SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
1997
First Quarter
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 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 April 30, 1997 there were outstanding 14,299,349 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 Ended March 31, 1997 and 1996 2
Condensed Consolidated Balance Sheet
March 31, 1997 and December 31, 1996 3
Condensed Consolidated Statement of Cash Flows
Three Months Ended March 31, 1997 and 1996 4
Notes to Condensed Consolidated Financial Statements 5-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11-16
Report of Independent Accountants 17
Part II. Other Information:
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6(a) Exhibits on Form 10-Q 20
Exhibit 3 Certificate of Incorporation and By-Laws
3.1 Certificate of Decrease, filed March 24, 1997
3.2 Certificate of Increase, filed March 24, 1997
Exhibit 11 Statement re Computation of Earnings per Share
Signatures 21
Exhibit I - Independent Accountants' Awareness Letter
</TABLE>
- 1 -
<PAGE>
Southern Peru Copper Corporation
and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
for the three months ended
March 31, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
(in thousands, except per share amounts)
<S> <C> <C>
Net sales:
Stockholders and affiliates $ 36,153 $ 13,356
Others 178,633 183,052
-------- --------
Total net sales 214,786 196,408
-------- --------
Operating costs and expenses:
Cost of sales 108,517 94,679
Administrative and other expenses 12,965 13,005
Depreciation, amortization and depletion 11,499 10,327
Provision for workers' participation 5,393 5,638
Exploration expense 1,064 655
-------- --------
Total operating costs and expenses 139,438 124,304
-------- --------
Operating income 75,348 72,104
Interest income 2,873 6,169
Other income 1,383 2,273
Interest expense (2,440) (3,132)
-------- --------
Earnings before taxes on income and minority
interest of labor shares 77,164 77,414
Taxes on income 19,805 26,288
-------- --------
Earnings before minority interest of labor shares 57,359 51,126
Minority interest of labor shares 1,543 2,018
-------- --------
Net earnings $ 55,816 $ 49,108
======== ========
Per common share amounts:
Net earnings (a) $ 0.70 $ 0.61
Dividends paid $ 0.30 $ 0.65
Weighted average number of shares outstanding 80,192 80,206
</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.
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<PAGE>
Southern Peru Copper Corporation
and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEET
at March 31, 1997 and
December 31, 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 173,853 $ 173,205
Accounts receivable, net 96,193 89,587
Inventories 110,843 118,681
Prepaid taxes 77,699 -
Other current assets 4,854 21,637
--------- ---------
Total current assets 463,442 403,110
Net property 874,223 855,808
Other assets 20,383 20,931
--------- ---------
Total Assets $1,358,048 $1,279,849
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 23,683 $ 23,683
Accounts payable 28,778 33,864
Accrued liabilities 40,977 47,768
--------- ---------
Total current liabilities 93,438 105,315
--------- ---------
Long-term debt 77,892 82,892
Deferred credits 64,576 -
Deferred income taxes 48,384 49,426
Accrued severance pay 4,805 4,806
--------- ---------
Total non-current liabilities 195,657 137,124
--------- ---------
Minority interest of labor shares 22,166 22,383
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01(a) 144 137
Class A common stock, par value $0.01(b) 659 666
Additional paid-in capital 265,745 265,745
Retained earnings 780,762 749,267
Treasury stock at cost (c) (523) (788)
--------- ---------
Total stockholders' equity 1,046,787 1,015,027
--------- ---------
Total Liabilities, Minority Interest and Stockholders' Equity
$1,358,048 $1,279,849
========= =========
(a) Common shares: Authorized 34,099 33,449
Outstanding 14,299 13,634
(b) Class A common shares Authorized & Outstanding 65,901 66,551
(c) Treasury stock common shares 31 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
for the three months ended
March 31, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 55,816 $ 49,108
Adjustments to reconcile net earnings to net cash provided from operating activities:
Depreciation, amortization and depletion 11,499 10,327
Deferred income taxes (1,623) 1,032
Minority interest of labor shares, net of distributions 808 139
Net loss on sale of property - 407
Cash provided from (used for) operating assets and liabilities:
Accounts receivable (6,640) 20,505
Inventories 7,838 6,540
Accounts payable and accrued liabilities 14,196 (52,959)
Other operating liabilities and reserves (21,749) (22,446)
Foreign currency translation gain 22 (1,293)
-------- --------
Net cash provided from operating activities 60,167 11,360
-------- --------
INVESTING ACTIVITIES
Capital expenditures (29,096) (14,575)
Proceeds from held-to-maturity investments 1,000 42,453
-------- --------
Net cash provided from (used for) investing activities (28,096) 27,878
-------- --------
FINANCING ACTIVITIES
Dividends paid (24,055) (52,150)
Proceeds from borrowings - 47,000
Repayment of borrowings (5,000) (921)
Escrow deposits on long-term loans 439 (10,151)
Purchase of labor share interest (3,056) -
Net treasury stock transactions - (1,155)
-------- --------
Net cash used for financing activities (31,672) (17,377)
-------- --------
Effect of exchange rate changes on cash 249 1,233
-------- --------
Increase in cash and cash equivalents 648 23,094
Cash and cash equivalents, beginning of period 173,205 219,646
-------- --------
Cash and cash equivalents, end of period $ 173,853 $ 242,740
======== ========
</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 March 31, 1997 and the results of operations and cash flows
for the three months ended March 31, 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 period are not necessarily indicative of the results to be expected
for the full year. The accompanying unaudited 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 first quarter
of 1997 is approximately $3.2 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 book 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, book
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 March 31, At December 31,
1997 1996
<S> <C> <C>
Metals at lower of average cost or market:
Finished goods $ 1.3 $ 2.4
Work-in-process 40.1 47.1
Supplies at average cost, net of reserves 69.4 69.2
------ ------
Total inventories $ 110.8 $ 118.7
====== ======
</TABLE>
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<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 recognized in the period in which the underlying hedged production is
sold.
First quarter 1997 earnings include a pre-tax gain of $5.6 million ($3.6
million after-tax) from the sale of put options in 1996 covering copper
sold in the first quarter of 1997.
The recognized pre-tax gains (losses) of the Company's copper hedging
activities, were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
(in millions)
<S> <C> <C>
Hedging activities gains (losses) $ 5.6 $(0.8)
</TABLE>
At March 31, 1997, the Company has recorded sales of 74.2 million pounds of
copper, at a provisional price of $1.09 per pound. These sales are subject
to final pricing based on the average monthly LME copper price principally
in the second quarter of 1997.
At March 31, 1997, the Company held no copper put options.
E. Supplemental Disclosures of Cash Flow Information:
<TABLE>
<CAPTION>
(in millions) Three Months Ended
March 31,
1997 1996
---- ----
<S> <C> <C>
Cash paid for:
Interest expense (net of amount capitalized) $ 2.2 $ 1.0
Income taxes (net of refunds) $ 22.4 $ 60.5
</TABLE>
Non-cash transactions:
During the first quarter of 1997 the Company recorded prepaid Peruvian
taxes and deferred credits as a result of the reinvestment program (see
note B).
- 6 -
<PAGE>
F. Commitments and Contingencies:
Environmental
The Company has made a significant number of environmental capital
expenditures, including, a sulfuric acid plant at the Ilo smelter for
partial recapture of emissions 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 committed 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 ("MPL"s) within a period of five years, except for
environmental controls applicable to its smelter operation which must be
put in place within 10 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 10-year implementation period. The Company remains,
however, subject to other environmental requirements applicable to its
operations.
Litigation
In February 1993, the Mayor of Tacna 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.
- 7 -
<PAGE>
In April 1996, SP 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.
SP Limited, other present and former corporate shareholders of SP Limited
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 SP Limited in Peru. Plaintiffs have
appealed 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. Oral arguments were heard in December 1996 and the
appellate court's decision is pending.
It is the opinion of management that the outcome of the legal proceedings
mentioned, as well as other miscellaneous litigation and proceedings now
pending, will not materially adversely affect the financial position of the
Company and its consolidated subsidiaries. However, it is possible that
litigation matters could have a material effect on quarterly or annual
operating results, when they are resolved in future periods.
G. Common Stock:
On March 3, 1997, Cerro Trading Company, Inc. transferred 650,000 Class A
common stock shares to The Pritzker Family Philanthropic Fund. In
accordance with the Company's Certificate of Incorporation these shares
were automatically converted into common stock of the Company.
On April 30, 1997, the Company declared a $0.35 per share dividend payable
June 2, 1997 to stockholders of record at the close of business on May 16,
1997.
- 8 -
<PAGE>
H. Summarized Financial Information of Significant Subsidiary:
The condensed consolidated financial information for Southern Peru Limited,
a wholly owned subsidiary of Southern Peru Copper Corporation, included in
the consolidated financial statements of the Company, is summarized below:
Statement of Earnings and Cash Flow
(in millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
---- ----
<S> <C> <C>
Earnings:
Net sales $214.8 $196.4
Operating income 75.3 72.1
Net earnings $55.8 $49.1
Cash Flow:
Operating activities $60.2 $11.4
Investing activities (28.1) 27.9
Financing activities (31.7) (17.4)
Balance Sheet
(in millions) At March 31, 1997 At December 31, 1996
------------------ --------------------
Current assets $463.4 $403.1
Noncurrent assets 894.6 876.7
Current liabilities 93.4 105.3
Noncurrent liabilities 195.7 137.1
Minority interest 22.2 22.4
Stockkholders' equity 1,046.8 1,015.0
</TABLE>
Southern Peru Limited holds all the operating assets and liabilities of the
Company and does not hold any other operating assets.
I. Impact of New Accounting Standard:
In February 1997, the Accounting Standards Board issued Statement of
Financial Accounting Standards 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.
- 9 -
<PAGE>
J. Subsequent Events:
On April 18, 1997, the Company completed the sale of its Ilo power plant to
a subsidiary of Tractebel S.A. ("Tractebel"), for $44.2 million, the
approximate book value of the assets. 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 the expanded operations.
On April 3, 1997, the Company entered into a committed seven-year loan
facility totaling $600 million with a group of international financial
institutions. The facility consists of a $400 million term loan portion and
a $200 million revolving credit line. The term loan facility bears an
initial interest rate of LIBOR plus 1.75%, subject to the Company receiving
an investment grade rating from an accredited rating agency.
- 10 -
<PAGE>
Part I Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reported net earnings of $55.8 million, or $0.70 per share, for the
first quarter ended March 31, 1997 compared with net earnings of $49.1 million,
or $0.61 per share, for the first quarter of 1996. The increase in earnings in
1997 resulted primarily from the Company's price protection program, a reduction
in the Company's effective tax rate due to a reinvestment tax incentive in Peru,
and favorable adjustments to provisionally priced sales made in the fourth
quarter of 1996.
Copper mine production increased 2% to 164.5 million pounds in the first quarter
of 1997 despite the heavy rains and flooding which disrupted operations for
several days in early March. Floods damaged roadways and railroad tracks
necessitating temporary repairs while permanent replacements are built. SPCC has
property damage and business interruption insurance and claims have been filed.
First quarter 1997 earnings include pre-tax gains of $5.6 million ($3.6 million
after-tax) related to the sale of copper put options in 1996 covering copper
sold in the first quarter of 1997. The Company has recognized cumulative pre-tax
gains of $16.7 million ($10.9 million after-tax) from its price protection
program since July 1996.
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 first quarter of 1997 is approximately $3.2 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 book 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, book
depreciation expense related to the qualifying property will be reduced over its
useful life (approximately 15 years).
Pricing for most of the Company's sales of copper is finalized one or two months
after shipment to customers. Sales are recorded based on prices in effect at the
time of shipment or the period end, if lower. Adjustments recorded in the first
quarter of 1997 for provisionally priced sales made in the fourth quarter of
1996 increased sales by $9.4 million and net earnings by $6.3 million. In the
first quarter of 1996, adjustments to provisionally priced sales decreased sales
by $10.4 million and net earnings by $6.2 million.
- 11 -
<PAGE>
The Company's expansion program is proceeding on schedule. In April the Company
entered into a committed seven year loan facility totaling $600 million with a
group of international financial institutions. With the financing in place, the
Company is proceeding with the expansion of the Cuajone mine which is expected
to increase the Company's annual copper production by 19% or 130 million pounds
when completed in early 1999.
Net Sales: Net sales in the first quarter of 1997 increased $18.4 million to
$214.8 million from the comparable period in 1996. The increase in net sales was
a result of final adjustments to provisionally priced sales and the recognition
of a $5.6 million gain on sales of copper put options in 1996 covering first
quarter 1997 copper sales, partially offset by lower copper prices in the first
quarter of 1997 as compared with the first quarter of 1996.
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
March 31,
Price Volume Data 1997 1996
- ----------------- ---- ----
<S> <C> <C>
Average Metal Prices
Copper (per pound-LME) $1.10 $1.17
Molybdenum (per pound-Metals Week Dealer Oxide) $4.38 $3.97
Silver (per ounce-COMEX) $5.01 $5.54
Sales Volume (in thousands)
Copper (pounds) 172,000 169,000
Molybdenum (pounds)(1) 2,234 1,867
Silver (ounces) 679 819
</TABLE>
(1) The Company's molybdenum production is sold in concentrate form. The
volume represents pounds of molybdenum contained in concentrate.
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 recognized in the period in
which the underlying hedged production is sold.
First quarter 1997 earnings include a pre-tax gain of $5.6 million ($3.6 million
after-tax) from the sale of put options in 1996 covering copper sold in the
first quarter of 1997.
- 12 -
<PAGE>
Gains and (Losses) The recognized pre-tax gains (losses) of the Company's copper
hedging activities, were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
(in millions)
<S> <C> <C>
Hedging activities gains (losses) $ 5.6 $(0.8)
</TABLE>
At March 31, 1997, the Company held no copper put options.
Operating Costs and Expenses: Operating costs and expenses were $139.4 million
in the first quarter of 1997 compared with $124.3 million for the same period in
1996. Cost of sales for the three months ended March 31, 1997 and 1996 were
$108.5 million and $94.7 million, respectively. The increase in cost of sales is
attributable primarily to greater sales of copper produced from purchased
concentrates.
Depreciation expense for the three month period ended March 31, 1997 was $11.5
million compared with $10.3 million in the comparable period in 1996. The higher
1997 depreciation reflects additions to property.
Nonoperating Items: Interest income was $2.9 million in the first quarter of
1997, compared with $6.2 million for the respective period in 1996. The decrease
reflected lower interest rates and lower invested cash balances in 1997. Other
income was $1.4 million in the first quarter of 1997, compared with $2.3 million
for the respective period in 1996. Exchange gains included in other income were
$1.3 million lower in the first quarter of 1997 compared with the comparable
1996 period. Lower current liabilities, related principally to income taxes and
workers' participation were the primary reasons for this reduction. Interest
expense was $2.4 million in the first quarter of 1997, compared with $3.1
million in the first quarter of 1996, primarily a result of a lower outstanding
debt balance and lower interest rates.
Taxes on Income: Taxes on income for the three months ended March 31, 1997 were
$19.8 million, compared with $26.3 million for the respective period 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 in the first quarter represents an accrual of
approximately 2.7% in 1997 and 3.3% in 1996, of the Branch's after-tax earnings,
as determined under Peruvian GAAP. The Labor Share percentage participation in
earnings decreased as a result of the Company's purchases of labor shares.
Cash Flows - Operating Activities: Net cash provided from operating activities
was $60.2 million in the first quarter of 1997, compared with $11.4 million in
the comparable 1996 period. The increase in operating cash flow was primarily a
result of lower payments for prior year's Peruvian income taxes and workers'
participation and higher net earnings in the first quarter of 1997, partially
offset by higher accounts receivable in the first quarter of 1997.
- 13 -
<PAGE>
Cash Flows - Investing Activities: Investing activities used cash of $28.1
million for the first quarter of 1997 compared with a source of cash of $27.9
million for the first quarter of 1996. The 1996 period included proceeds from
the maturity of investments of $42.5 million. In 1997, capital expenditures were
$29.1 million compared with $14.6 million in the respective period of 1996.
Cash Flows - Financing Activities: Financing activities in the first quarter of
1997 included the scheduled payment of $5.0 million of the Company's long-term
debt, distribution of $24.1 million of dividends and $3.1 million to repurchase
labor shares. In the first quarter of 1996, net borrowings after escrow
requirements were $35.9 million, dividends distributed were $52.2 million and
funds used to purchase treasury stock were $1.2 million.
Liquidity and Capital Resources: At March 31, 1997, the Company's debt as a
percentage of total capitalization (total debt, minority interests and
stockholders' equity) was 8.7%, compared with 9.3% at December 31, 1996. Debt at
March 31, 1997 was $101.6 million, compared with $106.6 million at the end of
1996.
On April 3, 1997, the Company entered into a committed seven-year loan facility
totaling $600 million with a group of international financial institutions. The
facility consists of a $400 million term loan portion and a $200 million
revolving credit line. The term loan facility bears an initial interest rate of
LIBOR plus 1.75%, subject to the Company receiving an investment grade rating
from an accredited rating agency.
The Company expects that it will meet its cash requirements for 1997 and beyond
from internally generated funds, cash on hand, from borrowings under the
facility or from additional external financing.
In the first quarter of 1997, the Company paid a dividend to shareholders of
$24.1 million or $0.30 per share. On April 30, 1997, the Company declared a
quarterly dividend on the common stock of $0.35 per share payable June 2, 1997
to stockholders of record at the close of business on May 16, 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 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. Commencement of the project is subject to arranging financing
and final engineering.
- 14 -
<PAGE>
The Cuajone mine expansion, which is expected to increase the Company's annual
copper production by 130 million pounds, is expected to require a capital
investment of approximately $245 million and is expected to be completed in
1999.
Engineering for the second stage of the program, the expansion and modernization
of the Ilo smelter has begun. Following completion of the preliminary
engineering and securing of the financing, SPCC plans to modernize its existing
copper smelter at Ilo and increase its capacity. 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.
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
expects 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.
- 15 -
<PAGE>
Impact of New Accounting Standards: In February 1997, the Accounting Standards
Board issued Statement of Financial Accounting Standards 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.
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.
- 16 -
<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 March 31, 1997 and
the interim condensed consolidated statements of earnings and cash flows for the
three months ended March 31, 1997 and 1996. 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
April 18, 1997
- 17 -
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On April 29, 1996, Southern Peru Limited, a subsidiary of the Company ("SP
Limited"), was served with a complaint filed in Peru by approximately 800 former
employees challenging the accounting of the 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 1970s. 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.
As of March 31, 1997, 127 additional former employees filed a similar lawsuit.
- 18 -
<PAGE>
Item 4 - Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders of the Company held on May 1, 1997, the
holders of Common Stock, voting as a class, were asked to elect two directors,
the holders of Class A Common Stock, voting as a class, were asked to elect 13
directors, and both classes, voting together, were asked to approve the
selection of the independent accountants for 1997.
Votes cast in the election of directors by holders of Common Stock were as
follows:
<TABLE>
<CAPTION>
Number of Shares
Names For Withheld
<S> <C> <C>
Amb. Everett E. Briggs 10,722,948 142,345
John F. McGillicuddy 10,735,275 130,018
</TABLE>
In the election of directors by holders of Class A Common Stock, each of the
following directors received 65,900,833 votes and no votes were withheld:
<TABLE>
<CAPTION>
<S> <C>
Jaime Claro Charles G. Preble
Augustus B. Kinsolving Robert A. Pritzker
Francis R. McAllister Michael O. Varner
Kevin R. Morano J. Steven Whisler
Robert J. Muth David B. Woodbury
Robert M. Novotny Douglas C. Yearley
Richard de J. Osborne
</TABLE>
Stockholders approved the selection of the independent accountants as follows:
<TABLE>
<CAPTION>
For Against Withheld
<S> <C> <C> <C>
Common Stock: 10,747,859 48,960 68,474
Class A Common Stock: 329,504,165 0 0
----------- ---------- ------------
Total 340,252,024 48,960 68,474
</TABLE>
Holders of Class A Common Stock are entitled to five votes per share when voting
together with the holders of Common Stock as one class.
- 19 -
<PAGE>
Item 6(a) - Exhibits on Form 10Q
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
<S> <C>
3 Certificate of Incorporation and By-Laws
3.1 Certificate of Decrease, filed March 24, 1997
3.2 Certificate of Increase, filed March 24, 1997
11 Statement re Computation of Earnings per Share
</TABLE>
- 20 -
<PAGE>
Exhibit 3.1
SOUTHERN PERU COPPER CORPORATION
CERTIFICATE OF DECREASE
OF
CLASS A COMMON STOCK
OF
SOUTHERN PERU COPPER CORPORATION
(Pursuant to Section 151(g) of the
Delaware General Corporation Law)
Southern Peru Copper Corporation, a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
does hereby certify:
FIRST: In Certificate of Designation filed with the Secretary of State
of the State of Delaware pursuant to Section 151 of the General Corporation Law
of the State of Delaware, the Corporation was authorized to issue 68,750,833
shares of Class A Common Stock, par value one cent ($0.01) per share (the Class
A Common Stock), as a series of the Corporation's authorized capital stock,
which number was decreased to 66,550,833 by a Certificate of Decrease filed with
the Secretary of State of the State of Delaware on February 29, 1996;
SECOND: The Board of Directors of the Corporation by resolution duly
authorized and directed that the number of shares of the Corporation's Class A
Common Stock be decreased from 66,550,833 shares to 65,900,833 shares.
IN WITNESS WHEREOF the Corporation has caused this Certificate to be
signed by its Secretary this 24th day of March 1997.
SOUTHERN PERU COPPER CORPORATION
/S/ Augustus B. Kinsolving
Augustus B. Kinsolving
Secretary
<PAGE>
Exhibit 3.2
SOUTHERN PERU COPPER CORPORATION
CERTIFICATE OF INCREASE
OF
COMMON STOCK
OF
SOUTHERN PERU COPPER CORPORATION
(Pursuant to Section 151(g) of the
Delaware General Corporation Law)
Southern Peru Copper Corporation, a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
does hereby certify:
FIRST: In a Certificate of Designation filed with the Secretary of
State of the State of Delaware pursuant to Section 151 of the General
Corporation Law of the State of Delaware, the Corporation was authorized to
issue 31,249,167 shares of Common Stock, par value one cent ($0.01) per share
(the "Common Stock"), as a series of the Corporation's authorized capital stock,
which number was increased to 33,449,167 by a Certificate of Increase filed with
the Secretary of State of the State of Delaware on February 29, 1996;
SECOND: The Board of Directors of the Corporation by resolution duly
authorized and directed that the number of shares of the Corporation's Common
Stock be increased from 33,449,167 shares to 34,099,167 shares.
IN WITNESS WHEREOF the Corporation has caused this Certificate to be
signed by its Secretary this 24th day of March, 1997.
SOUTHERN PERU COPPER CORPORATION
/S/ Augustus B. Kinsolving
Augustus B. Kinsolving
Secretary
<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>
3 Months Ended
March 31,
1997 1996
---- ----
<S> <C> <C>
Net earnings applicable to common stock $55,816 $49,108
======= =======
Weighted average number of common shares outstanding 80,192 80,218
Shares issuable from assumed exercise of Stock Options 3 -
------- -------
Weighted average number of common shares outstanding, 80,195 80,218
======= =======
as adjusted
Fully diluted earnings per share:
Net earnings applicable to common stock $.70 $.61
==== ====
Primary earnings per share:
Net earnings applicable to common stock $.70 $.61
==== ====
</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: May 13, 1997 /s/ Ronald J. O'Keefe
---------------------
Ronald J. O'Keefe
Executive Vice President and
Chief Financial Officer
Date: May 13, 1997 /s/ Brendan M. O'Grady
----------------------
Brendan M. O'Grady
Comptroller
- 21 -
<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 April 18, 1997 on our review of the interim
financial information of Southern Peru Copper Corporation and Subsidiaries as of
March 31, 1997 and for the three months ended March 31, 1997 and 1996 and
included in this Form 10-Q for the quarter ended March 31, 1997 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
May 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 173853
<SECURITIES> 0
<RECEIVABLES> 96193
<ALLOWANCES> 0
<INVENTORY> 110843
<CURRENT-ASSETS> 463442
<PP&E> 1766081
<DEPRECIATION> 891858
<TOTAL-ASSETS> 1358048
<CURRENT-LIABILITIES> 93438
<BONDS> 0
<COMMON> 266025
0
0
<OTHER-SE> 780762
<TOTAL-LIABILITY-AND-EQUITY> 1358048
<SALES> 214786
<TOTAL-REVENUES> 214786
<CGS> 108517
<TOTAL-COSTS> 108517
<OTHER-EXPENSES> 30921
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2440
<INCOME-PRETAX> 77164
<INCOME-TAX> 19805
<INCOME-CONTINUING> 57359
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55816
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.70
</TABLE>
