SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
2000 FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000 Commission File Number: 1-14066
SOUTHERN PERU COPPER CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3849074
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1150 North 7th. Avenue, Tucson, AZ 85705-0747
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (520) 798-7747
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- --------------------------------------- -----------------------
Common Stock, par value $0.01 per share New York Stock Exchange
Lima Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best knowledge of the registrant, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. |_|
As of February 28, 2001, there were of record 14,100,192 shares of Common Stock,
par value $0.01 per share, outstanding, and the aggregate market value of the
shares of Common Stock (based upon the closing price on such date as reported on
the New York Stock Exchange - Composite Transactions) of Southern Peru Copper
Corporation held by non affiliates was approximately $204 million. As of the
above date, there were also 65,900,833 shares of Class A Common Stock, par value
$0.01 per share, outstanding. Class A Common Stock is convertible on a
one-to-one basis into Common Stock.
PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE:
Part III: Proxy statement in connection with the Annual Meeting to be held
on May 9, 2001.
Part IV: Exhibit index is on page B1 through B3.
A1
PART I
Item 1. Business
THE COMPANY
The Company, an integrated producer of copper, operates mining, smelting and
refining facilities in the southern part of Peru. Southern Peru Copper
Corporation was reorganized into a holding company structure effective January
2, 1996, upon completion of a public offer to exchange newly issued Common Stock
for outstanding labor shares of the Company's Peruvian Branch ("Labor Shares")
called "Investment Shares" as of December 31, 1998. Effective December 31, 1998,
the Company's predecessor and wholly owned operating subsidiary, Southern Peru
Limited, was merged into the Company.
The Company, incorporated in 1952 was reorganized in 1955 and has conducted
copper mining operations since 1960. Pursuant to Peruvian law, the Company
conducts its operations in Peru through a registered branch (the "Branch"). The
Branch is not a corporation separate from the Company. It is, however, an
establishment, registered pursuant to Peruvian law, through which the Company
holds assets, incurs liabilities and conducts operations in Peru. Although it
has neither its own capital nor liability separate from that of the Company, it
is deemed to have an equity capital for purposes of determining the economic
interest of holders of investment shares. Investment shares are non-voting
ownership interests distributed to workers in accordance with former Peruvian
laws. The Branch comprises substantially all the assets and liabilities of the
Company associated with its copper operations in Peru.
Throughout this report, unless the context otherwise requires, the terms
"Southern Peru", "SPCC" and "the Company" refer to the present corporation and
its consolidated subsidiaries as well as its predecessor. In addition,
throughout this report, unless otherwise noted, all tonnages are in metric tons.
To convert to short tons, multiply by 1.102. All distances are in kilometers. To
convert to miles, multiply by 0.62137. All ounces are troy ounces.
On November 15, 1999, ASARCO Incorporated (ASARCO) transferred all of its
holdings of SPCC to Southern Peru Holdings Corporation, a wholly-owned
subsidiary of ASARCO. On November 17, 1999, Grupo Mexico S.A. de C.V. ("Grupo
Mexico") acquired all the holdings of ASARCO following a tender offer and
purchase of all outstanding common stock of ASARCO.
At December 31, 2000 the stockholders in the Company were Southern Peru Holdings
Corporation, a subsidiary of ASARCO (54.2%), Cerro Trading Company, Inc.
(14.2%), Phelps Dodge Overseas Capital Corporation (14.0%) and common
stockholders (17.6%).
CAUTIONARY STATEMENT
Forward-looking statements in this report and in other Company statements
include statements regarding expected commencement dates of mining or metal
production operations, projected quantities of future metal production,
anticipated production rates, operating efficiencies, costs and expenditures as
well as projected demand or supply for the Company's products. Actual results
could differ materially depending upon factors including the availability of
materials, equipment, required permits or approvals and financing, the
occurrence of unusual weather or operating conditions, lower than expected ore
grades, the failure of equipment or processes to operate in accordance with
specifications, labor relations, environmental risks as well as political and
economic risk associated with foreign operations. Results of operations are
directly affected by metals prices on commodity exchanges, which can be
volatile.
A2
Additional business information follows:
COPPER BUSINESS
The copper operations of the Company involve the mining, milling and flotation
of copper ore to produce copper concentrates, the smelting of copper
concentrates to produce blister copper and the refining of blister copper to
produce copper cathodes.
The Company also produces refined copper using solvent extraction/electrowinning
("SX/EW") technology. Silver, molybdenum and small amounts of other metals are
contained in copper ore as by-products. Silver sold is recovered in the refining
process or as an element of blister copper. Molybdenum is recovered from copper
concentrate in a molybdenum by-product plant. The Company has not reported
information by industry segments because substantially all of its revenues are
generated from its copper production.
REVIEW OF OPERATIONS
SPCC operates the Toquepala and Cuajone mines, high in the Andes, approximately
984 kilometers southeast of Lima. It also operates a smelter and refinery west
of the mines at the Pacific Ocean Coast City of Ilo, Peru. SPCC is the largest
mining company in Peru and one of the 10 largest private-sector copper mining
companies in the world.
OVERVIEW
Mined copper production at SPCC increased by 0.7% in the year 2000 due
principally to higher throughput at the Cuajone mine and higher production at
the SW/EW plant in Toquepala, which offset losses resulting from a fire in the
Cuajone Concentrator early in the year which reduced copper production by 11.9
million pounds, and harder ore processed at Toquepala. Improved operations at
the Ilo copper refinery and completion of the Toquepala SX/EW facility increased
2000 refined copper production by 6.8%.
The expansion of the Toquepala SX/EW facility, which increased annual production
to 56,250 tons, was completed in 1999. The Company's plan is to continue the
modernization of the Ilo smelter, to improve production through the
implementation of better technology, to comply with all environmental
regulations and to further develop strategies for the best utilization of its
financial resources. Modernization of the mining equipment at Cuajone will
continue for another year. The expansion program at Cuajone and Ilo will further
improve productivity, reduce operating costs, increase copper production and is
expected to significantly increase the capture of sulfur dioxide in excess of
92%.
MINING OPERATIONS
Total mined copper production at SPCC increased 0.7% in 2000, compared with
1999, due to higher production at Cuajone and higher SX/EW production.
Cuajone production increased 3.8% in 2000 to 395 million pounds of copper due
principally to higher throughput at the mine, following completion of its
expansion. Concentrator throughput for the year was 30.5 million tons of ore
producing 696 thousand tons of copper concentrates, despite a fire that occurred
in the concentrator in the first quarter of the year.
Toquepala mine production decreased 9.2% in 2000 to 233 million pounds of copper
due to harder ore. The Toquepala concentrator milled 16.3 million tons of ore.
Together, the two mines produced 4.2 million ounces of silver and 15.9 million
pounds of molybdenum as by-products.
A new drill, eight trucks, a shovel, a tractor and a front-end loader were added
at the Cuajone mine in 2000 and less efficient equipment was retired.
A3
SX/EW OPERATIONS
The SX/EW facility at Toquepala produces refined copper from solutions obtained
by leaching low-grade ore stored at the Toquepala and Cuajone mines. The
facility produced 56,100 tons in 2000 compared to 49,500 in 1999. This
represents 14.4 million pounds more copper over 1999 production.
ORE RESERVES
SPCC has identified substantial geologic resources. In October 1999, the Company
reported a substantial increase in proven and probable ore reserves at the
Toquepala mine. At year-end 2000, probable concentrator reserves totaled 676
million tons with an average copper grade of 0.74% at Toquepala and 1,212
million tons with an average copper grade of 0.64% at Cuajone. In addition, the
Company has a combined 1,793 million tons of leachable ore at Toquepala and
Cuajone that can be processed by the SX/EW operation.
SMELTING AND REFINING OPERATIONS
The Ilo smelter increased concentrates processed by 2.8% in 2000, reaching 1.133
million tons, a new production record. Smelting of SPCC concentrates increased
by 0.9%, while smelting of third party concentrates increased by 53.6% to 62,326
tons. As a result, blister production increased by 0.3% in 2000 as compared to
1999.
SPCC's total refined copper production increased 6.8% to 707.3 million pounds in
2000 from 662.0 million pounds in 1999. Refined production from the Ilo refinery
reached 583.7 million pounds in 2000, an increase of 5.6% from 1999 due to
current efficiency gains at the plant. Production from the SX/EW plant increased
to 123.6 million pounds of copper, a 13.2% increase over prior year.
SPCC's Ilo smelter provides feed for the refinery. Blister copper produced by
the smelter exceeds the refinery's capacity and the excess is sold to other
refineries around the world.
A4
EXPANSION AND MODERNIZATION PROGRAM
Expansion and modernization programs announced in prior years are underway.
During the year 2000, the following major equipment was received for the
Toquepala mine: one 4100 model P&H shovel, four Komatsu 218-ton capacity trucks,
five Caterpillar 218-ton capacity trucks, one 100XP model P&H rotary drill, two
844 model Caterpillar wheel tractor, one D10R model Caterpillar tractor, and one
24H model Caterpillar bulldozer. The smelter received one articulated truck, one
14H model Caterpillar bulldozer; the rail cars for concentrate were upgraded.
The Water Plan Implementation program is being continued under the approved
budget of $6.5 million; the Bottom Fuel Loading project is being developed in
the three operative areas covered by a budget of $1.4 million.
The project to expand and protect the Cuajone mine from maximum flooding of the
Torata River is under construction and reached 95% completion by late 2000, with
an investment of $67.7 million out of $75.5 million budget.
Engineering studies for the Ilo smelter modernization and expansion project were
continued, introducing the most efficient technology, proven in other
metallurgical facilities, looking not only to comply with Peruvian environmental
standards but also to provide economic and financial returns. The expansion and
modernization of the Toquepala concentrator and the Toquepala mine, as well as
the leaching section at Cuajone mine, are underway. Construction of these
projects is planned to begin in year 2001 improving SPCC production capacity to
over 900 million pounds of copper per year by 2004.
EXPLORATION
SPCC is developing an active exploration program in the different regions of
Peru, oriented to the discovery of copper and gold resources, as well as of
zinc, lead and silver. The Company owns mineral rights over 356,094 hectares and
has covered 51,102 hectares through joint ventures and option contracts with
third parties.
Our diamond drilling program at Los Chancas Project has reached 17,485 meters
and results lead us to believe resources of up to 200 million tons exist with a
copper grade of 1.0%, 0.07% molybdenum and 0.12 grams per ton of gold.
Evaluation will continue through metallurgical tests and a more intensive
drilling program.
SPCC has a 44.245% interest in the Tantahuatay Project. Estimated resources are
18.6 million tons with 0.68 grams per ton of gold in the zone of oxides for
Tantahuatay 2; and 12.6 million tons with 0.93 grams per ton of gold in the zone
of oxides for Cienaga; totaling a resource of 31.2 million tons with a grade
average of 0.78 grams per ton of gold and 9.5 grams per ton of silver. Results
of the metallurgical leaching tests for the gold zone show recoveries of 80%. It
is projected that an additional diamond drilling program and metallurgical tests
will be performed.
The Company has obtained encouraging results during its exploration activities
with possibilities to develop other projects in prospective areas. More
exploration in these areas will continue during 2001.
ENVIRONMENT
Company activities are subject to Peruvian laws and regulations. SPCC submitted
in 1996 the Environmental Compliance and Management Plan (known by its Spanish
acronym, PAMA) to the Peruvian Government as part of such regulations. The PAMA
included all current operations that did not have an approved environmental
impact study at the time. SPCC's PAMA was approved in January 1997 and it
contains 32 mitigation measures and projects necessary to bring the existing
operations to the established environmental standards. By the end of year 2000,
sixteen of such projects were already completed.
A5
The Smelter Expansion and Modernization Project represents the largest and most
significant project the Company will undertake in the next few years. Both
options under consideration comply with the Company's requirements. That is, to
employ proven technology that will provide both a good economic return and
exceed the requirements of current environmental regulations. The alternatives
may provide an opportunity to increase the smelter's capacity beyond the 1.1
million metric tons originally proposed and improve SO2 capture to more than the
PAMA's 92% requirement.
Starting in November of 1995, Southern Peru established and continues to operate
under the Supplementary Control Program (SCP), a voluntary effort, by which the
smelter production is curtailed during periods of adverse meteorological
conditions. For the year 2000, in conjunction with the operation of the
smelter's sulfuric acid plant that produced over 326,000 tons, this program has
contributed to improve air quality in Ilo. In addition to the environmental
programs dealing with air quality issues, the Company continues to have good
results with the remediation programs in both Ite bay and the slag removal
program on the beaches to the north of the smelter.
At the end of the year, SPCC submitted to the government the Spill Response
Plans for the three operating areas. Both ocean and land response equipment has
been purchased, and personnel training will continue during 2001.
Environmental capital expenditures for the period 1996-2000 exceeded $120
million. The Company foresees significant environmental capital expenditures
starting in 2001, once the Smelter Expansion and Modernization Project begins.
PRINCIPAL PRODUCTS AND MARKETS
The principal uses of copper are in the building and construction industry,
electrical and electronic products and, to a lesser extent, industrial machinery
and equipment, consumer products and the automotive and transportation
industries. Silver is used for photographic, electrical and electronic products
and, to a lesser extent, brazing alloys and solder, jewelry, coinage, silverware
and catalysts. Molybdenum is used to toughen alloy steels and soften tungsten
alloy and is also used in fertilizers, dyes, enamels and reagents.
During 2000, 1999, and 1998, substantially all of the Company's copper
production was exported from Peru and sold to customers in Europe, the Far East,
the United States and elsewhere in the Americas. A substantial portion of SPCC's
copper sales is made under annual contracts to industrial users. Silver is sold
under annual contracts or in spot sales and molybdenum is sold in concentrate
form to merchants and other refiners under annual contracts. Most customers
receive shipments on a monthly basis at a constant volume throughout the year.
As a result there is little seasonality in SPCC sales volumes.
BACKLOG OF ORDERS
Substantially all of the Company's metal production is sold under annual
contracts. To the extent not sold under annual contracts, production can be sold
on commodity exchanges or in spot sales. Final sales values are determined based
on prevailing commodity prices for the quotation period, generally being the
month of, the month prior to or the month following the actual or contractual
month of shipment or delivery according to the terms of the contract.
COMPETITIVE CONDITIONS
Competition in the copper market is principally on a price and service basis,
with price being the most important consideration when supplies of copper are
ample. The Company's products compete with other materials, including aluminum
and plastics.
A6
EMPLOYEES
At December 31, 2000 the Company employed 3,682 persons, about 57% of whom were
covered by labor agreements with nine labor unions. There were no labor strikes
in 2000.
ENERGY MATTERS AND WATER RESOURCES
Electric power for the Company's operating facilities is generated by two
thermal electric plants owned and operated by Enersur S.A., one located adjacent
to the Ilo smelter (Diesel plant) and the other to the south of the port of Ilo
(Coal plant). Power generation capacity is currently 344 megawatts. In addition,
the Company has 30 megawatts of power generation capacity from waste heat
boilers in the smelter and two small hydro-generating installations at Cuajone.
Power is distributed over a 224-kilometer closed loop transmission circuit.
In 1997, the Company sold its Ilo power plant to Enersur S.A. and entered into a
20-year power purchase agreement. The power purchase agreement contains
provisions obligating Enersur S.A. to construct additional capacity upon notice
to meet the Company's increased electricity requirements from the planned
expansion and modernization. The parties also entered into an agreement for the
sharing of certain services between the power plant and the Company's smelter at
Ilo. Under this agreement, the Company's cost of power has increased somewhat
from its 1996 level, while the Company has benefited by avoiding significant
capital expenditures required to meet the needs of the expanded operations.
SPCC has water concessions for well fields at Huaitire and Titijones and surface
water rights from the Suches Lake.
ENVIRONMENTAL MATTERS
Capital expenditures in connection with environmental projects were
approximately $6.4 million in 2000, $41.6 million in 1999 and $ 25.3 million in
1998. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation - Environmental Matters" which is herein incorporated by
reference.
CONCESSIONS
The Company has concessions from the Peruvian government for its exploration,
exploitation, extraction and/or production operations (collectively, the
"Concessions"). The Concessions are in full force and effect under applicable
Peruvian laws, and the Company believes it is in compliance with all material
terms and requirements applicable to the Concessions. The Concessions have
indefinite terms, subject to payment by SPCC of concession fees of up to $5 per
hectare annually for the mining concessions and a fee based on nominal capacity
for the processing concessions. Fees paid during 2000 were approximately $0.7
million.
REPUBLIC OF PERU
Substantially all of the Company's revenues are derived from the Toquepala mine,
the Cuajone mine, the SX/EW facility and the smelter and refinery at Ilo, all of
which are located within a 48-kilometer radius in the southern part of Peru.
Risks attendant to the Company's operations in Peru include those associated
with economic and political conditions, effects of currency fluctuations and
inflation, effects of government regulations and the geographic concentration of
the Company's operations.
A7
Item 2. Properties
FACILITIES
The Company's principal executive offices are located at 1150 North 7th. Avenue,
Tucson, AZ, 85705-0747 and Avenida Caminos del Inca No. 171, Chacarilla del
Estanque, Santiago de Surco, Lima 33, Peru. At December 31, 2000, the Company,
through its Peruvian Branch, has 100% interest in the Toquepala and Cuajone
mines, the SX/EW facility, the Ilo smelter, the sulfuric acid plant and the Ilo
refinery and operates them pursuant to concessions from the Peruvian Government.
See Item 1 "Business--Concessions". The Company owns, through the Branch, its
offices in Lima. Its offices in Tucson are located in space leased to it by
ASARCO. The Company believes that its existing properties are in good condition
and suitable for the conduct of its business.
The offices and the Company's major facilities, together with production
commencement dates, are listed below:
PERU UNITED STATES
---- -------------
Toquepala Mine -- southern Peru (1960) Executive Offices -- Tucson, AZ
Cuajone Mine -- southern Peru (1976)
SX/EW Facility -- southern Peru (1995)
Ilo Smelter -- Ilo, Peru (1960)
Ilo Refinery -- Ilo, Peru (1994-SPCC)
Acid Plant -- Ilo, Peru (1995)
Executive Offices -- Lima, Peru
The Company also owns and operates a railroad connecting the mines at Cuajone
and Toquepala with the smelting and refining facilities and a port at Ilo, which
are located approximately 196 rail kilometers from the two mine sites, which are
at elevations ranging from 3,220 to 3,330 meters. In addition, the Company
provides housing, hospitals and schools for employees and their families.
A8
METAL PRODUCTION STATISTICS
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Copper Production
MINES (contained copper in thousands of pounds)
Toquepala 232,886 256,387 246,783
Cuajone 394,548 379,995 315,640
SX/EW 123,602 109,225 104,026
- ------------------------------------------------------------------------------------------------------------------------------------
Total Mines 751,036 745,607 666,449
- ------------------------------------------------------------------------------------------------------------------------------------
SMELTER (contained copper in thousands of pounds)
SPCC concentrates 606,965 605,150 536,036
Purchased concentrates 45,267 32,986 111,732
- ------------------------------------------------------------------------------------------------------------------------------------
Total Smelter 652,232 638,136 647,768
- ------------------------------------------------------------------------------------------------------------------------------------
REFINERIES (thousands of pounds of copper)
Ilo 583,658 552,738 543,404
SX/EW 123,602 109,225 104,026
- ------------------------------------------------------------------------------------------------------------------------------------
Total Refineries 707,260 661,963 647,430
- ------------------------------------------------------------------------------------------------------------------------------------
COPPER SALES (thousands of pounds)
Refined 582,724 553,246 542,786
In blister 57,775 66,169 105,374
Concentrates 17,083 21,433 17
SX/EW 123,258 109,024 103,937
- ------------------------------------------------------------------------------------------------------------------------------------
Total sales of copper 780,840 749,872 752,114
- ------------------------------------------------------------------------------------------------------------------------------------
LME average price (cents
per pound) 82 71 75
COMEX average price (cents
per pound) 84 72 75
Molybdenum
(thousands of pounds contained in concentrate)
MINES
Toquepala 8,243 6,993 6,039
Cuajone 7,639 5,070 3,520
- ------------------------------------------------------------------------------------------------------------------------------------
Total produced 15,882 12,063 9,559
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Sales of molybdenum
in concentrate 16,043 11,836 9,677
- ------------------------------------------------------------------------------------------------------------------------------------
Metals Week Dealer
Oxide mean price ($/lb.) $ 2.55 $ 2.65 $ 3.41
A9
Silver (thousands of ounces) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
SMELTER (in blister)
Ilo - SPCC Concentrates 4,188 3,378 2,890
- -------------------------------------------------------------------------------------------------------------------------------
REFINERY
Ilo 3,343 2,796 2,735
- -------------------------------------------------------------------------------------------------------------------------------
SALES OF SILVER
Refined 3,454 2,739 2,724
In blister 411 497 564
In concentrates 110 - -
- -------------------------------------------------------------------------------------------------------------------------------
Total sales of silver 3,975 3,236 3,288
- -------------------------------------------------------------------------------------------------------------------------------
COMEX average price ($/oz.) $ 4.97 $ 5.22 $ 5.51
- -------------------------------------------------------------------------------------------------------------------------------
A10
COPPER RESERVES
Mineral Average Metal Production
Reserves Copper Contained Metal
(000s Content (000s Pounds)
Metric Tons) (%) --------------------------------------
12/31/00 12/31/00 2000 1999 1998
-------- -------- ---- ---- ----
Toquepala Sulfide 675,615 0.74 232,900 256,400 246,800
Leachable 1,732,229 0.19 112,941 100,916 93,700
Cuajone Sulfide 1,211,718 0.64 394,500 380,000 315,600
Leachable 61,148 0.49 10,661 8,309 10,300
The Company has ongoing exploration programs in Peru.
The Company calculates its ore reserves by methods generally applied within the
mining industry and in accordance with the regulations of the Securities and
Exchange Commission. All mineral reserves are estimated quantities of proven and
probable ore that under present and anticipated conditions may be economically
mined and processed by the extraction of their mineral content.
The following ore production information is provided:
2000 1999 1998
---- ---- ----
Average Mill Average Mill Average Mill
Ore Milled Recovery Ore Milled Recovery Rate Ore Milled Recovery
(000s Tons) Rate (%) (000s Tons) (%) (000s Tons) Rate (%)
------------------------------------------------------------------------------------------
Toquepala 16,276 85.93% 16,220 87.03% 16,339 88.49%
Cuajone 30,475 79.75% 28,607 72.31% 19,685 85.62%
The following productive capacity is provided:
Defined Capacity (a)
--------------------
Ilo Smelter 290,300 Tons
Ilo Refinery 245,000 Tons
Toquepala - SX/EW 56,250 Tons
(a) SPCC's estimate of actual capacity under normal operating conditions with
allowance for normal downtime for repairs and maintenance and based on the
average metal content of input material for the three years shown. No
adjustment is made for shutdowns or production curtailments due to strikes
or air quality emissions restraints.
A11
Item 3. Legal Proceedings
Reference is made to the information under the caption "Litigation" in Financial
Statement Footnote 18 "Commitments and Contingencies" on page A41 incorporated
herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
None.
A12
Executive Officers of the Registrant
Set forth below are the executive officers of the Company, their ages as of
February 06, 2001, and their positions.
Name Age Position
---- --- --------
German Larrea Mota-Velasco 47 Chairman of the Board, CEO and Director
Oscar Gonzalez Rocha 62 President and Director General
Daniel Tellechea Salido 55 Vice President, Finance
Genaro Larrea Mota-Velasco 40 Vice President, Commercial
Hector Calva Ruiz 63 Vice President, Exploration and Projects
Ernesto Duran Trinidad 47 Comptroller
Hector Garcia de Quevedo Topete 50 Treasurer
German Larrea Mota-Velasco, Chairman of the Board and Chief Executive
Officer of SPCC since December 1999 and Director since November 1999. Chairman
of the Board of Directors and Chief Executive Officer of Grupo Mexico (holding)
and Grupo Minero Mexico (mining division) since 1994 and of Grupo Ferroviario
Mexicano (railroad division), since 1997. Previously Executive Vice Chairman of
Grupo Mexico and member of the Board of Directors since 1981. Chairman and Chief
Executive Officer of ASARCO Incorporated from November 1999 to present, and its
President from November 1999 to January 2000.
Oscar Gonzalez Rocha, President and General Director of SPCC since
December 1999 and Director since November 1999. Managing Director for Mexicana
de Cobre, S.A. de C.V. from 1986 to 1989 and of Mexicana de Cananea, S.A. de
C.V. from 1990 to 1999. Alternate Director of Grupo Mexico since 1988 and a
Director of ASARCO Incorporated from November 1999 to present.
Daniel Tellechea Salido, Vice President, Finance of SPCC since December
1999 and Director since November 1999. Managing Director for Administration and
Finance of Grupo Mexico since 1994 and an Alternate Director since 1998.
Managing Director of Mexicana de Cobre, S.A. de C.V. from 1986 to 1993 and
Director, Vice President and Chief Financial Officer of ASARCO Incorporated from
November 1999 to present.
Genaro Larrea Mota-Velasco, Vice President, Commercial of SPCC since
December 1999 and Director since November 1999. Commercial Managing Director and
a Director of Grupo Mexico since 1994. Director, Vice President and Chief
Commercial Officer of ASARCO Incorporated from November 1999 to present.
Hector Calva Ruiz, Vice President, Exploration and Projects of SPCC
since December 1999 and Director since November 1999. Managing Director for
Exploration and Projects of Grupo Mexico since 1997 and an Alternate Director
since 1998. Managing Director of Industrial Minera Mexico, S.A. de C.V. from
1984 to 1997 and Director of ASARCO Incorporated from November 1999 to present.
Hector Garcia de Quevedo Topete, Treasurer of SPCC and a Director since
May 9, 2000. He has also been Managing Director for Grupo Mexico, S.A. de C.V.
since 1999. He was Advisor to the Chairman and Chief Executive Officer of Grupo
Mexico from 1994 to 1998.
Ernesto Duran Trinidad, Comptroller. Comptroller of Grupo Mexico, S.A. de
C.V. from 1994 to date. Comptroller of Mexicana de Cobre, S.A. de C.V. from 1983
to 1993.
A13
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
At December 31, 2000, there were 2,970 holders of record of the Company's Common
Stock. SPCC's Common Stock is traded on the New York Stock Exchange (NYSE) and
the Lima Stock Exchange (BVL). The SPCC Common Stock symbol is PCU on the NYSE
and PCUC1 on the BVL.
The table below sets forth the cash dividends paid per share of capital stock
and the high and low stock prices on both the NYSE, and the BVL for the periods
indicated.
2000 1999
---- ----
-----------------------------------------------------------------------------------------------------------------
Quarters 1st 2nd 3rd 4th Year 1st 2nd 3rd 4th Year
-----------------------------------------------------------------------------------------------------------------
Dividend per
Share $0.06 $0.05 $0.056 $0.174 $0.340 $0.03 $0.025 $0.022 $0.075 $0.152
Stock market price
NYSE:
High $16-7/16 $13 $15-7/8 $15-1/2 $16-7/16 $10-7/8 $15 $16-7/8 $18-1/16 $18-1/16
Low $12-9/16 $11 $11-5/16 $12-1/8 $11 $8-7/16 $10-1/16 $13-5/8 $13-13/16 $ 8-7/16
BVL:
High $16.16 $12.95 $15.84 $15.30 $16.16 $10.66 $15.08 $16.95 $17.45 $17.45
Low $12.52 $11.00 $11.35 $12.40 $11.00 $8.78 $10.12 $13.80 $14.01 $8.78
On February 27, 2001, a dividend of $0.143 per share, totaling $11.4 million was
declared payable April 4, 2001. The Company's dividend policy continues to be
reviewed at Board of Directors meetings, taking into consideration the current
intensive capital investment program.
For a description of limitations on the ability of the Company to make dividend
distributions, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Liquidity and Capital Resources" and Note 13 to the
Consolidated Financial Statements of the Company.
A14
Item 6. Selected Financial Data
FIVE-YEAR SELECTED FINANCIAL AND STATISTICAL DATA
(in millions, except per share and employee data)
2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Earnings:
Net sales $711 $585 $628 $814 $ 753
Operating costs and expenses (1) 561 539 558 577 497
Operating income 150 46 70 237 256
Minority interest of investment shares in
Income of Peruvian Branch 2 - - 4 5
Net earnings $93 $29 $55 $186 $181
Per Share Amounts:
Net earnings - basic and diluted $1.16 $0.37 $0.68 $2.32 $2.25
Dividends paid $0.340 $0.152 $0.51 $1.26 $ 1.47
Consolidated Balance Sheet:
Total assets $1,771 $1,545 $1,526 $1,561 $1,280
Cash and marketable securities 149 11 198 331 174
Total debt 347 223 234 248 107
Stockholders' equity 1,192 1,126 1,109 1,098 1,015
Consolidated Statement of Cash Flows:
Cash provided from operating activities $ 184 $ 90 $ 187 $ 278 $ 159
Dividends paid 27 12 41 101 118
Capital expenditures 132 250 259 184 121
Depreciation and depletion 77 74 61 47 42
Capital Stock:
Common shares outstanding 14.1 14.1 13.9 14.2 13.6
NYSE Price - high $16 7/16 $18-1/16 $16-11/16 $21-1/8 $21
- low $11.00 $ 8-7/16 $ 8-3/4 $12-3/4 $13-7/8
Class A common shares outstanding 65.9 65.9 65.9 65.9 66.6
Book value per share $ 14.90 $ 14.07 $ 13.88 $13.71 $ 12.66
P/E ratio 12.84 38.03 13.88 5.77 6.50
Financial Ratios:
Current assets to current liabilities 3.3 2.4 4.2 5.6 3.8
Debt as % of capitalization 22.4% 16.3% 17.2% 18.2% 9.3%
Employees (at year end) 3,682 3,844 4,557 4,829 4,859
Notes to five year selected financial and statistical data
(1) Includes provision for workers' participation of $12.1 million, $3.4
million, $10.6 million, $14.4 million, and $18.0 million in the years
ended December 31, 2000, 1999, 1998, 1997 and 1996, respectively.
A15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
The Company's business is affected by the factors outlined below which should be
considered in reviewing the financial position, results of operations and cash
flows of the Company for the periods described herein.
Inflation and Devaluation of the Peruvian New Sol: A portion of the Company's
operating costs are denominated in Peruvian new soles. Since the revenues of the
Company are primarily denominated in U.S. dollars, when inflation in Peru is not
offset by a corresponding devaluation of the new sol, the financial position,
results of operations and cash flows of the Company could be adversely affected.
The value of the net assets of the Company denominated in new soles can be
affected by devaluation of the new sol. The recent inflation and devaluation
rates are as follows:
Years ended December 31, 2000 1999 1998
---- ---- ----
Peruvian Inflation Rate 3.7% 3.7% 6.0%
New Sol/Dollar Devaluation Rate 0.5% 11.2% 15.7%
Peruvian Branch: The consolidated financial statements included herein are
prepared in U.S. dollars and in accordance with generally accepted accounting
principles in the United States (US GAAP). The Peruvian Branch (the Branch)
consists of substantially all the assets and liabilities of Southern Peru Copper
Corporation (SPCC) associated with its copper operations in the Republic of
Peru. The Branch is registered with the Peruvian government as a branch of a
foreign mining company. The results of the Branch are consolidated in the
financial statements of the Company.
The Branch maintains its books of account in new soles and prepares financial
information in accordance with generally accepted accounting principles in Peru
(Peruvian GAAP). Peruvian GAAP requires the inclusion in the financial
statements of the Branch of the Resultado por Exposicion a la Inflacion (Result
of Exposure to Inflation), which seeks to account for the effects of inflation
by adjusting the value of non-monetary assets and liabilities and equity by a
factor corresponding to wholesale price inflation rates during the period
covered by the financial statements. Monetary assets and liabilities are not so
adjusted.
Expansion and Modernization Project: Expansion and modernization programs
announced in prior years are underway.
The project to expand and protect the Cuajone mine from maximum flooding of the
Torata River reached 95% completion at the end of 2000, with an investment of
$67.7 million out of the $75.5 million budgeted. The Torata River was diverted
on June 30, 2000, allowing the beginning of the Cuajone pit expansion.
The evaluation of the two proposals regarding the Ilo Smelter modernization and
expansion project has been completed. Both alternatives fulfill the Company
requirements to use the most efficient proven technology, to provide economic
returns and exceed the requirements of current environmental standards.
Management is presently studying the possibility of increasing the design
capacity to 1.83 million metric tons instead of the 1.1 million metric tons
originally considered and of increasing the SO2 gas emission recapture from the
required 92% to a minimum of 95%. Accordingly, the Company is evaluating the
economic terms and the financial and tax benefits for new investments that would
allow the Company to position this new smelter as the largest and most
environmentally efficient smelter in America. The Company's objectives are to
A16
comply with the Peruvian environmental requirements well before 2006, the target
date in the Company's PAMA (Environmental Management and Compliance Program)
committed to with the Peruvian Government, while at the same time allowing for
an increased capacity that would contribute to the mining development of Peru
and SPCC.
Feasibility studies for expansion of the Toquepala concentrator, mine expansion
and an additional leaching area at Cuajone have been completed. Construction of
these projects may begin in the second quarter of 2001, improving SPCC
production capacity to over 900 million pounds per year.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
SPCC reported 2000 net earnings of $92.9 million, or diluted earnings per share
of $1.16, compared with net earnings of $29.4 million, or diluted earnings per
share of 37 cents in 1999 and net earnings of $54.6 million, or diluted earnings
per share of 68 cents, in 1998.
The increase in net earnings in 2000 compared with 1999 is primarily a result of
higher copper prices, higher production, and sales, better sales conditions and
reduced costs. The average price of copper in 2000 on the London Metal Exchange
increased by 11 cents per pound from 1999 to 82 cents per pound and COMEX
increased by 12 cents per pound from 1999 to 84 cents per pound.
Company's results for the year 2000, improved 3.2 times over 1999. While average
copper prices improved 15%, total sales in 2000 improved 21.6% over 1999 due to
increased sales volume and better sales conditions. In addition, cost cutting
programs significantly reduced costs in 2000. Administrative and production
costs were substantially reduced. Operating breakeven cost was reduced by 2.1
cents per pound from 56.1 cents in the year 1999 to 54.0 cents in the year 2000
notwithstanding the effect of fuel price increases worldwide in the year 2000.
This reduction represents 3.7% improvement over 1999 costs. The above are the
principal reasons for the increase of 216% in 2000 net earnings over the prior
year net earnings.
Net Sales: Net sales in 2000 were $711.1 million, compared with $584.5 million
in 1999 and $627.9 million in 1998. Sales increased in 2000 by $126.5 million,
largely as a result of higher copper prices and higher sales volume. Copper
sales volume was 31.0 million pounds higher in 2000 compared with 1999.
Sales decreased in 1999 by $43.4 million from 1998, largely as a result of lower
copper prices. Copper sales volume was 2.2 million pounds lower in 1999 compared
with 1998.
At December 31, 2000, there were no copper sales recorded at a provisional
price.
Prices: Sales prices for the Company's metals are established principally by
reference to prices quoted on the London Metal Exchange (LME), the New York
Commodity Exchange (COMEX) or published in Platt's Metals Week for dealer oxide
mean prices for molybdenum products.
Price/Volume Data 2000 1999 1998
---- ---- ----
Average Metal Prices
Copper (per pound - LME) $0.82 $0.71 $0.75
Copper (per pound - COMEX) $0.84 $0.72 $0.75
Molybdenum (per pound) $2.55 $2.65 $3.41
Silver (per ounce - COMEX) $4.97 $5.22 $5.51
A17
Sales Volume (in thousands) 2000 1999 1998
---- ---- ----
Copper (pounds) 780,840 749,872 752,114
Molybdenum (pounds) (1) 16,043 11,836 9,677
Silver (ounces) 3,975 3,236 3,288
(1) The Company's molybdenum production is sold in concentrate form. Volume
represents pounds of molybdenum contained in concentrates.
Financial Instruments: The Company may use derivative instruments to manage its
exposure to market risk from changes in commodity prices. Derivative instruments
which are designated as hedges must be deemed effective at reducing the risk
associated with the exposure being hedged and must be designated as a hedge at
the inception of the contract.
Copper: Depending on the market fundamentals and other conditions, the Company
may purchase put options to reduce or eliminate the risk of price declines below
the option strike price on a portion of its anticipated future production. Put
options purchased by the Company establish a minimum sales price for the
production covered by such put options and permit the Company to participate in
price increases above the option price. The cost of options is amortized on a
straight-line basis during the period in which the options are exercisable.
Depending upon market conditions, the Company may either sell options it holds
or exercise the options at maturity. Gains or losses from the sale or exercise
of options, net of unamortized acquisition costs, are recognized in the period
in which the underlying production is sold and are reported as a component of
the underlying transaction.
Earnings include pre-tax gains from option sales and exercises of $7.2 million
in 1998. At December 31, 1999 and 2000, the Company held no copper put options.
Fuel Swaps: The Company may enter into fuel swap agreements to limit the effect
of increases in fuel prices on its production costs. A fuel swap establishes a
fixed price for the quantity of fuel covered by the agreement. The difference
between the published price for fuel and the price established in the contract
for the month covered by the swap is recognized in production costs. As of
December 31, 2000, the Company had no fuel swap agreements.
In 2000 and 1999, the Company's production costs would have been $18.8 and $10.7
million higher respectively, if this exposure had not been hedged.
Foreign currency: The Company selectively uses foreign currency swaps to limit
the effects of exchange rate changes on future cash flow obligations denominated
in foreign currencies. A currency swap establishes a fixed dollar cost for a
fixed amount of foreign currency required at a future date. The Company has
entered into currency swap agreements on a portion of its capital cost
contracted in Euros.
As of December 31, 2000 the Company had the following currency swap agreements:
US$ Euros Forward
Maturity Date (in millions) Exchange Rate
------------- ------------- -------------
3/31/2001 2.6 2.3 1.1535
4/30/2001 3.3 2.9 1.1559
--- ---
5.9 5.2
During 2000, $4.8 million were recognized as exchange loss in the Company's
profit and loss statement. A hypothetical 10 percent decrease from December 2000
and 1999 rates, would increase the realized exchange loss on currency swaps by
$0.5 million and $2.9 million, respectively. The difference between the exchange
rate of the Euro published at the end of month and the exchange rate established
in the contract, is recognized as an exchange gain or loss in the profit and
loss statement.
A18
Cost of Sales: Cost of sales was $ 441.5 million in 2000, $410.1 million in 1999
and $446.5 million in 1998. The increase of $31.4 million in 2000 includes the
higher cost of copper processed and sold from purchased concentrates, the higher
cost of company mined copper as a result of an increase in volume sold and power
cost.
The decrease of $36.4 million in 1999 was principally due to the lower sales
volume of copper produced from third parties concentrates, lower unit cost of
company mined copper as a result of lower power and fuel costs, partially offset
by a $14.8 million charge for severance costs, which were part of the Company's
earnings enhancement program.
Administrative and other: Administrative and other expenses were $34.9 million
in 2000, $47.5 million in 1999 and $45.0 million in 1998. The decrease of $12.6
million in 2000 was principally due to decrease in labor, retirement incentive
program, pension costs and retirement plan payment for foreign contract
employees. The increase in 1999 of $2.5 million is associated with payments by
the severance cost of foreign contract employees' early termination.
Other Expenses: Depreciation and depletion expense was $77.4 million in 2000,
compared with $74.2 million in 1999 and $60.9 million in 1998. The increase in
2000 includes depreciation of the expanded SX/EW plant in Toquepala as well as
mining equipment of the Cuajone mine expansion. The increase in 1999 includes
depreciation of the new ball mills of the Cuajone concentrator as well as mining
equipment of the Cuajone mine expansion and the expansion of the SX/EW plant in
Toquepala.
Exploration expense was $7.7 million, $7.2 million, and $5.2 million in 2000,
1999 and 1998, respectively. The increase in 2000 reflects the increase of
drilling programs at the Company's exploration properties.
Non-Operating Items: Interest income was $3.5 million in 2000 compared with $7.8
million in 1999 and $15.8 million in 1998. The decreases in 2000 and 1999
reflects the lower invested balances as funds were utilized in the Company's
expansion program. Interest income is expected to continue to decrease as
available cash is used to fund the Company's expansion and modernization
program.
Other income was $2.3 million in 2000, compared with $3.6 million in 1999 and
$9.4 million in 1998. Other income in 1998 includes a $5.3 million insurance
settlement related to flood damage, which occurred in 1997.
Total interest expense was $26.9 million in 2000, compared with $25.2 million in
1999 and $25.6 million in 1998. In 2000, 1999 and 1998, the Company capitalized
$11.0 million, $7.3 million and $10.6 million of interest, respectively,
principally related to expenditures on the expansion program.
Taxes on Income: Taxes on income were $44.6 million, $9.7 million and $25.6
million for 2000, 1999 and 1998, respectively, and include $43.1 million, $11.6
million and $22.9 million of Peruvian income taxes and $1.5 million, $(1.9)
million and $2.7 million, for U.S. federal and state taxes for 2000, 1999 and
1998, respectively. U.S. income taxes are primarily attributable to investment
income as well as limitations on use of foreign tax credits in determining the
alternative minimum tax.
The Company obtains income tax credits in Peru for value-added taxes paid in
connection with the purchase of capital equipment and other goods and services
employed in its operations and records these credits as a prepaid expense. Under
current Peruvian law, the Company is entitled to use the credits against its
Peruvian income tax liability or to receive a refund. The carrying value of
these Peruvian tax credits approximates their fair market value.
Minority Interest of Investment Shares (previously known as Labor Shares):
Minority interest of investment shares was $2.0 million in 2000, compared with
none in 1999 and $0.5 million in 1998. The provision for minority interest of
investment shares represents an accrual of 1.5%, 1.7% and 2.0% for 2000, 1999
and 1998, respectively, of
A19
the Branch's after-tax earnings. The reduction in the percentage of minority
interest of investment shares in 2000 and 1999 is a result of purchases of
investment shares by the Company.
Cash Flows - Operating Activities: Net cash provided from operating activities
was $183.6 million in 2000, compared with $90.3 million in 1999 and $186.6
million in 1998. The increase in 2000 was primarily attributable to an earnings
increase of $63.5 million and a $31.4 million lower use of cash for operating
assets and liabilities, which includes a $44.6 million reduction in the increase
in accounts receivable as a result of higher copper prices late in 2000 and
$16.5 million decrease in inventories of purchased concentrates, refined copper
and supplies.
Other operating assets and liabilities increased to $39.7 million in 2000
compared to ($3.3) million in 1999 basically due to $ 34.7 million of prepaid
Peruvian taxes and $6.3 million of net book value of assets abandoned and other.
Accounts payable and accrued liabilities increased to $20.6 million in 2000
compared to $4.4 million in 1999, mainly due to workers participation $9.6
million, interest expense $0.8 million, salary and wages $1.5 million and other
$4.3 million.
The decrease in 1999 compared to 1998, was primarily attributable to $81.2
million of higher use of cash for operating assets and liabilities, which
includes $25.8 million for an increase in accounts receivable because of the
higher copper prices late in 1999 and the $41.0 million increase in inventories
of purchased concentrates, refined copper and supplies. Additionally, $25.2
million of lower earnings partially offset by $13.3 million of higher
depreciation and depletion contributed to the decrease in cash flow from
operating activities.
Cash Flows - Investing Activities: Net cash used for investing activities was
$131.2 million in 2000 compared with $227.5 million in 1999 and $75.9 million in
1998. Capital expenditures in 2000 were $131.7 million, compared with $250.3
million in 1999 and $258.7 million in 1998.
Capital expenditures in 2000, 1999 and 1998 reflect the Company's expansion and
modernization program and capitalization of mine stripping. Other investment
activities in 1999 include net proceeds of $22.2 million, from held-to-maturity
investments. These investments were utilized in the Company's expansion
programs.
The Company's planned capital expenditures in 2001 are estimated to be
approximately $360 million, which include expenditures related to the
modernization and expansion of the Ilo smelter, expansion of the Toquepala
concentrator, expansion in the leaching section of the SX/EW plant in Cuajone
and the completion of the Torata River flooding control.
Cash Flows - Financing Activities: Financing activities provided cash of $88.9
million in 2000, compared with a use of cash of ($27.3) million in 1999 and
($59.5) million in 1998. In 2000, activity included net debt incurred of $124.7
million, dividend payments of $27.2 million, additional escrow deposits of $6.7
million and purchases of investment shares of $1.5 million.
In 1999 activity included dividend payments of $12.2 million, net debt repayment
of $11.7 million and purchases of investment shares of $3.4 million.
LIQUIDITY AND CAPITAL RESOURCES:
Financing: In July 2000, the Company received authorization from CONASEV to
issue the equivalent of up to $200 million in bonds in the Peruvian market. On
July 20, 2000 the Company issued $30 million at a nominal fixed rate of 8.75%;
on December 7, 2000 the
A20
Company issued an additional $20 million at the same rate; in both cases,
maturity is seven years.
In March 1999, the Company concluded a $100 million, 15-year loan agreement with
Mitsui and Co., Ltd. The applicable interest for this loan is Japanese LIBO rate
plus 1.25%. This facility provides additional committed financing for SPCC's
modernization and expansion program. A commitment fee of 0.5% per annum is
payable on the undrawn portion of this loan through December 31, 2000. As of
December 31, 2000, $100.0 million had been drawn from this loan facility.
In 1997, the Company entered into a $600 million, seven year loan facility with
a group of international financial institutions. The facility consists of a $400
million term loan and a $200 million revolving credit line. The interest rate
during years four and five of the agreement on any loans outstanding is LIBOR
plus 2.00% per annum for term loans and LIBOR plus 2.25% for revolving credit
loans. A commitment fee of 0.5% per annum is payable on the undrawn portion of
the facility. No amounts had been drawn under this agreement as of December 31,
2000.
The Company also has a loan outstanding with Corporacion Andina de Fomento (CAF)
of $3.9 million with interest based on LIBOR, and an outstanding loan from the
United States Export - Import Bank(EXIM) of $2.9 million, with interest at a
6.43% fixed rate. Both loans are payable in semi-annual installments through
2001. At December 31, 2000, the Company had outstanding borrowings of $347.2
million, compared with $222.5 million at December 31, 1999.
Certain financing agreements contain covenants which limit the payment of
dividends to stockholders. Under the most restrictive covenant, the Company may
pay dividends to stockholders equal to 50% of the net income of the Company for
any fiscal quarter as long as such dividends are paid by June 30 of the
following year. Net assets of the Company unavailable for the payment of
dividends totaled $1.2 billion at December 31, 2000. In accordance with the most
restrictive covenant of the Company's loan agreements, additional indebtedness
of $844.4 million would have been permitted at December 31, 2000.
The Mitsui and Co., Ltd. credit agreement is collateralized by pledges of
receivables of 24,000 tons of copper per year. The EXIM Bank credit agreement is
collateralized by pledges of receivables from 7,000 tons of copper per year.
Starting June 1, 2001 once the EXIM Bank loan is fully paid, these 7,000 tons
will be pledged to Mitsui and Co., Ltd. under the credit agreement. The CAF loan
is collateralized by liens on the SX/EW facility. The SENS and the seven year
loan facility require that most of the collections of export copper sales be
deposited into a trust account in the United States. Twenty percent of these
collections are used as collateral for the outstanding SENS with the balance of
the collections remitted directly to the Company. The excess funds in the
collateral account are remitted to the Company, if all financial requirements
are met. As part of these agreements, the Company must maintain three-month and
six-month collection ratios, as defined (aggregate collections as a specified
multiple of debt service). Both facilities require escrow deposits of three
months debt service. In addition, certain of the agreements require the Company
to maintain a minimum stockholders' equity of $750 million, specified ratios of
debt to equity, current assets to current liabilities and an interest coverage
test. Reduction of ASARCO Incorporated's (ASARCO) voting interest in the Company
to less than a majority would constitute an event of default under two of the
financing agreements. The Company was in compliance with the various loan
covenants at December 31, 2000. Included in Other assets are $17.9 million held
in escrow accounts as required by the Company's loan agreements. The funds will
be released from escrow as scheduled loan repayments are made.
Also, in 1997, the Company privately placed $150 million SENS in the United
States and international markets. These notes, which have been registered with
the Securities and Exchange Commission, have an average maturity of seven years
and a final maturity in 2007 and were priced at par with a coupon rate of 7.9%.
In addition, in 1997, the Company sold $50 million of bonds, due June 2004 to
investors in Peru. The bonds have a fixed interest rate of 8.25%.
A21
The Company expects that it will meet its cash requirements for 2001 and beyond
from internally generated funds, cash on hand, borrowings under the seven-year
loan facility signed in April 1997, and from additional external financing.
At December 31, 2000 the Company's debt as a percentage of total capitalization
(the total of debt, minority interest of investment shares and stockholders
equity) was 22.4% as compared with 16.3% at December 31, 1999. At December 31,
2000, the Company's cash and marketable securities amounted to $149.1 million
compared to $10.6 million at December 31, 1999.
DIVIDENDS AND CAPITAL STOCK
The Company paid dividends to stockholders of $27.2 million, or $0.340 per
share, in 2000, $12.2 million, or $0.152 per share, in 1999, and $40.7 million,
or $0.51 per share, in 1998. Distributions to the investment share minority
interest were $0.5 million, $0.2 million, and $0.9 million in 2000, 1999 and
1998, respectively.
On February 27, 2001 a dividend of $0.143 per share, totaling $11.4 million was
declared, payable April 4, 2001. The Company's dividend policy continues to be
reviewed at the Board of Directors meetings, taking into consideration the
current intensive capital investment program, such as the expansion of mines,
concentrator/leach plant, smelter and future cash flow generated from
operations.
At the end of 2000 and 1999, the authorized and outstanding capital stock of the
Company consisted of 65,900,833 shares of Class A common stock par value $0.01
per share; and 34,099,167 authorized shares of common stock, par value $0.01 per
share, of which 14,100,192 common shares were outstanding at December 31, 2000
and 14,118,862 shares were outstanding at December 31, 1999.
ENVIRONMENTAL MATTERS
Company activities are subject to Peruvian laws and regulations. SPCC submitted
in 1996 the Environmental Compliance and Management Plan (known by its Spanish
acronym, PAMA) to the Peruvian Government as part of such regulations. The PAMA
included all current operations that did not have an approved environmental
impact study at the time. SPCC's PAMA was approved in January 1997 and it
contains 32 mitigation measures and projects necessary to bring the existing
operations to the established environmental standards. By the end of year 2000,
sixteen of such projects were already completed.
The Smelter Expansion and Modernization Project represents the largest and most
significant project in which the Company will embark itself in the next few
years. Both options under consideration comply with the Company's requirements.
That is, to employ proven technology that will provide both a good economic
return and exceed the requirements of current environmental regulations. The
alternatives may provide an opportunity to increase the smelter's capacity
beyond the 1.1 million tons originally proposed and improve SO2 capture to more
than the PAMA's 92% requirement.
Starting in November of 1995, Southern Peru established and continues to operate
the Supplementary Control Program (SCP), a voluntary effort, by which the
smelter production is curtailed during periods of adverse meteorological
conditions. For the year 2000, in conjunction with the operation of the
smelter's sulfuric acid plant that produced over 326,000 metric tons, this
program has contributed to improve air quality in Ilo. In addition to the
environmental programs dealing with air quality issues, the Company continues to
have good results with the remediation programs in both Ite bay and the slag
removal program on the beaches to the north of the smelter.
At the end of the year, SPCC submitted to the government the Spill Response
Plans for the three operating areas. Both ocean and land response equipment has
been purchased, and personnel training will continue during 2001.
Environmental capital expenditures for the period 1996-2000 exceeded $120
million. The Company foresees significant environmental capital expenditures
starting in 2001, once
A22
the Smelter Expansion and Modernization Project begins.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. Initially, the statement was to be effective
in fiscal years beginning after June 15, 1999. In June 1999, the FASB issued
SFAS No. 137, which defers the effective date of SFAS No.133 one year until June
15, 2000.
In June 2000 the FASB issued SFAS No.138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which amends the accounting and
reporting standards of SFAS No.133 for certain derivative instruments and
certain hedging activities.
The Company will adopt SFAS No.133 and No.138 effective January 1, 2001 and its
implementation will not materially affect its results of operation or financial
condition.
CAUTIONARY STATEMENT
Forward-looking statements in this report and in other Company statements
include statements regarding expected commencement dates of mining or metal
production operations, projected quantities of future metal production,
anticipated production rates, operating efficiencies, costs and expenditures as
well as projected demand or supply for the Company's products. Actual results
could differ materially depending upon factors including the availability of
materials, equipment, required permits or approvals and financing, the
occurrence of unusual weather or operating conditions, lower than expected ore
grades, the failure of equipment or processes to operate in accordance with
specifications, labor relations, environmental risks as well as political and
economic risk associated with foreign operations. Results of operations are
directly affected by metals prices on commodity exchanges which can be volatile.
A23
Item 8. Financial Statements and Supplementary Data.
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF EARNINGS
For the years ended December 31, 2000 1999 1998
--------- --------- ---------
(in thousands, except for per share amounts)
Net sales:
Stockholders and affiliates $ 97,718 $ -- $ 18,685
Others 613,339 584,546 609,231
---------------------------------------------------
Total net sales 711,057 584,546 627,916
Operating costs and expenses:
Cost of sales 441,476 410,134 446,515
Administrative and other 34,853 47,453 44,977
Depreciation and depletion 77,447 74,237 60,859
Exploration 7,700 7,156 5,185
---------------------------------------------------
Total operating costs and expenses 561,476 538,980 557,536
---------------------------------------------------
Operating income 149,581 45,566 70,380
Interest income 3,525 7,840 15,784
Interest expense (15,878) (17,881) (15,009)
Other income 2,306 3,610 9,437
---------------------------------------------------
Earnings before taxes on income and minority interest
of investment shares 139,534 39,135 80,592
Taxes on income 44,648 9,740 25,567
Minority interest of investment shares in income of
Peruvian Branch 1,969 (10) 461
---------------------------------------------------
Net earnings $ 92,917 $ 29,405 $ 54,564
===================================================
Per common share amounts:
Net earnings - basic and diluted $ 1.16 $ 0.37 $ 0.68
Dividends paid $ 0.340 $ 0.152 $ 0.51
Weighted average shares outstanding-basic 80,001 79,862 79,893
Weighted average shares outstanding-diluted 80,003 79,892 79,893
The accompanying notes are an integral part of these financial statements.
A24
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED BALANCE SHEET
At December 31, 2000 1999
----------- -----------
(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 149,088 $ 10,596
Accounts receivable:
Trade 85,866 57,041
Other 56,591 23,623
Inventories 114,931 110,171
Prepaid taxes 31,014 48,099
Other current assets 4,357 19,611
----------------------------------------
Total current assets 441,847 269,141
Net property 1,298,130 1,250,887
Other assets 30,581 25,425
----------------------------------------
Total assets $ 1,770,558 $ 1,545,453
========================================
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 24,339 $ 23,272
Accounts payable:
Trade 55,042 31,819
Other 13,115 26,594
Other current liabilities 39,884 29,472
----------------------------------------
Total current liabilities 132,380 111,157
----------------------------------------
Long-term debt 322,914 199,253
Deferred income taxes 94,891 79,888
Other liabilities 14,253 15,242
----------------------------------------
Total non-current liabilities 432,058 294,383
----------------------------------------
Contingencies (Note 18)
Minority interest of investment shares in the
Peruvian Branch 14,465 13,975
----------------------------------------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01;
shares authorized: 34,099,167;
shares issued: 14,330,093 143 143
Class A Common stock, par value $0.01;
shares issued and authorized:
65,900,833 659 659
Additional paid-in capital 265,745 265,745
Retained earnings 930,071 864,354
Treasury stock, at cost, common shares,
2000 - 229,901; 1999 - 211,231 (4,963) (4,963)
----------------------------------------
Total Stockholders' Equity 1,191,655 1,125,938
----------------------------------------
Total Liabilities, Minority Interest
and Stockholders' Equity $ 1,770,558 $ 1,545,453
========================================
The accompanying notes are an integral part of
these financial statements.
A25
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31, 2000 1999 1998
--------- --------- ---------
(Dollars in thousands)
OPERATING ACTIVITIES
Net earnings $ 92,917 $ 29,405 $ 54,564
Adjustments to reconcile net earnings to net
cash provided from operating activities:
Depreciation and depletion 77,447 74,237 60,859
Provision for deferred income taxes 15,047 21,792 14,847
Minority interest of investment shares 1,969 (10) 461
Net loss on sale or disposal of investments and property -- -- 9,773
Cash provided from (used for) operating assets and
liabilities:
Accounts receivable (62,157) (17,536) 8,292
Inventories (4,760) (21,220) 19,732
Accounts payable and accrued liabilities 20,592 4,405 9,234
Other operating assets and liabilities 39,650 (3,335) 5,802
Foreign currency transaction loss 2,889 2,543 3,025
-------------------------------------------------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 183,594 90,281 186,589
-------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (131,745) (250,254) (258,696)
Purchase of held-to-maturity investments -- (54,990) (40,900)
Proceeds from held-to-maturity investments -- 77,142 223,338
Sales of investments and property 542 609 376
-------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (131,203) (227,493) (75,882)
-------------------------------------------------
FINANCING ACTIVITIES
Debt incurred 148,000 2,000 --
Debt repaid (23,272) (13,683) (13,683)
Escrow deposits on long-term loans (6,659) (67) 2,311
Dividends paid to common stockholders (27,200) (12,152) (40,735)
Distributions to minority interests (460) (226) (892)
Net treasury stock transactions -- 221 (2,715)
Purchases of investment shares (1,512) (3,379) (3,791)
-------------------------------------------------
NET CASH PROVIDED FROM (USED FOR) FINANCING ACTIVITIES 88,897 (27,286) (59,505)
-------------------------------------------------
Effect of exchange rate changes on cash (2,796) (854) (1,745)
-------------------------------------------------
Increase (decrease) in cash and cash equivalents 138,492 (165,352) 49,457
Cash and cash equivalents, at beginning of year 10,596 175,948 126,491
-------------------------------------------------
CASH AND CASH EQUIVALENTS, AT END OF YEAR $ 149,088 $ 10,596 $ 175,948
=================================================
The accompanying notes are an integral part of these financial statements.
A26
Southern Peru Copper Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 2000 1999 1998
----------- ----------- -----------
(Dollars in thousands)
CAPITAL STOCK:
COMMON STOCK:
Balance at beginning and end of year $ 143 $ 143 $ 143
-------------------------------------------------------------
CLASS A COMMON STOCK:
Balance at beginning and end of year 659 659 659
-------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning and end of year 265,745 265,745 265,745
-------------------------------------------------------------
TREASURY STOCK:
Balance at beginning of year (4,963) (5,184) (2,469)
Purchased -- -- (3,001)
Used for corporate purposes -- 221 286
-------------------------------------------------------------
Balance at end of year (4,963) (4,963) (5,184)
-------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 864,354 847,229 833,560
Net earnings 92,917 29,405 54,564
Dividends paid (27,200) (12,152) (40,735)
Stock awards -- (128) (160)
-------------------------------------------------------------
Balance at end of year 930,071 864,354 847,229
-------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 1,191,655 $ 1,125,938 $ 1,108,592
=============================================================
The accompanying notes are an integral part of these financial statements.
A27
SOUTHERN PERU COPPER CORPORATION
and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of consolidation:
The consolidated financial statements of Southern Peru Copper Corporation and
Subsidiaries (the "Company") include the accounts of significant subsidiaries in
which the Company has voting control, and are prepared in accordance with
generally accepted accounting principles in the United States (U.S. GAAP).
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Use of estimates:
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue recognition:
Substantially all of the Company's copper is sold under annual contracts.
Revenue is recognized primarily in the month product is shipped to customers
based on prices as provided in sales contracts. When the price is not
determinable at the time of shipment to customers, revenue is recognized based
on prices prevailing at the time of shipment with final pricing generally
occurring within three months of shipment. Revenues with respect to these sales
are adjusted in the period of settlement to reflect final pricing and in periods
prior to settlement to reflect any decline in market prices, which may occur
between shipment and settlement. The Company sells copper in blister and refined
form at industry standard commercial terms. Net sales include the invoiced value
of copper, silver, molybdenum, acid, and gains from the sale or settlement of
copper put options.
Cash equivalents and marketable securities:
Cash equivalents include all highly liquid investments with a maturity of three
months or less, when purchased. Marketable securities include short-term liquid
investments with a maturity of more than three months, when purchased, and are
carried at cost, which approximates market.
Inventories:
Metal inventories are carried at the lower of average cost or market. Costs
incurred in the production of metal inventories exclude general and
administrative costs. Supplies inventories are carried at average cost less a
reserve for obsolescence.
Property:
Assets are valued at the lower of cost or net realizable value. In accordance
with SFAS No. 121,"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", the Company reviews long-lived assets and
certain identifiable intangibles related to those assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. Any impairment loss on such assets, as well as
long-lived assets and certain identifiable intangibles to be disposed of, is
measured as the amount by which the carrying value of the assets exceeds the
fair value of the assets (less disposal costs, if applicable).
The Company evaluates the carrying value of assets based on undiscounted future
cash flows considering expected metal prices based on historical metal prices
and price trends.
A28
Betterments, renewals, costs of bringing new mineral properties into production,
and the cost of major development programs at existing mines are capitalized as
mineral land. Maintenance, repairs, normal development costs at existing mines,
and gains or losses on assets retired or sold are reflected in earnings as
incurred. Buildings and equipment are depreciated on the straight-line method
over estimated lives from 5 to 40 years or the estimated life of the mine if
shorter. Depletion of mineral land is computed by the units-of-production method
using proven and probable ore reserves.
Exploration:
Tangible and intangible costs incurred in the search for mineral properties are
charged against earnings when incurred.
Hedging Activities:
Derivative instruments may be used to manage exposure to market risk from
changes in commodity prices, interest rates or the value of the Company's assets
and liabilities. Derivative instruments, which are designated as hedges, must be
deemed effective at reducing the risk associated with the exposure being hedged
and must be designated as a hedge at the inception of the contract.
The Company may purchase put options or create synthetic put options to reduce
or eliminate the risk of metal price declines below the option strike price on a
portion of its anticipated future production. The cost of options is amortized
on a straight-line basis during the period in which the options are exercisable.
Gains or losses from the sale or exercise of options, net of unamortized
acquisition costs, are recognized in the period in which the underlying hedged
production is sold.
Swap Agreements:
Fuel swap agreements limit the effect of changes in the price of fuel. The
differential to be paid or received as fuel prices change is recorded as a
component of cost of sales in the period the swap covers.
Stock-Based Compensation:
The Company applies the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Impact of New Accounting Standards:
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments and hedging activities.
Initially, the statement was to be effective in fiscal years beginning after
June 15, 1999. In June 1999, the FASB issued SFAS No. 137, which defers the
effective date of SFAS No.133 one year until June 15, 2000.
In June 2000 the FASB issued SFAS No.138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which amends the accounting and
reporting standards of SFAS No. 133 for certain derivative instruments and
certain hedging activities.
The Company will adopt SFAS No.133 and No.138 effective January 1, 2001 and its
implementation will not materially affect its results of operation or financial
condition.
2. Foreign Exchange
The functional currency of the Company is the U.S. dollar. The Company's sales,
cash, trade receivables, fixed asset additions, trade payables and debt are
primarily dollar-denominated. A portion of the operating costs of the Company is
denominated in Peruvian soles.
Gains and (losses) resulting from foreign currency transactions are included in
"Cost of sales" and amounted to ($2.9) million,($2.5) million, and ($3.0)
million in 2000, 1999 and 1998, respectively.
A29
3. Restructuring Charges
The Company's 1999 results include a $5.6 million pre-tax charge ($3.6 million
after-tax and workers' participations) for severance costs associated with the
Company's ongoing cost reduction program. The severance costs accrued are for
337 terminated employees at the Company's locations in Peru and Miami, Florida.
Approximately $3.8 million of the provision is included as a cost of sales
deduction on the Company's statement of earnings, and a $1.8 million is included
in administrative expense as it relates to non-operating personnel. This accrual
was paid in full in 1999.
4. Administrative Reorganization
The Company's 1999 results include a $8.4 million pre-tax charge ($5.4 million
after-tax and workers' participations) associated with the severance cost of
foreign contract employees early termination. The severance costs accrued are
for 55 terminated employees at the Company's location in Peru. Approximately
$5.8 million for the provision is included as cost of sales deduction on the
Company's statement of earnings and $2.6 million is included in administrative
expense as it relates to non-operating personnel. Payments in the amount of $4.6
and $2.9 million were made against this accrual in the years 2000 and 1999,
respectively.
5. Taxes on Income
The components of the provision for taxes on income are as follows:
For the years ended December 31, 2000 1999 1998
(in millions)
U.S. Federal and state
Current $0.5 $(2.5) $ 2.2
Deferred 1.0 0.6 0.5
-------------------------------------------------------
1.5 (1.9) 2.7
-------------------------------------------------------
Foreign:
Current 29.1 (9.5) 8.5
Deferred 14.0 21.1 14.4
-------------------------------------------------------
43.1 11.6 22.9
-------------------------------------------------------
Total provision for income taxes $44.6 $ 9.7 $25.6
=======================================================
Total taxes paid were $16.3 million, $1.2 million and $10.4 million in 2000,
1999 and 1998, respectively.
A30
Reconciliation of the statutory income tax rate to the effective income tax
rate is as follows:
For the years ended December 31, 2000 1999 1998
Peruvian income tax at maximum
statutory rates 30.0% 30.0% 30.0%
U.S. income tax at statutory rate 35.0 35.0 35.0
Utilization of foreign tax credits (22.7) (30.2) (20.8)
Percentage depletion (11.8) (5.2) (10.5)
Income not taxable in Peru 0.9 (1.8) (1.8)
Reversal of taxes previously accrued - (5.1) -
Other 0.6 2.2 (0.2)
-------------------------------------------------------------
Effective income tax rate 32.0% 24.9% 31.7%
=============================================================
Temporary differences and carryforwards which give rise to deferred tax assets,
liabilities and related valuation allowances are as follows:
Deferred tax assets (liabilities)
At December 31, 2000 1999
(in millions)
Current:
Accounts receivable $ 4.0 $ 4.0
Other 0.1 0.1
------------------- ------------------
Net deferred tax assets 4.1 4.1
------------------- ------------------
Non-current:
Foreign tax credit carryforwards 4.3 29.6
AMT credit carryforwards 13.6 12.2
Property, plant and equipment (93.7) (82.3)
Other (1.2) 2.4
Valuation allowance for deferred tax assets (17.9) (41.8)
------------------- ------------------
Net deferred tax liabilities (94.9) (79.9)
------------------- ------------------
Total net deferred tax liabilities $(90.8) $(75.8)
=================== ==================
The net deferred tax liabilities above reflect deferred tax assets of $55.7
million and $79.7 million, before valuation allowance, and deferred tax
liabilities of $128.6 and $113.6 million at December 31, 2000 and December 31,
1999, respectively.
The decrease in the valuation allowance of $24.0 million from 1999 to 2000 is
primarily attributable to both the utilization and expiration of foreign tax
credits in 2000.
At December 31, 2000, the foreign tax credit carryforward available to reduce
possible future U.S. income tax amounted to approximately $4.3 million expiring
as follows: $3.1 million in 2003 and $1.2 million in 2004. Foreign tax credit
carryforwards amounting to approximately $11.5 million expired in 2000. Foreign
tax credit carryforwards amounting to approximately $14.6 million were utilized
in 2000. Both of these amounts had previously been entirely offset by a
valuation allowance.
The Company has not recorded the benefit of foreign tax credit carryforwards
because of both the expiration dates and the rules governing the order in which
such credits are utilized. The Company also has not recorded a benefit for the
AMT credits, which are not available to reduce AMT. Because of limitations on
both percentage depletion and foreign tax credits under the AMT, the Company
expects an AMT liability for the foreseeable future. Thus, while such credits do
not expire, it is unlikely they will be utilized. Accordingly, a valuation
allowance has been established for the full amount of the foreign tax credit
carryforward and the AMT credit carryforward.
A31
On December 30, 2000, the transitory Peruvian government issued a decree that
included, among other things, a reduction in the statutory income tax rate for
reinvested earnings in 2001 and for all earnings after 2001, from 30% to 20%.
The Company may benefit from the reduction to the 2001 rate when the government
issues the necessary regulations to make this effective. To be effective for
years after 2001, the reduction to the Peruvian tax rate must be confirmed by
the government in late 2001. Accordingly, the Company has not reflected the
effect of such rate reductions on its recorded deferred tax liability.
The Company obtains income tax credits in Peru for value-added taxes paid in
connection with the purchase of capital equipment and other goods and services
employed in its operations and records these credits as a prepaid expense. Under
current Peruvian law, the Company is entitled to use the credits against its
Peruvian income tax liability or to receive a refund. The carrying value of
these Peruvian tax credits approximates their market value.
6. Net Sales
Net sales by country were as follows:
For the years ended December 31, 2000 1999 1998
---- ---- ----
(in millions)
United States $342.8 $155.0 $127.5
Italy 42.3 46.7 86.9
Switzerland 20.6 - -
United Kingdom 90.8 122.8 96.1
The Netherlands - - 57.7
Japan 76.0 52.4 44.7
Foreign - Other 138.6 207.6 215.0
-----------------------------------------------
Net sales $711.1 $584.5 $627.9
===============================================
At December 31, 2000, the Company had no copper sales recorded at provisional
prices.
Under the terms of a sales contract with Union Miniere as amended through
December 31, 1999, the Company is required to supply Union Miniere, through its
agent, S.A. Sogem N.V., with 16,300 tons of blister copper annually for a ten
year period from January 1, 2000 through December 31, 2009. The price of the
copper, contained in blister, supplied under the contract is determined based on
the LME monthly average settlement price, less a refining allowance, which is
negotiated annually.
Under the terms of a sales contract with Mitsui & Co. Ltd. (Mitsui), the Company
is required to supply Mitsui with 48,000 tons of copper cathodes annually for a
fifteen-year period through December 31, 2013. If the shipment destination is
Asia, the pricing of the cathodes is based upon the LME monthly average
settlement price, however, if destination of shipments is the United States, the
pricing of the cathodes is based upon the COMEX monthly average settlement plus
a producer premium, which is agreed upon annually based on world market terms.
Ninety thousand tons related to a prior contract (period 1994-2000) will be
supplied as follows: 48,000 in 2014 and 42,000 in 2015.
A32
7. Financial Instruments
Hedging Activities: The Company uses derivative instruments to manage its
exposure to market risk from changes in commodity prices. Derivative instruments
which are designated as hedges must be deemed effective at reducing the risk
associated with the exposure being hedged and must be designated as a hedge at
the inception of the contract.
Copper: Depending on the market fundamentals and other conditions, the Company
may purchase put options to reduce or eliminate the risk of price declines below
the option strike price on a portion of its anticipated future production. Put
options purchased by the Company establish a minimum sales price for the
production covered by such put options and permit the Company to participate in
price increases above the option price. The cost of options is amortized on a
straight-line basis during the period in which the options are exercisable.
Depending upon market conditions, the Company may either sell options it holds
or exercise the options at maturity. Gains or losses from the sale or exercise
of options, net of unamortized acquisition costs, are recognized in the period
in which the underlying production is sold and are reported as a component of
the underlying transaction.
Earnings include pre-tax gains from option sales and exercises of $7.2 million
in 1998. At December 31, 2000 and 1999, the Company held no copper put options.
Fuel Swaps: The Company may enter into fuel swap agreements to limit the effect
of increases in fuel prices on its production costs. A fuel swap establishes a
fixed price for the quantity of fuel covered by the agreement. The difference
between the published price for fuel and the price established in the contract
for the month covered by the swap is recognized in production costs. As of
December 31, 2000, the company had no fuel swap agreements
In 2000 and 1999, the Company's production cost would have been $18.8 million
and $10.7 million higher, respectively, if this exposure had not been hedged. In
1998 it would have been $3.3 million lower.
Foreign currency: The Company selectively uses foreign currency swaps to limit
the effects of exchange rate changes on future cash flow obligations denominated
in foreign currencies. A currency swap establishes a fixed dollar cost for a
fixed amount of foreign currency required at a future date. The Company has
entered into currency swap agreements on a portion of its capital cost
contracted in Euros.
As of December 31, 2000 and 1999, the Company had the following currency swap
agreements:
2000 US$ Euros Forward
Maturity Date (in millions) Exchange Rate
- ------------- ----------------------------- ----------------------
3/31/2001 2.6 2.3 1.1535
4/30/2001 3.3 2.9 1.1559
----------------------------
5.9 5.2
============================
1999 US$ Euros Forward
Maturity Date (in millions) Exchange Rate
- ------------- ----------------------------- ----------------------
1/31/2000 2.6 2.3 1.1189
7/31/2000 9.1 8.0 1.1341
10/31/2000 8.5 7.4 1.1419
12/29/2000 6.5 5.7 1.1467
3/31/2001 2.6 2.3 1.1535
4/30/2001 3.3 2.9 1.1559
-----------------------------
32.6 28.6
=============================
A33
The unrealized loss in the Company's currency swap position at December 31, 2000
was $1.1 million. A hypothetical 10% decrease from December 31, 2000 rates,
would increase the unrealized loss of currency swaps by $0.5 million. The
difference between the exchange rate of the Euro published at the end of month
and the exchange rate established in the contract, is recognized as an exchange
gain or loss in the profit and loss statement.
In 2000 a $4.8 million loss on currency swaps was recorded in the Company's
earnings results.
For certain of the Company's financial instruments, including cash and cash
equivalents, marketable securities, accounts receivables and accounts payable
the carrying amounts approximate fair value due to their short maturities.
Consequently, such financial instruments are not included in the following table
that provides information about the carrying amounts and estimated fair values
of other financial instruments:
At December 31, 2000 1999
-------------------- -------------------
(in millions) Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Fuel swap agreements -- -- -- $ 8.7
Currency swap agreements -- (1.1) -- (3.3)
Liabilities:
Long-term debt $347.2 $326.1 $222.5 $206.6
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Fuel swap agreements: Fair value is based on quoted market prices.
Currency swap agreements: Fair value is based on quoted market prices.
Long-term debt: Fair value is based on the quoted market prices for the same or
similar issues.
8. Workers' Participation
Provisions for workers' participation are calculated at 8% of pre-tax earnings
and are included in "Cost of sales" on the earnings statement. The current
portion of this participation, which is accrued during the year is based on
Branch taxable income and is distributed to workers following determination of
final results for the year.
9. Minority Interest of Investment Shares (Previously known as "Labor Shares")
The minority interest of the Investment Shares is based on the earnings of the
Company's Peruvian Branch.
The Company acquired 0.4 million, 0.8 million and 1.0 million investment shares
at a cost of $1.5 million, $3.4 million and $3.8 million in the years 2000, 1999
and 1998, respectively. The carrying value of the minority interest purchased
was reduced by $1.0 million, $2.1 million and $2.5 million in 2000, 1999 and
1998, respectively, and the excess paid over the carrying value was assigned
primarily to proven and probable sulfide and leachable ore reserves and
mineralized material and is being amortized based on production. As a result of
these acquisitions, the remaining investment shareholders hold a 1.5% interest
in the Branch at December 31, 2000, and are entitled to a pro rata participation
in the cash distributions made by the Branch. The investment shares are recorded
as a minority interest in the Company's financial statements.
A34
10. Inventories
At December 31, 2000 1999
---- ----
(in millions)
Metals:
Finished goods $1.9 $1.5
Work-in-process 46.0 48.7
Supplies, net of reserves 67.0 59.9
--------------- -----------------
Total inventories $114.9 $110.1
--------------- -----------------
11. Property
At December 31, 2000 1999
---- ----
(in millions)
Buildings and equipment $1,836.6 $1,825.2
Mineral land 421.5 395.6
Land, other than mineral 2.8 3.1
--------------- -----------------
Total property 2,260.9 2,223.9
Accumulated depreciation and depletion 962.8 973.0
--------------- -----------------
Net property $1,298.1 $1,250.9
=============== =================
12. Other Current Liabilities
At December 31, 2000 1999
---- ----
(in millions)
Accrued workers' participation $ 9.6 $ 0.6
Accrued severance pay, current portion 1.6 1.3
Salaries and wages 7.4 6.8
Taxes on income 19.8 20.4
Other 1.5 0.4
--------------- -----------------
Total other current liabilities $39.9 $29.5
=============== =================
13. Debt and Available Credit Facilities
Long-term debt at December 31, 2000 1999
---- ----
(in millions)
6.43% EXIM Bank credit agreement due 2001 $ 2.9 $ 8.7
10.04% CAF credit agreement due 2001 3.9 11.8
7.9% Secured Export Notes (SENS) due 2007 140.4 150.0
8.25% Corporate bonds due 2004 50.0 50.0
8.75% Corporate bonds due 2007 50.0 -
7.61% MITSUI credit agreement due 2013 100.0 2.0
--------------- -----------------
Total debt 347.2 222.5
Less, current portion 24.3 23.3
--------------- -----------------
Total long-term debt $ 322.9 $ 199.2
=============== =================
Interest paid by the Company (excluding amounts capitalized of $11.0 million,
$7.3 million and $10.6 million in 2000, 1999 and 1998, respectively) was $12.3
million, $15.3 million and $12.5 million in 2000, 1999 and 1998, respectively.
A35
Aggregate maturities of the borrowings outstanding at December 31, 2000, are as
follows (in millions):
2001 $24.3
2002 18.9
2003 20.5
2004 82.2
2005 34.0
Thereafter 167.3
--------------------
Total $ 347.2
--------------------
In July 2000, the Company received authorization from the Comision Nacional
Supervisora de Empresas y Valores (CONASEV) to issue the equivalent of up to
$200 million in bonds in the Peruvian market ("The Program"). Under this
program, on July 20, 2000, the Company issued $30 million at a nominal fixed
rate of 8.75%. On December 7, 2000 the Company issued an additional $20 million
at the same rate; in both cases, maturity is seven years.
In March 1999, the Company concluded a $100 million 15-year loan agreement with
Mitsui and Co., Ltd. The applicable interest for this loan is the LIBO rate plus
1.25%. This facility provides additional committed financing for SPCC's
modernization and expansion program. A commitment fee of 0.5% per annum is
payable on the undrawn portion of this loan. As of December 31, 2000, the loan
was fully drawn.
In 1997, the Company privately placed $150 million SENS in the United States and
international markets. These notes, which have been registered with the
Securities and Exchange Commission, have an average maturity of seven years and
a final maturity in 2007 and were priced at par with a coupon rate of 7.9%. In
addition, in 1997, the Company sold $50 million of bonds, due June 2004 to
investors in Peru. The bonds have an effective fixed interest rate of 8.25%.
In 1997, the Company entered into a $600 million seven-year credit agreement
with a group of international financial institutions. The agreement consists of
a $400 million term loan facility and a $200 million revolving credit facility.
The interest rate for years four and five of the agreement on any loans
outstanding is LIBOR plus 2.00% per annum for term loans and LIBOR plus 2.25%
for revolving credit loans. A commitment fee of 0.5% per annum is payable on the
undrawn portion of the facility. No amounts have been drawn under this agreement
as of December 31, 2000.
Some financing agreements contain covenants, which limit the payment of
dividends to stockholders. Under the most restrictive covenant, the Company may
pay dividends to stockholders equal to 50% of its net income for any fiscal
quarter as long as such dividends are paid by June 30 of the following year. As
a result, net assets of the Company unavailable for the payment of dividends
totaled $1.2 billion at December 31, 2000. In accordance with the most
restrictive covenant of the Company's loan agreements, additional indebtedness
of $844.4 million would have been permitted at December 31, 2000.
The Mitsui and Co., Ltd. credit agreement is collateralized by pledges of
receivables of 24,000 tons of copper per year. The EXIM Bank credit agreement is
collateralized by pledges of receivables from sales of 7,000 tons of copper per
year. Starting June 1, 2001 once the EXIM Bank loan is fully paid, these 7,000
tons will be pledged to Mitsui and Co., Ltd. under the credit agreement. The CAF
loan is collateralized by liens on the SX/EW facility. The SENS and the
seven-year loan facility require that most of the collections of export copper
sales be deposited into a trust account in the United States. Twenty percent of
these collections are used as collateral for the outstanding SENS with the
balance of the
A36
collections remitted directly to the Company. The excess funds in the collateral
account are remitted to the Company, if all financial requirements are met. As
part of these agreements, the Company must maintain three-month and six month
collection ratios, as defined (aggregate collections as a specified multiple of
debt service). Both facilities require escrow deposits of three months debt
service. In addition, certain of the agreements require the Company to maintain
a minimum stockholders' equity of $750 million, specified ratios of debt to
equity, current assets to current liabilities and an interest coverage test.
Reduction of ASARCO Incorporated's (ASARCO) voting interest in the Company to
less than a majority would constitute an event of default under two of the
financing agreements. The Company was in compliance with the various loan
covenants at December 31, 2000. Included in other assets at December 31, 2000
and 1999 are $17.9 million and $10.7 million, respectively, held in escrow
accounts as required by the Company's loan agreements. The funds will be
released from escrow as scheduled loan repayments are made.
14. Benefit Plans
The Company has a noncontributory defined benefit pension plan covering salaried
employees in the United States and certain employees in Peru. Benefits are based
on salary and years of service. The Company's funding policy is to contribute
amounts to the plans sufficient to meet the minimum funding requirements set
forth in the Employee Retirement Income Security Act of 1974, plus such
additional amounts as the Company may determine to be appropriate. Plan assets
are invested in commingled stock and bond funds.
Effective October 31, 2000 the Board of Directors amended the pension plan to
suspend the accrual of benefits.
The components of net periodic benefit costs are as follows:
For the years ended December 31, 2000 1999 1998
---- ---- ----
(in millions)
Service cost $ -- $ 0.5 $ 0.6
Interest cost 0.7 0.7 0.7
Expected return on plan assets (1.0) (0.9) (0.7)
Curtailment loss 1.1 - -
Amortization of prior service cost - 0.1 0.1
Amortization of transitional obligation - 0.2 0.2
--------------------------------------------------------
Net periodic benefit cost $ 0.8 $ 0.6 $ 0.9
========================================================
A37
The change in benefit obligation and plan assets and a reconciliation of funded
status are as follows:
At December 31, 2000 1999
(in millions)
Change in Benefit Obligation
Projected benefit obligation at beginning of year $ 10.5 $ 11.1
Service cost 0.1 0.5
Interest cost 0.7 0.7
Curtailment gain (loss) (1.3) --
Benefits paid (0.8) (0.6)
Actuarial gain (loss) 0.5 (1.2)
----------------------------
Projected benefit obligation at end of year $ 9.7 $ 10.5
============================
Change in Plan Assets
Fair value of plan assets at beginning of year $ 12.3 $ 11.2
Actual return on plan assets (0.6) 1.8
Benefits paid (0.8) (0.6)
Administrative expenses (0.1) (0.1)
----------------------------
Fair value of plan assets at end of year $ 10.8 $ 12.3
============================
Reconciliation of Funded Status
Funded status $ 1.1 $ 1.7
Unrecognized actuarial gain (1.5) (3.7)
Unrecognized transition obligation - 1.4
Unrecognized prior service cost - 1.0
----------------------------
Net amount reflected in consolidated
Balance Sheet $ (0.4) $ 0.4
============================
Weighted Average Assumptions:
Discount rate 7.75% 7.75%
Expected long-term rate of return on plan assets 8.0 % 8.0 %
Rate of Compensation Increase 4.0 % 4.0 %
Post-retirement Benefits:
The post-retirement health care plan for retired salaried employees eligible for
Medicare was adopted by the Company on May 1, 1996. Secondary coverage under the
Company's plan is available for all retired salaried employees who permanently
reside in the United States and who contribute amounts as defined by the plan.
The plan is unfunded.
Effective October 31,2000, the health care plan for retirees was terminated and
the Company informed retirees that they would be covered by the post-retirement
health care plan of ASARCO Incorporated, which offers substantially the same
benefits and requires the same contributions.
The components of net periodic benefit costs are as follows:
For the years ended December 31, 2000 1999 1998
(in millions)
Service cost $ 0.1 $ 0.1 $ 0.1
Interest cost 0.1 0.1 0.1
Curtailment loss 0.5 -- --
Amortization of prior service cost -- 0.1 0.1
-----------------------------------------
Net periodic benefit cost $ 0.7 $ 0.3 $ 0.3
=========================================
A38
The change in benefit obligation and plan assets and a reconciliation of funded
status are as follows:
At December 31,(in millions) 2000 1999
Change in Benefit Obligation
Benefit obligation at beginning of year $ 1.1 $ 1.2
Service cost -- 0.1
Interest cost 0.1 0.1
Plan amendments -- --
Curtailments (gain) loss 0.2 --
Benefits paid (0.1) (0.2)
Actuarial (gain) loss -- (0.1)
---------------------------------
Benefit obligation at end of year $ 1.3 $ 1.1
=================================
Reconciliation of Funded Status
Funded status $ (1.3) $(1.1)
Unrecognized actuarial (gain) loss -- (0.3)
Unrecognized prior service cost -- 0.6
---------------------------------
Postretirement benefit obligation $ (1.3) $(0.8)
=================================
Weighted-Average Assumptions
Discount rate 7.8% 7.8%
The annual assumed rate of increase in the per capita cost of covered benefits
(i.e., health care cost trend rate) is assumed to be 5%. The health care cost
trend rate assumption has a significant effect on the amounts reported. For
example, increasing the assumed health care cost trend rates by one percentage
point would increase the accumulated postretirement benefit obligation costs for
2000 by $0.1 million and the service and interest cost components of net
periodic postretirement benefit would have an insignificant change. Decreasing
the assumed health care cost trend rates by one percentage point in each year
would decrease the accumulated postretirement benefit obligation for 2000 by
$0.1 million and the service and interest cost components of net periodic
postretirement benefit costs would have an insignificant change.
A39
Employee Savings Plan:
The Company maintains an employee savings plan for employees working in the
United States and expatriate employees in Peru, which permits employees to make
contributions by payroll deduction pursuant to section 401(k) of the Internal
Revenue Code. The plan provides for a Company matching contribution equal to 50%
of the first 6% of employee contributions. In connection with the required
match, the Company's contributions charged against earnings were $0.02 million,
$0.1 million and $0.2 million in the years 2000, 1999 and 1998, respectively.
Effective November 15, 2000 the savings plan was terminated and no further
contributions from employees or the Company are accepted after that date. The
plan is awaiting a final letter of determination from the Internal Revenue
Service to proceed with the distribution of assets to plan participants.
15. Stockholders' Equity
Common Stock:
The stockholders of the Company at December 31, 2000 were:
Percent of
Total
Shares Number of
Shares
--------------- ---------------
Class A Common Shares:
Southern Peru
Holdings Corporation 43,348,949 54.2%
Cerro Trading Company, Inc. 11,378,088 14.2
Phelps Dodge Overseas Capital
Corporation 11,173,796 14.0
--------------- ---------------
--------------- ---------------
Total Class A 65,900,833 82.4
Common Shares 14,100,192 17.6
--------------- ---------------
Total 80,001,025 100.0%
--------------- ---------------
Class A common shares are entitled to five votes per share. Common shares are
entitled to one vote per share.
Stock Options:
The Company has two stockholder approved plans, a Stock Incentive Plan and a
Directors' Stock Award Plan. The Stock Incentive Plan provides for the granting
of nonqualified or incentive stock options, as defined under the Internal
Revenue Code of 1986, as amended, as well as for the award of restricted stock
and bonuses payable in stock. The price at which options may be granted under
the Stock Incentive Plan shall not be less than 100% of the fair market value of
the common stock on the date of grant in the case of incentive stock options, or
50% in the case of other options. In general, options are not exercisable for
six months and expire after 10 years from the date of grant.
Options granted may provide for Stock Appreciation Rights (SAR). A SAR permits
an optionee, in lieu of exercising the option, to receive from the Company
payment of an amount equal to the difference between the market value of the
stock on the date of election of the SAR and the purchase price of the stock
under the terms of the option.
The authorized number of shares under the Stock Incentive Plan is 1,000,000 of
which 300,000 may be awarded as restricted stock. At December 31, 2000, 645,060
shares are available for future grants under this plan (645,060 shares at
December 31, 1999). The weighted average remaining contractual life of stock
option's outstanding as of December 31, 2000 was 6.1 years.
A40
The Directors' Stock Award Plan provides that directors who are not compensated
as employees of the Company will be automatically awarded 200 shares of common
stock upon election and 200 additional shares following each annual meeting of
stockholders thereafter. Under the directors' plan, 100,000 shares have been
reserved for awards. At December 31, 2000, 16,800 have been awarded under this
plan.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost has
been recognized for awards under the stock incentive plan. If compensation cost
for the Company's Stock Incentive Plan had been determined based on the fair
value at the grant date for awards in 2000, 1999 and 1998, consistent with the
provisions of SFAS No. 123, the Company's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below:
(in millions, except per share amounts)
2000 1999 1998
---- ---- ----
Net earnings - as reported $92.9 $29.4 $54.6
Net earnings - pro forma $92.9 $29.1 $54.4
Earnings per share (Basic and diluted) - as reported
$1.16 $0.37 $0.68
Earnings per share (Basic and diluted) - pro forma
$1.16 $0.36 $0.68
For purposes of computing earnings per share, basic and diluted, the dilutive
effect of stock options on common shares outstanding is as follows:
Weighted average common shares outstanding: 2000 1999 1998
(in millions)
Basic and diluted 80.0 79.9 79.9
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 1999: dividend yield of nil (4.8%-1998); expected volatility of 48.0%
(40.4%-1998); risk-free interest rate of 4.8% (5.6%-1998); and expected life of
6.1 years (7.1 years-1999, 7.1 years-1998). There were no options granted in
2000.
Stock option activity over the past three years under the Stock Incentive Plan
was:
Weighted
Number of Average Option Price
Shares Price (Range Per Share)
------------------ ------------------ -----------------
Outstanding at January 1, 1998 155,785 $16.20 $16.06 to $17.06
Granted 102,025 12.78 12.78
Exercised (5,915) -- --
Cancelled or expired (960) 16.16 16.06 to 16.25
------------------
Outstanding at January 1, 1999 250,935 14.88 12.78 to 17.06
Granted 92,550 9.75 8.78 to 14.37
Exercised (141,865) 10.99 8.78 to 14.37
Cancelled or expired (36,780) 12.38 8.78 to 16.25
------------------
Outstanding at January 1, 2000 164,840 15.28 8.78 to 17.06
Granted --
Exercised (3,235) 14.07 8.78 to 16.19
Cancelled or expired (2,220) 11.27 8.78 to 16.25
------------------
Outstanding and exercisable at
December 31, 2000 159,385 $15.30 $8.78 to $17.06
16. Related Party Transactions
Grupo Mexico, whose subsidiary, Southern Peru Holdings Corporation is a 54.2%
stockholder of the Company, provides advice and services encompassing legal
advice
A41
on corporate matters, including shareholder and board meetings, advice on
financing, refinancing and other financial matters, preparation of outside
finance reports, services in all matters related to Human Resources, services
for engineering and construction, services for purchasing, procurement and
logistics, advice for international sales and for development of new projects to
the Company. In 2000, the Company paid to Grupo Mexico $7.0 million for these
services. In 1999 and 1998 the Company paid to ASARCO, 54.2% stockholder at the
time, for tax, treasury and administrative support services provided to the
Company, $0.8 million and $1.0 million respectively.
Minera Mexico International, Inc., a subsidiary of Grupo Mexico and Asarco,
purchased copper products from SPCC during 2000 in the amount of $26.7 million.
Asarco had no purchases from SPCC in 1999 and $14.6 million in purchases of
copper products in 1998.
Phelps Dodge Refining Corporation, an affiliate of Phelps Dodge and Phelps Dodge
Corporation, affiliated companies of a shareholder of SPCC, purchased copper
products from the Company in the amount of $68.3 million in 2000. Phelps Dodge
had no purchases from SPCC in 1999 and $4.1 million in purchases of copper
products in 1998.
Cerro Wire & Cable Co. and other affiliated companies of The Marmon Group, Inc.,
an affiliated company of one of the shareholders of SPCC purchased copper
products from the Company during 2000 in the amount of $13.2 million. There were
no copper purchases in 1999 and in 1998.
The Company purchases ocean shipping services from companies indirectly
controlled by QUEMCHI S.A. Its Vice Chairman is also a director of SPCC. The
total cost of these services amounted to $7.8 million, $8.3 million and $11.5
million in 2000, 1999 and 1998, respectively.
17. Concentration of Risk
The Company operates two copper mines, a smelter and two refineries in Peru and
substantially all of its assets are located there. There can be no assurances
that the Company's operations and assets that are subject to the jurisdiction of
the Government of Peru may not be adversely affected by future actions of such
government. Substantially all of the Company's products are exported from Peru
to customers principally in Europe, Asia, South America and the United States.
Financial instruments, which potentially subject the Company to a concentration
of credit risk, consist primarily of cash and cash equivalents, marketable
securities and trade accounts receivable.
The Company invests or maintains available cash with various high-quality banks,
principally in the U.S., Canada and Peru, or in commercial paper of highly rated
companies. As part of its cash management process, the Company regularly
monitors the relative credit standing of these institutions, and by policy,
limits the amount of credit exposure to any one institution. At December 31,
2000, the Company had invested 33.63% of its cash equivalents and marketable
securities with Peruvian banks, out of which 42.32% was invested with one
institution.
During the normal course of business, the Company provides credit to its
customers. Although the receivables resulting from these transactions are not
collateralized, the Company has not experienced significant problems with the
collection of receivables.
The largest ten trade receivable balances accounted for 70.6% of the trade
accounts receivable at December 31, 2000, of which one customer represented
18.9%.
18. Commitments and Contingencies
In September 1996, the Company announced a two-stage project which includes an
expansion of the Cuajone mine and an expansion and modernization of the copper
smelter at Ilo. At present, total capital cost for this project is estimated at
$870 million, budgeted to be spent through the year 2006.
The Cuajone mine expansion was completed in 1999. Additional equipment was
received during year 2000.
The second stage of the program, the expansion and modernization of the Ilo
smelter, is expected to be completed by the year 2006 at an estimated cost of
$672 million.
As a result of the expansion program, electric power requirements will increase
significantly, requiring the construction of substantial additional generating
capacity. In 1997, the Company sold its existing power plant to an independent
power company for $33.6 million. In connection with the sale, a power purchase
A42
agreement was also completed, under which the Company agreed to purchase its
power needs for the next twenty years.
Environmental:
Company activities are subject to Peruvian laws and regulations. SPCC submitted
in 1996 the Environmental Compliance and Management Plan (known by its Spanish
acronym, PAMA) to the Peruvian Government as part of such regulations. The PAMA
included all current operations that did not have an approved environmental
impact study at the time. SPCC's PAMA was approved in January 1997 and it
contains 32 mitigation measures and projects necessary to bring the existing
operations to the established environmental standards. By the end of year 2000,
sixteen of such projects were already completed.
The Smelter Expansion and Modernization Project represents the largest and most
significant project in which the Company will embark itself in the next few
years. Both options under consideration comply with the Company's requirements.
That is, to employ proven technology that will provide both a good economic
return and exceed the requirements of current environmental regulations. The
alternatives may provide an opportunity to increase the smelter's capacity
beyond the 1.1 million metric tons originally proposed and improve SO2 capture
to more than the PAMA's 92% requirement.
Starting in November of 1995, Southern Peru established and continues to operate
the Supplementary Control Program (SCP), a voluntary effort, by which the
smelter production is curtailed during periods of adverse meteorological
conditions. For the year 2000, in conjunction with the operation of the
smelter's sulfuric acid plant that produced over 326,000 metric tons, this
program has contributed to improve air quality in Ilo. In addition to the
environmental programs dealing with air quality issues, the Company continues to
have good results with the remediation programs in both Ite bay and the slag
removal program on the beaches to the north of the smelter.
At the end of the year, SPCC submitted to the government the Spill Response
Plans for the three operating areas. Both ocean and land response equipment has
been purchased, and personnel training will continue during 2001.
Environmental capital expenditures for the period 1996-2000 exceeded $120
million. The Company foresees significant environmental capital expenditures
starting in 2001, once the Smelter Expansion and Modernization Project begins.
Litigation:
In April 1996, the Company was served with a complaint filed in Peru by
approximately 800 former employees seeking the delivery of substantial number of
investment shares (formerly called "labor shares") of its Peruvian Branch plus
dividends. In October 1997, the Superior Court of Lima nullified a decision of a
court of first instance, which had been adverse to the Company. The Superior
Court remanded the case for a new trial. Plaintiffs filed an extraordinary
appeal before the Peruvian Supreme Court. The Supreme Court may grant
discretionary review in limited cases. In March 1999, the Company received
official notification that the Superior Court had denied plaintiffs'
extraordinary appeal and affirmed the decision of the Supreme Court of Lima,
which remanded the case to the lower court for further proceedings. In December
1999, the lower court decided against the Company, ordering the delivery of the
investment shares and dividends to the plaintiffs. The Company appealed this
decision in January 2000. On October, 10, 2000, the Superior Court of Lima
affirmed the lower court's decision which had been adverse to the Company. The
Company has filed an extraordinary appeal before the Peruvian Supreme Court. The
Supreme Court may grant discretionary review in limited cases.
There is also pending against the Company a similar lawsuit filed by 127
additional former employees. In the third quarter of 1997, the court of first
instance dismissed their complaint. Upon appeal filed by the plaintiffs, the
A43
Superior Court of Lima, in the third quarter of 1998, nullified the lower
court's decision on technical ground and remanded the case to the lower court
for further proceedings. In December 1999, the lower court dismissed the
complaint against the Company. Plaintiffs appealed this decision in January 2000
before the Superior Court. By the end of year 2000 the Superior Court rejected
the appeal. Plaintiffs have filed an extraordinary appeal before the Supreme
Court. The Supreme Court may grant discretionary review in limited cases.
On December 28, 2000, a lawsuit was filed against the Company in federal court
in New York City. The lawsuit seeks unspecified compensatory and punitive
damages for alleged personal injuries to eight persons resident in Peru arising
from alleged releases into the environment from the Company's operations in
Peru. The lawsuit is similar to a suit filed in 1995 in Texas, which was
dismissed in 1996 by a U. S. district judge. That ruling was affirmed
unanimously by a three-judge federal appeals court. The court made it clear that
the claims of Peruvian residents should be tried in the courts of Peru, not in
the United States.
It is the opinion of management that the outcome of the legal proceedings
mentioned, as well as other miscellaneous litigation and proceedings now
pending, will not materially adversely affect the financial position of the
Company and its consolidated subsidiaries. However, it is possible that
litigation matters could have a material effect on quarterly or annual operating
results, when they are resolved in future periods.
A44
Report of Independent Accountants
To the Board of Directors and Stockholders
of Southern Peru Copper Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, cash flows and changes in stockholders'
equity present fairly, in all material respects, the financial position of
Southern Peru Copper Corporation and its subsidiaries (the "Company") at
December 31, 2000, and the results of their operations and their cash flows for
the year ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
ARTHUR ANDERSEN, LLP
Phoenix, Arizona
January 24, 2001
A45
Report of Independent Accountants
To the Board of Directors and Stockholders of Southern Peru Copper Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of earnings, cash flows and changes in stockholders'
equity present fairly, in all material respects, the financial position of
Southern Peru Copper Corporation and its subsidiaries (the "Company") at
December 31, 1999 and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above. We have not audited the consolidated financial
statements of the Company for any period subsequent to December 31, 1999.
PricewaterhouseCoopers LLP
Denver, Colorado
March 10, 2000
A46
Unaudited Quarterly Data
Quarters
(in millions, except per share data)
2000 1999
---- ----
1st 2nd 3rd 4th Year 1st 2nd 3rd 4th Year
=======================================================================================================
Net sales $ 163.1 $ 157.0 $ 185.1 $ 205.9 $ 711.1 $ 123.9 $ 132.4 $ 156.1 $ 172.1 $ 584.5
Operating
Income $ 26.7 $ 29.3 $ 44.8 $ 48.8 $ 149.6 $ 6.4 $ 7.1 $ 18.6 $ 13.4 $ 45.6
Net earnings $ 16.5 $ 18.0 $ 27.8 $ 30.6 $ 92.9 $ 4.0 $ 3.6 $ 12.1 $ 9.7 $ 29.4
Net earnings per share:
Basic and diluted $ 0.21 $ 0.22 $ 0.35 $ 0.38 $ 1.16 $ 0.05 $ 0.05 $ 0.15 $ 0.12 $ 0.37
Dividend per share $ 0.06 $ 0.05 $ 0.056 $ 0.174 $ 0.34 $ 0.03 $ 0.025 $ 0.022 $ 0.075 $ 0.152
Stock prices
New York Stock Exchange:
High $16-7/16 $ 13 $15-7/8 $15-1/2 $16-7/16 $ 10-7/8 $ 15 $16-7/8 $18-1/16 $18-1/16
Low $12-9/16 $ 11 $11-5/16 $12-1/4 $ 11 $ 8-7/16 $10-1/16 $13-5/8 $13-13/16 $8-7/16
Lima Stock Exchange:
High $ 16.16 $ 12.95 $ 15.84 $ 15.30 $ 16.16 $ 10.66 $ 15.08 $ 16.95 $ 17.45 $ 17.45
Low $ 12.52 $ 11.00 $ 11.35 $ 12.40 $ 11.00 $ 8.78 $ 10.12 $ 13.80 $ 14.01 $ 8.78
Metal Price Sensitivity
Assuming that expected metal production and sales are achieved, that tax rates
are unchanged, that the number of shares outstanding is unchanged, and giving no
effect to hedging programs or changes in the costs of production, metal price
sensitivity factors would indicate the following estimated change in earnings
per share resulting from metal price changes in 2001. Estimates are based on
80.0 million shares outstanding.
Copper Silver Molybdenum
Change in Metal Price $0.01/lb. $1.00/oz. $1.00/lb.
Annual Change in Earnings
per Share $0.06 $0.03 $0.11
A47
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On February 25, 2000, the Board of Directors of the Company selected Arthur
Andersen L.L.P. to serve as independent accountants for the Company for the
calendar year 2000. Stockholders approved the proposal at the annual meeting of
stockholders held on May 9, 2000.
PART III
Items 10, 11, 12, and 13
Reference is made to the Section captioned "Executive Officers of the
Registrant" on pages A-12 to A-13. Information in response to the disclosure
requirements specified by these items appears under the captions and pages of
the 2000 Proxy Statement indicated below:
Proxy
Statement
Item Required Information Proxy Statement Section Pages
- ---- -------------------- ----------------------- -----
10. Directors and Executive Nominees for Election as Directors
Officers Representing Common Stock and
Nominees for Election as
Directors Representing
Class A Common Stock 4-6
11. Executive Compensation Committee Reports on Executive
Compensation through Employment
Agreements 9-14
Compensation of Directors 17
12. Security Ownership Security Ownership of Certain
Beneficial Owners and Beneficial
Ownership of Management 7-9
13. Certain Relationships Certain Transactions 16
and Related Transactions
The information referred to above is incorporated herein by reference.
A48
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
The following financial statements of Southern Peru Copper Corporation and
its subsidiaries are included at the indicated pages of the document as stated
below:
Form
10 - K
Pages
-----
Consolidated Statement of Earnings for the years ended
December 31, 2000 1999 and 1998 A23
Consolidated Balance Sheet at December 31, 2000 and 1999 A24
Consolidated Statement of Cash Flows for the years ended
December 31, 2000 1999 and 1998 A25
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 2000 1999 and 1998 A26
Notes to Consolidated Financial Statements A27 - A43
Report of Independent Accountants A44
2. Financial Statement Schedules
Financial Statement Schedules are omitted, as they are not required or are
not applicable, or the required information is shown in the financial statements
or notes thereto.
3. Exhibits
3.1 Restated Certificate of Incorporation, filed December 29, 1995
3.2 Certificate of Decrease, filed February 29, 1996
3.3 Certificate of Increase, filed February 29, 1996
3.4 Certificate of Decrease, filed March 24, 1997
3.5 Certificate of Increase, filed March 24, 1997
3.6 By-Laws, as last amended on February 3, 1998
4.1 Indenture, dated as of May 30, 1997, among Southern Peru Limited,
Southern Peru Copper Corporation, as guarantor, and Citibank, N.A.,
as Trustee.
4.2 Supplemental Indenture, dated as of May 30, 1997, among Southern
Peru Limited, Southern Peru Copper Corporation, as guarantor, and
Citibank, N.A., as Trustee.
4.3 Form of Amended and Restated Collateral Trust Agreement, dated as of
July 15, 1997, between Southern Peru Limited and Deutsche Bank AG,
New York Branch, as collateral trustee.
4.4 Form of Series A-1 Secured Export Notes due 2007.
4.5 Supplemental Indenture, dated as of October 15, 1998 among Southern
Peru Limited, Southern Peru Copper Corporation as guarantor, and
Citibank, N.A., as Trustee.
4.6 Supplemental Indenture, dated as of December 22, 1998 between
A49
Southern Peru Copper Corporation and Citibank, N.A. as Trustee.
10.1 Form of Agreement Among Certain Stockholders of the Company.
10.2 Tax Stability Agreement, dated August 8, 1994, between the
Government of Peru and the Company regarding SX/EW facility (and
English translation)
10.3 Incentive Compensation Plan of the Company.
10.4 Supplemental Retirement Plan of the Company, as amended and restated
as of November 4, 1999. Effective as of October 31, 2000, the
Supplemental Retirement Plan was terminated.
10.5 Stock Incentive Plan of the Company.
10.6 Form of Directors Stock Award Plan of the Company.
10.7 Deferred Fee Plan for Directors, as amended and restated as of
November 4, 1999.
10.8 Form of Agreement Accepting Membership in the Plan, containing text
of Retirement Plan and Trust for Selected Employees.
10.9 Compensation Deferral Plan, as amended and restated as of November
4, 1999. Effective as of October 31, 2000, the Compensation Deferral
Plan was terminated.
10.10 Credit Agreement dated as of March 31, 1997 among Southern Peru
Limited, as Borrower, Southern Peru Copper Corporation, as
Guarantor, the several banks and other financial institutions from
time to time parties to the Credit Agreement, Morgan Guaranty Trust
Company of New York, as Administrative Agent, The Chase Manhattan
Bank, as Documentation Agent, Citicorp Securities, Inc., as
Syndication Agent, and Deutsche Bank AG, New York Branch, as
Security and Collateral Agent.
10.11 First Amendment to the Credit Agreement, dated July 14, 1997.
10.12 Assignment and Assumption Agreement dated as of December 30, 1998,
between Southern Peru Copper Corporation, a Delaware Corporation,
and Southern Peru Limited.
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Accountants (Arthur Andersen, LLP).
23.2 Consent of Independent Accountants (PricewaterhouseCoopers, LLP).
The exhibits listed as 10.4 through 10.9 above are the management contracts or
compensatory plans or arrangements required to be filed pursuant to Item 14(c)
of Form 10-K.
(B) Reports on Form 8-K filed in the fourth quarter of 2000 and the first
quarter of 2001:
None
(C) Exhibits - The exhibits to this Form 10-K are listed on the Exhibit Index
on page B1 through B3. Copies of the following exhibits are filed with
this Form 10-K:
21.1 Subsidiaries of the Company
23.1 Consent of Independent Accountants (Arthur Andersen, LLP).
23.2 Consent of Independent Accountants (PricewaterhouseCoopers, LLP).
Copies of exhibits may be acquired upon written request to the Secretary and the
payment of processing and mailing costs.
A50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York.
SOUTHERN PERU COPPER CORPORATION
(Registrant)
By: /s/ Oscar Gonzalez Rocha
-----------------------------
Oscar Gonzalez Rocha
President and Director
Date: March 29, 2001
Pursuant to requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
/s/ German Larrea Mota-Velasco Chairman of the Board, Chief Executive
- ------------------------------ Officer and Director (principal
German Larrea Mota-Velasco executive Officer)
/s/ Oscar Gonzalez Rocha President and Director
- ------------------------------
Oscar Gonzalez Rocha
/s/ Daniel Tellechea Salido Vice President, Finance and Director
- ------------------------------ (principal financial officer)
Daniel Tellechea Salido
/s/ Ernesto Duran Trinidad Comptroller (principal accounting
- ------------------------------ officer)
Ernesto Duran Trinidad
DIRECTORS
/s/ Everet E. Briggs /s/ Manuel Calderon Cardenas
- ------------------------------ -----------------------------------
Everett E. Briggs Manuel Calderon Cardenas
/s/ Jaime Claro /s/ Robert A. Pritzker
- ------------------------------ -----------------------------------
Jaime Claro Robert A. Pritzker
/s/ Genaro Larrea Mota-Velasco /s/ J. Steven Whisler
- ------------------------------ -----------------------------------
Genaro Larrea Mota-Velasco J. Steven Whisler
/s/ Hector Calva Ruiz /s/ Manuel J. Iraola
- ------------------------------ -----------------------------------
Hector Calva Ruiz Manuel J. Iraola
/Xavier Garcia de Quevedo
- ------------------------------
Xavier Garcia de Quevedo
/s/ John F. McGillicudy
- ------------------------------
John F. McGillicuddy
/s/ Alberto de la Parra Zavala
- -------------------------------
Alberto de la Parra Zavala
Date: March 29, 2001
B1
Southern Peru Copper Corporation
Exhibit Index
Sequential
Exhibit Page
Number Document Description Number
- ------ -------------------- ------
3. Certificate of Incorporation and By-Laws
3.1 Restated Certificate of Incorporation, filed December 29, 1995
(Filed as Exhibit 3.1 to the Company's 1995 Annual Report on Form
10-K and incorporated herein by reference)
3.2 Certificate of Decrease, filed February 29, 1996 (Filed as Exhibit
3.2 to the Company's 1995 Annual Report on Form 10-K and
incorporated herein by reference)
3.3 Certificate of Increase, filed February 29, 1996 (Filed as Exhibit
3.3 to the Company's 1995 Annual Report on Form 10-K and
incorporated herein by reference)
3.4 Certificate of Decrease, filed March 24, 1997 (Filed as Exhibit 3.6
to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997 and incorporated herein by reference)
3.5 Certificate of Increase, filed March 24, 1997 (filed as Exhibit 3.5
to the Company's Quarterly Report for the quarter ended March 31,
1997 and incorporated herein by reference)
3.6 By-Laws, as last amended on February 3, 1998
4. Instruments Defining Rights of Security Holders
4.1 Indenture, dated as of May 30, 1997, among Southern Peru Limited,
Southern Peru Copper Corporation, as guarantor, and Citibank, N.A.,
as Trustee. (Filed as Exhibit 4.1(a) to the Company's Registration
Statement on Form S-4, as amended by Amendment No. 1 thereto, File
No. 333-34505, and incorporated herein by reference)
4.2 Supplemental Indenture, dated as of May 30, 1997, among Southern
Peru Limited, Southern Peru Copper Corporation, as guarantor, and
Citibank, N.A., as Trustee. (Filed as Exhibit 4.1(b) to the
Company's Registration Statement on Form S-4, as amended by
Amendment No. 1 thereto, File No. 333-34305, and incorporated herein
by reference)
4.3 Form of Amended and Restated Collateral Trust Agreement, dated as of
July 15, 1997, between Southern Peru Limited and Deutsche Bank AG,
New York Branch, as collateral trustee. (Filed as Exhibit 4.1(c) to
the Company's Registration Statement on Form S-4, as amended by
Amendment No. 1 thereto, File No. 333-34305, and incorporated herein
by reference)
B2
Southern Peru Copper Corporation
Exhibit Index
Sequential
Exhibit Page
Number Document Description Number
- ------ -------------------- ------
4.4 Form of Series A-1 Secured Export Notes due 2007 (Filed as Exhibit
4.1(d) to the Company's Registration Statement on Form S-4, as
amended by Amendment No. 1 thereto, File No. 333-34305, and
incorporated herein by reference)
4.5 Supplemental Indenture, dated as of October 15, 1998 among Southern
Peru Limited, Southern Peru Copper Corporation as guarantor, and
Citibank, N.A., as Trustee (Filed as Exhibit 4.5 to the Company's
1998 Annual Report on Form 10-K and incorporated herein by
reference)
4.6 Supplemental Indenture, dated as of December 22, 1998 between
Southern Peru Copper Corporation and Citibank, N.A., as Trustee
(Filed as Exhibit 4.6 to the Company's 1998 Annual Report on Form
10-K and incorporated herein by reference)
10. Material Contracts
10.1 Form of Agreement Among Certain Stockholders of the Company (Filed
as Exhibit 10.1 to the Company's Registration Statement on Form S-4,
as amended by Amendments No. 1 and 2 thereto, File No 33-97790 (the
"Form S-4"), and incorporated herein by reference)
10.2 Tax Stability Agreement, dated August 8, 1994, between the
Government of Peru and the Company regarding SX/EW facility (and
English translation) (Filed as Exhibit 10.3 to the Company's Form
S-4 and incorporated herein by reference)
10.3 Incentive Compensation Plan of the Company (Filed as Exhibit 10.11
to the Company's Form S-4 and incorporated herein by reference)
10.4 Supplemental Retirement Plan of the Company, as amended and restated
as of November 4, 1999 (Filed as Exhibit 10.4 to the Company's 1999
Annual Report on Form 10-K and incorporated herein by reference).
Effective as of October 31, 2000, the Supplemental Retirement Plan
was terminated.
10.5 Stock Incentive Plan of the Company (Filed as an Exhibit to the
Company's Registration Statement on Form S-8 dated March 25, 1996
(Registration No. 333-2736) and incorporated herein by reference)
10.6 Form of Directors Stock Award Plan of the Company (Filed as Exhibit
10.16 to the Company's Form S-4 and incorporated herein by
reference)
B3
Sequential
Exhibit Page
Number Document Description Number
- ------ -------------------- ------
10.7 Deferred Fee Plan for Directors, as amended and restated as of
November 4, 1999 (Filed as Exhibit 10.7 to the Company's 1999 Annual
Report on Form 10-K and incorporated herein by reference)
10.8 Form of Agreement Accepting Membership in the Plan, containing text
of the Retirement Plan and Trust for Selected Employees (Filed as
Exhibit 10.17 to the Company's Form S-4 and incorporated herein by
reference).
10.9 Compensation Deferral Plan, as amended and restated as of November
4, 1999 (Filed as Exhibit 10.9 to the Company's 1999 Annual Report
on Form 10-K and incorporated herein by reference). Effective as of
October 31, 2000, the Compensation Deferral Plan was terminated.
10.10 Credit Agreement dated as of March 31, 1997 among Southern Peru
Limited, as Borrower, Southern Peru Copper Corporation, as
Guarantor, several banks and other financial institutions from time
to time parties to the Credit Agreement, Morgan Guaranty Trust
Company of New York, as Administrative Agent, The Chase Manhattan
Bank, as Documentation Agent, Citicorp Securities, Inc., as
Syndication Agent, and Deutsche Bank AG, New York Branch, as
Security and Collateral Agent. (Filed as Exhibit 10.9 to the
Company's Registration Statement on Form S-4, File No. 333-3405, and
incorporated herein by reference).
10.11 First Amendment to the Credit Agreement, dated July 14, 1997. (Filed
as Exhibit 10.10 to the Company's Registration Statement on Form
S-4, File No. 333-34305, and incorporated herein by reference)
10.12 Assignment and Assumption Agreement dated as of December 30, 1998
between Southern Peru Copper Corporation, a Delaware Corporation,
and Southern Peru Limited. (Filed as Exhibit 10.12 to the Company's
1998 Annual Report on Form 10-K and incorporated herein by
reference).
21.1 Subsidiaries of the Company B4
23.1 Consent of Independent Accountants (Arthur Andersen, LLP) B5
23.2 Consent of Independent Accountants (PricewaterhouseCoopers, LLP) B6