SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 1999 Second Quarter FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended June 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 July 31, 1999 there were outstanding 13,968,862 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.
Southern Peru Copper Corporation and Subsidiaries INDEX TO FORM 10-Q Page No. Part I. Financial Information: Item 1. Financial Statements (unaudited) Condensed Consolidated Statement of Earnings Three Months and Six Months Ended June 30, 1999 and 1998 2 Condensed Consolidated Balance Sheet June 30, 1999 and December 31, 1998 3 Condensed Consolidated Statement of Cash Flows Three Months and Six Months Ended June 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 7-12 Report of Independent Accountants 13 Part II. Other Information: Item 6(a) Exhibits on Form 10-Q 14 Signatures 15 Exhibit 15 - Independent Accountants' Awareness Letter 1
<TABLE> <CAPTION> Southern Peru Copper Corporation and Subsidiaries CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (unaudited) 3 Months Ended 6 Months Ended June 30, June 30, 1999 1998 1999 1998 ---- ---- ---- ---- (in thousands, except for per share data) <S> <C> <C> <C> <C> Net sales: Stockholders and affiliates $ - $ 6,392 $ - $ 12,376 Others 132,376 146,147 256,318 292,558 -------- --------- -------- --------- Total net sales 132,376 152,539 256,318 304,934 -------- --------- -------- --------- Operating costs and expenses: Cost of sales 95,862 105,926 185,113 211,534 Administrative and other expenses 9,427 10,137 19,525 24,718 Depreciation and depletion 18,271 15,687 35,658 29,377 Exploration expense 1,706 976 2,466 2,168 -------- --------- -------- --------- Total operating costs and expenses 125,266 132,726 242,762 267,797 -------- --------- -------- --------- Operating income 7,110 19,813 13,556 37,137 Interest income 2,301 4,036 5,218 8,983 Other income 175 7,164 1,641 8,728 Interest expense (4,448) (3,837) (9,500) (8,244) --------- --------- --------- ---------- Earnings before taxes on income and minority interest of labor shares 5,138 27,176 10,915 46,604 Taxes on income 1,541 8,598 3,274 14,913 Minority interest of labor shares in income of Peruvian Branch 8 205 10 398 -------- ---------- -------- --------- Net earnings $3,589 $ 18,373 $ 7,631 $ 31,293 ======== ========= ======== ========= Per common share amounts: Net earnings - basic and diluted $0.05 $ 0.23 $0.10 $ 0.39 Dividends paid $ 0.025 $0.080 $ 0.055 $0.280 Weighted average common shares outstanding: Basic 79,867 79,850 79,862 79,936 Diluted 79,888 79,859 79,876 79,943 The accompanying notes are an integral part of these financial statements. </TABLE> 2
<TABLE> <CAPTION> Southern Peru Copper Corporation and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEET (unaudited) June 30, December 31, 1999 1998 <S> <C> <C> (in thousands) ASSETS Current assets: Cash and cash equivalents $ 105,916 $ 175,948 Marketable securities 30,520 22,152 Accounts receivable, net 70,357 64,561 Inventories 89,043 88,951 Other assets 59,266 58,450 ---------- ---------- Total current assets 355,102 410,062 Net property 1,144,216 1,088,557 Other assets 27,773 27,218 ---------- ---------- Total Assets $1,527,091 $1,525,837 ========== ========== LIABILITIES Current liabilities: Current portion of long-term debt $ 15,026 $ 13,683 Accounts payable 44,366 48,497 Accrued liabilities 37,336 34,836 ---------- ---------- Total current liabilities 96,728 97,016 ---------- ---------- Long-term debt 214,340 220,525 Deferred credits 15,831 15,722 Deferred income taxes 61,404 56,700 Other liabilities 11,231 10,951 ---------- ---------- Total non-current liabilities 302,806 303,898 ---------- ---------- Minority interest of labor shares in the Peruvian Branch 15,726 16,331 ---------- ---------- STOCKHOLDERS' EQUITY Common stock (a) 261,363 261,363 Retained earnings 850,468 847,229 ---------- ---------- Total Stockholders' Equity 1,111,831 1,108,592 ---------- ---------- Total Liabilities, Minority Interest & Stockholders' Equity $1,527,091 $1,525,837 ========== ========== (a) Common shares: Authorized 34,099 34,099 Outstanding 13,969 13,949 Class A common shares Authorized and Outstanding 65,901 65,901 The accompanying notes are an integral part of these financial statements. </TABLE> 3
Southern Peru Copper Corporation and Subsidiaries CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) <TABLE> <CAPTION> 3 Months Ended 6 Months Ended June 30, June 30, 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> (in thousands) OPERATING ACTIVITIES Net earnings $ 3,589 $ 18,373 $ 7,631 $ 31,293 Adjustments to reconcile net earnings to net cash provided from operating activities: Depreciation and depletion 18,271 15,687 35,658 29,377 Provision (benefit) for deferred income taxes (182) 1,751 5,074 4,197 Minority interest of labor shares 8 205 10 398 Cash provided from (used for) operating assets and liabilities: Accounts receivable (18,890) 3,696 (6,308) 12,413 Inventories (1,463) 2,846 (92) (1,655) Accounts payable and accrued liabilities 4,609 (17,342) (1,492) (2,943) Other operating assets and liabilities 1,254 23,319 3,699 7,464 Foreign currency transaction losses (gains) (286) 823 1,230 823 --------- -------- -------- -------- Net cash provided from operating activities 6,910 49,358 45,410 81,367 -------- -------- -------- -------- INVESTING ACTIVITIES Capital expenditures (47,372) (51,337) (97,686) (127,745) Purchases of held-to-maturity investments (30,520) (25,389) (54,990) (27,189) Proceeds from held-to-maturity investments 24,470 91,224 46,622 179,903 Sales of property 736 2,891 1,098 3,713 -------- -------- -------- --------- Net cash provided from (used for) investing activities (52,686) 17,389 (104,956) 28,682 --------- -------- --------- --------- FINANCING ACTIVITIES Debt repayment (6,842) (6,841) (6,842) (6,841) Proceeds from borrowings - - 2,000 - Escrow (deposits) withdrawals on long-term loans (40) 5,385 (67) 7,000 Dividends paid to common stockholders (1,997) (6,387) (4,393) (22,370) Distributions to minority interest (39) (130) (86) (526) Net treasury stock transactions - - - (3,001) Purchases of labor shares (462) (2,331) (645) (3,243) --------- --------- --------- --------- Net cash used for financing activities (9,380) (10,304) (10,033) (28,981) --------- --------- --------- --------- Effect of exchange rate changes on cash 284 (554) (453) (361) -------- --------- --------- -------- Increase (decrease) in cash and cash equivalents (54,872) 55,889 (70,032) 80,707 Cash and cash equivalents, at beginning of period 160,788 151,309 175,948 126,491 -------- -------- -------- -------- Cash and cash equivalents, at end of period $105,916 $207,198 $105,916 $ 207,198 ======== ======== ======== ========= 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 June 30, 1999 and the results of operations and cash flows for the three and six months ended June 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 six 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. Inventories were as follows: (in millions) June 30, December 31, 1999 1998 Metals at lower of average cost or market: Finished goods $1.2 $ 1.5 Work-in-process 34.9 37.9 Supplies at average cost, net of reserves 52.9 49.5 ---- ---- Total inventories $ 89.0 $88.9 ====== ===== C. At June 30, 1999, the Company has recorded sales of 3.2 million pounds of copper, at a provisional price of $0.65 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 third quarter of 1999. D. 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 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. 5
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. E. 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. F. 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 supposed to be effective for 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 $3.6 million, or 5 cents per common share, for the second quarter ended June 30, 1999 compared with net earnings of $18.4 million, or 23 cents per common share, for the second quarter of 1998. For the first six months of 1999, net earnings were $7.6 million or 10 cents per common share, compared to $31.3 million, or 39 cents per common share, for the same period of 1998. The decrease in earnings in the second quarter of 1999 is primarily a result of lower metal prices, which is estimated to have reduced earnings by approximately $19.5 million when compared with the second quarter of 1998. The average price for copper on the London Metal Exchange (LME) was 67 cents per pound for the second quarter of 1999 compared with 79 cents per pound in the second quarter of 1998. Average price for copper for the six months ended June 30, was 65 cents in 1999 and 78 cents in 1998. Prices for SPCC's principal by-products were also lower in the 1999 periods. The Company's 1999 second quarter results benefited from an estimated $5.2 million in realized pre-tax savings from the Company's cost reduction program. For the six months ended June 30, 1999 the pre-tax savings from the cost reduction program are estimated to be $18.4 million and the program is expected to improve full year 1999 pre-tax earnings by $30.0 million. The Company's results for the first six months 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. Mine copper production increased 14% to 180.0 million pounds in the second quarter of 1999 compared with second quarter of last year. This increase of 22.2 million pounds included 9.0 million pounds from the Cuajone mine, 16.2 million pounds from the Toquepala mine and a decrease of 3.0 million pounds in solvent extraction/electrowinning (SX/EW) production. The production increase at Cuajone is due to the completion of the mine expansion program. Toquepala's increase in production was due principally to higher ore grades. The decrease in SX/EW production was caused by planned shutdowns to allow for expansion modifications. 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 1999. High clay content in ore processed caused metallurgical problems which had a negative impact on copper recoveries, reducing expected copper production by an estimated 60 million pounds during the first half of 1999. The Company is currently making process modifications which are expected to improve recoveries. The expansion of the Toquepala SX/EW facility, which will increase annual production 26% to 62,000 tons, is on schedule to be completed in the third quarter of this year. Work on the Company's expansion and modernization of the Ilo smelter is continuing. 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 June 30, 1999 the inflation and devaluation rates were 1.3% and nil, respectively, and for the six month period ended June 30, 1999, the inflation and devaluation rate were 2.2% and 5.6%, respectively. Net Sales: Net sales in the second quarter of 1999 decreased $20.2 million to $132.4 million from the comparable period in 1998. Net sales for the first six months of 1999 totaled $256.3 million, compared with $304.9 million for the same period of 1998. The decrease in net sales was a result of lower copper prices in 1999 partially offset by an increase in sales volume of 14.0 million pounds in 7
the second quarter of 1999 and 12.7 million pounds in the first six months of 1999. At June 30, 1999, the Company has recorded sales on 3.2 million pounds of copper, at a provisional price of $0.65 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 third 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 Six Months Ended June 30 June 30 Price/Volume Data: 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Average Metal Prices: Copper (per pound-LME) $0.67 $0.79 $0.65 $0.78 Molybdenum (per pound) $2.64 $4.03 $2.67 $3.99 Silver (per ounce-COMEX) $5.13 $5.69 $5.20 $5.96 Sales Volume (in thousands): Copper (pounds) 181,200 167,200 349,900 337,200 Molybdenum (pounds) (1) 3,228 2,730 5,552 5,581 Silver (ounces) 674 764 1,307 1,518 </TABLE> (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. 8
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 six months of 1998. At June 30, 1999, the Company held no copper put options. Fuel swaps: The Company may enter into fuel swap agreements to limit the effect of changes in fuel prices on its production costs. A fuel swap establishes a fixed price for the quantity of fuel covered by the agreement. The difference between the published price for fuel and the price established in the contract for the month covered by the swap is recognized in production costs. As of June 30, 1999 and December 31, 1998, the Company had the following fuel swap agreements: Weighted Average Quantity Contract Price Fuel Type Period (barrels) (per barrel) June 30, 1999 Residual Oil 7/99-12/99 1,073,700 $10.76 1/00-12/00 1,048,800 $12.34 Diesel Fuel 7/99-12/99 360,000 $17.43 1/00-12/00 360,000 $18.80 December 31, 1998 Residual Oil 1/99-9/99 1,095,000 $9.84 Diesel Fuel 1/99-9/99 432,000 $15.80 The unrealized gain in the Company's fuel swap positions at June 30, 1999 was $5.7 million. A hypothetical 10 percent decrease from June 30, 1999 fuel prices, would reduce the unrealized gain on fuel swaps by $4.3 million. In the second quarter of 1999, the Company's production costs would have been $1.8 million higher if this exposure had not been hedged. Operating Costs and Expenses: Operating costs and expenses were $125.3 million in the second quarter of 1999 compared with $132.7 million in the second quarter of 1998. In the six months ended June 30, 1999, operating costs and expenses were $242.8 million, compared with $267.8 million in the comparable 1998 period. The decrease in the operating costs and expenses is principally due to lower unit cost of Company mined copper sold as a result of cost-reduction and production enhancement programs instituted by the Company in April 1998. In addition, the six month 1998 period included a charge of $10.0 million recorded in the first quarter of 1998 for severance costs associated with the cost reduction program. 9
Non-Operating Items: The Company's second quarter 1998 results include in, "Other income" a $5.3 million insurance settlement related to rain damage incurred in the first quarter of 1997. Interest income was $2.3 million in the second quarter of 1999 and $5.2 million for the first two quarters of 1999, as compared to $4.0 million and $9.0 million, respectively, in the comparable periods of 1998. 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 June 30, 1999 were $1.5 million, compared with $8.6 million for the second quarter of 1998. The decrease was principally due to lower earnings in 1999, as a consequence of lower metal prices. Cash Flows: Second Quarter: Net cash provided from operating activities was $6.9 million in the second quarter of 1999, compared with $49.4 million in the comparable 1998 period. The decrease was primarily the result of lower copper prices and changes in operating assets and liabilities. Net cash used for investing activities was $52.7 million in the second quarter of 1999, and was due principally to capital expenditures. In the second quarter of 1998, net cash provided from investing activities was $17.4 million and was principally due to higher proceeds from held-to-maturity investments to fund anticipated Cuajone expansion costs. Financing activities in the second quarter of 1999 was a use of cash of $9.4 million, compared with a use of cash of $10.3 million for the second quarter of 1998. The second quarter of 1999 includes a dividend distribution of $2.0 million, a debt payment of $6.8 million and $0.5 million used to repurchase labor shares. The second quarter of 1998 included a dividend distribution of $6.4 million, a debt payment of $6.8 million, purchases of labor shares of $2.3 million, net of $5.4 million of funds released from escrow accounts. Six Months: Net cash provided from operating activities was $45.4 million for the six month period ended June 30, 1999, compared with $81.4 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 $105.0 million in the six month period ended June 30, 1999 and was primarily due to capital expenditures. In the six month period ended June 30, 1998, net cash provided from investing activities was $28.7 million and was largely due to higher proceeds from held-to-maturity investments. The decrease in capital expenditures in the six months ended June 30, 1999 as compared to the 1998 period is attributable to the completion of the Cuajone expansion in 1998. Cash used for financing activities for the six months ended June 30, 1999 was $10.0 million, $29.0 million in the comparable 1998 period. Dividends paid to shareholders were $4.4 million in the 1999 six-month period and $22.4 million in the 1998 six-month period. Liquidity and Capital Resources: At June 30, 1999, the Company's debt as a percentage of total capitalization (total debt, minority interests and stockholders' equity) was 16.9% compared to 17.2% at December 31, 1998. Debt at June 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 $882.5 million at June 30, 1999. 10
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 second quarter of 1999, the Company paid a dividend to shareholders of $2.0 million or 2.5 cents per share, compared with $6.4 million or 8 cents per share in the same period of 1998. On July 26, 1999, the Company declared a quarterly dividend of 2.2 cents per share payable August 31, 1999 to stockholders of record at the close of business on August 17, 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. Year 2000: The Company has implemented a three phase program to identify and resolve Year 2000 (Y2K) issues related to the integrity and reliability of its computerized information systems as well as computer systems embedded in its production processes. Phase one of the Company's program which involved an assessment of Y2K compliance of the Company's computerized information systems and embedded computer systems has been completed. In phase two of the program the Company is modifying or replacing all non-compliant systems. The Company has identified three systems that are not Y2K compliant. These systems are being replaced and are expected to be operational by the third quarter of 1999. As of June 30, 1999, approximately 96% of the Company's computerized information system have been tested and are Y2K compliant with the remainder expected to be tested and be Y2K compliant by the third quarter of 1999. The Company continues to test these systems where appropriate. Under the third phase of the program the Company has sent detailed information requests to its principal customers, suppliers and service providers to determine the status of their Y2K compliance. As of June 30, 1999, the Company received confirmations from approximately 70% indicating that they are or will be Y2K compliant. The Company expects to have further communications with those who have not responded or have indicated further work was required to achieve Y2K compliance. The third phase of the program is expected to be completed in the third quarter of 1999. 11
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 will complete 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. As of June 30, 1999, the Company had spent approximately $1.0 million in addition to its normal internal information technology costs in connection with its Y2K program. The Company expects to incur additional costs of $0.3 million to complete phases two and three of the program. 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 supposed to be effective for 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. 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. 12
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 June 30, 1999 and the related condensed consolidated statements of earnings and cash flows for each of the three-month and six-month periods ended June 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 July 16, 1999 13
PART II - OTHER INFORMATION Item 6(a) - Exhibits on Form 10Q EXHIBIT INDEX Exhibit 15 Independent Accountants' Awareness Letter 14
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: August 9, 1999 /s/ Thomas J. Findley, Jr. -------------------------- Thomas J. Findley, Jr. Vice President and Chief Financial Officer Date: August 9, 1999 /s/ Brendan M. O'Grady ---------------------- Brendan M. O'Grady Comptroller 15
Exhibit 15 PricewaterhouseCoopers LLP Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 We are aware that our report dated July 16, 1999 on our review of the interim financial information of Southern Peru Copper Corporation and Subsidiaries as of June 30, 1999 and for the three-month and six-month periods ended June 30, 1999 and 1998 and included in this Form 10-Q for the quarter ended June 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 August 9, 1999