SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
1997
Second Quarter
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1997 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 July 31, 1997 there were outstanding 14,302,149 shares of Southern Peru
Copper Corporation common stock, par value $0.01 per share. There were also
outstanding 65,900,833 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)
Condensed Consolidated Statement of Earnings
Three Months and Six Months
Ended June 30, 1997 and 1996 2
Condensed Consolidated Balance Sheet
June 30, 1997 and December 31, 1996 3
Condensed Consolidated Statement of Cash Flows
Three Months and Six Months
Ended June 30, 1997 and 1996 4
Notes to Condensed Consolidated Financial Statements 5-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9-15
Report of Independent Accountants 16
Part II. Other Information:
Item 1. Legal Proceedings 17
Item 6(a) Exhibits on Form 10Q 18
Exhibit 4 Instruments defining the rights of security holders, including
indentures
Exhibit 11 Statement re Computation of Earnings per Share
Signatures 19
Exhibit I - Independent Accountants' Awareness Letter
</TABLE>
- 1 -
<PAGE>
Southern Peru Copper Corporation
and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
June 30, June 30,
(in thousands, except per share amounts)
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
Stockholders and affiliates $ 17,446 $ 17,892 $ 38,415 $ 31,248
Others 208,776 155,277 402,593 338,329
-------- -------- --------- --------
Total net sales 226,222 173,169 441,008 369,577
-------- -------- --------- --------
Operating costs and expenses:
Cost of sales 119,779 82,176 228,296 176,855
Administrative and other expenses 13,703 11,249 26,668 24,254
Depreciation, amortization and depletion 11,608 10,343 23,107 20,670
Provision for workers' participation 5,482 4,807 10,875 10,445
Exploration expense 1,648 492 2,712 1,147
-------- -------- --------- -------
Total operating costs and expenses 152,220 109,067 291,658 233,371
-------- -------- -------- -------
Operating income 74,002 64,102 149,350 136,206
Interest income 4,806 4,901 7,679 11,070
Other income 3,277 2,582 4,660 4,855
Interest expense (4,828) (3,205) (7,268) (6,337)
-------- -------- -------- --------
Earnings before taxes on income and
minority interest of labor shares 77,257 68,380 154,421 145,794
Taxes on income 15,782 21,805 35,587 48,093
-------- -------- -------- --------
Earnings before minority interest 61,475 46,575 118,834 97,701
of labor shares
Minority interest of labor shares 1,875 1,346 3,418 3,364
-------- -------- --------- --------
Net earnings $ 59,600 $ 45,229 $ 115,416 $ 94,337
======== ======== ========= ========
Per common share amounts:
Net earnings (a) $ 0.74 $ 0.56 $ 1.44 $ 1.18
Dividends paid $ 0.35 $ 0.30 $ 0.65 $ 0.95
Weighted average number of
shares outstanding 80,202 80,183 80,197 80,204
</TABLE>
(a) The effect on the calculation of 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
CONDENSED CONSOLIDATED BALANCE SHEET
at June 30, 1997 and
December 31, 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
(unaudited)
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 210,323 $ 173,205
Marketable securities 208,792 1,000
Accounts receivable, net 101,140 89,587
Inventories 121,391 118,681
Prepaid taxes 81,300 14,019
Other current assets 6,128 6,618
--------- ---------
Total current assets 729,074 403,110
Net property 854,632 855,808
Other assets 29,108 20,931
--------- ---------
Total Assets $1,612,814 $1,279,849
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 23,683 $ 23,683
Accounts payable 52,190 33,864
Accrued liabilities 44,385 47,768
--------- ---------
Total current liabilities 120,258 105,315
--------- ---------
Long-term debt 271,050 82,892
Deferred credits 69,780 -
Deferred income taxes 47,363 49,426
Other liabilities and reserves 3,952 4,806
--------- ---------
Total non-current liabilities 392,145 137,124
--------- ---------
Minority interest of labor shares 22,094 22,383
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01(a) 143 137
Class A common stock, par value $0.01(b) 659 666
Additional paid-in capital 265,745 265,745
Retained earnings 812,242 749,267
Treasury stock at cost (c) (472) (788)
--------- ---------
Total stockholders' equity 1,078,317 1,015,027
--------- ---------
Total Liabilities, Minority Interest and Stockholders' Equity
$1,612,814 $1,279,849
========= =========
(a) Common shares: Authorized 34,099 33,449
Outstanding 14,302 13,634
(b) Class A common shares Authorized & Outstanding 65,901 66,551
(c) Treasury stock common shares 28 46
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 3 -
<PAGE>
Southern Peru Copper Corporation
and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 59,600 $ 45,229 $ 115,416 $ 94,337
Adjustments to reconcile net earnings to
net cash provided from operating activities:
Depreciation, amortization and depletion 11,608 10,343 23,107 20,670
Provision for deferred income taxes (332) 1,184 (1,955) 2,216
Minority interest of labor shares 1,874 1,346 3,417 3,364
Net (gain)loss on sale of
investments and property 268 (121) 268 286
Cash provided from (used for)operating
assets and liabilities:
Accounts receivable (4,954) 17,130 (11,594) 37,635
Inventories (10,548) (11,370) (2,710) (4,830)
Accounts payable and accrued liabilities 28,680 61 16,674 (52,898)
Other operating assets and liabilities (1,111) 5,373 3,342 (17,073)
Foreign currency transaction gain (1,057) (1,135) (1,035) (2,428)
--------- -------- --------- --------
Net cash provided from operating activities 84,028 68,040 144,930 81,279
-------- -------- -------- --------
INVESTING ACTIVITIES
Capital expenditures (32,258) (37,356) (61,354) (51,931)
Purchases of held-to-maturity investments (208,792) - (208,792) -
Proceeds from held-to-maturity investments - - 1,000 42,453
Proceeds from the sale of investments
and property 41,885 - 41,885 -
-------- -------- -------- --------
Net cash used for investing activities (199,165) (37,356) (227,261) (9,478)
--------- --------- -------- ---------
FINANCING ACTIVITIES
Dividends paid (28,070) (24,054) (52,125) (76,204)
Proceeds from borrowings 200,000 - 200,000 47,000
Repayment of borrowings (6,842) (7,610) (11,842) (8,531)
Escrow deposits and finance fees
on long-term loans (12,317) (1) (11,878) (10,152)
Purchase of labor share interest (1,550) (2,681) (4,606) (2,681)
Distributions to minority interests (568) (824) (1,303) (2,703)
Net treasury stock transactions - - - (1,155)
-------- -------- -------- --------
Net cash provided from (used for)
financing activities 150,653 (35,170) 118,246 (54,426)
-------- -------- -------- --------
Effect of exchange rate changes on cash 954 (517) 1,203 716
-------- -------- -------- --------
Net increase (decrease) in cash
and cash equivalents 36,470 (5,003) 37,118 18,091
Cash and cash equivalents, beginning of period 173,853 242,740 173,205 219,646
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 210,323 $ 237,737 $ 210,323 $ 237,737
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 4 -
<PAGE>
SOUTHERN PERU COPPER CORPORATION
and Subsidiaries
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A. In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the Company's financial
position as of June 30, 1997 and the results of operations and cash flows
for the three and six months ended June 30, 1997 and 1996. 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
three month and six month periods are not necessarily indicative of the
results to be expected for the full year. The year end condensed
consolidated balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles. The accompanying condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 1996
annual report on Form 10-K.
B. In the first quarter of 1997, the Government of Peru approved a
reinvestment allowance for the Company's program to expand the Cuajone
mine. The reinvestment allowance provides the Company with tax incentives
in Peru and, as a result, certain U.S. tax credit carryforwards, for which
no benefit has previously been recorded, are expected to be realized. The
estimated net earnings impact of the reduction in the Company's effective
tax rate, as a result of the reinvestment allowance, for the second quarter
of 1997 is approximately $4.5 million and for the six months ended June 30,
1997, approximately $7.7 million. Pursuant to the reinvestment allowance
the Company will receive tax deductions in Peru in amounts equal to the
cost of the qualifying property (approximately $245 million). As qualifying
property is acquired, the financial statement carrying value of the
qualifying property will be reduced to reflect the tax benefit associated
with the reinvestment allowance (approximately $73 million). As a result,
financial statement depreciation expense related to the qualifying property
will be reduced over its useful life (approximately 15 years).
C. Inventories were as follows:
(in millions)
<TABLE>
<CAPTION>
At June 30, At December 31,
1997 1996
<S> <C> <C>
Metals at lower of average cost or market:
Finished goods $ 1.4 $ 2.4
Work-in-process 48.8 47.1
Supplies at average cost, net of reserves 71.2 69.2
------ ------
Total inventories $ 121.4 $ 118.7
====== ======
</TABLE>
- 5 -
<PAGE>
D. Metal Hedging Activities:
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 on a portion of 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 sell put options it holds or exercise the
options at maturity. Gains or losses, net of unamortized acquisition costs
are recorded as current liabilities or current assets and are subsequently
recognized in the period in which the underlying hedged production is sold.
Earnings for the first six months included a pre-tax gain of $5.6 million
in 1997 and a pre-tax loss of $0.3 million in 1996 from the Company's price
protection program. There were no pre-tax gains or losses from price
protection in the second quarter of 1997 compared with a pre-tax gain of
$0.5 in the second quarter of 1996.
Copper Price Protection Held at June 30, 1997
(in millions, except per lb. amounts)
<TABLE>
<CAPTION>
Percent of
Strike Price Unamortized Estimated
Pounds Period Per Pound Cost Production
------ ------ --------- ---- ----------
<S> <C> <C> <C> <C>
94.1 10/97-12/97 $0.95 $1.4 54%
44.0 1/98-3/98 $0.95 0.6 28%
---
$2.0
</TABLE>
At June 30, 1997, the Company has recorded sales of 73.6 million pounds of
copper, at a provisional price of $1.17 per pound. These sales are subject
to final pricing based on average monthly LME copper prices in the third
quarter of 1997.
E. On May 22, 1997, the Company sold $150 million of Secured Export Notes
through a Rule 144A and Regulation S offering with registration rights. The
notes mature in 2007 and were priced at par with a coupon rate of 7.90%. On
June 24, 1997, the Company sold $50 million of 8.25% bonds due June 2004.
The debt was issued through Southern Peru Limited, a wholly owned
subsidiary of the Company. Early in the second quarter, the Company also
entered into a $600 million, seven year backstop loan facility with a group
of international financial institutions. The proceeds of the aforementioned
borrowings will be used to finance the Company's $1 billion expansion and
modernization program at its Cuajone copper mine and Ilo smelter.
- 6 -
<PAGE>
F. Commitments and Contingencies:
Litigation
In February 1993, the Mayor of Tacna, Peru brought a lawsuit against SP
Limited 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. In May 1996, the
plaintiff appealed and the case presently is before the Peruvian Supreme
Court. There is generally no further right of appeal; however, the Peruvian
Supreme Court may grant discretionary review on limited issues in
exceptional cases.
In April 1996, Southern Peru Limited was served with a complaint filed in
Peru by approximately 800 former employees challenging the accounting of
the Company'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 plus
dividends and contains similar allegations to those made in a prior lawsuit
dismissed in September 1995. As of March 31, 1997, 127 additional former
employees filed a similar lawsuit. During the second quarter of 1997, SP
Limited was served with an adverse opinion by the lower court. Peruvian
outside counsel has informed SP Limited that the lower court decision is
not supported by facts or the law and that the possibility that it will not
be reversed or nullified by Peruvian courts following appeal is remote. An
appeal was filed during the second quarter of 1997.
G. Summarized Financial Information of Significant Subsidiary:
Southern Peru Limited: Southern Peru Limited is a wholly owned subsidiary
of Southern Peru Copper Corporation. Southern Peru Limited holds all the
operating assets and liabilities of the Company.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Earnings:
Net sales $226.2 $173.2 $441.0 $369.6
Operating income 74.0 64.1 149.4 136.2
Net earnings $59.6 $45.2 $115.4 $94.3
Cash Flow:
Operating activities $83.5 $67.2 $143.6 $78.6
Investing activities (199.2) (37.4) (227.3) (9.5)
Financing activities $151.2 $(34.3) $119.5 $(51.7)
</TABLE>
- 7 -
<PAGE>
<TABLE>
<CAPTION>
At June 30,
1997 1996
(in millions)
<S> <C> <C>
Balance Sheet:
Current assets $729.1 $403.1
Noncurrent assets 883.7 876.7
Current liabilities 120.3 105.3
Noncurrent liabilities 392.1 137.1
Minority interest 22.1 22.4
Stockkholders' equity 1,078.3 1,015.0
</TABLE>
H. On April 18, 1997, the Company completed the sale of its Ilo power plant to
a subsidiary of Tractebel S.A. ("Tractebel"), for $41.9 million. In
connection with the sale, a twenty year power purchase agreement was also
completed, under which Tractebel will provide the Company with its power
needs for the next twenty years. Under the agreement, the Company's cost of
power will increase somewhat from its current level, while the Company will
benefit by avoiding significant capital expenditures that would be required
to meet the needs of expanded operations.
I. Impact of New Accounting Standards:
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (the
"Statement"). The Statement specifies the computation, presentation and
disclosure requirements for earnings per share ("EPS"). It will require the
Company to present both basic and diluted EPS amounts for income from
continuing operations and net income on the face of the income statement.
The Company does not expect the impact of this statement to have a material
effect on its calculation of EPS. The statement will be effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income."
The Company is currently assessing the impact of this statement, which is
effective for fiscal years beginning after December 15, 1997.
J. Subsequent Events:
On July 31, 1997, the Company prepaid the remaining $40.0 million balance
on a variable rate loan from Mitsui & Co., Ltd. The payment will result in
a charge of $0.4 million for unamortized loan fees.
- 8 -
<PAGE>
Part I Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reported net earnings of $59.6 million, or $0.74 per share, for the
second quarter ended June 30, 1997 compared with net earnings of $45.2 million,
or $0.56 per share, for the second quarter of 1996. For the six month period
ended June 30, 1997, the Company reported net income of $115.4 million or $1.44
per share, compared with net income of $94.3 million or $1.18 per share in the
comparable 1996 period.
The Company's earnings in the second quarter 1997 increased $14.4 million
compared with the comparable 1996 period. Higher sales prices for copper and
molybdenum, as well as a reduction in the Company's effective tax rate,
primarily due to a reinvestment tax incentive in Peru, contributed to the
increase in earnings. As a result of a sharp decline in copper prices in June of
1996, second quarter provisionally priced copper sales were adjusted. The impact
of the adjustment in the second quarter 1996 reduced sales by $13.8 million and
net earnings by $8.2 million.
Net earnings for the six months ended June 30, 1997 increased $21.1 million,
over the same period in 1996, primarily as a result of 1996 price adjustments to
provisionally priced sales, the reduction in the Company's effective tax rate
due to the reinvestment tax incentive allowed in Peru and pre-tax gains of $5.6
million recorded in the first quarter of 1997 related to the Company's price
protection program.
Copper mine production decreased 2% in the second quarter of 1997 compared with
the second quarter of 1996 to 170.1 million pounds. Ore grades at the Company's
Toquepala and Cuajone mines were lower; however, throughput and better
recoveries at the Company's concentrators offset much of the effect of the lower
grades. Copper mine production for the six month period ended June 30, 1997 was
approximately the same as in the comparable 1996 period.
In the first quarter of 1997, the Government of Peru approved a reinvestment
allowance for the Company's program to expand the Cuajone mine. The reinvestment
allowance provides the Company with tax incentives in Peru and, as a result,
certain U.S. tax credit carryforwards, for which no benefit has previously been
recorded, are expected to be realized. The estimated net earnings impact of the
reduction in the Company's effective tax rate, as a result of the reinvestment
allowance, for the second quarter of 1997 is approximately $4.5 million and $7.7
million for the six months ended June 30, 1997. Pursuant to the reinvestment
allowance the Company will receive tax deductions in Peru in amounts equal to
the cost of the qualifying property (approximately $245 million). As qualifying
property is acquired, the financial statement carrying value of the qualifying
property will be reduced to reflect the tax benefit associated with the
reinvestment allowance (approximately $73 million). As a result, financial
statement depreciation expense related to the qualifying property will be
reduced over its useful life (approximately 15 years).
- 9 -
<PAGE>
In the second quarter the Company placed $150 million of Secured Export Notes.
In addition, a $50 million bond offering was sold in the Peruvian market. At
June 30, the Company had $419 million of cash and marketable securities and an
undrawn committed bank facility of $600 million. These funds are sufficient to
assure the financing of the Company's $1 billion expansion program which is
proceeding on schedule. Construction contracts for the Cuajone mine expansion
have been awarded and site construction commenced in July. Engineering work on
the Ilo smelter expansion is also underway.
Inflation and Devaluation of Peruvian Sol: A portion of the Company's operating
costs are denominated in Peruvian soles. Since the revenues of the Company are
primarily denominated in U.S. dollars, when inflation in Peru is not offset by a
corresponding devaluation of the sol, the financial position, results of
operations and cash flows of the Company could be adversely affected. For the
six months ended June 30, 1997 the inflation and devaluation rates were 4.14%
and 2.04%, respectively.
Net Sales: Net sales in the second quarter of 1997 were $226.2 million, compared
with $173.2 million in the second quarter of 1996. Sales for the six months
ended June 30, 1997 were $441.0 million compared with $369.6 million for the
comparable 1996 period. The $53.0 million increase in net sales in the second
quarter of 1997 is primarily attributable to 1996 price adjustments to
provisionally priced sales, higher sales volume and higher copper and molybdenum
prices. The increase in sales in the six month period ended June 30, 1997 as
compared with the comparable prior year period reflects increased sales volume,
adjustments to provisionally priced sales in 1996 and the recognition of a $5.6
million gain on the sale of copper put options covering first quarter 1997
copper sales.
At June 30, 1997, the Company has recorded sales of 73.6 million pounds of
copper, at a provisional price of $1.17 per pound. These sales are subject to
final pricing based on average monthly LME copper prices in the third quarter of
1997.
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 Six Months Ended
June 30, June 30,
Price/Volume Data 1997 1996 1997 1996
- ----------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Average Metal Prices
Copper (per pound-LME) $1.14 $1.12 $1.12 $1.14
Molybdenum (per pound-
Metals Week Dealer Oxide) $4.39 $3.15 $4.38 $3.56
Silver (per ounce-COMEX) $4.73 $5.29 $4.87 $5.42
Sales Volume (in thousands)
Copper (pounds) 184,000 161,800 356,000 330,800
Molybdenum (pounds)(1) 2,254 1,937 4,488 3,804
Silver (ounces) 816 726 1,495 1,545
</TABLE>
(1) The Company's molybdenum production is sold in concentrate form. The
volume represents pounds of molybdenum contained in concentrate.
- 10 -
<PAGE>
Metal Hedging Activities:
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 on a portion of 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 sell put options it holds or exercise the options at maturity. Gains or
losses, net of unamortized acquisition costs are recorded as current liabilities
or current assets and are subsequently recognized in the period in which the
underlying hedged production is sold.
Earnings for the first six months included a pre-tax gain of $5.6 million in
1997 and a pre-tax loss of $0.3 million in 1996 from the Company's price
protection program. There were no pre-tax gains or losses from price protection
in the second quarter of 1997 compared with a pre-tax gain of $0.5 in the second
quarter of 1996.
Copper Price Protection Held at June 30, 1997
(in millions, except per lb. amounts)
<TABLE>
<CAPTION>
Percent of
Strike Price Unamortized Estimated
Pounds Period Per Pound Cost Production
------ ------ --------- ---- ----------
<S> <C> <C> <C> <C>
94.1 10/97-12/97 $0.95 $1.4 54%
44.0 1/98-3/98 $0.95 0.6 28%
---
$2.0
</TABLE>
Operating Costs and Expenses: Operating costs and expenses were $152.2 million
in the second quarter of 1997 compared with $109.1 million for the same period
in 1996. For the six month period ended June 30, 1997 operating costs were
$291.7 million as compared with $233.4 million in the comparable 1996 period.
Cost of sales for the three month and six month period ended June 30, 1997 was
$119.8 million and $228.3 million, respectively, this compares to $82.2 million
and $176.9 million in the comparable 1996 periods. The increase in the second
quarter of 1997 is primarily attributable to greater sales of copper produced
from purchased concentrates, higher power costs and increased mine stripping at
the Toquepala mine. In the second quarter of 1997 the Company sold its power
plant to an independent power company in order to avoid substantial capital
improvements to meet the power needs of expanded operations, and as a
consequence power costs have increased. These factors which increased second
quarter 1997 cost of sales also affected the six month period ended June 30,
1997.
Depreciation expense for the three and six month periods ended June 30, 1997 was
$11.6 million and $23.1 million, respectively, compared with $10.3 million and
$20.7 million in the comparable periods in 1996. The higher 1997 depreciation
reflects additions to property.
- 11 -
<PAGE>
Nonoperating Items: Interest income for the three month and six month periods
ended June 30, 1997 was $4.8 million and $7.7 million, respectively, compared to
$4.9 million and $11.1 million in the comparable 1996 periods. The decrease in
1997 reflects lower interest rates on invested funds, offset in part in the
second quarter of 1997 by $1.1 million interest income received on a federal
income tax refund. The increase of $1.6 million in interest expense in the
second quarter of 1997 reflects financing fees primarily on new borrowings.
Taxes on Income: Taxes on income for the three and six month periods ended June
30, 1997 were $15.8 million and $35.6 million, respectively, as compared with
$21.8 million and $48.1 million for the respective periods in 1996. The decrease
was principally due to a reduction in the Company's effective tax rate as a
result of the reinvestment allowance in Peru.
Minority Interest of Labor Shares: The income statement provision for minority
interest of labor shares during the second quarter represents an accrual of
approximately 2.5% in 1997 and 3.3% in 1996, of the operating Branch's after-tax
earnings, as determined under Peruvian GAAP. The Labor Share percentage
participation in earnings decreased due to the purchase of labor shares by the
Company.
Cash Flows - Operating Activities: Net cash provided from operating activities
for the three month and six month period ended June 30, 1997 was $84.0 million
and $144.9 million, respectively as compared with $68.0 million and $81.3
million in the comparable 1996 periods. The increase in the second quarter was
primarily a result of higher net earnings. The increase in the six month period
was primarily a result of lower payments for prior year's Peruvian income taxes
and workers' participation and higher net earnings, partially offset by higher
accounts receivable in 1997.
Cash Flows - Investing Activities: Investing activities used cash of $199.2
million for the second quarter of 1997 compared with $37.4 million for the
second quarter of 1996. The 1997 period included purchases of held-to-maturity
investments of $208.8 million consisting of bank time deposits with maturities
ranging from three months to one year and proceeds from the sale of property of
$41.9 million. In the second quarter 1997, capital expenditures were $32.3
million compared with $37.4 million in the respective period of 1996.
In the six month period ended June 30, 1997 and 1996 capital expenditures were
$61.4 million and $51.9 million, respectively. Proceeds from sale of
held-to-maturity investments in the six month period ended June 30, 1997 and
1996 were $1.0 million and $42.5 million, respectively.
Cash Flows - Financing Activities: Financing activities in the second quarter of
1997 included the placement of $200 million of debt. Dividends paid in the
second quarter of 1997 were $28.1 million as compared with $24.1 million in the
comparable 1996 period. For the six months ended June 30, 1997 and 1996,
dividends paid were $52.1 million and $76.2 million, respectively.
- 12 -
<PAGE>
Liquidity and Capital Resources: At June 30, 1997, the Company's debt as a
percentage of total capitalization (total debt, minority interests and
stockholders' equity) was 21.1%, compared with 9.3% at December 31, 1996. Debt
at June 30, 1997 was $294.7 million, compared with $106.6 million at the end of
1996.
In April 1997, the Company entered into a $600 million seven-year loan facility
with a group of international financial institutions. The facility consists of a
$400 million term loan and a $200 million revolving credit line. The term loan
bears an interest rate of LIBOR plus 1.75%.
In May, the Company privately placed $150 million of Secured Export Notes in the
United States and offshore. These notes which have an average maturity of seven
years and a final maturity in 2007 were priced at par with a coupon rate of
7.9%. In addition, in June the Company sold $50 million of bonds, due June 2004
to investors in Peru. The bonds have a fixed interest rate of 8.25%. These funds
and the loan facility of $600 million will provide the Company with sufficient
resources for its $1 billion expansion program.
In the second quarter of 1997, the Company paid a dividend to shareholders of
$28.1 million or $0.35 per share. On July 30, 1997, the Company declared a
quarterly dividend on the common stock of $0.37 per share payable September 2,
1997 to stockholders of record at the close of business on August 15, 1997.
Dividends by the Company are limited by covenants under the Company's financing
agreements. Certain of these dividend restrictions directly apply to SP Limited
as the issuer of the debt, however, they also apply to SPCC in consolidation or
as the guarantor. The most restrictive of these covenants limits the payment of
dividends by SPCC to 50% of consolidated net income.
Expansion and Modernization Project: In September 1996, the Company announced a
two stage project which includes an expansion of the Cuajone mine and an
expansion and modernization of its copper smelter at Ilo. The total capital cost
for this project is estimated at $1.0 billion, budgeted to be spent over the
next six years.
The Cuajone mine expansion is expected to increase the Company's annual copper
production by 130 million pounds and require an estimated capital investment of
approximately $245 million. Construction contracts for the expansion have been
awarded and site construction commenced in July. Completion of this stage of its
expansion program is expected in 1999.
Engineering for the second stage of the program, the expansion and modernization
of the Ilo smelter began in 1997. Following completion of preliminary
engineering SPCC plans to modernize and increase the capacity of its existing
copper smelter at Ilo. The expected cost of the second stage, based on the
Company's preliminary engineering studies, is approximately $787 million and is
expected to be completed in 2003.
- 13 -
<PAGE>
A future opportunity for a third stage of the expansion and modernization plan,
consisting of a second expansion at Cuajone and further expansion of the Ilo
smelter capacity will be evaluated at a later date and will depend on the
availability of financing and other conditions at the time. A decision to
proceed on this stage of the project is not expected before 2000. The Company
anticipates that the projects will be funded from a combination of existing
cash, internally generated funds and external financing.
Environmental Matters: The Company has made a significant number of
environmental capital expenditures, including, a sulfuric acid plant at the Ilo
smelter for partial recapture of sulfur dioxide, completed in 1995 at a cost of
$103.0 million; a sewage treatment plant at Ilo, completed in 1994 at a cost of
$2.0 million; and a tailings storage facility at Quebrada Honda, which became
operational in 1996 and will be completed in 1997 at a cost of approximately $60
million. The Company has also incurred capital costs of $3.0 million for
environmental projects as a result of the commitment made in connection with the
Ilo refinery acquisition. In addition, in April 1996 the Company began a $35
million expansion of the Ilo sulfuric acid plant. The expansion will increase
the capture of sulfur dioxide emissions from the smelter from 18% to 30% and
will also increase sulfuric acid production at the smelter to 330,000 tons per
year in 1998, the expected year of expanded plant operation. Capital
expenditures in connection with these and other environmental projects were
approximately $29.8 million in 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's recently approved
environmental compliance and management plan, PAMA, sets forth the investment to
be made by the Company to comply with Peruvian environmental regulations
applicable to its operations. To implement the PAMA, the Company is required to
make a minimum annual investment of 1% of net annual sales until compliance is
met. The PAMA will require the Company to make significant additional capital
expenditures to achieve compliance with the maximum permissible levels for its
emission and waste discharges ("MPLs") within a period of five years, except for
environmental controls applicable to its smelter operation which must be put in
place within ten years. The PAMA contemplates a number of environmental
projects, the largest and most capital intensive of which is the planned
modernization of the Ilo smelter. Management believes that under current
Peruvian law and regulations, compliance with the PAMA will satisfy the MPL
requirements pertaining to the Company's operations during the applicable
five-or ten-year implementation period. The Company remains, however, subject to
other environmental requirements applicable to its operations.
Impact of New Accounting Standards: In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (the "Statement"). The Statement specifies the computation,
presentation and disclosure requirements for earnings per share ("EPS"). It will
require the Company to present both basic and diluted EPS amounts from income
for continuing operations and net income on the face of the income statement.
The Company does not expect the impact of this statement to have a material
effect on its calculation of EPS. The statement will be effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods.
- 14 -
<PAGE>
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income." The
Company is currently assessing the impact of this statement, which is effective
for fiscal years beginning after December 15, 1997.
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.
- 15 -
<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 condensed consolidated balance sheet of Southern Peru
Copper Corporation and Subsidiaries as of June 30, 1997 and the condensed
consolidated statements of earnings and cash flows for the three month and six
month periods ended June 30, 1997 and 1996. These 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 condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1996, and the
related consolidated statements of income, retained earnings, and cash flows for
the year then ended (not presented herein); and in our report dated January 28,
1997 we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1996, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
Coopers & Lybrand L.L.P.
New York, New York
July 21, 1997
- 16 -
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
With respect to the lawsuit filed in Peru by approximately 800 former employees
challenging the accounting of the Peruvian Branch of SP Limited and seeking the
delivery of a substantial number of labor shares of the Peruvian Branch of SP
Limited plus dividends reported on Form 10-Q for the first quarter of 1997 and
Form 10-K for 1996, the Peruvian Branch of SP Limited has been served with an
adverse opinion decided by a court of first instance in this lawsuit. Peruvian
outside counsel has informed SP Limited that the lower court decision is not
supported by facts or the law and that the possibility that it will not be
reversed or nullified by Peruvian courts following appeal is remote. An appeal
was filed during the second quarter of 1997.
With respect to the lawsuit against SP Limited, present and former shareholders
of SP Limited and others brought in September 1995 by 698 Peruvian plaintiffs
for personal injury and property damage allegedly caused by the operations of
the Peruvian Branch of SP Limited, reported on Form 10-Q for the first quarter
of 1997 and Form 10-K for 1996, on May 19, 1997 the U.S. Court of Appeals for
the Fifth Circuit affirmed the United States District Court orders denying
plaintiffs' motion to remand the case to state court and dismissing plaintiffs'
complaint.
- 17 -
<PAGE>
Item 6(a) - Exhibits on Form 10Q
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
<S> <C>
4 Instruments defining the rights of security holders, including indentures
There is currently an indenture under which long-term debt of the
Company is outstanding. The Registrant hereby agrees to furnish
to the Commission, upon request, a copy of this instrument which
defines the rights of holders of long-term debt securities. The
outstanding instrument does not represent long-term debt
securities in excess of 10% of the total assets of the Company as
of June 30, 1997.
11 Statement re Computation of Earnings per Share
</TABLE>
- 18 -
<PAGE>
Exhibit 11 Statement re Computation of Earnings per Share
This calculation is submitted in accordance with Regulation S-K item 601(b)(11).
Fully Diluted Earnings per Common Share
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings applicable to common stock $59,600 $45,229 $115,416 $94,337
======= ======= ======== =======
Weighted average number of common shares outstanding 80,202 80,183 80,197 80,206
Shares issuable from assumed exercise of Stock Options 22 - 22 -
------- ------- ------- -------
Weighted average number of common shares outstanding,
as adjusted 80,224 80,183 80,219 80,206
======= ======= ======= ======
Fully diluted earnings per share:
Net earnings applicable to common stock $ .74 $ .56 $ 1.44 $ 1.18
======= ======= ======= =======
Primary earnings per share:
Net earnings applicable to common stock $ .74 $ .56 $ 1.44 $ 1.18
======= ======= ======= =======
</TABLE>
<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: August 8, 1997 /s/ Ronald J. O'Keefe
---------------------
Ronald J. O'Keefe
Executive Vice President and
Chief Financial Officer
Date: August 8, 1997 /s/ Brendan M. O'Grady
----------------------
Brendan M. O'Grady
Comptroller
- 19 -
<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 July 21, 1997 on our review of the interim
financial information of Southern Peru Copper Corporation and Subsidiaries as of
June 30, 1997 and for the three month and six month periods ended June 30, 1997
and 1996 and included in this Form 10-Q for the quarter ended June 30, 1997 is
incorporated by reference in the Company's Registration Statement on Form S-8
(File No. 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
July 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 210323
<SECURITIES> 208792
<RECEIVABLES> 101140
<ALLOWANCES> 0
<INVENTORY> 121391
<CURRENT-ASSETS> 729074
<PP&E> 1721160
<DEPRECIATION> 866528
<TOTAL-ASSETS> 1612814
<CURRENT-LIABILITIES> 120258
<BONDS> 0
<COMMON> 266075
0
0
<OTHER-SE> 812242
<TOTAL-LIABILITY-AND-EQUITY> 1612814
<SALES> 226222
<TOTAL-REVENUES> 226222
<CGS> 119779
<TOTAL-COSTS> 119779
<OTHER-EXPENSES> 32441
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4828
<INCOME-PRETAX> 77257
<INCOME-TAX> 15782
<INCOME-CONTINUING> 61475
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