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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
1999 FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 Commission File Number: 1-14066
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SOUTHERN PERU COPPER CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3849074
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 Maiden Lane, New York, N.Y. 10038
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 510-2000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
--------------------------------------- -----------------------
Common Stock, par value $0.01 per share New York Stock Exchange
Lima Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best knowledge of the registrant, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. |_|
As of February 29, 2000, there were of record 14,097,092 shares of Common Stock,
par value $0.01 per share, outstanding, and the aggregate market value of the
shares of Common Stock (based upon the closing price on such date as reported on
the New York Stock Exchange - Composite Transactions) of Southern Peru Copper
Corporation held by nonaffiliates was approximately $215 million. As of the
above date, there were also 65,900,833 shares of Class A Common Stock, par value
$0.01 per share, outstanding. Class A Common Stock is convertible on a
one-to-one basis into Common Stock.
PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE:
Part III: Proxy statement in connection with the Annual Meeting to be held on
May 9, 2000.
Part IV: Exhibit index is on page B1 through B3.
A1
PART I
Item 1. Business
THE COMPANY
The Company, an integrated producer of copper, operates mining, smelting and
refining facilities in the southern part of Peru. Southern Peru Copper
Corporation was reorganized into a holding company structure effective January
2, 1996, upon completion of a public offer to exchange newly issued Common Stock
for outstanding labor shares of the Company's Peruvian Branch ("Labor Shares")
called "Investment Shares" as of December 31, 1998. Effective December 31, 1998,
the Company's predecessor and wholly owned operating subsidiary, Southern Peru
Limited, was merged into the Company.
The Company, incorporated in 1952 was reorganized in 1955 and has conducted
copper mining operations since 1960. Pursuant to Peruvian law, the Company
conducts its operations in Peru through a registered branch (the "Branch"). The
Branch is not a corporation separate from the Company. It is, however, an
establishment, registered pursuant to Peruvian law, through which the Company
holds assets, incurs liabilities and conducts operations in Peru. Although it
has neither its own capital nor liability separate from that of the Company, it
is deemed to have an equity capital for purposes of determining the economic
interest of holders of investment shares. Investment shares are non-voting
ownership interests distributed to workers in accordance with former Peruvian
laws. The Branch comprises substantially all the assets and liabilities of the
Company associated with its copper operations in Peru.
Throughout this report, unless the context otherwise requires, the terms
"Southern Peru", "SPCC" and "the Company" refer to the present corporation and
its consolidated subsidiaries as well as its predecessor. In addition,
throughout this report, unless otherwise noted, all tonnages are in metric tons.
To convert to short tons, multiply by 1.102. All distances are in kilometers. To
convert to miles, multiply by 0.62137. All ounces are troy ounces.
On November 15, 1999, ASARCO Incorporated (ASARCO) transferred all of its
holdings of SPCC to Southern Peru Holdings Corporation, a wholly-owned
subsidiary of ASARCO. On November 17, 1999, Grupo Mexico S.A. de C.V. ("Grupo
Mexico") acquired all the holdings of ASARCO following a tender offer and
purchase of all outstanding common stock of ASARCO.
At December 31, 1999 the stockholders in the Company were Southern Peru Holdings
Corporation, a subsidiary of ASARCO (54.2%), a subsidiary of Cerro Trading
Company, Inc.(14.2%), Phelps Dodge Overseas Capital Corporation (14.0%) and
common stockholders (17.6%).
Reference is made to the following Financial Statement footnote included in this
report: Net Sales in Note 7.
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 metals prices on commodity exchanges, which can be
volatile.
Additional business information follows:
A2
COPPER BUSINESS
The copper operations of the Company involve the mining, milling and flotation
of copper ore to produce copper concentrates, the smelting of copper
concentrates to produce blister copper and the refining of blister copper to
produce copper cathode.
The Company also produces refined copper using solvent extraction/electrowinning
("SX/EW") technology. Silver, molybdenum and small amounts of other metals are
contained in copper ore as by-products. Silver sold is recovered in the refining
process or as an element of blister copper. Molybdenum is recovered from copper
concentrate in a molybdenum by-product plant. The Company has not reported
information by industry segments because substantially all of its revenues are
generated from its copper production.
REVIEW OF OPERATIONS
SPCC operates the Toquepala and Cuajone mines, high in the Andes, approximately
984 kilometers southeast of Lima. It also operates a smelter and refinery west
of the mines at the Pacific Ocean coast City of Ilo, Peru. SPCC is one of Peru's
leading companies and one of the 10 largest private-sector copper mining
companies in the world.
Mine copper production at SPCC increased in 1999 due principally to higher
throughput at the Cuajone mine, following completion of the mine expansion. The
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 twelve months of 1999. Improved operations at the Ilo copper refinery and
completion of the Toquepala SX/EW facility, increased 1999 refined copper
production.
The Cuajone mine expansion completed earlier this year reached target ore
throughput rate during the second quarter 1999. The expansion of the Toquepala
SX/EW facility, which will increase annual production to 56,250 tons, was
completed in the third quarter of this year. The Company's investment program
includes continuing expansion of the Toquepala mining unit, expansion of the
concentrator and adding equipment in the pit. Likewise, modernization of the
mining equipment at Cuajone will continue and a possible expansion of the
leaching section of such unit and the construction of a SX/EW plant is being
analyzed. Special emphasis will be given to the modernization of the Ilo
smelter, in order to improve its efficiency, its production volume and
significantly increase the capture of sulfur dioxide, to comply with
environmental agreements and requirements.
MINING OPERATIONS
Total mined copper production at SPCC increased 11.9% in 1999, compared with
1998, due to higher production at Cuajone and the beginning of operations in the
fourth quarter of the SX/EW plant expansion.
Cuajone production increased 20.4% in 1999 to 380 million pounds of copper
due principally to higher throughput at the Cuajone mine, following
completion of the mine expansion. Concentrator throughput for the year was
28.6 million tons of ore producing 690,000 tons of copper concentrates. The
rainy conditions in the first quarter of the year and metallurgical
difficulties with the ore reduced copper production by an estimated 80
million pounds from planned levels during the twelve months of 1999.
Toquepala mine production increased 3.9% in 1999 to 256 million pounds of copper
due to an increase in ore grade. The Toquepala concentrator milled 16.2 million
tons of ore. Together, the two mines produced 3.4 million ounces of silver and
12.1 million pounds of molybdenum as by-products.
A3
SX/EW OPERATIONS
The SX/EW facility at Toquepala produces refined copper from solutions obtained
by leaching low-grade ore stored at the Toquepala and Cuajone mines. An
expansion of the facility was completed in the third quarter of 1999 increasing
annual production to 56,250 tons. The facility produced 49,500 tons in 1999
compared to 47,000 tons in 1998. This represents 5.2 million pounds more copper
over 1998 production.
ORE RESERVES
SPCC has identified substantial geologic resources. In October 1999, the Company
reported a substantial increase in proven and probable ore reserves at the
Toquepala mine. At year-end 1999, probable sulfide reserves totaled 692 million
tons with an average copper grade of 0.74% at Toquepala and 1,242 million tons
with an average copper grade of 0.64% at Cuajone. In addition, the Company has
leachable ore, Toquepala with 1,732 million tons with ore grade of 0.20% and
Cuajone with 62 million tons with ore grade of 0.49%.
SMELTING AND REFINING OPERATIONS
The Ilo smelter increased concentrate processed by 4.3% in 1999 as compared to
the prior year. Smelting of SPCC concentrates increased by 17.8%, replacing
higher-grade copper concentrate from third parties. As a result, blister
production decreased by 1.5% in 1999 as compared to 1998.
SPCC's total refined copper production, including the 109.2 million pounds from
the SX/EW plant, increased 2.2% to 662.0 million pounds in 1999 from 647.4
million pounds in 1998. Refined production from the Ilo refinery reached 552.7
million pounds in 1999, an increase of 1.7% from 1998 due to efficiency gains at
the plant.
The SX/EW expansion was completed during the third quarter of 1999 increasing
this facility's production by 5.0% when compared to the prior year.
SPCC's Ilo smelter provides feed for the refinery. Blister copper produced by
the smelter exceeds the refinery's capacity and the excess is sold to other
refineries around the world.
EXPANSION AND MODERNIZATION PROGRAM
Expansion and modernization programs announced in prior years are underway.
Expansion of the Cuajone mine was finished in 1999 with an investment of $245
million. During 1999 the following major equipment was received for the Cuajone
mine: one 4100 model P&H shovel with a capacity of 56 cubic yards, eight 793C
model Caterpillar 240-short ton capacity trucks, one 100XP model P&H rotary
drill, one 844 model Caterpillar wheel tractor and one LT1800 model Letorneau
front-end loader with a capacity of 33 cubic yards. This equipment is already
operating in the mine, with the exception of the P&H shovel, which will start
operations in March 2000. The expansion of the SX/EW plant in Toquepala was
finished in 1999 and is producing at its design capacity of 56,250 tons per
year.
The project to expand and protect the Cuajone mine from maximum flooding of the
Torata river is under construction and reached 40% completion at the end of
1999, with an investment of $36.0 million out of the $75.5 million budget. The
Torata river will be diverted in June 2000 to allow the beginning of the Cuajone
pit expansion.
Engineering studies for the Ilo smelter modernization and expansion project were
continued introducing the most efficient technology, proven in other
metallurgical facilities, looking not only to comply with Peruvian environmental
standards, but also to provide economic returns.
A4
Feasibility studies for expansion of the Toquepala concentrator, its mine, the
leaching section and a SX-EW plant at Cuajone are currently underway.
Construction of these projects may begin in the year 2000 improving SPCC
production capacity to over 900 million pounds of copper per year.
EXPLORATION
SPCC continues with its aggressive exploration program in Peru aimed at finding
economically attractive copper-gold deposits. Currently, the Company owns
330,000 hectares of mining rights and has access to another 108,000 hectares
through joint ventures and purchase options.
7,700 meters have been drilled at Los Chancas project. Preliminary results
indicate up to 200 million tons of ore with a copper content superior to 1%;
0.08% molybdenum; and 0.12 gr./ton of gold. The expected stripping ratio is low.
The first metallurgical tests indicate a ductile metal. More testing is underway
to determine the best way to treat this material. The Tantahuatay project, in
which SPCC has a 44% interest, has leacheable oxides containing a potential of 4
million gold ounces. Studies are currently underway to treat the arsenic content
of the deposit and make feasible the exploitation of the important copper
sulfides deposit located under the gold. Encouraging results have been found in
other gold/copper exploration projects. Work on these prospects will continue
during 2000.
ENVIRONMENT
With the operation of the sulfuric acid plant at the smelter in Ilo, which was
expanded to 317,500 tons per year and the Supplementary Control Program (SCP) to
control sulfur dioxide emissions by curtailing production during periods of
adverse weather, there has been an improvement of air quality in the Ilo area.
Part of the acid produced is used by the company to leach ore at its SX/EW
operation; the balance is sold in regional markets.
A5
PRINCIPAL PRODUCTS AND MARKETS
The principal uses of copper are in the building and construction industry,
electrical and electronic products and, to a lesser extent, industrial machinery
and equipment, consumer products and the automotive and transportation
industries. Silver is used for photographic, electrical and electronic products
and, to a lesser extent, brazing alloys and solder, jewelry, coinage, silverware
and catalysts. Molybdenum is used to toughen alloy steels and soften tungsten
alloy and is also used in fertilizers, dyes, enamels and reagents.
During 1999, 1998 and 1997, substantially all of the Company's copper production
was exported from Peru and sold to customers in Europe, the Far East, the United
States and elsewhere in Latin America. A substantial portion of SPCC's copper
sales is made under annual contracts to industrial users. Silver is sold under
annual contracts or in spot sales and molybdenum is sold in concentrate form to
merchants and other refiners under annual contracts. Most customers receive
shipments on a monthly basis at a constant volume throughout the year. As a
result there is little seasonality in SPCC sales volumes.
BACKLOG OF ORDERS
Substantially all of the Company's metal production is sold under annual
contracts. To the extent not sold under annual contracts, production can be sold
on commodity exchanges or in spot sales. Final sales values are determined based
on prevailing commodity prices for the quotation period, generally being the
month of, the month prior to or the month following the actual or contractual
month of shipment or delivery according to the terms of the contract.
COMPETITIVE CONDITIONS
Competition in the copper market is principally on a price and service basis,
with price being the most important consideration when supplies of copper are
ample. The Company's products compete with other materials, including aluminum
and plastics.
EMPLOYEES
At December 31, 1999 the Company employed 3,844 persons, about fifty-eight
percent of whom were covered by labor agreements with nine labor unions. There
were no labor strikes in 1999.
ENERGY MATTERS AND WATER RESOURCES
Electric power for the Company's operating facilities is generated by a thermal
electric plant owned and operated by Enersur S.A. and located adjacent to the
Ilo smelter. Power generation capacity is currently 150 megawatts. In addition,
the Company has 30 megawatts of power generation capacity from waste heat
boilers in the smelter and two small hydro-generating installations at Cuajone.
Power is distributed over a 224-kilometer closed loop transmission circuit.
In 1997, the Company sold its Ilo power plant to Enersur S.A. and entered into a
20-year power purchase agreement. The power purchase agreement contains
provisions obligating Enersur S.A. to construct additional capacity upon notice
to meet the Company's increased electricity requirements from the planned
expansion and modernization. The parties also entered into an agreement for the
sharing of certain services between the power plant and the Company's smelter at
Ilo. Under this agreement, the Company's cost of power has increased somewhat
from its 1996 level, while the Company has benefited by avoiding significant
capital expenditures required to meet the needs of the expanded operations.
SPCC has water concessions for well fields at Huaitire and Titijones and surface
water rights from Lake Suches.
A6
ENVIRONMENTAL MATTERS
The Company anticipates spending $50 million for environmental control capital
expenditures in 2000. Capital expenditures in connection with environmental
projects were approximately $41.6 million in 1999, $25.3 million in 1998 and
$47.8 million in 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Environmental Matters" which is herein
incorporated by reference.
CONCESSIONS
The Company has concessions from the Peruvian government for its exploration,
exploitation, extraction and/or production operations (collectively, the
"Concessions"). The Concessions are in full force and effect under applicable
Peruvian laws, and the Company believes it is in compliance with all material
terms and requirements applicable to the Concessions. The Concessions have
indefinite terms, subject to payment by SPCC of concession fees of up to $2 per
hectare annually for the mining concessions and a fee based on nominal capacity
for the processing concessions. Fees paid during 1999 were approximately $1.2
million.
REPUBLIC OF PERU
Substantially all of the Company's revenues are derived from the Toquepala mine,
the Cuajone mine, the SX/EW facility and the smelter and refinery at Ilo, all of
which are located within a 48-kilometer radius in the southern part of Peru.
Risks attendant to the Company's operations in Peru include those associated
with economic and political conditions, effects of currency fluctuations and
inflation, effects of government regulations and the geographic concentration of
the Company's operations.
A7
Item 2. Properties
FACILITIES
The Company's principal executive offices are located at 180 Maiden Lane, New
York, New York 10038 and Avenida Caminos del Inca No. 171, Chacarilla del
Estanque, Santiago de Surco, Lima 33, Peru. At December 31, 1999, the Company,
through its Peruvian Branch, has 100% interest in the Toquepala and Cuajone
mines, the SX/EW facility, the Ilo smelter, the sulfuric acid plant and the Ilo
refinery and operates them pursuant to concessions from the Peruvian Government.
See Item 1 "Business--Concessions". The Company owns, through the Branch, its
offices in Lima. Its offices in New York are located in space leased to it by
Asarco. The Company believes that its existing properties are in good condition
and suitable for the conduct of its business.
The offices and the Company's major facilities, together with production
commencement dates, are listed below:
PERU UNITED STATES
---- -------------
Toquepala Mine -- southern Peru (1960) Executive Offices -- New York, NY
Cuajone Mine -- southern Peru (1976)
SX/EW Facility -- southern Peru (1995)
Ilo Smelter -- Ilo, Peru (1960)
Ilo Refinery -- Ilo, Peru (1994-SPCC)
Acid Plant -- Ilo, Peru (1995)
Executive Offices -- Lima, Peru
The Company also owns and operates a railroad connecting the mines at Cuajone
and Toquepala with the smelting and refining facilities and a port at Ilo, which
are located approximately 196 rail kilometers from the two mines sites, which
are at elevations ranging from 3,220 to 3,330 meters. In addition, the Company
provides housing, hospitals and schools for employees and their families.
A8
METAL PRODUCTION STATISTICS
1999 1998 1997 1996 1995
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Copper Production
MINES (contained copper in thousands of pounds)
Toquepala 256,387 246,783 246,818 252,928 256,128
Cuajone 379,995 315,640 340,551 332,014 290,982
SX/EW 109,225 104,026 98,153 93,170 10,012
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Total Mines 745,607 666,449 685,522 678,112 557,122
- --------------------------------------------------------------------------------------------------------
SMELTER (contained copper in thousands of pounds)
SPCC concentrates 605,150 536,036 575,061 589,994 537,522
Purchased concentrates 32,986 111,732 63,679 43,614 96,934
- --------------------------------------------------------------------------------------------------------
Total Smelter 638,136 647,768 638,740 633,608 634,456
- --------------------------------------------------------------------------------------------------------
REFINERIES (thousands of pounds of copper)
Ilo 552,738 543,404 513,315 439,600 432,414
SX/EW 109,225 104,026 98,153 93,170 10,012
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Total Refineries 661,963 647,430 611,468 532,770 442,426
- --------------------------------------------------------------------------------------------------------
COPPER SALES (thousands of pounds)
Refined 553,246 542,786 514,320 439,400 436,638
In blister 66,169 105,374 110,412 162,418 200,592
Concentrates 21,433 17 19,955 -- --
SX/EW 109,024 103,937 99,297 92,472 9,374
- --------------------------------------------------------------------------------------------------------
Total sales of copper 749,872 752,114 743,984 694,290 646,604
- --------------------------------------------------------------------------------------------------------
LME average price (cents
per pound) 71 75 103 104 133
Molybdenum
(thousands of pounds contained in concentrate)
MINES
Toquepala 6,993 6,039 6,066 4,483 3,674
Cuajone 5,070 3,520 3,329 4,257 4,334
- --------------------------------------------------------------------------------------------------------
Total produced 12,063 9,559 9,395 8,740 8,008
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Sales of molybdenum
In concentrate 11,836 9,677 9,398 8,813 8,402
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Metals Week Dealer
Oxide mean price ($/lb.) $ 2.65 $ 3.41 $ 4.30 $ 3.78 $ 7.90
A9
1999 1998 1997 1996 1995
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Silver (thousands of ounces)
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SMELTER (in blister)
Ilo - SPCC Concentrates 3,378 2,890 3,146 3,097 2,958
- --------------------------------------------------------------------------------
REFINERY
Ilo 2,796 2,735 2,462 2,218 2,519
- --------------------------------------------------------------------------------
SALES OF SILVER
Refined 2,739 2,724 2,397 2,282 2,597
In blister 497 564 576 828 1,164
In concentrates -- -- 113 -- --
- --------------------------------------------------------------------------------
Total sales of silver 3,236 3,288 3,086 3,110 3,761
- --------------------------------------------------------------------------------
COMEX average price ($/oz.) $5.22 $5.51 $4.88 $5.18 $5.18
- --------------------------------------------------------------------------------
A10
METAL PRODUCTION STATISTICS
COPPER RESERVES
Mineral Average Metal Production
Reserves Copper Contained Metal
(000s Content (000s Pounds)
Tons) (%) -------------------------------
12/31/99 12/31/99 1999 1998 1997
-------- -------- ---- ---- ----
Toquepala Sulfide 691,900 0.74 256,400 246,800 246,800
Leachable 1,732,200 0.20 100,916 93,700 87,900
Cuajone Sulfide 1,242,300 0.64 380,000 315,600 340,600
Leachable 62,000 0.49 8,309 10,300 10,300
The Company has on going exploration programs in Peru.
The Company calculates its ore reserves by methods generally applied within the
mining industry and in accordance with the regulations of the Securities and
Exchange Commission. All mineral reserves are estimated quantities of proven and
probable ore that under present and anticipated conditions may be economically
mined and processed by the extraction of their mineral content.
The following ore production information is provided:
1999 1998 1997
---- ---- ----
Avg. Mill Avg. Mill Avg. Mill
Ore Milled Recovery Ore Milled Recovery Ore Milled Recovery
(000s Tons) Rate (%) (000s Tons) Rate (%) (000s Tons) Rate (%)
-------------------------------------------------------------------------------------
Toquepala 16,220 87.03% 16,339 88.49% 17,235 87.90%
Cuajone 28,607 72.31% 19,685 85.62% 19,703 87.00%
The following productive capacity is provided:
Defined Capacity (a)
--------------------
Ilo Smelter 290,300 tons
Ilo Refinery 245,000 tons
Toquepala - SX/EW 56,250 tons
(a) SPCC's estimate of actual capacity under normal operating conditions with
allowance for normal downtime for repairs and maintenance and based on the
average metal content of input material for the three years shown. No
adjustment is made for shutdowns or production curtailments due to strikes
or air quality emissions restraints.
A11
Item 3. Legal Proceedings
Reference is made to the information under the caption "Litigation" in Financial
Statement Footnote 19 "Commitments and Contingencies" on page A43 incorporated
herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
None.
A12
Executive Officers of the Registrant
Set forth below are the executive officers of the Company, their ages as of
February 29, 2000, and their positions.
Name Age Position
---- --- --------
German Larrea Mota-Velasco 46 Chairman of the Board, CEO and Director
Oscar Gonzalez Rocha 61 President and Director
Daniel Tellechea Salido 54 Vice President, Finance
Genaro Larrea Mota-Velasco 39 Vice President, Commercial
Hector Calva Ruiz 62 Vice President, Exploration and Development
Robert Ferri 52 General Counsel and Secretary
Ernesto Duran Trinidad 46 Comptroller
Genaro Guerrero Diaz Mercado 40 Vice President and Treasurer
German Larrea Mota-Velasco, Chairman of the Board and Chief Executive Officer of
SPCC since December 1999 and Director since November 1999. Chairman of the Board
of Directors and Chief Executive Officer of Grupo Mexico (holding); Grupo Minero
Mexico (mining division) and Grupo Ferroviario Mexicano (railroad division),
since 1994. Previously Executive Vice Chairman of Grupo Mexico and member of the
Board of Directors since 1981. Chairman and Chief Executive Officer of ASARCO
Incorporated from November 1999 to present, and its President from November 1999
to January 2000.
Oscar Gonzalez Rocha, President of SPCC since December 1999 and Director
since November 1999. Managing Director for Mexicana de Cobre, S.A. de C.V. from
1986 to 1989 and of Mexicana de Cananea, S.A. de C.V. from 1990 to 1999.
Alternate Director of Grupo Mexico since 1988 and a Director of ASARCO
Incorporated from November 1999 to present.
Daniel Tellechea Salido, Vice President, Finance of SPCC since December
1999 and Director since November 1999. Managing Director for Administration and
Finance of Grupo Mexico since 1994 and an Alternate Director since 1998.
Managing Director of Mexicana de Cobre, S.A. de C.V. from 1986 to 1993 and
Director, Vice President and Chief Financial Officer of ASARCO Incorporated from
November 1999 to present.
Genaro Larrea Mota-Velasco, Vice President, Commercial of SPCC since
December 1999 and Director since November 1999. Commercial Managing Director and
a Director of Grupo Mexico since 1994. Director, Vice President and Chief
Commercial Officer of ASARCO Incorporated from November 1999 to present.
Hector Calva Ruiz, Vice President, Exploration and Development of SPCC
since December 1999 and Director since November 1999. Managing Director for
Exploration and Projects of Grupo Mexico since 1997 and an Alternate Director
since 1998. Managing Director of Industrial Minera Mexico, S.A. de C.V. from
1984 to 1997 and Director of ASARCO Incorporated from November 1999 to present.
Genaro Guerrero Diaz Mercado, Vice President and Treasurer. Treasurer of
Grupo Mexico, S.A. de C.V. from 1994 to date.
Ernesto Duran Trinidad, Comptroller. Comptroller of Grupo Mexico, S.A. de
C.V. from 1994 to date. Comptroller of Mexicana de Cobre, S.A. de C.V. from 1983
to 1993.
Robert Ferri, General Counsel and Secretary. Assistant General Counsel of
ASARCO Incorporated, 1982-1987. Associate General Counsel, 1987-1996. Associate
General Counsel and Secretary, 1995-1998. Senior Associate General Counsel and
Secretary, 1998-1999. General Counsel and Secretary, ASARCO Incorporated, from
November 1999 to present, and Vice President since January 2000 to present.
A13
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
At December 31, 1999, there were 3,281 holders of record of the Company's Common
Stock. SPCC's Common Stock is traded on the New York Stock Exchange (NYSE) and
the Lima Stock Exchange (BVL). The SPCC Common Stock symbol is PCU on the NYSE
and PCUC1 on the BVL. The Common Stock commenced trading on the NYSE on a when
issued basis on January 5, 1996. Regular way trading commenced January 12, 1996.
On the BVL, the Common Stock commenced trading on January 5, 1996.
The table below sets forth the cash dividends paid per share of capital stock
and the high and low stock prices on both the NYSE and the BVL for the periods
indicated.
1999 1998
---- ----
---------------------------------------------------- ---------------------------------------------------
Quarters 1st 2nd 3rd 4th Year 1st 2nd 3rd 4th Year
---------------------------------------------------- ---------------------------------------------------
Dividend per
share $0.03 $0.025 $0.022 $0.075 $0.152 $0.20 $0.08 $0.11 $0.12 $0.51
Stock market price
NYSE:
High $10-7/8 $15 $16-7/8 $18-1/16 $18-1/16 $15-1/8 $16-11/16 $13-1/2 $12-7/8 $16-11/16
Low $8-7/16 $10-1/16 $13-5/8 $13-13/16 $8-7/16 $12-1/2 $13 $8-3/4 $8-15/16 $8-3/4
BVL:
High $10.66 $15.08 $16.95 $17.45 $17.45 $14.95 $16.50 $13.35 $12.70 $16.50
Low $8.78 $10.12 $13.80 $14.01 $8.78 $12.40 $12.95 $8.93 $8.89 $8.89
On February 25, a dividend of $0.06 a share, totaling $4.8 million was declared,
payable March 27, 2000. The Company's dividend policy will be reviewed at the
next Board of Directors meeting taking into consideration the current intensive
capital investment program, such as the expansion of mines, concentrator/leach
plant, smelter and future cash flow generated from operations.
For a description of limitations on the ability of the Company to make dividend
distributions, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Liquidity and Capital Resources" and Note 14 to the
Consolidated Financial Statements of the Company.
A14
Item 6. Selected Financial Data
FIVE-YEAR SELECTED FINANCIAL AND STATISTICAL DATA
(in millions, except per share and employee data) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Earnings:
Net sales $585 $628 $814 $ 753 $ 929
Operating costs and expenses (1) 539 558 577 497 558
Operating income 46 70 237 256 371
Minority interest of investment shares in
income of Peruvian Branch -- -- 4 5 44
----------------------------------------------------------------------
Net earnings $29 $55 $186 $ 181 $ 218
----------------------------------------------------------------------
Per Share Amounts:
Net earnings - basic and diluted $0.37 $0.68 $2.32 $ 2.25 $ 3.31
Dividends paid $0.152 $0.51 $1.26 $ 1.47 $ 1.27
Consolidated Balance Sheet:
Total assets $1,545 $1,526 $1,561 $1,280 $1,272
Cash and marketable securities 11 198 331 174 262
Total debt 223 234 248 107 94
Stockholders' equity 1,126 1,109 1,098 1,015 953
Consolidated Statement of Cash Flows:
Cash provided from operating activities $90 $181 $278 $ 159 $ 330
Dividends paid 12 41 101 118 84
Capital expenditures 250 259 184 121 183
Depreciation and depletion 74 61 47 42 36
Capital Stock:
Common shares outstanding 14.1 13.9 14.2 13.6 11.5
NYSE Price - high $18-1/16 $16-11/16 $21-1/8 $ 21 --
- low $8-7/16 $8-3/4 $12-3/4 $13-7/8 --
Class A common shares outstanding 65.9 65.9 65.9 66.6 68.8
Book value per share $14.09 $13.88 $ 13.71 $ 12.66 $11.90
P/E ratio 41.72 13.88 5.77 6.50 --
Financial Ratios:
Current assets to current liabilities 2.4 4.2 5.6 3.8 2.8
Debt as % of capitalization 16.3% 17.2% 18.2% 9.3% 8.8%
Employees (at year end) 3,844 4,557 4,829 4,859 5,035
Notes to five year selected financial and statistical data
- ----------------
(1) Includes provision for workers' participation of $3.4 million, $10.6
million, $14.4 million, $18.0 million, and $32.2 million in the years
ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively.
A15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
The Company's business is affected by the factors outlined below which should be
considered in reviewing the financial position, results of operations and cash
flows of the Company for the periods described herein.
Inflation and Devaluation of the Peruvian New Sol: A portion of the Company's
operating costs are denominated in Peruvian New 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 New Sol, the financial position,
results of operations and cash flows of the Company could be adversely affected.
The value of the net assets of the Company denominated in new soles can be
affected by devaluation of the new sol. The recent inflation and devaluation
rates are as follows:
Years ended December 31, 1999 1998 1997
---- ---- ----
Peruvian Inflation Rate 3.7% 6.0% 6.5%
New Sol/Dollar Devaluation Rate 11.2% 15.7% 4.9%
Peruvian Branch: The consolidated financial statements included herein are
prepared in U.S. dollars and in accordance with generally accepted accounting
principles in the United States (US GAAP). The Peruvian Branch (the Branch)
consists of substantially all the assets and liabilities of Southern Peru Copper
Corporation (SPCC) associated with its copper operations in the Republic of
Peru. The Branch is registered with the Peruvian government as a branch of a
foreign mining company. The results of the Branch are consolidated in the
financial statements of the Company.
The Branch maintains its books of account in new soles and prepares financial
information in accordance with generally accepted accounting principles in Peru
(Peruvian GAAP). Peruvian GAAP requires the inclusion in the financial
statements of the Branch of the Resultado por Exposicion a la Inflacion (Result
of Exposure to Inflation), which seeks to account for the effects of inflation
by adjusting the value of non-monetary assets and liabilities and equity by a
factor corresponding to wholesale price inflation rates during the period
covered by the financial statements. Monetary assets and liabilities are not so
adjusted.
Expansion and Modernization Project: Expansion and modernization programs
announced in prior years are underway. Expansion of the Cuajone mine was
finished in 1999 with an investment of $245 million. During 1999 the
following major equipment was received for the Cuajone mine: one 4100 model
P&H shovel with a 56 cubic yard capacity, eight 793C model Caterpillar 240
short ton capacity trucks, one 100XP model P&H rotary drill, one 844 model
Caterpillar wheel tractor and one LT1800 model Letorneau front end loader
with a 33 cubic yard capacity. This equipment is already operating at the
mine, with the exception of the P&H shovel, which will start operations by
March 2000. The expansion of the SX/EW plant in Toquepala was finished in
1999 and is producing at its design capacity of 56,250 tons per year.
The project to expand and protect the Cuajone mine from maximum flooding of the
Torata River is under construction and reached 40% completion at the end of
1999, with an investment of $36.0 million out of the $75.5 million budget. The
Torata River will be diverted in June 2000 to allow the beginning of the Cuajone
pit expansion.
Engineering studies for the Ilo smelter modernization and expansion project were
pursued until November 1999, at which time management decided to revisit the
available technologies in order to both fulfill the Peruvian environmental
standards, as established in the PAMA, and to better conform the project to
SPCC's
A16
financial capabilities. The alternatives under analysis may consider ways to
speed up the investment commitments as long as they do not compromise SPCC's
economic performance, and offer reasonable returns on the investment. This
review is expected to be completed in the second quarter of 2000 at which time
the best alternative will be selected.
Feasibility studies for expansion of the Toquepala concentrator and a new SX-EW
plant at Cuajone are currently under way. If attractive, construction of these
projects may begin in the year 2000 improving SPCC production capacity to over
900 million pounds per year.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
SPCC reported 1999 net earnings of $29.4 million, or diluted earnings per share
of 37 cents, compared with net earnings of $54.6 million, or diluted earnings
per share of 68 cents, in 1998 and net earnings of $185.7 million, or diluted
earnings per share of $2.32, in 1997.
The decline in net earnings in 1999 compared with 1998 is primarily a result of
lower copper prices and higher depreciation charges. The average price of copper
in 1999 on the London Metal Exchange declined 4 cents per pound from 1998 to 71
cents per pound. The earnings decrease was partially offset by savings realized
from the cost reduction program instituted by the Company in 1998.
In April 1998, SPCC initiated cost-reduction and production enhancement
programs, including reductions in operating expenses, purchased services and
general and administrative expenses, designed to reduce annual expense by $30
million when fully implemented. The programs are estimated to have increased
pre-tax earnings by $29.2 million in 1999, improving net after-tax earnings by
$18.8 million, or 24 cents per share. In the year 2000 the programs are expected
to improve net earnings by approximately $40.0 million, or 50 cents per share.
Results for 1999 include a non-recurring after-tax charge of $5.4 million ($8.4
million pre-tax), or 6 cents per share, for the severance cost of foreign
contract employees' early termination. In addition, the 1999 results also
include a non-recurring 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 cost
reduction program.
In connection with the cost reduction program the Company recorded a $10 million
pre-tax charge in the first quarter of 1998 for severance costs. In addition, in
the fourth quarter of 1998 the Company transferred title to a major portion of
the Ilo townsite to its worker occupants and the City of Ilo. Titles to 1,344
individual homesites were transferred. The Company recorded a pre-tax charge of
$10.9 million in 1998 to write-off the remaining book value of the transferred
property and to provide for other costs associated with the divestiture. The
Company expects future savings as a result of the transfer of the townsite
through reduced maintenance costs.
The decline in net earnings in 1998 compared with 1997 is primarily a result of
lower copper prices. The average price of copper in 1998 on the London Metal
Exchange declined 28 cents per pound from 1997 to 75 cents per pound, and at
year-end 1998 was 66 cents per pound. In addition to lower metal prices, results
for 1998 also reflect an increase in the effective income tax rate compared to
1997. The earnings decrease was partially offset by savings realized from the
cost reduction program instituted by the Company in 1998.
In 1997, the Government of Peru approved a reinvestment allowance for the
Company's program to expand the Cuajone mine. Pursuant to the reinvestment
allowance, the Company receives certain tax incentives in Peru. As a result,
U.S. tax credit carryforwards for which no benefit had previously been recorded
were utilized. Principally because of the reinvestment program, the Company's
effective tax rate was lower in 1997.
A17
As a result of the expansion program, electric power requirements will increase
significantly requiring the construction of additional generating capacity. In
the second quarter of 1997, the Company sold its existing power plant to an
independent power company for $33.6 million. In connection with the sale, a
power purchase agreement was also completed, under which the Company agreed to
purchase its power needs for twenty years. Under the agreement, the cost of
power has increased somewhat from its 1996 level; however, the Company will
avoid the significant capital expenditures that would be required to meet the
needs of expanded operations.
Net Sales: Net sales in 1999 were $584.5 million, compared with $627.9 million
in 1998 and $814.2 million in 1997. Sales decreased in 1999 by $43.4 million,
largely as a result of lower copper prices. Copper sales volume was 2.2 million
pounds lower in 1999 compared with 1998.
Sales decreased in 1998 by $186.3 million from 1997, largely as a result of
lower copper prices, offset somewhat by an increase in copper and molybdenum
volume. Copper sales volume was 8.1 million pounds higher in 1998 compared with
1997. Sales of copper produced at Company mines, however, decreased by 6.5
million pounds in 1998 as compared with 1997.
At December 31, 1999, there were no copper sales recorded at provisional prices.
Prices: Sales prices for the Company's metals are established principally by
reference to prices quoted on the London Metal Exchange (LME), the New York
Commodity Exchange (COMEX) or published in Platt's Metals Week for dealer oxide
mean prices for molybdenum products.
Price/Volume Data 1999 1998 1997
---- ---- ----
Average Metal Prices
Copper (per pound - LME) $ 0.71 $ 0.75 $ 1.03
Molybdenum (per pound) $ 2.65 $ 3.41 $ 4.30
Silver (per ounce - COMEX) $ 5.22 $ 5.51 $ 4.88
Sales Volume (in thousands)
Copper (pounds) 749,872 752,114 743,984
Molybdenum (pounds)(1) 11,836 9,677 9,398
Silver (ounces) 3,236 3,288 3,086
- ----------------
(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.
Copper: Depending on the market fundamentals and other conditions, the Company
may purchase put options to reduce or eliminate the risk of price declines below
the option strike price on a portion of its anticipated future production. Put
options purchased by the Company establish a minimum sales price for the
production covered by such put options and permit the Company to participate in
price increases above the option price. The cost of options is amortized on a
straight-line basis during the period in which the options are exercisable.
Depending upon market conditions, the Company may either sell options it holds
or exercise the options at maturity. Gains or losses from the sale or exercise
of options, net of unamortized acquisition costs, are recognized in the period
in which the underlying production is sold and are reported as a component of
the underlying transaction.
A18
Earnings include pre-tax gains from option sales and exercises of $7.2 million
in 1998 and $10.2 million in 1997. At December 31, 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
December 31, 1999 and 1998, the Company had the following fuel swap agreements:
Weighted
Average
Contract
Quantity Price
Fuel Type Period (Barrels) (per Barrel)
- -----------------------------------------------------------------------
1999
Residual Oil 1/00-12/00 1,468,800 $12.80
Diesel Fuel 1/00-12/00 504,000 $19.36
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 December 31, 1999
was $8.7 million. The effect of a hypothetical 10 percent decrease from December
31, 1999 fuel prices would be to reduce the unrealized gain on fuel swaps by
$3.7 million.
In 1999, the Company's production costs would have been $10.7 million higher if
this exposure had not been hedged.
Foreign currency: The Company selectively uses foreign currency swaps to limit
the effects of exchange rate changes on future cash flow obligations denominated
in foreign currencies. A currency swap establishes a fixed dollar cost for a
fixed amount of foreign currency required at a future date. The Company has
entered into currency swap agreements on a portion of its capital cost
contracted in Euros.
A19
As of December 31, 1999 the Company had the following currency swap agreements:
US$ Euros Forward
Maturity Date (in millions) Exchange Rate
------------- ------------- -------------
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 December 31, 1999
was $3.3 million. A hypothetical 10 percent decrease from December 31, 1999
rates, would increase the unrealized loss on currency swaps by $2.9 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.
Cost of Sales: Cost of sales was $410.1 million in 1999, $446.5 million in 1998
and $474.4 million in 1997. The decrease of $36.4 million in 1999 includes the
lower cost of copper processed and sold from purchased concentrates, the lower
unit cost of company mined copper as a result of decreases in power and fuel
costs, and benefits from the Company's cost reduction program. These decreases
were offset in part by a $14.8 million charge for severance costs, which were
part of the Company's earnings enhancement program.
The decrease of $27.9 million in 1998 was principally due to the lower sales
volume of copper produced from third parties' concentrates and lower power and
fuel costs, partially offset by a $10.0 million charge for severance cost and a
$10.9 million charge for Ilo townsite divestiture cost, which were part of the
Company's earnings enhancement program
Other Expenses: Depreciation and depletion expense was $74.2 million in 1999,
compared with $60.9 million in 1998 and $46.7 million in 1997. The increase in
1999 includes depreciation of the new ball mills of the Cuajone concentrator as
well as mining equipment of the Cuajone mine expansion and the expansion of the
SX/EW plant in Toquepala. The increase in 1998 includes depreciation of the
tailings dam facility completed in late 1997, the acid plant expansion completed
in 1998 and the addition of haul trucks in 1998 and 1997.
Exploration expenses were $7.2 million, $5.2 million and $7.4 million in 1999,
1998 and 1997, respectively. The increase in 1999 reflects the increase of
drilling programs at the Company's exploration properties.
Non-Operating Items: Interest income was $7.8 million in 1999 compared with
$15.8 million in 1998 and $20.9 million in 1997. The decreases in 1999 and 1998
reflects the lower invested balances as funds were utilized in the Company's
expansion program. Interest income is expected to continue to decrease as
available cash is used to fund the Company's expansion and modernization
program.
Other income was $3.6 million in 1999 compared with $9.4 million in 1998 and
$7.1 million in 1997. Other income in 1998 includes a $5.3 million insurance
settlement related to flood damage, which occurred in 1997.
Total interest expense was $25.2 million in 1999, compared with $25.6 million in
1998 and $21.9 million in 1997. In 1999, 1998 and 1997, the Company capitalized
$7.3 million, $10.6 million and $2.3 million of interest, respectively,
principally related to expenditures on the expansion program.
A20
Taxes on Income: Taxes on income were $9.7 million, $25.6 million and $55.6
million for 1999, 1998 and 1997, respectively, and includes $11.6 million, $22.9
million and $45.0 million of Peruvian income taxes and $(1.9) million, $2.7
million and $10.6 million, for U.S. federal and state taxes for 1999, 1998 and
1997, respectively. U.S. income taxes are primarily attributable to investment
income as well as limitations on use of foreign tax credits in determining the
alternative minimum tax.
In 1997, the Government of Peru approved a reinvestment allowance for the
Company's program to expand the Cuajone mine. The reinvestment allowance
provides the Company with tax incentives in Peru and, as a result, certain U.S.
tax credit carryforwards, for which no benefit had previously been recorded,
were realized. The reduction in the Company's effective tax rate, as a result of
the reinvestment allowance, lowered tax expense by approximately $14.7 million
in 1997. Pursuant to the reinvestment allowance the Company has received tax
deductions in Peru in amounts equal to the cost of the qualifying property
(approximately $245 million). The financial statement carrying value of the
qualifying property was reduced to reflect the tax benefit associated with the
reinvestment allowance (approximately $73 million). As a result, financial
statement depreciation expense related to the qualifying property will be
reduced over its useful life (approximately 15 years).
The Company obtains income tax credits in Peru for value-added taxes paid in
connection with the purchase of capital equipment and other goods and services
employed in its operations and records these credits as a prepaid expense. Under
current Peruvian law, the Company is entitled to use the credits against its
Peruvian income tax liability or to receive a refund.
Minority Interest of Investment Shares (previously known as Labor Shares): There
was no minority interest of investment shares in 1999, compared to $0.5 million
in 1998 and $4.4 million in 1997. The provision for minority interest of
investment shares represents an accrual of 1.7%, 2.0% and 2.4% for 1999, 1998
and 1997, respectively, of the Branch's after-tax earnings. The reductions in
the percentage of minority interest of investment shares in 1999 and 1998 is a
result of purchases of investment shares by the Company.
Cash Flows - Operating Activities: Net cash provided from operating activities
were $90.3 million in 1999, compared with $186.6 million in 1998 and $277.6
million in 1997. The decrease in 1999 was primarily attributable to an $81.1
million higher use of cash for operating assets and liabilities, which includes
$25.8 million for an increase in accounts receivable because of the higher
copper prices late in 1999 and $41.0 million increase in inventories of
purchased concentrates, refined copper and supplies. Additionally, $25.2 million
of lower earnings partially offset by $13.3 million of higher depreciation and
depletion contributed to the decrease in operating cash flow. The decrease in
1998 was primarily attributable to lower copper prices. The decrease in 1998
reflects lower earnings of $131.1 million partially offset by higher
depreciation and deferred tax provisions of $14.1 million and $21.7 million,
respectively.
Cash Flows - Investing Activities: Net cash used for investing activities was
$227.5 million in 1999 compared with $75.9 million in 1998 and $337.6 million in
1997. Capital expenditures in 1999 were $250.3 million, compared with $258.7
million in 1998 and $184.0 million in 1997.
Capital expenditures in 1999, 1998 and 1997 reflect the Company's expansion and
modernization program and capitalization of mine stripping. Other investment
activities in 1999 and 1998 include net proceeds of $22.2 million and $182.4
million, respectively, from held-to-maturity investments. These investments were
utilized in the Company's expansion programs.
The Company's planned capital expenditures in 2000 are estimated to be
approximately $269 million, which includes expenditures related to the
modernization and expansion of the Ilo smelter, feasibility studies for the
expansion of the Toquepala concentrator and a SX/EW plant in Cuajone and the
Torata River Flood Control project.
A21
Cash Flows - Financing Activities: Financing activities used cash of $27.3
million and $59.5 million in 1999 and 1998, respectively, compared to a source
of cash of $11.8 million in 1997. In 1999 activity included dividend payments of
$12.2 million, net debt repayment of $11.7 million and purchases of investment
shares of $3.4 million.
Included in 1998 uses of cash are debt repayments of $13.7 million, purchases of
investment shares of $3.8 million and net treasury stock transactions of $2.7
million.
LIQUIDITY AND CAPITAL RESOURCES
Financing: In March 1999, the Company concluded a $100 million, 15-year loan
agreement with Mitsui and Co., Ltd. The applicable interest for this loan is the
LIBO rate plus 1.25%. This facility provides additional committed financing for
SPCC's modernization and expansion program. A commitment fee of 0.5% per annum
is payable on the undrawn portion of this loan through December 31, 2001. As of
December 31, 1999 $2.0 million had been drawn from this loan facility.
In 1997, the Company entered into a $600 million, seven year loan facility with
a group of international financial institutions. The facility consists of a $400
million term loan and a $200 million revolving credit line. The interest rate
during the first three years of the agreement on any loans outstanding is LIBOR
plus 1.75% per annum for term loans and LIBOR plus 2.0% for revolving credit
loans. A commitment fee of 0.5% per annum is payable on the undrawn portion of
the facility. No amounts had been drawn under this agreement as of December 31,
1999.
Also in 1997, the Company privately placed $150 million secured export (SENS) in
the United States and international markets. These notes, which have been
registered with the Securities and Exchange Commission, begin amortizing in 2000
and mature in 2007 and were priced at par with a coupon rate of 7.9%. In
addition, in 1997 the Company sold $50 million of bonds, due June 2004, to
investors in Peru. The bonds have a fixed interest rate of 8.25%. The Company
expects that it will meet its cash requirements for 2000 and beyond from
internally generated funds, cash on hand, borrowings under the current
facilities and from additional external financing.
The Company also has a loan outstanding with Corporacion Andina de Fomento (CAF)
of $11.8 million with interest based on LIBOR, and an outstanding loan from the
United States Export-Import Bank (EXIM)of $8.8 million, with interest at a 6.43%
fixed rate. Both loans are payable in semi-annual installments through 2001. At
December 31, 1999, the Company had outstanding borrowings of $222.5 million,
compared with $234.2 million at December 31, 1998.
Certain financing agreements contain covenants which limit the payment of
dividends to stockholders. Under the most restrictive covenant, the Company may
pay dividends to stockholders equal to 50% of the net income of the Company for
any fiscal quarter as long as such dividends are paid by June 30 of the
following year. Net assets of the Company unavailable for the payment of
dividends totaled $1.1 billion at December 31, 1999. In accordance with the most
restrictive covenant of the Company's loan agreements, additional indebtedness
of $903.4 million would have been permitted at December 31, 1999.
The Mitsui and Co., Ltd. credit agreement is collateralized by pledges of
receivables of 24,000 tons of copper per year. The EXIM Bank credit agreement is
collateralized by pledges of receivables from 7,000 tons of copper per year. The
CAF loan is collateralized by liens on the SX/EW facility. The SENS and the
seven year loan facility require that most of the collections of export copper
sales be deposited into a trust account in the United States. Twenty percent of
these collections are used as collateral for the outstanding SENS with the
balance of the collections remitted directly to the Company. The excess funds in
the collateral account are remitted to the Company, if all financial
requirements are
A22
met. As part of these agreements, the Company must maintain three-month and
six-month collection ratios, as defined (aggregate collections as a specified
multiple of debt service). Both facilities require escrow deposits of three
months debt service. In addition, certain of the agreements require the Company
to maintain a minimum stockholders' equity of $750 million, specified ratios of
debt to equity, current assets to current liabilities and an interest coverage
test. Reduction of ASARCO Incorporated's (Asarco) voting interest in the Company
to less than a majority would constitute an event of default under two of the
financing agreements. The Company was in compliance with the various loan
covenants at December 31, 1999. Included in Other assets are $10.7 million held
in escrow accounts as required by the Company's loan agreements. The funds will
be released from escrow as scheduled loan repayments are made.
At December 31, 1999, the Company's debt as a percentage of total capitalization
(the total of debt, minority interest of investment shares and stockholders'
equity) was 16.3% as compared with 17.2% at December 31, 1998. At December 31,
1999, the Company's cash and marketable securities amounted to $10.6 million
compared with $198.1 million at December 31, 1998.
DIVIDENDS AND CAPITAL STOCK
The Company paid dividends to stockholders of $12.2 million, or $0.152 per
share, in 1999, $40.7 million, or $0.51 per share, in 1998 and $101.1 million,
or $1.26 per share in 1997. Distributions to the investment share minority
interest were $0.2 million, $0.9 million and $2.5 million in 1999, 1998 and
1997, respectively.
On February 25, 2000 a dividend of $0.06 a share, totaling $4.8 million was
declared, payable March 27, 2000. The Company's dividend policy will be reviewed
at the next Board of Directors meeting taking into consideration the current
intensive capital investment program, such as the expansion of mines,
concentrator/leach plant, smelter and future cash flow generated from
operations.
At the end of 1999 and 1998, the authorized and outstanding capital stock of the
Company consisted of 65,900,833 shares of Class A common stock, par value $0.01
per share; and 34,099,167 authorized shares of common stock, par value $0.01 per
share, of which 14,118,862 common shares were outstanding at December 31, 1999
and 13,949,812 shares were outstanding at December 31, 1998.
ENVIRONMENTAL MATTERS
The exploration, mining, milling, smelting and refining activities of the
Company are subject to Peruvian legislation and regulations. According to the
law, active mining companies submitted to the Ministry of Energy and Mines an
Environmental Compliance and Management Program (PAMA) that describes the
investments that the Company will make to comply with the maximum permissible
levels established for its operations by this Authority. The implementation of
the PAMA requires that the Company commit an annual minimum investment of 1% of
its sales. The Company's PAMA was approved in January 1997.
Under current Peruvian law and regulations, compliance with the PAMA will
satisfy environmental requirements pertaining to the Company's operations during
the applicable five-or-ten year implementation period. The Company remains,
however, subject to other environmental requirements applicable to its
operations.
The project with the PAMA that will demand the largest investment is the
modernization of the Ilo smelter. In a first phase the capture of sulfur dioxide
(SO2) will be increased from a current level of in excess of 30% to 67%. The
second phase of the project will further increase the capture of SO2 to in
excess of 92%, complying with current Peruvian environmental regulations.
A23
During the implementation of the project, Southern Peru continues to operate the
Supplementary Control Program (SCP), a voluntary effort, by which the smelter
production is restricted during periods of adverse meteorological conditions.
This program, in conjunction with the operation of the smelter's sulfuric acid
plant that was expanded to 317,500 tons per year, has contributed to effectively
improved air quality in Ilo.
In addition to the environmental programs for the Ilo smelter and the refinery,
the Company continues to have good results with the reclamation programs in both
Ite Bay and the beaches to the north of the smelter. Environmental capital
expenditures were $41.6 million in 1999, $25.3 million in 1998 and $47.8 million
in 1997. In addition, the Company estimates spending $50.0 million for
environmental control capital expenditures in 2000.
YEAR 2000
The Company completed 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. As of December 31, 1999, the Company had spent approximately $1.3
million in addition to its normal internal information technology costs in
connection with its Y2K program. Through January 2000, the Company noted no loss
of production or disruptive events related to the Y2K issue.
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.
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 metals prices on commodity exchanges which can be volatile.
A24
Item 8. Financial Statements and Supplementary Data.
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF EARNINGS
For the years ended December 31, 1999 1998 1997
(in thousands, except for per share amounts) ---- ---- ----
Net sales:
Stockholders and affiliates -- $ 18,685 $ 59,897
Others $ 584,546 609,231 754,259
-------------------------------------
Total net sales 584,546 627,916 814,156
Operating costs and expenses:
Cost of sales 410,134 446,515 474,385
Administrative and other 47,453 44,977 48,367
Depreciation and depletion 74,237 60,859 46,736
Exploration 7,156 5,185 7,390
-------------------------------------
Total operating costs and expenses 538,980 557,536 576,878
-------------------------------------
Operating income 45,566 70,380 237,278
Interest income 7,840 15,784 20,934
Interest expense (17,881) (15,009) (19,573)
Other income 3,610 9,437 7,066
-------------------------------------
Earnings before taxes on income and minority interest
of investment shares 39,135 80,592 245,705
Taxes on income 9,740 25,567 55,610
Minority interest of investment shares in income of
Peruvian Branch (10) 461 4,437
-------------------------------------
Net earnings $ 29,405 $ 54,564 $ 185,658
=====================================
Per common share amounts:
Net earnings - basic and diluted $ 0.37 $ 0.68 $ 2.32
Dividends paid $ 0.152 $ 0.51 $ 1.26
Weighted average shares outstanding-basic 79,862 79,893 80,188
Weighted average shares outstanding-diluted 79,892 79,893 80,197
The accompanying notes are an integral part of these financial statements.
A25
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED BALANCE SHEET
At December 31, 1999 1998
(Dollars in thousands) ---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 10,596 $ 175,948
Marketable securities -- 22,152
Accounts receivable:
Trade:
Stockholders and affiliates -- 1,446
Other trade 57,041 43,976
Other 23,623 19,139
Inventories 110,171 88,951
Prepaid taxes 48,099 35,422
Other current assets 19,611 23,028
---------------------------
Total current assets 269,141 410,062
Net property 1,250,887 1,088,557
Other assets 25,425 27,218
---------------------------
Total assets $ 1,545,453 $ 1,525,837
===========================
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 23,272 $ 13,683
Accounts payable:
Trade 31,819 28,477
Other 26,594 20,020
Other current liabilities 29,472 34,836
---------------------------
Total current liabilities 111,157 97,016
---------------------------
Long-term debt 199,253 220,525
Deferred credits 716 15,722
Deferred income taxes 79,888 56,700
Other liabilities 14,526 10,951
---------------------------
Total non-current liabilities 294,383 303,898
---------------------------
Contingencies (Note 19)
Minority interest of investment shares in the
Peruvian Branch 13,975 16,331
---------------------------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01;
shares authorized: 34,099,167;
shares issued: 14,330,093 143 143
Class A Common stock, par value $0.01;
shares issued and authorized:
65,900,833 659 659
Additional paid-in capital 265,745 265,745
Retained earnings 864,354 847,229
Treasury stock, at cost, common shares,
1999 - 211,231 1998 - 380,281 (4,963) (5,184)
---------------------------
Total Stockholders' Equity 1,125,938 1,108,592
---------------------------
Total Liabilities, Minority Interest
and Stockholders' Equity $ 1,545,453 $ 1,525,837
===========================
The accompanying notes are an integral part of these financial statements.
A26
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31, 1999 1998 1997
(Dollars in thousands) ---- ---- ----
OPERATING ACTIVITIES
Net earnings $ 29,405 $ 54,564 $ 185,658
Adjustments to reconcile net earnings to net
cash provided from operating activities:
Depreciation and depletion 74,237 60,859 46,736
Provision (benefit) for deferred income taxes 21,792 14,847 (6,934)
Minority interest of investment shares (10) 461 4,437
Net loss on sale or disposal of investments and property -- 9,773 268
Cash provided from (used for) operating assets and
liabilities:
Accounts receivable (17,536) 8,292 15,718
Inventories (21,220) 19,732 9,998
Accounts payable and accrued liabilities 4,405 9,234 (25,449)
Other operating assets and liabilities (3,335) 5,802 48,752
Foreign currency transaction (gain) loss 2,543 3,025 (1,616)
-------------------------------------
Net cash provided from operating activities 90,281 186,589 277,568
-------------------------------------
INVESTING ACTIVITIES
Capital expenditures (250,254) (258,696) (183,956)
Purchase of held-to-maturity investments (54,990) (40,900) (204,590)
Proceeds from held-to-maturity investments 77,142 223,338 1,000
Sales of investments and property 609 376 49,914
-------------------------------------
Net cash used for investing activities (227,493) (75,882) (337,632)
-------------------------------------
FINANCING ACTIVITIES
Debt incurred 2,000 -- 200,000
Debt repaid (13,683) (13,683) (58,684)
Escrow deposits on long-term loans (67) 2,311 (15,364)
Dividends paid to common stockholders (12,152) (40,735) (101,050)
Distributions to minority interests (226) (892) (2,504)
Net treasury stock transactions 221 (2,715) (1,681)
Purchases of investment shares (3,379) (3,791) (8,885)
-------------------------------------
Net cash provided from (used for)
financing activities (27,286) (59,505) 11,832
-------------------------------------
Effect of exchange rate changes on cash (854) (1,745) 1,518
-------------------------------------
Increase (decrease) in cash and cash equivalents (165,352) 49,457 (46,714)
Cash and cash equivalents, at beginning of year 175,948 126,491 173,205
-------------------------------------
Cash and cash equivalents, at end of year $ 10,596 $ 175,948 $ 126,491
=====================================
The accompanying notes are an integral part of these financial statements.
A27
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1999 1998 1997
(Dollars in thousands) ---- ---- ----
CAPITAL STOCK:
COMMON STOCK:
Balance at beginning of year $ 143 $ 143 $ 137
Conversion from Class A to Common Stock,
1997 - 650,000 shares -- -- 6
-------------------------------------------
Balance at end of year 143 143 143
-------------------------------------------
CLASS A COMMON STOCK:
Balance at beginning of year 659 659 666
Conversion to Common Stock, 1997 - 650,000 shares -- -- (7)
-------------------------------------------
Balance at end of year 659 659 659
-------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning and end of year 265,745 265,745 265,745
-------------------------------------------
TREASURY STOCK:
Balance at beginning of year (5,184) (2,469) (788)
Purchased -- (3,001) (1,997)
Used for corporate purposes 221 286 316
-------------------------------------------
Balance at end of year (4,963) (5,184) (2,469)
-------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 847,229 833,560 749,267
Net earnings 29,405 54,564 185,658
Dividends paid (12,152) (40,735) (101,050)
Stock awards (128) (160) (315)
-------------------------------------------
Balance at end of year 864,354 847,229 833,560
-------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 1,125,938 $ 1,108,592 $ 1,097,638
===========================================
The accompanying notes are an integral part of these financial statements.
A28
SOUTHERN PERU COPPER CORPORATION
and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of consolidation:
The consolidated financial statements of Southern Peru Copper Corporation and
Subsidiaries (the Company) include the accounts of significant subsidiaries in
which the Company has voting control, and are prepared in accordance with
generally accepted accounting principles in the United States (U.S. GAAP).
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Use of estimates:
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue recognition:
Substantially all of the Company's copper is sold under annual contracts.
Revenue is recognized primarily in the month product is shipped to customers
based on prices as provided in sales contracts. When the price is not
determinable at the time of shipment to customers, revenue is recognized based
on prices prevailing at the time of shipment with final pricing generally
occurring within three months of shipment. Revenues with respect to these sales
are adjusted in the period of settlement to reflect final pricing and in periods
prior to settlement to reflect any decline in market prices, which may occur
between shipment and settlement. The Company sells copper in blister and refined
form at industry standard commercial terms. Net sales include the invoiced value
of copper, silver, molybdenum, acid, and gains from the sale or settlement of
copper put options.
Cash equivalents and marketable securities:
Cash equivalents include all highly liquid investments with a maturity of three
months or less, when purchased. Marketable securities include short-term liquid
investments with a maturity of more than three months, when purchased, and are
carried at cost, which approximates market.
Inventories:
Metal inventories are carried at the lower of average cost or market. Costs
incurred in the production of metal inventories exclude general and
administrative costs. Supplies inventories are carried at average cost less a
reserve for obsolescence.
Property:
Assets are valued at the lower of cost or net realizable value. In accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", the Company reviews long-lived assets and
certain identifiable intangibles related to those assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. Any impairment loss on such assets, as well as
long-lived assets and certain identifiable intangibles to be disposed of, is
measured as the amount by which the carrying value of the assets exceeds the
fair value of the assets (less disposal costs, if applicable).
A29
The Company evaluates the carrying value of assets based on undiscounted future
cash flows considering expected metal prices based on historical metal prices
and price trends.
Betterments, renewals, costs of bringing new mineral properties into production,
and the cost of major development programs at existing mines are capitalized as
mineral land. Maintenance, repairs, normal development costs at existing mines,
and gains or losses on assets retired or sold are reflected in earnings as
incurred. Buildings and equipment are depreciated on the straight-line method
over estimated lives from 5 to 40 years or the estimated life of the mine if
shorter. Depletion of mineral land is computed by the units-of-production method
using proven and probable ore reserves.
Exploration:
Tangible and intangible costs incurred in the search for mineral properties are
charged against earnings when incurred.
Hedging Activities:
Derivative instruments may be used to manage exposure to market risk from
changes in commodity prices, interest rates or the value of the Company's assets
and liabilities. 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.
The Company may purchase put options or create synthetic put options to reduce
or eliminate the risk of metal price declines below the option strike price on a
portion of its anticipated future production. The cost of options is amortized
on a straight-line basis during the period in which the options are exercisable.
Gains or losses from the sale or exercise of options, net of unamortized
acquisition costs, are recognized in the period in which the underlying hedged
production is sold.
Swap Agreements:
Fuel swap agreements limit the effect of changes in the price of fuel. The
differential to be paid or received as fuel prices change is recorded as a
component of cost of sales in the period the swap covers.
Stock-Based Compensation:
The Company applies the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
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.
2. Merger of Subsidiary Company
Southern Peru Copper Corporation was reorganized into a holding company
structure effective January 2, 1996, upon completion of a public offer to
exchange newly issued Common Stock for outstanding investment shares of the
Company's Peruvian Branch. Effective December 31, 1998, the Company's
predecessor and wholly owned operating subsidiary, Southern Peru Limited, was
merged into the Company.
A30
3. Foreign Exchange
The functional currency of the Company is the U.S. dollar. The Company's sales,
cash, trade receivables, fixed asset additions, trade payables and debt are
primarily dollar-denominated. A portion of the operating costs of the Company is
denominated in Peruvian soles.
Gains and (losses) resulting from foreign currency transactions are included in
"Cost of sales" and amounted to ($2.5) million,($3.0) million, and $2.0 million
in 1999, 1998, and 1997, respectively.
4. Restructuring Charges
The Company's 1999 results include a $5.6 million pre-tax charge ($3.6 million
after-tax and workers' participation) 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. This accrual
was paid in full as of December 31, 1999.
5. Administrative Reorganization
The Company's full year results include an $8.4 million pre-tax charge ($5.4
million after-tax and workers' participation) associated with the severance cost
of foreign contract employees' early termination. The severance costs accrued
are for 55 employees at the Company's locations in Peru. Approximately $5.8
million of the provision is included as cost of sales deduction on the Company's
statement of earnings, and $2.6 million is included in administrative expense as
it relates to non-operating personnel. Payments in the amount of $2.9 million
were made against this accrual in the year 1999.
6. Taxes on Income
The components of the provision for taxes on income are as follows:
For the years ended December 31, 1999 1998 1997
(in millions) ---- ---- ----
U.S. Federal and state
Current $(2.5) $ 2.2 $10.2
Deferred 0.6 0.5 0.4
------------------------------
(1.9) 2.7 10.6
------------------------------
Foreign:
Current (9.5) 8.5 52.3
Deferred 21.1 14.4 (7.3)
------------------------------
11.6 22.9 45.0
------------------------------
Total provision for income taxes $ 9.7 $25.6 $55.6
==============================
Total taxes paid were $1.2 million, $10.4 million and $30.1 million in 1999,
1998 and 1997, respectively.
A31
Reconciliation of the statutory income tax rate to the effective income tax rate
is as follows:
For the years ended December 31, 1999 1998 1997
---- ---- ----
Peruvian income tax at maximum
statutory rates 30.0% 30.0% 30.0%
U.S. income tax at statutory rate 35.0 35.0 35.0
Utilization of foreign tax credits (30.2) (20.8) (16.9)
Peruvian reinvestment allowance -- -- (9.0)
Alternative minimum tax (AMT) credit -- -- (3.4)
Percentage depletion (5.2) (10.5) (9.6)
Income not taxable in Peru (1.8) (1.8) (2.6)
Reversal of taxes previously accrued (5.1) -- --
Other 2.2 (0.2) (0.9)
----------------------------
Effective income tax rate 24.9% 31.7% 22.6%
============================
Temporary differences and carryforwards which give rise to deferred tax assets,
liabilities and related valuation allowances are as follows:
Deferred tax assets (liabilities)
At December 31, 1999 1998
(in millions) ---- ----
Current:
Accounts receivable $ 4.0 $ 1.7
Inventories 0.1 0.1
-------------------
Net deferred tax assets 4.1 1.8
-------------------
Non-current:
Foreign tax credit carryforwards 29.6 23.4
AMT credit carryforwards 12.2 12.2
Property, plant and equipment (82.3) (58.5)
Other 2.4 1.8
Valuation allowance for deferred tax assets (41.8) (35.6)
-------------------
Net deferred tax liabilities (79.9) (56.7)
-------------------
Total net deferred tax liabilities $(75.8) $(54.9)
===================
At December 31, 1999, the foreign tax credit carryforward available to reduce
possible future U.S. income tax amounted to approximately $29.6 million expiring
as follows: $26.1 million in 2000, $3.1 million in 2003 and $0.4 million in
2004.
In 1997, the Government of Peru approved a reinvestment allowance for the
Company's program to expand the Cuajone mine. The reinvestment allowance
provides SPCC with tax incentives in Peru, and as a result, certain U.S. tax
credit carryforwards, for which no benefit had previously been recorded, were
realized. The reduction in the effective tax rate, as a result of the
reinvestment allowance for the twelve months ended December 31, 1997, lowered
tax expense approximately $14.7 million. Pursuant to the reinvestment allowance
SPCC has received tax deductions in Peru in amounts equal to the cost of the
qualifying property (approximately $245 million). The financial statement
carrying value of the qualifying property was reduced to reflect the tax benefit
associated with the reinvestment allowance (approximately $73 million). As a
result, financial statement depreciation expense related to the qualifying
property will be reduced over its useful life (approximately 15 years).
The Company has not recorded the benefit of foreign tax credit carryforwards
because of both the expiration dates and the rules governing the order in which
such credits are utilized. The Company also has not recorded a benefit
A32
for the AMT credits, which are not available to reduce AMT. Because of
limitations on both percentage depletion and foreign tax credits under the AMT,
the Company expects an AMT liability for the foreseeable future. Thus, while
such credits do not expire, it is unlikely they will be utilized. Accordingly, a
valuation allowance has been established for the full amount of the foreign tax
credit carryforward and the AMT credit carryforward.
The Company obtains income tax credits in Peru for value-added taxes paid in
connection with the purchase of capital equipment and other goods and services
employed in its operations and records these credits as a prepaid expense. Under
current Peruvian law, the Company is entitled to use the credits against its
Peruvian income tax liability or to receive a refund. The carrying value of
these Peruvian tax credits approximates their market value.
7. Net Sales
Net sales by country were as follows:
For the years ended December 31, 1999 1998 1997
(in millions) ---- ---- ----
United States $155.0 $127.5 $132.1
Italy 46.7 86.9 110.0
United Kingdom 122.8 96.1 98.4
The Netherlands -- 57.7 83.8
Japan 52.4 44.7 72.5
Foreign - Other 207.6 215.0 317.4
--------------------------------------
Net sales $584.5 $627.9 $814.2
======================================
At December 31, 1999, the Company had no copper sales recorded at provisional
prices.
Under the terms of a sales contract with Union Miniere as amended through
December 31, 1999, the Company is required to supply Union Miniere, through its
agent, S.A. Sogem N.V., with 16,300 tons of blister copper annually for a ten
year period from January 1, 2000 through December 31, 2009. The price of the
copper, contained in blister, supplied under the contract is determined based on
the LME monthly average settlement price, less a refining allowance, which is
negotiated annually.
Under the terms of a sales contract with Mitsui & Co. Ltd. (Mitsui), the Company
is required to supply Mitsui with 48,000 tons of copper cathodes annually for a
fifteen-year period through December 31, 2013. Pricing of the cathodes is based
upon the LME monthly average settlement price plus a producer premium, which is
agreed upon annually based on world market terms. 90,000 tons related to a prior
contract (period 1994-2000) will be supplied as follows: 48,000 in 2014 and
42,000 in 2015.
8. Financial Instruments
Hedging Activities: 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 the market fundamentals and other conditions, the Company
may purchase put options to reduce or eliminate the risk of price declines below
the option strike price on a portion of its anticipated future production. Put
options purchased by the Company establish a minimum sales price for the
production covered by such put options and permit the Company to participate in
price increases above the option price. The cost of options is
A33
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 1998 and $10.2 million
in 1997. At December 31, 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
December 31, 1999 and 1998, the Company has entered into the following fuel swap
agreements:
Weighted
Average
Contract
Quantity Price
Fuel Type Period (Barrels) (per Barrel)
- -------------------------------------------------------------------------
1999
Residual Oil 1/00-12/00 1,468,800 $12.80
Diesel Fuel 1/00-12/00 504,000 $19.36
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 December 31, 1999
was $8.7 million. The effect of a hypothetical 10 percent decrease from December
31, 1999 fuel prices would be to reduce the unrealized gain on fuel swaps by
$3.7 million.
In 1999, the Company's production cost would have been $10.7 million higher if
this exposure had not been hedged.
Foreign currency: The Company selectively uses foreign currency swaps to limit
the effects of exchange rate changes on future cash flow obligations denominated
in foreign currencies. A currency swap establishes a fixed dollar cost for a
fixed amount of foreign currency required at a future date. The Company has
entered into currency swap agreements on a portion of its capital cost
contracted in Euros.
As of December 31, 1999 the Company had the following currency swap agreements:
US$ Euros Forward
Maturity Date (in millions) Exchange Rate
------------- ------------- -------------
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
---------------------
32.6 28.6
---------------------
A34
The unrealized loss in the Company's currency swap position at December 31, 1999
was $3.3 million. A hypothetical 10 percent decrease from December 31, 1999
rates, would increase the unrealized loss of currency swaps by $2.9 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.
For certain of the Company's financial instruments, including cash and cash
equivalents, marketable securities, accounts receivables and accounts payable
the carrying amounts approximate fair value due to their short maturities.
Consequently, such financial instruments are not included in the following table
that provides information about the carrying amounts and estimated fair values
of other financial instruments:
At December 31, 1999 1998
(in millions) ----------------- -----------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
Assets:
Fuel swap agreements -- $ 8.7 -- $ (1.6)
Currency swap agreements -- (3.3) -- --
Liabilities:
Long-term debt $222.5 $206.6 $234.2 $225.0
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:
Fuel swap agreements - Fair value is based on quoted market prices.
Currency swap agreements: Fair value is based on quoted market prices.
Long-term debt - Fair value is based on the quoted market prices for the same or
similar issues.
9. Workers' Participation
Provisions for workers' participation are calculated at 8% of pre-tax earnings
and are included in "Cost of sales" on the earnings statement. The current
portion of this participation, which is accrued during the year, is based on
Branch taxable income and is distributed to workers following determination of
final results for the year.
10. Minority Interest of Investment Shares (Previously known as "Labor Shares")
The minority interest of the Investment Shares is based on the earnings of the
Company's Peruvian Branch.
The Company acquired 0.8 million, 1.0 million and 2.0 million investment shares
at a cost of $3.4 million, $3.8 million and $8.9 million in the years 1999, 1998
and 1997, respectively. The carrying value of the minority interest purchased
was reduced by $2.1 million, $2.5 million and $5.1 million in 1999, 1998 and
1997, respectively, and the excess paid over the carrying value was assigned
primarily to proven and probable sulfide and leachable ore reserves and
mineralized material and is being amortized based on production. As a result of
these acquisitions, the remaining investment shareholders hold a 1.7% interest
in the Branch at December 31, 1999, and are entitled to a pro rata participation
in the cash distributions made by the Branch. The investment shares are recorded
as a minority interest in the Company's financial statements.
A35
11. Inventories
At December 31, 1999 1998
(in millions) ---- ----
Metals:
Finished goods $ 1.5 $ 1.5
Work-in-process 48.7 37.9
Supplies, net of reserves 59.9 49.5
------------------------
Total inventories $ 110.1 $ 88.9
------------------------
12. Property
At December 31, 1999 1998
(in millions) ---- ----
Buildings and equipment $1,825.2 $1,623.4
Mineral land 395.6 376.7
Land, other than mineral 3.1 1.8
------------------------
Total property 2,223.9 2,001.9
Accumulated depreciation and depletion 973.0 913.3
------------------------
Net property $1,250.9 $1,088.6
------------------------
In 1998, the Company recorded a charge of $9.8 million to write-off the
remaining book value of the Ilo townsite property, transferred to its worker
occupants and the city of Ilo, Peru.
13. Other Current Liabilities
At December 31, 1999 1998
(in millions) ---- ----
Accrued workers' participation $ 0.6 $ 1.2
Accrued severance pay, current portion 1.3 1.8
Salaries and wages 6.8 7.8
Taxes on income 20.4 22.0
Other 0.4 2.0
------------------------
Total other current liabilities $ 29.5 $ 34.8
------------------------
14. Debt and Available Credit Facilities
Long-term debt at December 31, 1999 1998
(in millions) ---- ----
6.43% EXIM Bank credit agreement due 2001 $ 8.7 $ 14.6
9.2% CAF credit agreement due 2001 11.8 19.6
7.9% Secured Export Notes (SENS) due 2007 150.0 150.0
8.25% Corporate bonds due 2004 50.0 50.0
6.09% MITSUI credit agreement due 2013 2.0 --
------------------------
Total debt 222.5 234.2
Less, current portion 23.3 13.7
------------------------
Total long-term debt $ 199.2 $ 220.5
------------------------
Interest paid by the Company (excluding amounts capitalized of $7.3 million,
$10.6 million and $2.3 million in 1999, 1998 and 1997, respectively) was $15.3
million, $12.5 million and $19.0 million in 1999, 1998 and 1997, respectively.
A36
Aggregate maturities of the borrowings outstanding at December 31, 1999, are as
follows (in millions):
2000 $23.3
2001 24.3
2002 18.9
2003 20.5
2004 72.4
Thereafter 63.1
------
Total $222.5
------
In March 1999, the Company concluded a $100 million 15-year loan agreement with
Mitsui and Co., Ltd. The applicable interest for this loan is the LIBO rate plus
1.25%. This facility provides additional committed financing for SPCC's
modernization and expansion program. A commitment fee of 0.5% per annum is
payable on the undrawn portion of this loan through December 31, 2001. As of
December 31, 1999, $2.0 million had been drawn from this loan facility.
In 1997, the Company entered into a $600 million seven-year credit agreement
with a group of international financial institutions. The agreement consists of
a $400 million term loan facility and a $200 million revolving credit facility.
The interest rate during the first three years of the agreement on any loans
outstanding is LIBOR plus 1.75% per annum for term loans and LIBOR plus 2.0% for
revolving credit loans. A commitment fee of 0.5% per annum is payable on the
undrawn portion of the facility. No amounts have been drawn under this agreement
as of December 31, 1999.
Also in 1997, the Company privately placed $150 million of SENS in the United
States and international markets. These notes, which have been registered with
the Securities and Exchange Commission, begin amortizing in 2000 and mature in
2007 and were priced at par with a coupon rate of 7.9%. In addition, in June
1997 the Company sold $50 million of 8.25% bonds due June 2004 to investors in
Peru.
Some financing agreements contain covenants, which limit the payment of
dividends to stockholders. Under the most restrictive covenant, the Company may
pay dividends to stockholders equal to 50% of its net income for any fiscal
quarter as long as such dividends are paid by June 30 of the following year. As
a result, net assets of the Company unavailable for the payment of dividends
totaled $1.1 billion at December 31, 1999. In accordance with the most
restrictive covenant of the Company's loan agreements, additional indebtedness
of $903.4 million would have been permitted at December 31, 1999.
The Mitsui and Co., Ltd. credit agreement is collateralized by pledges of
receivables of 24,000 tons of copper per year. The EXIM Bank credit agreement is
collateralized by pledges of receivables from sales of 7,000 tons of copper per
year. The CAF loan is collateralized by liens on the SX/EW facility. The SENS
and the seven-year loan facility require that most of the collections of export
copper sales be deposited into a trust account in the United States. Twenty
percent of these collections are used as collateral for the outstanding SENS
with the balance of the collections remitted directly to the Company.
The excess funds in the collateral account are remitted to the Company, if all
financial requirements are met. As part of these agreements, the Company must
maintain three-month and six month collection ratios, as defined (aggregate
collections as a specified multiple of debt service). Both facilities require
escrow deposits of three months debt service. In addition, certain of the
agreements require the Company to maintain a minimum stockholders' equity of
$750 million, specified ratios of debt to equity, current assets to current
liabilities and an interest coverage test. Reduction of ASARCO Incorporated's
(Asarco) voting interest in the Company to less than a majority would
A37
constitute an event of default under two of the financing agreements. The
Company was in compliance with the various loan covenants at December 31, 1999.
Included in Other assets are $10.7 million held in escrow accounts as required
by the Company's loan agreements. The funds will be released from escrow as
scheduled loan repayments are made.
15. Benefit Plans
The Company has a noncontributory, defined benefit pension plan covering
salaried employees in the United States and certain employees in Peru. Benefits
are based on salary and years of service. The Company's funding policy is to
contribute amounts to the plans sufficient to meet the minimum funding
requirements set forth in the Employee Retirement Income Security Act of 1974,
plus such additional amounts as the Company may determine to be appropriate.
Plan assets are invested in commingled stock and bond funds.
The components of net periodic benefit costs are as follows:
For the years ended December 31, 1999 1998 1997
(in millions) ---- ---- ----
Service cost $0.5 $0.6 $0.4
Interest cost 0.7 0.7 0.5
Expected return on plan assets (0.9) (0.7) (0.5)
Amortization of prior service cost 0.1 0.1 --
Amortization of transitional obligation 0.2 0.2 0.2
--------------------------
Net periodic benefit cost $0.6 $0.9 $0.6
--------------------------
The change in benefit obligation and plan assets and a reconciliation of funded
status are as follows:
At December 31,
(in millions) 1999 1998
---- ----
Change in Benefit Obligation
Projected benefit obligation at beginning of year $ 11.1 $ 8.5
Service cost 0.5 0.6
Interest cost 0.7 0.7
Plan amendments -- 1.1
Benefits paid (0.6) (0.6)
Actuarial loss 1.2 0.8
-----------------------
Projected benefit obligation at end of year $ 10.5 $ 11.1
=======================
Change in Plan Assets
Fair value of plan assets at beginning of year $ 11.2 $ 7.7
Actual return on plan assets 1.8 2.5
Employer contributions -- 1.5
Benefits paid (0.6) (0.5)
Administrative expenses (0.1) --
-----------------------
Fair value of plan assets at end of year $ 12.3 $ 11.2
=======================
Reconciliation of Funded Status
Funded status $ 1.7 $ 0.1
Unrecognized actuarial gain (3.7) (1.7)
Unrecognized transition obligation 1.4 1.6
Unrecognized prior service cost 1.0 1.0
-----------------------
Net amount reflected in consolidated
Balance sheet $ 0.4 $ 1.0
=======================
A38
At December 31,
(in millions) 1999 1998
---- ----
Weighted Average Assumptions
Discount rate 7.75% 7.0%
Expected long-term rate of return on plan
Assets 8.0% 8.0%
Rate of compensation increase 4.0% 4.0%
Post-retirement Benefits:
The post-retirement health care plan for retired salaried employees eligible for
Medicare was adopted by the Company on May 1, 1996. Secondary coverage under the
Company's plan is available for all retired salaried employees who permanently
reside in the United States and who contribute amounts as defined by the plan.
The plan is unfunded.
The components of net periodic benefit costs are as follows:
For the years ended December 31, 1999 1998 1997
(in millions) ---- ---- ----
Service cost $0.1 $0.1 $0.1
Interest cost 0.1 0.1 --
Amortization of prior service cost 0.1 0.1 0.1
--------------------------
Net periodic benefit cost $0.3 $0.3 $0.2
==========================
The change in benefit obligation and plan assets and a reconciliation of funded
status are as follows:
At December 31,
(in millions) 1999 1998
---- ----
Change in Benefit Obligation
Benefit obligation at beginning of year $ 1.2 $ 0.9
Service cost 0.1 0.1
Interest cost 0.1 0.1
Plan amendments -- 0.1
Benefits paid (0.2) --
Actuarial (gain) loss (0.1) --
-----------------
Benefit obligation at end of year $ 1.1 $ 1.2
=================
Reconciliation of Funded Status
Funded status $(1.1) $(1.2)
Unrecognized actuarial (gain) loss (0.3) (0.1)
Unrecognized prior service cost 0.6 0.6
-----------------
Postretirement benefit obligation $(0.8) $(0.7)
=================
Weighted-Average Assumptions
Discount rate 7.75% 7%
Expected long-term rate of return on plan assets N/A N/A
Rate of compensation increase 4% 4%
The annual assumed rate of increase in the per capita cost of covered benefits
(i.e., health care cost trend rate) is assumed to be 5%. The health care cost
trend rate assumption has a significant effect on the amounts reported. For
example, increasing the assumed health care cost trend rates by one percentage
point would increase the accumulated postretirement benefit obligation costs
A39
for 1999 by $0.1 million and the service and interest cost components of net
periodic postretirement benefit would have an insignificant change. Decreasing
the assumed health care cost trend rates by one percentage point in each year
would decrease the accumulated postretirement benefit obligation for 1999 by
$0.1 million and the service and interest cost components of net periodic
postretirement benefit costs would have an insignificant change.
Employee Savings Plan:
The Company maintains an employee savings plan for employees working in the
United States and expatriate employees in Peru which permits employees to make
contributions by payroll deduction pursuant to section 401(k) of the Internal
Revenue Code. The plan provides for a Company matching contribution equal to 50%
of the first 6% of employee contributions. In connection with the required
match, the Company's contributions charged against earnings were $0.1 million,
$0.2 million and $0.2 million in the years 1999, 1998 and 1997, respectively.
16. Stockholders' Equity
Common Stock:
The stockholders of the Company at December 31, 1999 were:
Percent of
Total Number
Shares of Shares
---------- ------------
Class A Common Shares:
Southern Peru Holdings
Corporation 43,348,949 54.2%
Cerro Trading Co., Inc. 11,378,088 14.2
Phelps Dodge Overseas Capital
Corporation 11,173,796 14.0
---------- -----
Total Class A 65,900,833 82.4
Common Shares 14,118,862 17.6
---------- -----
Total 80,019,695 100.0%
---------- -----
Class A common shares are entitled to five votes per share. Common shares are
entitled to one vote per share.
Stock Options:
The Company has two stockholder approved plans, a Stock Incentive Plan and a
Directors' Stock Award Plan. The Stock Incentive Plan provides for the granting
of nonqualified or incentive stock options, as defined under the Internal
Revenue Code of 1986, as amended, as well as for the award of restricted stock
and bonuses payable in stock. The price at which options may be granted under
the Stock Incentive Plan shall not be less than 100% of the fair market value of
the common stock on the date of grant in the case of incentive stock options, or
50% in the case of other options. In general, options are not exercisable for
six months and expire after 10 years from the date of grant.
Options granted may provide for Stock Appreciation Rights (SAR). An SAR permits
an optionee, in lieu of exercising the option, to receive from the Company
payment of an amount equal to the difference between the market value of the
stock on the date of election of the SAR and the purchase price of the stock
under the terms of the option.
A40
The authorized number of shares under the Stock Incentive Plan is 1,000,000 of
which 300,000 may be awarded as restricted stock. At December 31, 1999, 645,060
shares are available for future grants under this plan (737,610 shares at
December 31, 1998). The weighted average remaining contractual life of stock
option's outstanding as of December 31, 1999 was 7.1 years.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost has
been recognized for awards under the stock incentive plan. If compensation cost
for the Company's Stock Incentive Plan had been determined based on the fair
value at the grant date for awards in 1999, 1998 and 1997, consistent with the
provisions of SFAS No. 123, the Company's net earnings and earnings per share
would have been reduced to the proforma amounts indicated below:
(in millions, except per share amounts)
1999 1998 1997
---- ---- ----
Net earnings - as reported $ 29.4 $ 54.6 $ 185.7
Net earnings - pro forma $ 29.1 $ 54.4 $ 185.5
Earnings per share (Basic and diluted) - as reported $ 0.37 $ 0.68 $ 2.32
Earnings per share (Basic and diluted) - pro forma $ 0.36 $ 0.68 $ 2.32
For purposes of computing earnings per share, basic and diluted, the dilutive
effect of stock options on common shares outstanding is as follows:
Weighted average common shares outstanding: 1999 1998 1997
(in millions) ---- ---- ----
Basic and diluted 79.9 79.9 80.2
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 1999: dividend yield of 7.9%(4.8%-1998, 4.05%-1997); expected
volatility of 48.0% (40.4%-1998, 29.2%-1997); risk-free interest rate of 4.8%
(5.6%-1998, 6.3%-1997); and expected life of 7.1 years (7.1 years-1998, 7.0
years-1997).
Stock option activity over the past three years under the Stock Incentive Plan
was:
Weighted
Number of Average Option Price
Shares Price (Range Per Share)
--------- ------- -------------------
Outstanding at January 1, 1997 69,890 $ 16.06 $ 16.06
Granted 90,475 16.30 16.25 to 17.06
Exercised (3,238) 16.06 16.06
Canceled or expired (1,342) 16.15 16.06 to 16.25
------
Outstanding at January 1, 1998 155,785 16.20 16.06 to 17.06
Granted 102,025 12.78 12.78
Exercised (5,915) -- --
Canceled or expired (960) 16.16 16.06 to 16.25
------
Outstanding at
January 1, 1999 250,935 14.88 12.78 to 17.06
Granted 92,550 9.75 8.78 to 14.37
Exercised (141,865) 10.99 8.78 to 14.37
Cancelled or expired (36,780) 12.38 8.78 to 16.25
-------
Outstanding and exercisable at
December 31, 1999 164,840 $ 15.28 $8.78 to $ 17.06
A41
The Directors' Stock Award Plan provides that directors who are not compensated
as employees of the Company will be automatically awarded 200 shares of common
stock upon election and 200 additional shares following each annual meeting of
stockholders thereafter. Under the directors' plan, 100,000 shares have been
reserved for awards. At December 31, 1999, 14,000 shares had been awarded under
this plan.
17. Related Party Transactions
Asarco, a 54.2% stockholder of the Company, provides legal, tax, treasury and
administrative support services to the Company. The amounts paid to Asarco for
these services were $0.8 million, $1.0 million and $1.6 million in 1999, 1998,
and 1997, respectively.
The Company purchases shipping services from a company indirectly controlled by
Quemchi S.A. of which the Vice Chairman is also director of SPCC. The total cost
of these services amounted to $8.3 million, $11.5 million and $13.3 million in
1999, 1998 and 1997, respectively.
18. Concentration of Risk
The Company operates two copper mines, a smelter and two refineries in Peru and
substantially all of its assets are located there. There can be no assurances
that the Company's operations and assets that are subject to the jurisdiction of
the Government of Peru may not be adversely affected by future actions of such
government. Substantially all of the Company's products are exported from Peru
to customers principally in Europe, Asia, South America and the United States.
Financial instruments, which potentially subject the Company to a concentration
of credit risk, consist primarily of cash and cash equivalents, marketable
securities and trade accounts receivable.
The Company invests or maintains available cash with various high-quality banks,
principally in the U.S., Canada and Peru, or in commercial paper of highly rated
companies. As part of its cash management process, the Company regularly
monitors the relative credit standing of these institutions, and by policy,
limits the amount of credit exposure to any one institution. At December 31,
1999, the Company had no investments of its cash equivalents and marketable
securities with Peruvian banks.
During the normal course of business, the Company provides credit to its
customers. Although the receivables resulting from these transactions are not
collateralized, the Company has not experienced significant problems with the
collection of receivables.
The largest ten trade receivable balances accounted for 68.3% of the trade
accounts receivable at December 31, 1999, of which one customer represented
18.6%.
19. Commitments and Contingencies
In September 1996, the Company announced a two-stage project which includes an
expansion of the Cuajone mine and an expansion and modernization of the copper
smelter at Ilo.
The Cuajone mine expansion, which consists of an expansion in annual copper
production by 130 million pounds at an estimated capital investment of $245
million, was completed at December 31, 1999. Additional mining equipment will be
received next year.
A42
The second stage of the program, the expansion and modernization of the Ilo
smelter is expected to be completed by the year 2006. Early in January 2000 the
Company announced that technologies currently being evaluated would allow
achievement of the smelter improvements at significantly less than the $875
million budgeted for the project. If such modifications to the original plan are
made, the smelter will still meet government standards when the modernization
program is completed, despite the capital savings. This evaluation should be
completed in the second quarter of 2000.
In 1998, the Company commenced a $48 million project to expand annual SX/EW
copper production by 26 million pounds. The project was completed in the third
quarter of 1999.
As a result of the expansion program, electric power requirements will increase
significantly, requiring the construction of substantial additional generating
capacity. In 1997, the Company sold its existing power plant to an independent
power company for $33.6 million. In connection with the sale, a power purchase
agreement was also completed, under which the Company agreed to purchase its
power needs for the next twenty years.
Environmental:
The exploration, mining, milling, smelting and refining activities of the
Company are subject to Peruvian legislation and regulations. According to the
law, active mining companies submitted to the Ministry of Energy and Mines an
Environmental Compliance and Management Program (PAMA) that describes the
investments that Company will make to comply with the maximum permissible levels
established for its operations by this Authority. The implementation of the PAMA
requires that the Company commit an annual minimum investment of 1% of its
sales. The Company's PAMA was approved in January 1997.
Under current Peruvian law and regulations, compliance with the PAMA will
satisfy environmental requirements pertaining to the Company's operations during
the applicable five-or-ten year implementation period. The Company remains,
however, subject to other environmental requirements applicable to its
operations.
The project with the PAMA that will demand the largest investment is the
modernization of the Ilo smelter. In the first phase, the capture of sulfur
dioxide (SO2) will be increased from a current level of in excess of 30% to 67%.
The second phase of the project will further increase the capture of SO2 to in
excess of 92%, complying with current Peruvian environmental regulations.
During the implementation of the project, Southern Peru continues to operate the
Supplementary Control Program (SCP), a voluntary effort, by which the smelter
production is restricted during periods of adverse meteorological conditions.
This program, in conjunction with the operation of the smelter's sulfuric acid
plant that was expanded to 317,500 tons per year, has contributed to improve air
quality in Ilo.
In addition to the environmental programs for the Ilo smelter and the refinery,
the Company continues to have good results with the reclamation programs in both
Ite Bay and the beaches to the north of the smelter. Environmental capital
expenditures were $41.6 million in 1999, $25.3 million in 1998 and $43.8 million
in 1997. In addition, the Company estimates spending $50.0 million for
environmental control capital expenditures in 2000.
A43
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 investment shares (formerly called "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 Superior 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. In December
1999, the lower court decided against the Company, ordering the delivery of the
investment shares and dividends to the plaintiffs. The Company appealed this
decision in January 2000. 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 ground and remanded the case to the
lower court for further proceedings. In December 1999, the lower court dismissed
the complaint against the Company. Plaintiffs appealed this decision in January
2000.
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.
A44
Report of Independent Accountants
To the Board of Directors and Stockholders
of Southern Peru Copper Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, cash flows and changes in stockholders'
equity present fairly, in all material respects, the financial position of
Southern Peru Copper Corporation and its subsidiaries (the "Company") at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 10, 2000
A45
Unaudited Quarterly Data
Quarters
(in millions, except per share data)
1999
----
1st 2nd 3rd 4th Year
==========================================================
Net sales $ 123.9 $ 132.4 $ 156.1 $ 172.1 $ 584.5
Operating Income $ 6.4 $ 7.1 $ 18.6 $ 13.4 $ 45.6
Net earnings $ 4.0 $ 3.6 $ 12.1 $ 9.7 $ 29.4
Net earnings per share:
Basic and diluted $ 0.05 $ 0.05 $ 0.15 $ 0.12 $ 0.37
Dividend per share $ 0.03 $ 0.025 $ 0.022 $ 0.075 $ 0.152
Stock prices
New York Stock Exchange:
High $ 10-7/8 $ 15 $ 16-7/8 $ 18-1/16 $18-1/16
Low $ 8-7/16 $10-1/16 $ 13-5/8 $13-13/16 $ 8-7/16
Lima Stock Exchange:
High $ 10.66 $ 15.08 $ 16.95 $ 17.45 $ 17.45
Low $ 8.78 $ 10.12 $ 13.80 $ 14.01 $ 8.78
1998
----
1st 2nd 3rd 4th Year
=======================================================
Net sales $ 152.4 $ 152.5 $ 173.8 $ 149.2 $ 627.9
Operating Income $ 17.3 $ 19.7 $ 30.2 $ 2.9 $ 70.1
Net earnings $ 12.9 $ 18.4 $ 19.9 $ 3.4 $ 54.6
Net earnings per share:
Basic and diluted $ 0.16 $ 0.23 $ 0.25 $ 0.04 $ 0.68
Dividend per share $ 0.20 $ 0.08 $ 0.11 $ 0.12 $ 0.51
Stock prices
New York Stock Exchange:
High $ 15-1/8 $16-11/16 $ 13-1/2 $ 12-7/8 $16-11/16
Low $ 12-1/2 $ 13 $ 8-3/4 $8-15/16 $ 8-3/4
Lima Stock Exchange:
High $ 14.95 $ 16.50 $ 13.35 $ 12.70 $ 16.50
Low $ 12.40 $ 12.95 $ 8.93 $ 8.89 $ 8.89
Metal Price Sensitivity
Assuming that expected metal production and sales are achieved, that tax rates
are unchanged, that the number of shares outstanding is unchanged, and giving no
effect to hedging programs or changes in the costs of production, metal price
sensitivity factors would indicate the following estimated change in earnings
per share resulting from metal price changes in 2000. Estimates are based on
80.0 million shares outstanding.
Copper Silver Molybdenum
------ ------ ----------
Change in Metal Price $0.01/lb. $1.00/oz. $1.00/lb.
Annual Change in Earnings per Share $0.06 $0.02 $0.11
A46
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
On February 25, 2000, the Board of Directors of the Company selected Arthur
Andersen L.L.P. to serve as independent accountants for the Company for the
calendar year 2000, and resolved to submit this selection to the approval of the
stockholders of the Company at the annual meeting of stockholders to be held on
May 9, 2000.
The Company's professional relationship with PricewaterhouseCoopers
L.L.P., the current accountants, has been harmonious and during the last two
fiscal years to date, the Company and its managers had no disagreement with
PricewaterhouseCoopers L.L.P. on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
PricewaterhouseCoopers L.L.P.'s reports on the Company's consolidated financial
statements for each of the past two fiscal years did not contain any adverse
opinion or disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope or accounting principles.
PART III
Items 10, 11, 12, and 13
Reference is made to the Section captioned "Executive Officers of the
Registrant" on page A-12. Information in response to the disclosure requirements
specified by these items appears under the captions and pages of the 1999 Proxy
Statement indicated below:
Proxy
Statement
Item Required Information Proxy Statement Section Pages
- ---- -------------------- ----------------------- -----
10. Directors and Executive Nominees for Election as Directors
Officers Representing Common Stock and
Nominees for Election as
Directors Representing
Class A Common Stock 4-6
Section 16(a) Beneficial Ownership
Reporting Compliance 19
11. Executive Compensation Committee Reports on Executive
Compensation through Employment
Agreements 9-16
Compensation of Directors and
Compensation Committee Interlocks
and Insider Participation 18-19
12. Security Ownership Security Ownership of Certain
Beneficial Owners and Beneficial
Ownership of Management 7-9
13. Certain Relationships Certain Transactions 17-19
and Related Transactions
The information referred to above is incorporated herein by reference.
A47
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
The following financial statements of Southern Peru Copper Corporation and
its subsidiaries are included at the indicated pages of the document as stated
below:
Form
10 - K
Pages
-----
Consolidated Statement of Earnings for the years ended
December 31, 1999, 1998 and 1997 A24
Consolidated Balance Sheet at December 31, 1999 and 1998 A25
Consolidated Statement of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 A26
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997 A27
Notes to Consolidated Financial Statements A28 - A43
Report of Independent Accountants A44
2. Financial Statement Schedules
Financial Statement Schedules are omitted, as they are not required or are
not applicable, or the required information is shown in the financial statements
or notes thereto.
3. Exhibits
3.1 Restated Certificate of Incorporation, filed December 29, 1995
3.2 Certificate of Decrease, filed February 29, 1996
3.3 Certificate of Increase, filed February 29, 1996
3.4 Certificate of Decrease, filed March 24, 1997
3.5 Certificate of Increase, filed March 24, 1997
3.6 By-Laws, as last amended on February 3, 1998
4.1 Indenture, dated as of May 30, 1997, among Southern Peru
Limited, Southern Peru Copper Corporation, as guarantor, and
Citibank, N.A., as Trustee.
A48
4.2 Supplemental Indenture, dated as of May 30, 1997, among
Southern Peru Limited, Southern Peru Copper Corporation, as
guarantor, and Citibank, N.A., as Trustee.
4.3 Form of Amended and Restated Collateral Trust Agreement, dated
as of July 15, 1997, between Southern Peru Limited and
Deutsche Bank AG, New York Branch, as collateral trustee.
4.4 Form of Series A-1 Secured Export Notes due 2007
4.5 Supplemental Indenture, dated as of October 15, 1998 among
Southern Peru Limited, Southern Peru Copper Corporation as
guarantor, and Citibank, N.A., as Trustee.
4.6 Supplemental Indenture, dated as of December 22, 1998 between
Southern Peru Copper Corporation and Citibank, N.A. as
Trustee.
10.1 Form of Agreement Among Certain Stockholders of the Company
10.2 Tax Stability Agreement, dated August 8, 1994, between the
Government of Peru and the Company regarding SX/EW facility
(and English translation)
10.3 Incentive Compensation Plan of the Company
10.4 Supplemental Retirement Plan of the Company, as amended and
restated as of November 4, 1999
10.5 Stock Incentive Plan of the Company
10.6 Form of Directors Stock Award Plan of the Company
10.7 Deferred Fee Plan for Directors, as amended and restated as of
November 4, 1999
10.8 Form of Agreement Accepting Membership in the Plan, containing
text of Retirement Plan and Trust for Selected Employees
10.9 Compensation Deferral Plan, as amended and restated as of
November 4, 1999
10.10 Credit Agreement dated as of March 31, 1997 among Southern
Peru Limited, as Borrower, Southern Peru Copper Corporation,
as Guarantor, the several banks and other financial
institutions from time to time parties to the Credit
Agreement, Morgan Guaranty Trust Company of New York, as
Administrative Agent, The Chase Manhattan Bank, as
Documentation Agent, Citicorp Securities, Inc., as Syndication
Agent, and Deutsche Bank AG, New York Branch, as Security and
Collateral Agent.
10.11 First Amendment to the Credit Agreement, dated July 14, 1997.
10.12 Assignment and Assumption Agreement dated as of December 30,
1998, between Southern Peru Copper Corporation, a Delaware
Corporation, and Southern Peru Limited.
A49
21.1 Subsidiaries of the Company
23.1 Consent of Independent Accountants
The exhibits listed as 10.4 through 10.9 and 10.13 above are the management
contracts or compensatory plans or arrangements required to be filed pursuant to
Item 14(c) of Form 10-K.
(B) Reports on Form 8-K filed in the fourth quarter of 1999 and the first
quarter of 2000:
1. Report on Form 8-K, filed December 1, 1999 disclosing the acquisition by
Grupo Mexico S.A. de C.V. on November 17, 1999 of all of the shares of
ASARCO Incorporated following a tender offer, and the appointment of new
directors of the Company.
2. Report on Form 8-K/A filed March 1, 2000 disclosing the selection of
Arthur Andersen L.L.P. to serve as independent accountants for the Company
for calendar year 2000.
3. Report on Form 8-K/A-2 filed March 14, 2000 enclosing the letter of
PricewaterhouseCoopers L.L.P. agreeing with the statements made by the
Company regarding the change of independent accountants.
(C) Exhibits - The exhibits to this Form 10-K are listed on the Exhibit Index
on page B1 through B3. Copies of the following exhibits are filed with
this Form 10-K:
10.4 Supplemental Retirement Plan of the Company, as amended and restated
as of November 4, 1999
10.7 Deferred Fee Plan for Directors, as amended and restated as of
November 4, 1999
10.9 Compensation Deferral Plan, as amended and restated as of November
4, 1999
21.1 Subsidiaries of the Company
23.1 Consent of Independent Accountants
Copies of exhibits may be acquired upon written request to the Secretary and the
payment of processing and mailing costs.
A50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York.
SOUTHERN PERU COPPER CORPORATION
(Registrant)
By: /s/ Oscar Gonzalez Rocha
--------------------------------------------
Oscar Gonzalez Rocha
President and Director
Date: March 15, 2000
Pursuant to requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
/s/ German Larrea Mota/Velasco Chairman of the Board, Chief
- ------------------------------ Executive Officer and Director
German Larrea Mota/Velasco (principal executive Officer)
/s/ Oscar Gonzalez Rocha President and Director
- ------------------------------
Oscar Gonzalez Rocha
/s/ Daniel Tellechea Salido Vice President, Finance and
- ------------------------------ Director (principal financial
Daniel Tellechea Salido officer)
/s/ Ernesto Duran Trinidad Comptroller (principal
- ------------------------------ accounting officer)
Ernesto Duran Trinidad
DIRECTORS
/s/ Everett E. Briggs /s/ Manuel Calderon Cardenas
- ------------------------------ ----------------------------
Everett E. Briggs Manuel Calderon Cardenas
/s/ Jaime Claro /s/ Robert A. Pritzker
- ------------------------------ ----------------------------
Jaime Claro Robert A. Pritzker
/s/ Genaro Larrea Mota-Velasco
- ------------------------------ ----------------------------
Genaro Larrea Mota-Velasco Charles B. Smith
/s/ Hector Calva Ruiz /s/ J. Steven Whisler
- ------------------------------ ----------------------------
Hector Calva Ruiz J. Steven Whisler
/s/ Xavier Garcia de Quevedo
- ------------------------------ ----------------------------
Xavier Garcia de Quevedo Douglas C. Yearley
/s/ John F. McGillicuddy
- ------------------------------
John F. McGillicuddy
/s/ Alberto de la Parra Zavala
- ------------------------------
Alberto de la Parra Zavala
Date: March 15, 2000
Southern Peru Copper Corporation
Exhibit Index
Sequential
Exhibit Page
Number Document Description Number
- ------ -------------------- ------
3. Certificate of Incorporation and By-Laws
3.1 Restated Certificate of Incorporation, filed December 29,1995 (Filed as
Exhibit 3.1 to the Company's 1995 Annual Report on Form 10-K and
incorporated herein by reference)
3.2 Certificate of Decrease, filed February 29, 1996 (Filed as Exhibit 3.2 to
the Company's 1995 Annual Report on Form 10-K and incorporated herein by
reference)
3.3 Certificate of Increase, filed February 29, 1996 (Filed as Exhibit 3.3 to
the Company's 1995 Annual Report on Form 10-K and incorporated herein by
reference)
3.4 Certificate of Decrease, filed March 24, 1997 (Filed as Exhibit 3.6 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997 and incorporated herein by reference)
3.5 Certificate of Increase, filed March 24, 1997 (Filed as Exhibit 3.5 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997 and incorporated herein by reference)
3.6 By-Laws, as last amended on February 3, 1998 (Filed as Exhibit 3.6 to the
Company's 1997 Annual Report on Form 10-K and incorporated herein by
reference).
4. Instruments Defining Rights of Security Holders
4.1 Indenture, dated as of May 30, 1997, among Southern Peru Limited, Southern
Peru Copper Corporation, as guarantor, and Citibank, N.A., as Trustee.
(Filed as Exhibit 4.1(a) to the Company's Registration Statement on Form
S-4, as amended by Amendment No. 1 thereto, File No. 333-34505, and
incorporated herein by reference)
4.2 Supplemental Indenture, dated as of May 30, 1997, among Southern Peru
Limited, Southern Peru Copper Corporation, as guarantor, and Citibank,
N.A., as Trustee. (Filed as Exhibit 4.1(b) to the Company's Registration
Statement on Form S-4, as amended by Amendment No. 1 thereto, File No.
333-34305, and incorporated herein by reference)
4.3 Form of Amended and Restated Collateral Trust Agreement, dated as of July
15, 1997, between Southern Peru Limited and Deutsche Bank AG, New York
Branch, as collateral trustee. (Filed as Exhibit 4.1(c) to the Company's
Registration Statement on Form S-4, as amended by Amendment No. 1 thereto,
File No. 333-34305, and incorporated herein by reference)
Southern Peru Copper Corporation
Exhibit Index
Sequential
Exhibit Page
Number Document Description Number
- ------ -------------------- ------
4.4 Form of Series A-1 Secured Export Notes due 2007 (Filed as Exhibit 4.1(d)
to the Company's Registration Statement on Form S-4, as amended by
Amendment No. 1 thereto, File No. 333-34305, and incorporated herein by
reference)
4.5 Supplemental Indenture, dated as of October 15, 1998 among Southern Peru
Limited, Southern Peru Copper Corporation as guarantor, and Citibank,
N.A., as Trustee (Filed as Exhibit 4.5 to the Company's 1998 Annual Report
on Form 10-K and incorporated herein by reference).
4.6 Supplemental Indenture, dated as of December 22, 1998 between Southern
Peru Copper Corporation and Citibank, N.A., as Trustee (Filed as Exhibit
4.6 to the Company's 1998 Annual Report on Form 10-K and incorporated
herein by reference).
10. Material Contracts
10.1 Form of Agreement Among Certain Stockholders of the Company (Filed as
Exhibit 10.1 to the Company's Registration Statement on Form S-4, as
amended by Amendments No. 1 and 2 thereto, File No 33-97790 (the "Form
S-4"), and incorporated herein by reference)
10.2 Tax Stability Agreement, dated August 8, 1994, between the Government of
Peru and the Company regarding SX/EW facility (and English translation)
(Filed as Exhibit 10.3 to the Company's Form S-4 and incorporated herein
by reference)
10.3 Incentive Compensation Plan of the Company (Filed as Exhibit 10.11 to the
Company's Form S-4 and incorporated herein by reference)
10.4 Supplemental Retirement Plan of the Company, as amended and restated as of
November 4,1999
10.5 Stock Incentive Plan of the Company (Filed as an Exhibit to the Company's
Registration Statement on Form S-8 dated March 25, 1996 (Registration No.
333-2736) and incorporated herein by reference)
10.6 Form of Directors Stock Award Plan of the Company (Filed as Exhibit 10.16
to the Company's Form S-4 and incorporated herein by reference)
10.7 Deferred Fee Plan for Directors, as amended and restated as of November 4,
1999
10.8 Form of Agreement Accepting Membership in the Plan, containing text of
Retirement Plan and Trust for Selected Employees (Filed as Exhibit 10.17
to the Company's Form S-4 and incorporated herein by reference)
Southern Peru Copper Corporation
Exhibit Index
Sequential
Exhibit Page
Number Document Description Number
- ------ -------------------- ------
10.9 Compensation Deferral Plan, as amended and restated as of November 4, 1999
10.10 Credit Agreement dated as of March 31, 1997 among Southern Peru Limited,
as Borrower, Southern Peru Copper Corporation, as Guarantor, the several
banks and other financial institutions from time to time parties to the
Credit Agreement, Morgan Guaranty Trust Company of New York, as
Administrative Agent, The Chase Manhattan Bank, as Documentation Agent,
Citicorp Securities, Inc., as Syndication Agent, and Deutsche Bank AG, New
York Branch, as Security and Collateral Agent. (Filed as Exhibit 10.9 to
the Company's Registration Statement on Form S-4, File No. 333-3405, and
incorporated herein by reference)
10.11 First Amendment to the Credit Agreement, dated July 14, 1997. (Filed as
Exhibit 10.10 to the Company's Registration Statement on Form S-4, File
No. 333-34305, and incorporated herein by reference)
10.12 Assignment and Assumption Agreement dated as of December 30, 1998, between
Southern Peru Copper Corporation, a Delaware Corporation, and Southern
Peru Limited (Filed as Exhibit 10.12 to the Company's 1998 Annual Report
on Form 10-K and incorporated herein by reference)
10.13 Consulting Agreement between the Company and Mr. C. G. Preble dated March
18, 1999 (Filed as Exhibit 10.13 to the Company's 1998 Annual Report on
Form 10-K and incorporated herein by reference)
21.1 Subsidiaries of the Company
23.1 Consent of Independent Accountants