Docoh
Loading...

SCCO Southern Copper

Filed: 27 Jul 21, 4:46pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: June 30, 2021

or

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

Graphic

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

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

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Common stock, par value $0.01 per share

SCCO

New York Stock Exchange

Lima Stock Exchange

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 No

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 No

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

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

As of July 26, 2021 there were outstanding 773,081,269 shares of Southern Copper Corporation common stock, par value $0.01 per share.

Southern Copper Corporation (“SCC”)

INDEX TO FORM 10-Q

    

    

Page No.

Part I. Financial Information:

Item. 1

Condensed Consolidated Financial Statements (Unaudited)

3

Condensed Consolidated Statements of Earnings for the three and six months ended June 30, 2021 and 2020

3

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2021 and 2020

4

Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020

5

Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2021 and 2020

6

Condensed Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2021 and 2020

7

Notes to Condensed Consolidated Financial Statements

8-38

Item 2.

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

39-60

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

61-62

Item 4.

Controls and procedures

62

Report of Independent Registered Public Accounting Firm

63

Part II. Other Information:

64

Item 1.

Legal Proceedings

64

Item 1A.

Risk Factors

64

Item 2.

Unregistered Sale of Equity Securities and Use of Proceeds

64

Item 4.

Mine Safety Disclosures

64

Item 6.

Exhibits

65-66

List of Exhibits

67-69

Signatures

70

2

PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Southern Copper Corporation

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

    

Three Months Ended

Six Months Ended

June 30, 

June 30, 

2021

2020

    

2021

    

2020

(in millions, except for per share amounts) 

Net sales (including sales to related parties, see note 5)

$

2,897.0

$

1,785.4

$

5,429.5

$

3,505.1

Operating cost and expenses:

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

 

985.5

 

976.7

 

1,929.3

 

1,932.4

Selling, general and administrative

 

31.4

 

31.4

 

61.6

 

60.6

Depreciation, amortization and depletion

 

195.4

 

193.8

 

396.0

 

386.8

Exploration

 

9.5

 

6.3

 

15.8

 

14.9

Total operating costs and expenses

 

1,221.8

 

1,208.2

 

2,402.7

 

2,394.7

Operating income

 

1,675.2

 

577.2

 

3,026.8

 

1,110.4

Interest expense

 

(96.6)

 

(98.1)

 

(193.4)

 

(200.0)

Capitalized interest

 

7.3

 

6.0

 

14.5

 

11.2

Other income (expense)

 

(8.2)

 

(1.0)

 

(5.9)

 

(8.4)

Interest income

 

1.3

 

4.3

 

3.7

 

12.2

Income before income taxes

 

1,579.0

 

488.4

 

2,845.7

 

925.4

Income taxes (including royalty taxes, see Note 4)

 

647.7

 

224.4

 

1,155.2

 

446.2

Net income before equity earnings of affiliate

 

931.3

 

264.0

 

1,690.5

 

479.2

Equity earnings (loss) of affiliate, net of income tax

 

5.1

 

(3.1)

 

13.1

 

(2.1)

Net income

 

936.4

 

260.9

 

1,703.6

 

477.1

Less: Net income attributable to the non-controlling interest

 

3.7

 

1.4

7.0

 

2.8

Net income attributable to SCC

$

932.7

$

259.5

$

1,696.6

$

474.3

Per common share amounts attributable to SCC:

Net earnings-basic and diluted

$

1.21

$

0.34

$

2.19

$

0.61

$

Weighted average shares outstanding-basic and diluted

 

773.1

 

773.1

 

773.1

 

773.1

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

3

Southern Copper Corporation

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

    

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2021

    

2020

    

2021

    

2020

(in millions)

Net income and comprehensive income

$

936.4

$

260.9

$

1,703.6

$

477.1

Comprehensive income attributable to the non-controlling interest

 

3.7

1.4

7.0

 

2.8

Comprehensive income attributable to SCC

$

932.7

$

259.5

$

1,696.6

$

474.3

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

4

Southern Copper Corporation

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

June 30, 

December 31, 

    

2021

    

2020

(in millions)

ASSETS

Current assets:

Cash and cash equivalents

$

2,394.3

$

2,183.6

Short-term investments

 

545.8

 

410.8

Accounts receivable trade

 

1,435.6

 

1,068.9

Accounts receivable other (including related parties 2021- $27.6 and 2020 - $23.3)

 

71.0

 

67.7

Inventories

 

893.9

 

950.2

Prepaid taxes

126.3

104.8

Other current assets

 

44.6

 

29.2

Total current assets

 

5,511.5

 

4,815.2

Property and mine development, net

 

9,456.1

 

9,458.7

Ore stockpiles on leach pads

 

1,180.2

 

1,125.0

Intangible assets, net

 

140.1

 

143.0

Right-of-use assets

 

944.3

 

979.0

Deferred income tax

 

234.7

 

230.0

Equity method investment

 

123.4

 

114.3

Other non-current assets

 

105.1

 

81.3

Total assets

$

17,695.4

$

16,946.5

LIABILITIES

Current liabilities:

Accounts payable (including related parties 2021- $89.9 and 2020- $104.3)

$

560.8

$

594.6

Accrued income taxes

 

460.8

 

340.9

Accrued workers’ participation

 

216.3

 

247.8

Accrued interest

 

98.6

 

98.6

Lease liabilities current

72.0

70.6

Other accrued liabilities

 

43.6

 

32.3

Total current liabilities

 

1,452.1

 

1,384.8

Long-term debt

 

6,545.9

 

6,544.2

Lease liabilities

872.3

908.4

Deferred income taxes

 

168.7

 

159.4

Non-current taxes payable

Other liabilities and reserves

 

128.3

 

128.7

Asset retirement obligation

 

555.3

 

545.0

Total non-current liabilities

 

8,270.5

 

8,285.7

Commitments and contingencies (Note 9)

STOCKHOLDERS’ EQUITY (NOTE 10)

Common stock par value $0.01; shares authorized, 2021 and 2020–2,000; shares issued, 2021 and 2020–884.6

 

8.8

 

8.8

Additional paid-in capital

 

3,454.9

 

3,441.5

Retained earnings

 

7,538.0

 

6,846.4

Accumulated other comprehensive income

 

(8.4)

 

(8.4)

Treasury stock, at cost, common shares

 

(3,075.8)

 

(3,063.5)

Total Southern Copper Corporation stockholders’ equity

 

7,917.5

 

7,224.8

Non-controlling interest

 

55.3

 

51.2

Total equity

 

7,972.8

 

7,276.0

Total liabilities and equity

$

17,695.4

$

16,946.5

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

5

Southern Copper Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

    

Three Months Ended

    

Six Months Ended

    

June 30, 

June 30, 

2021

2020

2021

2020

(in millions)

OPERATING ACTIVITIES

Net income

$

936.4

$

260.9

$

1,703.6

$

477.1

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

Depreciation, amortization and depletion

 

195.4

 

193.8

 

396.0

 

386.8

Equity earnings of affiliate, net of dividends received

 

(5.1)

 

0.2

 

(9.1)

(0.8)

Loss (gain) on foreign currency transaction effect

 

6.3

 

(0.8)

 

(13.4)

(28.9)

Provision (benefit) for deferred income taxes

 

42.1

 

(18.8)

 

3.2

(11.3)

Other, net

 

5.2

 

4.1

 

11.9

11.0

Change in operating assets and liabilities:

Increase in accounts receivable

 

(203.4)

 

(144.3)

 

(366.7)

(21.0)

Decrease (increase) in inventories

 

(37.1)

 

86.0

 

1.1

156.4

Increase (decrease) in accounts payable and accrued liabilities

 

78.5

 

(66.6)

 

77.2

(169.0)

(Increase) decrease in other operating assets and liabilities

 

43.2

 

104.8

 

40.4

94.2

Net cash provided by operating activities

 

1,061.5

 

419.3

 

1,844.2

 

894.5

INVESTING ACTIVITIES

Capital expenditures

 

(219.8)

 

(113.3)

 

(452.4)

 

(214.3)

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

 

(129.9)

 

10.1

 

(135.0)

 

50.0

Other

 

(10.4)

 

(10.5)

0.4

Net cash used in investing activities

 

(360.1)

 

(103.2)

 

(597.9)

 

(163.9)

FINANCING ACTIVITIES

Repayments of debt

 

 

(400.0)

 

 

(400.0)

Capitalization of debt issuance cost

0.1

Cash dividends paid to common stockholders

 

(541.1)

 

(154.6)

(1,005.0)

 

(463.8)

Other, net

 

(1.4)

 

(0.2)

 

(2.7)

 

(2.5)

Net cash used in financing activities

 

(542.5)

 

(554.8)

 

(1,007.7)

 

(866.2)

Effect of exchange rate changes on cash and cash equivalents

 

(31.9)

 

(4.1)

 

(27.9)

 

19.3

(Decrease) increase in cash and cash equivalents

 

127.0

 

(242.8)

 

210.7

 

(116.3)

Cash and cash equivalents, at beginning of period

 

2,267.3

 

2,051.6

 

2,183.6

 

1,925.1

Cash and cash equivalents, at end of period

$

2,394.3

$

1,808.8

$

2,394.3

$

1,808.8

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

6

Southern Copper Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

    

Three Months Ended

    

Six Months Ended

June 30, 

June 30, 

2021

2020

2021

2020

(in millions)

TOTAL EQUITY, beginning of period

$

7,578.3

$

6,763.2

$

7,276.0

$

6,858.2

STOCKHOLDERS’ EQUITY, beginning of period

 

7,525.1

 

6,716.2

 

7,224.8

 

6,810.3

CAPITAL STOCK:

Balance at beginning and end of period:

 

8.8

 

8.8

 

8.8

 

8.8

ADDITIONAL PAID-IN CAPITAL:

Balance at beginning of period

 

3,439.5

 

3,410.5

 

3,441.5

 

3,424.9

Other activity of the period

 

15.4

 

7.7

 

13.4

 

(6.7)

Balance at end of period

 

3,454.9

 

3,418.2

 

3,454.9

 

3,418.2

TREASURY STOCK:

Southern Copper common shares

Balance at beginning of the period

 

(2,767.5)

 

(2,767.9)

 

(2,767.5)

 

(2,767.9)

Used for corporate purposes

 

0.1

 

 

0.1

 

Balance at end of period

 

(2,767.4)

 

(2,767.9)

 

(2,767.4)

 

(2,767.9)

Parent Company common shares

Balance at beginning of period

 

(293.7)

 

(266.3)

 

(296.0)

 

(281.0)

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

 

(14.7)

 

(7.3)

 

(12.4)

 

7.4

Balance at end of period

 

(308.4)

 

(273.6)

 

(308.4)

 

(273.6)

Treasury stock balance at end of period

 

(3,075.8)

 

(3,041.5)

 

(3,075.8)

 

(3,041.5)

RETAINED EARNINGS:

Balance at beginning of period

 

7,146.4

 

6,341.2

 

6,846.4

 

6,435.6

Net earnings

 

932.7

 

259.5

 

1,696.6

 

474.3

Dividends declared and paid, common stock, per share, 2021- '$1.30, 2020– '$0.60

 

(541.1)

 

(154.6)

 

(1,005.0)

 

(463.8)

Balance at end of period

 

7,538.0

 

6,446.1

 

7,538.0

 

6,446.1

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):

Balance at beginning and end of period

 

(8.4)

 

(10.1)

 

(8.4)

 

(10.1)

STOCKHOLDERS’ EQUITY, end of period

 

7,917.5

 

6,821.5

 

7,917.5

 

6,821.5

NON-CONTROLLING INTEREST, beginning of period

 

53.2

 

47.0

 

51.2

 

47.9

Net earnings

 

3.7

 

1.4

 

7.0

 

2.8

Distributions paid

 

(1.6)

 

(0.3)

 

(2.9)

 

(2.6)

NON-CONTROLLING INTEREST, end of period

 

55.3

 

48.1

 

55.3

 

48.1

TOTAL EQUITY, end of period

$

7,972.8

$

6,869.6

$

7,972.8

$

6,869.6

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

7

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”). As of June 30, 2021, 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 (“Southern Copper”, "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 fairly state the Company’s financial position as of June 30, 2021 and the results of operations, comprehensive income, cash flows and changes in equity for the three and six months ended June 30, 2021 and 2020. The results of operations for the six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the full year. The December 31, 2020 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, 2020 and notes included in the Company’s 2020 annual report on Form 10-K.

COVID – 19 PANDEMIC

Since the World Health Organization (“WHO”) declared the COVID-19 virus outbreak as a global pandemic, all the countries where the Company operates and conducts exploration activities, as well as the countries where its main customers and suppliers are located, have published health and safety rules and restrictions on individuals and business activities.

As of June 30, 2021, the Company‘s production facilities in Mexico and Peru were working at approximately 95% of their production capacity. The Company has developed a rigorous COVID-19 emergency protocol and the workforce is gradually returning to work at all of our facilities. As of June 30, 2021, approximately 96% of the workforce in Mexico was working on site or at home under strict safety measures; the remaining 4% of the workforce was not working, including all individuals at high risk due to age and/or preexisting medical conditions. At our Peruvian operations, approximately 67% of the workforce was working on site or at home under strict safety measures, while the remaining 33% was not working, including all individuals at high risk due to age and/or preexisting medical conditions.

The Company has restarted exploration activities at all of its locations. Activities resumed in Ecuador in September 2020; at the end of the second quarter of 2020 in Argentina; and in February 2021 in Chile.

The financial reporting process and the information required to prepare the Company’s financial statements suffered no interruption and the financial statements were prepared without restrictions or difficulties.

SCC´s Corporate Crisis Committee as well as its Crisis Committees in Mexico and Peru continue to closely monitor the impact of the pandemic and to analyze and quickly resolve any issues that may arise. As of June 30, 2021, there were no major delays in the supply of materials and services critical for the operations and sales. Also, shipments and collections have registered no known major delays.

8

After having completed the first stage of its capital programs at Buenavista in Mexico and Toquepala in Peru, the Company currently has no pending major capital expenditures commitments (see Note 9 - Commitments and Contingencies). The Company paid the first tranche of its 2010 bonds of $400 million on April 15, 2020. The Company has no other major debt maturity scheduled until 2022.

The Company performed a qualitative analysis and as of June 30, 2021, identified no indicators of impairment. As the Company reported in its 2020 Annual report on Form 10-K, the results of its impairment sensitivity analysis showed projected discounted cash flows in excess of the carrying amounts of long-lived assets by margins ranging from 1.3 to 4.3 times such carrying amount. This analysis included a stress test using a copper price assumption of $2.00 per pound and a molybdenum price assumption of $4.00 per pound. (Please see, Management´s Discussion and Analysis, Critical Policies and Estimates, Asset Impairments on the 2020 Form 10-K).

NOTE 2 — SHORT-TERM INVESTMENTS:

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

At June 30, 

At December 31, 

    

2021

    

2020

Trading securities

$

545.3

$

410.2

Weighted average interest rate

 

0.3

%  

 

0.4

%

Available-for-sale

$

0.5

$

0.6

Weighted average interest rate

 

0.7

%  

 

0.7

%

Total

$

545.8

$

410.8

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 as of June 30, 2021 and December 31, 2020, included corporate bonds and asset and mortgage backed obligations. As of June 30, 2021 and December 31, 2020, gross unrealized gains and losses on available-for-sale securities were not material.

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

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

Three months ended

Six months ended

 

June 30, 

June 30, 

    

2021

    

2020

    

2021

    

2020

 

Trading:

Interest earned

$

0.2

$

(*)  

$

0.7

$

0.4

Unrealized gain (loss) at the end of the period

$

(*)  

$

(*)  

$

(*)  

$

(*)  

Available-for-sale:

Interest earned

$

(*)  

$

(*)  

$

(*)  

$

(*)  

Investment redeemed

$

$

$

0.1

$

0.1

(*) Less than $0.1 million.

9

NOTE 3 — INVENTORIES:

Inventories were as follows:

At June 30, 

At December 31, 

(in millions)

    

2021

    

2020

Inventory, current:

Metals at average cost:

Finished goods

$

57.5

$

50.8

Work-in-process

 

263.3

 

248.9

Ore stockpiles on leach pads  

228.3

298.5

Supplies at average cost

 

344.8

 

352.0

Total current inventory

$

893.9

$

950.2

Inventory, long-term:

Ore stockpiles on leach pads

$

1,180.2

$

1,125.0

During the six months ended June 30, 2021 and 2020, total leaching costs capitalized as non-current inventory of ore stockpiles on leach pads amounted to $118.8 million and $94.3 million, respectively. Leaching inventories recognized in cost of sales amounted to $133.8 million and $209.5 million for the six months ended June 30, 2021 and 2020, respectively.

NOTE 4 — INCOME TAXES:

The income tax provision and the effective income tax rate for the first six months of 2021 and 2020 consisted of (in millions):

    

2021

    

2020

Statutory income tax provision

$

956.4

$

406.8

Peruvian royalty

 

38.9

 

4.3

Mexican royalty

 

107.9

 

21.4

Peruvian special mining tax

 

52.0

 

13.7

Total income tax provision

$

1,155.2

$

446.2

Effective income tax rate

40.6

%

48.2

%

These provisions include income taxes for Peru, Mexico and the United States. The Mexican royalty, the Peruvian royalty and the Peruvian special mining tax are included in the income tax provision. The decrease in the effective income tax rate in 2021 compared to the same period in 2020 was primarily attributable to a movement in exchange gains and losses from the strong depreciation of the Mexican peso against the U.S. dollar in 2020.

Peruvian royalty and special mining tax: The Company has accrued $65.4 million and $16.7 million of royalty charge in the first six months of 2021 and 2020, respectively, of which $38.9 million and $4.3 million were included in income taxes in 2021 and 2020, respectively.

The Company has accrued $52.0 million and $13.7 million of special mining tax as part of the income tax provision for the first six months of 2021 and 2020, respectively.

Mexican mining royalty: The Company has accrued $107.9 million and $21.4 million of royalty taxes as part of the income tax provision for the first six months of 2021 and 2020, respectively.

10

Accounting for uncertainty in income taxes: The Company effectively settled the 2014 through 2016 IRS audit on April 14, 2021. The decrease in unrecognized tax benefits from the audit settlement had no material effect on the Company’s financial statements.

NOTE 5 — 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 and railroad transportation, construction services, energy supply, and other 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. Article Nine of the Amended and Restated Certificate of Incorporation of the Company prohibits the Company from engaging in a Material Affiliate Transaction that was not the subject of prior review by a committee of the Board of Directors with at least three members, each of whom is independent, and defines a Material Affiliate Transaction as a transaction or series of related transactions between Grupo Mexico or one of its affiliates (other than the Company or its subsidiaries), on the one hand, and the Company or one of its subsidiaries, on the other hand, that involves consideration of more than $10.0 million in the aggregate. It is the Company’s policy that (i) a Material Affiliate Transaction not be entered into or continued without the review and approval by the Audit Committee or its subcommittee of related party transactions comprised of independent directors,(ii) any potential related party transaction process with aggregate consideration between $8.0 million and $10.0 million be authorized by the General Counsel and Chief Financial Officer of the Company and (iii) that all related party transactions, including any Material Affiliate Transaction, be reported to the Audit Committee of the Board of Directors or to its subcommittee of related party transactions.

11

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

At June 30, 

At December 31, 

    

2021

    

2020

Related parties receivable current:

Grupo Mexico and affiliates:

Asarco LLC

$

6.4

$

5.3

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

 

0.3

 

0.3

Grupo Mexico

 

2.7

 

2.7

Mexico Generadora de Energia S. de R.L. ("MGE")

17.6

14.4

Grupo Mexico Servicios de Ingenieria, S.A. de C.V.

0.2

0.2

Related to the controlling group:

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

0.1

0.2

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

0.3

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

0.2

$

27.6

$

23.3

Related parties payable:

Grupo Mexico and affiliates:

Asarco LLC

$

12.5

$

13.9

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

 

0.3

 

0.3

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

 

2.7

 

4.7

Grupo Mexico

 

 

0.9

Grupo Mexico Servicios

10.2

19.6

Grupo Mexico Servicios de Ingenieria, S.A. de C.V.

1.2

0.7

MGE

45.0

40.8

Mexico Compania Constructora S.A de C.V.

17.4

22.9

Related to the controlling group:

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

 

0.2

 

0.3

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

 

0.3

 

0.1

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

0.1

0.1

$

89.9

$

104.3

12

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 first six months of 2021 and 2020 (in millions):

    

2021

    

2020

Purchase activity

Asarco LLC

$

10.2

$

168.4

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

 

0.6

 

0.5

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

 

21.6

 

22.2

Grupo Mexico

5.0

Grupo Mexico Servicios

14.3

8.9

Intermodal Mexico S.A. de C.V.

0.5

MGE

 

140.9

 

105.2

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

 

31.4

 

25.8

Peru Mining Exploration & Development Company

0.4

Total purchases

$

219.9

$

336.0

Sales activity

Asarco LLC

$

14.7

$

11.0

MGE

61.1

21.2

Total sales

$

75.8

$

32.2

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 and Grupo Mexico Servicios, a subsidiary of Grupo Mexico, for these services and expects to continue requiring these services in the future.

In the first six months of 2021, the Company made donations of $0.8 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 the same period of 2020, the Company made donations of $3.0 million to this organization.

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 Compania Constructora S.A. de C.V., which are all subsidiaries of Grupo Mexico. Additionally, the Company´s Peruvian and Mexican operations paid fees for engineering services provided by Grupo Mexico Servicios de Ingenieria, S.A. de C.V., a subsidiary of Grupo Mexico. The Company’s Mexican operations also paid fees for construction services provided by Intermodal Mexico, S.A. de C.V., a subsidiary of Grupo Mexico. In addition, the Company purchased 3 mining concessions from Peru Mining Exploration & Development Company, a subsidiary of Grupo Mexico.

The Company’s Mexican operations purchased copper concentrates and rod from Asarco LLC and also paid fees for tolling services. Additionally, the Company´s Mexican operations purchased power from MGE. Both companies are subsidiaries of Grupo Mexico.

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 2 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 2.5% of its power output to third-party energy users, compared to 1.0% as of June 30, 2020.

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 began to sell power to Industrial Minera Mexico, S.A. de C.V. and subsidiaries

13

(IMMSA) and other subsidiaries of Grupo Mexico in the third quarter of 2014. Currently, Eolica el Retiro supplies 16.6% of its power output to IMMSA and Mexcobre, compared to 9.1% as of June 30, 2020.

The Company sold starter sheets, copper concentrate, sulfuric acid, silver and gold to Asarco LLC. In addition, the Company received rental fees from Grupo Mexico Servicios.

In September 2019, Asarco LLC signed a promissory agreement to pay to the Company´s Mexican operations $62.0 million plus interest no later than October 31, 2021, with quarterly payments of $0.5 million. The annual interest rate of the note was Libor plus 200 basis points, which would be reviewed annually. In November 2020, Asarco repaid this agreement. Related to this agreement, the Company recorded interest income of $1.3 million in the first six months of 2020.

The Company also received fees for natural gas and services provided to MGE, a subsidiary of Grupo Mexico. In May 2020, MGE signed a promissory note to pay to the Company´s Mexican operations 97.2 million Mexican pesos (approximately $5.1 million) plus interest no later than November 30, 2020. The annual interest rate of the note was 8.28% with monthly payments. MGE repaid this note in December 2020.

Companies with relationships to the controlling group:

The following table summarizes the purchase and sales activities with other Larrea family companies in the first six months of 2021 and 2020 (in millions):

    

2021

    

2020

Purchase activity

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

$

0.2

$

0.2

Mextransport

0.7

2.3

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

0.1

0.1

Total purchases

$

1.0

$

2.6

Sales activity

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

$

(*)

$

0.1

Mextransport

0.9

0.8

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

(*)

0.1

Total sales

$

0.9

$

1.0

(*) 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.

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. and Operadora de Cinemas, S.A. de C.V. The Company´s Mexican operations received fees from Mextransport for reimbursement of maintenance expenses and for rental services.

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.

14

In addition, the Company has a 30.0% participation in Apu Coropuna S.R.L. (“Apu Coropuna”), which it accounts for on the equity method. Apu Coropuna is a company that performs exploration activities in the Pucay prospect, located in Arequipa, Peru.

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

In the first six months of 2021, the Company engaged in no purchase or sales activities with companies that have relationships with SCC executive officers.

NOTE 6 — LEASES:

The Company has operating leases for power generating facilities, vehicles and properties. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. Some of the Company’s leases include both lease and non-lease components which are accounted for separately. The Company’s leases have remaining lease terms of two years to 12 years, and do not include options to extend the leases. The Company’s lease agreements do not contain options to purchase the leased assets or to terminate the leases before the expiration date. In addition, the Company’s lease contracts have no material residual value guarantees or material restrictive covenants. As none of the Company’s leases stipulates an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

The weighted average remaining lease term for the Company’s leases is nine years, and the weighted average discount rate for these leases is 3.69%.

The operating lease expense recognized in the first six months of 2021 and 2020 was classified as follows (in millions):

Classification

    

2021

 

2020

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

 

$

57.2

$

57.5

Selling, general and administrative

 

0.1

 

0.1

Exploration

 

0.1

 

0.1

Total lease expense

 

$

57.4

$

57.7

The Company’s short-term lease costs for the first six months of 2021 were $0.1 million.

Maturities of lease liabilities are as follows:

Lease liabilities

Year

    

(in millions)

2021

 

$

57.3

2022

 

113.7

2023

 

112.2

2024

 

104.8

2025

 

103.7

After 2025

 

723.0

Total lease payments

 

$

1,214.7

Less: interest on lease liabilities

 

(270.4)

Present value of lease payments

 

$

944.3

15

NOTE 7 — ASSET RETIREMENT OBLIGATION:

Peruvian operations:

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.

On June 24, 2019, MINEM approved a change to the guarantees required for the mining closure plans. The new regulation specifies that annual guarantees can be secured with real estate up to a maximum of 50% of the total required and the remaining amount can be covered by credit instruments. Currently, the Company has pledged the value of its Lima office complex to back 50% of the guarantee and has a stand-by letter of credit for the other 50% as a security for this obligation.Through January 2021, the Company has provided total guarantees of $56.5 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 3 units. In March 2016, MINEM approved the Mining Closure Plan for the Toquepala expansion project and the revised closure plans for the Cuajone mine and the Ilo facilities were approved in January and October 2019 respectively. Based on these new estimates, the Company increased the asset retirement obligation by $28.1 million in 2019. The closure plan for the Tia Maria project was approved in February 2017. However, the Company has not recorded a retirement obligation for the Tia Maria project because work on the project is still on hold. The Company believes that under these circumstances, the recording of a retirement obligation is not appropriate.

Mexican operations:

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.

In 2020, the Company made a change in the estimate for the asset retirement obligation for its Mexican operations, mainly due to a detailed review of the closing activities required for each facility. The effect of this change was an increase in the asset retirement obligation of $269.3 million, which was recorded in December 2020.

The following table summarizes the asset retirement obligation activity for the first six months of 2021 and 2020 (in millions):

    

2021

    

2020

Balance as of January 1

$

545.0

$

262.3

Closure payments

 

(1.9)

 

(0.8)

Accretion expense

 

12.2

 

7.4

Balance as of June 30, 

$

555.3

$

268.9

16

NOTE 8 BENEFIT PLANS:

Post retirement defined benefit plans:

The Company has 2 non-contributory defined benefit pension plans to cover 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 first six months of 2021 and 2020 are as follows (in millions):

(in millions)

    

2021

    

2020

Service cost

$

0.7

$

0.7

Interest cost

 

0.7

 

0.9

Expected return on plan assets

 

(1.7)

 

(1.4)

Amortization of prior service cost / (credit)

 

0.1

 

0.1

Amortization of net loss/(gain)

 

0.1

 

0.1

Net periodic benefit cost

$

(0.1)

$

0.4

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 first six months of 2021 and 2020 are as follows (in millions):

(in millions)

    

2021

    

2020

Interest cost

$

0.8

$

0.6

Amortization of net loss (gain)

 

0.1

 

(*)

Amortization of prior service cost/ (credit)

 

(*)

 

(*)

Net periodic benefit cost

$

0.9

$

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.

17

Environmental capital investments in the first six months of 2021 and 2020 were as follows (in millions):

    

2021

    

2020

Peruvian operations

$

0.7

$

(5.5)

Mexican operations

 

21.8

 

19.4

$

22.5

$

13.9

(*) The activity in 2020 for the Peruvian operations includes prepayment settlements classified to expenses.

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 obligations, 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 7 “Asset retirement obligation” for further discussion of this matter.

Air Quality Standards (“AQS”): In June 2017, MINAM enacted a supreme decree that defined new AQS for daily sulfur dioxide in the air (250 µg/m3). As of June 30, 2021, the Company maintains a lower daily average level of µg/m3 (micrograms per cubic meter) of SO2, than those required by the AQS.

Soil Environmental Quality Standards (“SQS”): In 2013, the Peruvian government enacted Soil Quality Standards. In accordance with the regulatory requirements of the law, the Company prepared Soil Descontamination Plans (“SDP”) for environmentally impacted sites at each of its operation units (Toquepala, Cuajone and Ilo) with the assistance of consulting companies. The cost of these SDPs are not material, either individually or in aggregated form, for the financial statements of the Company.

Climate change: On April 17, 2018, the Peruvian government enacted Law N. 30754, establishing a Climate Change

Framework. This law establishes that promoting public and private investments in climate change management is of national interest. The law proposes creating an institutional framework to address climate change in Peru, and outlines new measures, particularly with respect to climate change mitigation. It includes, for example, provisions dealing with: increasing carbon capture and use of carbon sinks; afforestation and reforestation practices; land use changes; and sustainable systems of transportation, solid waste management, and energy systems. This is the first Latin American climate change framework law to incorporate obligations from the Paris Agreement. Regulations to this law were enacted by Supreme Decree 013-2019 published on December 31, 2019 and are applicable to all Peruvian institutions and agencies. It is expected that further Peruvian regulations will be applicable to non-governmental entities. The Company anticipates initiating a multi-year process to adopt applicable reporting recommendations of the Task-Force on Climate Related Financial Disclosures (TCFD) once new Peruvian climate change regulations applicable to non-governmental entities are implemented. The Company is committed to the environment and to managing climate-related impacts. The Company’s focus is to seek continuous improvement in the responsible use of natural resources while complying with strict applicable legal standards for prevention, mitigation, control and remediation of environmental impacts. Implementing continuous improvement in the Company’s processes improves efficiency in the use and consumption of energy, water, and other natural resources.

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

18

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 to provide 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, which established 3 categories of collective actions under which a group of 30 or more individuals can be considered sufficient to prove a “legitimate interest” to file civil actions for injuries derived from alleged violations of environmental, consumer protection, financial services and economic competition laws and to seek restitution or economic compensation for the alleged injuries or the suspension of the activities which allegedly generated the injuries in question. 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 likely to 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.

Guaymas sulfuric acid spill:

On July 9, 2019, there was an incident at the Company´s Marine Terminal in Guaymas, Sonora, that caused the discharge of approximately 3 cubic meters of sulfuric acid into the sea in the industrial port area.

The Guaymas bay has an estimated water volume of 340 million cubic meters. The spill, upon entering in contact with the sea’s alkaline conditions, led to quick dilution of the discharge and the sulfuric acid was naturally and immediately neutralized. As a result, the discharge was considered harmless; the report from the Ministry of Navy found that neither the flora nor fauna of the port area were affected.

On July 10, 2019, PROFEPA made a first inspection of the area, concluding that the Company executed all the appropiate procedures in order to contain the discharge, and no reference was made to the existence of negative impacts on the environment resulting from the incident.

On Friday, July 19, 2019, PROFEPA revisited the facilities to carry out a second inspection, declaring a partial temporary shutdown that affected only the storage process and transportation of sulfuric acid at the terminal, arguing the absence of an authorization of environmental impact. It is important to note that these facilities have been operating since 1979, prior to the 1988 Mexican General Law of Ecological Balance and the Protection of the Environment. Companies that were operating before the aforementioned law are exempt from the permit requirement. In addition, in 2009, PROFEPA awarded a certification of “Clean Industry and Environmental Quality” to the facility which was subsequently renewed 4 times (for a two-year period each time).

The Company is not aware of the reasons or causes for this partial and temporary closure, but will continue working with the environmental authorities to provide certainty that the operation is in strict compliance with environmental regulations. The Company expects the environmental authorities to suspend the partial temporary shutdown, once they resolve their concerns. Currently, the Company does not expect any impact on its operations. As of June 30, 2021, the matter is pending resolution.

Climate change:

Grupo Mexico, the indirect parent of SCC has issued sustainability reports under the Global Reporting Initiative (GRI) for more than 10 years. Grupo Mexico also participates in different Mexican and international reporting programs such as the Greenhouse Gases (GHG) Mexico Program and the Carbon Disclosure Program (CDP). In 2013, GHG and CDP have signed a memorandum of understanding to work on aligning their reporting frameworks. Grupo Mexico’s 2018 CDP questionnaire included responses to the Task Force on Climate-Related Disclosure or TCFD concerns. In

19

compliance with the 2012 Mexican Climate Change Law, Grupo Mexico’s GHG emissions are reported and verified independently. On October 18, 2017, Grupo Mexico was selected to join the S&P Sustainability Indices MILA Pacific Alliance (DJSI MILA). In 2017, this regional sustainability index included 42 leading companies in sustainability from the countries that form part of the Pacific Alliance: Mexico, Chile, Colombia and Peru. As indicated above, the Grupo Mexico 2020 report is aligned with the reporting standards of the Global Reporting Initiative (GRI) and, for the first time, also adheres to the frameworks of the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosures.

The Company believes that all of its facilities in Peru and Mexico are in material compliance with applicable environmental, mining and other applicable laws and regulations. The Company also believes that continued compliance with environmental laws of Mexico and Peru will have no material adverse effects on the Company’s business, properties, or operating results.

Litigation matters:

Peruvian operations

The Tia Maria Mining Project

There are 5 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 that approved the Environmental Impact Assessment of the project; (ii) the cancellation of the project and the withdrawal of mining activities in the area; (iii) to declare null and void the mining concession application for the Tia Maria project; and (iv) to declare null and void the resolution that approved the construction license. The lawsuits were filed by Messrs. Jorge Isaac del Carpio Lazo (filed May 22, 2015), Ernesto Mendoza Padilla (filed May 26, 2015), Juan Alberto Guillen Lopez (filed June 18, 2015), Junta de Usuarios del Valle del Tambo (filed April 30, 2015), and Gobierno Regional de Arequipa (filed December 16, 2019).

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 upheld the first instance ruling. On April 27, 2018, the plaintiff filed an extraordinary appeal before the Supreme Court. As of June 30, 2021, 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. On November 20, 2018, the Constitutional Court reversed the previous decisions and remanded the case to the lower court for further action. In the third quarter of 2020, the Company was notified that the complaint had been reinstated. The Company answered the complaint on September 15, 2020. On December 2, 2020, the lower court issued a resolution, considering the complaint answered. As of June 30, 2021, the case remains pending resolution.

The Guillen Lopez case is currently before the lower court. On July 19, 2019, the oral arguments took place. On January 7, 2020, the Judge decided to suspend the proceeding until the del Carpio Lazio case is concluded. Therefore, as of June 30, 2021, the case remains pending resolution.

The Junta de Usuarios del Valle del Tambo case is currently before the lower court. On May 2016, the Company was included in the process, after the Ministry of Energy and Mines filed a civil complaint. On March 6, 2019, the Company was formally notified of the lawsuit and answered the complaint on March 20, 2019. On July 8, 2019, the Company requested the suspension of the proceeding until the del Carpio Lazio case is concluded. As of June 30, 2021, the case remains pending resolution.

The Gobierno Regional de Arequipa case is currently before the lower court and the Company answered the complaint on September 15, 2020. As of June 30, 2021, the case remains pending resolution.

20

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, since 1995, constructed and operated the tailings dams with proper governmental authorization. Following 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 June 30, 2021, the case was 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 in 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 environmental damages. During the second quarter of 2018, the criminal complaint was dismissed. This decision was appealed and was pending resolution as of June 30, 2021.

Through the first half of 2015, 6 collective action lawsuits were filed in federal courts in Mexico City and Sonora against 2 subsidiaries of the Company seeking economic compensation, clean up and remedial activities in order to restore the environment to its pre-existing conditions. NaN of the collective action lawsuits have been dismissed by the court. As of June 30, 2021, 3 lawsuits were in process: 2 were filed by Acciones Colectivas de Sinaloa, A.C. and 1 by Defensa Colectiva, A.C., requesting precautionary measures about construction of facilities to monitor public health services and prohibiting the closure of the Rio Sonora Trust.

Similarly, in 2015, 8 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, 3 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 NaN 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. In the last quarter of 2018, BVC was served with other 3 civil action lawsuits, claiming similar damages. These lawsuits were filed by Los Corrales de la Estancia, S.C. de R.L.; Jose Antonio Navarro; Jesus Maria

21

Peña Molina, et al; these actions were dismissed by the court, because they have expired. As of June 30, 2021, NaN cases were pending resolution.

In 2015, 4 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 1 subsidiary of the Company; and (iv) the alleged inactivity of the authorities with regard to the spill in August 2014. The plaintiffs of these lawsuits are: Francisca Garcia Enriquez, et al filed 2 lawsuits, Francisco Ramon Miranda, et al and Jesus David Lopez Peralta et al. In the third quarter of 2016, 4 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. In 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 2 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; which claimed the lack of community approval for the authorization granted by SEMARNAT to build the new BVC tailings dam, on September 5, 2018, the Supreme Court of Justice issued a resolution establishing that such authorization was granted to BVC in compliance with the applicable legislation. However, SEMARNAT must hold 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 for BVC’s operations. SEMARNAT has carried out the consultation ordered by the Supreme Court. As a result, the Judge in the case has been informed about compliance with the resolution, which required BVC to take additional measures of environmental impact prevention, such as: (i) building at least 3 monitoring wells downstream from the curtain of the contingency dam in a period of six months; (ii) monitoring of the groundwater level and water quality every six months; (iii) carrying out rain collection work in order to restore water to the Sonora River basin, for which six months are granted to present the execution program; (iv) determining the location of wildlife conservation and protection areas and defining if biological corridors need to be established; (v) obtaining photographic or videographic evidence every six months; (vi) submitting to SEMARNAT, two years before the closure and abandonment of the site, or earlier if necessary, the closure program that includes the cleaning and restoration of the soil including Mexican regulation NOM-141; (vii) including measures in the Environmental Monitoring Program that are aligned with the environmental components impacted; and (viii) hiring an external environmental consultant to validate compliance with the current and new conditions that are imposed. The foregoing does not impact BVC’s operations. Additionally, the lawsuits filed by Maria de los Angeles Enriquez Bacame and Norberto Bustamante have been dismissed and closed without prejudice to the Company. As of June 30, 2021, the remaining cases were still pending resolution.

It is currently not possible to determine the extent of the damages sought in these state and federal lawsuits but the Company believes that these lawsuits are without merit. Accordingly, the Company is vigorously defending against them. Nevertheless, the Company believes 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

In April 2019, a derivative lawsuit was filed against the Company, certain current and former Directors, and Grupo Mexico 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 Mexico.

In October 2019, the plaintiff amended the complaint to include claims related to certain administrative services contracts between the Company’s subsidiaries and Grupo Mexico. The amended complaint alleges, among other things, that the construction contracts, the mineral contracts, the transportation contracts, and the administrative services contracts were unfair as a result of breaches of fiduciary duties and the Company’s charter. The amended complaint also added Americas Mining Corporation (“AMC”) as a defendant, alleging that AMC breached its fiduciary duties as a

22

controlling stockholder of the Company. The amended complaint seeks, among other things, unspecified monetary damages. In January 2020, the Company, the current and former Directors, and Grupo Mexico responded to the complaint by filing motions to dismiss. The Plaintiff filed a brief in response to the motions on March 13, 2020. On July 16, 2020, the Court denied the motions to dismiss the breach of fiduciary duty claims against the Directors. On October 6, 2020, the Court dismissed the Plaintiff’s claims against Grupo Mexico for lack of personal jurisdiction. On February 11, 2021, the Court granted the Directors’ motion to dismiss plaintiff’s breach of contract claim. The Court also granted AMC’s motion to dismiss all claims against AMC other than those related to the mineral contracts.

As of June 30, 2021, because the Company has not reached a conclusion as to whether an unfavorable outcome is either probable or remote, the Company expresses no opinion as to the likelihood of an unfavorable outcome or the amount or range of any possible loss to the Company.

Labor matters:

Peruvian operations: 68% of the Company’s 4,666 Peruvian employees were unionized as of June 30, 2021. Currently, there are 6 separate unions, 1 large union and 5 small unions.

The Company decided to hold talks with the 6 unions to sign collective agreements prior to their effective dates. As a result, in June 2021, the Company signed a four-year collective agreement with one of the unions and granted, among other things, annual salary increases of 5% for each year from December 2021 and a signing bonus of S/ 60,000 (approximately $ 15,520) that will be recorded as labor expense.

We are in the process of negotiating similar agreements with the 5 remaining unions.

Mexican operations: In recent years, the Mexican operations have experienced a positive improvement in their labor environment, as 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 began a strike in 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 would 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, once again, the election results from February 28, 2018, by which the National Federation of Independent Unions won by a majority. In the last quarter of 2019, a Federal Court issued a resolution that established that the Labor Court should analyze the list of workers with the right to vote in the union election. The Company and the National Federation of Independent Unions challenged such determination before the Supreme Court of Justice and the case was still pending resolution as of March 31, 2020. As of June 30, 2021, the Company had virtually completed the rehabilitation plan to restore operations at the San Martin mine with a total expense of approximately $89.1 million and has reached full operating capacity.

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 June 30, 2021, the case was 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.

In 2020, a small group of workers at the Charcas mine claimed an additional workers’ participation payment and a minor incident was reported. This claim lacked legal basis given that the Company had already completely fulfilled said

23

obligation with the workers in question. Consequently, the Company took legal action and through conciliation and mediation with labor authorities, the incident concluded with no further repercussions for the Company.

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 final approval for Tia Maria´s Environmental Impact Assessment (“EIA”). On July 8, 2019, the Company received the construction permit for this 120,000 ton annual SX-EW copper greenfield project with a total capital budget of $1,400 million. This permit was obtained after completing an exhaustive review process, complying with all established regulatory requirements and addressing all observations raised.

On July 15, 2019, anti-mining groups staged a violent demonstration affecting economic as well as other activities in the Islay province. These actions were followed by the filing of 3 complaints, sponsored by groups opposing the Tia Maria project, with the Mining Council, which is the Peruvian administrative authority responsible for ruling on these complaints. The Mining Council temporarily suspended the construction permit on August 8, 2019. On October 7, 2019, as part of the process, the Mining Council conducted a hearing to hear the complaints and the Company´s position. On October 30, 2019, the Mining Council of the Peruvian Ministry of Energy and Mines ratified the construction permit for the Tia Maria project.

The Company has been working to promote the welfare of the Islay province population. As part of these efforts, the Company has implemented social programs in education, healthcare and productive development to improve the quality-of-life in the region. The Company also has promoted agricultural and livestock activities in the Tambo Valley and supported growth in manufacturing, fishing and tourism in Islay.

During the construction and operation phase, the Company will make it a priority to hire local labor to fill the 9,000 jobs (3,600 direct and 5,400 indirect) that the Company expects to generate during Tia Maria’s construction phase. When operating, the Company expects Tia Maria to directly employ 600 workers and indirectly provide jobs for another 4,200. Additionally, from day one of its operations, the Company will generate significant contributions to revenues in the Arequipa region via royalties and taxes.

Tia Maria´s project budget is approximately $1.4 billion, of which $340.4 million has been invested through June 30, 2021. 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 therefore, do not release any emissions into the atmosphere.

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. In June 2021, the Company made an additional payment of $12.5 million. The balance of $375.0 million will be paid if the Company decides to develop the project, which is not a present obligation.

24

Corporate Social Responsibility:

The Company has a corporate social responsibility policy to maintain and promote the continuity of its mining operations and obtain the best results. The main objective of this policy is to integrate the Company´s operations with local communities in the areas of influence of its operations by creating permanent positive relationships to develop optimum social conditions and 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 funding various social and infrastructure improvement projects in Toquepala’s neighboring communities. The total amount committed for these purposes is S/445.0 million (approximately $115.1 million).

As the Toquepala expansion project has been completed, the Company considers that these commitments constitute present obligations of the Company and consequently has recorded a liability of $35.9 million in its condensed consolidated financial statements as of June 30, 2021.

In addition, the Company has committed S/70.2 million (approximately $18.2 million) for the construction of a high-performance school in the Tacna 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.

Moquegua Region: In the Moquegua region, the Company participates in a “development roundtable” with local municipal authorities and community representatives to discuss social needs and to determine the ways that the Company can contribute to sustainable development in the region. Currently, the roundtable is discussing the creation of a Moquegua Region Development Fund, for which the Company has offered a contribution of S/1,000 million (approximately $258.7 million). While final funding is not yet settled, the Company has committed to contribute S/108.4 million (approximately $28.0 million) as an advance, which is being utilized to fund an educational project. In addition, there is a commitment to finance the construction of a residual water treatment plant in Ilo for S/78.7 million (approximately $20.4 million) and to build three schools in Moquegua for S/ 15.3 million (approximately $4.0 million).

In addition, the Company has committed S/88.8 million (approximately $23.0 million) to build two 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.

Power purchase agreements:

Electroperu S.A.: In June 2014, the Company entered into a power purchase agreement for 120 megawatts (“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 starting on May 1, 2017 and ending on October 31, 2029.

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 5 “Related party transactions”.

25

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 5 “Related party transactions”.

Parque Eolico de Fenicias, S. de R.L. de C.V.: On February 20, 2020, the Company signed a power purchase agreement with Parque Eolico de Fenicias, S. de R.L. de C.V., and indirect subsidiary of Grupo Mexico, to supply 611,400 MWh of power per year to some of the Company´s Mexican operations for 20 years. This agreement is expected to start in October 2021.

Corporate operations

Commitment for capital projects:

As of June 30, 2021, the Company had committed approximately $253.4 million to 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 — STOCKHOLDERS’EQUITY:

Treasury Stock:

Activity in treasury stock in the six-month period ended June 30, 2021 and 2020 is as follows (in millions):

    

2021

    

2020

Southern Copper common shares

Balance as of January 1,

$

2,767.5

$

2,767.9

Used for corporate purposes

 

(0.1)

 

Balance as of June 30, 

 

2,767.4

 

2,767.9

Parent Company (Grupo Mexico) common shares

Balance as of January 1,

 

296.0

 

281.0

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

 

12.4

 

(7.4)

Balance as of June 30, 

 

308.4

 

273.6

Treasury stock balance as of June 30, 

$

3,075.8

$

3,041.5

Southern Copper Common Shares:

At June 30, 2021 and at December 31, 2020, there were in treasury 111,514,817 and 111,522,817 shares of SCC’s common stock, respectively.

SCC share repurchase program:

In 2008, the Company’s Board of Directors (“BOD”) authorized a $500 million share repurchase program that has since been increased by the BOD and is currently authorized to $3 billion. Pursuant to this program, the Company has purchased 119.5 million shares of common stock at a cost of $2.9 billion. These shares are available for general corporate purposes. The Company may purchase additional shares of its common stock from time to time, based on

26

market conditions and other factors. This repurchase program has no expiration date and may be modified or discontinued at any time.

The NYSE closing price of SCC common shares as of June 30, 2021 was $64.32 and the maximum number of shares that the Company could purchase at that price was 1.3 million shares.

As a result of the repurchase of shares of SCC’s common stock, Grupo Mexico’s direct and indirect ownership was 88.9% as of June 30, 2021. There has been no activity in the SCC share repurchase program since the third quarter of 2016.

Directors’ Stock Award Plan:

The Company established a stock award compensation plan for certain directors who are not compensated as employees of the Company. Under this plan, participants currently receive 1,600 shares of common stock upon election and 1,600 additional shares following each annual meeting of stockholders thereafter. 600,000 shares of Southern Copper common stock have been reserved for this plan. On April 26, 2018, the Company's stockholders approved a five-year extension of the Plan until January 29, 2023 and an increase of the shares award from 1,200 to 1,600. The fair value of the award is measured each year at the date of the grant. Commencing with the 2021 grant, the 1,600 shares shall be granted quarterly and conditioned upon the attendance of each director to each Board meeting. The award is not subject to vesting requirements.

Parent Company common shares:

At June 30, 2021 and at December 31, 2020 there were in treasury 85,548,509 and 87,598,097 of Grupo Mexico’s common shares, respectively.

Employee Stock Purchase Plan:

2015 Plan: In January 2015, the Company offered to eligible employees a new stock purchase plan through a trust that acquires series B shares of Grupo Mexico stock for sale to its employees, and employees of subsidiaries, and certain affiliated companies. The purchase price was set at 38.44 Mexican pesos (approximately $2.63) for the initial subscription, which expires in January 2023. Every two years employees will be able to acquire title to 50% of the shares paid in the previous two years. The employees will pay for shares purchased through monthly payroll deductions over the eight year period of the plan. At the end of the eight year period, the Company will grant the participant a bonus of 1 share for every 10 shares purchased by the employee. Any future subscription will be at the average market price at the date of acquisition or the grant date.

If Grupo Mexico pays dividends on shares during the eight year period, the participants will be entitled to receive the dividend in cash for all shares that have been fully purchased and paid as of the date that the dividend is paid. If the participant has only partially paid for shares, the entitled dividends will be used to reduce the remaining liability owed for purchased shares.

In the case of voluntary or involuntary resignation/termination of the employee, the Company will pay to the employee the fair market sales price at the date of resignation of the fully paid shares, net of costs and taxes. When the fair market sales value of the shares is higher than the purchase price, the Company will apply a deduction over the amount to be paid to the employee based on a decreasing schedule specified in the plan.

In case of retirement or death of the employee, the Company will render the buyer or his legal beneficiary, the fair market sales value as of the date of retirement or death of the shares effectively paid, net of costs and taxes.

27

The stock based compensation expense for the first semester of 2021 and 2020 and the unrecognized compensation expense under this plan were as follows (in millions):

    

2021

    

2020

Stock based compensation expense

$

0.3

$

0.3

Unrecognized compensation expense

$

1.1

$

1.7

The following table presents the activity of this plan for the six months ended June 30, 2021 and 2020:

    

    

Unit Weighted Average

Shares

Grant Date Fair Value

Outstanding shares at January 1, 2021

 

1,264,410

$

2.63

Granted

 

 

Exercised

 

(370,959)

$

2.63

Forfeited

 

 

Outstanding shares at June 30, 2021

 

893,451

$

2.63

Outstanding shares at January 1, 2020

 

1,379,734

$

2.63

Granted

 

 

Exercised

 

(54,221)

$

2.63

Forfeited

 

 

Outstanding shares at June 30, 2020

 

1,325,513

$

2.63

2018 Plan: In November 2018, the Company offered a new stock purchase plan (the “New Employee Stock Purchase Plan”) to eligible employees through a trust that acquires series B shares of Grupo Mexico stock for sale to its employees, and employees of subsidiaries, and certain affiliated companies. The purchase price was established at 37.89 Mexican pesos (approximately $1.86) for the initial subscription, which expires in October 2026. Every two years employees will be able to acquire title to 50% of the shares paid in the previous two years. The employees will pay for shares purchased through monthly payroll deductions over the eight-year period of the plan. At the end of the eight-year period, the Company will grant the participant a bonus of 1 share for every 10 shares purchased by the employee. Any future subscription will be at the average market price at the date of acquisition or the grant date.

If Grupo Mexico pays dividends on shares during the eight-year period, the participants will be entitled to receive the dividend in cash for all shares that have been fully purchased and paid as of the date that the dividend is paid. If the participant has only partially paid for shares, the entitled dividends will be used to reduce the remaining liability owed for purchased shares.

In the case of voluntary or involuntary resignation/termination of the employee, the Company will pay to the employee the fair market sales price on the date of resignation of the fully paid shares, net of costs and taxes. When the fair market sales value of the shares is higher than the purchase price, the Company will apply a deduction over the amount to be paid to the employee based on a decreasing schedule specified in the plan.

In case of retirement or death of the employee, the Company will render the buyer or his legal beneficiary, the fair market sales value as of the date of retirement or death of the shares effectively paid, net of costs and taxes.

The stock based compensation expense for the six months ended June 30, 2021 and 2020 and the unrecognized compensation expense under this plan were as follows (in millions):

    

2021

2020

Stock based compensation expense

$

0.3

 

$

0.3

Unrecognized compensation expense

$

3.6

 

$

4.2

28

The following table presents the stock award activity of this plan for the six months ended June 30, 2021 and 2020:

Unit Weighted Average

    

Shares

    

Grant Date Fair Value

Outstanding shares at January 1, 2021

 

3,918,458

$

1.86

Granted

 

Exercised

 

(625,742)

$

1.86

Forfeited

 

Outstanding shares at June 30, 2021

 

3,292,716

$

1.86

Outstanding shares at January 1, 2020

4,002,898

$

1.86

Granted

Exercised

(37,940)

1.86

Forfeited

Outstanding shares at June 30, 2020

 

3,964,958

$

1.86

Non-controlling interest:

The following table presents the non-controlling interest activity for the six months ended June 30, 2021 and 2020 (in millions):

    

2021

    

2020

Balance as of January 1,

 

$

51.2

 

$

47.9

Net earnings

 

7.0

 

2.8

Dividend paid

 

(2.9)

 

(2.6)

Balance as of June 30, 

 

$

55.3

 

$

48.1

NOTE 11 — FAIR VALUE MEASUREMENT:

Subtopic 820-10 of ASC “Fair value measurement and disclosures — Overall” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under Subtopic 820-10 are described below:

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 - Inputs that are observable, either directly or indirectly, but do not qualify as Level 1 inputs. (i.e., quoted prices for similar assets or liabilities).

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable (other than accounts receivable associated with provisionally priced sales) and accounts payable approximate fair value due to their short maturities. Consequently, such financial instruments are not included in the following table, which provides

29

information about the carrying amounts and estimated fair values of other financial instruments that are not measured at fair value in the condensed consolidated balance sheet as of June 30, 2021 and December 31, 2020 (in millions):

At June 30, 2021

At December 31, 2020

    

Carrying Value

    

Fair Value

    

Carrying Value

    

Fair Value

Liabilities:

Long-term debt level 1

6,195.1

8,345.9

6,193.6

8,692.1

Long-term debt level 2

350.8

379.8

350.6

385.7

Total long-term debt

$

6,545.9

$

8,725.7

$

6,544.2

$

9,077.8

Long-term debt is carried at amortized cost and its estimated fair value is based on quoted market prices classified as Level 1 in the fair value hierarchy except for the cases of the Yankee bonds and the notes due 2022, which qualify as Level 2 in the fair value hierarchy as they are based on quoted prices in markets that are not active.

Fair values of assets and liabilities measured at fair value on a recurring basis were calculated as follows as of June 30, 2021 and December 31, 2020 (in millions):

Fair Value at Measurement Date Using:

    

    

    

Significant

    

Fair Value

Quoted prices in

other

Significant

as of

active markets for

observable

unobservable

June 30, 

identical assets

inputs

inputs

Description

2021

(Level 1)

(Level 2)

(Level 3)

Assets:

Short term investment:

Trading securities

$

545.3

$

545.3

$

$

Available-for-sale debt securities:

Corporate bonds

 

Asset backed securities

 

0.3

0.3

Mortgage backed securities

 

0.2

0.2

Accounts receivable:

Embedded derivativesNot classified as hedges:

Provisionally priced sales:

Copper

 

837.7

 

837.7

Molybdenum

 

221.8

 

221.8

 

Total

$

1,605.3

$

1,604.8

$

0.5

$

Fair Value at Measurement Date Using:

    

    

    

Significant

    

Fair Value

Quoted prices in

other

Significant

as of

active markets for

observable

unobservable

December 31, 

identical assets

inputs

inputs

Description

2020

(Level 1)

(Level 2)

(Level 3)

Assets:

Short term investment:

Trading securities

$

410.2

$

410.2

$

$

Available-for-sale debt securities:

Corporate bonds

 

Asset backed securities

 

0.3

 

0.3

Mortgage backed securities

 

0.3

0.3

Accounts receivable:

Embedded derivatives-Not classified as hedges:

Provisionally priced sales:

Copper

 

491.9

 

491.9

Molybdenum

 

129.2

 

129.2

 

Total

$

1,031.9

$

1,031.3

$

0.6

$

30

The Company’s short-term trading securities investments are classified as Level 1 because they are valued using quoted prices of the same securities as they consist of bonds issued by public companies and are publicly traded. The Company’s short-term available-for-sale investments are classified as Level 2 because they are valued using quoted prices for similar investments.

The Company’s accounts receivables associated with provisionally priced copper sales are valued using quoted market prices based on the forward price on the LME or on the COMEX. Such value is classified within Level 1 of the fair value hierarchy. Molybdenum prices are established by reference to the publication Platts Metals Week and are considered Level 1 in the fair value hierarchy.

NOTE 12 — REVENUE:

The Company’s net sales were $5,429.5 million in the six months ended June 30, 2021, compared to $3,505.1 million in the same period of 2020. The geographic breakdown of the Company’s sales is as follows (in millions):

Three Months Ended June 30, 2021

Mexican 

Mexican 

IMMSA

Peruvian 

Corporate & 

    

Open-Pit

    

Unit

    

Operations

    

Elimination

    

Consolidated

The Americas:

Mexico

$

494.9

$

109.6

$

$

(38.8)

$

565.7

United States

 

393.2

 

14.7

 

61.8

 

 

469.7

Peru

 

 

0.1

 

143.2

 

 

143.3

Brazil

 

 

5.6

 

120.6

 

 

126.2

Chile

 

1.0

 

 

95.2

 

 

96.2

Other American countries

 

7.7

 

 

1.0

 

 

8.7

Europe:

 

 

 

 

 

Switzerland

 

318.2

 

18.7

 

103.2

 

 

440.1

Italy

 

0.2

 

1.1

 

108.7

 

 

110.0

Spain

 

102.2

 

 

23.5

 

 

125.7

Other European countries

 

74.7

 

6.7

 

118.9

 

 

200.3

Asia:

 

 

 

 

 

Singapore

 

163.4

 

4.8

 

108.9

 

 

277.1

Japan

 

2.9

 

 

147.7

 

 

150.6

Other Asian countries

 

73.8

 

0.1

 

109.5

 

 

183.4

Total

$

1,632.2

$

161.4

$

1,142.2

$

(38.8)

$

2,897.0

31

Six Months Ended June 30, 2021

Mexican 

Mexican 

IMMSA

Peruvian 

Corporate & 

    

Open-Pit

    

Unit

    

Operations

    

Elimination

    

Consolidated

The Americas:

Mexico

$

948.4

$

176.1

$

$

(65.0)

$

1,059.5

United States

 

782.6

 

31.7

 

81.0

 

 

895.3

Peru

 

 

0.1

 

290.6

 

 

290.7

Brazil

 

 

7.6

 

217.6

 

 

225.2

Chile

 

2.9

 

 

151.3

 

 

154.2

Other American countries

 

18.0

 

0.7

 

2.8

 

 

21.5

Europe:

 

 

 

 

 

Switzerland

 

612.6

 

25.8

 

195.5

 

 

833.9

Italy

 

0.2

 

1.9

 

181.9

 

 

184.0

Spain

 

193.2

 

 

43.4

 

 

236.6

Other European countries

 

148.1

 

33.2

 

199.9

 

 

381.2

Asia:

 

 

 

 

 

Singapore

 

235.0

 

8.4

 

236.0

 

 

479.4

Japan

 

24.4

 

 

310.3

 

 

334.7

Other Asian countries

 

145.3

 

0.2

 

187.8

 

 

333.3

Total

$

3,110.7

$

285.7

$

2,098.1

$

(65.0)

$

5,429.5

Three Months Ended June 30, 2020

Mexican

Mexican

IMMSA

Peruvian

Corporate &

    

Open-Pit

    

Unit

    

Operations

    

Elimination

    

Consolidated

The Americas:

Mexico

$

207.2

$

70.5

$

$

(21.5)

$

256.2

United States

 

298.7

 

4.0

 

19.5

322.2

Peru

 

 

2.6

 

40.1

42.7

Brazil

 

 

1.3

 

20.9

22.2

Chile

 

17.6

 

 

41.0

58.6

Other American countries

 

0.7

 

0.6

 

0.2

1.5

Europe:

Switzerland

236.2

15.9

147.8

399.9

Italy

1.0

52.1

53.1

Spain

18.2

18.2

Other European countries

56.1

3.6

66.9

126.6

Asia:

Singapore

116.2

1.9

111.1

229.2

Japan

2.3

138.1

140.4

Other Asian countries

63.5

0.2

50.9

114.6

Total

$

1,016.7

$

101.6

$

688.6

$

(21.5)

$

1,785.4

32

Six Months Ended June 30, 2020

Mexican

Mexican

IMMSA

Peruvian

Corporate &

    

Open-Pit

    

Unit

    

Operations

    

Elimination

    

Consolidated

The Americas:

Mexico

$

570.9

$

169.7

$

$

(48.3)

$

692.3

United States

 

556.9

 

4.2

 

60.4

621.5

Peru

 

 

5.6

 

113.1

118.7

Brazil

 

 

4.8

 

75.4

80.2

Chile

 

19.5

 

 

89.2

108.7

Other American countries

 

9.0

 

1.4

 

0.4

10.8

Europe:

Switzerland

408.6

30.9

214.3

653.8

Italy

4.4

118.9

123.3

Spain

64.8

64.8

Other European countries

76.4

9.7

119.9

206.0

Asia:

Singapore

177.9

5.1

246.9

429.9

Japan

11.7

236.8

248.5

Other Asian countries

74.7

0.3

71.6

146.6

Total

$

1,970.4

$

236.1

$

1,346.9

$

(48.3)

$

3,505.1

The following table presents information regarding the sales value by reporting segment of the Company’s significant products for the three and six months ended June 30, 2021 and 2020 (in millions):

Three Months Ended June 30, 2021

    

Mexican

Mexican

    

IMMSA 

    

Peruvian

    

Corporate, Other &

    

Total

Open-pit

Unit

Operations

Eliminations

Consolidated

Copper

$

1,382.6

$

27.4

$

957.4

$

(19.2)

$

2,348.2

Molybdenum

 

149.6

 

 

132.6

 

 

282.2

Silver

 

68.0

 

36.9

 

32.7

 

(17.4)

 

120.2

Zinc

 

 

81.3

 

 

 

81.3

Other

 

32.0

 

15.8

 

19.5

 

(2.2)

 

65.1

Total

$

1,632.2

$

161.4

$

1,142.2

$

(38.8)

$

2,897.0

Six Months Ended June 30, 2021

    

Mexican

Mexican

    

IMMSA 

    

Peruvian

    

Corporate, Other &

    

Total

Open-pit

Unit

Operations

Eliminations

Consolidated

Copper

$

2,663.1

$

51.2

$

1,784.2

$

(32.9)

$

4,465.6

Molybdenum

 

240.7

 

 

211.1

 

 

451.8

Silver

 

140.7

 

85.4

 

62.2

 

(29.1)

 

259.2

Zinc

 

 

116.5

 

 

0.5

 

117.0

Other

 

66.2

 

32.6

 

40.6

 

(3.5)

 

135.9

Total

$

3,110.7

$

285.7

$

2,098.1

$

(65.0)

$

5,429.5

33

Three Months Ended June 30, 2020

    

Mexican

Mexican

    

IMMSA 

    

Peruvian

    

Corporate, Other &

    

Total

Open-pit

Unit

Operations

Eliminations

Consolidated

Copper

$

866.0

$

11.7

$

599.7

$

(7.7)

$

1,469.7

Molybdenum

 

58.1

 

 

48.9

 

 

107.0

Zinc

 

59.0

 

27.2

 

22.5

 

(9.5)

 

99.2

Silver

 

 

51.2

 

 

(2.8)

 

48.4

Other

 

33.6

 

11.5

 

17.5

 

(1.5)

 

61.1

Total

$

1,016.7

$

101.6

$

688.6

$

(21.5)

$

1,785.4

Six Months Ended June 30, 2020

    

Mexican

Mexican

    

IMMSA 

    

Peruvian

    

Corporate, Other &

    

Total

Open-pit

Unit

Operations

Eliminations

Consolidated

Copper

$

1,665.7

$

29.7

$

1,160.7

$

(20.6)

$

2,835.5

Molybdenum

 

130.1

 

 

102.9

 

 

233.0

Zinc

 

103.6

 

62.7

 

42.5

 

(21.4)

 

187.4

Silver

 

 

116.5

 

 

(3.3)

 

113.2

Other

 

71.0

 

27.2

 

40.8

 

(3.0)

 

136.0

Total

$

1,970.4

$

236.1

$

1,346.9

$

(48.3)

$

3,505.1

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

Mexican

    

Mexican

    

IMMSA

    

Peruvian

    

Corporate &

    

Open-Pit

Unit

Operations

Elimination

Consolidated

As of June 30, 2021:

 

  

 

  

 

  

 

  

 

  

Trade receivables

$

655.5

$

66.9

$

713.2

$

$

1,435.6

Related parties, current

 

18.9

 

 

0.9

 

7.8

 

27.6

As of December 31, 2020:

 

  

 

  

 

  

 

  

 

  

Trade receivables

$

566.0

$

57.8

$

445.1

$

$

1,068.9

Related parties, current

 

15.4

 

 

0.8

 

7.1

 

23.3

As of June 30, 2021, the Company has long-term contracts with promises to deliver the following products in 2021:

Copper concentrates (in tons)

    

188,000

Copper cathodes (in tons)

48,000

Molybdenum concentrates (in tons)

 

41,414

Sulfuric acid (in tons)

 

322,415

Provisionally priced sales: At June 30, 2021, the Company has recorded provisionally priced sales of copper at average forward prices per pound, and molybdenum at the June 30, 2021 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 June 30, 2021:

    

Sales volume

    

Priced at

    

(million lbs.)

(per pound)

Month of settlement

Copper

196.6

4.26

July 2021 through November 2021

Molybdenum

11.7

18.95

July 2021 through September 2021

34

The provisional sales price adjustment included in accounts receivable and net sales as of June 30, 2021 includes a negative adjustment of $16.8 million for copper and a positive adjustment of $79.9 million for molybdenum.

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

NOTE 13 SEGMENT AND RELATED INFORMATION:

Company management views Southern Copper as having 3 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 3 reportable segments identified are groups of mines, each of which constitute an operating segment, with similar economic characteristics, types 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 types 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 3 segments and the results of the Company’s operations are regularly reported to the Chief Operating Decision Maker (“CODM”) on the segment basis. The CODM of the Company focuses on operating income and on total assets as measures of performance to evaluate different segments and to make decisions to allocate resources to the reported segments. These are common measures in the mining industry.

35

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

Three Months Ended June 30, 2021

(in millions)

    

    

Mexican

    

    

Corporate, other

    

Mexican

IMMSA 

Peruvian 

and

Open-pit

Unit

Operations

eliminations

Consolidated

Net sales outside of segments

$

1,632.2

$

122.6

$

1,142.2

$

$

2,897.0

Intersegment sales

 

38.8

 

 

(38.8)

 

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

 

498.3

 

112.6

 

417.4

 

(42.8)

 

985.5

Selling, general and administrative

 

16.4

 

2.8

 

9.5

 

2.7

 

31.4

Depreciation, amortization and depletion

 

95.6

 

12.8

 

77.7

 

9.3

 

195.4

Exploration

 

0.7

 

0.9

 

3.2

 

4.7

 

9.5

Operating income

$

1,021.2

$

32.3

$

634.4

$

(12.7)

1,675.2

Less:

Interest, net

 

(88.0)

Other income (expense)

 

(8.2)

Income taxes

 

(647.7)

Equity earnings of affiliate

 

5.1

Non-controlling interest

 

(3.7)

Net income attributable to SCC

$

932.7

Capital investment

$

125.4

$

18.2

$

73.9

$

2.3

$

219.8

Property and mine development, net

$

4,609.8

$

546.0

$

3,695.8

$

604.5

$

9,456.1

Total assets

$

7,874.8

$

994.5

$

4,812.2

$

4,013.9

$

17,695.4

Six Months Ended June 30, 2021

(in millions)

    

    

Mexican

    

    

Corporate, other

    

Mexican

IMMSA 

Peruvian 

and

Open-pit

Unit

Operations

eliminations

Consolidated

Net sales outside of segments

$

3,110.7

 

220.7

 

2,098.1

 

$

5,429.5

Intersegment sales

 

 

65.0

 

 

(65.0)

 

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

 

1,008.2

 

193.0

 

802.3

 

(74.2)

 

1,929.3

Selling, general and administrative

 

32.3

 

4.9

 

18.9

 

5.5

 

61.6

Depreciation, amortization and depletion

 

191.2

 

26.7

 

159.1

 

19.0

 

396.0

Exploration

 

1.2

 

2.1

 

7.2

 

5.3

 

15.8

Operating income

$

1,877.8

$

59.0

$

1,110.6

$

(20.6)

3,026.8

Less:

Interest, net

 

(175.2)

Other income (expense)

 

(5.9)

Income taxes

 

(1,155.2)

Equity earnings of affiliate

 

13.1

Non-controlling interest

 

(7.0)

Net income attributable to SCC

$

1,696.6

Capital investment

$

275.0

$

32.5

$

140.4

$

4.5

$

452.4

Property and mine development, net

$

4,609.8

$

546.0

$

3,695.8

$

604.5

$

9,456.1

Total assets

$

7,874.8

$

994.5

$

4,812.2

$

4,013.9

$

17,695.4

36

Three Months Ended June 30, 2020

(in millions)

    

    

Mexican

    

    

Corporate, other

    

Mexican

IMMSA 

Peruvian 

and

Open-pit

Unit

Operations

eliminations

Consolidated

Net sales outside of segments

$

1,016.7

$

80.1

$

688.6

$

$

1,785.4

Intersegment sales

 

21.5

 

 

(21.5)

 

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

 

526.4

 

81.9

 

395.9

 

(27.5)

 

976.7

Selling, general and administrative

 

19.2

 

1.8

 

8.3

 

2.1

 

31.4

Depreciation, amortization and depletion

 

93.6

 

10.3

 

80.3

 

9.6

 

193.8

Exploration

 

0.8

 

2.2

 

2.5

 

0.8

 

6.3

Operating income

$

376.7

$

5.4

$

201.6

$

(6.5)

577.2

Less:

Interest, net

 

(87.8)

Other income (expense)

 

(1.0)

Income taxes

 

(224.4)

Equity earnings of affiliate

 

(3.1)

Non-controlling interest

 

(1.4)

Net income attributable to SCC

$

259.5

Capital investment

$

65.5

$

14.4

$

30.8

$

2.6

$

113.3

Property and mine development, net

$

4,400.1

$

506.7

$

3,775.9

$

514.3

$

9,197.0

Total assets

$

7,150.2

$

824.1

$

4,749.4

$

3,081.3

$

15,805.0

Six Months Ended June 30, 2020

(in millions)

    

    

Mexican

    

    

Corporate, other

    

Mexican

IMMSA 

Peruvian 

and

Open-pit

Unit

Operations

eliminations

Consolidated

Net sales outside of segments

$

1,970.4

$

187.8

$

1,346.9

$

$

3,505.1

Intersegment sales

 

 

48.3

 

 

(48.3)

 

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

 

991.4

 

194.1

 

806.9

 

(60.0)

 

1,932.4

Selling, general and administrative

 

35.9

 

4.2

 

17.4

 

3.1

 

60.6

Depreciation, amortization and depletion

 

185.0

 

20.9

 

161.6

 

19.3

 

386.8

Exploration

 

1.5

 

5.1

 

4.1

 

4.2

 

14.9

Operating income

$

756.6

$

11.8

$

356.9

$

(14.9)

1,110.4

Less:

Interest, net

 

(176.6)

Other income (expense)

 

(8.4)

Income taxes

 

(446.2)

Equity earnings of affiliate

 

(2.1)

Non-controlling interest

 

(2.8)

Net income attributable to SCC

$

474.3

Capital investment

$

103.7

$

39.7

$

66.0

$

4.9

$

214.3

Property and mine development, net

$

4,400.1

$

506.7

$

3,775.9

$

514.3

$

9,197.0

Total assets

$

7,150.2

$

824.1

$

4,749.4

$

3,081.3

$

15,805.0

37

NOTE 14 SUBSEQUENT EVENTS:

Dividends:

On July 22, 2021, the Board of Directors authorized a dividend of $0.90 per share payable on August 26, 2021 to shareholders of record at the close of business on August 12, 2021.

38

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides information that management believes is relevant to an assessment and understanding of the condensed consolidated financial condition and results of operations of Southern Copper Corporation and its subsidiaries (collectively, “SCC”, “the Company”, “our”, and “we”). This item should be read in conjunction with our interim unaudited Condensed Consolidated Financial Statements and the notes thereto included in this quarterly report. Additionally, the following discussion and analysis should be read in conjunction with the Management Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements included in Part II of our annual report on Form 10-K for the year ended December 31, 2020.

EXECUTIVE OVERVIEW

Business: Our business is primarily the production and sale of copper. In the process of producing copper, a number of valuable metallurgical by-products are recovered, which we also produce and sell. Market forces outside of our control largely determine the sale prices for our products. Our management, therefore, focuses on value creation through copper production, cost control, production enhancement and maintaining a prudent capital structure to remain profitable. We endeavor to achieve these goals through capital spending programs, exploration efforts and cost reduction programs. Our aim is to remain profitable during periods of low copper prices and to maximize financial performance in periods of high copper prices.

We are one of the world’s largest copper mining companies in terms of production and sales and our principal operations are in Peru and Mexico. We also have exploration programs in Chile, Argentina and Ecuador. In addition to copper, we produce significant amounts of other metals, either as a by-product of the copper process or through a number of dedicated mining facilities in Mexico.

Outlook: Various key factors will affect our outcome. These include, but are not limited to, the following:

Sales structure: In the second quarter of 2021, approximately 81.1% of our revenue came from the sale of copper; 9.7% from molybdenum; 4.1% from silver; 2.8% from zinc; and 2.3% from various other products, including gold, sulfuric acid and other materials.

Copper: In the second quarter of 2021, the LME copper price increased from an average of $3.85 per pound in the first quarter of 2021 to $4.40 (+14.3%). Currently, we are seeing prices at about $4.25 per pound, which bodes a

positive outlook for the Company. We believe the following factors are influencing the market:

The strong demand that we are seeing in the U.S. and Europe, particularly in terms of cathode consumption.
The combined inventories of the LME, Comex, Shanghai and Bonded warehouses remain at relatively low levels, particularly given the number days of consumption considered.
The uncertainty regarding future production from Chile and Peru, which together represent about 40% of the world supply.
The most important market intelligence houses for the copper market are expecting a market deficit of about 250,000 tons this year due to a recovery in demand, which should grow between 2.0% and 3.5%.

Molybdenum: Represented 9.7% of our sales in the second quarter of 2021 and is currently our most significant by-product. Molybdenum prices averaged $13.89 per pound in the second quarter of 2021, compared to $8.24 in the same period of 2020. This represented a 68.6% increase.

Molybdenum is mainly used in the production of special alloys for stainless steel that require significant hardness and corrosion and heat resistance. A new use for this metal is in lubricants and sulfur filtering of heavy oils and shale gas production.

39

Silver: Represented 4.1% of our sales in the second quarter of 2021. We believe that the prices for silver will be supported by its level of industrial use and the fact that, like gold, it represents value shelter in times of economic turmoil.

Zinc: Represented 2.8% of our sales in the second quarter of 2021. We consider zinc has very good long term fundamentals due to high levels of industrial consumption and expected production.

Production: In 2021 and 2022, we expect to produce 958,000 tons of copper, given that production during these periods will be affected by a temporary reduction in ore grade and recovery at our Peruvian operations.

We expect our copper production to recover by 2023 and reach 1,030,000 tons of production as we get Peruvian

production back on track and generate new production on our Pilares, El Pilar and Buenavista-Zinc Concentrator

projects.

We also expect to produce 20.6 million ounces of silver in 2021, which represents a decrease of 4.3% with regard to our 2020 production level. In 2021, we expect to produce 72,800 tons of zinc from our mines, up 5.6% from 2020 production level. Additionally, we expect to produce 28,300 tons of molybdenum, which represents a decrease of 6.5% compared to 2020 production levels.

Capital Investments: In the first semester of 2021, we spent $452.4 million on capital investments; this represented an increase of 111.1% with regard to the figure registered for the same period in 2020, and represented 26.7% of net income.

CYBERSECURITY EVENT

As previously reported, on March 1, 2021, at approximately 02:00 hours Mexico City time, we experienced a Ransomware cyber-attack, which was operated by humans. This cyber-attack encrypted a total of 479 servers and 303 pieces of personal equipment. However, due to the quick response of our IT team, our Enterprise Resource Planning software was not affected by the aforementioned attack.

After the attack, we immediately began a remediation and recovery process and completely restored the affected servers. So far, the forensic investigation has not identified any concrete evidence of information stolen during the attack. However, we maintain active lines of work in cyberintelligence and forensic investigation to continue monitoring the DarkWeb/DeepWeb and social networks to identify any publication or activity related to the Company; ensure that our systems infrastructure is safe and validate the technological controls affected during the attack.

In March 2021, we appointed a new Head of Information Technology, who is implementing a new information security strategy to ensure business continuity based on processes (controls and corporate governance framework), technology and human capital (organizational culture). The areas of compliance, internal control, information technology and internal audit are working together to integrate reference frameworks, risk management models and the necessary controls to implement the information security strategy and corresponding programs.

As of June 30, 2021, we recorded $0.3 million in costs related to this incident, but may, nonetheless, incur additional costs derived from the strategy and controls being implemented.

COVID-19

In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on a rapid increase in global transmission rates. The full impact of the COVID-19 outbreak will continue and the magnitude of the impact on the Company’s financial condition, liquidity and future operating results is uncertain. Senior Management is actively monitoring the global situation´s effect on the Company´s financial condition, liquidity, operations, suppliers, industry and workforce and is focusing principally on the health, safety and well-being of our employees, their families and the communities where we have operations. As of June 30, 2021, there were no major delays in the

40

supply of the materials and services critical for operations and sales. In addition, the supply of non-critical materials and services for the operations is gradually being restored. Additionally, shipments of products and collections experienced no known major delays in the second quarter of 2021.

As of June 30, 2021, a positive trend was observed in the copper price, which closed at $4.26 per pound (LME) after having dropped to $2.18 per pound at the end of the first quarter of 2020. Considering the market outlook previously described, we have a positive view for the 2021 copper market.

The Company maintains a solid financial position and performance level. We believe this has allowed and will continue to allow us to deal with the effects of the pandemic in a way that prevents adverse material effects on our operations and financial results. The table below compares some of our financial information as follows:

Jun-21

Dec-20

Jun-20

($ in millions, except ratios)

Cash and cash equivalents

2,394.3

2,183.6

1,808.8

Accounts receivable

1,506.6

1,136.6

937.7

Total assets

17,695.4

16,946.5

15,805.0

Long term debt

6,545.9

6,544.2

6,542.6

Sales

5,429.5

7,984.9

3,505.1

RATIOS

Current assets to current liabilities

3.80

3.49

4.33

Accounts receivable turnover (1)

3.60

7.03

3.74

Total debt ratio (2)

0.37

0.39

0.41

Net income margin (3)

31.2%

19.7%

13.5%

(1)Represents net sales divided by accounts receivable.
(2)Represents total debt divided by total assets.
(3)Represents net income divided by net sales, as a percentage.

Governmental authorities in Mexico and Peru have declared that essential economic activities must continue during the COVID-19 health emergency. These activities include industrial mining and/or any other activity necessary to ensure the provision of essential services such as electricity; provide elements to install medical and hospital infrastructure; and manufacture health-related supplies and technological equipment. We believe that industrial mining stands as the most efficient and timely supplier of inputs that are critical to the productive chain to fight the pandemic.

Given the nature of mining operations, which are highly automated, conducted in remote locations and with mandatory use of personal safety equipment at all the mines, it is easier to implement and comply with COVID-19 protective measures, such as physical isolation and control of access to facilities. Industrial mining uses advanced and reliable machinery and does not require high physical concentration of employees. In many cases, workers fulfill their duties maintaining distances of more than 100 meters from their closest coworkers.

At the present time, our operations are in compliance with all sanitary and government regulations and maintain proper environmental safeguards. Our COVID-19 emergency protocol has reinforced preventive measures such as disinfecting, clinical monitoring before work, cleaning and sanitizing of work areas and respect for social distancing. We have also restricted the access of contractors, suppliers and personnel to our facilities if visits are not indispensable and enforced multiple actions to limit workforce exposure to COVID-19 by imposing travel restrictions, prohibiting face-to-face meetings and urging frequent hand washing, as well as adhering to all other health, safety and social distancing measures required by governmental authorities. As of June 30, 2021, approximately 96% of the workforce in Mexico was working on site or at home under strict safety measures; the remaining 4% of the workforce was not working, including all individuals at high risk due to age and/or preexisting medical conditions. At our Peruvian operations, approximately 67% of the workforce was working onsite or at home

41

under strict safety measures while the remaining 33% was not working, including all individuals at high risk due to age and/or preexisting medical conditions.

KEY MATTERS

Below, we discuss several matters that we believe are important to understand the results of our operations and financial condition. These matters include, (i) our earnings, (ii) our production, (iii) our “operating cash costs” as a measure of our performance, (iv) metal prices, (v) business segments, (vi) the effect of inflation and other local currency issues, and (vii) our capital investment and exploration program.

Earnings: The table below highlights key financial and operational data of our Company for the three and six months ended June 30, 2021 and 2020 (in millions, except copper price, percentages and per share amounts):

    

Three months ended June 30, 

Six months ended June 30, 

    

    

2021

    

2020

    

Variance

% Change

 

    

2021

    

2020

    

Variance

% Change

 

Copper price LME

4.40

2.42

1.98

    

81.8

%

4.13

2.49

1.64

    

65.9

%

Pounds of copper sold

514.9

595.9

(81.0)

 

(13.6)

%

1,044.4

1,150.4

(106.0)

 

(9.2)

%

Net sales

$

2,897.0

$

1,785.4

$

1,111.6

 

62.3

%

$

5,429.5

$

3,505.1

$

1,924.4

 

54.9

%

Operating income

$

1,675.2

$

577.2

$

1,098.0

 

190.2

%

$

3,026.8

$

1,110.4

$

1,916.4

 

172.6

%

Net income attributable to SCC

$

932.7

$

259.5

$

673.2

259.4

%

$

1,696.6

$

474.3

$

1,222.3

257.7

%

Earnings per share

$

1.21

$

0.34

$

0.87

255.9

%

$

2.19

$

0.61

$

1.58

259.0

%

Dividends per share

$

0.70

$

0.20

$

0.50

250.0

%

$

1.30

$

0.60

$

0.70

116.7

%

Net sales in the second quarter of 2021 were 62.3% higher than in the same period of 2020, which was primarily attributable to higher metal prices for copper (+81.8%), molybdenum (+68.6%), zinc (+48.3%) and silver (+61.9%), as well as an increase in sales volume of zinc (+12.4%). This was slightly offset by decreases in sales volumes of copper (-13.6%), molybdenum (-11.0%) and silver (-24.6%).

Net income attributable to SCC in the second quarter of 2021 was 259.4% higher than in the same period of 2020. This growth was mainly attributable to the increase in metal prices mentioned above.

Net sales in the first six months of 2021 were 54.9% higher than in the same period of 2020, which was primarily attributable to higher metal prices for copper (+65.9%), molybdenum (+40.9%), silver (+58.8%) and zinc (+37.6%). This was slightly offset by decreases in sales volumes of copper (-9.2%), molybdenum (-5.9%), silver (-14.5%) and zinc (-5.9%).

Net income attributable to SCC in the first six months of 2021 was 257.7% higher than in the same period of 2020. This growth was mainly attributable to the increase in metal prices mentioned above and to stable operating costs (+0.3%).

Production: The table below highlights our mine production data for the three and six months ended June 30, 2021 and 2020:

Three months ended June 30, 

Six months ended June 30, 

    

2021

    

2020

    

Variance

    

% Change

    

2021

    

2020

    

Variance

    

% Change

Copper (in million pounds)

 

522.7

 

558.1

 

(35.4)

 

(6.3)

%

 

1,048.3

 

1,091.4

 

(43.1)

 

(3.9)

%

 

Molybdenum (in million pounds)

 

15.4

 

17.2

 

(1.8)

 

(10.8)

%

 

31.3

 

33.1

 

(1.8)

 

(5.5)

%

 

Silver (in million ounces)

 

4.6

 

5.5

 

(0.9)

 

(16.2)

%

 

9.6

 

10.8

 

(1.2)

 

(11.3)

%

 

Zinc (in million pounds)

 

37.7

 

34.6

 

3.1

 

8.9

%

 

74.0

 

77.1

 

(3.1)

 

(4.0)

%

 

42

The table below highlights our copper production data for the three and six months ended June 30, 2021 and 2020:

Three Months Ended June 30, 

Six Months Ended June 30, 

Copper (in million pounds):

    

2021

    

2020

    

Variance

    

% Change

    

2021

    

2020

    

Variance

    

% Change

Toquepala

 

130.2

 

149.3

 

(19.1)

 

(12.8)

%

258.6

 

282.8

 

(24.2)

 

(8.6)

%

 

Cuajone

 

93.2

 

94.8

 

(1.6)

 

(1.7)

%

180.7

 

184.0

 

(3.3)

 

(1.8)

%

 

La Caridad

 

72.9

 

74.7

 

(1.8)

 

(2.3)

%

145.2

 

148.3

 

(3.1)

 

(2.0)

%

 

Buenavista

 

221.9

 

233.3

 

(11.4)

 

(4.9)

%

453.8

 

465.4

 

(11.6)

 

(2.5)

%

 

IMMSA

 

4.5

 

6.0

 

(1.5)

 

(24.0)

%

10.0

 

10.9

 

(0.9)

 

(8.8)

%

 

Total mined copper

 

522.7

 

558.1

 

(35.4)

 

(6.3)

%

1,048.3

 

1,091.4

 

(43.1)

 

(3.9)

%

 

Second quarter: Mined copper production in the second quarter of 2021 fell by 6.3% to 522.7 million pounds compared to 558.1 million pounds in the second quarter of 2020. This was mainly attributable to a drop in production at all our mines, most importantly Toquepala (-12.8%) and Buenavista (-4.9%) due to lower grades.

Molybdenum production decreased 10.8% in the second quarter of 2021 with regard to the levels registered in the second quarter of 2020. This was attributable to a decrease in production at our Toquepala (-18.8%) and Buenavista (-29.4%) mines due to lower ore grades and recoveries. This effect was partially offset by a increase in production at the La Caridad (+4.7%) and Cuajone (+2.7%) mines due to higher ore grades.

Silver mine production decreased 16.2% in the second quarter of 2021 due to a drop in production at the Toquepala (-24.2%), Buenavista (-15.7%) and IMMSA (-25.2%) operations. This was offset by higher production at the Cuajone (+8.5%) and La Caridad (+1.6%) mines.

Zinc production increased 8.9% in the second quarter of 2021 compared with the same period of 2020. This increase was mainly attributable to higher production at the Charcas (+31.8%) and San Martin (+37.3%) mines, which was partially offset by lower production at the Santa Barbara mine (-24.9%).

Six months: Mined copper production in the first six months of 2021 decreased 3.9% to 1,048.3 million pounds compared to 1,091.4 million pounds in the same period of 2020. This decrease was mainly attributable to a drop in production at all our mines and at Toquepala (-8.6%) and Buenavista (-2.5%) in particular due to lower grades.

Molybdenum production decreased 5.5% in the first six months of 2021 compared to the same period in 2020; this was mainly due to lower production at our Buenavista (-25.8%) and Toquepala (-6.6%) mines, which was partially offset by higher production at the Cuajone (+8.0%) and La Caridad (+2.9%) mines.

Silver mine production decreased 11.3% in the first six months of 2021; this was principally due to lower production at our Toquepala (-17.1%), Buenavista (-14.5%) and IMMSA (-17.5%) operations, which was partially offset by higher production at Cuajone (+10.9%) and La Caridad (+5.0%) mines.

Zinc production decreased 4.0% in the first six months of 2021, which was mainly due to the shut down at the Santa Eulalia mine due to severe flooding. This was partially offset by higher production at our Charcas and San Martin mines. We are currently evaluating different options to supply the concentrator at Santa Eulalia.

Operating Cash Costs: An overall benchmark that we use, which is a common industry metric to measure performance is operating cash costs per pound of copper produced. Operating cash cost is a non-GAAP measure that does not have a standardized meaning and may not be comparable to similarly titled measures provided by other companies. This non-GAAP information should not be considered in isolation or as substitute for measures of performance determined in accordance with GAAP. A reconciliation of our operating cash cost per pound of copper produced to the cost of sales (exclusive of depreciation, amortization and depletion) as presented in the consolidated statement of earnings is presented under the subheading, “Non-GAAP Information Reconciliation” on page 60. We disclose operating cash cost per pound of copper produced, both before and net of by-product revenues.

43

We define operating cash cost per pound of copper produced before by-product revenues as cost of sales (exclusive of depreciation, amortization and depletion), plus selling, general and administrative charges, treatment and refining charges net of sales premiums; less the cost of purchased concentrates, workers’ participation and other miscellaneous charges, including royalty charges, and the change in inventory levels; divided by total pounds of copper produced by our own mines.

In our calculation of operating cash cost per pound of copper produced, we exclude depreciation, amortization and depletion, which are considered non-cash expenses. Exploration is considered a discretionary expenditure and is also excluded. Workers’ participation provisions are determined on the basis of pre-tax earnings and are also excluded. Additional exclusions from operating cash costs are items of a non-recurring nature and the mining royalty charge as it is based on various calculations of taxable income, depending on which jurisdiction, Peru or Mexico, is imposing the charge. We believe these adjustments allow our management and stakeholders to more fully visualize our controllable cash cost, which we believe is one of the lowest of all copper-producing companies of similar size.

We define operating cash cost per pound of copper produced net of by-product revenues as operating cash cost per pound of copper produced, as defined in the previous paragraph, less by-product revenues and net revenue (loss) on sale of metal purchased from third parties.

In our calculation of operating cash cost per pound of copper produced, net of by-product revenues, we credit against our costs the revenues from the sale of all our by-products, including, molybdenum, zinc, silver, gold, etc. and the net revenue (loss) on sale of metals purchased from third parties. We disclose this measure including the by-product revenues in this way because we consider our principal business to be the production and sale of copper. As part of our copper production process, much of our by-products are recovered. These by-products, as well as the processing of copper purchased from third parties, are a supplemental part of our production process and their sales value contribute to covering part of our incurred fixed costs. We believe that our Company is viewed by the investment community as a copper company, and is valued, in large part, by the investment community’s view of the copper market and our ability to produce copper at a reasonable cost.

We believe that both of these measures are useful tools for our management and our stakeholders. Our cash costs before by-product revenues allow us to monitor our cost structure and address areas of concern within operating management. The measure operating cash cost per pound of copper produced net of by-product revenues is a common measure used in the copper industry and is a useful management tool that allows us to track our performance and better allocate our resources. This measure is also used in our investment project evaluation process to determine a project’s potential contribution to our operations, its competitiveness and its relative strength in different price scenarios. The expected contribution of by-products is generally a significant factor used by the copper industry to determine whether to move forward or not in the development of a new mining project. As the price of our by-product commodities can have significant fluctuations from period to period, the value of its contribution to our costs can be volatile.

44

Our operating cash cost per pound of copper produced, before and net of by-product revenues, is presented in the table below for the three and six months ended June 30, 2021 and 2020:

Operating cash cost per pound of copper produced (1)

(In millions, except cost per pound and percentages)

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

    

2021

    

2020

    

Variance

    

% Change

    

2021

    

2020

    

Variance

    

% Change

Total operating cash cost before by‑product revenues

$

817.9

$

684.6

$

133.3

 

19.5

%

$

1,589.3

$

1,420.3

$

169.0

 

11.9

%

Total by‑product revenues

$

(521.1)

$

(321.5)

$

(199.6)

 

62.1

%

$

(914.8)

$

(661.7)

$

(253.1)

 

38.2

%

Total operating cash cost net of by‑product revenues

$

296.8

$

363.1

$

(66.3)

 

(18.3)

%

$

674.5

$

758.6

$

(84.1)

 

(11.1)

%

Total pounds of copper produced(2)

 

507.7

 

541.7

 

(34.0)

 

(6.3)

%

 

1,018.5

 

1,059.6

 

(41.1)

 

(3.9)

%

Operating cash cost per pound before byproduct revenues

$

1.61

$

1.26

$

0.35

 

27.8

%

$

1.56

$

1.34

$

0.22

 

16.4

%

Byproducts per pound revenues

$

(1.02)

$

(0.59)

$

(0.43)

 

72.9

%

$

(0.90)

$

(0.62)

$

(0.28)

 

45.2

%

Operating cash cost per pound net of byproduct revenues

$

0.59

$

0.67

$

(0.08)

 

(11.9)

%

$

0.66

$

0.72

$

(0.06)

 

(8.3)

%

(1)These are non-GAAP measures. Please see page 60 for reconciliation to GAAP measure.
(2)Net of metallurgical losses.

As seen in the table above, our per pound cash cost before by-product revenues in the second quarter of 2021 was 27.4% higher than in the same period of 2020. This increase is mainly attributable to an increase in production costs and to the unit cost effect of lower production. Our cash cost per pound net of by-product revenue for the second quarter of 2021 decreased 12.1% when compared with the same period of 2020. This was mainly attributable to a significant increase in by-product revenues.

For the six months ended June 30, 2021, our per pound cash cost before by-product revenues was 16.4% higher than in the same period of 2020. This increase was mainly driven by an increase in production costs. The operating cash cost per pound of copper net of by-product revenue was $0.66 in the six months ended June 30, 2021. This represented an improvement of 7.8% compared to the $0.72 reported in the same period of 2020 and was mainly due to a significant increase in by-product revenues.

Metal Prices: The profitability of our operations is dependent on, and our financial performance is significantly affected by, the international market prices for the products we produce, and for copper, molybdenum, zinc and silver in particular.

We are subject to market risks arising from the volatility of copper and other metal prices. For the remaining six months of 2021, assuming that expected metal production and sales are achieved, tax rates remain unchanged and no effects are generated by potential hedging programs, metal price sensitivity factors would indicate the following change in estimated net income attributable to SCC resulting from metal price changes:

    

Copper

    

Molybdenum

    

Zinc

    

Silver

Change in metal prices (per pound except silver—per ounce)

$

0.10

$

1.00

$

0.10

$

1.00

Change in net earnings (in millions)

$

58.7

$

18.9

$

6.9

$

7.0

45

Business Segments: We view our Company as having three reportable segments and manage it on the basis of these segments. These segments are (1) our Peruvian operations, (2) our Mexican open-pit operations and (3) our Mexican underground operations, known as our IMMSA unit. Our Peruvian operations include the Toquepala and Cuajone mine complexes and the smelting and refining plants, industrial railroad and port facilities that service both mines. The Peruvian operations produce copper, with significant by-product production of molybdenum, silver and other material. Our Mexican open-pit operations include La Caridad and Buenavista mine complexes, the smelting and refining plants and support facilities, which service both mines. The Mexican open pit operations produce copper, with significant by-product production of molybdenum, silver and other material. Our IMMSA unit includes five underground mines that produce zinc, lead, copper, silver and gold, and several industrial processing facilities for zinc, copper and silver.

Segment information is included in our review of “Results of Operations” in this item and also in Note 13 “Segment and Related Information” of our condensed consolidated financial statements.

Inflation and Exchange Rate Effect of the Peruvian Sol and the Mexican Peso: Our functional currency is the U.S. dollar and our revenues are primarily denominated in U.S. dollars. Significant portions of our operating costs are denominated in Peruvian sol and Mexican pesos. Accordingly, when inflation and currency devaluation/appreciation of the Peruvian currency and Mexican currency occur, our operating results can be affected. In recent years, we believe such changes have not had a material effect on our results and financial position. Please see Item 3. “Quantitative and Qualitative Disclosures about Market Risk” for more detailed information.

Capital Investment Programs: We made capital investments of $452.4 million in the six months ended June 30, 2021, compared to $214.3 million in the same period of 2020. In general, the capital investments and investment projects described below are intended to increase production, decrease costs or address social and environmental commitments.

Set forth below are descriptions of some of our current expected capital investment programs. We expect to meet the cash requirements for these projects by utilizing cash on hand; internally generated funds and additional external financing, including funding received in September 2019. All capital spending plans will continue to be reviewed and adjusted to respond to changes in the economy, market conditions or the COVID-19 pandemic.

Projects in Mexico:

Buenavista Zinc - Sonora: This project is located within the Buenavista facility and includes the development of a new concentrator to produce approximately 100,000 tons of zinc and 20,000 tons of copper per year. We have completed the basic engineering study and the detailed engineering study has reached 94% completion. In order to continue with the project, stronger preventive measures to combat COVID-19 have been put in place. Procurement has progressed 84%. Additionally, construction site works are in progress. The project has all the necessary permits. The project´s budget is $413 million, and we expect to initiate operations in 2023. As of June 30, 2021, we had invested $178.2 million in this project. When completed, we anticipate that this new facility will double the Company’s zinc production capacity and will provide 490 direct jobs and 1,470 indirect jobs.

Pilares - Sonora: This project, located six kilometers from La Caridad, will be developed as an open-pit mine operation with an annual production capacity of 35,000 tons of copper in concentrate. A new 25-meter wide off-road facility for mining trucks has been built and will be used to transport the ore from the pit to the primary crushers at the La Caridad copper concentrator. This will significantly improve the overall mineral ore grade (combining the 0.78% expected from Pilares with 0.34% from La Caridad). The budget for Pilares is $159 million and we expect the project to begin production in the first quarter of 2022. As of June 30, 2021, we had invested $75.3 million in this project.

El Pilar - Sonora: This is a low-capital intensity copper development project strategically located in Sonora, Mexico, approximately 45 kilometers from our Buenavista mine. Its copper oxide mineralization contains estimated proven and probable reserves of 281 million tons of ore with an average copper grade of 0.301%. El Pilar will operate as a conventional open-pit mine with an annual production capacity of 36,000 tons of copper cathodes. This operation will use highly cost efficient and environmentally friendly SX-EW technology. We estimate a development investment of approximately $310 million. As of June 30, 2021, we had invested $2.0 million in this project. The results from experimental pads in leaching process have confirmed adequate levels of copper recovery. We expect this project to start

46

production in 2023 with an expected mine life of 13 years. The Company continues developing the project basic engineering and site environmental activities.

The San Martin mine recovery program. After eleven years of illegal stoppage, we resumed control of the San Martin mine in August 2018. The San Martin facilities deteriorated during this period but we made a major renovation and restarted operations during the second quarter of 2019. Currently, the mine has 200,000 tons of ore and the concentrator has initiated production. In 2020, we produced 14,361 tons of zinc, 2.8 million ounces of silver, 3,601 tons of copper, and 1,425 tons of lead. As of June 2021, the Company had virtually completed the rehabilitation plan to restore operations at the San Martin mine with a total expense of approximately $89.1 million and has reached full operating capacity.

Projects in Peru:

Quebrada Honda dam expansion – Tacna: This project aims to enlarge the main and lateral dams in Quebrada Honda and includes the relocation of some facilities due to dam growth and implementation of other facilities for water recovery, among other factors. As of June 30, 2021, the engineering study was complete. The majority of the main equipment and materials have been procured and are arriving according to schedule. Construction is in progress with work on three fronts. This project has a total budget of $140.0 million, of which we had committed $52.0 million and invested $62.8 million as of June 30, 2021.

Tia Maria - Arequipa: On July 8, 2019, we were granted the construction permit for this 120,000 ton annual SX-EW copper greenfield project with a total capital budget of $1,400 million. The Government awarded the permit after completing an exhaustive review process, complying with all established regulatory requirements and addressing all observations raised. The challenges surrounding the construction permit were overcome when on October 30, 2019, the Mining Council of the Peruvian Ministry of Energy and Mines ratified the construction permit for the Tia Maria project.

The Company has been consistently working to promote the welfare of the Islay province population. As part of these efforts, we have implemented successful social programs in education, healthcare and productive development to improve the quality-of-life in the region. We also have promoted agricultural and livestock activities in the Tambo Valley and supported growth in manufacturing, fishing and tourism in Islay.

On January 7, 2021, the mayor of the Islay province (Arequipa, Peru) awarded a City Diploma to SPCC in recognition of the Company’s efforts to assist the population of Islay during the COVID-19 pandemic. SPCC provided medical assistance, tests, oxygen, personal protection equipment and food stuffs to the population in the area of influence of the Tia Maria project.

We consider that the initiation of construction activities at Tia Maria will generate significant economic opportunities for the Islay province and the Arequipa region. During the construction and operation phase, we will make it a priority to hire local labor to fill the 9,000 jobs (3,600 direct and 5,400 indirect) that we expect to generate during Tia Maria’s construction phase. When operating, we expect Tia Maria to directly employ 600 workers and indirectly provide jobs for another 4,200. Additionally, from day one of our operations, we will generate significant contributions to revenues in the Arequipa region via royalties and taxes.

This greenfield project, located in Arequipa, Peru, 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 due to their technical process with no emissions released into the atmosphere. 

Potential projects

We have a number of other projects that we may develop in the future. We continuously evaluate new projects on the basis of our long-term corporate objectives, expected return on investment, environmental concerns, required investment and estimated production, among other considerations. All capital spending plans will continue to be reviewed and adjusted to respond to changes in the economy, market conditions or the COVID-19 pandemic.

47

El Arco - Baja California: This is a world-class copper deposit located in the central part of the Baja California peninsula, with ore reserves of over 2.4 billion tons with an ore grade of 0.422%, 0.3 billion tons of leach material with an ore grade of 0.288% and 0.11 grams of gold per ton. This project envisions an open-pit mine with a combined concentrator and SX-EW operations, with an estimated production capacity of 190,000 tons of copper and 105,000 ounces of gold annually. The project has an estimated capital budget of $2.9 billion. As of June 30, 2021, we have invested $63.6 million in this project. The Company has started the baseline study and it is reviewing the basic engineering analysis to request the environmental impact permit. Several years back, we began to acquire the rights to all relevant mining concessions in the area; this process was completed in 2020.

Los Chancas - Apurimac: This greenfield project, located in Apurimac, Peru, is a copper and molybdenum porphyry deposit. Current estimates indicate the presence of 545 million tons of mineralized material with a copper content of 0.59%, molybdenum content of 0.04% and 0.039 grams of gold per ton, as well as 181 million tons of mineralized leachable material with a total copper content of 0.357%. Los Chancas project envisions an open-pit mine with a combined operation of concentrator and SX-EW processes to produce 130,000 tons of copper and 7,500 tons of molybdenum anually. The estimated capital investment is $2,600 million and the project is expected to be in operation in 2027. In 2019, we continued to engage in social and environmental improvements for the local communities. In 2020,

we continued to work on these activities and plan to conclude the environmental impact assessment for the project in

2021.

Michiquillay Project - Cajamarca: On June 12, 2018, Southern Copper signed a contract and made an initial payment of $12.5 million for the acquisition of the Michiquillay project in Cajamarca, Peru. The Company has created a multidisciplinary management team to plan the development of this project. As part of this plan, the Company has established contact with the local and regional authorities and communities in order to promote programs for the sustainable development of the area. In 2020, we continued to develop social and environmental programs for the local communities. In February 2021, we completed a semi-detailed environmental impact assessment and submitted it to the Peruvian authorities for approval. This will allow us to begin a 50,000 meter diamond drilling program to verify and update the project´s estimated mineralized materials. In June 2021, the Company paid an additional $12.5 million to acquire the project.

Michiquillay is a world class mining project with estimated mineralized material of 1,150 million tons with an estimated copper grade of 0.63%. When developed, we expect Michiquillay 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, at a competitive cash-cost. We estimate an investment of approximately $2.5 billion will be required and expect production start-up by 2028 and that Michiquillay will become one of Peru´s largest copper mines. The project will create significant business opportunities in the Cajamarca region; generate new jobs for the local communities and contribute with taxes and royalties to the local, regional and national governments.

The information above is based on estimates only. We cannot make any assurances that we will undertake any of these projects or that the information noted is accurate.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (“ESG”)

We are committed to improving our ESG record by adopting best practices. In this regard, our sustainable development policies were recently updated. These policies, applicable to SCC and its subsidiaries, formalize our vision, commitments and objectives to promote sustainable development and generate shared value for our stakeholders. For further information on our disclosure on Human Capital Resources, see the section included in Part I, Item 1 of our Annual report on Form 10-K for the year ended December 31, 2020. Also, see our disclosure on our COVID-19 response, environmental disclosure and support of our local communities elsewhere in this report.

Southern Peru signed an inter-institutional cooperation agreement with the Ministry of Health of Peru that allows the Company to support the government in efforts to organize and implement 26 vaccination sites in the regions of Arequipa, Moquegua, Tacna, Cajamarca and Apurimac. The Company will donate more than USD $2.45 million to vaccinate 424 thousand-plus people over the next 2 months, which is equivalent to 40% of the population of these regions. The aforementioned agreement was the third of three agreements signed with the Peruvian government to

48

aggressively fight the pandemic. The first entailed a donation of 2,181.4 tons of medical oxygen, which was produced by the oxygen plants at our Ilo smelter to provide liquid oxygen to to the southern regions of Peru. The second donated four oxygen plants (two of them mobile), which are currently operating in the regions of Tacna, Puno, Arequipa, Piura and Cajamarca.

Our company is committed with sourcing our operations with renewable energy. In 2020, 22% of Southern Copper Corporation’s electricity came from renewable sources. We are currently evaluating options to contract an additional portion of our power demand from renewable electricity. In 2022, we expect at least 25% of our energy supply will come from renewable electricity.

The percentage of recycled water from mining operations has increased 5% over the last three years and reached 74% in 2020. This represented savings of approximately 3.5 million cubic meters of fresh water a year. The Company has made major efforts to increase the amount of water available to the nearby communities in Mexico and Peru and has rehabilitated more than 200 kilometers of irrigation canals and 400 water reservoirs. These initiatives have benefitted 20 thousand farmers and in just 5 years, the Company has invested $79 million in water projects for communities.

Grupo Mexico published its Sustainable Development Report 2020, which contains information on Southern Copper Corporation’s progress in areas relative to sustainability and is aligned with the reporting standards of the Global Reporting Initiative (GRI) and, for the first time, also adheres to the frameworks of the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosure. The 2020 version includes a section on the SCC’s response to the COVID-19 pandemic and provides greater detail on issues relative to economic, governance and climate change performance.

CLIMATE CHANGE

Peruvian operations: On April 17, 2018, the Peruvian government enacted Law N. 30754, establishing a Climate Change Framework. Through this law, promoting public and private investments in climate change management is declared to be of national interest. The law proposes to create an institutional framework to address climate change in Peru, outlining new measures, particularly with respect to climate change mitigation. It includes, for example, provisions regarding: increasing carbon capture and use of carbon sinks; afforestation and reforestation practices; land use changes; and sustainable systems of transportation, solid waste management, and energy systems. This is the first climate change framework law in Latin America to incorporate obligations from the Paris Agreement. Regulations to this law were enacted by Supreme Decree 013-2019, which was published on December 31, 2019 and are applicable to all Peruvian institutions and agencies. It is expected that further Peruvian regulations will be applicable to non-governmental entities. The Company anticipates initiating a multi-year process to adopt applicable reporting recommendations of the Task-Force on Climate-Related Financial Disclosures (TCFD) once new Peruvian climate change regulations applicable to non-governmental entities are implemented. The Company is committed to the environment and to managing climate-related impacts. The Company’s focus is to seek continuous improvement in the responsible use of natural resources while complying with strict applicable legal standards for prevention, mitigation, control and remediation of environmental impacts. Implementing continuous improvement in the Company’s processes improves efficiency in the use and consumption of energy, water, and other natural resources.

Mexican operations: Grupo Mexico, the indirect parent of SCC has issued sustainability reports under the Global Reporting Initiative (GRI) for more than 10 years. Grupo Mexico also participates in different Mexican and international reporting programs such as the Greenhouse Gases (GHG) Mexico Program and CDP (formerly the Carbon Disclosure Project). In 2013, GHG and CDP signed a memorandum of understanding to work on aligning their reporting frameworks. Grupo Mexico’s 2018 CDP questionnaire included responses to the Task Force on Climate-Related Disclosure or TCFD concerns. In compliance with the 2012 Mexican Climate Change Law, Grupo Mexico’s GHG emissions are reported and verified independently. Grupo Mexico’s Sustainability Reports, which disclose inventories of GHG emissions, can be found at “https://www.gmexico.com/en/Pages/development.aspx”. As indicated above, the Grupo Mexico 2020 report is aligned with the reporting standards of the Global Reporting Initiative (GRI) and, for the first time, also adheres to the frameworks of the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosures.

49

ACCOUNTING ESTIMATES

Our discussion and analysis of financial condition and results of operations, as well as quantitative and qualitative disclosures about market risks, are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Preparation of these consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We make our best estimate of the ultimate outcome for these items based on historical trends and other information available when the financial statements are prepared. Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available to management. Areas where the nature of the estimate makes it reasonably possible that actual results could materially differ from amounts estimated include: ore reserves, revenue recognition, ore stockpiles on leach pads and related amortization, estimated impairment of assets, asset retirement obligations, determination of discount rates related to the financial lease liabilities, classification of operating leases versus financial leases, valuation allowances for deferred tax assets, unrecognized tax benefits and fair value of financial instruments. We base our estimates on historical experience and on various other assumptions that we believe reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

RESULTS OF OPERATIONS

The following highlights key financial results for the three and six months ended June 30, 2021 and 2020 (in millions):

    

Three Months Ended

    

    

Six Months Ended

    

    

June 30, 

June 30, 

Statement of Earnings Data

    

2021

    

2020

    

Variance

    

% Change

    

2021

    

2020

    

Variance

    

% Change

Net sales

$

2,897.0

$

1,785.4

$

1,111.6

$

62.3

%

$

5,429.5

$

3,505.1

$

1,924.4

$

54.9

%

Operating costs and expenses

 

(1,221.8)

 

(1,208.2)

 

(13.6)

 

1.1

%

 

(2,402.7)

 

(2,394.7)

 

(8.0)

 

0.3

%

Operating income

 

1,675.2

 

577.2

 

1,098.0

 

190.2

%

 

3,026.8

 

1,110.4

 

1,916.4

 

172.6

%

Non‑operating income (expense)

 

(96.2)

 

(88.8)

 

(7.4)

 

8.3

%

 

(181.1)

 

(185.0)

 

3.9

 

(2.1)

%

Income before income taxes

 

1,579.0

 

488.4

 

1,090.6

 

223.3

%

 

2,845.7

 

925.4

 

1,920.3

 

207.5

%

Income taxes

 

(647.7)

(224.4)

(423.3)

188.6

%

(1,155.2)

(446.2)

(709.0)

158.9

%

Equity earnings of affiliate

 

5.1

(3.1)

8.2

(264.5)

%

13.1

(2.1)

15.2

(723.8)

%

Net income attributable to non‑controlling interest

 

(3.7)

 

(1.4)

 

(2.3)

 

164.3

%

 

(7.0)

 

(2.8)

 

(4.2)

 

150.0

%

Net income attributable to SCC

$

932.7

$

259.5

$

673.2

$

259.4

%

$

1,696.6

$

474.3

$

1,222.3

$

257.7

%

NET SALES

Net sales in the second quarter of 2021 were 62.3% higher than in the same period of 2020. This improvement was driven by an increase in prices of copper (+81.8% - LME), molybdenum (+68.6%), silver (+61.9%) and zinc (+48.3%) and by an uptick in the sales volume of zinc (+12.4%). This effect was slightly offset by lower sales volumes for copper (-13.6%), molybdenum (-11.0%) and silver (-24.6%).

50

    

    

Three Months Ended June 30, 

 

    

Six Months Ended June 30, 

 

    

2021

    

2020

    

% Change

    

2021

    

2020

    

% Change

Copper price ($per pound—LME)

$

4.40

$

2.42

81.8

%

$

4.13

$

2.49

65.9

%

Copper price ($per pound—COMEX)

$

4.43

$

2.43

82.3

%

$

4.14

$

2.50

65.6

%

Molybdenum price ($per pound)(1)

$

13.89

$

8.24

68.6

%

$

12.54

$

8.90

40.9

%

Zinc price ($per pound—LME)

$

1.32

$

0.89

48.3

%

$

1.28

$

0.93

37.6

%

Silver price ($per ounce—COMEX)

$

26.78

$

16.54

61.9

%

$

26.54

$

16.71

58.8

%

(1)Platts Metals Week Dealer Oxide

The table below provides our metal sales as a percentage of our total net sales for the three and six months ended June 30, 2021 and 2020:

    

Three Months Ended

Six Months Ended

    

June 30, 

June 30, 

Sales as a percentage of total net sales

    

2021

    

2020

    

    

2021

    

2020

Copper

 

81.1

%  

82.3

%

 

82.2

%  

80.9

%

Molybdenum

 

9.7

%  

6.0

%

 

8.3

%  

6.6

%

Silver

 

4.1

%  

5.6

%

 

4.8

%  

5.4

%

Zinc

 

2.8

%  

2.7

%

 

2.2

%  

3.2

%

Other by‑products

 

2.3

%  

3.4

%

 

2.5

%  

3.9

%

Total

 

100.0

%  

100.0

%

 

100.0

%  

100.0

%

The table below provides our copper sales by type of product for the three and six months ended June 30, 2021 and 2020. The difference in value between products is the level of processing. At the market price, concentrates take a discount since they require smelting and refining processes, while refined and rod copper receive premiums due to their purity and presentation.

    

Three Months Ended June 30, 

    

Six Months Ended June 30, 

    

Copper Sales (million pounds)

    

2021

    

2020

    

Variance

    

% Change

    

2021

    

2020

    

Variance

    

% Change

Refined (including SX‑EW)

210.3

294.2

(83.9)

(28.5)

%

446.3

569.9

(123.6)

(21.7)

%

Rod

122.3

73.7

48.6

65.9

%

245.8

175.3

70.5

40.2

%

Concentrates and other

182.3

228.0

(45.7)

(20.0)

%

352.3

405.2

(52.9)

(13.1)

%

Total

514.9

595.9

(81.0)

(13.6)

%

1,044.4

1,150.4

(106.0)

(9.2)

%

The table below provides our copper sales volume by type of product as a percentage of our total copper sales volume for the three and six months ended June 30, 2021 and 2020:

Three months ended June 30, 

Six months ended June 30, 

Copper Sales by product type

    

2021

    

2020

    

2021

    

2020

    

Refined (including SX‑EW)

 

40.8

%  

49.4

%  

 

42.7

%  

49.5

%  

Rod

 

23.8

%  

12.4

%  

 

23.6

%  

15.3

%  

Concentrates and other

 

35.4

%  

38.2

%  

 

33.7

%  

35.2

%  

Total

 

100.0

%  

100.0

%  

 

100.0

%  

100.0

%  

51

OPERATING COSTS AND EXPENSES

The table below summarizes the production cost structure by major components as a percentage of total production cost:

    

Three months ended June 30, 

    

Six months ended June 30, 

2021

    

2020

2021

    

2020

Power

 

16.4

%  

17.8

%

 

18.0

%  

16.8

%

Labor

 

11.7

%  

14.0

%

 

11.8

%  

13.8

%

Fuel

 

14.3

%  

9.5

%

 

14.2

%  

11.2

%

Maintenance

 

21.6

%  

21.5

%

 

21.1

%  

21.9

%

Operating material

 

17.2

%  

17.4

%

 

17.0

%  

17.5

%

Other

 

18.8

%  

19.8

%

 

17.9

%  

18.8

%

Total

 

100.0

%  

100.0

%

 

100.0

%  

100.0

%

Second quarter: Operating costs and expenses were $1,221.8 million in the second quarter of 2021 compared to $1,208.2 million in the same period of 2020. The increase of $13.6 million was primarily due to:

Operating cost and expenses for the second quarter of 2020

    

$

1,208.2

Plus:

Increase in other cost of sales (exclusive of depreciation, amortization and depletion), which was mainly driven by an uptick in the workers' participation expense and an increase in the cost of repair materials, fuel and power; this was partially offset by an increase in capitalized leachable material and lower inventory consumption.

 

84.4

Increase in exploration expense.

 

3.2

Increase in depreciation, amortization and depletion expense.

 

1.6

Less:

Decrease in the volume and cost of metals purchased from third parties.

    

 

(75.6)

Operating cost and expenses for the second quarter of 2021

$

1,221.8

Six months: Operating costs and expenses were $2,402.7 million in the first six months of 2021 compared to $2,394.7 million in the same period of 2020. The increase of $8.0 million was primarily due to:

Operating cost and expenses for the first six months of 2020

    

$

2,394.7

Plus:

Increase in other cost of sales (exclusive of depreciation, amortization and depletion), which was mainly attributable to an increase in the workers' participation expense and in the cost of repairing materials, fuel and power; this was partially offset by an increase in capitalized leachable material and lower inventory consumption.

160.6

Increase in depreciation, amortization and depletion expense.

    

 

9.2

Increase in exploration expense.

 

1.0

Increase in selling, general and administrative expenses.

 

0.9

Less:

Decrease in volume and cost of metals purchased from third parties.

 

(163.7)

Operating cost and expenses for the first six months of 2021

$

2,402.7

52

NON-OPERATING INCOME (EXPENSES)

Non-operating income (expense) represented a net expense of $96.2 million and $181.1 million in the three and six months ended June 30, 2021 compared to a net expense of $88.8 million and $185.0 million in the three and six months ended June 30, 2020.

Second quarter: The $7.4 million increase in the expense level was principally due to:

$7.2 million increase in miscellaneous expense, net, which was mainly attributable to a $5.0 million insurance payment received in the second quarter of 2020 due to rain damages at our Peruvian operations,
$3.0 million decrease in interest income; which was partially offset by a
$1.5 million decrease in interest expense, and a
$1.3 million increase in capitalized interest.

Six months: The $3.9 million decrease in the expense level was principally due to: