SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 1997 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, 1997 Commission file number 1-14066 ------------------ ------- SOUTHERN PERU COPPER CORPORATION (formerly known as Southern Peru Copper Holding Company) (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, 1997 there were outstanding 14,302,149 shares of Southern Peru Copper Corporation common stock, par value $0.01 per share. There were also outstanding 65,900,833 shares of Southern Peru Copper Corporation Class A common stock, par value $0.01 per share.
SOUTHERN PERU COPPER CORPORATION AND SUBSIDIARIES INDEX TO FORM 10-Q <TABLE> <CAPTION> <S> <C> Page No. Part I. Financial Information: Item 1. Financial Statements (unaudited) Condensed Consolidated Statement of Earnings Three Months and Nine Months Ended September 30, 1997 and 1996 2 Condensed Consolidated Balance Sheet September 30, 1997 and December 31, 1996 3 Condensed Consolidated Statement of Cash Flows Three Months and Nine Months Ended September 30, 1997 and 1996 4 Notes to Condensed Consolidated Financial Statements 5-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-15 Report of Independent Accountants 16 Part II. Other Information: Item 1. Legal Proceedings 17 Item 6(a) Exhibits on Form 10Q 18 Exhibit 4 Instruments defining the rights of security holders, including indentures Exhibit 11 Statement re Computation of Earnings per Share Signatures 19 Exhibit I - Independent Accountants' Awareness Letter </TABLE> -1-
Southern Peru Copper Corporation and Subsidiaries CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (unaudited) <TABLE> <CAPTION> 3 Months Ended 9 Months Ended September 30, September 30, 1997 1996 1997 1996 ---- ---- ---- ---- (in thousands, except per share amounts) <S> <C> <C> <C> <C> Net sales: Stockholders and affiliates $ 11,528 $ 18,446 $ 49,943 $ 49,694 Others 190,780 162,054 593,373 500,383 --------- --------- ---------- --------- Total net sales 202,308 180,500 643,316 550,077 --------- --------- ---------- --------- Operating costs and expenses: Cost of sales 121,984 99,868 350,280 276,723 Administrative and other expenses 12,453 11,622 39,121 35,876 Depreciation, amortization and depletion 12,268 10,634 35,375 31,304 Provision for workers' participation 2,846 3,480 13,721 13,925 Exploration expense 1,801 832 4,513 1,979 --------- --------- --------- --------- Total operating costs and expenses 151,352 126,436 443,010 359,807 --------- --------- --------- --------- Operating income 50,956 54,064 200,306 190,270 Interest income 7,024 3,999 14,703 15,069 Other income 2,710 3,003 7,370 7,858 Interest expense (7,190) (3,248) (14,458) (9,585) --------- --------- --------- --------- Earnings before taxes on income and minority interest of labor shares 53,500 57,818 207,921 203,612 Taxes on income 13,001 19,085 48,588 67,178 --------- --------- --------- --------- Earnings before minority interest of labor shares 40,499 38,733 159,333 136,434 Minority interest of labor shares 660 853 4,078 4,217 --------- --------- --------- --------- Net earnings $ 39,839 $ 37,880 $ 155,255 $ 132,217 ========= ========= ========= ========= Per common share amounts: Net earnings (a) $ 0.50 $ 0.47 $ 1.94 $ 1.65 Dividends paid $ 0.37 $ 0.28 $ 1.02 $ 1.23 Weighted average number of shares outstanding 80,203 80,184 80,198 80,198 </TABLE> (a) The effect on the calculation of net earnings per common share of the Company's Common Stock equivalents (shares under option) was insignificant. The accompanying notes are an integral part of these financial statements. -2-
Southern Peru Copper Corporation and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEET <TABLE> <CAPTION> September 30, December 31, 1997 1996 (unaudited) (in thousands) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 82,067 $ 173,205 Marketable securities 311,563 1,000 Accounts receivable, net 80,563 89,587 Inventories 107,052 118,681 Prepaid taxes 79,307 14,019 Other current assets 6,222 6,618 ---------- ---------- Total current assets 666,774 403,110 Net property 883,798 855,808 Other assets 33,523 20,931 ---------- ---------- Total Assets $1,584,095 $1,279,849 ========== ========== LIABILITIES Current liabilities: Current portion of long-term debt $ 13,683 $ 23,683 Accounts payable 42,401 33,864 Accrued liabilities 65,323 47,768 ---------- ---------- Total current liabilities 121,407 105,315 ---------- ---------- Long-term debt 241,051 82,892 Deferred credits 65,478 - Deferred income taxes 43,548 49,426 Other liabilities and reserves 4,073 4,806 ---------- ---------- Total non-current liabilities 354,150 137,124 Minority interest of labor shares 20,057 22,383 ---------- ---------- STOCKHOLDERS' EQUITY Common stock, par value $0.01(a) 143 137 Class A common stock, par value $0.01(b) 659 666 Additional paid-in capital 265,745 265,745 Retained earnings 822,406 749,267 Treasury stock at cost (c) (472) (788) ---------- ---------- Total stockholders' equity 1,088,481 1,015,027 ---------- ---------- Total Liabilities, Minority Interest and Stockholders' Equity $1,584,095 $1,279,849 ========== ========== (a) Common shares: Authorized 34,099 33,449 Outstanding 14,302 13,634 (b) Class A common shares Authorized & Outstanding 65,901 66,551 (c) Treasury stock common shares 28 46 </TABLE> The accompanying notes are an integral part of these financial statements. -3-
Southern Peru Copper Corporation and Subsidiaries CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) <TABLE> <CAPTION> 3 Months Ended 9 Months Ended September 30, September 30, 1997 1996 1997 1996 ( in thousands) ( in thousands) <S> <C> <C> <C> <C> OPERATING ACTIVITIES Net earnings $ 39,839 $ 37,880 $155,255 $132,217 Adjustments to reconcile net earnings to net cash provided from operating activities: Depreciation, amortization and depletion 12,268 10,634 35,375 31,304 Provision for deferred income taxes (4,993) 4,567 (5,132) 6,783 Minority interest of labor shares 661 853 4,078 4,217 Net (gain)loss on sale of investments and property - (1) 268 285 Cash provided from (used for)operating assets and liabilities: Accounts receivable 20,577 (14,294) 8,983 23,341 Inventories 14,339 259 11,629 (4,571) Accounts payable and accrued liabilities 9,937 12,194 26,611 (40,704) Other operating assets and liabilities (1,283) 4,944 243 (12,129) Foreign currency transaction gains (641) (1,748) (1,676) (4,176) -------- -------- -------- -------- Net cash provided from operating activities 90,704 55,288 235,634 136,567 -------- -------- --------- -------- INVESTING ACTIVITIES Capital expenditures (44,397) (42,260) (105,751) (94,191) Purchases of held-to-maturity investments (102,771) (1,000) (311,563) (1,000) Proceeds from held-to-maturity investments - - 1,000 42,453 Proceeds from the sale of investments and property 4,638 - 46,523 - -------- -------- --------- -------- Net cash used for investing activities (142,530) (43,260) (369,791) (52,738) -------- -------- --------- -------- FINANCING ACTIVITIES Dividends paid (29,675) (22,465) (81,800) (98,669) Proceeds from borrowings - - 200,000 47,000 Repayment of borrowings (39,999) (5,789) (51,841) (14,320) Escrow deposits and finance fees on long-term loans (2,963) 87 (14,841) (10,065) Purchase of labor share interest (3,640) (3,417) (8,246) (6,098) Distributions to minority interests (735) (813) (2,038) (3,516) Treasury stock purchased - - - (1,155) -------- -------- --------- -------- Net cash provided from (used for) financing activities (77,012) (32,397) 41,23 (86,823) -------- -------- --------- -------- Effect of exchange rate changes on cash 582 250 1,785 966 -------- -------- --------- -------- Net decrease in cash and cash equivalents (128,256) (20,119) (91,138) (2,028) Cash and cash equivalents at beginning of period 210,323 237,737 173,205 219,646 -------- -------- -------- -------- Cash and cash equivalents at end of period $ 82,067 $217,618 $ 82,067 $217,618 ======== ======== ======== ======== </TABLE> The accompanying notes are an integral part of these financial statements. -4-
SOUTHERN PERU COPPER CORPORATION and Subsidiaries NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) A. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company's financial position as of September 30, 1997 and the results of operations and cash flows for the three and nine months ended September 30, 1997 and 1996. This financial data has been subjected to a limited review by Coopers & Lybrand L.L.P., 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 year end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1996 annual report on Form 10-K. B. In the first quarter of 1997, the Government of Peru approved a reinvestment allowance for the Company's program to expand the Cuajone mine. The reinvestment allowance provides the Company with tax incentives in Peru and, as a result, certain U.S. tax credit carryforwards, for which no benefit had previously been recorded, are expected to be realized. The estimated net earnings impact of the reduction in the Company's effective tax rate, as a result of the reinvestment allowance, for the third quarter of 1997 is approximately $2.9 million and for the nine months ended September 30, 1997, approximately $10.6 million. Pursuant to the reinvestment allowance the Company will receive tax deductions in Peru in amounts equal to the cost of the qualifying property (approximately $245 million). As qualifying property is acquired, the financial statement carrying value of the qualifying property will be reduced to reflect the tax benefit associated with the reinvestment allowance (approximately $73 million). As a result, financial statement depreciation expense related to the qualifying property will be reduced over its useful life (approximately 15 years). C. Inventories were as follows: (in millions) <TABLE> <CAPTION> September 30, December 31, 1997 1996 <S> <C> <C> Metals at lower of average cost or market: Finished goods $ 1.6 $ 2.4 Work-in-process 41.5 47.1 Supplies at average cost, net of reserves 64.0 69.2 ------ ------ Total inventories $107.1 $118.7 ====== ====== </TABLE> -5-
D. Metal Hedging Activities: Depending on the market fundamentals of a metal and other conditions, the Company may purchase put options to reduce or eliminate the risk of metal price declines 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. Depending upon market conditions the Company may sell put options it holds or exercise the options at maturity. Gains or losses, net of unamortized acquisition costs are recorded as current liabilities or current assets and are subsequently recognized in the period in which the underlying hedged production is sold. Earnings for the first nine months included a pre-tax gain of $5.6 million and $4.1 million in 1997 and 1996, respectively, from the Company's price protection program. There were no pre-tax gains or losses from price protection in the third quarter of 1997 compared with a pre-tax gain of $4.4 in the third quarter of 1996. Copper Price Protection Held at September 30, 1997 (in millions, except per lb. amounts) <TABLE> <CAPTION> Percent of Strike Price Unamortized Estimated Pounds Period Per Pound Cost Production ------ ------ --------- ---- ---------- <S> <C> <C> <C> <C> 94.1 10/97-12/97 $0.95 $1.4 54% 44.0 01/98-03/98 $0.95 0.6 28% ---- $2.0 </TABLE> In October 1997 and the first week of November 1997, the Company sold copper put options covering 21.5 million pounds of fourth quarter 1997 copper sales with an average strike price of $0.95. The total pre-tax gain from this activity was $1.0 million. At September 30, 1997, the Company recorded sales of 80.4 million pounds of copper, at a provisional average price of $0.97 per pound. These sales are subject to final pricing based on average monthly LME copper prices in the fourth quarter of 1997. E. On May 22, 1997, the Company sold $150 million of Secured Export Notes through a Rule 144A and Regulation S offering with registration rights. The notes mature in 2007 and were priced at par with a coupon rate of 7.90%. On June 24, 1997, the Company sold $50 million of 8.25% bonds due June 2004. The debt was issued through Southern Peru Limited, a wholly owned subsidiary of the Company. Early in the second quarter, the Company also entered into a $600 million, seven year backstop loan facility with a group of international financial institutions. The proceeds of the aforementioned borrowings will be used to finance the Company's $1 billion expansion and modernization program at its Cuajone copper mine and Ilo smelter. On October 8, 1997, the Company offered to exchange its 7.90% Series A-1 Secured Export Notes due 2007, pursuant to an offering registered under the Securities Act of 1933, as amended, for a like amount of its issued and outstanding 7.90% Series A Secured Export Notes due 2007. Terms and conditions of the Series A-1 Secured Export Notes are identical in all material respects to the Series A Notes. -6-
F. Commitments and Contingencies: Litigation In April 1996, Southern Peru Limited, a wholly owned subsidiary of the Company, was served with a complaint filed in Peru by approximately 800 former employees seeking the delivery of a substantial number of labor shares of its Peruvian Branch plus dividends. In October 1997, the Superior Court of Lima nullified a decision of a court of first instance, which had been adverse to Southern Peru Limited. The Superior Court remanded the case for a new trial. There is also pending against Southern Peru Limited a similar lawsuit filed by 127 additional former employees. In the third quarter of 1997, the court of first instance dismissed their complaint. The plaintiffs have appealed to the Superior Court of Lima. G. Summarized Financial Information of Significant Subsidiary: Southern Peru Limited: Southern Peru Limited is a wholly owned subsidiary of Southern Peru Copper Corporation. Southern Peru Limited holds all the operating assets and liabilities of the Company. <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 ---- ---- ---- ---- (in millions) <S> <C> <C> <C> <C> Earnings: Net sales $202.3 $180.5 $643.3 $550.1 Operating income 51.0 54.1 200.3 190.3 Net earnings 39.8 37.9 155.3 132.2 Cash Flow: Operating activities $ 90.7 $ 55.3 $235.6 $136.6 Investing activities (142.5) (43.3) (369.8) (52.7) Financing activities (77.0) (32.4) 41.2 (86.8) </TABLE> <TABLE> <CAPTION> September 30, December 31, 1997 1996 (in millions) <S> <C> <C> Balance Sheet: Current assets $666.8 $403.1 Noncurrent assets 917.3 876.7 Current liabilities 121.4 105.3 Noncurrent liabilities 354.2 137.1 Minority interest 20.1 22.4 Stockholders' equity 1,088.5 1,015.0 </TABLE> -7-
H. Impact of New Accounting Standards: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (the "Statement"), which specifies the computation, presentation and disclosure requirements for earnings per share ("EPS"). The Statement will require the Company to present both basic and diluted EPS amounts for income from continuing operations and net income on the face of the income statement. The Company does not expect the impact of this statement to have a material effect on its calculation of EPS. The Statement will be effective for financial statements issued for periods ending after December 15, 1997, including interim periods. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income." The Company is currently assessing the impact of this statement, which is effective for fiscal years beginning after December 15, 1997. -8-
Part I Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company reported net earnings of $39.8 million, or $0.50 per share, for the third quarter ended September 30, 1997 compared with net earnings of $37.9 million, or $0.47 per share, for the third quarter of 1996. For the nine month period ended September 30, 1997, the Company reported net income of $155.3 million or $1.94 per share, compared with net income of $132.2 million or $1.65 per share in the comparable 1996 period. The Company's earnings increased in the third quarter 1997 compared with the comparable 1996 period. Higher copper prices and a reduction in the Company's effective tax rate, were primarily responsible for the increase in earnings. The effect of higher copper price was partially offset by adjustments to provisionally priced sales during the quarter. Sales are provisionally priced when shipped and adjustments to the actual prices realized are reflected in earnings approximately two months later. In comparison to sales at the monthly average prices, these adjustments reduced net earnings by $8.1 million. In addition, 1996 third quarter earnings included a pre-tax gain of $4.4 million on the sales and exercise of copper put options. Net earnings for the nine months ended September 30, 1997 increased $23.1 million, over the same period in 1996, primarily as a result of the reduction in the Company's effective tax rate due to the reinvestment tax incentive allowed in Peru and higher copper prices. Copper mine production in the third quarter of 1997 was 168.4 million pounds compared to 169.9 million pounds in the third quarter of 1996. For the first nine months of 1997 mined copper production was 503 million pounds compared with 504.6 million pounds in the first nine months of 1996. The modest decline in copper production for the third quarter and nine months of 1997 are the result of lower ore grades at the Company's Toquepala and Cuajone mines. Most of the effect of the lower ore grades was offset by higher throughput and better recoveries. In the first quarter of 1997, the Government of Peru approved a reinvestment allowance for the Company's program to expand the Cuajone mine. The reinvestment allowance provides the Company with tax incentives in Peru and, as a result, certain U.S. tax credit carryforwards, for which no benefit had previously been recorded, are expected to be realized. The estimated net earnings impact of the reduction in the Company's effective tax rate, as a result of the reinvestment allowance, for the third quarter of 1997 is approximately $2.9 million and $10.6 million for the nine months ended September 30, 1997. Pursuant to the reinvestment allowance the Company will receive tax deductions in Peru in amounts equal to the cost of the qualifying property (approximately $245 million). As qualifying property is acquired, the financial statement carrying value of the qualifying property will be reduced to reflect the tax benefit associated with the reinvestment allowance (approximately $73 million). As a result, financial statement depreciation expense related to the qualifying property will be reduced over its useful life (approximately 15 years). -9-
In the second quarter the Company placed $150 million of Secured Export Notes. In addition, a $50 million bond offering was sold in the Peruvian market. At September 30, the Company had $394 million of cash and marketable securities and an undrawn committed bank facility of $600 million. These funds are sufficient to assure the financing of the Company's $1 billion expansion program which is proceeding on schedule. Construction contracts for the Cuajone mine expansion have been awarded and site construction commenced in July. Engineering work on the Ilo smelter expansion is also underway. 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 nine months ended September 30, 1997 the inflation and devaluation rates were 5.15% and 1.96%, respectively. Net Sales: Net sales in the third quarter of 1997 were $202.3 million, compared with $180.5 million in the third quarter of 1996. Net sales for the nine months ended September 30, 1997 were $643.3 million compared with $550.1 million for the comparable 1996 period. The $21.8 million increase in net sales in the third quarter of 1997 is primarily attributable to higher sales volume and higher copper prices. The effect of higher copper prices was partially offset by adjustments of $12.9 million to provisionally priced sales during the quarter. In addition, 1996 third quarter sales included a gain of $5.2 million on the sales and exercise of copper put options. The increase in sales in the nine month period ended September 30, 1997 as compared with the comparable prior year period reflects increased sales volume and copper price, and adjustments to provisionally priced sales in 1996. At September 30, 1997, the Company has recorded sales of 80.4 million pounds of copper, at a provisional average price of $0.97 per pound. These sales are subject to final pricing based on average monthly LME copper prices in the fourth quarter of 1997. 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 "Metals Week" for dealer oxide prices for molybdenum products. <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, Price/Volume Data 1997 1996 1997 1996 - ----------------- ---- ---- ---- ---- <S> <C> <C> <C> <C> Average Metal Prices Copper (per pound-LME) $1.03 $0.90 $1.09 $1.06 Molybdenum (per pound- Metals Week Dealer Oxide) $4.27 $3.29 $4.35 $3.47 Silver (per ounce-COMEX) $4.51 $5.04 $4.75 $5.29 Sales Volume (in thousands) Copper (pounds) 199,600 188,600 555,600 519,400 Molybdenum (pounds)(1) 1,924 2,152 6,412 5,956 Silver (ounces) 818 818 2,313 2,363 </TABLE> (1) The Company's molybdenum production is sold in concentrate form. The volume represents pounds of molybdenum contained in concentrate. -10-
Metal Hedging Activities: Depending on the market fundamentals of a metal and other conditions, the Company may purchase put options to reduce or eliminate the risk of metal price declines 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. Depending upon market conditions the Company may sell put options it holds or exercise the options at maturity. Gains or losses, net of unamortized acquisition costs are recorded as current liabilities or current assets and are subsequently recognized in the period in which the underlying hedged production is sold. Earnings for the first nine months included a pre-tax gain of $5.6 million and $4.1 million in 1997 and 1996, respectively, from the Company's price protection program. There were no pre-tax gains or losses from price protection in the third quarter of 1997 compared with a pre-tax gain of $4.4 in the third quarter of 1996. Copper Price Protection Held at September 30, 1997 (in millions, except per lb. amounts) <TABLE> <CAPTION> Percent of Strike Price Unamortized Estimated Pounds Period Per Pound Cost Production ------ ------ --------- ---- ---------- <S> <C> <C> <C> <C> <C> 94.1 10/97-12/97 $0.95 $1.4 54% 44.0 01/98-03/98 $0.95 0.6 28% ---- $2.0 </TABLE> In October 1997 and the first week of November 1997, the Company sold copper put options covering 21.5 million pounds of fourth quarter 1997 copper sales with an average strike price of $0.95. The total pre-tax gain from this activity was $1.0 million. Operating Costs and Expenses: Operating costs and expenses were $151.4 million in the third quarter of 1997 compared with $126.4 million for the same period in 1996. For the nine month period ended September 30, 1997 operating costs were $443.0 million as compared with $359.8 million in the comparable 1996 period. Cost of sales for the three month and nine month period ended September 30, 1997 was $122.0 million and $350.3 million, respectively, compared with $99.9 million and $276.7 million in the comparable 1996 periods. The increase is primarily attributable to greater sales of copper produced from purchased concentrates, higher power costs and increased mine stripping at the Toquepala mine. In the second quarter of 1997 the Company sold its power plant to an independent power company in order to avoid substantial capital improvements to meet the power needs of expanded operations, and as a consequence power costs have increased. Depreciation expense for the three and nine month periods ended September 30, 1997 was $12.3 million and $35.4 million, respectively, compared with $10.6 million and $31.3 million in the comparable 1996 periods. The higher 1997 depreciation reflects additions to property, including the refinery expansion program completed in the late 1996, and the addition of haulage trucks and other mobile equipment. -11-
Non-operating Items: Interest income for the three month and nine month periods ended September 30, 1997 was $7.0 million and $14.7 million, respectively, compared to $4.0 million and $15.1 million in the comparable 1996 periods. The increase in the third quarter of 1997 reflects the higher amount of invested funds as a result of the new debt issues in the second quarter of 1997. Interest expense for the three month and nine month periods ended September 30, 1997 was $7.2 million and $14.5 million, respectively, compared to $3.2 million and $9.6 million in the comparable 1996 periods. The increase of $4.0 million in interest expense in the third quarter of 1997 reflects the increase in borrowings. Taxes on Income: Taxes on income for the three and nine month periods ended September 30, 1997 were $13.0 million and $48.6 million, respectively, as compared with $19.1 million and $67.2 million for the respective periods in 1996. The decrease was principally due to a reduction in the Company's effective tax rate as a result of the reinvestment allowance in Peru. Minority Interest of Labor Shares: The income statement provision for minority interest of labor shares during the third quarter represents an accrual of approximately 2.3% in 1997 and 3.0% in 1996, of the after-tax earnings, as determined under Peruvian GAAP, of the Peruvian Branch of Southern Peru Limited, which comprises substantially all of the operations of the Company in Peru. The Labor Share percentage participation in earnings decreased due to the purchase of labor shares by the Company. Cash Flows - Operating Activities: Net cash provided from operating activities for the three month and nine month period ended September 30, 1997 was $90.7 million and $235.6 million, respectively, compared with $55.3 million and $136.6 million in the comparable 1996 periods. The increase in the third quarter was primarily a result of increased earnings and depreciation and a decrease in net operating assets. The major component of the decrease in operating assets was a reduction in trade receivable as the copper price decreased from $1.17 per pound at June 30, 1997 to $0.97 per pound at September 30, 1997. The increase in the nine month period was primarily a result of lower payments for prior year's Peruvian income taxes and workers' participation and higher net earnings. Cash Flows - Investing Activities: Investing activities used cash of $142.5 million for the third quarter of 1997 compared with $43.3 million for the third quarter of 1996. The 1997 period included purchases of held-to-maturity investments of $102.8 million consisting of bank time deposits with maturities ranging from three months to one year and capital expenditures of $44.4 million compared with $42.3 million in the third quarter of 1996. Cash used for investing activities was $369.8 million for the nine month period ended September 30, 1997 compared with $52.7 million in the corresponding 1996 period. Investing activities for the nine month period ending September 30, 1997 included the purchase of $311.6 million held-to-maturity securities and capital expenditures of $105.8 million primarily related to the expansion program. Partially offsetting the cash used for investing activities were proceeds from the sale of investments and property of $46.5 million. Investing activities for the nine month period ended September 30, 1996, included capital expenditures of $94.2 million and proceeds from held-to-maturity investments of $42.5 million. Cash Flows - Financing Activities: Financing activities in the third quarter of 1997 included dividend payments of $29.7 million as compared with $22.5 million in the comparable 1996 period. For the nine months ended September 30, 1997 and 1996, dividends paid were $81.8 million and $98.7 million, respectively. In July, the Company prepaid the remaining $40 million balance of a variable rate loan from Mitsui & Co. Ltd. -12-
Cash provided from financing activities was $41.2 million for the nine month period ended September 30, 1997, compared with cash used of $86.8 million in the comparable 1996 period. The 1997 period includes proceeds of $200 million from the sale of $150 million of Secured Export Notes and $50 million bonds. The 1996 period included $47 million of new borrowings. Repayment of borrowings in the nine month 1997 and 1996 periods were $51.8 million and $14.3 million, respectively. Liquidity and Capital Resources: At September 30, 1997, the Company's debt as a percentage of total capitalization (total debt, minority interests and stockholders' equity) was 18.7%, compared with 9.3% at December 31, 1996. Debt at September 30, 1997 was $254.7 million, compared with $106.6 million at the end of 1996. In April 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 term loan bears an interest rate of LIBOR plus 1.75%. In May, the Company privately placed $150 million of Secured Export Notes in the United States and offshore. These notes which have an average maturity of seven years and a final maturity in 2007 were priced at par with a coupon rate of 7.9%. In addition, in June the Company sold $50 million of 8.25% bonds due June 2004 to investors in Peru. On October 8, 1997, the Company offered to exchange its 7.90% Series A-1 Secured Export Notes due 2007, pursuant to an offering registered under the Securities Act of 1933, as amended, for a like amount of its issued and outstanding 7.90% Series A Secured Export Notes due 2007. Terms and conditions of the Series A-1 Secured Export Notes are identical in all material respects to the Series A Notes. At September 30, 1997, the Company had $394 million of cash and marketable securities and an undrawn committed bank facility of $600 million. These funds will provide the Company with sufficient resources for its $1 billion expansion program. In the third quarter of 1997, the Company paid a dividend to shareholders of $29.7 million or $0.37 per share. On October 28, 1997, the Company declared a quarterly dividend on the common stock of $0.24 per share payable December 5, 1997 to stockholders of record at the close of business on November 19, 1997. Dividends by the Company are limited by covenants under the Company's financing agreements. Certain of these dividend restrictions directly apply to Southern Peru Limited, a wholly owned subsidiary of the Company, as the issuer of the debt, however, they also apply to SPCC in consolidation or as the guarantor. The most restrictive of these covenants limits the payment of dividends by SPCC to 50% of consolidated net income. Expansion and Modernization Project: In September 1996, the Company announced a two stage project which includes an expansion of the Cuajone mine and an expansion and modernization of its copper smelter at Ilo. The total capital cost for this project is estimated at $1.0 billion, budgeted to be spent over the next six years. The Cuajone mine expansion is expected to increase the Company's annual copper production by 130 million pounds and require an estimated capital investment of approximately $245 million. Construction contracts for the expansion have been awarded and site construction commenced in July. Completion of this stage of its expansion program is expected in 1999. -13-
Engineering for the second stage of the program, the expansion and modernization of the Ilo smelter, began in 1997. Following completion of preliminary engineering, SPCC plans to modernize and increase the capacity of its existing copper smelter at Ilo. The expected cost of the second stage, based on the Company's preliminary engineering studies, is approximately $787 million and is expected to be completed in 2003. A future opportunity for a third stage of the expansion and modernization plan, consisting of a second expansion at Cuajone and further expansion of the Ilo smelter capacity, will be evaluated at a later date and will depend on the availability of financing and other conditions at the time. A decision to proceed on this stage of the project is not expected before 2000. The Company anticipates that the projects will be funded from a combination of existing cash, internally generated funds and external financing. Environmental Matters: The Company has made a significant number of environmental capital expenditures, including, a sulfuric acid plant at the Ilo smelter for partial recapture of sulfur dioxide, completed in 1995 at a cost of $103.0 million; a sewage treatment plant at Ilo, completed in 1994 at a cost of $2.0 million; and a tailings storage facility at Quebrada Honda, which became operational in 1996 and will be completed in 1997 at a cost of approximately $60 million. The Company has also incurred capital costs of $3.0 million for environmental projects as a result of the commitment made in connection with the Ilo refinery acquisition. In addition, in April 1996 the Company began a $35 million expansion of the Ilo sulfuric acid plant. The expansion will increase the capture of sulfur dioxide emissions from the smelter from 18% to 30% and will also increase sulfuric acid production at the smelter to 330,000 tons per year in 1998, the expected year of expanded plant operation. Capital expenditures in connection with these and other environmental projects were approximately $29.8 million in 1996. The Company's exploration, mining, milling, smelting and refining activities are subject to Peruvian laws and regulations, including environmental laws and regulations, which change from time to time. The Company's recently approved environmental compliance and management plan, PAMA, sets forth the investment to be made by the Company to comply with Peruvian environmental regulations applicable to its operations. To implement the PAMA, the Company is required to make a minimum annual investment of 1% of net annual sales until compliance is met. The PAMA will require the Company to make significant additional capital expenditures to achieve compliance with the maximum permissible levels for its emission and waste discharges ("MPLs") within a period of five years, except for environmental controls applicable to its smelter operation which must be put in place within ten years. The PAMA contemplates a number of environmental projects, the largest and most capital intensive of which is the planned modernization of the Ilo smelter. Management believes that under current Peruvian law and regulations, compliance with the PAMA will satisfy the MPL requirements pertaining to the Company's operations during the applicable five-or ten-year implementation period. The Company remains, however, subject to other environmental requirements applicable to its operations. Impact of New Accounting Standards: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (the "Statement"), which specifies the computation, presentation and disclosure requirements for earnings per share ("EPS"). The Statement will require the Company to present both basic and diluted EPS amounts from income for continuing operations and net income on the face of the income statement. The Company does not expect the impact of this statement to have a material effect on its calculation of EPS. The Statement will be effective for financial statements issued for periods ending after December 15, 1997, including interim periods. -14-
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income." The Company is currently assessing the impact of this statement, which is effective for fiscal years beginning after December 15, 1997. 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. -15-
COOPERS & LYBRAND L.L.P. 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, 1997 and the condensed consolidated statements of earnings and cash flows for the three month and nine month periods ended September 30, 1997 and 1996. 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, 1996, and the related consolidated statements of income, retained earnings, and cash flows for the year then ended (not presented herein); and in our report dated January 28, 1997 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, 1996, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Coopers & Lybrand L.L.P. New York, New York October 17, 1997 -16-
PART II - OTHER INFORMATION Item 1 - Legal Proceedings 1. With respect to the lawsuit filed in Peru by approximately 800 former employees seeking the delivery of a substantial number of labor shares of the Peruvian Branch of Southern Peru Limited plus dividends, reported on Form 10-Q for the first and second quarters of 1997 and on Form 10-K for 1996, in October 1997 the Superior Court of Lima nullified a decision by a court of first instance, which had been adverse to Southern Peru Limited. The Superior Court remanded the case for a new trial. With respect to a similar lawsuit by up to 127 additional former employees, reported on Form 10-Q for the first and second quarters of 1997 and on Form 10-K for 1996, in the third quarter of 1997, the court of first instance dismissed their complaint. The plaintiffs have appealed to the Superior Court of Lima. 2. With respect to the lawsuit filed by the Mayor of Tacna, Peru, in 1993 against Southern Peru Limited, seeking $100 million in damages from alleged harmful deposition of tailings, slag, and smelter emissions, reported on Form 10-Q for the first and second quarters of 1997 and on Form 10-K for 1996 and prior years, in the third quarter of 1997 the Supreme Court of Peru affirmed the dismissal of the case by the Superior Court of Tacna. -17-
Item 6(a) - Exhibits on Form 10Q EXHIBIT INDEX <TABLE> <CAPTION> Exhibit <S> <C> 11 Statement re Computation of Earnings per Share </TABLE> -18-
Exhibit 11 Statement re Computation of Earnings per Share This calculation is submitted in accordance with Regulation S-K item 601(b)(11). Fully Diluted Earnings per Common Share (in thousands, except per share amounts) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net earnings applicable to common stock $39,839 $37,880 $155,255 $132,217 ======= ======= ======== ======== Weighted average number of common shares outstanding 80,203 80,184 80,198 80,198 Shares issuable from assumed exercise of Stock Options 22 - 22 - -------- ------- ------- ------- Weighted average number of common shares outstanding, as adjusted 80,225 80,184 80,220 80,198 ======== ======= ======= ======= Fully diluted earnings per share: Net earnings applicable to common stock $ 0.50 $ 0.47 $ 1.94 $ 1.65 ======== ======== ======== ======= Primary earnings per share: Net earnings applicable to common stock $ 0.50 $ 0.47 $ 1.94 $ 1.65 ======== ======== ======== ======= </TABLE>
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 13, 1997 /s/ Ronald J. O'Keefe --------------------- Ronald J. O'Keefe Executive Vice President and Chief Financial Officer Date: November 13, 1997 /s/ Brendan M. O'Grady ---------------------- Brendan M. O'Grady Comptroller -19-
Exhibit I COOPERS & LYBRAND L.L.P. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 We are aware that our report dated October 17, 1997 on our review of the interim financial information of Southern Peru Copper Corporation and Subsidiaries as of September 30, 1997 and for the three month and nine month periods ended September 30, 1997 and 1996 and included in this Form 10-Q for the quarter ended September 30, 1997 is incorporated by reference in the Company's Registration Statement on Form S-8 (File No. 33-32736). Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not be considered a part of the Registration Statement prepared or certified by us within the meaning of Sections 7 and 11 of that Act. Coopers & Lybrand L.L.P. New York, New York November 13, 1997