SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
1999
Second Quarter
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 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 July 31, 1999 there were outstanding 13,968,862 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.
<PAGE>
Southern Peru Copper Corporation
and Subsidiaries
INDEX TO FORM 10-Q
Page No.
Part I. Financial Information:
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statement of Earnings
Three Months and Six Months
Ended June 30, 1999 and 1998 2
Condensed Consolidated Balance Sheet
June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statement of Cash Flows
Three Months and Six Months
Ended June 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 7-12
Report of Independent Accountants 13
Part II. Other Information:
Item 6(a) Exhibits on Form 10-Q 14
Signatures 15
Exhibit 15 - Independent Accountants' Awareness Letter
1
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<TABLE>
<CAPTION>
Southern Peru Copper Corporation
and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)
3 Months Ended 6 Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(in thousands, except for per share data)
<S> <C> <C> <C> <C>
Net sales:
Stockholders and affiliates $ - $ 6,392 $ - $ 12,376
Others 132,376 146,147 256,318 292,558
-------- --------- -------- ---------
Total net sales 132,376 152,539 256,318 304,934
-------- --------- -------- ---------
Operating costs and expenses:
Cost of sales 95,862 105,926 185,113 211,534
Administrative and other expenses 9,427 10,137 19,525 24,718
Depreciation and depletion 18,271 15,687 35,658 29,377
Exploration expense 1,706 976 2,466 2,168
-------- --------- -------- ---------
Total operating costs and expenses 125,266 132,726 242,762 267,797
-------- --------- -------- ---------
Operating income 7,110 19,813 13,556 37,137
Interest income 2,301 4,036 5,218 8,983
Other income 175 7,164 1,641 8,728
Interest expense (4,448) (3,837) (9,500) (8,244)
--------- --------- --------- ----------
Earnings before taxes on income
and minority interest of labor shares 5,138 27,176 10,915 46,604
Taxes on income 1,541 8,598 3,274 14,913
Minority interest of labor shares in
income of Peruvian Branch 8 205 10 398
-------- ---------- -------- ---------
Net earnings $3,589 $ 18,373 $ 7,631 $ 31,293
======== ========= ======== =========
Per common share amounts:
Net earnings - basic and diluted $0.05 $ 0.23 $0.10 $ 0.39
Dividends paid $ 0.025 $0.080 $ 0.055 $0.280
Weighted average common shares outstanding:
Basic 79,867 79,850 79,862 79,936
Diluted 79,888 79,859 79,876 79,943
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<TABLE>
<CAPTION>
Southern Peru Copper Corporation
and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
June 30, December 31,
1999 1998
<S> <C> <C>
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 105,916 $ 175,948
Marketable securities 30,520 22,152
Accounts receivable, net 70,357 64,561
Inventories 89,043 88,951
Other assets 59,266 58,450
---------- ----------
Total current assets 355,102 410,062
Net property 1,144,216 1,088,557
Other assets 27,773 27,218
---------- ----------
Total Assets $1,527,091 $1,525,837
========== ==========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 15,026 $ 13,683
Accounts payable 44,366 48,497
Accrued liabilities 37,336 34,836
---------- ----------
Total current liabilities 96,728 97,016
---------- ----------
Long-term debt 214,340 220,525
Deferred credits 15,831 15,722
Deferred income taxes 61,404 56,700
Other liabilities 11,231 10,951
---------- ----------
Total non-current liabilities 302,806 303,898
---------- ----------
Minority interest of labor shares
in the Peruvian Branch 15,726 16,331
---------- ----------
STOCKHOLDERS' EQUITY
Common stock (a) 261,363 261,363
Retained earnings 850,468 847,229
---------- ----------
Total Stockholders' Equity 1,111,831 1,108,592
---------- ----------
Total Liabilities, Minority
Interest & Stockholders' Equity $1,527,091 $1,525,837
========== ==========
(a) Common shares: Authorized 34,099 34,099
Outstanding 13,969 13,949
Class A common shares Authorized
and Outstanding 65,901 65,901
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
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Southern Peru Copper Corporation
and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
(in thousands)
OPERATING ACTIVITIES
Net earnings $ 3,589 $ 18,373 $ 7,631 $ 31,293
Adjustments to reconcile net earnings to
net cash provided from operating activities:
Depreciation and depletion 18,271 15,687 35,658 29,377
Provision (benefit) for deferred income taxes (182) 1,751 5,074 4,197
Minority interest of labor shares 8 205 10 398
Cash provided from (used for) operating
assets and liabilities:
Accounts receivable (18,890) 3,696 (6,308) 12,413
Inventories (1,463) 2,846 (92) (1,655)
Accounts payable and accrued liabilities 4,609 (17,342) (1,492) (2,943)
Other operating assets and liabilities 1,254 23,319 3,699 7,464
Foreign currency transaction losses (gains) (286) 823 1,230 823
--------- -------- -------- --------
Net cash provided from operating activities 6,910 49,358 45,410 81,367
-------- -------- -------- --------
INVESTING ACTIVITIES
Capital expenditures (47,372) (51,337) (97,686) (127,745)
Purchases of held-to-maturity investments (30,520) (25,389) (54,990) (27,189)
Proceeds from held-to-maturity investments 24,470 91,224 46,622 179,903
Sales of property 736 2,891 1,098 3,713
-------- -------- -------- ---------
Net cash provided from (used for) investing
activities (52,686) 17,389 (104,956) 28,682
--------- -------- --------- ---------
FINANCING ACTIVITIES
Debt repayment (6,842) (6,841) (6,842) (6,841)
Proceeds from borrowings - - 2,000 -
Escrow (deposits) withdrawals on long-term loans (40) 5,385 (67) 7,000
Dividends paid to common stockholders (1,997) (6,387) (4,393) (22,370)
Distributions to minority interest (39) (130) (86) (526)
Net treasury stock transactions - - - (3,001)
Purchases of labor shares (462) (2,331) (645) (3,243)
--------- --------- --------- ---------
Net cash used for financing activities (9,380) (10,304) (10,033) (28,981)
--------- --------- --------- ---------
Effect of exchange rate changes on cash 284 (554) (453) (361)
-------- --------- --------- --------
Increase (decrease) in cash and cash equivalents (54,872) 55,889 (70,032) 80,707
Cash and cash equivalents, at beginning of period 160,788 151,309 175,948 126,491
-------- -------- -------- --------
Cash and cash equivalents, at end of period $105,916 $207,198 $105,916 $ 207,198
======== ======== ======== =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
4
<PAGE>
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 June 30, 1999 and
the results of operations and cash flows for the three and six months ended
June 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
six 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. Inventories were as follows:
(in millions)
June 30, December 31,
1999 1998
Metals at lower of average cost or market:
Finished goods $1.2 $ 1.5
Work-in-process 34.9 37.9
Supplies at average cost, net of reserves 52.9 49.5
---- ----
Total inventories $ 89.0 $88.9
====== =====
C. At June 30, 1999, the Company has recorded sales of 3.2 million pounds of
copper, at a provisional price of $0.65 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 third quarter of 1999.
D. 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 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.
5
<PAGE>
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.
E. 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.
F. 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
supposed to be effective for 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
<PAGE>
Part I Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reported net earnings of $3.6 million, or 5 cents per common share,
for the second quarter ended June 30, 1999 compared with net earnings of $18.4
million, or 23 cents per common share, for the second quarter of 1998. For the
first six months of 1999, net earnings were $7.6 million or 10 cents per common
share, compared to $31.3 million, or 39 cents per common share, for the same
period of 1998. The decrease in earnings in the second quarter of 1999 is
primarily a result of lower metal prices, which is estimated to have reduced
earnings by approximately $19.5 million when compared with the second quarter of
1998. The average price for copper on the London Metal Exchange (LME) was 67
cents per pound for the second quarter of 1999 compared with 79 cents per pound
in the second quarter of 1998. Average price for copper for the six months ended
June 30, was 65 cents in 1999 and 78 cents in 1998. Prices for SPCC's principal
by-products were also lower in the 1999 periods.
The Company's 1999 second quarter results benefited from an estimated $5.2
million in realized pre-tax savings from the Company's cost reduction program.
For the six months ended June 30, 1999 the pre-tax savings from the cost
reduction program are estimated to be $18.4 million and the program is expected
to improve full year 1999 pre-tax earnings by $30.0 million. The Company's
results for the first six months 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.
Mine copper production increased 14% to 180.0 million pounds in the second
quarter of 1999 compared with second quarter of last year. This increase of 22.2
million pounds included 9.0 million pounds from the Cuajone mine, 16.2 million
pounds from the Toquepala mine and a decrease of 3.0 million pounds in solvent
extraction/electrowinning (SX/EW) production. The production increase at Cuajone
is due to the completion of the mine expansion program. Toquepala's increase in
production was due principally to higher ore grades. The decrease in SX/EW
production was caused by planned shutdowns to allow for expansion modifications.
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 1999. High clay content in ore
processed caused metallurgical problems which had a negative impact on copper
recoveries, reducing expected copper production by an estimated 60 million
pounds during the first half of 1999. The Company is currently making process
modifications which are expected to improve recoveries. The expansion of the
Toquepala SX/EW facility, which will increase annual production 26% to 62,000
tons, is on schedule to be completed in the third quarter of this year. Work on
the Company's expansion and modernization of the Ilo smelter is continuing.
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 June 30, 1999 the inflation and devaluation rates were 1.3%
and nil, respectively, and for the six month period ended June 30, 1999, the
inflation and devaluation rate were 2.2% and 5.6%, respectively.
Net Sales: Net sales in the second quarter of 1999 decreased $20.2 million to
$132.4 million from the comparable period in 1998. Net sales for the first six
months of 1999 totaled $256.3 million, compared with $304.9 million for the same
period of 1998. The decrease in net sales was a result of lower copper prices in
1999 partially offset by an increase in sales volume of 14.0 million pounds in
7
<PAGE>
the second quarter of 1999 and 12.7 million pounds in the first six months of
1999.
At June 30, 1999, the Company has recorded sales on 3.2 million pounds of
copper, at a provisional price of $0.65 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 third 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 Six Months Ended
June 30 June 30
Price/Volume Data: 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average Metal Prices:
Copper (per pound-LME) $0.67 $0.79 $0.65 $0.78
Molybdenum (per pound) $2.64 $4.03 $2.67 $3.99
Silver (per ounce-COMEX) $5.13 $5.69 $5.20 $5.96
Sales Volume (in thousands):
Copper (pounds) 181,200 167,200 349,900 337,200
Molybdenum (pounds) (1) 3,228 2,730 5,552 5,581
Silver (ounces) 674 764 1,307 1,518
</TABLE>
(1) The Company's molybdenum production is sold in concentrate form. Volume
represents pounds of molybdenum contained in concentrates.
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.
8
<PAGE>
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 six months of 1998. At June 30, 1999, 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 June
30, 1999 and December 31, 1998, the Company had the following fuel swap
agreements:
Weighted Average
Quantity Contract Price
Fuel Type Period (barrels) (per barrel)
June 30, 1999
Residual Oil 7/99-12/99 1,073,700 $10.76
1/00-12/00 1,048,800 $12.34
Diesel Fuel 7/99-12/99 360,000 $17.43
1/00-12/00 360,000 $18.80
December 31, 1998
Residual Oil 1/99-9/99 1,095,000 $9.84
Diesel Fuel 1/99-9/99 432,000 $15.80
The unrealized gain in the Company's fuel swap positions at June 30, 1999 was
$5.7 million. A hypothetical 10 percent decrease from June 30, 1999 fuel prices,
would reduce the unrealized gain on fuel swaps by $4.3 million.
In the second quarter of 1999, the Company's production costs would have been
$1.8 million higher if this exposure had not been hedged.
Operating Costs and Expenses: Operating costs and expenses were $125.3 million
in the second quarter of 1999 compared with $132.7 million in the second quarter
of 1998. In the six months ended June 30, 1999, operating costs and expenses
were $242.8 million, compared with $267.8 million in the comparable 1998 period.
The decrease in the operating costs and expenses is principally due to lower
unit cost of Company mined copper sold as a result of cost-reduction and
production enhancement programs instituted by the Company in April 1998. In
addition, the six month 1998 period included a charge of $10.0 million recorded
in the first quarter of 1998 for severance costs associated with the cost
reduction program.
9
<PAGE>
Non-Operating Items: The Company's second quarter 1998 results include in,
"Other income" a $5.3 million insurance settlement related to rain damage
incurred in the first quarter of 1997.
Interest income was $2.3 million in the second quarter of 1999 and $5.2 million
for the first two quarters of 1999, as compared to $4.0 million and $9.0
million, respectively, in the comparable periods of 1998. 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 June 30, 1999 were
$1.5 million, compared with $8.6 million for the second quarter of 1998. The
decrease was principally due to lower earnings in 1999, as a consequence of
lower metal prices.
Cash Flows:
Second Quarter: Net cash provided from operating activities was $6.9 million in
the second quarter of 1999, compared with $49.4 million in the comparable 1998
period. The decrease was primarily the result of lower copper prices and changes
in operating assets and liabilities.
Net cash used for investing activities was $52.7 million in the second quarter
of 1999, and was due principally to capital expenditures. In the second quarter
of 1998, net cash provided from investing activities was $17.4 million and was
principally due to higher proceeds from held-to-maturity investments to fund
anticipated Cuajone expansion costs.
Financing activities in the second quarter of 1999 was a use of cash of $9.4
million, compared with a use of cash of $10.3 million for the second quarter of
1998. The second quarter of 1999 includes a dividend distribution of $2.0
million, a debt payment of $6.8 million and $0.5 million used to repurchase
labor shares. The second quarter of 1998 included a dividend distribution of
$6.4 million, a debt payment of $6.8 million, purchases of labor shares of $2.3
million, net of $5.4 million of funds released from escrow accounts.
Six Months: Net cash provided from operating activities was $45.4 million for
the six month period ended June 30, 1999, compared with $81.4 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 $105.0 million in the six month
period ended June 30, 1999 and was primarily due to capital expenditures. In the
six month period ended June 30, 1998, net cash provided from investing
activities was $28.7 million and was largely due to higher proceeds from
held-to-maturity investments. The decrease in capital expenditures in the six
months ended June 30, 1999 as compared to the 1998 period is attributable to the
completion of the Cuajone expansion in 1998.
Cash used for financing activities for the six months ended June 30, 1999 was
$10.0 million, $29.0 million in the comparable 1998 period. Dividends paid to
shareholders were $4.4 million in the 1999 six-month period and $22.4 million in
the 1998 six-month period.
Liquidity and Capital Resources: At June 30, 1999, the Company's debt as a
percentage of total capitalization (total debt, minority interests and
stockholders' equity) was 16.9% compared to 17.2% at December 31, 1998. Debt at
June 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 $882.5 million at June 30, 1999.
10
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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 second quarter of 1999, the Company paid a dividend to shareholders of
$2.0 million or 2.5 cents per share, compared with $6.4 million or 8 cents per
share in the same period of 1998. On July 26, 1999, the Company declared a
quarterly dividend of 2.2 cents per share payable August 31, 1999 to
stockholders of record at the close of business on August 17, 1999.
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. The Company has
identified three systems that are not Y2K compliant. These systems are being
replaced and are expected to be operational by the third quarter of 1999. As of
June 30, 1999, approximately 96% of the Company's computerized information
system have been tested and are Y2K compliant with the remainder expected to be
tested and be Y2K compliant by the third quarter of 1999. The Company continues
to test these systems where appropriate.
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 June 30, 1999, the Company
received confirmations from approximately 70% 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 third quarter of 1999.
11
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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 will complete 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.
As of June 30, 1999, the Company had spent approximately $1.0 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.
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 supposed to be effective for 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.
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.
12
<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 June 30, 1999 and the related
condensed consolidated statements of earnings and cash flows for each of the
three-month and six-month periods ended June 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
July 16, 1999
13
<PAGE>
PART II - OTHER INFORMATION
Item 6(a) - Exhibits on Form 10Q
EXHIBIT INDEX
Exhibit
15 Independent Accountants' Awareness Letter
14
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN PERU COPPER CORPORATION
(Registrant)
Date: August 9, 1999 /s/ Thomas J. Findley, Jr.
--------------------------
Thomas J. Findley, Jr.
Vice President and
Chief Financial Officer
Date: August 9, 1999 /s/ Brendan M. O'Grady
----------------------
Brendan M. O'Grady
Comptroller
15
<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 July 16, 1999 on our review of the interim
financial information of Southern Peru Copper Corporation and Subsidiaries as of
June 30, 1999 and for the three-month and six-month periods ended June 30, 1999
and 1998 and included in this Form 10-Q for the quarter ended June 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
August 9, 1999
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