SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 1999 Third Quarter FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 1999 Commission file number 1-14066 SOUTHERN PERU COPPER CORPORATION (Exact name of registrant as specified in its charter) Delaware 13-3849074 (State or other jurisdiction of (I.R.S Employer incorporation or organization) Identification No.) 180 Maiden Lane, New York, N.Y. 10038 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 212-510-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ As of October 31, 1999 there were outstanding 14,018,862 shares of Southern Peru Copper Corporation common stock, par value $0.01 per share. There were also outstanding 65,900,833 shares of Southern Peru Copper Corporation Class A common stock, par value $0.01 per share.
<TABLE> Southern Peru Copper Corporation Southern Peru Copper Corporation and Subsidiaries <CAPTION> INDEX TO FORM 10-Q Page No. Part I. Financial Information: <S> <C> Item 1. Financial Statements (unaudited) Condensed Consolidated Statement of Earnings Three Months and Nine Months Ended September 30, 1999 and 1998 2 Condensed Consolidated Balance Sheet September 30, 1999 and December 31, 1998 3 Condensed Consolidated Statement of Cash Flows Three Months and Nine Months Ended September 30, 1999 and 1998 4 Notes to Condensed Consolidated Financial Statements 5-6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-13 Report of Independent Accountants 14 Part II. Other Information: Item 6 Exhibit and Report on Form 8-K 15 Signatures 16 Exhibit 15 - Independent Accountants' Awareness Letter </TABLE> 1
<TABLE> Southern Peru Copper Corporation <CAPTION> and Subsidiaries CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (unaudited) 3 Months Ended 9 Months Ended September 30, September 30, 1999 1998 1999 1998 (in thousands, except for per share data) Net sales: <S> <C> <C> <C> <C> Stockholders and affiliates $ - $ 6,680 $ - $ 19,056 Others 156,086 167,107 412,404 459,664 Total net sales 156,086 173,787 412,404 478,720 Operating costs and expenses: Cost of sales 105,816 117,386 290,928 328,920 Administrative and other expenses 11,585 9,774 31,111 34,491 Depreciation and depletion 18,017 15,145 53,675 44,523 Exploration expense 2,085 1,252 4,551 3,419 Total operating costs and expenses 137,503 143,557 380,265 411,353 Operating income 18,583 30,230 32,139 67,367 Interest income 1,729 3,626 6,947 12,610 Other income 1,021 212 2,663 8,940 Interest expense (4,089) (4,214) (13,589) (12,458) Earnings before taxes on income and minority interest of labor shares 17,244 29,854 28,160 76,459 Taxes on income 5,173 9,553 8,447 24,467 Minority interest of labor shares in income of Peruvian Branch (10) 410 1 808 Net earnings $12,081 $ 19,891 $ 19,712 $ 51,184 Per common share amounts: Net earnings - basic and diluted $0.15 $ 0.25 $0.25 $ 0.64 Dividends paid $ 0.022 $ 0.11 $ 0.077 $ 0.39 Weighted average common shares outstanding: Basic 79,870 79,850 79,865 79,936 Diluted 79,910 79,859 79,884 79,943 The accompanying notes are an integral part of these financial statements. </TABLE> 2
<TABLE> Southern Peru Copper Corporation and Subsidiaries <CAPTION> CONDENSED CONSOLIDATED BALANCE SHEET (unaudited) September 30, December 31, 1999 1998 (in thousands) ASSETS <S> <C> <C> Cash and cash equivalents $ 102,854 $ 175,948 Marketable securities - 22,152 Accounts receivable, net 65,526 64,561 Inventories 101,986 88,951 Other assets 57,232 58,450 Total current assets 327,598 410,062 Net property 1,193,983 1,088,557 Other assets 26,248 27,218 Total Assets $1,547,829 $1,525,837 LIABILITIES Current liabilities: Current portion of long-term debt $ 19,108 $ 13,683 Accounts payable 54,575 48,497 Accrued liabilities 38,393 34,836 Total current liabilities 112,076 97,016 Long-term debt 210,258 220,525 Deferred credits 9,305 15,722 Deferred income taxes 66,901 56,700 Other liabilities 12,282 10,951 Total non-current liabilities 298,746 303,898 Minority interest of labor shares in the Peruvian Branch 14,853 16,331 STOCKHOLDERS' EQUITY Common stock (a) 261,363 261,363 Retained earnings 860,791 847,229 Total Stockholders' Equity 1,122,154 1,108,592 Total Liabilities, Minority Interest & Stockholders' Equity $1,547,829 $1,525,837 (a) Common shares: Authorized 34,099 34,099 Outstanding 13,969 13,950 Class A common shares Authorized and Outstanding 65,901 65,901 The accompanying notes are an integral part of these financial statements. </TABLE> 3
<TABLE> Southern Peru Copper Corporation and Subsidiaries <CAPTION> CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) 3 Months Ended 9 Months Ended September 30, September 30, 1999 1998 1999 1998 (in thousands) OPERATING ACTIVITIES <S> <C> <C> <C> <C> Net earnings $ 12,081 $ 19,891 $ 19,712 $ 51,184 Adjustments to reconcile net earnings to net cash provided from operating activities: Depreciation and depletion 18,017 15,145 53,675 44,523 Provision (benefit) for deferred income taxes 4,717 7,218 9,791 11,415 Minority interest of labor shares (10) 410 1 808 Cash provided from (used for) operating assets and liabilities: Accounts receivable 4,491 (9,181) (1,817) 3,232 Inventories (12,943) 6,604 (13,035) 4,949 Accounts payable and accrued liabilities 9,993 1,372 8,501 (1,571) Other operating assets and liabilities 3,063 5,201 7,355 16,139 Foreign currency transaction losses (gains) 932 1,093 2,162 1,916 Net cash provided from operating activities 40,341 47,753 86,345 132,595 INVESTING ACTIVITIES Capital expenditures (69,970) (61,708) (167,656) (189,453) Purchases of held-to-maturity investments - (13,291) (54,990) (40,480) Proceeds from held-to-maturity investments 30,520 800 77,142 180,703 Sales of property 12 6 516 244 Net cash used for investing activities (39,438) (74,193) (144,988) (48,986) FINANCING ACTIVITIES Debt repayment - - (6,842) (6,841) Proceeds from borrowings - - 2,000 - Escrow (deposits) withdrawals on long-term loans - (5,016) (67) 1,984 Dividends paid to common stockholders (1,757) (8,784) (6,150) (31,154) Distributions to minority interest (33) (177) (119) (703) Net treasury stock transactions - - - (3,001) Purchases of labor shares (1,459) (381) (2,104) (3,624) Net cash used for financing activities (3,249) (14,358) (13,282) (43,339) Effect of exchange rate changes on cash (716) (586) (1,169) (947) Increase (decrease) in cash and cash equivalents (3,062) (41,384) (73,094) 39,323 Cash and cash equivalents, at beginning of period 105,916 207,198 175,948 126,491 Cash and cash equivalents, at end of period $102,854 $165,814 $102,854 $165,814 The accompanying notes are an integral part of these financial statements. </TABLE> 4
Southern Peru Copper Corporation and Subsidiaries NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) A. In the opinion of Southern Peru Copper Corporation ("the Company"), the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company's financial position as of September 30, 1999 and the results of operations and cash flows for the three and nine months ended September 30, 1999 and 1998. Certain reclassifications have been made in the financial statements from amounts previously reported. This financial data has been subjected to a review by PricewaterhouseCoopers LLP, the Company's independent accountants. The results of operations for the three month and nine month periods are not necessarily indicative of the results to be expected for the full year. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1998 annual report on Form 10-K. B. The Company's third quarter 1999 results include a $5.6 million pre-tax charge ($3.6 million after-tax) for severance costs associated with the Company's ongoing cost reduction program. The severance costs accrued are for 337 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 $1.8 million is included in administrative expense as it relates to non-operating personnel. Payments in the amount of $0.6 million were made against this accrual in the third quarter of 1999. C. Inventories were as follows: (in millions) September 30, December 31, 1999 1998 Metals at lower of average cost or market: Finished goods $1.4 $ 1.5 Work-in-process 47.1 37.9 Supplies at average cost, net of reserves 53.5 49.5 Total inventories $ 102.0 $88.9 D. At September 30, 1999, the Company has recorded sales of 0.4 million pounds of copper, at a provisional price of $0.80 per pound. These sales are subject to final pricing based on the average monthly LME copper prices in the month of settlement which will occur in the fourth quarter of 1999. E. Financial Instruments: The Company uses derivative instruments to manage its exposure to market risk from changes in commodity prices. Derivative instruments which are designated as hedges must be deemed effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract. Copper: Depending on market fundamentals and other conditions, the Company may purchase put options to reduce or eliminate the risk of price declines below the option strike price on a portion of its anticipated future production. Put options purchased by the Company establish a minimum sales price for the production covered by such put options and permit the Company to participate in price increases above the option price. The cost of the options is 5
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. Fuel swaps: The Company may enter into fuel swap agreements to limit the effect of changes in fuel prices on its production costs. A fuel swap establishes a fixed price for the quantity of fuel covered by the agreement. The difference between the published price for fuel and the price established in the contract for the month covered by the swap is recognized in production costs. 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 agreement on a portion of its capital cost contracted in euros. F. Commitments and Contingencies: Litigation In April 1996, the Company was served with a complaint filed in Peru by approximately 800 former employees seeking the delivery of a substantial number of labor shares of its Peruvian Branch plus dividends. In October 1997, the Superior Court of Lima nullified a decision of a court of first instance, which had been adverse to the Company. The Superior Court remanded the case for a new trial. Plaintiff 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 Supreme Court had denied plaintiff's extraordinary appeal and affirmed the decision of the Supreme Court of Lima which remanded the case to the lower court for further proceedings. There is also pending against the Company a similar lawsuit filed by 127 additional former employees. In the third quarter of 1997, the court of first instance dismissed their complaint. Upon appeal filed by the plaintiffs, the Superior Court of Lima , in the third quarter of 1998, nullified the lower court's decision on technical grounds and remanded the case to the lower court for further proceedings. It is the opinion of management that the outcome of the legal proceedings mentioned, as well as other miscellaneous litigation and proceedings now pending, will not materially adversely affect the financial position of the Company and its consolidated subsidiaries. However, it is possible that litigation matters could have a material effect on quarterly or annual operating results, when they are resolved in future periods. G. 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. The Company is currently assessing the impact of SFAS No. 133. 6
Part I Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company reported net earnings of $12.1 million, or 15 cents per common share, for the third quarter ended September 30, 1999 compared with net earnings of $19.9 million, or 25 cents per common share, for the third quarter of 1998. For the first nine months of 1999, net earnings were $19.7 million or 25 cents per common share, compared to $51.2 million, or 64 cents per common share, for the same period of 1998. Results for the third quarter and the first nine months of 1999 include an after-tax charge of $3.6 million ($5.6 million pre-tax), or 5 cents per share, for severance costs associated with the Company's ongoing cost-reduction program. The Company's results for the first nine months of 1998 include a $10.0 million pre-tax charge ($6.0 million after-tax), recorded in the first quarter of 1998, for severance costs associated with the Company's cost reduction program. The decrease in earnings in the third quarter of 1999 is primarily attributable to severance costs related to the Company's ongoing cost-reduction effort, and lower realized copper prices when compared with the third quarter of 1998. Since the Company prices most copper sales in the month prior to shipment and the average LME price for copper in the three pricing months was 71 cents, the full benefit of the increase in the LME price in the third quarter of 1999 will not be realized until the fourth quarter of 1999. The Company's 1999 third quarter results benefited from an estimated $2.4 million in realized pre-tax savings from the Company's cost reduction program. For the nine months ended September 30, 1999 the pre-tax savings from the cost reduction program are estimated to be $25.4 million and the program is expected to improve full year 1999 pre-tax earnings by $30.0 million. Mine copper production increased 16.2% to 184.8 million pounds in the third quarter of 1999 compared with third quarter of last year. This increase of 25.8 million pounds was due to increased production from the Cuajone mine, following completion of the mine expansion at Cuajone in the first quarter. Copper sales volume, however, was 16.9 million pounds lower in the third quarter of 1999 compared to the third quarter of 1998 as the Company sold blister copper produced from purchased concentrates in 1998. The Company's $1.2 billion expansion and modernization program is progressing on schedule. The Cuajone mine expansion completed earlier this year reached target ore throughput rates during the second quarter of 1999. Rainy conditions in the first quarter of the year and metallurgical difficulties with the ore reduced copper production by an estimated 80 million pounds during the first nine months of 1999. The expansion of the Toquepala solvent extraction/electrowinning (SX/EW) facility, which will increase annual production 26% to 124 million pounds, was completed in the third quarter of this year. Engineering work on the Company's expansion and modernization of the Ilo smelter is continuing. 7
In early October, the Company reported increased proven and probable ore reserves at the Toquepala mine. The sulfide ore reserves at In early October, the Company reported increased proven and probable ore reserves at the Toquepala mine. The sulfide ore reserves at Toquepala increased 161% to 770 million tons and leachable reserves increased 166% to 1,931 million tons. Drilling programs have further indicated 247 million tons of mineralized material grading .68% copper. Full definition of this material is expected to be completed in 2000. In addition, in October 1999 the Company reported preliminary drilling results at its Los Chancas exploration project in Southern Peru, which indicated the presence of a porphyry copper deposit. Additional drilling will be necessary to define the extent of mineralization. Inflation and Devaluation of Peruvian Sol: A portion of the Company's operating costs are denominated in Peruvian soles. Since the revenues of the Company are primarily denominated in U.S. dollars, when inflation in Peru is not offset by a corresponding devaluation of the sol, the financial position, results of operations and cash flows of the Company could be adversely affected. For the three months ended September 30, 1999 the inflation and devaluation rates were 0.9% and 3.8%, respectively, and for the nine month period ended September 30, 1999, the inflation and devaluation rates were 3.1% and 9.6%, respectively. Net Sales: Net sales in the third quarter of 1999 decreased $17.7 million to $156.1 million from the comparable period in 1998. Net sales for the first nine months of 1999 totaled $412.4 million, compared with $478.7 million for the same period of 1998. The decrease in net sales was a result of lower realized copper prices in 1999 and a decrease in sales volume of 16.9 million pounds in the third quarter of 1999 and 4.2 million pounds in the first nine months of 1999. At September 30, 1999, the Company has recorded sales on 0.4 million pounds of copper, at a provisional price of $0.80 per pound. These sales are subject to final pricing based on the average monthly LME copper price in the month of settlement which will occur in the fourth quarter of 1999. Prices: Sales prices for the Company's metals are established principally by reference to prices quoted on the LME, the New York Commodity Exchange (COMEX) or as published in Platt's Metals Week for Dealer Oxide Mean prices for molybdenum products. <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, Price/Volume Data: 1999 1998 1999 1998 <S> <C> <C> <C> <C> Average Metal Prices: Copper (per pound-LME) $0.76 $0.74 $0.69 $0.77 Molybdenum (per pound) $2.68 $3.28 $2.67 $3.75 Silver (per ounce-COMEX) $5.24 $5.18 $5.21 $5.70 Sales Volume (in thousands): Copper (pounds) 199,000 215,900 548,900 553,100 Molybdenum (pounds) (1) 3,018 2,449 8,570 8,030 Silver (ounces) 987 910 2,294 2,428 </TABLE> (1) The Company's molybdenum production is sold in concentrate form. Volume represents pounds of molybdenum contained in concentrates. 8
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 market fundamentals and other conditions, the Company may purchase put options to reduce or eliminate the risk of price declines below the option strike price on a portion of its anticipated future production. Put options purchased by the Company establish a minimum sales price for the production covered by such put options and permit the Company to participate in price increases above the option price. The cost of the options is amortized on a straight-line basis during the period in which the options are exercisable. Depending upon market conditions the Company may either sell options it holds or exercise the options at maturity. Gains or losses from the sale or exercise of options, net of unamortized acquisition costs, are recognized in the period in which the underlying production is sold and are reported as a component of the underlying transaction. Earnings include pre-tax gains from option sales and exercises of $7.2 million in the first nine months of 1998. At September 30, 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 September 30, 1999 and December 31, 1998, the Company had the following fuel swap agreements: <TABLE> <CAPTION> Weighted Average Quantity Contract Price Fuel Type Period (barrels) (per barrel) <S> <C> <C> <C> September 30,1999 Residual Oil 10/99-12/99 521,700 $11.02 Residual Oil 1/00-12/00 1,468,800 $12.80 Diesel Fuel 10/99-12/99 159,000 $18.06 Diesel Fuel 1/00-12/00 504,000 $19.32 December 31, 1998 Residual Oil 1/99-9/99 1,095,000 $9.84 Diesel Fuel 1/99-9/99 432,000 $15.80 </TABLE> The unrealized gain in the Company's fuel swap positions at September 30, 1999 was $11.8 million. The effect of a hypothetical 10 percent decrease from September 30, 1999 fuel prices would be to reduce the unrealized gain on fuel swaps by $4.9 million. In the third quarter of 1999, the Company's production costs would have been $4.8 million higher if this exposure had not been hedged. Foreign currency: The Company selectively uses foreign currency swaps to limit the effects of exchange rate changes on future cash flow obligations denominated in foreign currencies. A currency swap establishes a fixed dollar cost for a fixed amount of foreign currency required at a future date. The Company has entered into currency swap agreements on a portion of its capital cost contracted in euros. 9
As of September 30, 1999 the Company had the following currency swap agreements: US$ Euros Forward Exchange Rate Maturity Date (in millions) 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 The unrealized loss in the Company's currency swap position at September 30, 1999 was $1.3 million. A hypothetical 10 percent decrease from September 30, 1999 rates, would increase the unrealized loss on currency swaps by $3.1 million. The full cost of the currency swap amounts as acquired will, when exercised, be included in the cost of the capital asset for which these swaps were obtained. Operating Costs and Expenses: Operating costs and expenses were $137.5 million in the third quarter of 1999 compared with $143.6 million in the third quarter of 1998. In the nine months ended September 30, 1999, operating costs and expenses were $380.3 million, compared with $411.4 million in the comparable 1998 period. Cost of sales for the three month and nine month periods ended September 30, 1999 was $105.8 million and $290.9 million, respectively, compared with $117.4 million and $328.9 million in the comparable 1998 periods. The decrease in the third quarter 1999 is principally due to reduced sales volume of copper processed from purchased concentrates. The decrease was partially offset by a provision of $3.8 million for severance cost related to the Company's cost reduction program (an additional $1.8 million was charged as an administrative cost). The cost decrease in the nine month 1999 period also reflects the effect of reduced sales of purchased material, as well as savings generated by the Company's cost reduction program. In addition, the nine month 1998 period included a charge of $7.2 million for severance costs (an additional $2.8 million was charged as an administrative cost). Depreciation expense for the three and nine month periods ended September 30, 1999 was $18.0 million and $53.7 million, respectively, compared with $15.1 million and $44.5 million in the comparable 1998 periods. The higher 1999 depreciation includes depreciation of the assets of the Cuajone mine expansion project, which was completed in early 1999. Non-Operating Items:"Other income" for the nine months ended September 30, 1998 include a $5.3 million insurance settlement related to rain damage incurred in 1997. Interest income was $1.7 million in the third quarter of 1999 and $6.9 million for the first nine months of 1999, as compared to $3.6 million and $12.6 million, respectively, in the comparable 1998 periods. The decrease reflects lower invested balances as Company funds were used for the expansion and modernization program. Taxes on Income: Taxes on income for the three months ended September 30, 1999 were $5.2 million, compared with $9.6 million for the third quarter of 1998. The decrease was principally due to lower earnings in 1999. 10
Cash Flows: Third Quarter: Net cash provided from operating activities was $40.3 million in the third quarter of 1999, compared with $47.8 million in the comparable 1998 period. The decrease was primarily the result of lower realized copper prices. Net cash used for investing activities was $39.4 million in the third quarter of 1999 and included $70.0 million for capital expenditures which were in part funded by $30.5 million of proceeds from held-to-maturity investments. In the third quarter of 1998, net cash used for investing activities was $74.2 million and was principally due to $61.7 million of capital expenditures and $13.3 million of purchases of held-to-maturity investments. Net cash used for financing activities in the third quarter of 1999 was $3.2 million, compared with $14.4 million for the third quarter of 1998. The third quarter of 1999 includes a dividend distribution of $1.8 million and $1.5 million used to repurchase labor shares. The third quarter of 1998 included a dividend distribution of $8.8 million and $5.0 million of funds deposited to escrow accounts. Nine Months: Net cash provided from operating activities was $86.3 million for the nine month period ended September 30, 1999, compared with $132.6 million in the corresponding 1998 period. The decrease was primarily caused by lower copper prices and changes in operating assets and liabilities. Net cash used for investing activities was $145.0 million in the nine month period ended September 30, 1999 and was primarily due to $167.7 million for capital expenditures, less $22.2 million of net funds provided from held-to-maturity investments. In the nine month period ended September 30, 1998, net cash used for investing activities was $49.0 million and was primarily due to $189.5 million for capital expenditures, less $140.2 million of net funds provided from held-to-maturity investments. The decrease in capital expenditures in the nine months ended September 30, 1999 as compared to the 1998 period is attributable to the completion of the Cuajone expansion in the first quarter of 1999 partially offset by investments made in the Toquepala solvent extraction/electrowinning (SX/EW) facility and other projects. Cash used for financing activities for the nine months ended September 30, 1999 was $13.3 million and $43.3 million in the comparable 1998 period. Dividends paid to shareholders were $6.2 million in the 1999 nine-month period and $31.2 million in the 1998 nine-month period. Liquidity and Capital Resources: At September 30, 1999, the Company's debt as a percentage of total capitalization (total debt, minority interests and stockholders' equity) was 16.8% compared to 17.2% at December 31, 1998. Debt at September 30, 1999 was $229.4 million compared to $234.2 million at the end of 1998. Additional indebtedness permitted under terms of the most restrictive of the Company's credit agreements totaled $892.8 million at September 30, 1999. The Company expects that it will meet its cash requirements for 1999 and beyond from internally generated funds, cash on hand, from borrowings under existing credit facilities and from additional external financing. In the third quarter of 1999, the Company paid a dividend to shareholders of $1.8 million or 2.2 cents per share, compared with $8.8 million or 11 cents per share in the same period of 1998. On November 4, 1999, the Company declared a quarterly dividend of 7.5 cents per share payable December 6, 1999 to stockholders of record at the close of business on November 19, 1999. 11
Certain financing agreements contain covenants which limit the payment of dividends to stockholders. Under the most restrictive covenant, the Company may pay dividends to stockholders equal to 50% of the net income of the Company for any fiscal quarter as long as such dividends are paid by June 30 of the following year. Year 2000: The Company has implemented a three phase program to identify and resolve Year 2000 (Y2K) issues related to the integrity and reliability of its computerized information systems as well as computer systems embedded in its production processes. Phase one of the Company's program which involved an assessment of Y2K compliance of the Company's computerized information systems and embedded computer systems has been completed. In phase two of the program the Company is modifying or replacing all non-compliant systems. As of September 30, 1999, approximately 98% of the Company's systems have been tested and are Y2K compliant with the remainder expected to be tested and be Y2K compliant by the fourth quarter of 1999. The Company continues to test these systems where appropriate. As of September 30, 1999, the Company had spent approximately $1.2 million in addition to its normal internal information technology costs in connection with its Y2K program. The Company expects to incur an additional $0.1 million to complete the program. Phase three of the program, which involved the Company sending detailed information requests to their principal customers, suppliers and service providers to determine the status of their Y2K compliance, has been completed. The Company will have further contact with those who have not responded or have indicated further work was required to achieve Y2K compliance, but none are critical to the Company's operations. Among other things, the Company's operations depend on the availability of utility services, principally electricity, and reliable performance by international transportation services. A substantial disruption in any of these services due to providers of these services failing to achieve Y2K compliance would have an adverse impact on the Company's financial results, the significance of which would depend on the length and severity of the disruption. In response to a request from the Company, a detailed plan to ensure Y2K compliance by the Company's principal electrical power supplier was received. The Company is monitoring this plan. The Company has completed a contingency plan for each of its principal operating services during the third quarter of 1999. The purpose of the contingency plan is to identify possible alternatives which could be used in the event of a disruption in the delivery of essential goods or services and to minimize the effect of such a disruption. The above estimates and conclusions contain forward-looking statements and are based on management's best estimate of future events. Actual results could differ materially depending on the availability of resources and the Company's ability to identify and correct all Y2K issues. Impact of New Accounting Standards: In 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. The Company is currently assessing the impact of SFAS No. 133. 12
Cautionary statement: Forward-looking statements in this report and in other Company statements include statements regarding expected commencement dates of mining or metal production operations, projected quantities of future metal production, anticipated production rates, operating efficiencies, costs and expenditures as well as projected demand or supply for the Company's products. Actual results could differ materially depending upon factors including the availability of materials, equipment, required permits or approvals and financing, the occurrence of unusual weather or operating conditions, lower than expected ore grades, the failure of equipment or processes to operate in accordance with specifications, labor relations, environmental risks as well as political and economic risk associated with foreign operations. Results of operations are directly affected by metal prices on commodity exchanges which can be volatile. 13
PricewaterhouseCoopers LLP REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Southern Peru Copper Corporation: We have reviewed the condensed consolidated balance sheet of Southern Peru Copper Corporation and Subsidiaries as of September 30, 1999 and the related condensed consolidated statements of earnings and cash flows for each of the three-month and nine-month periods ended September 30, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements, referred to above, for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1998 and the related consolidated statements of earnings, cash flows, and changes in common stockholders' equity for the year then ended (not presented herein); and in our report dated January 22, 1999, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1998, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. PricewaterhouseCoopers LLP New York, New York October 18, 1999 14
PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K (a) The following Exhibit is filed as part of this report: 15. Independent Accountants' Awareness Letter (b) Report on Form 8-K: 1. Report on Form 8-K filed October 7, 1999, enclosing a press release issued by the Company dated October 7, 1999, which announces significant new mineralization at the Toquepala Mine. 15
SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOUTHERN PERU COPPER CORPORATION (Registrant) Date: November 12, 1999 /s/ Thomas J. Findley, Jr. Thomas J. Findley, Jr. Vice President and Chief Financial Officer Date: November 12, 1999 /s/ Brendan M. O'Grady Brendan M. O'Grady Comptroller 16
Exhibit 15 PricewaterhouseCoopers LLP Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 We are aware that our report dated October 15, 1999 on our review of the interim financial information of Southern Peru Copper Corporation and Subsidiaries as of September 30, 1999 and for the three-month and nine-month periods ended September 30, 1999 and 1998 and included in this Form 10-Q for the quarter ended September 30,1999 is incorporated by reference in the Company's Registration Statements on Form S-8 (File Nos. 333-02736 and 333-40293). Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not be considered a part of the Registration Statement within the meaning of Sections 7 and 11 of that Act. PricewaterhouseCoopers LLP New York, New York November 12, 1999 17