| SOUTHERN COPPER CORP/ Item 1A Risk Factors Every investor or potential investor in Southern Copper Corporation should carefully consider the following risk factors |
| Risks Relating to Our Business Generally Our financial performance is highly dependent on the price of copper and the other metals we produce |
| Our financial performance is significantly affected by the market prices of the metals that we produce, particularly the market prices of copper and molybdenum |
| Historically, prices of the metals we produce have been subject to wide fluctuations and are affected by numerous factors beyond our control, including international economic and political conditions, levels of supply and demand, the availability and costs of substitutes, inventory levels maintained by users, actions of participants in the commodities markets and currency exchange rates |
| In addition, the market prices of copper and certain other metals have on occasion been subject to rapid short-term changes |
| In 2005, an approximately 29prca increase in copper prices on the LME, and the COMEX, and a 95prca increase in molybdenum prices, contributed to an increase of approximately 33prca in our total sales in 2005 as compared with 2004, this after an increase of approximately 96prca in 2004 |
| While the price of copper dropped to a 15-year low of dlra0dtta61 per pound in 2001, it has since increased by approximately 213dtta0prca to dlra2dtta26 per pound as of February 28, 2006 |
| The price of molybdenum has also recently increased significantly and is currently at historically high levels |
| The average annual price of molybdenum over the five-year period ended December 31, 2005 was dlra11dtta54 per pound, with a price per pound as of February 28, 2006 of dlra22dtta25 per pound |
| Over the past three years, as a result of this increase in molybdenum prices, molybdenum has become a significant contributor to our sales |
| We cannot predict whether metals prices will rise or fall in the future |
| A decline in metals prices and, in particular, copper or molybdenum prices, could have an adverse impact on our results of operations and financial condition, and we might, in very adverse market conditions, consider curtailing or modifying certain of our mining and processing operations |
| Changes in the level of demand for our products could adversely affect our product sales |
| Our revenue is dependent on the level of industrial and consumer demand for the concentrates and refined and semi-refined metal products we sell |
| Changes in technology, industrial processes and consumer habits may affect the level of that demand to the extent that changes increase or decrease the need for our metal products |
| A change in demand could impact our results of operations and financial condition |
| Our actual reserves may not conform to our current estimates of our ore deposits |
| There is a degree of uncertainty attributable to the calculation of reserves |
| Until reserves are actually mined and processed, the quantity of ore and grades must be considered as estimates only |
| The proven and probable ore reserves data included in this report are estimates prepared by us based on evaluation methods generally used in the mining industry |
| Independent engineers have not verified these reserves estimates |
| We may be required in the future to revise our reserves estimates based on our actual production |
| We cannot assure you that our actual reserves conform to geological, metallurgical or other expectations or that the estimated volume and grade of ore will be recovered |
| Market prices, increased production costs, reduced recovery rates, short-term operating factors, royalty taxes and other factors may render proven and probable reserves uneconomic to exploit and may result in revisions of reserves data from time to time |
| Reserves data are not indicative of future results of operations |
| See “Ore Reserves” |
| 27 ______________________________________________________________________ Our business requires capital expenditures which we may not be able to maintain |
| Our business is capital intensive |
| Specifically, the exploration and exploitation of copper and other metal reserves, mining, smelting and refining costs, the maintenance of machinery and equipment and compliance with laws and regulations require capital expenditures |
| We must continue to invest capital to maintain or to increase the amount of copper reserves that we exploit and the amount of copper and other metals we produce |
| We cannot assure that we will be able to maintain our production levels to generate sufficient cash, or that we have access to sufficient financing to continue our exploration, exploitation and refining activities at or above present levels |
| The expected benefits of our recent acquisition of Minera Mexico, including expected synergies, may not be realized |
| On April 1, 2005, we completed our acquisition of Minera Mexico from AMC, a subsidiary of Grupo Mexico, our controlling stockholder |
| We are now in the process of integrating two companies that previously had been affiliated but operated independently |
| We acquired Minera Mexico based on a number of factors, including trends we believe may favor consolidation in the copper mining industry, potential improvement in production and our relative cost position, geographic diversification of our operations and potential operating synergies |
| We also considered potential negative effects in evaluating the transaction, including lower than expected mineral production from Minera Mexico, diversion of management’s attention and the risk that potential operating synergies may not be realized |
| We cannot assure you that the benefits we expect from the acquisition will be achieved or that potential negative effects will not be realized and adversely affect us |
| Restrictive covenants in the agreements governing our indebtedness and the indebtedness of our Minera Mexico subsidiary may restrict our ability to pursue our business strategies |
| Our financing instruments and those of our Minera Mexico subsidiary include financial and other restrictive covenants that, among other things, limit our and Minera Mexico’s abilities to incur additional debt and sell assets |
| If either we or our Minera Mexico subsidiary do not comply with these obligations, we could be in default under the applicable agreements which, if not addressed or waived, could require repayment of the indebtedness immediately |
| Our Minera Mexico subsidiary is further limited by the terms of its outstanding notes, which also restrict the Company’s applicable incurrence of debt and liens |
| In addition, future credit facilities may contain limitations on its incurrence of additional debt and liens and on its ability to dispose of assets |
| See “Management’s Discussion and of Financial Condition and Results of Operations–Liquidity and Capital Resources–Financing |
| ” Applicable law restricts the payment of dividends from our Minera Mexico subsidiary to us |
| Minera Mexico is a Mexican company and, as such, may pay dividends only out of net income that has been approved by the shareholders |
| Shareholders must also approve the actual dividend payment, after mandatory legal reserves have been created and losses for prior fiscal years have been satisfied |
| As a result, these legal constraints may limit the ability of our Minera Mexico subsidiary to pay dividends to us, which in turn, may have an impact on our ability to service debt |
| Our operations are subject to risks, some of which are not insurable |
| As shown by our recent tragic mining accident in Mexico, the business of mining, smelting and refining copper, zinc and other metals is subject to a number of risks and hazards, including industrial accidents, labor disputes, unusual or unexpected geological conditions, changes in the regulatory environment, environmental hazards and weather and other natural phenomena, such as earthquakes |
| Such occurrences could result 28 ______________________________________________________________________ in damage to, or destruction of, mining operations resulting in monetary losses and possible legal liability |
| In particular, surface and underground mining and related processing activities present inherent risks of injury to personnel and damage to equipment |
| We maintain insurance against many of these and other risks, which may not provide adequate coverage in certain circumstances |
| Insurance against certain risks, including certain liabilities for environmental pollution or hazards as a result of exploration and production, is not generally available to us or other companies within the mining industry |
| These or other uninsured events may adversely affect our financial condition and results of operations |
| The loss of one of our large customers could have a negative impact on our results of operations |
| The loss of one or more of our significant customers could adversely affect our financial condition and results of operations |
| In 2005, 2004 and 2003, our largest customer accounted for approximately 11dtta7prca, 10dtta7prca and 6dtta7prca, respectively, of our sales |
| Additionally, our five largest customers in each of 2005, 2004 and 2003 collectively accounted for approximately 40dtta8prca, 33dtta7prca and 26dtta5prca, respectively, of our sales |
| Deliveries under our copper sales agreements can be suspended or cancelled by our customers in certain cases |
| Under each of our copper sales agreements, we or our customers may suspend or cancel delivery of copper during a period of force majeure |
| Events of force majeure under these agreements include acts of nature, labor strikes, fires, floods, wars, transportation delays, government actions or other events that are beyond the control of the parties |
| Any suspension or cancellation by our customers of deliveries under our copper or other sales contracts that are not replaced by deliveries under new contracts or sales on the spot market would reduce our cash flow and could adversely affect our financial condition and results of operations |
| The copper mining industry is highly competitive |
| We face competition from other copper mining and producing companies around the world |
| Although we are currently among the lowest cost copper producers in our region, we cannot assure you that competition from lower cost producers will not adversely affect us in the future |
| In addition, mines have limited lives and, as a result, we must periodically seek to replace and expand our reserves by acquiring new properties |
| Significant competition exists to acquire properties producing or capable of producing copper and other metals |
| The mining industry has experienced significant consolidation in recent years, including consolidation among some of our main competitors, as a result of which an increased percentage of copper production is from companies that also produce other products and may, consequently, be more diversified than we are |
| We cannot assure you that the result of current or further consolidation in the industry will not adversely affect us |
| Potential changes to international trade agreements, trade concessions or other political and economic arrangements may benefit copper producers operating in countries other than Peru and Mexico, where our mining operations are currently located |
| We cannot assure you that we will be able to compete on the basis of price or other factors with companies that in the future may benefit from favorable trading or other arrangements |
| Increases in energy costs, accounting policy changes and other matters may adversely affect our results of operations |
| We require substantial amounts of fuel oil, electricity and other resources for our operations |
| We rely upon third parties for our supply of the energy resources consumed in our operations |
| The prices for and availability of energy resources may be subject to change or curtailment, respectively, due to, among other things, new laws or regulations, imposition of new taxes or tariffs, interruptions in production by suppliers, worldwide price levels and market conditions |
| For example, during the 1970s and 1980s, our ability to import fuel oil was restricted by Peruvian government policies that required us to purchase fuel oil domestically from a government-owned oil producer at prices substantially above those prevailing on the world market |
| In addition, in recent years the price of oil has risen dramatically due to a variety of factors |
| Disruptions in supply or increases in costs of energy resources could have a material adverse effect on our financial condition and results of operations |
| We believe our results of operations can, from time to time, be affected by accounting policy changes, including the March 17, 2005 Emerging Issues Task Force, or EITF, consensus ratified by the Financial Accounting Standards Board, or FASB, on March 30, 2005 and the subsequent modification to the transition provisions approved by the EITF in its June 15-16, 2005 meeting |
| The consensus states that stripping costs incurred during the production phase of a mine are variable production costs that should be included in the cost of the inventory produced (extracted) during the period that the stripping costs are incurred |
| On January 1, 2006 the Company adopted this consensus by reversing dlra499dtta5 million of net cumulative capitalized stripping cost and capitalized leach inventory cost as of December 31, 2005 and recording a net charge of dlra322dtta9 million to retained earnings after the recognition of a workers participation and tax benefit of dlra176dtta6 million |
| In addition, near-term future years operating income could be negatively impacted to the extent that costs previously capitalized are expensed |
| For further discussions see “Notes to consolidated combined financial statements – Impact of new accounting standards” |
| A 2005 Mexican Supreme Court decision reduced our results by requiring increased workers’ profit sharing payments by our Minera Mexico subsidiary |
| In May 2005, the court rendered a decision that changed the method of computing the amount of statutory workers’ profit-sharing required to be paid by certain Mexican companies, including Minera Mexico |
| The court’s ruling in effect prohibited applying net operating loss carryforwards in computing the income used as the base for determining the workers’ profit sharing amounts, as further described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Liquidity and Capital Resources–Other Liquidity Considerations” |
| Additionally, we expect our future results will continue to be affected by the recently-enacted Peruvian mining royalty charge, which has reduced our earnings in the second half of 2004 and the year 2005, as further described under Business–Mining Rights and Concessions–Peru |
| We may be adversely affected by labor disputes |
| In the last several years we have experienced a number of strikes or other labor disruptions that have had an adverse impact on our operations and operating results |
| See “Business–Employees |
| ” For example, in Peru, on August 31, 2004, unionized workers at our mining units in Toquepala and Cuajone initiated work stoppages and sought additional wage increases based on high metals prices |
| The strike was resolved on September 13, 2004 |
| Additionally, in February 2006 construction workers at the Ilo Smelter modernization project went on strike and blocked access to our Ilo production facilities |
| Our Ilo refinery and smelter production was interrupted for a short period before the matter was resolved |
| This disruption did not significantly affect our production |
| In Mexico, on October 26, 2005 the workers at our La Caridad mining complex went on strike claiming that the Company still owed them profit sharing from 2003 |
| The strike was declared illegal and the workers returned to work two days later after the Company agreed to pay each worker approximately dlra900dtta00 |
| On July 12, 2004, the workers of Mexcobre went on strike asking for the review of certain 30 ______________________________________________________________________ contractual clauses |
| On October 15, 2004, the workers of Mexcananea went on strike, followed by the Mexicana de Cobre workers |
| The strike lasted for 6 days at Mexicana de Cobre and 9 days at Mexicana de Cananea |
| In each case, our operations at the particular mine ceased until the strike was resolved |
| In Mexico, collective bargaining agreements are negotiated every year in respect of salaries and every two years for other benefits |
| We cannot assure you that we will not experience strikes or other labor-related work stoppages that could have a material adverse effect on our financial condition and results of operations |
| Environmental, health and safety laws and other regulations may increase our costs of doing business, restrict our operations or result in operational delays |
| Our exploration, mining, milling, smelting and refining activities are subject to a number of Peruvian and Mexican laws and regulations, including environmental laws and regulations, as well as certain industry technical standards |
| Additional matters subject to regulation include, but are not limited to, concession fees, transportation, production, water use and discharge, power use and generation, use and storage of explosives, surface rights, housing and other facilities for workers, reclamation, taxation, labor standards, mine safety and occupational health |
| Environmental regulations in Peru and Mexico have become increasingly stringent over the last decade and we have been required to dedicate more time and money to compliance and remediation activities |
| Furthermore, Mexican authorities have become more rigorous and strict in enforcing Mexican environmental laws |
| We expect additional laws and regulations will be enacted over time with respect to environmental matters |
| Recently, Peruvian environmental laws have been enacted imposing closure and remediation obligations on the mining industry |
| Our Mexican operations are also subject to the environmental agreement entered into by Mexico, the United States and Canada in connection with the North American Free Trade Agreement |
| The development of more stringent environmental protection programs in Peru and Mexico and in relevant trade agreements could impose constraints and additional costs on our operations and require us to make significant capital expenditures in the future |
| We cannot assure you that future legislative, regulatory or trade developments will not have an adverse effect on our business, properties, results of operations, financial condition or prospects |
| Our metals exploration efforts are highly speculative in nature and may be unsuccessful |
| Metals exploration is highly speculative in nature, involves many risks and is frequently unsuccessful |
| Once mineralization is discovered, it may take a number of years from the initial phases of drilling before production is possible, during which time the economic feasibility of production may change |
| Substantial expenditures are required to establish proven and probable ore reserves through drilling, to determine metallurgical processes to extract the metals from the ore and, in the case of new properties, to construct mining and processing facilities |
| We cannot assure you that our exploration programs will result in the expansion or replacement of current production with new proven and probable ore reserves |
| Development projects have no operating history upon which to base estimates of proven and probable ore reserves and estimates of future cash operating costs |
| Estimates are, to a large extent, based upon the interpretation of geological data obtained from drill holes and other sampling techniques, and feasibility studies that derive estimates of cash operating costs based upon anticipated tonnage and grades of ore to be mined and processed, the configuration of the ore body, expected recovery rates of the mineral from the ore, comparable facility and equipment operating costs, anticipated climatic conditions and other factors |
| As a result, actual cash operating costs and economic returns based upon development of proven and probable ore reserves may differ significantly from those originally estimated |
| Moreover, significant decreases in actual or expected prices may mean reserves, once found, will be uneconomical to produce |
| 31 ______________________________________________________________________ Our profits may be negatively affected by currency exchange rate fluctuations |
| Our assets, earnings and cash flows are influenced by various currencies due to the geographic diversity of our sales and the countries in which we operate |
| As some of our costs are incurred in currencies other than our functional currency, the US dollar, fluctuations in currency exchange rates may have a significant impact on our financial results |
| These costs principally include electricity, labor, maintenance, operation contractors and fuel |
| For the year ended December 31, 2005, a substantial portion of our costs were denominated in a currency other than US dollar |
| Operating costs are influenced by the currencies of the countries where our mines and processing plants are located and also by those currencies in which the costs of equipment and services are determined |
| The Peruvian nuevo sol, the Mexican peso and the US dollar are the most important currencies influencing costs |
| The US dollar is our functional currency and our revenues are primarily denominated in US dollars |
| However, portions of our operating costs are denominated in Peruvian nuevos soles and Mexican pesos |
| Accordingly, when inflation in Peru or Mexico increases without a corresponding devaluation of the nuevo sol or peso, our financial position, results of operations and cash flows could be adversely affected |
| To manage the volatility related to the risk of currency rate fluctuations, we may enter into forward exchange contracts |
| We cannot assure you, however, that currency fluctuations will not have an impact on our financial condition and results of operations |
| Further, in the past there has been a strong correlation between copper prices and the exchange rate of the US dollar |
| A strengthening of the US dollar may therefore be accompanied by lower copper prices, which would negatively affect our financial condition and results of operations |
| We may be adversely affected by challenges relating to slope stability |
| Our open-pit mines get deeper as we mine them, presenting certain geotechnical challenges including the possibility of slope failure |
| If we are required to decrease pit slope angles or provide additional road access to prevent such a failure, our stated reserves could be negatively affected |
| Further, hydrological conditions relating to pit slopes, renewal of material displaced by slope failures and increased stripping requirements could also negatively affect our stated reserves |
| We have taken actions in order to maintain slope stability, but we cannot assure you that we will not have to take additional action in the future or that our actions taken to date will be sufficient |
| Unexpected failure or additional requirements to prevent slope failure may negatively affect our results of operations and financial condition, as well as have the effect of diminishing our stated ore reserves |
| Litigation involving Asarco may adversely affect us |
| Our direct and indirect parent corporations, including AMC and Grupo Mexico, have from time to time been named parties in various litigations involving ASARCO LLC (“Asarco”) |
| Asarco, a mining company, is indirectly wholly owned by Grupo Mexico |
| In August 2002 the US Department of Justice brought a claim alleging fraudulent conveyance in connection with Asarco’s environmental liabilities and AMC’s then-proposed purchase of SCC from Asarco |
| That action was settled pursuant to a Consent Decree dated February 2, 2003 |
| The consent decree is binding solely on the US government |
| In October 2004, AMC, Grupo Mexico, Mexicana de Cobre and other parties, not including SCC, were named in a lawsuit filed in New York State court in connection with alleged asbestos liabilities, which lawsuit claims, among other matters, that AMC’s purchase of SCC from Asarco should be voided as a fraudulent conveyance |
| While Grupo Mexico and its affiliates believe that these claims are without merit, we cannot assure you that these or future claims, if successful, will not have an adverse effect on our parent corporations or us |
| Any increase in the financial obligations of our parent corporations, as a result of matters related to Asarco or otherwise could, among other matters result in our parent corporations attempting to obtain increased dividends or other funding from us |
| In 32 ______________________________________________________________________ 2005, certain subsidiaries of Asarco filed bankruptcy petitions in connection with alleged asbestos liabilities |
| The work stoppage was settled in November 2005 with the extension of the existing contract for an additional thirteen month period until December 31, 2006 |
| A further deterioration of the financial condition of Asarco could result in additional claims being filed against Grupo Mexico and its subsidiaries, including SCC, Minera Mexico or its subsidiaries |
| As a result of various factors, including the above mentioned work stoppage, in August 2005, Asarco LLC entered into bankruptcy proceedings under Chapter 11 of the US Bankruptcy Code before the US Bankruptcy Court of Corpus Christi, Texas |
| Asarco’s bankruptcy case is being joined with the bankruptcy cases of its subsidiaries |
| Asarco is in continuing possession of its properties and is operating and managing its businesses as a debtor in possession |
| Asarco believes that by utilizing the Chapter 11 process it can achieve an orderly restructuring of its business and finally resolve, among other contingencies, its environmental and asbestos claims |
| However, it is impossible to predict how the bankruptcy court will ultimately rule with respect to such petitions and the impact such rulings will have on Asarco and its subsidiaries and ultimately upon us |
| We are controlled by Grupo Mexico, which exercises significant influence over our affairs and policies and whose interests may be different from yours |
| Grupo Mexico owns indirectly approximately 75dtta1prca of our capital stock |
| We own substantially all of Minera Mexico’s capital stock |
| In addition, certain of our and Minera Mexico’s officers and directors are also officers of Grupo Mexico |
| We cannot assure you that the interests of Grupo Mexico will not conflict with yours |
| Grupo Mexico has the ability to determine the outcome of substantially all matters submitted for a vote to our stockholders and thus exercises control over our business policies and affairs, including the following: • the composition of our board of directors and, as a result, any determinations of our board with respect to our business direction and policy, including the appointment and removal of our officers; • determinations with respect to mergers and other business combinations, including those that may result in a change of control; • whether dividends are paid or other distributions are made and the amount of any dividends or other distributions; • sales and dispositions of our assets; and • the amount of debt financing that we incur |
| In addition, we and Minera Mexico have in the past engaged in, and expect to continue to engage in, transactions with Grupo Mexico and its other affiliates that may present conflicts of interest |
| For additional information regarding the share ownership of, and our relationships with, Grupo Mexico and its affiliates, see “Related Party Transactions |
| ” We may pay a significant amount of our net income as cash dividends on our common stock in the future |
| We have distributed a significant amount of our net income as dividends since 1996 |
| Our dividend practice is subject to change at the discretion of our board of directors at any time |
| The amount that we pay in dividends is subject to a number of factors, including our results of operations, financial condition, cash requirements, tax considerations, future prospects, legal restrictions, contractual restrictions in credit agreements, limitations imposed by the government of Peru, Mexico or other countries where we have significant operations and other factors that our board of directors may deem relevant |
| We anticipate paying a significant amount of our net income as cash dividends on our common stock in the foreseeable future |
| Such payments would reduce cash available to meet our debt service obligations |
| 33 ______________________________________________________________________ Risks Associated with Doing Business in Peru and Mexico There is uncertainty as to the termination and renewal of our mining concessions |
| Under the laws of Peru and Mexico, mineral resources belong to the state and government concessions are required in both countries to explore for or exploit mineral reserves |
| In Peru, our mineral rights derive from concessions from the Peruvian Ministry of Energy and Mines for our exploration, exploitation, extraction and/or production operations |
| In June 2004, the Peruvian Congress enacted legislation imposing a royalty to be paid by mining companies in favor of the regional governments and communities where mining resources are located |
| Under the new law, we are subject to a 1prca to 3prca tax, based on sales, applicable to the value of the concentrates produced in our Toquepala and Cuajone mines |
| ” In Mexico, our mineral rights derive from concessions granted, on a discretionary basis, by the Secretaria de Economia (Ministry of Economy), pursuant to the Ley Minera (the Mining Law) and regulations thereunder |
| Mining concessions in both Peru and Mexico may be terminated if the obligations of the concessionaire are not satisfied |
| In Peru, we are obligated to pay certain fees for our mining concession |
| In Mexico, we are obligated, among other things, to explore or exploit the relevant concession, to pay any relevant fees, to comply with all environmental and safety standards, to provide information to the Ministry of Economy and to allow inspections by the Ministry of Economy |
| Any termination or unfavorable modification of the terms of one or more of our concessions, or failure to obtain renewals of such concessions subject to renewal or extensions, could have a material adverse effect on our financial condition and prospects |
| Peruvian economic and political conditions may have an adverse impact on our business |
| A significant part of our operations are conducted in Peru |
| Accordingly, our business, financial condition or results of operations could be affected by changes in economic or other policies of the Peruvian government or other political, regulatory or economic developments in Peru |
| During the past several decades, Peru has had a history of political instability that has included military coups and a succession of regimes with differing policies and programs |
| Past governments have frequently intervened in the nation’s economy and social structure |
| Among other actions, past governments have imposed controls on prices, exchange rates and local and foreign investment as well as limitations on imports, have restricted the ability of companies to dismiss employees, have expropriated private sector assets (including mining companies) and have prohibited the remittance of profits to foreign investors |
| From 1985 through 1990, during the Alan Garcia administration, government policies restricted our ability, among other things, to repatriate funds and import products from abroad |
| In addition, currency exchange rates were strictly controlled and all exports sales were required to be deposited in Peru’s Banco Central de Reserva, where they were exchanged from US dollars to the Peruvian currency at less-than-favorable rates of exchange |
| These policies generally had an adverse effect on our results of operations |
| Controls on repatriation of funds limited the ability of our stockholders to receive dividends outside of Peru but did not limit the ability of our stockholders to receive distributions of earnings in Peru |
| In July 1990, Alberto Fujimori was elected president, and his administration implemented a broad-based reform of Peru’s economic and social conditions aimed at stabilizing the economy, restructuring the national government by reducing bureaucracy, privatizing state-owned companies, promoting private investment, developing and strengthening free markets and enacting programs for the strengthening of basic services related to education, health, housing and infrastructure |
| After taking office for his third term in July 2000 under extreme protest, President Fujimori was forced to call for general elections due to the outbreak of corruption scandals, and later resigned in favor of a transitory government headed by the president of Congress, Valentin Paniagua |
| Paniagua took office in November 2000 and in July 2001 handed over the presidency to Alejandro Toledo, the winner of the elections decided in the second round held on June 3, 2001, ending two years of political turmoil |
| Since his election, President Toledo has retained, for the most part, the economic policies of the previous government, focusing on promoting private investment, eliminating tax exemptions, reducing underemployment and unemployment and privatizing state-owned companies in various sectors including energy, mining and public services |
| President Toledo also implemented fiscal austerity programs, among other proposals, in order to stimulate the economy |
| Despite Peru’s moderate economic growth, the Toledo administration has at times faced public unrest spurred by the high rates of unemployment, underemployment and poverty |
| President Toledo has been forced to restructure his cabinet on several occasions to quell public unrest and to maintain his political alliances |
| Given that the Toledo administration continues to face a fragmented Congress and continuing public unrest, we cannot assure you that the government will continue its current economic policies or that Peru’s recent economic growth will be sustained |
| In addition, presidential elections are expected to be held in Peru in the second quarter of 2006, which may mean a change in Peru’s economic policies |
| Because we have significant operations in Peru, future Peruvian governmental actions could have an adverse effect on market conditions, prices and returns on our securities, and on our business, results of operations, financial condition, ability to obtain financing and prospects |
| There is a risk of terrorism in Peru relating to Sendero Luminoso and the Movimiento Revolucionario Tupac Amaru, which were particularly active in the 1980s and early 1990s |
| We cannot guarantee that acts by these or other terrorist organizations will not adversely affect our operations in the future |
| Mexican economic and political conditions may have an adverse impact on our business |
| A significant part of our operations are based in Mexico |
| In the past, Mexico has experienced both prolonged periods of weak economic conditions and dramatic deterioration in economic conditions, characterized by exchange rate instability and significant devaluation of the peso, increased inflation, high domestic interest rates, a substantial outflow of capital, negative economic growth, reduced consumer purchasing power and high unemployment |
| An economic crisis occurred in 1995 in the context of a series of internal disruptions and political events including a large current account deficit, civil unrest in the southern state of Chiapas, the assassination of two prominent political figures, a substantial outflow of capital and a significant devaluation of the peso |
| We cannot assure you that such conditions will not recur, that other unforeseen negative political or social conditions will not arise or that such conditions will not have a material adverse effect on our financial condition and results of operations |
| On July 2, 2000, Vicente Fox of the Partido Accion Nacional (the National Action Party), or PAN, was elected president |
| Although his election ended more than 70 years of presidential rule by the Partido Revolucionario Institucional (the Institutional Revolutionary Party), or PRI, neither the PAN nor the PRI succeeded in securing a majority in the Mexican congress |
| In elections in 2003 and 2004, the PAN lost additional seats in the Mexican Congress and state governorships |
| The lack of a majority party in the legislature and the lack of alignment between the legislature and the executive branch have resulted in legislative gridlock, which is expected to continue at least until the Mexican presidential elections in 2006 |
| Such legislative gridlock has impeded the progress of structural reforms in Mexico, which may have a material adverse effect on the Mexican economy and cause disruptions to our operations |
| Furthermore, economic plans of the Mexican government in the past have not, in certain respects, fully achieved their objectives, and we cannot assure you that any reforms that are undertaken will achieve their stated goals |
| Because we have significant operations in Mexico, we cannot provide any assurance that current legislative gridlock and/or future political developments in Mexico, including the 2006 presidential and 35 ______________________________________________________________________ congressional elections, will not have a material adverse effect on market conditions, prices and returns on our securities, our ability to obtain financing, and our results of operations and financial condition |
| Peruvian inflation, reduced economic growth and fluctuations in the nuevo sol exchange rate may adversely affect our financial condition and results of operations |
| Over the past several decades, Peru has experienced periods of high inflation, slow or negative economic growth and substantial currency devaluation |
| The inflation rate in Peru, as measured by the Indice de Precios al Consumidor and published by the Instituto Nacional de Estadistica e Informatica, the National Institute of Statistics, has fallen from a high of 7cmam649dtta7prca in 1990 to 1dtta5prca in 2005 |
| The Peruvian currency has been devalued numerous times during the last 20 years |
| The devaluation rate has decreased from a high of 4cmam019dtta3prca in 1990 to 4dtta5prca in 2005 |
| Our revenues are primarily denominated in US dollars and our operating expenses are partly denominated in US dollars |
| If inflation in Peru were to increase without a corresponding devaluation of the nuevo sol relative to the US dollar, our financial position and results of operations, and the market price of our common stock, could be affected |
| Although the Peruvian government’s stabilization plan has significantly reduced inflation and the Peruvian economy has experienced moderate growth in recent years, we cannot assure you that inflation will not increase from its current level or that such growth will continue in the future at similar rates or at all |
| Among the economic circumstances that could lead to a devaluation of the nuevo sol is the decline of Peruvian foreign reserves to inadequate levels |
| Peru’s foreign reserves at February 28, 2006, were dlra14dtta0 billion as compared to dlra12dtta6 billion at December 31, 2004 |
| We cannot assure you that Peru will be able to maintain adequate foreign reserves to meet its foreign currency denominated obligations or that Peru will not devalue its currency should its foreign reserves decline |
| Mexican inflation, restrictive exchange control policies and fluctuations in the peso exchange rate may adversely affect our financial condition and results of operations |
| Although all of our Mexican operations’ sales of metals are priced and invoiced in US dollars, a substantial portion of our Mexican operations’ cost of sales are denominated in pesos |
| Accordingly, when inflation in Mexico increases without a corresponding devaluation of the peso, as it did in 2000, 2001 and 2002, the net income generated by our Mexican operations is adversely affected |
| The annual inflation rate in Mexico was 3dtta3prca in 2005, 5dtta2prca in 2004 and 4dtta0prca in 2003 |
| The Mexican government has publicly announced that it does not expect inflation to exceed 3dtta0prca in 2006 |
| At the same time, the peso has been subject in the past to significant devaluation, which may not have been proportionate to the inflation rate and may not be proportionate to the inflation rate in the future |
| While the Mexican government does not currently restrict the ability of Mexican companies or individuals to convert pesos into dollars or other currencies, in the future, the Mexican government could impose a restrictive exchange control policy, as it has done in the past |
| We cannot assure you that the Mexican government will maintain its current policies with regard to the peso or that the peso’s value will not fluctuate significantly in the future |
| The imposition of such exchange control policies could impair Minera Mexico’s ability to obtain imported goods and to meet its US dollar-denominated obligations and could have an adverse effect on our business and financial condition |
| Developments in other emerging market countries and in the United States may adversely affect the prices of our common stock and our debt securities |
| The market value of securities of companies with significant operations in Peru and Mexico is, to varying degrees, affected by economic and market conditions in other 36 ______________________________________________________________________ emerging market countries |
| Although economic conditions in such countries may differ significantly from economic conditions in Peru or Mexico, as the case may be, investors’ reactions to developments in any of these other countries may have an adverse effect on the market value or trading price of the securities, including debt securities, of issuers that have significant operations in Peru or Mexico |
| In addition, in recent years economic conditions in Mexico have increasingly become correlated to US economic conditions |
| Therefore, adverse economic conditions in the United States could also have a significant adverse effect on Mexican economic conditions including the price of our debt securities |
| We cannot assure you that the market value or trading prices of our common stock and debt securities, will not be adversely affected by events in the United States or elsewhere, including in emerging market countries |