SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
1997 FORM 10-K/A
(Amendment No. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File Number: 1-14066
SOUTHERN PERU COPPER CORPORATION
(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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, par value $0.01 per share New York Stock Exchange
Lima Stock Exchange
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best knowledge of the registrant, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [X]
As of February 27, 1998, there were of record 13,981,972 shares of Common Stock,
par value $0.01 per share, outstanding, and the aggregate market value of the
shares of Common Stock (based upon the closing price on such date as reported on
the New York Stock Exchange - Composite Transactions) of Southern Peru Copper
Corporation held by nonaffiliates was approximately $184 million. As of the
above date, there were also 65,900,833 shares of Class A Common Stock, par value
$0.01 per share, outstanding. Class A Common Stock is convertible on a
one-to-one basis into Common Stock.
PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE:
Part III: Proxy statement in connection with the Annual Meeting to be held on
April 30, 1998.
Part IV: Exhibit index is on page B1.
<PAGE>
Southern Peru Copper Corporation and Subsidiaries
Form 10-K/A
(Amendment No. 1)
December 31, 1997
The undersigned registrant hereby amends the 1997 Annual Report on Form 10-K as
set forth in the pages attached hereto to correct a typographical error in the
number for Deferred Income Taxes for 1997 in the consolidated balance sheet and
in footnote No. 14 to the consolidated financial statements presented in
Item 8. Financial Statements and Supplementary Data.
In satisfaction of applicable rules of the Securities and Exchange Commission,
the following item has been refiled to reflect such corrections:
Item 8. Financial Statements and Supplementary Data.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
Southern Peru Copper Corporation
By /s/ Ronald J. O'Keefe
----------------------------
Ronald J. O'Keefe
Chief Financial Officer
Date: March 26, 1998
<PAGE>
A26
Item 8. Financial Statements and Supplementary Data.
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
For the years ended December 31, 1997 1996 1995
(in thousands, except for per share amounts) ---- ---- ----
<S> <C> <C> <C>
Net sales:
Stockholders and affiliates $ 59,897 $ 71,740 $ 85,819
Others 754,259 681,292 843,021
---------------- --------------- --------------
Total net sales 814,156 753,032 928,840
Operating costs and expenses:
Cost of sales 456,509 389,577 439,382
Administrative and other 53,769 49,979 52,687
Depreciation and depletion 46,736 41,623 35,952
Provision for workers' participation 14,392 18,025 32,212
Exploration 7,390 5,063 1,950
---------------- --------------- --------------
Total operating costs and expenses 578,796 504,267 562,183
---------------- --------------- --------------
Operating income 235,360 248,765 366,657
Interest income 20,934 18,264 14,827
Interest expense (19,573) (12,467) (13,904)
Other income 8,984 11,358 12,825
---------------- --------------- --------------
Earnings before taxes on income and minority interest
of labor shares 245,705 265,920 380,405
Taxes on income 55,610 80,200 119,093
Minority interest of labor shares in income of Peruvian
Branch (4,437) (5,208) (43,558)
---------------- --------------- --------------
Net earnings $185,658 $180,512 $217,754
================ =============== ==============
Per common share amounts:
Net earnings - basic and diluted $2.32 $2.25 $3.31
Dividends paid $1.26 $1.47 $1.27
Weighted average number of shares outstanding-basic 80,188 80,195 65,717
Weighted average number of shares outstanding-diluted 80,197 80,252 65,717
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
A27
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
At December 31, 1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 126,491 $ 173,205
Marketable securities 204,590 1,000
Accounts receivable:
Trade:
Stockholders and affiliates 2,941 8,504
Other trade 44,740 70,252
Other 26,083 10,831
Inventories 108,683 118,681
Other current assets 48,062 20,637
-----------------------------------
Total current assets 561,590 403,110
Net property 947,457 855,808
Other assets 34,278 20,931
===================================
Total assets $1,543,325 $1,279,849
===================================
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 13,683 $ 23,683
Accounts payable:
Trade 22,296 23,740
Other 25,645 10,124
Other current liabilities 23,490 47,768
-----------------------------------
Total current liabilities 85,114 105,315
-----------------------------------
Long-term debt 234,208 82,892
Deferred credits 58,574 -
Deferred income taxes 44,323 49,426
Other liabilities 4,083 4,806
-----------------------------------
Total non-current liabilities 341,188 137,124
-----------------------------------
Contingencies
Minority interest of labor shares in the
Peruvian Branch 19,385 22,383
-----------------------------------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01; shares authorized:
1997 - 34,099,167; 1996 - 33,449,167
shares issued: 1997 - 14,330,093;
1996 - 13,680,093 143 137
Class A Common stock, par value $0.01;
Shares issued and authorized: 1997 - 65,900,833;
1996 - 66,550,833 659 666
Additional paid-in capital 265,745 265,745
Retained earnings 833,560 749,267
Treasury stock, at cost, common shares 1997 -
172,986; 1996 - 46,419 (2,469) (788)
-----------------------------------
Total Stockholders' Equity 1,097,638 1,015,027
-----------------------------------
Total Liabilities, Minority Interest
and Stockholders' Equity $1,543,325 $1,279,849
===================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
A28
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31, 1997 1996 1995
---- ----- ----
(Dollars in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $185,658 $180,512 $217,754
Adjustments to reconcile net earnings to net cash provided from operating
activities:
Depreciation and depletion 46,736 41,623 35,952
Provision (benefit) for deferred income taxes (7,289) 12,043 3,168
Minority interest of labor shares 4,437 5,208 43,558
Net loss on sale of investments and property 268 110 2,473
Cash provided from (used for) operating assets and liabilities:
Accounts receivable 15,718 10,498 (1,939)
Inventories 9,998 (15,046) 7,992
Accounts payable and accrued liabilities (7,089) (52,023) 19,667
Other operating assets and liabilities 30,747 (17,444) 7,699
Foreign currency transaction gain (1,616) (6,707) (5,950)
----------------------------------------------------
Net cash provided from operating activities 277,568 158,774 330,374
----------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (183,956) (120,803) (183,041)
Release of restricted cash - - 60,450
Purchase of held-to-maturity investments (204,590) - (76,333)
Proceeds from held-to-maturity investments 1,000 41,453 76,877
Sales of investments and property 49,914 - 2,596
----------------------------------------------------
Net cash used for investing activities (337,632) (79,350) (119,451)
----------------------------------------------------
FINANCING ACTIVITIES
Debt incurred 200,000 47,000 62,000
Debt repaid (58,684) (34,289) (86,110)
Escrow deposits on long-term loans (15,364) (10,065) 10,809
Dividends paid to common stockholders (101,050) (117,913) (83,747)
Distributions to minority interests (2,504) (4,091) -
Net treasury stock transactions (1,681) (1,155) -
Purchases of labor shares (8,885) (7,130) -
Proceeds from labor share subscription - - 10,944
----------------------------------------------------
Net cash provided from (used for)
financing activities 11,832 (127,643) (86,104)
----------------------------------------------------
Effect of exchange rate changes on cash 1,518 1,778 1,491
----------------------------------------------------
Increase (decrease) in cash and cash equivalents (46,714) (46,441) 126,310
Cash and cash equivalents, at beginning of year 173,205 219,646 93,336
----------------------------------------------------
Cash and cash equivalents, at end of year $126,491 $173,205 $219,646
----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
A29
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
For the years ended December 31, 1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
CAPITAL STOCK:
SOUTHERN PERU COPPER CORPORATION
COMMON STOCK:
Balance at beginning of year $137 $115 $ -
Issuance of 11,480,093 shares - - 115
Conversion from Class A to Common Stock, 1997 - 650,000 shares; 1996 -
2,200,000 shares 6 22 -
---------------------------------------------------
Balance at end of year 143 137 115
---------------------------------------------------
CLASS A COMMON STOCK:
Balance at beginning of year 666 688 -
Issuance of 68,750,833 shares - - 688
Conversion to Common Stock, 1997 - 650,000 shares;
1996 - 2,200,000 shares (7) (22) -
---------------------------------------------------
Balance at end of year 659 666 688
---------------------------------------------------
SOUTHERN PERU LIMITED
COMMON STOCK:
Balance at beginning of year, 76,251,193 shares - - 763
Retirement of treasury stock, 10,533,700 shares - - (106)
Exchange for shares of Southern Peru
Copper Corporation, 65,717,493 shares - - (657)
---------------------------------------------------
Balance at end of year - - -
---------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
SOUTHERN PERU COPPER CORPORATION
Balance at beginning of year 265,745 265,738 -
Additional paid-in capital on shares issued - - 81,222
Market value of shares issued in exchange for
labor shares - - 184,516
Additional paid-in capital on treasury shares issued - 7 -
---------------------------------------------------
Balance at end of year 265,745 265,745 265,738
---------------------------------------------------
SOUTHERN PERU LIMITED
Balance at beginning of year - - 122,477
Retirement of treasury stock - - (41,224)
Exchange to shares of Southern Peru Copper Corp. - - (81,253)
---------------------------------------------------
Balance at end of year - - -
---------------------------------------------------
TREASURY STOCK:
SOUTHERN PERU COPPER CORPORATION
Balance at beginning of year (788) - -
Purchased (1,997) (1,155) -
Used for corporate purposes 316 367 -
---------------------------------------------------
Balance at end of year (2,469) (788) -
---------------------------------------------------
SOUTHERN PERU LIMITED
Balance at beginning of year, 10,533,700 shares - - (60,000)
Retirement of 10,533,700 shares of treasury stock - - 60,000
---------------------------------------------------
Balance at end of year - - -
---------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 749,267 686,946 571,609
Net earnings 185,658 180,512 217,754
Dividends paid (101,050) (117,913) (83,747)
Stock awards (315) (278) -
Retirement of treasury stock - - (18,670)
---------------------------------------------------
Balance at end of year 833,560 749,267 686,946
---------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $1,097,638 $1,015,027 $ 953,487
---------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
A30
SOUTHERN PERU COPPER CORPORATION
and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of consolidation:
The consolidated financial statements of Southern Peru Copper Corporation and
Subsidiaries (the Company) include the accounts of significant subsidiaries in
which the Company has voting control, and are prepared in accordance with
generally accepted accounting principles in the United States (U.S. GAAP).
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
Use of estimates:
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue recognition:
Substantially all of the Company's copper is sold under annual contracts. Sales
are recognized when title passes. Pricing is based on prevailing monthly average
London Metal Exchange (LME) copper prices for a quotation period, generally
being the month of, the month prior or the month following the actual or
contractual month of shipment or delivery according to the terms of the
contracts. Price estimates used for provisionally priced sales are based on
prices in effect at the time of shipment or period end prices, if lower, and
these estimates are subject to change during the settlement period. The Company
sells copper in blister and refined form at industry standard commercial terms.
Net sales include the invoiced value of copper, silver, molybdenum, and gains
from the sale or settlement of copper put options.
Cash equivalents and marketable securities:
Cash equivalents include all highly liquid investments with a maturity of three
months or less, when purchased. Marketable securities include short-term liquid
investments with a maturity of more than three months, when purchased, and are
carried at cost, which approximates market.
Inventories:
Metal inventories are carried at the lower of average cost or market. Costs
incurred in the production of metal inventories exclude general and
administrative costs. Supplies inventories are carried at average cost less a
reserve for obsolescence.
Property:
Assets are valued at cost or net realizable value. In accordance with SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", the Company reviews long-lived assets, certain
identifiable intangibles and goodwill related to those assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. The impairment loss on such assets, as well
as long-lived assets and certain identifiable intangibles to be disposed of, is
measured as the amount by which the carrying value of the assets exceeds the
fair value of the assets (less disposal costs, if applicable).
The Company evaluates the carrying value of assets based on undiscounted future
cash flows considering expected metal prices based on historical metal prices
and price trends.
<PAGE>
A31
Betterments, renewals, costs of bringing new mineral properties into production,
and the cost of major development programs at existing mines are capitalized as
mineral land. Maintenance, repairs, normal development costs at existing mines,
and gains or losses on assets retired or sold are reflected in earnings as
incurred. Buildings and equipment are depreciated on the straight-line method
over estimated lives from 5 to 40 years, or the estimated life of the mine if
shorter. Depletion of mineral land is computed by the units-of-production method
using proven and probable ore reserves.
Exploration:
Tangible and intangible costs incurred in the search for mineral properties are
charged against earnings when incurred.
Financial Instruments:
The Company may use derivative instruments to manage its exposure to market risk
from changes in commodity prices. Derivative instruments which are designated as
hedges must be deemed effective at reducing the risk associated with the
exposure being hedged and must be designated as a hedge at the inception of the
contract.
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 a portion of its anticipated future
production. The cost of options is amortized on a straight-line basis during the
period in which the options are exercisable. Gains or losses from the sale or
exercise of options, net of unamortized acquisition costs, are recognized in the
period in which the underlying hedged production is sold and are reported as a
component of the underlying transaction.
The Company may enter into fuel swap agreements to limit the effect of fuel
price changes on production costs. A fuel swap establishes a fixed price for the
quantity of fuel covered by the agreement. The difference between the published
price for fuel and the price established in the contract for the month covered
by the swap is recognized in production costs.
Stock Based Compensation:
In 1996 the Company elected to apply the disclosure only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."
Impact of New Accounting Standard:
In 1997 the Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share." The statement did not have a material impact on the
Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
statement which is effective for fiscal years beginning after December 15, 1997,
requires the Company to make certain disclosures but has no impact on the
Company's financial statements.
2. Exchange Offer
Southern Peru Copper Holding Company, (the Holding Company), was incorporated on
September 7, 1995, pursuant to the General Corporation Law of the State of
Delaware for the purpose of conducting an exchange offer of its common stock,
par value $0.01 per share for any and all labor shares of the Peruvian Branch
(the Branch) of Southern Peru Copper Corporation (the Operating Company). In
connection with the exchange offer, the Operating Company changed its name to
Southern Peru Limited (SP Limited) and the Holding Company changed its name to
Southern Peru Copper Corporation.
<PAGE>
A32
The exchange offer expired on December 29, 1995, with 80.8% of the labor shares
tendered which reduced the interest of labor shares from 17.3% to 3.3%. The
common stock is listed on the New York Stock Exchange and the Lima Stock
Exchange and trading commenced January 5, 1996.
In addition, the stockholders of SP Limited exchanged 65,717,493 shares of their
common stock for 68,750,833 shares of Class A common stock in the Company.
With the completion of the exchange offer, the Company has outstanding two
classes of common stock, the common stock exchanged for labor shares and Class A
common stock which at December 31, 1997, represented 17.8% and 82.2% of the
common equity of the Company, respectively. Holders of common stock are entitled
to one vote per share and holders of Class A common stock are entitled to five
votes per share except for the election of directors and as required by law.
The exchange of common stock for labor shares was accounted for as a purchase of
a minority interest. The value of the common stock issued in the exchange (based
on the average per share trading value for the three business days ended January
9, 1996) plus issuance costs exceeded the carrying value of the minority
interests acquired by $82.0 million, net of income taxes. The increase in value
was assigned to proven and probable sulfide and leachable ore reserves and
mineralized material which is being amortized based on the units of production
method, and to metal inventory.
The following table provides the comparative unaudited proforma 1995 earnings
information, as if the exchange offer were completed on January 1, 1995:
<TABLE>
<CAPTION>
1995
(Unaudited)
<S> <C> <C>
Historical Proforma
(in millions, except per share data)
Net sales $ 928.8 $ 928.8
------ ------
Earnings before taxes on
income and minority interest of labor shares 380.4 370.7(a)
Taxes on income 119.1 118.9(b)
Minority interest of labor
shares in Peruvian Branch 43.5 7.7(c)
-- ---- ----
Net earnings $ 217.8 $ 244.1
====== ======
Net earnings per share (basic and diluted) $ 3.31 $ 3.04
Cash dividends paid per share $ 1.27 $ 1.04
Weighted average number of
shares outstanding 65.7 80.2
</TABLE>
(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 proven
and probable mineral reserves, mineralized material and to metal inventory.
Proforma earnings reflect the amortization of the excess of market value
over book value which was assigned to mineral reserves and mineralized
material, based on actual copper production and a charge to cost of
products sold of the excess amount which would have been assigned to metal
inventory at January 1, 1995.
(b) Reflects the reduction of the deferred income taxes related to the
amortization of 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.
(c) Reflects the reduction of the minority interest of the labor shares
tendered pursuant to the exchange offer.
<PAGE>
A33
3. Foreign Exchange
The functional currency of the Company is the U.S. dollar. The Company's sales,
cash, trade receivables, fixed asset additions, trade payables and debt are
primarily dollar-denominated. A portion of the operating costs of the Company is
denominated in Peruvian soles.
Gains resulting from foreign currency transactions are included in "Other
income" and amounted to $2.0 million, $6.7 million and $6.0 million in 1997,
1996 and 1995, respectively.
4. Taxes on Income
The components of the provision for taxes on income are as follows:
<TABLE>
<CAPTION>
For the years ended December 31, 1997 1996 1995
---- ---- ----
(in millions)
<S> <C> <C> <C>
------------------- --------------- ---------------
U.S. Federal and state $ 10.6 $ 5.3 $ 4.6
------------------- --------------- ---------------
Foreign:
Current 52.3 62.9 111.3
Deferred (7.3) 12.0 3.2
------------------- --------------- ---------------
Foreign 45.0 74.9 114.5
=================== =============== ===============
Total provision for income taxes $ 55.6 $ 80.2 $ 119.1
=================== =============== ===============
</TABLE>
Total taxes paid were $30.1 million, $123.4 million and $80.1 million in
1997, 1996 and 1995, respectively.
Reconciliation of the statutory income tax rate to the effective income tax rate
is as follows:
<TABLE>
<CAPTION>
For the years ended December 31, 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Peruvian income tax at maximum
statutory rates 30.0% 30.0% 30.0%
U.S. income tax at statutory rate 35.0 35.0 35.0
Utilization of foreign tax credits (16.9) (25.3) (27.9)
Peruvian reinvestment allowance (9.0) - -
Alternative minimum tax (AMT) credit (3.4) - -
Percentage depletion (9.6) (9.0) (6.6)
Income not deductible (not taxable)
in Peru (2.6) (1.8) 0.1
Other (0.9) 1.3 0.7
==================== =================== ====================
Effective income tax rate 22.6% 30.2% 31.3%
==================== =================== ====================
</TABLE>
<PAGE>
A34
Temporary differences and carryforwards which give rise to deferred tax assets,
liabilities and related valuation allowances are as follows:
<TABLE>
<CAPTION>
Deferred tax assets (liabilities)
At December 31, 1997 1996
---- ----
(in millions)
<S> <C> <C>
Current:
Accounts receivable $1.6 $ 0.5
Inventories 0.1 0.1
------------------- ------------------
Net deferred tax assets 1.7 0.6
------------------- ------------------
Non-current:
Foreign tax credit carryforwards - 69.4
AMT credit carryforwards - 6.8
Property, plant and equipment (43.5) (48.7)
Other (0.8) (0.7)
Valuation allowance for deferred tax assets - (76.2)
------------------- ------------------
Net deferred tax liabilities (44.3) (49.4)
------------------- ------------------
Total net deferred tax liabilities $(42.6) $ (48.8)
=================== ==================
</TABLE>
The decrease in the valuation allowance of $76.2 million from 1996 to 1997 is
primarily attributable to the utilization of foreign tax credits and alternative
minimum tax credits in 1997.
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 SPCC with tax incentives in Peru, and as a result, certain
U.S. tax credit carryforwards, for which no benefit had previously been
recorded, were realized. The reduction in the effective tax rate, as a result of
the reinvestment allowance for the twelve months ended December 31, 1997,
lowered tax expense approximately $14.7 million. Pursuant to the reinvestment
allowance SPCC has received 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).
The Company obtains income tax credits in Peru for value-added taxes (VAT)paid
in connection with the purchase of capital equipment and other goods and
services employed in its operations and records these credits as a prepaid
expense. Under current Peruvian law, the Company is entitled to use the credits
against its Peruvian income tax liability or to receive a refund. The carrying
value of these Peruvian tax credits approximates their market value.
<PAGE>
A35
5. Net Sales
<TABLE>
<CAPTION>
Net sales by country were as follows:
For the years ended December 31, 1997 1996 1995
---- ---- ----
(in millions)
<S> <C> <C> <C>
United States $132.1 $ 77.4 $ 60.3
Italy 110.0 109.4 153.0
United Kingdom 98.4 110.3 108.8
The Netherlands 83.8 94.3 189.7
Japan 72.5 82.0 102.4
Foreign - Other 317.4 279.6 314.6
================ ============== ===============
Net sales $814.2 $753.0 $928.8
================ ============== ===============
</TABLE>
At December 31, 1997, the Company had recorded sales of 42.1 million pounds of
copper at a provisional price of 78.2 cents per pound. These sales are subject
to final pricing based on the average monthly LME copper price in the month of
final settlement which will occur principally in the first quarter of 1998.
Under the terms of a sales contract with Union Miniere, the Company is required
to supply Union Miniere, through its agent, S.A. Sogem N.V., with 46,300 tons of
blister copper annually for a ten year period from January 1, 1994, through
December 31, 2003. The price of the copper, contained in blister, supplied under
the contract is determined based on the LME monthly average settlement price
less a refining allowance, which is agreed upon annually based on world market
terms.
Under the terms of a sales contract with Mitsui & Co. Ltd (Mitsui), the Company
is required to supply to Mitsui, at its option, up to 26,455 tons of copper
cathodes annually for a seven year period from January 1, 1994 through December
31, 2000. Pricing of the cathodes is based upon the LME monthly average
settlement price plus a producer premium which is agreed upon annually based on
world market terms.
6. Financial Instruments
Hedging Activities: The Company may use derivative instruments to manage its
exposure to market risk from changes in commodity prices. Derivative instruments
which are designated as hedges must be deemed effective at reducing the risk
associated with the exposure being hedged and must be designated as a hedge at
the inception of the contract.
Copper: Depending on the market fundamentals and other conditions, the Company
may purchase put options to reduce or eliminate the risk of price declines below
the option strike price 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. The cost of options is amortized on a
straight-line basis during the period in which the options are exercisable.
Depending upon market conditions the Company may either sell options it holds or
exercise the options at maturity. Gains or losses from the sale or exercise of
options, net of unamortized acquisition costs, are recognized in the period in
which the underlying production is sold and are reported as a component of the
underlying transaction.
<PAGE>
A36
Earnings include gains from option sales and exercises of $10.2 million in 1997,
$9.9 million in 1996 and losses of $2.1 million in 1995.
<TABLE>
<CAPTION>
At December 31, 1997, the Company held the following copper put options:
(in millions, except per pound amounts)
Percent of
Strike Price Unamortized Estimated
Pounds Period Per Pound Cost Production
- ------------ ------------------- ---------------------- --------------------- -------------------------------
<S> <C> <C> <C> <C>
44.0 1/98-3/98 $0.95 $0.6 27%
</TABLE>
Fuel Swaps: The Company may enter into fuel swap agreements to limit the effect
of changes in fuel prices on its production costs. A fuel swap establishes a
fixed price for the quantity of fuel covered by the agreement. The difference
between the published price for fuel and the price established in the contract
for the month covered by the swap is recognized in production costs. As of
December 31, 1997, the Company has entered into the following fuel swap
agreements:
<TABLE>
<CAPTION>
Percent of
Quantity Contract Estimated Fuel
Fuel Type Period (Barrels) Price Requirement
- --------------------------- ----------------------- ------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C>
Residual Oil #6: 1/98-3/98 270,000 $13.21 88%
4/98-12/98 270,000 $13.93 30%
Diesel Fuel #2: 1/98-3/98 80,500 $20.83 54%
4/98-12/98 120,000 $21.40 27%
</TABLE>
The estimated fair value of the Company's financial instruments is:
<TABLE>
<CAPTION>
At December 31, 1997 1996
(in millions) Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $126.5 $126.5 $ 173.2 $ 173.2
Marketable securities -
held to maturity 204.6 204.6 1.0 1.0
Put options 0.6 7.2 - -
Fuel swap agreements - (0.5) - -
Liabilities:
Long-term debt $247.9 $248.3 $ 106.6 $ 102.3
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents - The carrying amount approximates fair value because
of the short maturity of these instruments.
Marketable securities - The carrying amount and fair value are reported at
amortized cost, which approximates market, since these securities are to be held
to maturity.
<PAGE>
A37
Put options - Fair value is an estimate based on relevant market information
such as: volatility of similar options, futures prices and the contracted strike
price.
Fuel swap agreements - Fair value is based on quoted market prices.
Long-term debt - Fair value is based on the quoted market prices for the same or
similar issues.
7. Workers' Participation
Provisions for workers' participation are calculated at 8% of pre-tax Branch
earnings as required by Peruvian law. This participation is accrued during the
year and distributed to workers following determination of final results for the
year.
8. Minority Interest of Labor Shares
The minority interest of the labor shares is based on the earnings of the
Company's Peruvian Branch.
During 1997 and 1996, the Company acquired approximately 2.0 million (1.8
million in 1996) labor shares representing a 0.6% (0.5% in 1996) interest in the
Branch at a total cost of $8.9 million ($7.1 million in 1996). The carrying
value of the minority interest was reduced by $5.1 million and the excess paid
over the carrying value of $3.8 million was assigned primarily to proven and
probable sulfide and leachable ore reserves and mineralized material and is
being amortized based on production. As a result of the acquisition, the
remaining labor shareholders hold a 2.2% interest in the Branch at December 31,
1997, and are entitled to a pro rata participation in the cash distributions
made by the Branch. The labor shares are recorded as a minority interest in the
Company's financial statements.
9. Inventories
<TABLE>
<CAPTION>
At December 31, 1997 1996
---- ----
(in millions)
<S> <C> <C>
Metals:
Finished goods $ 0.6 $ 2.4
Work-in-process 45.0 47.1
Supplies, net of reserves 63.1 69.2
----------------- -----------------
----------------- -----------------
Total inventories $108.7 $118.7
----------------- -----------------
</TABLE>
10. Property
<TABLE>
<CAPTION>
At December 31, 1997 1996
---- ----
(in millions)
<S> <C> <C>
Buildings and equipment $1,574.3 $ 1,503.3
Mineral land 250.0 235.3
Land, other than mineral 1.3 0.9
----------------- -----------------
----------------- -----------------
Total property 1,825.6 1,739.5
Accumulated depreciation 878.1 883.7
---------------- -----------------
Net property $ 947.5 $ 855.8
----------------- -----------------
</TABLE>
<PAGE>
A38
11. Other Current Liabilities
<TABLE>
<CAPTION>
At December 31, 1997 1996
(in millions) ---- ----
<S> <C> <C>
Accrued workers' participation $13.8 $ 16.7
Accrued severance pay, current portion 1.7 3.1
Salaries and wages 8.0 8.1
Taxes on income - 8.9
Other - 11.0
----------------- -----------------
Total other current liabilities $23.5 $ 47.8
----------------- -----------------
</TABLE>
12. Debt and Available Credit Facilities
<TABLE>
<CAPTION>
Long-term debt at December 31, 1997 1996
---- ----
(in millions)
<S> <C> <C>
6.43% EXIM Bank credit agreement $20.4 $ 26.3
CAF credit agreement - average 9.4% 27.5 35.3
Mitsui credit agreement - LIBOR + 2.87% - 45.0
7.9% Secured Export Notes due 2007 150.0 -
8.25% Corporate bonds due 2004 50.0 -
----------------- -----------------
Total debt 247.9 106.6
Less, current portion 13.7 23.7
----------------- -----------------
Total long-term debt $234.2 $ 82.9
----------------- -----------------
</TABLE>
Interest paid by the Company (excluding amounts capitalized of $2.3 million, nil
and $1.8 million in 1997, 1996 and 1995, respectively) was $19.0 million, $10.8
million and $12.6 million in 1997, 1996 and 1995, respectively.
Fees paid for loan agreements of $13.9 million and $1.6 million in 1997 and
1995, respectively, are included in other assets and amortized over the
respective terms of the loans.
Aggregate maturities of the borrowings outstanding at December 31, 1997,
are as follows (in millions):
<TABLE>
<CAPTION>
<S> <C>
1998 $13.7
1999 13.7
2000 23.3
2001 24.3
2002 18.9
Thereafter 154.0
--------------------
Total $247.9
--------------------
</TABLE>
In April 1997, the Company entered into a $600 million seven-year credit
agreement with a group of international financial institutions. The agreement
consists of a $400 million term loan facility and a $200 million revolving
credit facility. The interest rate during the first three years of the agreement
on any loans outstanding is LIBOR plus 1.75% per annum for term loans and LIBOR
plus 2.0% for revolving credit loans. A commitment fee of 0.5% per annum is
payable on the undrawn portion of the facility. No amounts have been drawn under
this agreement as of December 31, 1997.
<PAGE>
A39
In May 1997, the Company privately placed $150 million of Secured Export Notes
in the United States and international markets. These notes were issued with an
average maturity of seven years and a final maturity in 2007 and were priced at
par with a coupon rate of 7.9%. In addition, in June 1997 the Company sold $50
million of 8.25% bonds due June 2004 to investors in Peru.
Some financing agreements contain covenants which limit the payment of dividends
to stockholders. Under the most restrictive covenant, the Company may pay
dividends to stockholders equal to 50% of its net income for any fiscal quarter
as long as such dividends are paid by June 30 of the following year. As a
result, net assets of the Company unavailable for the payment of dividends
totaled $1,082 million at December 31, 1997. In accordance with the most
restrictive covenant of the Company's loan agreements, additional indebtedness
of $849.7 million would have been permitted at December 31, 1997.
The EXIM Bank credit agreement is collateralized by pledges of receivables from
sales of 7,700 tons of copper per year. The CAF loan is collateralized by liens
on the SX/EW facility. The Secured Export Notes and the seven-year loan facility
require that most of the collections of export copper sales be deposited into a
trust account in the United States. Twenty percent of these collections are used
as collateral for the outstanding Secured Export Notes with the balance of the
collections remitted directly to the Company. The excess funds in the collateral
account are remitted to the Company, if all financial requirements are met. As
part of these agreements, the Company must maintain three month and six month
collection ratios, as defined (aggregate collection as a specified multiple of
debt service). Both facilities require escrow deposits of three months debt
service. In addition, certain of the agreements require the Company to maintain
a minimum stockholders' equity of $750 million, specified ratios of debt to
equity, current assets to current liabilities and an interest coverage test.
Reduction of ASARCO Incorporated's (Asarco) voting interest in the Company to
less than a majority would constitute an event of default under one of the
financing agreements. The Company is in compliance with the various loan
covenants at December 31, 1997. Included in Other Assets are $13.5 million held
in escrow accounts as required by the Company's loan agreements. The funds will
be released from escrow as scheduled loan repayments are made.
13. Benefit Plans
The Company has two noncontributory, defined benefit pension plans covering
salaried employees in the United States and certain employees in Peru. Benefits
are based on salary and years of service. The Company's funding policy is to
contribute amounts to the plans sufficient to meet the minimum funding
requirements set forth in the Employee Retirement Income Security Act of 1974,
plus such additional amounts as the Company may determine to be appropriate.
Plan assets are primarily invested in immediate participation guarantee
contracts, mutual funds, stock index funds and deposit administration contracts.
Effective January 1, 1997 one of the Company's pension plans, which provides
benefits to non-U.S. expatriate employees, was amended to cease future benefit
accruals. Accordingly, those participants became eligible for future benefits
under the Company's other pension plan.
<PAGE>
A40
Net pension costs consisted of:
<TABLE>
<CAPTION>
For the years ended December 31, 1997 1996 1995
(in millions) ---- ---- ----
<S> <C> <C> <C>
Service cost $ 0.4 $ 0.5 $ 0.3
Interest cost on projected
benefit obligations 0.6 0.5 0.4
Actual return on plan assets (0.6) (0.6) (0.4)
Other items - 0.4 0.3
------------------- ------------------- --------------------
Net pension cost $ 0.4 $ 0.8 $ 0.6
------------------- ------------------- --------------------
</TABLE>
The funded status of the plans using the projected unit credit method is:
<TABLE>
<CAPTION>
At December 31, 1997 1996
(in millions) ---- ----
<S> <C> <C>
Assets and obligations:
Vested benefit obligation $7.8 $ 5.3
Nonvested benefits 0.5 0.5
------------------- -----------------
Accumulated benefit obligation 8.3 5.8
Plan assets at fair value 9.0 5.0
------------------- -----------------
------------------- -----------------
Plan assets in excess of (less than)
accumulated benefit obligation 0.7 (0.8)
------------------- -----------------
------------------- -----------------
Projected benefit obligation (PBO) 9.7 7.2
Plan assets at fair value 9.0 5.0
------------------- -----------------
Plan assets less than PBO (0.7) (2.2)
Minimum liability - (0.5)
Prior service cost (0.1) (0.1)
Initial net plan obligation 1.8 2.1
Effect of changes in assumptions and
actuarial gains and losses (0.6) (0.2)
------------------- -----------------
Pension asset (liability) reflected
in consolidated balance sheet $0.4 $(0.9)
=================== =================
</TABLE>
The actuarial computations for 1997 and 1996 are based upon a discount rate on
benefit obligations of 7%, an expected long-term rate of return on plan assets
of 8% and expected annual salary increases of 4%.
Post-retirement Benefits:
The post-retirement health care plan for retired salaried employees eligible for
Medicare was adopted by the Company on May 1, 1996. Secondary coverage under the
Company's plan is available for all retired salaried employees who permanently
reside in the United States and who contribute amounts as defined by the plan.
Net periodic post-retirement benefit costs include:
<TABLE>
<CAPTION>
For the year ended December 31, 1997 1996
(in millions) ---- ----
<S> <C> <C>
Service and interest cost $0.1 $0.1
Amortization of prior service cost 0.1 0.1
--- ---
Net periodic post-retirement benefit costs $0.2 $0.2
==== ====
</TABLE>
<PAGE>
A41
The following sets forth the plan's status reconciled with amounts reported in
the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
At December 31, 1997 1996
(in millions) ---- ----
<S> <C> <C>
Accumulated post-retirement benefit obligation (APBO):
Retirees $0.2 $0.2
Fully eligible active plan participants 0.1 0.1
Other plan participants 0.6 0.6
--- ---
Total APBO 0.9 0.9
Item not yet recognized in earnings:
Prior service cost (0.5) (0.7)
----- -----
Post-retirement benefit obligation $0.4 $0.2
==== ====
</TABLE>
The annual assumed rate of increase in the per capita cost of covered benefits
(i.e. health cost trend rate) is 6% for 1997 and 1996 and is assumed to decrease
gradually to 5% by 1999 and remain at that level thereafter. The health care
cost trend rate assumption has a significant effect on the amounts reported. For
example, increasing the assumed health care cost trend rates by one percentage
point in each year would increase the accumulated post-retirement benefit
obligation at December 31, 1997 by $0.1 million and would have no material
effect on the net periodic post-retirement benefit costs for 1997. The discount
rate used in determining the accumulated post-retirement benefit obligation was
7% at December 31, 1997 and 1996. The plan is unfunded.
Employee Savings Plan:
The Company maintains an employee savings plan for employees working in the
United States and expatriate employees in Peru which permits employees to make
contributions by salary reduction pursuant to section 401(k) of the Internal
Revenue Code. The plan was amended, effective January 1, 1997, to include a
Company matching contribution equal to 50% of the first 6% of employee
contributions. In connection with the required match, the Company's
contributions charged against earnings were $0.2 million in 1997.
14. Stockholders' Equity
Common Stock:
The stockholders of the Company at December 31, 1997 were:
<TABLE>
<CAPTION>
Percent of
Total Number of
-------------------- --------------------
<S> <C> <C>
Class A Common Shares:
ASARCO Incorporated 43,348,949 54.1%
Cerro Trading Company, Inc. 11,378,088 14.2%
Phelps Dodge Overseas Capital
Corporation 11,173,796 14.0%
-------------------- --------------------
-------------------- --------------------
Total Class A Common Shares 65,900,833 82.3%
Common Shares 14,157,107 17.7%
-------------------- --------------------
Total 80,057,940 100.0%
-------------------- --------------------
-------------------- --------------------
</TABLE>
<PAGE>
A42
On March 3, 1997, Cerro Trading Company, Inc. transferred 650,000 Class A
common 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.
Stock Options:
The Company has two stockholder approved plans, a Stock Incentive Plan and a
Directors' Stock Award Plan. The Stock Incentive Plan provides for the
granting of nonqualified or incentive stock options, as defined under the
Internal Revenue Code of 1986, as amended, as well as for the award of
restricted stock and bonuses payable in stock. The price at which options may
be granted under the Stock Incentive Plan shall not be less than 100% of the
fair market value of the common stock on the date of grant in the case of
incentive stock options, or 50% in the case of other options. In general,
options are not exercisable for six months and expire after 10 years from the
date of grant.
Options granted may provide for Stock Appreciation Rights (SAR). An SAR
permits an optionee, in lieu of exercising the option, to receive from the
Company payment of an amount equal to the difference between the market value
of the stock on the date of election of the SAR and the purchase price of the
stock under the terms of the option.
The authorized number of shares under the Stock Incentive Plan is 1,000,000 of
which 300,000 may be awarded as restricted stock. At December 31, 1997,
836,635 shares are available for future grants under this plan (927,110 shares
at December 31, 1996).
The Directors' Stock Award Plan provides that directors who are not
compensated as employees of the Company will be automatically awarded 200
shares of common stock upon election and 200 additional shares following each
annual meeting of stockholders thereafter. Under the directors plan, 100,000
shares have been reserved for awards. At December 31, 1997, 8,400 shares have
been awarded under this plan.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost
has been recognized for awards under the stock option plan. If compensation
cost for the Company's Stock Incentive Plan had been determined based on the
fair value at the grant date for awards in 1997 and 1996, consistent with the
provisions of SFAS No. 123, the Company's net earnings and earnings per share
would have been reduced to the proforma amounts indicated below:
<TABLE>
<CAPTION>
(in millions, except per share amounts)
1997 1996
---- ----
<S> <C> <C>
Net earnings - as reported $185.7 $180.5
Net earnings - pro forma $185.5 $180.4
Earnings per share (Basic) - as reported $ 2.32 $ 2.25
Earnings per share (Diluted) - as reported $ 2.32 $ 2.25
Earnings per share (Basic) - pro forma $ 2.32 $ 2.25
Earnings per share (Diluted) - pro forma $ 2.32 $ 2.25
</TABLE>
<PAGE>
A43
For purposes of computing earnings per share, basic and diluted, the dilutive
effect of stock options on common shares outstanding is as follows:
<TABLE>
<CAPTION>
Weighted average common shares outstanding: 1997 1996
(in millions) ---- ----
<S> <C> <C>
Basic 80.2 80.2
Dilutive effect of stock options - -
================= ==============
Diluted 80.2 80.2
================= ==============
</TABLE>
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 1997: dividend yield of 4.05% (6.57%-1996); expected volatility of
29.2% (28.4%-1996); risk-free interest rate of 6.31% (6.17%-1996); and expected
life of 7.0 years (6.9 years-1996).
Stock option activity over the past two years under the Stock Incentive Plan
was:
<TABLE>
<CAPTION>
Weighted
Number of Average Option Price
Shares Price (Range Per Share)
----------------- ----------------- ----------------------------------
<S> <C> <C> <C>
Outstanding at January 1, 1996 - - -
Granted 72,890 16.06 $16.06
Exercised - - -
Canceled or expired - - -
-----------------
Outstanding at January 1, 1997 72,890 16.06 16.06
Granted 90,475 16.30 16.25 to 17.06
Exercised (3,238) 16.06 16.06
Canceled or expired (1,342) 16.15 16.06 to 16.25
-----------------
Outstanding and exercisable at
December 31, 1997 158,785 $16.20 $16.06 to $17.06
</TABLE>
15. Related Party Transactions
Asarco, a 54.1% stockholder of the Company, provides legal, tax, treasury and
administrative support services to the Company. The amounts paid to Asarco for
these services were $1.6 million, $0.8 million and $0.3 million in 1997, 1996
and 1995, respectively.
16. Concentration of Risk
The Company operates two copper mines, a smelter and two refineries in Peru and
substantially all of its assets are located there. There can be no assurances
that the Company's operations and assets that are subject to the jurisdiction of
the Government of Peru may not be adversely affected by future actions of such
government. Substantially all of the sales of the Company's products are
exported from Peru to customers principally in Europe, Asia, South America and
the United States. In 1995, one customer represented 13% of net sales.
<PAGE>
A44
Financial instruments which potentially subject the Company to a concentration
of credit risk consist primarily of cash and cash equivalents, marketable
securities and trade accounts receivable.
The Company invests or maintains available cash with various high-quality banks,
principally in the U.S., Canada and Peru, or in commercial paper of highly rated
companies. As part of its cash management process, the Company regularly
monitors the relative credit standing of these institutions, and by policy,
limits the amount of credit exposure to any one institution. At December 31,
1997, the Company had invested 19.7% of its cash equivalents and marketable
securities with Peruvian banks, of which 41.3% of this amount was invested with
one institution.
During the normal course of business, the Company provides credit to its
customers. Although the receivables resulting from these transactions are not
collateralized, the Company has not experienced significant problems with the
collection of receivables.
The largest ten trade receivable balances accounted for 60.9% of the trade
accounts receivable at December 31, 1997, of which one customer represented
12.2%.
17. Commitments and Contingencies
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 the copper smelter at Ilo. 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 annual copper production by
130 million pounds at an estimated capital investment of $245 million.
Construction contracts for the expansion have been awarded and site construction
commenced in mid-1997 and completion of this stage of the expansion program is
expected in early 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.
The Company has planned a third stage of the expansion and modernization plan,
consisting of a second expansion at Cuajone and further expansion of the Ilo
smelter capacity. The Company expects to consider a decision to proceed with
this third stage in 1999, dependent on the availability of financing and other
conditions at the time. The Company expects that the projects will be funded
from a combination of existing cash, internally-generated funds and external
financing.
As a result of the $1 billion expansion program, electric power requirements
will increase significantly, requiring the construction of substantial
additional generating capacity. In the second quarter of 1997, the Company sold
its existing power plant to an independent power company for $33.6 million. In
connection with the sale, a power purchase agreement was also completed, under
which the Company will purchase its power needs for the next twenty years. Under
the agreement, cost of power will increase somewhat from its 1996 level,
however, the company will avoid the significant capital expenditures that would
be required to meet the needs of expanded operations and its power costs will be
favorably affected by benefits available to independent power companies in Peru.
<PAGE>
A45
Environmental:
As part of the 1991 Agreement, 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,
completed in 1996 at a cost of $40.8 million. The Company also has incurred
capital costs of $3.0 million for environmental projects committed with the Ilo
refinery acquisition in 1994. 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 environmental projects were approximately $43.8
million in 1997.
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 environmental
compliance and management plan, PAMA, sets forth the investment to be made by
the Company to comply with current 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
emissions 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 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 April 1996, Southern Peru Limited, a wholly owned subsidiary of the Company,
was served with a complaint filed in Peru by approximately 800 former employees
seeking the delivery of a substantial number of labor shares of its Peruvian
Branch plus dividends. In October 1997, the Superior Court of Lima nullified a
decision of a court of first instance, which had been adverse to Southern Peru
Limited. The Superior Court remanded the case for a new trial. Plaintiff filed
an extraordinary appeal before the Peruvian Supreme Court. The Supreme Court may
grant discretionary review in limited cases. The Supreme Court has not yet ruled
as to whether it will accept the appeal. There is also pending against Southern
Peru Limited a similar lawsuit filed by 127 additional former employees. In the
third quarter of 1997, the court of first instance dismissed their complaint.
The plaintiffs have appealed to the Superior Court of Lima.
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.
<PAGE>
A46
18. 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. Separate
financial statements and other disclosures for Southern Peru Limited are not
presented because management has determined that such information is not
material to holders of Southern Peru Limited's debt securities.
<TABLE>
<CAPTION>
Statement of Earnings and Cash Flow
For the years ended December 31, 1997 1996 1995
(in millions) ---- ---- ----
<S> <C> <C> <C>
Earnings:
Net sales $814.2 $753.0 $928.8
Operating income 235.4 248.8 366.7
Net earnings 185.7 180.5 217.8
Cash Flow:
Operating activities $277.6 $158.8 $330.4
Investing activities (337.6) (79.3) (119.5)
Financing activities 11.8 (127.6) (86.1)
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet
At December 31, 1997 1996
(in millions) ---- ----
<S> <C> <C> <C>
Current assets $561.6 $403.1
Noncurrent assets 981.7 876.7
Current liabilities 85.1 105.3
Noncurrent liabilities 341.2 137.1
Minority interest 19.4 22.4
Stockholders' equity 1,097.6 1,015.0
</TABLE>
Southern Peru Limited, a wholly owned subsidiary of Southern Peru Copper
Corporation, holds all the operating assets and liabilities of the Company and
does not hold any other operating assets. Accordingly, the effect of the
exchange offer described in note 2 has been reflected in the summary financial
information presented above.
<PAGE>
A47
Unaudited Quarterly Data
Quarters
(in millions, except per share data)
<TABLE>
<CAPTION>
1997 1996
---- ----
1st 2nd 3rd 4th Year 1st 2nd 3rd 4th Year
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $214.8 $226.2 $202.3 $170.9 $814.2 $196.4 $173.2 $180.5 $202.9 $753.0
Operating
income $ 75.3 $ 74.0 $ 51.0 $ 35.1 $235.4 $ 72.1 $ 64.1 $ 54.1 $ 58.5 $248.8
Net earnings $ 55.8 $ 59.6 $ 39.9 $ 30.4 $185.7 $ 49.1 $ 45.2 $ 37.9 $ 48.3 $180.5
Net earnings per share:
Basic $ 0.70 $ 0.74 $ 0.50 $ 0.38 $ 2.32 $ 0.61 $ 0.56 $ 0.47 $ 0.60 $ 2.25
Diluted $ 0.70 $ 0.74 $ 0.50 $ 0.38 $ 2.32 $ 0.61 $ 0.56 $ 0.47 $ 0.60 $ 2.25
Dividend per share $ 0.30 $ 0.35 $ 0.37 $ 0.24 $ 1.26 $ 0.65 $ 0.30 $ 0.28 $ 0.24 $ 1.47
Stock prices
New York Stock Exchange:
High $17-3/8 $21-1/8 $20-7/8 $18-1/4 $21-1/8 $21 $19 $16 $16-1/4 $21
Low $15 $16-7/8 $17-5/8 $12-3/4 $12-3/4 $15 $15-1/4 $14-3/8 $13-7/8 $13-7/8
Lima Stock Exchange(a):
High $17.35 $21.20 $21.06 $17.99 $21.20 $21.10 $17.99 $15.45 $16.10 $21.10
Low $14.85 $16.80 $17.30 $12.58 $12.58 $13.58 $14.34 $13.92 $13.50 $13.50
</TABLE>
(a) The Company's common stock is quoted on the Lima Stock Exchange in U.S.
dollars.
Metal Price Sensitivity
Assuming that expected metal production and sales are achieved, that tax rates
are unchanged, that the number of shares outstanding is unchanged, and giving no
effect to hedging programs or changes in the costs of production, metal price
sensitivity factors would indicate the following estimated change in earnings
per share resulting from metal price changes in 1998. Estimates are based on
80.2 million shares outstanding.
<TABLE>
<CAPTION>
Copper Silver Molybdenum
<S> <C> <C> <C>
Change in Metal Price $.01/lb. $1.00/oz. $1.00/lb.
Annual Change in Earnings
per Share $0.05 $0.02 $0.07
</TABLE>
<PAGE>
A48
Report of Independent Accountants
To the Board of Directors and Stockholders
of Southern Peru Copper Corporation
We have audited the accompanying consolidated balance sheets of Southern Peru
Copper Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of earnings, cash flows, and changes in common
stockholders' equity for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Southern Peru
Copper Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
January 23, 1998
