SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
1996 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, 1996 Commission File Number: 1-14066
SOUTHERN PERU COPPER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3849074
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 Maiden Lane, New York, N.Y. 10038
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (212) 510-2000
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. [X]
As of March 7, 1997, there were of record 14,296,399 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 $243.0 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 1, 1997.
Part IV: Exhibit index is on page B-1.
A1
PART I
Item 1. Business
THE COMPANY
The Company is an integrated producer of copper which operates mining, smelting
and refining facilities in the southern part of Peru. The Company, incorporated
in Delaware in 1995, conducts its operations through its wholly owned
subsidiary, Southern Peru Limited ("SP Limited"). SP Limited was incorporated in
1952. It was reorganized in 1955 and has conducted copper mining operations
since 1960. Pursuant to Peruvian law, SP Limited conducts its operations in Peru
through a registered branch (the "Branch"). The Branch is not a corporation
separate from SP Limited. It is, however, an establishment, registered pursuant
to Peruvian law, through which SP Limited holds assets, incurs liabilities and
conducts operations in Peru. Although it has neither its own capital nor
liability separate from that of SP Limited, it is deemed to have an equity
capital for purposes of determining the economic interests of holders of labor
shares (the "Labor Shares"). Labor 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 SP Limited associated
with its copper operations in Peru.
On November 29, 1995, the Company offered to exchange newly issued common stock,
par value $0.01 per share (the "Common Stock"), for any and all of the
outstanding Labor Shares of the Branch. Two series of Labor Shares (S-1 and S-2)
are listed and traded on the Lima Stock Exchange. The exchange offered one share
of Common Stock for four S-1 Labor Shares and one share of Common Stock for five
S-2 Labor Shares. The exchange offer expired on December 29, 1995 with 80.8% of
all outstanding Labor Shares exchanged for 11,479,667 shares of Common Stock. In
connection with the exchange offer, the former Southern Peru Copper Corporation
changed its name to Southern Peru Limited and the Company (formerly known as
Southern Peru Copper Holding Company) changed its name to Southern Peru Copper
Corporation. Throughout this Report on Form 10-K, unless the context otherwise
requires, the terms "Southern Peru", "SPCC" and "Company" refer to the present
corporation and its consolidated subsidiaries, as well as its predecessor, now
named Southern Peru Limited, which previously was the parent company and is now
a wholly-owned subsidiary of the Company. In addition, throughout this report,
unless otherwise noted, all tonnages are in short tons and all ounces are troy
ounces.
In connection with the consummation of the exchange offer, ASARCO Incorporated
("Asarco"), Cerro Trading Company, Inc. ("Cerro") and Phelps Dodge Overseas
Capital Corporation ("Phelps Dodge" and, together with Asarco and Cerro, the
"Class A Common Stockholders") exchanged their common shares in SP Limited for
Class A common stock, par value $0.01 per share (the "Class A Common Stock"), of
the Company. At December 31, 1996 the stockholders in the Company were Asarco
(54.1%), Cerro (15.0%), Phelps Dodge (13.9%) and common stockholders (17.0%).
COPPER PRODUCTION
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. In 1995, the Company also produced 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.
A2
Over the last several years, drilling programs at the Toquepala and Cuajone
mines have identified substantial additional ore reserves and mineralized
material which continues to be evaluated for classification as proven and
probable ore reserves. During 1996, drilling was concentrated primarily at
Cuajone and delineated a substantial increase in proven and probable ore
reserves. At year end 1996, proven and probable sulfide reserves totaled 1,400.3
million tons with an average copper grade of 0.65% at Cuajone and 331.6 million
tons with an average copper grade of 0.82% at Toquepala. Mineralized material
still being evaluated totals an additional 180 million tons at an average grade
of 0.56% at Cuajone and 200 million tons at an average grade of 0.71% at
Toquepala. In addition, the Company has 665 million tons of leachable, low-grade
ore that can be economically processed by its new SX/EW operation.
Total mine production for 1996 was 678.1 million pounds of copper, including
93.2 million pounds of refined copper cathodes produced at the new SX/EW plant,
an increase of 22% over 1995. Production of copper in concentrate grew to 584.9
million pounds compared with 547.1 million pounds the prior year. Toquepala
produced 252.9 million pounds and Cuajone produced 332.0 million pounds of
copper contained in concentrates in 1996.
As part of the Company's recently completed $445-million modernization program,
new larger equipment was added at both mines. At Cuajone, 12 new 240-ton
capacity trucks and one 56-cubic-yard capacity shovel that can load the haul
trucks in just three passes were added. At Toquepala, mining equipment has been
supplemented with seven new 240-ton capacity trucks and a new 56-cubic-yard
capacity shovel. Two secondary crushers at the Cuajone concentrator were
replaced and four tertiary crushers were added at the Toquepala concentrator.
Large flotation cells were installed at both concentrators, resulting in a
considerable saving in power costs. The concentrator at Cuajone had record
production of 613,000 tons of copper concentrate. The Toquepala concentrator
milled over 18.6 million tons of ore from the mine, also a record. Together the
two mines also produced 3.1 million ounces of silver and 8.7 million pounds of
molybdenum.
The new SX/EW facility had its first full year of operation in 1996. Built at a
cost of $105 million, the plant produces refined copper from solutions obtained
from leaching low-grade ore that has been stored at the Toquepala and Cuajone
mines. The plant produced 93.2 million pounds of refined copper, 20% more than
projected, at a cash cost under 35 cents per pound in its first full year of
operation.
Total refined production, including the 93.2 million pounds from the SX/EW
plant, increased to 532.8 million pounds from 442.4 million pounds in 1995.
Refined production from the Ilo refinery reached a record 439.6 million pounds
in 1996. The refinery, purchased from the Peruvian government in 1994 for $65
million, was built in the 1970s to treat the output of SPCC's smelter. The
purchase of the refinery made SPCC an integrated copper producer and lowered the
Company's cash cost of producing copper. As part of the acquisition agreement,
the Company spent $20 million to modernize the refinery. The most significant
improvement was to the tankhouse where installation of acid-resistant polymer
cells and a new rectifier increased capacity by 20%, bringing the refinery's
capacity to 494 million pounds of copper cathode per year.
SPCC's Ilo smelter continues to provide all the feed for the refinery. Since the
smelter's capacity exceeds that of the refinery, the Company sells blister
copper to other refiners around the world. Smelter operations benefited from a
full year of operation of the Modified El Teniente Converter ("CMT"), installed
in late 1995, that allowed the closing of a reverberatory furnace and two
older-design converter furnaces. The CMT was installed on schedule and reached
full production rates almost immediately upon start-up. A record 1.17 million
tons of concentrate were smelted at the smelter in 1996. Production of blister
copper was 634 million pounds, the same as in 1995.
A3
In September 1996, SPCC announced plans to increase annual mined copper
production and modernize the smelter. The project will be accomplished in three
stages. The first stage is the expansion of the Cuajone mine and the second
stage, the modernization and expansion of the Ilo smelter. Commencement of both
stages is subject to the arrangement of long-term financing. Orders have been
placed for some equipment for the mine expansion at Cuajone that involve long
lead times and engineering work for both stages has commenced. The third stage
in the plan, which provides for further expansion of the Cuajone mine and the
Ilo smelter, is optional and no decision to proceed is likely to be made until
2000.
The first stage expansion plan at Cuajone will increase annual mine production
by 130 million pounds. The existing concentrator will be expanded by adding a
third crushing line and expanding the grinding and flotation circuits. Mining
operations will be increased by the addition of 11 new 240-ton-capacity trucks,
drilling and auxiliary equipment and one new 56-cubic-yard-capacity shovel.
Completion of the mine expansion is expected early in 1999. The modernization of
the Ilo smelter will be completed in phases. A new smelting furnace utilizing
flash furnace technology, along with associated support and environmental
control facilities will be installed by 2001. The converter operations will be
modernized by installing either flash technology or conventional Peirce-Smith
converter technology. This choice of converter technology will be made before
2000 and new converter operations are planned to be in service by 2003. The
delay in selecting the converter technology will allow the Company to evaluate
the operation of the new flash converting technology at other copper smelters.
Plans call for the smelter to continue to operate its existing furnaces and
converters until the new plant proves capable of operating reliably at designed
rates. The modernized smelter will meet international environmental guidelines.
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 1996, 1995 and 1994, 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 commodities exchanges or in spot sales. Final sales values are determined
based on prevailing commodity prices for the quotational period, generally being
the month of, the month prior or the month following the actual or contractual
month of shipment or delivery according to the terms of the contract.
A4
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, 1996 the Company employed approximately 4,900 persons, about
two-thirds of whom were covered by labor agreements with nine labor unions.
There were no labor strikes in 1996.
ENERGY MATTERS AND WATER RESOURCES
Electric power for the Company's operating facilities is generated by the
Company's thermal electric plant located adjacent to the Ilo smelter. The
Company is negotiating the sale of the power plant that provides electricity for
its operations to a subsidiary of Tractebel S.A., a Belgian concern. A new 40
megawatt gas turbine will be added to the plant in 1997, raising its total
capacity to 175 megawatts. SPCC would purchase all of its power requirements
from the Tractebel subsidiary pursuant to a 20-year agreement. The sale will
relieve the Company of the necessity to invest additional capital for enlarging
the power plant to meet its future power requirements.
In connection with the anticipated sale of the power plant, on February 21,
1997, SPCC entered into agreements with the Tractebel subsidiary for the sale of
the new turbine and the 20-year power purchase agreement. Closing of the
transaction is subject to obtaining necessary government approvals.
SPCC has water concessions for well fields at Huaitire and Titijones and surface
water rights from Lake Suches. The Company also operates desalination plants at
Ilo, producing water for industrial and domestic use.
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 1996 were approximately
$183,300.
ENVIRONMENTAL MATTERS
The Company recently installed new facilities and implemented operating
procedures to further reduce the impact of its operations on the environment. In
January 1996, the sulfuric acid plant at the Ilo smelter was dedicated.
Completed in 1995, the plant captures 18% of the smelter's off-gases and 60% of
those from the CMT to produce sulfuric acid. A portion of the acid is used by
the Company to leach ore as part of the SX/EW operation and the rest is sold to
customers. The plant produced 214,000 tons of acid in 1996 in its first full
year of operation. A $35 million expansion of the acid plant is now underway
with completion expected in March 1998 with annual acid production projected to
increase to 330,000 tons. When completed, the expanded acid plant will capture
all the off-gases from the CMT, or 30% of the entire smelter's emissions.
Additionally, the Company has a supplemental control program at the smelter that
is designed to decrease sulfur dioxide emissions during adverse weather
conditions by curtailing operations.
A5
With the completion of a starter dam at Quebrada Honda, tailings are now
deposited on land at a location close to both mines.
The environmental projects have contributed significantly to the important
progress made in reducing the impact of the Company's operations on the
environment. The major modernization project now underway at the smelter will
continue the Company's progress in meeting international environmental
guidelines.
Capital expenditures for environmental projects in 1996 were approximately $29.8
million and in 1997 are anticipated to be approximately $50 million including
expenditures under the Company's environmental compliance and management plan
(the "PAMA"). The Company's exploration, mining, milling, smelting and refining
activities are subject to Peruvian laws and regulations, including environmental
laws and regulations, which change from time to time. The Company's recently
approved PAMA, sets forth the investment to be made by the Company to comply
with current Peruvian environmental regulations applicable to its operations. To
implement the PAMA, the Company is required to make a minimum annual investment
of 1% of net annual sales until compliance is met. The PAMA will require the
Company to make significant additional capital expenditures to achieve
compliance with the maximum permissible levels for its emission and waste
discharges ("MPLs") within a period of five years, except for environmental
controls applicable to its smelter operation which must be put in place within
10 years. Upon completion of the smelter modernization, management expects that
95% to 98% of smelter emissions will be captured, depending upon the converter
technology selected for installation at the smelter. The PAMA contemplates a
number of environmental projects, the largest and most capital intensive of
which is the planned modernization of the Ilo smelter. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Expansion and Modernization Project." Management believes that under current
Peruvian law and regulations, compliance with the PAMA will satisfy the MPL
requirements pertaining to the Company's operations during the applicable five-
or 10- year implementation period. The Company's remains, however, subject to
other environmental requirements applicable to its operations.
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 30-mile 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.
NEW ACCOUNTING STANDARD
In February 1997, The Accounting Standards Board issued Statement of Financial
Accounting Standards 128, "Earnings Per Share". The Company is currently
assessing the impact of this statement which will be effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods.
A6
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.
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, 1996, the Company,
through SP Limited and the Branch, has 100% interests 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 SP
Limited and the Branch, its offices in Lima. Its offices in New York are located
in space leased to it by Asarco. Its offices in Miami are leased by the Company.
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) Logistics Services, Inc., Miami, FL
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 at Ilo, a power plant
and port facilities, which are located approximately 122 rail miles 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.
A7
METAL PRODUCTION STATISTICS
Production Statistics
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Copper Production
MINES (contained copper in thousands of pounds)
Toquepala 252,928 256,128 223,594 230,094 226,464
Cuajone 332,014 290,982 312,074 300,820 315,892
SX-EW 93,170 10,012 - - -
Total Mines 678,112 557,122 535,668 530,914 542,356
SMELTER (contained copper in thousands of pounds)
From SPCC concentrates 589,994 537,522 536,864 530,092 536,814
From purchased concentrates 43,614 96,934 107,342 95,498 70,964
Total Smelter 633,608 634,456 644,206 625,590 607,778
REFINERIES (thousands of pounds of copper)
Ilo (a) 439,600 432,414 421,342 396,750 394,118
SX/EW 93,170 10,012 - - -
Total refined 532,770 442,426 421,342 396,750 394,118
COPPER SALES (thousands of pounds)
Refined 439,400 436,638 424,776 400,894 383,954
In Blister 162,418 200,592 228,346 212,446 205,110
SX/EW 92,472 9,374 - - -
Total sales of Copper 694,290 646,604 653,122 613,340 589,064
LME average price (cents
per pound) 104.1 133.2 104.7 86.8 103.5
poundlb.)
Molybdenum
(thousands of pounds contained in concentrate)
MINES
Toquepala 4,483 3,674 3,058 2,570 3,616
Cuajone 4,257 4,334 3,062 3,742 3,468
Total produced 8,740 8,008 6,120 6,312 7,084
Sale of molybdenum
in concentrate 8,813 8,402 5,698 6,804 7,062
Metals Week Dealer
Oxide price ($/lb.) $ 3.61 $ 7.42 $ 4.50 $ 2.28 $ 2.18
A8
Silver
(thousands of ounces)
SMELTER (in blister)
Ilo - SPCC Concentrates 3,097 2,958 2,979 2,813 2,675
REFINERY
Ilo (b) 2,218 2,519 2,131 2,237 2,012
SALES OF SILVER
Refined (b) 2,282 2,597 1,947 2,212 1,986
In blister 828 1,164 1,237 1,135 1,051
Total sales of Silver 3,110 3,761 3,184 3,347 3,037
COMEX average price ($/oz.) $ 5.18 $ 5.18 $ 5.28 $ 4.30 $ 3.94
(a) The Ilo refinery was purchased by the Company in May 1994. The data prior to
the acquisition reflects cathode production for SPCC on a toll basis.
(b) Prior to the acquisition of the refinery, silver contained in blister was
sold by SPCC. The refinery production reflects the total silver production by
the refinery before and after its acquisition by SPCC. The "Sales of Silver -
Refined" amount reflects the silver sold to the refinery by SPCC prior to the
acquisition and the refined silver sold by the Company after the acquisition
A9
METAL PRODUCTION STATISTICS
COPPER RESERVES
Mineral Metal Production
Reserves Contained Metal
(000s Tons (000s Pounds)
-------------
12/31/96 12/31/96 1996 1995 1994
-------- -------- ---- ---- ----
Toquepala Sulfide 331,600 0.82 252,900 256,100 223,600
Leachable 650,0000 0.20 93,200 10,000 -
Cuajone Sulfide 1,400,300 0.65 332,000 291,000 312,100
Leachable 15,000 0.98 - - -
The Company has ongoing exploration programs in Peru. Results of drilling at
Toquepala and Cuajone have identified mineralized material consisting of 200
million tons grading 0.71% copper at Toquepala and 180 million tons grading
0.56% at Cuajone. This mineralized material will not qualify as proven and
probable reserves until such time as a final and comprehensive economic and
technical feasibility study has been completed demonstrating that such
additional material can be economically mined.
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.
A10
The following ore production information is provided:
1996 1995 1994
Ore Milled Avg. Mill Ore Milled Avg. Mill Ore Milled Avg. Mill
(000s Tons) Recovery (000s Tons) Rate (%) (000s Tons) Recovery Rate
Rate (%) (%)
Toquepala 18,609 84.20% 16,937 89.03% 15,737 88.83%
Cuajone 21,249 81.71% 21,378 84.27% 21,688 85.97%
The following productive capacity is provided:
Defined Capacity (a)
Ilo Smelter 300,000 tons
Ilo Refinery 247,000 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.
Item 3. Legal Proceedings
Reference is made to the information under the caption "Litigation" in Financial
Statement Footnote 20 "Commitments and Contingencies" on page A38 incorporated
herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
None.
A11
Executive Officers of the Registrant
Set forth below are the executive officers of the Company, their ages as of
February 28, 1997, and their positions.
Name Age Position
---- --- --------
Richard de J. Osborne.................... 62 Chairman of the Board and Director
Charles G. Preble........................ 64 President, Chief Executive Officer and Director
Charles B. Smith......................... 58 Executive Vice President and Chief Operating Officer
Ronald J. O'Keefe........................ 54 Executive Vice President and Chief Financial Officer
Kevin R. Morano.......................... 43 Vice President and Director
Winston Cundiff, III........ 50 Vice President (Human Resources, Peru)
Hans A. Flury............................ 45 Vice President (Legal, Peru)
Guillermo D. Payet....................... 58 Vice President (Finance, Peru)
Eduardo Santistevan...................... 55 Vice President (Logistics, Peru)
Augustus B. Kinsolving................... 57 Secretary, General Counsel and Director
Brendan M. O'Grady....................... 52 Comptroller
Thomas J. Findley, Jr.................... 49 Treasurer
Richard de J. Osborne, Chairman of the Board of the Company since February 1996
and a director since 1976. Mr. Osborne has been Chairman of the Board, Chief
Executive Officer and President of Asarco since 1985 and a director since 1976.
Charles G. Preble, President and Chief Executive Officer of the Company since
1985 and a director since 1984.
Charles B. Smith, Executive Vice President and Chief Operating Officer of the
Company since February 1996. From 1992 to February 1996, he was Vice President
and General Manager (Operations, Peru). From 1988 to 1992, he served as Vice
President-U.S. Operations for ARCO Coal Company (coal production and marketing).
Ronald J. O'Keefe, Executive Vice President and Chief Financial Officer of the
Company since April 1995. Previously he was Controller of Asarco from 1982
through March 1995.
Kevin R. Morano, Vice President and a director of the Company since 1993. He has
been Vice President-Finance and Chief Financial Officer of Asarco since 1993.
Prior to that he was general manager of Asarco's Ray Complex from 1991 to 1993.
From 1989 to 1991 he served as Asarco's Treasurer.
Winston Cundiff, III, Vice President (Human Resources, Peru) of the Company
since September 1996. From 1995 to August 1996 he served as General Director of
Human Resources for the Company. From 1991 to 1994, he served as Director Human
Resources Training and Quality for Liquid Air Corporation.
Hans A. Flury, Vice President (Legal, Peru) of the Company since 1989.
Guillermo D. Payet, Vice President (Finance, Peru) of the Company since 1991.
Prior to that, he was Vice President, Finance and Logistics (Peru) from 1987 to
1991.
Eduardo Santistevan, Vice President (Logistics, Peru) of the Company since 1991.
From 1988 to 1990, he served as General Maintenance Superintendent. He is the
brother-in-law of Charles G. Preble.
Augustus B. Kinsolving, Secretary, General Counsel and a director of the
Company, has been a director since 1989, Secretary since May 1994 and General
Counsel since October 1994. He has been a Vice President of Asarco since 1983,
its General Counsel since 1986 and served as its Secretary from 1987 to 1995.
A12
Brendan M. O'Grady, Comptroller of the Company since 1992. Previously, he was
Assistant Comptroller from 1981 to 1992.
Thomas J. Findley, Jr., Treasurer of the Company since 1996. He has been
Treasurer of ASARCO since 1992.
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
At December 31, 1996, after giving effect to completion of the Company's
exchange offer, there were approximately 4,342 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. The SPCC Common Stock symbol is
PCU on the NYSE and PCUC1 on the Lima Stock Exchange. 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 Lima Stock Exchange, 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 Lima Stock Exchange for
the periods indicated.
1996 1995
---- ----
1st 2nd 3rd 4th Year 1st 2nd 3rd 4th Year
--- --- --- --- ---- --- --- --- --- ----
Dividend per
share (a) $0.65 $0.30 $0.28 $0.24 $1.47 $0.41 $0.11 $0.33 $0.42 $1.27
Stock market
price:
NYSE High $21 $19 $16 $16 1/4 $21 N/A N/A N/A N/A N/A
Low $15 $15 1/4 $14 3/8 $13 7/8 $13 7/8 N/A N/A N/A N/A N/A
Lima Stock
Exchange:
High (b) $21.10 $17.99 $15.45 $16.10 $21.10 N/A N/A N/A N/A N/A
Low (b) $13.58 $14.34 $13.92 $13.50 $13.50 N/A N/A N/A N/A N/A
On February 4, 1997, the Board of Directors of the Company declared a dividend
of $0.30 per share payable March 3, 1997 to stockholders of record as of
February 14, 1997.
(a) 1995 amounts have been rounded.
(b) The Company's common stock is quoted on the Lima Stock Exchange in
U.S. Dollars.
For a description of limitations on the ability of the Company and SP Limited to
make distributions, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources" and Note 15
to the Consolidated Financial Statements of the Company.
A13
Item 6. Selected Financial Data
FIVE-YEAR SELECTED FINANCIAL AND STATISTICAL DATA
(in millions, except per share and employee data) 1996 1995 1994 1993 1992
Consolidated Statement of Earnings:
Net sales $ 753 $ 929 $ 702 $ 547 $ 622
Operating costs and expenses (1) 504 562 560 477 490
Operating income 249 367 142 70 132
Minority interest of labor shares in
income of Peruvian Branch 5 44 19 11 21
Earning before cumulative effect of
the change in accounting principle 181 218 91 29 46
Cumulative effect of the change in
accounting principle - - - 165 (2) -
Net earnings $ 181 $ 218 $ 91 $ 194 $ 46
Per Share Amounts (3):
Earning before cumulative effect of
the change in accounting principle $ 2.25 $ 3.31 $ 1.39 $ 0.45 $ 0.69
Cumulative effect of the change in
accounting principle - - - 2.51 -
Net earnings $ 2.25 $ 3.31 $ 1.39 $ 2.96 $ 0.69
Dividends paid $ 1.47 $ 1.27 $ 0.33 $ 0.27 $ 0.23
Consolidated Balance Sheet:
Total assets $1,280 $1,272 $ 969 $ 728 $ 723
Total debt 107 94 118 16 -
Stockholders' equity 1,015 953 635 565 389
Consolidated Statement of Cash Flows:
Cash provided from operating activities $ 159 $ 330 $ 135 $ 32 $ 129
Dividends paid 118 84 21 18 15
Capital expenditures 121 183 182 (4) 32 23
Depreciation, amortization and depletion 42 36 40 35 32
Other Items:
Current assets to current liabilities 3.8 2.8 3.0 4.2 3.8
Debt as % of capitalization 9.3% 8.8% 14.2% 2.4% -
Employees (at year end) 4,859 5,035 5,407 5,629 5,685
(1) Includes provision for workers' participation of $18.0 million, $32.2
million, $13.9 million, $8.8 million and $14.1 million in the years
ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively.
(2) Represents the cumulative effect as of January 1, 1993, of adopting
Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes."
(3) Per share amounts are presented after giving retroactive effect to a 100
to 1 stock split declared and made on November 4, 1994.
(4) Capital expenditures include $65.0 million for the acquisition of the
Ilo refinery in May 1994.
A14
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 Sol: A portion of the Company's
operating costs are denominated in Peruvian soles. Since the revenues of the
Company are primarily denominated in U.S. dollars, when inflation in Peru is not
offset by a corresponding devaluation of the sol, the financial position,
results of operations and cash flows of the Company could be adversely affected.
The Peruvian economy has improved significantly following the implementation of
the government's stabilization and reform plan in 1991. The recent inflation and
devaluation rates are as follows:
Years ended December 31, 1996 1995 1994
---- ---- ----
Peruvian Inflation Rate 11.8% 10.2% 15.4%
Sol/Dollar Devaluation Rate 12.1% 6.0% 1.4%
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 ("U.S. GAAP"). The Peruvian Branch (the
"Branch") consists of substantially all of the assets and liabilities of
Southern Peru Copper Corporation 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 soles, prepares financial
information in accordance with generally accepted accounting principles in Peru
("Peruvian GAAP") and reports such information to the Peruvian government on
this basis for purposes of calculating its Peruvian income tax liability as well
as amounts payable for workers' participation. Since these amounts are
determined on the basis of Peruvian GAAP, they cannot be directly derived from
the consolidated financial statements of the Company. 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.
RESULTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994
Earnings: The Company reported net earnings for the year 1996 of $180.5 million
or $2.25 per share, compared with net earnings of $217.8 million, or $3.31 per
share, in 1995 and net earnings of $91.2 million, or $1.39 per share in 1994.
Earnings are significantly affected by changes in copper prices. Lower copper
prices decreased 1996 net earnings by an estimated $109 million compared with
1995. This decline in earnings due to lower copper prices was somewhat offset by
increased production and lower production costs. Sales of copper produced from
the Company's mines, including the new solvent extraction/electrowinning
("SX/EW") facility increased significantly in 1996 compared with 1995.
The improvement in the 1995 earnings over 1994 was principally due to higher
copper and molybdenum prices and reduced operating costs, in part, as a result
of the acquisition of the Ilo refinery in May 1994.
A15
Net earnings in 1996 reflect a reduction in the minority interest of labor
shares in the Branch. An exchange of labor shares for common shares was
completed in the fourth quarter of 1995 ("Exchange") and reduced the interest of
labor shares from 17.3% to 3.3%. At December 31, 1996, the interest of labor
shares was 2.8%.
As a result of ongoing drilling programs at the Company's mines, proven and
probable ore reserves increased substantially in 1996. At December 31, 1996,
proven and probable ore reserves at Toquepala were 331.6 million tons with an
average grade of 0.82% copper, and at Cuajone were 1,400.3 million tons with an
average grade of 0.65% copper. In addition, leachable reserves at the two mines
were 665 million tons with an average grade of 0.22% copper.
Net Sales: Net sales in 1996 were $753.0 million compared with $928.8 million in
1995 and $701.7 million in 1994. While copper sales volume was 47.7 million
pounds higher in 1996 than in 1995, net sales decreased by $175.8 million,
principally due to lower copper prices. Copper sales volume was 6.5 million
pounds lower in 1995 than in 1994 primarily due to slightly lower smelter
production in 1995 and a reduction in inventory levels in 1994. The resulting
decrease in copper sales volume was more than offset by higher copper and
molybdenum prices and higher molybdenum volume in 1995.
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 Metals Week for dealer oxide prices
for molybdenum products.
Price/Volume Data
1996 1995 1994
---- ---- ----
Average Metal Prices
Copper (per pound - LME) $1.04 $1.33 $1.05
Molybdenum (per pound) 3.61 7.42 4.50
Silver (per ounce - COMEX) 5.18 5.18 5.28
Sales Volume (in thousands)
Copper (pounds) 694,290 646,604 653,122
Molybdenum (pounds) (1) 8,813 8,402 5,698
Silver (ounces) 3,110 3,761 3,184
(1) The Company's molybdenum production is sold in concentrate form. Volume
represents pounds of molybdenum contained in concentrate.
Financial Instruments: Depending on the market fundamentals of a metal and other
conditions, the Company may purchase 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. 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, 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.
For the full year 1996, the Company realized pre-tax gains of $16.7 million as a
result of its copper price protection program, of which $11.1 million was
recognized in 1996. The remaining $5.6 million will be recognized in the first
quarter of 1997 when the underlying production is sold. Copper put options with
a cost of $1.2 million expired during the first six months of 1996. The
recognized pre-tax gains (losses) of the Company's metal hedging activities, net
of transaction costs were $9.9 million, $(2.1) million and $(1.8) million in
1996, 1995 and 1994, respectively.
A16
Operating Costs and Expenses: Operating costs and expenses were $504.3 million
in 1996 compared with $562.2 million in 1995 and $559.7 million in 1994. Cost of
sales decreased to $389.6 million in 1996 from $439.4 million in 1995. While the
volume of all copper sold increased by 47.7 million pounds in 1996 as compared
with 1995, cost of sales decreased by $49.8 million. The cost of sales decrease
was principally attributable to a reduction in sales of copper produced from
purchased concentrates of 61.3 million pounds, and an increase of 109.0 million
pounds in sales of copper produced from Company mines, of which 83.1 million
pounds represented increased production from the new low-cost SX/EW facility.
The unit cost of purchased concentrates in 1995 was considerably higher, as a
result of market prices. Cost of sales decreased from $454.0 million in 1994 to
$439.4 million in 1995, principally reflecting the savings derived from
operating the Ilo refinery, purchased in May 1994, partially offset by higher
sales volumes of by-products and the higher cost of purchased concentrates.
Administrative and other expenses were $50.0 million in 1996 compared with $52.7
million in 1995 and $48.1 million in 1994.
Depreciation, amortization and depletion expense was $41.6 million in 1996
compared with $36.0 million in 1995 and $39.7 million in 1994. The increase in
1996 includes the depreciation expense on major additions to property in late
1995. Increased ore reserves had the effect of reducing depreciation,
amortization and depletion expense by $6.1 million in 1995. The increase in ore
reserves in 1996 had no material impact on 1996 depreciation expense.
The provision for workers participation was $18.0 million in 1996 compared with
$32.2 million in 1995 and $13.9 million in 1994. The decrease in 1996 was due to
lower pre-tax profits of the Branch, and the 1995 increase reflects higher
profits. Peruvian law provides that workers in mining companies participate in
8% of pre-tax profits. Such participations are paid in the following year.
Non-Operating Items: Interest income was $18.3 million in 1996 compared with
$14.8 million in 1995 and $6.5 million for 1994. The increases in 1996 and 1995
reflected higher interest rates and higher invested cash balances. Interest
income is expected to decrease as available cash is used to fund the Company's
expansion program. Other income was $11.4 million in 1996 compared with $12.8
million in 1995 and $23.2 million in 1994. 1995 and 1994 include pre-tax gains
on sales of investments of $1.3 million and $18.4 million, respectively.
Exchange gains included in other income are $6.7 million, $6.0 million and $1.6
million for the years 1996, 1995 and 1994, respectively. Interest expense was
$12.5 million in 1996 compared with $13.9 million in 1995 and $7.8 million for
1994. Interest expense in 1995 included the write-off of $2.0 million of
previously capitalized loan fees related to the pre-payment of $77 million of
the Company's long-term debt.
Taxes on Income: Taxes on income were $80.2 million, $119.1 million and $54.1
million for 1996, 1995 and 1994, respectively, and include $74.9 million, $114.5
million and $46.8 million for Peruvian income taxes and $5.3 million, $4.6
million and $7.3 million, respectively, for U.S. federal and state taxes. 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.
The Company obtains income tax credits in Peru for value-added taxes ("VAT")
paid in connection with the purchase of capital equipment and other goods and
services employed in its operations and records these payments as a prepaid
expense. Under current Peruvian law, the Company is entitled to credit the
amount of such VAT against its Peruvian income tax liability or receive a
refund.
Minority Interest of Labor Shares: The minority interest of labor shares was
$5.2 million in 1996 compared with $43.6 million in 1995 and $18.6 million in
1994. The income statement provision for minority interest of labor shares
represents an accrual of 3.1%, 17.3% and 17.5% for 1996, 1995 and 1994,
respectively, of the Branch's after-tax earnings as determined under Peruvian
GAAP.
A17
The reduction in the minority interest of labor shares principally reflects the
effect of the Exchange completed in the fourth quarter of 1995.
Cash Flows - Operating Activities: Net cash flow from operating activities was
$158.8 million in 1996, compared with $330.4 million for 1995 and $134.9 million
in 1994. The decrease in operating cash flow in 1996 was a result of higher
Peruvian income taxes paid in 1996, principally relating to the final tax
payment for 1995 and lower cash earnings. The increase in operating cash flow in
1995 reflects higher cash earnings and changes in working capital.
Cash Flows - Investing Activities: Net cash used for investing activities was
$79.3 million in 1996 as compared with $119.5 million in 1995 and $138.8 million
in 1994. Capital expenditures in 1996 were $120.8 million as compared with
$183.0 million in 1995 and $181.9 million in 1994. In 1996, $19.4 million was
spent to complete the Quebrada Honda tailings project, through the starter dam
phase. In addition, $27.2 million was spent on new large capacity shovels and
haul trucks for the mines. In 1995, the Company spent $36 million for completion
of the sulfuric acid plant at the Ilo smelter and $77 million for completion of
the Toquepala SX/EW plant. In 1995, $61.1 million was transferred from a
restricted account and used to support the capital spending.
In May 1994, the Company purchased the Ilo refinery from a Peruvian
government-owned entity for $65 million in cash and a commitment to make an
additional $20.2 million of capital improvements over three years. The Company
had substantially completed this commitment at December 31, 1996. The
acquisition of the refinery has allowed the Company to integrate its operation
from the mining and smelting of copper to the production of refined copper and
to reduce its cash costs of operations.
In 1994, the Company realized proceeds of $50.3 million from the sale of
investments. Investments in marketable securities include a net redemption in
1996 and 1995 of $41.5 million and $0.5 million, respectively, as compared with
a net investment in marketable securities of $7.2 million in 1994.
Cash Flows - Financing Activities: Financing activities used cash of $127.6
million in 1996 as compared with $86.1 million in 1995 and cash provided of
$64.7 million in 1994. The 1996 amount includes purchase of labor shares and
treasury stock of $8.3 million, net borrowings of $2.6 million as compared with
net repayment of borrowings of $13.3 million in 1995 and net proceeds from
borrowing of $90.3 million in 1994. The 1995 amount includes proceeds from a
subscription of labor shares of $10.9 million. Distributions to the labor share
minority interest were $4.1 million in 1996. Dividends paid in 1996 were $117.9
million as compared with $83.7 million in 1995 and $21.4 million in 1994. On
February 4, 1997 a dividend of $0.30 a share, totaling $24.1 million was
declared, payable March 3, 1997.
LIQUIDITY AND CAPITAL RESOURCES
1991 Agreement: In December 1991, the Company and the Government of Peru signed
an agreement (the "1991 Agreement") resolving all open issues concerning the
conclusion of the investment recovery contract which governed the development
and operation of the Cuajone mine. Under the 1991 Agreement, the Company agreed
to undertake an investment program over the five years, 1992-1996, and the
Peruvian Government agreed not to discriminate against the Company in comparison
with treatment given to other mining companies. As part of this agreement, in
1991 the Company transferred $55.0 million from its accounts in New York to an
interest-bearing account with the Central Reserve Bank of Peru, to be withdrawn
by the Company at its discretion solely for application to the investment
program. In March 1995, these funds, aggregating $61.1 million, including
accumulated interest, were transferred to the Branch as a capital contribution
and used for the capital spending program. In conjunction with the transfer,
labor shareholders contributed $10.9 million to the capital of the Branch.
A18
At December 31, 1996, the Company had expended $443.6 million under the agreed
five-year capital program and has met its obligations under the 1991 Agreement.
Financing: In January 1996, the Company borrowed $47 million, the remaining
commitment available under a $50 million loan from Mitsui & Co. Ltd. at a rate
of LIBOR plus 2.87%. In addition, in November 1996, the Company prepaid $12.9
million, the remaining loan balance from two Peruvian commercial banks. At
December 31, 1996 the Company had outstanding borrowings under its long-term
loan agreements of $106.6 million. There were no amounts available under these
facilities at December 31, 1996. The loans are payable in semi-annual
installments through 2001 and bear interest based on LIBOR, except for a 6.43%
fixed-rate loan from the United States Export-Import Bank. The December 31, 1996
balance on this loan was $26.3 million.
The financing agreements contain covenants which limit the payment of dividends
to stockholders. Under the most restrictive loan, the Company may not pay a
dividend if the aggregate amount of all dividend payments with respect to any
fiscal quarter is greater than 50% of Net Income (as defined therein) of the
Company for such fiscal quarter. However, this agreement permits dividends with
respect to the final quarter of each fiscal year to the extent that total
dividends for such fiscal year do not exceed 50% of the first $50 million of
earnings plus 100% of earnings in excess of $50 million for such fiscal year.
These dividend restrictions directly apply to SP Limited as the issuer of the
debt. However, on consolidation they also apply to SPCC. Net assets of SP
Limited unavailable for the payment of dividends to SPCC totaled $821 million at
December 31, 1996.
The financing agreements are collateralized by pledges of receivables from
34,200 tons of copper per year and liens on certain product inventory, fixed
assets and mining concessions. 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. Any reduction of ASARCO Incorporated's ("Asarco") voting
interest in the Company to less than a majority would constitute an event of
default under one of the financing agreements. The Company is in compliance with
the various loan covenants at December 31, 1996. Included in Other Assets are
$11.3 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, 1996, the Company's debt as a percentage of total capitalization
(defined as the sum of the total of debt, minority interest of labor shares and
stockholder's equity) was 9.3% as compared with 8.8% at December 31, 1995. Debt
at December 31, 1996 was $106.6 million, compared with $93.9 million at the end
of 1995.
Cash Position and Requirements: At December 31, 1996, the Company's cash and
cash equivalents and marketable securities amounted to $174.2 million as
compared with $262.1 million at December 31, 1995.
Expansion and Modernization Project: In September 1996, the Company announced a
project including an expansion of the Cuajone mine and an expansion and
modernization of its copper smelter at Ilo. Commencement of the project will
begin once financing has been arranged. The Company is in the process of
arranging financing for the program. In January 1997, the Company received
preliminary commitments from a group of six financial institutions for a loan
facility of $600 million with a final maturity of 7 years. The commitment and
terms of the financing are subject to final documentation which is expected to
be completed in early 1997. Upon closing of this financing, the Company expects
to commence the modernization and expansion project. Additional financing for
the project also is being sought from other sources. The Cuajone mine expansion
which will expand the annual copper production by 130 million pounds represents
the first stage of the project. Engineering for the second stage of the program,
the modernization of the Ilo smelter has begun. Following completion of the
preliminary engineering and securing of the financing, SPCC plans to modernize
its existing copper smelter at Ilo to meet
A19
current international environmental guidelines and to increase capacity. Total
capital cost for the first two stages of the project is estimated at $1.0
billion, budgeted to be spent over the next six years.
Stage I, the expansion of the Cuajone mine, is expected to require a capital
investment of approximately $245 million and is expected to be completed in
early 1999. Stage II, the expansion and modernization of the Ilo smelter, is
expected to cost approximately $787 million, based on the Company's preliminary
engineering studies, and is expected to be completed in 2003.
A future opportunity for a third stage of the expansion and modernization plan,
consisting of a second expansion at Cuajone and further expansion of the Ilo
smelter capacity will be evaluated at a later date and will depend on the
availability of financing and other conditions at the time. A decision to
proceed on this stage of the project is not expected before 2000. The Company
expects that the projects will be funded from a combination of existing cash,
internally generated funds and external financing.
EXCHANGE OFFER
In November 1995, the Company offered to exchange newly issued common stock for
any and all of the outstanding labor shares of the Company's Peruvian Branch.
The exchange offer expired on December 29, 1995, with 80.8% of outstanding labor
shares exchanged for 11,480,093 shares of common stock. The common stock has
been listed on the New York Stock Exchange and the Lima Stock Exchange since
January 5, 1996.
In conjunction with the exchange of labor shares, the founding common
stockholders of the Company exchanged their shares for Class A common shares.
The exchange of common stock for labor shares has been accounted for as a
purchase of a minority interest. The value of the common stock issued in the
exchange (based on the average per share trading value for the three business
days ended January 9, 1996) plus issuance costs exceeded the carrying value of
the minority interests acquired by $82.0 million, net of tax. The increase in
value was assigned to metal inventory and to proven and probable sulfide and
leachable ore reserves and mineralized material.
DIVIDENDS AND CAPITAL STOCK
The Company paid dividends to stockholders of $117.9 million, or $1.47 per
share, in 1996, $83.7 million, or $1.27 per share, in 1995 and $21.4 million, or
$0.33 per share in 1994.
At the end of 1996 and 1995, the authorized and outstanding capital stock of the
Company consisted of 66,550,833 and 68,750,833 shares of Class A common stock,
par value $0.01 per share, respectively; and 33,449,167 and 31,249,167
authorized shares of common stock, par value $0.01 per share, respectively, of
which 13,633,674 shares were outstanding at December 31, 1996 and 11,479,667
shares were outstanding at December 31, 1995. At the end of 1994, 76,251,193
shares of old Common Stock were issued of which 65,717,493 shares were
outstanding.
A20
ENVIRONMENTAL MATTERS
As part of the 1991 Agreement, the Company made a significant number of
environmental capital expenditures, including, a sulfuric acid plant at the Ilo
smelter for partial recapture of sulfur dioxide, completed in 1995 at a cost of
$103.0 million; a sewage treatment plant at Ilo, completed in 1994 at a cost of
$2.0 million; and a tailings storage facility at Quebrada Honda, which was
completed in 1996 at a cost of $40.8 million. The Company has also incurred
capital costs of $3.0 million for environmental projects as a result of the
commitment made in connection with the Ilo refinery acquisition. In addition, in
April 1996 the Company began a $35 million expansion of the Ilo sulfuric acid
plant. The expansion will increase the capture of sulfur dioxide emissions from
the smelter from 18% to 30% and will also increase sulfuric acid production at
the smelter to 330,000 tons per year in 1998, the expected year of expanded
plant operation. Capital expenditures in connection with these and other
environmental projects were approximately $29.8 million in 1996.
The Company's exploration, mining, milling, smelting and refining activities are
subject to Peruvian laws and regulations, including environmental laws and
regulations, which change from time to time. The Company's recently approved
environmental compliance and management plan, PAMA, sets forth the investment to
be made by the Company to comply with current Peruvian environmental regulations
applicable to its operations. To implement the PAMA, the Company is required to
make a minimum annual investment of 1% of net annual sales until compliance is
met. The PAMA will require the Company to make significant additional capital
expenditures to achieve compliance with the maximum permissible levels for its
emission and waste discharges ("MPLs") within a period of five years, except for
environmental controls applicable to its smelter operation which must be put in
place within ten years. The PAMA contemplates a number of environmental
projects, the largest and most capital intensive of which is the planned
modernization of the Ilo smelter. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Expansion and Modernization
Project." Management believes that under current Peruvian law and regulations,
compliance with the PAMA will satisfy the MPL 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.
ACCOUNTING MATTERS
The American Institute of Certified Public Accountants issued Statement of
Position 96-1, "Environmental Remediation Liabilities" ("SOP 96-1") in October
1996. SOP 96-1 provides authoritative guidance on specific accounting issues in
connection with recognizing, measuring and disclosing environmental remediation
liabilities. Application of SOP 96-1 in the fourth quarter of 1996 had no effect
on the Company's financial statements.
SUBSEQUENT EVENT
On February 21, 1997, the Company entered into agreements with Powerfin Peru
S.A., a wholly owned subsidiary of Tractebel S.A. ("Tractebel"), for the sale of
a new turbine at its Ilo power plant and a 20-year power purchase agreement for
its copper operations in Peru. Negotiations are being finalized covering the
sale of the Company's existing power plant assets. Closing of the transaction is
subject to obtaining necessary Peruvian government approvals.
A21
Item 8. Financial Statements and Supplementary Data.
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF EARNINGS
For the years ended December 31, 1996 1995 1994
---- ---- ----
(dollars in thousands except for per share amounts)
Net sales:
Stockholders and affiliates $ 71,740 $ 85,819 $ 78,386
Others 681,292 843,021 623,292
-------- -------- --------
Total net sales 753,032 928,840 701,678
Operating costs and expenses:
Cost of sales 389,577 439,382 453,951
Administrative and other 49,979 52,687 48,134
Depreciation, amortization and depletion 41,623 35,952 39,742
Provision for workers' participation 18,025 32,212 13,944
Exploration 5,063 1,950 3,880
--------- --------- ---------
Total operating costs and expenses 504,267 562,183 559,651
--------- --------- ---------
Operating income 248,765 366,657 142,027
Interest income 18,264 14,827 6,521
Interest expense (12,467) (13,904) (7,779)
Other income 11,358 12,825 23,204
--------- --------- ---------
Earnings before taxes on income and minority interest
of labor shares 265,920 380,405 163,973
Taxes on income 80,200 119,093 54,139
Minority interest of labor shares in income of Peruvian
Branch 5,208 43,558 18,610
--------- --------- ---------
Net earnings $ 180,512 $ 217,754 $ 91,224
========= ========= =========
Per common share amounts:
Net earnings $ 2.25 $ 3.31 $ 1.39
Dividends paid $ 1.47 $ 1.27 $ 0.33
Weighted average number of shares outstanding 80,195 65,717 65,717
The accompanying notes are an integral part of these financial statements.
A22
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED BALANCE SHEET
at December 31, 1996 1995
---- ----
(dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 173,205 $ 219,646
Marketable securities 1,000 42,453
Accounts receivable:
Trade:
Stockholders and affiliates 8,504 8,732
Other trade 70,252 80,100
Other 10,831 11,631
Inventories 118,681 103,635
Other current assets 20,637 16,648
----------- -----------
Total current assets 403,110 482,845
Net property 855,808 779,368
Other assets 20,931 9,488
----------- -----------
Total assets $ 1,279,849 $ 1,271,701
=========== ===========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 23,683 $ 17,034
Accounts payable:
Trade 23,740 32,889
Other 10,124 8,056
Other current liabilities 47,768 112,390
----------- -----------
Total current liabilities 105,315 170,369
----------- -----------
Long-term debt 82,892 76,828
Deferred income taxes 49,426 39,677
Other liabilities 4,806 6,354
----------- -----------
Total non-current liabilities 137,124 122,859
----------- -----------
Contingencies
Minority interest of labor shares in the
Peruvian Branch 22,383 24,986
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01;
1996 - 33,449,167; 1995 - 31,249,167
shares authorized;
Issued 1996-13,633,674; 1995-11,479,667 137 115
Class A Common stock, par value $0.01;
Issued and Authorized: 1996 - 66,550,833;
1995 - 68,750,833 666 688
Additional paid-in capital 265,745 265,738
Retained earnings 749,267 686,946
Treasury stock, at cost, 46,419 shares
at December 31, 1996 (788) -
------------ ------------
Total Stockholders' equity 1,015,027 953,487
------------ ------------
Total Liabilities, Minority Interest
and Stockholders' equity $ 1,279,849 $ 1,271,701
============ ============
The accompanying notes are an integral part of these financial statements.
A23
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31, 1996 1995 1994
---- ----- ----
(dollars in thousands)
OPERATING ACTIVITIES
Net earnings $ 180,512 $ 217,754 $ 91,224
Adjustments to reconcile net earnings to net
cash provided from operating activities:
Depreciation, amortization and depletion 41,623 35,952 39,742
Provision for deferred income taxes 12,043 3,168 (2,342)
Minority interest of labor shares 5,208 43,558 18,610
Net (gain) loss on sale of investments and property 110 2,473 (17,876)
Cash provided from (used for) operating assets and liabilitie
Accounts receivable 10,498 (1,939) (47,787)
Inventories (15,046) 7,992 3,502
Accounts payable and accrued liabilities (52,023) 19,667 49,400
Other operating assets and liabilities (17,444) 7,699 2,040
Foreign currency transaction gain (6,707) (5,950) (1,619)
-------- -------- --------
Net cash provided from operating activities 158,774 330,374 134,894
-------- -------- --------
INVESTING ACTIVITIES
Capital expenditures (120,803) (183,041) (181,912)
Release of restricted cash - 60,450 -
Purchase of held-to-maturity investments - (76,333) (82,461)
Proceeds from held-to-maturity investments 41,453 76,877 75,302
Sales of investments and property - 2,596 50,252
--------- --------- ---------
Net cash used for investing activities (79,350) (119,451) (138,819)
--------- --------- ---------
FINANCING ACTIVITIES
Debt incurred 47,000 62,000 104,176
Debt repaid (34,289) (86,110) (1,803)
Escrow deposits on long-term loans (10,065) 10,809 (12,026)
Dividends paid to common stockholders (117,913) (83,747) (21,415)
Distributions to minority interests (4,091) - -
Net treasury stock transactions (1,155) - -
Purchase of labor share interest (7,130) - -
Proceeds from labor share subscription - 10,944 -
Installment payment on purchase of Joint Venture
interest - - (4,200)
Net cash provided from (used for) -------- ------- --------
financing activities (127,643) (86,104) 64,732
--------- ------- --------
Effect of exchange rate changes on cash 1,778 1,491 819
Net increase (decrease) in cash and cash equivalents (46,441) 126,310 61,626
Cash and cash equivalents, beginning of year 219,646 93,336 31,710
---------- ---------- ---------
Cash and cash equivalents, end of year $ 173,205 $ 219,646 $ 93,336
========== ========== =========
The accompanying notes are an integral part of these financial statements.
A24
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1996 1995 1994
---- ---- ----
(dollars in thousands)
Common stock:
Southern Peru Copper Corporation
(formerly Southern Peru Copper Holding Company):
Common Stock:
Balance at beginning of year $ 115
Issuance of 11,480,093 shares - $ 115
Conversion from Class A to Common Stock, 2,200,000 shares 22 -
-------- -------
Balance at end of year 137 115
-------- -------
Class A Common Stock:
Balance at beginning of year 688
Issuance of 68,750,833 shares - 688
Conversion to Common Stock, 2,200,000 shares (22) -
-------- --------
Balance at end of year 666 688
-------- --------
Southern Peru Limited:
Balance at beginning of year, 76,251,193 shares 763 $ 763
Retirement of treasury stock, 10,533,700 shares (106) -
Exchange for shares of Southern Peru
Copper Corporation, 65,717,493 shares (657) -
-------- --------
Balance at end of year - 763
-------- --------
Additional paid-in capital:
Southern Peru Copper Corporation
Balance at beginning of year 265,738
Additional paid-in capital on shares issued - 81,222
Market value of shares issued in exchange for
labor shares - 184,516
Additional paid-in capital on treasury
shares issued 7 -
-------- --------
Balance at end of year 265,745 265,738
-------- --------
Southern Peru Limited:
Balance at beginning of year 122,477 122,477
Retirement of treasury stock (41,224) -
Exchange to shares of Southern Peru Copper Corporation (81,253) -
--------- --------
Balance at end of year - 122,477
--------- --------
Treasury Stock:
Southern Peru Copper Corporation
Balance at beginning of year -
Purchased (1,155)
Used for corporate purposes 367
--------
Balance at end of year (788)
--------
Southern Peru Limited:
Balance at beginning of year, 10,533,700 shares (60,000) (60,000)
Retirement of 10,533,700 shares of treasury stock 60,000 -
------- --------
Balance at end of year - (60,000)
------- --------
Retained earnings:
Balance at beginning of year 686,946 571,609 501,800
Net earnings 180,512 217,754 91,224
Dividends paid (117,913) (83,747) (21,415)
Stock awards (278) - -
Retirement of treasury stock - (18,670) -
--------- -------- ---------
Balance at end of year 749,267 686,946 571,609
--------- -------- ---------
Total stockholders' equity $1,015,027 $ 953,487 $ 634,849
========== ========= =========
The accompanying notes are an integral part of these financial statements.
A25
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 its 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 reclassifications have been made in the financial
statements from amounts previously reported to conform to the current year's
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. Sales
are recognized when title passes. Pricing is based on prevailing monthly average
London Metal Exchange ("LME") copper prices for a quotational period, generally
being the month of, the month prior or the month following the actual or
contractual month of shipment or delivery according to the terms of the
contracts. Price estimates used for provisionally priced sales are based on
prices in effect at the time of shipment or period end prices, if lower, and
these estimates are subject to change during the settlement period. The Company
sells copper in blister and refined form at industry standard commercial terms.
Net sales include, principally the invoiced value of copper, silver, molybdenum
and, in 1996, gains from the sale or settlement of copper put options.
Cash equivalents and marketable securities:
The Company considers all highly liquid investments with a maturity of three
months or less, when purchased, to be cash equivalents. Marketable securities
include liquid investments with a maturity, when purchased, of more than three
months and are carried at cost, which approximates market value.
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 stated at cost or net realizable value. During 1995, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement requires that long-lived assets, certain identifiable
intangibles and goodwill related to those assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. The 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. Application of the statement had no impact in 1996 or
1995. 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.
A26
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. The cost of major mine development programs at existing mines, the cost
of bringing new mineral properties into production and the cost of mineral lands
are capitalized and charged to earnings on the units-of-production method using
proven and probable ore reserves.
Maintenance, repairs, normal development costs at existing mines and gains or
losses on assets retired or sold are reflected in earnings as incurred. The cost
of renewals is capitalized and the property unit being replaced is retired. The
cost of betterments is capitalized. General and administrative costs attributed
to mining, exploration and development are expensed as incurred.
Financial Instruments:
Depending on the market fundamentals of a metal and other conditions, the
Company may purchase 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 production is sold and are reported as a
component of the underlying transaction.
Exploration:
Tangible and intangible costs incurred in the search for mineral properties are
charged against earnings when incurred.
2. Exchange Offer
Southern Peru Copper Holding Company, (the "Holding Company"), was incorporated
on September 7, 1995, pursuant to the General Corporation Law of the State of
Delaware for the purpose of conducting an exchange offer of its common stock,
par value $0.01 per share, for any and all labor shares of the Peruvian Branch
(the "Branch") of Southern Peru Copper Corporation (the "Operating Company"). In
connection with the exchange offer, the Operating Company changed its name to
Southern Peru Limited ("SP Limited") and the Holding Company changed its name to
Southern Peru Copper Corporation (the "Company").
The Holding Company offered to exchange one share of its common stock for four
S-1 labor shares and one share of common stock for five S-2 labor shares. The
exchange offer expired on December 29, 1995, with 80.8% of the labor shares
tendered which reduced the interest of labor shares from 17.3% to 3.3%. At
December 31, 1996, the interest of labor shares was 2.8%. The common stock is
listed on the New York Stock Exchange and the Lima Stock Exchange and trading
commenced January 5, 1996.
In addition, the stockholders of SP Limited exchanged 65,717,493 of their common
stock for 68,750,833 Class A common stock in the Company.
With the completion of the exchange offer, the Company has outstanding two
classes of common stock; the common stock exchanged for labor shares and Class A
common stock which at December 31, 1996 represent 17% and 83% of the common
equity of the Company, respectively. Holders of common stock are entitled to one
vote per share and holders of Class A common stock are entitled to five votes
per share except for the election of directors and as required by law.
A27
The exchange of common stock for labor shares was accounted for as a purchase of
a minority interest. The value of the common stock issued in the exchange (based
on the average per share trading value for the three business days ended January
9, 1996) plus issuance costs exceeded the carrying value of the minority
interests acquired by $82.0 million, net of income taxes. The increase in value
was assigned to proven and probable sulfide and leachable ore reserves and
mineralized material which is being amortized based on production, and to metal
inventory.
The following table provides the comparative unaudited proforma 1995 earnings
information, as if the exchange offer was completed on January 1, 1995.
1995
(Unaudited)
Historical Proforma
(in millions, except per share data)
Net sales $ 928.8 $ 928.8
------ ------
Earnings before taxes on
income and minority interest
of labor shares 380.4 370.7(a)
Taxes on income 119.1 118.9(b)
Minority interest of labor
shares in Peruvian Branch 43.5 7.7(c)
------ ------
Net earnings $ 217.8 $ 244.1
====== ======
Net earnings per share $ 3.31 $ 3.04
Cash dividends paid per share $ 1.27 $ 1.04
Weighted average number of
shares outstanding 65.7 80.2
a) The market value of the common stock issued for labor shares tendered
pursuant to the exchange offer was in excess of the book value of the
minority interest of such labor shares. This excess was assigned to proven
and probable mineral reserves, mineralized material and to metal inventory.
Proforma earnings reflect the amortization of the excess of market value
over book value which was assigned to mineral reserves and mineralized
material, based on actual copper production and a charge to cost of
products sold of the excess amount which would have been assigned to metal
inventory at January 1, 1995.
b) Reflects the reduction of the deferred income taxes related to the
amortization of excess of the market value of common stock issued for labor
shares tendered pursuant to the exchange offer over the book value of the
minority interest of such labor shares.
c) Reflects the reduction of the minority interest of the labor shares
tendered pursuant to the exchange offer.
A28
3. Impact of New Accounting Statement
The American Institute of Certified Public Accountants issued Statement of
Position 96-1, "Environmental Remediation Liabilities" ("SOP 96-1") in October
1996. SOP 96-1 provides authoritative guidance on specific accounting issues in
connection with recognizing, measuring and disclosing environmental remediation
liabilities. Application of SOP 96-1 in the fourth quarter of 1996 had no effect
on the Company's financial statements.
4. 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 resulting from foreign currency transactions are included in "Other
income" and amounted to $6.7 million, $6.0 million and $1.6 million in 1996,
1995 and 1994, respectively.
5. Investments
In 1995, Fomenta S.A., a wholly owned Peruvian subsidiary, sold its 28.5%
interest in Metalurgica Peruana S.A., ("MEPSA"), for $1.4 million. The sale of
MEPSA, carried at cost, resulted in a pre-tax gain of $1.3 million.
During 1994, the Company sold three investments for $50.3 million. The sale of
these investments, primarily indirect interests in other Peruvian mining
companies, carried at cost, resulted in a pre-tax gain of $18.4 million.
6. Acquisition
On May 31, 1994, the Company purchased the Peruvian government owned Minero Peru
Ilo refinery for $65.0 million in cash. The purchase price was primarily
allocated to supplies inventory ($14.9 million) and fixed assets ($51.2 million)
based on their fair values. The Company also committed to make an additional
$20.2 million of capital improvements over three years. The Company had
substantially completed this commitment at December 31, 1996. Prior to the
acquisition, the Company was required to toll-refine copper under a contract
with Minero Peru. The costs of operating the refinery have been included in the
consolidated operating results since the date of acquisition.
7. Taxes on Income
The components of the provision for taxes on income are as follows:
For the years ended December 31, 1996 1995 1994
---- ---- ----
(dollars in millions)
U.S. Federal and state $ 5.3 $ 4.6 $ 7.3
------- ------- -------
Foreign:
Current 62.9 111.3 49.1
Deferred 12.0 3.2 (2.3)
------- ------- -------
Foreign 74.9 114.5 46.8
------- ------- -------
Total provision for income taxes $ 80.2 $ 119.1 $ 54.1
======= ======= =======
Total taxes paid were $123.4 million, $80.1 million and $42.4 million in
1996, 1995 and 1994, respectively.
A29
Reconciliation of the statutory income tax rate to the effective income tax
rate is as follows:
For the years ended December 31, 1996 1995 1994
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 (25.3) (27.9) (14.1)
Percentage depletion (9.0) (6.6) (12.5)
Income not deductible (not taxable)
in Peru (1.8) 0.1 2.2
Effect of labor shares - - (4.0)
Other 1.3 0.7 (3.6)
----- ----- -----
Effective income tax rate 30.2% 31.3% 33.0%
===== ===== =====
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, 1996 1995
(dollars in millions)
Current:
Accounts receivable $ 0.5 $ 1.5
Inventories 0.1 0.1
----- -----
Net deferred tax assets 0.6 1.6
----- -----
Non-current:
Foreign tax credit carryforwards 69.4 80.8
Alternative minimum tax ("AMT") credit carryforwards 6.8 5.8
Property, plant and equipment (48.7) (38.8)
Other (0.7) (0.9)
Valuation allowance for deferred tax assets (76.2) (86.6)
------ ------
Net deferred tax liabilities (49.4) (39.7)
------ ------
Total net deferred tax liabilities $ (48.8) $ (38.1)
======== ========
At December 31, 1996, the foreign tax credit carryforward available to reduce
possible future U.S. income taxes amounted to $69.4 million which expires as
follows: $16.8 million in 1998, $13.6 million in 1999 and $39.0 million in 2001.
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 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 decrease in the valuation
allowance of $10.4 million from 1995 to 1996 is attributable to the expiration
of foreign tax credits in 1996.
Peruvian value added taxes paid are recorded as prepaid expenses and are
utilized to pay Peruvian income taxes or are refunded by the Peruvian tax
department. The carrying value of these Peruvian tax credits approximates their
market value.
A30
8. Net Sales
Net sales were to the following customers:
For the years ended December 31, 1996 1995 1994
---- ---- ----
(dollars in millions)
S.A. Sogem, N.V. (under a long-term
Supply contract, see below) $ 58.9 $ 120.8 $ 81.8
Japanese Group (a group of Japanese
Customers who purchased under
a single sales contract) - 7.1 78.6
Others (none of which are individually
10% or more of annual sales) 694.1 800.9 541.3
-------- ------- -------
Net sales $ 753.0 $ 928.8 $ 701.7
======= ======= =======
At December 31, 1996, the Company has recorded sales of 68.2 million pounds of
copper at a provisional price of $1.02 per pound. These sales are subject to
final pricing based on the average monthly LME copper price in the month of
final settlement which will occur principally in the first quarter of 1997.
Under the terms of a sales contract with Mitsui & Co. Ltd. ("Mitsui"), the
Company is required to supply Mitsui, at its option, up to 26,455 tons of copper
cathodes annually for a seven-year period from January 1, 1994 through December
31, 2000. Pricing of the cathodes is based upon the LME monthly average
settlement price plus a producer premium for refined copper cathodes which is
agreed upon annually based on world market terms.
Under the terms of a sales contract with Union Miniere, the Company is required
to supply Union Miniere through its agent, S.A. Sogem N.V., with 46,300 tons of
blister copper annually for a ten-year period from January 1, 1994, through
December 31, 2003. 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 agreed upon annually based on world market
terms.
9. Financial Instruments
Depending on the market fundamentals of a metal and other conditions, the
Company may purchase 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. 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, 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.
For the full year 1996, the Company realized pre-tax gains of $16.7 million as a
result of its copper price protection program, of which $11.1 million was
recognized in 1996. The remaining $5.6 million will be recognized in the first
quarter of 1997 when the underlying production is sold. Copper put options with
a cost of $1.2 million expired during the first six months of 1996. The
recognized pre-tax gains (losses) of the Company's metal hedging activities, net
of transaction costs were $9.9 million, $(2.1) million and $(1.8) million in
1996, 1995 and 1994, respectively.
A31
The estimated fair values of the Company's financial instruments are:
At December 31, 1996 1995
(dollars in millions) Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Cash and cash equivalents $ 173.2 $ 173.2 $ 219.6 $ 219.6
Marketable securities -
Held to Maturity 1.0 1.0 42.5 42.5
Put Options - - 3.2 1.6
Liabilities:
Long-term Debt $ 106.6 $ 102.3 $ 93.9 $ 87.8
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents - The carrying amount approximates fair value because
of the short maturity of those instruments.
Marketable securities - The carrying amount and fair value are reported at
amortized cost since these securities are to be held to maturity.
Put options - Fair value is an estimate based on relevant market information
such as: volatility of similar options, futures prices and the contracted strike
price.
Long-term debt - The fair value is based on the quoted market prices for the
same or similar issues or the carrying value is used where a market price is
unavailable.
10. Workers' Participation
Provisions for workers' participation are calculated at 8% of pre-tax Branch
earnings as required by Peruvian law. The amount is calculated under Peruvian
GAAP and cannot, therefore, be directly derived from the consolidated financial
statements which are prepared in accordance with U.S. GAAP. This participation
is expensed during the year. The Company distributes the accrued participation
to workers following the final results for the year.
11. Minority Interest of Labor Shares
The minority interest of the labor shares is based on the earnings of the
Company's Peruvian Branch. The amount is calculated under Peruvian GAAP and
cannot therefore be directly derived from the consolidated financial statements
which are prepared in accordance with U.S. GAAP.
Under Peruvian law, the holders of the labor shares are entitled to preemptive
rights, which require the Branch to offer holders the right to purchase a
sufficient number of shares to maintain their existing ownership percentage of
the Branch whenever the Company invests additional capital in the Branch. In
March 1995, the Company invested $61.1 million in the Branch as a capital
contribution to Branch equity (see note 20). Labor shareholders subscribed to
3.4 million new shares, with a contribution of $10.9 million, representing 84.2%
of the total possible subscription. Since full subscription rights were not
exercised, labor share participation in the Branch decreased from 17.47% to
17.31%.
A32
On November 29, 1995, the Company announced an offer to exchange the common
stock of the Company for any and all of the labor shares of the Branch. The
offer expired on December 29, 1995, and 46.6 million labor shares or 80.8% of
the total, were exchanged for common stock decreasing the labor share
participation from 17.3% to 3.3%.
During 1996, the Company acquired approximately 1.8 million labor shares
representing a 0.5% interest in the Branch at a total cost of $7.1 million. The
carrying value of minority interest was reduced by $4.4 million and the excess
paid over carrying value of $2.7 million was assigned to proven and probable
sulfide and leachable ore reserves and mineralized material and is being
amortized based on production. As a result of the acquisition, the remaining
labor shareholders hold a 2.8% interest in the Branch at December 31, 1996 and
are entitled to participate in 2.8% of the distributions of the Branch. The 2.8%
share of the Branch's after-tax earnings attributable to the labor shares is
recorded as a minority interest in the Company's financial statements.
12. Inventories
At December 31, 1996 1995
---- ----
(dollars in millions)
Metals:
Finished goods $ 2.4 $ 2.0
Work-in-process 47.1 33.1
Supplies, net of reserves 69.2 68.5
---- ----
Total inventories $ 118.7 $ 103.6
====== ======
13. Property
At December 31, 1996 1995
---- ----
(dollars in millions)
Buildings and equipment $ 1,503.3 $ 1,391.7
Mineral Land 235.3 237.9
Land, other than mineral 0.9 0.9
-------- --------
Total property 1,739.5 1,630.5
Accumulated depreciation 883.7 851.1
-------- --------
Net property $ 855.8 $ 779.4
======== ========
14. Other Current Liabilities
At December 31, 1996 1995
---- ----
(dollars in millions)
Taxes on income $ 8.9 $ 59.7
Provision for workers' participation 16.7 31.1
Accrued severance pay, current portion 3.1 3.7
Salaries and wages 8.1 8.0
Other 11.0 9.9
------ ------
Total other current liabilities $ 47.8 $ 112.4
====== ======
A33
Debt and Available Credit Facilities
Long-term debt at December 31, consists of: 1996 1995
---- ----
(dollars in millions)
EXIM Bank credit agreement, interest at 6.43%,
principal due 1996-2001 $ 26.3 $ 32.1
CAF credit agreement, interest at an average of 9.1%
as of December 31, 1996, principal due 1996-2001 35.3 43.2
Mitsui credit agreement, interest at LIBOR + 2.87%,
principal due 1996-2001 45.0 3.2
Term loans, interest at prime + 3.00% - 15.4
------- ------
Total debt 106.6 93.9
Less, current portion 23.7 17.1
------ ------
Total long-term debt $ 82.9 $ 76.8
====== ======
The fair market value of long-term debt was $102.3 million at December 31, 1996
and $87.8 million at December 31, 1995, and was determined using discounted cash
flow analysis on the fixed-rate debt. The fair market value of the variable-rate
debt approximates its carrying amount.
Aggregate maturities of the borrowings outstanding at December 31, 1996, are as
follows (in millions):
1997 $ 23.7
1998 23.7
1999 23.7
2000 23.7
2001 11.8
------
Total $ 106.6
=======
At December 31, 1996, there were no unused and available lines of credit
available to the Company under its long-term loan facilities.
Under the most restrictive covenant of the Company's loan agreements, additional
indebtedness of $752 million would have been permitted at December 31, 1996.
Interest paid for borrowings (including amounts capitalized of $1.8 million and
$1.6 million in 1995 and 1994, respectively) was $10.8 million, $14.4 million
and $10.5 million in 1996, 1995 and 1994, respectively.
Fees paid for loan agreements were $1.6 million and $3.5 million in 1995 and
1994, respectively, and are amortized over the respective terms of the loans. On
July 21, 1995, the Company prepaid substantially all of the outstanding balance
related to a $115.0 million facility resulting in a charge to interest expense
of $2.0 million for unamortized loan fees.
The financing agreements contain covenants which limit the payment of dividends
to stockholders. Under the most restrictive loan, the Company may not pay a
dividend if the aggregate amount of all dividend payments with respect to any
fiscal quarter is greater than 50% of net income (as defined therein) of the
Company for such fiscal quarter. However, this agreement permits dividends with
respect to the final quarter of each fiscal year to the extent that total
dividends for such fiscal year do not exceed 50% of the first $50 million of
earnings plus 100% of earnings in excess of $50 million for such fiscal year.
These dividend restrictions directly apply to SP Limited as the issuer of the
debt. However, on consolidation they also apply to SPCC. Net assets of SP
Limited unavailable for the payment of dividends to SPCC totaled $821 million at
December 31, 1996.
A34
The financing agreements are collateralized by pledges of receivables from
34,200 tons of copper per year and liens on certain product inventory, fixed
assets and mining concessions. 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. Any reduction of ASARCO Incorporated's ("Asarco") voting
interest in the Company to less than a majority would constitute an event of
default under one of the financing agreements. The Company is in compliance with
the various loan covenants at December 31, 1996. Included in Other Assets are
$11.3 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.
16.Benefit Plans
The Company has two noncontributory, defined benefit pension plans 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 primarily invested in immediate participation guarantee
contracts, mutual funds, stock index funds and money market instruments.
Effective January 1, 1997 one of the Company's pension plans, which provides
benefits to non-U.S. expatriate employees, was amended to cease future benefit
accruals. Accordingly, those participants became eligible for future benefits
under the Company's other pension plan.
Net pension costs consist of:
For the years ended December 31, 1996 1995 1994
---- ---- ----
(dollars in millions)
Service cost $ 0.5 $ 0.3 $ 0.5
Interest cost on projected benefit obligation 0.5 0.4 0.4
Actual return on plan assets (0.6) (0.4) 0.4
Other items 0.4 0.3 (0.5)
----- ----- ------
Net pension cost $ 0.8 $ 0.6 $ 0.8
===== ===== =====
A35
The funded status of the plans using the projected unit credit method is:
At December 31, 1996 1995
---- ----
(dollars in millions)
Assets and obligations:
Vested benefit obligation $ 5.3 $ 5.2
Nonvested benefits 0.5 0.5
----- -----
Accumulated benefit obligation 5.8 5.7
Plan assets at fair value 5.0 4.4
----- -----
Plan assets less than accumulated
benefit obligation 0.8 1.3
=== ===
Projected benefit obligation (PBO) 7.2 7.1
Plan assets at fair value 5.0 4.4
----- -----
Plan assets less than PBO 2.2 2.7
Minimum liability 0.5 1.4
Prior service cost 0.1 0.1
Initial net plan obligation (2.1) (2.3)
Effect of changes in assumptions and
actuarial gains and losses 0.2 (0.5)
----- ------
Pension liability reflected on
consolidated balance sheet $ 0.9 $ 1.4
===== =====
The actuarial computations are based upon a discount rate on benefit obligations
of 7%, an expected long-term rate of return on plan assets of 8% and expected
annual salary increases of 4%.
Postretirement Benefits:
The postretirement 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 are
permanently residing in the United States and who contribute amounts as defined
by the plan.
Net periodic postretirement benefit costs include the following:
For the year ended December 31, 1996
(dollars in millions)
Service and interest cost $0.1
Amortization of prior service cost 0.1
---
Net periodic postretirement benefit cost $0.2
===
A36
The following sets forth the plan's status reconciled with amounts reported in
the Consolidated Balance Sheet:
At December 31. 1996
----
(dollars in millions)
Accumulated postretirement benefit obligation ("APBO")
Retirees $ 0.2
Fully eligible active plan participants 0.1
Other plan participants 0.6
---
Total APBO 0.9
Item not yet recognized in earnings:
Prior service cost (0.7)
-----
Postretirement benefit obligation $ 0.2
-----
The annual assumed rate of increase in the per capita cost of covered benefits
(i.e. health cost trend rate) is 6% for 1997 and is assumed to decrease
gradually to 5% by 1999 and remain at that level thereafter. 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 in each year would increase the accumulated postretirement benefit
obligation at December 31, 1996 by $0.1 million and would have no material
effect on the net periodic postretirement benefit costs for 1996. The discount
rate used in determining the accumulated postretirement benefit obligation was
7% at December 31, 1996. The plan is unfunded.
17. Stockholders' Equity
Common Stock:
The stockholders of the Company at December 31, 1996 were:
Percent of Total
Outstanding Number of
Shares Shares
Class A Common Shares:
ASARCO Incorporated 43,348,949 54.06%
Cerro Trading Company, Inc. 12,028,088 15.00
Phelps Dodge Overseas Capital Corporation 11,173,796 13.94
---------- -----
66,550,833 83.00%
Common Shares 13,633,674 17.00%
---------- -----
Total 80,184,507 100.00%
========== ======
On February 27, 1996, Cerro Trading Company, Inc. transferred 2,200,000 Class
A common stock shares to The Pritzker Family Philanthropic Fund. In accordance
with the Company's Certificate of Incorporation these shares were
automatically converted into common stock of the Company.
A37
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.
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, 1996,
927,110 shares are available for future grants under this plan.
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. 100,000 shares have been reserved for awards under
the Directors Plan. At December 31, 1996, 5,800 shares have been awarded under
this plan.
The Company has elected the disclosure only requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost
has been recognized for the Stock Incentive Plan. Had compensation cost for
the Company's Stock Incentive Plan been determined based on the fair value at
the grant date for awards in 1996 consistent with the provisions of SFAS No.
123, the effect on the Company's net earnings and earnings per share would
have been immaterial.
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 1996: dividend yield of 6.57%; expected volatility of 28.4%; risk-free
interest rate of 6.17%; and expected life of 6.9 years.
18.Related Parties
Asarco, a stockholder of the Company, provides principally legal, tax, treasury
and administrative support services to the Company. The amounts paid to Asarco
for these services were $0.8 million, $0.3 million and $0.2 million in 1996,
1995, and 1994, respectively.
A38
19.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 adversely be affected by future actions by such
government. Substantially all of the sales of the Company's products are
exported from Peru to customers principally in Europe, the Pacific Rim 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,
1996, the Company had invested 40.9% of its cash equivalents and marketable
securities with Peruvian banks, of which 21.7% of this amount was invested with
one institution.
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 56.6% of the trade
accounts receivable at December 31, 1996 of which one customer represented
11.5%.
20. Commitments and Contingencies
Cuajone Investment Recovery
In December 1991, the Company and the Government of Peru signed an agreement the
("1991 Agreement") resolving all open issues concerning the conclusion of the
investment recovery contract which governed the development and operation of the
Cuajone mine. The Company agreed to undertake an investment program over the
five years, 1992-1996, and the Peruvian Government agreed not to discriminate
against the Company in comparison with treatment given to other mining
companies. As part of the 1991 Agreement, in 1991 the Company transferred $55.0
million from its accounts in New York to an interest-bearing account with the
Central Reserve Bank of Peru, to be withdrawn by the Company at its discretion
solely for application to the investment program. In March 1995, these funds,
aggregating $61.1 million, including accumulated interest, were transferred to
the Branch as a capital contribution and used for the capital spending program.
In conjunction with the transfer, labor shareholders contributed $10.9 million
to the capital of the Branch.
At December 31, 1996, the Company had expended $443.6 million under the
five-year capital program agreed to with the Peruvian Government and has met its
obligations under the agreement.
A39
Environmental
As part of the 1991 Agreement, the Company has made a significant number of
environmental capital expenditures, including, a sulfuric acid plant at the Ilo
smelter for partial recapture of emissions of sulfur dioxide, completed in 1995
at a cost of $103.0 million, a sewage treatment plant at Ilo, completed in 1994
at a cost of $2.0 million, and a tailings storage facility at Quebrada Honda,
which was completed in 1996 at a cost of $40.8 million. The Company also has
incurred capital costs of $3.0 million for environmental projects committed with
the Ilo refinery acquisition. In addition, in April 1996 the Company began a $35
million expansion of the Ilo sulfuric acid plant. The expansion will increase
the capture of sulfur dioxide emissions from the smelter from 18% to 30% and
will also increase sulfuric acid production at the smelter to 330,000 tons per
year in 1998, the expected year of expanded plant operation. Capital
expenditures in connection with these and other environmental projects were
approximately $29.8 million in 1996.
The Company's exploration, mining, milling, smelting and refining activities are
subject to Peruvian laws and regulations, including environmental laws and
regulations, which change from time to time. The Company's recently approved
environmental compliance and management plan, PAMA, sets forth the investment to
be made by the Company to comply with current Peruvian environmental regulations
applicable to its operations. To implement the PAMA, the Company is required to
make a minimum annual investment of 1% of net annual sales until compliance is
met. The PAMA will require the Company to make significant additional capital
expenditures to achieve compliance with the maximum permissible levels for its
emission and waste discharges ("MPLs") within a period of five years, except for
environmental controls applicable to its smelter operation which must be put in
place within 10 years. The PAMA contemplates a number of environmental projects,
the largest and most capital intensive of which is the planned modernization of
the Ilo smelter. Management believes that under current Peruvian law and
regulations, compliance with the PAMA will satisfy the MPL requirements
pertaining to the Company's operations during the applicable five- or 10-year
implementation period. The Company remains, however, subject to other
environmental requirements applicable to its operations.
Litigation
In February 1993, the Mayor of Tacna brought a lawsuit against SP Limited
seeking $100 million in damages from alleged harmful deposition of tailings,
slag and smelter emissions. On May 3, 1996, the Superior Court of Tacna, Peru
affirmed the lower court's dismissal. In May 1996, the plaintiff appealed and
the case presently is before the Peruvian Supreme Court. There is generally no
further right of appeal, however, the Peruvian Supreme Court may grant
discretionary review on limited issues in exceptional cases.
In April 1996, SP Limited was served with a complaint filed in Peru by
approximately 800 former employees challenging the accounting of the Company's
Peruvian Branch and its allocation of financial results to the Mining Community,
the former legal entity representing workers in Peruvian mining companies, in
the 1970's. The complaint seeks the delivery of a substantial number of labor
shares of the Peruvian Branch plus dividends and contains similar allegations to
those made in a prior lawsuit dismissed in September 1995. In August 1996, 64
additional former employees filed a similar lawsuit.
A40
SP Limited, other present and former corporate shareholders of SP Limited and
certain other companies are defendants in a lawsuit in federal district court in
Corpus Christi, Texas brought in September 1995 by 698 Peruvian plaintiffs
seeking damages for personal injury and property damage allegedly caused by the
operations of SP Limited in Peru. Plaintiffs have appealed from the district
court order dismissing the complaint and from an earlier order of that court
denying plaintiffs' motion to remand the case to state court. Oral arguments
were heard in December 1996 and the appellate court's decision is pending.
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.
21. Summarized Financial Information of Significant Subsidiary
The condensed consolidated financial information for Southern Peru Limited, a
wholly owned subsidiary of Southern Peru Copper Corporation, included in the
consolidated financial statements of the Company, is summarized below:
Statement of Earnings and Cash Flow
for the years ended December 31, 1996 1995 1994
---- ---- ----
(dollars in millions)
Earnings:
Net sales $753.0 $928.8 $701.7
Operating income 248.8 366.7 142.0
Net earnings $180.5 $217.8 $91.2
Cash Flow:
Operating activities $158.8 $330.4 $134.9
Investing activities (79.3) (119.5) (138.8)
Financing activities (127.6) (86.1) 64.7
Balance Sheet
At December 31, 1996 1995
---- ----
(dollars in millions)
Current assets $403.1 $482.8
Non current assets 876.7 788.9
Current liabilities 105.3 170.4
Noncurrent liabilities 137.1 122.9
Minority interest 22.4 25.0
Stockholders' equity 1,015.0 953.5
Southern Peru Limited, a wholly owned subsidiary of Southern Peru Copper
Corporation, holds all the operating assets and liabilities of the Company and
does not hold any other operating assets. Accordingly, the effect of the
exchange offer described in note 2 has been reflected in the summary financial
information presented above.
A41
22. Subsequent Event:
On February 21, 1997, the Company entered into agreements with Powerfin Peru
S.A., a wholly owned subsidiary of Tractebel S.A. ("Tractebel") for the sale of
a new turbine at its Ilo power plant and a twenty year power purchase agreement
for its copper operations in Peru. Negotiations are being finalized covering the
sale of the Company's existing power plant assets. Closing of the transaction is
subject to obtaining necessary Peruvian government approvals.
Unaudited Quarterly Data
Quarters
(in millions, except per share data and per share prices)
1996 1995
---- ----
1st 2nd 3rd 4th Year 1st 2nd 3rd 4th Year
--- --- --- --- ---- --- --- --- --- ----
Net sales $196.4 $173.2 $180.5 $202.9 $753.0 $204.7 $212.2 $270.6 $241.3 $928.8
Operating
Income $ 72.1 $ 64.1 $ 54.1 $ 58.5 $248.8 $ 77.2 $ 75.4 $112.6 $101.5 $366.7
Net earnings $ 49.1 $ 45.2 $ 37.9 $ 48.3 $180.5 $ 44.4 $ 42.8 $ 62.2 $ 68.4 $217.8
Net earnings
per share (a)$ 0.61 $ 0.56 $ 0.47 $ 0.60 $ 2.25 $ 0.65 $ 0.67 $ 0.95 $ 1.04 $ 3.31
(a) Net earnings per share in 1996, reflect increased outstanding common shares
as a result of the exchange offer completed at the end of 1995. See note 2
to the financial statements.
Metal Price Sensitivity
Assuming that expected metal production and sales are achieved, 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 1997. Estimates are based on
80.2 million shares outstanding.
Copper Silver Molybdenum
Change in Metal Price $.01/lb. $1.00/oz. $1.00/lb.
Annual Change in Earnings per Share $0.05 $0.02 $0.04
A42
Report of Independent Accountants
To the Board of Directors
of Southern Peru Copper Corporation
We have audited the accompanying consolidated balance sheets of Southern Peru
Copper Corporation and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of earnings, cash flows, and changes in common
stockholders' equity for each of the three years in the period ended December
31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Southern Peru
Copper Corporation and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND LLP
New York, New York
January 28, 1997 except for
Note 22 which is as of
February 21, 1997
A43
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Items 10, 11, 12, and 13
Reference is made to the Section captioned "Executive Officers of the
Registrant" on pages A-11 to A-12. Information in response to the disclosure
requirements specified by these items appears under the captions and pages of
the 1997 Proxy Statement indicated below:
Proxy
Statement
Item Required Information Proxy Statement Section Pages
10. Directors and Executive Officers Nominees for Election as Directors Representing
Common Stock and Nominees for Election as
Directors Representing
Class A Common Stock 4-6
11. Executive Compensation Committee Reports on Executive Compensation through
Employment Agreements 12-20
Compensation of Directors and Compensation Committee
Interlocks and Insider
Participation 23
12. Security Ownership Security Ownership of Certain Beneficial Owners and
Beneficial
Ownership of Management 7-12
13. Certain Relationships Certain Transactions 21-22
and Related Transactions
The information referred to above is incorporated herein by reference.
A44
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, 1996, 1995 and 1994 A21
Consolidated Balance Sheet at December 31, 1996 and 1995
A22
Consolidated Statement of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 A23
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994 A24
Notes to Consolidated Financial Statements A25-A41
Report of Independent Accountants A42
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 By-Laws, as last amended on February 9, 1996
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
A45
10.4 Supplemental Retirement Plan of the Company
10.5 Stock Incentive Plan of the Company
10.6 Form of Directors Stock Award Plan of the Company
10.7 Form of Deferred Fee Plan for Directors
10.8 Form of Agreement Accepting Membership in the Plan, containing
text of Retirement Plan and Trust for Selected Employees
11. Statement re Computation of Earnings per Share
21.1 Subsidiaries of the Company
23.1 Consent of Independent Accountants
The exhibits listed as 10.3 through 10.8 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 1996 and the first
quarter of 1997:
None.
(c) Exhibits - The exhibits to this Form 10-K are listed on the Exhibit Index
on page B-1. Copies of the following exhibits are filed with this Form
10-K:
11. Statement re Computation of Earnings per Share
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.
A46
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
By: /s/ Charles G. Preble
----------------------
Charles G. Preble
President and Chief Executive
Officer
Dated:
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.
Signature Title
/s/ Richard de J. Osborne Chairman of the Board and Director
----------------------
Richard de J. Osborne
/s/ Charles G. Preble President, Chief Executive Officer and Director
Charles G. Preble (principal executive officer)
/s/ Ronald J. O'Keefe Executive Vice President and Chief Financial Officer
Ronald J. O'Keefe (principal financial officer)
/s/ Brendan M. O'Grady Comptroller
Brendan M. O'Grady (principal accounting officer)
/s/ Everett E. Briggs Director
Everett E. Briggs
/s/ Jaime Claro Director
Jaime Claro
/s/ Augustus B. Kinsolving Director
Augustus B. Kinsolving
/s/ Francis R. McAllister Director
Francis R. McAllister
/s/ John F. McGillicuddy Director
John F. McGillicuddy
/s/ Kevin R. Morano Director
Kevin R. Morano
/s/ Robert J. Muth Director
Robert J. Muth
A47
/s/ Robert M. Novotny Director
Robert M. Novotny
/s/ Robert A. Pritzker Director
Robert A. Pritzker
/s/ Michael O. Varner Director
Michael O. Varner
/s/ J. Steven Whisler Director
J. Steven Whisler
/s/ David B. Woodbury Director
David B. Woodbury
/s/ Douglas C. Yearley Director
Douglas C. Yearley
Dated: March 28, 1997
B1
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) B 2
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 By-Laws, as last amended on February 9, 1996
(Filed as Exhibit 3.4 to the Company's 1995 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
(Filed as Exhibit 10.12 to the Company's Form S-4 and incorporated
herein by reference)
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. 33-32736) 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)
B2
10.7 Form of Deferred Fee Plan for Directors
(Filed as Exhibit 10.8 to the Company's 1995 Annual Report on Form
10-K and incorporated herein by reference)
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)
11. Statement re Computation of Earnings per Share
21.1 Subsidiaries of the Company
23.1 Consent of Independent Accountants
Form 10K
Exhibit 11 Statement re Computation of Earnings per Share
This calculation is submitted in accordance with regulation S-K item 601(b)(11).
Fully Diluted Earnings per Common Share
(in thousands, except per share amounts)
For the years ended December 31,
1996 1995 1994
---- ---- ----
Net earnings applicable to common stock $ 180,512 $ 217,754 $ 91,224
========= ========= ========
Weighted average number of common shares outstanding 80,195 65,717 65,717
Shares issuable from assumed exercise of Stock Options 57 - -
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Weighted average number of common shares outstanding, 80,252 65,717 65,717
adjusted
Fully diluted earnings per share:
Net earnings applicable to common stock $ 2.25 $ 3.31 $ 1.39
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Primary earnings per share
Net earnings applicable to common stock $ 2.25 $ 3.31 $ 1.39
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Exhibit 21.1
SOUTHERN PERU COPPER CORPORATION
Subsidiaries
(More than 50% ownership)
Percentage of
voting
securities owned Key to
or other bases of notes
Name of Company control below
PARENT: ASARCO Incorporated (New Jersey)
Registrant: Southern Peru Copper Corporation (Delaware)
Southern Peru Limited (Delaware) 100.0 (A)
Fomenta, S.A. (Peru) 99.50 (A)
Pegasus Travels, S.A. (Peru) 90.0 (A)
Logistics Services Incorporated (Delaware) 100.0 (A)
LSI-Peru, S.A. (Peru) 98.18 (A)
Global Natural Resources Inc. (Delaware) 100.0 (C)
Multimines Corporation (Delaware) 100.0 (B)
Multimines Insurance Company, Ltd. (Bermuda) 100.0 (A)
Recursos e Inversiones Andinas, S. A. (Peru) 99.99 (A)
Compania Minera Los Tolmos, S.A. (Peru) 98.05 (B)
Inversiones Mineras El Puente, S.A. (Peru) 99.88 (B)
Pacific Mining Investments Ltd. (Cayman Islands) 100.0 (C)
(A) Included in financial statements of SPCC and consolidated subsidiaries at
December 31, 1996.
(B) Excluded from financial statements of SPCC and consolidated subsidiaries
(these companies are not in the aggregate considered significant);
(C) Inactive (having no assets or liabilities or undergoing liquidation);
Exhibit 23.1
Form 10-K
Consent of Independent Accountants
We consent to the incorporation by reference in the prospectus constituting part
of the Registration Statement on Form S-8 (File No. 33-32736) of Southern Peru
Copper Corporation of our report dated January 28, 1997, except for Note 22
which is as of February 21, 1997, on our audit of the consolidated financial
statements of Southern Peru Copper Corporation and Subsidiaries, which report
appears on page A42 of this Annual Report on Form 10-K.
We also consent to the reference to our Firm as experts in the prospectus
referred to in the preceding paragraph only insofar as such reference relates to
our report appearing on page A42 of this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
New York, New York
March 28, 1997