Financial Statement USGAAP 2014

Grupo México, S. A. B. de C. V. and
Subsidiaries
Consolidated Financial Statements for
the Years Ended December 31, 2014 and
2013 and Independent Auditors’ Report
Dated April 20, 2015
Grupo México, S. A. B. de C. V. and Subsidiaries
Independent Auditors’ Report and Consolidated
Financial Statements for 2014 and 2013
Table of contents
Page
Independent Auditors’ Report
1
Consolidated Balance Sheets
3
Consolidated Statements of Income
5
Consolidated Statements of Comprehensive Income
6
Consolidated Statements of Stockholders’ Equity
7
Consolidated Statements of Cash Flows
8
Notes to Consolidated Financial Statements
10
Grupo México, S. A. B. de C. V. and Subsidiaries
Consolidated Balance Sheets
As of December 31, 2014 and 2013
(In thousands of U.S. dollars)
Assets
2014
Current assets:
Cash and cash equivalents
Restricted cash
Short-term investments
Trade accounts receivable
Other accounts receivable
Inventories – Net
Prepaid expenses and other
Deferred income tax
Total current assets
$
Restricted cash
Property, plant and equipment – Net
Leachable material – Net
Other intangible assets – Net
Deferred income tax
Other assets
Concession titles – Net
Investment in shares of associated companies and other investments
Total assets
1,300,766
91,745
339,604
887,705
418,811
1,286,389
18,423
235,430
4,578,873
2013
$
139,177
12,760,255
563,500
392,211
1,118,037
292,856
184,631
848,190
2,380,339
55,529
208,725
910,018
326,153
1,158,116
19,226
283,194
5,341,300
275,106
11,465,160
443,489
302,845
701,742
387,524
216,976
1,075,007
$
20,877,730
$
20,209,149
$
388,208
914,981
15,125
231,035
13,360
241,088
1,803,797
$
367,071
948,096
13,907
36,704
219,473
1,585,251
Liabilities and Stockholders' Equity
Current liabilities:
Bank loan and current portion of long-term debt
Accounts payable and accrued liabilities
Due to related parties
Income tax payable
Deferred income tax
Employees' statutory profit sharing
Total current liabilities
Long-term debt
Labor liabilities
Deferred income tax
Other liabilities and reserves
Total liabilities
5,559,700
553,101
1,042,497
311,316
9,270,411
5,443,772
358,555
1,003,723
344,131
8,735,432
(Continues)
3
Stockholders' equity:
Stockholders' equity of Grupo México, S. A. B. de C. V.
Common stock (shares authorized and issued: 2014 and 2013,
7,785,000,000)
Reserve for purchase of shares
Additional paid-in capital
Treasury stock
Accumulated other comprehensive income (loss) gain
Retained earnings
Stockholders' equity of Grupo México, S. A. B. de C. V.
Noncontrolling interest
Total stockholders' equity
Total liabilities and stockholders' equity
$
2014
2013
2,003,496
243,306
9,043
(1,665,482)
(264,787)
9,503,553
9,829,129
2,003,496
243,306
9,043
(1,059,380)
125,697
8,235,712
9,557,874
1,778,190
11,607,319
1,915,843
11,473,717
20,877,730
$
20,209,149
See accompanying notes to these consolidated financial statements.
(Concluded)
4
Grupo México, S. A. B. de C. V. and Subsidiaries
Consolidated Statements of Income
For the years ended December 31, 2014 and 2013
(In thousands of U.S. dollars, except for income per share amounts)
2014
Income:
Net product sales
Service revenue
$
Costs and operating expenses:
Cost of product sales (exclusive of depreciation, amortization and
depletion)
Cost of services (exclusive of depreciation and amortization)
General expenses
Environmental remediation
Depreciation, amortization and depletion
Exploration
Income from operations
Interest expense
Capitalized interest
Interest income
(Gain) loss on investments in equity securities
Foreign exchange gain (loss)
2013
7,033,622
2,290,431
9,324,053
$
3,845,049
1,213,772
279,437
91,350
806,167
79,445
6,315,220
3,797,265
1,272,014
97,056
691,900
57,599
5,915,834
3,008,833
3,441,211
353,574
(147,257)
(53,785)
(157,727)
9,183
3,988
Income before income taxes
Income taxes
Equity in the results of associated companies and other unconsolidated
subsidiaries
Consolidated net income
Less: net income attributable to noncontrolling interest
7,279,454
2,077,591
9,357,045
334,966
(95,165)
(49,851)
51,247
(3,604)
237,593
3,004,845
3,203,618
953,864
957,170
31,517
27,290
2,082,498
2,273,738
(377,568)
(428,806)
Net income attributable to Grupo México, S. A. B. de C. V.
$
1,704,930
$
1,844,932
Net earnings - basic and diluted income per share
Dividends paid
$
$
0.22
0.09
$
$
0.24
0.09
Weighted average shares outstanding (´000)
7,785,000
7,785,000
See accompanying notes to these consolidated financial statements.
5
Grupo México, S. A. B. de C. V. and Subsidiaries
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2014 and 2013
(In thousands of U.S. dollars)
2014
Consolidated net income
$
Other comprehensive income (loss) of controlling interests before tax:
Derivative instruments classified as cash flow hedges:
Net unrealized gain in the year
2013
2,082,498
$
97
Defined benefit plans:
Net (loss) gain in pension plan during the year
Net (loss) gain in other post retirement plans during the year
Foreign currency translation and other
Net unrealized gain (loss) on marketable securities
2,273,738
60
(59,256)
(147,979)
(207,235)
69,038
119,379
188,417
(257,871)
60,726
560
(95)
Other comprehensive (loss) income of controlling interest before tax
Other comprehensive loss of noncontrolling interest
Income tax (provision) benefit related to items of other
comprehensive income
(464,449)
(36,354)
249,108
(45,362)
73,965
(66,667)
Total other comprehensive (loss) income, net of tax
(426,838)
137,079
Total comprehensive income
Total comprehensive income attributable to
noncontrolling interest
Total comprehensive income attributable to Grupo México, S. A. B. de
C. V.
$
1,655,660
2,410,817
341,214
383,444
1,314,446
$
2,027,373
See accompanying notes to consolidated financial statements.
6
Grupo México, S. A. B. de C. V. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the years ended December 31, 2014 and 2013
(In thousands of U.S. dollars)
Stockholders' equity of
Outstanding shares
in thousands
Balances as of beginning of 2013
Dividends paid
Increase in treasury stock
Comprehensive result:
Consolidated net income
Other comprehensive income
Balances as of December 31, 2013
Dividends paid
Increase in treasury stock
Disolution of shares
Acquisition of noncontrolling interest
Comprehensive result:
Consolidated net income
Other comprehensive loss
Balances as of December 31, 2014
7,785,000
Reserve for
shares purchase
Common stock
$
2,003,496
$
243,306
Additional
paid-in capital
$
9,043
Treasury stock
$
(805,373)
Accumulated other
comprehensive loss
$
(56,744)
Grupo Mexico,
S. A. B. de CV
Retained earnings
$
6,947,898
$
-
-
-
-
(254,007)
-
-
-
-
-
-
182,441
182,441
1,844,932
1,844,932
1,844,932
182,441
2,027,373
125,697
8,235,712
9,557,874
7,785,000
2,003,496
243,306
9,043
(1,059,380)
-
-
-
-
(606,102)
-
-
-
-
-
-
-
(390,484)
(390,484)
7,785,000
$
2,003,496
$
243,306
$
9,043
$
(1,665,482)
$
(264,787)
(557,118)
-
8,341,626
1,704,930
1,704,930
9,503,553
$
(557,118)
(254,007)
(577,274)
150,085
(9,900)
$
Noncontrolling interest
$
1,748,117
Total
$
(171,917)
(43,801)
10,089,743
(729,035)
(297,808)
428,806
(45,362)
383,444
2,273,738
137,079
2,410,817
1,915,843
11,473,717
(577,274)
(606,102)
150,085
(9,900)
(174,576)
(78,060)
(150,085)
(76,146)
(751,850)
(684,162)
(86,046)
1,704,930
(390,484)
1,314,446
377,568
(36,354)
341,214
2,082,498
(426,838)
1,655,660
9,829,129
$
1,778,190
$
11,607,319
See accompanying notes to these consolidated financial statements.
7
Grupo México, S. A. B. de C. V. and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended December 31, 2014 and 2013
(In thousands of U.S. dollars)
2014
Operating:
Consolidated net income
Charges (credits) not requiring (providing) resources:
Seniority premiums and compensation for retirement benefits
Foreign exchange loss (gain)
Depreciation, amortization and depletion
Equity in the results of associated companies and other
unconsolidated subsidiaries
Deferred income tax and employees' statutory profit sharing
Loss on sale of property
(Gain) loss on investments in equity securities
$
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Accounts receivable and payable, accrued liabilities and other
liabilities
Net cash provided by operating activities
2,082,498
2013
$
2,273,738
194,546
(44,783)
806,167
(189,581)
12,440
691,900
(31,517)
(294,782)
35,917
(157,727)
2,590,319
(27,290)
(33,274)
40,700
51,247
2,819,880
(69,542)
(248,284)
405,996
(163,251)
195,957
2,468,450
(180,586)
2,882,039
(2,433,199)
226,817
4,924
99,713
(130,879)
30,286
(2,202,338)
(2,858,110)
(20,796)
4,618
214,609
(73,636)
(2,733,315)
384,020
(115,192)
(191,595)
(751,850)
(684,162)
392,874
(164,355)
(729,035)
(297,808)
(1,358,779)
(798,324)
Decrease in cash and cash equivalents
(1,092,667)
(649,600)
Effect of exchange rate changes on cash and cash equivalents
13,094
(1,079,573)
(27,539)
(677,139)
Investing:
Additions to property and equipment
Decrease in (acquisition of) of other permanent investments
Sale of property and equipment
Restricted cash
Purchase of short-term investments
Stock reimbursement in permanent shares
Net cash used in investing activities
Financing:
Proceeds from notes payable
Acquisition of non-controlling interest in subsidiary
Debt repaid
Dividends paid to controlling and noncontrolling stockholders
Increase in treasury stock
Net cash used in financing activities
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
2,380,339
$
1,300,766
3,057,478
$
2,380,339
(Continues)
8
2014
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest
Income taxes
Employees’ statutory profit sharing
$
$
$
325,943
971,982
255,892
2013
$
$
$
292,402
963,557
310,106
See accompanying notes to these consolidated financial statements.
9
Grupo México, S. A. B. de C. V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 2014 and 2013
(In millions of U.S. dollars)
1.
Nature of business and significant events:
Nature of business - The operating companies that comprise Grupo México, S. A. B. de C. V. and
subsidiaries (collectively theCompany or GMEXICO) are engaged in the exploration, mining and processing
of metallic and nonmetallic minerals, providing multi-use freight railway services and providing infrastructure
services.
The Company’s mining operations are provided by its wholly owned subsidiary Americas Mining
Corporation (AMC), which in turn is parent company of Southern Copper Corporation (SCC) and Asarco Inc.
(Asarco).
SCC and subsidiaries comprise an integrated producer of copper and other minerals, which operates mining,
smelting and refining facilities in Peru and Mexico. SCC and subsidiaries conduct their Peruvian operations
through a registered branch (theBranch). The Branch is not a corporation separate from SCC. The Company's
Mexican operations are conducted through Minera México, S. A. de C. V. and subsidiaries (MM).
The Branch produces copper and other minerals through the operation of two mining facilities, a smelting
facility, two solvent extraction/electro winning (SX/EW) facilities and a refining facility, all located in
southern Peru.
MM and its subsidiaries produce copper in Mexico through the operation of two major open-pit mines, three
SX-EW facilities, one smelting facilities and a refining facility, one precious metals refining facility and one
copper wire facility. MM’s operations also include five underground mining facilities producing, zinc and
copper concentrates, one zinc refining facility, one coal mine and one coke plant.
Asarco produces copper in the United State of America (EUA), through its operation of three major open-pit
mines, one smelting facilities, one of which is currently on standby, two SX-EW facilities, a refining facility
and a copper wire facility.
The Company’s railway system operations are carried out by Infraestructura y Transportes México, S. A. de
C. V. (ITM), in which GMEXICO owns 75%. The remaining 25% of ITM is owned by Sinca Inbursa, S. A.
de C. V. and Grupo Carso, S. A. B. de C. V. ITM owns 74% of Grupo Ferroviario Mexicano, S. A. de
C. V. (GFM), which, owns 100% of Ferrocarril Mexicano, S. A. de C. V. (Ferromex). The remaining 26% of
GFM is owned by Union Pacific.
On November 24, 2005, the Company reported that ITM, through its recently incorporated subsidiary,
Infraestructura y Transportes Ferroviarios, S. A. de C. V. (ITF), acquired 99.99% of the capital stock of
Ferrosur, S. A. de C. V. (Ferrosur) from Sinca Inbursa, S. A. de C. V. (Sinca) and Grupo Condumex,
S. A. de C. V. (GCondumex). In accordance with guidance set forth in Accounting Standards Codification
(ASC) Topic 805, tBusiness Combinations, given that it was a condition precedent, in order to consolidate
Ferrosur, ITF needed to obtain authorization of the purchase from the Federal Antitrust Commission. On
November 8, 2006, the Federal Antitrust Commission denied the acquisition of Ferrosur by ITF. As a result,
ITM and ITF legally challenged the resolution proposed by the Federal Tax and Administrative Justice Court.
On March 25, 2011, the First Collegiate Circuit Court in Administrative Matters ruled in favor of ITM and
ITF and approved the acquisition. Accordingly, Ferrosur is consolidated as from April 1, 2011, prior to which
it was accounted for using the equity method. On September 6, 2011 the Federal Competition Commission
(COFECO) definitively closed the investigation into the alleged monopolistic practices of Ferromex and
Ferrosur. With this development, the fines were wiaved and all legal actions that were generated in
connection with the acquisition of Ferrosur in 2005 were concluded.
10
ITM, through its wholly owned subsidiary, GFM, was formed to participate in the privatization of the
Mexican Railway System. The main subsidiary of GFM is Ferromex, which is engaged in providing freight
and multi-modal railroad services and related activities, including land transportation, storage and other
complementary railroad transportation services. The Mexican Federal Government granted Ferromex a
50-year concession (exclusive for 30 years) to operate the railroad tracks known as North-Pacific and the
Ojinaga-Topolobampo Short Line. The concession is renewable, subject to certain conditions, for a similar
period. The Mexican Federal Government also sold certain fixed assets and the materials necessary to operate
Ferromex, plus 25% of the shares of Ferrocarril y Terminal del Valle de México, S. A. de C. V. (FTVM), the
entity responsible for operating the México City Railway Terminal. GFM accounts for this 25% investment in
FTVM under the equity method. In August 1999, Ferromex obtained the rights to operate the Nogales Nacozari Short Line concession for 30 years, renewable for a period not exceeding 50 years, beginning on
September 1, 1999. In addition, ITM through its subsidiary, Ferrosur, operates the Southeast railroad track
concession granted by the government.
The Company’s infrastructure operations are carried out by México Proyectos y Desarrollos, S.A. de C.V.
(MPD), which owns 100% of Controladora de Infraestrutura Petrolera México, S.A. de C.V. (CIPEME),
Controladora de Infraestrutura Energética México, S.A. de C.V. (CIEM), and México Compañía
Constructora, S.A. de C.V. (MCC).
CIPEME’s principal activity is to provide oil well drilling and related services. As of December 31, 2014,
CIPEME has provided services to Petróleos Mexicanos (PEMEX) for over 50 years. CIPEME has overseas
well drilling jack ups and additionally provides cement engineering, and directional drilling services and
leases modular drills. CIPEME also provides water well drilling services for the mining industry in Mexico.
The main operation of CIEM through its subsidiaries is the construction of power plants (Caridad I Plant, II
Plant and Wind Farm). Caridad I plant began operations in December 2013. As of December 31, 2014,
Caridad Plant II was generating test energy to start operations in 2015 and Wind Farm, began operations in
August 2014- These buildings provide electricity to the mining division.
The main operation of MCC is to provide directly or indirectly construction services on public and private
infrastructure projects, the construction of storage and hydroelectric dams, waterways and irrigation systems,
roads, thermoelectric plants, railroad projects, mining projects, manufacturing plants, petrochemical plants,
and housing projects.
The operations under MM, ITF, GFM and MPD and their respective subsidiaries are collectively referred to
as the Mexican Operations. The operations under the Branch and SCC are collectively referred to as the
Peruvian Operations. Asarco´s operations are referred to as the American Operations.
Significant Events i.
Fitch confirms ratings for GMexico and Subsidiaries.- In October 2014, the credit rating agency
Fitch confirmed its BBB+ ratings for GMexico, AMC, and SCC. Fitch also confirmed its ratings of
BBB+ for GFM and AAA (mex) for Ferromex. These ratings are a clear reflection of our solid
financial structure, cost discipline, and efficiency in the allocation of our capital expenditures.
ii.
Toquepala receives approval for the Environmental Impact Assessment (EIA).- The Peruvian
Ministry of Energy and Mines approved the EIA for Toquepala on December 17, 2014. This project
represents an investment of approximately $1,200.0 and will have an annual production capacity of
100,000 tons of copper content and 3,100 tons of molybdenum.
iii.
Acquisition Silver Bell.- The Silver Bell mine is owned and operated by Silver Bell Mining, L.L.C.
(SBM), a wholly owned subsidiary of AR Silver Bell, Inc. (AR SB), a wholly owned subsidiary of
ASARCO. Prior to September 22, 2014, SBM was owned 75% by AR SB and the non-controlling
interests of 12.5% each were owned by Ginrei, Inc., a wholly owned subsidiary of Mitsui & Co., Inc.
and Mitsui & Co., Ltd. (collectively, Mitsui). On September 22, 2014, AR SB purchased the noncontrolling 25% interest from Mitsui for $115.2. The purchase was a taxable event for income tax
purposes. Equity was reduced by $9.9 reflecting the $39.0 difference between the $115.2 paid for the
25% interest and the book value of $76.0, offset by related deferred taxes of $29.1.
11
SBM is engaged in the mining and processing of oxide copper ore through its operation of a SX/EW
facility. Most of its revenues are derived from the mining and processing of copper, which is sold as
high-grade copper cathode. During the time Mitsui owned a 25% interest in SBM, they had the right to
purchase, at fair market value, 25% of all products produced by SBM. After to transaction Mitsui lost
the right to purchase a fair market value.
iv.
Tia Maria receives approval of the EIA.- On August 1, 2014 thePeruvian Ministry of Energy and
Mines approved the EIA for our Tia Maria project located in the Arequipa region, which will produce
120,000 tons of electrolyte copper per year through a highly efficient and economic leaching process
(SX/EW). The total investment for the project is estimated at $1,400.0.
v.
ITM increases US border crossing activity.- ITM experienced a 12% growth in international traffic in
2014, operating 50% of the railroad crossings with the US, while there was a 0.4% decrease in truck
crossings at the California, Arizona, and Texas borders. ITM continues to invest in order to capitalize
on this traffic in different sectors, and also in its intermodal corridors from Hermosillo, Chihuahua,
Monterrey, and Bajio to various US markets.
vi.
Consolidation of the most important fleet of locomotives and rolling stock in Mexico.- Thirty-four
locomotives were purchased in June 2014 to bring the total fleet to 828 locomotives. ITM also
purchased 325 bi-level locomotive cars to continue to increase the traffics within the Automotive
Industry. ITM’s fleet is now 25,377 units.
vii.
Campeche platform starts operations.- The jack-up platform, Campeche, with a 400 foot flow depth
and drilling capacity of 35,000 feet, arrived in the Gulf of Mexico on September 8, 2014 and was
positioned on November 15, 2014 to start a 7-year contract with Pemex.
viii.
First Section of the Salamanca-Leon Highway Opens.- Section I of the Salamanca-Leon highway,
consisting of 28.6 km, was opened on December 12, 2014. At December close, 97,212 vehicles had
traveled on this section of the highway, confirming the favorable expectations for the project.
Construction of the entire Salamanca-Leon highway is 76% complete. To date, $274.0 has been
invested from a total expected capital budget of $364.0. The second 52.9 km section is expected to
open in third quarter to 2015.
Consolidation principles.- The consolidated financial statements include the financial statements of
GMEXICO (as parent and holding company) and those of its subsidiaries, over which the Company exercises
control. All significant intercompany transactions and balances have been eliminated in consolidation. These
consolidated financial statements were prepared under accounting principles generally accepted in the United
States of America (USGAAP).
The Company’s direct consolidated subsidiaries are shown below:
Company
Ownership Percentage
2014
2013
Activity
Americas Mining Corporation
100
100
Exploration and extraction of minerals.
Infraestructura y Transportes Mexico, S.
A. de C. V.
74.9
74.9
Freight and multimodal railway
services.
México Proyectos y Desarrollos,
S. A. de C. V.
100
100
Public and private infrastructure and
construction.
Grupo México Servicios, S. A. de
C. V. (GMS)
100
100
Administrative and personnel services.
-
100
Holding of airway transportation
companies.
100
100
Merchandising services.
Infraestructura de Transportes Aéreos
México, S. A. de C. V. (1) (ITAM)
Air Finance, LLC
12
(1)
In December 19, 2014, the stockholders' meeting approved the merger of ITAM with GMS, the latter
acting as the merging company and acquiring all of the rights and obligations of the absorbed
company. The merger went into effect as at December 31, 2014.
Investments in the entities in which control is exercised are consolidated in these financial statements because
shareholdings or other contractual rights grant the Company the power to govern the Company's financial and
operating policies. Investments over which the Company does not exercise control are recognized by the
equity method.
Foreign currency financial statements - In accordance with local laws, the Peruvian branch mantains its
accounting books in Peruvian nuevos soles and MM, ITM and MPD in Mexican pesos.
In the mining division and at CIPEME from the infrastructure division, the functional currency is the U.S.
dollar, therefore, foreign currency assets and liabilities are remeasured into U.S. dollars at current exchange
rates except for non-monetary items such as inventory, property, plant and equipment, intangible assets, other
assets and stockholders' equity which are remeasured at historical exchange rates. Revenues and expenses are
generally translated at actual exchange rates in effect during the period, except for those revenues and
expenses associated with non-monteary items, which are remeasured at historical exchange rates. Gains and
losses from foreign currency remeasurement are included in consolidated earnings of the period. The gains
and losses resulting from foreign currency transactions are included in Cost of sales (exclusive of
depreciation, amortization and depletion).
The functional currency of ITM, ITF, GFM and MCC is the Mexican peso. Therefore, these entities translate
all assets and liabilities using the year-end exchange rate, while capital stock continues to be translated at
historical exchange rates. The components of the statements of income, including foreign exchange gains and
losses recorded in Mexican pesos as a result of fluctuations in the exchange rate between the Mexican pesos
and the U.S. dollars for transactions carried out in U.S. dollars, are translated at the average exchange rate for
the period. The effects of translation are reflected as a component of accumulated other comprehensive loss
within stockholders' equity. The gains and losses from foreign currency transactions are shown in the
consolidated statements of income.
Relevant exchange rates used in the preparation of these consolidated financial statements were as follows.
The consolidated financial statements should not be construed as representations that Mexican pesos had
been, could have been or may be converted in the future into dollars at such rates or any other rates:
2014
Mexican pesos (Ps.) per one U.S. dollar:
Current exchange rate at December 31
Weighted average exchange rate for the year ended
Peruvian nuevos soles (Pns.) per one U.S. dollar:
Current exchange rate at December 31
Weighted average exchange rate for the year ended
2013
Ps.
14.7180
Ps.
13.0765
Ps.
13.2982
Ps.
12.7674
Pns.
2.9890
Pns.
2.7960
Pns.
2.8370
Pns.
2.7020
Use of estimates - The preparation of consolidated financial statements in conformity with USGAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Although management believes the
estimates and assumptions used in the preparation of these consolidated financial statements were appropriate
in the circumstances, actual results could differ from those estimates and assumptions.
13
Reclassifications - Certain amounts in the consolidated financial statements as of and for the year ended
December 31, 2013 have been reclassified in order to conform to the presentation of the consolidated
financial statements as of and for the year ended December 31, 2014 (see Note 19).
2.
Significant accounting policies:
A summary of the significant accounting policies used in the preparation of the accompanying consolidated
financial statements is as follows:
a.
Revenue recognition - Substantially all of AMC copper is sold under annual or other longer-term
contracts. Revenue is recognized when title passes to the customer. The passing of title is based on
terms of the contract, generally upon shipment. Copper revenue is determined based on the monthly
average of prevailing commodity prices according to the terms of the contracts. AMC provides
allowances for doubtful accounts based upon historical bad debt, claims experience and periodic
evaluation of specific customer accounts.
For certain of AMC sales of copper and molybdenum products, customer contracts allow for pricing
based on a month subsequent to shipping, in most cases within the following three months and
occasionally in some cases a few additional months. In such cases, revenue is recorded at a provisional
price at the time of shipment. The provisionally priced copper sales are adjusted to reflect forward in
the London Metal Exchange (LME) or in the Commodities Exchange in New York (COMEX) copper
prices at the end of each month until a final adjustment is made to the price of the shipments upon
settlement with customers pursuant to the terms of the contract. In the case of molybdenum sales, for
which there are no published forward prices, the provisionally priced sales are adjusted to reflect the
market prices at the end of each month until a final adjustment is made to the price of the shipments
upon settlement with customers pursuant to the terms of the contract.
These provisional pricing arrangements are accounted for separately from the contract as an embedded
derivative instrument under ASC 815-30 Derivatives and Hedging – Cash Flows Hedges.
AMC sells copper in concentrate, rod, anode, cathode, electrolytic and electrowon form at industry
standard commercial terms.
ITM and subsidiaries recognize revenue as transportation services in the period services are rendered
as the shipment moves from origin.
MCC recognize revenues based on the percentage of completion method, in which revenue is
recognized based on the cumulative costs incurred as a percentage of total estimated costs required to
complete the project. If the most recent cost estimate exceeds the total contract revenue, a loss is
recorded to income of the period.
CIPEME recognizes income from rental of platforms and equipment in the month they accrue and
according to the relevant lease contracts.
CIEM recognizes revenue for energy contracts based on the transmitted kilowatts and prices published
by the CFE, hourly and based on the geographical area where energy is transmitted.
b.
Shipping and handling fees and costs - Amounts billed to customers for shipping and handling, are
classified as sales. Amounts incurred for shipping and handling are included in cost of sales (exclusive
of depreciation, amortization and depletion).
c.
Cash and cash equivalents - The Company considers all highly-liquid debt instruments purchased
with an original maturity of three months or less to be cash equivalents.
14
d.
Restricted cash - Restricted cash consists of cash in the custody of the Company for which the use in
whole or in part is restricted for specific purposes pursuant to binding agreements. The restricted cash,
including both current and long-term balances at December 31, 2014 and 2013, were $230.9 and
$330.6, respectively. The carrying value approximates fair value and is classified as Level 1 inputs in
the fair value hierarchy (See Note 22 for definition of Level 1).
e.
Short - term investments - The Company classifies investments as trading, held-to-maturity, or
available-for-sale at the time of purchase and reassesses such classifications as of each balance sheet
date. Investments classified as trading securities are acquired and held principally for the purpose of
selling them in the near term. Trading securities are stated at fair value with any unrealized gains or
losses recognized within earnings. Held-to-maturity investments are those which the Company has
both the ability and intent to hold until maturity and are carried at amortized cost. Available-for-sale
securities include investments that are classified neither as trading nor held-to-maturity and are stated
at fair value with any unrealized gains and losses recorded as a component of other comprehensive
income within stockholders’ equity and reclassified to current earnings upon their sale or maturity.
Financial investments classified as held-to-maturity and available-for-sale are subject to annual
impairment tests in which the Company evaluates if any events have occurred or economic conditions
exist that would indicate that an impairment loss exists and if such loss is other than temporary. The
Company considers various factors including, but not limited to, the severity and duration of the loss,
the financial condition and future prospects of the issuer and the intent to sell and the Company’s
ability to maintain the instrument until maturity. If there is evidence that the reduction in fair value is
other than temporary, the impairment is recognized in earnings.
f.
Inventories - Metal inventories, consisting of work- in-process and finished goods, are carried at the
lower of average cost or market. Costs incurred in the production of metal inventories exclude general
and administrative costs. Once molybdenum, silver, zinc and other by-products are identified, they are
transferred to their respective production facilities and the incremental cost required to complete
production is assigned to their inventory value.
Work-in-process inventories represent materials that are in the process of being converted into a
saleable product. Conversion processes vary depending on the nature of the copper ore and the specific
mining operation. For sulfide ores, processing includes milling and concentrating and results in the
production of copper and molybdenum concentrates. Molybdenum in-process inventory includes the
cost of molybdenum concentrates and the costs incurred to convert those concentrates into various
high-purity molybdenum chemicals or metallurgical products.
Finished goods include saleable products (e.g., copper concentrates, copper anodes, blister copper,
copper cathodes, copper rod, molybdenum concentrates and other metallurgical products).
Materials and supplies consist of operating and maintenance supplies that are carried in warehouses at
various operating sites. These inventories are valued at average acquisition cost, less a reserve for
obsolescence and excess inventory.
ITM inventories consist primarily of rails, railroad ties and other materials for maintenance of property
and equipment, as well as diesel fuel used in providing railroad services. Inventories are stated at the
lower of cost or net realizable value, using the average cost method. Cost of sales is recognized at
historical cost of the purchased inventories. Values thus determined do not exceed their market value.
The allowance for obsolete inventories is considered sufficient to absorb losses on those items, which
is determined according to studies performed by the Company management.
15
g.
Leachable material - The leaching process is an integral part of the mining operations carried out at
the Company’s open-pit mines. The Company capitalizes the production cost of leachable material in
their mines at Toquepala, La Caridad, Buenavista, Ray, Silver Bell, recognizing it as inventory or
long-term leachable material. The estimates of recoverable mineral content contained in the leaching
dumps are supported by engineering studies. As the production cycle of the leaching process is
significantly longer than the conventional process of concentrating, smelting and electrolytic refining,
the Company includes on its balance sheet, current leach inventory (included in work-in-process
inventories) and long-term leach inventory. Through 2013, the cost attributed to the leach material is
charged to cost of sales generally over a five-year period.
During the fourth quarter of 2014, the Company completed the construction of a new plant that has
resulted in increased efficiency in production and use of leachable material. Accordingly, the Company
changed its method of amortization to the units of production method. This change in estimate effected
by a change in accounting principle will result in a better matching of costs to revenues as a result of
the improved production levels expected from the new plant and will result in a better estimate of
current and long-term leachable material inventory. As the plant entered into operation in the fourth
quarter of 2014, the impact to results in 2014 was not considered significant and totaled approximately
$17.0 recognized within cost of sales. The Company anticipates that the impact in future periods will
be significant as a result of expected increased production levels.
As of December 31, 2014 the Company has leachable inventory of $864.3 of which $300.8 was
classified as a current asset.
h.
Property, plant and equipment - Property, plant and equipment are recorded at acquisition cost, net of
accumulated depreciation and amortization. Cost includes major expenditures for improvements and
replacements, which extend useful lives or increase capacity and interest costs associated with
significant capital additions.
Depreciation and amortization are calculated using the straight-line method, based on the estimated
useful lives of the related assets, as follows:
Useful Life (Years)
Buildings and equipment
Locomotives and freight cars
Rails and structures
Drilling equipment
4 – 44
9 – 33
13 – 15
15 – 25
Buildings and equipment are depreciated on the straight-line method over their estimated lives ranging
from 5 to 40 years or the estimated life of the mine if shorter.
The Mexican railway operation uses the straight-line method based on the estimated useful lives of the
related assets estimated by the administration.
Property, plant and equipment are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying
amount of an asset is not recoverable when the estimated future undiscounted cash flows expected to
result from the use of the asset are less than the carrying value of the asset. The Company measures an
impairment loss as the difference between the carrying value of the asset and its fair value.
i.
Mine development - Mine development, included within property, plant and equipment includes
primarily the cost of acquiring land rights to an exploitable ore body, pre-production stripping costs at
new mines that are commercially exploitable, costs associated with bringing new mineral properties
into production and removal of overburden to prepare unique and identifiable areas outside the current
mining area for such future production. Mine development costs are amortized on a unit of production
basis over the remaining life of the mines.
16
Drilling and other associated costs incurred in the Company's efforts to delineate new resources,
whether near mine or Greenfield are expensed as incurred. These costs are classified as mineral
exploration costs. Once the Company determines through feasibility studies that proven and probable
reserves exist and that the drilling and other associated costs embody a probable future benefit that
involves a capacity, singly or in combination with other assets, to contribute directly or indirectly to
future net cash inflow, the costs are classified as mine development costs. These mine development
costs incurred prospectively to develop the property are capitalized as incurred, until the
commencement of production, and are amortized using the units of production method over the
estimated life of the ore body. During the production stage, drilling and other related costs incurred to
maintain production are included in production cost in the period in which they are incurred.
Drilling and other related costs incurred in the Company's efforts to delineate a major expansion of
reserves at an existing production property are expensed as incurred. Once the Company determines
through feasibility studies that proven and probable incremental reserves exist and that the drilling and
other associated costs embody a probable future benefit that involves a capacity, singly or in
combination with other assets, to contribute directly or indirectly to future net cash inflow, then the
costs are classified as mine development costs. These incremental mine development costs are
capitalized as incurred, until the commencement of production and amortized using the units of
production method over the estimated life of the ore body. A major expansion of reserves is one that
increases total reserves at a property by approximately 10%.
For the years ended December 31, 2014 and 2013 the Company did not capitalize any drilling and
related costs. The net balance of capitalized mine development costs at December 31, 2014 and 2013
were $34.8 and $36.2, respectively.
j.
Ore reserves - AMC periodically reevaluates estimates of its ore reserves, included in property, plant
and equipment, which represent the Company's estimate as to the amount of unmined copper
remaining in its existing mine locations that can be produced and sold at a profit. Such estimates are
based on engineering evaluations derived from samples of drill holes and other openings, combined
with assumptions about copper market prices and production costs at each of the respective mines.
AMC updates its estimate of ore reserves at the beginning of each year. In this calculation AMC uses
current metal prices which are defined as the average metal price over the preceding three years. The
current price per pound of copper, as defined, was $3.36 dollars and $3.65 dollars at the end of 2014
and 2013, respectively. The ore reserve estimates are used to determine the amortization of mine
development and intangible assets as well as future expected cash flows for impairment testing.
Once AMC determines through feasibility studies that proven and probable reserves exist and that the
drilling and other associated costs embody a probable future benefit that involves a capacity, singly or
in combination with other assets, to contribute directly or indirectly to future net cash inflow, then the
costs are classified as mine development costs and AMC discloses the related ore reserves.
k.
Value Beyond Proven and Probable Ore Reserves - Included as a component of property, plant and
equipment on the consolidated balance sheets at December 31, 2014 and 2013, are values for ore
bodies beyond proven and probable reserves (VBPP). VBPP is attributable to (i) mineralized material,
which includes measured and indicated amounts that the Company believes could be brought into
production with the modification of existing permits and should market conditions and technical
assessments warrant, (ii) inferred mineral resources, and (iii) exploration potential. Mineralized
material is a mineralized body that has been delineated by appropriately spaced drilling and/or
underground sampling to support reported tonnage and average grade of minerals. Such a deposit does
not qualify as proven and probable reserves until legal and economic feasibility are confirmed based
upon a comprehensive evaluation of development costs, unit costs, grades, recoveries and other
material factors. Inferred mineral resources are those parts of a mineral resource for which the overall
tonnages, grades, and mineral contents can be estimated with a reasonable level of confidence based on
evidence and apparent geological and grade continuity after applying economic parameters. An
inferred mineral resource has a lower level of confidence than that applying to an indicated mineral
resource. Exploration potential is the estimated value of potential mineral deposits that the Company
has the legal right to access. Carrying amounts assigned to VBPP are not charged to expense until the
asset becomes associated with additional proven and probable reserves and they are produced or the
asset is determined to be impaired. Transfers from VBPP to proven reserves are recorded at the
carrying value.
17
l.
Railway improvements and maintenance and overhauls - Railway improvements and maintenance
are capitalized in the caption Rails and structures, when the components of more than 20% of a track
section are changed. The capitalized items are depreciated at an average rate between 3.3% and 6.6%.
When maintenance or repairs do not require changing the components of more than 20% of one
section of a track, the cost is expensed as incurred. Regular maintenance and repair costs are expensed
as incurred. The costs of a locomotive overhauls, which extend the useful life, are capitalized and
amortized over a term ranging from 4 to 10 years, depending on the type of overhaul.
m.
Concession titles - Concessions related to railroad activities are recorded at their adjudication cost.
Amortization is calculated using the straight-line method, based on the remaining estimated useful life
of the fixed assets under concession, which was an average of 30.3, 50 and 20 years for Ferromex,
Ferrosur and Transgolfo, S. A. de C. V. (TTG), respectively, (as determined by independent experts)
as of the date the concessions were granted.
n.
Asset retirement obligations (reclamation and remediation costs) - The fair value of a liability for
asset retirement obligations is recognized in the period in which the liability is incurred. The liability is
measured at fair value and is adjusted to its present value in subsequent periods as accretion expense is
recorded. The corresponding asset retirement costs are capitalized as part of the carrying value of the
related long-lived assets and depreciated over the asset's useful life.
o.
Debt issuance costs - Debt issuance costs, which are included in other assets, are amortized using the
effective interest method over the term of the related debt.
p.
Intangible assets - Intangible assets include primarily the excess amount paid over the carrying value
for investment shares of the Branch and mining and engineering development studies. Intangible assets
are carried at its acquisition cost, net of accumulated amortization and are amortized principally on a
unit of production basis over the estimated remaining life of the mines. Intangible assets are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable.
q.
Exploration - Costs incurred in the search for mineral properties are charged against earnings when
incurred.
r.
Income taxes - Provisions for income tax are based on taxes payable or refundable for the current year
and deferred taxes on temporary differences between the amount of taxable income and pretax
financial income and between the tax bases of assets and liabilities and their reported amounts in the
financial statements. Deferred tax assets and liabilities are included in the consolidated financial
statements at currently enacted income tax rates applicable to the period in each jurisdiction in which
the deferred tax assets and liabilities are expected to be realized and settled as prescribed in ASC Topic
740 Income Taxes. As changes in tax laws or rates are enacted in each jurisdiction, deferred tax assets
and liabilities are adjusted in income in the period that the change is enacted. Deferred income tax
assets are reduced by any benefits that, in the Company's opinion, are more likely than not to be
realized. Accounting Standards Update (ASU) No. 2013-11, Presentation of an Unrecognized Tax
Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward
Exists was effective for the Company’s fiscal year beginning January 1, 2014. As a result of the
adoption of ASU No. 2013-11 on January 1, 2014, liabilities associated with unrecognized tax benefits
within non-current tax payable were reclassified to net against deferred income tax assets. In
accordance with ASU 2013-11, the Company netted unrecognized tax benefits against the foreign tax
credit carryforward.
The Company's operations involve dealing with uncertainties and judgments in the application of
complex tax regulations in multiple jurisdictions. The final taxes paid are dependent upon many
factors, including negotiations with taxing authorities in various jurisdictions and resolution of disputes
arising from federal, state, and international tax audits. The Company recognizes potential liabilities
and records tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based
on the estimate of whether, and the extent to which, additional taxes will be due. The Company
follows the guidance of ASC 740 Income tax (FIN 48 Uncertain tax positions in prior literature) to
record these liabilities. The Company adjusts these reserves in light of changing facts and
circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution
may result in a payment that is materially different from the Company's current estimate of the tax
liabilities.
18
If the Company´s estimate of tax liabilities proves to be less than the ultimate assessment, an additional
charge to expense would result. If payment of these amounts ultimately proves to be less than the
recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the
period when the Company determines the liabilities are no longer necessary.
The Company classifies income tax-related interest and penalities as income taxes in the financial
statements, as well as interest and penalities, if any related to unrecognized tax benefits.
s.
Derivative financial instruments - The Company obtains financing under different conditions; when it
is at a variable rate in order to reduce exposure to the risk of volatility in interest rates, at times it
contracts interest rate swap financial derivatives which convert their interest payment profile from
variable to fixed rate. Trading with financial derivatives is performed only with institutions of
recognized solvency and limits have been established for each institution. The Company’s policy is not
to carry out speculative transactions using financial derivatives.
The Company recognizes all the assets or liabilities which arise from transactions with financial
derivatives on the consolidated balance sheet at fair value, regardless of the purpose for which they are
held. Fair value is determined based on recognized market prices, and when they are not listed in
recognized market, it is determined by using valuation techniques accepted in the financial community.
When the derivatives are contracted for the purpose of hedging risks and comply with all hedge
requirements, the designation is documented at the beginning of the hedging relationship, describing
the objective, characteristics, accounting recognition and how the effectiveness will be measured in
relation to this transaction.
t.
Asset impairments - The Company evaluates its long-term mining, railway and infrastructure division
assets when events or changes in economic circumstances indicate that the carrying amount of such
assets may not be recoverable. These evaluations, in the case of the mining segment, are based on
business plans that are prepared using a time horizon that is reflective of the Company's expectations
of metal prices over its business cycle. The Company is currently using a long-term average copper
price and an average molybdenum, reflective of the current price environment, for the impairment
tests. The results of its impairment tests using these long-term copper and molybdenum prices show no
impairment in the carrying value of their assets.
In recent years the Company’s assumptions for long-term average prices resulted in stricter evaluations
for impairment analysis than would the higher three year average prices for copper and molybdenum.
Should this situation reverse in the future with three year average prices below the long-term price
assumption, the Company would assess the need to use the three year average prices in its evaluations.
The Company uses an estimate of the future undiscounted net cash flows of the related asset or asset
group over the remaining life to measure whether the assets are recoverable and measures any
impairment by reference to fair value.
Railway segment reviews the carrying value of long-lived assets in use when the presence of any
indication of impairment which could indicate that the carrying value may not be recoverable,
considering the greater of the net present value of future cash flows or the net selling price in the case
of its eventual disposal. The impairment loss is recognized if the carrying amount exceeds the greater
of the amounts mentioned above. The impairment indicators considered for these purposes are, among
others, operating losses and negative cash flows in the period if they are combined with a history or
projection of losses, depreciation and amortization charged to results, which in percentage terms in
relation to revenues are substantially higher than in previous, obsolescence, competition and other
economic and legal factors exercises. At December 31, 2014 and 2013, there are no indications of
impairment in these assets.
19
Infrastructure segment reviews the carrying amounts of long-lived assets in use when an impairment
indicator suggests that such amounts might be not recoverable, considering the greater of the present
value of future net cash flows or the net sales price upon disposal. Impairment is recorded when the
carrying amounts exceed the greater of the aforementioned amounts. As of December 31, 2014 and
2013, there were no indicators of impairment noted for long-lived assets.
u.
Investment in shares of associated companies and other investment - Investments in shares of
associated companies are valued according to the equity method. Under this method, the acquisition
costs are initially recognized based on the net fair value of the entities’ identifiable assets and liabilities
as of the date of acquisition. Such value is subsequently adjusted for the portion related both to
comprehensive income (loss) of the associated company and the distribution of earnings or capital
reimbursements thereof. The equity in income of associates is included in earnings. Comprehensive
income attributable to associates is included in other comprehensive income. Investments in equity
securities made by the Company and classified as held for trading purposes in entities over which it
does not exercise control, joint control, or significant influence are initially recorded at acquisition cost
and adjusted to fair value if such investments have readily determinable fair values.
v.
Other comprehensive income - Represents changes in equity during a period, except those resulting
from investments by owners and distributions to owners. During the years ended December 31, 2014
and 2013, the components of other comprehensive income were the unrealized gain on cash flow
hedge derivative instruments, the unrecognized gain (loss) on employee benefit obligations, and
realized gain (loss) included in net income.
w.
Environmental remediation costs - It is the Company’s policy to accrue a liability for environmental
obligations when it is considered probable and reasonably estimable. Such accruals are adjusted as new
information develops or circumstances change and are recorded at gross amounts.
x.
Recently adopted accounting pronouncements – On January 1, 2014, the Company adopted ASU
2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income. The amendments in this update supersede and replace the
presentation requirements for reclassifications out of accumulated other comprehensive income in
ASUs 2011-05 (issued in June 2011) and 2011-12 (issued in December 2011) for all public and private
organizations. The amendments require an entity to provide information about the amounts reclassified
out of accumulated other comprehensive income by component. In addition, an entity is required to
present, either on the face of the statement where net income is presented or in the notes, significant
amounts reclassified out of accumulated other comprehensive income by the respective line items of
net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net
income in its entirety in the same reporting period. For other amounts that are not required under U.S.
GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other
disclosures required under U.S. GAAP that provide additional detail about those amounts.
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an
Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax
Credit Carryforward Exists. The guidance states that an unrecognized tax benefit, or a portion of an
unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred
tax asset for a net operating loss carryforward or a tax credit carryforward to the extent that, among
others, the tax law of the applicable jurisdiction allows for the use of such tax assets to settle any
additional income taxes that would result from the disallowance of a tax position. The Company
adopted this in 2014; see income tax note above.
20
Recently issued accounting pronouncements pending adoption
In February 2013, the Financial Accounting Standards Board (FASB) issued the Accounting Standard
Updates (ASU) 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several
Liability Arrangements for which the Total Amount of the Obligation is Fixed at the Reporting Date.
The amendments in this ASU require an entity to measure joint and several obligations as the sum of
the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and
any additional amount the reporting entity expects to pay on behalf of its co-obligors. The amendments
in this guidance are effective for fiscal years, and interim periods within those years, beginning after
December 15, 2014. The Company will apply this guidance in any future arrangement and does not
expect this guidance to have a material impact on its consolidated financial information.
In May 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers (Topic 606).
The objective of the new revenue standard is to provide a single comprehensive revenue recognition
model for all contracts with customers to improve comparability within industries, across industries
and across capital markets.
The core principle of the standard is that the Company should recognize revenue to represent the
transfer of promised goods or services to customers in an amount that reflects the consideration to
which the Company expects to be entitled in exchange for those goods or services.
The Company should apply the following five steps to achieve the core principle:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations (promises) in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the Company satisfies a performance obligation.
The guidance also specifies the accounting for some costs to obtain or fulfill a contract with a
customer. Additionally, the Company should disclose sufficient qualitative and quantitative
information to enable users of financial statements to understand the nature, amount, timing, and
uncertainty of revenue and cash flows arising from contracts with customers.
This revenue standard is effective for the first interim period within annual reporting periods beginning
after December 15, 2016, and early adoption is not permitted. The Company does not expect this
guidance to have a material impact on the consolidated financial information.
In May 2014 the FASB issued ASU 2014-09, Revenue Recognition (Topic 606) Revenue from
Contracts with Customers. This ASU requires companies to recognize revenue when a customer
obtains control rather than when companies have transferred substantially all risks and rewards of a
good or service. In addition, the update requires expanded disclosures surrounding the Company’s
revenue transactions. This ASU is effective for the Company in 2018.
3.
Short-term investment
The balances of short-term investments were as follows:
2014
Trading securities
Weighted average interest rate
$
Available for sale
Weighted average interest rate
$
Total
$
2013
333.7
0.78%
$
5.9
$
0.44%
339.6
202.6
3.78%
6.1
0.42%
$
208.7
21
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 December 31, 2014 and 2013, included corporate bonds and asset and mortgage
backed obligations. As of December 31, 2014 and 2013, gross unrealized gains and losses on available-forsale securities were not material.
Related to these investments the Company earned interest, which was recorded as interest income in the
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 general expense in the consolidated
statement of income.
As of December 31, contractual maturities of debt securities classified as available-for-sale are as follows:
2014
One year or less
Maturing after five years through ten years
Due after ten years
Total debt securities
2013
$
1.3
0.1
4.5
$
0.8
0.2
5.1
$
5.9
$
6.1
The following table summarized the activity of these investments:
2014
Trading:
Interest earned
Unrealized loss
$
Available for sale:
Interest earned
Investment redeemed
$
(*)
4.
2013
4.9
2.1
(*)
$
$
5.2
(1.9)
(*)
0.8
0.8
As of December 31, 2014 and 2014 are less than $0.1 in both years.
Other accounts receivable
2014
Recoverable taxes
Prepayments
Loan to workers
Deferred employee participation in profit sharing
Other
Total
2013
$
231.2
148.8
20.9
11.6
6.3
$
155.1
123.5
23.1
14.1
10.4
$
418.8
$
326.2
22
5.
Inventories
2014
Metals and minerals:
Finished goods
Work-in-process
Materials and supplies
2013
$
149.0
679.4
458.0
$
150.5
545.6
462.0
Inventories – Net
$
1,286.4
$
1,158.1
Inventory, long-term:
Leachable material Long-term
$
563.5
$
443.5
As of December 31, 2014 and 2013, work in-process includes $300.8 and $191.7, respectively, of capitalized
leaching costs.
Total leaching costs added as long-term inventory of leachable material amounted to $529.1 and $421.2,
respectively.
Leachable material recognized as cost of sales amounted to $300.0 and $217.3 in 2014 and 2013,
respectively.
6.
Prepaid expenses and other
2014
Prepaid insurance
Contributions
7.
2013
$
10.5
7.9
$
10.7
8.5
$
18.4
$
19.2
Property, plant and equipment
2014
Buildings and equipment
Locomotives and freight cars
Rails and structures
Drilling equipment
Train yards and terminals
Value beyond proven and probable reserves
Other railway equipment
$
Less - Accumulated depreciation, amortization and depletion
Land, other than mineral
Construction in progress
Property, plant and equipment - Net
$
10,686.5
982.1
1,206.3
948.3
198.8
150.0
846.0
15,018.0
2013
$
9,459.6
1,046.7
1,108.1
679.9
199.2
142.8
413.7
13,050.0
(6,787.4)
8,230.6
(6,241.4)
6,808.6
1,032.2
3,497.5
947.2
3,709.4
12,760.3
$
11,465.2
Depreciation and depletion expense for the years ended December 31, 2014 and 2013 amounted to $787.8 and
$676.3, respectively.
23
8.
Concession titles
Concessions are comprised of the following:
2014
North-Pacific railroad track
Southeast railroad track
Nogales-Nacozari short railroad track
Ojinaga-Topolobampo short railroad track
South-Oaxaca short railroad track
Overhauls
2013
$
97.1
187.2
1.3
0.2
0.2
16.4
302.4
Accumulated amortization
$
109.3
210.7
1.6
0.2
0.2
19.0
341.0
(117.8)
Concession titles – Net
$
(124.0)
184.6
$
217.0
Amortization charged to 2014 and 2013 income amounted to $8.7 and $9.1, respectively.
The value of the North-Pacific Railway concession title was determined by deducting the value of the tangible
assets received from the price paid for the Ferromex shares, net of the liability arising from the capital lease of
24 locomotives that Ferrocarriles Nacionales de México (FNM) had entered into with Arrendadora
Internacional, S. A. de C. V. (settled in 2001).
9.
Investments in associated companies and other investments
Investments in associated companies and other investments
The investments in associated companies and other investments were as follows:
Equity in the results
from the year ended
Investment at December 31,
Associated companies
FTVM
TTX Company
Minera Coimolache
Wind Farm El Retiro
Other
Total
%
50.0
0.6
44.2
2014
$
2013
27.8
8.1
66.7
$
7.5
$
December 31,
110.1
$
2014
28.1
9.1
57.1
134.1
5.0
$
233.4
$
2013
7.7
$
-
6.3
-
23.9
20.9
-
31.6
$
27.2
The Company has a 44.2% participation in 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. To support
the cost of the development of Tantahuatay, the Company loaned $56.6 to Coimolache. The repayment of this
loan was completed in August 2014.
24
Investments in equity securities
The Company’s share in these investments, and their carrying amounts, are as follows:
Company
Grupo Aeroportuario del
Pacífico S. A. B. de C. V.
10.
Share in 2014
20.88%
Share in 2013
28.03%
2014
$
2013
738.1
$
841.6
Other intangible assets
2014
Mining concessions
Infrastructure concessions
Mine engineering and development studies
Software
$
121.2
242.3
6.0
13.8
383.3
(48.1)
335.2
57.0
$
121.2
147.3
6.0
12.2
286.7
(46.2)
240.5
62.3
$
392.2
$
302.8
Accumulated amortization
Goodwill
Intangible assets
2013
Amortization expense on intangible assets was $1.9 and $2.4 for the years ended December 31, 2014 and
2013, respectively. The estimated aggregate amortization expense for intangibles is $7.6 for the years 2015
through 2019 for an average expected annual expense of approximately $1.5 per year during this period.
11.
Other noncurrent assets
2014
Patents and licenses
Amortization
$
Long - term receivable
Deferred charges
Advances to suppliers
Others
2013
18.0
(3.9)
14.1
$
112.1
9.4
61.6
95.7
$
292.9
13.4
(3.5)
9.9
226.0
11.0
34.9
105.7
$
387.5
25
12.
Maintenance agreements
Ferromex has executed two maintenance and repairs agreements with Lámparas General Electric, S. de R. L.
de C. V. (Lámparas), an agreement with Alstom Mexicana, S. A. de C. V. (ALSTOM), and another with
EMD Locomotive Company de México, S. A. de C. V. (EMDL) to provide repair and maintenance services,
as well as the major repairs of some locomotives of Ferromex, as follows:
Suplier
Number of
locomotives
included
Terms of the agreement
Initial date
Expiration date
June 2017
June 2024 and
December 2026
February 2015
June 2026
Lámparas
251
August 2012
Lámparas
ALSTOM
EMDL
159
50
117
May 1999
February 2010
Jun 2006
Total
577
Ferromex has the right to rescind some of the maintenance contracts, assuming then the cost for early
termination.
The Lámparas agreement for 251 locomotives expiring in June 2017 stipulates the following payments for
early termination: a) $2.7 if it occurs between July 1, 2014 and June 30, 2015, b) $1.8 if it occurs between
July 1, 2015 and June 30, 2016 and c) $1.0 if it occurs between July 1, 2016 and June 30, 2017.
The Lámparas agreement for 159 locomotives includes two separate fleets (AC4400 and ES44AC), the
agreement for the AC4400 fleet which expires in June 2024 indicates that the Company may cancel as of July
1, 2009 and pay a penalty ranging from $2.0 in 2009 to U.S. $0.1 in June 2024. The agreement for the 100
ES44AC locomotives (EVO), indicates that the Company may cancel as of 2010, but will be subject to
penalties of $2.7 to $ 0.2 in 2026.
The ALSTOM agreement, with maturity in January 2015, contemplates an early termination, for which the
Company would have to pay the cost of inventories and the termination benefits specified in the employement
contracts of ALSTOM's personnel.
The EMDL agreement may not be canceled before July 1, 2015. If Ferromex decides to conclude the contract
between July 1, 2015 and June 30, 2016, it would have to pay an amount equivalent to 15 months average
billing. The cancellation payment will decrease by one month for each 12 month period during the current
contract.
As of December 31, 2014 and 2013, Ferrosur has an agreement to receive maintenance with ALSTOM to
receive maintenance, repairs and inspecting services to the transport equipment. The terms of the agreement
covers a five year period starting from March 1, 2010.
Maintenance and repairs - Regarding the locomotives’ maintenance and repair work, pursuant to the
agreements, Ferromex must make monthly payments based on certain fees that include mainly preventive and
corrective maintenance. These fees are recorded in the results of operations as the services are received. For
the years ended December 31, 2014 and 2013, Ferromex paid $71.9 and $72.5, respectively.
Overhauls - Overhauls are capitalized to property and equipment as incurred and amortized over the period
between overhauls which may vary depending on the use of the railways. Generally, the costs are amortized
over 5 to 8 years average. Overhauls that are carried out according to the contractual requirements of the
concession titles are capitalized to the concession title asset.
26
13.
Bank loans and long-term debt
At December 31, 2014 and 2013, the Company was in compliance with the guarantees and restrictions
established by the debt agreements which include financial covenants and restrictions on entering into
additional debt and on certain capital expenditures. Consolidated debt was as follows:
2014
SCC
ASARCO
MM
GFM/ITM
MPD
Total
Less - Current portion
$
Long-term debt
$
2013
4,154.9
115.6
51.1
413.7
1,212.6
5,947.9
(388.2)
$
5,559.7
$
4,153.8
51.1
420.2
1,185.8
5,810.9
(367.1)
5,443.8
The maturities of long-term debt and notes payable as of December 31, 2014 were as follows:
Year
2015
2016
2017
2018
Thereafter
(*)
Principal due *
$
388.2
156.3
74.8
75.6
5,298.2
$
5,993.1
Total debt maturities do not include the debt discount valuation account of $45.2.
Mining segment:
2014
2013
SCC
6.375%
5.375%
6.750%
7.500%
5.250%
3.500%
Notes due 2015 ($200 face amount, less
unamortized discount of $0.2 and $0.3 at
December 31, 2014 and 2013, respectively)
Notes due 2020 ($400 face amount, less
unamortized discount of $1.2 and $1.4 at
December 31,2014 and 2013, respectively)
$
199.8
$
199.7
398.8
398.6
1,092.2
1,092.1
Notes due 2035 ($1,000 face amount, less
unamortized discount of $14.2 and $14.5 at
December 31, 2014 and 2013, respectively)
985.8
985.5
Notes due 2042 ($1,200 face amount, less
unamortized discount of $20.9 and $21.2 at
December 31, 2014 and 2013)
1,179.1
1,178.8
299.2
299.1
Notes due 2040 ($1,100 face amount, less
unamortized discount of $7.8 and $7.9 at
December 31,2014 and 2013)
Notes due 2022 ($300 face amount, less
unamortized discount of $0.8 and $0.9 at
December 31,2014 and 2013)
27
2014
2013
MM
9.250%
Yankee Bonds - Series B due 2028
51.1
51.1
ASARCO
1.250%
Mitsui credit agreement due 2019 ($115.6 face
amount LIBOR rate plus 1.125%)
Total
115.6
4,321.6
Less - Current portion
Long-term debt
4,204.9
(224.3)
$
4,097.3
$
4,204.9
The difference between the face amount and the balances as of December 31, 2014 and 2013 of the senior
unsecured notes is the unamortized issuance discount, which is being amortized over the term of the related
debt.
The bonds, referred above as Yankee bonds, contain a covenant requiring MM to maintain a ratio of EBITDA
to interest expense of not less than 2.5 to 1.0 as such terms are defined by the facility. At December 31, 2014,
MM is in compliance with this covenant.
Between July 2005 and November 2012 SCC issued senior unsecured notes six times totaling $4.2 billion as
listed above. Interest on the notes is paid semi-annually in arrears. The notes rank pari passu with each other
and rank pari passu in right of payment with all of SCC’s other existing and future unsecured and
unsubordinated indebtedness.
The indentures relating to the notes contain certain restrictive covenants, including limitations on liens,
limitations on sale and leaseback transactions, rights of the holders of the notes upon the occurrence of a
change of control triggering event, limitations on subsidiary indebtedness and limitations on consolidations,
mergers, sales or conveyances. Certain of these covenants cease to be applicable before the notes mature if
SCC obtains an investment grade rating. SCC obtained investment grade rating in 2005. SCC has registered
these notes under the Securities Act of 1933, as amended. SCC may issue additional debt from time to time
pursuant to certain of the indentures.
Related to these notes, SCC capitalized $28.9 of issuance costs which unamortized balance is included in
Other assets, non-current on the consolidated balance sheet and are being amortized as interest expense over
the life of the loans. At December 31, 2014 and 2013, the balance of capitalized debt issuance costs was $25.8
and $26.1, respectively. Amortization charged to interest expense was $0.9 and $0.8 in 2014 and 2013,
respectively.
If SCC experiences a Change of Control Triggering Event, SCC must offer to repurchase the notes at a
purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any. A
Change of Control Trigger Event means a Change of Control (as defined) and a rating decline (as defined),
that is, if the rating of the notes, by at least one of the rating agencies shall be decreased by one or more
gradations.
At December 31, 2014, SCC was in compliance with the covenants of the notes.
In September 2014, Asarco borrowed $115.6 primarily to purchase Mitsui’s 25% interest in SBM. Principal
payments are due quarterly starting with March 2015 and ending with September 2019. Until the debt is
repaid, Asarco selects a rate and a period (one, three or six month term) for interest payments. The interest
rate, set at the beginning of each payment period is either a LIBOR based rate, plus 1.125 basis points or the
bank’s variable rate, plus 0.125 basis points. The initial rate set in September 2014 for three months was
1.36%. The rate set for the three months ending March 23, 2015, is 1.37%.
28
The debt agreement contains restrictive covenants, including restrictions on liens on property, mergers, sales
of assets, transactions with affiliates, and restricted payments. The debt agreement requires the Company to
maintain compliance with certain ratio levels, such as maintaining an interest coverage ratio of 3:1. At
December 31, 2014, the Company was in compliance with the terms of the debt agreement.
Aggregate maturities of the outstanding borrowings at December 31, 2014, are as follows:
Year
2015
2016
2017
2018
Thereafter
Principal due (*)
$
224.3
24.3
24.3
24.3
4,069.6
4,366.8
(*)
Total debt maturities do not include the debt discount valuation account of $45.2.
Railway segment:
2014
Loan from HSBC BANK PLC and EXPORT
DEVELOPMENT CANADA (EDC), $2.9 with maturities
every six months through November 26, 2014, subject to
interest at six month LIBOR plus 0.08% (1)
Loan from HSBC MÉXICO, S. A. COMMERCIAL BANK
(HSBC), $0.5 with maturities every six months through
November 26, 2014, subject to interest at six months LIBOR
plus 0.40% (1)
$
2013
-
$
-
2.9
0.5
Loan from CREDIT AGRICOLE CIB (formerly CALYON
EXIMBANK) with maturities every three months through
June 15, 2016, subject to interest at the three month LIBOR
without spread (2)
12.5
20.8
Loan from CREDIT AGRICOLE CIB (formerly CALYON
EXIMBANK) - , $3.5 in 2014 ($5.8 in 2013) with maturities
every three months through June 15, 2016, subject to interest
at three month LIBOR rate plus 0.40% to 0.50% (2)
3.5
5.8
29.5
34.0
Loan from EXIMBANK-PEFCO funded in March 16, 2013,
with maturities every three months through May 15, 2021,
subject to interest rate at monthly LIBOR plus 0.65% (3)
29
2014
2013
Long-term debt contracts in Mexican pesos:
Loan from Banco Nacional de México, S.A. (BANAMEX) and
Export- Import United State Bank (EXIMBANK) with
maturities every three months through September 15, 2015,
subject to interest at the fixed rate of 8.18% (4)
7.1
Loan from BANAMEX with maturities every three months
through March 15, 2014, subject to interest at the fixed rate
of 8.25% (4)
18.7
-
Loan from Financial Group IXE (IXE BANK or IXE), on May
31, 2012 for Ps.450,000, subject to 91-days the Interbank
Offering Rate in Mexico (Spanish acronym TIIE) of interest
plus 1.35% with maturing quarterly from august 31, 2013 (5)
0.7
21.4
30.9
Debt securities (certificados bursátiles) (6)
Total
339.7
413.7
305.9
420.2
Less - Current portion of long-term debt
(28.4)
(113.3)
Long-term debt
$
385.3
$
306.9
The maturities of notes payable as of December 31, 2014, were as follows:
Year
2015
2016
2017
2018
Thereafter
Principal due
$
28.4
16.0
10.6
7.6
351.1
$
413.7
(1)
Loans from HSBC BANK PCL - EDC and HSBC, respectively contracted for the purchase of 15
SD70ACe locomotives, which are pledged for these loans.
(2)
Loans from CREDIT AGRICOLE CIB (formerly CALYON) - EXIM and CREDIT AGRICOLE CIB
(before CALYON), respectively contracted for the purchase of 40 locomotives, which are pledged for
these loans.
(3)
Loan from PEFCO - EXIMBANK on March 16, 2013 for $41.9, subject to interest at three-month
LIBOR rate plus 0.65%, contracted for the purchase of 24 locomotives which expire on May 15, 2021.
(4)
Loans from BANAMEX - EXIMBANK and direct loan from BANAMEX, issued to pay, in advance
the bridge loan from BANAMEX, used for the purchase of 60 locomotives, which are pledged for such
loans.
In the loans mentioned in the point (1), (2) and (4) Ferromex signed as guarantor.
(5)
Credit with IXE BANCO issued on May, 31, 2011 by Ferrosur to refinance liabilities.
30
(6)
On October 14, 2014, the Comisión Nacional Bancaria y de Valor (Spanish acronym CNBV)
authorized Ferromex a new securitization certificate program up to an amount of Ps.5,000,000,000
(nominal value), for a five-year term.
On November 14, 2007, the CNBV authorized Ferromex a new securitization certificate program of up
to an amount of Ps.5,000,000,000 (nominal value), for a four-year term.
As of December 31, 2014 and 2013, Ferromex has issued debt under these programs with the
following features and whose balances are as follows:
Issuance
Date of
Transaction
Maturity
Date
Annual Rate
FERROMX -07
Nov 16, 2007
Nov 7, 2014
TIIE 28 days + 0.34%
FERROMX -07-2
Nov 16, 2007
Oct 28, 2022
Fixed rate of 9.03%
101.9
114.7
FERROMX -11
Apr 15, 2011
Apr 2, 2021
Fixed rate of 8.88%
101.9
114.7
FERROMX -14
Oct 20, 2014
Oct 7, 2024
Fixed rate of 6.76%
135.9
2014
$
$
-
2013
$
339.7
76.5
$
305.9
The loans and securitization certificates establish certain covenants for GFM, which as of December 31, 2014
had been fulfilled.
The average annual rates for the years ended December 31, 2014 and 2013 were: 6-month LIBOR: 0. 33%
and 0. 47%, 3-month LIBOR 0.24% and 0.28% and 28 day TIIE 2.52% and 3.11%, respectively.
Infraestructure segment:
2014
2013
PEMSA
Bank loan with MONEX, S.A. (MONEX), with maturity on
August 30, 2017, accrues interest at a rate equal to monthly
LIBOR plus 2.5%.(1)
$
-
$
1.4
Bank loan with IXE, with maturity on May 31, 2014, accrues
interest at a rate equal to monthly LIBOR plus 4.75% (2)
-
1.9
Bank loan with IXE, with maturity on August 6, 2014,
accrues interest at a rate equal to monthly LIBOR plus
4.25% (3)
-
5.0
CIPEME
Bank loan with HSBC, with maturity on June 14, 2020,
accrues interest at a rate equal to monthly LIBOR plus
2.50% (4)
211.7
175.0
Bank loan with INBURSA, S.A. (INBURSA), with maturity
on June 14, 2020, accrues interest at a rate equal to monthly
LIBOR plus 3.25% (5)
87.0
108.4
Bank loan with INBURSA, with maturity on July 2, 2020,
accrues interest at a rate equal to monthly LIBOR plus
3.25% (6)
95.7
116.9
31
2014
2013
MCC
Bank loan with BANOBRAS, S.A. (BANOBRAS), with
maturity on October 1, 2032, accrues interest at a rate equal
to monthly LIBOR plus 5.85% (7)
141.1
105.6
575.0
575.0
77.3
67.5
24.8
29.1
1,212.6
1,185.8
MGE
5.50% Senior secured notes with New York Mellon a due in
2012 payable semi annually with a final maturity date of
December 6, 2032 (8)
México Generadora de Energía Eólica, S.A. de C.V.
(MGEO)
5.50% Senior secured notes due in 2019 payable semi
annually with a final maturity date of March 12, 2029 (9)
MPD
Bank loan with HSBC, with maturity on August, 2015,
accrues interest at a rate equal to monthly TIIE 1.25% (10)
Total
Less, current portion
(135.5)
Total long-term debt
$
1,077.1
(253.8)
$
932.0
The maturities of notes payable as of December 31, 2014 were a follows:
Year
2015
2016
2017
2018
Thereafter
Principal due
$
135.5
116.0
39.8
43.6
877.7
$
1,212.6
(1)
Loan with MONEX, to acquire water well drilling equipment, which assets are held as collateral, with
monthly amortizations through August 30, 2017. This loan was liquidated on September 5, 2014.
(2)
Loan from IXE contracted in 2010 for $10.0, due on May 31, 2014, to finance the continued drilling
operations in Poza Rica, Veracruz on the project Aceite Terciario del Golfo (ATG), with monthly
amortizations through May 31, 2014. This loan was liquidated on June 2, 2014.
(3)
Loan from IXE contracted in 2013 for $5.0, due on August 6, 2014, to finance the continued drilling
operations in Poza Rica, Veracruz on the project ATG.
(4)
Mortgage loan with HSBC for the acquisition of the jack up rig Tabasco and Campeche for $275.0.
payable in 5 years.
32
(5)
Mortgage loan with INBURSA for the acquisition of the jack up rig Zacatecas for $129.8, with
monthly amortizations through June 14, 2020.
(6)
Mortgage loan with INBURSA for the acquisition of the jack up rig Chihuahua for $141.3. with
monthly amortizations through July 2, 2020.
(7)
Loan with BANOBRAS used for the construction of the highway denominated León - Salamanca in
Guanajuato, Mexico, with quarterly amortizations through October 1, 2032. During 2014 increased by
$35.5.
(8)
(9)
The proceeds of the offering are used for the payment of development and construction of two naturalgas-fired combined cycled electric generating plants, with a potential net capacity of 258.1 megawatts
each, with by monthly amortizations through December 6, 2032.
(10)
The proceeds of this credit facility are used for the development and construction of a wind farm
located in Juchitán, Oaxaca with a potential net capacity of 74 megawatts. Once the project is fully
operating amortizations will be paid on a semi-annual basis.
(11)
The proceeds of this credit facility were used to finance MPD infrastructure projects while larger credit
facilities with longer tenors are obtained. Principal was payable in full on April 21, 2014. This credit
will be paid in full on August 2015. Interest is being paid on a monthly basis.
The loans establish certain covenants, which the Company is in compliance as of December 31, 2014.
14.
Asset retirement obligation (ARO)
SCC
SCC maintains an estimated 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, SCC’s closure plans were
approved by MINEM. As part of the closure plans, SCC 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 reviews of closing plans every five years. Currently and for the nearterm future, SCC has pledged the value of its Lima office complex as support for this obligation. The
accepted value of the Lima office building, for this purpose, is $27.8. Through December 2014, SCC has
provided guarantees of $17.9. The closure cost recognized for this liability includes the cost, as outlined in its
closure plans, of dismantling the Toquepala and Cuajone concentrators, the smelter and refinery in Ilo, and
the shops and auxilary facilities at the three units. In 2014, the Company reviewed ASC 410-20 Asset
Retirement Obligation rule and adjusted the liability by $36.3 at its Peruvian operations. A comparable
adjustment was applied against the deferred asset recognized in property. The net effect of these adjustments
did not change the Company’s net income.
In 2010, the Company communicated to the Mexican federal environmental authorities its closure plans for
the copper smelter plant at San Luis Potosi. The Company initiated a program for plant demolition and soil
remediation. In January 2014, the Company approved an increase in the budget for this program to $62.4, of
which the Company has spent $46.9 through December 31, 2014. Plant demolition and construction of a
confinement area at the south of the property were completed in 2012 and the Company expects to complete
soil remediation and the construction of a second confinement area during the second quarter of 2015. The
Company expects that once the site is remediated, a decision will be made on whether sell or develop the
property.
33
In 2012, SCC decided to recognize 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, or writen or oral contract requiring SCC to carry out mine closure and environmental remediation
activities, SCC considers that a constructive obligation presently exists based on, among other things, the
remediation caused by the closure of the San Luis Potosi smelter in 2010. Consequently, according to ASC410-20 on December 31, 2012 SCC recorded an asset retirement obligation of $25.1 on and increased net
property by $20.3. The overall cost recognized for mining closure includes the estimated costs of dismantling
concentrators, smelter and refinery plants, shops and other facilities.
The following table summarizes the asset retirement obligation activity for the two years ended December 31,
2014 and 2013:
2014
Balance as of January 1
Changes in estimates
Closure payments
Accretion expense
$
Balance as of December 31,
$
2013
124.8
(9.6)
(12.2)
13.1
$
116.1
$
122.3
(6.3)
8.8
124.8
ASARCO
Accounting for reclamation and remediation obligations requires management to make estimates, unique to
each mining operation, relating to the future costs anticipated to complete reclamation and remediation work
that is required to comply with existing laws and regulations. Actual costs incurred in future periods could
differ from amounts estimated. Additionally, future changes to environmental laws and regulations could
increase the extent of reclamation and remediation work required. Any such changes could materially affect
the amounts charged to earnings for reclamation and remediation. As of December 31, 2014 and 2013, $21.9
and $16.6, respectively, were accrued for potential reclamation obligations. Accretion expense related to
ARO’s was $2.6 and $2.4 for the years ended December 31, 2014 and 2013, respectively.
Asarco has approximately $6.8 and $6.7 of cash and investments pledged to secure certain ARO’s, which are
recorded as restricted cash and investments as of December31, 2014 and 2013, respectively.
Information relating to the total obligations for ARO liabilities as of December 31, 2014 and 2013, is as
follows:
2014
15.
2013
Balance as of January 1
Remediation expanditures
Accretion expense
$
16.6
2.7
2.6
$
17.3
(3.1)
2.4
Balance as of December 31
$
21.9
$
16.6
Employees' statutory profit sharing
SCC’s operations in Peru, Mexico, and other subsidiaries of GMEXICO are subject to statutory workers’
participation.
34
In Peru, the provision for workers’ participation is calculated at 8% of pre-tax earnings. The current portion of
this participation, which is accrued during the year, is based on Peruvian Branch’s taxable income and is
distributed to workers following determination of final results for the year. The annual amount payable to an
individual worker is capped at the worker’s salary for an 18 month period. Amounts determined in excess of
the 18 months of worker’s salary is no longer made as a payment to the worker and is levied first for the
benefit of the Fondo Nacional de Capacitacion Laboral y de Promocion del Empleo (National Workers’
Training and Employment Promotion Fund) until this entity receives from all employers in its region an
amount equivalent to 2,200 Peruvian taxable units (approximately $2.8 in 2014). Any remaining excess is
levied as payment for the benefit of the regional governments. These levies fund worker training, employment
promotion, road infrastructure and other government programs.
In Mexico, workers’ participation is determined using the guidelines established in the Mexican income tax
law (LISR for its initials in Spanish) at a rate of 10% of pre-tax earnings as adjusted by the tax law. In
December 2013, the Mexican Congress approved some amendments to the tax law, as a consequence, SCC
recorded a deferred workers’ participation provision of $16.3.
The provision for workers’ participation is allocated in Cost of sales (exclusive of depreciation, amortization
and depletion) and to General expenses in the consolidated statement of income. For the years ended
December 31, 2014 and 2013, workers' participation expense was $209.8 and $233.0, respectively.
16.
Related party balances and transactions
2014
Due to related parties:
TTX Company
Ferrocarril y Terminal Valle de México S. A. de C. V.
México Transporte Aéreos, S.A. de C.V. (Mextransport)
Others
Fondo Inmobiliario, S. A. de C. V.
$
2013
9.9
2.9
1.3
1.0
$
8.4
3.1
0.8
1.2
0.4
15.1
$
13.9
$
The Company has entered into certain transactions in the ordinary course of business with parties that are
controlling shareholders or their affiliates. These transactions include the lease of office space, air
transportation and construction services and products and services relating to mining and refining. The
Company lends and borrows funds among affiliates for acquisitions and other corporate purposes. These
financial transactions bear interest and are subject to review and approval by senior management, as are all
related party transactions. It is the Company’s policy that the Audit Committee of the Board of Directors shall
review all related party transactions. The Company is prohibited from entering or continuing a material
related party transaction that has not been reviewed and approved or ratified by the Audit Committee.
The Larrea family controls a majority of the capital stock of GMEXICO, and has extensive interests in other
businesses, including aviation and real estate. SCC engages in certain transactions in the ordinary course of
business with other companies controlled by the Larrea family relating to the lease of office space and air
transportation.
35
The following table summarize the purchase activity with companies with relationships to SCC executive
officers’ families in 2014 and 2013:
2014
2013
Higher Technology S.A.C.
Servicios y Fabricaciones Mecánicas S.A.C.
Sempertrans
PIGOBA, S.A. de C.V.
Breaker, S.A. de C.V.
$
3.2
1.3
1.2
10.1
0.6
$
2.2
0.4
1.1
0.3
3.9
Total purchased
$
16.4
$
7.9
SCC purchased industrial materials from Higher Technology S.A.C., and paid fees for maintenance services
provided by Servicios y Fabricaciones Mecánicas S.A.C. Mr. Carlos Gonzalez, the son of SCC’s Chief
Executive Officer, has a proprietary interest in these companies.
SCC purchased industrial material from Sempertrans France Belting Technology and Sempertrans Belchatow
SP Z.O.O., in which Mr. Alejandro Gonzalez is employed as a sales representative. Also, SCC purchased
industrial material from PIGOBA, S.A. de C.V., a company in which Mr. Alejandro Gonzalez has a
proprietary interest. Mr. Alejandro Gonzalez is the son of SCC’s Chief Executive Officer.
SCC purchased industrial material and services from Breaker, S.A. de C.V., a company in which Mr. Jorge
Gonzalez, son-in-law of SCC’s Chief Executive Officer, has a proprietary interest, and from Breaker Peru,
S.A.C., a company in which Misters Jorge González and Carlos González, son-in-law and son, respectively,
of SCC’s Chief Executive Officer have a proprietary interest.
It is anticipated that in the future SCC will enter into similar transactions with these same parties.
17.
Benefit plans
Mining segment
SCC - Peruvian and Mexican Operations
SCC has two non-contributory defined benefit pension plans covering former salaried employees in the
United States and certain former employees in Peru (theExpatriate Plan). Effective October 31, 2000, the
Board of Directors amended the qualified pension plan to suspend the accrual of benefits.
In October 2014, the Society of Actuaries (SOA) issued new mortality tables based on a comprehensive study
of private retirement plans. Effective December 31, 2014, the Company elected to update the mortality
assumption to the new SOA tables.
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 (theMexican Plan).
The components of net periodic benefit costs calculated in accordance with ASC 715 Compensation
retirement benefits, using December 31 as a measurement date, consist of the following:
2014
Service Cost
Interest Cost
Expected return on plans assets
Amortization of transition assets, net
Amortization of net actuarial (loss)
Amortization of net loss
$
Net periodic benefit cost
$
2013
1.0
1.1
(3.3)
0.1
(0.4)
0.2
$
(1.3)
$
1.1
1.0
(3.4)
(0.7)
0.2
(1.8)
36
The change in benefit obligation and plan assets and a reconciliation of funded status are as follows:
2014
Change in benefit obligation:
Projected benefit obligation at beginning of year
Service cost
Interest cost
Actuarial gain census
Benefit paid
Actuarial (gain)/loss
Actuarial (gain) loss assumption changes
Inflation adjustment
Projected benefit obligation at end of year
$
2013
26.8
1.0
1.1
$
(1.9)
(1.6)
2.2
(1.8)
$
25.8
$
2014
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contribution
Benefits paid
Currency exchange rate adjustment
27.9
1.1
1.0
(0.3)
(2.2)
0.3
(1.0)
26.8
2013
$
60.6
3.7
(0.5)
(1.1)
(5.0)
$
61.9
(0.2)
0.1
(0.9)
(0.3)
Fair value of plan assets at end of year
$
57.7
$
60.6
Funded status at the end of year
$
31.9
$
33.8
ASC 715 amounts recognized in the statement of financial position consists of:
2014
Non current assets
$
2013
31.9
$
33.8
ASC-715 amounts recognized in accumulated other comprehensive income (net of income taxes of $0.4 and
$1.5 in as of December 31, 2014 and 2013, respectively) consists of:
2014
2013
Net (gain)
Prior service cost
$
(1.3)
1.6
$
(1.7)
0.1
Total
$
0.3
$
(1.6)
The following table summarizes the changes in accumulated other comprehensive income for the years ended
December 31, related to the defined benefit pension plan, net of income tax:
2014
Reconciliation of accumulated other comprehensive income:
Accumulated other comprehensive income at beginning of
plan year
Net loss amortized during the year
Net loss occurring during the year
Amortization of transition obligation
Currency exchange rate adjustment
$
Net adjustment to accumulated other comprehensive income
(net income taxes of $(1.1) and $(1. 3) in 2014 and 2013,
respectively)
Accumulated other comprehensive income at end of plan year
2013
(1.6)
0.1
0.2
(0.1)
1.7
$
-
0.1
1.9
$
0.3
(3.6)
0.4
1.5
2.0
$
(1.6)
37
The following table summarizes the amounts in accumulative other comprehensive income amortized and
recognized as a component of net periodic benefit cost in 2014 and 2013, net of income tax:
2014
Net loss
Amortization of net gain
Amortization of transition obligation
$
Total amortization expenses
$
2013
0.2
0.1
(0.1)
$
0.2
$
1.5
0.4
1.9
The assumptions used to determine the pension obligation are:
Peruvian Operations
Discount rate
Expected long-term rate of return on plan asset
Rate of increase in future compensation level
2014
2013
3.50%
4.50%
N/A
4.25%
4.50%
N/A
2014
2013
6.70%
6.70%
4.00%
7.10%
7.10%
4.00%
Mexican Operations (*)
Discount rate
Expected long-term rate of return on plan asset
Rate of increase in future compensation level
(*)
These rates are based on Mexican pesos as the pension obligations are related to employees in Mexico.
The scheduled maturities of the benefits expected to be paid in each of the next five years, and thereafter, are
as follows:
Expected
Benefit Payments
Year
2015
2016
2017
2018
2019
2020 to 2024
$
7.2
1.5
1.4
1.5
1.6
8.3
Total
$
21.5
Peruvian Operations
Expatriate Planl
SCC’s funding policy is to contribute amounts to the qualified pension plan sufficient to meet the minimum
funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional
amounts as SCC may determine to be appropriate. Plan assets are invested in stock and bond funds.
Plan assets are invested in a group annuity contract (the Contract) with Metropolitan Life Insurance Company
(MetLife). The Contract invests in the MetLife Broad Market Bond Fund (the Bond Fund) managed by
BlackRock, Inc. (BlackRock), and the MetLife General Account Payment Fund (the Money Fund).
38
The Money Fund seeks to earn interest and maintain a $1.00 per share net asset value, by investing in U.S.
Dollar-denominated money market securities.
The Bond Fund seeks to outperform the Barclays Capital U.S. Aggregate Bond Index, net of fees, over a full
market cycle. The Bond Fund invests in publicly traded, investment grade securities. These may include
corporate securities, mortgage securities, treasuries and cash, agency securities, commercial mortgage backed
securities and other investment vehicles.
Plan assets are invested with the objective of maximizing returns with an acceptable level of risk and
maintaining adequate liquidity to fund expected benefit payments. The Company’s policy for determining
asset mix-targets to meet investment objectives includes periodic consultation with recognized third party
investment consultants.
The expected long-term rate of return on plan assets is reviewed annually, taking into consideration asset
allocations, historical returns and the current economic environment. Based on these factors the Company
expects its assets will earn an average of 4.50% per annum assuming its long-term mix will be consistent with
its current mix.
Mexican Operations
MM’s policy for determining asset mix targets includes periodic consultation with recognized third party
investment consultants. The expected long-term rate of return on plan assets is updated periodically, taking
into consideration assets allocations, historical returns and the current economic environment. The fair value
of plan assets is impacted by general market conditions. If actual returns on plan assets vary from the
expected returns, actual results could differ.
The plan assets are managed by three financial institutions, Scotiabank Inverlat, S.A. (INVERLAT), Banco
Santander and IXE, S.A. 27% of the funds are invested in Mexican government securities, including treasury
certificates and development bonds of the Mexican government. The remaining 73% is invested in common
shares of GMEXICO.
The plan assets are invested without restriction in active markets that are accessible when required and are
therefore considered as level 1, in accordance with ASC 820 Fair Value Measurement.
These plans accounted for approximately 30% of benefit obligations. The following table represents the asset
mix of the investment portfolio as of December 31:
%
Asset category:
Equity securities
Treasury bills
2014
2013
73
27
74
26
100
100
The amount of contributions that SCC expects to pay to the plan during 2015 is $6.3, which includes $3.4 of
pending payments to former Buenavista workers.
Post-retirement Health Care Plan
Peru:
SCC adopted the post-retirement health care plan for retired salaried employees eligible for Medicare in 1996.
SCC manages the plan and is currently providing health benefits to retirees.
The plan is accounted for in accordance with ASC 715 Compensation retirement benefits.
39
Mexico:
Through 2007, the Buenavista unit provided health care services free of charge to employees and retired
unionized employees and their families through its own hospital at the Buenavista unit. In 2011, SCC signed
an agreement with the Secretary of Health of the State of Sonora to provide these services to its retired
workers and their families. The new workers of Buenavista del Cobre, S.A. de C.V. (BVC) will receive health
services from the Mexican Institute of Social Security as is the case for all Mexican workers.
The components of net period benefit costs are as follows:
2014
Interest cost
Amortization of prior service cost/(credit)
$
Net periodic benefit costs
$
2013
1.3
(0.3)
$
1.0
$
1.7
1.7
The change in benefit obligation and a reconciliation of funded status are as follows:
2014
Change in benefit obligation:
Projected benefit obligation at beginning of year
Interest cost
Actuarial (gain) claims cost
Benefit paid
Actuarial (gain)/loss
Actuarial loss/(gain) assumption changes
Inflation adjustment
21.7
1.3
(0.2)
(0.6)
(3.2)
0.4
(2.3)
$
$
17.1
$
21.7
Change in plan assets:
Employer contributions
Benefits paid
$
0.1
(0.1)
$
0.1
(0.1)
Fair value of plan assets at end of year
$
Funded status at the end of the year
$
(17.1)
$
(21.7)
$
(0.1)
(17.0)
$
(0.1)
(21.6)
$
(17.1)
$
(21.7)
$
(4.8)
(0.1)
$
(4.9)
Projected benefit obligation at end of year
ASC-715 amounts recognized in statement of financial
position consists of:
Current liabilities
Non-current assets
Total
ASC-715 amounts recognized in accumulated other
comprehensive income (net of income tax) consists of:
Net loss (gain)
Prior service cost (credit)
Total (net of income taxes of $3.3 and $3.0 in 2014 and 2013,
respectively)
$
2013
-
27.2
1.7
(0.1)
(6.8)
(0.2)
(0.1)
$
-
(4.3)
(0.1)
$
(4.4)
40
The following table summarizes the changes in accumulated other comprehensive income for the years ended
December 31, related to the post-retirement health care plan, net of income tax:
2014
Reconciliation of accumulated other comprehensive income:
Accumulated other comprehensive income at beginning of
plan year
Gain occurring during the year
Loss amortized during the year
Currency exchange rate adjustment
Net adjustment to accumulated other comprehensive income
(net of income taxes of $3.3 and $3.0 in 2014 and 2013,
respectively)
Accumulated other comprehensive income (loss) at end of plan
year
$
2013
(4.4)
(1.8)
0.1
1.2
$
(0.3)
(4.1)
-
(0.5)
$
(4.9)
(4.1)
$
(4.4)
The following table summarizes the amounts in accumulative other comprehensive income amortized and
recognized as a component of net periodic benefit cost in 2014 and 2013, net of income tax:
2014
Net/ (gain) loss
Amortization of transition obligation
$
2013
(1.8)
0.1
Total amortization (income) expenses
$
(4.1)
-
(1.7)
(4.1)
The discount rates used in the calculation of other post-retirement benefits and cost as of December 31 were:
2014
2013
3.50%
4.25%
6.70%
7.10%
Peruvian Operations
Discount rate
Mexican Operations
Discount rate
The benefits expected to be paid in each of the next five years, and thereafter, are as follows:
Expected
Benefit Payments
Year
2015
2016
2017
2018
2019
2020 to 2023
$
1.0
1.1
1.1
1.2
1.3
13.3
Total
$
19.0
Peruvian operations
Expatriate Planl
For measurement purposes, a 5.8% annual rate of increase in the per capita cost of covered health care
benefits was assumed for 2014. The rate is assumed to decrease gradually to 4.6%.
41
Assumed health care cost trend rates can have a significant effect on amounts reported for health care plans.
However, because of the size of SCC’s plan, a one percentage-point change in assumed health care trend rate
would not have a significant effect.
Mexican operations
For measurement purposes, a 4.0% annual rate of increase in the per capita cost of covered health care
benefits was assumed for 2014 and remains at that level thereafter.
An increase in other benefit cost trend rates have a significant effect on the amount of the reported
obligations, as well as component cost of the other benefit plan. One percentage-point change in assumed
other benefits cost trend rates would have the following effects:
Increase
One percentage point
Decrease
Effect on total service and interest cost components
$
1.3
$
0.8
Effect on the post-retirement benefit obligation
$
17.2
$
13.7
Asarco - American Operations
Pension and Postretirement Plans
Asarco recognizes the funded status (i.e., the difference between the fair value of plan assets and benefit
obligations) of its defined benefit postretirement plans in the consolidated balance sheets, with corresponding
adjustments to other comprehensive income, net of tax. These amounts are recognized as net periodic
postretirement cost in accordance with Asarco’s accounting policy for amortizing such amounts. Further,
actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic
postretirement cost in the same periods will be recognized as a component of other comprehensive income.
These amounts will be subsequently recognized as a component of net periodic postretirement cost on the
same basis as the amounts recognized in accumulated other comprehensive income.
Pension Plans
Asarco maintains two noncontributory defined benefit pension plans covering substantially all of its
employees. Benefits for salaried plans are based on salary and years of service. Hourly plans are based on
negotiated benefits and years of service. Pension costs are determined annually with the assistance of
independent actuaries. Asarco’s funding policy is to contribute amounts to the plans sufficient to meet the
minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such
additional tax deductible amounts as may be advisable under the circumstances. Benefit accruals under the
salaried plan were frozen effective April 30, 2011. As amended, anyone who has not yet become a participant
as of that date will be excluded and current participants will not accrue any credited service after April 30,
2011, for purposes of determining retirement benefits; however, participants will continue to accrue credited
service for purposes of vesting and for eligibility for early retirement under the Plan. Plan assets are invested
principally in commingled stock funds, mutual funds and securities issued by the U.S. government. The
pension plans have a December 31 year-end.
Supplemental Executive Retirement Plan (SERP)
Asarco records a liability related to a SERP benefit for certain of its executives. All assumptions used to
calculate the liability match the salaried plans noted above. As such, unrealized gains and losses that will arise
in subsequent periods, as calculated by the actuaries, will be recognized as a component of other
comprehensive income until such amounts are realized. The total present value of the SERP liability recorded
as of December 31, 2014 and 2013 was $1.5 and $1.2, respectively. These amounts are in addition to the
salaried plan information as presented below.
42
The measurement dates used to determine benefit obligations were December 31, 2014 and 2013, and are
based on census data provided as of the beginning of the years of such plans. No events have occurred that
would have a significant impact on those calculations and measurements.
Postretirement Benefits
Contributory postretirement health care coverage under Asarco’s health plans is provided to substantially all
U.S. retirees not eligible for Medicare. A cost-sharing Medicare supplement plan is available for retired
salaried employees and life insurance coverage is provided to substantially all retirees. The plans are
unfunded but exist as general corporate obligations. The postretirement health care plans have a December 31
year-end.
The measurement dates used to determine benefit obligations were December 31, 2014 and 2013, and are
based on census data provided as of the beginning of each plan year. No events have occurred that would
have a significant impact on those calculations and measurements.
Changes to Asarco’s benefit plans as of December 31, 2014 and 2013, are as follows:
Change in projected
benefit obligation
period ended December
31, 2014
Beginning of the
period – January 1
Service cost
Interest cost
Actuarial (gain)
Administrative
expenses paid
Benefits paid
Pension
Benefits
salaried
$
216.6
0.9
10.1
32.1
Pension
benefits
hourly
$
(1.2)
(13.0)
272.6
5.9
12.9
28.8
Postretirement
health care
salaried
Postretirement
health care
hourly
$
$
(1.7)
(13.7)
Benefit Obligation at
December 31
$
245.5
$
304.8
Accumulated Benefit
Obligation
$
245.5
$
304.8
27.2
0.6
1.1
(1.3)
-
245.0
11.8
14.0
146.5
$
(2.0)
$
Total
25.6
(2.9)
(35.7)
(7.0)
$
410.3
761.4
19.2
38.1
206.1
$
986.2
The 2014 actuarial losses for the pension plans primarily result from decreases in the discount rate and from
using updated mortality tables.
Change in plan assets
period ended
December 31, 2014
Beginning of the
period – January 1
Actual return on plan
assets
Employer
contributions
Benefits paid
Administrative
expenses
Pension
benefits
salaried
$
171.8
Pension
benefits
hourly
$
234.2
13.0
18.5
10.8
(13.0)
16.8
(13.7)
(1.2)
(1.7)
Postretirement
health care
salaried
Postretirement
health care
hourly
$
$
-
-
181.4
$
254.1
$
Funded Status at
December 31
$
(64.1)
$
(50.7)
$
36.7
(35.8)
-
(25.6)
406.0
31.5
7.1
(7.1)
-
$
$
2.0
(2.0)
Fair Value of Plan
Assets at December
31
Total
$
-
$
(410.3)
(2.9)
$
435.5
43
Change in projected
benefit obligation period
ended December 31,
2013
Beginning of the
period – January 1
Service cost
Interest cost
Actuarial (gain)
Administrative
expenses paid
Benefits paid
Pension
benefits
salaried
$
239.3
0.9
9.2
(19.5)
Pension
benefits
hourly
$
298.7
7.3
11.8
(30.5)
(0.8)
(12.5)
Postretirement
health care
salaried
Postretirement
health care
hourly
$
$
(1.1)
(13.6)
Benefit Obligation at
December 31
$
216.6
$
272.6
Accumulated Benefit
Obligation
$
216.6
$
272.6
38.5
1.0
1.1
(11.5)
-
335.5
15.7
10.9
(109.3)
$
(1.9)
$
Total
27.2
(1.9)
(35.8)
(7.8)
$
245.0
912.0
24.9
33.0
(170.8)
$
761.4
The 2013 actuarial gains for the pension plans primarily resulted increases in the discount rates.
Change in plan assets
period ended
December 31, 2013
Beginning of the
period – January 1
Actual return on plan
assets
Employer
contributions
Benefits paid
Administrative
expenses
Pension
benefits
salaried
$
161.0
Pension
benefits
hourly
$
210.6
16.6
23.8
7.5
(12.5)
14.4
(13.6)
(0.8)
(1.0)
Postretirement
health care
salaried
Postretirement
health care
hourly
$
$
-
-
171.8
$
234.2
$
Funded Status at
December 31
$
(44.8)
$
(38.4)
$
371.6
40.4
7.8
(7.8)
-
$
$
1.9
(1.9)
Fair Value of Plan
Assets at December
31
Total
31.6
(35.8)
-
-
(27.2)
(1.8)
$
-
$
$
(245.0)
406.0
Amounts recognized in the accompanying consolidated balance sheets consisted of the following:
Period ended
December 31, 2014
Current liabilities
Non-current
liabilities
Net amount
recognized
Pension benefits
salaried
Pension benefits
hourly
Postretirement
health care
salaried
Postretirement
health care
hourly
$
$
$
$
(64.1)
$
(64.1)
(50.8)
$
(50.8)
(1.7)
(24.0)
$
(25.7)
(9.3)
Total
$
(401.0)
$
(410.3)
(11.0)
(539.9)
$
(550.9)
44
Period ended
December 31, 2013
Current liabilities
Non-current
liabilities
Net amount
recognized
Pension benefits
salaried
Pension benefits
hourly
Postretirement
health care
salaried
Postretirement
health care
hourly
$
$
$
$
-
-
(44.8)
$
(44.8)
(38.5)
$
(38.5)
(1.9)
(25.3)
$
(27.2)
(8.6)
Total
$
(236.4)
$
(245.0)
(10.5)
(345.0)
$
(355.5)
Amounts recognized in other comprehensive income (loss) during the periods consisted of the following:
Period ended December
31, 2014
Net loss
Pension
Postretirement
Postretirement
benefits
benefits
health care
health care
salaried
hourly
salaried
hourly
$
Period ended December
31, 2013
Net loss
Pension
30.9
$
26.6
$
0.5
$
147.5
Pension
Pension
Postretirement
Postretirement
benefits
benefits
health care
health care
salaried
hourly
salaried
hourly
$
(26.6)
$
(40.1)
$
(10.2)
$
(109.1)
Total
$
205.5
Total
$
(186.0)
Amounts recorded in accumulated other comprehensive income consisted of the following:
Period ended December
31, 2014
Beginning balance
Amortization of net
gain
Net gain / (loss)
$
Net amount recorded
$
Pension
Pension
Postretirement
Postretirement
benefits
benefits
health care
health care
salaried
hourly
salaried
hourly
12.8
$
-
Beginning balance
Amortization of net
gain
Net gain / (loss)
$
Net amount recorded
$
$
31.0
Period ended December
31, 2013
1.6
43.8
28.2
$
1.8
(1.3)
26.6
$
(16.6)
$
(16.1)
(76.7)
$
70.8
Pension
Postretirement
Postretirement
benefits
benefits
health care
health care
salaried
hourly
salaried
hourly
$
(2.2)
(24.3)
12.8
41.7
$
(1.3)
(38.7)
$
1.7
(6.4)
$
1.2
(11.5)
$
(16.7)
$
1.0
146.5
Pension
39.3
Total
32.4
2.8
202.8
$
(76.7)
126.7
Total
$
0.1
(109.2)
$
(78.9)
107.0
(2.2)
(183.7)
$
(78.9)
45
The components of net periodic benefit cost for the years ended December 31, 2014 and 2013, are as follows:
Pension
benefits
salaried
Period ended December
31, 2014
Service cost
Interest cost
Expected return on
plan assets
Recognized loss
(gain)
Total net periodic
benefit cost
$
Total net periodic
benefit cost
0.9
10.1
$
5.9
12.9
(11.9)
$
$
$
0.6
1.1
2.5
Pension
benefits
hourly
0.9
9.2
$
(11.7)
7.3
11.8
-
(0.1)
$
4.8
$
(1.0)
$
24.7
Postretirement
health care
hourly
$
$
0.9
1.1
15.7
10.9
-
(2.8)
$
(1.2)
0.8
26.2
Total
$
-
$
19.2
38.0
(28.2)
Postretirement
health care
salaried
1.3
Total
-
$
(15.6)
2.2
0.6
11.8
13.9
(1.8)
$
Pension
benefits
salaried
$
Postretirement
health care
hourly
-
(0.9)
$
Postretirement
health care
salaried
(16.3)
-
Period ended December
31, 2013
Service cost
Interest cost
Expected return on
plan assets
Recognized loss
(gain)
Pension
benefits
hourly
24.8
33.0
(27.3)
(0.1)
$
26.5
2.2
$
32.7
The actuarial assumptions used to determine end of period benefit obligations were as follows:
Period ended December 31, 2014
Pension
benefits
salaried
Pension
benefits
hourly
Postretirement
health care
salaried
Postretirement
health care
hourly
Discount rate
Expected return on assets
Rate of compensation increase
4.05%
6.75%
N/A
4.15%
6.75%
3.50%
3.95%
N/A
N/A
3.90%
N/A
N/A
Period ended December 31, 2013
Pension
benefits
salaried
Pension
benefits
hourly
Postretirement
health care
salaried
Postretirement
health care
hourly
Discount rate
Expected return on assets
Rate of compensation increase
4.85%
7.25%
N/A
4.95%
7.25%
3.50%
4.70%
N/A
N/A
5.05%
N/A
N/A
Weighted-average assumptions used to determine net period benefit costs as follows:
Period ended December 31, 2014
Pension
benefits
salaried
Pension
benefits
hourly
Postretirement
health care
salaried
Postretirement
health care
hourly
Discount rate
Expected return on assets
Rate of compensation increase
4.85%
7.25%
N/A
4.95%
7.25%
3.5%
4.70%
N/A
N/A
5.05%
N/A
N/A
46
Period ended December 31, 2013
Pension
benefits
salaried
Pension
benefits
hourly
Postretirement
health care
salaried
Postretirement
health care
hourly
Discount rate
Expected return on assets
Rate of compensation increase
3.95%
7.50%
N/A
4.05%
7.50%
4.00%
3.80%
N/A
N/A
4.05%
N/A
N/A
Plan Assets
Asarco’s investment policy is to actively manage certain asset classes where potential exists to outperform the
broader market while maintaining acceptable risk levels inherent in specific benchmarks used to measure
performance for each asset class. To develop an expected long term rate of return on assets assumption,
Asarco considered the historical returns and the future expectations for returns for each asset class as well as
the target asset allocation of the pension portfolio.
Prior to November 2013, the assets of the Salaried and Hourly Pension Plans were combined in a single
master investment trust. In November 2013, Asarco split the assets of the master investment trust between a
trust for the Salaried Pension Plan and a trust for the Hourly Pension Plan, based on each Plan’s interest in the
master investment trust. The split allows Asarco to better tailor a trust’s investment strategy to meet the needs
of each Plan.
Asarco’s policy for determining asset allocation targets includes periodic consultation with recognized thirdparty investment consultants. The fair value of plan assets is affected by general market conditions. If actual
returns on plan assets vary from the expected returns, actual results could differ.
The allocations as of December 31, 2014 and 2013, were as follows:
2014
Common and collective trusts:
U.S. equity composite
International equity composite
Bond composite
Global real estate composite
Hedge fund composite
Cash and cash equivalents
Total asset allocation
Total asset allocation
Level 3
$
97.1
81.0
179.9
29.7
44.6
3.1
40.0%
88.0%
5.0%
33.0%
100.0%
60.0%
12.0%
95.0%
67.0%
-
100.0%
-
$
435.4
30.0%
60.0%
10.0%
2013
Common and collective trusts:
U.S. equity composite
International equity composite
Bond composite
Global real estate composite
Registered investment company
Partnership/ Join venture hedge fund
composite
Cash and cash equivalents
Asset allocation and fair value hierarchy
Level 1
Level 2
$
$
Asset allocation and fair value hierarchy
Level 1
Level 2
Level 3
98.6
92.3
141.2
31.2
2.2
40.5%
89.0%
10.2%
75.6%
100.0%
59.5%
11.0%
89.8%
24.4%
-
-
27.6
12.9
100.0%
-
100%
-
406.0
43.0%
53.0%
4.0%
47
Investments in commingled composite funds are recorded at fair value based on the net asset value of the fund
as provided by the fund manager or general partner. Investments in these funds are specific to asset allocation
strategies. The classifications include both direct investments in debt and equity securities as well as
investments in privately held entities that manage an underlying portfolio of marketable debt and equity
securities.
The changes in fair values for pension assets measured at Level 3 in the fair value hierarchy are:
2014
2013
Beginning balance at January 1
Purchases
Sales
Actual return on assets still held at December 31
$
27.6
27.0
(11.4)
1.4
$
20.7
16.0
(10.1)
1.0
Ending balanace at December 31
$
44.6
$
27.6
There were no transfers in/out of the Level 3 category during the years ended December 31, 2014, and 2013.
For the year ended December 31, 2014, the health care cost trend rate assumptions have a significant effect on
the amounts for postretirement health care costs and obligations, as follows:
Salaried
Hourly
Annual effect on total service and interest cost component
1% increase
1% decrease
$
0.2
(0.2)
$
6.1
(4.7)
Effect on postretirement benefit obligation
1% increase
1% decrease
$
2.7
(2.3)
$
78.8
(62.3)
At December 31, 2014, assumed health care cost trend rates were:
Salaried
Health care trend rate for 2014
Health care trend rate assumed for 2015
Ultimate health care trend rate assumed
Year that the rate reaches the ultimate
trend rate
Hourly
Pre-65 Medical
Post-65 Medical
Pre-65 Medical
Post-65 Medical
Trend
Trend
Trend
Trend
6.20%
5.80%
4.50%
6.40%
6.00%
4.80%
6.30%
5.90%
4.40%
6.50%
6.00%
4.60%
2084
2094
2094
2094
Cash Inflows and Outflows
Asarco contributed approximately $27.6 and $21.9 to the pension plans in 2014 and 2013, respectively, and
expects to contribute approximately $28.2 to the combined pension plans in 2015.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was reflected as of December
31, 2014 and 2013, assuming that Asarco will continue to provide a prescription drug benefit to retirees that is
at least actuarially equivalent to Medicare Part D. The benefit payments listed in the following table are
shown net of the expected Medicare Part D subsidy.
48
Asarco projects benefit payments to be paid by the combined plans as follows:
Pension Benefits
2015
2016
2017
2018
2019
2020 – 2024
Postretirement Health
Care
$
31.4
30.4
31.5
32.3
33.1
172.4
$
11.0
11.4
12.2
13.7
14.6
86.1
$
331.1
$
149.0
Employee Savings Plan
Asarco maintains employee savings plans for salaried and hourly employees that permit employees to make
contributions by payroll deductions pursuant to section 401(k) of the Internal Revenue Code (IRC). Asarco
matches contributions up to 6% of compensation for its employees. As of April 30, 2011, in conjunction with
the salaried pension plan freeze, Asarco increased the matching contributions for employees who were active
participants in the salaried plan, from 6% to 9% of compensation. In connection with the required match,
Asarco’s contributions, for both the salaried and hourly plans, charged against earnings were $4.5 and $4.4 in
2014 and 2013, respectively.
Copper Basin 401(k) Plan
Copper Basin also maintains a defined contribution plan that permits eligible employees to make
contributions by payroll deductions pursuant to Section 401(k) of the IRC, which includes a matching
Company contribution up to 6% of compensation. The contributions charged against earnings in 2014 and
2013, were $0.1.
ITM - Defined Benefit Pension Plans
In ITM and subsidiaries the liabilities and costs pertaining to the seniority premiums to which employees are
entitled after 15 years of service are recognized on the basis of actuarial studies performed by independent
experts.
ITM has also established plans to cover dismissal indemnities on the basis of actuarial studies, performed by
independent experts. At 2014 and 2013 labor liabilities were immaterial.
GMS - Corporate Services
Grupo México Servicios, S. A. de C. V., direct subsidiary of GMEXICO provides various professional
services to its affiliates. Currently GMS has 63 executives. As of December 31, 2014 and 2013 the labor
liabilities were immaterial.
18.
Stockholders' equity
Common stock:
At December 31, 2014 and 2013, the Company’s outstanding common stock consists of 7,785,000,000, fully
paid and subscribed shares, corresponding to fixed capital Series B, Class I shares. Variable capital is limited
to ten times the amount of the minimum fixed capital.
49
Series B consists of ordinary voting stock representing 100% of all Class I and Class II voting stock. At least
51% of the shares comprising this Series must be subscribed by private individuals or companies considered
to be Mexican investors, as established by the foreign investment law.
During 2014 the Board of Directors of the Company approved four dividends in accordance with the
resolutions made at the Ordinary Stockholders’ Meeting held on April 30, 2013 amounting to a total of $577.3
paid as follows: on February 18, 2014, a Ps.0.26 per share dividend was paid equal to the amount of $152.8,
on May 30, 2014, a Ps.0.20 per share dividend was paid in the amount of $121.0, on August 11, 2014, a
Ps.0.26 per share dividend was paid in the amount of $154.6 and on November 6, 2014, a Ps.0.26 per share
dividend was paid in the amount of $148.9. All dividends were paid out of retained earnings.
During 2013 the Board of Directors of the Company approved four dividends in accordance with the
resolutions made at the Ordinary Stockholders’ Meeting held on April 30, 2012 amounting to a total of $557.1
paid as follows: on February 28, 2013, a Ps.0.26 per share dividend was paid equal to the amount of $157.7,
on May 23, 2013, a Ps.0.26 per share dividend was paid in the amount of $164.0, on August 6, 2013, a
Ps.0.13 per share dividend was paid in the amount $79.7 and on November 4, 2013, a Ps.0.26 per share
dividend was paid in the amount of $155.7. All dividends were paid out of retained earnings.
Dividends paid are not subject to income tax if the dividends come from the Net Tax Profit Account (Spanish
acronym CUFIN). Any dividends paid in excess of this account are subject to a tax equivalent to 38.89%. T
The tax is payable by the Company and may be credited against its income tax in the same year or in the
following two years. Dividends paid from previously taxed profits are not subject to tax withholding or
additional tax payment. In the event of a capital reduction, any excess of stockholders' equity over capital
contributions, the latter restated in accordance with the provisions of the Income Tax Law, is accorded the
same tax treatment as dividends.
As a result of the 2014 Mexican income tax reform, CUFIN throught December 31, 2014 is presented
individually, wich amounted Ps.39,048.3 millions (equal to $2,653.1).
At December 31, 2013, the consolidated CUFIN consolidated amounted to Ps.48,187.8 (equal to $3,685.1).
Treasury Stock - Included in the treasury stock of SCC are shares of SCC's common stock carried at cost.
Activity in treasury stock was as follows:
2014
SCC common shares
Balance as of January 1
Other activity, including received dividends, interest and
currency translation effect – Net
Balance as of December 31
$
2013
1,059
$
606
$
1,665
805
254
$
1,059
At December 31, 2014 and 2013, SCC’s treasury stock includes 71,977,964 and 49,278,536 shares of SCC’s
common stock, respectively with a cost of $1,693.5 and $1,011.0, respectively.
In 2008, the SCC’s Board of Directors (BOD) authorized a share repurchase program for $500 that has since
been increased by the BOD and is currently authorized to $3,000. SCC may purchase additional shares of its
common stock from time to time, based on market conditions and other factors. This repurchase program has
no expiration date and may be modified or discontinued at any time.
The shares of SCC are used for general corporate purposes, including, among others, for awards under the
Directors' Stock Award Plan. GMEXICO's shares are used to grant awards under both the Employee Stock
Purchase Plan and the Executive Stock Purchase Plan.
50
Directors Stock Award Plan - SCC established a stock award compensation plan for certain directors who are
not compensated as employees of the Company. Under this plan, participants will receive 1,200 shares of
common stock upon election and 1,200 additional shares following each annual meeting of stockholders
thereafter. 600,000 shares of SCC’s common stock have been reserved for this plan. The fair value of the
award is measured each year at the date of the grant.
Reserve for purchase of shares - In April 2005, the Company established a reserve of $201.7 to repurchase
shares, of which $10.0 will be included in the share plans of the Company for future sales to employees.
During 2014 and 2013, the Company repurchased $606.0 and $254.0, respectively.
Common shares of Grupo Mexico - At December 31, 2014 and 2013, Grupo México has 89,950,310 and
75,262,919 shares in treasury stock.
Employee Stock Purchase Plan - During 2007, the Company offered to eligible employees a stock purchase
plan (the Employee Stock Purchase Plan) through a trust that acquires shares of the Company´s stock for sale
to its employees, employees of subsidiaries, and certain affiliated companies. The purchase price is
established at the approximate fair market value on the grant date. 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.
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 resignation of the employee, the Company will pay to the employee the fair market
sales price at the date of resignation/termination 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 for each case.
In case of retirement or death of the employee, the Company will render the buyer or his legal beneficiary,
fair market 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 years ended on December 31, 2014 and 2013 and the
remaining balance of the unrecognized compensation expense under the Employee Stock Purchase Plan were
as follows:
2014
Stock based compensation expense
$
Unrecognized compensation expense
$
2013
2.1
-
$
2.1
$
2.1
The following table presents the stock award activity of the Employee Stock Purchase Plan for the years
ended December 31, 2014 and 2013:
Shares
Outstanding shares at January 1, 2013
Exercised
Forfeited
Outstanding shares at December 31, 2013
Exercised
Forfeited
Outstanding shares at December 31, 2014
6,955,572
(2,474,814)
(31,159)
4,449,599
(150,987)
4,298,612
Unit weighted average
grant date fair value
$
1.16
1.16
1.16
1.16
1.16
1.16
51
During 2010, the Company offered to eligible employees a new stock purchase plan (the New Employee
Stock Purchase Plan) through a trust that acquires shares of the Company’s stock for sale to its employees,
employees of subsidiaries, and certain affiliated companies. The purchase price was established at Ps.26.51
(approximately $2.05) for the initial subscription. The terms of the New Employee Stock Purchase Plan are
similar to the terms of the Employee Stock Purchase Plan.
The stock based compensation expense for the years ended December 31, 2014 and 2013 and the remaining
balance of the unrecognized compensation expense under the New Employee Stock Purchase Plan, were as
follows:
2014
2013
Stock based compensation expense
$
0.6
$
0.6
Unrecognized compensation expense
$
2.0
$
2.6
The unrecognized compensation expense under this plan is expected to be recognized over the remaining
four-year period.
The following table presents the stock award activity of the New Employee Stock Purchase Plan for the years
ended December 31, 2014 and 2013:
Unit weighted average
grant date fair value
Shares
Outstanding shares at January 1, 2013
Granted
Exercised
Forfeited
Outstanding shares at December 31, 2013
2,944,742
226,613
(38,098)
(120,793)
3,012,464
Granted
Exercised
Forfeited
Outstanding shares at December 31, 2014
$
2.05
2.05
2.05
2.05
2.05
(724,573)
2,287,891
2.05
2.05
Executive Stock Purchase Plan - The Company also offers a stock purchase plan for certain members of its
executive management and the executive management of its subsidiaries and certain affiliated companies.
Under this plan, participants will receive incentive cash bonuses which are used to purchase shares of the
Company which are deposited in a trust.
19.
Income taxes
The components of the provision (benefit) for each jurisdiction for current and deferred income tax in 2014
and 2013 were as follows:
For the year ended December 31. 2014
U.S.
Peru
México
Income tax:
Current
Deferred
Uncertain tax
positions
Total provision for
income tax
$
839.0
(44.8)
$
$
(14.0)
(64.8)
$
19.9
794.2
$
(58.9)
386.4
(167.8)
Total
$
$
218.6
1,211.4
(277.4)
19.9
$
953.9
52
For the year ended December 31. 2013
U.S.
Peru
México
Income tax:
Current
Deferred
Total provision for
income tax
Total
$
565.8
57.0
$
35.9
(31.8)
$
416.1
(85.8)
$
1,017.8
(60.6)
$
622.8
$
4.1
$
330.3
$
957.2
The reconciliation of the statutory income tax rate to the effective tax rate is as follows:
2014
2013
Expected tax
35.0%
35.0%
Effect of income taxed at a rate other than the statutory rate
Depletion
Permanent differences
Peru tax on net income deemed distributed
Decrease in unrecognized tax benefits for uncertain tax
positions
Other
(5.4)
(4.4)
4.2
-
(3.2)
(5.3)
1.7
0.9
(0.2)
2.5
(1.5)
2.3
Effective income tax rate
31.7%
29.9%
The Company files income tax returns in three jurisdictions, Peru, Mexico and the United States. For the
years presented above, the statutory income tax rates for Peru and Mexico were 30% and 35% for the United
States. While the largest components of income taxes are the Peruvian and Mexican taxes, the Company is a
domestic U.S. entity. Therefore, the rate used in the above reconciliation is the U.S. statutory rate.
For all of the years presented, the Peruvian branch, Minera Mexico and AMC filed separate tax returns in
their respective tax jurisdictions. Although the tax rules and regulations imposed in the separate tax
jurisdictions may vary significantly, similar permanent items exist, such as items which are nondeductible or
nontaxable. Some permanent differences relate specifically to SCC and Asarco such as the allowance in the
United States for percentage depletion. SCC’s taxable income for the fiscal years 2012 through 2014,was, or
will be, included in the U.S. federal income tax return of AMC. Asarco’s taxable income for the fiscal year
November 2000 through 2014, was, or will be, included in the U.S. federal income tax return of AMC.
Deferred taxes include the U.S., Peruvian and Mexican tax effects of the following types of temporary
differences and carryforwards:
Temporary differences and carryforwards that gave rise to deferred tax liabilities, assets and related valuation
allowances were as follows:
2014
Assets:
Inventories
Minimum tax credits
Postretirement benefit obligations
Pension obligations
Capitalized exploration expenses
Foreign tax credit carryforward, net of FIN 48
Reserves
Tax loss carryforwards
Valuation allowance
Effect on U.S. tax of Peruvian deferred tax liabilities
Other
Total deferred tax assets
$
$
2013
93.0
93.8
156.3
35.0
27.9
519.1
110.3
18.5
(50.9)
253.8
96.7
1,353.5
$
33.6
85.7
98.1
26.7
24.4
483.6
62.1
9.0
(50.9)
68.6
144.0
$
984.9
53
2014
Liabilities:
Property and equipment
Investments
Deferred charges
Retained earnings
Mexican tax consolidated dividends
Other
Total deferred tax liabilities
Total net deferred tax assets
2013
(780.6)
(34.5)
(75.2)
(737.6)
(37.2)
(79.6)
(7.5)
(31.5)
(110.2)
(1,003.6)
(6.2)
(159.3)
(1,055.8)
$
297.7
$
(18.7)
AMC, Asarco and SCC/U.S. and PERU
U.S. Tax Matters
In September 2013 the Internal Revenue Service (IRS) issued the final Tangible Property Regulations. These
regulations are effective January 1, 2014 with some elective retroactive application available. These
regulations look to provide a framework for distinguishing capital expenditures from deductible business
expenses and they attempt to find the middle ground where taxpayers and the IRS often disagreed. The
Company has reviewed these regulations and has concluded that they should not have a material effect on its
financial statements.
As of December 31, 2014, AMC considers its ownership of the stock of Minera Mexico to be essentially
permanent in duration. The excess of the amount for financial reporting over the tax basis of the investment in
this stock is estimated to be at least $5.3 billion.
As of December 31, 2014, $37.7 of the Company’s cash, cash equivalents, restricted cash and short-term
investments of $722.0 was held by foreign subsidiaries. The cash, cash equivalents and short-term
investments maintained in the Company’s foreign operations are generally used to cover local operating and
investment expenses. The Company had provided a deferred tax liability of $7.4 as of December 31, 2013 for
the U.S. income tax effects of $76.2 of foreign earnings that may potentially be repatriated in the future. At
December 31, 2014 Minera Mexico has determined that it has no remittable earnings available for dividends
to the United States due to its internal financial obligations and current expansion, and that at the end of 2014
it has met the indefinite reversal criteria of ASC 740-30-25-17 that it intends to reinvest its earnings
indefinitely. Any distribution of earning from the Company’s Mexican subsidiaries to the United States is
subject to a U.S. federal income tax that equates to approximately 10% of the amount of the distribution, after
considering foreign tax credit utilization. Distributions of earnings from the Peruvian branch to the United
States are not subject to repatriation taxes. The Peruvian operations are not foreign subsidiaries. Rather they
are mainly comprised of operations that are treated as a branch of the SCC U.S. operations from a tax
perspective.
At December 31, 2014, there were $804.8 of foreign tax credit available for carryback or carryforward. These
credits have limited carryback and carryforward periods and can only be used to reduce U.S. income tax on
foreign earnings included in the annual U.S. consolidated income tax return. At December 31, 2014, there
were $93.7 of minimum tax credits available for carryforward. A valuation allowance against the minimum
tax credits of $50.9 exists because the Company does not expect to be able to utilize a portion of credits due
to separate company limitations. There were no other material U.S. tax credits at December 31, 2014.
These foreign tax credits are presented above on a gross basis and have not been reduced within this
disclosure for any unrecognized tax benefits. ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit
When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists is
effective prospectively for the Company’s fiscal year beginning January 1, 2014. In accordance with ASU
2013-11 the Company has recorded $285.5 of an unrecognized tax benefit as an offset to our deferred tax
asset for foreign tax credits. The remaining foreign tax credits of $519.1 will be used to offset future
liabilities.
54
Since March 2009, Grupo Mexico, through its wholly-owned subsidiary AMC, owns an interest in excess of
80% of SCC. Accordingly, SCC’s results are included in the consolidated results of the Grupo Mexico
subsidiary for U.S. federal income tax reporting. SCC provides current and deferred income taxes, as if it
were filing a separate income tax return.
Peruvian Tax MattersSCC obtains income tax credits in Peru for value-added taxes paid in connection with the purchase of capital
equipment and other goods and services, employed in its operations and records these credits as a prepaid
expense. Under current Peruvian law, SCC is entitled to use the credits against its Peruvian income tax
liability or to receive a refund. The carrying value of these Peruvian tax credits approximates their net
realizable value.
Special Mining taxRoyalty mining charge: In September 2011, the Peruvian government enacted a new tax for the mining
industry. This tax is based on operating income and its rate ranges from 2% to 8.4%. It begins at 2% for
operating income margin and up to 10% and increases by 0.4% of operating income for each additional 5% of
operating income until 85% of operating income margin is reached. SCC made provisions for this tax of $35.3
and $25.5 in 2014 and 2013, respectively. These provisions are included as income tax in the consolidated
statement of earnings.
As of December 31, 2014, the income tax rate was 30% and the dividend tax rate was 4.1%. In the last quarter
of 2014, the Peruvian congress enacted tax law changes to both the income tax and dividend tax rates that
become effective on January 1, 2015. The new rates are as follows:
Year
Income Tax Rate
Dividend Tax Rate
2015 – 2016
2017 – 2018
2019 and later
28%
27%
26%
6.8%
8.0%
9.3%
The recalculation of the deferred tax liability for the Peruvian jurisdiction using the new tax rates did not have
a material effect on the deferred tax liability or the financial statements of the company.
Mexican Tax Matters
In 2013, the Mexican Congress enacted tax law changes that become effective on January 1, 2014. Among
others, this new law:
i)
ii)
iii)
iv)
v)
vi)
vii)
establishes a mining royalty at the rate of 7.5% on taxable EBITDA adjusted as defined by Mexican
tax regulations; that had a net after tax cost of $79.3,
an additional royalty of 0.5% over gross income from sales of gold, silver and platinum;
replaces the consolidation tax regime and creates a more restrictive tax consolidation regimen;
establishes a 10% withholding on dividends distributed to Mexican individuals or foreign residents
(individuals or corporations) and applies to net income generated after 2013;
a new environmental tax on the sale and importation or fossil fuels that had an annual estimated cost of
approximately $9.4, and was included in cost of fuel,
limits (at 47 or 53%) deductions for tax-exempt salaries as well as for contributions to pension plans;
maintains the Mexican statutory income tax rate at 30% thereby eliminating the scheduled reductions
for 2014 and 2015; and (viii) eliminates the flat tax.
Related to these tax changes, in 2013 SCC recognized a deferred income tax charge of $34.7.
55
Accounting for Uncertainty in Income TaxesThe total amount of unrecognized tax benefits in 2014 and 2013 were as follows:
2014
2013
Unrecognized tax benefits, opening balance
Gross (decreases) increases - tax positions in prior period
Gross increases - current-period tax positions
$
197.5
80.6
7.4
$
415.1
(218.2)
0.6
Unrecognized tax benefits, ending balance
$
285.5
$
197.5
The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $285.5 at
December 31, 2014 and $197.5 at December 31, 2013. These amounts relate entirely to U.S. income tax
matters. AMC has no unrecognized Peruvian or Mexican tax benefits.
As of December 31, 2014 and 2013, SCC’s liability for uncertain tax positions included no amount for
accrued interest and penalties due to the excess foreign tax credits.
The following tax years remain open to examination and adjustment by the Company’s three major tax
jurisdictions:
Peru:
U.S.:
Mexico:
2011 up to 2014 (years 2011 and 2012 are being examinated in 2015)
2008 and all future years
2010 and all future years
Management does not expect that any of the open years will result in a cash payment within the upcoming
twelve months ending December 31, 2015. The Company’s reasonable expectations about future resolutions
of uncertain items did not materially change during the year ended December 31, 2014.
20.
Business segments
The Company's segments are organized using the management approach by industry and geographical region,
resulting in five primary reportable segments: MM, SCC, Asarco, ITM and Infraestructure. The MM segment
(open pit and underground operations) produce copper, with production of by-products of molybdenum, silver
and other material. The Branch and Asarco include integrated copper extraction, smelting and refining
operations, produce copper, with production of by-products of molybdenum, silver and other material, mainly
in Peru and the U.S., respectively. ITM carries out railway transportation activities through its subsidiaries
ITF and GFM in México. Infraestructure activities are mainly performed by CIPEME, MCC and CIEM which
main operations are oil well drilling services, construction services and the construction of electricity plants,
respectively. The corporate and other amounts are originated from corporate activities performed in the U.S.
Information by segments is shown in the same format used by the Company's management to evaluate each
business. An operating segment is defined as a component of the Company dedicated to business activities
from which the Company generates income and incurs costs and expenses, with respect to which information
for decision-making is prepared and in respect of which the Company's management evaluates the allocation
of resources periodically. The accounting policies of the segments are described in the summary of significant
accounting policies. The Company assesses the performance by segment based on the operating income or
(loss).
56
Financial information by business segment in 2014 and 2013 were as follows:
2014
Corporate
MM
SCC
Asarco
ITM
Infraestructure
and other
Total
Sales of product and
services
$
3,284
$
2,482
$
1,268
$
1,974
$
316
$
$
9,324
Income from operations
$
1,450
$
742
$
152
$
518
$
153
$
(6)
$
3,009
General expenses
$
154
$
73
$
(44)
$
55
$
21
$
20
$
279
Depreciation and
amortization
$
242
$
203
$
125
$
171
$
61
$
4
$
806
Net financing costs
$
3
$
130
$
1
$
(37)
$
33
$
(134)
$
Net income attributable
to controlling interest
$
786
$
341
$
201
$
260
$
81
$
36
$
1,705
Total assets, not
including investment
in shares of
associated companies
$
6,568
$
4,782
$
2,912
$
2,691
$
2,517
$
560
$
20,030
Total liabilities
$
774
$
4,936
$
1,150
$
905
$
1,410
$
95
$
9,270
Net adds in property,
plant and equipment
$
4,701
$
2,735
$
1,650
$
1,802
$
1,824
$
48
$
12,760
Capital expenditures
$
(1,074)
$
$
(2,433)
(456)
$
(132)
$
(289)
$
(482)
$
-
-
(4)
2013
Corporate
MM
Sales of product and
services
Income from
operations
General expenses
Depreciation and
amortization
Net financing costs
Net income
attributable to
controlling interest
Total assets, not
including
investment in
shares of
associated
companies
SCC
Asarco
$
3,252
$
2,614
$
$
$
1,525
77
$
$
1,024
27
$
$
$
$
216
9
$
$
180
(186)
$
431
$
$
5,700
Total liabilities
Net investment in
property, plant and
equipment
$
$
Capital expenditures
$ (1,276)
Infraestructure
and other
$
1,836
$
242
$
353
(75)
$
$
470
60
$
$
80
12
$
$
$
$
111
(10)
$
$
151
(29)
$
$
30
(29)
850
$
322
$
197
$
$
5,271
$
2,566
$
3,103
747
$
4,874
$
518
$
3,953
$
2,523
$
1,636
$
$
(426)
$
1,413
ITM
(168)
$
Total
$
9,357
(11)
(4)
$
$
3,441
97
$
$
4
7
$
$
29
$
16
$
$
2,134
$
360
1,105
$
1,413
$
78
$
1,897
$
1,410
$
46
$ 11,465
(415)
$
(573)
$
-
-
692
(238)
1,845
$ 19,134
8,735
$ (2,858)
57
The Company generated sales from customers and rendered railway transportation services in the following
areas:
2014
Country
MM
U.S.
México
Europe
Peru
China and Asia
Latin America, except
Mexico and Peru
$
Grand total
$
SCC
925
1,709
187
161
$
Asarco
112
1
706
282
773
302
$
1,268
-
608
3,284
$
ITM
$
30
1,944
-
-
2,482
$
Infraestructure
$
$
-
$
316
-
-
1,268
Total
2,335
3,970
893
282
934
-
1,974
910
$
316
$
9,324
2013
Country
MM
U.S.
México
Europe
Peru
China and Asia
Latin America, except
Mexico and Peru
$
Grand total
$
SCC
1,002
1,316
291
97
$
Asarco
28
1
325
766
811
546
$
1,413
-
683
3,252
$
ITM
$
-
2,614
$
Infraestructure
1,836
-
$
$
1,836
-
$
-
2,443
3,395
325
1,057
908
-
1,229
242
-
1,413
Total
$
242
$
9,357
Product sales in 2014 and 2013 were as follows:
Product
MM
Copper
Molybdenum
Silver
Zinc
Other
$
Total
$
Product
2,380
300
201
210
215
$
3,306
$
$
Total
$
2,138
207
72
$
-
$
3,339
$
$
2,482
1,314
$
$
2,614
(68)
1,435
$
(133)
Total
$
5,957
389
396
202
335
$
7,279
44
(42)
-
36
$
7,034
Eliminations
97
$
(9)
-
-
5,733
510
273
210
308
(34)
37
$
$
-
2013
ASARCO
2,289
148
80
(25)
Total
-
-
SCC
2,366
241
314
202
216
Eliminations
1,240
3
34
65
MM
Copper
Molybdenum
Silver
Zinc
Other
2014
Asarco
SCC
1,515
(14)
$
(189)
58
Revenues from services in the ITM and Infraestructure division in 2014 and 2013 were as follows:
ITM
2014
2013
Freight
Passages
Care-Hire
Others
$
1,845.6
11.3
49.2
67.9
$
1,720.6
12.0
36.7
66.7
Total
$
1,974.8
$
1,836.0
Infraestructure
2014
21.
2013
Drilling
Construction
Energy
$
197.3
112.5
5.7
$
193.8
21.9
26.3
Total
$
315.5
$
242.0
Derivative instruments
Ferromex interest rate swap
On March 17, 2008, Ferromex contracted with BBVA Bancomer S. A. (Bancomer) an interest rate swap (for
a notional amount of $80.0), with the purpose of managing interest rate risks on its outstanding loans with
CRÉDIT AGRICOLE CIB-EXIMBANK (formerly CALYON) Export - Import Bank of United States
(EXIM-BANK) and CREDIT AGRICOLE CIB before CALYON, through which Ferromex pays amounts
based on fixed interest rates and receives amounts based on variable interest rates. The swap whose notional
amount at December 31, 2014 is $16.0, expires on June 15, 2016, both the notional amount and the maturity
date of the sawp coincide with the risk position). During 2014, Ferromex paid interest based on average
LIBOR of 0.2356%. The difference was recorded in financing cost, in addition to the variable rate that
accrued on the loan. Bancomer had the option to cancel the fixed rate on March 16, 2010, however the Bank
did not exercise that option, and as a result, the annual fixed rate remained at 2.8%. The valuation of interest
rate swap as of December 31, 2014 is an unfavorable amount of $0.3 (($0.8) unfavorable on December 31,
2013). The effect of the difference amount the contracted rates against the swap in 2014 was ($0.6)
unfavorable.
22.
Financial instruments
Subtopic 810-10 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 810-10 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).
59
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 that provides information about the carrying amounts and estimated fair values of other
financial instruments that are not measured at fair value in the consolidated balance sheet as of December 31,
2014 and 2013:
Balance at December 31, 2014
Carrying Value
Fair Value
Liabilities - Long-term debt (*)
$
5,947.9
$
5,613.9
Balance at December 31, 2013
Carrying Value
Fair Value
Liabilities - Long-term debt (*)
(*)
$
5,810.8
$
5,481.6
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 case of the Yankee bonds and the
6.375% senior unsecured notes due date July 2015 which qualify at Level 2 in the fair value hierarchy
as they are based on quoted priced in market that are not active.
Fair values of assets and liabilities measured at fair value on a recurring basis were calculated as of December
31, 2014 and 2013, as follows:
Assets:
Short-term investments:
-Trading securities
-Available for sale debt
securities:
Corporate bonds
Asset backed obligations
Mortgage backed securities
Accounts receivable:
-Derivatives - Not classified
as hedges:
Provisionally priced sales:
Copper
Molybdenum
Investments in equity
securities
Liabilities:
Other current liabilities:
-Liability derivatives Classified as cash flow
hedges:
Swap
Total
Balance at
December 31, 2014
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
$
$
$
377.4
0.3
-
4.6
32.7
$
0.3
3.8
-
4.6
202.2
105.5
202.2
105.5
-
-
738.1
738.1
-
-
(16.0)
$
340.9
Significant
unobservable
inputs
(Level 3)
1,412.1
$
1,386.7
(16.0)
$
21.6
$
3.8
60
Assets:
Short-term investments:
-Trading securities
-Available for sale debt
securities:
Corporate bonds
Asset backed obligations
Mortgage backed securities
Accounts receivable:
-Derivatives - Not classified
as hedges:
Provisionally priced sales:
Copper
Molybdenum
Investments in equity
securities
Balance at
December 31, 2013
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
$
$
$
0.4
0.1
5.2
Liabilities:
Other current liabilities:
-Liability derivatives Classified as cash flow
hedges:
Swap
Total
246.3
-
-
$
0.4
0.1
5.2
4.1
-
53.9
100.2
53.9
100.2
-
-
841.6
841.6
-
-
(26.7)
$
242.2
Significant
unobservable
inputs
(Level 3)
1,221.0
$
1,237.9
(26.7)
$
(21.0)
$
4.1
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 publicly
traded. SCC’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
Platt’s Metals Week and are considered Level 1 in the fair value hierarchy.
23.
Concentration of risk
The Company operates four open-pit copper mines, five underground poly-metallic mines, two smelters and
eight refineries in Peru and Mexico and substantially all of its assets are located in these countries. There can
be no assurances that Company’s operations and assets that are subject to the jurisdiction of the governments
of Peru and Mexico will not be adversely affected by future actions of such governments. Much of
Company’s products are exported from Peru and Mexico to customers principally in the United States,
Europe, Asia and South America.
Financial instruments, which potentially subject the Company to a concentration of credit risk, consist
primarily of cash and cash equivalents, short-term investments and trade accounts receivable.
The Company invests or maintains available cash with various banks, principally in the United States,
Mexico, Europe and Peru, or in commercial papers of highly-rated companies. As part of its cash
management process, the Company regularly monitors the relative credit standing of these institutions.
61
At December 31, 2014, the Company had invested its cash and cash equivalents as follows:
Country
Amount
% of total cash (1)
Mexico
United States
Switzerland
Peru
$
650.1
532.5
465.6
83.9
37.5%
30.7%
27.0%
4.8%
Total cash and short-term investment
$
1,732.1
100.0%
(1)
98.7% of the Company’s cash is in U.S. dollars.
During the normal course of business, the Company provides credit to its customers. Although the receivables
resulting from these transactions are not collateralized, the Company has not experienced significant problems
with the collection of receivables.
The Company is exposed to credit loss in cases where the financial institutions with which it has entered into
derivative transactions (commodity, foreign exchange and currency/interest rate swaps) are unable to pay
when they owe funds as a result of protection agreements with them. To minimize the risk of such losses, the
Company only uses highly-rated financial institutions that meet certain requirements. The Company also
periodically reviews the creditworthiness of these institutions to ensure that they are maintaining their ratings.
The Company does not anticipate that any of the financial institutions will default on their obligations.
The Company’s largest customers as percentage of accounts receivable and total sales were as follows:
2014
2013
Accounts receivable trade as of December 31
Five largest customers
Largest customer
27.5%
7.1%
32.0%
10.5%
Total sales in year
Five largest customers
Largest customer
28.2%
6.7%
23.5%
6.9%
Asarco sells its products to a broad customer base. Mitsui, when it was the 25% minority owner of SBM, had
a right of first refusal for its 25% proportionate share of the copper produced by SBM. The remaining 75%
was sold through SCC’s normal customer base and on the spot market. Mitsui generally exercised this right
and revenues from Mitsui accounted for approximately 2% and 3% of Asarco’s consolidated revenues or
approximately $29.0 and $51.0 for the years ended December 31, 2014 and 2013, respectively. In 2014, in
addition to sales to Mitsui, there were two customers who individually accounted for 15% and 10% of
Asarco’s consolidated revenues. In 2013, in addition to sales to Mitsui, there were two customers who
individually accounted for 14% and 9% of Asarco’s consolidated revenues. If any of these major customers
discontinued purchasing products from Asarco, Asarco does not believe this would have a material adverse
effect on results since other customers and markets are readily available.
24.
Commitments
Mining segment
Peruvian Operations
Power purchase agreement - Enersur
In 1997, SCC signed a power purchase agreement with an independent power company, Enersur S.A. under
which SCC agreed to purchase all of its power needs for its current Peruvian operations from Enersur for
twenty years, through April 2017.
62
Power purchase agreement - Electroperu
In June 2014, SCC signed a power purchase agreement for 120 megawatt (MW) with the state company
Electroperu S.A., under which Electroperu S.A. will supply energy for the Peruvian operations for twenty
years tarting on April 17, 2017 and ending on April 30, 2037.
Power purchase agreement - Kallpa Generacion S.A. (Kallpa)
In July 2014, SCC signed 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.
Tia Maria
The EIA for the Tia Maria project was approved by MINEM in 2014. SCC expects to receive authorization to
move forward with the project’s construction phase in the first quarter of 2015. The project budget is $1.4.0
billion, of which $353.6 has been expended through 2014. When completed, Tia Maria is expected to produce
120,000 tons of copper per year.
In connection with the Tia Maria project, in 2014 SCC established a S/.100 fund (approximately $33.0) for
the benefit of social and infrastructure improvements in the neighboring communities to Tia Maria. Through
December 31, 2014 S/.0.7 has been expended on improvement projects.
Toquepala Concentrator Expansion
The EIA for the Toquepala concentrator expansion was approved by MINEM in December 2014. SCC
expects to receive authorization to move forward with the construction phase in second quarter of 2015. The
project budget is $1.2 billion, of which $346.0 has been expended through 2014. When completed, this
expansion project is expected to increase annual production capacity by 100,000 tons of copper and 3,100
tons of molybdenum.
In connection with this project, SCC has committed to fund various social and infrastructure improvement
projects in Toquepala’s neighboring communities. The total amount committed for these purposes is S/.445.0
(approximately $148.9), of which S/. 45.0 (approximately $15.1), has been expended through 2014.
Long-term sales contracts
The following are the significant outstanding long-term contracts:
Under the terms of a sales contract with Mitsui & Co. Ltd. (Mitsui), SCC was required to supply Mitsui with
48,000 tons of copper cathodes annually through 2013 to the Asian Market. Premium levels were agreed upon
annually based on world market terms. 90,000 tons related to a prior contract (period 1994-2000) will be
supplied as follows: 48,000 tons in 2014 and 42,000 tons in 2015.
In 2013, a new long term copper sales agreement was signed with Mitsui for five years, with shipments
beginning in 2015. Mitsui and SCC will negotiate market terms and conditions for annual contracts no later
than November 30 of the year prior to shipment.
The contract considers the following annual volumes of copper cathodes; 6,000 tons for 2015 and 48,000 tons
for each of the years from 2016 through 2019. The contract volume would increase by 24,000 tons the year
after Tia Maria reaches full production capacity. Failure to reach an agreement on market terms would cancel
the annual contract but not the long-term agreement. Under the terms of the agreement all shipments would be
to Asia and there are no exclusivity rights for Mitsui or commissions included. This contract may be renewed
for additional five year periods, upon the agreement of both parties.
63
Under the terms of a sales contract with Molibdenos y Metales, S.A., SPCC Peru Branch is required to supply
30,800 tons of molybdenum concentrates from 2014 through 2016. This contract may be extended for one
more calendar year during each October to maintain a three year period unless either party decides to
terminate the agreement. The sale price of the molybdenum concentrates is based on the monthly average of
the high and low Metals Week Dealer Oxide quotation. The roasting charge deduction is agreed based on
international market terms.
Under the terms of a sales contract with Molymex, S.A. de C.V., Minera Mexico is required to supply at least
the 85% of its molybdenum concentrates production from 2012 through 2015. The sale price of the
molybdenum concentrate is based on the monthly average of the high and low Metals Week Dealer Oxide
quotation. The roasting charge deduction is negotiated based on international market terms.
Mexican Operations
Power purchase agreement - MGE
MGE, a subsidiary of GMEXICO, has completed the construction of one of the two power plants in Mexico
designed to supply power to some of MGE’s Mexican operations. It is expected that MGE will supply
approximately 12% of its power output to third-party energy users. These plants are natural gas-fired
combined cycle power generating units, with a net total capacity of 516.2 megawatts.
In 2012, SCC signed a power purchase agreement with MGE through 2032. The first plant was completed in
June 2013 and the second in the second quarter of 2014. MGE already has the authorization for the
interconnection with the Mexican electrical system to start operations at the second plant. The first plant
began to supply power to SCC in December 2013, and the second plant is ready to supply once the demand in
the mine requires it.
American Operations:
Operating Leases
Asarco has a non-cancelable operating lease for its corporate offices that expires June 2020. The Company
also rents operating equipment on a short-term basis and has long-term land leases requiring royalty payments
based on production.
SX/EW Capital Lease
SBM leased SX/EW equipment under a capital lease that expired in June 2013. The capital lease agreement
contained a dismantling fee of $5.2 that was included in the capital lease asset and capital lease obligation,
which were expensed over the capital lease term. When the lease expired in June 2013, SBM extended the
lease for one year and treated the lease as an operating lease. In June 2014, SBM entered into a new capital
lease expiring December 2028 with a fixed price purchase option at the end of the lease and no dismantling
fee. In June 2014, the Company recorded a capital lease asset and capital lease obligation of $30.9. The capital
lease asset was reduced by the forgiven dismantling fee obligation of $5.2, resulting in a capital lease asset of
$25.8 at June 2014. The resulting capital lease asset was classified as Machinery and equipment of $6.4 and
Buildings and improvements of $19.3. As of December 31, 2014, accumulated depreciation was $0.6.
64
Minimum future payments under the debt and non-cancelable leases having initial and remaining terms in
excess of one year in the aggregate at December 31, 2014, are as follows:
Capital Lease
Offices
Corporate Total
Future payments required in:
2015
2016
2017
2018
2019
Thereafter
Total payments
$
Less imputed interest
Capital lease obligation
3.4
3.8
3.4
3.3
3.3
32.6
$
0.9
0.9
0.9
1.0
1.0
0.5
$
4.3
4.7
4.3
4.3
4.3
33.1
49.8
$
5.2
$
55.0
(18.5)
$
31.3
Total rental expense was $16.1 and $21.8 for the years ended December 31, 2014 and 2013, respectively, and
is included in Cost of product sales in the Consolidated Statements of Income. Included in total rental
expenses are land royalty payments, contingent rental fees based on production, for $10.5 and $12.1 for the
years ended December 31, 2014 and 2013, respectively. In addition, for the years ended December 31, 2014
and 2013, total SX/EW lease expense was $4.0 and $5.4, respectively.
Letters of Credit, Surety Bonds and Guarantees:
Asarco had outstanding surety bonds totaling $13.5 and $13.8 at December 31, 2014 and 2013, respectively.
These bonds are primarily associated with reclamation and permit obligations of $12.4 at December 31, 2014
and 2013, and other miscellaneous bonds of $1.1 and $1.5 as of December 31, 2014 and 2013, respectively.
The underlying liabilities associated with the above-referenced financial assurances are reflected in the
Consolidated Balance Sheets as asset retirement obligations.
Railway segment
Ferromex and Ferrosur operations are subject to Mexican federal and state laws, and to regulations related to
environmental protection. Under these laws, guidelines have been issued concerning air, soil and water
pollution, and studies have been carried out concerning environmental impact, noise control and hazardous
residues. The Environment and Natural Resources Ministry may impose administrative and criminal sanctions
against companies that breach environmental laws and it has authority to partially or entirely close any
facilities that fail to comply with such regulations.
As of December 31, 2014, there are seven administrative records with Procuraduría Federal de Protección al
Ambiente (PROFEPA) related to material spills, in which minor economic sanctions could be imposed,
remediation actions were carried out. That event did not affect Ferromex financial statements. All rail
accidents with material spills affecting environment that are greater than $50.0 are covered by insurance for
environmental damages.
Under the terms of the concession, the Federal Government has the right to receive payments from Ferromex
and Ferrosur equal to 0.5% of the gross revenue during the first 15 years of the concession and 1.25% during
the remaining years of the concession. For the years ended on December 31, 2014 and 2013, such payments
amounted to $23.9 and $18.7, respectively.
65
Under the terms of the concession, the Port Authority of Coatzacoalcos (APICOA) is entitled to receive from
TTG, a monthly fee per square meter of surface of the Terminal. For the years ended on December 31, 2014
and 2013, such payments amounted to $0.4 and $0.3, respectively.
Ferromex leases the building where its main offices are located, the lease agreement is for ten years beginning
from April 1, 2003. In addition, Ferromex and Ferrosur lease certain equipment, such as hoppers, boxcars,
flatcars and tanker cars.
Commitments for minimum payments under lease agreements for the following years are as follows:
Total
2015
2016
2017
2018
2019 - Thereafter
$
110.2
107.7
91.2
78.6
125.2
Total
$
512.9
Ferromex entered into a fuel purchase agreement with PEMEX, under which Ferromex is required to
purchase, at market value, a minimum of 15,705 meters and a maximum cubic 37,760 meters cubic of diesel
per month, although this limit may be exceeded, without any repercussions, according to the contract of sale
of first-hand petroleum products for consumption concluded between PEMEX Refining and Ferromex which
took effect from September 15, 2011. The contract is valid for four years, renewable for an additional two
years and thereafter renewable each year.
On August 29, 2014 Ferromex signed a purchase agreement of nineteen locomotives EMD brand SD70ACe
model of 4,300 h.p. with Electro-Motive Diesel, Inc. amounting $44.7. The locomotives will be received from
February to May 2015 and will come to increase the Ferromex’s motor power offering better services to
customers.
On January 5, 2001, the Company entered into a diesel fuel contract with PEMEX Refinery for its own
consumption, which establishes a contractual volume in relation to any month that PEMEX Refinery is forced
to sell and Ferrosur to buy, indicating a maximum contract amount and a minimum contract volume by
assigned shipping dock (volume 2,075 cubic meters (m3) minimum and maximum volume 10,500 m3 in
total). The contract is effective from the date above and continues in force for an indefinite term until
terminated by either party at the end of any month upon notice to the other party with at least three months’
notice. On June 29, 2007, the contract was amended and is valid for four years, after which written request
may be made to extend for a term of two years, after which subsequent one-year term renewals may be made.
25.
Contingencies
Mining Segment
Environmental matters
Peruvian and Mexican Operation
SCC has instituted extensive environmental conservation programs at its mining facilities in Peru and Mexico.
SCC’s environmental programs include, among other features, water recovery systems to conserve water and
minimize 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.
66
Environmental capital expenditures in years 2014 and 2013, were as follows:
2014
2013
Peruvian operations
Mexican operations
$
127.0
24.4
$
76.9
39.8
Total
$
151.4
$
116.7
Peruvian operations:
SCC’s operations are subject to applicable Peruvian environmental laws and regulations. The Peruvian
government, through the Environmental Ministry conducts annual audits of SCC’s Peruvian mining and
metallurgical operations. Through these environmental audits, matters related to environmental commitments,
compliance with legal requirements, atmospheric emissions, and effluent monitoring are reviewed. SCC
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 closure and
reclamation. In accordance with the requirements of this law SCC’s closure plans were approved by MINEM.
As part of the closure plans, SCC is providing guarantees to ensure that sufficient funds will be available for
the asset retirement obligation. See Note 14, Asset retirement obligation, for further discussion in this matter.
In 2008, the Peruvian government enacted environmental regulations establishing more stringent air quality
standards (AQS) for daily sulfur dioxide (SO2) concentration for the Peruvian territory.
These regulations, as amended in 2013, recognize distinct zones/areas, as atmospheric basins. As part of these
regulations, MINAM was required to carry-out a 12 month ambient air monitoring period, prior to January 1,
2014, to establish SO2 levels. Those areas with a mean 24-hour SO2 concentration equal or less than 20
micrograms per cubic meter (ug/m3) are required to develop programs to maintain this level of compliance.
Those areas or cities exceeding the mean 24-hour SO2 concentration of 20 ug/m3 will be required to establish
an action plan to address this problem and are required to achieve the 20 ug/m3 AQS in the future. Meanwhile
they are required to achieve mean 24-hour AQS equal to 80 ug/m3 of SO2. MINAM has established three
atmospheric basins that require further attention to comply with 80ug/m3 of SO2. The Ilo basin is one of these
three areas and the Company’s smelter and refinery are part of the area. A supreme decree issued on April 8,
2014, indicates that the Company should review its compliance with these regulations and develop a
modification plan to reach compliance.
The Company is working with an environmental technical study group, established by a MINAM resolution
to identify air quality issues and develop plans to comply with the pertinent regulations.
In 2013, the Peruvian government enacted new soil environmental quality standards (SQS) applicable to any
existing facility or project that generates or could generate risk of soil contamination in its area of operation or
influence. In March 2014, MINAM issued a supreme decree which establishes additional provisions for the
gradual implementation of SQS. Under this rule the Company has twelve months to identify contaminated
sites in and around its facilities and present a report of identified contaminated sites. If such sites exist, the
Company must submit a decontamination plan for approval within 24 months from the date it is notified by
the authority. This decontamination plan shall include remediation actions, a schedule and compliance
deadlines. Also, under this rule, if deemed necessary, the Company may request a one year extension, given
sound justification. Soil confirmation tests must be carried out after completion of decontamination actions
(within the approved schedule) and results must be presented to the authorities within 30 days after receiving
such results. Non-compliance with this obligation or with decontamination goals will carry penalties, although
no specific sanctions have been established yet. During compliance schedule, companies cannot be penalized
for non-compliance with the SQS. In the fourth quarter of 2014, the Company selected the consultant to carry
out soil samplings, studies and other requirements of the rules.
67
Mexican operations:
SCC’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 SCC’s Mexican operations is the Federal General Law of Ecological
Balance and Environmental Protection (the General Law), which is enforced by PROFEPA. PROFEPA
monitors compliance with environmental legislation and enforces Mexican environmental laws, regulations and
official standards. PROFEPA may initiate administrative proceedings against companies that violate
environmental laws, which in the most extreme cases may result in the temporary or permanent closing of noncomplying facilities, the revocation of operating licenses and/or other sanctions or fines. Also, according to the
federal criminal code, PROFEPA must inform corresponding authorities regarding environmental noncompliance.
In January 2011, Article 180 of the General Law was amended. This amendment, gives an individual or
company 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, natural
resources, flora, fauna or human health, because it will be sufficient to argue that the harm may be caused. In
addition in 2011, amendments to the Civil Federal Procedures Code (CFPC) were published in the Official
Gazette and are now in force. These amendments establish three categories of collective actions, by means of
which 30 or more people claiming injury derived from environmental, consumer protection, financial services
and economic competition issues will be considered to be sufficient in order to have a legitimate interest to
seek through a civil procedure restitution or economic compensation or suspension of the activities from
which the alleged injury derived. The amendments to the CFPC may result in more litigation, with plaintiffs
seeking remedies, including suspension of the activities alleged to cause harm.
In June 2013, the Environmental Liability Federal Law was published in the Official Gazette and became
effective one month thereafter. The law establishes general guidelines in order to determine which
environmental actions will be considered to cause environmental harm that will give rise to administrative
responsibilities (remediation or compensations) and criminal responsibilities. Also economic fines could be
established.
On August 6, 2014, an accidental spill of approximately 40,000 cubic meters of copper sulfate solution
occurred at a leaching pond that was under construction ten kilometers away from the mine of BVC a
subsidiary of SCC. The accident was caused by a rock collapse that affected the system’s pumping station and
by a construction defect in the seal of a pipe in the leaching system containment dam, a part of the new SXEW III plant. This solution reached the Bacanuchi River, a branch of the Sonora River. All the immediate
actions were properly taken in order to contain the spill, and to comply with all the legal requirements.
On August 19, 2014, PROFEPA, as part of the administrative proceeding initiated after the spill, announced
the filing of a criminal complaint against BVC and those determined to be responsible for the environmental
damages. The criminal complaint filed by PROFEPA against BVC is in the procedural stages. SCC is
vigorously defending against it. According to the Mexican Environmental Responsibilities Federal Law,
administrative fines and sanctions could go upward to Ps.40.0 million (approximately $3.0). Additional
sanctions or fines may be imposed, including the cost of cleanup and remediation of the polluted sites, as well
as economic compensation to individuals who may have suffered damages as a result of the spill, provided
that direct damages are proven.
On September 15, 2014, BVC, in agreement with the Mexican Federal Government, established a trust of up
to Ps. 2.0 billion pesos (approximately $150.0) to support the remedial efforts that BVC had already
undertaken, to comply with the environmental remediation plan and to pay, as the case may be, material
damages to the riverside residents of the seven counties affected by the spill.
68
In 2014, BVC estimated the contingent liability at $91.4, of which $16.4 had been paid previous to the
establishment of the trust, and approximately Ps.1.0 billion (approximately $74.9) was deposited in the trust.
These funds have been available and have been used to compensate claims as they have arisen. This deposit
was classified as restricted cash and was recorded as an operating expense in the 2014 results. A technical
committee was created to manage the funds, comprised of representatives from the federal government, SCC
and specialists assisted by a team of environmental experts. The trust established by SCC and the
administrative agreement executed with the corresponding Federal authorities, serves as an alternative
mechanism for dispute resolution to mitigate public and private litigation risks.
On November 27, 2014, a remediation program was presented before the Seretaría de Medio Ambiente y
Recursos Naturales (Spanish acronymSEMARNAT), the federal agency of environment and natural
resources, which was approved on January 6, 2015.
On December 31, 2014, PROFEPA initiated an administrative proceeding directly derived from the spill,
which is still in its initial stages. The National Commission for Water (Spanish acronym CONAGUA), and
the Federal Commission for the Protection against Sanitary Risks (Spanish acronym COFEPRIS), have
initiated certain proceedings, not directly linked to the spill, to monitor SCC’s compliance with the applicable
environmental laws. In addition, SCC has been served with three collective action lawsuits seeking damages
for injuries related to the spill, which are in an early procedural stages. For a description of collective actions
in Mexico refer to the 2011 amendments to the CFPC described above. SCC asserts that these lawsuits are
without merit and is vigorously defending against them.
SCC reasonably considers that none of the legal proceedings resulting from the spill, individually or in the
aggregate, would have a material effect on its financial position or results of operations.
SCC believes that all of its facilities in Peru and Mexico are in material compliance with applicable
environmental, mining and other laws and regulations.
SCC also believes that continued compliance with environmental laws of Mexico and Peru will not have a
material adverse effect on SCC’s business, properties, result of operations, financial condition or prospects
and will not result in material capital expenditures.
American operations
Environmental Litigation and Related Matters - In connection with the matters referred to below, Asarco is
working with federal and state agencies to resolve environmental issues. Asarco accrues for losses when such
losses are deemed probable and reasonably estimable. Such accruals are adjusted as new information comes
to Asarco’s attention or circumstances change. These environmental liabilities are not discounted to present
value. Recoveries of environmental remediation and related costs from insurance carriers and other parties are
recorded when realized. Remedial action is being undertaken by Asarco at the following site:
Hayden - The Environmental Protection Agency (EPA) notified Asarco that it was considering listing certain
areas surrounding Asarco’s Hayden Smelter in Hayden, Arizona, on the Federal Superfund’s National
Priorities List (NPL). The basis of the listing was ostensibly that emissions from the smelter have contributed
to elevated levels of metals in soil. Asarco, the EPA and the Arizona Department of Environmental Quality
(ADEQ) entered into negotiations to address environmental conditions at the Hayden site without resorting to
such a listing. The parties participated in extensive negotiations regarding the scope of actions to be taken at
the Hayden site, which resulted in an agreement regarding cleanup of the site. Pursuant thereto, Asarco has
completed work on certain residential yards that the EPA deemed to be a high priority.
69
As required under the approved settlement agreement, Asarco established and funded a $15.0 trust on July 3,
2008, to secure its obligations. The funds in the Hayden trust are to be used to pay for (I) required cleanup of
the residential areas surrounding the smelter and (II) to pay for additional investigative work at the Hayden
site to identify any releases of hazardous substances if any such releases are not otherwise being addressed
under any other regulatory program for cleanup. Under the settlement agreement, Asarco’s liability for
cleanup of the residential areas is limited to $13.5, while there is no cap on Asarco’s liability for the cost of
the required investigation activities of on-site remediation. The residential cleanup is substantially complete
and management believes the funds in the Hayden site trust are adequate to cover the expected investigative
activities. The amounts reserved in Asarco’s consolidated balance sheets as of December 31, 2014 and 2013,
were $0.0 and $2.0, respectively.
On November 10, 2011, the EPA issued Asarco a finding of violation (FOV) stating it believed the Hayden
smelter was a major source of Hazardous Air Pollutants (HAPs). In 2012 Asarco completed an anode
ventilation project at the smelter and is currently evaluating additional smelter upgrades to comply with the
newly implemented sulfur dioxide regulations. Asarco believes that these upgrades will reduce HAPs
emissions to a verifiable degree sufficient to resolve the FOV. Further discussions and negotiations have
continued with the EPA and Department of Justice on this matter through the end of 2014. Asarco has
recorded a contingent liability to cover potential litigation costs in the amount of $1.0 at December 31, 2014
and 2013, respectively.
Litigation matters:
Peruvian operations
Garcia Ataucuri and Others against SCC’s Peruvian Branch:
In April 1996, the Branch was served with a complaint filed in Peru by Mr. Garcia Ataucuri and
approximately 900 former employees seeking the delivery of a substantial number of labor shares (acciones
laborales) plus dividends on such shares, to be issued to each former employee in proportion to their time of
employment with SCC’s Peruvian Branch, pursuant a former Peruvian mandated profit sharing law.
The labor share litigation is based on claims of former employees for ownership of labor shares that the
plaintiffs state that the Branch did not issue during the 1970s until 1979 under the said former Peruvian
mandated profit sharing law. In 1971, the Peruvian government enacted legislation providing that mining
workers would have a 10% participation in the pre-tax profits of their employing enterprises. This
participation was distributed 40% in cash and 60% in an equity interest of the enterprise. In 1978, the equity
portion, which was originally delivered to a mining industry workers’ organization, was set at 5.5% of pre-tax
profits and was delivered, mainly in the form of labor shares to individual workers. The cash portion was set
at 4.0% of pre-tax earnings and was delivered to individual employees also in proportion to their time of
employment with the Branch. In 1992, the workers’ participation was set at 8%, with 100% payable in cash
and the equity participation was eliminated from the law.
In relation to the issuance of labor shares by the Branch in Peru, the Branch is a defendant in the following
lawsuits:
1)
Mr. Garcia Ataucuri seeks delivery, to himself and each of the approximately 900 former employees of
the Peruvian Branch, of the 3,876,380,679.65 old peruvian soles or 38,763,806.80 labor shares (acciones
laborales), as required by Decree Law 22333 (a former profit sharing law), to be issued proportionally to
each former employee in accordance with the time of employment of such employee with SCC’s Branch
in Peru, plus dividends on such shares. The 38,763,806.80 labor shares sought in the complaint, with a
face value of 100.00 old soles each, represent 100% of the labor shares issued by the Branch during the
1970s until 1979 for all of its employees during that period. The plaintiffs do not represent 100% of the
Branch´s eligible employees during that period.
70
It should be noted that the lawsuit refers to a prior Peruvian currency called sol de oro or old soles, which
was later changed to the inti, and then into today´s nuevo sol. Due to past period of high inflation
between 1985 and 1990, one billion of old soles is equivalent to today’s one nuevo sol.
After lengthy proceedings before the civil courts in Peru on September 19, 2001, on appeal from the
Branch, the Peruvian Supreme Court annulled the proceedings noting that the civil courts lacked
jurisdiction and that the matter had to be decided by a labor court (the 2000 appeal).
In October 2007, in a separate proceeding initiated by the plaintiffs, the Peruvian Constitutional Court
nullified the September 19, 2001 Peruvian Supreme Court decision and ordered the Supreme Court to
decide again on the merits of the case accepting or denying the Branch’s 2000 appeal.
In May 2009, the Supreme Court rejected the 2000 appeal of the Branch affirming the adverse decision
of the appellate civil court and lower civil court. While the Supreme Court has ordered SCC’s Peruvian
Branch to deliver the labor shares and dividends, it has clearly stated that SCC’s Peruvian Branch may
prove, by all legal means, its assertion that the labor shares and dividends were distributed to the former
employees in accordance with the profit sharing law then in effect, an assertion which SCC’s Peruvian
Branch continues to make. None of the court decisions state the manner by which the Branch must
comply with the delivery of such labor shares or make a liquidation of the amount to be paid for past
dividends and interest, if any.
On June 9, 2009, SCC’s Peruvian Branch filed a proceeding of relief before a civil court in Peru seeking
the nullity of the 2009 Supreme Court decision and, in a separate proceeding, a request for a
precautionary measure. The civil court rendered a favorable decision on the nullity and the precautionary
measure, suspending the enforcement of the Supreme Court decision, for the reasons indicated above and
other reasons. In February 2012, the Branch was notified that the civil court had reversed its prior
decisions. On appeal by the Peruvian Branch the Superior Court affirmed the lower court’s decisions
regarding the nullity of the 2009 Supreme Court decision and the precautionary measure. As a result, the
nullity of the precautionary measure became final and is not appealable. However, the nullity of the 2009
Supreme Court decision was appealed by the Branch before the Constitutional Court. On April 10, 2014,
the Constitutional Court denied the Company’s appeal and affirmed the lower court’s decision.In view of
this, SCC´s Peruvian Branch continues to analyze the manner in which competent lower court will
enforce the Supreme Court’s decision and its financial impact
2)
In addition, there are filed against SCC’s Branch the following lawsuits, involving approximately 800
plaintiffs, which seek the same number of labor shares as in the Garcia Ataucuri case, plus interest,
labor shares resulting from capital increases and dividends: Armando Cornejo Flores and others v.
SCC’s Peruvian Branch (filed May 10, 2006); Alejandro Zapata Mamani and others v. SCC’s Peruvian
Branch (filed June 27, 2008); Edgardo Garcia Ataucuri, in representation of 216 of SCC’s Peruvian
Branch former workers, v. SCC’s Peruvian Branch (filed May 2011); Juan Guillermo Oporto Carpio v.
SCC’s Peruvian Branch (filed August 2011); Rene Mercado Caballero v. SCC’s Peruvian Branch
(filed November 2011); Enrique Salazar Alvarez and others v. SCC’s Peruvian Branch (filed
December 2011); Jesus Mamani Chura and others v. SCC’s Peruvian Branch (filed March 2012);
Armando Cornejo Flores, in representation of 37 of SCC’s Peruvian Branch former workers v. SCC’s
Peruvian Branch (filed March 2012), Porfirio Ochochoque Mamani and others v. SCC´s Peruvian
Branch (filed July 2012); Alfonso Flores Jimenez and others v. SCC’s Peruvian Branch (filed July
2013) and Micaela Laura Alvarez de Vargas and others v. SCC’s Peruvian Branch (filed August 2013).
SCC’s Peruvian Branch has answered the complaints and denied the validity of the claims.
SCC’s Peruvian Branch asserts that the labor shares were distributed to the former employees in accordance
with the profit sharing law then in effect. The Peruvian Branch has not made a provision for these lawsuits
because it believes that it has meritorious defenses to the claims asserted in the complaints. Additionally, the
amount of this contingency cannot be reasonably estimated by management at this time.
71
The Virgen Maria Mining Concessions of the Tia Maria Mining Project
The Tia Maria project includes various mining concessions, totaling 32,989.64 hectares. One of the
concessions is the Virgen Maria mining concession totaling 943.72 hectares or 2.9% of the total mining
concessions.
Related to the Virgen Maria mining concessions, SCC is party to the following lawsuits:
a)
Exploraciones de Concesiones Metalicas S.A.C. (Excomet): In August 2009, a lawsuit was filed
against SCC’s Branch by the former stockholders of Excomet. The plaintiffs allege that the acquisition
of Excomet’s shares by the Branch is null and void because the $2.0 purchase price paid by the Branch
for the shares of Excomet was not fairly negotiated by the plaintiffs and the Branch. In 2005, the
Branch acquired the shares of Excomet after lengthy negotiations with the plaintiffs, and after the
plaintiffs, which were all the stockholders of Excomet, approved the transaction in a general
stockholders’ meeting. Excomet was at the time owner of the Virgen Maria mining concession. In
October 2011, the civil court dismissed the case on the grounds that the claim had been barred by the
statute of limitations. On appeal by the plaintiffs, the superior court reversed the lower court´s
decision. As of December 31, 2014, the case remains pending resolution without further developments.
b)
Sociedad Minera de Responsabilidad Limitada Virgen Maria de Arequipa (SMRL Virgen Maria): In
August 2010, a lawsuit was filed against SCC’s Branch and others by SMRL Virgen Maria, a company
which until July 2003 owned the mining concession Virgen Maria. SMRL Virgen Maria sold this
mining concession in July 2003 to Excomet (see a) above). The plaintiff alleges that the sale of the
mining concession Virgen Maria to Excomet is null and void because the persons who attended the
shareholders’ meeting of SMRL Virgen Maria, at which the purchase was agreed upon, were not the
real owners of the shares. The plaintiff is also pursuing the nullity of all the subsequent acts regarding
the mining property (acquisition of the shares of Excomet by SCC’s Branch, noted above, and the sale
of this concession to SCC’s Branch by Excomet). In October 2011, the civil court dismissed the case
on the grounds that the claim had been barred by the statute of limitations. Upon appeal by the
plaintiffs, the superior court remanded the proceedings to the lower court, ordering the issuance of a
new decision. On June 25, 2013, the lower court dismissed the case due to procedural defects. Upon
appeal by the plaintiff, on December 2, 2013 the Superior Court reversed the lower court’s decision
due to procedural defects and ordered the issuance of a new resolution. In July 2014, once again the
lower court dismissed the case on the grounds that the claim had barred by the statute of limitations.
The plaintiff appealed this resolution before the Superior Court. As of December 31, 2014, the case
remains pending resolution without further developments.
c)
Omar Nunez Melgar: In May 2011, Mr. Omar Nunez Melgar commenced a lawsuit against the
Peruvian Mining and Metallurgical Institute and MINEM challenging the denial of his request of a
new mining concession that conflicted with SCC’s Branch’s Virgen Maria mining concession. SCC’s
Branch has been made a party to the proceedings as the owner of the Virgen Maria concession. SCC’s
Branch has answered the complaint and denied the validity of the claim. As of December 31, 2014, the
case remains pending resolution without further developments.
SCC asserts that the lawsuits are without merit and is vigorously defending against these lawsuits.
Special Regional Pasto Grande Project (Pasto Grande Project)
In the last quarter of 2012, the Pasto Grande Project, an entity of the Regional Government of Moquegua,
filed a lawsuit against SCC’s Peruvian Branch alleging property rights over a certain area used by the
Peruvian Branch and seeking the demolition of the tailings dam where SCC’s Peruvian Branch has deposited
its tailings from the Toquepala and Cuajone operations since 1995. The Peruvian Branch has had title to use
the area in question since 1960 and has constructed and operated the tailing dams also with proper
governmental authorization, since 1995. SCC’s Peruvian Branch asserts that the lawsuit is without merit and
is vigorously defending against the lawsuit. Upon a motion filed by the Peruvian Branch the lower court has
included the Ministry of Energy and Mines as a defendant in this lawsuit. The Ministry of Energy and Mines
has answered the complaint and denied the validity of the claim. As of December 31, 2014, the case remains
pending resolution without further developments.
72
American operations
Disputed Claims Reserve (DCR):
Certain claims of Asarco’s bankruptcy settlement, which became effective in December 2009, were not
settled on the effective date; therefore, Asarco has provided funds to the Parent’s plan administrator (PPA) for
the ultimate settlement of contingent liabilities that relate to the following:
‒
Administrative claims, of labor unions, medical plan administration fees and other miscellaneous
items;
‒
Enhancement claims, by legal firms, consulting firms and other professionals participating in the
bankruptcy proceedings, and;
‒
Substantial contribution claims, by previous officers, board members and plan participants.
The full face value of claims remaining in the DCR on December 31, 2014, is approximately $12.9. Asarco
has recorded liabilities in the amounts of $6.7 and $18.0 at December 31, 2014 and 2013, respectively,
representing management’s best estimate to ultimately settle and pay these claims.
The PPA has reserved cash in the DCR for future payments of these unsettled administrative general
unsecured claims and any successful remaining administrative claims listed above and related administrative
costs. On December 31, 2014 and 2013, the DCR restricted cash balances were $28.7 and $40.3, respectively.
Any residual cash in the DCR will be returned to Asarco and any deficiency will be funded by Asarco. During
2014 and 2013, various claims and administrative fees were settled and paid in the amount of $11.5 and $4.0,
respectively. As claims continue to be settled Asarco periodically petitions the Bankruptcy Court to have a
portion of the DCR returned, based on the current status of the remaining unsettled claims. In December
2013, based on a court order, the PPA to return to Asarco retorden $8.0 to Asarco from the DCR.
Management believes the remaining amount of restricted cash is sufficient to pay the final disputed claims in
full.
In addition to the above claims, there was a substantial contribution claim by Sterlite (USA), Inc., and Sterlite
Industries (India) Ltd., (collectively, Sterlite) in the amount of $56.2 that was denied by the Bankruptcy Court
in 2011. Asarco also filed a claim against Sterlite related to the breach of an asset purchase agreement to
acquire assets of Asarco. In February 2012, the Bankruptcy Court entered judgment in favor of Asarco in the
net amount of $82.8 related to the breach of an asset purchase agreement. The $82.8 Asarco was awarded
includes $102.8 in interest damages, $30.0 in additional professional fees, less $50.0 representing a letter of
credit Sterlite posted as security, which was previously drawn by Asarco in November 2009. In October of
2014, the Company received a final cash settlement from Sterlite related to this judgment, in the amount of
$65.9, net of $16.9 in legal fees, which is reflected in general expenses on the statement of income.
Labor matters:
In recent years SCC has experienced a positive labor environment in its operations in Mexico and Peru which is
allowing an increase productivity as well as helping to achieving the goals of its capital expansion program.
Peruvian operations
Approximately 69% of the Company’s 4,524 Peruvian employees were unionized at December 31, 2014.
There are seven separate unions, three of them at each major production area that represent the majority of the
SCC´s workers; and four smaller unions that represent the balance of workers. SCC conducted negotiations
with the unions whose collective bargaining agreements expired in 2012. In 2013, SCC signed three-year
agreements with all the unions. The agreements included, among other things, annual salary increases of 6.5%
for first year and 5% for the second and third year.
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Mexican operations
In recent years, the Mexican operations have experienced a positive improvement of their labor environment, as
its workers, opted to change their affiliation from the Sindicato Nacional de Trabajadores Mineros, Metalurgicos
y Similares de la Republica Mexicana (National Union of Mine and Metal Workers and Similar Activities of the
Mexican Republic or the National Mining Union) led by Napoleon Gomez Urrutia to other less politicized
unions.
The workers of the San Martin and Taxco mines, however, are still under the National Mining Union, have been
on strike since July 2007. On December 10, 2009, a federal court confirmed the legality of the San Martin strike.
In order to recover the control of the San Martin mine and resume operations, on January 27, 2011, SCC filed a
court petition requesting that the court, among other things define the termination payment for each unionized
worker. The court denied the petition alleging that, according to federal labor law, the union was the only
legitimate party to file such petition. On appeal by SCC, on May 13, 2011, the Mexican federal tribunal accepted
the petition. In July 2011, the National Mining Union appealed the favorable court decision before the Supreme
Court. On November 7, 2012, the Supreme Court affirmed the decision of the federal tribunal. SCC filed a new
proceeding before the labor court on the basis of the Supreme Court decision, which recognized the right of the
labor court to define responsibility for the strike and the termination payment for each unionized worker. A
favorable decision of the labor court in this new proceeding would have the effect of terminating the protracted
strike at San Martin. As of December 31, 2014, the case remains pending resolution without further
developments.
In the case of the Taxco mine, following the workers refusal to allow exploration of new reserves, SCC
commenced litigation seeking to terminate the labor relationship with workers of the Taxco mine (including the
related collective bargaining agreement). On September 1, 2010, the federal labor court issued a ruling
approving the termination of the collective bargaining agreement and all the individual labor contracts of the
workers affiliated with the Mexican mining union at the Taxco mine. The mining union appealed the labor court
ruling before a federal court. In September 2011, the federal court accepted the union’s appeal and requested that
the federal labor court review the procedure. After several legal proceedings on January 25, 2013, SCC filed a
new proceeding before the labor court. On June 16, 2014 the labor court denied the petition of the SCC. The
resolution issued by the labor court was challenged by the Company before a federal court. Considering the
above decision of the Supreme Court, there could be grounds for a favorable decision to end the protracted strike
at the Taxco Unit. As of December 31, 2014, the resolution of this case remains pending.
It is expected that operations at these mines will remain suspended until these labor issues are resolved.
In view of these lengthy strikes, SCC has reviewed the carrying value of the San Martin and Taxco mines to
ascertain whether impairment exists. SCC concluded that there is a non-material impairment of the assets located
at these mines.
Other legal matters:
SCC
SCC is involved in various other legal proceedings incidental to its operations, but SCC 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.
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Asarco
Asarco is a defendant in lawsuits in Arizona, the earliest of which commenced in 1975, involving the United
States, Native Americans and other Arizona water users. These suits seek damages for usage and alleged
contamination of ground water. The lawsuits could affect Asarco’s use of water at its Ray Complex, Mission
Complex and other Arizona operations. Asarco is also involved in multiple suits and claims against it arising
from such matters as workers’ compensation claims and employment-related claims, among other matters.
Management has analyzed the issues and has accrued approximately $9.3 and $6.3 to settle these additional
litigation matters as of December 31, 2014 and 2013, respectively.
Corporate and railway segment
Grupo Aeroportuario del Pacífico, S.A.B. de C.V. (GAP)
On June 13, 2011, GMéxico announced that its Board of Directors had approved the (direct or indirect)
acquisition of over 30% and up to 100% of the outstanding shares of Grupo Aeroportuario del Pacífico, S. A.
B. de C. V. (GAP), excluding treasury shares, and that in regard to any such transaction GMéxico would have
to make a mandatory public offering (OPA) for up to 100% of the outstanding shares of GAP, in accordance
with the Mexican Securities Law and other applicable laws. GMéxico and ITM (the Reporting Parties)
requested the CNBV authorization for an OPA. GAP and related parties filed certain lawsuits in Mexico and
obtained a suspension of such public offering.
The Reporting Parties appealed the ruling requesting the suspension of the CNBV’s authorization and on May
29, 2012, the Reporting Parties announced that they would not request the CNBV’s authorization for the
OPA, which had been scheduled for June 13, 2011.
On April 16, 2013, GMéxico provided a letter to certain holders of ADS and Shares (the Stockholders’ Letter
dated April 16), requesting a favorable vote on all the proposals included on the Agenda of GAP’s Annual
Ordinary General Stocholders’ Meeting to be held on April 23, 2013 (the Stockholders’ Meeting held on
April 23). The Stockholders’ Meeting held on April 23 was called by GMéxico, which also suggested all the
proposals included in the agenda of such meeting. The Stockholders’ Letter dated April 16 had several
proposals, including one whereby the bylaws that GMéxico believes to be inconsistent with applicable
Mexican laws would no longer be mandatory, such as those designed to: (i) limit the ability of a stockholder
other than Aeropuertos Mexicanos del Pacífico, S. A. de C. V. (AMP), GAP’s majority stockholder, to own
more than 10% of all outstanding shares; (ii) limit the exercise of voting rights for shares exceeding 10% of
all shares outstanding of GAP, and (iii) which exclude any individual other than AMP from seeking a change
in control over GAP. During the Stockholders’ Meeting held on April 23, GMéxico also asked GAP
stockholders to approve the designation of an independent stockholder representative to perform an
investigation to determine whether certain GAP directors and senior officers had been involved in illegal
actions to the detriment of GAP, which may result in a liability for such directors and officers of GAP and its
minority stockholders. Similarly, on December 3, 2013, and based on opinions issued by various experts,
GMéxico called another Stockholders’ Meeting whose most significant proposal was to seek the termination
of the Technical Assistance and Technology Transfer Agreement. GMéxico held and intends to continue to
hold discussions with GAP management, directors, other stockholders and third parties in regard to this and
other matters previously discussed.
GMéxico has obtained favorable rulings at trial and appellate levels in relation to the proceeding for
annulment filed against GAP, which declares that the bylaws limiting shareholding to 10% of GAP’s common
stock are invalid and illegal. The investigation and ruling of this matter has been filed with the First Court of
the Mexican Supreme Court, which may issue a final ruling.
Through joint actions or legal procedures, the Reporting Parties may at any time continue to seek the
amendment of GAP’s bylaws and the designation of the number of members of GAP’s Board of Directors
they believe they are entitled to, based on their proportional equity in the company. In 2014, the matter was
filed with the Mexican Supreme Court, where it is currently being resolved.
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The Reporting Parties continue exploring the possibility of additional investments in GAP, in conformity with
applicable Mexican and US laws, but have not made a decision regarding the number of shares they intend to
acquire in such transaction, how it will be performed or the related term.
The Reporting Parties may, from time to time, acquire or sell GAP shares in the Mexican or New York Stock
Exchange, publicly, privately or in any other manner, or propose changes to GAP’s Board of Directors and, as
determined by the Reporting Parties based on the evolution of GAP’s businesses and prospects, share and
ADS prices, conditions in financial and securities markets and in the industry and general economy of GAP,
applicable regulatory developments and other relevant factors.
Similarly, the Reporting Parties may, from time to time, hold discussions with GAP management, relevant
directors and other stockholders and third parties regarding their investments, the business and its strategy.
Other contingencies:
Railway segment
Negotiations being conducted with another Mexican railroad company.
Ferromex’s owed net receivables by Kansas City Southern México, S. A. de C. V. (KCSM) formerly TFM, S.
A. de C. V. (TFM) accrued from 1998 to January 2010 and negotiations are currently being conducted to
determine the amounts receivable by segment (interline services and trackage and haulage rights) that are not
clearly defined in the concession titles. As of December 31, 2014, the net receivable balance accrued over the
period from 1998 to January 2010 amounts to $23.3. As of December 31, 2014 Ferromex considers that these
amounts have been properly assessed and therefore no additional contingencies have been recorded in order to
take into account any contingent positive or negative results ensuing from the negotiations and legal
proceedings specified below.
Legal actions and administrative proceedings
Ferromex is involved in various legal actions deriving from its normal operations. In regard to these actions,
Ferromex and its legal counsel are of the opinion that regardless of their outcome when taken as a whole, they
would have no material adverse effect on the Company´s financial condition or on the results of its
operations. The main legal actions in which the Ferromex is involved are the following:
a.
Ordinary commercial actions against KCSM.
i.
For the period running from February 19, 1998 to August 31, 2001, the amounts claimed at the
time action was filed (nominal value) were for a total of Ps.792.7 and $20.6. After being
processed at all court levels, Ferromex was denied constitutional relief under a writ of amparo,
although its right to sue again was safeguarded. Since due to the judgment rendered on
February 3, 2005, Ferromex’s right to sue again was safeguarded, it should be underscored that
Ferromex is still entitled to recover the relevant amounts and therefore, these will be claimed
once the Ministry of Communications and Transportation (Spanish acronym SCT) issues the
new official communication whereby the compensation to be paid by concessionaires will be
determined.
ii.
On September 19, 2006, Ferromex filed an ordinary commercial action against KCSM, seeking
that accounts be rendered for the period running from January 2002 to December 2004, and
claiming payment for the resulting amounts. After all motions and proceedings came to a close,
the action filed by Ferromex was dismissed, and Ferromex was ordered to pay legal costs and
expenses at both jurisdictional levels. This court order has not yet been enforced. At present
Ferromex is awaiting for the official communication from the SCT regarding payment of
compensation so as to determine the legal action that should be taken.
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Actions for annulment against several official communications issued by SCT on trackage rights, and
interconnection and terminal services. Currently three of these actions are being processed before the
Federal Court of Administrative and Fiscal Justice (Spanish acronym TFJFA), the Supreme Court of
Justice, the Collegiate Courts and the SCT. Currently the Entity is awaiting the relevant resolutions.
Inquiry into Monopolistic Practices IO-02-2006.- By means of official communication No.
DGIPMARCI-10-096-2008-001 dated January 14, 2008, COFECO requested that ITM, GFM,
Ferromex, ITF, Ferrosur and other companies submit sundry information, which Ferromex submitted
on February 28, 2008. COFECO served Notices of Probable Responsibility to the companies which
had participated in the stock acquisitions reported by ITM and ITF from November 2005 onwards. On
January 22, 2009, a ruling was issued in this inquiry proceeding. On January 30, 2009, COFECO
notified Ferromex of its ruling, finding that the Company together with other companies were
responsible for monopolistic practices and imposed monetary sanctions, the one imposed on Ferromex
amounting to $82.2 and GFM to $0.7. The entities subject to this inquiry appealed for reconsideration.
By ruling issued on June 9, 2009, COFECO decided to uphold its ruling of January 22, 2009. This
decision was challenged by an amparo action (Case File 887/2009). After several motions and actions
at the different jurisdictional levels, by means of a ruling published on July 13, 2011, the Thirteenth
Collegiate Circuit Court in Administrative Matters (13° TCC) took cognizance of the review motion
under case file number: R.A. 262/2011. In addition, the case was also sent to the Supreme Court for it
to give consideration to the matters set forth in the constitutional relief action filed regarding the
unconstitutionality of section I of article 9 of the Federal Economic Competition Law (FLEC) under
case file. R.A. 393/2012. This matter was resolved at the session held on October 17, 2012, where the
only pronouncement of the Supreme Court dealt with the unconstitutionality of section I of article 9 of
the FLEC and denied constitutional relief under the amparo, while upholding the jurisdictional control
over the matter of 13° TCC, which will have to take cognizance of the matters regarding the legality or
illegality of the judgment being challenged. On September 30, 2013 Ferromex was served notice of the
judgment rendered in case file of the amparo action for constitutional relief under review number R.A.
262/2011, by which relief under the amparo was granted in order to reverse the resolution issued on
June 9, 2009 by COFECO, under the appeal for reconsideration R.A. 08/2009 and all joined actions,
ordering retrial as specified for another ruling to be rendered to cure the violations as set forth in the
ruling of the Court. With respect to the amparo whereby relief was denied, it dealt with the
replacement due to the absence of, and delegation of authority by, the defendant governmental party.
By a ruling issued on October 10, 2013, receipt was acknowledged of official communication filed by
the Head Counsel of COFECO remitting the resolution issued on October 8, 2013 regarding RA-082008 by the Plenum of COFECO, by which the judgment in the amparo action was executed under the
following terms: (i)to annul the resolution issued in said case file on June 9, 2009; (ii)to reverse the
challenged resolution issued in case file IO-002-2006; and (iii) to close case file IO-002-2006 and all
joinders, since there are not sufficient elements to file action for liability against claimants.
b.
Indirect Litigation. These are actions in which Company is a codefendant by virtue of labor actions
filed against Ferrocarriles Nacionales de México (FNM), which due to their particular characteristics
cannot be quantified. Nevertheless any financial impact they may have has to be absorbed by the entity
in charge of the liquidation of FNM or by the Mexican Federal Government, under terms previously
agreed upon.
c.
Direct Litigation. These are labor-related actions filed against The Company as defendant. The amount
of the entry recorded would have to be settled in the event the actions are lost and should there be no
possibility of reaching a settlement. The amounts of the indemnities paid during 2014 and 2013 on
labor-related actions were $1.1 and $1.6, respectively.
As of December 31, 2013 the Company believes that it has adequately valued accounts receivable and
payable and, therefore, did not create a further estimate to cover a possible differential in favor or against that
resulted from the negotiations and judgments mentioned above.
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Tax contingency matters
Tax contingencies are provided for under ASC 740 - 10 - 50 - 15 Uncertain tax position (see Note 19 Income
taxes).
Other
The Company is involved in several lawsuits related to its operations, but it believes that any adverse legal
rulings, whether jointly or individually, will not have a material effect on its financial position or operating
results. Similarly, the Company does not believe that the result of lawsuits derived from alleged joint actions
will have a material adverse effect on its financial position or operating results.
Even though the defendants, including GMéxico and its affiliates, believe that there are no grounds to the
allegations in the joint action lawsuits, the Company cannot confirm whether these or future lawsuits, if
successful, will not have a negative effect on GMéxico.
26.
Subsequent events
On January 29, 2015 the Board of Directors approved an increase in the share repurchase program to $2
billion from $3 billion.
During 2015 the Board of Directors of the Company approved a dividend in accordance with the resolutions
take at Ordinary Stockholders’ Meeting held on January 30, 2015, whereby a Ps.0.26 per share dividend was
paid on February 18, 2015.
On April 20, 2015, SCC issued $2.0 billion of fixed-rate senior unsecured notes. This debt was issued in two
tranches, $500.0 due 2025 at an annual interest rate of 3.875% and $1.5 billion due 2045 at an annual interest
rate of 5.875%. These notes will be general unsecured obligations of SCC and will rank equally with all of its
existing and future unsecured and unsubordinated debt. Net proceeds will be used for general corporate
purposes, including the financing of SCC´s capital expenditure program.
The Company evaluated subsequent events after December 31, 2014 and through April 20, 2015, the date
these consolidated financial statements were available for issuance, and determined any events or transactions
occurring during this period that would require recognition or disclosure are appropriately addressed in these
consolidated financial statements.
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