SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
1998
Second Quarter
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1998 Commission file number 1-14066
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SOUTHERN PERU COPPER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3849074
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
180 Maiden Lane, New York, N.Y. 10038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 212-510-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
As of July 31, 1998 there were outstanding 13,949,612 shares of Southern Peru
Copper Corporation common stock, par value $0.01 per share. There were also
outstanding 65,900,833 shares of Southern Peru Copper Corporation Class A common
stock, par value $0.01 per share.
Southern Peru Copper Corporation
and Subsidiaries
INDEX TO FORM 10-Q
Page No.
Part I. Financial Information:
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statement of Earnings
Three Months and Six Months 2
Ended June 30, 1998 and 1997
Condensed Consolidated Balance Sheet
June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statement of Cash Flows
Three Months and Six Months 4
Ended June 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8-13
Report of Independent Accountants 14
Part II. Other Information:
Item 6(a) Exhibits on Form 10-Q 15
Exhibit 11 Statement re Computation of Earnings per Share
Signatures 16
Exhibit I - Independent Accountants' Awareness Letter
- 1 -
Southern Peru Copper Corporation
and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)
3 Months Ended 6 Months Ended
June 30, June 30,
1998 1997 1998 1997
(in thousands, except for per share amounts)
Net sales:
Stockholders and affiliates $ 6,392 $ 17,446 $ 12,376 $ 38,415
Others 146,147 208,776 292,558 402,593
--------- --------- --------- ---------
Total net sales 152,539 226,222 304,934 441,008
--------- --------- --------- ---------
Operating costs and expenses:
Cost of sales 101,630 120,701 204,203 230,825
Administrative and other expenses 11,262 11,651 27,048 23,103
Depreciation and depletion 15,687 11,608 29,377 23,107
Provision for workers' participation 3,296 5,482 5,182 10,875
Exploration expense 976 1,648 2,168 2,712
--------- --------- --------- ---------
Total operating costs and expenses 132,851 151,090 267,978 290,622
--------- --------- --------- ---------
Operating income 19,688 75,132 36,956 150,386
Interest income 4,036 4,806 8,983 7,679
Other income 7,289 2,147 8,909 3,624
Interest expense (3,837) (4,828) (8,244) (7,268)
---------- ---------- ---------- ----------
Earnings before taxes on income
and minority interest of labor shares 27,176 77,257 46,604 154,421
Taxes on income 8,598 15,782 14,913 35,587
Minority interest of labor shares in
income of Peruvian Branch 205 1,875 398 3,418
---------- --------- --------- ---------
Net earnings $ 18,373 $ 59,600 $ 31,293 $ 115,416
========= ========= ========= =========
Per common share amounts:
Net earnings - basic and diluted $ 0.23 $ 0.74 $ 0.39 $ 1.44
Dividends paid $ 0.08 $ 0.35 $ 0.28 $ 0.65
Weighted average common shares outstanding:
Basic 79,850 80,202 79,936 80,197
Diluted 79,859 80,202 79,943 80,197
The accompanying notes are an integral part of these financial statements.
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Southern Peru Copper Corporation
and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
June 30, December 31,
1998 1997
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 207,198 $ 126,491
Marketable securities 51,876 204,590
Accounts receivable, net 61,203 73,764
Inventories 110,338 108,683
Other assets 57,009 48,062
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Total current assets 487,624 561,590
Net property 1,020,669 947,457
Other assets 24,960 34,278
---------- ----------
Total Assets $1,533,253 $1,543,325
========== ==========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 13,683 $ 13,683
Accounts payable 38,287 47,941
Accrued liabilities 32,764 23,490
---------- ----------
Total current liabilities 84,734 85,114
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Long-term debt 227,367 234,208
Deferred credits 36,090 58,574
Deferred income taxes 56,551 44,323
Other liabilities 7,788 4,083
---------- ----------
Total non-current liabilities 327,796 341,188
---------- ----------
Minority interest of labor shares
in the Peruvian Branch 17,164 19,385
---------- ----------
STOCKHOLDERS' EQUITY
Common stock (a) 261,077 264,078
Retained earnings 842,482 833,560
---------- ----------
Total Stockholders' Equity 1,103,559 1,097,638
---------- ----------
Total Liabilities, Minority
Interest & Stockholders' Equity $1,533,253 $1,543,325
========== ==========
(a) Common shares: Authorized 34,099 34,099
Outstanding 13,949 14,157
Class A common shares Authorized
and Outstanding 65,901 65,901
The accompanying notes are an integral part of these financial statements.
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Southern Peru Copper Corporation
and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
3 Months Ended 6 Months Ended
June 30, June 30,
1998 1997 1998 1997
(in thousands) (in thousands)
OPERATING ACTIVITIES
Net earnings $ 18,373 $ 59,600 $ 31,293 $115,416
Adjustments to reconcile net earnings to
net cash provided from operating activities:
Depreciation and depletion 15,687 11,608 29,377 23,107
Provision (benefit) for deferred income taxes 1,751 (332) 4,197 (1,955)
Minority interest of labor shares 205 1,875 398 3,418
Cash provided from (used for) operating assets and liabilities:
Accounts receivable 3,696 (4,954) 12,413 (11,594)
Inventories 2,846 (10,548) (1,655) (2,710)
Accounts payable and accrued liabilities (17,342) 28,680 (2,943) 16,674
Other operating assets and liabilities 23,319 (844) 7,464 3,609
Foreign currency transaction losses (gain) 823 (1,057) 823 (1,035)
-------- --------- -------- ---------
Net cash provided from operating activities 49,358 84,028 81,367 144,930
-------- -------- -------- --------
INVESTING ACTIVITIES
Capital expenditures (51,337) (32,258) (127,745) (61,354)
Purchases of held-to-maturity investments (21,732) (208,792) (27,189) (208,792)
Proceeds from held-to-maturity investments 87,567 - 179,903 1,000
Sales of property 2,891 41,885 3,713 41,885
-------- --------- --------- --------
Net cash provided from (used for) investing
activities 17,389 (199,165) 28,682 (227,261)
-------- ---------- --------- ---------
FINANCING ACTIVITIES
Debt repaid (6,841) (6,842) (6,841) (11,842)
Proceeds from borrowings - 200,000 - 200,000
Escrow deposits (withdrawals) on long-term loans 5,385 (12,317) 7,000 (11,878)
Dividends paid to common stockholders (6,387) (28,070) (22,370) (52,125)
Distributions to minority interest (130) (568) (526) (1,303)
Net treasury stock transactions - - (3,001) -
Purchases of labor shares (2,331) (1,550) (3,243) (4,606)
--------- ---------- --------- ---------
Net cash provided from (used for) financing activities
(10,304) 150,653 (28,981) 118,246
--------- --------- --------- --------
Effect of exchange rate changes on cash (554) 954 (361) 1,203
--------- --------- -------- --------
Increase in cash and cash equivalents 55,889 36,470 80,707 37,118
Cash and cash equivalents, at beginning of period 151,309 173,853 126,491 173,205
-------- --------- -------- --------
Cash and cash equivalents, at end of period $ 207,198 $ 210,323 $ 207,198 $ 210,323
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
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Southern Peru Copper Corporation
and Subsidiaries
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly the Company's
financial position as of June 30, 1998 and the results of operations and
cash flows for the three and six months ended June 30, 1998 and 1997.
Certain reclassifications have been made in the financial statements from
amounts previously reported. This financial data has been subjected to a
review by PricewaterhouseCoopers LLP, the Company's independent
accountants. The results of operations for the three month and six month
periods are not necessarily indicative of the results to be expected for
the full year. The accompanying condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's 1997 annual report
on Form 10-K.
B. The effective tax rate increased in 1998 compared with 1997, primarily
because in 1997 the Company recognized a reduction in its effective tax
rate as a result of a reinvestment incentive approved by the Government of
Peru in connection with the expansion of the Cuajone mine.
C. The Company's first quarter 1998 results include a $10.0 million pre-tax
charge ($6.0 million after-tax) for severance costs associated with the
Company's cost reduction program.
D. Inventories were as follows:
(in millions)
June 30, December 31,
1998 1997
Metals at lower of average cost or market:
Finished goods $ 1.4 $ 0.6
Work-in-process 48.0 45.0
Supplies at average cost, net of reserves 60.9 63.1
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Total inventories $ 110.3 $ 108.7
======= =======
E. At June 30, 1998, the Company has recorded sales of 2.9 million pounds of
copper, at a provisional price of $0.75 per pound. These sales are subject
to final pricing based on the average monthly LME copper prices in the
month of settlement in the third quarter of 1998. Pricing adjustments in
the second quarter on first quarter provisionally priced sales were
immaterial.
F. Financial Instruments:
The Company may use derivative instruments to manage its exposure to market
risk from changes in commodity prices. Derivative instruments which are
designated as hedges must be deemed effective at reducing the risk
associated with the exposure being hedged and must be designated as a hedge
at the inception of the contract.
- 5 -
Copper: Depending on market fundamentals and other conditions, the Company
may purchase put options to reduce or eliminate the risk of price declines
below the option strike price on a portion of its anticipated future
production. Put options purchased by the Company establish a minimum sales
price for the production covered by such put options and permit the Company
to participate in price increases above the option price. The cost of the
options is amortized on a straight-line basis during the period in which
the options are exercisable. Depending upon market conditions the Company
may either sell options it holds or exercise the options at maturity. Gains
or losses from the sale or exercise of options, net of unamortized
acquisition costs, are recognized in the period in which the underlying
production is sold and are reported as a component of the underlying
transaction.
Earnings for the first six months of 1998 and 1997 include pre-tax gains of
$7.2 million and $5.6 million, respectively, from copper hedging
activities. There was no copper hedging activity in the second quarter of
1998 and 1997.
At June 30, 1998, the Company held no copper put options.
Fuel swaps: The Company may enter into fuel swap agreements to limit the
effect of changes in fuel prices on its production costs. A fuel swap
establishes a fixed price for the quantity of fuel covered by the
agreement. The difference between the published price for fuel and the
price established in the contract for the month covered by the swap is
recognized in production costs. As of June 30, 1998, the Company has
entered into the following fuel swap agreements:
Contract Percent of
Quantity Price Estimated Fuel
Fuel Type Period (Barrels) (per Barrel) Requirement
--------- ------ --------- ------------ -----------
Residual Oil #6: 7/98-9/98 180,000 $12.81 60%
10/98-12/98 90,000 $13.93 30%
Diesel Fuel #2: 7/98-12/98 80,000 $21.40 27%
G. Commitments and Contingencies:
Litigation
In April 1996, Southern Peru Limited, a wholly owned subsidiary of the
Company, was served with a complaint filed in Peru by approximately 800
former employees seeking the delivery of a substantial number of labor
shares of its Peruvian Branch plus dividends. In October 1997, the Superior
Court of Lima nullified a decision of a court of first instance, which had
been adverse to Southern Peru Limited. The Superior Court remanded the case
for a new trial. Plaintiff filed an extraordinary appeal before the
Peruvian Supreme Court. The Supreme Court may grant discretionary review in
limited cases. The Supreme Court has not yet ruled as to whether it will
accept the appeal. There is also pending against Southern Peru Limited a
similar lawsuit filed by 127 additional former employees. In the third
quarter of 1997, the court of first instance dismissed their complaint. The
plaintiffs have appealed to the Superior Court of Lima.
It is the opinion of management that the outcome of the legal proceeding
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.
- 6 -
H. 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.
Separate financial statements and disclosures for Southern Peru Limited are
not presented because management has determined that such information is
not material to holders of Southern Peru Limited's debt securities.
Statements of Earnings and Cash Flows
(in millions) Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Earnings:
Net sales $152.5 $226.2 $304.9 $441.0
Operating income 19.7 75.1 37.0 150.4
Net earnings 18.4 59.6 31.3 115.4
Cash Flow:
Operating activities $ 49.4 $ 84.0 $ 81.4 $144.9
Investing activities 17.4 (199.2) 28.7 (227.3)
Financing activities (10.3) 150.7 (29.0) 118.2
Balance Sheet
(in millions) At June 30, At December 31,
1998 1997
Current assets $ 487.6 $ 561.6
Noncurrent assets 1,045.6 981.7
Current liabilities 84.7 85.1
Noncurrent liabilities 327.8 341.2
Minority interest 17.2 19.4
Stockholders' equity 1,103.6 1,097.6
Southern Peru Limited holds all of the operating assets and liabilities of
the Company and does not hold any other operating assets.
I. Impact of New Accounting Standards:
In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This
statement, which establishes standards for reporting and display of
comprehensive income and its components, had no impact on the financial
statements.
In March 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers Disclosure about Pensions and other Postretirement
Benefits." This statement which is effective for fiscal years beginning
after December 15, 1997, will not impact the Company's financial statements
but modifies the disclosures about pensions and other postretirement
benefit plans.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
statement which is effective for fiscal quarters of fiscal years beginning
after June 15,1999, establishes accounting and reporting standards for
derivative instruments and hedging activities. The Company is currently
assessing the impact of this statement.
- 7 -
Part I Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reported net earnings of $18.4 million, or $0.23 per share on a
diluted basis, for the second quarter ended June 30, 1998 compared with net
earnings of $59.6 million, or diluted earnings per share of $0.74, for the
second quarter of 1997. For the first six months of 1998, net earnings were
$31.3 million or diluted earnings per share of $0.39, compared to $115.4
million, or diluted earnings per share of $1.44 for the same period of 1997. The
decrease in earnings in 1998 is primarily a result of low copper prices, which
were lower by approximately 30% in the three month and six month 1998 periods,
and a decrease of 16.8 million pounds of copper sold in the second quarter of
1998 compared with the same period of 1997.
In light of the low copper prices the Company implemented early in the second
quarter a comprehensive $30 million annual cost reduction program. The program
includes reductions in general and administrative expenses, and purchased
materials and supplies, as well as operational improvements. The program also
includes personnel reductions and the institution of a hiring freeze of the
Company's salaried staff. To provide for the personnel reductions a $10 million
pre-tax charge was recorded in the first quarter of 1998 for severance costs. In
the second quarter of 1998 the program has produced a pre-tax benefit of
approximately $6.3 million.
Copper production in the second quarter and the first six months of 1998 and
1997, was as follows (in millions of pounds):
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Mined 157,800 170,100 310,900 334,600
Refined 163,600 150,400 321,600 299,500
The decrease of approximately 7% in mine production in both periods of 1998
compared with the 1997 periods, is principally due to a reduction in the grade
of ore in both of the Company's mines and lower throughput due to hard ore at
the Toquepala mine. The increase in refined copper production of 9% and 7% in
the second quarter and six months of 1998, respectively, is due to increased
production efficiencies at the Ilo refinery and an increase in production at the
solvent extraction/electrowinning facility.
Molybdenum production increased 6.5% to 2.3 million pounds in the second quarter
of 1998 compared with the second quarter of 1997. For the first half of 1998
production increased 24.3% to 5.5 million pounds compared with the same period
of 1997. The increase is attributable to higher molybdenum ore grades at both of
the Company's mines.
The Cuajone mine expansion, which will increase annual copper production by 130
million pounds is on schedule and is expected to be completed in early 1999.
Approximately one half of the $245 million committed to the project has been
invested through June 30, 1998. Engineering and planning for the Ilo smelter
modernization are also moving forward on schedule.
- 8 -
Inflation and Devaluation of Peruvian Sol: A portion of the Company's operating
costs are denominated in Peruvian soles. Since the revenues of the Company are
primarily denominated in U.S. dollars, when inflation in Peru is not offset by a
corresponding devaluation of the sol, the financial position, results of
operations and cash flows of the Company could be adversely affected. For the
three months ended June 30,1998 the inflation and devaluation rates were 1.74%
and 4.31%, respectively, and for the six month periods ended June 30, 1998, the
inflation and devaluation rate were 5.31% and 7.36%, respectively.
Net Sales: Net sales in the second quarter of 1998 decreased $73.7 million to
$152.5 million from the comparable period in 1997. Net sales for the first six
months of 1998 totaled $304.9 million, compared with $441.0 million for the same
period of 1997. The decrease in net sales was a result of lower copper prices in
1998. In addition, copper sales volume decreased by 16.8 million pounds in the
second quarter of 1998 compared with the same period of 1997.
At June 30, 1998, the Company has recorded sales on 2.9 million pounds of
copper, at a provisional price of $0.75 per pound. These sales are subject to
final pricing based on the average monthly LME copper price in the month of
settlement in the third quarter of 1998.
Prices: Sales prices for the Company's metals are established principally by
reference to prices quoted on the London Metal Exchange (LME), the New York
Commodity Exchange (COMEX) or published in Platt's Metals Week for dealer oxide
mean prices for molybdenum products.
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
Price/Volume Data:
Average Metal Prices
Copper (per pound-LME) $0.79 $1.14 $0.78 $1.12
Molybdenum (per pound) $4.03 $4.53 $3.99 $4.54
Silver (per ounce-COMEX) $5.69 $4.73 $5.96 $4.87
Sales Volume (in thousands):
Copper (pounds) 167,200 184,000 337,200 356,000
Molybdenum (pounds) (1) 2,730 2,254 5,581 4,488
Silver (ounces) 764 816 1,518 1,495
(1) The Company's molybdenum production is sold in concentrate form. Volume
represents pounds of molybdenum contained in concentrates.
Financial Instruments:
The Company may use derivative instruments to manage its exposure to market risk
from changes in commodity prices. Derivative instruments which are designated as
hedges must be deemed effective at reducing the risk associated with the
exposure being hedged and must be designated as a hedge at the inception of the
contract.
- 9 -
Copper: Depending on market fundamentals and other conditions, the Company may
purchase put options to reduce or eliminate the risk of price declines below the
option strike price on a portion of its anticipated future production. Put
options purchased by the Company establish a minimum sales price for the
production covered by such put options and permit the Company to participate in
price increases above the option price. The cost of the options is amortized on
a straight-line basis during the period in which the options are exercisable.
Depending upon market conditions the Company may either sell options it holds or
exercise the options at maturity. Gains or losses from the sale or exercise of
options, net of unamortized acquisition costs, are recognized in the period in
which the underlying production is sold and are reported as a component of the
underlying transaction.
Earnings for the first six months of 1998 and 1997 included a pre-tax gain of
$7.2 million and $5.6 million, respectively, from copper hedging activities.
There was no copper hedging activity in the second quarter of 1998 and 1997.
At June 30, 1998, the Company held no copper put options.
Fuel swaps: The Company may enter into fuel swap agreements to limit the effect
of changes in fuel prices on its production costs. A fuel swap establishes a
fixed price for the quantity of fuel covered by the agreement. The difference
between the published price for fuel and the price established in the contract
for the month covered by the swap is recognized in production costs. As of June
30, 1998, the Company has entered into the following fuel swap agreements:
Contract Percent of
Quantity Price Estimated Fuel
Fuel Type Period (Barrels) (per Barrel) Requirement
--------- ------ --------- ------------ -----------
Residual Oil #6: 7/98-9/98 180,000 $12.81 60%
10/98-12/98 90,000 $13.93 30%
Diesel Fuel #2: 7/98-12/98 80,000 $21.40 27%
Operating Costs and Expenses: Operating costs and expenses were $132.9 million
in the second quarter of 1998 compared with $151.1 million in the second quarter
of 1997. The decrease in the operating costs and expenses is principally due to
lower volume of copper sold (a decrease of 16.8 million pounds), lower unit cost
of Company mined copper sold (a decrease of approximately 3 cents) and lower
cost of copper sold which was produced from third party concentrates. These
decreases were partially offset by a payment of $3.5 million in the second
quarter of 1998 to terminate a supplemental power supply contract.
The contract was terminated as part of the Company's cost reduction program.
Operating costs and expenses were $268.0 million in the six months ended June
30, 1998 compared with $290.6 million in the comparable 1997 period. The
decrease is principally due to reduced sales volume and lower cost of copper
produced from third party concentrates, partially offset by a charge in the
first quarter of 1998 of $10 million for severance costs associated with the
Company's cost reduction program.
Non-Operating Items: The Company's second quarter 1998 results include in,
"Other income" a $5.3 million insurance settlement related to rain damage in the
first quarter of 1997.
- 10 -
Total interest cost increased by $1.4 million in the second quarter of 1998 as
compared to the second quarter of 1997, as a result of higher debt levels.
However, net interest expense reported on the statement of earnings decreased by
$1.0 million as interest on funds invested in the Company's expansion program
was capitalized.
Taxes on Income: Taxes on income for the three months ended June 30, 1998 were
$8.6 million, compared with $15.8 million for the second quarter of 1997. The
decrease was principally due to lower earnings in 1998.
The effective tax rate increased in 1998 as compared to 1997 period primarily
because in 1997 the Company recognized a reduction in its effective tax rate as
a result of a reinvestment incentive approved by the Government of Peru in
connection with the expansion of the Cuajone mine.
Minority Interest of Labor Shares: The minority interest of labor shares was
$0.2 million in the second quarter of 1998, compared to $1.9 million in the
second quarter of 1997. The decrease reflects lower earnings and a reduction in
labor shares outstanding as result of the Company's repurchase program.
Cash Flows:
Second Quarter - Net cash provided from operating activities was $49.4 million
in the second quarter of 1998, compared with $84.0 million in the comparable
1997 period. The decrease was primarily the result of lower copper prices.
Investing activities in the second quarter of 1998 was a source of cash of $17.4
million, compared with a use of cash of $199.2 million for the second quarter of
1997. The increase in cash provided from investing activities in the second
quarter of 1998 is due to higher proceeds from held-to-maturity investments
partially offset by increased capital expenditures. The increase in capital
expenditures from the prior year second quarter is principally related to the
expansion of the Cuajone mine.
Financing activities in the second quarter of 1998 was a use of cash of $10.3
million, compared with a source of cash of $150.7 million for the second quarter
of 1997. The decrease in cash provided in the second quarter of 1998 is mainly
because the second quarter of 1997 included the sale of $150 million of Secured
Export Notes (SENS) and a sale of $50 million bonds in the Peruvian market.
The second quarter of 1998 includes a dividend distribution of $6.4 million, a
scheduled payment of $6.8 million of long term debt and $2.3 million used to
repurchase labor shares. The second quarter of 1997 included a dividend
distribution of $28.1 million, a scheduled payment of $6.8 million of long term
debt and funds used to purchase labor shares and treasury stock of $1.6 million.
Six Months - Net cash provided from operating activities was $81.4 million for
the six month period ended June 30, 1998, compared with $144.9 million in the
corresponding 1997 period. The decrease was primarily caused by lower copper
prices.
- 11 -
Cash provided from investing activities was $28.7 for the six month period ended
June 30, 1998, compared with cash used of $227.3 million in the corresponding
1997 period. Investing activities for the six month period ending June 30, 1998
include proceeds from the redemption of held-to-maturity investments of $179.9
million, reduced by purchases of held-to-maturity investments of $27.2 million
and capital expenditures of $127.7 million. Investing activities for the six
months ending June 30, 1997 include the purchase of held-to-maturity investments
of $208.8 million, proceeds from the sale of property of $41.9 million and
capital expenditures of $61.4 million.
Cash used for financing activities for the six months ended June 30, 1998 was
$29.0 million compared with cash provided of $118.2 million in the comparable
1997 period. The cash provided in the 1997 period include proceeds from the $150
million SENS offering and $50 million from the issuance of bonds. Dividends paid
to shareholders were $22.4 million in the 1998 six-month period and $52.1
million in the 1997 six-month period.
Liquidity and Capital Resources: At June 30, 1998, the Company's debt as a
percentage of total capitalization (total debt, minority interests and
stockholders' equity) was 17.7% compared to 18.2% at December 31, 1997. Debt at
June 30, 1998 was $241.1 million, compared to $247.9 million at the end of 1997.
Additional indebtedness permitted under terms of the most restrictive of the
Company's credit agreements totaled $862.5 million at June 30, 1998.
The Company expects that it will meet its cash requirements for 1998 and beyond
from internally generated funds, cash on hand, from borrowings under the
seven-year loan facility signed in April 1997, and from additional external
financing.
In the second quarter of 1998, the Company paid a dividend to shareholders of
$6.4 million or $0.08 per share, compared with $28.1 million or $0.35 per share
in the same period of 1997. On July 24, 1998, the Company declared a quarterly
dividend of $0.11 per share payable September 2, 1998 to stockholders of record
at the close of business on August 17, 1998.
Certain financing agreements contain covenants which limit the payment of
dividends to stockholders. Under the most restrictive covenant, the Company may
pay dividends to stockholders equal to 50% of the net income of the Company for
any fiscal quarter as long as such dividends are paid by June 30 of the
following year.
Year 2000: The Company has implemented a three phase program to identify and
resolve Year 2000 (Y2K) issues related to the integrity and reliability of its
computerized information systems as well as computer systems embedded in the
machinery and equipment used in its operations. Phase one of the Company's
program which involved an assessment of Y2K compliance of the Company's
computerized information systems and embedded computer systems has been
completed. In phase two of the program the Company is modifying or replacing all
non-compliant systems. The Company has identified two computerized information
systems that are not Y2K compliant. These systems are being replaced and are
expected to be operational by April 1999. As of June 30, 1998, substantially all
of the Company's embedded computer systems are Y2K compliant and the remaining
embedded computer systems are expected to be Y2K compliant by the first quarter
of 1999. Under the third phase of the program the Company will send detailed
information requests to its principal customers, suppliers and service providers
to determine the status of their Y2K compliance.
- 12 -
As of June 30, 1998, the Company had spent approximately $0.7 million in
addition to its normal internal information technology costs in connection with
its Y2K program. The Company expects to incur additional costs of $0.2 million
to complete phases two and three of the program.
Pursuant to phase three of its program, the Company will send surveys to its
major customers, suppliers and service providers in the third quarter of 1998
and also expects to complete this phase of the program in the first quarter of
1999.
Among other things, the Company's operations depend on the availability of
utility services, principally electricity, and reliable performance by
international transportation services. A substantial disruption in any of these
services due to providers of these services failing to achieve Y2K compliance
could have a significant impact on the Company's financial results depending on
the length and severity of the disruption. The Company is currently identifying
alternatives and will complete a contingency plan for each of its principal
operations by March 1999. The purpose of the contingency plan is to identify
possible alternatives which could be used in the event of a disruption in the
delivery of essential goods or services and to minimize the effect of such a
disruption.
Impact of New Accounting Standards: In the first quarter of 1998, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." This statement, which establishes standards for reporting
and display of comprehensive income and its components, had no impact on the
financial statements.
In March 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employers Disclosure about Pensions and other Postretirement Benefits." This
statement which is effective for fiscal years beginning after December 15, 1997,
will not impact the Company's financial statements but modifies the disclosures
about pensions and other postretirement benefit plans.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
which is effective for fiscal quarters of fiscal years beginning after June
15,1999, establishes accounting and reporting standards for derivative
instruments and hedging activities. The Company is currently assessing the
impact of this statement.
Cautionary statement: Forward-looking statements in this report and in other
Company statements include statements regarding expected commencement dates of
mining or metal production operations, projected quantities of future metal
production, anticipated production rates, operating efficiencies, costs and
expenditures as well as projected demand or supply for the Company's products.
Actual results could differ materially depending upon factors including the
availability of materials, equipment, required permits or approvals and
financing, the occurrence of unusual weather or operating conditions, lower than
expected ore grades, the failure of equipment or processes to operate in
accordance with specifications, labor relations, environmental risks as well as
political and economic risk associated with foreign operations. Results of
operations are directly affected by metal prices on commodity exchanges which
can be volatile.
- 13 -
PricewaterhouseCoopers LLP
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Southern Peru Copper Corporation:
We have reviewed the condensed consolidated balance sheet of Southern Peru
Copper Corporation and Subsidiaries as of June 30, 1998 and the condensed
consolidated statements of earnings and cash flows for the three month and six
month periods ended June 30, 1998 and 1997. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements, referred to above,
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1997 and the
related consolidated statements of earnings, cash flows, and changes in common
stockholders' equity for the year then ended (not presented herein); and in our
report dated January 23, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 1997,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
New York, New York
July 17, 1998
- 14 -
PART II - OTHER INFORMATION
Item 6(a) - Exhibits on Form 10Q
EXHIBIT INDEX
Exhibit
11 Statement re Computation of Earnings per Share
- 15 -
Exhibit 11 Statement re Computation of Earnings per Share
This calculation is submitted in accordance with Regulation S-K item 601(b)(11).
Earnings per Common Share
(in thousands, except per share amounts)
3 Months Ended 6 Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Net earnings applicable to common stock $18,373 $59,600 $31,293 $115,416
======= ======= ======= ========
Weighted average number of common shares outstanding 79,850 80,202 79,936 80,197
Shares issuable from assumed exercise of Stock Options 9 - 7 -
------ ------ ------ ------
Weighted average number of common shares outstanding,
as adjusted 79,859 80,202 79,943 80,197
====== ====== ====== ======
Diluted earnings per share:
Net earnings applicable to common stock $0.23 $0.74 $0.39 $1.44
===== ===== ===== =====
Basic earnings per share:
Net earnings applicable to common stock $0.23 $0.74 $0.39 $1.44
===== ===== ===== =====
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN PERU COPPER CORPORATION
(Registrant)
Date: August 14, 1998 /s/ Ronald J. O'Keefe
---------------------
Ronald J. O'Keefe
Executive Vice President and
Chief Financial Officer
Date: August 14, 1998 /s/ Brendan M. O'Grady
----------------------
Brendan M. O'Grady
Comptroller
- 16 -
Exhibit I
PricewaterhouseCoopers LLP
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
We are aware that our report dated July 17, 1998 on our review of the interim
financial information of Southern Peru Copper Corporation and Subsidiaries as of
June 30,1998 and for the three month and six month periods ended June 30, 1998
and 1997 and included in this Form 10-Q for the quarter ended June 30,1998 is
incorporated by reference in the Company's Registration Statement on Form S-8
(File Nos. 33-32736 and 333-40293). Pursuant to Rule 436(c) under the Securities
Act of 1933, this report should not be considered a part of the Registration
Statement prepared or certified by us within the meaning of Sections 7 and 11 of
that Act.
PricewaterhouseCoopers LLP
New York, New York
August 10, 1998