SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
1999
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, 1999 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, 1999 there were outstanding 14,018,862 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.
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<TABLE>
Southern Peru Copper Corporation
Southern Peru Copper Corporation
and Subsidiaries
<CAPTION>
INDEX TO FORM 10-Q
Page No.
Part I. Financial Information:
<S> <C>
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statement of Earnings
Three Months and Nine Months
Ended September 30, 1999 and 1998 2
Condensed Consolidated Balance Sheet
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statement of Cash Flows
Three Months and Nine Months
Ended September 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7-13
Report of Independent Accountants 14
Part II. Other Information:
Item 6 Exhibit and Report on Form 8-K 15
Signatures 16
Exhibit 15 - Independent Accountants' Awareness Letter
</TABLE>
1
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<TABLE>
Southern Peru Copper Corporation
<CAPTION>
and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)
3 Months Ended 9 Months Ended
September 30, September 30,
1999 1998 1999 1998
(in thousands, except for per share data)
Net sales:
<S> <C> <C> <C> <C>
Stockholders and affiliates $ - $ 6,680 $ - $ 19,056
Others 156,086 167,107 412,404 459,664
Total net sales 156,086 173,787 412,404 478,720
Operating costs and expenses:
Cost of sales 105,816 117,386 290,928 328,920
Administrative and other expenses 11,585 9,774 31,111 34,491
Depreciation and depletion 18,017 15,145 53,675 44,523
Exploration expense 2,085 1,252 4,551 3,419
Total operating costs and expenses 137,503 143,557 380,265 411,353
Operating income 18,583 30,230 32,139 67,367
Interest income 1,729 3,626 6,947 12,610
Other income 1,021 212 2,663 8,940
Interest expense (4,089) (4,214) (13,589) (12,458)
Earnings before taxes on income
and minority interest of labor shares 17,244 29,854 28,160 76,459
Taxes on income 5,173 9,553 8,447 24,467
Minority interest of labor shares in
income of Peruvian Branch (10) 410 1 808
Net earnings $12,081 $ 19,891 $ 19,712 $ 51,184
Per common share amounts:
Net earnings - basic and diluted $0.15 $ 0.25 $0.25 $ 0.64
Dividends paid $ 0.022 $ 0.11 $ 0.077 $ 0.39
Weighted average common shares outstanding:
Basic 79,870 79,850 79,865 79,936
Diluted 79,910 79,859 79,884 79,943
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<TABLE>
Southern Peru Copper Corporation
and Subsidiaries
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
September 30, December 31,
1999 1998
(in thousands)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 102,854 $ 175,948
Marketable securities - 22,152
Accounts receivable, net 65,526 64,561
Inventories 101,986 88,951
Other assets 57,232 58,450
Total current assets 327,598 410,062
Net property 1,193,983 1,088,557
Other assets 26,248 27,218
Total Assets $1,547,829 $1,525,837
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 19,108 $ 13,683
Accounts payable 54,575 48,497
Accrued liabilities 38,393 34,836
Total current liabilities 112,076 97,016
Long-term debt 210,258 220,525
Deferred credits 9,305 15,722
Deferred income taxes 66,901 56,700
Other liabilities 12,282 10,951
Total non-current liabilities 298,746 303,898
Minority interest of labor shares
in the Peruvian Branch 14,853 16,331
STOCKHOLDERS' EQUITY
Common stock (a) 261,363 261,363
Retained earnings 860,791 847,229
Total Stockholders' Equity 1,122,154 1,108,592
Total Liabilities, Minority
Interest & Stockholders' Equity $1,547,829 $1,525,837
(a) Common shares: Authorized 34,099 34,099
Outstanding 13,969 13,950
Class A common shares Authorized
and Outstanding 65,901 65,901
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<TABLE>
Southern Peru Copper Corporation
and Subsidiaries
<CAPTION>
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
3 Months Ended 9 Months Ended
September 30, September 30,
1999 1998 1999 1998
(in thousands)
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net earnings $ 12,081 $ 19,891 $ 19,712 $ 51,184
Adjustments to reconcile net earnings to
net cash provided from operating activities:
Depreciation and depletion 18,017 15,145 53,675 44,523
Provision (benefit) for deferred income taxes 4,717 7,218 9,791 11,415
Minority interest of labor shares (10) 410 1 808
Cash provided from (used for) operating
assets and liabilities:
Accounts receivable 4,491 (9,181) (1,817) 3,232
Inventories (12,943) 6,604 (13,035) 4,949
Accounts payable and accrued liabilities 9,993 1,372 8,501 (1,571)
Other operating assets and liabilities 3,063 5,201 7,355 16,139
Foreign currency transaction losses (gains) 932 1,093 2,162 1,916
Net cash provided from operating activities 40,341 47,753 86,345 132,595
INVESTING ACTIVITIES
Capital expenditures (69,970) (61,708) (167,656) (189,453)
Purchases of held-to-maturity investments - (13,291) (54,990) (40,480)
Proceeds from held-to-maturity investments 30,520 800 77,142 180,703
Sales of property 12 6 516 244
Net cash used for investing activities (39,438) (74,193) (144,988) (48,986)
FINANCING ACTIVITIES
Debt repayment - - (6,842) (6,841)
Proceeds from borrowings - - 2,000 -
Escrow (deposits) withdrawals on long-term loans - (5,016) (67) 1,984
Dividends paid to common stockholders (1,757) (8,784) (6,150) (31,154)
Distributions to minority interest (33) (177) (119) (703)
Net treasury stock transactions - - - (3,001)
Purchases of labor shares (1,459) (381) (2,104) (3,624)
Net cash used for financing activities (3,249) (14,358) (13,282) (43,339)
Effect of exchange rate changes on cash (716) (586) (1,169) (947)
Increase (decrease) in cash and cash equivalents (3,062) (41,384) (73,094) 39,323
Cash and cash equivalents, at beginning of period 105,916 207,198 175,948 126,491
Cash and cash equivalents, at end of period $102,854 $165,814 $102,854 $165,814
The accompanying notes are an integral part of these financial statements.
</TABLE>
4
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Southern Peru Copper Corporation
and Subsidiaries
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A. In the opinion of Southern Peru Copper Corporation ("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, 1999
and the results of operations and cash flows for the three and nine months
ended September 30, 1999 and 1998. 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 1998 annual report on Form 10-K.
B. The Company's third quarter 1999 results include a $5.6 million pre-tax
charge ($3.6 million after-tax) for severance costs associated with the
Company's ongoing cost reduction program. The severance costs accrued are
for 337 employees at the Company's locations in Peru and Miami, Florida.
Approximately $3.8 million of the provision is included as a cost of sales
deduction on the Company's statement of earnings, and $1.8 million is
included in administrative expense as it relates to non-operating
personnel. Payments in the amount of $0.6 million were made against this
accrual in the third quarter of 1999.
C. Inventories were as follows:
(in millions)
September 30, December 31,
1999 1998
Metals at lower of average cost or market:
Finished goods $1.4 $ 1.5
Work-in-process 47.1 37.9
Supplies at average cost, net of reserves 53.5 49.5
Total inventories $ 102.0 $88.9
D. At September 30, 1999, the Company has recorded sales of 0.4 million pounds
of copper, at a provisional price of $0.80 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 1999.
E. Financial Instruments:
The Company uses 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
5
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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.
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.
Foreign currency: The Company selectively uses foreign currency swaps to
limit the effects of exchange rate changes on future cash flow obligations
denominated in foreign currencies. A currency swap establishes a fixed
dollar cost for a fixed amount of foreign currency required at a future
date. The Company has entered into currency swap agreement on a portion of
its capital cost contracted in euros.
F. Commitments and Contingencies:
Litigation
In April 1996, 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 the Company. 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. In March 1999 the Company received
official notification that the Supreme Court had denied plaintiff's
extraordinary appeal and affirmed the decision of the Supreme Court of Lima
which remanded the case to the lower court for further proceedings. There
is also pending against the Company 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.
G. Impact of New Accounting Standards:
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement establishes accounting and reporting standards for
derivative instruments and hedging activities. Initially, the statement was
to be effective in fiscal years beginning after June 15, 1999. In June
1999, the FASB issued SFAS No. 137 which defers the effective date of SFAS
No. 133 one year until June 15, 2000. The Company is currently assessing
the impact of SFAS No. 133.
6
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Part I Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reported net earnings of $12.1 million, or 15 cents per common
share, for the third quarter ended September 30, 1999 compared with net earnings
of $19.9 million, or 25 cents per common share, for the third quarter of 1998.
For the first nine months of 1999, net earnings were $19.7 million or 25 cents
per common share, compared to $51.2 million, or 64 cents per common share, for
the same period of 1998. Results for the third quarter and the first nine months
of 1999 include an after-tax charge of $3.6 million ($5.6 million pre-tax), or 5
cents per share, for severance costs associated with the Company's ongoing
cost-reduction program. The Company's results for the first nine months of 1998
include a $10.0 million pre-tax charge ($6.0 million after-tax), recorded in the
first quarter of 1998, for severance costs associated with the Company's cost
reduction program.
The decrease in earnings in the third quarter of 1999 is primarily attributable
to severance costs related to the Company's ongoing cost-reduction effort, and
lower realized copper prices when compared with the third quarter of 1998. Since
the Company prices most copper sales in the month prior to shipment and the
average LME price for copper in the three pricing months was 71 cents, the full
benefit of the increase in the LME price in the third quarter of 1999 will not
be realized until the fourth quarter of 1999.
The Company's 1999 third quarter results benefited from an estimated $2.4
million in realized pre-tax savings from the Company's cost reduction program.
For the nine months ended September 30, 1999 the pre-tax savings from the cost
reduction program are estimated to be $25.4 million and the program is expected
to improve full year 1999 pre-tax earnings by $30.0 million.
Mine copper production increased 16.2% to 184.8 million pounds in the third
quarter of 1999 compared with third quarter of last year. This increase of 25.8
million pounds was due to increased production from the Cuajone mine, following
completion of the mine expansion at Cuajone in the first quarter. Copper sales
volume, however, was 16.9 million pounds lower in the third quarter of 1999
compared to the third quarter of 1998 as the Company sold blister copper
produced from purchased concentrates in 1998.
The Company's $1.2 billion expansion and modernization program is progressing on
schedule. The Cuajone mine expansion completed earlier this year reached target
ore throughput rates during the second quarter of 1999. Rainy conditions in the
first quarter of the year and metallurgical difficulties with the ore reduced
copper production by an estimated 80 million pounds during the first nine months
of 1999. The expansion of the Toquepala solvent extraction/electrowinning
(SX/EW) facility, which will increase annual production 26% to 124 million
pounds, was completed in the third quarter of this year. Engineering work on the
Company's expansion and modernization of the Ilo smelter is continuing.
7
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In early October, the Company reported increased proven and probable ore
reserves at the Toquepala mine. The sulfide ore reserves at In early October,
the Company reported increased proven and probable ore reserves at the Toquepala
mine. The sulfide ore reserves at Toquepala increased 161% to 770 million tons
and leachable reserves increased 166% to 1,931 million tons. Drilling programs
have further indicated 247 million tons of mineralized material grading .68%
copper. Full definition of this material is expected to be completed in 2000.
In addition, in October 1999 the Company reported preliminary drilling results
at its Los Chancas exploration project in Southern Peru, which indicated the
presence of a porphyry copper deposit. Additional drilling will be necessary to
define the extent of mineralization.
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, 1999 the inflation and devaluation rates were
0.9% and 3.8%, respectively, and for the nine month period ended September 30,
1999, the inflation and devaluation rates were 3.1% and 9.6%, respectively.
Net Sales: Net sales in the third quarter of 1999 decreased $17.7 million to
$156.1 million from the comparable period in 1998. Net sales for the first nine
months of 1999 totaled $412.4 million, compared with $478.7 million for the same
period of 1998. The decrease in net sales was a result of lower realized copper
prices in 1999 and a decrease in sales volume of 16.9 million pounds in the
third quarter of 1999 and 4.2 million pounds in the first nine months of 1999.
At September 30, 1999, the Company has recorded sales on 0.4 million pounds of
copper, at a provisional price of $0.80 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 1999.
Prices: Sales prices for the Company's metals are established principally by
reference to prices quoted on the LME, the New York Commodity Exchange (COMEX)
or as published in Platt's Metals Week for Dealer Oxide Mean prices for
molybdenum products.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
Price/Volume Data: 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Average Metal Prices:
Copper (per pound-LME) $0.76 $0.74 $0.69 $0.77
Molybdenum (per pound) $2.68 $3.28 $2.67 $3.75
Silver (per ounce-COMEX) $5.24 $5.18 $5.21 $5.70
Sales Volume (in thousands):
Copper (pounds) 199,000 215,900 548,900 553,100
Molybdenum (pounds) (1) 3,018 2,449 8,570 8,030
Silver (ounces) 987 910 2,294 2,428
</TABLE>
(1) The Company's molybdenum production is sold in concentrate form. Volume
represents pounds of molybdenum contained in concentrates.
8
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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 include pre-tax gains from option sales and exercises of $7.2 million
in the first nine months of 1998. At September 30, 1999, the Company held no
copper put options.
Fuel swaps: The Company may enter into fuel swap agreements to limit the effect
of increases 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, 1999 and December 31, 1998, the Company had the following fuel
swap agreements:
<TABLE>
<CAPTION>
Weighted Average
Quantity Contract Price
Fuel Type Period (barrels) (per barrel)
<S> <C> <C> <C>
September 30,1999
Residual Oil 10/99-12/99 521,700 $11.02
Residual Oil 1/00-12/00 1,468,800 $12.80
Diesel Fuel 10/99-12/99 159,000 $18.06
Diesel Fuel 1/00-12/00 504,000 $19.32
December 31, 1998
Residual Oil 1/99-9/99 1,095,000 $9.84
Diesel Fuel 1/99-9/99 432,000 $15.80
</TABLE>
The unrealized gain in the Company's fuel swap positions at September 30, 1999
was $11.8 million. The effect of a hypothetical 10 percent decrease from
September 30, 1999 fuel prices would be to reduce the unrealized gain on fuel
swaps by $4.9 million.
In the third quarter of 1999, the Company's production costs would have been
$4.8 million higher if this exposure had not been hedged.
Foreign currency: The Company selectively uses foreign currency swaps to limit
the effects of exchange rate changes on future cash flow obligations denominated
in foreign currencies. A currency swap establishes a fixed dollar cost for a
fixed amount of foreign currency required at a future date. The Company has
entered into currency swap agreements on a portion of its capital cost
contracted in euros.
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As of September 30, 1999 the Company had the following currency swap agreements:
US$ Euros Forward Exchange Rate
Maturity Date (in millions)
1/31/2000 2.6 2.3 1.1189
7/31/2000 9.1 8.0 1.1341
10/31/2000 8.5 7.4 1.1419
12/29/2000 6.5 5.7 1.1467
3/31/2001 2.6 2.3 1.1535
4/30/2001 3.3 2.9 1.1559
The unrealized loss in the Company's currency swap position at September 30,
1999 was $1.3 million. A hypothetical 10 percent decrease from September 30,
1999 rates, would increase the unrealized loss on currency swaps by $3.1
million. The full cost of the currency swap amounts as acquired will, when
exercised, be included in the cost of the capital asset for which these swaps
were obtained.
Operating Costs and Expenses: Operating costs and expenses were $137.5 million
in the third quarter of 1999 compared with $143.6 million in the third quarter
of 1998. In the nine months ended September 30, 1999, operating costs and
expenses were $380.3 million, compared with $411.4 million in the comparable
1998 period.
Cost of sales for the three month and nine month periods ended September 30,
1999 was $105.8 million and $290.9 million, respectively, compared with $117.4
million and $328.9 million in the comparable 1998 periods. The decrease in the
third quarter 1999 is principally due to reduced sales volume of copper
processed from purchased concentrates. The decrease was partially offset by a
provision of $3.8 million for severance cost related to the Company's cost
reduction program (an additional $1.8 million was charged as an administrative
cost). The cost decrease in the nine month 1999 period also reflects the effect
of reduced sales of purchased material, as well as savings generated by the
Company's cost reduction program. In addition, the nine month 1998 period
included a charge of $7.2 million for severance costs (an additional $2.8
million was charged as an administrative cost).
Depreciation expense for the three and nine month periods ended September 30,
1999 was $18.0 million and $53.7 million, respectively, compared with $15.1
million and $44.5 million in the comparable 1998 periods. The higher 1999
depreciation includes depreciation of the assets of the Cuajone mine expansion
project, which was completed in early 1999.
Non-Operating Items:"Other income" for the nine months ended September 30, 1998
include a $5.3 million insurance settlement related to rain damage incurred in
1997.
Interest income was $1.7 million in the third quarter of 1999 and $6.9 million
for the first nine months of 1999, as compared to $3.6 million and $12.6
million, respectively, in the comparable 1998 periods. The decrease reflects
lower invested balances as Company funds were used for the expansion and
modernization program.
Taxes on Income: Taxes on income for the three months ended September 30, 1999
were $5.2 million, compared with $9.6 million for the third quarter of 1998. The
decrease was principally due to lower earnings in 1999.
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Cash Flows:
Third Quarter: Net cash provided from operating activities was $40.3 million in
the third quarter of 1999, compared with $47.8 million in the comparable 1998
period. The decrease was primarily the result of lower realized copper prices.
Net cash used for investing activities was $39.4 million in the third quarter of
1999 and included $70.0 million for capital expenditures which were in part
funded by $30.5 million of proceeds from held-to-maturity investments. In the
third quarter of 1998, net cash used for investing activities was $74.2 million
and was principally due to $61.7 million of capital expenditures and $13.3
million of purchases of held-to-maturity investments.
Net cash used for financing activities in the third quarter of 1999 was $3.2
million, compared with $14.4 million for the third quarter of 1998. The third
quarter of 1999 includes a dividend distribution of $1.8 million and $1.5
million used to repurchase labor shares. The third quarter of 1998 included a
dividend distribution of $8.8 million and $5.0 million of funds deposited to
escrow accounts.
Nine Months: Net cash provided from operating activities was $86.3 million for
the nine month period ended September 30, 1999, compared with $132.6 million in
the corresponding 1998 period. The decrease was primarily caused by lower copper
prices and changes in operating assets and liabilities.
Net cash used for investing activities was $145.0 million in the nine month
period ended September 30, 1999 and was primarily due to $167.7 million for
capital expenditures, less $22.2 million of net funds provided from
held-to-maturity investments. In the nine month period ended September 30, 1998,
net cash used for investing activities was $49.0 million and was primarily due
to $189.5 million for capital expenditures, less $140.2 million of net funds
provided from held-to-maturity investments. The decrease in capital expenditures
in the nine months ended September 30, 1999 as compared to the 1998 period is
attributable to the completion of the Cuajone expansion in the first quarter of
1999 partially offset by investments made in the Toquepala solvent
extraction/electrowinning (SX/EW) facility and other projects.
Cash used for financing activities for the nine months ended September 30, 1999
was $13.3 million and $43.3 million in the comparable 1998 period. Dividends
paid to shareholders were $6.2 million in the 1999 nine-month period and $31.2
million in the 1998 nine-month period.
Liquidity and Capital Resources: At September 30, 1999, the Company's debt as a
percentage of total capitalization (total debt, minority interests and
stockholders' equity) was 16.8% compared to 17.2% at December 31, 1998. Debt at
September 30, 1999 was $229.4 million compared to $234.2 million at the end of
1998. Additional indebtedness permitted under terms of the most restrictive of
the Company's credit agreements totaled $892.8 million at September 30, 1999.
The Company expects that it will meet its cash requirements for 1999 and beyond
from internally generated funds, cash on hand, from borrowings under existing
credit facilities and from additional external financing.
In the third quarter of 1999, the Company paid a dividend to shareholders of
$1.8 million or 2.2 cents per share, compared with $8.8 million or 11 cents per
share in the same period of 1998. On November 4, 1999, the Company declared a
quarterly dividend of 7.5 cents per share payable December 6, 1999 to
stockholders of record at the close of business on November 19, 1999.
11
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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 its
production processes. 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. As of September
30, 1999, approximately 98% of the Company's systems have been tested and are
Y2K compliant with the remainder expected to be tested and be Y2K compliant by
the fourth quarter of 1999. The Company continues to test these systems where
appropriate.
As of September 30, 1999, the Company had spent approximately $1.2 million in
addition to its normal internal information technology costs in connection with
its Y2K program. The Company expects to incur an additional $0.1 million to
complete the program. Phase three of the program, which involved the Company
sending detailed information requests to their principal customers, suppliers
and service providers to determine the status of their Y2K compliance, has been
completed. The Company will have further contact with those who have not
responded or have indicated further work was required to achieve Y2K compliance,
but none are critical to the Company's operations.
Among other things, the Company's operations depend on the availability of
utility services, principally electricity, and reliable performance by
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 this plan. The Company has completed a contingency
plan for each of its principal operating services during the third quarter of
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.
The above estimates and conclusions contain forward-looking statements and are
based on management's best estimate of future events. Actual results could
differ materially depending on the availability of resources and the Company's
ability to identify and correct all Y2K issues.
Impact of New Accounting Standards: In June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities.
Initially, the statement was to be effective in fiscal years beginning after
June 15, 1999. In June 1999, the FASB issued SFAS No. 137 which defers the
effective date of SFAS No. 133 one year until June 15, 2000. The Company is
currently assessing the impact of SFAS No. 133.
12
<PAGE>
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, 1999 and the related
condensed consolidated statements of earnings and cash flows for each of the
three-month and nine-month periods ended September 30, 1999 and 1998. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements, referred to above,
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1998 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 22, 1999, 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, 1998,
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 18, 1999
14
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) The following Exhibit is filed as part of this report:
15. Independent Accountants' Awareness Letter
(b) Report on Form 8-K:
1. Report on Form 8-K filed October 7, 1999, enclosing a press release
issued by the Company dated October 7, 1999, which announces
significant new mineralization at the Toquepala Mine.
15
<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, 1999 /s/ Thomas J. Findley, Jr.
Thomas J. Findley, Jr.
Vice President and
Chief Financial Officer
Date: November 12, 1999 /s/ Brendan M. O'Grady
Brendan M. O'Grady
Comptroller
16
<PAGE>
Exhibit 15
PricewaterhouseCoopers LLP
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
We are aware that our report dated October 15, 1999 on our review of the interim
financial information of Southern Peru Copper Corporation and Subsidiaries as of
September 30, 1999 and for the three-month and nine-month periods ended
September 30, 1999 and 1998 and included in this Form 10-Q for the quarter ended
September 30,1999 is incorporated by reference in the Company's Registration
Statements on Form S-8 (File Nos. 333-02736 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 within the meaning of Sections 7 and 11 of
that Act.
PricewaterhouseCoopers LLP
New York, New York
November 12, 1999
17
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