SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
1996
Third Quarter
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1996 Commission file number 1-14066
------------------ -------
SOUTHERN PERU COPPER CORPORATION
(formerly known as Southern Peru Copper Holding Company)
(Exact name of registrant as specified in its charter)
Delaware 13-3849074
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
180 Maiden Lane, New York, N.Y. 10038
------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 212-510-2000
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of September 30, 1996 there were outstanding 13,633,474 shares of Southern
Peru Copper Corporation common stock, par value $0.01 per share. There were also
outstanding 66,550,833 shares of Southern Peru Copper Corporation class A common
stock, par value $0.01 per share.
<PAGE>
SOUTHERN PERU COPPER CORPORATION
AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information:
Item 1. Financial Statements (unaudited)
Consolidated Statement of Earnings
Three Months and Nine Months Ended
September 30, 1996 and 1995 2
Consolidated Balance Sheet
September 30, 1996 and December 31, 1995 3
Consolidated Statement of Cash Flows
Three Months and Nine Months Ended
September 30, 1996 and 1995 4
Notes to Consolidated Financial Statements 5-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9-13
Report of Independent Accountants 14
Part II. Other Information:
Signatures 15
Exhibit I - Independent Accountants' Awareness Letter
</TABLE>
1
<PAGE>
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales:
Stockholders and affiliates $ 18,446 $ 26,050 $ 49,694 $ 57,864
Others 162,054 244,525 500,383 629,626
-------- -------- -------- --------
Total net sales 180,500 270,575 550,077 687,490
-------- -------- -------- --------
Operating costs and expenses:
Cost of sales 99,868 130,375 276,723 332,330
Administrative and other expenses 11,622 12,228 35,876 38,321
Depreciation, amortization and depletion 10,634 5,888 31,304 27,361
Provision for workers' participation 3,480 9,162 13,925 23,080
Exploration expense 832 279 1,979 1,193
--------- --------- --------- ---------
Total operating costs and expenses 126,436 157,932 359,807 422,285
--------- --------- --------- ---------
Operating income 54,064 112,643 190,270 265,205
Interest income 3,999 2,626 15,069 8,636
Other income 3,003 1,262 7,858 6,894
Interest expense (3,248) (4,732) (9,585) (10,520)
--------- --------- --------- ---------
Earnings before taxes on income and minority
interest of labor shares 57,818 111,799 203,612 270,215
Taxes on income 19,085 36,915 67,178 89,224
--------- --------- --------- ---------
Earnings before minority interest 38,733 74,884 136,434 180,991
of labor shares
Minority interest of labor shares 853 12,741 4,217 31,624
--------- --------- --------- ---------
Net earnings $ 37,880 $ 62,143 $ 132,217 $ 149,367
========= ========= ========= =========
Per common share amounts:
Net earnings (a) $ 0.47 $ 0.95 $ 1.65 $ 2.27
Dividends paid $ 0.28 $ 0.33 $ 1.23 $ 0.85
Weighted average number of shares outstanding 80,184 65,717 80,198 65,717
</TABLE>
(a) The effect on the net earnings per common share of the Company's Common
Stock equivalents (shares under option) was insignificant.
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 217,618 $ 219,646
Marketable securities 1,000 42,453
Accounts receivable:
Trade:
Stockholders and affiliates 4,863 8,732
Other trade 58,274 80,100
Other 13,742 11,631
Inventories 108,206 103,635
Other current assets 16,124 16,648
---------- ----------
Total current assets 419,827 482,845
Property 1,714,569 1,630,517
Accumulated depreciation, amortization and depletion (870,360) (851,149)
Other assets 20,775 9,488
---------- ----------
Total Assets $1,284,811 $1,271,701
========== ==========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 27,017 $ 17,034
Accounts payable - trade 29,988 32,889
Accounts payable - other 7,406 8,056
Accrued liabilities 61,802 112,390
---------- ----------
Total current liabilities 126,213 170,369
---------- ----------
Long-term debt 99,527 76,828
Accrued severance pay 4,572 6,354
Deferred income taxes 45,720 39,677
---------- ----------
Total non-current liabilities 149,819 122,859
---------- ----------
Minority interest of labor shares 22,792 24,986
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01(a) 137 115
Class A common stock, par value $0.01(b) 666 688
Additional paid-in capital 265,745 265,738
Retained earnings 720,222 686,946
Treasury stock at cost, 47 common shares (783) -
---------- ----------
Total stockholders' equity 985,987 953,487
---------- ----------
Total Liabilities, Minority Interest and Stockholders' Equity $1,284,811 $1,271,701
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Authorized Outstanding
<S> <C> <C> <C>
(a) Common shares 31,249 13,633 11,480
(b) Class A common shares 68,751 66,551 68,751
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $37,880 $62,143 $132,217 $149,367
Adjustments to reconcile net earnings to net cash provided from
operating activities:
Depreciation, amortization and depletion 10,634 5,888 31,304 27,361
Deferred income taxes 4,567 1,146 6,783 1,552
Minority interest of labor shares, net of distributions 40 12,741 701 31,624
(Gains) losses from sales and dispositions of assets (1) 133 285 (1,158)
Cash provided from (used for) operating assets and liabilities:
Accounts receivable (14,294) (41,185) 23,341 (10,501)
Inventories 259 29,349 (4,571) 12,290
Accounts payable and accrued liabilities 12,194 13,259 (40,704) 1,064
Other operating liabilities and reserves 10,782 7,387 (10,159) 8,549
Other operating assets (5,838) 5,110 (1,970) 2,751
Foreign currency translation gain (1,748) (156) (4,176) (1,565)
------ -------- ------- -------
Net cash provided from operating activities 54,475 95,815 133,051 221,334
------ -------- ------- -------
INVESTING ACTIVITIES
Capital expenditures (42,260) (51,732) (94,191) (159,475)
Purchase of held to maturity investments (1,000) - (1,000) (33,880)
Transfer of cash from restricted account - 917 - 60,450
Proceeds from maturity of investments - 16,927 42,453 76,877
Proceeds from the sale of investments - - - 856
Other net - - - 1,195
------- -------- ------- -------
Net cash used for investing activities (43,260) (33,888) (52,738) (53,977)
------- -------- ------- -------
FINANCING ACTIVITIES
Dividends paid (22,465) (21,435) (98,669) (55,747)
Proceeds from borrowings - 47,000 47,000 62,000
Repayment of borrowings (5,789) (77,573) (14,320) (78,677)
Escrow deposits on long-term loans 87 11,550 (10,065) 11,550
Proceeds from labor share subscription - - - 10,944
Treasury stock and labor share purchases (3,417) - (7,253) -
------- -------- ------- -------
Net cash used for financing activities (31,584) (40,458) (83,307) (49,930)
------- -------- ------- -------
Effect of exchange rate changes on cash 250 (622) 966 (1,030)
------- ------- ------ -------
Increase (decrease) in cash and cash equivalents (20,119) 20,847 (2,028) 116,397
Cash and cash equivalents, beginning of period 237,737 188,886 219,646 93,336
-------- -------- -------- --------
Cash and cash equivalents, end of period $217,618 $209,733 $217,618 $209,733
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SOUTHERN PERU COPPER CORPORATION
and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Interim Financial Statements:
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the Company's financial position as of
September 30, 1996 and the results of operations and cash flows for the three
and nine months ended September 30, 1996 and 1995. This financial data has been
subjected to a limited review by Coopers & Lybrand L.L.P., the Company's
independent accountants. The results of operations for the nine month period are
not necessarily indicative of the results to be expected for the full year. The
accompanying consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's 1995 annual report on Form 10-K.
2. Inventories:
<TABLE>
<CAPTION>
Inventories consists of: September 30, December 31,
1996 1995
(in millions)
<S> <C> <C>
Metals:
Finished goods $ 1.6 $ 2.0
Work-in-process 36.0 33.1
Supplies, net of reserves 70.6 68.5
------ -------
Total inventories $108.2 $103.6
====== ======
</TABLE>
3. Metal Hedging and Trading Activity:
Hedging: Depending on the market fundamentals of a metal and other conditions,
the Company may purchase put options to reduce or eliminate the risk of metal
price declines below the option strike price on its anticipated future
production. Put options purchased by the Company establish a minimum sales price
for the production covered by such put options and permit the Company to
participate in price increases above the option price.
Depending upon market conditions the Company may either sell put options it
holds or exercise the options at maturity. Gains or losses, net of unamortized
acquisition costs, are recognized in the period in which the underlying hedged
production is sold. Third quarter results include a pre-tax gain of $4.4 million
from the sale or exercise of copper put options held by the Company with respect
to copper sales in the period. Results for the nine months include a pre-tax
gain of $5.2 million from the sale or exercise of copper put options held by the
Company with respect to copper sales in the nine month period.
The table below details copper put options purchased and held by the Company at
September 30, 1996:
Copper Put Options at September 30,1996
(in millions, except per lb. amounts)
<TABLE>
<CAPTION>
Percent of
Option Strike Price Unamortized Estimated
Lbs. Period Per lb. Cost Sales
---- ------ ------- ---- -----
<S> <C> <C> <C> <C>
38.7 10/96 - 12/96 $ 0.95 $ 0.6 25%
41.3 1/97 - 3/97 $ 0.95 0.4 26%
---- -----
80.0 $ 1.0
==== =====
</TABLE>
5
<PAGE>
In October, SPCC sold or exercised additional copper put options covering 38.7
million pounds of fourth quarter 1996 copper sales with an average strike price
of $0.95. The total pre-tax gain from the October option activity was $1.7
million.
The Company's pre-tax gain from 1996 copper option sales and exercises through
October 31, 1996 is $15.7 million. Of that amount $10.6 million remains to be
recognized, $5.9 million in the fourth quarter of 1996 and $4.7 million in the
first quarter of 1997.
The pre-tax earnings effect, in millions, of the company's copper hedging
activities, net of transaction costs, were as follows.
<TABLE>
<CAPTION>
(in millions) Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Hedging activities $4.4 $(1.1) $4.1 $(1.1)
</TABLE>
4. Common Stock:
The stockholders of the Company at September 30, 1996 were:
<TABLE>
<CAPTION>
Percent of Total
Outstanding Number of
Shares Shares
<S> <C> <C>
Class A Common Shares:
ASARCO Incorporated 43,348,949 54.06%
Cerro Trading Company, Inc. 12,028,088 15.00
Phelps Dodge Overseas Capital Corporation 11,173,796 13.94
---------- ------
66,550,833 83.00%
Common Shares 13,633,474 17.00%
---------- ------
80,184,307 100.00%
========== ======
</TABLE>
On October 30, 1996, the Company declared a $0.24 per share dividend payable
December 2, 1996 to stockholders of record at the close of business on November
14, 1996.
5. Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
(in millions) Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash paid for:
Interest expense (net of amount capitalized) $ 2.9 $ 3.1 $ 7.6 $ 10.4
Income taxes (net of refunds) $19.5 $17.4 $105.9 $ 57.4
</TABLE>
6. Proforma 1995 earnings information:
In November 1995, the Company offered to exchange new common shares for labor
shares issued by the Peruvian Branch to workers under prior law in Peru (the
Exchange Offer). The labor shares, which are traded on the Lima Stock Exchange,
represented a 17.3% interest in the Peruvian Branch, which comprises
substantially all of the operations of the Company in Peru. The offer ended on
December 29, 1995 with 80.8% of the labor shares tendered. The Company,
effectively now owns 97.1% of the Peruvian Branch.
6
<PAGE>
The following shows comparative annotated proforma 1995 earnings information as
if the Exchange Offer was completed January 1, 1995.
<TABLE>
<CAPTION>
(in millions, except for per share data) Three Months Ended Nine Months Ended
September 30,1995 September 30, 1995
Historical Proforma Historical Proforma
<S> <C> <C> <C> <C>
Net sales $270.6 $270.6 $687.5 $687.5
Earnings before taxes on income and minority
interest of labor shares 111.8 111.2(a) 270.2 268.6(a)
Taxes on income 36.9 36.7(b) 89.2 88.7(b)
Earnings before minority interest of labor
shares 74.9 74.5 181.0 179.9
Minority interest of labor shares in
Peruvian Branch 12.8 2.2(c) 31.6 5.8(c)
Net earnings $62.1 $72.3 $149.4 $174.1
Weighted average number of shares outstanding 65.7 80.2 65.7 80.2
Net earnings per share $0.95 $0.90 $2.27 $2.17
Cash dividend paid per share $0.33 $0.27 $0.85 $0.70
</TABLE>
Proforma Effects
(a) The market value of the common stock issued for labor shares tendered
pursuant to the Exchange Offer was in excess of the book value of the
minority interest of such labor shares. This excess was assigned to
mineral reserves and mineralized material. Proforma earnings reflect
the amortization of the excess based on a ratio of actual copper
production in the period to the total copper contained in the mineral
reserves and the mineralized material.
(b) Reflects the amortization of the deferred income taxes on the excess of
the market value of common stock issued for labor shares tendered
pursuant to the Exchange Offer over the book value of the minority
interest of such labor shares. The amortization of the deferred taxes
is calculated on the same basis as described in footnote (a) above.
(c) Reflects the reduction of the minority interest of the labor shares
tendered pursuant to the Exchange offer.
7. Commitments and contingencies:
On February 26, 1993, the Mayor of Tacna brought a lawsuit against Southern Peru
Limited (SP Limited), a wholly owned subsidiary of the Company, seeking $100
million in damages from alleged harmful deposition of tailings, slag and smelter
emissions. On May 3, 1996, the Superior Court of Tacna, Peru affirmed the lower
court's dismissal. There is generally no further right of appeal, however, the
Peruvian Supreme Court may grant discretionary review on limited issues in
exceptional cases.
On April 29, 1996, SP Limited, was served with a complaint filed in Peru by
approximately 800 former employees challenging the accounting of its
subsidiary's Peruvian Branch and its allocation of financial results to the
Mining Community, the former legal entity representing workers in Peruvian
mining companies, in the 1970's. The complaint seeks the delivery of a
substantial number of labor shares of the Peruvian Branch of the subsidiary plus
dividends and contains similar allegations made in a prior lawsuit dismissed in
September 1995.
7
<PAGE>
As reported on Form 10-K for 1995, SP Limited, ASARCO Incorporated, other
present and former corporate shareholders of the subsidiary of the Company and
certain other companies are defendants in a lawsuit in federal district court in
Corpus Christi, Texas brought in September 1995 by 698 Peruvian plaintiffs
seeking damages for personal injury and property damage allegedly caused by the
operations of the subsidiary in Peru. Plaintiffs have filed a notice of appeal
from the district court order dismissing the complaint and from an earlier order
of that court denying plaintiffs' motion to remand the case to state court.
The Company's exploration, mining, milling, smelting and refining activities are
subject to Peruvian laws and regulations, including environmental laws and
regulations, which change from time to time. The Company has submitted an
environmental compliance program to the Government of Peru (the "PAMA"). The
PAMA would require the Company to make significant additional capital
expenditures to achieve compliance with current Peruvian environmental
requirements within a period of five years except for environmental controls
applicable to its smelter operations, which must be put in place within ten
years. Once the PAMA is approved by the government, compliance with the PAMA
will satisfy all environmental requirements pertaining to the Company's
operations throughout the applicable five or ten year period.
It is the opinion of management that the outcome of the legal proceedings
mentioned, as well as the other miscellaneous litigation and proceedings now
pending, will not materially adversely affect the financial position or results
of operations of the Company and its consolidated subsidiaries. However, it is
possible that litigation and environmental contingencies could have a material
effect on quarterly or annual operating results, when they are resolved in
future periods.
8. Impact of new accounting standards:
Impact of New Accounting Standards: The Financial Accounting Standards Board
issued SFAS No. 123 "Accounting for Stock-Based Compensation" in October 1995.
In accordance with this pronouncement, the Company has a choice of adopting the
accounting provisions of SFAS No. l23 or continuing its current accounting with
additional disclosure required. The Company has elected the disclosure only
alternative and will continue its current accounting.
The American Institute of Certified Public Accountants issued Statement of
Position 96-1, "Environmental Remediation Liabilities" ("SOP 96-1") in October
1996. SOP 96-1 provides authoritative guidance on specific accounting issues in
connection with recognizing, measuring and disclosing environmental cleanup
liabilities. The Company is currently assessing the impact of this statement,
which is effective for fiscal years beginning after December 15, 1996.
8
<PAGE>
Part I Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reported net earnings of $37.9 million, or $0.47 per share, for the
third quarter ended September 30, 1996 compared with net earnings of $62.1
million, or $0.95 per share, for the third quarter ended September 30, 1995. For
the nine month period ended September 30, 1996, the Company reported net income
of $132.2 million, or $1.65 per share, compared with net income of $149.4
million or $2.27 per share in the comparable 1995 period.
The Company's earnings in the third quarter of 1996 and the nine months ended
September 30, 1996 were significantly reduced by the decline in the copper price
from the comparable 1995 periods. The decline in earnings due to lower copper
prices was somewhat offset by increased production and lower production costs.
Sales of copper produced from the Company's mines, including the new solvent
extraction/electrowinning (SX/EW) facility increased significantly in the third
quarter of 1996 and the nine months ended September 30, 1996, when compared to
the comparable 1995 periods. Net earnings for the third quarter of 1996 and the
nine month period ended September 30, 1996 reflect a reduction in the minority
interest of labor shares in the Company's Peruvian Branch. An exchange of labor
shares for common shares was completed in the fourth quarter of 1995 and reduced
the interest of labor shares from 17.3% to 3.3%. The exchange offer increased
the number of common shares outstanding to 80.2 million from 65.7 million.
The Company's copper mine production in the third quarter of 1996 was 169.9
million pounds, an increase of 23% over the year ago period. The increase was
attributable to higher ore grades at the Cuajone mine and 24.4 million pounds of
refined copper produced from the Company's new SX/EW plant, which commenced
operations in the fourth quarter of 1995.
In September 1996, the Company announced that its board of directors approved
the expansion of the Cuajone copper mine and commencement of engineering studies
for the modernization of its copper smelter at Ilo. Commencement of the
expansion project will begin once financing has been arranged. The Cuajone mine
expansion represents the first stage of a multi-year programmed expansion which
will expand Cuajone mine annual copper production by 65,000 tons. Engineering
for the second stage of the program, the modernization of the Ilo smelter, will
begin immediately. Following completion of the preliminary engineering and
securing of financing, SPCC plans to modernize its existing copper smelter at
Ilo to increase capacity, modernize facilities and to meet current international
environmental guidelines. A future opportunity for a third stage of the
modernization and expansion plan, consisting of a second expansion at Cuajone
and further expansion of smelter capacity at the Ilo smelter will be evaluated
at a later date and will depend on the availability of financing and other
conditions at the time.
As a result of ongoing drilling programs at the Company's mines, proven and
probable sulfide ore reserves at the Cuajone Mine have been increased
approximately 300 million tons effective June 30, 1996. The ore grade of this
increase is .59% copper. The increase in ore reserves had no material impact on
net earnings for the three or nine months ended September 30, 1996.
The Company's exploration, mining, milling, smelting and refining activities are
subject to Peruvian laws and regulations, including environmental laws and
regulations, which change from time to time. The Company has submitted an
environmental compliance program to the Government of Peru (the "PAMA"). The
PAMA would require the Company to make significant additional capital
expenditures to achieve compliance with current Peruvian environmental
requirements within a period of five years except for environmental controls
applicable to its smelter operations, which must be put in place within ten
years. Once the PAMA is approved by the government, compliance with the PAMA
will satisfy all environmental requirements pertaining to the Company's
operations throughout the applicable five or ten year period.
9
<PAGE>
Net Sales: Net sales in the third quarter of 1996 were $180.5 million, compared
with $270.6 million in the third quarter of 1995. Sales for the nine months
ended September 30, 1996 were $550.1 million compared to $687.5 million for the
comparable 1995 period. The $90.1 million decrease in net sales in the third
quarter of 1996 is primarily attributable to lower copper and molybdenum prices.
Copper sales were 188.6 million pounds in the third quarter of 1996 as compared
with 189.8 million pounds in the 1995 third quarter. Copper sales volume
included 23.8 million pounds and 69.4 million pounds of copper produced at the
new SX/EW facility in the third quarter of 1996 and the nine month period,
respectively.
Prices: Sales prices for the Company's metals are established principally by
reference to prices quoted on the London Metal Exchange ("LME"), the New York
Commodity Exchange ("COMEX") or published in "Metals Week" for dealer oxide
prices for molybdenum products.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
Price Volume Data 1996 1995 1996 1995
- ----------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Average Metal Prices
Copper (per pound-LME) $0.90 $1.37 $1.06 $1.34
Molybdenum (per pound-Metals Week Dealer Oxide) $3.47
$3.29 $4.37 $8.45
Silver (per ounce-COMEX) $5.04 $5.32 $5.29 $5.16
Sales Volume (in thousands)
Copper (pounds) 188,600 189,800 519,400 468,700
Molybdenum (pounds)(1) 2,152 2,656 5,956 6,074
Silver (ounces) 818 1,110 2,363 2,708
</TABLE>
(1) The Company's molybdenum production is sold in concentrate form. The volume
represents pounds of molybdenum contained in concentrate.
Metal Hedging and Trading Activity:
Hedging: Depending on the market fundamentals of a metal and other conditions,
the Company may purchase put options to reduce or eliminate the risk of metal
price declines below the option strike price on its anticipated future
production. Put options purchased by the Company establish a minimum sales price
for the production covered by such put options and permit the Company to
participate in price increases above the option price.
Depending upon market conditions the Company may either sell put options it
holds or exercise the options at maturity. Gains or losses, net of unamortized
acquisition costs, are recognized in the period in which the underlying hedged
production is sold. Third quarter results include a pre-tax gain of $4.4 million
from the sale or exercise of copper put options held by the Company with respect
to copper sales in the period. Results for the nine months include a pre-tax
gain of $5.2 million from the sale or exercise of copper put options held by the
Company with respect to copper sales in the nine month period.
The table below details copper put options purchased and held by the Company at
September 30, 1996:
Copper Put Options at September 30,1996
(in millions, except per lb. amounts)
<TABLE>
<CAPTION>
Percent of
Option Strike Price Unamortized Estimated
Lbs. Period Per lb. Cost Sales
---- ------ ------- ---- -----
<S> <C> <C> <C> <C>
38.7 10/96 - 12/96 $ 0.95 $ 0.6 25%
41.3 1/97 - 3/97 $ 0.95 0.4 26%
---- -----
80.0 $ 1.0
==== =====
</TABLE>
10
<PAGE>
In October, SPCC sold or exercised additional copper put options covering 38.7
million pounds of fourth quarter 1996 copper sales with an average strike price
of $0.95. The total pre-tax gain from the October option activity was $1.7
million.
The Company's pre-tax gain from 1996 copper option sales and exercises through
October 31, 1996 is $15.7 million. Of that amount $10.6 million remains to be
recognized, $5.9 million in the fourth quarter of 1996 and $4.7 million in the
first quarter of 1997.
The pre-tax earnings effect, in millions, of the company's copper hedging
activities, net of transaction costs, were as follows.
<TABLE>
<CAPTION>
(in millions) Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Hedging activities $4.4 $(1.1) $4.1 $(1.1)
</TABLE>
Operating Costs and Expenses: Operating costs and expenses were $126.4 million
in the third quarter of 1996 compared with $157.9 million for the same period in
1995. Cost of sales for the three months ended September 30, 1996 and 1995 were
$99.9 million and $130.4 million respectively. The decrease in cost of sales is
attributable primarily to the reduction of sales of copper produced from
purchased concentrates which were replaced by sales of copper produced from the
Company's new SX/EW operation.
Cost of sales was $276.7 million for the nine month period ended September 30,
1996, compared with $332.3 million in the corresponding 1995 period. While the
volume of all copper sold increased by 50.7 million pounds in the nine month
1996 period, as compared to the 1995 period, cost of sales decreased by $55.6
million. This decrease in cost of sales was principally attributable to a
reduction in sales of 62.4 million pounds of copper produced from purchased
concentrates and an increase of 113.1 million pounds in sales of copper produced
from Company mines, of which 69.4 million pounds were from the new SX/EW
facility. The unit cost of purchased concentrates in 1995 were considerably
higher, as cost is based on prevailing market prices.
Depreciation expense for the three and nine month periods ended September 30,
1996 was $10.6 million and $31.3 million, respectively as compared to $5.9
million and $27.4 million in the comparable periods in 1995. An increase to ore
reserves at June 30, 1995 resulted in lower depreciation expense in the third
quarter of 1995. Higher nine month depreciation in 1996 reflects additions to
property.
The provision for workers' participation for the three and nine month periods
ended September 30, 1996 was $3.5 million and $13.9 million, respectively, as
compared with $9.2 million and $23.1 million for the comparable period in 1995.
The decrease was due to lower pre-tax profits of the Branch.
11
<PAGE>
Nonoperating Items: Interest income was $4.0 million in the third quarter of
1996, and $15.1 million for the nine month period ended September 30, 1996,
compared with $2.6 million and $8.6 million for the respective periods in 1995.
The increase reflected a higher interest rate and higher invested cash balances
in 1996. Other income was $3.0 million in the third quarter of 1996, and $7.9
million for the nine month period ended September 30, 1996, compared with $1.3
million and $6.9 million for the respective periods in 1995. 1996 exchange gains
were higher than in 1995 due primarily to a higher devaluation rate. Also, nine
month 1995 results include a gain of $1.3 million on the sale of an investment.
Interest expense was $3.2 million in the third quarter of 1996, and $9.6 million
for the nine months period ended September 30, 1996, compared with $4.7 million
and $10.5 million for the respective periods in 1995. The third quarter 1995
included a write-off of previously capitalized loan fees of $2.0 related to the
prepayment of $77 million of the Company's long term debt. In addition, the nine
month 1995 period included $1.9 million of interest capitalized.
Taxes on Income: Taxes on income for the three and nine month periods ended
September 30, 1996 were $19.1 million and $67.2 million, respectively, as
compared to $36.9 million and $89.2 million for the respective periods in 1995.
The decrease was due to lower taxable earnings in the 1996 periods.
Minority Interest of Labor Shares: The income statement provision for minority
interest of labor shares during the third quarter represents an accrual of
approximately 3.0% in 1996 and 17.4% in 1995, of the Branch's after-tax
earnings, as determined under Peruvian GAAP. The Labor Share percentage
participation in earnings decreased principally as a result of the 1995 exchange
offer in which labor shares of the Branch were exchanged for common shares of
the Company.
Cash Flows - Operating Activities: Net cash provided from operating activities
was $54.5 million in the third quarter of 1996, compared to $95.8 million in the
third quarter of 1995. The decrease in operating cash flow was primarily due to
lower operating earnings partially offset by higher non-cash charges for
depreciation and deferred taxes in 1996. Net cash provided from operating
activities was $133.1 million for the nine months ended September 30, 1996,
compared with $221.3 million in the corresponding 1995 period. The decrease in
operating cash flow was a result of higher payments of Peruvian income taxes and
lower earnings before minority interest of labor shares in the first nine months
of 1996.
Cash Flows - Investing Activities: Investing activities used cash of $43.3
million for the three months ended September 30, 1996 compared $33.9 million for
the three months ended September 30, 1995. Lower proceeds from the maturity of
investments in 1996 was partially offset by lower capital spending. Net cash
used for investing activities was $52.7 million for the nine month period ended
September 30, 1996, compared with $54.0 million in the corresponding 1995
period.
Cash Flows - Financing Activities: Financing activities in the third quarter of
1996 included the scheduled payment of $5.8 million of the Company's long-term
debt, distribution of $22.5 million of dividends, and $3.4 million to repurchase
labor shares. In the third quarter of 1995 net repayments of debt after escrow
requirements were $19.0 million and dividends distributed were $21.4 million.
Net cash used for financing activities was $83.3 million in the nine month
period ended September 30, 1996, compared with $49.9 million in the comparable
1995 period. Dividends paid in the nine month 1996 period were $98.7 million
compared with $55.7 million in the comparable 1995 period. Borrowings, net of
escrow requirements were $22.6 million in the 1996 period, compared to
repayments, net of escrow release of $5.2 million in the comparable 1995 period.
In the nine month 1996 period, cash of $6.1 million was used to purchase labor
shares. In the nine month 1995 period cash of $10.9 million was received from a
labor share subscription.
12
<PAGE>
Liquidity and Capital Resources: At September 30, 1996, the Company's debt as a
percentage of total capitalization was 11.1%, compared with 8.8% at December 31,
1995. Debt at September 30, 1996 was $126.5 million, compared with $93.9 million
at the end of 1995.
The Company expects that it will meet its cash requirements for 1996 and beyond
from internally generated funds, cash on hand, from borrowings under its credit
agreements or from additional external financing.
On October 30, the Company declared a quarterly dividend on the common stock of
$0.24 per share payable December 2, 1996 to stockholders of record at the close
of business on November 14, 1996.
Impact of New Accounting Standards: The Financial Accounting Standards Board
issued SFAS No. 123 "Accounting for Stock-Based Compensation" in October 1995.
In accordance with this pronouncement, the Company has a choice of adopting the
accounting provisions of SFAS No. l23 or continuing its current accounting with
additional disclosure required. The Company has elected the disclosure only
alternative and will continue its current accounting.
The American Institute of Certified Public Accountants issued Statement of
Position 96-1, "Environmental Remediation Liabilities" ("SOP 96-1") in October
1996. SOP 96-1 provides authoritative guidance on specific accounting issues in
connection with recognizing, measuring and disclosing environmental cleanup
liabilities. The Company is currently assessing the impact of this statement,
which is effective for fiscal years beginning after December 15, 1996.
Cautionary Statement: Forward-looking statements in this report and in other
Company statements include statements regarding expected commencement dates of
mining or metal production operations, projected quantities of future metal
production, anticipated production rates, operating efficiencies, costs and
expenditures as well as projected demand or supply for the Company's products.
Actual results could differ materially depending upon factors including the
availability of materials, equipment, required permits or approvals and
financing, the occurrence of unusual weather or operating conditions, lower than
expected ore grades, the failure of equipment or processes to operate in
accordance with specifications, labor relations, environmental risks as well as
political and economic risk associated with foreign operations. Results of
operations are directly affected by metals prices on commodity exchanges which
can be volatile.
13
<PAGE>
COOPERS & LYBRAND L.L.P.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Southern Peru Copper Corporation:
We have reviewed the accompanying interim condensed consolidated balance sheet
of Southern Peru Copper Corporation and Subsidiaries as of September 30, 1996
and the interim condensed consolidated statements of earnings and cash flows for
the three month and nine month periods ended September 30, 1996 and 1995. These
interim condensed consolidated financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim condensed consolidated financial statements
for them to be in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
October 18, 1996
14
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN PERU COPPER CORPORATION
(Registrant)
Date: November 14, 1996 /s/ Ronald J. O'Keefe
---------------------
Ronald J. O'Keefe
Executive Vice President and
Chief Financial Officer
Date: November 14, 1996 /s/ Brendan M. O'Grady
----------------------
Brendan M. O'Grady
Comptroller
15
<PAGE>
Exhibit I
COOPERS & LYBRAND L.L.P.
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
We are aware that our report dated October 18, 1996 on our review of the interim
financial information of Southern Peru Copper Corporation and Subsidiaries as of
September 30, 1996 and for the three month and nine month periods ended
September 30, 1996 and 1995 and included in this Form 10-Q for the quarter ended
September 30, 1996 is incorporated by reference in the Company's Registration
Statements on Form S-8 (File Nos. 33-32736). Pursuant to Rule 436(c) under the
Securities Act of 1933, this report should not be considered a part of the
Registration Statement prepared or certified by us within the meaning of
Sections 7 and 11 of that Act.
Coopers & Lybrand L.L.P.
New York, New York
November 12, 1996
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