Exhibit 13
REPORT OF MANAGEMENT
The management of Cyprus Amax Minerals Company is responsible for the integrity
and objectivity of the financial statements and other financial information
contained in this Annual Report. The financial statements were prepared in
accordance with generally accepted accounting principles and include estimates
that are based on management's best judgment.
Cyprus Amax maintains an internal control system which includes formal policies
and procedures designed to provide reasonable assurance that assets are
safeguarded and transactions are properly recorded and executed in accordance
with management's authorization. Cyprus Amax's internal audit function audits
compliance with the internal control system and issues reports to Cyprus Amax's
management and the Audit Committee of the Board of Directors.
Cyprus Amax's financial statements have been audited by Price Waterhouse LLP,
whose appointment is ratified yearly by the shareholders at the annual
shareholders' meeting. Price Waterhouse LLP conducted their audit in accordance
with generally accepted auditing standards. These standards include an
evaluation of internal accounting controls in establishing the scope of audit
testing necessary to allow them to render an independent professional opinion on
the fairness of Cyprus Amax's financial statements.
The Audit Committee of the Board of Directors, composed solely of directors who
are not Cyprus Amax employees, meets periodically with representatives of
management and Price Waterhouse LLP to review their work and ensure that they
are properly discharging their responsibilities.
/s/ Milton H. Ward
Milton H. Ward
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
/s/ Gerald J. Malys
Gerald J. Malys
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/John Taraba
John Taraba
Vice President and Controller
(Principal Accounting Officer)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Cyprus Amax Minerals Company:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity, and of cash
flows present fairly, in all material respects, the financial position of Cyprus
Amax Minerals Company and its subsidiaries at December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, 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.
/s/ Price Waterhouse LLP
Denver, Colorado
February 11, 1998
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(In millions except as noted and per share data)
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
REVENUE $3,346 $2,843 $3,207 $2,788 $1,763 $1,641 $1,657 $1,866 $1,790 $1,327
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
COSTS AND EXPENSES
Cost of Sales 2,257 2,074 2,108 2,071 1,333 1,286 1,323 1,423 1,241 921
Selling and
Administrative Expenses 128 128 143 111 70 77 97 81 103 92
Depreciation, Depletion,
and Amortization 444 339 296 253 145 128 119 118 94 64
Write-Downs and Special
Charges 241 116 445 10 - 410 35 82 4 9
Merger and Reorganization
Expenses - - - 13 33 29 - - - -
Exploration Expense 43 34 33 23 25 19 21 14 15 12
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Costs and Expenses 3,113 2,691 3,025 2,481 1,606 1,949 1,595 1,718 1,457 1,098
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME (LOSS) FROM OPERATIONS 233 152 182 307 157 (308) 62 148 333 229
OTHER INCOME (EXPENSE)
Interest Income 36 28 24 17 7 3 5 8 13 6
Interest Expense (208) (189) (137) (107) (42) (19) (22) (19) (12) (15)
Capitalized Interest 10 83 43 16 1 3 5 - - -
Earnings (Loss) on Equity
Investments and Other (31) 3 8 (12) 7 (8) 4 (13) (7) (2)
------ ------ ------ ------ ------ ------ ------ ------ ------ -------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST 40 77 120 221 130 (329) 54 124 327 218
Income Tax Benefit
(Provision) 22 (11) (3) (55) (31) 83 (11) (13) (92) (49)
Minority Interest 7 11 7 - 1 - - - - 1
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME (LOSS) FROM CONTINUING
OPERATIONS 69 77 124 166 100 (246) 43 111 235 170
Income From Operations of
Discontinued Oil and
Gas Division, Net of
Applicable Taxes of $2 - - - 9 - - - - - -
------ ------- ------ ----- ------ ------ ----- ------ ----- -----
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGES/(1)/ 69 77 124 175 100 (246) 43 111 235 170
Cumulative Effect of
Accounting Changes/(2)/ - - - - - (88) - - (70) -
------ ------ ------ ------ ------ ------ ------ ------ ------ -----
NET INCOME (LOSS) 69 77 124 175 100 (334) 43 111 165 170
Preferred Stock Dividends (19) (19) (19) (18) (2) (11) (15) (15) (15) (6)
------ ------ ------ ------ ------ ------ ------ ------ ------ -----
INCOME (LOSS) APPLICABLE TO
COMMON SHARES $ 50 $ 58 $ 105 $ 157 $ 98 $ (345) $ 28 $ 96 $ 150 $ 164
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
. The 1997 results included net after-tax coal charges of $79 million primarily
for the sale and assignment of two coal contracts, mine closure costs,
reclamation adjustments, impairment charges, the favorable settlement of a
royalty issue, and the gain on the sale of a 15 percent equity interest to
Mitsubishi Corporation. Additionally, Cyprus Amax recorded a $19 million
after-tax gain on the sale of Kubaka to Amax Gold, favorable tax adjustments
of $38 million, and an after-tax charge of $5 million for the costs of
redeeming the 9 7/8% Notes.
. The 1996 results included an after-tax charge of $61 million associated with
the Copper/Molybdenum segment primarily for environmental remediation and
costs to temporarily close the Tohono mine. Additionally, Amax Gold wrote
down its Guanaco mine in Chile and recorded an unrelated favorable tax
adjustment, which reduced Cyprus Amax's after-tax earnings by $13 million.
. In 1995 the Company consolidated Amax Gold based on an increased ownership
position. The 1995 results included an after-tax charge of $338 million to
recognize the write-downs of certain coal assets and provisions for
associated liabilities.
. On November 15, 1993, Amax was merged into Cyprus; therefore, the 1994
results included a full year of Amax operations for revenue of $888 million
whereas the 1993 results included Amax for the 47-day period following the
merger. The 1994 results also included after-tax gains of $13 million for
various special items. The merger contributed revenue of $140 million for
1993, and the impact on earnings was immaterial, excluding indirect merger
expenses. The 1993 results also included $104 million revenue and $75 million
after-tax gain from the sale of Cyprus Amax's LTV bankruptcy claims and $25
million after-tax for indirect merger expenses.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
SELECTED FINANCIAL DATA (CONTINUED)
(In millions except as noted and per share data)
1997 1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
PER SHARE DATA
Basic Earnings (Loss) Per Common Share
Income (Loss) From Continuing
Operations/(1)/ $ 0.54 $ 0.62 $ 1.13 $ 1.59 $ 1.85 $(6.31) $ 0.72
Income From Operations of
Discontinued Oil
and Gas Division - - - 0.10 - - -
Cumulative Effect of
Accounting Changes/(2)/ - - - - - (2.15) -
------ ------ ------ ------ ------ ------ ------
NET INCOME (LOSS) $ 0.54 $ 0.62 $ 1.13 $ 1.69 $ 1.85 $(8.46) $ 0.72
====== ====== ====== ====== ====== ====== ======
Cash Dividends Per Common Share $ 0.80 $ 0.80 $ 0.80 $ 0.90 $ 0.80 $ 0.85 $ 0.80
CONSOLIDATED BALANCE SHEET DATA
Cash and Cash Equivalents $ 250 $ 193 $ 191 $ 139 $ 96 $ 116 $ 98
Working Capital $ 297 $ 304 $ 292 $ 423 $ 41 $ 336 $ 299
Total Assets $6,459 $6,786 $6,196 $5,407 $5,618 $1,709 $1,984
Long-Term Debt $2,089 $2,415 $1,734 $1,191 $1,278 $ 232 $ 239
Capital Lease
Obligations $ 113 $ 139 $ 143 $ 200 $ 69 $ - $ -
Shareholders' Equity $2,330 $2,360 $2,365 $2,329 $2,217 $ 923 $1,290
OTHER FINANCIAL DATA
Book Value Per Common
Share $22.99 $23.43 $23.62 $23.39 $22.49 $21.22 $30.23
Long-Term Debt/Total
Capitalization 48.6% 52.0% 44.2% 37.4% 37.8% 20.1% 15.6%
Current Ratio 1.4:1 1.4:1 1.4:1 1.7:1 1.0:1 2.2:1 2.0:1
Cash Provided by
Operating Activities $ 481 $ 440 $ 675 $ 110 $ 74 $ 143 $ 285
STOCK PRICE - COMMON
STOCK/(3)/
High $ 26 13/16 $ 29 1/8 $ 32 1/8 $ 33 1/8 $ 36 3/8 $ 32 $ 25 3/8
Low $ 14 7/16 $ 19 7/8 $ 24 1/4 $ 23 7/8 $ 21 1/4 $ 18 1/2 $ 17 1/2
1990 1989 1988
---- ---- ----
PER SHARE DATA
Basic Earnings (Loss) Per Common Share
Income (Loss) From Continuing
Operations/(1)/ $ 2.38 $ 5.67 $ 4.21
Income From Operations of
Discontinued Oil
and Gas Division - - -
Cumulative Effect of
Accounting Changes/(2)/ - (1.80) -
------ ------ ------
NET INCOME (LOSS) $ 2.38 $ 3.87 $ 4.21
====== ====== ======
Cash Dividends Per Common Share $ 0.80 $ 0.73 $ 0.20
CONSOLIDATED BALANCE SHEET DATA
Cash and Cash Equivalents $ 39 $ 44 $ 163
Working Capital $ 336 $ 251 $ 343
Total Assets $1,919 $1,841 $1,651
Long-Term Debt $ 246 $ 108 $ 120
Capital Lease
Obligations $ - $ - $ -
Shareholders' Equity $1,284 $1,294 $1,204
OTHER FINANCIAL DATA
Book Value Per Common
Share $30.33 $28.69 $25.62
Long-Term Debt/Total
Capitalization 16.1% 7.7% 9.1%
Current Ratio 2.5:1 2.0:1 2.6:1
Cash Provided by
Operating Activities $ 199 $ 304 $ 271
STOCK PRICE - COMMON
STOCK/(3)/
High $ 28 1/2 $ 33 $ 24
Low $ 13 7/8 $ 21 3/8 $ 13 1/8
/(1)/ Financial information reflects net after-tax charges of $79 million for
coal write-downs, favorable tax adjustments of $38 million, an after-tax
gain of $19 million on the sale of Kubaka to Amax Gold, and an after-tax
charge of $5 million for the costs of redeeming the 9 7/8% Notes in 1997;
an after-tax charge of $74 million for environmental remediation
liabilities, costs to temporarily close a copper mine, the write-down of
the net assets of the Guanaco gold mine, and an unrelated favorable tax
adjustment for Amax Gold in 1996; an after-tax charge of $338 million for
the write-down of certain coal assets and provision for associated
liabilities in 1995; an after-tax gain of $13 million for various special
items in 1994; an after-tax charge for 1993 indirect merger costs of $25
million; an after-tax gain of $75 million in 1993 for the sale of LTV
bankruptcy claims; and write-downs and other provisions of $338 million in
1992, $32 million in 1991, and $63 million in 1990.
/(2)/ In 1992 Cyprus adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." Cumulative effect
adjustments are presented net of tax. Also in 1992 the Company adopted
SFAS No. 109, "Accounting for Income Taxes." In 1990 Cyprus adopted SFAS
No. 96, "Accounting for Income Taxes," retroactive to January 1, 1989. In
adopting SFAS No. 96, Cyprus Amax recorded a cumulative $70 million charge
for periods prior to January 1, 1989.
/(3)/ Stock prices prior to June 1989 have been restated to reflect a stock
split.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1997
Cyprus Amax earned $69 million in 1997, or 54 cents per share, compared with
1996 earnings of $77 million, or 62 cents per share, and 1995 earnings of $124
million, or $1.13 per share. The 1997 results included net after-tax coal
charges of $79 million, favorable tax adjustments of $38 million, an after-tax
gain of $19 million on the sale of Kubaka to Amax Gold, and an after-tax charge
of $5 million for the costs of redeeming the 9 7/8% Notes. The 1996 results
included an after-tax charge of $61 million primarily for environmental
remediation at the Miami, Arizona, operation and costs to temporarily close the
Tohono mine in Arizona. In addition, Amax Gold wrote down its Guanaco mine and
recorded an unrelated favorable tax adjustment that together reduced Cyprus
Amax's after-tax earnings by $13 million in 1996. The 1995 results included an
after-tax charge of $338 million to recognize the write-downs of certain coal
assets and provisions for associated liabilities.
Excluding the write-downs and special items, the 1997 earnings were $96 million,
or 83 cents per share, compared with 1996 earnings of $151 million, or $1.42 per
share, and 1995 earnings of $462 million, or $4.77 per share.
SELECTED RESULTS (In millions except per share data)
1997 1996 1995
--------- ------- -------
Revenue $3,346 $2,843 $3,207
Net Income $ 69 $ 77 $ 124
Earnings per Share $0.54 $0.62 $ 1.13
NOTE: SUPPLEMENTAL DATA (In millions)
1997 1996 1995
------ ------ ------
Special Items, Net of Tax $ (27) $ (74) $ (338)
Net Income Excluding Special Items $ 96 $ 151 $ 462
The decrease in earnings in 1997, excluding write-downs and special items, was
primarily due to $84 million higher net interest expense resulting from less
interest being capitalized on development projects that were completed in the
first half of 1997, 16 cents per ton lower coal profit margins, and $9 million
lower lithium earnings primarily due to lower carbonate prices. Partially
offsetting were an increase of 286 million pounds of produced copper sold, 25
cents per pound higher average molybdenum realizations, and 3 cents per pound
lower copper cost of sales. Additionally, Amax Gold earnings improved by $6
million due to cash costs dropping by $57 per ounce to $198 per ounce and sales
increasing by 458,000 ounces to 721,000 ounces, partially offset by realized
prices decreasing by $52 per ounce to $360 per ounce. The decrease in earnings
in 1996 from 1995 results, excluding write-downs and special items, reflected 29
cents per pound lower copper realizations, $2.28 per pound lower molybdenum
realizations, and 56 cents per ton lower coal realizations.
The 1997 revenue of $3,346 million was 18 percent higher than 1996 revenue of
$2,843 million because of $137 million of gains recorded on the settlements of
certain coal contracts and higher produced copper, coal, and gold sales,
partially offset by lower coal and gold realizations. Revenue in 1996 was 11
percent lower than 1995 revenue of $3,207 million primarily because of lower
copper and molybdenum realizations.
SEGMENT RESULTS
Segment operating earnings is earnings before corporate overhead, interest,
equity and other, income taxes, and minority interest. This discussion should
be read in conjunction with the Consolidated Financial Statements on pages 29 to
32, the information on write-downs and special charges in Note 4 and industry
segments in Note 18 to the Consolidated Financial Statements, and the
supplemental information on mineral reserves and selected operating statistics.
Following is a summary of the operating earnings by segment with special items
and write-downs included and excluded. Special items on a consolidated basis
are presented net of tax benefit or provision and are not necessarily infrequent
or unusual in the mining industry. Detail of each segment's results are
explained in the individual segment sections.
SUMMARY RESULTS (In millions)
1997 1996 1995
------ ------ ------
Segment Operating Earnings (Loss)
Copper/Molybdenum $ 314 $ 151 $ 584
Coal (15) 90 (308)
Other 2 (32) (37)
------ ------ ------
Total Segment Operating Earnings $ 301 $ 209 $ 239
====== ====== ======
NOTE: SUPPLEMENTAL DATA (In millions)
1997 1996 1995
------ ------ ------
Segment Operating Earnings (Loss) Excluding Special Items:
Copper/Molybdenum $ 314 $ 231 $ 584
Coal 71 90 137
Other (17) 4 (37)
------ ------ ------
Total Segment Operating Earnings $ 368 $ 325 $ 684
====== ====== ======
COPPER/MOLYBDENUM
SELECTED COPPER/MOLYBDENUM DATA (In millions)
1997 1996 1995
------ ------ ------
Revenue $1,564 $1,331 $1,720
Segment Operating Earnings $ 314 $ 151 $ 584
Total Copper Production, Lbs. 1,018 768 687
Total Copper Sales, Lbs. 1,143 893 828
Produced Copper Sales, Lbs. 1,030 744 723
Total Molybdenum Production, Lbs. 63 56 75
Total Molybdenum Sales, Lbs. 61 63 68
Average Copper Realization, $/Lb. $ 1.04 $ 1.04 $ 1.33
Copper Cost of Sales, $/Lb. $ 0.78 $ 0.81 $ 0.71
Copper Net Cash Costs, $/Lb. $ 0.62 $ 0.71 $ 0.57
Copper Full Mine Costs, $/Lb. $ 0.75 $ 0.80 $ 0.66
Average Molybdenum Realization, $/Lb. $ 5.50 $ 5.25 $ 7.53
Copper/Molybdenum reported segment earnings of $314 million for 1997 compared
with $151 million in 1996. The 1996 results included an $80 million pre-tax
charge primarily for environmental remediation activities at its Miami, Arizona,
copper mine for long-term clean-up efforts at Pinal Creek. The charge also
included costs to temporarily suspend operations at the Tohono mine near Casa
Grande, Arizona, and certain other minor adjustments in the primary molybdenum
business. The Copper/Molybdenum segment earnings in 1997 were $83 million higher
than in 1996, excluding the special items. The increase was attributed to an
increase of 286 million pounds of produced copper sold, 25 cents per pound
higher average molybdenum realizations, and 3 cents per pound lower copper cost
of sales.
NOTE: SUPPLEMENTAL DATA (In millions)
1997 1996 1995
------ ------ ------
Special Items $ -- $ (80) $ --
Segment Operating Earnings Excluding Special Items $ 314 $ 231 $ 584
Copper realizations in 1997 averaged $1.04 per pound for the year, which were
comparable to 1996. Cyprus Amax has price protection programs in place that
will ensure a minimum net average realization on an LME basis at December 31,
1997, of 89 cents per pound on 45 percent of total production for 1998. In 1996
Cyprus Amax sold a portion of its 1997 copper price protection contracts, of
which 110 million pounds related to the third and fourth quarters of 1997,
resulting in $13 million recorded as income in 1997, net of the respective cost
amortization. In the fourth quarter of 1997, Cyprus Amax sold 34 million pounds
of 1998 copper price protection contracts generating $5 million of proceeds,
which will increase copper realizations and income during the periods to which
the original contracts were applicable. As of February 19, 1998, Cyprus Amax
sold an additional 12 million pounds of 1998 copper price protection contracts
generating $2 million of proceeds. Cyprus Amax periodically may elect to buy or
sell copper price protection contracts to mitigate the risk of metal price
declines on a portion of its future copper sales.
For 1997 net cash costs improved 9 cents per pound compared with 1996, primarily
because of lower production costs at Cerro Verde, increased low cost production
from El Abra, and lower costs at the Arizona operations.
Cost of sales decreased 3 cents per pound from 1996 to 78 cents per pound for
1997 due to increased lower cost South American sales and lower domestic costs.
Copper production totaled 1,018 million pounds for the year, 250 million pounds
more than in 1996 due to a 197 million pound increase in production at El Abra,
a 16 million pound or 15 percent increase in Cerro Verde's production, and a 37
million pound or 6 percent increase from domestic operations. The production for
1997 is a new total production record for Cyprus Amax and also production
records for the Bagdad, Miami, and Cerro Verde mines. Copper rod production of
667 million pounds was also an annual record.
Demand for copper continued to grow for the twelfth consecutive year in 1997;
however, strong demand growth estimated at over three percent was exceeded by
increased supply. The year-end 1997 combined LME and Comex inventories of
461,000 short tons, although moderate, still rose almost 300,000 tons from the
very low year-end 1996 levels. Prices during 1997 dropped from a high of $1.22
per pound in June to a low of 77 cents per pound at year end.
Total Cyprus Amax copper sales in 1997 of 1,143 million pounds were 28 percent
higher than the 1996 sales of 893 million pounds. Produced copper sales of
1,030 million pounds for 1997 were 286 million pounds higher than 1996 produced
sales of 744 million pounds due primarily to the 250 million pound increase in
production.
The Cerro Verde mine in Peru, 82 percent owned by Cyprus Amax, produced 122
million pounds of copper, which is 16 percent above its original expanded annual
design capacity of 105 million annual pounds. During 1997 the Company completed
its exploration drilling and studies of the Cerro Negro copper oxide deposit,
which lies adjacent to the current Cerro Verde leach pad. The estimated
mineable reserve of oxide copper contains more than 70 million tonnes of ore at
a grade of 0.532 percent copper. When in full production, Cerro Negro is
expected to produce 44 million pounds of copper annually. Development of this
project has been deferred until copper prices improve.
The El Abra copper mine in Chile, 51 percent owned by Cyprus Amax, achieved
commercial production on December 1, 1996. During 1997 El Abra worked through
some typical start-up problems with its SX-EW plant and crushers. In December
1997, the El Abra mine announced it had successfully concluded its finance
completion tests. Sociedad Contractual Minera El Abra
also refinanced its project loans, releasing Cyprus Amax from all but $200
million in loan guarantees. At December 31, 1997, El Abra increased its copper
reserves on a 100 percent basis, by approximately 170 million tons. Also during
1997 Cyprus Amax entered into a joint exploration program with Corporacion
Nacional del Cobre de Chile (Codelco) on Manto Rojo, an adjoining property to El
Abra.
The Tohono mine in Arizona suspended mining operations in July 1997. Copper
will continue to be recovered from leaching of previously mined ore.
Evaluations of the feasibility of mining the significant copper resource at
Tohono are promising, but a decision has not been made to develop the ore body.
Cyprus Amax's marketable copper reserves of approximately 21.8 billion pounds
increased slightly from 21.6 billion pounds in 1996 due to the additional El
Abra and Cerro Verde reserves, partially offset by 1997 production. Molybdenum
reserves of 2.1 billion pounds at December 31, 1997, were comparable to 1996.
In the first quarter of 1997, Cyprus Amax signed an agreement to ultimately
acquire an 80 percent interest in the Kansanshi copper project from Zambia
Consolidated Copper Mines (ZCCM). Cyprus Amax paid $3 million to ZCCM at
closing and incurred $7 million on an extensive exploration drilling program in
1997. Additional exploration totaling $10 million is planned in 1998. A second
phase, depending on the results of this exploration program, calls for a $10
million payment to ZCCM and $15 million for further drilling and a feasibility
study. Upon determination that a mining project is feasible, Cyprus Amax would
make a final payment of $15 million to ZCCM.
In January 1998, Cyprus Amax reached an agreement with the Highlands Pacific
Group to acquire up to 75 percent of its 86 percent interest in the Frieda River
copper and gold exploration project in Papua New Guinea. Cyprus Amax is
committed under the agreement to spend up to $7 million on resource drilling and
further engineering studies in 1998 and, if Cyprus Amax elects to proceed to the
next stage of exploration and development, up to a total of $32 million to
complete the feasibility study.
Primary molybdenum earned $63 million in 1997 compared with $58 million in 1996,
excluding special items. Molybdenum sales decreased to 61 million pounds from
63 million pounds in 1996. Production increased to 63 million pounds from 56
million pounds. Realizations in 1997 averaged $5.50 per pound compared with
$5.25 per pound in 1996.
During 1997 approximately $18 million was spent on the Henderson 2000 project at
the Henderson primary molybdenum mine in Colorado, or approximately 10 percent
of estimated total construction costs. The project is to replace the 20-year-
old underground and surface rail haulage system with an underground and overland
conveyor system and to develop the lowest level of the mine. This project is
expected to be completed in 2000. During 1997 Cyprus Amax staged a 3 million
pound build up of molybdenum inventories in order to satisfy customer
requirements during the transition from rail to conveyor haulage associated with
the Henderson 2000 project implementation in 1999.
Molybdenum demand in the Western World in 1997 was near the record levels of
1995, primarily reflecting strong stainless steel applications. Chemical
products continue to show demand strength in most areas. Western World demand
in 1997 increased an estimated three percent over 1996, met by increases in
world molybdenum supply.
Changes in worldwide supply and demand and the related market perceptions can
have a major impact on copper and molybdenum prices. Therefore,
Copper/Molybdenum segment earnings can be expected to fluctuate. Each 10 cents
per pound change in the segment's average annual copper realization or
production cost would have resulted in a change in pre-tax income of
approximately $100 million at 1997 production and sales levels. Price
protection in place for 1998 would partially offset the exposure to significant
price decreases. In response to the current copper price environment, the
Copper/Molybdenum division is temporarily curtailing some higher cost domestic
copper production and reducing capital spending to a sustaining level. As a
result, Cyprus Amax expects 1998 copper production of about 950 million pounds
with net cash costs of approximately 60 cents per pound. For molybdenum each
$1.00 per pound change in average annual molybdenum margin would have resulted
in a change in pre-tax income of approximately $60 million at 1997 sales levels.
The impact on profits is delayed about three months on approximately 50 percent
of Cyprus Amax molybdenum production since the profit on by-product production
is recognized when copper inventories are sold.
COAL
SELECTED COAL DATA (In millions)
1997 1996 1995
------ ------ ------
Revenue $1,403 $1,284 $1,298
Segment Operating Earnings (Loss) $ (15) $ 90 $ (308)
Coal Production, Tons
- Consolidated Coal Mines 83.4 76.4 75.2
- Oakbridge (41% Share) 5.0 5.7 5.5
Coal Sales, Tons
- Eastern Mines 29.3 29.1 29.4
- Powder River Basin 40.7 35.6 35.7
- Western Mines 12.0 12.3 12.5
- Springvale 1.5 .9 -
------ ------ ------
Total Sales 83.5 77.9 77.6
- Oakbridge (41% Share) 5.7 6.2 6.1
Average Realization, $/Ton $14.53 $15.69 $16.25
Average Cost of Sales, $/Ton $13.90 $14.90 $14.73
Average Cash Costs, $/Ton $11.91 $13.03 $12.19
Average Unit Costs, $/Ton $14.00 $15.10 $14.34
Coal reported a segment operating loss of $15 million for the year compared with
operating earnings of $90 million in 1996. The 1997 results included pre-tax
unfavorable adjustments of $86 million. These adjustments included the sale and
assignment of two coal contracts and provisions for mine closure costs and asset
write-downs, which resulted in a net pre-tax gain of $17 million in the first
quarter of 1997; a favorable settlement of a royalty issue for $5 million pre-
tax, a $19 million pre-tax charge for the closure of the Maple Meadow mine, and
a $14 million pre-tax gain on the sale of a 15 percent equity interest in Cyprus
Plateau Mining Corporation to Mitsubishi Corporation in the third quarter of
1997; and pre-tax charges of $36 million and $5 million for the anticipated
closure of the Armstrong Creek and Shoshone mines, respectively, reclamation
adjustments of $7 million at Star Point and Chinook, Statement of Financial
Accounting Standards No. 121 impairment charges at the West Virginia steam coal
properties and Chinook for $34 million and $14 million, respectively, due to
updated mine and business plans that reflect the current views on the domestic
markets for mid- to high-sulfur coal and updated reserve information, and
miscellaneous coal adjustments of $6 million in the
fourth quarter of 1997. The 1995 results included a $445 million pre-tax charge
for write-downs of certain coal assets and provisions for associated liabilities
for the Wabash and Kentucky operations.
NOTE: SUPPLEMENTAL DATA (In millions)
1997 1996 1995
------ ----- ------
Special Items $ (86) $ -- $(445)
Segment Operating Earnings Excluding Special Items $ 71 $ 90 $ 137
Excluding the special items, Coal segment earnings were $71 million in 1997, $19
million lower than in 1996. The decrease in earnings was attributable to lower
earnings in the Powder River Basin due to higher stripping ratios, the
termination of an above market priced contract in late 1996, and an increase in
tons sold on the spot market; higher costs at the Star Point mine reflecting the
winding down of production; lower earnings in Colorado due to more longwall
moves and the Union Pacific Railroad problems affecting shipments; partially
offset by substantially higher earnings in Pennsylvania due to higher production
and productivity and lower costs. During 1997 the Union Pacific Railroad had
problems in supplying adequate locomotive power and crews to ship committed
sales volumes which lowered Coal's annual shipments and negatively affected
Coal's pre-tax earnings by $7 million. The lower operating earnings in 1996 were
due to a year-end 1995 contract expiration and renegotiation at Kentucky
operations, which negatively affected 1996 earnings by $39 million; adverse
weather in the East and Midwest; and poor mining conditions and lower
realizations at the Wabash mine.
Coal production, including Cyprus Amax's 41 percent share of Oakbridge, Ltd., of
88 million tons and sales of 89 million tons in 1997 were 6 million tons and 5
million tons higher than the 1996 period, respectively. Thirteen of Cyprus
Amax's coal mines set annual production records in 1997.
The 1997 average realization was $14.53 per ton and the average cost of sales
was $13.90 per ton. This resulted in a profit margin of 63 cents per ton for
the year and a cash margin of $2.62 per ton. This compares with an average
realization of $15.69 and an average cost of sales of $14.90, yielding a profit
margin of 79 cents per ton and a cash margin of $2.66 per ton for 1996.
In the first quarter of 1997, Cyprus Amax received $70 million as a result of a
1996 agreement in which Central Illinois Public Service Company discontinued
coal purchases from the Delta mine in Illinois.
Also in the first quarter of 1997, Amax Coal Company, a subsidiary of Cyprus
Amax, entered into an agreement which led to the assignment of a coal supply
agreement for its Wabash mine for an undisclosed amount of cash plus future
payments. This transaction did not have a significant impact on 1997 earnings.
The annual earnings impact of the future cash payments is expected to exceed the
mine's 1996 earnings. Under the coal supply agreement, Wabash was committed to
supply up to 3.6 million tons of coal annually to PSI Energy, Inc. through the
year 2010.
In the third quarter of 1997, Cyprus Amax sold a 15 percent equity interest in
Cyprus Plateau Mining Corporation to subsidiaries of Mitsubishi Corporation.
Cyprus Plateau operates the new Willow Creek and the existing Star Point mines
in Utah. A $14 million pre-tax gain was recorded on the sale. The Willow Creek
mine will replace the existing Star Point mine, which is phasing out its mine
life.
Longwall start-up at the Willow Creek mine is anticipated in the second quarter
of 1998. Approximately $146 million of the mine construction and development
capital was committed through 1997, which was higher than expected due to
geologic conditions that have increased the cost of underground development and
reduced the saleable pre-production coal available as a credit to development
costs. The planned life of the Willow Creek mine is at least 20 years. The mine
will produce low sulfur, low ash, and high BTU bituminous coal, which will be
marketed mainly to power utilities in the United States, Japan, and other
Pacific Rim countries.
Growth in demand for U.S. coal is expected to be strong for at least the next
five years. The domestic electric power sector, accounting for 85 percent of
U.S. demand, is expected to grow at a rate equal to or slightly greater than
real gross domestic product. The U.S. coal market is projected to grow by
approximately three percent in 1998. U.S. coal production is expected to expand
to nearly 1,120 million tons in 1998, according to the Energy Information
Administration. The major factors influencing growth are stronger electricity
use and little or no growth in nuclear, natural gas, and hydroelectric
generation.
The accelerating deregulation of the electric power generation industry has
presented new opportunities for innovation. During 1997 Cyprus Amax Coal has
implemented alliances with several utilities and formed a business venture
called Millennium Fuel Services, LLC, which will offer a full range of products
and services to electric generators, including fuel supply, logistics services,
contract administration, inventory management, fuel blending, and conversion
optimization.
Approximately 95 percent of Cyprus Amax coal is marketed to electric utilities
with the vast majority of customers in the United States. During 1997 Cyprus
Amax committed to 39 contracts, ranging from one to 11 years, for cumulative
tons of approximately 57 million, with annual tonnage of 17 million in 1998.
More than 96 percent of 1998 domestic production is committed for sale, with
approximately 94 percent to be shipped under contracts with an initial term of
at least one year.
Cyprus Amax coal reserves totaled 2.4 billion tons (including Cyprus Amax's 41
percent share of Oakbridge) at December 31, 1997. Domestic reserves of 1.5
billion tons are developed and assigned to operating mines and comprises
approximately 79 percent compliance coal, 7 percent low sulfur coal, and the
remainder high sulfur coal. The compliance and low sulfur reserves satisfy the
less than 2.5 pound sulfur dioxide Phase I (low sulfur) standard of the Clean
Air Act, and the developed compliance reserves satisfy the less than 1.2 pound
sulfur dioxide Phase II (compliance) standard, which will become effective in
2000. With this large reserve base of compliance and low sulfur coal, in
addition to diverse geographical locations, Cyprus Amax believes that it has the
resources and market access to be a long-term, competitive coal company.
On February 24, 1998, Cyprus Amax signed a letter of intent to sell selected
Appalachian and Midwestern coal properties to AEI Holding Company, Inc. It is
expected to be completed during the second quarter of 1998.
During 1997 Oakbridge's production of 5 million tons (Cyprus Amax's 41 percent
share) was 1 million tons lower than 1996 production. This decrease was
attributable to several of the mines experiencing problematic mining conditions
and labor disruptions at the Baal Bone and Clarence mines. During the fourth
quarter of 1997, the Clarence mine was written down by $13 million due to its
planned closure. Excluding this write-down, Oakbridge, which is reported
in Earnings (Loss) on Equity Investments and Other, incurred a loss of $20
million in 1997 compared with income of $7 million in 1996. The decrease in
earnings was attributable to the factors mentioned above and weak export coal
selling prices resulting in an 18 percent drop in average realizations.
In May 1997, Ban-Pu, a 6.7 percent shareholder in Oakbridge, advised Cyprus
Amax's Australian coal subsidiary that it intended to exercise an option entered
into in 1994 that required Cyprus Amax to purchase Ban-Pu's shareholding in
Oakbridge. The share purchase, which increased Cyprus Amax's ownership interest
in Oakbridge to 48 percent, was completed in January 1998 for an investment of
approximately $10 million.
OTHER
SELECTED RESULTS (In millions)
1997 1996 1995
----- ----- -----
Lithium $ 21 $ 30 $ 28
Amax Gold 6 (36) (14)
Exploration (43) (20) (33)
Businesses Sold/Non-Operating 18 (6) (18)
----- ----- -----
Segment Operating Earnings (Loss) $ 2 $ (32) $ (37)
===== ===== =====
NOTE: SUPPLEMENTAL DATA (In millions)
1997 1996 1995
----- ----- -----
Special Items $ 19 $ (36) $ --
===== ===== =====
Other Minerals, which includes Lithium, Amax Gold, Exploration, and Businesses
Sold/Non-Operating, reported combined operating earnings for the year of $2
million compared with a loss of $32 million in 1996. During the second quarter
of 1997, Cyprus Amax sold the Kubaka mine to Amax Gold and recorded a gain of
$19 million, reflecting the minority interest's share. In the fourth quarter of
1996, Amax Gold wrote down the net asset value of the Guanaco mine in Chile by
$36 million. Other Minerals had a combined loss for 1996 of $32 million
compared with a loss of $37 million in 1995.
Lithium earned $21 million in 1997, a decrease of $9 million due primarily to
lower carbonate prices. In December 1997, Cyprus Amax announced its intention
to sell its lithium subsidiary in order to focus on its core businesses.
Proceeds from the sale will be used to strengthen Cyprus Amax's financial
position.
Amax Gold reported operating earnings in 1997 of $6 million compared with break-
even earnings in 1996, excluding the above-mentioned write-down. This increase
in earnings resulted from increasing sales by 458,000 ounces to 721,000 ounces,
reducing cash costs by $57 per ounce to $198 per ounce, partially offset by a
decline in realized prices of $52 per ounce to $360 per ounce. Amax Gold's
operating results, excluding the write-down, were break-even for 1996 compared
with a $14 million loss for 1995. The improvement resulted from a 10 percent
increase in sales volumes, slightly higher realizations, and 9 percent lower
unit costs. In the second quarter of 1997, Cyprus Amax increased its ownership
in Amax Gold from 52.5 percent to 58.8 percent when it sold its 50 percent
interest in the Kubaka gold mine in exchange for 15.4 million shares of Amax
Gold Common Stock.
For 1997 Amax Gold produced 730,000 ounces of gold compared with 1996 production
of 268,000 ounces and 1995 production of 238,000 ounces. Amax Gold's average
realized price was $360 per ounce in 1997, $412 per ounce in 1996, and $406 per
ounce in 1995. These realized prices compare with average spot gold prices of
$331 per ounce in 1997, $388 per ounce in 1996, and $384 per ounce in 1995. Amax
Gold's average realized price exceeded the average spot price in each year due
to the positive impact of hedging activities. Amax Gold's average cash operating
costs were reduced to $198 per ounce in 1997 from $255 per ounce in 1996 and
$313 per ounce in 1995. For 1998 Amax Gold expects gold production to be more
than 750,000 ounces with cash costs averaging slightly below $200 per ounce.
Construction of the Fort Knox mine near Fairbanks, Alaska, was essentially
completed in early 1997, and commercial production was achieved March 1, 1997.
The mine has outperformed original expectations due to higher mill throughput,
which resulted in higher than anticipated production and lower cash operating
costs of $170 per ounce for 1997. At December 31, 1997, Fort Knox increased its
reserves by about 450,000 contained ounces, which more than replaced 1997 Fort
Knox production and will lower its depreciation and depletion rate by about $20
per ounce. Commercial production was achieved at the Kubaka mine in Russia as
of June 1, 1997. This mine also has performed better than originally expected
with cash operating
costs of $175 per ounce in 1997. Production at the Refugio mine in Chile has
been hampered by the severe weather in mid-1997, which caused the crushing
operations to be suspended for nearly three months. Production at Refugio is
expected to improve during the first quarter of 1998 as the weather-related
problems and other operational inefficiencies are addressed.
On February 9, 1998, Amax Gold announced that it has entered into a merger
agreement with Kinross Gold Corporation whereby each share of Amax Gold Common
Stock will be converted into 0.8 of a share of Kinross Common Stock. Cyprus
Amax will exchange $135 million of cash and indebtedness of Amax Gold at the
effective time of the merger for approximately 35 million shares of Kinross
Common Stock. The merger is expected to close before the end of June 1998, and
Cyprus Amax will own approximately 31 percent of the new Kinross. This merger
will result in the deconsolidation of Amax Gold.
Exploration expense of $43 million in 1997 was $23 million higher than in 1996
due to the expenditures on the Kansanshi copper project in Zambia, and the
absence of the gains recorded in 1996 for the sale of Cerro Quema, an
exploration project in Panama, and certain other small properties. Exploration
expense of $20 million in 1996 was $13 million lower than 1995 due to the above-
mentioned gains. Exploration expenditures in 1997 primarily funded projects in
Africa, Eurasia, Chile, Indonesia, Australia, Canada, the United States, Peru,
Central America, and Mexico. In 1998 our exploration program will be focused on
copper. We will continue to drill at El Abra and other current operations to add
reserves and evaluate sulfide ore potential. Our advanced exploration program
will focus on our Zambia project and our Papua New Guinea prospect. See the
Copper/Molybdenum segment for discussion of the Zambia copper and the Papua New
Guinea copper-gold exploration projects.
Businesses Sold/Non-Operating reported earnings of $18 million in 1997 compared
with a loss of $6 million in 1996. The 1997 results included a $19 million
gain on the sale of the Kubaka mine to Amax Gold, which reflected the minority
interest's share. The 1996 results were $12 million favorable relative to the
1995 results due to the absence of environmental expenses and other adjustments
related to the sale of oil and gas assets.
CORPORATE AND OTHER
Corporate expenses of $68 million for 1997 were $11 million higher than in 1996
primarily due to the pre-tax cost of $7 million for the purchase of
approximately 70 percent of the Company's $300 million 9 7/8% Notes, higher
depreciation, and general inflation. Corporate expenses of $57 million in 1996
were comparable with 1995.
Net interest expense, after capitalized interest and interest income, increased
$84 million to $162 million in 1997. Interest expense increased $19 million to
$208 million due to increased borrowings for El Abra, Cerro Verde, and higher
Amax Gold debt. Capitalized interest decreased $73 million to $10 million due
to the completion of construction projects in the first half of 1997. Interest
income increased by $8 million to $36 million in 1997 due to higher cash
balances. For 1996 net interest expense of $78 million increased $8 million
from 1995 due to increased borrowings.
Equity losses of $31 million were $34 million unfavorable compared with 1996.
The majority of this decrease related to Oakbridge. See the Coal section for a
discussion on Oakbridge's results. Equity earnings of $3 million in 1996
declined $5 million from 1995 primarily due to lower metals prices that affected
a 50 percent owned metals recovery operation in Louisiana.
Income tax benefit in 1997, including special items, was $22 million. This
included favorable tax adjustments of $38 million resulting from the settlement
of certain prior years' tax issues. Income tax expense, including special items,
was $11 million for 1996, which included a favorable tax adjustment of $10
million recorded by Amax Gold. Income tax expense was $3 million for 1995, which
reflected utilization of investment tax credits.
While general inflation rates have remained steady at about two to three percent
over the past three years, inflation has continued to affect costs. Higher
costs for compensation and benefits, coupled with inflation of certain supplies
and service costs, continue to increase mine operating costs. Most of Cyprus
Amax's products are commodities whose price changes do not correlate exactly to
inflation. The Company is continuing specific programs, employing capital, and
leveraging purchases to more than offset these increases, as well as
implementing quality improvement programs to increase productivity and reduce
costs. During 1997 Cyprus
Amax continued its company-wide quality and efficiency initiative, Quest 21,
that is improving our systems and processes and is expected to further reduce
costs.
ENVIRONMENTAL
During 1997 Cyprus Amax spent approximately $108 million for reclamation,
remediation, and environmental compliance compared with 1996 environmental
expenditures of about $154 million. About $12 million of the total 1997
spending was for capital expenditures, and $55 million of the total spending was
charged to reserves. Environmental expenditures in 1998 are expected to remain
at approximately the 1997 spending level.
At December 31, 1997, Cyprus Amax had short-term and long-term accruals of
approximately $411 million for expected mine closure, reclamation, and
environmental remediation liabilities compared with accruals of $424 million at
year-end 1996. Significant components of the year-end 1997 accrual include $316
million for future reclamation and for closure of discontinued or previously
sold operations and $95 million for environmental remediation at Superfund and
other similar sites.
The reserves for future reclamation and closure include $190 million for Coal,
$104 million for Copper/Molybdenum, and $22 million for Other. Significant
elements of the reclamation and closure reserves include $49 million for
combined Eagle Butte and Belle Ayr mines, $40 million for the Climax molybdenum
mine, $21 million for the Delta coal mine, and $19 million for Amax Metals
Recovery.
Cyprus Amax has been advised by the Environmental Protection Agency ("EPA") and
several state environmental agencies that it may be liable under the
Comprehensive Environmental Response Compensation and Liability Act ("CERCLA")
or similar state laws and regulations ("Superfund") for costs of correcting
environmental hazards at a number of sites that have been or are being
investigated by the EPA or states. The Company has estimated the cost of
reasonably possible outcomes for all sites to range between $65 million and $280
million, of which $95 million is considered probable and has been accrued at
December 31, 1997. Certain Superfund-type sites and mine reclamation liabilities
are discussed in Note 14 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, Cyprus Amax had a ratio of long-term debt to total
capitalization of 49 percent, a ratio of current assets to current liabilities
of 1.4 to 1.0, and a cash balance of $250 million.
During 1997 $558 million was generated from operating activities, before changes
in working capital; $319 million from financings relating to El Abra, Fort Knox,
Refugio, Cerro Verde, Kubaka, and Springvale; $145 million from repayment of the
El Abra subordinated debt; and $154 million from the proceeds of asset sales
reflecting the settlement of two coal contracts and the 15 percent interest in
Cyprus Plateau to Mitsubishi. Those sources of funds were sufficient to finance
cash requirements for capital expenditures of $391 million, net interest
payments of $136 million, dividend payments of $92 million, $232 million for the
purchase of 70 percent of the $300 million 9 7/8% Notes, $200 million repayments
on the $350 million term loan, $76 million repayment on Amax Gold's debt, and
$28 million of payments on capitalized leases.
In April 1997, Cyprus Amax closed on a long-term $110 million project financing
for its Cerro Verde copper mine. Proceeds from the financing were used to repay
existing short-term debt that was guaranteed by Cyprus Amax. The term of the
financing is eight years.
In May 1997, Amax Gold completed a $71 million tax-exempt industrial revenue
bond financing for the solid waste disposal facility at the Fort Knox mine.
Proceeds were used to repay amounts borrowed under the Cyprus Amax demand loan
facility. The revenue bond is a bullet loan due in 2009, backed by a letter of
credit guaranteed by Cyprus Amax.
In June 1997, Cyprus Amax announced a fixed-spread tender offer to purchase
all of the Company's $300 million 9 7/8% Notes due June 13, 2001. A total of
approximately 70 percent, or $209 million, of the Notes were tendered. Cyprus
Amax paid an aggregate of approximately $232 million (excluding accrued
interest) for the tendered Notes. This resulted in an after-tax charge of $5
million, which was recorded in the second quarter of 1997.
In November 1997, Cyprus Amax and Codelco, the national copper company of Chile,
refinanced the $1 billion in project loans for the El Abra copper mine. In
addition, El Abra cash balances were used to reduce the total debt by $50
million and pay approximately $70 million of accrued interest. The refinancing
has a 9.5-year term, less restrictive covenants, and 1.3 percent lower average
interest rates for an initial annual interest cost savings of about $15 million
for El Abra. Cyprus Amax received $300 million in principal plus $70 million in
accrued interest as a result of the refinancing of subordinated debt that the
Company contributed to the copper project's original construction financing in
the summer of 1995. Cyprus Amax will continue a back-stop guarantee on $200
million of El Abra's $1 billion of senior debt.
In December 1997, Cyprus Amax elected to prepay $200 million on the five-year
$350 million term loan. This will reduce interest expense by approximately $13
million annually.
During December 1997, Amax Gold refinanced its $34 million portion of the
Refugio gold loan with approximately $28 million borrowed under a new $40
million credit facility. This is a bullet loan due in 2002, guaranteed by
Cyprus Amax. The decline in gold prices since the gold was borrowed in early
1995 resulted in a pre-tax gain of approximately $6 million, which will be
amortized, net of approximately $2 million in deferred financing costs, over the
four remaining years of the original loan life. Amax Gold also received
repayment of $10 million previously lent to the other 50 percent owner of
Refugio. These amounts were used for debt service and to fund working capital
requirements for the Kubaka mine.
During 1996 Cyprus Amax provided Amax Gold with a demand loan facility to fund
additional costs at the Fort Knox project and for general corporate purposes,
with such funding to be provided at the discretion of Cyprus Amax. At December
31, 1997, the outstanding loan balance from Amax Gold was $73 million and the
remaining amount available was $70 million. Additionally, Cyprus Amax has
guaranteed Amax Gold's Fort Knox, Kubaka, and Refugio loans and a letter of
credit backing its industrial revenue bond debt. Cyprus Amax receives certain
fees for providing this support and holds security interests in certain Amax
Gold assets.
In August 1997, Cyprus Amax amended and restated its $1 billion revolving
credit agreement to extend its term until 2002 and to lower the facility fee
and borrowing rates. At December 31, 1997, the Company had not drawn against
this facility.
Non-cash working capital decreased to $47 million during 1997 from $111 million
in 1996. Short-term debt and the current portion of long-term debt increased by
$120 million, primarily due to a $29 million increase in Cerro Verde's short-
term borrowings, a $42 million increase in Amax Gold's current portion of long-
term debt due to scheduled repayments on Fort Knox and Kubaka in 1998, and a $54
million increase at El Abra due to 1998 scheduled debt repayments. Income taxes
payable decreased $46 million due to the favorable settlement of income tax
examinations and asset write-downs. Inventories increased $31 million primarily
due to increased coal production and the impact on shipments from the Union
Pacific Railroad problems, a build-up in molybdenum inventories due to the
Henderson 2000 project, and a materials and supplies inventory build-up
primarily at Kubaka and El Abra, partially offset by lower copper inventories
due to lower copper production costs and produced copper sales exceeding
production. Accounts and notes receivable decreased $15 million primarily due
to lower copper, gold, and coal realizations.
Cash capital expenditures in 1997, excluding capitalized interest, were $391
million, which is a significant drop from 1996's capital expenditures of $856
million due to the completion of our major development projects.
Copper/Molybdenum capital expenditures of $159 million included $18 million for
initial Henderson 2000 project expenditures at the Henderson molybdenum mine,
which will replace ore trains with conveyors, and the remainder primarily for
sustaining and replacement capital and capitalized stripping.
Coal cash capital expenditures of $138 million included $78 million for
development of the Willow Creek mine in Utah and the remainder for sustaining
and replacement capital. Other Minerals cash capital expenditures included Amax
Gold's expenditures of $31 million primarily for the Fort Knox and Kubaka
projects and $26 million for the development of the Kubaka mine prior to the
sale to Amax Gold, $22 million for the enhancement and upgrades of computer
systems, and $15 million for Lithium.
Capital spending in 1998 is planned to decrease to approximately $275 million.
Copper/Molybdenum capital expenditures are estimated at $155 million with
approximately $49 million for the Henderson 2000 project, $6 million at Cerro
Verde for a crushing system expansion, $17 million at Miami on the acid plant
and initial stages of construction of a new leach pad, and the remainder is for
sustaining and replacement capital and capitalized stripping. Coal expects to
spend approximately $95 million in 1998, including $22 million for the
continued development of the Willow Creek mine and $40 million at Emerald for
the infrastructure required to access the Northeast reserves. Amax Gold's
capital expenditures are estimated at $15 million for sustaining and replacement
capital.
During 1998 Cyprus Amax expects to be able to provide sufficient funds for
general corporate purposes, capital expenditures, and acquisitions through
internally generated funds, sales of selected assets, and existing or new
borrowings. Cyprus Amax paid regular dividends of $0.80 per common share and
$4.00 per preferred share during 1997.
For the year ended December 31, 1997, Cyprus Amax adopted Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share (EPS). SFAS No. 128
replaced the presentation of primary EPS with a presentation of basic EPS.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Cyprus Amax's basic earnings per share is the same as primary
earnings per share as if presented under Accounting Principles Board Opinion No.
15 "Earnings Per Share."
YEAR 2000 CONVERSION
Cyprus Amax has created and staffed a Year 2000 Program Management Office to
oversee and coordinate Year 2000 conversion for the Company. Year 2000 data
processing has potential implication to Cyprus Amax's business applications and
automated mine operations, such as process controllers and other electronic
measuring devices. Cyprus Amax has initiated involvement from site, division,
and corporate personnel to investigate and address Year 2000 compliance, and
projects are underway to timely identify, evaluate, and implement Year 2000
compliance solutions. Cyprus Amax is also communicating with customers,
manufacturers, suppliers, financial institutions, and others with whom it does
business to coordinate Year 2000 compliance. The total cost of Year 2000
projects is estimated to range from $23 million to $29 million, which will be
expensed as incurred. All critical applications are expected to be compliant by
the end of 1999.
CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
With the exception of historical matters, the matters discussed in this report
are forward-looking statements that involve risks and uncertainties that could
cause actual results to differ materially from projected results. Such forward-
looking statements include statements regarding projections of mineral
production levels, cash operating costs, capital expenditure levels, certain
significant cost and expenses, price protection programs, percentage increases
and decreases in production from the Company's operations, schedules for
completion of feasibility studies and initial feasibility studies, potential
increases in reserves and production, the timing and scope of future drilling
and other exploration activities, expectations regarding receipt of permits and
commencement of mining or production, anticipated recovery rates, and potential
acquisitions or increases in property interests. Factors that could cause
actual results to differ materially include changes in relevant mineral prices,
mineral supply contract renegotiations, the presence or absence of price
protection programs, unanticipated ore grade, geological, hydrological,
metallurgical, processing, access, transportation activities, results of pending
and future feasibility studies, operating and development project risks, changes
in project parameters as plans continue to be refined, political, economic and
operational risks of foreign and domestic operations, joint venture
relationships, competitive conditions, availability of materials and equipment,
the timing and receipt of governmental permits, changes in laws or regulations
or their interpretation and application, force majeure events, the failure of
plant, equipment or processes to operate in accordance with specifications or
expectations, accidents, adverse weather, labor relations, delays in start-up
dates, environmental costs and risks, the outcome of acquisition or disposition
negotiations, and general domestic and international economic and political
conditions, as well as other factors described herein or in the Company's
filings with the U.S. Securities and Exchange Commission. Many of these factors
are beyond the Company's ability to predict or control. Readers are cautioned
not to put undue reliance on forward-looking statements.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31
(In millions except per share data) 1997 1996 1995
------ ------ ------
REVENUE $3,346 $2,843 $3,207
------ ------ ------
COSTS AND EXPENSES
Cost of Sales 2,257 2,074 2,108
Selling and Administrative Expenses 128 128 143
Depreciation, Depletion, and Amortization 444 339 296
Write-Downs and Special Charges 241 116 445
Exploration Expense 43 34 33
------ ------ ------
TOTAL COSTS AND EXPENSES 3,113 2,691 3,025
------ ------ ------
INCOME FROM OPERATIONS 233 152 182
OTHER INCOME (EXPENSE)
Interest Income 36 28 24
Interest Expense (208) (189) (137)
Capitalized Interest 10 83 43
Earnings (Loss) on Equity Investments and Other (31) 3 8
------ ------ ------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 40 77 120
Income Tax Benefit (Provision) 22 (11) (3)
Minority Interest 7 11 7
------ ------ ------
NET INCOME 69 77 124
Preferred Stock Dividends (19) (19) (19)
------ ------ ------
INCOME APPLICABLE TO COMMON SHARES $ 50 $ 58 $ 105
====== ====== ======
EARNINGS PER COMMON SHARE
Basic and Diluted/(1)/ $ 0.54 $ 0.62 $ 1.13
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 93 93 93
Diluted 103 103 103
/(1)/ Diluted earnings per share were anti-dilutive in 1997, 1996, and 1995.
The accompanying notes are an integral part of these statements.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
At December 31 (In millions except share amounts) 1997 1996
------- -------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 250 $ 193
Accounts and Notes Receivable, Net 201 216
Inventories 526 495
Prepaid Expenses 147 145
Deferred Income Taxes 8 -
------- -------
Total Current Assets 1,132 1,049
------- -------
PROPERTIES - At Cost, Net 4,978 5,226
OTHER ASSETS 349 511
------- -------
TOTAL ASSETS $6,459 $6,786
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-Term Debt $ 55 $ 36
Current Portion of Long-Term Debt 180 79
Accounts Payable 139 142
Accrued Payroll and Benefits 100 94
Accrued Royalties and Interest 50 41
Accrued Closure, Reclamation, and Environmental 59 61
Other Accrued Liabilities 143 143
Taxes Payable Other Than Income Taxes 67 61
Income Taxes Payable 23 69
Dividends Payable 19 19
------- -------
Total Current Liabilities 835 745
------- -------
NONCURRENT LIABILITIES AND DEFERRED CREDITS
Long-Term Debt 2,089 2,415
Capital Lease Obligations 113 139
Deferred Employee and Retiree Benefits 407 412
Deferred Closure, Reclamation, and Environmental 352 363
Deferred Income Taxes 57 44
Other 117 151
------- -------
Total Noncurrent Liabilities and Deferred Credits 3,135 3,524
------- -------
COMMITMENTS AND CONTINGENCIES (NOTES 14 AND 16) - -
MINORITY INTEREST 159 157
------ ------
SHAREHOLDERS' EQUITY
Preferred Stock, $1 Par Value, 20,000,000 Shares Authorized:
$4.00 Series A Convertible Stock, $50 Stated Value,
4,664,302 Shares Issued in 1997 and 1996 5 5
Common Stock, Without Par Value, 150,000,000 Shares Authorized,
96,031,038 Shares Issued in 1997 and 96,031,139 in 1996 1 1
Paid-In Surplus 2,947 2,952
Accumulated Deficit (504) (481)
Other (8) 5
------ -------
2,441 2,482
Treasury Stock at Cost, 2,548,867 Shares in 1997 and
2,788,535 Shares in 1996 (58) (64)
Loan to Savings Plan (53) (58)
------ -------
Total Shareholders' Equity 2,330 2,360
------ -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,459 $6,786
====== =======
The accompanying notes are an integral part of these statements.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31 (In millions) 1997 1996 1995
----- ----- -----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 69 $ 77 $ 124
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation, Depletion, and Amortization 444 339 296
Write-Downs and Special Charges 241 116 445
Deferred Income Taxes (8) 13 (67)
Gain on Sales of Assets (166) (41) (13)
Issuance of Stock for Employee Benefits 6 6 6
Other, Net 62 13 27
Changes in Assets and Liabilities Net of Effects from
Businesses Acquired/Sold:
(Increase) Decrease in Receivables (15) 146 24
(Increase) Decrease in Inventories (36) (61) 8
Increase in Prepaid Expenses (1) (25) (28)
Decrease in Current Liabilities (25) (17) (26)
Decrease (Increase) in Other Assets 14 (1) (15)
Decrease in Other Liabilities (104) (125) (106)
----- ----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 481 440 675
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures (391) (856) (929)
Payments for Businesses Purchased - (70) -
Capitalized Interest (10) (83) (43)
Advances from (to) and Investments in Affiliates 155 (12) (145)
Collections on Notes Receivable 7 - -
Proceeds from Sales of Assets 154 63 77
Cash Effect of Consolidating Amax Gold Inc. - - 37
----- ----- -----
NET CASH USED FOR INVESTING ACTIVITIES (85) (958) (1,003)
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Sale-Leaseback - 24 -
Net Proceeds from Issuance of Long-Term Debt 681 722 770
Payments on Long-Term Debt (911) (14) (118)
Net Borrowings on Short-Term Debt 91 526 125
Payments on Short-Term Debt (74) (596) (29)
Production Payments - (25) (258)
Payments on Capital Lease Obligations (28) (18) (13)
Proceeds from Issuance of Stock for Employee Benefits 1 1 3
Dividends Paid (92) (93) (92)
Dividends to Minority Interests (7) (7) (8)
----- ----- -----
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (339) 520 380
----- ----- -----
NET INCREASE IN CASH AND CASH EQUIVALENTS 57 2 52
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 193 191 139
----- ----- -----
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 250 $ 193 $ 191
===== ===== =====
The accompanying notes are an integral part of these statements.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Preferred Stock Common Stock
-------------------- -------------------- Loan to
Shares Net Shares Paid-In Accumulated Treasury Savings
(In millions) Outstanding Amount Outstanding Amount Surplus Deficit Other Stock Plan
----------- ------ ----------- ------ -------- ------------ ------ -------- -------
December 31, 1994 5 $5 92 $1 $2,961 $(496) $ 7 $(80) $(69)
Net Income 124
Dividends
Preferred Stock,
Series A (19)
Common Stock (74)
Common Stock Issued for
Employee Benefit Plans
and Exercise of Stock
Options 1 (5) 10 5
Unrealized Gain on Securities
Available for Sale (3)
Foreign Currency Translation
Adjustment (2)
---------- ------ ----------- ------ -------- ------------ ------ -------- ------
December 31, 1995 5 5 93 1 2,956 (465) 2 (70) (64)
Net Income 77
Dividends
Preferred Stock,
Series A (19)
Common Stock (74)
Common Stock Issued for
Employee Benefit Plans
and Exercise of Stock
Options (4) 6 6
Unrealized Loss on Securities
Available for Sale 1
Foreign Currency Translation
Adjustment 2
---------- ------ ----------- ------ -------- ------------ ------ --------- ------
DECEMBER 31, 1996 5 5 93 1 2,952 (481) 5 (64) (58)
Net Income 69
Dividends
Preferred Stock,
Series A (19)
Common Stock (73)
Common Stock Issued for
Employee Benefit Plans
and Exercise of Stock
Options (5) 6 5
Foreign Currency Translation
Adjustment (13)
---------- ------ ----------- ------ -------- ------------ ------ -------- ------
December 31, 1997 5 $5 93 $1 $2,947 $(504) $ (8) $(58) $(53)
========== ====== =========== ====== ======== ============ ====== ======== ======
The accompanying notes are an integral part of these statements.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS
Cyprus Amax Minerals Company (Cyprus Amax or the Company) is a diversified
mining company engaged, directly or through its subsidiaries and affiliates, in
the exploration for and extraction, processing, and marketing of mineral
resources. Cyprus Amax operates in three principal industry segments:
Copper/Molybdenum, Coal, and Other (which includes Lithium, Amax Gold, and
Exploration).
The Copper/Molybdenum segment explores for, mines, processes, and markets copper
and molybdenum primarily in the Americas, Europe, Africa, and Indonesia. The
Company operates three major copper mines in Arizona, one in Chile, one in Peru,
and one primary molybdenum mine in Colorado. Additionally, the Company operates
two copper rod plants, a copper smelter, and a refinery in the United States.
The Company also processes molybdenum concentrates at its conversion plants in
the United States and Europe into such products as technical grade molybdic
oxide, ferromolybdenum, pure molybdic oxide, and other molybdenum chemicals.
The El Abra copper mine in Chile, 51 percent owned by Cyprus Amax, achieved
commercial production on December 1, 1996. Cyprus Amax's share of the mine's
annual production capacity is approximately 250 million pounds. The South
American mines are expected to account for 40 percent of the total 1998
production of approximately 950 million pounds. Substantially all of Cyprus
Amax's copper metal production is committed under sales agreements with metal
fabricators at prices which fluctuate with commodity exchange quotations, and
approximately 12 percent of copper/molybdenum sales were for export markets.
The Company does not believe that the loss of any one customer would have a
material adverse effect on the results of Cyprus Amax, and since
copper/molybdenum are internationally traded, the sales should be readily
replaced. From time to time the Company uses various price protection programs
to ameliorate the adverse effect of low prices for its copper production.
The Coal segment mines, cleans, markets, and sells coal to electric utilities
and industrial users. The majority of the Company's coal is produced in the
United States and sold to domestic electric utilities under term contracts, with
an initial term of at least one year. Coal is typically sold under term
contracts at fixed prices subject to escalation, de-escalation, and
renegotiation. As Cyprus Amax increases its coal production, an increasing
amount will be sold in spot markets or under shorter term contracts. Loss of
any one customer would not have a material adverse effect on the results of
Cyprus Amax. The Coal segment has 20 domestic operating mines of which 11 are
governed by union contracts. Union representation accounts for approximately 51
percent of Coal's employees and 32 percent of domestic production. The contract
with the United Mine Workers of America, which covers all the union coal sites
except Kentucky and Sycamore, expires in August of 1998.
The Lithium division is a major producer of lithium with production facilities
in the United States and Chile. Lithium and lithium compounds are sold
worldwide to such diverse businesses as aluminum smelting, ceramics, lubricants,
specialty glass, synthetic rubber, plastics, batteries, alloys, and
pharmaceuticals. The various lithium products are sold under a combination of
long- and short-term contracts, with approximately 24 percent of United States
produced lithium sold in foreign markets. Loss of any one customer would not
have a material adverse effect on the results of Cyprus Amax. In December 1997,
Cyprus Amax announced its intention to sell its lithium subsidiary.
Cyprus Amax owns 58.8 percent of Amax Gold Inc. (Amax Gold or AGI) which is
engaged in the mining and processing of gold and silver ore and in the
exploration for, and acquisition and development of, gold-bearing properties,
principally in the Americas, Russia, Australia, and Africa. Construction of the
Fort Knox mine in Alaska was completed in early 1997, and the mine achieved
commercial production on March 1, 1997. In the second quarter of 1997, Cyprus
Amax completed the sale of its 50 percent ownership interest in the Kubaka gold
mine in Russia to Amax Gold for
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
common stock, increasing Cyprus Amax's ownership interest to 58.8 percent.
Commercial production was achieved at the Kubaka mine on June 1, 1997. Amax
Gold's 1998 production is expected to be approximately 750,000 ounces of which
53 percent is from domestic mines, 30 percent from Russia, and 17 percent from
South America. Amax Gold sells all of its refined gold to banks and other
bullion dealers, utilizing a variety of hedging programs, and the majority of
its 1997 sales were to Europe. The profitability of Amax Gold's operations is
significantly affected by the market price of gold, which historically has
fluctuated widely and is affected by numerous factors. On February 9, 1998, Amax
Gold announced that it has entered into a merger agreement with Kinross Gold
Corporation whereby each share of Amax Gold Common Stock will be converted into
0.8 of a share of Kinross Common Stock. Cyprus Amax will exchange $135 million
of cash and indebtedness of Amax Gold at the effective time of the merger for
approximately 35 million shares of Kinross Common Stock. The merger is expected
to close before the end of June 1998, and Cyprus Amax will own approximately 31
percent of the new Kinross. This merger will result in the deconsolidation of
Amax Gold.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The financial statements include the accounts of
Cyprus Amax Minerals Company and related entities which it controls.
Investments in companies over which the Company can exercise significant
influence, but not control, are accounted for using the equity method.
Investments in joint ventures are accounted for using proportionate
consolidation, consistent with accepted mining industry practice.
EARNINGS PER SHARE (EPS) - For the year ended December 31, 1997, Cyprus Amax
adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
Per Share." SFAS No. 128 replaced the presentation of primary EPS with a
presentation of basic EPS. Basic earnings per common share are determined by
dividing net income as reduced by preferred stock dividends by the weighted
average number of common shares outstanding during the year. Cyprus Amax's
basic earnings per share is the same as primary earnings per share as if
presented under Accounting Principles Board (APB) Opinion No. 15, "Earnings Per
Share." Diluted earnings per share are determined by dividing net income by the
weighted average number of common shares and common stock equivalents
outstanding plus shares which would be issued upon conversion of the preferred
stock. At December 31, 1997, 1996, and 1995, Cyprus Amax had Series A
Convertible Preferred Stock outstanding that could be converted into
approximately 10 million shares of Common Stock.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. Overdrafts representing outstanding checks in excess of funds on
deposit are classified as accounts payable.
ACCOUNTS RECEIVABLE - Cyprus Amax entered into an agreement in November 1996 to
sell coal, copper, and molybdenum receivables on an ongoing basis. Cyprus
Amax's accounts and notes receivable at December 31, 1997 and 1996, were net of
$150 million of receivables sold.
INVENTORIES - Inventories are carried at the lower of current market value or
cost. Coal and Gold product inventories and materials and supplies inventories
are generally valued on the basis of average costs. Molybdenum inventories are
computed on the last-in, first-out (LIFO) method. The costs of all other
product inventories are determined on the first-in, first-out (FIFO) method.
PROPERTIES - Costs for mineral rights and certain tangible assets, and mine
development costs incurred to expand capacity of operating mines, develop new
ore bodies, or develop mine areas substantially
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in advance of current production are capitalized and charged to operations
generally on the units-of-production method. Mobile mining equipment and most
other assets are depreciated on a straight-line basis over their estimated
useful lives. Interest costs for the construction or development of significant
long-term assets are capitalized and amortized over the related assets'
estimated useful lives or the life of the mine, whichever is shorter. Gains or
losses upon retirement or replacement of equipment and facilities are credited
or charged to income.
IMPAIRMENT OF LONG-LIVED ASSETS - Cyprus Amax follows SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". SFAS No. 121 prescribes that an impairment loss is recognized in the event
that facts and circumstances indicate that the carrying amount of an asset may
not be recoverable and an estimate of future undiscounted cash flows is less
than the carrying amount of the asset. Impairment is recorded based on an
estimate of future discounted cash flows.
EXPLORATION - Expenditures incurred in the search for mineral deposits and the
determination of the commercial viability of such deposits are charged against
income as incurred.
INCOME TAXES - The provision for income taxes includes federal, state, and
foreign income taxes currently payable and deferred based on currently enacted
tax laws. Deferred income taxes are provided for the tax consequences of
differences between the financial statement and tax basis of assets and
liabilities.
Deferred income taxes have not been provided on the Company's share of
undistributed earnings of certain foreign subsidiaries and unconsolidated
affiliates because the Company considers those earnings to be reinvested
indefinitely. It is not practical to estimate the amount of taxes that might be
payable on the eventual remittance of those earnings. On remittance, certain
countries impose withholding taxes that, subject to certain limitations, would
generate tax credits that could substantially reduce any U.S. tax.
TRANSLATION OF FOREIGN CURRENCIES - Amounts in foreign currencies are translated
into U.S. dollars using the translation procedures specified in SFAS No. 52.
When local functional currency is translated to U.S. dollars, the effects are
recorded as a separate component of shareholders' equity. For foreign
subsidiaries with U.S. dollar functional currency, the effects of remeasurement
are included in income. Exchange gains and losses arising from transactions
denominated in a foreign currency are translated at average exchange rates and
included in income.
HEDGING PROGRAMS AND DERIVATIVE CONTRACTS - The Company's use of derivative
financial instruments is principally limited to management of interest rate and
commodity price risks. The Company may use price protection programs to reduce
or eliminate the risk of metal price declines on a portion of its future copper
or gold sales. Premiums paid are amortized during the period in which the
options are exercisable. Gains and losses on such transactions are matched to
product sales and charged or credited to sales revenue when that product is
sold. Gains and losses on derivative contracts that do not qualify as hedges
are recognized currently.
The Company may enter into interest rate swap agreements or options to limit the
effect of increases in interest rates on floating debt or to take advantage of
lower rates on fixed debt. The differences to be paid or received on these
agreements are included in interest expense as incurred.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECLAMATION AND ENVIRONMENTAL COSTS - Minimum standards for mine reclamation
have been established by various governmental agencies which affect certain
operations of the Company. Certain reclamation is performed and expensed on an
ongoing basis as mining operations are performed. The remaining reclamation
costs are related to mine closure and are accrued and charged against income on
a units-of-production basis over the life of the mine. Cyprus Amax is subject
to various environmental regulations. Environmental liabilities are accrued on
an ongoing basis when such losses are probable and reasonably estimable and
reflect management's best estimates of future obligations. Costs of future
expenditures for environmental remediation obligations are not discounted to
their present value.
STOCK-BASED COMPENSATION - During 1996 the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." Cyprus Amax has elected to measure
compensation cost using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Note 13 to the Consolidated Financial Statements contains a summary of the
disclosures of pro forma net income and earnings per share as if the fair value
based method of accounting as defined in SFAS No. 123 had been applied.
USE OF ESTIMATES - The preparation of Cyprus Amax's consolidated financial
statements in conformity with generally accepted accounting principles requires
Cyprus Amax's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes. The more
significant areas requiring the use of management estimates relate to mineral
reserves; reclamation and environmental obligations; postemployment,
postretirement, and other employee benefit liabilities; valuation allowances for
deferred tax assets; fair value of financial instruments; future cash flows
associated with assets; and useful lives for depreciation, depletion, and
amortization. Actual results could differ from those estimated.
NOTE 3: BUSINESS ACQUISITIONS AND DISPOSITIONS
On September 30, 1997, Cyprus Amax sold a 15 percent interest in its wholly-
owned subsidiary, Cyprus Plateau Mining Corporation, to Mitsubishi Corporation
for cash proceeds of $29 million.
On September 30, 1997, Cyprus Amax sold its wholly-owned subsidiary, Cyprus
Mineral Park Corporation, and the copper ore body at the Cyprus Tonopah Mining
Corporation to Equatorial Mining N.L.
In the second quarter of 1997, Cyprus Amax sold its 50 percent interest in the
Kubaka gold mine in eastern Russia to Amax Gold. Under terms of the
transactions, Cyprus Amax received 15.4 million shares of Amax Gold Common
Stock.
On February 13, 1996, Cyprus Amax acquired a 50 percent interest in the
Springvale underground coal mine in New South Wales, Australia, at a cost of
approximately $70 million.
On October 31, 1995, Cyprus Amax sold substantially all of the assets of the
Climax Specialty Metals Division of Climax Performance Materials Corporation to
CSM Industries, Inc.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: WRITE-DOWN OF ASSETS AND SPECIAL CHARGES
Write-Downs and Special Charges reported on the Consolidated Statement of
Operations consist of the following:
In the first quarter of 1997, a $101 million pre-tax charge was recorded to
write down the asset basis and to provide for employee separation and mine
closure costs at the Wabash and Delta mines due to the sale and assignment of
two coal contracts. In addition, a $10 million pre-tax charge was recorded at
the Star Point mine in Utah primarily to write down equipment and to accrue for
potential closure costs, and $6 million of pre-tax charges were recorded for the
write-down of other coal assets.
In the third quarter of 1997, a $17 million pre-tax charge was recorded for the
closure of the Maple Meadow mine in West Virginia in the fourth quarter of 1997
and an adjustment to mine closure costs for the Ayrshire mine in Indiana.
In the fourth quarter of 1997, a $102 million pre-tax charge was recorded. This
included $36 million and $5 million pre-tax charges for the anticipated closure
of the Armstrong Creek and Shoshone mines, respectively, reclamation adjustments
of $7 million at the Star Point and Chinook mines, and miscellaneous coal asset
adjustments of $6 million. Additionally, SFAS No. 121 impairment pre-tax
charges of $34 million and $14 million were recorded at the West Virginia steam
coal properties and the Chinook mine, respectively, due to updated mine and
business plans that reflect the current views on the domestic markets for mid-
to high-sulfur coal and updated reserve information.
In the fourth quarter of 1996, an $80 million pre-tax charge was recorded
primarily for environmental remediation activities, principally at the Miami,
Arizona, copper mine, costs to temporarily close the Tohono mine near Casa
Grande, Arizona, and adjustments in the primary molybdenum business.
In addition, during the fourth quarter of 1996, a $36 million pre-tax charge was
recorded by Amax Gold to write down the net assets of the Guanaco gold mine in
Chile as a result of a detailed study of the continuity of ore, costs, and
production rates.
In the third quarter of 1995, a $445 million pre-tax charge was recorded to
write down certain coal assets and to provide for associated liabilities. In
1995 Amax Coal signed a new coal contract with PSI Energy, Inc. that settled
arbitration matters and called for a reduction in price with a move toward
market price by the year 2000. The new contract provided an eight-year
extension of the term. This resulted in a pre-tax write-down of the carrying
value of the Wabash mine's assets of $310 million. Additionally, the coal
market outlook for Mountain Coals operations in eastern Kentucky reflected weak
demand and lower prices and the expiration of long-term contracts in 1995 and
1998. This prompted adoption of a revised mine plan in 1995 to reduce costs.
Coal reserves were reduced and the Company wrote down its Kentucky operations by
$135 million pre-tax.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: INVENTORIES
Inventories detailed by component and industry segment are summarized below:
At December 31 (In millions) 1997 1996
----- -----
Component
Ores, Concentrates, and Other
In-Process Inventories $ 234 $ 237
Finished Goods 178 161
Materials and Supplies 114 97
----- -----
$ 526 $ 495
===== =====
Industry Segment
Copper/Molybdenum $ 310 $ 321
Coal 128 112
Other 88 62
----- -----
$ 526 $ 495
===== =====
The excess of estimated replacement cost over the LIFO basis was $43 million at
December 31, 1997, and $36 million at December 31, 1996.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: PROPERTIES
At December 31 (In millions) 1997 1996
-------- --------
Copper/Molybdenum $ 3,523 $ 3,432
Coal 3,241 3,134
Other 1,406 1,347
------- -------
8,170 7,913
Less: Accumulated Depreciation, Depletion,
Amortization, and Write-downs (3,192) (2,687)
------- -------
Net Properties $ 4,978 $ 5,226
======= =======
Net Properties consists of the following:
Property, Plant, and Equipment $ 2,688 $ 2,858
Reserves/Mineral Rights and Sales Contracts 2,290 2,368
------- -------
Net Properties $ 4,978 $ 5,226
======= =======
NOTE 7: DEBT
At December 31 (In millions) 1997 1996
------- -------
10 1/8% Notes, Due 2002 $ 150 $ 150
9 7/8% Notes, Due 2001 91 300
8 3/8% Debentures, Due 2023 150 150
7 3/8% Notes, Due 2007 250 250
6 5/8% Notes, Due 2005 250 250
Cyprus Amax Term Loan Facility, 6.1% for 1997,
Due 2001 150 350
Capital Lease Obligations,
Interest Rates Range from 7.3% to 8.4%,
Due from 1997 through 2005 145 173
El Abra Project Financing, 7.1% for 1997, Due from 1998
through 2007 510 383
Fort Knox Financing, 6.4% for 1997, Due from 1997
through 2001 222 250
Refugio Project Financing, 5.4% for 1997 - 38
Amax Gold Corporate Financing, 7.0% for 1997, Due 2002 40 -
Kubaka Project Financing, 10.6% for 1997, Due from 1997
through 2001 73 50
Cerro Verde Project Financing, 9.3% for 1997, Due 2005 106 80
Springvale Financing, 6.0% for 1997, Due from 1998
through 2006 97 88
Fort Knox Industrial Revenue Bond, 4.5% for 1997, Due 2009 71 -
Other 72 93
------- -------
2,377 2,605
Add: Unamortized Net Premium 5 28
------- -------
2,382 2,633
Less: Current Portion (180) (79)
------- -------
Long-Term Debt and Capital Lease Obligations $ 2,202 $ 2,554
======= =======
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Scheduled debt maturities (in millions), excluding capital lease obligations,
as of December 31, 1997, for the next five years are $148, $144, $150, $397, and
$295 for 1998, 1999, 2000, 2001, and 2002, respectively.
In March 1996, Amax Gold renegotiated the $250 million Fort Knox loan agreement
due to projected higher capital costs to complete the mine. Repayments began in
1997, and the final payment is in December 2001. As of December 31, 1997, $23
million in gold and $199 million in U.S. dollars remained outstanding. The loan
is collateralized by the assets and production of the Fort Knox and Hayden Hill
properties and the stock of the subsidiaries owning the Guanaco and Sleeper
properties. The loan agreement places restrictions on proceeds of future equity
offerings and borrowings, restricts dividends, and requires certain net worth
and cash flow ratios to be maintained. In addition, Amax Gold is required to
maintain gold reserve minimums and to hedge a portion of future production in
order to obtain specified cash flows. Cyprus Amax has guaranteed the loan until
economic completion of the Fort Knox mine.
In June 1996, the Company obtained $70 million Australian ($55 million U.S.
dollars) to finance the purchase of 50 percent of the Springvale coal mine in
Australia. The debt is payable from December 1998 through June 2006. In March
1996, the Company finalized a loan agreement for $61 million Australian of which
$56 million Australian ($42 million U.S. dollars) was outstanding as of December
31, 1997. The debt does not have a defined term for repayment, but will be
repaid with available cash. The weighted average interest rate on both loans
was 6.0 percent during 1997.
In December 1996, the Company finalized a $350 million Term Loan Agreement to be
used for general corporate purposes. The Company elected to prepay $200 million
of the term loan in December 1997. The weighted average interest rate on this
debt was 6.1 percent for 1997. The remaining debt is payable in December 2001.
In January 1997, an additional $30 million was obtained for Kubaka project
financing bringing the total project financing to $130 million. Interest on the
project financing averaged 8.9 percent in 1997 with final maturity in December
2001. During 1996 Omolon Gold Mining Company, the project company, borrowed $14
million under a subordinated line of credit, and in 1997 a $15 million working
capital line of credit was obtained. The subordinated debt and working capital
line of credit both have variable interest rates which averaged 12.0 percent in
1997. At December 31, 1997, $146 million remained outstanding, of which Amax
Gold's share was $73 million. Project financing accounts for $59 million of the
$73 million. The project loan has been guaranteed by Cyprus Amax until economic
completion is achieved, while the lines of credit are guaranteed until repaid.
In April 1997, the Company obtained $110 million in project financing for the
Cerro Verde copper mine in Peru, of which Cyprus Amax owns 82 percent. Proceeds
from the financing were used to repay existing debt. The term of the financing
covers 8 years, but may be extended to 10 years. The weighted average interest
rate on this debt during 1997 was 9.3 percent.
In May 1997, Amax Gold completed a $71 million tax-exempt industrial revenue
bond financing for the solid waste disposal facility at the Fort Knox mine. The
12-year variable rate bonds were backed by a letter of credit, which was
guaranteed by Cyprus Amax. A bullet payment is due in 2009. The weighted
average interest rate for this bond was 4.5 percent for 1997.
In June 1997, the Company offered to purchase its $300 million 9 7/8%
Notes due June 13, 2001. As a result of the offer, approximately 70 percent, or
$209 million, of the Notes were tendered at an
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
aggregated cost of $232 million, excluding accrued interest. The repurchase
resulted in an after-tax charge of $5 million for costs incurred in connection
with the redemption.
In November 1997, Cyprus Amax, along with its joint venture partner Corporacion
Nacional del Cobre de Chile (Codelco), announced the refinancing of the project
debt for construction and development of the El Abra copper mine project in
Chile. The senior debt consists of $850 million in project financings provided
by a syndicate of banks and $150 million of original financings provided by a
German financial institution. The Company guarantees $200 million of the $850
million tranche. Cyprus Amax's proportional share of the total $1 billion
borrowings is $510 million. The refinancing has a 9.5-year term, less
restrictive covenants, and lower interest rates with the first principal payment
scheduled for May 15, 1998. The weighted average interest rate on this debt at
December 31, 1997, was 6.8 percent. The loan agreement specifies certain
restrictions on additional borrowings by El Abra and on dividend and
subordinated debt payments. No such restricted payments may be made prior to
the first principal repayment of senior debt.
In December 1997, Amax Gold borrowed $40 million under a new credit facility
guaranteed by Cyprus Amax. Approximately $28 million in proceeds was used to
repay its share of the original Refugio project gold loan. The new credit
facility is a five-year term loan with a $40 million bullet payment due in
December 2002. The loan bears interest at LIBOR plus 1.0 percent, or 7.0
percent in 1997. The refinancing resulted in a $6 million pre-tax gain due to
the decline in gold prices since the original 1995 borrowings, which will be
recognized over the four years remaining on the original loan agreement.
At December 31, 1997, the Company had $55 million of short-term debt
outstanding, of which $52 million was attributable to Cerro Verde's $80 million
short-term line of credit, guaranteed by the Company. The average interest rate
for 1997 was 6.5 percent. At December 31, 1996, $31 million was outstanding on
Cerro Verde's line of credit, and $6 million was outstanding on short-term
credit lines from banks.
As of December 1997, the Company had a revolving credit agreement (the
"Revolving Credit Agreement") expiring in August 2002, that provides a $1
billion line of credit with interest rates to be determined, at the option of
the Company, by a competitive bid process or at a fixed margin over various
indices. The Company pays a facility fee on the full amount of the credit line,
irrespective of usage. The Revolving Credit Agreement contains certain
covenants with which the Company is currently in compliance. At December 31,
1997 and 1996, the Company had no loans outstanding under the Revolving Credit
Agreement.
NOTE 8: DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Cyprus Amax's use of derivative financial instruments is principally limited to
management of interest rate and commodity price risks.
INTEREST RATE PROTECTION AGREEMENTS - Occasionally, interest rate swap
agreements are used to re-characterize interest rates from fixed to floating
rates or vice-versa. In the fourth quarter of 1993, the Company entered into
interest rate swap agreements, which expired in November 1996, that effectively
converted $200 million of its fixed rate borrowings into floating rate
obligations.
Additionally, Amax Gold has entered into interest rate swap option agreements to
reduce the impact of changes in interest rates. At December 31, 1997, Amax Gold
had interest rate swaps and swap option sales contracts that, if exercised
between January 1998 and April 1998, would obligate Amax
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Gold to pay a fixed rate of 5.97 percent over an average term of 0.8 years on a
principal amount of $205 million. Amax Gold also purchased swap options with the
right to pay 6.9 percent over an average term of 1.5 years on a principal amount
of $138 million. Gains or losses realized on these contracts will be amortized
over the term of the loan. Amax Gold would break even if required to terminate
these interest rate swap agreements, given market interest rates at December 31,
1997. Due to the requirements placed on Amax Gold as a condition of its Fort
Knox borrowings, Amax Gold does not expect to close these contracts.
Interest rate forward contracts have been entered into on $300 million of El
Abra's senior debt, at a blended fixed rate of 5.83 percent amortized over two,
three, and four years.
PRICE PROTECTION PROGRAMS - The Company and Amax Gold may use price protection
programs to reduce or eliminate the risk of metal price declines on a portion of
their future copper or gold sales. These agreements include copper and gold put
options, copper synthetic put options, gold call and compound options, copper
and gold forward sales, and gold purchase sales. Put options purchased by
Cyprus Amax or Amax Gold establish a minimum sales price for the sales covered
by such put options and permit the Company or Amax Gold to participate in price
increases above the strike price. Amax Gold also sells put options which give
it the obligation to buy at predetermined prices. Synthetic put options are
established by entering into a forward sale and purchasing a call option for the
same quantity of the relevant metal and for the time period relating to such
forward sale. Amax Gold also purchases and sells call options which give it the
right to purchase or obligation to sell gold at a predetermined price.
Cyprus Amax has entered into copper price protection contracts for 1998 to
ensure a minimum average realization on an LME basis at December 31, 1997, of 90
cents per pound on 336 million pounds of copper. Cyprus Amax previously sold a
portion of its 1997 copper price protection contracts, of which 110 million
pounds related to the third and fourth quarters of 1997, resulting in $13
million recorded as income, net of the respective cost amortization. In the
fourth quarter of 1997, Cyprus Amax sold 34 million pounds of 1998 copper price
protection contracts generating $5 million of proceeds, which will increase
copper realizations and income during the periods in 1998 to which the original
contracts were applicable. As of February 19, 1998, Cyprus Amax sold an
additional 12 million pounds of 1998 copper price protection contracts
generating $2 million of proceeds. The price protection program for El Abra
ensures a minimum net average realization on an LME basis of 85 cents in 1998 on
96 million pounds. Cyprus Amax's share of El Abra is 51 percent. Cyprus Amax
periodically may elect to sell or buy copper price protection contracts to
mitigate the risk of metal price declines on a portion of its future copper
sales.
Amax Gold has entered into forward sales and purchase contracts, spot deferred
forward sales, put and call options, and compound options to manage the effect
of price changes on precious metals produced and sold. Amax Gold's price risk
management activities have historically utilized derivative instruments and
strategies that qualified for hedge accounting. Amax Gold increased its use of
derivative instruments during 1997, and the total program has put it in the
position whereby it is partially protected from further downward pressure in the
price of gold during 1998 and future years and at the same time will enable Amax
Gold to participate in any upward price movement. Some of the instruments
utilized in this program do not qualify for hedge accounting and, consequently,
must be marked to market. At December 31, 1997, the mark to market gain on this
program was $5 million, which has been reflected in the 1997 results.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1997, Amax Gold's outstanding hedge contracts were as
follows:
AVERAGE
REALIZED PRICE
GOLD OUNCES PER OUNCE PERIOD
- ----------------------------------------------------------------------------------------------
FORWARD SALES 326,000 $399 Jan. 1998 - Dec. 2002
PURCHASED PUT OPTIONS 126,000 $419 Jan. 1998 - Dec. 2000
As of December 31, 1997, Amax Gold's outstanding commodity derivative contracts
which are marked to market are as follows:
AVERAGE
REALIZED PRICE
GOLD OUNCES PER OUNCE PERIOD
- ----------------------------------------------------------------------------------------------
FORWARD PURCHASES 514,000 $327 Jan. 1998 - Dec. 1998
PURCHASED PUT AND COMPOUND PUT OPTIONS 1,073,000 $341 Jan. 1998 - Dec. 2000
SOLD PUT OPTIONS 412,000 $337 Jan. 1998 - Jun. 1998
PURCHASED CALL AND COMPOUND CALL OPTIONS 303,000 $333 Jan. 1998 - Dec. 1998
SOLD CALL OPTIONS 199,000 $314 Jan. 1998 - Jun. 1998
CREDIT RISK - Cyprus Amax and Amax Gold are exposed to credit losses in the
event of nonperformance by counterparties to financial instruments, but does not
expect any counterparties to fail to meet their obligations. The Company
generally does not obtain collateral or other security to support financial
instruments subject to credit risk but monitors the credit standing of
counterparties.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated fair values for financial instruments under SFAS No. 107 are
determined at discrete points in time based on relevant market information.
These estimates involve uncertainties and cannot be determined with precision.
The estimated fair values of the Company's financial instruments, as measured on
December 31, 1997 and 1996, are as follows:
At December 31 (In millions) 1997 1996
-------------------- --------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
--------- -------- --------- --------
Cash and Cash Equivalents $ 250 $ 250 $ 193 $ 193
Long-Term Receivables $ 66 $ 57 $ 215 $ 211
Price Protection Contracts $ 25 $ 105 $ 42 $ 92
Long-Term Debt $(2,089) $(2,148) $(2,415) $(2,479)
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS: the carrying amounts approximate fair value because
of the short maturity of those instruments.
LONG-TERM RECEIVABLES: the fair value is estimated based on expected discounted
future cash flows.
PRICE PROTECTION CONTRACTS: are reported at cost and expensed as they expire.
The fair value of the options is estimated based on the spot price, while the
fair value of the forward sales is estimated based on the quoted market price
for the contracts at December 31, 1997 and 1996.
LONG-TERM DEBT: the fair value of long-term debt is estimated based on the
quoted market prices for the same or similar issues offered to the Company for
debt of similar maturities.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: INCOME TAXES
Income before Income Taxes and Minority Interest consists of the following:
(In millions) 1997 1996 1995
------ ------ ------
Domestic $ 33 $ 61 $ 102
Foreign 7 16 18
----- ----- -----
$ 40 $ 77 $ 120
===== ===== =====
Income tax (benefit) provision is composed of:
(In millions) 1997 1996 1995
----- ----- -----
Current - Federal $ (24) $ (12) $ 56
- State 1 - 5
- Foreign 9 9 9
----- ----- -----
(14) (3) 70
----- ----- -----
Deferred - Federal (11) 20 (56)
- State (7) (5) (11)
- Foreign 10 (1) -
----- ----- -----
(8) 14 (67)
----- ----- -----
$ (22) $ 11 $ 3
===== ===== =====
The deferred tax (assets)/liabilities comprises the tax effect of the following
at December 31:
(In millions) 1997 1996
-------- --------
Reclamation Liabilities $ (71) $ (62)
Postretirement Benefits (250) (268)
Capitalized Lease Obligations (40) (60)
Accrued Liabilities (298) (294)
Net Operating Loss Carryforwards (174) (100)
Investment Tax Credit Carryforwards (7) (18)
State Tax Deduction (14) (20)
Minimum Tax Credit Carryforwards (261) (276)
Other - (2)
------- -------
Total Deferred Tax Assets (1,115) (1,100)
Valuation Allowance 221 181
------- -------
Net Deferred Tax Assets (894) (919)
------- -------
Properties 943 970
Prepaid Expenses - 5
------- -------
Total Deferred Tax Liabilities 943 975
------- -------
Total $ 49 $ 56
======= =======
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: INCOME TAXES (CONT'D)
Deferred Tax Assets of $9 million are included in Other Assets on the
Consolidated Balance Sheet at December 31, 1996. Deferred Tax Liabilities of
$21 million are included in Income Taxes Payable on the Consolidated Balance
Sheet at December 31, 1996.
The Company has approximately $7 million of investment tax credit carryforwards
expiring from 1998 to 2006 and $261 million of minimum tax credit carryforwards
which do not expire. There is a net operating loss carryforward for regular tax
of $333 million ($119 million related to Amax Gold) and an $83 million net
operating loss carryforward (all related to Amax Gold) for alternative minimum
tax purposes. The Company also had Chilean net operating loss carryforwards of
$290 million ($105 million related to Amax Gold) that do not expire. A
valuation allowance of $221 million has been recorded against all of these
benefits.
The increase in the valuation allowance of $40 million relates to increased
minimum tax credit carryforwards and regular tax net operating losses not
expected to be realized.
The following is a reconciliation between the amount determined by applying the
federal statutory rate of 35 percent to Net Income excluding Minority Interests
and the Income Tax (Benefit) Provision:
(In millions)
1997 1996 1995
------ ------ ------
Income Taxes at Statutory Rate $ 14 $ 27 $ 42
Increases (Decreases) Resulting from:
Percentage Depletion (10) (12) (16)
State Income Taxes, Net of Federal Benefit (1) (10) (3)
Foreign Operations 2 10 4
Tax Carryforwards Used 6 (2) (25)
Adjustments to Prior Years (38) - -
Other, Net 5 (2) 1
----- ----- -----
Income Tax (Benefit) Provision $ (22) $ 11 $ 3
===== ===== =====
The adustments to prior years of $38 million related primarily to the settlement
of prior years' income tax examinations.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: PREFERRED STOCK TRANSACTIONS
The $4.00 Series A Convertible Preferred Stock is convertible into Common Stock
at any time at a conversion price of $24.30 per share. The Series A Convertible
Preferred Stock has a stated value of $50.00 per share and carries a cumulative
dividend payable quarterly. The Series A Convertible Preferred Stock is
redeemable at the option of the Company, in whole or in part, at any time
beginning at $52.40 per share on and after December 18, 1996, and declining to
$50.00 per share on and after December 18, 2002.
In 1989 the Board of Directors of Cyprus Amax declared a dividend of one
preferred share purchase right for each outstanding share of Common Stock in
connection with the redemption of then-existing rights. If the rights become
exercisable following the occurrence of certain specified events, each right
will entitle the holder, within certain limitations, to purchase two-thirds of
one one-hundredth of a share of Series A Junior Participating Preferred Stock
for $93.33 subject to certain anti-dilution adjustments. If a person or group
acquires 20 percent of Common Stock, every other holder of a right will be
entitled to buy at the right's then-exercise price a number of shares of Common
Stock having a value of twice such exercise price. After the threshold is
crossed, the rights become non-redeemable, except that, prior to the time a
person or group acquires 50 percent or more of the Common Stock, the rights
other than those held by such person or group can be exchanged at a ratio of one
share of Common Stock for each right. In the event of certain extraordinary
transactions, including mergers, the rights entitle holders to buy at the
right's then-exercise price equity in the acquiring company having a value of
twice such exercise price. The rights do not have any voting rights nor are
they entitled to dividends. The rights are redeemable by Cyprus Amax at $.0067
each until a person or group acquires 20 percent of Common Stock or until the
rights expire on February 28, 1999. In addition, on May 24, 1993, the Board of
Directors increased the number of authorized shares of the Series A Junior
Participating Preferred Stock from 500,000 shares to 1,500,000 shares of which
none were issued or outstanding at December 31, 1997.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EMPLOYEE BENEFIT PLANS
PENSION PLANS - Cyprus Amax has a number of defined benefit pension plans
covering most of its employees. Benefits are based on either the employee's
compensation prior to retirement or stated amounts for each year of service with
the Company. Cyprus Amax makes annual contributions to these plans in
accordance with the requirements of the Employee Retirement Income Security Act
of 1974 ("ERISA"). Plan assets consist of cash and cash equivalents, equity and
fixed income securities, and real estate.
Net annual pension cost included the following components:
Year ended December 31 (In millions) 1997 1996 1995
------ ------ ------
Service Cost $ 12 $ 11 $ 8
Interest Cost 22 20 20
Actual Gain on Plan Assets (42) (33) (37)
Deferred Gain 19 13 21
Other 2 3 2
----- ----- -----
$ 13 $ 14 $ 14
===== ===== =====
The following table sets forth the funded status of the plans:
1997 1996
----------------------- -----------------------
ASSETS ACCUMULATED Assets Accumulated
EXCEED BENEFITS exceed benefits
ACCUMULATED EXCEED accumulated exceed
At December 31 (In millions) BENEFITS ASSETS benefits assets
------------ -------- ------------ --------
Actuarial Present Value of Benefit Obligations:
Vested Benefit Obligation $ 105 $ 160 $ 208 $ 17
===== ===== ===== ====
Accumulated Benefit Obligation $ 113 $ 185 $ 228 $ 17
===== ===== ===== ====
Projected Benefit Obligation $(117) $(203) $(248) $(17)
Plan Assets at Fair Value 131 166 258 2
----- ----- ----- ----
Plan Assets Greater Than (Less Than)
Projected Benefit Obligation 14 (37) 10 (15)
Unrecognized Net Loss 4 31 15 1
Unrecognized Prior Service Cost 2 6 9 (1)
Unrecognized Transition Credit (1) - (1) -
----- ---- ----- ----
Prepaid/(Accrued) Pension Cost $ 19 $ - $ 33 $(15)
===== ===== ===== ====
Prepaid pension cost of $20 million and $19 million is included in Prepaid
Expenses on the Consolidated Balance Sheet at December 31, 1997 and 1996,
respectively. An accrued pension obligation of $1 million is included in
Accrued Payroll and Benefits at December 31, 1997 and 1996.
The significant actuarial assumptions at December 31 were as follows:
(In percents) 1997 1996 1995
---- ---- ----
Rate of Increase in Future Compensation Levels 5.00 5.75 5.25
Expected Long-Term Rate of Return on Assets 9.00 9.00 9.00
Discount Rate 7.25 7.75 7.25
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net periodic pension cost is determined using the assumptions as of the
beginning of the year, and the funded status is determined using the assumptions
as of the end of the year.
Substantially all domestic employees not covered under the plans administered by
Cyprus Amax are covered under multi-employer defined benefit plans administered
by the United Mine Workers of America. Contributions by Cyprus Amax to these
multi-employer plans, which are expensed when paid, are based primarily upon
hours worked and amounted to $3 million in 1997 and $4 million in 1996 and
1995.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS - In addition to the Company's
defined benefit pension plans, the Company has plans that provide postretirement
medical benefits and life insurance benefits. The medical plans provide
benefits for most employees who reach normal, or in certain cases, early
retirement age while employed by the Company. The postretirement medical plans
are contributory, with annual adjustments to retiree contributions, and contain
certain other cost-sharing features such as deductibles and coinsurance.
Net periodic postretirement benefit cost consists of the following components:
(In millions) 1997 1996 1995
------ ------ ------
Service Cost $ 6 $ 5 $ 5
Interest Cost 23 26 26
Net Amortization (4) (1) (3)
----- ----- -----
Net Periodic Postretirement Benefit Cost $ 25 $ 30 $ 28
===== ===== =====
The following table sets forth the plans' combined status:
At December 31 (In millions) 1997 1996
------ ------
Accumulated Postretirement Benefit Obligation:
Retirees $ 225 $ 275
Fully Eligible Active Plan Participants 23 26
Other Active Plan Participants 52 44
----- -----
Total Accumulated Postretirement Benefit Obligation 300 345
Plan Assets at Fair Value - -
----- -----
Accumulated Postretirement Benefit Obligation
in Excess of Plan Assets $ 300 $ 345
===== =====
Accumulated Postretirement Benefit Obligation $(300) $(345)
Unrecognized Prior Service Cost (6) (6)
Unrecognized Net Gain (74) (32)
----- -----
Accrued Postretirement Benefit Cost $(380) $(383)
===== =====
The accumulated postretirement benefit obligation at December 31, 1997 and 1996,
consisted of a current liability of $23 million and $22 million included in
Accrued Payroll and Benefits, respectively, and a long-term liability of $357
million and $361 million, respectively, included in Deferred Employee and
Retiree Benefits.
The weighted average annual rate of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) for medical benefits is 7 percent
for 1998 and is assumed to decrease gradually (one-half percent per year) to
4.25 percent by the year 2003 and remain at that level thereafter.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Increasing the assumed health care cost trend rate by one percentage point in
each year would increase the accumulated postretirement benefit obligation for
the medical plans as of December 31, 1997, by $16 million and the aggregate of
the service cost and interest cost components of net periodic postretirement
benefit cost for 1997 by $2 million.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation as of December 31, 1997, 1996, and 1995, was
7.25 percent, 7.75 percent, and 7.25 percent, respectively. The change in the
discount rate and the change in the assumed health care cost trend rate from 8.5
percent to 7.0 percent for 1998 resulted in a $4 million unrecognized net gain
as of December 31, 1997.
In addition, health care and life insurance benefits of certain retirees are
covered by multi-employer benefit trusts established by the United Mine Workers
of America and the Bituminous Coal Operators Association, Inc. Current and
projected operating deficits of these trusts led to the passage of the Coal
Industry Retiree Health Benefit Act of 1992 (the "Act"). The Act established a
new multi-employer benefit trust called the United Mine Workers of America
Combined Benefit Fund (the "Fund") that will provide health and life insurance
benefits to all beneficiaries of the earlier trusts who were receiving benefits
as of July 20, 1992. The Act provides for the assignment of beneficiaries to
former employers and the allocation of any unassigned beneficiaries to
enterprises using a formula included in the legislation. The Company has chosen
to account for its obligation under the Act on a cash basis in accordance with
established accounting guidance. The 1997, 1996, and 1995 contributions to the
Fund were each $1 million.
The Company also has a number of postemployment plans covering severance,
disability income, and continuation of health and life insurance for disabled
employees. At December 31, 1997 and 1996, the accumulated postemployment
benefit liability consisted of a current amount of $6 million and $4 million,
respectively, included in Accrued Payroll and Benefits and $23 million and $34
million, respectively, included in Deferred Employee and Retiree Benefits.
NOTE 12: COMMON STOCK PLANS
SAVINGS PLANS - Cyprus Amax sponsors a savings plan (the "Savings Plan")
covering substantially all of its non-represented employees which includes an
employee stock ownership feature (Leveraged ESOP). In February 1990, the
Savings Plan acquired 4,245,810 shares of Cyprus Amax's unissued Common Stock at
an acquisition price of $22.375 per share. The Savings Plan financed the
purchase of shares with a $95 million interest-bearing promissory note payable
to Cyprus Amax. The loan to the Savings Plan bears interest at 9 3/4 percent
per annum and matures on February 1, 2010, and is serviced by Cyprus Amax's
contribution to the Savings Plan and dividends paid on the Cyprus Amax Common
Shares purchased with the proceeds of the loan. Cyprus Amax intends to
contribute the greater of 75 percent of employee matchable contributions or the
minimum per the promissory note. The expense related to the Savings Plan is
based upon the shares allocated method. Shares are released for allocation to
participants, based on a predetermined formula, as loan payments are made. The
amount contributed for 1997 and 1996 was $9 million and 1995 was $8 million.
The amount of interest incurred by the Savings Plan for the Leveraged ESOP was
$8 million in 1997, 1996, and 1995. The interest expense offset of the
Leveraged ESOP due to dividends on allocated and unallocated shares was $3
million in 1997, 1996, and 1995. The aggregate compensation expense related to
the Savings Plan amounted to $6 million in 1997, 1996, and 1995. Leveraged ESOP
shares are treated as shares outstanding for purposes of calculating earnings
per share.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the number of shares held in the Leveraged ESOP
at year end:
1997 1996 1995
--------- --------- ---------
Allocated Shares 1,192,315 1,042,763 898,172
Committed to be Released Shares 3,925 6,744 9,683
Suspense Shares 2,340,291 2,589,446 2,836,500
Amax Gold sponsors a thrift plan covering substantially all of its full-time
non-represented employees. Amax Gold contributes Amax Gold Common Stock to the
plan at 75 percent of the first 6 percent of base pay contributed by each
participant. Amax Gold contributions were $1 million in 1997, 1996, and 1995.
NOTE 13: STOCK-BASED COMPENSATION PLANS
At December 31, 1997, the Company has three stock-based compensation plans,
which are described below. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plan. The compensation cost that
has been charged against income for its performance-based plan was $2.0 million,
$1.2 million, and $1.5 million for 1997, 1996, and 1995, respectively. Had
compensation cost for the Company's three stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
(In millions except per share data) 1997 1996 1995
----- ----- -----
Net Income
As Reported $ 69 $ 77 $ 124
Pro Forma $ 63 $ 71 $ 123
Basic and Diluted Earnings Per Share/(1)/
As Reported $0.54 $0.62 $1.13
Pro Forma $0.48 $0.56 $1.12
/(1)/Diluted earnings per share were anti-dilutive in 1997, 1996, and 1995.
Under the Management Incentive Program (the "Program"), key employees of Cyprus
Amax may be granted options to purchase Common Stock at fair market value as of
the grant date. These options are in the form of either incentive stock options
or non-qualified options and may be granted with stock appreciation rights
("SARs"). SARs permit holders to surrender exercisable options in exchange for
a payment, in either shares or cash, determined by the amount by which the
market price of the shares on the dates the rights are exercised exceeds the
grant price.
Options granted under the Program are exercisable after completion of the
specified period of continuous employment stated in the terms of the grant and
expire at the end of ten years after the date of grant. Additionally, under the
Program certain employees may be granted restricted shares of Common Stock.
Restricted stock is subject to forfeiture if the recipient terminates
employment.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under the Program, the Company may grant in any year up to 1.2 percent of the
number of shares of Common Stock outstanding (plus the cumulative number of
carried-forward shares) as stock options or restricted stock awards, up to a
limit of five million shares issued as statutory options.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997, 1996, and 1995, respectively: dividend
payment of $0.80 per share per year; expected volatility of 30 percent for 1997
and 1996 and 31 percent for 1995; risk-free interest rates of 6.20, 5.34, and
7.31 percent; and expected lives of 3.46 for 1997 and 3.37 years for 1996 and
1995.
A summary of the status of the Company's fixed stock option plan as of December
31, and changes during the years ended 1997, 1996, and 1995, is presented below:
1997 1996 1995
------------------------------- ------------------------- -----------------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
SHARES EXERCISE Shares Exercise Shares Exercise
Fixed Options (000) PRICE (000) Price (000) Price
- ------------- ------------------------------- -------------------------- -----------------------------
Outstanding at
Beginning of Year 4,233 $ 27 2,919 $ 28 3,051 $ 27
Granted 716 23 1,762 26 297 27
Exercised (75) 21 (108) 22 (231) 21
Forfeited (96) 26 (340) 29 (198) 30
-------- -------- -------- -------- -------- --------
Outstanding at
End of Year 4,778 $ 27 4,233 $ 27 2,919 $ 28
======== ======== ========
Options Exercisable
at Year End 2,716 2,141 2,213
Weighted Average
Fair Value of
Options Granted
During the Year $ 5.26 $ 6.48 $ 6.90
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ---------------------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
- --------------- ----------- ---------------- --------------- ----------- -------------
$16.61-$23.38 978,661 7.13 YEARS $ 22.87 292,986 $21.79
$23.50-$26.00 1,095,501 5.01 25.37 1,059,501 25.41
$26.13-$26.13 1,000 7.45 26.13 1,000 26.13
$26.44-$26.44 1,670,250 8.01 26.44 344,661 26.44
$27.56-$35.75 1,032,471 5.58 31.84 1,017,471 31.90
---------- ----------
$16.61-$35.75 4,777,883 6.61 26.63 2,715,619 27.58
========== ==========
Under the 1993 Key Executive Long-Term Incentive Plan, the Company may grant in
any year up to one-half percent of the number of shares of Common Stock
outstanding (plus the cumulative number of carried-forward shares) as restricted
stock awards. Key executives may receive restricted stock awards and cash
incentive payments based on the rate of return received by investors in the
Company's stock, compared to that of its peers. As of December 31, 1997,
716,609 cumulative
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
shares were awarded and 1,371,400 shares were authorized and unissued. On
January 2, 1998, an additional 176,900 shares were awarded.
Cyprus Amax maintains a stock plan for non-employee directors which grants each
eligible director 500 shares of Common Stock each year. In 1996 this plan was
amended and restated and then approved by shareholders and is now known as the
Amended and Restated Stock Plan for Non-Employee Directors (the "Plan"). This
amended Plan revised the maximum number of shares that may be awarded and stock
options that may be granted under the Plan. The aggregate number of shares that
may be awarded and options that may be granted will equal the sum of one-
sixteenth of one percent of the number of shares of common stock outstanding as
of the end of the immediately preceding fiscal year plus the cumulative number
of carryforward shares from all prior fiscal years not previously used to make
grants and awards. Prior to being amended, the Plan provided that a maximum of
35,000 shares of Common Stock could be issued under the Plan. As of December
31, 1997, 34,500 cumulative shares have been granted and 50,000 stock options
awarded.
NOTE 14: CONTINGENCIES
Cyprus Amax had outstanding letters of credit totaling $66 million at December
31, 1997, primarily for reclamation, dragline leases, and insurance programs for
workers compensation, general liability, and automobiles. Cyprus Amax has
guaranteed the portion of project financing attributed to certain joint venture
partners totaling $184 million at December 31, 1997.
Cyprus Tohono Mining Company was informed in late 1995 by the office of the
Assistant U.S. Attorney in Tucson, Arizona, that an action was being considered
under federal environmental laws against Cyprus Tohono Corporation and certain
of its employees. The facts giving rise to this matter involve a break in a
process line at Tohono occurring in 1992. It is not possible to state with
reasonable certainty at this time what action will be taken by the government.
Cyprus Miami and other companies, in conjunction with the Arizona Department of
Environmental Quality's Water Quality Assurance Revolving Fund program,
continued remediation and assessment of ground water quality at Pinal Creek near
Miami, Arizona, throughout 1997. Despite the fact that the ongoing program,
initiated in 1989, has resulted in continued improvement of subsurface water
quality in the area, Cyprus Miami was informed that the State of Arizona was
contemplating enforcement action against Cyprus Miami and/or other companies in
connection with the Pinal Creek water quality issues under federal and state
environmental laws. On November 10, 1997, Cyprus Miami as a member of the Pinal
Creek group joined with the State of Arizona in seeking approval of the District
Court for entry of a Consent Decree to resolve all matters related to the
contemplated enforcement action. The Decree commits Cyprus Amax and other Pinal
Creek group members to complete the work outlined in the remedial action plan
submitted to the State in May 1997. The Final Remediation Action Plan will be
finalized through provisions of the Decree. Approximately $42 million remained
in the Pinal Creek remediation reserve at December 31, 1997. Cyprus Miami has
commenced contribution litigation against other parties involved in this matter
and has asserted claims against certain of its past insurance carriers. While
significant recoveries are expected, Cyprus Miami cannot reasonably estimate the
amount and, therefore, has not taken potential recoveries into consideration in
the recorded reserve.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cyprus Amax or its subsidiaries have been advised by the EPA and several state
environmental agencies that they may be liable under the CERCLA or similar state
laws and regulations for costs of responding to environmental conditions at a
number of sites which have been or are being investigated by the EPA or states
to establish whether releases of hazardous substances have occurred and, if so,
to develop and implement remedial actions. Cyprus Amax has been named as a
potentially responsible party ("PRP") or has received EPA requests for
information for several sites. For all sites, Cyprus Amax had an aggregate
reserve of approximately $95 million at December 31, 1997, for its share of the
estimated liability. Liability estimates are based on an evaluation of, among
other factors, currently available facts, existing technology, presently enacted
laws and regulations, Cyprus Amax's experience in remediation, other companies'
remediation experience, Cyprus Amax's status as a PRP, and the ability of other
PRPs to pay their allocated portions. The cost range of reasonably possible
outcomes for all sites is estimated to be from $65 million to $280 million, and
work on these sites is expected to be substantially completed in the next
several years, subject to the inherent delays involved in the process.
Remediation costs that could not be reasonably estimated at December 31, 1997,
are not expected to have a material impact on the financial condition and
ongoing operations of the Company. Cyprus Amax believes certain insurance
policies partially cover these claims; however, some of the insurance carriers
have denied responsibility, and Cyprus Amax is litigating coverage. Further,
Cyprus Amax believes that it has other potential claims for recovery from third
parties, including the U.S. Government and other PRPs, as well as liability
offsets through lower cost remedial solutions. However, neither insurance
recoveries nor other claims or offsets have been recognized in the financial
statements unless such offsets are considered probable of realization.
At December 31, 1997, Cyprus Amax's accruals for deferred closure, shutdown of
closed operations, and reclamation totaled approximately $316 million.
Reclamation is an ongoing activity and a cost associated with Cyprus Amax's
mining operations. Accruals for closure and final reclamation liabilities are
established on a life of mine basis. The Cyprus Amax Coal reclamation reserve
component of $190 million is largely a result of reclamation obligations
incurred for replacing soils and revegetation of mined areas as required by
provisions and permits pursuant to the Surface Mining Control and Reclamation
Act. The Copper/Molybdenum and Other reclamation reserve components are $104
million and $22 million, respectively, and include costs for site stabilization,
cleanup, long-term monitoring, and water treatment costs as expected to be
required largely by state laws and regulations as well as by sound environmental
practice. Total reclamation costs for Cyprus Amax at the end of current mine
lives is estimated at about $630 million.
Cyprus Amax believes that it has adequate reserves such that none of these
matters or contingencies is expected to have a material adverse effect on its
business or financial condition, results, and cash flows, and is unaware of any
additional environmental matters which, based on information currently known to
Cyprus Amax, would have a material effect upon the Company's financial condition
or results of operations.
NOTE 15: RELATED PARTY TRANSACTIONS
In May 1997, Amax Gold completed a $71 million tax-exempt industrial revenue
bond financing for the solid waste disposal facility at the Fort Knox mine.
During December 1997, Amax Gold completed a $40 million credit facility which
was used to refinance the existing Refugio gold loan and for working capital and
debt service requirements. Cyprus Amax has guaranteed the Refugio loan and a
letter of credit backing the industrial revenue bond. Amax Gold pays an
interest differential to Cyprus Amax as a guaranty fee on each loan.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In May 1997, Cyprus Amax sold its 50 percent interest in the Russian Kubaka gold
mine project to Amax Gold. Amax Gold received shareholder approval for the
acquisition in December 1996. Cyprus Amax received 11,789,474 shares of Amax
Gold Common Stock in May 1997 at closing and 3,585,526 shares in June 1997 upon
commencement of commercial production. As a result of these transactions,
Cyprus Amax increased its ownership to 58.8 percent.
During 1996 Cyprus Amax provided Amax Gold with a $250 million demand loan
facility to fund additional costs at the Fort Knox project and for general
corporate purposes, with such funding to be provided at the discretion of Cyprus
Amax. During 1997 Amax Gold borrowed a total of $49.5 million and repaid $106.2
million on the demand loan facility. As of December 31, 1997, Cyprus Amax has
loaned Amax Gold $73.3 million, net of repayments. At December 31, 1997, an
additional $70 million was available on the demand loan.
In 1996 Amax Gold renegotiated its $250 million Fort Knox loan agreement. As
support to the restructured facility, Cyprus Amax has guaranteed the loan until
economic compeltion of the Fort Knox mine. The lenders waived certain
restrictive covenants and reduced the interest rate. In return for the
increased financial support, Cyprus Amax receives certain fees, the interest
differential, and security interest in certain Amax Gold assets. In November
1996, Cyprus Amax received 2,771,098 shares from Amax Gold as repayment of the
guaranty and financing fee and interest and interest differential payments.
In February 1995, Cyprus Amax agreed to provide Amax Gold with an additional $80
million in double-convertible revolving credit (DOCLOC II). During 1995 Cyprus
Amax converted $80 million of the outstanding borrowings to 14,919,806 shares of
Amax Gold Common Stock at a conversion price of $5.362 per share.
In April 1994, Cyprus Amax and Amax Gold entered into an agreement whereby the
Company has provided Amax Gold with a $100 million double-convertible line of
credit (DOCLOC I). The outstanding indebtedness under the line of credit may be
repaid by Amax Gold with the issuance of Amax Gold Convertible Preferred Stock.
Both companies have conversion rights to convert the line of credit into Amax
Gold Common Stock at a maximum price of $8.265 per share and a minimum price of
$5.854 per share. As of December 31, 1997 and 1996, no borrowings were
outstanding under this line of credit. Certain amounts have been made available
to Amax Gold as support for the Fort Knox and Refugio loans (Note 7). Amax Gold
has agreed not to borrow under DOCLOC I as part of the consideration for the
Fort Knox loan guaranty.
In 1994 Cyprus Amax established a joint exploration agreement with Amax Gold to
explore for gold. The agreement provides Cyprus Amax a 75 percent interest and
Amax Gold a 25 percent interest in the gold prospects resulting from future
exploration. Amax Gold has a right of first refusal from Cyprus Amax to
purchase and develop gold deposits, and Cyprus Amax has a similar right with
respect to base metals. Each party funds work in proportion to its interest,
and Cyprus Amax provides staffing and management.
In May 1997, Ban-Pu, a 6.7 percent shareholder in Oakbridge, advised Cyprus
Amax's Australian coal subsidiary that they intended to exercise an option
entered into in 1994 that required Cyprus Amax to purchase Ban-Pu's shareholding
in Oakbridge. The share purchase, which increased Cyprus Amax's ownership
interest in Oakbridge to 48 percent, was completed in January 1998 for an
investment of approximately $10 million.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1997, the subordinated loans outstanding to Oakbridge, Ltd. from
Cyprus Amax totaled $38 million, of which $21 million is convertible to
Oakbridge Common Stock on certain terms and conditions.
In June 1994, Cyprus Amax acquired a 51 percent interest in Sociedad Contractual
Minera El Abra, which owns the mineral rights to the El Abra copper deposit in
Chile, for $330 million. Development of the mine required an investment of
approximately $1 billion. Funding of the investment to develop the oxide
reserves included approximately $300 million of subordinated shareholder loans
from Cyprus Amax and $750 million in project financing. In November 1997, the
$1 billion in project loans was refinanced with senior debt, and Cyprus Amax was
repaid the $300 million of subordinated notes. Cyprus Amax has a back-stop
guarantee on $200 million of El Abra's $1 billion of senior debt.
NOTE 16: LEASES AND MINERAL ROYALTY OBLIGATIONS
Cyprus Amax leases mineral interests and various other types of properties,
including draglines, shovels, longwalls, offices, computing services, and
miscellaneous equipment. Certain of the Company's mineral leases require
minimum annual royalty payments, whereas others provide only for royalties based
on production.
Accrued minimum mineral royalties that are not expected to be recovered from
future coal production consist of the following at December 31:
(In millions) 1997 1996
------ ------
Minimum Future Royalties $ 68 $ 85
Less Imputed Interest (15) (20)
----- -----
Present Value of Payments 53 65
Less Current Portion Included in Accrued
Royalties and Interest (9) (9)
----- -----
Long-Term Portion Included in Other
Noncurrent Liabilities and Deferred Credits $ 44 $ 56
===== =====
The Company's property, plant, and equipment held under capital leases consist
of the following:
(In millions) 1997 1996
------ ------
Mining Equipment $ 211 $ 211
Less Accumulated Depreciation (116) (89)
----- -----
$ 95 $ 122
===== =====
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Summarized below as of December 31, 1997, are future minimum rentals and
royalties under noncancelable leases:
OPERATING MINERAL CAPITAL
(In millions) LEASES ROYALTIES LEASES
--------- --------- --------
1998 $ 28 $ 22 $ 44
1999 19 22 65
2000 17 19 28
2001 13 16 11
2002 10 10 10
After 2002 18 45 16
---- ---- ----
Total Payments $105 $134 $174
==== ====
Less Imputed Interest (29)
----
Present Value of Lease Payments 145
Less Current Portion (32)
----
Capital Lease Obligations $113
====
Rentals and mineral royalties charged to expense were as follows:
(In millions) 1997 1996 1995
----- ----- -----
Rental Expense $ 43 $ 51 $ 48
Mineral Royalties $ 64 $ 68 $ 72
NOTE 17: CASH FLOW INFORMATION
The Consolidated Statement of Cash Flows provides information about changes in
cash and cash equivalents that have a maturity of three months or less when
acquired. Net Cash Provided by Operating Activities reflects cash payments for
interest and income taxes as shown below:
(In millions) 1997 1996 1995
----- ------ -----
Interest Paid (Net of Interest Capitalized
and Interest Rate Swap Payments/Receipts) $ 189 $ 110 $ 81
Income Taxes Paid, Net $ 7 $ 6 $ 60
Supplemental Disclosures of Non-Cash Transactions:
(In millions) 1997 1996 1995
----- ----- -----
Fair Value of Assets Acquired, Other Than Cash
and Cash Equivalents $ - $ 75 $ -
Liabilities Assumed - (5) -
----- ----- -----
Cash Payments $ - $ 70 $ -
===== ===== =====
Sale of Businesses in Exchange for Common Stock $ - $ 1 $ -
Receipt of AGI Common Stock as Repayment of
Guaranty, Notes Receivable, and Interest (Note 15) $ - $ 15 $ 81
Capital Lease Obligation - Sale-Leaseback $ - $ 24 $ -
Note Receivable for Coal Contract $ 24 $ - $ -
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: INFORMATION BY INDUSTRY SEGMENT
Cyprus Amax operates in three principal industry segments - Copper/Molybdenum,
Coal, and Other - which supply mineral products primarily to the construction,
automobile, steel, and utility industries, and gold to banks and other bullion
dealers. The financial information for these segments is presented below:
(In millions) 1997 1996 1995
----------- -------------- ------------
SEGMENT REVENUE
Copper/Molybdenum $ 1,564 $ 1,331 $ 1,720
Coal 1,403 1,284 1,298
Other 379 228 189
-------- ------- --------
$ 3,346 $ 2,843 $ 3,207
======== ======= ========
SEGMENT OPERATING INCOME (LOSS)
Copper/Molybdenum $ 314 $ 151 /(3)/ $ 584
Coal (15)/(1)/ 90 (308)/(5)/
Other 2 /(2)/ (32)/(4)/ (37)
-------- ------- --------
301 209 239
Corporate (68) (57) (57)
Interest, Net (162) (78) (70)
Earnings (Loss) on Equity Investments and Other (31) 3 8
-------- ------- --------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 40 77 120
Income Tax Benefit (Provision) 22 (11) (3)
Minority Interest 7 11 7
-------- ------- --------
NET INCOME $ 69 $ 77 $ 124
======== ======= ========
/(1)/Includes an $86 million pre-tax charge to recognize the write-down for
$236 million of certain coal assets and provisions for associated
liabilities (Note 4), a pre-tax gain of $14 million on the sale of a 15
percent interest in Cyprus Plateau (Note 3), a $5 million pre-tax favorable
settlement of a royalty issue, and net pre-tax favorable adjustments of $131
million primarily for the sale and assignment of two coal contracts.
/(2)/Includes a $19 million pre-tax gain on the sale of Kubaka to Amax Gold
(Note 3).
/(3)/Includes an $80 million pre-tax charge for environmental remediation
liabilities and costs to temporarily close the Tohono mine (Note 4).
/(4)/Includes a $36 million pre-tax charge to write down the net assets of the
Guanaco gold mine (Note 4).
/(5)/Includes a $445 million pre-tax charge to recognize the write-down of
certain coal assets and provisions for associated liabilities (Note 4).
(In millions) 1997 1996 1995
------ ------ ------
IDENTIFIABLE ASSETS
Copper/Molybdenum $3,047 $3,258 $3,060
Coal 1,851 1,933 1,947
Other 1,181 1,190 939
Corporate 380 405 250
---------- ------ --------
$6,459 $6,786 $6,196
========== ====== ========
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: INFORMATION BY INDUSTRY SEGMENT (CONTINUED)
(In millions) 1997 1996 1995
----- ----- ------
CAPITAL EXPENDITURES
Copper/Molybdenum $ 143 $ 449 $ 599
Coal 147 186 163
Other 62 283 265
Corporate 23 23 5
----- ----- ------
$ 375 $ 941 $1,032
===== ===== ======
DEPRECIATION, DEPLETION, AND AMORTIZATION
Copper/Molybdenum $ 189 $ 135 $ 118
Coal 153 163 146
Other 98 38 29
Corporate 4 3 3
----- ----- ------
$ 444 $ 339 $ 296
===== ===== ======
EXPORT SALES
Copper/Molybdenum $ 195 $ 162 $ 253
Coal 66 76 51
Other 121 75 56
----- ----- ------
$ 382 $ 313 $ 360
===== ===== ======
Financial information by geographic location for the past three years is
presented below:
(In millions) 1997 1996 1995
------- ------- -------
REVENUE
Domestic $2,858 $2,636 $3,032
Foreign 488/(1)/ 207 175
------ ------ ------
$3,346 $2,843 $3,207
====== ====== ======
OPERATING INCOME
Domestic $ 190 $ 203 $ 221
Foreign 111/(1)/ 6 18
------ ------ ------
$ 301 $ 209 $ 239
====== ====== ======
IDENTIFIABLE ASSETS
Domestic $4,664 $4,825 $4,900
Foreign 1,795/(1)/ 1,961 1,296
------ ------ ------
$6,459 $6,786 $6,196
====== ====== ======
/(1)/ South America accounts for approximately 81 percent, 95 percent, and 82
percent, respectively, of Foreign Revenue, Foreign Operating Income, and
Foreign Identifiable Assets.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY RESULTS (UNAUDITED) 1997
- -----------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
(IN MILLIONS EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
- -----------------------------------------------------------------------------------------------------
REVENUE $ 888 $ 842 $ 860 $ 757
SEGMENT OPERATING INCOME (LOSS) $ 109 $ 146 $ 103 $ (58)
NET INCOME (LOSS) $ 57 $ 66 $ 44 $ (97)
INCOME (LOSS) APPLICABLE TO COMMON SHARES $ 52 $ 61 $ 39 $ (102)
- -----------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER COMMON SHARE $0.56 $0.65 $0.42 $(1.09)
- -----------------------------------------------------------------------------------------------------
1996
- -----------------------------------------------------------------------------------------------------
Revenue $ 684 $ 740 $ 665 $ 754
Segment Operating Income (Loss) $ 112 $ 96 $ 51 $ (49)
Net Income (Loss) $ 62 $ 53 $ 14 $ (52)
Income (Loss) Applicable to Common Shares $ 57 $ 48 $ 9 $ (57)
- -----------------------------------------------------------------------------------------------------
Earnings (Loss) Per Common Share $0.62 $0.52 $0.10 $(0.61)
=====================================================================================================
First quarter 1997 results included a net after-tax gain of $29 million for a
favorable tax adjustment resulting from settlement of certain prior years' tax
issues and the impact of coal settlements, net of certain provisions for mine
closing costs.
Second quarter 1997 results included an after-tax gain of $19 million for the
sale of Kubaka to Amax Gold and an after-tax charge of $5 million for the costs
of redeeming the 9 7/8% Notes.
Third quarter 1997 results included a net after-tax gain of $8 million from the
sale of a 15 percent interest of Cyprus Plateau, a favorable tax adjustment, a
favorable settlement of a royalty issue, and the write-down of the Maple Meadow
mine.
Fourth quarter 1997 results included favorable tax adjustments of $14 million, a
$13 million write-down in Cyprus Amax's equity investment of Oakbridge, and net
after-tax charges of $79 million associated with the Coal segment for mine
closures, reclamation adjustments, and write-downs due to impairment of assets
as stated in SFAS No. 121.
Fourth quarter 1996 results included an after-tax charge of $74 million for
environmental remediation liabilities, costs to temporarily close a copper mine,
the write-down of the net assets of the Guanaco gold mine, and an unrelated
favorable tax adjustment for Amax Gold.
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION (CONTINUED)
MINERAL RESERVES AND SELECTED OPERATING STATISTICS (UNAUDITED)
The following table presents reserve information of Cyprus Amax as of December
31, 1993 through 1997, and selected operating statistics for the years then
ended. Proved reserves represent those reserves that, under presently
anticipated conditions, will be commercially recoverable from known mineral
deposits with a high degree of certainty. Proved and probable reserves include
reserves that are less well defined than proved reserves, but that have been
indicated to exist on the basis of geological and engineering data. Reserve
estimates were prepared by Cyprus Amax's engineers. Reserves of entities
proportionately consolidated are shown at Cyprus Amax's ownership percentage.
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
COPPER/MOLYBDENUM
Proved and Probable Ore Reserves
Copper - United States (million tons) 2,020 2,200/(5)/ 2,317/(5)/ 2,423/(5)/ 2,499/(5)/
Average Grade (percent) .34 .33/(5)/ .34/(5)/ .35/(5)/ .35/(5)/
Copper - South America (million tons) 1,235/(1)/ 1,096 1,097 1,101/(9)/ -
Average Grade (percent) .57 .60 .61 .61 -
Molybdenum (million tons) 343 351/(6)/ 313 322 316
Average Grade (percent) .223 .223 .232 .232 .228
Saleable Product (billion pounds)
Copper 21.8 21.6 22.6 23.8 13.7
Molybdenum 2.1 2.1 2.1 2.1 2.0
Production (million pounds)
Copper 1,018 768 687 648 632
Molybdenum 63 56 75 57 28
Average Realized Price (per pound)
Copper $ 1.04 $ 1.04 $ 1.33 $ 1.09 $ 0.94
Molybdenum $ 5.50 $ 5.25 $ 7.53 $ 3.77 $ 2.82
------ ------ ------ ------ ------
COAL
Proved and Probable Reserves
(million tons) 2,232/(2)/ 2,390/(7)/ 2,396/(8)/ 2,538 2,681
Production (million tons) 83 76 75 75/(10)/ 27
Average Realized Price (per ton) $14.53 $15.69 $16.25 $16.12 $20.80
------ ------ ------ ------ ------
LITHIUM
Proved Ore Reserves
Lithium (thousand tons) 379 384 389 393 397
Production
Lithium Carbonate Equivalents (million pounds) 40 45 38 32 32
------ ------ ------ ------ ------
GOLD
Amax Gold (100% in 1997, 1996, and 1995;
and Cyprus Amax share in 1994 and 1993)
Proved and Probable Reserves
(million contained ounces) 7.1/(3)/ 6.4 7.0 3.0 3.0
Production (thousand ounces) 730 268 238 - -
Average Realized Price (per ounce) $ 360 $ 412 $ 406 $ - $ -
Kubaka (Cyprus Amax Share)
Proved and Probable Reserves
(million contained ounces) -/(3)/ 1.3 1.2 1.0 1.0
------ ------ ------ ------ ------
CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION (CONTINUED)
1997 1996 1995 1994 1993
----- ----- ----- ------------ -----
EQUITY COMPANIES/(4)/
Proved and Probable Reserves
Coal (million tons)
Oakbridge (100%) 322.3 341.4 372.3 423.8/(11)/ 358.7
Cyprus Amax Share (41.3%) 133.1 141.0 158.7 170.8 143.5
----- ----- ----- ------------ -----
/(1)/ South America copper reserves increased due to additional reserves at El
Abra.
/(2)/ Coal reserves decreased due to 83 million tons of production, the
elimination of 49 million tons in West Virginia due to revised mine plans
and reevaluation of economics of future mining, and the expiration of
leases in the Midwest for a 34 million reduction in undeveloped reserves.
/(3)/ The Kubaka mine was sold to Amax Gold in the second quarter of 1997.
Prior to 1997, the Kubaka reserves were shown separately, but in 1997
they are included in Amax Gold's reserves, which accounts for their
increase.
/(4)/ Reserves for Equity Companies are shown at 100 percent for the operation
or company. Cyprus Amax has a beneficial ownership equivalent to its
percentage ownership in the venture which is shown on a separate line.
/(5)/ Reserves were restated to include the Sierrita mill reserves as copper
reserves, while in previous years they were reflected on a separate line
for copper and molybdenum reserves.
/(6)/ Molybdenum reserves increased due to lower expected costs resulting from
the Henderson 2000 project.
/(7)/ Coal reserves decreased due to 76 million tons of production, the write-
off of the undeveloped Midwest reserves of approximately 210 million
tons, and the addition of approximately 257 million tons in Pennsylvania.
/(8)/ Coal reserves decreased primarily due to new mine plans at the Kentucky
operations, the sale of Minnehaha, and 1995 production, partially offset
by an increase in Wyoming due to a lease acquired from the Bureau of Land
Management.
/(9)/ Represents Cerro Verde and El Abra reserves purchased in 1994.
/(10)/ Coal production increased in 1994 due to a full year of production from
former Amax mines.
/(11)/ Oakbridge reserves increased due to acquiring additional leases at
Ellalong/Pelton.
STOCK MARKET INFORMATION
Cyprus Amax Common Stock is traded on the New York Stock Exchange (NYSE) under
the symbol "CYM." The ranges of actual trade prices by quarters for the Common
Stock, as reported by the NYSE, are set forth below.
ACTUAL TRADE PRICES
Common Stock
---------------------------------------------------
1997 1996
===================================================
Period HIGH LOW High Low
---------------------------------------------------
1st Quarter $ 24 7/8 $ 21 1/4 $ 29 1/4 $ 24 1/2
2nd Quarter $ 26 3/8 $ 21 5/8 $ 29 $ 22 5/8
3rd Quarter $ 26 13/16 $ 22 3/8 $ 24 1/8 $ 19 7/8
4th Quarter $ 25 15/16 $ 14 7/16 $ 25 1/4 $ 21 3/8
In addition to its Common Stock, Cyprus Amax has 4,664,302 shares of $4.00
Series A Convertible Preferred Stock outstanding as of February 24, 1998. These
shares are held by three registered shareholders. Each share of Series A
Convertible Preferred Stock carries the right to receive a dividend of $4.00 per
year. Dividends are paid out of funds legally available when and if declared by
the Board of Directors. Due to the limited number of shareholders, there is no
market for these shares.
During 1997 and 1996, Cyprus Amax declared cash dividends amounting to $0.80 and
$4.00 per share on its Common Stock and Series A Convertible Preferred Stock,
respectively. On February 12, 1998, the Board of Directors of Cyprus Amax
declared dividends of $0.20 per share of the Common Stock for shareholders of
record on April 9, 1998, and a regular quarterly dividend of $1.00 per share of
Series A Convertible Preferred Stock for shareholders of record on February 24,
1998. The Board of Directors will continue to evaluate the Company's
performance and the appropriateness of dividends. It is currently anticipated
that dividends will continue to be paid during 1998.
The closing trade price per share of the Common Stock on February 23, 1998, as
reported by the NYSE was $15 3/4. As of February 23, 1998, the number of
registered shareholders of Cyprus Amax Common Stock was approximately 39,812.