SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
1998
Third Quarter
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1998 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
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 October 31, 1998 there were outstanding 13,949,612 shares of Southern Peru
Copper Corporation common stock, par value $0.01 per share. There were also
outstanding 65,900,833 shares of Southern Peru Copper Corporation Class A common
stock, par value $0.01 per share.
<PAGE>
Southern Peru Copper Corporation
and Subsidiaries
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information:
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statement of Earnings
Three Months and Nine Months
Ended September 30, 1998 and 1997 2
Condensed Consolidated Balance Sheet
September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statement of Cash Flows
Three Months and Nine Months
Ended September 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8-13
Report of Independent Accountants 14
Part II. Other Information:
Item 1 Legal Proceedings 15
Item 6(a) Exhibits on Form 10-Q 16
Exhibit 11 Statement re Computation of Earnings per Share
Signatures 17
Exhibit I - Independent Accountants' Awareness Letter
</TABLE>
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<PAGE>
Southern Peru Copper Corporation
and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
(in thousands, except for per share data)
<S> <C> <C> <C> <C>
Net sales:
Stockholders and affiliates $ 6,680 $ 11,528 $ 19,056 $ 49,943
Others 167,107 190,776 459,664 593,373
--------- --------- --------- ---------
Total net sales 173,787 202,304 478,720 643,316
Operating costs and expenses:
Cost of sales 116,308 125,361 325,689 367,064
Administrative and other expenses 10,896 11,280 37,944 34,383
Depreciation and depletion 15,145 12,268 44,523 35,375
Exploration expense 1,252 1,800 3,419 4,513
--------- --------- --------- ---------
Total operating costs and expenses 143,601 150,709 411,575 441,335
Operating income 30,186 51,595 67,145 201,981
Interest income 3,626 7,024 12,610 14,703
Other income 256 2,071 9,162 5,695
Interest expense (4,214) (7,190) (12,458) (14,458)
---------- --------- --------- ---------
Earnings before taxes on income
and minority interest of labor shares 29,854 53,500 76,459 207,921
Taxes on income 9,553 13,000 24,467 48,588
Minority interest of labor shares in
income of Peruvian Branch 410 661 808 4,078
---------- --------- ------- ---------
Net earnings $ 19,891 $ 39,839 $ 51,184 $ 155,255
========= ========= ========= =========
Per common share amounts:
Net earnings - basic and diluted $ 0.25 $ 0.50 $ 0.64 $ 1.94
Dividends paid $ 0.11 $ 0.37 $ 0.39 $ 1.02
Weighted average common shares outstanding:
Basic 79,850 80,203 79,908 80,198
Diluted 79,850 80,203 79,911 80,198
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
Southern Peru Copper Corporation
and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 165,814 $ 126,491
Marketable securities 64,367 204,590
Accounts receivable, net 70,319 73,764
Inventories 103,734 108,683
Other assets 51,427 48,062
---------- ----------
Total current assets 455,661 561,590
Net property 1,056,606 947,457
Other assets 28,596 34,278
Total Assets $1,540,863 $1,543,325
========== ==========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 13,683 $ 13,683
Accounts payable 40,767 47,941
Accrued liabilities 33,556 23,490
--------- ---------
Total current liabilities 88,006 85,114
Long-term debt 227,367 234,208
Deferred credits 25,446 58,574
Deferred income taxes 58,240 44,323
Other liabilities 10,101 4,083
---------- ----------
Total non-current liabilities 321,154 341,188
---------- ----------
Minority interest of labor shares
in the Peruvian Branch 17,036 19,385
---------- ----------
STOCKHOLDERS' EQUITY
Common stock (a) 261,077 264,078
Retained earnings 853,590 833,560
---------- ---------
Total Stockholders' Equity 1,114,667 1,097,638
---------- ----------
Total Liabilities, Minority
Interest & Stockholders' Equity $1,540,863 $1,543,325
========== ==========
(a) Common shares: Authorized 34,099 34,099
Outstanding 13,949 14,157
Class A common shares Authorized
and Outstanding 65,901 65,901
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
Southern Peru Copper Corporation
and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
1998 1997 1998 1997
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 19,891 $ 39,839 $ 51,184 155,255
Adjustments to reconcile net earnings to
net cash provided from operating activities:
Depreciation and depletion 15,145 12,268 44,523 35,375
Provision for (benefit from) deferred income
taxes 7,218 (3,177) 11,415 (5,132)
Minority interest of labor shares 410 661 808 4,078
Cash provided from (used for) operating
assets and liabilities:
Accounts receivable (9,181) 20,577 3,232 8,983
Inventories 6,604 14,339 4,949 11,629
Accounts payable and accrued liabilities 1,372 9,937 (1,571) 26,611
Other operating assets and liabilities 5,266 (3,099) 12,729 511
Foreign currency transaction losses (gains) 1,093 (641) 1,916 (1,676)
-------- -------- -------- --------
Net cash provided from operating activities 47,818 90,704 129,185 235,634
-------- -------- -------- --------
INVESTING ACTIVITIES
Capital expenditures (61,708) (44,397) (189,453) (105,751)
Purchases of held-to-maturity investments (13,291) (102,771) (40,480) (311,563)
Proceeds from held-to-maturity investments 800 - 180,703 1,000
Sale of property (59) 4,638 3,654 46,523
-------- -------- -------- -------
Net cash provided from (used for) investing
activities (74,258) (142,530) (45,576) (369,791)
-------- -------- ------- --------
FINANCING ACTIVITIES
Debt repaid - (39,999) (6,841) (51,841)
Proceeds from borrowings - - - 200,000
Escrow (deposits) withdrawals on long-term loans (5,016) (2,963) 1,984 (14,841)
Dividends paid to common stockholders (8,784) (29,675) (31,154) (81,800)
Distributions to minority interest (177) (735) (703) (2,038)
Treasury stock transactions - - (3,001) -
Purchases of labor shares (381) (3,640) (3,624) (8,246)
-------- -------- --------- -------
Net cash provided from (used for) financing activities
(14,358) (77,012) (43,339) 41,234
--------- -------- --------- --------
Effect of exchange rate changes on cash (586) 582 (947) 1,785
-------- ---- ------- ------
Increase (decrease) in cash and cash equivalents (41,384) (128,256) 39,323 (91,138)
Cash and cash equivalents, at beginning of period 207,198 210,323 126,491 173,205
- -------- -------- -------- -------
Cash and cash equivalents, at end of period $ 165,814 $ 82,067 $ 165,814 $ 82,067
========= ======== ========= ========
</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 condensed
consolidated financial statements contain all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly the Company's
financial position as of September 30, 1998 and the results of operations
and cash flows for the three and nine month periods ended September 30,
1998 and 1997. Certain reclassifications have been made in the financial
statements from amounts previously reported. This financial data has been
subjected to a review by PricewaterhouseCoopers LLP, the Company's
independent accountants. The results of operations for the three month
and nine month periods are not necessarily indicative of the results to be
expected for the full year. The accompanying condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 1997
annual report on Form 10-K.
B. The effective tax rate increased in 1998 compared with 1997, primarily
because in 1997 the Company recognized a reduction in its effective tax
rate as a result of a reinvestment incentive approved by the Government of
Peru in connection with the expansion of the Cuajone mine.
C. In the first quarter 1998 the Company recorded a $10.0 million charge ($6.0
million after-tax) for severance costs associated with the Company's cost
reduction program.
D. Inventories were as follows:
(in millions)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
<S> <C> <C>
Metals at lower of average cost or market:
Finished goods $ 0.9 $ 0.6
Work-in-process 46.1 45.0
Supplies at average cost, net of reserves 56.7 63.1
------- -------
Total inventories $ 103.7 $ 108.7
======= =======
</TABLE>
E. At September 30, 1998, the Company has recorded sales of 24.7 million
pounds of copper, at a provisional price of $0.74 per pound. These sales
are subject to final pricing based on the average monthly LME copper prices
in the month of settlement which will occur in the fourth quarter of 1998.
Pricing adjustments recorded in the third quarter related to second quarter
provisionally priced sales were immaterial.
F. 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.
Copper: Depending on 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 the
options is
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<PAGE>
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.
Earnings for the first nine months of 1998 and 1997 include pre-tax gains
of $7.2 million and $5.6 million, respectively, from copper hedging
activities. There were no pre-tax gains or losses from copper hedging
activities in the third quarter of 1998 and 1997. At September 30, 1998,
the Company held no copper put options.
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 September 30, 1998, the Company has
entered into the following fuel swap agreements:
<TABLE>
<CAPTION>
Contract Percent of
Quantity Price Estimated Fuel
<S> <C> <C> <C> <C>
Fuel Type Period (Barrels) (per Barrel) Requirement
Residual Oil #6 10/98-12/98 90,000 $13.93 30%
Diesel Fuel #2 10/98-12/98 40,000 $21.40 29%
</TABLE>
G. Commitments and Contingencies:
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. Plaintiffs 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.
Upon appeal filed by the plaintiffs, the Superior Court of Lima, in the
third quarter of 1998, nullified the lower court's decision on technical
grounds and remanded the case to the lower court for further proceedings.
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.
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
-6-
<PAGE>
consolidated financial statements of the Company, is summarized below.
Separate financial statements and 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.
Statements of Earnings and Cash Flows
<TABLE>
<CAPTION>
(in millions) Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings:
Net sales $173.8 $202.3 $478.7 $643.3
Operating income 30.2 51.6 67.1 202.0
Net earnings 19.9 39.8 51.2 155.3
Cash Flow:
Operating activities $ 47.8 $ 90.7 $129.2 $235.6
Investing activities (74.3) (142.5) (45.6) (369.8)
Financing activities (14.4) (77.0) (43.3) 41.2
Balance Sheet
(in millions) At September 30, At December 31,
1998 1997
Current assets $ 455.7 $ 561.6
Noncurrent assets 1,085.2 981.7
Current liabilities 88.0 85.1
Noncurrent liabilities 321.2 341.2
Minority interest 17.0 19.4
Stockholders' equity 1,114.7 1,097.6
</TABLE>
Southern Peru Limited holds all of the operating assets and liabilities of
the Company and does not hold any other operating assets.
I. Impact of New Accounting Standards:
In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This
statement, which establishes standards for reporting and display of
comprehensive income and its components, had no impact on the financial
statements.
In March 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers Disclosure about Pensions and other Postretirement
Benefits." This statement which is effective for fiscal years beginning
after December 15, 1997, will not impact the Company's financial statements
but modifies the disclosures about pensions and other postretirement
benefit plans.
In March 1998, the American Institute of Certified Public Accountants
Accounting Standards Executive Committee issued Statement of Position No.
98-1 "Accounting for the Costs for Computer Software Developed or Obtained
for Internal Use." This statement which is effective for fiscal years
beginning after December 15, 1998, provides guidance on accounting for the
costs of computer software developed or obtained for internal use. This
statement will not have a material impact on the Company's financial
statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
statement which is effective for fiscal quarters of fiscal years beginning
after June 15, 1999, establishes accounting and reporting standards for
derivative instruments and hedging activities.
The Company is currently assessing the impact of this statement.
-7-
<PAGE>
Part I Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reported net earnings of $19.9 million, or $0.25 per share on a
diluted basis, for the third quarter ended September 30, 1998 compared with net
earnings of $39.8 million, or diluted earnings per share of $0.50, for the third
quarter of 1997. The decrease in earnings for the third quarter of 1998 was
primarily the result of lower copper prices and a decrease in Cuajone mine
production. For the first nine months of 1998, net earnings were $51.2 million
or diluted earnings per share of $0.64, compared to $155.3 million, or diluted
earnings per share of $1.94 for the same period of 1997. Results for the nine
month period ended September 30, 1998 include an after tax charge of $6.0
million, or $0.08 per share, for severance costs associated with the Company's
cost reduction program.
Results for the third quarter and first nine months of 1998 reflect a sharp
decline in metal prices in 1998 compared with the previous year. The average
price of copper in the third quarter of 1998 on the London Metal Exchange
declined 29 cents per pound from the year earlier period. The decrease in third
quarter 1998 earnings was partially offset by savings realized from the
Company's $30 million cost reduction program instituted earlier this year. In
addition to lower copper prices, results for the first nine months of 1998 also
reflect an increase in income tax expense compared to the corresponding period
of 1997.
In view of the low copper prices, in April of 1998 the Company implemented a
cost reduction program designed to reduce annual expenses by $30 million when
fully implemented. The program provides for reductions in operating expenses,
purchased services and general and administrative expenses. The cost reduction
program is estimated to have produced a benefit of approximately $10.5 million
($6.4 million after-tax) in the third quarter of 1998 and approximately $20.0
million ($12.3 million after-tax) year to date.
Mine copper production decreased 5.6% to 159 million pounds in the third quarter
of 1998 compared with the third quarter of last year. The reduction is
principally attributable to lower throughput at the Company's Cuajone mine as a
result of production interruptions required to complete the necessary tie-ins
for the Cuajone expansion program. These interruptions reduced third quarter
copper production by 18.8 million pounds and nine month production by 20.3
million pounds. The decrease in copper production was partially offset by
increased production at the Toquepala mine and the solvent
extraction/electrowinning (SX/EW) facility. Mine copper production for the nine
months ended September 30, 1998 decreased 6.6% to 469.9 million pounds compared
with the year earlier period. Production for the first nine months was also
affected by lower grade at the Cuajone mine and by production disruptions caused
by heavy rains in January.
Refined copper production increased 5.6% in the third quarter of 1998 to 163.4
million pounds as a result of production efficiencies at the Ilo refinery which
added 5.7 million pounds and an increase of 2.9 million pounds from the
Company's SX/EW facility. For the nine months ended September 30, 1998
refined copper production increased 6.8% to 485.0 million pounds.
Molybdenum production increased 23.4% to 2.5 million pounds in the third quarter
of 1998 compared with the third quarter of 1997. In the first nine months of
1998 production increased 24% to 7.9 million pounds compared with the same
period of 1997. The increase in both periods is attributable to higher
molybdenum ore grade and recoveries at the Company's mines.
-8-
<PAGE>
The Cuajone mine expansion, which will increase annual copper production by 130
million pounds is on schedule and is expected to be completed in early 1999.
Over 60% of the $245 million committed to the project has already been invested
through September 30, 1998.
The Company has also commenced the project for the modernization and expansion
of its Ilo smelter which is expected to be completed in 2003. The Ilo smelter
project will consist of installation of a new single line flash smelting furnace
and a single line flash converting furnace to process 1.25 million tons of
concentrate per year. When the modernization program is completed, the smelter
will meet current international environmental guidelines. The estimated cost of
the project is $875 million.
Inflation and Devaluation of Peruvian Sol: A portion of the Company's operating
costs are denominated in Peruvian soles. Since the revenues of the Company are
primarily denominated in U.S. dollars, when inflation in Peru is not offset by a
corresponding devaluation of the sol, the financial position, results of
operations and cash flows of the Company could be adversely affected. For the
three months ended September 30,1998 the inflation and devaluation rates were
0.4% and 3.7%, respectively, and for the nine month period ended September 30,
1998, the inflation and devaluation rates were 5.7% and 11.4%, respectively.
Net Sales: Net sales in the third quarter of 1998 decreased $28.5 million to
$173.8 million from $202.3 million in the comparable period in 1997. The
decrease is due to lower copper prices as compared to the year ago quarter
partially offset by an increase in sales volume of 16.3 million pounds. Net
sales for the nine month period ended September 30, 1998 totaled $478.7 million,
compared with $643.3 million for the same period of 1997. The decrease in net
sales for the nine month period ended September 30, 1998, was a result of lower
copper prices.
At September 30, 1998, the Company has recorded sales of 24.7 million pounds of
copper at a provisional price of $0.74 per pound. These sales are subject to
final pricing based on the average monthly LME copper price in the month of
settlement which will occur in the fourth quarter of 1998.
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 Platt's Metals Week for dealer oxide
mean prices for molybdenum products.
Metal sales volumes and prices for the three and nine month periods ended
September 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
<S> <C> <C> <C> <C>
1998 1997 1998 1997
Average Metal Prices:
Copper (per pound-LME) $0.74 $1.03 $0.77 $1.09
Molybdenum (per pound-Metals
Week Dealer Oxide Mean) $3.28 $4.38 $3.75 $4.49
Silver (per ounce-COMEX) $5.18 $4.51 $5.70 $4.75
Sales Volume (in thousands):
Copper (pounds) 215,900 199,600 553,100 555,600
Molybdenum (pounds) (1) 2,449 1,924 8,030 6,412
Silver (ounces) 910 818 2,428 2,313
</TABLE>
(1) The Company's molybdenum production is sold in concentrate form. Volume
represents pounds of molybdenum contained in concentrates.
-9-
<PAGE>
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.
Copper: Depending on 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 the 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.
Earnings for the first nine months of 1998 and 1997 include pre-tax gains of
$7.2 million and $5.6 million, respectively, from copper hedging activities.
There were no copper hedging activities in the third quarter of 1998 and 1997.
At September 30, 1998, the Company held no copper put options.
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
September 30, 1998, the Company has entered into the following fuel swap
agreements:
<TABLE>
<CAPTION>
Contract Percent of
Quantity Price Estimated Fuel
<S> <C> <C> <C> <C>
Fuel Type Period (Barrels) (per Barrel) Requirement
Residual Oil #6 10/98-12/98 90,000 $13.93 30%
Diesel Fuel #2 10/98-12/98 40,000 $21.40 29%
</TABLE>
Operating Costs and Expenses: Operating costs and expenses were $143.6 million
in the third quarter of 1998 compared with $150.7 million in the third quarter
of 1997. The decrease in the operating costs and expenses is principally due to
lower unit cost of Company mined copper sold (a decrease of approximately 11
cents per pound of copper sold) as a result of decreases in power and fuel costs
and benefits from the Company's cost reduction program, partially offset by the
higher volume of copper sold which was produced from third party concentrates.
Operating costs and expenses were $411.6 million in the nine months ended
September 30, 1998 compared with $441.3 million in the comparable 1997 period.
The decrease is principally due to reduced sales volume and lower cost of copper
produced from third party concentrates, partially offset by a charge in the
first quarter of 1998 of $10.0 million for severance costs associated with the
Company's cost reduction program.
Non-Operating Items: For the nine month period ended September 30, 1998, Other
Income includes a $5.3 million insurance settlement related to rain damage which
occurred in the first quarter of 1997.
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<PAGE>
Total interest expense decreased by $1.2 million in the third quarter of 1998 as
compared to the third quarter of 1997, principally as a result of lower debt.
Net interest expense reported on the statement of earnings, however, decreased
by $3.0 million as the amount of interest capitalized as a result of the
Company's expansion program increased by $1.8 million.
Taxes on Income: Taxes on income for the three months ended September 30, 1998
were $9.6 million, compared with $13.0 million for the third quarter of 1997.
The decrease was principally due to lower earnings in 1998.
The effective tax rate increased in 1998 as compared to 1997 primarily because
in 1997 the Company recognized a reduction in its effective tax rate as a result
of a reinvestment incentive approved by the Government of Peru in connection
with the expansion of the Cuajone mine.
Minority Interest of Labor Shares: The minority interest of labor shares was
$0.4 million in the third quarter of 1998, compared to $0.7 million in the third
quarter of 1997. The decrease reflects lower earnings and a reduction in labor
shares outstanding as a result of the Company's repurchase program.
Cash Flows:
Third Quarter - Net cash provided from operating activities was $47.8 million in
the third quarter of 1998, compared with $90.7 million in the comparable 1997
period. The decrease was primarily the result of lower copper prices.
Net cash used for investing activities in the third quarter of 1998 was $74.3
million, compared with $142.5 million for the third quarter of 1997. The
decrease in cash used in investing activities in the third quarter of 1998 is
due to lower purchases of held-to-maturity investments partially offset by
increased capital expenditures. The increase in capital expenditures from the
prior year third quarter is principally related to the Cuajone mine expansion.
Net cash used for financing activities in the third quarter of 1998 was $14.4
million, compared with $77.0 million for the third quarter of 1997. The decrease
in cash used in the third quarter of 1998 was caused in part by a $40.0 million
repayment of long-term debt in the third quarter of 1997.
The third quarter of 1998 includes a dividend distribution of $8.8 million, $5.0
million of escrow deposits on long-term loans and $0.4 million used to
repurchase labor shares. The third quarter of 1997 included a dividend
distribution of $29.7 million, an escrow deposit on long-term loans of $3.0
million and $3.6 million of labor shares purchased.
Nine Months - Net cash provided from operating activities was $129.2 million for
the nine month period ended September 30, 1998, compared with $235.6 million in
the corresponding 1997 period. The decrease was caused by lower earnings
primarily attributable to lower copper prices.
Cash used for investing activities was $45.6 million for the nine month period
ended September 30, 1998, compared with cash used of $369.8 million in the
corresponding 1997 period. Investing activities for the nine month period ended
September 30, 1998 include proceeds from the redemption of held-to-maturity
investments of $180.7 million, reduced by purchases of held-to-maturity
investments of $40.5 million and capital expenditures of $189.5 million.
Investing activities for the nine months ending September 30, 1997 included the
purchase of held-to-maturity investments of $311.6 million and capital
expenditures of $105.8 million.
-11-
<PAGE>
Cash used for financing activities for the nine months ended September 30, 1998
was $43.3 million compared with cash provided of $41.2 million in the comparable
1997 period. The cash provided in the 1997 period reflects proceeds from the
$150 million Secured Export Notes offering and $50 million from the issuance of
bonds, offset in part by debt repayments of $51.8 million. Dividends paid to
shareholders were $31.2 million in the 1998 nine month period and $81.8 million
in the 1997 nine month period.
Liquidity and Capital Resources: At September 30, 1998, the Company's debt as a
percentage of total capitalization (total debt, minority interests and
stockholders' equity) was 17.6% compared to 18.2% at December 31, 1997. Debt at
September 30, 1998 was $241.1 million, compared to $247.9 million at the end of
1997. Additional indebtedness permitted under terms of the most restrictive of
the Company's credit agreements totaled $873.6 million at September 30, 1998.
The Company expects that it will meet its cash requirements for 1998 and beyond
from internally generated funds, cash on hand, borrowings under the seven-year
loan facility signed in April 1997, and from additional external financing.
In the third quarter of 1998, the Company paid a dividend to shareholders of
$8.8 million or $0.11 per share, compared with $29.7 million or $0.37 per share
in the same period of 1997. On November 3, 1998 the Company declared a quarterly
dividend of $0.12 per share payable December 4, 1998 to stockholders of record
at the close of business on November 19, 1998.
Certain 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 the net income of the Company for
any fiscal quarter as long as such dividends are paid by June 30 of the
following year.
Year 2000: The Company has implemented a three phase program to identify and
resolve Year 2000 (Y2K) issues related to the integrity and reliability of its
computerized information systems as well as computer systems embedded in the
production processing equipment used in its operations. Phase one of the
Company's program which involved an assessment of Y2K compliance of the
Company's computerized information systems and embedded computer systems has
been completed. In phase two of the program the Company is modifying or
replacing all non-compliant systems. The Company has identified two computerized
information systems that are not Y2K compliant. These systems are being replaced
and are expected to be operational by April 1999. As of September 30, 1998,
substantially all of the Company's embedded computer systems are Y2K compliant
and the remaining embedded computer systems are expected to be Y2K compliant by
the first quarter of 1999.
As of September 30, 1998, the Company had spent approximately $0.6 million in
addition to its normal internal information technology costs in connection with
its Y2K program. The Company expects to incur additional costs of $0.3 million
to complete phases two and three of the program.
Under the third phase of the program the Company has sent detailed information
requests to its principal customers, suppliers and service providers to
determine the status of their Y2K compliance. As of September 30, 1998, the
Company received confirmations from approximately 40% indicating that they are
or will be Y2K compliant. The Company expects to have further communications
with those who have not responded or have indicated further work was required to
achieve Y2K compliance. The third phase of the program is expected to be
completed in the first quarter of 1999.
Among other things, the Company's operations depend on the availability of
utility services, principally electricity, and reliable performance by
-12-
<PAGE>
international transportation services. A substantial disruption in any of these
services due to providers of these services failing to achieve Y2K compliance
would have an adverse impact on the Company's financial results the significance
of which would depend on the length and severity of the disruption. In response
to a request from the Company, a detailed plan to ensure Y2K compliance by the
Company's principal electrical power supplier was received. The Company is
monitoring the progress of these plans. Similar arrangements will be made with
other key suppliers before the end of 1998. The Company is currently identifying
alternatives and will complete a contingency plan for each of its principal
operations by March 1999. The purpose of the contingency plan is to identify
possible alternatives which could be used in the event of a disruption in the
delivery of essential goods or services and to minimize the effect of such a
disruption.
Impact of New Accounting Standards: In the first quarter of 1998, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." This statement, which establishes standards for reporting
and display of comprehensive income and its components, had no impact on the
financial statements.
In March 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employers Disclosure about Pensions and other Postretirement Benefits." This
statement which is effective for fiscal years beginning after December 15, 1997,
will not impact the Company's financial statements but modifies the disclosures
about pensions and other postretirement benefit plans.
In March 1998, the American Institute of Certified Public Accountants Accounting
Standards Executive Committee issued Statement of Position No. 98-1 "Accounting
for the Costs for Computer Software Developed or Obtained for Internal Use."
This statement which is effective for fiscal years beginning after December 15,
1998, provides guidance on accounting for the costs of computer software
developed or obtained for internal use. This statement will not have a material
impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
which is effective for fiscal quarters of fiscal years beginning after June 15,
1999, establishes accounting and reporting standards for derivative instruments
and hedging activities. The Company is currently assessing the impact of this
statement.
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 metal prices on commodity exchanges which
can be volatile.
-13-
<PAGE>
PricewaterhouseCoopers LLP
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Southern Peru Copper Corporation:
We have reviewed the condensed consolidated balance sheet of Southern Peru
Copper Corporation and Subsidiaries as of September 30, 1998 and the related
condensed consolidated statements of earnings and cash flows for the three month
and nine month periods ended September 30, 1998 and 1997. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statement referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1997 and the
related consolidated statements of earnings, cash flows, and changes in common
stockholders' equity for the year then ended (not presented herein); and in our
report dated January 23, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 1997,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
New York, New York
October 16, 1998
-14-
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
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. Plaintiffs 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.
Upon appeal filed by the plaintiffs, the Superior Court of Lima, in the third
quarter of 1998, nullified the lower court's decision on technical grounds and
remanded the case to the lower court for further proceedings.
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.
-15-
<PAGE>
Item 6(a) - Exhibits on Form 10Q
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
<S> <C>
11 Statement re Computation of Earnings per Share
</TABLE>
-16-
<PAGE>
Exhibit 11 Statement re Computation of Earnings per Share
This calculation is submitted in accordance with Regulation S-K item 601(b)(11).
Earnings per Common Share
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings applicable to common stock $19,891 $39,839 $51,184 $155,255
======= ======= ======= ========
Weighted average number of common shares outstanding 79,850 80,203 79,908 80,198
Shares issuable from assumed exercise of Stock Options - - 3 -
------- ------ ------- -------
Weighted average number of common shares outstanding,
as adjusted 79,850 80,203 79,911 80,198
====== ====== ====== ======
Diluted earnings per share:
Net earnings applicable to common stock $0.25 $0.50 $0.64 $1.94
===== ===== ===== =====
Basic earnings per share:
Net earnings applicable to common stock $0.25 $0.50 $0.64 $1.94
===== ===== ===== =====
</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: November 12, 1998 /s/ Ronald J. O'Keefe
---------------------
Ronald J. O'Keefe
Executive Vice President
and Chief Financial Officer
Date: November 12, 1998 /s/ Brendan M. O'Grady
----------------------
Brendan M. O'Grady
Comptroller
-17-
<PAGE>
Exhibit I
PricewaterhouseCoopers LLP
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
We are aware that our report dated October 16, 1998 on our review of the interim
financial information of Southern Peru Copper Corporation and Subsidiaries as of
September 30,1998 and for the three month and nine month periods ended September
30, 1998 and 1997 and included in this Form 10-Q for the quarter ended September
30,1998 is incorporated by reference in the Company's Registration Statement on
Form S-8 (File Nos. 33-32736 and 333-40293). 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.
PricewaterhouseCoopers LLP
New York, New York
November 12, 1998
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 165814
<SECURITIES> 64367
<RECEIVABLES> 70319
<ALLOWANCES> 0
<INVENTORY> 103734
<CURRENT-ASSETS> 455661
<PP&E> 1971859
<DEPRECIATION> 915253
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<OTHER-SE> 853590
<TOTAL-LIABILITY-AND-EQUITY> 1540863
<SALES> 478720
<TOTAL-REVENUES> 478720
<CGS> 325689
<TOTAL-COSTS> 325689
<OTHER-EXPENSES> 85886
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12458
<INCOME-PRETAX> 76459
<INCOME-TAX> 24467
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