacted a supreme decree which establishes water quality standards in the Peruvian territory. The Company has reviewed this decree and considers that its adoption will not have a material impact on its financial position.

 

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

 

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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.

 

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 8th, 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 September 30, 2018, the case remains pending resolution.

 

The Mendoza Padilla case was 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 September 30, 2018, the case remains pending resolution without further developments.

 

The Guillen Lopez case is currently before the lower court. As of September 30, 2018, the case remains pending resolution without further developments.

 

The Company asserts that the remaining 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 tailing 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 September 30, 2018, 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.

 

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Mexican operations

 

The 2014 Accidental Spill at Buenavista Mine

 

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 those responsible for the environmental damages. During the second quarter of 2018, the criminal complaint was dismissed with no further consequences.

 

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 September 30, 2018, these cases remain pending resolution.

 

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. As of September 30, 2018, 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 to build the dam, potential impacts and prevention measures, with no material effects to BVC’s operations. As of September 30, 2018, 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,

 

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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.

 

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, as a result of post-mediation negotiations conducted through the parties and a mediator, 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. The Company will distribute the Net Settlement Amount via a special dividend 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 hold shares of common stock of the Company as of the date that is three days prior to the funding date, which funding date will be no later than ten days after a judgment approving the settlement becomes a final judgment. A settlement hearing is scheduled for November 27, 2018. The settlement is subject to the approval of the Court. The Company can offer no assurance that the settlement will be approved or the timing or amount of any funding or dividend.

 

Labor matters:

 

Peruvian operations: 71% of the Company’s 4,867 Peruvian employees were unionized at September 30, 2018. Currently, there are six separate unions, one large union and five smaller unions. In the first quarter of 2016, the Company signed three-year agreements with all the existing unions at that time. These agreements include, among other things, annual salary increases of 5% for each of the three years. In June 2018, the Company signed a three-year collective bargain 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 which was recorded as labor expense.

 

In August 2018, the Company signed a three-year collective bargain 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 which was recorded as labor expense. As of September 30, 2018, the Company continues negotiations with the two unsigned unions.

 

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.

 

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

 

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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. As of September 30, 2018, the rehabilitation of San Martin mine is in progress with a budgeted cost of $77 million.

 

In the case of the Taxco mine, following the workers refusal to allow exploration of new reserves, the Company commenced litigation seeking to terminate the labor relationship with workers at the mine (including termination of the related collective bargaining agreement). On September 1, 2010, the federal labor court issued a ruling approving the termination of the collective bargaining agreement and all the individual labor contracts of the workers affiliated with the National mining union at the Taxco mine. The mining union appealed the labor court ruling before a federal court. In September 2011, the federal court accepted the union’s appeal and remanded the case to the federal labor court for reconsideration. After several legal proceedings on January 25, 2013, the Company filed a new proceeding before the labor court. On June 16, 2014, the labor court denied the petition of the Company. The resolution issued by the labor court was challenged by the Company before a federal court. In August 2015, the Supreme Court decided to assert jurisdiction over the case and to rule on it directly. As of September 30, 2018, 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 2018.

 

Tia Maria´s project budget is approximately $1.4 billion, of which $355.0 million has been invested through September 30, 2018. 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 3,600 jobs 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.

 

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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. An additional $12.5 million has been accrued by the Company as it evaluates the project for development, over a three to five year period. This amount is classified in other non-current liabilities in the Company’s condensed consolidated financial statements. The balance of $375 million will be paid if the Company decides to develop the project.

 

Toquepala Concentrator Expansion:

 

In April 2015, the construction permit for the Toquepala expansion project was approved by the MINEM. The project budget is $1.3 billion, of which $1,192.4 million has been invested through September 30, 2018. When completed, this project is expected to increase annual production capacity by 100,000 tons of copper and 3,100 tons of molybdenum. The project has reached 98% progress and is expected to initiate production in the fourth quarter of 2018.

 

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 $132 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 $209 million). While final funding is not yet settled, the Company has committed to contribute S/ 108.5 million (approximately $32 million) in advance, which is being utilized in an educational project and S/ 48.4 million (approximately $14 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/ 143.0 million (approximately $43 million) for the construction of five 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.

 

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Power purchase agreements:

 

Peruvian operations

 

·                  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

 

·                  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: In 2013, the Company signed a power purchase agreement with Eolica el Retiro, 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”.

 

Corporate operations

 

Commitment for Capital projects:

 

As of September 30, 2018, the Company has committed approximately $1,382.7 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”).

 

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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 September 30, 2018

 

 

 

(in millions)

 

 

 

Mexican
Open-Pit

 

Mexican
IMMSA Unit

 

Peruvian
Operations

 

Corporate, other
and eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales outside of segments

 

$

995.1

 

$

90.1

 

$

638.5

 

 

$

1,723.7

 

Intersegment sales

 

 

17.2

 

 

$

(17.2

)

 

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

 

398.8

 

74.7

 

369.3

 

(18.8

)

824.0

 

Selling, general and administrative

 

15.8

 

1.9

 

8.5

 

0.2

 

26.4

 

Depreciation, amortization and depletion

 

95.1

 

11.5

 

61.6

 

2.4

 

170.6

 

Exploration

 

0.4

 

1.1

 

2.2

 

2.3

 

6.0

 

Operating income

 

$

485.0

 

$

18.1

 

$

196.9

 

$

(3.3

)

696.7

 

Less: