SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
1998 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, 1998 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. [ ]
As of February 26, 1999, there were of record 13,962,062 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 $138 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 April 29, 1999.
Part IV: Exhibit index is on page B1 through B3.
A-1
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. Southern Peru Copper
Corporation was reorganized into a holding company structure effective January
2, 1996, upon completion of a public offer to exchange newly-issued Common Stock
for outstanding labor shares of the Company's Peruvian Branch ("Labor Shares").
Effective December 31, 1998, the Company's predecessor and wholly-owned
operating subsidiary, Southern Peru Limited, was merged into the Company.
The Company, incorporated in 1952 was reorganized in 1955 and has conducted
copper mining operations since 1960. Pursuant to Peruvian law, the Company
conducts its operations in Peru through a registered branch (the "Branch"). The
Branch is not a corporation separate from the Company. It is, however, an
establishment, registered pursuant to Peruvian law, through which the Company
holds assets, incurs liabilities and conducts operations in Peru. Although it
has neither its own capital nor liability separate from that of the Company, it
is deemed to have an equity capital for purposes of determining the economic
interest of holders of 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 the Company
associated with its copper operations in Peru.
Throughout this report, unless the context otherwise requires, the terms
"Southern Peru", "SPCC" and "the Company" refer to the present corporation and
its consolidated subsidiaries as well as its predecessor. In addition,
throughout this report, unless otherwise noted, all tonnages are in short tons
and all ounces are troy ounces.
At December 31, 1998 the stockholders in the Company were ASARCO Incorporated
(54.3%), Cerro Trading Company, Inc. (14.2%), Phelps Dodge Overseas Capital
Corporation (14.0%) and common stockholders (17.5%).
Reference is made to the following Financial Statement footnote included in this
report: Net Sales in Note 5.
CAUTIONARY STATEMENT
Forward-looking statements in this report and in other Company statements
include statements regarding expected commencement dates of mining or metal
production operations, projected quantities of future metal production,
anticipated production rates, operating efficiencies, costs and expenditures as
well as projected demand or supply for the Company's products. Actual results
could differ materially depending upon factors including the availability of
materials, equipment, required permits or approvals and financing, the
occurrence of unusual weather or operating conditions, lower than expected ore
grades, the failure of equipment or processes to operate in accordance with
specifications, labor relations, environmental risks as well as political and
economic risk associated with foreign operations. Results of operations are
directly affected by metals prices on commodity exchanges which can be volatile.
Additional business information follows:
COPPER BUSINESS
The copper operations of the Company involve the mining, milling and flotation
of copper ore to produce copper concentrates, the smelting of copper
concentrates to produce blister copper and the refining of blister copper to
produce copper cathode.
A-2
The Company also produces refined copper using solvent extraction/electrowinning
("SX/EW") technology. Silver, molybdenum and small amounts of other metals are
contained in copper ore as by-products. Silver sold is recovered in the refining
process or as an element of blister copper. Molybdenum is recovered from copper
concentrate in a molybdenum by-product plant. The Company has not reported
information by industry segments because substantially all of its revenues are
generated from its copper production.
REVIEW OF OPERATIONS
SPCC operates the Toquepala and Cuajone mines, high in the Andes, approximately
400 miles southeast of Lima. It also operates a smelter and refinery west of the
mines at the Pacific Coast city of Ilo, Peru. SPCC is the largest mining company
in Peru and one of the 10 largest private-sector copper mining companies in the
world.
OVERVIEW
Mine copper production at SPCC declined in 1998 due to the impact of extended
heavy rains and expected interruptions associated with the startup of the
expanded concentrator at Cuajone. Smelter and refinery output increased,
however, due to improved operating efficiencies and the treatment of purchased
concentrates. Low-cost copper production from the SX/EW facility at Toquepala
increased 6%, also as a result of improved operating practices.
SPCC currently has a major, $1.2 billion expansion and modernization program
underway that includes expansions of the Cuajone mine, the SX/EW facility at the
Toquepala mine, and the Ilo smelter. The modernization project at Ilo will use
flash smelting and flash converting technology to increase production capacity
and enhance environmental controls. Expansion of the mill at the Cuajone mine
was completed in 1998 and commissioning is in progress. Modernization of the
mining equipment at Cuajone will continue for another two years. Engineering
began on modernization and expansion of the Ilo smelter. The expansion program
at Cuajone and Ilo will further improve productivity, reduce operating costs,
increase copper production and is expected to significantly increase the capture
of sulfur dioxide to in excess of 99%.
MINING OPERATIONS
Total mined copper production at SPCC decreased 2.8% in 1998, compared with
1997, due to lower production at Cuajone.
Cuajone production decreased 7% in 1998 to 316 million pounds due principally to
production interruptions during the integration of the expansion at the
concentrator and the impact of heavy rains. Normal startup delays at the
concentrator reduced concentrate production at Cuajone during the year.
Concentrator throughput for the year was 21.7 million tons of ore producing 570
thousand tons of copper concentrates. Flooding and power interruptions hampered
mining early in 1998 but the mine recovered later in the year and fourth quarter
1998 production was 8% greater compared with the same period of the prior year.
Toquepala mine production for the year was 247 million pounds equaling 1997
production. The Toquepala concentrator milled 18.0 million tons of ore.
Together, the two mines produced 2.9 million ounces of silver and 9.6 million
pounds of molybdenum as by-products.
A-3
New drills, trucks and a shovel were added at the Cuajone mine in 1998 and
older, less efficient equipment was retired. As part of the Cuajone expansion
project, two grinding mills, flotation equipment, a vertical regrind mill,
pressure filters, a reclaimed water pumping station and other enhancements were
added to the Cuajone concentrator.
SX/EW OPERATIONS
The SX/EW facility at Toquepala produces refined copper from solutions obtained
by leaching low-grade ore stored at the Toquepala and Cuajone mines. Higher than
anticipated production through most of the year offset production losses from
the first quarter when the operations were hampered by power interruptions and
flooding. The facility produced 5.9 million pounds more copper in 1998 than in
1997. The SX/EW plant obtained registration during the year from the New York
Commodity Exchange (COMEX), certifying cathode quality and complementing
certification previously obtained from the London Metal Exchange (LME).
ORE RESERVES
SPCC identified substantial additional mineralized material in 1996 and
continues to evaluate the extent of those resources. At year-end 1998, proven
and probable sulfide reserves totaled 1,401 million tons with an average copper
grade of 0.64% at Cuajone and 295 million tons with an average copper grade of
0.83% at Toquepala. An additional 209 million tons of mineralized material at an
average copper grade of 0.56% at Cuajone and 330 million tons at an average
copper grade of 0.65% at Toquepala still are being evaluated. Further drilling
is also underway at Toquepala to define and identify additional, deeper
reserves. In addition, the Company has 794 million tons of leachable, low-grade
ore that can be processed economically by the SX/EW operation.
SMELTING AND REFINING OPERATIONS
The Ilo smelter increased its production of blister copper by 1% compared with
1997 by treating concentrates with higher copper contents. The smelter increased
its purchase of concentrates from others to offset decreased concentrate
production primarily at Cuajone. Improved productivity at the smelter offset the
effect of production curtailments under the Company's Supplemental Control
Program (SCP) to control emissions from the smelter.
SPCC's total refined copper production, including the 104.0 million pounds from
the SX/EW plant, increased 6% to 647.4 million pounds in 1998 from 611.5 million
pounds in 1997. Refined production from the Ilo refinery reached 543.4 million
pounds in 1998. SPCC has spent $20.0 million in recent years to modernize the
Ilo refinery, which was purchased in 1994 from a Peruvian government-owned
entity. Installation of acid-resistant polymer cells and a new rectifier in the
tank house increased capacity by almost 30% to 540 million pounds of copper
cathode per year. SPCC's Ilo smelter provides feed for the refinery. Blister
copper produced by the smelter exceeds the refinery's capacity and the excess is
sold to other refineries around the world.
EXPANSION AND MODERNIZATION PROGRAM
Excellent progress is being made on the $1.1 billion expansion and modernization
program originally announced by the Company in 1996. The major expansion of the
Cuajone mine and expansion and modernization of the Ilo smelter will increase
copper production and is expected to improve the sulfur dioxide capture rate to
over 99%.
A-4
Most of the $245 million Cuajone mine expansion was completed in 1998.
Acquisition of new mining equipment will continue for the next two years. The
expansion will increase mined copper output at Cuajone by 130 million pounds per
year, increasing the Company's total production by 19%. New equipment and
processes were installed at the Cuajone concentrator in 1998, testing and
calibration continues and the expanded facility is expected to reach design
rates of production by the end of the first quarter of 1999.
Engineering for the modernization and expansion of the Ilo smelter began during
the year. The $875 million Ilo smelter project consists of installation of a new
single line flash smelting furnace and a single line flash converting furnace to
process 1.25 million tons of concentrate per year. The project is designed so
that the smelter's existing furnaces can continue to operate while the new flash
furnaces are brought on-line, enabling SPCC to maintain normal production during
the new facilities' startup period. The Company's use of flash converting
technology will provide significant material handling advantages and will permit
improved capture of sulfur dioxide. When the smelter modernization is complete,
the smelter is expected to have a sulfur capture rate in excess of 99% and will
meet or exceed current Peruvian standards and international environmental
guidelines.
Permits were received late in the year to proceed with construction of the
Torata River Flood Control Project. To divert the Torata River around the
proposed Cuajone pit expansion, SPCC will construct a dam and approximately
eight kilometers of tunnel and pipelines. The project will protect the expanded
pit from flooding during major storm events, alleviate periodic flooding for
neighbors down-river from the mine and make a portion of the current river
valley available for placement of mine waste material. Field construction
activities for the $75.5 million project are scheduled to begin this year with
completion scheduled for 2001.
A third stage of the expansion and modernization program is under consideration
which includes an additional expansion of the Cuajone mine and further expansion
of the Ilo smelter. Additional mining equipment and a new SAG mill would be
added at Cuajone to increase total annual copper production by 240 million
pounds, or 30% of total production. The decision to proceed with the third stage
expansion will be based on copper prices, availability of financing and
completion of the current program. When all of the expansion projects are
completed, SPCC will produce 930 million pounds of copper per year, or 1.4 times
1998 production.
EXPLORATION
SPCC has an active exploration program focusing on copper and gold-bearing
properties. The Company currently has rights to conduct exploration on over
275,000 hectares of land in Peru.
The Tantahuatay project, owned 44% by SPCC, has focused on defining a shallow,
heap-leachable gold oxide resource, underlaid by a large, disseminated,
copper-gold sulfide resource. Preliminary studies are being conducted to
determine the viability of developing the gold resource.
Several other copper and gold projects, wholly owned by the Company, were
drilled in 1998 and show encouraging results. Those projects continue to be
evaluated. SPCC's exploration activities are independent from exploration
activities of its founding shareholders.
A-5
ENVIRONMENT
In addition to the expansion and modernization of the Ilo smelter, Southern Peru
continues to install new facilities and implement new operating procedures to
further reduce the impact of its operations on the environment. An expansion of
the Ilo smelter acid plant commenced operations during the first quarter of
1998, capturing all of the off-gases from the Modified El Teniente Converter
(CMT), or 30% of the smelter's total emissions. The original sulfuric acid
plant, completed in 1995, captured 60% of the CMT off-gases, or 18% of the
smelter's total emissions. With the addition, the acid plant produced 307,100
tons of sulfuric acid in 1998. Part of the acid produced is used by the Company
to leach ore at its SX/EW operation; the balance is sold in regional markets.
Southern Peru also uses its SCP to control sulfur dioxide emissions by
curtailing production during periods of adverse weather. The acid plants and the
SCP program have been effective in improving air quality in the Ilo area.
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 1998, 1997, and 1996, substantially all of the Company's copper
production was exported from Peru and sold to customers in Europe, the Far East,
the United States and elsewhere in Latin America. A substantial portion of
SPCC's copper sales is made under annual contracts to industrial users. Silver
is sold under annual contracts or in spot sales and molybdenum is sold in
concentrate form to merchants and other refiners under annual contracts. Most
customers receive shipments on a monthly basis at a constant volume throughout
the year. As a result there is little seasonality in SPCC sales volumes.
BACKLOG OF ORDERS
Substantially all of the Company's metal production is sold under annual
contracts. To the extent not sold under annual contracts, production can be sold
on commodity exchanges or in spot sales. Final sales values are determined based
on prevailing commodity prices for the quotation period, generally being the
month of, the month prior to or the month following the actual or contractual
month of shipment or delivery according to the terms of the contract.
COMPETITIVE CONDITIONS
Competition in the copper market is principally on a price and service basis,
with price being the most important consideration when supplies of copper are
ample. The Company's products compete with other materials, including aluminum
and plastics.
EMPLOYEES
At December 31, 1998 the Company employed 4,557 persons, about fifty-five
percent of whom were covered by labor agreements with nine labor unions. There
were no labor strikes in 1998.
A-6
ENERGY MATTERS AND WATER RESOURCES
Electric power for the Company's operating facilities is generated by a thermal
electric plant owned and operated by Enersur S.A. and located adjacent to the
Ilo smelter. Power generation capacity is currently 150 megawatts. In addition,
the Company has 30 megawatts of power generation capacity from waste heat
boilers in the smelter and two small hydro-generating installations at Cuajone.
Power is distributed over a 139-mile, closed loop transmission circuit.
In 1997, the Company sold its Ilo power plant to Enersur S.A. and entered into a
20-year power purchase agreement. The power purchase agreement contains
provisions obligating Enersur S.A. to construct additional capacity upon notice
to meet the Company's increased electricity requirements from the planned
expansion and modernization. The parties also entered into an agreement for the
sharing of certain services between the power plant and the Company's smelter at
Ilo. Under this agreement, the Company's cost of power will increase somewhat
from its 1996 level, while the Company will benefit by avoiding significant
capital expenditures that would be required to meet the needs of the expanded
operations.
SPCC has water concessions for well fields at Huaitire and Titijones and surface
water rights from Lake Suches.
ENVIRONMENTAL MATTERS
The Company anticipates spending $75.9 million for environmental control capital
expenditures in 1999. Capital expenditures in connection with environmental
projects were approximately $25.3 million in 1998, $47.8 million in 1997 and
$24.6 million in 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Environmental Matters" which is herein
incorporated by reference.
CONCESSIONS
The Company has concessions from the Peruvian government for its exploration,
exploitation, extraction and/or production operations (collectively, the
"Concessions"). The Concessions are in full force and effect under applicable
Peruvian laws, and the Company believes it is in compliance with all material
terms and requirements applicable to the Concessions. The Concessions have
indefinite terms, subject to payment by SPCC of concession fees of up to $2 per
hectare annually for the mining concessions and a fee based on nominal capacity
for the processing concessions. Fees paid during 1998 were approximately
$273,000.
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.
A-7
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, 1998, the Company,
through its Peruvian Branch, has 100% interest in the Toquepala and Cuajone
mines, the SX/EW facility, the Ilo smelter, the sulfuric acid plant and the Ilo
refinery and operates them pursuant to concessions from the Peruvian Government.
See Item 1 "Business--Concessions". The Company owns, through the Branch, its
offices in Lima. Its offices in New York are located in space leased to it by
Asarco. 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 and a port 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.
A-8
METAL PRODUCTION STATISTICS
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Copper Production
MINES (contained copper in thousands of pounds)
Toquepala .............. 246,783 246,818 252,928 256,128 223,594
Cuajone ................ 315,640 340,551 332,014 290,982 312,074
SX/EW .................. 104,026 98,153 93,170 10,012 -
- --------------------------------------------------------------------------------
Total Mines ......... 666,449 685,522 678,112 557,122 535,668
- --------------------------------------------------------------------------------
SMELTER (contained copper in thousands of pounds)
SPCC concentrates ...... 536,036 575,061 589,994 537,522 536,864
Purchased concentrates . 111,732 63,679 43,614 96,934 107,342
- --------------------------------------------------------------------------------
Total Smelter ....... 647,768 638,740 633,608 634,456 644,206
- --------------------------------------------------------------------------------
REFINERIES (thousands of pounds of copper)
Ilo (a) .................. 543,404 513,315 439,600 432,414 421,342
SX/EW .................... 104,026 98,153 93,170 10,012 -
- --------------------------------------------------------------------------------
Total Refineries ......647,430 611,468 532,770 442,426 421,342
- --------------------------------------------------------------------------------
COPPER SALES (thousands of pounds)
Refined .................. 542,786 514,320 439,400 436,638 424,776
In blister ............... 105,374 110,412 162,418 200,592 228,346
Concentrates ............. 17 19,955 - - -
SX/EW .................... 103,937 99,297 92,472 9,374 -
- --------------------------------------------------------------------------------
Total sales of copper .. 752,114 743,984 694,290 646,604 653,122
- --------------------------------------------------------------------------------
LME average price (cents
per pound) ............ 75 103 104 133 105
Molybdenum
(thousands of pounds contained in concentrate)
MINES
Toquepala ................ 6,039 6,066 4,483 3,674 3,058
Cuajone .................. 3,520 3,329 4,257 4,334 3,062
- --------------------------------------------------------------------------------
Total produced ........ 9,559 9,395 8,740 8,008 6,120
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Sales of, molybdenum
In concentrate .......... 9,677 9,398 8,813 8,402 5,698
- --------------------------------------------------------------------------------
Metals Week Dealer
Oxide mean price($/lb.) $ 3.41 $ 4.30 $ 3.78 $ 7.90 $ 4.69
A-9
Silver (thousands of ounces)
- --------------------------------------------------------------------------------
SMELTER (in blister)
Ilo - SPCC Concentrates 2,890 3,146 3,097 2,958 2,979
- --------------------------------------------------------------------------------
REFINERY (b)
Ilo 2,735 2,462 2,218 2,519 2,131
- --------------------------------------------------------------------------------
SALES OF SILVER
Refined (b) 2,724 2,397 2,282 2,597 1,947
In blister 564 576 828 1,164 1,237
In concentrates - 113 - - -
- --------------------------------------------------------------------------------
Total sales of silver 3,288 3,086 3,110 3,761 3,184
- --------------------------------------------------------------------------------
COMEX average price($/oz.) $ 5.51 $ 4.88 $ 5.18 $ 5.18 $ 5.28
- --------------------------------------------------------------------------------
<FN>
(a) The Ilo refinery was purchased by the Company in May 1994. The data prior
to the acquisition also includes 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 prior to
the acquisition and the refined silver sold by the Company after the
acquisition.
</FN>
A-10
METAL PRODUCTION STATISTICS
COPPER RESERVES
Mineral Average
Reserves Copper Metal Production
(000s Content Contained Metal
Tons) (%) (000s Pounds)
------------------------------
12/31/98 12/31/98 1998 1997 1996
-------- -------- ---- ---- ----
Toquepala Sulfide 295,300 0.83 246,800 246,800 252,900
Leachable 725,000 0.19 93,700 87,900 88,600
Cuajone Sulfide 1,400,600 0.64 315,600 340,600 332,000
Leachable 68,700 0.49 10,300 10,300 4,600
The Company has ongoing exploration programs in Peru. Results of drilling at
Toquepala and Cuajone have identified mineralized material consisting of 330
million tons grading 0.65% copper at Toquepala and 209 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.
The following ore production information is provided:
1998 1997 1996
Ore Avg. Ore Avg. Ore Avg.
Milled Mill Milled Mill Milled Mill
(000s Recovery (000s Recovery (000s Recovery
Tons) Rate (%) Tons) Rate (%) Tons) Rate (%)
----- -------- ----- -------- ----- --------
Toquepala 18,011 88.49% 18,998 87.90% 18,609 84.20%
Cuajone 21,699 85.62% 21,719 87.00% 21,249 81.71%
The following productive capacity is provided:
Defined Capacity (a)
--------------------
Ilo Smelter 320,000 tons
Ilo Refinery 270,000 tons
Toquepala - SX/EW 50,000 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.
A-11
Item 3. Legal Proceedings
Reference is made to the information under the caption "Litigation" in Financial
Statement Footnote 17 "Commitments and Contingencies" on page A45 incorporated
herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
None.
A-12
Executive Officers of the Registrant
Set forth below are the executive officers of the Company, their ages as of
February 28, 1999, and their positions.
Name Age Position
---- --- --------
Richard de J. Osborne 64 Chairman of the Board and Director
Charles G. Preble 66 President, Chief Executive Officer
and Director
Charles B. Smith 60 Executive Vice President and Chief
Operating Officer
Ronald J. O'Keefe 56 Executive Vice President
Thomas J. Findley, Jr. 51 Vice President and Chief Financial Officer
Kevin R. Morano 45 Vice President and Director
Winston Cundiff, III 52 Vice President (Human Resources, Peru)
Hans A. Flury 47 Vice President (Legal, Peru)
Guillermo D. Payet 60 Vice President (Finance, Peru)
Eduardo Santistevan 57 Vice President (Logistics, Peru)
Andrew T. Swarthout 47 Vice President (Exploration, Peru)
Frank R. Tweddle 39 Vice President (Commercial, Peru)
David J. Thomas 54 Vice President (Operations, Peru)
Augustus B. Kinsolving 59 Secretary, General Counsel and Director
Brendan M. O'Grady 54 Comptroller
Christopher F. Schultz 47 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 and Chief
Executive Officer of Asarco since 1985, its President from 1982 until 1998 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 of the Company since February 1999.
Prior to that he was Executive Vice President and Chief Financial Officer of the
Company since April 1995. Previously he was Controller of Asarco from 1982
through March 1995.
Thomas J. Findley, Jr., Vice President and Chief Financial Officer of the
Company since February 2, 1999. From 1997 to February 1999, he was Director of
Development for ASARCO Incorporated. Prior to that he was Treasurer of ASARCO
from 1992 to 1997. He was also Treasurer of the Company from 1996 to April 1998.
Kevin R. Morano, Vice President and a director of the Company since 1993. He has
been Executive Vice President, Chief Financial Officer and a director of Asarco
since 1998, previously its Vice President-Finance and Chief Financial Officer
from 1993 until 1998, and general manager of Asarco's Ray Complex from 1991 to
1993.
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.
A-13
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.
Andrew T. Swarthout, Vice President (Exploration, Peru) elected Vice President
on April 30, 1998. From December 1995 to April 1998, he was Director General of
Exploration for the Company. Prior to that he was Manager of Exploration for
Peru for Asarco from May 1995 to November 1995. From March 1993 to May 1995 he
was consultant to the Vice President, Exploration of Asarco.
Frank R. Tweddle, Vice President (Commercial, Peru) elected Vice President on
May 1, 1997. From May 1994 to April 1997, he was Assistant Director of Marketing
for the Company. From 1988 to April 1994 he was Vice President Trading for
Minpeco USA.
David J. Thomas, Vice President (Operations, Peru) of the Company since October
1997. Prior to that he was Director of Project Development for Touchstone Mining
(Australia) from June 1996 to September 1997. From September 1993 to May 1996 he
was Director of Austpac Gold (Australia). From 1989 to August 1993 he was Vice
President of Mellon Bank.
Augustus B. Kinsolving, Secretary, General Counsel and a director of the
Company, has been a director since 1989 and Secretary and General Counsel since
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.
Brendan M. O'Grady, Comptroller of the Company since 1992. Previously, he was
Assistant Comptroller from 1981 to 1992.
Christopher F. Schultz, Treasurer of the Company since April 1998. He has been
Treasurer of Asarco since 1997. Prior to that he was Assistant Treasurer of
Asarco since 1993.
A-14
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
At December 31, 1998, there were 2,561 holders of record of the Company's Common
Stock. SPCC's Common Stock is traded on the New York Stock Exchange (NYSE) and
the Lima Stock Exchange (BVL). The SPCC Common Stock symbol is PCU on the NYSE
and PCUC1 on the BVL. The Common Stock commenced trading on the NYSE on a when
issued basis on January 5, 1996. Regular way trading commenced January 12, 1996.
On the BVL, the Common Stock commenced trading on January 5, 1996.
The table below sets forth the cash dividends paid per share of capital stock
and the high and low stock prices on both the NYSE and the BVL for the periods
indicated.
1998 1997
---- ----
-------------------------------------------------------- -------------------------------------------------------
Quarters 1st 2nd 3rd 4th Year 1st 2nd 3rd 4th Year
-------------------------------------------------------- -------------------------------------------------------
Dividend per
share $0.20 $0.08 $0.11 $0.12 $0.51 $0.30 $0.35 $0.37 $0.24 $1.26
Stock market price
NYSE:
High $15-1/8 $16-11/16 $13-1/2 $12-7/8 $16-11/16 $17-3/8 $21-1/8 $20-7/8 $18-1/4 $21-1/8
Low $12-1/2 $13 $8-3/4 $8-15/16 $8-3/4 $15 $16-7/8 $17-5/8 $12-3/4 $12-3/4
BVL:
High $14.95 $16.50 $13.35 $12.70 $16.50 $17.35 $21.20 $21.06 $17.99 $21.20
Low $12.40 $12.95 $8.93 $8.89 $8.89 $14.85 $16.80 $17.30 $12.58 $12.58
On February 2, 1999, the Board of Directors of the Company declared a dividend
of $0.03 per share payable March 3, 1999 to stockholders of record as of
February 22, 1999.
For a description of limitations on the ability of the Company to make dividend
distributions, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Liquidity and Capital Resources" and Note 12 to the
Consolidated Financial Statements of the Company.
A-15
Item 6. Selected Financial Data
FIVE-YEAR SELECTED FINANCIAL AND STATISTICAL DATA
(in millions, except per share and employee data)
1998 1997 1996 1995 1994
Consolidated Statement of Earnings:
Net sales $628 $814 $ 753 $ 929 $ 702
Operating costs and expenses (1) 558 577 497 558 558
Operating income 70 237 256 371 144
Minority interest of labor shares in
income of Peruvian Branch - 4 5 44 19
Net earnings $55 $186 $ 181 $ 218 $91
Per Share Amounts (2):
Net earnings - basic and diluted $0.68 $2.32 $ 2.25 $ 3.31 $ 1.39
Dividends paid $0.51 $1.26 $ 1.47 $ 1.27 $ 0.33
Consolidated Balance Sheet:
Total assets $1,526 $1,561 $1,280 $1,272 $969
Cash and marketable securities 198 331 174 262 136
Total debt 234 248 107 94 118
Stockholders' equity 1,109 1,098 1,015 953 635
Consolidated Statement of Cash Flows:
Cash provided from operating activities $181 $278 $ 159 $ 330 $ 135
Dividends paid 41 101 118 84 21
Capital expenditures 259 184 121 183 182
Depreciation and depletion 61 47 42 36 40
Capital Stock:
Common shares outstanding 13.9 14.2 13.6 11.5 55.2
NYSE Price - high $16-11/16 $21-1/8 $ 21 - -
- low $8-3/4 $12-3/4 $13-7/8 - -
Class A common shares outstanding 65.9 65.9 66.6 68.8 -
Book value per share $13.88 $ 13.71 $ 12.66 $ 11.90 $ 9.67
P/E ratio 13.88 5.77 6.50 - -
Financial Ratios:
Current assets to current liabilities 4.2 5.6 3.8 2.8 3.0
Debt as % of capitalization 17.2% 18.2% 9.3% 8.8% 14.2%
Debt as % of capitalization, net of
excess cash (3) 5.6% - - - 1.7%
Employees (at year end) 4,557 4,829 4,859 5,035 5,407
Notes to five year selected financial and statistical data
<FN>
(1) Includes provision for workers' participation of $10.6 million, $14.4
million, $18.0 million, $32.2 million and $13.9 million in the years ended
December 31, 1998, 1997, 1996, 1995, and 1994, respectively.
(2) Per share amounts are presented after giving retroactive effect to a 100 to
1 stock split declared and made on November 4, 1994. In addition, earnings
per share are basic and diluted.
(3) Available cash exceeded debt at December 31, 1997, 1996 and 1995.
</FN>
A-16
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 value of the net assets of the Company denominated in soles can be affected
by devaluation of the sol. The recent inflation and devaluation rates are as
follows:
Years ended December 31, 1998 1997 1996
---- ---- ----
Peruvian Inflation Rate 6.0% 6.5% 11.8%
Sol/Dollar Devaluation Rate 15.7% 4.9% 12.1%
Peruvian Branch: The consolidated financial statements included herein are
prepared in U.S. dollars and in accordance with generally accepted accounting
principles in the United States (US GAAP). The Peruvian Branch (the Branch)
consists of substantially all the assets and liabilities of Southern Peru Copper
Corporation (SPCC) associated with its copper operations in the Republic of
Peru. The Branch is registered with the Peruvian government as a branch of a
foreign mining company. The results of the Branch are consolidated in the
financial statements of the Company.
The Branch maintains its books of account in soles, prepares financial
information in accordance with generally accepted accounting principles in Peru
(Peruvian GAAP). Peruvian GAAP requires the inclusion in the financial
statements of the Branch of the Resultado por Exposicion a la Inflacion (Result
of Exposure to Inflation), which seeks to account for the effects of inflation
by adjusting the value of non-monetary assets and liabilities and equity by a
factor corresponding to wholesale price inflation rates during the period
covered by the financial statements. Monetary assets and liabilities are not so
adjusted.
Expansion and Modernization Project: In September 1996, the Company announced a
two-stage project which includes an expansion of the Cuajone mine and an
expansion and modernization of the copper smelter at Ilo. Total capital cost for
this project is estimated at $1.1 billion, budgeted to be spent through the year
2003.
Most of the $245 million Cuajone mine expansion was completed in 1998.
Acquisition of new mining equipment will continue for the next two years. When
completed, the expansion will increase mined copper output at Cuajone by 130
million pounds per year, or 19% of the Company's total production. Throughput at
the concentrator increased in December and is expected to reach design levels in
the first quarter of 1999. Testing and calibration of the expanded facilities
are ongoing and the Company officially inaugurated the project in March 1999.
A-17
The second stage of the program, the expansion and modernization of the Ilo
smelter will consist of installation of a new single line flash smelting furnace
and a single line flash converting furnace to process 1.25 million tons of
concentrate per year. A major advantage incorporated into the project is the
ability to operate existing furnaces while the new flash furnaces are brought
on-line, thereby minimizing production disruptions during the startup period of
the new facilities. The Company has decided to use flash converting technology
rather than conventional Peirce Smith converters because flash converting
provides significant material handling advantages and achieves improved sulfur
capture. When the modernization program is completed, the smelter is expected to
have a sulfur capture rate in excess of 99% and to meet or exceed current
international environmental guidelines. The estimated cost of the project is
$875 million and is expected to be completed by 2003.
In 1998, the Company commenced a $48 million project to expand annual SX/EW
copper production by 26 million pounds. Engineering design is underway and
equipment purchases are being made. The project is on schedule and completion is
expected in the third quarter of 1999.
Late in the year, the Peruvian government approved the Company's Torata River
Control Project. The project will divert the Torata River around the Cuajone
mine pit expansion. The $75.5 million project will commence in 1999 and is
scheduled for completion in 2001.
An optional third stage of the expansion and modernization program, would
include a second expansion at Cuajone and further expansion of the Ilo smelter
capacity. Consideration of whether to proceed with this third stage is dependent
on copper prices, the availability of financing and other conditions at the time
of decision. The Company expects that the projects will be funded from a
combination of existing cash, internally generated funds and external financing.
RESULTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
SPCC reported 1998 net earnings of $54.6 million, or diluted earnings per share
of 68 cents, compared with net earnings of $185.7 million, or diluted earnings
per share of $2.32 in 1997 and net earnings of $180.5 million, or diluted
earnings per share of $2.25 in 1996.
The decline in net earnings in 1998 compared with 1997 is primarily a result of
lower copper prices. The average price of copper in 1998 on the London Metal
Exchange declined 28 cents per pound from 1997 to 75 cents per pound, and at
year end 1998 was 66 cents per pound. In addition to lower metal prices, results
for 1998 also reflect an increase in the effective income tax rate compared to
1997. The earnings decrease was partially offset by savings realized from the
cost reduction program instituted by the Company in 1998.
In April 1998, SPCC initiated cost-reduction and production enhancement
programs, including reductions in operating expenses, purchased services and
general and administrative expenses, designed to reduce annual expense by $30
million when fully implemented. The program is estimated to have increased
pre-tax earnings by $25.7 million in 1998, improving net after-tax earnings by
$15.8 million, or 20 cents per share. In 1999, the program is expected to
improve net earnings by $17 million, or 21 cents per share.
In connection with the cost reduction program the Company recorded a $10 million
pre-tax charge in the first quarter of 1998 for severance costs. In addition, in
the fourth quarter of 1998 the Company transferred title to a major portion of
the Ilo townsite to its worker occupants and the City of Ilo. Titles to 1,344
individual homesites were transferred. The Company recorded a pre-tax charge of
$10.9 million in 1998 to write-off the remaining book value of the transferred
A-18
property and to provide for other costs associated with the divestiture. The
Company expects future savings as a result of the transfer of the townsite
through reduced maintenance costs.
The improvement in net earnings in 1997 compared with 1996 was largely the
result of a lower effective income tax rate, offset in part by higher power
costs.
In 1997, the Government of Peru approved a reinvestment allowance for the
Company's program to expand the Cuajone mine. Pursuant to the reinvestment
allowance, the Company receives certain tax incentives in Peru. As a result,
U.S. tax credit carryforwards for which no benefit had previously been recorded
were utilized. Principally because of the reinvestment program, the Company's
effective tax rate was lower in 1997, compared with the prior year, increasing
net earnings by approximately $14.7 million.
As a result of the expansion program, electric power requirements will increase
significantly requiring the construction of additional generating capacity. In
the second quarter of 1997, the Company sold its existing power plant to an
independent power company for $33.6 million. In connection with the sale, a
power purchase agreement was also completed, under which the Company agreed to
purchase its power needs for twenty years. Under the agreement, the cost of
power will increase somewhat from its 1996 level, however, the Company will
avoid the significant capital expenditures that would be required to meet the
needs of expanded operations.
Net Sales: Net sales in 1998 were $627.9 million, compared with $814.2 million
in 1997 and $753.0 million in 1996. Sales decreased in 1998 by $186.3 million,
largely as a result of lower copper prices, offset somewhat by an increase in
copper and molybdenum volume. Copper sales volume was 8.1 million pounds higher
in 1998 compared with 1997. Sales of copper produced at Company mines, however,
decreased by 6.5 million pounds in 1998 as compared with 1997.
Copper sales volume was 49.7 million pounds higher in 1997 compared with 1996.
Of this increase, 46.4 million pounds were from purchased concentrates.
At December 31, 1998, the Company has recorded sales of 27.5 million pounds of
copper at a provisional price of 66 cents per pound. These sales are subject to
final pricing based on the average monthly LME copper price in the month of
settlement which will occur in the first quarter of 1999.
Prices: Sales prices for the Company's metals are established principally by
reference to prices quoted on the London Metal Exchange (LME), the New York
Commodity Exchange (COMEX) or published in Platt's Metals Week for dealer oxide
mean prices for molybdenum products.
Price/Volume Data 1998 1997 1996
---- ---- ----
Average Metal Prices
Copper (per pound - LME) $0.75 $1.03 $1.04
Molybdenum (per pound - Metals
Week Dealer Oxide Mean) $3.41 $4.30 $3.78
Silver (per ounce - COMEX) $5.51 $4.88 $5.18
Sales Volume (in thousands)
Copper (pounds) 752,114 743,984 694,290
Molybdenum (pounds)(1) 9,677 9,398 8,813
Silver (ounces) 3,288 3,086 3,110
(1) The Company's molybdenum production is sold in concentrate form. Volume
represents pounds of molybdenum contained in concentrates.
A-19
Financial Instruments: The Company uses derivative instruments to manage its
exposure to market risk from changes in commodity prices. Derivative instruments
which are designated as hedges must be deemed effective at reducing the risk
associated with the exposure being hedged and must be designated as a hedge at
the inception of the contract.
Copper: Depending on the market fundamentals and other conditions, the Company
may purchase put options to reduce or eliminate the risk of price declines below
the option strike price on a portion of its anticipated future production. Put
options purchased by the Company establish a minimum sales price for the
production covered by such put options and permit the Company to participate in
price increases above the option price. The cost of options is amortized on a
straight-line basis during the period in which the options are exercisable.
Depending upon market conditions, the Company may either sell options it holds
or exercise the options at maturity. Gains or losses from the sale or exercise
of options, net of unamortized acquisition costs, are recognized in the period
in which the underlying production is sold and are reported as a component of
the underlying transaction.
Earnings include pre-tax gains from option sales and exercises of $7.2 million
in 1998, $10.2 million in 1997 and $9.9 million in 1996. At December 31, 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 as a component of cost of sales.
As of December 31, 1998 and 1997, the Company has entered into the following
fuel swap agreements:
Weighted
Average
Contract
Quantity Price
Fuel Type Period (Barrels) (per Barrel)
- ------------------ --------------------- ---------------- --------------------
1998
Residual Oil 1/99-9/99 1,095,000 $ 9.84
Diesel Fuel 1/99-9/99 432,000 $15.80
1997
Residual Oil 1/98-12/98 540,000 $13.57
Diesel Fuel 1/98-12/98 200,000 $21.17
In the event of a hypothetical 10 percent decrease in the respective fuel
prices, the Company would incur higher production costs in 1999 of approximately
$3.2 million over the life of the contracts than it would have incurred had the
exposure not been hedged.
In 1998, the Company's production costs would have been $3.3 million lower if
this exposure had not been hedged.
Cost of Sales: Cost of sales was $442.2 million in 1998 compared with $474.4
million in 1997 and $400.7 million in 1996. The decrease of $32.2 million in
1998 includes the lower cost of copper processed and sold from purchased
concentrates, the lower unit cost of company mined copper as a result of
decreases in power and fuel costs, and benefits from the Company's cost
reduction program. These decreases were offset in part by a $10 million charge
for severance costs and a
A-20
$10.9 million charge for Ilo townsite divestiture costs, which were part of the
Company's earnings enhancement program.
The increase of $73.7 million in 1997 was principally due to the higher sales
volume of copper produced from purchased concentrates and higher power costs.
Other Expenses: Depreciation and depletion expense was $60.9 million in 1998,
compared with $46.7 million in 1997 and $41.6 million in 1996. The increase in
1998 includes depreciation of the tailings dam facility completed in late 1997,
the acid plant expansion completed in 1998 and the addition of haul trucks in
1998 and 1997. The increase in 1997 reflects depreciation of the refinery
expansion program completed in late 1996, and the addition of haul trucks and
other mobile equipment.
Exploration expense was $5.2 million, $7.4 million and $5.1 million, in 1998,
1997 and 1996, respectively. The increase in 1997 reflects an acceleration of
drilling programs at the Company's exploration properties.
Non-Operating Items: Interest income was $15.8 million in 1998 compared with
$20.9 million in 1997 and $18.3 million in 1996. The decrease in 1998 is because
of lower invested balances as funds were utilized in the Company's expansion
program. The increase in 1997 reflects higher invested cash balances partially
offset by lower interest rates. Interest income is expected to decrease as
available cash is used to fund the Company's expansion and modernization
program.
Other income was $9.8 million in 1998 compared with $7.1 million in 1997 and
$4.5 million in 1996. Other income in 1998 includes a $5.3 million insurance
settlement related to flood damage which occurred in 1997.
Total interest expense was $25.6 million in 1998, compared with $21.9 million in
1997 and $12.5 million in 1996. Increased interest expense in 1998 and 1997
reflect the cost of additional borrowings in connection with the Company's
expansion program. In 1998 and 1997, the Company capitalized $10.6 million and
$2.3 million of interest, respectively, principally related to expenditures on
the expansion program.
Taxes on Income: Taxes on income were $25.6 million, $55.6 million and $80.2
million for 1998, 1997 and 1996, respectively, and include $22.9 million, $45.0
million and $74.9 million of Peruvian income taxes and $2.7 million, $10.6
million and $5.3 million, for U.S. federal and state taxes for 1998, 1997 and
1996, respectively. U.S. income taxes are primarily attributable to investment
income as well as limitations on use of foreign tax credits in determining the
alternative minimum tax.
In 1997, the Government of Peru approved a reinvestment allowance for the
Company's program to expand the Cuajone mine. The reinvestment allowance
provides the Company with tax incentives in Peru and, as a result, certain U.S.
tax credit carryforwards, for which no benefit had previously been recorded,
were realized. The reduction in the Company's effective tax rate, as a result of
the reinvestment allowance, lowered tax expense by approximately $14.7 million
in 1997. Pursuant to the reinvestment allowance the Company receives tax
deductions in Peru in amounts equal to the cost of the qualifying property
(approximately $245 million). As qualifying property is acquired, the financial
statement carrying value of the qualifying property will be reduced to reflect
the tax benefit associated with the reinvestment allowance (approximately $73
million). As a result, financial statement depreciation expense related to the
qualifying property will be reduced over its useful life (approximately 15
years).
The Company obtains income tax credits in Peru for value-added taxes paid in
connection with the purchase of capital equipment and other goods and services
employed in its operations and records these credits as a prepaid expense. Under
A-21
current Peruvian law, the Company is entitled to use the credits against its
Peruvian income tax liability or to receive a refund.
Minority Interest of Labor Shares: The minority interest of labor shares was
$0.5 million in 1998, compared to $4.4 million in 1997 and $5.2 million in 1996.
The provision for minority interest of labor shares represents an accrual of
2.0%, 2.4% and 3.1% for 1998, 1997 and 1996, respectively, of the Branch's
after-tax earnings. The reductions in the percentage of minority interest of
labor shares in 1998 and 1997 is a result of purchases of labor shares by the
Company.
Cash Flows - Operating Activities: Net cash provided from operating activities
was $181.4 million in 1998, compared with $277.6 million in 1997 and $158.4
million in 1996. The decrease in 1998 was primarily attributable to lower copper
prices. The decrease in 1998 reflects lower earnings of $131.1 million partially
offset by higher depreciation and deferrred tax provisions of $14.1 million and
$21.7 million, respectively.
The increase in 1997 reflects higher earnings of $5.1 million, higher
depreciation of $5.1 million and changes in operating assets and liabilities.
The increase in cash provided from operating assets and liabilities reflects a
decrease in trade accounts receivable due to the decline in copper prices in the
final months of 1997 and a reduction in the Company's income tax payments, due
to the reinvestment allowance in Peru.
Cash Flows - Investing Activities: Net cash used for investing activities was
$70.7 million in 1998, compared with $337.6 million in 1997 and $79.4 million in
1996. Capital expenditures in 1998 were $258.7 million, compared with $184.0
million in 1997 and $120.8 million in 1996.
The increase in capital expenditures in 1998 from 1997 reflects the expansion
project at the Cuajone mine and the Ilo smelter modernization program as well as
increased capitalization of mine stripping. Other investment activities in 1998
include net proceeds of $182.4 million from held-to-maturity investments.
The increase in 1997 capital expenditures reflects $51.1 million for the Cuajone
mine expansion and $14.4 million for a new gas turbine, which was later sold
with the Company's Ilo power plant.
The Company's planned capital expenditures in 1999 are estimated to be
approximately $285 million, which includes expenditures related to the
completion of the expansion of the Cuajone mine, completion of the SX/EW plant
expansion, the Torata River Flood Control project and the Ilo smelter
modernization.
Cash Flows - Financing Activities: Financing activities used cash of $59.5
million in 1998 compared with providing cash of $11.8 million in 1997 and a use
of cash of $127.3 million in 1996. Included in 1998 activity are debt repayments
of $13.7 million, and purchases of labor shares and net treasury stock
transactions of $3.8 million and $2.7 million, respectively.
Included in 1997 are proceeds from the sale of $150 million of Secured Export
Notes (SENS) and the placement of $50 million of bonds in the Peruvian market.
Debt repaid in 1997 was $58.7 million, including the prepayment of a $35.0
million loan from Mitsui & Co., Ltd. In 1997, purchases of labor shares and
treasury stock were $8.9 million and $1.7 million, respectively.
On February 2, 1999 a dividend of $0.03 a share, totaling $2.4 million was
declared, payable March 3, 1999. It has been the Company's policy to distribute
approximately 50% of net earnings as dividends.
A-22
LIQUIDITY AND CAPITAL RESOURCES
Financing: In 1997, the Company entered into a $600 million seven year loan
facility with a group of international financial institutions. The facility
consists of a $400 million term loan and a $200 million revolving credit line.
The interest rate during the first three years of the agreement on any loans
outstanding is LIBOR plus 1.75% per annum for term loans and LIBOR plus 2.0% for
revolving credit loans. A commitment fee of 0.5% per annum is payable on the
undrawn portion of the facility. No amounts have been drawn under this agreement
as of December 31, 1998.
Also, in 1997, the Company privately placed $150 million SENS in the United
States and international markets. These notes, which have been registered with
the Securities and Exchange Commission, have an average maturity of seven years
and a final maturity in 2007 and were priced at par with a coupon rate of 7.9%.
In addition, in 1997, the Company sold $50 million of bonds, due June 2004 to
investors in Peru. The bonds have a fixed interest rate of 8.25%. The Company
expects that it will meet its cash requirements for 1999 and beyond from
internally generated funds, cash on hand, borrowings under the seven-year loan
facility signed in April 1997, and from additional external financing.
The Company also has a loan outstanding with Corporacion Andina de Fomento (CAF)
of $19.6 million with interest based on LIBOR and an outstanding loan from the
United States Export - Import (EXIM) Bank of $14.6 million, with interest at a
6.43% fixed rate. Both loans are payable in semi-annual installments through
2001.
At December 31, 1998, the Company had outstanding borrowings of $234.2 million,
compared with $247.9 million at December 31, 1997.
Certain financing agreements contain covenants which limit the payment of
dividends to stockholders. Under the most restrictive covenant, the Company may
pay dividends to stockholders equal to 50% of the net income of the Company for
any fiscal quarter as long as such dividends are paid by June 30 of the
following year. Net assets of the Company unavailable for the payment of
dividends totaled $1,106 million at December 31, 1998. In accordance with the
most restrictive covenant of the Company's loan agreements, additional
indebtedness of $874.4 million would have been permitted at December 31, 1998.
The EXIM Bank credit agreement is collateralized by pledges of receivables from
7,700 tons of copper per year. The CAF loan is collateralized by liens on the
SX/EW facility. The SENS and the seven year loan facility require that most of
the collections of export copper sales be deposited into a trust account in the
United States. Twenty percent of these collections are used as collateral for
the outstanding SENS with the balance of the collections remitted directly to
the Company. The excess funds in the collateral account are remitted to the
Company, if all financial requirements are met. As part of these agreements, the
Company must maintain three-month and six-month collection ratios, as defined
(aggregate collections as a specified multiple of debt service). Both facilities
require escrow deposits of three months debt service. In addition, certain of
the agreements require the Company to maintain a minimum stockholders' equity of
$750 million, specified ratios of debt to equity, current assets to current
liabilities and an interest coverage test. Reduction of ASARCO Incorporated's
(Asarco) voting interest in the Company to less than a majority would constitute
an event of default under one of the financing agreements. The Company is in
compliance with the various loan covenants at December 31, 1998. Included in
Other assets are $11.2 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, 1998, the Company's debt as a percentage of total capitalization
(the total of debt, minority interest of labor shares and stockholders' equity)
was 17.2% as compared with 18.2% at December 31, 1997.
A-23
At December 31, 1998, the Company's cash and marketable securities amounted to
$198.1 million compared with $331.1 million at December 31, 1997.
DIVIDENDS AND CAPITAL STOCK
The Company paid dividends to stockholders of $40.7 million, or $0.51 per share,
in 1998, $101.1 million, or $1.26 per share, in 1997 and $117.9 million, or
$1.47 per share in 1996. Distributions to the labor share minority interest were
$0.9 million, $2.5 million and $4.1 million in 1998, 1997 and 1996,
respectively.
At the end of 1998 and 1997, the authorized and outstanding capital stock of the
Company consisted of 65,900,833 shares of Class A common stock, par value $0.01
per share; and 34,099,167 authorized shares of common stock, par value $0.01 per
share, of which 13,949,812 were outstanding at December 31, 1998 and 14,157,107
shares were outstanding at December 31, 1997.
ENVIRONMENTAL MATTERS
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 environmental
compliance and management plan, PAMA, approved in January 1997, 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 emissions and waste discharges 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." Under current Peruvian law
and regulations, compliance with the PAMA will satisfy environmental
requirements pertaining to the Company's operations during the applicable
five-or-ten year implementation period. The Company remains, however, subject to
other environmental requirements applicable to its operations. Environmental
capital expenditures were $25.3 million, $47.8 million and $24.6 million in
1998, 1997 and 1996, respectively. In addition, the Company estimates spending
$75.9 million for environmental control capital expenditures in 1999.
YEAR 2000
The Company has implemented a three phase program to identify and resolve Year
2000 (Y2K) issues related to the integrity and reliability of its computerized
information systems as well as computer systems embedded in its production
processes. Phase one of the Company's program which involved an assessment of
Y2K compliance of the Company's computerized information systems and embedded
computer systems has been completed. In phase two of the program the Company is
modifying or replacing all non-compliant systems. The Company has identified two
computerized information systems that are not Y2K compliant. These systems are
being replaced and are expected to be operational by the second quarter of 1999.
In addition, the Company has identified one embedded computer system that is not
Y2K compliant. This system is being replaced and is expected to be operational
in the third quarter of 1999. As of December 31, 1998, approximately 60% of the
Company's computerized information systems have been tested and are Y2K
compliant
A-24
with the remainder expected to be tested and be Y2K compliant by the second
quarter of 1999. The Company continues to test these systems where appropriate.
In addition, the Company continues to test its computer systems embedded in the
production processes and expects to be completed and Y2K compliant by the third
quarter of 1999.
As of December 31, 1998, the Company had spent approximately $0.9 million in
addition to its normal internal information technology costs in connection with
its Y2K program. The Company expects to incur additional costs of $0.3 million
to complete phases two and three of the program.
Under the third phase of the program the Company has sent detailed information
requests to its principal customers, suppliers and service providers to
determine the status of their Y2K compliance. As of December 31, 1998, the
Company received confirmations from approximately 50% indicating that they are
or will be Y2K compliant. The Company expects to have further communications
with those who have not responded or have indicated further work was required to
achieve Y2K compliance. The third phase of the program is expected to be
completed in the 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
would have an adverse impact on the Company's financial results the significance
of which would depend on the length and severity of the disruption. In response
to a request from the Company, a detailed plan to ensure Y2K compliance by the
Company's principal electrical power supplier was received. The Company is
monitoring the progress of this plan. The Company will complete a contingency
plan for each of its principal operations during the second quarter of 1999. The
purpose of the contingency plan is to identify possible alternatives which could
be used in the event of a disruption in the delivery of essential goods or
services and to minimize the effect of such a disruption.
The above estimates and conclusions contain forward-looking statements and are
based on management's best estimate of future events. Actual results could
differ materially depending on the availability of resources and the Company's
ability to identify and correct all Y2K issues.
IMPACT OF NEW ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued statement of Position No. 98-1
"Accounting for the Cost of Computer Software Developed or Obtained for Internal
Use." This statement which is effective for fiscal years beginning after
December 15, 1998, provides guidance on accounting for the costs of computer
software developed or obtained for internal use. This statement will not have a
material impact on the Company's financial statements.
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 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.
A-25
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.
A-26
Item 8. Financial Statements and Supplementary Data.
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF EARNINGS
For the years ended December 31, 1998 1997 1996
---- ---- ----
(in thousands, except for per share amounts)
Net sales:
Stockholders and affiliates $ 18,685 $ 59,897 $ 71,740
Others 609,231 754,259 681,292
---------------- -------------- --------------
Total net sales 627,916 814,156 753,032
Operating costs and expenses:
Cost of sales 442,206 474,385 400,733
Administrative and other 49,612 48,367 49,979
Depreciation and depletion 60,859 46,736 41,623
Exploration 5,185 7,390 5,063
---------------- -------------- --------------
Total operating costs and expenses 557,862 576,878 497,398
---------------- -------------- --------------
Operating income 70,054 237,278 255,634
Interest income 15,784 20,934 18,264
Interest expense (15,009) (19,573) (12,467)
Other income 9,763 7,066 4,489
---------------- -------------- --------------
Earnings before taxes on income and
minority interest of labor shares 80,592 245,705 265,920
Taxes on income 25,567 55,610 80,200
Minority interest of labor shares
in income of Peruvian Branch 461 4,437 5,208
---------------- -------------- --------------
Net earnings $ 54,564 $185,658 $180,512
================ ============== ==============
Per common share amounts:
Net earnings - basic and diluted $0.68 $2.32 $2.25
Dividends paid $0.51 $1.26 $1.47
Weighted average number
of shares outstanding-basic 79,893 80,188 80,195
Weighted average number
of shares outstanding-diluted 79,893 80,197 80,252
The accompanying notes are an integral part of these financial statements.
A-27
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED BALANCE SHEET
At December 31, 1998 1997
---- ----
(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 175,948 $ 126,491
Marketable securities 22,152 204,590
Accounts receivable:
Trade:
Stockholders and affiliates 1,446 2,941
Other trade 43,976 44,740
Other 19,139 26,083
Inventories 88,951 108,683
Other current assets 58,450 66,067
--------------------------------
Total current assets 410,062 579,595
Net property 1,088,557 947,457
Other assets 27,218 34,278
--------------------------------
Total assets $1,525,837 $1,561,330
================================
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 13,683 $ 13,683
Accounts payable:
Trade 28,477 22,296
Other 20,020 25,645
Other current liabilities 34,836 41,495
----------------------------
Total current liabilities 97,016 103,119
----------------------------
Long-term debt 220,525 234,208
Deferred credits 15,722 58,574
Deferred income taxes 56,700 44,323
Other liabilities 10,951 4,083
----------------------------
Total non-current liabilities 303,898 341,188
----------------------------
Contingencies
Minority interest of labor shares in the
Peruvian Branch 16,331 19,385
----------------------------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01; shares authorized:
1998 and 1997 - 34,099,167;
shares issued: 1998 and 1997 - 14,330,093 143 143
Class A Common stock, par value $0.01;
shares issued and authorized: 1998 and 1997 -
65,900,833 659 659
Additional paid-in capital 265,745 265,745
Retained earnings 847,229 833,560
Treasury stock, at cost, common shares,
1998-380,281, 1997 - 172,986 (5,184) (2,469)
-----------------------------
Total Stockholders' Equity 1,108,592 1,097,638
-----------------------------
Total Liabilities, Minority Interest
and Stockholders' Equity $1,525,837 $1,561,330
=============================
The accompanying notes are an integral part of these financial statements.
A-28
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31, 1998 1997 1996
---- ---- ----
(Dollars in thousands)
OPERATING ACTIVITIES
Net earnings $ 54,564 $185,658 $180,512
Adjustments to reconcile net earnings
to net cash provided from operating
activities:
Depreciation and depletion 60,859 46,736 41,623
Provision (benefit) for deferred income taxes 14,374 (7,289) 12,043
Minority interest of labor shares 461 4,437 5,208
Net loss on sale or disposal
of investments and property 9,773 268 110
Cash provided from (used for) operating assets
and liabilities:
Accounts receivable 8,292 15,718 10,498
Inventories 19,732 9,998 (15,046)
Accounts payable and accrued liabilities 9,707 (25,094) (52,023)
Other operating assets and liabilities 635 48,752 (17,811)
Foreign currency transaction (gain) loss 3,025 (1,616) (6,707)
-------------------------------
Net cash provided from operating activities 181,422 277,568 158,407
-------------------------------
INVESTING ACTIVITIES
Capital expenditures (258,696) (183,956) (120,803)
Purchase of held-to-maturity investments (40,900) (204,590) -
Proceeds from held-to-maturity investments 223,338 1,000 41,453
Sales of investments and property 5,543 49,914 -
--------------------------------
Net cash used for investing activities (70,715) (337,632) (79,350)
--------------------------------
FINANCING ACTIVITIES
Debt incurred - 200,000 47,000
Debt repaid (13,683) (58,684) (34,289)
Escrow deposits on long-term loans 2,311 (15,364) (10,065)
Dividends paid to common stockholders (40,735) (101,050) (117,913)
Distributions to minority interests (892) (2,504) (4,091)
Net treasury stock transactions (2,715) (1,681) (788)
Purchases of labor shares (3,791) (8,885) (7,130)
------------------------------
Net cash provided from (used for)
financing activities (59,505) 11,832 (127,276)
------------------------------
Effect of exchange rate changes on cash (1,745) 1,518 1,778
------------------------------
Increase (decrease) in cash and cash equivalents 49,457 (46,714) (46,441)
Cash and cash equivalents, at beginning of year 126,491 173,205 219,646
------------------------------
Cash and cash equivalents, at end of year $175,948 $126,491 $173,205
-------------------------------
The accompanying notes are an integral part of these financial statements.
A-29
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1998 1997 1996
---- ---- ----
(Dollars in thousands)
CAPITAL STOCK:
COMMON STOCK:
Balance at beginning of year $ 143 $ 137 $ 115
Conversion from Class A to Common Stock,
1997 - 650,000 shares; 1996 - 2,200,000 shares - 6 22
--------------------------------------------------
Balance at end of year 143 143 137
--------------------------------------------------
CLASS A COMMON STOCK:
Balance at beginning of year 659 666 688
Conversion to Common Stock, 1997 -650,000 shares;
1996 -2,200,000 shares - (7) (22)
--------------------------------------------------
Balance at end of year 659 659 666
--------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 265,745 265,745 265,738
Additional paid-in capital on treasury
shares issued - - 7
--------------------------------------------------
Balance at end of year 265,745 265,745 265,745
--------------------------------------------------
TREASURY STOCK:
Balance at beginning of year (2,469) (788) -
Purchased (3,001) (1,997) (1,155)
Used for corporate purposes 286 316 367
--------------------------------------------------
Balance at end of year (5,184) (2,469) (788)
--------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 833,560 749,267 686,946
Net earnings 54,564 185,658 180,512
Dividends paid (40,735) (101,050) (117,913)
Stock awards (160) (315) (278)
---------------------------------------------------
Balance at end of year 847,229 833,560 749,267
---------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $1,108,592 $1,097,638 $1,015,027
---------------------------------------------------
The accompanying notes are an integral part of these financial statements.
A-30
SOUTHERN PERU COPPER CORPORATION
and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of consolidation:
The consolidated financial statements of Southern Peru Copper Corporation and
Subsidiaries (the Company) include the accounts of significant subsidiaries in
which the Company has voting control, and are prepared in accordance with
generally accepted accounting principles in the United States (U.S. GAAP).
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Use of estimates:
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue recognition:
Substantially all of the Company's copper is sold under annual contracts.
Revenue is recognized primarily in the month product is shipped to customers
based on prices as provided in sales contracts. When the price is not
determinable at the time of shipment to customers, revenue is recognized based
on prices prevailing at the time of shipment with final pricing generally
occurring within three months of shipment. Revenues with respect to these sales
are adjusted in the period of settlement to reflect final pricing and in periods
prior to settlement to reflect any decline in market prices which may occur
between shipment and settlement. The Company sells copper in blister and refined
form at industry standard commercial terms. Net sales include the invoiced value
of copper, silver, molybdenum, acid, and gains from the sale or settlement of
copper put options.
Cash equivalents and marketable securities:
Cash equivalents include all highly liquid investments with a maturity of three
months or less, when purchased. Marketable securities include short-term liquid
investments with a maturity of more than three months, when purchased, and are
carried at cost, which approximates market.
Inventories:
Metal inventories are carried at the lower of average cost or market. Costs
incurred in the production of metal inventories exclude general and
administrative costs. Supplies inventories are carried at average cost less a
reserve for obsolescence.
Property:
Assets are valued at the lower of cost or net realizable value. In accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", the Company reviews long-lived assets,
certain identifiable intangibles and goodwill related to those assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. Any impairment loss on
such assets, as well as long-lived assets and certain identifiable intangibles
to be disposed of, is measured as the amount by which the carrying value of the
assets exceeds the fair value of the assets (less disposal costs, if
applicable).
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.
A-31
Betterments, renewals, costs of bringing new mineral properties into production,
and the cost of major development programs at existing mines are capitalized as
mineral land. Maintenance, repairs, normal development costs at existing mines,
and gains or losses on assets retired or sold are reflected in earnings as
incurred. Buildings and equipment are depreciated on the straight-line method
over estimated lives from 5 to 40 years, or the estimated life of the mine if
shorter. Depletion of mineral land is computed by the units-of-production method
using proven and probable ore reserves.
Exploration:
Tangible and intangible costs incurred in the search for mineral properties are
charged against earnings when incurred.
Hedging Activities:
Derivative instruments may be used to manage exposure to market risk from
changes in commodity prices, interest rates or the value of the Company's assets
and liabilities. Derivative instruments which are designated as hedges must be
deemed effective at reducing the risk associated with the exposure being hedged
and must be designated as a hedge at the inception of the contract.
The Company may purchase put options or create synthetic put options to reduce
or eliminate the risk of metal price declines below the option strike price on a
portion of its anticipated future production. The cost of options is amortized
on a straight-line basis during the period in which the options are exercisable.
Gains or losses from the sale or exercise of options, net of unamortized
acquisition costs, are recognized in the period in which the underlying hedged
production is sold.
Swap Agreements:
Fuel swap agreements limit the effect of changes in the price of fuel. The
differential to be paid or received as fuel prices change is recorded as a
component of cost of sales.
Stock Based Compensation:
The Company applies the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Impact of New Accounting Standards:
In March 1998, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of Position No. 98-1
"Accounting for the Cost of Computer Software Developed or Obtained for Internal
Use." This statement which is effective for fiscal years beginning after
December 15, 1998, provides guidance on accounting for the costs of computer
software developed or obtained for internal use. This statement will not have a
material impact on the Company's financial statements.
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 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.
2. Merger of Subsidiary Company
Southern Peru Copper Corporation was reorganized into a holding company
structure effective January 2, 1996, upon completion of a public offer to
exchange newly-issued Common Stock for outstanding labor shares of the Company's
Peruvian Branch. Effective December 31, 1998, the Company's predecessor and
wholly-owned operating subsidiary, Southern Peru Limited, was merged into the
Company.
A-32
3. Foreign Exchange
The functional currency of the Company is the U.S. dollar. The Company's sales,
cash, trade receivables, fixed asset additions, trade payables and debt are
primarily dollar-denominated. A portion of the operating costs of the Company is
denominated in Peruvian soles.
Gains and (losses) resulting from foreign currency transactions are included in
"Cost of sales" and amounted to ($3.0) million, $2.0 million and $6.7 million in
1998, 1997 and 1996, respectively.
4. Taxes on Income
The components of the provision for taxes on income are as follows:
For the years ended December 31, 1998 1997 1996
---- ---- ----
(in millions)
U.S. Federal and state
Current $ 2.2 $ 10.2 $ 5.0
Deferred 0.5 0.4 0.3
------------ --------------- ---------------
U.S. Federal and state 2.7 10.6 5.3
------------ --------------- ---------------
Foreign:
Current 8.5 52.3 62.9
Deferred 14.4 (7.3) 12.0
------------ --------------- ---------------
Foreign 22.9 45.0 74.9
------------ --------------- ---------------
Total provision for income taxes $25.6 $ 55.6 $80.2
============ =============== ===============
Total taxes paid were $10.4 million, $30.1 million and $123.4 million in 1998,
1997 and 1996, respectively.
Reconciliation of the statutory income tax rate to the effective income tax rate
is as follows:
For the years ended December 31, 1998 1997 1996
---- ---- ----
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 (20.8) (16.9) (25.3)
Peruvian reinvestment allowance - (9.0) -
Alternative minimum tax (AMT) credit - (3.4) -
Percentage depletion (10.5) (9.6) (9.0)
Income not taxable in Peru (1.8) (2.6) (1.8)
Other (0.2) (0.9) 1.3
---------- --------- ---------
Effective income tax rate 31.7% 22.6% 30.2%
========== ========= =========
A-33
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, 1998 1997
---- ----
(in millions)
Current:
Accounts receivable $ 1.7 $ 1.6
Inventories 0.1 0.1
-------------------------------
Net deferred tax assets 1.8 1.7
-------------------------------
Non-current:
Foreign tax credit carryforwards 23.4 26.1
AMT credit carryforwards 12.2 11.5
Property, plant and equipment (58.5) (43.5)
Other 1.8 (0.8)
Valuation allowance for deferred tax assets (35.6) (37.6)
-------------------------------
Net deferred tax liabilities (56.7) (44.3)
-------------------------------
Total net deferred tax liabilities $(54.9) $(42.6)
===============================
At December 31, 1998, the foreign tax credit carryforward available to reduce
possible future U.S. income tax amounted to approximately $23.4 million all of
which expires in 2000.
In 1997, the Government of Peru approved a reinvestment allowance for the
Company's program to expand the Cuajone mine. The reinvestment allowance
provides SPCC with tax incentives in Peru, and as a result, certain U.S. tax
credit carryforwards, for which no benefit had previously been recorded, were
realized. The reduction in the effective tax rate, as a result of the
reinvestment allowance for the twelve months ended December 31, 1997, lowered
tax expense approximately $14.7 million. Pursuant to the reinvestment allowance
SPCC has received tax deductions in Peru in amounts equal to the cost of the
qualifying property (approximately $245 million). As qualifying property is
acquired, the financial statement carrying value of the qualifying property is
reduced to reflect the tax benefit associated with the reinvestment allowance
(approximately $73 million). As a result, financial statement depreciation
expense related to the qualifying property will be reduced over its useful life
(approximately 15 years).
The Company has not recorded the benefit of foreign tax credit carryforwards
because of both the expiration dates and the rules governing the order in which
such credits are utilized. The Company also has not recorded a benefit for the
AMT credits, which are not available to reduce AMT. Because of limitations on
both percentage depletion and foreign tax credits under the AMT, the Company
expects an AMT liability for the foreseeable future. Thus, while such credits do
not expire, it is unlikely they will be utilized. Accordingly, a valuation
allowance has been established for the full amount of the foreign tax credit
carryforward and the AMT credit carryforward.
The Company obtains income tax credits in Peru for value-added taxes paid in
connection with the purchase of capital equipment and other goods and services
employed in its operations and records these credits as a prepaid expense. Under
current Peruvian law, the Company is entitled to use the credits against its
Peruvian income tax liability or to receive a refund. The carrying value of
these Peruvian tax credits approximates their market value.
A-34
5. Net Sales
Net sales by country were as follows:
For the years ended December 31, 1998 1997 1996
---- ---- ----
(in millions)
United States $127.5 $132.1 $ 77.4
Italy 86.9 110.0 109.4
United Kingdom 96.1 98.4 110.3
The Netherlands 57.7 83.8 94.3
Japan 44.7 72.5 82.0
Foreign - Other 215.0 317.4 279.6
------------- ----------- ------------
Net sales $627.9 $814.2 $753.0
============= =========== ============
At December 31, 1998, the Company had recorded sales of 27.5 million pounds of
copper at a provisional price of 66 cents 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 in the first quarter of 1999.
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.
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 1994 through 2000. Pricing of the cathodes
is based upon the LME monthly average settlement price plus a producer premium
which is agreed upon annually based on world market terms.
6. Financial Instruments
Hedging Activities: The Company uses derivative instruments to manage its
exposure to market risk from changes in commodity prices. Derivative instruments
which are designated as hedges must be deemed effective at reducing the risk
associated with the exposure being hedged and must be designated as a hedge at
the inception of the contract.
Copper: Depending on the market fundamentals and other conditions, the Company
may purchase put options to reduce or eliminate the risk of price declines below
the option strike price on a portion of its anticipated future production. Put
options purchased by the Company establish a minimum sales price for the
production covered by such put options and permit the Company to participate in
price increases above the option price. The cost of options is amortized on a
straight-line basis during the period in which the options are exercisable.
Depending upon market conditions, the Company may either sell options it holds
or exercise the options at maturity. Gains or losses from the sale or exercise
of options, net of unamortized acquisition costs, are recognized in the period
in which the underlying production is sold and are reported as a component of
the underlying transaction.
Earnings include pre-tax gains from option sales and exercises of $7.2 million
in 1998, $10.2 million in 1997 and $9.9 million in 1996. At December 31, 1998,
the Company held no copper put options.
A-35
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 as a component of cost of sales.
As of December 31, 1998 and 1997, the Company has entered into the following
fuel swap agreements:
Weighted
Average
Contract
Quantity Price
Fuel Type Period (Barrels) (per Barrel)
- ----------------- --------------- --------------------- ----------------
1998
Residual Oil 1/99-9/99 1,095,000 $ 9.84
Diesel Fuel 1/99-9/99 432,000 $15.80
1997
Residual Oil 1/98-12/98 540,000 $13.57
Diesel Fuel 1/98-12/98 200,000 $21.17
In the event of a hypothetical 10 percent decrease in the respective fuel
prices, the Company would incur higher production costs in 1999 of approximately
$3.2 million over the life of the contracts than it would have incurred had the
exposure not been hedged.
In 1998, the Company's production cost would have been $3.3 million lower if
this exposure had not been hedged.
The estimated fair value of the Company's financial instruments is:
At December 31, 1998 1997
(in millions) Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Assets:
Cash and cash equivalents $175.9 $175.9 $126.5 $126.5
Marketable securities -
held to maturity 22.2 22.2 204.6 204.6
Put options - - 0.6 7.2
Fuel swap agreements - (1.6) - (0.5)
Liabilities:
Long-term debt $234.2 $225.0 $247.9 $248.3
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 these instruments.
Marketable securities - The carrying amount and fair value are reported at
amortized cost, which approximates market, 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 strike price.
Fuel swap agreements - Fair value is based on quoted market prices.
A-36
Long-term debt - Fair value is based on the quoted market prices for the same or
similar issues.
7. Workers' Participation
Provisions for workers' participation are calculated at 8% of pre-tax earnings
and are included in "Cost of sales" on the earnings statement. The current
portion of this participation which is accrued during the year is based on
Branch taxable income and is distributed to workers following determination of
final results for the year.
8. Minority Interest of Labor Shares
The minority interest of the labor shares is based on the earnings of the
Company's Peruvian Branch.
The Company acquired 1.0 million, 2.0 million and 1.8 million labor shares at a
cost of $3.8 million, $8.9 million and $7.1 million in the years 1998, 1997 and
1996, respectively. The carrying value of the minority interest was reduced by
$2.5 million, $5.1 million and $4.4 million in 1998, 1997 and 1996,
respectively, and the excess paid over the carrying value was assigned primarily
to proven and probable sulfide and leachable ore reserves and mineralized
material and is being amortized based on production. As a result of these
acquisitions, the remaining labor shareholders hold a 1.9% interest in the
Branch at December 31, 1998, and are entitled to a pro rata participation in the
cash distributions made by the Branch. The labor shares are recorded as a
minority interest in the Company's financial statements.
9. Inventories
At December 31, 1998 1997
---- ----
(in millions)
Metals:
Finished goods $ 1.5 $ 0.6
Work-in-process 37.9 45.0
Supplies, net of reserves 49.5 63.1
----------------- -----------------
Total inventories $88.9 $108.7
----------------- -----------------
10. Property
At December 31, 1998 1997
---- ----
(in millions)
Buildings and equipment $1,623.4 $1,493.6
Mineral land 376.7 330.7
Land, other than mineral 1.8 1.3
----------------- -----------------
Total property 2,001.9 1,825.6
Accumulated depreciation 913.3 878.1
----------------- -----------------
Net property $1,088.6 $ 947.5
----------------- -----------------
In 1998, the Company recorded a charge of $9.8 million to write-off the
remaining book value of the Ilo townsite property, transferred to its worker
occupants and the city of Ilo, Peru.
A-37
11. Other Current Liabilities
At December 31, 1998 1997
---- ----
(in millions)
Accrued workers' participation $ 1.2 $13.8
Accrued severance pay, current portion 1.8 1.7
Salaries and wages 7.8 8.0
Taxes on income 22.0 18.0
Other 2.0 -
----------------- -----------------
Total other current liabilities $34.8 $41.5
----------------- -----------------
12. Debt and Available Credit Facilities
Long-term debt at December 31, 1998 1997
---- ----
(in millions)
6.43% EXIM Bank credit agreement $ 14.6 $ 20.4
CAF credit agreement - 8.9% 19.6 27.5
7.9% Secured Export Notes (SENS) due 2007 150.0 150.0
8.25% Corporate bonds due 2004 50.0 50.0
--------------- -----------------
Total debt 234.2 247.9
Less, current portion 13.7 13.7
--------------- -----------------
Total long-term debt $220.5 $234.2
--------------- -----------------
Interest paid by the Company (excluding amounts capitalized of $10.6 million and
$2.3 million in 1998 and 1997, respectively) was $12.5 million, $19.0 million
and $10.8 million in 1998, 1997 and 1996, respectively.
Fees paid for loan agreements of $13.9 million in 1997 are included in other
assets and amortized over the respective terms of the loans.
Aggregate maturities of the borrowings outstanding at December 31, 1998, are as
follows (in millions):
1999 $ 13.7
2000 23.3
2001 24.3
2002 18.9
2003 20.5
Thereafter 133.5
--------------------
Total $234.2
--------------------
In 1997, the Company entered into a $600 million seven-year credit agreement
with a group of international financial institutions. The agreement consists of
a $400 million term loan facility and a $200 million revolving credit facility.
The interest rate during the first three years of the agreement on any loans
outstanding is LIBOR plus 1.75% per annum for term loans and LIBOR plus 2.0% for
revolving credit loans. A commitment fee of 0.5% per annum is payable on the
undrawn portion of the facility. No amounts have been drawn under this agreement
as of December 31, 1998.
Also in 1997, the Company privately placed $150 million of SENS in the United
States and international markets. These notes were issued with an average
maturity of seven years and a final maturity in 2007 and were priced at par with
a coupon rate of 7.9%. In addition, in June 1997 the Company sold $50 million of
8.25% bonds due June 2004 to investors in Peru.
A-38
Some financing agreements contain covenants which limit the payment of dividends
to stockholders. Under the most restrictive covenant, the Company may pay
dividends to stockholders equal to 50% of its net income for any fiscal quarter
as long as such dividends are paid by June 30 of the following year. As a
result, net assets of the Company unavailable for the payment of dividends
totaled $1,106 million at December 31, 1998. In accordance with the most
restrictive covenant of the Company's loan agreements, additional indebtedness
of $874.4 million would have been permitted at December 31, 1998.
The EXIM Bank credit agreement is collateralized by pledges of receivables from
sales of 7,700 tons of copper per year. The CAF loan is collateralized by liens
on the SX/EW facility. The SENS and the seven-year loan facility require that
most of the collections of export copper sales be deposited into a trust account
in the United States. Twenty percent of these collections are used as collateral
for the outstanding SENS with the balance of the collections remitted directly
to the Company. The excess funds in the collateral account are remitted to the
Company, if all financial requirements are met. As part of these agreements, the
Company must maintain three month and six month collection ratios, as defined
(aggregate collections as a specified multiple of debt service). Both facilities
require escrow deposits of three months debt service. In addition, certain of
the agreements require the Company to maintain a minimum stockholders' equity of
$750 million, specified ratios of debt to equity, current assets to current
liabilities and an interest coverage test. Reduction of ASARCO Incorporated's
(Asarco) voting interest in the Company to less than a majority would constitute
an event of default under one of the financing agreements. The Company is in
compliance with the various loan covenants at December 31, 1998. Included in
Other assets are $11.2 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.
13. Benefit Plans
The Company has a noncontributory, defined benefit pension plan covering
salaried employees in the United States and certain employees in Peru. Benefits
are based on salary and years of service. The Company's funding policy is to
contribute amounts to the plans sufficient to meet the minimum funding
requirements set forth in the Employee Retirement Income Security Act of 1974,
plus such additional amounts as the Company may determine to be appropriate.
Plan assets are invested in commingled stock and bond funds. 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.
A-39
The components of net periodic benefit costs are as follows:
For the years ended December 31, 1998 1997 1996
---- ---- ----
(in millions)
Service cost $ 0.6 $ 0.4 $ 0.5
Interest cost 0.7 0.5 0.5
Expected return on plan assets (0.7) (0.5) (0.4)
Amortization of prior service cost 0.1 - -
Amortization of transitional obligation 0.2 0.2 0.2
------------------------------------
Net periodic benefit cost $ 0.9 $ 0.6 $ 0.8
------------------------------------
The change in benefit obligation and plan assets and a reconciliation of funded
status are as follows:
At December 31, 1998 1997
---- ----
(in millions)
Change in Benefit Obligation
Projected benefit obligation at beginning of year $ 8.5 $ 5.9
Service cost 0.6 0.4
Interest cost 0.7 0.5
Plan amendments 1.1 2.6
Benefits paid (0.6) (0.4)
Actuarial loss (gain) 0.8 (0.5)
-----------------------------
Projected benefit obligation at end of year $ 11.1 $ 8.5
=============================
Change in Plan Assets
Fair value of plan assets at beginning of year $ 7.7 $ 3.7
Actual return on plan assets 2.5 0.5
Plan amendment - 2.5
Employer contributions 1.5 1.4
Benefits paid (0.5) (0.4)
-----------------------------
Fair value of plan assets at end of year $ 11.2 $ 7.7
=============================
Reconciliation of Funded Status
Funded status $ 0.1 $ (0.8)
Unrecognized actuarial gain (1.7) (0.6)
Unrecognized transition obligation 1.6 1.8
Unrecognized prior service cost 1.0 -
-----------------------------
Net amount reflected in consolidated
Balance sheet $ 1.0 $ 0.4
=============================
Weighted Average Assumptions
Discount rate 7.0% 7.0%
Expected long-term rate of return on plan
assets 8.0% 8.0%
Rate of compensation increase 4.0% 4.0%
A-40
Post-retirement Benefits:
The post-retirement health care plan for retired salaried employees eligible for
Medicare was adopted by the Company on May 1, 1996. Secondary coverage under the
Company's plan is available for all retired salaried employees who permanently
reside in the United States and who contribute amounts as defined by the plan.
The components of net periodic benefit costs are as follows:
For the years ended December 31, 1998 1997 1996
---- ---- ----
(in millions)
Service cost $ 0.1 $ 0.1 $ 0.1
Interest cost 0.1 - -
Amortization of prior service cost 0.1 0.1 0.1
Recognized actuarial loss - - -
--------------------------------------
Net periodic benefit cost $ 0.3 $ 0.2 $ 0.2
======================================
The change in benefit obligation and plan assets and a reconciliation of funded
status are as follows:
At December 31, 1998 1997
---- ----
(in millions)
Change in Benefit Obligation
Benefit obligation at beginning of year $ 0.9 $ 0.9
Service cost 0.1 0.1
Interest cost 0.1 -
Plan amendments 0.1 -
Benefits paid - -
Actuarial (gain) loss - (0.1)
------------------------------------
Benefit obligation at end of year $ 1.2 $ 0.9
====================================
Reconciliation of Funded Status
Funded status $(1.2) $(0.9)
Unrecognized actuarial loss (0.1) (0.1)
Unrecognized prior service cost 0.6 0.6
-----------------------------------
Postretirement benefit obligation $(0.7) $(0.4)
====================================
Weighted-Average Assumptions
Discount rate 7% 7%
Expected long-term rate of return
on plan assets N/A N/A
Rate of compensation increase 4% 4%
A-41
The annual assumed rate of increase in the per capita cost of covered benefits
(i.e., health care cost trend rate) is assumed to be 5% in 1999 and 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 would increase the accumulated postretirement
benefit obligation costs for 1998 by $0.1 million and the service and interest
cost components of net periodic postretirement benefit would have an
insignificant change. Decreasing the assumed health care cost trend rates by one
percentage point in each year would decrease the accumulated postretirement
benefit obligation for 1998 by $0.1 million and the service and interest cost
components of net periodic postretirement benefit costs would have an
insignificant change. The plan is unfunded.
Employee Savings Plan:
The Company maintains an employee savings plan for employees working in the
United States and expatriate employees in Peru which permits employees to make
contributions by salary reduction pursuant to section 401(k) of the Internal
Revenue Code. The plan was amended, effective January 1, 1997, to include a
Company matching contribution equal to 50% of the first 6% of employee
contributions. In connection with the required match, the Company's
contributions charged against earnings were $0.2 million in 1998 and 1997.
A-42
14. Stockholders' Equity
Common Stock:
The stockholders of the Company at December 31, 1998 were:
Percent of
Total Number
Shares of Shares
-------------------- --------------------
Class A Common Shares:
ASARCO Incorporated 43,348,949 54.3%
Cerro Trading Company, Inc. 11,378,088 14.2
Phelps Dodge Overseas Capital
Corporation 11,173,796 14.0
-------------------- --------------------
Total Class A 65,900,833 82.5
Common Shares 13,949,812 17.5
-------------------- --------------------
Total 79,850,645 100.0%
-------------------- --------------------
Class A common shares are entitled to five votes per share. Common shares are
entitled to one vote per share.
Stock Options:
The Company has two stockholder approved plans, a Stock Incentive Plan and a
Directors' Stock Award Plan. The Stock Incentive Plan provides for the
granting of nonqualified or incentive stock options, as defined under the
Internal Revenue Code of 1986, as amended, as well as for the award of
restricted stock and bonuses payable in stock. The price at which options may
be granted under the Stock Incentive Plan shall not be less than 100% of the
fair market value of the common stock on the date of grant in the case of
incentive stock options, or 50% in the case of other options. In general,
options are not exercisable for six months and expire after 10 years from the
date of grant.
Options granted may provide for Stock Appreciation Rights (SAR). An SAR
permits an optionee, in lieu of exercising the option, to receive from the
Company payment of an amount equal to the difference between the market value
of the stock on the date of election of the SAR and the purchase price of the
stock under the terms of the option.
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, 1998,
737,610 shares are available for future grants under this plan (836,635 shares
at December 31, 1997). The weighted average remaining contractual life of
stock option's outstanding as of December 31, 1998 was 8.3 years.
The Directors' Stock Award Plan provides that directors who are not
compensated as employees of the Company will be automatically awarded 200
shares of common stock upon election and 200 additional shares following each
annual meeting of stockholders thereafter. Under the directors plan, 100,000
shares have been reserved for awards. At December 31, 1998, 11,400 shares have
been awarded under this plan.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost
has been recognized for awards under the stock incentive plan. If compensation
cost for the Company's Stock Incentive Plan had been determined based on the
fair value at the grant date for awards in 1998, 1997 and 1996, consistent
A-43
with the provisions of SFAS No. 123, the Company's net earnings and earnings
per share would have been reduced to the proforma amounts indicated below:
(in millions, except per share amounts)
1998 1997 1996
---- ---- ----
Net earnings - as reported $54.6 $185.7 $180.5
Net earnings - pro forma $54.4 $185.5 $180.4
Earnings per share (Basic) - as reported $0.68 $ 2.32 $ 2.25
Earnings per share (Diluted) - as reported $0.68 $ 2.32 $ 2.25
Earnings per share (Basic) - pro forma $0.68 $ 2.32 $ 2.25
Earnings per share (Diluted) - pro forma $0.68 $ 2.32 $ 2.25
For purposes of computing earnings per share, basic and diluted, the dilutive
effect of stock options on common shares outstanding is as follows:
Weighted average common shares outstanding: 1998 1997 1996
---- ---- ----
(in millions)
Basic and diluted 79.9 80.2 80.2
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 1998: dividend yield of 4.8% (4.05%-1997, 6.57%-1996); expected
volatility of 40.4% (29.2%-1997, 28.4%-1996); risk-free interest rate of 5.6%
(6.31%-1997, 6.17%-1996); and expected life of 7.1 years (7.0 years-1997, 6.9
years-1996).
Stock option activity over the past three years under the Stock Incentive Plan
was:
Weighted
Number of Average Option Price
Shares Price (Range Per Share)
------------------ ------------------ ----------------------------------
Outstanding at January 1, 1996 - - -
Granted 72,890 $16.06 $16.06
Exercised - - -
Canceled or expired - - -
------------------
Outstanding at January 1, 1997 72,890 16.06 16.06
Granted 90,475 16.30 16.25 to 17.06
Exercised (3,238) 16.06 16.06
Canceled or expired (1,342) 16.15 16.06 to 16.25
------------------
Outstanding at January 1, 1998 158,785 16.20 16.06 to 17.06
Granted 99,025 12.78 12.78
Exercised - - -
Canceled or expired (960) 16.16 16.06 to 16.25
------------------
Outstanding and exercisable at
December 31, 1998 256,850 $14.88 $12.78 to $17.06
15. Related Party Transactions
Asarco, a 54.3% stockholder of the Company, provides legal, tax, treasury and
administrative support services to the Company. The amounts paid to Asarco for
these services were $1.0 million, $1.6 million and $0.8 million in 1998, 1997,
and 1996, respectively.
A-44
16. Concentration of Risk
The Company operates two copper mines, a smelter and two refineries in Peru and
substantially all of its assets are located there. There can be no assurances
that the Company's operations and assets that are subject to the jurisdiction of
the Government of Peru may not be adversely affected by future actions of such
government. Substantially all of the Company's products are exported from Peru
to customers principally in Europe, Asia, South America and the United States.
Financial instruments which potentially subject the Company to a concentration
of credit risk consist primarily of cash and cash equivalents, marketable
securities and trade accounts receivable.
The Company invests or maintains available cash with various high-quality banks,
principally in the U.S., Canada and Peru, or in commercial paper of highly rated
companies. As part of its cash management process, the Company regularly
monitors the relative credit standing of these institutions, and by policy,
limits the amount of credit exposure to any one institution. At December 31,
1998, the Company had invested 28.6% of its cash equivalents and marketable
securities with Peruvian banks, of which 54.0% 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 58.3% of the trade
accounts receivable at December 31, 1998, of which one customer represented
12.1%.
17. Commitments and Contingencies
In September 1996, the Company announced a two stage project which includes an
expansion of the Cuajone mine and an expansion and modernization of the copper
smelter at Ilo. Total capital cost for this project is estimated at $1.1
billion, budgeted to be spent through the year 2003.
The Cuajone mine expansion which consists of an expansion in annual copper
production by 130 million pounds at an estimated capital investment of $245
million was substantially completed at December 31, 1998, however, some new
mining equipment will continue to be received over the next two years. The
second stage of the program, the expansion and modernization of the Ilo smelter
is expected to be completed over the period 1998-2003 at an estimated cost of
$875 million.
In 1998, the Company commenced a $48 million project to expand annual SX/EW
copper production by 26 million pounds. Project completion is expected in the
third quarter of 1999.
As a result of the expansion program, electric power requirements will increase
significantly, requiring the construction of substantial additional generating
capacity. In 1997, the Company sold its existing power plant to an independent
power company for $33.6 million. In connection with the sale, a power purchase
agreement was also completed, under which the Company agreed to purchase its
power needs for the next twenty years.
A-45
Environmental:
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 environmental
compliance and management plan, PAMA, approved in January 1997, 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 emissions and waste discharges 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." Under current Peruvian law
and regulations, compliance with the PAMA will satisfy environmental
requirements pertaining to the Company's operations during the applicable
five-or-ten year implementation period. The Company remains, however, subject to
other environmental requirements applicable to its operations. Environmental
capital expenditures were $25.3 million, $43.8 million and $24.6 million in
1998, 1997 and 1996, respectively. In addition, the Company estimates spending
$75.9 million for environmental control capital expenditures in 1999.
Litigation:
In April 1996, the Company was served with a complaint filed in Peru by
approximately 800 former employees seeking the delivery of a substantial number
of labor shares of its Peruvian Branch plus dividends. In October 1997, the
Superior Court of Lima nullified a decision of a court of first instance, which
had been adverse to the Company. The Superior Court remanded the case for a new
trial. Plaintiffs 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 the Company a similar lawsuit filed by 127 additional
former employees. In the third quarter of 1997, the court of first instance
dismissed their complaint. Upon appeal filed by the plaintiffs, the Superior
Court of Lima, in the third quarter of 1998, nullified the lower court's
decision on technical grounds and remanded the case to the lower court for
further proceedings.
It is the opinion of management that the outcome of the legal proceedings
mentioned, as well as other miscellaneous litigation and proceedings now
pending, will not materially adversely affect the financial position of the
Company and its consolidated subsidiaries. However, it is possible that
litigation matters could have a material effect on quarterly or annual operating
results, when they are resolved in future periods.
A-46
Unaudited Quarterly Data
Quarters
(in millions, except per share data)
1998 1997
---- ----
1st 2nd 3rd 4th Year 1st 2nd 3rd 4th Year
==========================================================================================================
Net sales $152.4 $152.5 $173.8 $149.2 $627.9 $214.8 $226.2 $202.3 $170.9 $814.2
Operating
income $ 17.3 $ 19.7 $ 30.2 $ 2.9 $ 70.1 $ 75.3 $ 74.0 $ 51.0 $ 35.1 $235.4
Net earnings $ 12.9 $ 18.4 $ 19.9 $ 3.4 $ 54.6 $ 55.8 $ 59.6 $ 39.9 $ 30.4 $185.7
Net earnings per share:
Basic $ 0.16 $ 0.23 $ 0.25 $ 0.04 $ 0.68 $ 0.70 $ 0.74 $ 0.50 $ 0.38 $ 2.32
Diluted $ 0.16 $ 0.23 $ 0.25 $ 0.04 $ 0.68 $ 0.70 $ 0.74 $ 0.50 $ 0.38 $ 2.32
Dividend per share $ 0.20 $ 0.08 $ 0.11 $ 0.12 $ 0.51 $ 0.30 $ 0.35 $ 0.37 $ 0.24 $ 1.26
Stock prices
New York Stock Exchange:
High $15-1/8 $16-11/16 $13-1/2 $12-7/8 $16-11/16 $17-3/8 $21-1/8 $20-7/8 $18-1/4 $21-1/8
Low $12-1/2 $13 $8-3/4 $8-15/16 $8-3/4 $15 $16-7/8 $17-5/8 $12-3/4 $12-3/4
Lima Stock Exchange:
High $14.95 $16.50 $13.35 $12.70 $16.50 $17.35 $21.20 $21.06 $17.99 $21.20
Low $12.40 $12.95 $8.93 $8.89 $8.89 $14.85 $16.80 $17.30 $12.58 $12.58
Metal Price Sensitivity
Assuming that expected metal production and sales are achieved, that tax rates
are unchanged, that the number of shares outstanding is unchanged, and giving no
effect to hedging programs or changes in the costs of production, metal price
sensitivity factors would indicate the following estimated change in earnings
per share resulting from metal price changes in 1999. Estimates are based on
79.9 million shares outstanding.
Copper Silver Molybdenum
Change in Metal Price $0.01/lb. $1.00/oz. $1.00/lb.
Annual Change in Earnings
per Share $0.06 $0.02 $0.10
A-47
Report of Independent Accountants
To the Board of Directors and Stockholders
of Southern Peru Copper Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, cash flows and changes in stockholders'
equity present fairly, in all material respects, the financial position of
Southern Peru Copper Corporation and subsidiaries (the "Company") at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
January 22, 1999
A-48
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-12 to A-13. Information in response to the disclosure
requirements specified by these items appears under the captions and pages of
the 1999 Proxy Statement indicated below:
Proxy
Statement
Item Required Information Proxy Statement Section Pages
10. Directors and Executive Nominees for Election as Directors
Officers Representing Common Stock and
Nominees for Election as
Directors Representing
Class A Common Stock 4-6
Section 16(a) Beneficial Ownership
Reporting Compliance 20-21
11. Executive Compensation Committee Reports on Executive
Compensation through Employment
Agreements 11-17
Compensation of Directors and
Compensation Committee Interlocks
and Insider Participation 20
12. Security Ownership Security Ownership of Certain
Beneficial Owners and Beneficial
Ownership of Management 7-11
13. Certain Relationships Certain Transactions 18-19
and Related Transactions
The information referred to above is incorporated herein by reference.
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:
A-49
Form
10 - K
Pages
Consolidated Statement of Earnings for the years ended
December 31, 1998, 1997 and 1996 A26
Consolidated Balance Sheet at December 31, 1998 and 1997 A27
Consolidated Statement of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 A28
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996 A29
Notes to Consolidated Financial Statements A30 - A46
Report of Independent Accountants A47
2. Financial Statement Schedules
Financial Statement Schedules are omitted, as they are not required or are
not applicable, or the required information is shown in the financial statements
or notes thereto.
3. Exhibits
3.1 Restated Certificate of Incorporation, filed December 29, 1995
3.2 Certificate of Decrease, filed February 29, 1996
3.3 Certificate of Increase, filed February 29, 1996
3.4 Certificate of Decrease, filed March 24, 1997
3.5 Certificate of Increase, filed March 24, 1997
3.6 By-Laws, as last amended on February 3, 1998
4.1 Indenture, dated as of May 30, 1997, among Southern Peru Limited,
Southern Peru Copper Corporation, as guarantor, and Citibank, N.A., as
Trustee.
4.2 Supplemental Indenture, dated as of May 30, 1997, among Southern Peru
Limited, Southern Peru Copper Corporation, as guarantor, and Citibank,
N.A., as Trustee.
4.3 Form of Amended and Restated Collateral Trust Agreement, dated as of
July 15, 1997, between Southern Peru Limited and Deutsche Bank AG, New
York Branch, as collateral trustee.
4.4 Form of Series A-1 Secured Export Notes due 2007
4.5 Supplemental Indenture, dated as of October 15, 1998 among Southern
Peru Limited, Southern Peru Copper Corporation as guarantor, and
Citibank, N.A., as Trustee.
A-50
4.6 Supplemental Indenture, dated as of December 22, 1998 between Southern
Peru Copper Corporation and Citibank, N.A. as Trustee.
10.1 Form of Agreement Among Certain Stockholders of the Company
10.2 Tax Stability Agreement, dated August 8, 1994, between the Government
of Peru and the Company regarding SX/EW facility (and English
translation)
10.3 Incentive Compensation Plan of the Company
10.4 Supplemental Retirement Plan of the Company, as amended and restated
April 30, 1998
10.5 Stock Incentive Plan of the Company
10.6 Form of Directors Stock Award Plan of the Company
10.7 Deferred Fee Plan for Directors, as amended and restated April 30,
1998
10.8 Form of Agreement Accepting Membership in the Plan, containing text of
Retirement Plan and Trust for Selected Employees
10.9 Compensation Deferral Plan, as amended and restated April 30, 1998
10.10 Credit Agreement dated as of March 31, 1997 among Southern Peru
Limited, as Borrower, Southern Peru Copper Corporation, as Guarantor,
the several banks and other financial institutions from time to time
parties to the Credit Agreement, Morgan Guaranty Trust Company of New
York, as Administrative Agent, The Chase Manhattan Bank, as
Documentation Agent, Citicorp Securities, Inc., as Syndication Agent,
and Deutsche Bank AG, New York Branch, as Security and Collateral
Agent.
10.11 First Amendment to the Credit Agreement, dated July 14, 1997.
10.12 Assignment and Assumption Agreement dated as of December 30, 1998,
between Southern Peru Copper Corporation, a Delaware Corporation, and
Southern Peru Limited.
10.13 Consulting Agreement between the Company and Mr. C. G. Preble dated
March 18, 1999.
11. Statement re Computation of Earnings Per Share
21.1 Subsidiaries of the Company
23.1 Consent of Independent Accountants
The exhibits listed as 10.4 through 10.9 and 10.13 above are the management
contracts or compensatory plans or arrangements required to be filed pursuant to
Item 14(c) of Form 10-K.
(B) Reports on Form 8-K filed in the fourth quarter of 1997 and the first
quarter of 1998:
None.
A-51
(C) Exhibits - The exhibits to this Form 10-K are listed on the Exhibit
Index on page B1 through B3. Copies of the following exhibits are filed
with this Form 10-K:
4.5 Supplemental Indenture, dated as of October 15, 1998 among Southern
Peru Limited, Southern Peru Copper Corporation as guarantor, and
Citibank, N.A., as Trustee.
4.6 Supplemental Indenture, dated as of December 22, 1998 between Southern
Peru Copper Corporation and Citibank, N.A., as Trustee.
10.4 Supplemental Retirement Plan of the Company, as amended and restated
as of April 30, 1998
10.7 Deferred Fee Plan for Directors, as amended and restated as of April
30, 1998
10.9 Compensation Deferral Plan, as amended and restated as of April 30,
1998
10.12 Assignment and Assumption Agreement dated as of December 30, 1998,
between Southern Peru Copper Corporation, a Delaware Corporation and
Southern Peru Limited.
10.13 Consulting Agreement between the Company and Mr. C. G. Preble dated
March 18, 1999
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.
A-52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York.
SOUTHERN PERU COPPER CORPORATION
(Registrant)
By: /s/ Charles G. Preble
Charles G. Preble
President and Chief Executive Officer
Date: March 9, 1999
Pursuant to requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
/s/ Richard de J. Osborne Chairman of the Board and Director
Richard de J. Osborne
/s/ Charles G. Preble President, Chief Executive Officer
Charles G. Preble and Director (principal executive officer)
/s/ Thomas J. Findley, Jr. Vice President and Chief Financial Officer
Thomas J. Findley, Jr. (principal financial officer)
/s/ Brendan M. O'Grady Comptroller (principal accounting officer)
Brendan M. O'Grady
DIRECTORS
/s/ Everett E. Briggs /s/ Robert J. Muth
Everett E. Briggs Robert J. Muth
/s/ Jaime Claro /s/ Robert A. Pritzker
Jaime Claro Robert A. Pritzker
/s/ William Dowd /s/ Michael O. Varner
William Dowd Michael O. Varner
/s/ Augustus B. Kinsolving /s/ J. Steven Whisler
Augustus B. Kinsolving J. Steven Whisler
/s/ Francis R. McAllister /s/ David B. Woodbury
Francis R. McAllister David B. Woodbury
/s/ John F. McGillicuddy _________________________
John F. McGillicuddy Douglas C. Yearley
/s/ Kevin R. Morano
Kevin R. Morano
Date: March 9, 1999
B-1
Southern Peru Copper Corporation
Exhibit Index
Sequential
Exhibit Page
Number Document Description Number
3. Certificate of Incorporation and By-Laws
3.1 Restated Certificate of Incorporation, filed December 29, 1995 (Filed as
Exhibit 3.1 to the Company's 1995 Annual Report on Form 10-K and
incorporated herein by reference)
3.2 Certificate of Decrease, filed February 29, 1996 (Filed as Exhibit 3.2
to the Company's 1995 Annual Report on Form 10-K and incorporated herein
by reference)
3.3 Certificate of Increase, filed February 29, 1996 (Filed as Exhibit 3.3
to the Company's 1995 Annual Report on Form 10-K and incorporated herein
by reference)
3.4 Certificate of Decrease, filed March 24, 1997 (Filed as Exhibit 3.6 to
the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997 and incorporated herein by reference)
3.5 Certificate of Increase, filed March 24, 1997 (Filed as Exhibit 3.5 to
the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997 and incorporated herein by reference)
3.6 By-Laws, as last amended on February 3, 1998
4. Instruments Defining Rights of Security Holders
4.1 Indenture, dated as of May 30, 1997, among Southern Peru Limited, Southern
Peru Copper Corporation, as guarantor, and Citibank, N.A., as Trustee.
(Filed as Exhibit 4.1(a) to the Company's Registration Statement on Form
S-4, as amended by Amendment No. 1 thereto, File No. 333-34505, and
incorporated herein by reference)
4.2 Supplemental Indenture, dated as of May 30, 1997, among Southern Peru
Limited, Southern Peru Copper Corporation, as guarantor, and Citibank,
N.A., as Trustee.
(Filed as Exhibit 4.1(b) to the Company's Registration Statement on Form
S-4, as amended by Amendment No. 1 thereto, File No. 333-34305, and
incorporated herein by reference)
4.3 Form of Amended and Restated Collateral Trust Agreement, dated as of
July 15, 1997, between Southern Peru Limited and Deutsche Bank AG, New
York Branch, as collateral trustee.
(Filed as Exhibit 4.1(c) to the Company's Registration Statement on Form
S-4, as amended by Amendment No. 1 thereto, File No. 333-34305, and
incorporated herein by reference)
B-2
Southern Peru Copper Corporation
Exhibit Index
Sequential
Exhibit Page
Number Document Description Number
4.4 Form of Series A-1 Secured Export Notes due 2007 (Filed as Exhibit
4.1(d) to the Company's Registration Statement on Form S-4, as amended by
Amendment No. 1 thereto, File No. 333-34305, and incorporated herein by
reference)
4.5 Supplemental Indenture, dated as of October 15, 1998 among Southern Peru
Limited, Southern Peru Copper Corporation as guarantor, and Citibank,
N.A., as Trustee B7-B12
4.6 Supplemental Indenture, dated as of December 22, 1998 between Southern
Peru Copper Corporation and Citibank, N.A., as Trustee B13-B17
10. Material Contracts
10.1 Form of Agreement Among Certain Stockholders of the Company (Filed as
Exhibit 10.1 to the Company's Registration Statement on Form S-4, as
amended by Amendments No. 1 and 2 thereto, File No 33-97790 (the "Form
S-4"), and incorporated herein by reference)
10.2 Tax Stability Agreement, dated August 8, 1994, between the Government
of Peru and the Company regarding SX/EW facility (and English translation)
(Filed as Exhibit 10.3 to the Company's Form S-4 and incorporated herein
by reference)
10.3 Incentive Compensation Plan of the Company (Filed as Exhibit 10.11 to
the Company's Form S-4 and incorporated herein by reference)
10.4 Supplemental Retirement Plan of the Company, as amended and restated as
of April 30, 1998 B18-23
10.5 Stock Incentive Plan of the Company (Filed as an Exhibit to the
Company's Registration Statement on Form S-8 dated March 25, 1996
(Registration No. 333-2736) and incorporated herein by reference)
10.6 Form of Directors Stock Award Plan of the Company (Filed as Exhibit
10.16 to the Company's Form S-4 and incorporated herein by reference)
10.7 Deferred Fee Plan for Directors, as amended and restated as of April
30, 1998 B24-29
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)
B-3
Southern Peru Copper Corporation
Exhibit Index
Sequential
Exhibit Page
Number Document Description Number
10.9 Compensation Deferral Plan, as amended and restated as of April 30,
1998 B30-B36
10.10 Credit Agreement dated as of March 31, 1997 among Southern Peru
Limited, as Borrower, Southern Peru Copper Corporation, as Guarantor, the
several banks and other financial institutions from time to time parties
to the Credit Agreement, Morgan Guaranty Trust Company of New York, as
Administrative Agent, The Chase Manhattan Bank, as Documentation Agent,
Citicorp Securities, Inc., as Syndication Agent, and Deutsche Bank AG, New
York Branch, as Security and Collateral Agent. (Filed as Exhibit 10.9 to
the Company's Registration Statement on Form S-4, File No. 333-3405, and
incorporated herein by reference)
10.11 First Amendment to the Credit Agreement, dated July 14, 1997. (Filed
as Exhibit 10.10 to the Company's Registration Statement on Form S-4, File
No. 333-34305, and incorporated herein by reference)
10.12 Assignment and Assumption Agreement dated as of December 30, 1998,
between Southern Peru Copper Corporation, a Delaware Corporation, and
Southern Peru Limited B37-B38
10.13 Consulting Agreement between the Company and Mr. C. G. Preble dated
March 18, 1999 B39-B40
11. Statement re Computation of Earnings per Share B4
21.1 Subsidiaries of the Company B5
23.1 Consent of Independent Accountants B6
B-4
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).
Diluted Earnings per Common Share
(in thousands, except per share amounts)
For the years ended December 31, 1998 1997 1996
- -------------------------------- ---- ---- ----
Net earnings applicable to common stock $54,564 $185,658 $180,512
==================================================
Weighted average number of common shares
outstanding
79,893 80,188 80,195
Shares issuable from assumed exercise of
Stock Options - 9 57
--------------------------------------------------
Weighted average number of common shares
outstanding, adjusted 79,893 80,197 80,252
Diluted earnings per share:
Net earnings applicable to common stock $0.68 $2.32 $2.25
==================================================
Basic earnings per share
Net earnings applicable to common stock $0.68 $2.32 $2.25
==================================================
B-5
Exhibit 21.1
SOUTHERN PERU COPPER CORPORATION
Subsidiaries
(More than 50% ownership)
Percentage of
voting
securities
owned
Or other bases
Name of Company control
PARENT: ASARCO Incorporated (New Jersey)
Registrant: Southern Peru Copper Corporation (Delaware)
Fomenta, S.A. (Peru) 99.50
Pegasus Travels, S.A. (Peru) 90.0
Logistics Services Incorporated (Delaware) 100.0
LSI-Peru, S.A. (Peru) 98.18
Multimines Insurance Company, Ltd. (Bermuda) 100.0
Recursos e Inversiones Andinas, S. A. (Peru) 99.99
Not included in this listing are subsidiaries which in the aggregate would not
constitute a significant subsidiary.
B-6
Exhibit 23.1
Form 10-K
Consent of Independent Accountants
We consent to the incorporation by reference in the prospectuses constituting
part of the Registration Statements on Form S-8 (File Nos. 333-02736 and
333-40293) of Southern Peru Copper Corporation of our report dated January 22,
1999, on our audit of the consolidated financial statements of Southern Peru
Copper Corporation and Subsidiaries, which report appears on page A47 of this
Annual Report on Form 10-K.
We also consent to the reference to our Firm as experts in the prospectuses
referred to in the preceding paragraph only insofar as such reference relates to
our report appearing on page A47 of this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
New York, New York
March 18, 1999
B-7
Exhibit 4.5
SUPPLEMENTAL INDENTURE
Dated as of October 15, 1998
among
SOUTHERN PERU LIMITED
Company,
SOUTHERN PERU COPPER CORPORATION,
Guarantor
and
CITIBANK, N.A.
as Trustee under the Indenture
dated as of May 30, 1997
relating to Secured Export Notes
B-8
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS AND RULES OF CONSTRUCTION
1.1 Definitions.....................................................1
ARTICLE II
MISCELLANEOUS
2.1 Amendment of Section 608 of Article Six.........................2
2.2 Scope...........................................................2
ARTICLE III
MISCELLANEOUS
3.1 Execution of Supplemental Indenture.............................2
3.2 Conflicts.......................................................2
3.3 Counterparts....................................................3
3.4 GOVERNING LAW...................................................3
B-9
SUPPLEMENTAL INDENTURE
This SUPPLEMENTAL INDENTURE dated as of October 15, 1998 among
Southern Peru Limited, a corporation organized under the laws of Delaware (the
"Company"), Southern Peru Copper Corporation, a corporation organized under the
laws of Delaware, as Guarantor (the "Guarantor"), and Citibank, N.A., a national
banking association, as trustee (the "Trustee"), registrar and principal paying
agent.
RECITALS
WHEREAS, the Company and the Guarantor have entered into (i)
an Indenture (the "Original Indenture") dated as of May 30, 1997, with the
Trustee, the Registrar and the Principal Paying Agent providing for the issuance
by the Company and guarantee by the Guarantor from time to time in one or more
series of up to $750,000,000 aggregate principal amount of secured export notes
and (ii) a Supplemental Indenture, dated as of May 30, 1997, providing for the
issuance of $150,000,000 aggregate principal amount of the Company's secured
export notes designated as its 7.90% Series A Secured Export Notes due 2007;
WHEREAS, pursuant to paragraph (9) of Section 1001 of the
Original Indenture, the Company and the Guarantor, when authorized by their
respective Board Resolutions, and the Trustee may, without the vote or approval
of any Holders, enter into a Supplemental Indenture for the purpose of, inter
alia, curing any ambiguity or correcting or supplementing any provision in the
Original Indenture which may be defective or inconsistent with any other
provisions in the Original Indenture, if such action shall not adversely affect
the interests of the Holders of SENs of any Series in any material respect; and
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH,
that in consideration of the premises, for the equal and ratable benefit of all
Holders of any Series of SENs, the parties hereto agree to supplement and amend
the Original Indenture as follows:
ARTICLE I
DEFINITIONS AND RULES OF CONSTRUCTION
Section 1.1 Definitions For all purposes of this Supplemental
Indenture, except as otherwise expressly provided or unless the context
otherwise requires:
(1) the terms defined in this Article have the meanings
assigned to them in this Article and include the plural as
well as the singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have
the meanings assigned to them therein;
B-10
(3) the words "herein", "hereof' and "hereunder" and other
words of similar import refer to this Supplemental Indenture
as a whole and not to any particular Article, Section or other
subdivision;
(4) unless the context otherwise requires, any reference to an
"Article" or a "Section" refers to an Article or a Section, as
the case may be, of this Supplemental Indenture; and
(5) the terms which are defined in the Original Indenture have
the respective meanings assigned therein.
"Original Indenture" has the meaning specified in the
recitals to this Supplemental Indenture.
ARTICLE II
AMENDMENT
Section 2.1 Amendment of Section 608 of Article Six. Section
608 of Article Six is hereby amended by deleting the parenthetical phrase that
occurs after the words "pursuant to this Article" and inserting after the words
"shall be applied" the following parenthetical phrase:
"(except to the extent applied or released in accordance with the
provisions of Section 601 or 602)".
Section 2.2 Scope. Except as expressly amended herein, all of
the provisions of the Original Indenture and the Supplemental Indenture, each
dated as of May 30, 1997, are and shall continue to be in full force and effect.
ARTICLE III
MISCELLANEOUS
Section 3.1 Execution of Supplemental Indenture. This
Supplemental Indenture is executed and shall be construed as an indenture
supplemental to the Original Indenture and, as provided in the Original
Indenture, this Supplemental Indenture forms a part thereof.
Section 3.2 Conflicts. In the case of a conflict between a
provision of this Supplemental Indenture (a "Supplemental Provision") and any
other provision of the Original Indenture, the Supplemental Provision shall
control.
B-11
Section 3.3 Counterparts. This Supplemental Indenture may be
executed in any number of counterparts, each of which so executed shall be
deemed to be an original, but all such counterparts shall together constitute
but one and the same instrument.
Section 3.4 GOVERNING LAW. THIS SUPPLEMENTAL INDENTURE SHALL
BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN THE STATE
OF NEW YORK.
B-12
IN WITNESS WHEREOF, the parties hereto have caused this
Supplemental Indenture to be duly executed as of the day and year first above
written.
SOUTHERN PERU LIMITED
By: /s/ C.F. Schultz
Name: C.F. Schultz
Title: Treasurer
SOUTHERN PERU COPPER CORPORATION
By: /s/ C.F. Schultz
Name: C.F. Schultz
Title: Treasurer
CITIBANK, N.A.,
as Trustee, Principal Paying Agent and Registrar
By: /s/ Jenny Cheng
Name: Jenny Cheng
Title: Assistant Vice President
B-13
================================================================================
Exhibit 4.6
SUPPLEMENTAL INDENTURE
Dated as of December 22, 1998
between
SOUTHERN PERU COPPER CORPORATION,
and
CITIBANK, N.A.
as Trustee under the Indenture
dated as of May 30, 1997
relating to Secured Export Notes
---------------
================================================================================
B-14
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS AND RULES OF CONSTRUCTION
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
.
ARTICLE II
ASSUMPTION
2.1 Assumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE III
MISCELLANEOUS
3.1 Execution of Supplemental Indenture . . . . . . . . . . . . . . . . . 2
.
3.2 Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
.
3.3 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.4 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
B-15
SUPPLEMENTAL INDENTURE
This SUPPLEMENTAL INDENTURE dated as of December 22, 1998
between Southern Peru Copper Corporation, a corporation organized under the laws
of Delaware ("SPCC") and Citibank, N.A., a national banking association, as
trustee ( the "Trustee"), registrar and principal paying agent.
RECITALS
WHEREAS, Southern Peru Limited (the "Issuer") and SPCC have
entered into (i) an Indenture (the "Original Indenture") dated as of May 30,
1997, with the Trustee, the Registrar and the Principal Paying Agent providing
for the issuance by the Issuer and the guarantee by SPCC from time to time in
one or more series of up to $750,000,000 aggregate principal amount of secured
export notes (ii) a Supplemental Indenture, dated as of May 30, 1997, providing
for the issuance of $150,000,000 aggregate principal amount of the Issuer's
secured export notes designated as its 7.90% Series A secured Export Notes due
2007 (the "Notes") and (iii) a Supplemental Indenture, dated as of October 15,
1998 (the Original Indenture and such two Supplemental Indentures, the
"Indenture");
WHEREAS, pursuant to Section 901 of the Original Indenture,
the Issuer may merge with and into SPCC provided that SPCC complies with the
applicable requirements of such Section;
WHEREAS, pursuant to paragraph (1) of Section 1001 of the
Original Indenture, a Supplemental Indenture may be entered into without the
vote or approval of any Holders for the purpose of, inter alia, evidencing the
succession of another Person to the Company and the assumption by any such
successor of the covenants of the Company contained in the Indenture;
WHEREAS, the Issuer is to be merged with and into
SPCC, as contemplated by Section 901 of the Original Indenture (the "Merger");
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITHNESSETH, that
in consideration of the premises, for the equal and ratable benefit of all
Holders of any Series of SENs, the parties hereto agree to supplement and amend
the Original Indenture as follows:
ARTICLE I
DEFINITIONS AND RULES OF CONSTRUCTION
Section 1.1 Definition. For all purposes of this Supplemental
Indenture, except as otherwise expressly provided or unless the context
otherwise requires:
B-16
(1) the terms defined in this Article have the meanings assigned to them
in this Article and include the plural as well as the singular;
(2) all other terms used herein which are defined in the Trust Indenture
Act, either directly or by reference therein, have the meanings
assigned to them therein;
(3) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Supplemental Indenture as a whole and not
to any particular Article, Section or other subdivision;
(4) unless the context otherwise requires, any reference to an "Article"
or a "Section" refers to an Article or a Section, as the case may be,
of this Supplemental Indenture; and
(5) the terms which are defined in the Original Indenture have the
respective meanings assigned therein.
"Indenture", "Merger", "Notes" and "Original Indenture" have the
respective meanings specified in the recitals to this Supplemental
Indenture.
ARTICLE II
ASSUMPTION
Section 2.1 Assumption. Upon the effectiveness of the Merger,
SPCC hereby assumes the due and punctual payment of the principal of, premium,
if any, and interest and Additional Amounts, if any, on the Notes according to
their terms. SPCC further assumes the due and punctual performance of all of the
covenants and obligation of the Company under the Notes and the Indenture upon
the effectiveness of the Merger. From and after the Merger (i) all references to
the Company in the Indenture shall be deemed to be references to SPCC and (ii)
all references to the Guarantor in the Indenture, and all provisions relating
solely to the Guarantor, shall be deemed to be deleted.
ARTICLE III
MISCELLANEOUS
Section 3.1 Execution of Supplemental Indenture. This
Supplemental Indenture is executed and shall be construed as an indenture
supplemental to the Original Indenture and, as provided in the Original
Indenture, this Supplemental Indenture forms a part thereof.
Section 3.2 Conflicts. In the case of a conflict between a
provision of this Supplemental Indenture (a "Supplemental Provision") and any
other provision of the Original Indenture, the Supplemental Provision shall
control.
B-17
Section 3.3 Counterparts. This Supplemental Indenture may be
executed in any number of counterparts, each of which so executed shall be
deemed to be an original, but all such counterparts shall together constitute
but one and the same instrument.
Section 3.4 GOVERNING LAW. THIS SUPPLEMENTAL INDENTURE SHALL
BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN THE STATE
OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this
Supplemental Indenture to be duly executed as of the day and year first above
written.
SOUTHERN PERU COPPER CORPORATION
By: /s/ Kevin R. Morano
Name: Kevin R. Morano
Title: Vice President
CITIBANK, N.A.
as Trustee, Principal Paying Agent
and Registrar
By: /s/ Carol Ng
Name: Carol Ng
Title: Vice President
B-18
Exhibit 10.4
SOUTHERN PERU COPPER CORPORATION
SUPPLEMENTAL RETIREMENT PLAN
(As Amended and Restated as of April 30, 1998)
Section 1. Effective Date.
The effective date of the Supplemental Retirement Plan (the "Plan") as
originally adopted is December 12, 1990. The effective date of the Plan as
hereby amended and restated is April 30, 1998.
Section 2. Definitions.
1. Benefits. The amount calculated under Section 4 for each Eligible
Employee.
2. Benefit Commencement Date. The date benefits commence under the
Pension Plan.
3. Board. The Board of Directors of Southern Peru Copper Corporation.
4. Code. The Internal Revenue Code of 1986, as amended.
5. Committee. The Compensation Committee of the Board or any individual
or individuals to whom it delegates authority.
6. Company. Southern Peru Copper Corporation.
7. Deferral Amount. Any Benefit amount, including earnings thereon,
receipt of which is deferred under Section 7.
8. Disability. - permanent and total disability as defined in the Pension
Plan.
9. Eligible Employee. Any employee who meets the eligibility criteria of
Section 3.
10. Investment Manager. The investment company selected by the Company for
deemed investment of deferred benefits.
11. Pension Plan. The Retirement Benefit Plan for Salaried Employees of
Southern Peru Copper Corporation.
B-19
Section 3. Eligibility.
All salaried employees of the Company or of any subsidiary specifically
designated by the Company, whose retirement benefits payable under the Pension
Plan, are reduced:
(i) due to the benefit limitations of Section 415 of the Code; or
(ii) due to the requirement of Section 401(a)(17) of the Code that
compensation in excess of the limit in effect for a particular year
thereunder may not be taken into account for Pension Plan purposes; or
(iii) due to participation in any Company plan or program that provides for
elective pre-tax deferrals (the reductions under this Section 3(i),
(ii), and (iii) hereinafter collectively referred to as "Code
Reductions") shall be eligible as to Benefits under this Plan.
Section 4. Calculation of Benefits.
The Company will pay or cause to be paid to each Eligible Employee or surviving
spouse of such Eligible Employee (as defined in the Pension Plan), as the case
may be, who receives payment under the Pension Plan (for purposes of this
section 4 each a "Recipient"), a Benefit which is equivalent to the excess, if
any, of
(i) the amount such Recipient would have received under the Pension Plan
for each calendar year, taking into account all provisions of the
Pension Plan in effect and applicable from time to time to the
Recipient, except for the Code Reductions; over
(ii) the amount the Recipient is entitled to receive under the Pension Plan
for such year, taking into account the Code Reductions.
Section 5. Payment of Benefits.
(a) Except as otherwise provided herein, Benefits under the Plan shall be paid
in a lump sum, in cash, on January 15th of the year following the year of the
Eligible Employee's Benefit Commencement Date.
(b) An Eligible Employee may elect to receive annuity payments under the Plan in
the same form and at approximately the same time as payments are to be made to
the Eligible Employee under the Pension Plan. Such an election must be made in
writing at least twelve (12) months prior to the Benefit Commencement Date,
except in the event of termination by reason of "Disability", in which case the
election may be made at any time prior to the date of termination. An election
under this subsection may be amended at any time provided that no such amendment
shall be given effect unless it is made in writing at least twelve (12) months
prior to the date of termination.
B-20
Section 6. Death of Employee.
Upon the death of an Eligible Employee:
(i) Who has elected an annuity form of payment pursuant to Section 5(b),
the Eligible Employee's beneficiary under the Pension Plan shall
receive the Benefit described in Section 4 above, if any, in the same
form and approximately at the same time as payments are made to such
beneficiary under the Pension Plan.
(ii) Who has not elected an annuity form of payment pursuant to Section
5(b), the Eligible Employee's surviving spouse, if any, shall receive
any Benefits at the same time as provided in Section 5, except a valid
election under Section 7 shall survive the death of the Eligible
Employee. In such case, the surviving spouse shall have the same
rights as are provided to the Eligible Employee pursuant to Section 7
below except that further deferrals will not be permitted. If there is
no surviving spouse, the amount payable pursuant to this subsection
shall be paid as soon as practicable in a lump sum to the Eligible
Employee's beneficiary, or if none, to his estate
Section 7. Deferral of Benefit Payments.
(a) If the value of the Benefits payable to an Eligible Employee is at least
$50,000, an Eligible Employee may elect at least twelve (12) months prior to the
date Benefits will be paid under Section 5(a), to defer, for a period not to
exceed twenty (20) years from the Benefit Commencement Date, the Deferral Amount
to a future date or to provide for the payment of a Deferral Amount in a series
of scheduled installments. Any election made pursuant to this subsection may be
amended, provided that no such amendment shall be given effect unless it is made
in writing at least twelve (12) months prior to the date Benefits under the Plan
are payable, except in the event of termination by reason of Disability, in
which case the election may be made at any time prior to the Benefit
Commencement Date. Any such election may be changed, provided that no such
change shall be given effect unless it is made in writing at least twelve (12)
months prior to the date benefits under the Plan are payable.
(b) At any time subsequent to the Benefit Commencement Date, an Eligible
Employee who made an election pursuant to Section 7(a) and who has suffered a
severe financial hardship which has resulted from events beyond the Eligible
Employee's control ("Hardship Event"), may request a payment of all or a portion
of the value of his Deferral Amount which is not yet payable. If such a request
shall be approved by the Committee payment of all or a portion of the value of
the Deferral Amount shall be made as soon as practicable to the Eligible
Employee but only in an amount reasonably needed to satisfy such Hardship Event.
Whether a Hardship Event has occurred shall be determined in accordance with
Treasury Regulation Sections 1.457- 2(h)(4) and (5).
B-21
(c) At any time subsequent to the Benefit Commencement Date, an Eligible
Employee who made an election pursuant to Section 7(a) may elect the
acceleration of payment of all or a portion of the Deferral Amount not yet
payable subject to a 6% penalty. Payment of such amount, less such penalty
(which shall be forfeited), shall be paid in cash in a single lump sum as soon
as practicable after the requested payment date.
(d) At any time subsequent to the Benefit Commencement Date, an Eligible
Employee who has made an election pursuant to Section 7(a) may file an election
to amend such prior election affecting any amount payable at least 12 months
subsequent to such amendment, provided no such election may accelerate any
payment to a date earlier than 12 months from the date of amendment. The amended
form of payment may be a single sum payment of any amounts not yet due and
payable or annual installments of any such amounts, or a combination thereof,
provided no payments may be extended longer than the time specified in Section
7(a).
Section 8. Investment of Deferral Amounts.
(a) Any Deferral Amount shall be deemed invested in accordance with an election
to be made by the Eligible Employee in such investment vehicles as are provided
under rules established by the Committee. SPCC will attempt to follow the
Eligible Employee's elections, but will not be required to do so. Regardless of
whether the Eligible Employee's elections are followed, the Deferral Amount
shall be credited with deemed earnings, gains, losses, expenses, and changes in
the fair market value of such Deferral Amount as if SPCC had followed such
investment designations. All elections and amendments to elections shall be in
accordance with rules, if any, as shall be established by the Committee.
(b) The election of a deemed investment option is the sole responsibility of
each Eligible Employee. Neither SPCC, nor the Committee that administers the
Plan, nor any trustee of any trust that may be established in connection with
the Plan are authorized or permitted to advise (or shall have any liability with
respect to) an Eligible Employee as to the election of any option or the manner
in which his Deferral Amount shall be deemed to be invested.
Section 9. Value of Benefits.
The amount of the lump sum referred to in Section 5(a) shall be the present
value of the Benefit amount determined under Section 4 (after taking into
account, if applicable, any reductions as set forth in the Pension Plan to
reflect the commencement of payments prior to age 65) by assuming that the
Eligible Employee has elected a single life annuity under the Pension Plan and
by using the following actuarial assumptions:
(a) Discount Rate. The discount rate used in computing the present value of
benefits payable under the Plan is the yield on 10-year treasury notes on the
Eligible Employee's Benefit Commencement Date, or if a legal holiday, the first
business day immediately following the Benefit Commencement Date. At any time
during a thirteen month period ending with the Benefit Commencement Date, an
Eligible Employee may designate an alternative date for fixing the interest rate
(the Alternative Date) used to calculate the value of the lump sum distribution.
The designation must be in writing, and the Alternative Date must be within 7
calendar days of the date the designation is received by the Company. The
designation of the Alternative Date for fixing the interest rate, once made, may
not be changed for any reason. Notwithstanding the foregoing, if an Eligible
Employee designates an Alternative Date under this subsection in contemplation
of commencing benefits under the Pension Plan, such designation will survive a
subsequent postponement of the commencement of benefits under the Pension Plan
by such Eligible Employee, except that, if the yield on 10-year treasury notes
on the Benefit Commencement Date is higher than on the Alternative Date, the
yield on the Benefit Commencement Date will be used.
B-22
(b) Mortality Table. The Mortality Table used will be that contained in U.S.
Internal Revenue Service Revenue Ruling 95-6 or any succeeding Revenue Ruling
issued by the Internal Revenue Service for use in applying the provisions of
Sections 415 and 417(e) of the Internal Revenue Code.
Section 10. Employee's Rights Unsecured.
The right of any Eligible Employee to receive benefits under the provisions of
the Plan shall be contractual in nature only; however, the amounts of such
benefits may be held in a trust, the assets of which shall be subject to the
claims of the Company's general creditors in the event of bankruptcy or
insolvency only. Any amounts paid from such trust shall reduce the amount of
benefits owed by the Company.
Section 11. Severability.
The provisions of this Plan shall be severable, and if any one or more
provisions shall be considered or held to be invalid or unenforceable, or shall
result in a portion of the Plan being treated as a pension plan under Title I of
ERISA, the remaining provisions shall continue to be valid and enforceable.
Section 12. Participation in Other Plans.
Nothing in this Plan will affect any right which an Eligible Employee may
otherwise have to participate in any other retirement plan, or agreement, which
the Company may have now or hereafter.
Section 13. Discretion of Company and Board.
Any decision made or action taken by the Company or by the Board arising out of
or in connection with the construction, administration, interpretation, and
effect of the Plan shall lie within the absolute discretion of the Company or
the Board, as the case may be, and shall be final, conclusive and binding upon
all persons.
Section 14. Assignment.
No right or interest of the Eligible Employee under this Plan shall be subject
to voluntary or involuntary alienation, assignment or transfer of any kind.
B-23
Section 15. Cost to be Borne by Subsidiary.
If any payment under this Plan is to be made to an Eligible Employee on account
of any employee's service for a subsidiary of the Company, the cost of such
payment shall be borne in such proportions as the Company and such subsidiary
shall determine.
Section 16. Amendment.
This Plan may at any time or from time to time be amended, modified,
discontinued or terminated by the Board if, in its sole discretion, such a
change is deemed necessary and desirable.
Section 17. Governing Law.
This Agreement shall be governed by and construed in accordance with the laws of
the State of New York.
IN WITNESS WHEREOF, the Company has caused this Amendment to
its Supplemental Retirement Plan to be duly adopted and executed by its
duly authorized officers and its corporate seal affixed hereto on the
30th day of April, 1998.
Southern Peru Copper Corporation
By: /s/ K. R. Morano
Vice President
Attest:
/s/ C. D. Gonzalez
Assistant Secretary
B-24
Exhibit 10.7
SOUTHERN PERU COPPER CORPORATION
DEFERRED FEE PLAN FOR DIRECTORS
(As Amended and Restated as of April 30, 1998)
Section 1. Effective Date. The effective date of the Plan as originally adopted
is March 1, 1996. The effective date of the Plan as hereby amended and restated
is April 30, 1998.
Section 2. Definitions.
1. Board. The Board of Directors of Southern Peru Copper Corporation.
2. Company. Southern Peru Copper Corporation.
3. Deemed Retirement Date. May 1 of the calendar year in which a Participant
reaches his Normal Retirement Date.
4. Deferral Amounts. All compensation deferred by a Director under the Plan.
5. Director. Any individual serving as a member of the Board.
6. Fair Market Value. As to Company stock, Fair Market Value shall mean the
average of the high and low prices of a single share of Company common
stock as reported by the Wall Street Journal for New York Stock Exchange -
Composite Trading as of the first trading day coincident with or next
following the day as of which such value is to be determined.
7. Investment Subaccount. An account which earns interest pursuant to Section
5.
8. Normal Retirement Date. For purposes of this Plan, Normal Retirement Date
for a Director is the date of the Annual Meeting of Stockholders next
following the Director's 65th birthday.
9. Participant. Any eligible Director or former Director with a Participant
Account balance.
10. Participant Account. A bookkeeping account established in the financial
records of the Company for each Participant. Participant accounts consist
of an SPCC Stock Subaccount and an Investment Subaccount. Participant
Accounts are credited with a Participant's Deferral Amounts, and deemed
investment earnings or losses arising therefrom based on Participant
elections pursuant to Sections 4 and 5.
11. SPCC Stock Subaccount A phantom SPCC stock equivalent account consisting of
deemed whole shares of Southern Peru Copper Corporation common stock and
cash.
B-25
Section 3. Eligibility. Any Non-employee Director is eligible to participate in
the Plan.
Section 4. Participation. To become a Participant, a Director must file a
written election to defer either 50 percent or 100 percent of cash compensation
payable by reason of service on the Board. An amount equal to the compensation
deferred will be credited to the Participant's Participant Account as soon as
practicable after the date such compensation is otherwise payable.
An election to participate must be received by the Company prior to
January 1 of the calendar year during which the election is to be effective and
shall be irrevocable for the entire year. Notwithstanding the foregoing, a
Director may elect to become a Participant in the Plan for the calendar year in
which he first becomes eligible by filing a written election to participate
within 30 days of becoming eligible. The election will be effective on a
prospective basis and only as to remuneration not yet earned.
An election shall remain in effect for subsequent years unless amended
or terminated in writing prior to January 1 of any subsequent year. An election
can be revoked or withdrawn at any time with respect to amounts to be earned in
years subsequent to the date of revocation or withdrawal.
Section 5. Deemed Investment Provisions. The Company will establish a
Participant Account for each Participant. Each Participant Account will have an
SPCC Stock Subaccount and/or an Investment Subaccount. A Participant must
allocate his Deferral Amounts, in increments of 25 percent, to one or both of
the Subaccounts.
(a) Deferral Amounts Allocated to SPCC Stock Subaccounts
1) A Participant's SPCC Stock Subaccount shall be deemed invested in
accordance with the Participant's election in whole shares of Company
common stock which could be purchased at Fair Market Value with the
Deferral Amounts credited to a Participant's SPCC Stock Subaccount on
the last business day of each calendar quarter.
2) The Stock Subaccount also shall be credited with a bookkeeping entry
indicating the number of additional whole shares which could be
purchased at Fair Market Value with any dividends payable on the
deemed shares held in the SPCC Stock Subaccount on the day such
dividends are payable to shareholders of Company common stock.
3) Any amounts that are insufficient to permit the crediting of a whole
share of Company common stock shall be carried as a cash balance
bookkeeping entry in such Stock Subaccount. On any date on which new
funds are available for deemed investment in Company stock (either due
to an additional deferral or the availability of deemed dividends),
the cash amount will be added to any such other funds, and the maximum
number of whole shares that could be purchased at Fair Market Value
will be deemed invested. The remaining amount, if any, will be held as
cash. No interest shall be credited on any such Stock Subaccount cash
balance.
4) The SPCC Stock Subaccount shall be adjusted to reflect any stock
split, stock dividend, recapitalization, merger, consolidation,
reorganization or other similar change in the Company's common stock.
B-26
(b) Deferral Amounts Allocated to Investment Subaccounts
A Participant's Deferral Amounts will be credited to his Investment
Subaccount except to the extent he has elected in writing to credit his
Deferral Amounts to his Stock Subaccount. Each Investment Subaccount
will be credited with interest from the date on which deferred
compensation would normally have been paid, until payment, at a rate
equal to the yield rate for U.S. Treasury debt obligations with a
10-year maturity effective for the last business day in each quarter,
on the first day of each calendar quarter in which such interest is
credited to the Participant's Investment Subaccount. Interest will be
compounded quarterly.
Section 6. Transfers. No election may be made to have amounts previously
credited to a Participant's Investment Subaccount transferred to his Stock
Subaccount. Amounts previously credited to a Participant's Stock Subaccount may
not be transferred to his Investment Subaccount, except on or after the earlier
in time of (a) one year prior to Normal Retirement Date, or (b) the date of
termination.
Section 7. Payment of Deferred Compensation.
(a) Retirement at Normal Retirement Date
A Participant who retires at his Normal Retirement Date will receive
the entire value of his Participant Account in cash on January 15 of
the year following the year of retirement.
(b) Termination at Other than Normal Retirement Date
A Participant who terminates service as a Director at a date other than
Normal Retirement Date will receive the entire value of his Participant
Account in cash on the 15th day of the 13th month following the date of
termination.
(c) Further Deferral
Notwithstanding (a) and (b) of this section, a Participant may elect to
further defer receipt of all or a portion of his Participant Account
for a period of up to 10 years from the earlier in time of the Deemed
Retirement Date or the date of termination. In order to defer a payment
of benefits under the Plan, a Participant must file a written election
at least one year in advance of the date that a payment of benefits
under the Plan would otherwise be made. The Participant may elect to
receive the amount deferred in a single cash payment or in annual cash
installments. Any further elections to defer the receipt of benefits
under the Plan must also be filed at least one year prior to the
scheduled payment date. Acceleration of any benefits deferred pursuant
to this paragraph can only be made by filing a request for payment at
least one year in advance of the requested accelerated payment date.
B-27
(d) Financial Hardship of Participants
At any time a Participant may request a payment of all or a portion of
the value of his Participant Account. Such a request shall be approved
by the Company only upon a finding that the Participant has suffered a
severe financial hardship which has resulted from events beyond the
Participant's control ("Hardship Event"), and only in the amount
reasonably needed to satisfy such Hardship Event. Whether a Hardship
Event has occurred shall be determined in accordance with Treasury
Regulation Sections 1.457- 2(h)(4) and (5). In the event such a payment
is approved, payment of all or a portion of the value of the
Participant Account shall be made as soon as practicable to the
Participant.
(e) Other Withdrawals
Absent a Hardship Event or adequate prior notice (in accordance with
paragraph (c) above), a request for a payment of all or a portion of
the value of a Participant Account may be made by a Participant subject
to a 6% penalty of the amount of the requested payment, which penalty
shall be deducted from the requested payment. The requested payment,
less such penalty, shall be paid in cash in a single lump sum as soon
as practicable after the requested payment date.
Section 8. Designation of Beneficiary.
(a) A Participant may designate a beneficiary by giving written notice to the
Company. If no beneficiary is designated, the beneficiary will be the
Participant's estate. If more than one beneficiary statement has been
filed, the beneficiary or beneficiaries designated in the statement
bearing the most recent date will be deemed the valid beneficiary.
(b) In the event of a Participant's death before he has received all of the
benefits to which he is entitled hereunder, the value of the
Participant's Participant Account shall be paid to the estate or
designated beneficiary of the deceased Participant in one cash lump sum
as soon as practicable after the first January 15 or July 15 following
such date of death, unless the Participant has elected to continue
without change the schedule for payment of benefits, in which case the
beneficiary shall have the right to transfer amounts previously credited
to a Participant's Stock Subaccount to his Investment Subaccount.
(c) If a distribution is to be made to a beneficiary and such beneficiary
dies before such distribution has been made, the amount of the
distribution will be paid to the estate of the beneficiary in one lump
sum.
Section 9. Participant's Rights Unsecured. The right of any Participant to
receive benefits under the provisions of the Plan shall be contractual in nature
only; however, the amounts of such benefits may be held in a trust, the assets
of which shall be subject to the claims of the Company's general creditors only
in the event of bankruptcy or insolvency. Any amounts paid to a Participant from
such trust shall reduce the amount of benefits owed by the Company.
B-28
Section 10. Assignability. No right to receive payments hereunder shall be
transferable or assignable by a Participant or beneficiary.
Section 11. Participation in Other Plans. Nothing in this Plan will affect any
right which a Participant may otherwise have to participate in any other
retirement plan or agreement which the Company may have now or hereafter.
Section 12. Discretion of Company and Board. Any decision made or action taken
by the Company or by the Board arising out of or in connection with the
construction, administration, interpretation and effect of the Plan shall lie
within the absolute discretion of the Company or the Board, as the case may be,
and shall be final, conclusive and binding upon all persons.
Section 13. Amendment. This Plan may at any time or from time to time be
amended, modified or terminated by the Board. No amendment, modification or
termination shall, without the consent of a Participant, adversely affect such
Participant's accruals in his Participant Account.
Section 14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
B-29
IN WITNESS WHEREOF, the Company has caused this Amendment to its
Deferred Fee Plan for Directors to be duly adopted and executed by its duly
authorized officers and its corporate seal affixed hereto on the 30th day of
April, 1998.
Southern Peru Copper Corporation
By: /s/ K. R. Morano
Vice President
Attest:
/s/ C. D. Gonzalez
Assistant Secretary
B-30
Exhibit 10.9
SOUTHERN PERU COPPER CORPORATION
COMPENSATION DEFERRAL PLAN
(As Amended and Restated as of April 30, 1998)
Section 1 - Effective Date.
The effective date of the Plan as originally adopted is January 1, 1998. The
effective date of the Plan as hereby amended and restated is April 30, 1998.
Section 2 - Definitions.
1) Board. The Board of Directors of Southern Peru Copper Corporation.
2) Code. The Internal Revenue Code of 1986, as amended.
3) Committee. The Compensation Committee of the Board or any individual
or individuals to whom authority has been delegated hereunder by the
Compensation Committee.
4) Company. Southern Peru Copper Corporation and any subsidiary of
Southern Peru Copper Corporation that has adopted the Plan.
5) Deferral Amounts. A Participant's Salary Deferral Amounts, Incentive
Compensation Deferral Amounts, Employer Provided Benefit, and Special
Incentive Compensation Awards.
6) Director. Any individual serving as a member of the Board.
7) Incentive Compensation Plan. The Southern Peru Copper Corp. Incentive
Plan for Select Management Payroll Employees, and the Logistic
Services Incorporated Incentive Plan.
8) Participant. An Eligible Employee, as defined in Section 3, who has a
valid election in effect under the Plan. ------------
9) Participant Account. A bookkeeping account established in the
financial records of the Company to record the Deferral Amounts and
deemed investment earnings or losses arising therefrom based on
Participant elections pursuant to Section 5.
10) Retirement. Retirement under the Retirement Benefit Plan for Salaried
Employees of Southern Peru Copper Corporation.
11) Savings Plan. Savings Plan of Southern Peru Copper Corporation and
Participating Subsidiaries.
B-31
Section 3 - Eligibility.
a) Salary Deferral
For purposes of salary deferral, any employee eligible to participate in
the Savings Plan who:
1) had compensation from the Company of at least $80,000 (or such
other greater limit as may be established under Code Section
414(q)(1)(B)(1)) (the "HCE Limit") for the calendar year preceding the year
for which the election is effective, or
2) has an annualized base salary equal to or greater than the HCE
Limit for the year for which the election is effective shall be considered
an "Eligible Employee".
b) Incentive Compensation Deferral
For purposes of deferrals of incentive compensation received under the
Incentive Compensation Plan ("Incentive Compensation Awards"), any exempt
salaried employee of the Company who meets the compensation requirements of
Section 3(a)(1) or 3 (a) (2) above, shall be considered an "Eligible
Employee".
Section 4 - Participation.
a) Election to Defer
1) Salary Deferral. To become a Participant in the salary deferral
component of the Plan for a particular calendar year, an Eligible Employee
must elect, prior to the beginning of such calendar year, to defer receipt
of a percentage of his base annual salary to be earned during the
succeeding calendar year. Such an election shall be in writing on forms
prescribed by the Committee, and shall include the percentage of base
annual salary to be deferred. A Participant's election to defer with
respect to a calendar year under this subsection (a)(1) shall continue in
effect for all subsequent calendar years until changed in accordance with
subsection (d). An employee of the Company who becomes an Eligible Employee
during a calendar year may elect to become a Participant in the Salary
Deferral component of the Plan for such calendar year by electing to defer
a percentage of his base annual salary (in accordance with Section 4(b))
within 30 days of becoming an Eligible Employee. The election will be
effective on a prospective basis beginning with the payroll period that
occurs as soon as administratively practicable following receipt of the
election by the Committee.
2) Incentive Compensation Deferral. To become a participant in the
Incentive Compensation Deferral component of the Plan for a particular
calendar year, an Eligible Employee must elect, prior to the beginning of
such calendar year, to defer receipt of an amount not to exceed 100 percent
of his Incentive Compensation Award, payable during the calendar year to
which the election relates. Such an election shall be in writing on forms
prescribed by the Committee. A Participant's election to defer with respect
to a calendar year under this subsection (a)(2) shall continue in effect
for all subsequent calendar years until changed in accordance with
subsection (d).
B-32
b) Deferral Amount
1) Salary Deferral. A Participant who meets the requirements of
Section 4(a)(1) for a calendar year may elect to have the following amounts
(the "Salary Deferral Amount") credited to his account for such calendar
year or portion thereof during which an election is effective (the
"Deferral Period"):
a) the product of (i) the Participant's elected salary deferral
contribution percentage under this Plan (not to exceed the
maximum contribution percentage permitted under the Savings
Plan) and (ii) the lesser of the Participant's base annual
salary for such year or the Compensation Limit (as defined
below); reduced by the maximum contribution permitted for
highly compensated employees under the Savings Plan due to
the limitations imposed by Code Section 401(k)(3) or by the
plan administrator for the Savings Plan for such calendar
year; and
b) the Participant's elected salary deferral contribution
percentage under the Savings Plan as in effect on January 1
of such year, multiplied by the Participant's base annual
salary in excess of the Code Section 401(a)(17) limit, as
adjusted from time to time ($160,000 in 1999) (the
"Compensation Limit"); provided, however, that the total
amount of Salary Deferrals under this subsection cannot
exceed the maximum contribution percentage as may then be
permitted under the Savings Plan).
2) Incentive Compensation Deferral. The amount of a Participant's
incentive compensation deferral for a Deferral Period shall be any whole
dollar amount or whole percent of his Incentive Compensation Award payable
during the calendar year as elected by the Participant (the "Incentive
Compensation Deferral Amount"). In the event the award payable is less than
the dollar amount specified in the Participant's election, the full amount
of the award shall be deferred (subject to Section 15).
3) Employer Provided Benefit. With respect to each Deferral Period,
the Company shall make a deemed matching contribution equal to 50% of each
Participant's Salary Deferral Amount (each such deemed matching
contribution, an "Employer Provided Benefit); provided, however, that no
Participant's Employer Provided Benefit with respect to a particular year
may exceed the amount by which 3% of such Participant's base salary for
such year exceeds the matching contribution made by the Company on the
Participant's behalf under the Savings Plan for such year.
4) Special Incentive Awards. Notwithstanding anything to the contrary
herein, the Committee, in its discretion, may provide for any amounts
awarded to a Participant by the Board or the Committee as a special
incentive award under the Incentive Compensation Plan to be deferred
pursuant to the terms of this Plan and credited to a Participant's Account,
subject to the terms and limitations of the award ("Special Incentive
Awards").
c) Irrevocability of Election
Subject to the provisions of subsection (d) of this Section 4, a deferral
election hereunder shall be irrevocable.
B-33
d) Change of Election A Participant may change prior elections with respect to
Salary Deferral or Incentive Compensation Deferral once in each calendar
year. Changes shall be in writing, on forms prescribed by the Committee.
Such change of election shall first be effective for the calendar year
beginning after the date the change is received by the Committee.
Section 5 - Deemed Investment Provisions.
a) At the time of the election to participate in the Plan, the Participant
must elect in writing to have his Deferral Amounts deemed invested, in
increments of no less than 5%, in one or more of the investment funds as
are provided under the Savings Plan, except; however, that the SPCC Common
Stock Fund shall not be available as a deemed investment. Said election
must total one hundred percent (100%) of his Deferral Amounts.
b) The Participant Accounts shall be credited with deemed earnings, gains,
losses, expenses and changes in the fair market value of such Participant
Accounts as if the Company had followed such investment designations.
c) Each Participant may elect in writing that his future Deferral Amounts be
deemed invested in a proportion different from that previously elected, but
the new election shall be prospective only and shall be made in accordance
with paragraph (b) of this Section 5. Any changes in such deemed
investments must be in accordance with rules, if any, as are established by
the Committee.
d) The election of a deemed investment option is the sole responsibility of
each Participant. Neither the Company, nor the Committee, nor any trustee
of any trust that may be established in connection with the Plan are
authorized or permitted to advise (or shall have any liability with respect
to) a Participant as to the election of any option or the manner in which
his Deferral Amounts shall be deemed to be invested.
e) Consistent with this Section 5, each Participant may elect in writing, that
a whole percentage (no less than 5%) or specific dollar amount of his
deemed investment in any fund may be transferred to any other fund
available under the Plan. Such election will be prospective only and will
be permitted in accordance with rules, if any, as are established by the
Committee.
B-34
Section 6 - Value and Payment of Benefits.
a) Payment of Benefits
Each Participant shall receive the value of his Participant Account in cash
on January 15 of the year following the year of the Participant's normal
Retirement from the Company. If a Participant terminates service with the
Company prior to qualifying for normal Retirement, the value of his
Participant Account will be distributed in cash on the 15th day of the 13th
month following the date of termination (subject to Section 15). In the
event of the death of a Participant before receiving the value of his
Participant Account, such distribution shall be paid to his beneficiary or
beneficiaries designated pursuant to Section 7 as soon as practicable under
the Plan.
b) Further Deferral
Notwithstanding subsection (a) of this section, a Participant who
retires from the Company, and who at the time of retirement has a balance
in his Participant's Account of at least $50,000, may elect to further
defer receipt of all or a portion of his Participant Account, but not less
than $50,000 for a period of up to 20 years from his date of retirement
from the Company. To defer a payment of benefits under the Plan, a
Participant must file a written election at least one year in advance of
the date that payment of benefits under the Plan would otherwise be made.
The Participant may elect to receive the amount deferred in a single cash
payment or in annual cash installments. Any further elections to defer the
receipt of benefits under the Plan must also be filed at least one year
prior to the scheduled payment date. Acceleration of any benefits deferred
pursuant to this paragraph can be made by filing a request for payment at
least one year in advance of the requested accelerated payment date.
c) Financial Hardship of Participants
Except as may otherwise be provided by the terms of a Special Incentive
Award, at any time prior to commencement of payment of benefits pursuant to
paragraph (b) of this Section 6, a Participant may request a payment of all
or a portion of the value of his Participant Account. Such a request shall
be approved by the Committee only upon a finding that the Participant has
suffered a severe financial hardship which has resulted from events beyond
the Participant's control ("Hardship Event"), and only in the amount
reasonably needed to satisfy such Hardship Event. Whether a Hardship Event
has occurred shall be determined in accordance with Treasury Regulation
Sections 1.457- 2(h)(4) and (5). In the event such a payment is approved,
payment of all or a portion of the value of the Participant Account shall
be made as soon as practicable to the Participant.
d) Other Withdrawals
Absent a Hardship Event or adequate prior notice (in accordance with
paragraph (b) above), a request for a payment of all or a portion of the
value of a Participant Account may be made by a Participant subject to a 6%
penalty of the amount of the requested payment, which penalty shall be
deducted from the requested payment. The requested payment, less such
penalty, shall be paid in cash in a single lump sum as soon as practicable
after the requested payment date.
Section 7 - Designation of Beneficiary.
A Participant may designate one or more beneficiaries by giving written notice
to the Committee. If no beneficiary is so designated, the Participant's
beneficiary will be the Participant's estate. If more than one beneficiary
statement has been filed the beneficiary or beneficiaries designated in the
statement bearing the most recent date will be deemed the valid beneficiary.
B-35
Section 8 - Participant's Rights Unsecured.
The right of any Participant to receive benefits under the provisions of the
Plan shall be contractual in nature only; however, the amounts of such benefits
may be held in a trust, the assets of which shall be subject to the claims of
the Company's general creditors only in the event of bankruptcy or insolvency.
Any amounts paid to a Participant from such trust shall reduce the amount of
benefits owed by the Company.
Section 9 - Participation in Other Plans.
Nothing in this Plan will affect any right which a Participant may otherwise
have to participate in any other retirement plan or agreement which the Company
may have now or hereafter.
Section 10 - Non-Alienation of Benefits.
No right to receive payments hereunder shall be transferable or assignable by a
Participant or beneficiary.
Section 11 - Administration of the Plan.
The Plan shall be administered by the Committee. The Committee shall construe
and interpret the Plan and may adopt rules and regulations governing the
administration of the Plan, as well as exercise any duties and powers conferred
on it by the terms of the Plan. The Committee shall act by vote or written
consent of a majority of its members or otherwise as in accordance with its
general procedures as in effect from time to time.
Section 12 - Amendment or Termination of the Plan.
This Plan may at any time or from time to time be amended, modified or
terminated by the Board. No amendment, modification or termination shall,
without the consent of a Participant, adversely affect such Participant's
accruals in his Participant Account.
Section 13 - No Entitlement to Awards or Right of Continued Employment.
Neither the establishment of the Plan nor the payment of any benefits hereunder
nor any action of the Company, a subsidiary of the Company, or the Committee
shall be held or construed to confer upon any person any legal right to be
awarded any amounts under the Incentive Plan or the Incentive Compensation Plan
or to continue in the employ of the Company or a subsidiary of the Company. The
Company and its subsidiaries expressly reserve the right to discharge any
Participant whenever the interest of any such company in its sole discretion may
so require without liability to such company or the Committee except as to any
rights which may be expressly conferred upon such Participant under the Plan.
Section 14 - Discretion of Company, Committee, and Board.
Any decision made or action taken by the Company or by the Committee or by the
Board arising out of or in connection with the construction, administration,
interpretation and effect of the Plan shall lie within the absolute discretion
of the Company, the Committee or the Board, as the case may be, and shall be
final, conclusive and binding upon all persons.
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Section 15 - Tax Withholding.
There shall be deducted from all deferrals or payments made under this Plan the
amount of any taxes required to be withheld by any Federal, state, local or
foreign government, including any employment taxes required to be withheld under
Code Section 3121(v). The Participants and their beneficiaries, distributees,
and personal representatives will bear any and all Federal, foreign, state,
local or other income or other taxes imposed on amounts paid under the Plan, and
the Company may take whatever actions are necessary and proper to satisfy all
obligations of such persons for payment of all such taxes.
Section 17 - Severability.
In the event any provision of this Plan would serve to invalidate the Plan, that
provision shall be deemed to be null and void, and the Plan shall be construed
as if it did not contain the particular provision that would make it invalid.
Section 18 - Governing Law; Binding Effect; Miscellaneous.
The Plan shall be governed and construed and enforceable in accordance with the
laws of the State of New York, except as superseded by applicable Federal law.
Where appearing in the Plan, the masculine gender shall include the feminine
gender.
IN WITNESS WHEREOF, the Company has caused the Southern Peru Copper
Corporation Compensation Deferral Plan to be duly adopted and executed by its
duly authorized officers and its corporate seal affixed hereon as of the 30th
day of April, 1998.
Southern Peru Copper Corporation
By: /s/ K. R. Morano
Vice President
Attest:
/s/ C. D. Gonzalez
Assistant Secretary
B-37
Exhibit 10.12
ASSIGNMENT AND ASSUMPTION AGREEMENT
Assignment and Assumption Agreement dated as of December 30, 1998,
between Southern Peru Copper Corporation, a Delaware corporation ("SPCC"), and
Southern Peru Limited (the "Company").
RECITALS
WHEREAS, this Assignment and Assumption Agreement (this
"Agreement") relates to the Credit and Guarantee Agreement (the "Credit
Agreement") dated as of March 31, 1997 among SPCC, the Company, the several
banks and other financial institutions from time to time parties to the Credit
Agreement (collectively, the "Lenders", individually, a "Lender"), Morgan
Guaranty Trust Company of New York, as Administrative Agent for the Lenders (in
such capacity, the " Administrative Agent"), The Chase Manhattan Bank, as
Documentation Agent for the Lenders (in such capacity, the " Documentation
Agent"), Citicorp Securities, Inc., as Syndication Agent (in such capacity, the
"Syndication Agent"), and Deutsche Bank AG, New York Branch, as Security and
Collateral Agent for the Lenders (in such capacity, the "Collateral Agent");
WHEREAS, pursuant to Section 8.3 of the Credit Agreement, the
Company may merge with and into SPCC in accordance with the terms and subject to
the conditions set forth therein (including, without limitation, the fact that
this Agreement shall be satisfactory to the Required Lenders, as evidenced by
their acknowledgment and approval hereof); and
WHEREAS, the Company is to be merged with and into SPCC, as
expressly contemplated by Section 8.3 of the Credit Agreement (the "Merger");
NOW, THEREFORE, in consideration of the foregoing and the
mutual agreements contained herein, the parties hereto agree as follows:
SECTION 1. DEFINITIONS
1.1 Defined Terms. All capitalized terms not otherwise defined
herein shall have the respective meanings set forth in the Credit Agreement.
SECTION 2. ASSIGNMENT AND ASSUMPTION
2.1 Assignment and Assumption. (a) Upon the effectiveness of
the Merger (the "Effective Time"), the Company hereby assigns to SPCC all of its
rights and obligations under the Credit Agreement and the other Loan Documents
and SPCC hereby accepts such assignment and assumes all of the obligations and
acquires all of the rights of the Company thereunder.
(b) From and after the Effective Time, (i) SPCC shall have
succeeded the Company as the "Borrower" under the Credit Agreement and the other
Loan Documents, and all references to the "Borrower" in the Credit Agreement and
the other Loan Documents shall refer to SPCC and not to the Company, and (ii) to
the guarantee by the "Parent" contained in Section 10 of the Credit Agreement
shall be without further force or effect.
B-38
SECTION 3. MISCELLANEOUS
3.1 Counterparts. This Agreement may be executed in any number
of counterparts (including by facsimile transmission), and all such counterparts
shall together constitute but one and the same instrument.
3.2 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED N ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the day and year first above written.
SOUTHERN PERU LIMITED
By: /s/ K.R. Morano
Name: K. R. Morano
Title: Vice President
SOUTHERN PERU COPPER CORPORATION
By: /s/ K.R. Morano
Name: K. R. Morano
Title: Vice President
B-39
Exhibit 10.13
Consulting Agreement Between the Company and Mr. C. G. Preble
(dated March 18, 1999)
Charles B. Smith
Executive Vice President &
Chief Operating Officer
March 18, 1999
Mr. Charles G. Preble
President and Chief Executive Officer
Southern Peru Copper Corporation
180 Maiden Lane
New York, NY 10038
Dear Chuck:
In accordance with the Company's retirement policy for its officers, you will
retire as President and CEO effective April 30, 1999. The purpose of this letter
is to set forth the terms and conditions of our relationship after your
retirement. Please signify your agreement by signing this letter where indicated
below and returning it to me. The enclosed copy is for your records.
1. Consulting Arrangement: To ensure a smooth transition in the leadership of
the Company, you will, during the one-year period commencing with your
retirement, provide consulting services to the Company from time to time,
as may reasonably be requested by the then President and CEO or his
designee, with respect to matters of governmental and public relations, by
the CEO.
In consideration of these services, the Company will pay you a consulting
fee of $2,000 per day or any portion of a day, with a minimum number of
consulting days set at 25, for the one-year period beginning the first day
of the month following your retirement. You will also be reimbursed for
reasonable out-of-pocket expenses incurred by you with respect to such
services in accordance with the Company's expense reimbursement policy.
Fees and expenses will be paid quarterly after you submit a statement to
the Company setting forth the date(s) on which you provided consulting
services to the Company during the previous quarter, and your reimbursable
expenses for the previous month.
2. Office Support: The Company will provide you, through October 1999, with an
office (with furnishings and other appointments) of a type and size and
secretarial assistance of a type and extent provided by the Company to its
vice presidents generally. This office will be at the Company's offices in
Lima, Peru. A guest office and associated secretarial services will be
provided after October 1999 for the duration of this contract.
B-40
3. Security and Transportation: An automobile and driver will be provided when
you are in Lima, Peru.
4. Visit to Operating Sites: Standard guest accommodations including housing,
food, and transportation from and to Lima will be provided when you visit a
SPCC operating site.
5. Confidentiality: During the course of providing consulting services to the
Company, you will have access to confidential information relating to the
Company and its affiliates. You agree to treat all confidential information
as proprietary.
6. Miscellaneous: This agreement is personal to you and may not be assigned by
you other than by the laws of descent and distribution. This agreement is
binding for the Company and its successors and assignees.
This agreement supersedes any previous understandings or agreement, written or
otherwise, regarding the subject matter hereof and may only be amended by a
written instrument signed by the Company and you.
The terms of this agreement will be construed according to the laws of the State
of New York without regard to the conflict of laws provision thereof.
Regards,
/s/Charles B. Smith
Charles B. Smith
Agreed to:
Name: /s/ Charles G. Preble
Charles G. Preble
Date: March 18, 1999