SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

2004 FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2004

Commission File Number: 1-14066

 

SOUTHERN PERU 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.)
2575 East Camelback Rd. Phoenix, AZ		85016
(Address of principal executive offices)		(Zip code)
Registrant’s telephone number, including area code:		(602) 977-6595

 

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

 

Title of each class		Name of each exchange on which registered
Common Stock, par value $0.01 per share		New York Stock Exchange Lima Stock Exchange

 

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 ý      No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best knowledge of the registrant, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Act of 1934).

                                Yes ý     No o

 

As of February 28, 2005, there were of record 14,116,952 shares of Common Stock, par value $0.01 per share, outstanding, and the aggregate market value of the shares of Common Stock (based upon the closing price on such date as reported on the New York Stock Exchange - Composite Transactions) of Southern Peru Copper Corporation held by non affiliates was approximately $888 million. As of the above date, there were also 65,900,833 shares of Class A Common Stock, par value $0.01 per share, outstanding. Class A Common Stock is convertible on a one-to-one basis into Common Stock.

 

PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE:

 

 

 

PART I

 

Item 1.  Business

 

THE COMPANY

 

The Company, an integrated producer of copper, operates mining, smelting and refining facilities in the southern part of Peru.

 

The Company, incorporated in 1952 was reorganized in 1955, 1996 and 1998 and has conducted copper mining operations since 1960. Pursuant to Peruvian law, the Company conducts its operations in Peru through a registered branch (the “Peruvian Branch” or the “Branch”). The Branch is not a corporation separate from the Company. It is, however, an establishment, registered pursuant to Peruvian law, through which the Company holds assets, incurs liabilities and conducts operations in Peru. Although it has neither its own capital nor liability separate from that of the Company, it is deemed to have an equity capital for purposes of determining the economic interest of holders of Investment Shares. Investment Shares are non-voting ownership interests distributed to workers in accordance with former Peruvian laws. The Branch comprises substantially all the assets and liabilities of the Company associated with its copper operations in Peru.

 

Throughout this report, unless the context otherwise requires, the terms “Southern Peru”, “SPCC” and “the Company” refer to the present corporation and its consolidated subsidiaries. In addition, throughout this report, unless otherwise noted, all tonnages are in metric tons. To convert to short tons, multiply by 1.102. All distances are in kilometers. To convert to miles, multiply by 0.62137. All ounces are troy ounces.

 

On November 15, 1999, ASARCO Incorporated (“ASARCO”) transferred all of the stock of SPCC owned by it to Southern Peru Holdings Corporation, a wholly owned subsidiary of ASARCO. On November 17, 1999, Grupo México S.A. de C.V. (“Grupo Mexico”) acquired substantially all of the stock of ASARCO following a tender offer and purchase of all outstanding common stock of ASARCO.

 

On March 31, 2003, Southern Peru Holdings Corporation sold all its stock in the Company to Americas Mining Corporation (“AMC”), the parent of ASARCO. Immediately after the transaction, the shares were transferred to SPHC II Incorporated, a subsidiary of AMC, and were pledged to a group of financial institutions. Pursuant to a financing agreement, AMC has agreed to comply with financial covenants, involving SPCC, including covenants requiring the maintenance of minimum stockholders’ equity, specific debt to equity ratios and interest rate coverage ratios.

 

Proposed Purchase of Grupo Mexico’s Mexican Mining Subsidiary Shares:

The Board of Directors of the Company, upon the recommendation of a special committee of disinterested directors, has unanimously approved a merger agreement under which the Company’s majority shareholder, Grupo Mexico will, through its subsidiary, Americas Mining Corporation (“AMC”), -sell to SPCC its approximately 99.15% shareholding in Minera Mexico S.A. de C.V. (“MM”), in return for the issuance to AMC of approximately 67.2 million shares of SPCC. Each member of the special committee received a fee of $15,000 per month of committee service, in lieu of regular meeting fees. The transaction will result in Grupo Mexico increasing its ownership share in the Company to approximately 75% from its current 54.2%. As part of this proposed transaction SPCC has paid on March 1, 2005 a special transaction dividend in the aggregate amount of $100 million to all of SPCC’s existing shareholders. The transaction will be treated as a reorganization of entities under common control. The Company has filed a proxy statement with the Securities and Exchange Commission and has scheduled a special stockholders meeting for March 28, 2005. The completion of the merger is dependent upon the satisfaction of a number of conditions set forth in the merger agreement and outlined in the proxy statement, including an affirmative vote by two-thirds of the

 

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outstanding shares.

 

It is not currently anticipated that the merger will result in any change in the two-class structure of the Company’s capital stock and that both Common Stock and Class A Common Stock will remain outstanding. Class A Common Stock, which has voting preferences, would be converted to Common Shares with equal voting interest only if all Class A Common shares are simultaneously converted. The transaction is expected to ultimately result in SPCC having a single class of registered Common Stock listed on the New York and Lima stock exchanges.

 

At December 31, 2004 the stockholders of record in the Company were SPHC II Incorporated, a subsidiary of Grupo Mexico (54.2%), Cerro Trading Company, Inc. (11.9%), SPCC Investors, LLC (2.3%), Phelps Dodge Overseas Capital Corporation (11.2%), Climax Molybdenum B.V. (2.8%), and common stockholders (17.6%).

 

CAUTIONARY STATEMENT

 

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

 

Additional business information follows:

 

COPPER BUSINESS

 

Copper is an important component in the world’s infrastructure. Copper has unique chemical and physical properties, including high electrical conductivity and resistance to corrosion, as well as excellent malleability and ductility, that have made it a superior material for use in the electrical energy, telecommunications, building construction, transportation and industrial machinery businesses. Wire and cable products, used principally as energy cable, building wire and magnet wire, account for as much as 75% of copper consumption. Copper is also an important metal in non-electrical applications such as plumbing, roofing and, when alloyed with zinc to form brass, in many industrial and consumer applications. The building and construction industry accounts for approximately 40% of worldwide copper usage.

 

Copper industry fundamentals, including copper demand, price levels and stocks, strengthened in 2004 and copper prices have continued to improve in 2005 from the 15-year price lows set during 2002.

 

Business Reporting Segments: The Company’s operations are within one reportable segment.

 

REVIEW OF OPERATIONS

 

SPCC operates the Toquepala and Cuajone open pit mines, high in the Andes, approximately 984 kilometers southeast of Lima. It also operates a smelter and a

 

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refinery west of the mines at the Pacific Ocean Coast City of Ilo, Peru. SPCC is one of the largest mining companies in Peru and one of the 10 largest private sector copper mining companies in the world.

 

PRODUCTS

 

The copper operations of the Company involve mining of open pit mines, milling and flotation of copper ore to produce copper concentrates, the smelting of copper concentrates to produce blister copper, and the refining of blister copper to produce copper cathodes. The Company also produces refined copper using the solvent extraction/electrowinning (“SX/EW”) technology. Molybdenum, silver, and small amounts of other metals are contained in copper ore as by-products. Silver sold is recovered in the refining process or as an element of blister copper. Molybdenum is recovered from copper concentrate in a molybdenum by-product plant.

 

COPPER AND MOLYBDENUM PRODUCTION PROCESS

 

The process of producing copper starts at the open pit mines of Toquepala and Cuajone. The first step is drilling and blasting (using explosives) the rock material containing copper. Ore is loaded onto trucks using electric shovels. Material with a copper grade over 0.4% is loaded onto rail cars and sent to the milling circuit, where giant rotating crushers reduce the size of the rocks to less than ¾ of an inch. The ore is then sent to the ball and bar mills, which grind it to the consistency of fine powder.

 

The finely ground powder is agitated in a water and reagents solution and is then transported to flotation cells. Air is pumped into the cells producing a froth, which carries the copper mineral to the surface but not the waste rock. The waste rock is called tailings. Tailings are sent to thickeners where water is recovered. The remaining tailings are sent to Quebrada Honda, the Company’s tailings storage facility.

 

The bulk concentrated copper (copper and molybdenum) is processed in the molybdenum plant, which is floated in the Rougher circuit. The underflow of this circuit constitutes the final copper concentrates. The overflow is processed in cleaning cells, flotation in Agitator cells and columnar flotation. The final molybdenum concentrate is overrated to enlarge the percentage of solid, then the product is filtered and dried; finally, is packaged and weighed for its delivery. The produced molybdenum concentrates has 54% to 55% molybdenum content with a 7.5% average humidity.

 

Recovered copper, which now has the consistency of froth, is filtered and dried to produce copper concentrates, with an average content of 27% copper. Concentrates from both mines are then shipped by rail to the smelter at Ilo, on the Pacific coast.

 

At the smelter, the concentrates are blended with flux, and then sent to the reverberatory furnaces and the El Teniente converter, producing copper matte and slag (basically iron and other impurities). Copper matte contains approximately 35% copper and the matte of the El Teniente converter contains approximately 73% copper. Copper matte is then sent to the converters, where the material is oxidized in two steps:

 

a)   the iron sulfides in the matte are oxidized using silica, producing a slag, which is returned to the reverberatory furnaces,

 

b)   the copper contained in the matte sulfides is then oxidized to produce copper that, after casting, is called blister copper, containing 99.3% copper. Some of the blister production is sold to customers; the remainder is sent to the refinery.

 

At the refinery, blister copper is smelted again in a furnace, to produce copper anodes with a content of 99.8% copper. Anodes are then suspended in tanks containing sulfuric acid and copper sulfate. A low electrical current is passed through the anodes and chemical solution and the dissolved copper is deposited on very thin copper starting sheets to produce copper cathodes. Copper cathodes contain approximately 99.99% copper. During this process, silver, gold, and other metals (palladium, platinum, selenium,

 

A3

 

etc.) along with other impurities settle on the bottom of the tank. The anodic mud (slime) is processed at the precious metal plant where silver and gold are recovered.

 

The Company also produces low cost refined copper, using SX/EW technology. During the SX/EW process, low-grade mineral is leached with sulfuric acid to allow for copper content recovery. The acid and copper solution is then agitated with a solvent that contains chemical additives, which attract copper ions. As the solvent is lighter than water, it floats to the surface carrying with it the copper content. The solvent is then separated using an acid solution, freeing the copper. The acid solution with the copper is then moved to the electrolytic extraction tanks, where copper is transformed to cathodes, similar to the refining process carried out at the Ilo refinery.

 

Slope Stability:   Both the Toquepala and Cuajone pits are approximately 700 meters deep and under the present mine plan configuration will reach a depth of 1200 meters. The deepening pit presents a number of geotechnical challenges to the Company. Perhaps the foremost concern is the possibility of slope failure, a possibility that all open pit mines face. In order to maintain slope stability, SPCC has in the past decreased pit slope angles, installed additional or duplicate haul road access, and increased stripping requirements. The Company has also responded to hydrological conditions and removed material displaced by a slope failure. There is not assurance that the Company will not have to take these or other actions in the future, any of which may negatively affect the Company’s results of operations and financial condition, as well as have the effect of diminishing the Company’s stated ore reserves. To meet the geotechnical challenges relating to slope stability of the  open pit mines, SPCC has taken the following steps:

 

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

 

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

 

The studies were completed in 2000 and SPCC believes it implemented the study recommendations. One of the major changes implemented was slope angle reduction at both mines, Toquepala by 5 degrees average and Cuajone by 7 degrees average, while this increased the waste included in the mineable reserve calculation it did improve the stability of the pits.

 

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

 

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

 

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

 

A4

 

OVERVIEW

 

Total copper production for the full-year 2004 increased 6.1% to 876 million pounds. The increase in production was principally due to the higher ore grade and copper recovery in Toquepala and Cuajone concentrators. SX/EW copper production decreased by 12.4 million pounds, because of lower grades of PLS (Pregnant Leaching Solution).

 

The Toquepala concentrator milled 21.8 million tons of ore in 2004, producing 580,110 tons of copper concentrate, both new records for Toquepala. The concentrator capacity was increased in 2002 to 60,000 tons per day from 45,000 tons per day. Toquepala mine production increased by 40.7 million pounds of copper in 2004. In 2004, the Cuajone mine produced 21.7 million more pounds of copper than the previous year, largely due to higher grade ore processed.

 

In 2004, the Ilo smelter processed 1.21 million tons of concentrates. Ilo refinery cathode production decreased by 1.2% to 618.8 million pounds.

 

In July 2003, the Company awarded a contract to provide the technology and basic engineering for the modernization of the Ilo smelter to Fluor/Xstrata. The selected proposal meets with SPCC’s requirements, which are the use of proven technology (the ISASMELT from Australia) and compliance with the current environmental regulations. It is projected that the project will be completed before January 2007, the deadline established in the Company’s agreement with the Peruvian government.

 

MINING OPERATIONS

 

Mined copper production at SPCC’s Toquepala and Cuajone mines increased 8.7% in 2004, compared with 2003, due to higher production in both mines.

 

Cuajone production increased 5.3% in 2004 to 428.6 million pounds of copper due principally to higher ore grades and better recovery. The Cuajone concentrator throughput for the year was 29.3 million tons of ore resulting in production of 753 thousand tons of copper concentrates.

 

Toquepala mine production increased 13.0% in 2004 to 354.6 million pounds of copper due to higher ore grades, mill throughput and better recoveries. The Toquepala concentrator milled 21.8 million tons of ore. Together, the two mines produced 4.8 million ounces of silver and 23.5 million pounds of molybdenum as by-products.

 

SX/EW OPERATIONS

 

The SX/EW facility at Toquepala produces refined copper from solutions obtained by leaching low-grade ore stored at the Toquepala and Cuajone mines. The facility produced 92.9 million pounds of copper in 2004 compared to 105.3 million pounds in 2003, a decrease of 12.4 million pounds of copper. The decrease is mainly due to lower grades of PLS.

 

In 2003, the Board of Directors approved a leach dump project at Toquepala. The project includes the installation of a crushing, conveying and spreading system at the Toquepala leach dumps. The project is estimated to be completed in mid-2005 at a budgeted cost of $69.7 million. As of December 31, 2004 $44.3 million has been expended on this project. The project is expected to reduce production costs for SPCC’s leaching facilities and will largely eliminate costly truck haulage in the process.

 

ORE RESERVES

 

Ore reserves at Toquepala and Cuajone are those estimated quantities of proven and probable material that may be economically mined and processed for extraction of their

 

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component value. Ore reserve estimates are based on engineering evaluations of assay values derived from the sampling of drill holes and other openings. The Company believes that the samplings taken are spaced at intervals close enough to render the estimates reliable. The ore reserve estimates include assessments of the metallurgy to determine copper recovery by flotation process and column leaching, as well as economic, marketing, legal, environmental, governmental and other necessary considerations. The Company has an internal reserve review function. The Company’s engineering department reviews reserve computations. In addition, the Company periodically engages independents consultants to review its mine planning procedure. Ore reserve tables are on pages A12 to A14.

 

SMELTING AND REFINING OPERATIONS

 

The Ilo smelter processed 1.21 million tons of concentrates. Smelting of SPCC concentrates increased by 2.5%. As a result, blister production increased to 320,722 tons in 2004, compared to 314,900 tons in 2003.

 

SPCC’s total refined copper production decreased 2.7% to 711.7 million pounds in 2004 from 731.4 million pounds in 2003. Refined production from the Ilo refinery was 618.8 million pounds in 2004, a decrease of 1.2% from 2003. This decrease was caused by interruptions in the flow of blister to the refinery during the early part of 2004, as a result of the Company’s Supplementary Control Program. Loss of production early in the year could not be made up despite the increasing blister availability in the latter part of the year. Production from SX/EW plant decreased to 92.9 million pounds of copper, an 11.8% decrease from the prior year due to lower PLS grades.

 

SPCC’s Ilo smelter provides feed for the refinery. Blister copper produced by the smelter exceeds the refinery’s capacity and the excess is sold to other refineries around the world.

 

EXPANSION AND MODERNIZATION PROGRAM

 

For a description of the Company’s Expansion and Modernization Program see “Expansion and Modernization Programs” on page A23

 

EXPLORATION

 

Los Chancas:  This project, a copper and molybdenum porphyry deposit, is located in the south of Peru, in the department of Apurimac. In 2004, the Company completed the final phase of the diamond-drilling program, with 10,500 meters drilled. The Company has completed the second and final phase of metallurgical testing and has commenced pre-feasibility studies. Once completed, SPCC will be able to make a determination if more exploration is needed or if the project contains commercially mineable reserves, which would warrant future development after a comprehensive economic, technical and legal feasibility studies are completed. Testing to date indicate a mineral deposit of 200 million tons with a copper grade of 1.0%, 0.07% molybdenum and 0.12 grams of gold per ton.

 

Tantahuatay:  This project is located in north of Peru, in the department of Cajamarca. Exploration work performed by SPCC is in the upper part of the deposit principally for gold recovery. Work to date indicates mineralization of 27.1 million tons with an average gold content of 0.89 grams per ton and 13.0 grams of silver per ton. During 2004 the Company’s efforts were directed towards solving social and environmental concerns of the nearby communities. The project continues to be in the exploratory stage. SPCC has a 44.245% interest in this project.

 

Tia Maria:  This project, a copper porphyritic system, is located in the south of Peru in the department of Arequipa. In 2004, 12,165 meters of diamond drilling were completed out of 15,000 meters projected. The drilling is continuing into 2005 to complete the program. The project is still in the exploratory stage.

 

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Other Peruvian prospects:  As part of the Company’s 2005 program, drilling has been scheduled at the Gloria Cristina prospect located in the north of Peru, in the department of La Libertad and at the Millune prospect in the south of Peru, in the department of Tacna. Both prospects show evidence of copper-gold mineralization.

 

Chilean exploration prospects:  In 2003, the Company acquired several exploration properties in Chile, with over 35,000 hectares of mining rights. In 2004, the Company began drilling programs at some of these prospects. At Sierra Aspera, a copper-gold prospect, located in the north of Chile in the Atacama region, 1,715 meters of diamond drilling was completed. At El Salado, another copper-gold prospect in the Atacama region, 945 meters of diamond drilling was completed in 2004. Drilling for these prospects will continue in 2005. Other properties in the Chilean group are scheduled for future exploration.

 

Currently, the Company has direct control of 149,185 hectares of mineral rights.

 

PRINCIPAL PRODUCTS AND MARKETS

 

The principal uses of copper are in the building and construction industry, electrical and electronic products and, to a lesser extent, industrial machinery and equipment, consumer products and the automotive and transportation industries. Silver is used for photographic, electrical and electronic products and, to a lesser extent, brazing alloys and solder, jewelry, coinage, silverware and catalysts. Molybdenum is used to toughen alloy steels and soften tungsten alloy and is also used in fertilizers, dyes, enamels and reagents.

 

During 2004, 2003 and 2002, substantially all of the Company’s copper production was exported from Peru and sold to customers in Europe, the Far East, the United States and elsewhere in the Americas. Approximately, 96.7%, 96.2% and 95.3% of the Company’s copper production for the years 2004, 2003 and 2002, respectively, was exported from Peru. A substantial portion of SPCC’s copper sales are made under annual contracts or longer-term contracts to industrial users. Silver is sold under annual or longer-term contracts or in spot sales and molybdenum is sold in concentrate form to merchants and other refiners under annual or longer-term contracts. Most customers receive shipments on a monthly basis at a constant volume throughout the year. As a result, there is little seasonality in SPCC sales volumes.

 

BACKLOG OF ORDERS

 

Approximately 86%, 90% and 93% of the Company’s metal production for the years 2004, 2003 and 2002, respectively, was sold under annual or longer-term contracts. To the extent not sold under annual contracts, production was sold on commodity exchanges or in spot sales. Final sales prices are determined based on prevailing commodity prices for the quotation period, generally being the month of, the month prior to or the months following the actual or contractual month of shipment or delivery according to the terms of the contract.

 

COMPETITIVE CONDITIONS

 

Competition in the copper market is principally on a price and service basis, with price being the most important consideration when supplies of copper are ample. The Company’s products compete with other materials, including aluminum and plastics.

 

EMPLOYEES

 

At December 31, 2004 the Company employed 3,544 persons, about 58.6% of whom were covered by labor agreements with nine labor unions. In the third quarter of 2004, labor unions at Cuajone and Toquepala struck for 12 days. The union demands included, salary increases, benefits, different application of certain aspects of the labor agreement and they expressed opposition to SPCC’s acquisition of Minera Mexico S.A. de

 

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C.V. The Labor Ministry declared the strike illegal and the workers returned to work but asserted their right to return to strike. In early 2005, the workers removed the strike threat, indicating they would pursue their grievances through the Ministry of Labor. There were no labor strikes in 2003. There were fourteen days of labor strikes in the fourth quarter of 2002 in the Toquepala area.

 

ENERGY MATTERS AND WATER RESOURCES

 

Electric power for the Company’s operating facilities is generated by two thermal electric plants owned and operated by Enersur S.A. (“Enersur”), one located adjacent to the Ilo smelter (diesel and waste heat boilers plant) and the other to the south of the port of Ilo (coal plant).

 

Power generation capacity is currently 344 megawatts. In addition, the Company has 9 megawatts of power generation capacity from two small hydro-generating installations at Cuajone. Power is distributed over a 224-kilometer closed loop transmission circuit.

 

In 1997, the Company sold its Ilo power plant to Enersur and entered into a 20-year power purchase agreement. The power purchase agreement contained provisions obligating Enersur to construct additional capacity upon notice to meet the Company’s increased electricity requirements from the planned expansion and modernization. The parties also entered into an agreement for the sharing of certain services between the power plant and the Company’s smelter at Ilo. Under this agreement, the Company’s cost of power increased somewhat from its 1996 level, but the Company has benefited by avoiding significant capital expenditures thought then to be required to meet the needs of the expanded operations.

 

In March 2003, the Company agreed to amend the power purchase agreement, resolving certain issues that arose between the parties and reducing power costs for the remaining life of the agreement. A new contract, documenting this agreement, was executed in June 2003. The new agreement released Enersur from the obligation to construct additional capacity upon notice to meet the Company’s increased electricity requirements from the expansion and modernization program. The Company made a one-time contractual payment to Enersur of $4.0 million in the second quarter of 2003 associated with the termination of the original power purchase agreement. SPCC believes it can satisfy the need for increased electricity requirements from other sources, including local power providers.

 

SPCC has water concessions for well fields at Huaitire, Vizcachas and Titijones and surface water rights from the Suches Lake, which are sufficient to supply the needs of its two operating units, Toquepala and Cuajone. At Ilo, the Company has desalinization plants that produce water for industrial and domestic use.

 

ENVIRONMENTAL MATTERS

 

Capital expenditures in connection with environmental projects were approximately $65.6 million in 2004, $2.1 million in 2003 and $2.5 million in 2002. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risk, - Environmental Matters”.

 

MINING RIGHTS AND CONCESSIONS

 

The Company has 214,904 hectares in concessions from the Peruvian Government for its exploration, exploitation, extraction and/or production operations (collectively, the “Concessions)”, as per the following schedule:

 

(In hectares)		Toquepala		Cuajone		Ilo		Other		Total
Plants		300		456		421				1,177
Operations		39,905		29,844		12,803				82,552
Exploration								131,175		131,175
Total		40,205		30,300		13,224		131,175		214,904

 

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The Company believes that the Concessions are in full force and effect under applicable Peruvian laws and that it is in compliance with all material terms and requirements applicable to the Concessions. The Concessions are granted for indefinite periods and, provided that the Company pays the concession fees of up to $3 per hectare annually for the mining concessions and a fee based on nominal capacity for the processing concessions, there are no conditions, occurrences or events that may cause the revocation, cancellation, lapsing or termination of the concessions. Fees paid during 2004, 2003 and 2002 were approximately $1.1 million, $1.0 million and $1.1 million, respectively. SPCC has two types of mining concessions: metallic and non-metallic concessions. SPCC has also water concessions for well fields at Huaitire, Titijones and Vizcachas and surface water rights from the Suches Lake, which are sufficient to supply the needs of its two operating units, Toquepala and Cuajone.

 

In addition, in 2003, the Company acquired several exploration properties in Chile, with over 35,000 hectares of mining rights.

 

None of the Company’s designated reserves requires the Company to obtain or request an extension of a concession. As long as all concession fees are paid, the Company maintains the right to explore and exploit its reserves. The Company may let certain concessions lapse when it is determined that they are not material to the Company’s operations.

 

REPUBLIC OF PERU

 

All of the Company’s revenues are derived from the Toquepala mine, the Cuajone mine, the SX/EW facility and the smelter and refinery at Ilo, all of which are located within a 48-kilometer radius in the southern part of Peru. Risks attendant to the Company’s operations in Peru include those associated with economic and political conditions, effects of currency fluctuations and inflation, effects of government regulations and the geographic concentration of the Company’s operations.

 

INTERNET ADDRESS

 

The Company’s Internet address is www.southernperu.com. Commencing with the Form 8-K dated March 14, 2003, the Company has made available free of charge on www.southernperu.com its annual, quarterly and current reports, as soon as reasonably practical after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”). The Company’s web page includes the Corporate Governance guidelines and the charters of its most important Board Committees. However, the information found on the Company’s website is not part of this or any other report.

 

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Item 2. Properties

 

FACILITIES

 

The Company’s principal executive offices are located at 2575 East Camelback Road, Suite 500, Phoenix, AZ, 85016 and at Avenida Caminos del Inca No. 171, Chacarilla del Estanque, Santiago de Surco, Lima 33, Peru. At December 31, 2004, the Company through its Peruvian Branch has 100% interest in the Toquepala and Cuajone mines, the SX/EW facility, the Ilo smelter, the sulfuric acid plant and the Ilo refinery and operates them pursuant to concessions from the Peruvian Government. See Item 1 “Business, Mining Rights and Concessions”. The Company owns, through the Branch, its offices in Lima. Its offices in Phoenix are located in space leased to it by ASARCO. The Company believes that its existing properties are in good condition and suitable for the conduct of its business.

 

The offices and the Company’s major facilities, together with production commencement dates, are listed below:

 

PERU		UNITED STATES
Toquepala Mine — Southern Peru (1960)		Executive Offices — Phoenix, AZ (2000)
Cuajone Mine — Southern Peru (1976)
SX/EW Facility — Southern Peru (1995)
Ilo Smelter — Ilo, Peru (1960)
Ilo Refinery — Ilo, Peru (1994-SPCC)
Acid Plant — Ilo, Peru (1995)
Executive Offices — Lima, Peru (1977)

 

The Company also owns and operates a railroad connecting the mines at Cuajone and Toquepala with the smelting and refining facilities and a port at Ilo, which are located approximately 196 rail kilometers from the two mine sites, which are at elevations ranging from 3,220 to 3,330 meters. In addition, the Company owns homes, hospitals and schools, which have been included in fixed assets, in order to provide services for employees and their families.

 

A10

 

METAL PRODUCTION STATISTICS

 

		2004			2003			2002
Copper Production
MINES (contained copper in thousands of pounds)
Toquepala		354,618			313,878			276,513
Cuajone		428,553			406,814			370,834
SX/EW		92,869			105,283			116,524
Total Mines		876,040			825,975			763,871
SMELTER (blister copper in thousands of pounds)
SPCC concentrates		707,071			687,727			632,910
Purchased concentrates		—			6,552