FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number 1-10122
Magma Copper Company
(Exact name of registrant as specified in its charter)
Delaware 86-0219794
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7400 N. Oracle Rd., Suite 200
Tucson, Arizona 85704
(Address of Principal executive offices) (Zip Code)
(602) 575-5600
(Registrant's telephone number, including area code)
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
______ ______
Number of shares of common stock outstanding
at March 31, 1994: 45,742,906
MAGMA COPPER COMPANY
Form 10-Q
For the Quarter Ended March 31, 1994
INDEX
Page
Number
Part I - Financial Information
Item 1 - Financial Statements
Introduction to the Financial Statements 1
Consolidated Balance Sheets -
March 31, 1994 and December 31, 1993 2
Consolidated Statements of Operations-
Three months ended March 31, 1994 and 1993 3
Consolidated Statements of Cash Flows -
Three months ended March 31, 1994 and 1993 4
Notes to Consolidated Financial Statements 5
Report of Independent Public Accountants 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K 12
Signature 14
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The financial statements for the three months ended March 31, 1994 and
1993 include, in the opinion of the Company, all adjustments (which consist
only of normal recurring adjustments) necessary to present fairly the results
of operations for such periods. Results of operations for the three months
ended March 31, 1994, are not necessarily indicative of results of operations
which will be realized for the year ending December 31, 1994. The financial
statements should be read in conjunction with the Company's Form 10-K, for
the year ended December 31, 1993.
The financial statements included herein have been subjected to a
review, in accordance with the standards established by the American
Institute of Certified Public Accountants, by Arthur Andersen & Co., the
registrant's independent public accountants.
<TABLE>
MAGMA COPPER COMPANY
Consolidated Balance Sheets
(In thousands)
<CAPTION>
March 31, December 31,
1994 1993
---------- ------------
<S> <C> <C>
Assets
Current Assets:
Cash $ 119,741 $ 230,414
Marketable securities 206,252 108,890
Accounts receivable 44,820 51,090
Inventories:
Metals 66,345 53,676
Materials and supplies 24,724 25,045
Prepaid expenses 7,937 10,883
--------- ---------
Total current assets 469,819 479,998
--------- ---------
Net Property, Plant and Mine
Development 882,622 866,361
--------- ---------
Other 8,179 4,428
--------- ---------
Total Assets $1,360,620 $1,350,787
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 17,964 $ 17,952
Accrued liabilities 93,784 89,208
Current portion of long-term debt 12,222 12,395
Income taxes payable 2,594 --
--------- ---------
Total current liabilities 126,564 119,555
--------- ---------
Accrued Pension, Retirement and
Other Liabilities 62,926 62,208
Deferred Income Taxes 96,557 96,592
Long-Term Debt 390,145 392,260
Stockholders' Equity:
Series D preferred stock 20 20
Series E preferred stock 20 20
Common stock 457 457
Capital in excess of par value 620,327 620,282
Retained earnings 66,766 62,059
Unearned stock grant compensation (2,216) (2,666)
Unrealized loss on marketable
securities (946) --
--------- ---------
Total stockholders' equity 684,428 680,172
--------- ---------
Total Liabilities and
Stockholders' Equity $1,360,620 $1,350,787
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<TABLE>
MAGMA COPPER COMPANY
Consolidated Statements of Operations
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended
--------------------------
March 31, March 31,
1994 1993
--------- ---------
<S> <C> <C>
Sales $175,532 $194,605
Cost of sales:
Cost of products sold (140,224) (167,332)
Depreciation, depletion and
amortization (15,143) (14,850)
Selling, general and administrative (5,148) (5,023)
Exploration, research and development (3,238) (1,041)
------- -------
Income from operations 11,779 6,359
Other income (expense):
Interest expense (5,966) (9,697)
Interest income 3,620 2,558
Other 994 1,153
------- -------
Income before income taxes and
cumulative effect of accounting
change 10,427 373
Income tax provision (2,816) (97)
------- -------
Income before cumulative effect of
accounting change 7,611 276
Cumulative effect of accounting change,
net of tax -- (888)
------- -------
Net income (loss) $ 7,611 $ (612)
======= =======
Preferred stock dividends (2,906) --
------- -------
Net income available for common stock $ 4,705 $ (612)
======= =======
Earnings per share of common
stock, primary:
Income before cumulative effect
of accounting change $ .16 $ .01
Cumulative effect of accounting
change, net of tax -- (.02)
------- -------
Net income (loss) $ .16 $ (.01)
======= =======
Preferred stock dividends (.06) --
------- -------
Earnings (loss) per share of
common stock $ .10 $ (.01)
======= =======
Average common shares outstanding,
primary 49,033 49,073
Earnings (loss) per share of common
stock, fully diluted:
Income before cumulative effect
of accounting change $ .10* $ .01
Cumulative effect of accounting
change, net of tax -- (.02)
------- -------
Net income (loss) $ .10* $ (.01)
======= =======
Average common shares outstanding,
fully diluted 63,118 49,073
* The Company's convertible preferred stock is not included in the
calculation as its effects are antidilutive.
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<TABLE>
MAGMA COPPER COMPANY
Consolidated Statements of Cash Flows
(In thousands)
<CAPTION>
Three Months Ended
-----------------------
March 31, March 31,
1994 1993
-------- --------
<S> <C> <C>
Net income $ 7,611 $ (612)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 15,143 14,850
Gain on sale of assets (185) (650)
Other 555 381
------- -------
23,124 13,969
------- -------
Change in certain assets and liabilities:
(Increase) decrease in:
Accounts receivable 6,270 (16,864)
Inventories (9,383) (551)
Prepaid expenses 2,946 2,432
Increase (decrease) in:
Accounts payable and accrued expenses 4,588 (1,166)
Income taxes payable 2,594 (4,900)
Accrued pension, retirement and other
liabilities 718 2,276
Deferred income taxes (35) (2,108)
------- -------
Net change in certain assets and liabilities 7,698 (20,881)
------- -------
Net cash provided (used) by operating activities 30,822 (6,912)
------- -------
Cash flows from investing activities:
Capital expenditures (34,438) (19,528)
(Purchase) sale of marketable securities (98,308) 35,468
Proceeds from sale of assets 254 1,115
Other (3,746) (601)
------- -------
Net cash provided (used) by investing activities (136,238) 16,454
------- -------
Cash flows from financing activities:
Long-term debt repayment (1,000) (1,000)
Long-term lease financing (1,288) (585)
Debt issuance costs (108) (129)
Issuance of common stock under stock plans 128 239
Issuance of preferred stock (83) --
Preferred stock dividend (2,906) --
------- -------
Net cash used by financing activities (5,257) (1,475)
------- -------
Net increase (decrease) in cash (110,673) 8,067
Cash at the beginning of the period 230,414 121,057
------- -------
Cash at the end of the period $119,741 $129,124
======= =======
Marketable securities 206,252 85,638
------- -------
Total cash and marketable securities $325,993 $214,762
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for -
Interest $ 8,598 $ 8,068
Income taxes, net -- 6,500
Supplemental schedule of non-cash
investing and financing activities:
Purchase of property financed by note
payable and leases -- 3,532
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
MAGMA COPPER COMPANY
Notes to Consolidated Financial Statements
Note 1 -- Basis of Consolidation
The accompanying consolidated financial statements include the accounts
of Magma Copper Company and its wholly-owned subsidiaries ("Magma" or the
"Company"). All material intercompany activity has been eliminated. Certain
amounts previously reported have been reclassified to conform to the current
presentation in the accompanying consolidated financial statements.
Note 2 -- Inventories
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
--------- ------------
<S> <C> <C>
Metals in process, net $ 49,362 $ 37,454
Finished goods 16,983 16,222
------- -------
Metals 66,345 53,676
Materials and supplies, net 24,724 25,045
------- -------
$ 91,069 $ 78,721
======= =======
</TABLE>
Note 3 -- Income Taxes
SFAS 109, "Accounting for Income Taxes", requires use of the liability
method for providing deferred income taxes, which generally records deferred
taxes for transactions reported in different years for financial reporting
and tax purposes.
In calculating income taxes, the Company has benefitted from deductions
for percentage depletion. In general, the Company's cumulative percentage
depletion deductions exceed cost basis of depletable properties, resulting in
current percentage depletion being treated as a permanent difference. The
effect of this permanent difference causes the effective tax rate to be
generally lower than the statutory tax rate.
The Company has recorded a provision for income taxes of $2,816,000 in
the first three months of 1994. The provision for income taxes differs from
the amounts computed by applying the federal statutory tax rate to the net
income before taxes, as follows:
<TABLE>
<CAPTION>
For the three months ended
March 31, 1994
---------------------------
Dollars Tax Rate
(In millions) (percentage)
------------ -----------
<S> <C> <C>
Income tax provision
at federal
statutory rate $(3,649) (35)%
Percentage depletion 1,208 12
State tax (375) (4)
------ ---
Total provision $(2,816) (27)%
====== ===
</TABLE>
Note 4 -- Commitments and Contingencies
The Company is from time to time involved in various legal proceedings
of a character normally incident to its business, including various claims
and pending actions against the Company seeking damages in large amounts or
clarifications of legal rights. Although there can be no assurance in this
regard, the Company does not believe that adverse decisions in any pending or
threatened proceedings, or any amounts which it may be required to pay by
reason thereof, would have a material adverse effect on the financial
condition or results of operations of the Company.
Note 5 -- Capitalized Interest
During the first three months of 1994 and 1993, $4,755,000 and $774,000,
respectively of interest cost was capitalized on certain long-term projects.
The total amount of interest cost incurred was $10,721,000 and $10,471,000
for the first quarter of 1994 and 1993, respectively.
Note 6 -- Disclosure About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash. The carrying amount approximates fair value.
Marketable Securities. In the first quarter of 1994 the Company adopted
SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities".
Accordingly, certain of the Company's investments with an average maturity of
less than 2 years have been classified as available-for-sale securities and
are reported at their fair value, estimated based on quoted market prices for
those or similar investments, of $206.3 million compared to an amortized cost
basis of $207.2 million.
<TABLE>
<CAPTION>
First
Quarter
1994
(In Millions)
-----------
<S> <C>
Amortized cost basis $207.2
Unrealized holding gain
(net of tax) .1
Unrealized holding loss
(net of tax) (1.0)
-----
Fair market value $206.3
=====
</TABLE>
During the first quarter of 1994 the Company received $93.9 million in
proceeds from available-for-sale securities, including net realized gains,
utilizing the specific identification method, of $0.7 million. The net
unrealized holding loss for the period ended March 31, 1994 was $0.9 million.
Long-Term Debt. The fair value of the Company's long-term debt is
estimated based on the quoted market prices for the same or similar issues or
on the current rates offered to the Company for debt of the same remaining
maturities.
Price Protection Contracts. From time to time the Company enters into
options and futures contract or fixed price forward sales agreements as a
hedge against lower copper prices. The carrying amount of these contracts
reflects the cost of the option premium which will be amortized ratably as
the options expire. The fair value of these contracts is estimated based on
quotes from brokers and market prices at March 31, 1994.
The estimated fair values of the Company's financial instruments as of
March 31, 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-------- -------
<S> <C> <C>
Cash $119,741 $119,741
Marketable securities 206,252 206,252
Long-term debt (includes
current portion) 402,367 444,430
Copper price protection
contracts 8,633 (2,801)
</TABLE>
The fair value estimates are made at discrete points in time based on
relevant market information and information about the financial instruments.
These estimates may be subjective in nature and involve uncertainties and
significant judgment and therefore cannot be determined with precision.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Magma Copper Company:
We have reviewed the accompanying condensed consolidated balance sheet
of Magma Copper Company (a Delaware corporation) and subsidiaries as of March
31, 1994, and the related condensed consolidated statements of operations and
cash flows for the three-month periods ended March 31, 1994 and 1993. These
financial statements are the responsibility of the Company's management.
We conducted our reviews 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 reviews, we are not aware of any material modifications
that should be made to the 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 of Magma Copper Company
and subsidiaries as of December 31, 1993 (not presented herein), and in our
report dated January 27, 1994, we expressed an unqualified opinion on that
balance sheet. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1993, is fairly
stated, in all material respects, in relation to the balance sheet from which
it has been derived.
Arthur Andersen and Co.
Tucson, Arizona,
April 15, 1994.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
MATERIAL CHANGES IN FINANCIAL POSITION
Net income for the three months ended March 31, 1994 was $7.6
million compared to a net loss of $.6 million for the same period in 1993.
This increase is primarily due to the effects of extraordinary rains and
flooding in Arizona during the first quarter of 1993. The rains and flooding
reduced pounds of copper sold and increased production costs which reduced
first quarter 1993 after-tax earnings by $13 million. The first quarter 1994
also benefited from reduced production cost. These improvement were
partially offset by a 13 cent per pound decrease in copper price realized
compared to the first quarter of 1993 and increased cost and lower custom
smelting revenues due to a planned smelter shutdown related to the completion
of the smelter expansion.
Net cash provided from operating activities was $30.8 million
during the first three months of 1994 compared to a negative $6.9 million for
the same period in 1993. This increase is due to higher earnings, timing of
estimated tax payments, and a decrease in accounts receivable partially
offset by higher in-process inventories related to the smelter shutdown.
Working capital at March 31, 1994 was approximately $343 million
(including $326 million in cash and marketable securities) compared to $360
million (including $339 million in cash and marketable securities) at
December 31, 1993.
The Company's cash position and cash flow from operations were used
to fund capital expenditures of approximately $34 million for the three
months ended March 31, 1994 as compared to $20 million for the same period in
1993.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Results of Operations for the Three Months Ended March 31, 1994 As Compared
with the Three Months Ended March 31, 1993
Total sales decreased by 10% to $176 million in 1994 from $195
million in 1993. Sales of copper decreased in 1994 to $156 million, from
$176 million in 1993 due to a $0.13 per pound decrease in realized price.
The following table sets forth the volume of copper sold in relation to the
components that make up cost of products sold:
<TABLE>
<CAPTION>
Three months ended
March 31,
(In millions)
1994 1993
------ ------
<S> <C> <C>
Pounds sold from:
Magma sources 139.6 128.7
Purchased 40.7 49.7
Total pounds of copper sold 180.3 178.4
===== =====
Toll processing pounds (including
tolled to anode) 13.5 8.7
===== =====
Cost of Products Sold:
Magma sources $ 96.8 $110.4
Purchased 33.1 43.9
Tolling 2.9 2.2
Other 7.4 10.8
----- -----
Total cost of products sold $140.2 $167.3
===== =====
Per Pound Cost of Products Sold:
Magma Sources
Before credits $ .70 $ .87
Credits (1) (.11) (.10)
----- -----
Net $ .59 $ .77
===== =====
(1) Deductions for rod premiums, profit on by-products and custom
processing.
</TABLE>
Sales of other metal by-products, acid and treatment tolls earned
increased approximately $1 million in 1994 from 1993 primarily due to
improved acid revenue and more toll material processed.
Cost of products sold decreased by 16% to $140 million in 1994 due
primarily to improved production costs and the effects of the extraordinary
rains and flooding in Arizona during the first quarter of 1993. Increased
volume of Magma source copper sold offset the decrease in sales of copper
purchased from third parties.
Depreciation, depletion and amortization expense remained relatively
constant at $15 million in 1994 from 1993.
Selling, general and administrative expenses remained relatively
constant at $5 million while exploration, research and development costs
increased by $2 million reflecting increased exploration activity at domestic
and foreign properties.
The Company's provision for income taxes of nearly $3 million for 1994
and $.1 million for 1993 reflects higher income in the current period.
At December 31, 1993, the company adopted SFAS 112, "Employers'
Accounting for Postemployment Benefits". The Company elected to adopt this
statement early and to record the entire cumulative adjustment in the year of
adoption. Under SFAS 112, $.9 million (after tax) was charged to first
quarter 1993 earnings.
Net income in 1994 was $7.6 million, or $.10 per share fully diluted,
compared to a net loss of $.6 million, or $(.01) per share, in 1993. After
dividends on preferred stock, $4.7 million in 1993 is available for common
stockholders, or $.10 per common share, compared to a loss of $.6 million or
$(.01) per common share in 1993.
CAPITAL RESOURCES AND LIQUIDITY
Despite a 13 cent per pound decrease in the copper price realized, the
Company's first quarter earnings before interest, taxes, depreciation and
amortization ("EBITDA") were $28 million, as compared to $22 million in 1993
primarily the result of lower current production costs and the effects of the
extraordinary rains in Arizona during the first quarter of 1993. Net cash
provided by operating activities was approximately $31 million and capital
expenditures were $34 million. Cash and marketable securities at March 31,
1993 were $326 million as compared to $215 million from a year ago.
During the first quarter of 1994, the smelter expansion was completed
on schedule and is currently operating at or better than projected production
and cost levels. Additionally, the Company is continuing the development of
the Lower Kalamazoo and the permitting of the Robinson Mining District. The
Company anticipates that permitting could be achieved as early as September
1994 and production could begin in the first quarter of 1996. Total capital
expenditures for all projects are estimated to approximate $134 million for
the year 1994.
To the extent undertaken, the Company intends to finance these
projects with internal cash flow, current cash balances and new borrowings if
required. The Company does not currently anticipate difficulty in attracting
any additional borrowing which may be required. The decision to undertake or
complete these projects is subject to a variety of factors, which may include
(depending on the project) the completion of favorable feasibility studies
and permitting. There can be no assurance that the Company will undertake
all of these opportunities or that, if undertaken, they will prove
successful.
During the first half of 1993 the Company's Pinto Valley and Superior
Mining Divisions were adversely affected by significant rainfalls which
caused flooding, water containment structural failures and operating
difficulties, as well as technical violations of various permitting
conditions and state surface water quality standards. The Company has
tentatively agreed to enter into a consent decree with appropriate regulatory
authorities to settle all claims relating to this matter. The consent decree
is expected to be executed by the Company and its governmental counterparts
during the second quarter of 1994. Under the proposed settlement, the
Company would pay fines totalling $625,000, and contribute monies towards or
perform several supplemental environmental projects costing approximately
$200,000. In addition, the Company expects to spend $8 million in 1994 to
upgrade and expand its tailings and water containment facilities at these
divisions; these costs are being capitalized and will be amortized over the
remaining mine life.
In April, 1994 the Company filed a Form S-3 Registration Statement for
up to $300 million in debt and/or equity securities which may be issued from
time to time. The Company does not currently plan to issue securities.
PART II - OTHER INFORMATION
- - ---------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 11 - Statement re computation of per share
earnings.
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the three
months ended March 31, 1994.
<TABLE>
MAGMA COPPER COMPANY EXHIBIT 11
Computation of Per Share Earnings
(In thousands, except per share amounts)
<CAPTION>
Three Months
ended March 31,
----------------------
1994 1993
------- -------
<S> <C> <C>
Primary
- - -------
Weighted average common
shares outstanding 49,033 49,073
Earnings used in per common
share computation:
Net income (loss) $ 7,611 $ (612)
Preferred stock dividends (2,906) --
------ ------
Net income (loss) available
for common stock $ 4,705 $ (612)
====== ======
Earnings per share:
Income before cumulative effect of
accounting change and preferred stock
dividends $ .16 $ .01
Cumulative effect of accounting change -- (.02)
------ ------
Net income (loss) $ .16 $ (.01)
====== ======
Preferred stock dividends (.06) --
------ ------
Earnings (loss) per share of
common stock $ .10 $ (.01)
====== ======
Assuming full dilution
- - ----------------------
Weighted average common
shares outstanding 63,118 49,073
Earnings used in per common
share computation:
Net income (loss) $ 7,611 $ (612)
Earnings per share:
Net income (loss) $ .10 $ (.01)
Computation of weighted average
shares outstanding-fully diluted
- - ----------------------------------
Primary weighted average
shares outstanding 49,033 49,073
Assuming full dilution:
Conversion of Series D Preferred
Stock (2 million shares at 3.448
conversion rate) 6,896 --
Conversion of Series E Preferred
Stock (2 million shares at 3.5945
conversion rate) 7,189 --
------ ------
Fully diluted weighted
average shares outstanding 63,118 49,073
====== ======
</TABLE>
Signature
---------
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.
MAGMA COPPER COMPANY
Date: May 5, 1994
By: /s/ Douglas J. Purdom
--------------------------
Douglas J. Purdom
Vice President and
Chief Financial Officer
(Principal Accounting
and Financial Officer)
