-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IXpWpLTkkhmFi5McNLEBSvOt8LTGre7zQzCojXEYP7TzeMf78z+anHIJRfeUzdei jlnp0BCCZwRRX1jz5T5ZZg== 0000912057-00-011674.txt : 20000316 0000912057-00-011674.hdr.sgml : 20000316 ACCESSION NUMBER: 0000912057-00-011674 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN PERU COPPER CORP/ CENTRAL INDEX KEY: 0001001838 STANDARD INDUSTRIAL CLASSIFICATION: METAL MINING [1000] IRS NUMBER: 133849074 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14066 FILM NUMBER: 570219 BUSINESS ADDRESS: STREET 1: 180 MAIDEN LANE CITY: NEW YORK STATE: NY ZIP: 10038 BUSINESS PHONE: 2125102000 MAIL ADDRESS: STREET 1: 180 MAIDEN LANE STREET 2: 180 MAIDEN LANE CITY: NEW YORK STATE: NY ZIP: 10038 FORMER COMPANY: FORMER CONFORMED NAME: SOUTHERN PERU COPPER HOLDING CO DATE OF NAME CHANGE: 19951006 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 1999 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered --------------------------------------- ----------------------- Common Stock, par value $0.01 per share New York Stock Exchange Lima Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best knowledge of the registrant, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. |_| As of February 29, 2000, there were of record 14,097,092 shares of Common Stock, par value $0.01 per share, outstanding, and the aggregate market value of the shares of Common Stock (based upon the closing price on such date as reported on the New York Stock Exchange - Composite Transactions) of Southern Peru Copper Corporation held by nonaffiliates was approximately $215 million. As of the above date, there were also 65,900,833 shares of Class A Common Stock, par value $0.01 per share, outstanding. Class A Common Stock is convertible on a one-to-one basis into Common Stock. PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE: Part III: Proxy statement in connection with the Annual Meeting to be held on May 9, 2000. Part IV: Exhibit index is on page B1 through B3. A1 PART I Item 1. Business THE COMPANY The Company, an integrated producer of copper, operates mining, smelting and refining facilities in the southern part of Peru. Southern Peru Copper Corporation was reorganized into a holding company structure effective January 2, 1996, upon completion of a public offer to exchange newly issued Common Stock for outstanding labor shares of the Company's Peruvian Branch ("Labor Shares") called "Investment Shares" as of December 31, 1998. Effective December 31, 1998, the Company's predecessor and wholly owned operating subsidiary, Southern Peru Limited, was merged into the Company. The Company, incorporated in 1952 was reorganized in 1955 and has conducted copper mining operations since 1960. Pursuant to Peruvian law, the Company conducts its operations in Peru through a registered branch (the "Branch"). The Branch is not a corporation separate from the Company. It is, however, an establishment, registered pursuant to Peruvian law, through which the Company holds assets, incurs liabilities and conducts operations in Peru. Although it has neither its own capital nor liability separate from that of the Company, it is deemed to have an equity capital for purposes of determining the economic interest of holders of investment shares. Investment shares are non-voting ownership interests distributed to workers in accordance with former Peruvian laws. The Branch comprises substantially all the assets and liabilities of the Company associated with its copper operations in Peru. Throughout this report, unless the context otherwise requires, the terms "Southern Peru", "SPCC" and "the Company" refer to the present corporation and its consolidated subsidiaries as well as its predecessor. In addition, throughout this report, unless otherwise noted, all tonnages are in metric tons. To convert to short tons, multiply by 1.102. All distances are in kilometers. To convert to miles, multiply by 0.62137. All ounces are troy ounces. On November 15, 1999, ASARCO Incorporated (ASARCO) transferred all of its holdings of SPCC to Southern Peru Holdings Corporation, a wholly-owned subsidiary of ASARCO. On November 17, 1999, Grupo Mexico S.A. de C.V. ("Grupo Mexico") acquired all the holdings of ASARCO following a tender offer and purchase of all outstanding common stock of ASARCO. At December 31, 1999 the stockholders in the Company were Southern Peru Holdings Corporation, a subsidiary of ASARCO (54.2%), a subsidiary of Cerro Trading Company, Inc.(14.2%), Phelps Dodge Overseas Capital Corporation (14.0%) and common stockholders (17.6%). Reference is made to the following Financial Statement footnote included in this report: Net Sales in Note 7. 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. Additional business information follows: A2 COPPER BUSINESS The copper operations of the Company involve the mining, milling and flotation of copper ore to produce copper concentrates, the smelting of copper concentrates to produce blister copper and the refining of blister copper to produce copper cathode. The Company also produces refined copper using solvent extraction/electrowinning ("SX/EW") technology. Silver, molybdenum and small amounts of other metals are contained in copper ore as by-products. Silver sold is recovered in the refining process or as an element of blister copper. Molybdenum is recovered from copper concentrate in a molybdenum by-product plant. The Company has not reported information by industry segments because substantially all of its revenues are generated from its copper production. REVIEW OF OPERATIONS SPCC operates the Toquepala and Cuajone mines, high in the Andes, approximately 984 kilometers southeast of Lima. It also operates a smelter and refinery west of the mines at the Pacific Ocean coast City of Ilo, Peru. SPCC is one of Peru's leading companies and one of the 10 largest private-sector copper mining companies in the world. Mine copper production at SPCC increased in 1999 due principally to higher throughput at the Cuajone mine, following completion of the mine expansion. The 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 twelve months of 1999. Improved operations at the Ilo copper refinery and completion of the Toquepala SX/EW facility, increased 1999 refined copper production. The Cuajone mine expansion completed earlier this year reached target ore throughput rate during the second quarter 1999. The expansion of the Toquepala SX/EW facility, which will increase annual production to 56,250 tons, was completed in the third quarter of this year. The Company's investment program includes continuing expansion of the Toquepala mining unit, expansion of the concentrator and adding equipment in the pit. Likewise, modernization of the mining equipment at Cuajone will continue and a possible expansion of the leaching section of such unit and the construction of a SX/EW plant is being analyzed. Special emphasis will be given to the modernization of the Ilo smelter, in order to improve its efficiency, its production volume and significantly increase the capture of sulfur dioxide, to comply with environmental agreements and requirements. MINING OPERATIONS Total mined copper production at SPCC increased 11.9% in 1999, compared with 1998, due to higher production at Cuajone and the beginning of operations in the fourth quarter of the SX/EW plant expansion. Cuajone production increased 20.4% in 1999 to 380 million pounds of copper due principally to higher throughput at the Cuajone mine, following completion of the mine expansion. Concentrator throughput for the year was 28.6 million tons of ore producing 690,000 tons of copper concentrates. The rainy conditions in the first quarter of the year and metallurgical difficulties with the ore reduced copper production by an estimated 80 million pounds from planned levels during the twelve months of 1999. Toquepala mine production increased 3.9% in 1999 to 256 million pounds of copper due to an increase in ore grade. The Toquepala concentrator milled 16.2 million tons of ore. Together, the two mines produced 3.4 million ounces of silver and 12.1 million pounds of molybdenum as by-products. A3 SX/EW OPERATIONS The SX/EW facility at Toquepala produces refined copper from solutions obtained by leaching low-grade ore stored at the Toquepala and Cuajone mines. An expansion of the facility was completed in the third quarter of 1999 increasing annual production to 56,250 tons. The facility produced 49,500 tons in 1999 compared to 47,000 tons in 1998. This represents 5.2 million pounds more copper over 1998 production. ORE RESERVES SPCC has identified substantial geologic resources. In October 1999, the Company reported a substantial increase in proven and probable ore reserves at the Toquepala mine. At year-end 1999, probable sulfide reserves totaled 692 million tons with an average copper grade of 0.74% at Toquepala and 1,242 million tons with an average copper grade of 0.64% at Cuajone. In addition, the Company has leachable ore, Toquepala with 1,732 million tons with ore grade of 0.20% and Cuajone with 62 million tons with ore grade of 0.49%. SMELTING AND REFINING OPERATIONS The Ilo smelter increased concentrate processed by 4.3% in 1999 as compared to the prior year. Smelting of SPCC concentrates increased by 17.8%, replacing higher-grade copper concentrate from third parties. As a result, blister production decreased by 1.5% in 1999 as compared to 1998. SPCC's total refined copper production, including the 109.2 million pounds from the SX/EW plant, increased 2.2% to 662.0 million pounds in 1999 from 647.4 million pounds in 1998. Refined production from the Ilo refinery reached 552.7 million pounds in 1999, an increase of 1.7% from 1998 due to efficiency gains at the plant. The SX/EW expansion was completed during the third quarter of 1999 increasing this facility's production by 5.0% when compared to the prior year. SPCC's Ilo smelter provides feed for the refinery. Blister copper produced by the smelter exceeds the refinery's capacity and the excess is sold to other refineries around the world. EXPANSION AND MODERNIZATION PROGRAM Expansion and modernization programs announced in prior years are underway. Expansion of the Cuajone mine was finished in 1999 with an investment of $245 million. During 1999 the following major equipment was received for the Cuajone mine: one 4100 model P&H shovel with a capacity of 56 cubic yards, eight 793C model Caterpillar 240-short ton capacity trucks, one 100XP model P&H rotary drill, one 844 model Caterpillar wheel tractor and one LT1800 model Letorneau front-end loader with a capacity of 33 cubic yards. This equipment is already operating in the mine, with the exception of the P&H shovel, which will start operations in March 2000. The expansion of the SX/EW plant in Toquepala was finished in 1999 and is producing at its design capacity of 56,250 tons per year. The project to expand and protect the Cuajone mine from maximum flooding of the Torata river is under construction and reached 40% completion at the end of 1999, with an investment of $36.0 million out of the $75.5 million budget. The Torata river will be diverted in June 2000 to allow the beginning of the Cuajone pit expansion. Engineering studies for the Ilo smelter modernization and expansion project were continued introducing the most efficient technology, proven in other metallurgical facilities, looking not only to comply with Peruvian environmental standards, but also to provide economic returns. A4 Feasibility studies for expansion of the Toquepala concentrator, its mine, the leaching section and a SX-EW plant at Cuajone are currently underway. Construction of these projects may begin in the year 2000 improving SPCC production capacity to over 900 million pounds of copper per year. EXPLORATION SPCC continues with its aggressive exploration program in Peru aimed at finding economically attractive copper-gold deposits. Currently, the Company owns 330,000 hectares of mining rights and has access to another 108,000 hectares through joint ventures and purchase options. 7,700 meters have been drilled at Los Chancas project. Preliminary results indicate up to 200 million tons of ore with a copper content superior to 1%; 0.08% molybdenum; and 0.12 gr./ton of gold. The expected stripping ratio is low. The first metallurgical tests indicate a ductile metal. More testing is underway to determine the best way to treat this material. The Tantahuatay project, in which SPCC has a 44% interest, has leacheable oxides containing a potential of 4 million gold ounces. Studies are currently underway to treat the arsenic content of the deposit and make feasible the exploitation of the important copper sulfides deposit located under the gold. Encouraging results have been found in other gold/copper exploration projects. Work on these prospects will continue during 2000. ENVIRONMENT With the operation of the sulfuric acid plant at the smelter in Ilo, which was expanded to 317,500 tons per year and the Supplementary Control Program (SCP) to control sulfur dioxide emissions by curtailing production during periods of adverse weather, there has been an improvement of air quality in the Ilo area. Part of the acid produced is used by the company to leach ore at its SX/EW operation; the balance is sold in regional markets. A5 PRINCIPAL PRODUCTS AND MARKETS The principal uses of copper are in the building and construction industry, electrical and electronic products and, to a lesser extent, industrial machinery and equipment, consumer products and the automotive and transportation industries. Silver is used for photographic, electrical and electronic products and, to a lesser extent, brazing alloys and solder, jewelry, coinage, silverware and catalysts. Molybdenum is used to toughen alloy steels and soften tungsten alloy and is also used in fertilizers, dyes, enamels and reagents. During 1999, 1998 and 1997, substantially all of the Company's copper production was exported from Peru and sold to customers in Europe, the Far East, the United States and elsewhere in Latin America. A substantial portion of SPCC's copper sales is made under annual contracts to industrial users. Silver is sold under annual contracts or in spot sales and molybdenum is sold in concentrate form to merchants and other refiners under annual contracts. Most customers receive shipments on a monthly basis at a constant volume throughout the year. As a result there is little seasonality in SPCC sales volumes. BACKLOG OF ORDERS Substantially all of the Company's metal production is sold under annual contracts. To the extent not sold under annual contracts, production can be sold on commodity exchanges or in spot sales. Final sales values are determined based on prevailing commodity prices for the quotation period, generally being the month of, the month prior to or the month following the actual or contractual month of shipment or delivery according to the terms of the contract. COMPETITIVE CONDITIONS Competition in the copper market is principally on a price and service basis, with price being the most important consideration when supplies of copper are ample. The Company's products compete with other materials, including aluminum and plastics. EMPLOYEES At December 31, 1999 the Company employed 3,844 persons, about fifty-eight percent of whom were covered by labor agreements with nine labor unions. There were no labor strikes in 1999. ENERGY MATTERS AND WATER RESOURCES Electric power for the Company's operating facilities is generated by a thermal electric plant owned and operated by Enersur S.A. and located adjacent to the Ilo smelter. Power generation capacity is currently 150 megawatts. In addition, the Company has 30 megawatts of power generation capacity from waste heat boilers in the smelter and two small hydro-generating installations at Cuajone. Power is distributed over a 224-kilometer closed loop transmission circuit. In 1997, the Company sold its Ilo power plant to Enersur S.A. and entered into a 20-year power purchase agreement. The power purchase agreement contains provisions obligating Enersur S.A. to construct additional capacity upon notice to meet the Company's increased electricity requirements from the planned expansion and modernization. The parties also entered into an agreement for the sharing of certain services between the power plant and the Company's smelter at Ilo. Under this agreement, the Company's cost of power has increased somewhat from its 1996 level, while the Company has benefited by avoiding significant capital expenditures required to meet the needs of the expanded operations. SPCC has water concessions for well fields at Huaitire and Titijones and surface water rights from Lake Suches. A6 ENVIRONMENTAL MATTERS The Company anticipates spending $50 million for environmental control capital expenditures in 2000. Capital expenditures in connection with environmental projects were approximately $41.6 million in 1999, $25.3 million in 1998 and $47.8 million in 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operation - Environmental Matters" which is herein incorporated by reference. CONCESSIONS The Company has concessions from the Peruvian government for its exploration, exploitation, extraction and/or production operations (collectively, the "Concessions"). The Concessions are in full force and effect under applicable Peruvian laws, and the Company believes it is in compliance with all material terms and requirements applicable to the Concessions. The Concessions have indefinite terms, subject to payment by SPCC of concession fees of up to $2 per hectare annually for the mining concessions and a fee based on nominal capacity for the processing concessions. Fees paid during 1999 were approximately $1.2 million. REPUBLIC OF PERU Substantially all of the Company's revenues are derived from the Toquepala mine, the Cuajone mine, the SX/EW facility and the smelter and refinery at Ilo, all of which are located within a 48-kilometer radius in the southern part of Peru. Risks attendant to the Company's operations in Peru include those associated with economic and political conditions, effects of currency fluctuations and inflation, effects of government regulations and the geographic concentration of the Company's operations. A7 Item 2. Properties FACILITIES The Company's principal executive offices are located at 180 Maiden Lane, New York, New York 10038 and Avenida Caminos del Inca No. 171, Chacarilla del Estanque, Santiago de Surco, Lima 33, Peru. At December 31, 1999, the Company, through its Peruvian Branch, has 100% interest in the Toquepala and Cuajone mines, the SX/EW facility, the Ilo smelter, the sulfuric acid plant and the Ilo refinery and operates them pursuant to concessions from the Peruvian Government. See Item 1 "Business--Concessions". The Company owns, through the Branch, its offices in Lima. Its offices in New York are located in space leased to it by Asarco. The Company believes that its existing properties are in good condition and suitable for the conduct of its business. The offices and the Company's major facilities, together with production commencement dates, are listed below: PERU UNITED STATES ---- ------------- Toquepala Mine -- southern Peru (1960) Executive Offices -- New York, NY Cuajone Mine -- southern Peru (1976) SX/EW Facility -- southern Peru (1995) Ilo Smelter -- Ilo, Peru (1960) Ilo Refinery -- Ilo, Peru (1994-SPCC) Acid Plant -- Ilo, Peru (1995) Executive Offices -- Lima, Peru The Company also owns and operates a railroad connecting the mines at Cuajone and Toquepala with the smelting and refining facilities and a port at Ilo, which are located approximately 196 rail kilometers from the two mines sites, which are at elevations ranging from 3,220 to 3,330 meters. In addition, the Company provides housing, hospitals and schools for employees and their families. A8 METAL PRODUCTION STATISTICS
1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- Copper Production MINES (contained copper in thousands of pounds) Toquepala 256,387 246,783 246,818 252,928 256,128 Cuajone 379,995 315,640 340,551 332,014 290,982 SX/EW 109,225 104,026 98,153 93,170 10,012 - -------------------------------------------------------------------------------------------------------- Total Mines 745,607 666,449 685,522 678,112 557,122 - -------------------------------------------------------------------------------------------------------- SMELTER (contained copper in thousands of pounds) SPCC concentrates 605,150 536,036 575,061 589,994 537,522 Purchased concentrates 32,986 111,732 63,679 43,614 96,934 - -------------------------------------------------------------------------------------------------------- Total Smelter 638,136 647,768 638,740 633,608 634,456 - -------------------------------------------------------------------------------------------------------- REFINERIES (thousands of pounds of copper) Ilo 552,738 543,404 513,315 439,600 432,414 SX/EW 109,225 104,026 98,153 93,170 10,012 - -------------------------------------------------------------------------------------------------------- Total Refineries 661,963 647,430 611,468 532,770 442,426 - -------------------------------------------------------------------------------------------------------- COPPER SALES (thousands of pounds) Refined 553,246 542,786 514,320 439,400 436,638 In blister 66,169 105,374 110,412 162,418 200,592 Concentrates 21,433 17 19,955 -- -- SX/EW 109,024 103,937 99,297 92,472 9,374 - -------------------------------------------------------------------------------------------------------- Total sales of copper 749,872 752,114 743,984 694,290 646,604 - -------------------------------------------------------------------------------------------------------- LME average price (cents per pound) 71 75 103 104 133 Molybdenum (thousands of pounds contained in concentrate) MINES Toquepala 6,993 6,039 6,066 4,483 3,674 Cuajone 5,070 3,520 3,329 4,257 4,334 - -------------------------------------------------------------------------------------------------------- Total produced 12,063 9,559 9,395 8,740 8,008 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Sales of molybdenum In concentrate 11,836 9,677 9,398 8,813 8,402 - -------------------------------------------------------------------------------------------------------- Metals Week Dealer Oxide mean price ($/lb.) $ 2.65 $ 3.41 $ 4.30 $ 3.78 $ 7.90
A9 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------- Silver (thousands of ounces) - -------------------------------------------------------------------------------- SMELTER (in blister) Ilo - SPCC Concentrates 3,378 2,890 3,146 3,097 2,958 - -------------------------------------------------------------------------------- REFINERY Ilo 2,796 2,735 2,462 2,218 2,519 - -------------------------------------------------------------------------------- SALES OF SILVER Refined 2,739 2,724 2,397 2,282 2,597 In blister 497 564 576 828 1,164 In concentrates -- -- 113 -- -- - -------------------------------------------------------------------------------- Total sales of silver 3,236 3,288 3,086 3,110 3,761 - -------------------------------------------------------------------------------- COMEX average price ($/oz.) $5.22 $5.51 $4.88 $5.18 $5.18 - -------------------------------------------------------------------------------- A10 METAL PRODUCTION STATISTICS COPPER RESERVES
Mineral Average Metal Production Reserves Copper Contained Metal (000s Content (000s Pounds) Tons) (%) ------------------------------- 12/31/99 12/31/99 1999 1998 1997 -------- -------- ---- ---- ---- Toquepala Sulfide 691,900 0.74 256,400 246,800 246,800 Leachable 1,732,200 0.20 100,916 93,700 87,900 Cuajone Sulfide 1,242,300 0.64 380,000 315,600 340,600 Leachable 62,000 0.49 8,309 10,300 10,300
The Company has on going exploration programs in Peru. The Company calculates its ore reserves by methods generally applied within the mining industry and in accordance with the regulations of the Securities and Exchange Commission. All mineral reserves are estimated quantities of proven and probable ore that under present and anticipated conditions may be economically mined and processed by the extraction of their mineral content. The following ore production information is provided:
1999 1998 1997 ---- ---- ---- Avg. Mill Avg. Mill Avg. Mill Ore Milled Recovery Ore Milled Recovery Ore Milled Recovery (000s Tons) Rate (%) (000s Tons) Rate (%) (000s Tons) Rate (%) ------------------------------------------------------------------------------------- Toquepala 16,220 87.03% 16,339 88.49% 17,235 87.90% Cuajone 28,607 72.31% 19,685 85.62% 19,703 87.00%
The following productive capacity is provided: Defined Capacity (a) -------------------- Ilo Smelter 290,300 tons Ilo Refinery 245,000 tons Toquepala - SX/EW 56,250 tons (a) SPCC's estimate of actual capacity under normal operating conditions with allowance for normal downtime for repairs and maintenance and based on the average metal content of input material for the three years shown. No adjustment is made for shutdowns or production curtailments due to strikes or air quality emissions restraints. A11 Item 3. Legal Proceedings Reference is made to the information under the caption "Litigation" in Financial Statement Footnote 19 "Commitments and Contingencies" on page A43 incorporated herein by reference. Item 4. Submission of Matters to a Vote of Security Holders None. A12 Executive Officers of the Registrant Set forth below are the executive officers of the Company, their ages as of February 29, 2000, and their positions.
Name Age Position ---- --- -------- German Larrea Mota-Velasco 46 Chairman of the Board, CEO and Director Oscar Gonzalez Rocha 61 President and Director Daniel Tellechea Salido 54 Vice President, Finance Genaro Larrea Mota-Velasco 39 Vice President, Commercial Hector Calva Ruiz 62 Vice President, Exploration and Development Robert Ferri 52 General Counsel and Secretary Ernesto Duran Trinidad 46 Comptroller Genaro Guerrero Diaz Mercado 40 Vice President and Treasurer
German Larrea Mota-Velasco, Chairman of the Board and Chief Executive Officer of SPCC since December 1999 and Director since November 1999. Chairman of the Board of Directors and Chief Executive Officer of Grupo Mexico (holding); Grupo Minero Mexico (mining division) and Grupo Ferroviario Mexicano (railroad division), since 1994. Previously Executive Vice Chairman of Grupo Mexico and member of the Board of Directors since 1981. Chairman and Chief Executive Officer of ASARCO Incorporated from November 1999 to present, and its President from November 1999 to January 2000. Oscar Gonzalez Rocha, President of SPCC since December 1999 and Director since November 1999. Managing Director for Mexicana de Cobre, S.A. de C.V. from 1986 to 1989 and of Mexicana de Cananea, S.A. de C.V. from 1990 to 1999. Alternate Director of Grupo Mexico since 1988 and a Director of ASARCO Incorporated from November 1999 to present. Daniel Tellechea Salido, Vice President, Finance of SPCC since December 1999 and Director since November 1999. Managing Director for Administration and Finance of Grupo Mexico since 1994 and an Alternate Director since 1998. Managing Director of Mexicana de Cobre, S.A. de C.V. from 1986 to 1993 and Director, Vice President and Chief Financial Officer of ASARCO Incorporated from November 1999 to present. Genaro Larrea Mota-Velasco, Vice President, Commercial of SPCC since December 1999 and Director since November 1999. Commercial Managing Director and a Director of Grupo Mexico since 1994. Director, Vice President and Chief Commercial Officer of ASARCO Incorporated from November 1999 to present. Hector Calva Ruiz, Vice President, Exploration and Development of SPCC since December 1999 and Director since November 1999. Managing Director for Exploration and Projects of Grupo Mexico since 1997 and an Alternate Director since 1998. Managing Director of Industrial Minera Mexico, S.A. de C.V. from 1984 to 1997 and Director of ASARCO Incorporated from November 1999 to present. Genaro Guerrero Diaz Mercado, Vice President and Treasurer. Treasurer of Grupo Mexico, S.A. de C.V. from 1994 to date. Ernesto Duran Trinidad, Comptroller. Comptroller of Grupo Mexico, S.A. de C.V. from 1994 to date. Comptroller of Mexicana de Cobre, S.A. de C.V. from 1983 to 1993. Robert Ferri, General Counsel and Secretary. Assistant General Counsel of ASARCO Incorporated, 1982-1987. Associate General Counsel, 1987-1996. Associate General Counsel and Secretary, 1995-1998. Senior Associate General Counsel and Secretary, 1998-1999. General Counsel and Secretary, ASARCO Incorporated, from November 1999 to present, and Vice President since January 2000 to present. A13 PART II Item 5. Market For Registrant's Common Equity and Related Stockholder Matters At December 31, 1999, there were 3,281 holders of record of the Company's Common Stock. SPCC's Common Stock is traded on the New York Stock Exchange (NYSE) and the Lima Stock Exchange (BVL). The SPCC Common Stock symbol is PCU on the NYSE and PCUC1 on the BVL. The Common Stock commenced trading on the NYSE on a when issued basis on January 5, 1996. Regular way trading commenced January 12, 1996. On the BVL, the Common Stock commenced trading on January 5, 1996. The table below sets forth the cash dividends paid per share of capital stock and the high and low stock prices on both the NYSE and the BVL for the periods indicated.
1999 1998 ---- ---- ---------------------------------------------------- --------------------------------------------------- Quarters 1st 2nd 3rd 4th Year 1st 2nd 3rd 4th Year ---------------------------------------------------- --------------------------------------------------- Dividend per share $0.03 $0.025 $0.022 $0.075 $0.152 $0.20 $0.08 $0.11 $0.12 $0.51 Stock market price NYSE: High $10-7/8 $15 $16-7/8 $18-1/16 $18-1/16 $15-1/8 $16-11/16 $13-1/2 $12-7/8 $16-11/16 Low $8-7/16 $10-1/16 $13-5/8 $13-13/16 $8-7/16 $12-1/2 $13 $8-3/4 $8-15/16 $8-3/4 BVL: High $10.66 $15.08 $16.95 $17.45 $17.45 $14.95 $16.50 $13.35 $12.70 $16.50 Low $8.78 $10.12 $13.80 $14.01 $8.78 $12.40 $12.95 $8.93 $8.89 $8.89
On February 25, a dividend of $0.06 a share, totaling $4.8 million was declared, payable March 27, 2000. The Company's dividend policy will be reviewed at the next Board of Directors meeting taking into consideration the current intensive capital investment program, such as the expansion of mines, concentrator/leach plant, smelter and future cash flow generated from operations. For a description of limitations on the ability of the Company to make dividend distributions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" and Note 14 to the Consolidated Financial Statements of the Company. A14 Item 6. Selected Financial Data FIVE-YEAR SELECTED FINANCIAL AND STATISTICAL DATA
(in millions, except per share and employee data) 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Consolidated Statement of Earnings: Net sales $585 $628 $814 $ 753 $ 929 Operating costs and expenses (1) 539 558 577 497 558 Operating income 46 70 237 256 371 Minority interest of investment shares in income of Peruvian Branch -- -- 4 5 44 ---------------------------------------------------------------------- Net earnings $29 $55 $186 $ 181 $ 218 ---------------------------------------------------------------------- Per Share Amounts: Net earnings - basic and diluted $0.37 $0.68 $2.32 $ 2.25 $ 3.31 Dividends paid $0.152 $0.51 $1.26 $ 1.47 $ 1.27 Consolidated Balance Sheet: Total assets $1,545 $1,526 $1,561 $1,280 $1,272 Cash and marketable securities 11 198 331 174 262 Total debt 223 234 248 107 94 Stockholders' equity 1,126 1,109 1,098 1,015 953 Consolidated Statement of Cash Flows: Cash provided from operating activities $90 $181 $278 $ 159 $ 330 Dividends paid 12 41 101 118 84 Capital expenditures 250 259 184 121 183 Depreciation and depletion 74 61 47 42 36 Capital Stock: Common shares outstanding 14.1 13.9 14.2 13.6 11.5 NYSE Price - high $18-1/16 $16-11/16 $21-1/8 $ 21 -- - low $8-7/16 $8-3/4 $12-3/4 $13-7/8 -- Class A common shares outstanding 65.9 65.9 65.9 66.6 68.8 Book value per share $14.09 $13.88 $ 13.71 $ 12.66 $11.90 P/E ratio 41.72 13.88 5.77 6.50 -- Financial Ratios: Current assets to current liabilities 2.4 4.2 5.6 3.8 2.8 Debt as % of capitalization 16.3% 17.2% 18.2% 9.3% 8.8% Employees (at year end) 3,844 4,557 4,829 4,859 5,035
Notes to five year selected financial and statistical data - ---------------- (1) Includes provision for workers' participation of $3.4 million, $10.6 million, $14.4 million, $18.0 million, and $32.2 million in the years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively. A15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW The Company's business is affected by the factors outlined below which should be considered in reviewing the financial position, results of operations and cash flows of the Company for the periods described herein. Inflation and Devaluation of the Peruvian New Sol: A portion of the Company's operating costs are denominated in Peruvian New Soles. Since the revenues of the Company are primarily denominated in U.S. dollars, when inflation in Peru is not offset by a corresponding devaluation of the New Sol, the financial position, results of operations and cash flows of the Company could be adversely affected. The value of the net assets of the Company denominated in new soles can be affected by devaluation of the new sol. The recent inflation and devaluation rates are as follows: Years ended December 31, 1999 1998 1997 ---- ---- ---- Peruvian Inflation Rate 3.7% 6.0% 6.5% New Sol/Dollar Devaluation Rate 11.2% 15.7% 4.9% Peruvian Branch: The consolidated financial statements included herein are prepared in U.S. dollars and in accordance with generally accepted accounting principles in the United States (US GAAP). The Peruvian Branch (the Branch) consists of substantially all the assets and liabilities of Southern Peru Copper Corporation (SPCC) associated with its copper operations in the Republic of Peru. The Branch is registered with the Peruvian government as a branch of a foreign mining company. The results of the Branch are consolidated in the financial statements of the Company. The Branch maintains its books of account in new soles and prepares financial information in accordance with generally accepted accounting principles in Peru (Peruvian GAAP). Peruvian GAAP requires the inclusion in the financial statements of the Branch of the Resultado por Exposicion a la Inflacion (Result of Exposure to Inflation), which seeks to account for the effects of inflation by adjusting the value of non-monetary assets and liabilities and equity by a factor corresponding to wholesale price inflation rates during the period covered by the financial statements. Monetary assets and liabilities are not so adjusted. Expansion and Modernization Project: Expansion and modernization programs announced in prior years are underway. Expansion of the Cuajone mine was finished in 1999 with an investment of $245 million. During 1999 the following major equipment was received for the Cuajone mine: one 4100 model P&H shovel with a 56 cubic yard capacity, eight 793C model Caterpillar 240 short ton capacity trucks, one 100XP model P&H rotary drill, one 844 model Caterpillar wheel tractor and one LT1800 model Letorneau front end loader with a 33 cubic yard capacity. This equipment is already operating at the mine, with the exception of the P&H shovel, which will start operations by March 2000. The expansion of the SX/EW plant in Toquepala was finished in 1999 and is producing at its design capacity of 56,250 tons per year. The project to expand and protect the Cuajone mine from maximum flooding of the Torata River is under construction and reached 40% completion at the end of 1999, with an investment of $36.0 million out of the $75.5 million budget. The Torata River will be diverted in June 2000 to allow the beginning of the Cuajone pit expansion. Engineering studies for the Ilo smelter modernization and expansion project were pursued until November 1999, at which time management decided to revisit the available technologies in order to both fulfill the Peruvian environmental standards, as established in the PAMA, and to better conform the project to SPCC's A16 financial capabilities. The alternatives under analysis may consider ways to speed up the investment commitments as long as they do not compromise SPCC's economic performance, and offer reasonable returns on the investment. This review is expected to be completed in the second quarter of 2000 at which time the best alternative will be selected. Feasibility studies for expansion of the Toquepala concentrator and a new SX-EW plant at Cuajone are currently under way. If attractive, construction of these projects may begin in the year 2000 improving SPCC production capacity to over 900 million pounds per year. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 SPCC reported 1999 net earnings of $29.4 million, or diluted earnings per share of 37 cents, compared with net earnings of $54.6 million, or diluted earnings per share of 68 cents, in 1998 and net earnings of $185.7 million, or diluted earnings per share of $2.32, in 1997. The decline in net earnings in 1999 compared with 1998 is primarily a result of lower copper prices and higher depreciation charges. The average price of copper in 1999 on the London Metal Exchange declined 4 cents per pound from 1998 to 71 cents per pound. The earnings decrease was partially offset by savings realized from the cost reduction program instituted by the Company in 1998. In April 1998, SPCC initiated cost-reduction and production enhancement programs, including reductions in operating expenses, purchased services and general and administrative expenses, designed to reduce annual expense by $30 million when fully implemented. The programs are estimated to have increased pre-tax earnings by $29.2 million in 1999, improving net after-tax earnings by $18.8 million, or 24 cents per share. In the year 2000 the programs are expected to improve net earnings by approximately $40.0 million, or 50 cents per share. Results for 1999 include a non-recurring after-tax charge of $5.4 million ($8.4 million pre-tax), or 6 cents per share, for the severance cost of foreign contract employees' early termination. In addition, the 1999 results also include a non-recurring 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 cost reduction program. In connection with the cost reduction program the Company recorded a $10 million pre-tax charge in the first quarter of 1998 for severance costs. In addition, in the fourth quarter of 1998 the Company transferred title to a major portion of the Ilo townsite to its worker occupants and the City of Ilo. Titles to 1,344 individual homesites were transferred. The Company recorded a pre-tax charge of $10.9 million in 1998 to write-off the remaining book value of the transferred property and to provide for other costs associated with the divestiture. The Company expects future savings as a result of the transfer of the townsite through reduced maintenance costs. The decline in net earnings in 1998 compared with 1997 is primarily a result of lower copper prices. The average price of copper in 1998 on the London Metal Exchange declined 28 cents per pound from 1997 to 75 cents per pound, and at year-end 1998 was 66 cents per pound. In addition to lower metal prices, results for 1998 also reflect an increase in the effective income tax rate compared to 1997. The earnings decrease was partially offset by savings realized from the cost reduction program instituted by the Company in 1998. In 1997, the Government of Peru approved a reinvestment allowance for the Company's program to expand the Cuajone mine. Pursuant to the reinvestment allowance, the Company receives certain tax incentives in Peru. As a result, U.S. tax credit carryforwards for which no benefit had previously been recorded were utilized. Principally because of the reinvestment program, the Company's effective tax rate was lower in 1997. A17 As a result of the expansion program, electric power requirements will increase significantly requiring the construction of additional generating capacity. In the second quarter of 1997, the Company sold its existing power plant to an independent power company for $33.6 million. In connection with the sale, a power purchase agreement was also completed, under which the Company agreed to purchase its power needs for twenty years. Under the agreement, the cost of power has increased somewhat from its 1996 level; however, the Company will avoid the significant capital expenditures that would be required to meet the needs of expanded operations. Net Sales: Net sales in 1999 were $584.5 million, compared with $627.9 million in 1998 and $814.2 million in 1997. Sales decreased in 1999 by $43.4 million, largely as a result of lower copper prices. Copper sales volume was 2.2 million pounds lower in 1999 compared with 1998. Sales decreased in 1998 by $186.3 million from 1997, largely as a result of lower copper prices, offset somewhat by an increase in copper and molybdenum volume. Copper sales volume was 8.1 million pounds higher in 1998 compared with 1997. Sales of copper produced at Company mines, however, decreased by 6.5 million pounds in 1998 as compared with 1997. At December 31, 1999, there were no copper sales recorded at provisional prices. Prices: Sales prices for the Company's metals are established principally by reference to prices quoted on the London Metal Exchange (LME), the New York Commodity Exchange (COMEX) or published in Platt's Metals Week for dealer oxide mean prices for molybdenum products. Price/Volume Data 1999 1998 1997 ---- ---- ---- Average Metal Prices Copper (per pound - LME) $ 0.71 $ 0.75 $ 1.03 Molybdenum (per pound) $ 2.65 $ 3.41 $ 4.30 Silver (per ounce - COMEX) $ 5.22 $ 5.51 $ 4.88 Sales Volume (in thousands) Copper (pounds) 749,872 752,114 743,984 Molybdenum (pounds)(1) 11,836 9,677 9,398 Silver (ounces) 3,236 3,288 3,086 - ---------------- (1) The Company's molybdenum production is sold in concentrate form. Volume represents pounds of molybdenum contained in concentrates. Financial Instruments: The Company may use derivative instruments to manage its exposure to market risk from changes in commodity prices. Derivative instruments which are designated as hedges must be deemed effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract. Copper: Depending on the market fundamentals and other conditions, the Company may purchase put options to reduce or eliminate the risk of price declines below the option strike price on a portion of its anticipated future production. Put options purchased by the Company establish a minimum sales price for the production covered by such put options and permit the Company to participate in price increases above the option price. The cost of options is amortized on a straight-line basis during the period in which the options are exercisable. Depending upon market conditions, the Company may either sell options it holds or exercise the options at maturity. Gains or losses from the sale or exercise of options, net of unamortized acquisition costs, are recognized in the period in which the underlying production is sold and are reported as a component of the underlying transaction. A18 Earnings include pre-tax gains from option sales and exercises of $7.2 million in 1998 and $10.2 million in 1997. At December 31, 1999, the Company held no copper put options. Fuel Swaps: The Company may enter into fuel swap agreements to limit the effect of increases in fuel prices on its production costs. A fuel swap establishes a fixed price for the quantity of fuel covered by the agreement. The difference between the published price for fuel and the price established in the contract for the month covered by the swap is recognized in production costs. As of December 31, 1999 and 1998, the Company had the following fuel swap agreements: Weighted Average Contract Quantity Price Fuel Type Period (Barrels) (per Barrel) - ----------------------------------------------------------------------- 1999 Residual Oil 1/00-12/00 1,468,800 $12.80 Diesel Fuel 1/00-12/00 504,000 $19.36 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 December 31, 1999 was $8.7 million. The effect of a hypothetical 10 percent decrease from December 31, 1999 fuel prices would be to reduce the unrealized gain on fuel swaps by $3.7 million. In 1999, the Company's production costs would have been $10.7 million higher if this exposure had not been hedged. Foreign currency: The Company selectively uses foreign currency swaps to limit the effects of exchange rate changes on future cash flow obligations denominated in foreign currencies. A currency swap establishes a fixed dollar cost for a fixed amount of foreign currency required at a future date. The Company has entered into currency swap agreements on a portion of its capital cost contracted in Euros. A19 As of December 31, 1999 the Company had the following currency swap agreements: US$ Euros Forward Maturity Date (in millions) Exchange Rate ------------- ------------- ------------- 1/31/2000 2.6 2.3 1.1189 7/31/2000 9.1 8.0 1.1341 10/31/2000 8.5 7.4 1.1419 12/29/2000 6.5 5.7 1.1467 3/31/2001 2.6 2.3 1.1535 4/30/2001 3.3 2.9 1.1559 The unrealized loss in the Company's currency swap position at December 31, 1999 was $3.3 million. A hypothetical 10 percent decrease from December 31, 1999 rates, would increase the unrealized loss on currency swaps by $2.9 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. Cost of Sales: Cost of sales was $410.1 million in 1999, $446.5 million in 1998 and $474.4 million in 1997. The decrease of $36.4 million in 1999 includes the lower cost of copper processed and sold from purchased concentrates, the lower unit cost of company mined copper as a result of decreases in power and fuel costs, and benefits from the Company's cost reduction program. These decreases were offset in part by a $14.8 million charge for severance costs, which were part of the Company's earnings enhancement program. The decrease of $27.9 million in 1998 was principally due to the lower sales volume of copper produced from third parties' concentrates and lower power and fuel costs, partially offset by a $10.0 million charge for severance cost and a $10.9 million charge for Ilo townsite divestiture cost, which were part of the Company's earnings enhancement program Other Expenses: Depreciation and depletion expense was $74.2 million in 1999, compared with $60.9 million in 1998 and $46.7 million in 1997. The increase in 1999 includes depreciation of the new ball mills of the Cuajone concentrator as well as mining equipment of the Cuajone mine expansion and the expansion of the SX/EW plant in Toquepala. The increase in 1998 includes depreciation of the tailings dam facility completed in late 1997, the acid plant expansion completed in 1998 and the addition of haul trucks in 1998 and 1997. Exploration expenses were $7.2 million, $5.2 million and $7.4 million in 1999, 1998 and 1997, respectively. The increase in 1999 reflects the increase of drilling programs at the Company's exploration properties. Non-Operating Items: Interest income was $7.8 million in 1999 compared with $15.8 million in 1998 and $20.9 million in 1997. The decreases in 1999 and 1998 reflects the lower invested balances as funds were utilized in the Company's expansion program. Interest income is expected to continue to decrease as available cash is used to fund the Company's expansion and modernization program. Other income was $3.6 million in 1999 compared with $9.4 million in 1998 and $7.1 million in 1997. Other income in 1998 includes a $5.3 million insurance settlement related to flood damage, which occurred in 1997. Total interest expense was $25.2 million in 1999, compared with $25.6 million in 1998 and $21.9 million in 1997. In 1999, 1998 and 1997, the Company capitalized $7.3 million, $10.6 million and $2.3 million of interest, respectively, principally related to expenditures on the expansion program. A20 Taxes on Income: Taxes on income were $9.7 million, $25.6 million and $55.6 million for 1999, 1998 and 1997, respectively, and includes $11.6 million, $22.9 million and $45.0 million of Peruvian income taxes and $(1.9) million, $2.7 million and $10.6 million, for U.S. federal and state taxes for 1999, 1998 and 1997, respectively. U.S. income taxes are primarily attributable to investment income as well as limitations on use of foreign tax credits in determining the alternative minimum tax. In 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, were realized. The reduction in the Company's effective tax rate, as a result of the reinvestment allowance, lowered tax expense by approximately $14.7 million in 1997. Pursuant to the reinvestment allowance the Company has received tax deductions in Peru in amounts equal to the cost of the qualifying property (approximately $245 million). The financial statement carrying value of the qualifying property was 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). The Company obtains income tax credits in Peru for value-added taxes paid in connection with the purchase of capital equipment and other goods and services employed in its operations and records these credits as a prepaid expense. Under current Peruvian law, the Company is entitled to use the credits against its Peruvian income tax liability or to receive a refund. Minority Interest of Investment Shares (previously known as Labor Shares): There was no minority interest of investment shares in 1999, compared to $0.5 million in 1998 and $4.4 million in 1997. The provision for minority interest of investment shares represents an accrual of 1.7%, 2.0% and 2.4% for 1999, 1998 and 1997, respectively, of the Branch's after-tax earnings. The reductions in the percentage of minority interest of investment shares in 1999 and 1998 is a result of purchases of investment shares by the Company. Cash Flows - Operating Activities: Net cash provided from operating activities were $90.3 million in 1999, compared with $186.6 million in 1998 and $277.6 million in 1997. The decrease in 1999 was primarily attributable to an $81.1 million higher use of cash for operating assets and liabilities, which includes $25.8 million for an increase in accounts receivable because of the higher copper prices late in 1999 and $41.0 million increase in inventories of purchased concentrates, refined copper and supplies. Additionally, $25.2 million of lower earnings partially offset by $13.3 million of higher depreciation and depletion contributed to the decrease in operating cash flow. The decrease in 1998 was primarily attributable to lower copper prices. The decrease in 1998 reflects lower earnings of $131.1 million partially offset by higher depreciation and deferred tax provisions of $14.1 million and $21.7 million, respectively. Cash Flows - Investing Activities: Net cash used for investing activities was $227.5 million in 1999 compared with $75.9 million in 1998 and $337.6 million in 1997. Capital expenditures in 1999 were $250.3 million, compared with $258.7 million in 1998 and $184.0 million in 1997. Capital expenditures in 1999, 1998 and 1997 reflect the Company's expansion and modernization program and capitalization of mine stripping. Other investment activities in 1999 and 1998 include net proceeds of $22.2 million and $182.4 million, respectively, from held-to-maturity investments. These investments were utilized in the Company's expansion programs. The Company's planned capital expenditures in 2000 are estimated to be approximately $269 million, which includes expenditures related to the modernization and expansion of the Ilo smelter, feasibility studies for the expansion of the Toquepala concentrator and a SX/EW plant in Cuajone and the Torata River Flood Control project. A21 Cash Flows - Financing Activities: Financing activities used cash of $27.3 million and $59.5 million in 1999 and 1998, respectively, compared to a source of cash of $11.8 million in 1997. In 1999 activity included dividend payments of $12.2 million, net debt repayment of $11.7 million and purchases of investment shares of $3.4 million. Included in 1998 uses of cash are debt repayments of $13.7 million, purchases of investment shares of $3.8 million and net treasury stock transactions of $2.7 million. LIQUIDITY AND CAPITAL RESOURCES Financing: In March 1999, the Company concluded a $100 million, 15-year loan agreement with Mitsui and Co., Ltd. The applicable interest for this loan is the LIBO rate plus 1.25%. This facility provides additional committed financing for SPCC's modernization and expansion program. A commitment fee of 0.5% per annum is payable on the undrawn portion of this loan through December 31, 2001. As of December 31, 1999 $2.0 million had been drawn from this loan facility. In 1997, the Company entered into a $600 million, seven year loan facility with a group of international financial institutions. The facility consists of a $400 million term loan and a $200 million revolving credit line. The interest rate during the first three years of the agreement on any loans outstanding is LIBOR plus 1.75% per annum for term loans and LIBOR plus 2.0% for revolving credit loans. A commitment fee of 0.5% per annum is payable on the undrawn portion of the facility. No amounts had been drawn under this agreement as of December 31, 1999. Also in 1997, the Company privately placed $150 million secured export (SENS) in the United States and international markets. These notes, which have been registered with the Securities and Exchange Commission, begin amortizing in 2000 and mature in 2007 and were priced at par with a coupon rate of 7.9%. In addition, in 1997 the Company sold $50 million of bonds, due June 2004, to investors in Peru. The bonds have a fixed interest rate of 8.25%. The Company expects that it will meet its cash requirements for 2000 and beyond from internally generated funds, cash on hand, borrowings under the current facilities and from additional external financing. The Company also has a loan outstanding with Corporacion Andina de Fomento (CAF) of $11.8 million with interest based on LIBOR, and an outstanding loan from the United States Export-Import Bank (EXIM)of $8.8 million, with interest at a 6.43% fixed rate. Both loans are payable in semi-annual installments through 2001. At December 31, 1999, the Company had outstanding borrowings of $222.5 million, compared with $234.2 million at December 31, 1998. Certain financing agreements contain covenants which limit the payment of dividends to stockholders. Under the most restrictive covenant, the Company may pay dividends to stockholders equal to 50% of the net income of the Company for any fiscal quarter as long as such dividends are paid by June 30 of the following year. Net assets of the Company unavailable for the payment of dividends totaled $1.1 billion at December 31, 1999. In accordance with the most restrictive covenant of the Company's loan agreements, additional indebtedness of $903.4 million would have been permitted at December 31, 1999. The Mitsui and Co., Ltd. credit agreement is collateralized by pledges of receivables of 24,000 tons of copper per year. The EXIM Bank credit agreement is collateralized by pledges of receivables from 7,000 tons of copper per year. The CAF loan is collateralized by liens on the SX/EW facility. The SENS and the seven year loan facility require that most of the collections of export copper sales be deposited into a trust account in the United States. Twenty percent of these collections are used as collateral for the outstanding SENS with the balance of the collections remitted directly to the Company. The excess funds in the collateral account are remitted to the Company, if all financial requirements are A22 met. As part of these agreements, the Company must maintain three-month and six-month collection ratios, as defined (aggregate collections as a specified multiple of debt service). Both facilities require escrow deposits of three months debt service. In addition, certain of the agreements require the Company to maintain a minimum stockholders' equity of $750 million, specified ratios of debt to equity, current assets to current liabilities and an interest coverage test. Reduction of ASARCO Incorporated's (Asarco) voting interest in the Company to less than a majority would constitute an event of default under two of the financing agreements. The Company was in compliance with the various loan covenants at December 31, 1999. Included in Other assets are $10.7 million held in escrow accounts as required by the Company's loan agreements. The funds will be released from escrow as scheduled loan repayments are made. At December 31, 1999, the Company's debt as a percentage of total capitalization (the total of debt, minority interest of investment shares and stockholders' equity) was 16.3% as compared with 17.2% at December 31, 1998. At December 31, 1999, the Company's cash and marketable securities amounted to $10.6 million compared with $198.1 million at December 31, 1998. DIVIDENDS AND CAPITAL STOCK The Company paid dividends to stockholders of $12.2 million, or $0.152 per share, in 1999, $40.7 million, or $0.51 per share, in 1998 and $101.1 million, or $1.26 per share in 1997. Distributions to the investment share minority interest were $0.2 million, $0.9 million and $2.5 million in 1999, 1998 and 1997, respectively. On February 25, 2000 a dividend of $0.06 a share, totaling $4.8 million was declared, payable March 27, 2000. The Company's dividend policy will be reviewed at the next Board of Directors meeting taking into consideration the current intensive capital investment program, such as the expansion of mines, concentrator/leach plant, smelter and future cash flow generated from operations. At the end of 1999 and 1998, the authorized and outstanding capital stock of the Company consisted of 65,900,833 shares of Class A common stock, par value $0.01 per share; and 34,099,167 authorized shares of common stock, par value $0.01 per share, of which 14,118,862 common shares were outstanding at December 31, 1999 and 13,949,812 shares were outstanding at December 31, 1998. ENVIRONMENTAL MATTERS The exploration, mining, milling, smelting and refining activities of the Company are subject to Peruvian legislation and regulations. According to the law, active mining companies submitted to the Ministry of Energy and Mines an Environmental Compliance and Management Program (PAMA) that describes the investments that the Company will make to comply with the maximum permissible levels established for its operations by this Authority. The implementation of the PAMA requires that the Company commit an annual minimum investment of 1% of its sales. The Company's PAMA was approved in January 1997. Under current Peruvian law and regulations, compliance with the PAMA will satisfy environmental 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. The project with the PAMA that will demand the largest investment is the modernization of the Ilo smelter. In a first phase the capture of sulfur dioxide (SO2) will be increased from a current level of in excess of 30% to 67%. The second phase of the project will further increase the capture of SO2 to in excess of 92%, complying with current Peruvian environmental regulations. A23 During the implementation of the project, Southern Peru continues to operate the Supplementary Control Program (SCP), a voluntary effort, by which the smelter production is restricted during periods of adverse meteorological conditions. This program, in conjunction with the operation of the smelter's sulfuric acid plant that was expanded to 317,500 tons per year, has contributed to effectively improved air quality in Ilo. In addition to the environmental programs for the Ilo smelter and the refinery, the Company continues to have good results with the reclamation programs in both Ite Bay and the beaches to the north of the smelter. Environmental capital expenditures were $41.6 million in 1999, $25.3 million in 1998 and $47.8 million in 1997. In addition, the Company estimates spending $50.0 million for environmental control capital expenditures in 2000. YEAR 2000 The Company completed 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. As of December 31, 1999, the Company had spent approximately $1.3 million in addition to its normal internal information technology costs in connection with its Y2K program. Through January 2000, the Company noted no loss of production or disruptive events related to the Y2K issue. 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. 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. A24 Item 8. Financial Statements and Supplementary Data. Southern Peru Copper Corporation and Subsidiaries CONSOLIDATED STATEMENT OF EARNINGS
For the years ended December 31, 1999 1998 1997 (in thousands, except for per share amounts) ---- ---- ---- Net sales: Stockholders and affiliates -- $ 18,685 $ 59,897 Others $ 584,546 609,231 754,259 ------------------------------------- Total net sales 584,546 627,916 814,156 Operating costs and expenses: Cost of sales 410,134 446,515 474,385 Administrative and other 47,453 44,977 48,367 Depreciation and depletion 74,237 60,859 46,736 Exploration 7,156 5,185 7,390 ------------------------------------- Total operating costs and expenses 538,980 557,536 576,878 ------------------------------------- Operating income 45,566 70,380 237,278 Interest income 7,840 15,784 20,934 Interest expense (17,881) (15,009) (19,573) Other income 3,610 9,437 7,066 ------------------------------------- Earnings before taxes on income and minority interest of investment shares 39,135 80,592 245,705 Taxes on income 9,740 25,567 55,610 Minority interest of investment shares in income of Peruvian Branch (10) 461 4,437 ------------------------------------- Net earnings $ 29,405 $ 54,564 $ 185,658 ===================================== Per common share amounts: Net earnings - basic and diluted $ 0.37 $ 0.68 $ 2.32 Dividends paid $ 0.152 $ 0.51 $ 1.26 Weighted average shares outstanding-basic 79,862 79,893 80,188 Weighted average shares outstanding-diluted 79,892 79,893 80,197
The accompanying notes are an integral part of these financial statements. A25 Southern Peru Copper Corporation and Subsidiaries CONSOLIDATED BALANCE SHEET At December 31, 1999 1998 (Dollars in thousands) ---- ---- ASSETS Current assets: Cash and cash equivalents $ 10,596 $ 175,948 Marketable securities -- 22,152 Accounts receivable: Trade: Stockholders and affiliates -- 1,446 Other trade 57,041 43,976 Other 23,623 19,139 Inventories 110,171 88,951 Prepaid taxes 48,099 35,422 Other current assets 19,611 23,028 --------------------------- Total current assets 269,141 410,062 Net property 1,250,887 1,088,557 Other assets 25,425 27,218 --------------------------- Total assets $ 1,545,453 $ 1,525,837 =========================== LIABILITIES Current liabilities: Current portion of long-term debt $ 23,272 $ 13,683 Accounts payable: Trade 31,819 28,477 Other 26,594 20,020 Other current liabilities 29,472 34,836 --------------------------- Total current liabilities 111,157 97,016 --------------------------- Long-term debt 199,253 220,525 Deferred credits 716 15,722 Deferred income taxes 79,888 56,700 Other liabilities 14,526 10,951 --------------------------- Total non-current liabilities 294,383 303,898 --------------------------- Contingencies (Note 19) Minority interest of investment shares in the Peruvian Branch 13,975 16,331 --------------------------- STOCKHOLDERS' EQUITY Common stock, par value $0.01; shares authorized: 34,099,167; shares issued: 14,330,093 143 143 Class A Common stock, par value $0.01; shares issued and authorized: 65,900,833 659 659 Additional paid-in capital 265,745 265,745 Retained earnings 864,354 847,229 Treasury stock, at cost, common shares, 1999 - 211,231 1998 - 380,281 (4,963) (5,184) --------------------------- Total Stockholders' Equity 1,125,938 1,108,592 --------------------------- Total Liabilities, Minority Interest and Stockholders' Equity $ 1,545,453 $ 1,525,837 =========================== The accompanying notes are an integral part of these financial statements. A26 Southern Peru Copper Corporation and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31, 1999 1998 1997 (Dollars in thousands) ---- ---- ---- OPERATING ACTIVITIES Net earnings $ 29,405 $ 54,564 $ 185,658 Adjustments to reconcile net earnings to net cash provided from operating activities: Depreciation and depletion 74,237 60,859 46,736 Provision (benefit) for deferred income taxes 21,792 14,847 (6,934) Minority interest of investment shares (10) 461 4,437 Net loss on sale or disposal of investments and property -- 9,773 268 Cash provided from (used for) operating assets and liabilities: Accounts receivable (17,536) 8,292 15,718 Inventories (21,220) 19,732 9,998 Accounts payable and accrued liabilities 4,405 9,234 (25,449) Other operating assets and liabilities (3,335) 5,802 48,752 Foreign currency transaction (gain) loss 2,543 3,025 (1,616) ------------------------------------- Net cash provided from operating activities 90,281 186,589 277,568 ------------------------------------- INVESTING ACTIVITIES Capital expenditures (250,254) (258,696) (183,956) Purchase of held-to-maturity investments (54,990) (40,900) (204,590) Proceeds from held-to-maturity investments 77,142 223,338 1,000 Sales of investments and property 609 376 49,914 ------------------------------------- Net cash used for investing activities (227,493) (75,882) (337,632) ------------------------------------- FINANCING ACTIVITIES Debt incurred 2,000 -- 200,000 Debt repaid (13,683) (13,683) (58,684) Escrow deposits on long-term loans (67) 2,311 (15,364) Dividends paid to common stockholders (12,152) (40,735) (101,050) Distributions to minority interests (226) (892) (2,504) Net treasury stock transactions 221 (2,715) (1,681) Purchases of investment shares (3,379) (3,791) (8,885) ------------------------------------- Net cash provided from (used for) financing activities (27,286) (59,505) 11,832 ------------------------------------- Effect of exchange rate changes on cash (854) (1,745) 1,518 ------------------------------------- Increase (decrease) in cash and cash equivalents (165,352) 49,457 (46,714) Cash and cash equivalents, at beginning of year 175,948 126,491 173,205 ------------------------------------- Cash and cash equivalents, at end of year $ 10,596 $ 175,948 $ 126,491 =====================================
The accompanying notes are an integral part of these financial statements. A27 Southern Peru Copper Corporation and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1999 1998 1997 (Dollars in thousands) ---- ---- ---- CAPITAL STOCK: COMMON STOCK: Balance at beginning of year $ 143 $ 143 $ 137 Conversion from Class A to Common Stock, 1997 - 650,000 shares -- -- 6 ------------------------------------------- Balance at end of year 143 143 143 ------------------------------------------- CLASS A COMMON STOCK: Balance at beginning of year 659 659 666 Conversion to Common Stock, 1997 - 650,000 shares -- -- (7) ------------------------------------------- Balance at end of year 659 659 659 ------------------------------------------- ADDITIONAL PAID-IN CAPITAL: Balance at beginning and end of year 265,745 265,745 265,745 ------------------------------------------- TREASURY STOCK: Balance at beginning of year (5,184) (2,469) (788) Purchased -- (3,001) (1,997) Used for corporate purposes 221 286 316 ------------------------------------------- Balance at end of year (4,963) (5,184) (2,469) ------------------------------------------- RETAINED EARNINGS: Balance at beginning of year 847,229 833,560 749,267 Net earnings 29,405 54,564 185,658 Dividends paid (12,152) (40,735) (101,050) Stock awards (128) (160) (315) ------------------------------------------- Balance at end of year 864,354 847,229 833,560 ------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 1,125,938 $ 1,108,592 $ 1,097,638 ===========================================
The accompanying notes are an integral part of these financial statements. A28 SOUTHERN PERU COPPER CORPORATION and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Principles of consolidation: The consolidated financial statements of Southern Peru Copper Corporation and Subsidiaries (the Company) include the accounts of significant subsidiaries in which the Company has voting control, and are prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP). Certain prior year amounts have been reclassified to conform to the current year presentation. Use of estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue recognition: Substantially all of the Company's copper is sold under annual contracts. Revenue is recognized primarily in the month product is shipped to customers based on prices as provided in sales contracts. When the price is not determinable at the time of shipment to customers, revenue is recognized based on prices prevailing at the time of shipment with final pricing generally occurring within three months of shipment. Revenues with respect to these sales are adjusted in the period of settlement to reflect final pricing and in periods prior to settlement to reflect any decline in market prices, which may occur between shipment and settlement. The Company sells copper in blister and refined form at industry standard commercial terms. Net sales include the invoiced value of copper, silver, molybdenum, acid, and gains from the sale or settlement of copper put options. Cash equivalents and marketable securities: Cash equivalents include all highly liquid investments with a maturity of three months or less, when purchased. Marketable securities include short-term liquid investments with a maturity of more than three months, when purchased, and are carried at cost, which approximates market. Inventories: Metal inventories are carried at the lower of average cost or market. Costs incurred in the production of metal inventories exclude general and administrative costs. Supplies inventories are carried at average cost less a reserve for obsolescence. Property: Assets are valued at the lower of cost or net realizable value. In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", the Company reviews long-lived assets and certain identifiable intangibles related to those assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Any impairment loss on such assets, as well as long-lived assets and certain identifiable intangibles to be disposed of, is measured as the amount by which the carrying value of the assets exceeds the fair value of the assets (less disposal costs, if applicable). A29 The Company evaluates the carrying value of assets based on undiscounted future cash flows considering expected metal prices based on historical metal prices and price trends. Betterments, renewals, costs of bringing new mineral properties into production, and the cost of major development programs at existing mines are capitalized as mineral land. Maintenance, repairs, normal development costs at existing mines, and gains or losses on assets retired or sold are reflected in earnings as incurred. Buildings and equipment are depreciated on the straight-line method over estimated lives from 5 to 40 years or the estimated life of the mine if shorter. Depletion of mineral land is computed by the units-of-production method using proven and probable ore reserves. Exploration: Tangible and intangible costs incurred in the search for mineral properties are charged against earnings when incurred. Hedging Activities: Derivative instruments may be used to manage exposure to market risk from changes in commodity prices, interest rates or the value of the Company's assets and liabilities. Derivative instruments, which are designated as hedges, must be deemed effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract. The Company may purchase put options or create synthetic put options to reduce or eliminate the risk of metal price declines below the option strike price on a portion of its anticipated future production. The cost of options is amortized on a straight-line basis during the period in which the options are exercisable. Gains or losses from the sale or exercise of options, net of unamortized acquisition costs, are recognized in the period in which the underlying hedged production is sold. Swap Agreements: Fuel swap agreements limit the effect of changes in the price of fuel. The differential to be paid or received as fuel prices change is recorded as a component of cost of sales in the period the swap covers. Stock-Based Compensation: The Company applies the disclosure only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Impact of New Accounting Standards: In June 1998, the 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. 2. Merger of Subsidiary Company Southern Peru Copper Corporation was reorganized into a holding company structure effective January 2, 1996, upon completion of a public offer to exchange newly issued Common Stock for outstanding investment shares of the Company's Peruvian Branch. Effective December 31, 1998, the Company's predecessor and wholly owned operating subsidiary, Southern Peru Limited, was merged into the Company. A30 3. Foreign Exchange The functional currency of the Company is the U.S. dollar. The Company's sales, cash, trade receivables, fixed asset additions, trade payables and debt are primarily dollar-denominated. A portion of the operating costs of the Company is denominated in Peruvian soles. Gains and (losses) resulting from foreign currency transactions are included in "Cost of sales" and amounted to ($2.5) million,($3.0) million, and $2.0 million in 1999, 1998, and 1997, respectively. 4. Restructuring Charges The Company's 1999 results include a $5.6 million pre-tax charge ($3.6 million after-tax and workers' participation) 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. This accrual was paid in full as of December 31, 1999. 5. Administrative Reorganization The Company's full year results include an $8.4 million pre-tax charge ($5.4 million after-tax and workers' participation) associated with the severance cost of foreign contract employees' early termination. The severance costs accrued are for 55 employees at the Company's locations in Peru. Approximately $5.8 million of the provision is included as cost of sales deduction on the Company's statement of earnings, and $2.6 million is included in administrative expense as it relates to non-operating personnel. Payments in the amount of $2.9 million were made against this accrual in the year 1999. 6. Taxes on Income The components of the provision for taxes on income are as follows: For the years ended December 31, 1999 1998 1997 (in millions) ---- ---- ---- U.S. Federal and state Current $(2.5) $ 2.2 $10.2 Deferred 0.6 0.5 0.4 ------------------------------ (1.9) 2.7 10.6 ------------------------------ Foreign: Current (9.5) 8.5 52.3 Deferred 21.1 14.4 (7.3) ------------------------------ 11.6 22.9 45.0 ------------------------------ Total provision for income taxes $ 9.7 $25.6 $55.6 ============================== Total taxes paid were $1.2 million, $10.4 million and $30.1 million in 1999, 1998 and 1997, respectively. A31 Reconciliation of the statutory income tax rate to the effective income tax rate is as follows: For the years ended December 31, 1999 1998 1997 ---- ---- ---- Peruvian income tax at maximum statutory rates 30.0% 30.0% 30.0% U.S. income tax at statutory rate 35.0 35.0 35.0 Utilization of foreign tax credits (30.2) (20.8) (16.9) Peruvian reinvestment allowance -- -- (9.0) Alternative minimum tax (AMT) credit -- -- (3.4) Percentage depletion (5.2) (10.5) (9.6) Income not taxable in Peru (1.8) (1.8) (2.6) Reversal of taxes previously accrued (5.1) -- -- Other 2.2 (0.2) (0.9) ---------------------------- Effective income tax rate 24.9% 31.7% 22.6% ============================ Temporary differences and carryforwards which give rise to deferred tax assets, liabilities and related valuation allowances are as follows: Deferred tax assets (liabilities) At December 31, 1999 1998 (in millions) ---- ---- Current: Accounts receivable $ 4.0 $ 1.7 Inventories 0.1 0.1 ------------------- Net deferred tax assets 4.1 1.8 ------------------- Non-current: Foreign tax credit carryforwards 29.6 23.4 AMT credit carryforwards 12.2 12.2 Property, plant and equipment (82.3) (58.5) Other 2.4 1.8 Valuation allowance for deferred tax assets (41.8) (35.6) ------------------- Net deferred tax liabilities (79.9) (56.7) ------------------- Total net deferred tax liabilities $(75.8) $(54.9) =================== At December 31, 1999, the foreign tax credit carryforward available to reduce possible future U.S. income tax amounted to approximately $29.6 million expiring as follows: $26.1 million in 2000, $3.1 million in 2003 and $0.4 million in 2004. In 1997, the Government of Peru approved a reinvestment allowance for the Company's program to expand the Cuajone mine. The reinvestment allowance provides SPCC with tax incentives in Peru, and as a result, certain U.S. tax credit carryforwards, for which no benefit had previously been recorded, were realized. The reduction in the effective tax rate, as a result of the reinvestment allowance for the twelve months ended December 31, 1997, lowered tax expense approximately $14.7 million. Pursuant to the reinvestment allowance SPCC has received tax deductions in Peru in amounts equal to the cost of the qualifying property (approximately $245 million). The financial statement carrying value of the qualifying property was 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). The Company has not recorded the benefit of foreign tax credit carryforwards because of both the expiration dates and the rules governing the order in which such credits are utilized. The Company also has not recorded a benefit A32 for the AMT credits, which are not available to reduce AMT. Because of limitations on both percentage depletion and foreign tax credits under the AMT, the Company expects an AMT liability for the foreseeable future. Thus, while such credits do not expire, it is unlikely they will be utilized. Accordingly, a valuation allowance has been established for the full amount of the foreign tax credit carryforward and the AMT credit carryforward. The Company obtains income tax credits in Peru for value-added taxes paid in connection with the purchase of capital equipment and other goods and services employed in its operations and records these credits as a prepaid expense. Under current Peruvian law, the Company is entitled to use the credits against its Peruvian income tax liability or to receive a refund. The carrying value of these Peruvian tax credits approximates their market value. 7. Net Sales Net sales by country were as follows: For the years ended December 31, 1999 1998 1997 (in millions) ---- ---- ---- United States $155.0 $127.5 $132.1 Italy 46.7 86.9 110.0 United Kingdom 122.8 96.1 98.4 The Netherlands -- 57.7 83.8 Japan 52.4 44.7 72.5 Foreign - Other 207.6 215.0 317.4 -------------------------------------- Net sales $584.5 $627.9 $814.2 ====================================== At December 31, 1999, the Company had no copper sales recorded at provisional prices. Under the terms of a sales contract with Union Miniere as amended through December 31, 1999, the Company is required to supply Union Miniere, through its agent, S.A. Sogem N.V., with 16,300 tons of blister copper annually for a ten year period from January 1, 2000 through December 31, 2009. The price of the copper, contained in blister, supplied under the contract is determined based on the LME monthly average settlement price, less a refining allowance, which is negotiated annually. Under the terms of a sales contract with Mitsui & Co. Ltd. (Mitsui), the Company is required to supply Mitsui with 48,000 tons of copper cathodes annually for a fifteen-year period through December 31, 2013. Pricing of the cathodes is based upon the LME monthly average settlement price plus a producer premium, which is agreed upon annually based on world market terms. 90,000 tons related to a prior contract (period 1994-2000) will be supplied as follows: 48,000 in 2014 and 42,000 in 2015. 8. Financial Instruments Hedging Activities: The Company uses derivative instruments to manage its exposure to market risk from changes in commodity prices. Derivative instruments which are designated as hedges must be deemed effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract. Copper: Depending on the market fundamentals and other conditions, the Company may purchase put options to reduce or eliminate the risk of price declines below the option strike price on a portion of its anticipated future production. Put options purchased by the Company establish a minimum sales price for the production covered by such put options and permit the Company to participate in price increases above the option price. The cost of options is A33 amortized on a straight-line basis during the period in which the options are exercisable. Depending upon market conditions, the Company may either sell options it holds or exercise the options at maturity. Gains or losses from the sale or exercise of options, net of unamortized acquisition costs, are recognized in the period in which the underlying production is sold and are reported as a component of the underlying transaction. Earnings include pre-tax gains from option sales and exercises of $7.2 million in 1998 and $10.2 million in 1997. At December 31, 1999, the Company held no copper put options. Fuel Swaps: The Company may enter into fuel swap agreements to limit the effect of increases in fuel prices on its production costs. A fuel swap establishes a fixed price for the quantity of fuel covered by the agreement. The difference between the published price for fuel and the price established in the contract for the month covered by the swap is recognized in production costs. As of December 31, 1999 and 1998, the Company has entered into the following fuel swap agreements: Weighted Average Contract Quantity Price Fuel Type Period (Barrels) (per Barrel) - ------------------------------------------------------------------------- 1999 Residual Oil 1/00-12/00 1,468,800 $12.80 Diesel Fuel 1/00-12/00 504,000 $19.36 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 December 31, 1999 was $8.7 million. The effect of a hypothetical 10 percent decrease from December 31, 1999 fuel prices would be to reduce the unrealized gain on fuel swaps by $3.7 million. In 1999, the Company's production cost would have been $10.7 million higher if this exposure had not been hedged. Foreign currency: The Company selectively uses foreign currency swaps to limit the effects of exchange rate changes on future cash flow obligations denominated in foreign currencies. A currency swap establishes a fixed dollar cost for a fixed amount of foreign currency required at a future date. The Company has entered into currency swap agreements on a portion of its capital cost contracted in Euros. As of December 31, 1999 the Company had the following currency swap agreements: US$ Euros Forward Maturity Date (in millions) Exchange Rate ------------- ------------- ------------- 1/31/2000 2.6 2.3 1.1189 7/31/2000 9.1 8.0 1.1341 10/31/2000 8.5 7.4 1.1419 12/29/2000 6.5 5.7 1.1467 3/31/2001 2.6 2.3 1.1535 4/30/2001 3.3 2.9 1.1559 --------------------- 32.6 28.6 --------------------- A34 The unrealized loss in the Company's currency swap position at December 31, 1999 was $3.3 million. A hypothetical 10 percent decrease from December 31, 1999 rates, would increase the unrealized loss of currency swaps by $2.9 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. For certain of the Company's financial instruments, including cash and cash equivalents, marketable securities, accounts receivables and accounts payable the carrying amounts approximate fair value due to their short maturities. Consequently, such financial instruments are not included in the following table that provides information about the carrying amounts and estimated fair values of other financial instruments: At December 31, 1999 1998 (in millions) ----------------- ----------------- Carrying Fair Carrying Fair Value Value Value Value -------- ----- -------- ----- Assets: Fuel swap agreements -- $ 8.7 -- $ (1.6) Currency swap agreements -- (3.3) -- -- Liabilities: Long-term debt $222.5 $206.6 $234.2 $225.0 The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Fuel swap agreements - Fair value is based on quoted market prices. Currency swap agreements: Fair value is based on quoted market prices. Long-term debt - Fair value is based on the quoted market prices for the same or similar issues. 9. Workers' Participation Provisions for workers' participation are calculated at 8% of pre-tax earnings and are included in "Cost of sales" on the earnings statement. The current portion of this participation, which is accrued during the year, is based on Branch taxable income and is distributed to workers following determination of final results for the year. 10. Minority Interest of Investment Shares (Previously known as "Labor Shares") The minority interest of the Investment Shares is based on the earnings of the Company's Peruvian Branch. The Company acquired 0.8 million, 1.0 million and 2.0 million investment shares at a cost of $3.4 million, $3.8 million and $8.9 million in the years 1999, 1998 and 1997, respectively. The carrying value of the minority interest purchased was reduced by $2.1 million, $2.5 million and $5.1 million in 1999, 1998 and 1997, respectively, and the excess paid over the carrying value was assigned primarily to proven and probable sulfide and leachable ore reserves and mineralized material and is being amortized based on production. As a result of these acquisitions, the remaining investment shareholders hold a 1.7% interest in the Branch at December 31, 1999, and are entitled to a pro rata participation in the cash distributions made by the Branch. The investment shares are recorded as a minority interest in the Company's financial statements. A35 11. Inventories At December 31, 1999 1998 (in millions) ---- ---- Metals: Finished goods $ 1.5 $ 1.5 Work-in-process 48.7 37.9 Supplies, net of reserves 59.9 49.5 ------------------------ Total inventories $ 110.1 $ 88.9 ------------------------ 12. Property At December 31, 1999 1998 (in millions) ---- ---- Buildings and equipment $1,825.2 $1,623.4 Mineral land 395.6 376.7 Land, other than mineral 3.1 1.8 ------------------------ Total property 2,223.9 2,001.9 Accumulated depreciation and depletion 973.0 913.3 ------------------------ Net property $1,250.9 $1,088.6 ------------------------ In 1998, the Company recorded a charge of $9.8 million to write-off the remaining book value of the Ilo townsite property, transferred to its worker occupants and the city of Ilo, Peru. 13. Other Current Liabilities At December 31, 1999 1998 (in millions) ---- ---- Accrued workers' participation $ 0.6 $ 1.2 Accrued severance pay, current portion 1.3 1.8 Salaries and wages 6.8 7.8 Taxes on income 20.4 22.0 Other 0.4 2.0 ------------------------ Total other current liabilities $ 29.5 $ 34.8 ------------------------ 14. Debt and Available Credit Facilities Long-term debt at December 31, 1999 1998 (in millions) ---- ---- 6.43% EXIM Bank credit agreement due 2001 $ 8.7 $ 14.6 9.2% CAF credit agreement due 2001 11.8 19.6 7.9% Secured Export Notes (SENS) due 2007 150.0 150.0 8.25% Corporate bonds due 2004 50.0 50.0 6.09% MITSUI credit agreement due 2013 2.0 -- ------------------------ Total debt 222.5 234.2 Less, current portion 23.3 13.7 ------------------------ Total long-term debt $ 199.2 $ 220.5 ------------------------ Interest paid by the Company (excluding amounts capitalized of $7.3 million, $10.6 million and $2.3 million in 1999, 1998 and 1997, respectively) was $15.3 million, $12.5 million and $19.0 million in 1999, 1998 and 1997, respectively. A36 Aggregate maturities of the borrowings outstanding at December 31, 1999, are as follows (in millions): 2000 $23.3 2001 24.3 2002 18.9 2003 20.5 2004 72.4 Thereafter 63.1 ------ Total $222.5 ------ In March 1999, the Company concluded a $100 million 15-year loan agreement with Mitsui and Co., Ltd. The applicable interest for this loan is the LIBO rate plus 1.25%. This facility provides additional committed financing for SPCC's modernization and expansion program. A commitment fee of 0.5% per annum is payable on the undrawn portion of this loan through December 31, 2001. As of December 31, 1999, $2.0 million had been drawn from this loan facility. In 1997, the Company entered into a $600 million seven-year credit agreement with a group of international financial institutions. The agreement consists of a $400 million term loan facility and a $200 million revolving credit facility. The interest rate during the first three years of the agreement on any loans outstanding is LIBOR plus 1.75% per annum for term loans and LIBOR plus 2.0% for revolving credit loans. A commitment fee of 0.5% per annum is payable on the undrawn portion of the facility. No amounts have been drawn under this agreement as of December 31, 1999. Also in 1997, the Company privately placed $150 million of SENS in the United States and international markets. These notes, which have been registered with the Securities and Exchange Commission, begin amortizing in 2000 and mature in 2007 and were priced at par with a coupon rate of 7.9%. In addition, in June 1997 the Company sold $50 million of 8.25% bonds due June 2004 to investors in Peru. Some financing agreements contain covenants, which limit the payment of dividends to stockholders. Under the most restrictive covenant, the Company may pay dividends to stockholders equal to 50% of its net income for any fiscal quarter as long as such dividends are paid by June 30 of the following year. As a result, net assets of the Company unavailable for the payment of dividends totaled $1.1 billion at December 31, 1999. In accordance with the most restrictive covenant of the Company's loan agreements, additional indebtedness of $903.4 million would have been permitted at December 31, 1999. The Mitsui and Co., Ltd. credit agreement is collateralized by pledges of receivables of 24,000 tons of copper per year. The EXIM Bank credit agreement is collateralized by pledges of receivables from sales of 7,000 tons of copper per year. The CAF loan is collateralized by liens on the SX/EW facility. The SENS and the seven-year loan facility require that most of the collections of export copper sales be deposited into a trust account in the United States. Twenty percent of these collections are used as collateral for the outstanding SENS with the balance of the collections remitted directly to the Company. The excess funds in the collateral account are remitted to the Company, if all financial requirements are met. As part of these agreements, the Company must maintain three-month and six month collection ratios, as defined (aggregate collections as a specified multiple of debt service). Both facilities require escrow deposits of three months debt service. In addition, certain of the agreements require the Company to maintain a minimum stockholders' equity of $750 million, specified ratios of debt to equity, current assets to current liabilities and an interest coverage test. Reduction of ASARCO Incorporated's (Asarco) voting interest in the Company to less than a majority would A37 constitute an event of default under two of the financing agreements. The Company was in compliance with the various loan covenants at December 31, 1999. Included in Other assets are $10.7 million held in escrow accounts as required by the Company's loan agreements. The funds will be released from escrow as scheduled loan repayments are made. 15. Benefit Plans The Company has a noncontributory, defined benefit pension plan covering salaried employees in the United States and certain employees in Peru. Benefits are based on salary and years of service. The Company's funding policy is to contribute amounts to the plans sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Company may determine to be appropriate. Plan assets are invested in commingled stock and bond funds. The components of net periodic benefit costs are as follows: For the years ended December 31, 1999 1998 1997 (in millions) ---- ---- ---- Service cost $0.5 $0.6 $0.4 Interest cost 0.7 0.7 0.5 Expected return on plan assets (0.9) (0.7) (0.5) Amortization of prior service cost 0.1 0.1 -- Amortization of transitional obligation 0.2 0.2 0.2 -------------------------- Net periodic benefit cost $0.6 $0.9 $0.6 -------------------------- The change in benefit obligation and plan assets and a reconciliation of funded status are as follows: At December 31, (in millions) 1999 1998 ---- ---- Change in Benefit Obligation Projected benefit obligation at beginning of year $ 11.1 $ 8.5 Service cost 0.5 0.6 Interest cost 0.7 0.7 Plan amendments -- 1.1 Benefits paid (0.6) (0.6) Actuarial loss 1.2 0.8 ----------------------- Projected benefit obligation at end of year $ 10.5 $ 11.1 ======================= Change in Plan Assets Fair value of plan assets at beginning of year $ 11.2 $ 7.7 Actual return on plan assets 1.8 2.5 Employer contributions -- 1.5 Benefits paid (0.6) (0.5) Administrative expenses (0.1) -- ----------------------- Fair value of plan assets at end of year $ 12.3 $ 11.2 ======================= Reconciliation of Funded Status Funded status $ 1.7 $ 0.1 Unrecognized actuarial gain (3.7) (1.7) Unrecognized transition obligation 1.4 1.6 Unrecognized prior service cost 1.0 1.0 ----------------------- Net amount reflected in consolidated Balance sheet $ 0.4 $ 1.0 ======================= A38 At December 31, (in millions) 1999 1998 ---- ---- Weighted Average Assumptions Discount rate 7.75% 7.0% Expected long-term rate of return on plan Assets 8.0% 8.0% Rate of compensation increase 4.0% 4.0% Post-retirement Benefits: The post-retirement health care plan for retired salaried employees eligible for Medicare was adopted by the Company on May 1, 1996. Secondary coverage under the Company's plan is available for all retired salaried employees who permanently reside in the United States and who contribute amounts as defined by the plan. The plan is unfunded. The components of net periodic benefit costs are as follows: For the years ended December 31, 1999 1998 1997 (in millions) ---- ---- ---- Service cost $0.1 $0.1 $0.1 Interest cost 0.1 0.1 -- Amortization of prior service cost 0.1 0.1 0.1 -------------------------- Net periodic benefit cost $0.3 $0.3 $0.2 ========================== The change in benefit obligation and plan assets and a reconciliation of funded status are as follows: At December 31, (in millions) 1999 1998 ---- ---- Change in Benefit Obligation Benefit obligation at beginning of year $ 1.2 $ 0.9 Service cost 0.1 0.1 Interest cost 0.1 0.1 Plan amendments -- 0.1 Benefits paid (0.2) -- Actuarial (gain) loss (0.1) -- ----------------- Benefit obligation at end of year $ 1.1 $ 1.2 ================= Reconciliation of Funded Status Funded status $(1.1) $(1.2) Unrecognized actuarial (gain) loss (0.3) (0.1) Unrecognized prior service cost 0.6 0.6 ----------------- Postretirement benefit obligation $(0.8) $(0.7) ================= Weighted-Average Assumptions Discount rate 7.75% 7% Expected long-term rate of return on plan assets N/A N/A Rate of compensation increase 4% 4% The annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is assumed to be 5%. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point would increase the accumulated postretirement benefit obligation costs A39 for 1999 by $0.1 million and the service and interest cost components of net periodic postretirement benefit would have an insignificant change. Decreasing the assumed health care cost trend rates by one percentage point in each year would decrease the accumulated postretirement benefit obligation for 1999 by $0.1 million and the service and interest cost components of net periodic postretirement benefit costs would have an insignificant change. Employee Savings Plan: The Company maintains an employee savings plan for employees working in the United States and expatriate employees in Peru which permits employees to make contributions by payroll deduction pursuant to section 401(k) of the Internal Revenue Code. The plan provides for a Company matching contribution equal to 50% of the first 6% of employee contributions. In connection with the required match, the Company's contributions charged against earnings were $0.1 million, $0.2 million and $0.2 million in the years 1999, 1998 and 1997, respectively. 16. Stockholders' Equity Common Stock: The stockholders of the Company at December 31, 1999 were: Percent of Total Number Shares of Shares ---------- ------------ Class A Common Shares: Southern Peru Holdings Corporation 43,348,949 54.2% Cerro Trading Co., Inc. 11,378,088 14.2 Phelps Dodge Overseas Capital Corporation 11,173,796 14.0 ---------- ----- Total Class A 65,900,833 82.4 Common Shares 14,118,862 17.6 ---------- ----- Total 80,019,695 100.0% ---------- ----- Class A common shares are entitled to five votes per share. Common shares are entitled to one vote per share. Stock Options: The Company has two stockholder approved plans, a Stock Incentive Plan and a Directors' Stock Award Plan. The Stock Incentive Plan provides for the granting of nonqualified or incentive stock options, as defined under the Internal Revenue Code of 1986, as amended, as well as for the award of restricted stock and bonuses payable in stock. The price at which options may be granted under the Stock Incentive Plan shall not be less than 100% of the fair market value of the common stock on the date of grant in the case of incentive stock options, or 50% in the case of other options. In general, options are not exercisable for six months and expire after 10 years from the date of grant. Options granted may provide for Stock Appreciation Rights (SAR). An SAR permits an optionee, in lieu of exercising the option, to receive from the Company payment of an amount equal to the difference between the market value of the stock on the date of election of the SAR and the purchase price of the stock under the terms of the option. A40 The authorized number of shares under the Stock Incentive Plan is 1,000,000 of which 300,000 may be awarded as restricted stock. At December 31, 1999, 645,060 shares are available for future grants under this plan (737,610 shares at December 31, 1998). The weighted average remaining contractual life of stock option's outstanding as of December 31, 1999 was 7.1 years. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly, no compensation cost has been recognized for awards under the stock incentive plan. If compensation cost for the Company's Stock Incentive Plan had been determined based on the fair value at the grant date for awards in 1999, 1998 and 1997, consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the proforma amounts indicated below: (in millions, except per share amounts)
1999 1998 1997 ---- ---- ---- Net earnings - as reported $ 29.4 $ 54.6 $ 185.7 Net earnings - pro forma $ 29.1 $ 54.4 $ 185.5 Earnings per share (Basic and diluted) - as reported $ 0.37 $ 0.68 $ 2.32 Earnings per share (Basic and diluted) - pro forma $ 0.36 $ 0.68 $ 2.32
For purposes of computing earnings per share, basic and diluted, the dilutive effect of stock options on common shares outstanding is as follows: Weighted average common shares outstanding: 1999 1998 1997 (in millions) ---- ---- ---- Basic and diluted 79.9 79.9 80.2 The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1999: dividend yield of 7.9%(4.8%-1998, 4.05%-1997); expected volatility of 48.0% (40.4%-1998, 29.2%-1997); risk-free interest rate of 4.8% (5.6%-1998, 6.3%-1997); and expected life of 7.1 years (7.1 years-1998, 7.0 years-1997). Stock option activity over the past three years under the Stock Incentive Plan was:
Weighted Number of Average Option Price Shares Price (Range Per Share) --------- ------- ------------------- Outstanding at January 1, 1997 69,890 $ 16.06 $ 16.06 Granted 90,475 16.30 16.25 to 17.06 Exercised (3,238) 16.06 16.06 Canceled or expired (1,342) 16.15 16.06 to 16.25 ------ Outstanding at January 1, 1998 155,785 16.20 16.06 to 17.06 Granted 102,025 12.78 12.78 Exercised (5,915) -- -- Canceled or expired (960) 16.16 16.06 to 16.25 ------ Outstanding at January 1, 1999 250,935 14.88 12.78 to 17.06 Granted 92,550 9.75 8.78 to 14.37 Exercised (141,865) 10.99 8.78 to 14.37 Cancelled or expired (36,780) 12.38 8.78 to 16.25 ------- Outstanding and exercisable at December 31, 1999 164,840 $ 15.28 $8.78 to $ 17.06
A41 The Directors' Stock Award Plan provides that directors who are not compensated as employees of the Company will be automatically awarded 200 shares of common stock upon election and 200 additional shares following each annual meeting of stockholders thereafter. Under the directors' plan, 100,000 shares have been reserved for awards. At December 31, 1999, 14,000 shares had been awarded under this plan. 17. Related Party Transactions Asarco, a 54.2% stockholder of the Company, provides legal, tax, treasury and administrative support services to the Company. The amounts paid to Asarco for these services were $0.8 million, $1.0 million and $1.6 million in 1999, 1998, and 1997, respectively. The Company purchases shipping services from a company indirectly controlled by Quemchi S.A. of which the Vice Chairman is also director of SPCC. The total cost of these services amounted to $8.3 million, $11.5 million and $13.3 million in 1999, 1998 and 1997, respectively. 18. Concentration of Risk The Company operates two copper mines, a smelter and two refineries in Peru and substantially all of its assets are located there. There can be no assurances that the Company's operations and assets that are subject to the jurisdiction of the Government of Peru may not be adversely affected by future actions of such government. Substantially all of the Company's products are exported from Peru to customers principally in Europe, Asia, South America and the United States. Financial instruments, which potentially subject the Company to a concentration of credit risk, consist primarily of cash and cash equivalents, marketable securities and trade accounts receivable. The Company invests or maintains available cash with various high-quality banks, principally in the U.S., Canada and Peru, or in commercial paper of highly rated companies. As part of its cash management process, the Company regularly monitors the relative credit standing of these institutions, and by policy, limits the amount of credit exposure to any one institution. At December 31, 1999, the Company had no investments of its cash equivalents and marketable securities with Peruvian banks. During the normal course of business, the Company provides credit to its customers. Although the receivables resulting from these transactions are not collateralized, the Company has not experienced significant problems with the collection of receivables. The largest ten trade receivable balances accounted for 68.3% of the trade accounts receivable at December 31, 1999, of which one customer represented 18.6%. 19. Commitments and Contingencies In September 1996, the Company announced a two-stage project which includes an expansion of the Cuajone mine and an expansion and modernization of the copper smelter at Ilo. The Cuajone mine expansion, which consists of an expansion in annual copper production by 130 million pounds at an estimated capital investment of $245 million, was completed at December 31, 1999. Additional mining equipment will be received next year. A42 The second stage of the program, the expansion and modernization of the Ilo smelter is expected to be completed by the year 2006. Early in January 2000 the Company announced that technologies currently being evaluated would allow achievement of the smelter improvements at significantly less than the $875 million budgeted for the project. If such modifications to the original plan are made, the smelter will still meet government standards when the modernization program is completed, despite the capital savings. This evaluation should be completed in the second quarter of 2000. In 1998, the Company commenced a $48 million project to expand annual SX/EW copper production by 26 million pounds. The project was completed in the third quarter of 1999. As a result of the expansion program, electric power requirements will increase significantly, requiring the construction of substantial additional generating capacity. In 1997, the Company sold its existing power plant to an independent power company for $33.6 million. In connection with the sale, a power purchase agreement was also completed, under which the Company agreed to purchase its power needs for the next twenty years. Environmental: The exploration, mining, milling, smelting and refining activities of the Company are subject to Peruvian legislation and regulations. According to the law, active mining companies submitted to the Ministry of Energy and Mines an Environmental Compliance and Management Program (PAMA) that describes the investments that Company will make to comply with the maximum permissible levels established for its operations by this Authority. The implementation of the PAMA requires that the Company commit an annual minimum investment of 1% of its sales. The Company's PAMA was approved in January 1997. Under current Peruvian law and regulations, compliance with the PAMA will satisfy environmental 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. The project with the PAMA that will demand the largest investment is the modernization of the Ilo smelter. In the first phase, the capture of sulfur dioxide (SO2) will be increased from a current level of in excess of 30% to 67%. The second phase of the project will further increase the capture of SO2 to in excess of 92%, complying with current Peruvian environmental regulations. During the implementation of the project, Southern Peru continues to operate the Supplementary Control Program (SCP), a voluntary effort, by which the smelter production is restricted during periods of adverse meteorological conditions. This program, in conjunction with the operation of the smelter's sulfuric acid plant that was expanded to 317,500 tons per year, has contributed to improve air quality in Ilo. In addition to the environmental programs for the Ilo smelter and the refinery, the Company continues to have good results with the reclamation programs in both Ite Bay and the beaches to the north of the smelter. Environmental capital expenditures were $41.6 million in 1999, $25.3 million in 1998 and $43.8 million in 1997. In addition, the Company estimates spending $50.0 million for environmental control capital expenditures in 2000. A43 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 investment shares (formerly called "labor shares") of its Peruvian Branch plus dividends. In October 1997, the Superior Court of Lima nullified a decision of a court of first instance, which had been adverse to the Company. The Superior Court remanded the case for a new trial. 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 Superior 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. In December 1999, the lower court decided against the Company, ordering the delivery of the investment shares and dividends to the plaintiffs. The Company appealed this decision in January 2000. 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 ground and remanded the case to the lower court for further proceedings. In December 1999, the lower court dismissed the complaint against the Company. Plaintiffs appealed this decision in January 2000. It is the opinion of management that the outcome of the legal proceedings mentioned, as well as other miscellaneous litigation and proceedings now pending, will not materially adversely affect the financial position of the Company and its consolidated subsidiaries. However, it is possible that litigation matters could have a material effect on quarterly or annual operating results, when they are resolved in future periods. A44 Report of Independent Accountants To the Board of Directors and Stockholders of Southern Peru Copper Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, cash flows and changes in stockholders' equity present fairly, in all material respects, the financial position of Southern Peru Copper Corporation and its subsidiaries (the "Company") at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP New York, New York March 10, 2000 A45 Unaudited Quarterly Data Quarters (in millions, except per share data)
1999 ---- 1st 2nd 3rd 4th Year ========================================================== Net sales $ 123.9 $ 132.4 $ 156.1 $ 172.1 $ 584.5 Operating Income $ 6.4 $ 7.1 $ 18.6 $ 13.4 $ 45.6 Net earnings $ 4.0 $ 3.6 $ 12.1 $ 9.7 $ 29.4 Net earnings per share: Basic and diluted $ 0.05 $ 0.05 $ 0.15 $ 0.12 $ 0.37 Dividend per share $ 0.03 $ 0.025 $ 0.022 $ 0.075 $ 0.152 Stock prices New York Stock Exchange: High $ 10-7/8 $ 15 $ 16-7/8 $ 18-1/16 $18-1/16 Low $ 8-7/16 $10-1/16 $ 13-5/8 $13-13/16 $ 8-7/16 Lima Stock Exchange: High $ 10.66 $ 15.08 $ 16.95 $ 17.45 $ 17.45 Low $ 8.78 $ 10.12 $ 13.80 $ 14.01 $ 8.78
1998 ---- 1st 2nd 3rd 4th Year ======================================================= Net sales $ 152.4 $ 152.5 $ 173.8 $ 149.2 $ 627.9 Operating Income $ 17.3 $ 19.7 $ 30.2 $ 2.9 $ 70.1 Net earnings $ 12.9 $ 18.4 $ 19.9 $ 3.4 $ 54.6 Net earnings per share: Basic and diluted $ 0.16 $ 0.23 $ 0.25 $ 0.04 $ 0.68 Dividend per share $ 0.20 $ 0.08 $ 0.11 $ 0.12 $ 0.51 Stock prices New York Stock Exchange: High $ 15-1/8 $16-11/16 $ 13-1/2 $ 12-7/8 $16-11/16 Low $ 12-1/2 $ 13 $ 8-3/4 $8-15/16 $ 8-3/4 Lima Stock Exchange: High $ 14.95 $ 16.50 $ 13.35 $ 12.70 $ 16.50 Low $ 12.40 $ 12.95 $ 8.93 $ 8.89 $ 8.89
Metal Price Sensitivity Assuming that expected metal production and sales are achieved, that tax rates are unchanged, that the number of shares outstanding is unchanged, and giving no effect to hedging programs or changes in the costs of production, metal price sensitivity factors would indicate the following estimated change in earnings per share resulting from metal price changes in 2000. Estimates are based on 80.0 million shares outstanding. Copper Silver Molybdenum ------ ------ ---------- Change in Metal Price $0.01/lb. $1.00/oz. $1.00/lb. Annual Change in Earnings per Share $0.06 $0.02 $0.11 A46 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure On February 25, 2000, the Board of Directors of the Company selected Arthur Andersen L.L.P. to serve as independent accountants for the Company for the calendar year 2000, and resolved to submit this selection to the approval of the stockholders of the Company at the annual meeting of stockholders to be held on May 9, 2000. The Company's professional relationship with PricewaterhouseCoopers L.L.P., the current accountants, has been harmonious and during the last two fiscal years to date, the Company and its managers had no disagreement with PricewaterhouseCoopers L.L.P. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. PricewaterhouseCoopers L.L.P.'s reports on the Company's consolidated financial statements for each of the past two fiscal years did not contain any adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles. PART III Items 10, 11, 12, and 13 Reference is made to the Section captioned "Executive Officers of the Registrant" on page A-12. Information in response to the disclosure requirements specified by these items appears under the captions and pages of the 1999 Proxy Statement indicated below: Proxy Statement Item Required Information Proxy Statement Section Pages - ---- -------------------- ----------------------- ----- 10. Directors and Executive Nominees for Election as Directors Officers Representing Common Stock and Nominees for Election as Directors Representing Class A Common Stock 4-6 Section 16(a) Beneficial Ownership Reporting Compliance 19 11. Executive Compensation Committee Reports on Executive Compensation through Employment Agreements 9-16 Compensation of Directors and Compensation Committee Interlocks and Insider Participation 18-19 12. Security Ownership Security Ownership of Certain Beneficial Owners and Beneficial Ownership of Management 7-9 13. Certain Relationships Certain Transactions 17-19 and Related Transactions The information referred to above is incorporated herein by reference. A47 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as part of this report: 1. Financial Statements The following financial statements of Southern Peru Copper Corporation and its subsidiaries are included at the indicated pages of the document as stated below: Form 10 - K Pages ----- Consolidated Statement of Earnings for the years ended December 31, 1999, 1998 and 1997 A24 Consolidated Balance Sheet at December 31, 1999 and 1998 A25 Consolidated Statement of Cash Flows for the years ended December 31, 1999, 1998 and 1997 A26 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 A27 Notes to Consolidated Financial Statements A28 - A43 Report of Independent Accountants A44 2. Financial Statement Schedules Financial Statement Schedules are omitted, as they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. 3. Exhibits 3.1 Restated Certificate of Incorporation, filed December 29, 1995 3.2 Certificate of Decrease, filed February 29, 1996 3.3 Certificate of Increase, filed February 29, 1996 3.4 Certificate of Decrease, filed March 24, 1997 3.5 Certificate of Increase, filed March 24, 1997 3.6 By-Laws, as last amended on February 3, 1998 4.1 Indenture, dated as of May 30, 1997, among Southern Peru Limited, Southern Peru Copper Corporation, as guarantor, and Citibank, N.A., as Trustee. A48 4.2 Supplemental Indenture, dated as of May 30, 1997, among Southern Peru Limited, Southern Peru Copper Corporation, as guarantor, and Citibank, N.A., as Trustee. 4.3 Form of Amended and Restated Collateral Trust Agreement, dated as of July 15, 1997, between Southern Peru Limited and Deutsche Bank AG, New York Branch, as collateral trustee. 4.4 Form of Series A-1 Secured Export Notes due 2007 4.5 Supplemental Indenture, dated as of October 15, 1998 among Southern Peru Limited, Southern Peru Copper Corporation as guarantor, and Citibank, N.A., as Trustee. 4.6 Supplemental Indenture, dated as of December 22, 1998 between Southern Peru Copper Corporation and Citibank, N.A. as Trustee. 10.1 Form of Agreement Among Certain Stockholders of the Company 10.2 Tax Stability Agreement, dated August 8, 1994, between the Government of Peru and the Company regarding SX/EW facility (and English translation) 10.3 Incentive Compensation Plan of the Company 10.4 Supplemental Retirement Plan of the Company, as amended and restated as of November 4, 1999 10.5 Stock Incentive Plan of the Company 10.6 Form of Directors Stock Award Plan of the Company 10.7 Deferred Fee Plan for Directors, as amended and restated as of November 4, 1999 10.8 Form of Agreement Accepting Membership in the Plan, containing text of Retirement Plan and Trust for Selected Employees 10.9 Compensation Deferral Plan, as amended and restated as of November 4, 1999 10.10 Credit Agreement dated as of March 31, 1997 among Southern Peru Limited, as Borrower, Southern Peru Copper Corporation, as Guarantor, the several banks and other financial institutions from time to time parties to the Credit Agreement, Morgan Guaranty Trust Company of New York, as Administrative Agent, The Chase Manhattan Bank, as Documentation Agent, Citicorp Securities, Inc., as Syndication Agent, and Deutsche Bank AG, New York Branch, as Security and Collateral Agent. 10.11 First Amendment to the Credit Agreement, dated July 14, 1997. 10.12 Assignment and Assumption Agreement dated as of December 30, 1998, between Southern Peru Copper Corporation, a Delaware Corporation, and Southern Peru Limited. A49 21.1 Subsidiaries of the Company 23.1 Consent of Independent Accountants The exhibits listed as 10.4 through 10.9 and 10.13 above are the management contracts or compensatory plans or arrangements required to be filed pursuant to Item 14(c) of Form 10-K. (B) Reports on Form 8-K filed in the fourth quarter of 1999 and the first quarter of 2000: 1. Report on Form 8-K, filed December 1, 1999 disclosing the acquisition by Grupo Mexico S.A. de C.V. on November 17, 1999 of all of the shares of ASARCO Incorporated following a tender offer, and the appointment of new directors of the Company. 2. Report on Form 8-K/A filed March 1, 2000 disclosing the selection of Arthur Andersen L.L.P. to serve as independent accountants for the Company for calendar year 2000. 3. Report on Form 8-K/A-2 filed March 14, 2000 enclosing the letter of PricewaterhouseCoopers L.L.P. agreeing with the statements made by the Company regarding the change of independent accountants. (C) Exhibits - The exhibits to this Form 10-K are listed on the Exhibit Index on page B1 through B3. Copies of the following exhibits are filed with this Form 10-K: 10.4 Supplemental Retirement Plan of the Company, as amended and restated as of November 4, 1999 10.7 Deferred Fee Plan for Directors, as amended and restated as of November 4, 1999 10.9 Compensation Deferral Plan, as amended and restated as of November 4, 1999 21.1 Subsidiaries of the Company 23.1 Consent of Independent Accountants Copies of exhibits may be acquired upon written request to the Secretary and the payment of processing and mailing costs. A50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York. SOUTHERN PERU COPPER CORPORATION (Registrant) By: /s/ Oscar Gonzalez Rocha -------------------------------------------- Oscar Gonzalez Rocha President and Director Date: March 15, 2000 Pursuant to requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ German Larrea Mota/Velasco Chairman of the Board, Chief - ------------------------------ Executive Officer and Director German Larrea Mota/Velasco (principal executive Officer) /s/ Oscar Gonzalez Rocha President and Director - ------------------------------ Oscar Gonzalez Rocha /s/ Daniel Tellechea Salido Vice President, Finance and - ------------------------------ Director (principal financial Daniel Tellechea Salido officer) /s/ Ernesto Duran Trinidad Comptroller (principal - ------------------------------ accounting officer) Ernesto Duran Trinidad DIRECTORS /s/ Everett E. Briggs /s/ Manuel Calderon Cardenas - ------------------------------ ---------------------------- Everett E. Briggs Manuel Calderon Cardenas /s/ Jaime Claro /s/ Robert A. Pritzker - ------------------------------ ---------------------------- Jaime Claro Robert A. Pritzker /s/ Genaro Larrea Mota-Velasco - ------------------------------ ---------------------------- Genaro Larrea Mota-Velasco Charles B. Smith /s/ Hector Calva Ruiz /s/ J. Steven Whisler - ------------------------------ ---------------------------- Hector Calva Ruiz J. Steven Whisler /s/ Xavier Garcia de Quevedo - ------------------------------ ---------------------------- Xavier Garcia de Quevedo Douglas C. Yearley /s/ John F. McGillicuddy - ------------------------------ John F. McGillicuddy /s/ Alberto de la Parra Zavala - ------------------------------ Alberto de la Parra Zavala Date: March 15, 2000 Southern Peru Copper Corporation Exhibit Index
Sequential Exhibit Page Number Document Description Number - ------ -------------------- ------ 3. Certificate of Incorporation and By-Laws 3.1 Restated Certificate of Incorporation, filed December 29,1995 (Filed as Exhibit 3.1 to the Company's 1995 Annual Report on Form 10-K and incorporated herein by reference) 3.2 Certificate of Decrease, filed February 29, 1996 (Filed as Exhibit 3.2 to the Company's 1995 Annual Report on Form 10-K and incorporated herein by reference) 3.3 Certificate of Increase, filed February 29, 1996 (Filed as Exhibit 3.3 to the Company's 1995 Annual Report on Form 10-K and incorporated herein by reference) 3.4 Certificate of Decrease, filed March 24, 1997 (Filed as Exhibit 3.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and incorporated herein by reference) 3.5 Certificate of Increase, filed March 24, 1997 (Filed as Exhibit 3.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and incorporated herein by reference) 3.6 By-Laws, as last amended on February 3, 1998 (Filed as Exhibit 3.6 to the Company's 1997 Annual Report on Form 10-K and incorporated herein by reference). 4. Instruments Defining Rights of Security Holders 4.1 Indenture, dated as of May 30, 1997, among Southern Peru Limited, Southern Peru Copper Corporation, as guarantor, and Citibank, N.A., as Trustee. (Filed as Exhibit 4.1(a) to the Company's Registration Statement on Form S-4, as amended by Amendment No. 1 thereto, File No. 333-34505, and incorporated herein by reference) 4.2 Supplemental Indenture, dated as of May 30, 1997, among Southern Peru Limited, Southern Peru Copper Corporation, as guarantor, and Citibank, N.A., as Trustee. (Filed as Exhibit 4.1(b) to the Company's Registration Statement on Form S-4, as amended by Amendment No. 1 thereto, File No. 333-34305, and incorporated herein by reference) 4.3 Form of Amended and Restated Collateral Trust Agreement, dated as of July 15, 1997, between Southern Peru Limited and Deutsche Bank AG, New York Branch, as collateral trustee. (Filed as Exhibit 4.1(c) to the Company's Registration Statement on Form S-4, as amended by Amendment No. 1 thereto, File No. 333-34305, and incorporated herein by reference)
Southern Peru Copper Corporation Exhibit Index
Sequential Exhibit Page Number Document Description Number - ------ -------------------- ------ 4.4 Form of Series A-1 Secured Export Notes due 2007 (Filed as Exhibit 4.1(d) to the Company's Registration Statement on Form S-4, as amended by Amendment No. 1 thereto, File No. 333-34305, and incorporated herein by reference) 4.5 Supplemental Indenture, dated as of October 15, 1998 among Southern Peru Limited, Southern Peru Copper Corporation as guarantor, and Citibank, N.A., as Trustee (Filed as Exhibit 4.5 to the Company's 1998 Annual Report on Form 10-K and incorporated herein by reference). 4.6 Supplemental Indenture, dated as of December 22, 1998 between Southern Peru Copper Corporation and Citibank, N.A., as Trustee (Filed as Exhibit 4.6 to the Company's 1998 Annual Report on Form 10-K and incorporated herein by reference). 10. Material Contracts 10.1 Form of Agreement Among Certain Stockholders of the Company (Filed as Exhibit 10.1 to the Company's Registration Statement on Form S-4, as amended by Amendments No. 1 and 2 thereto, File No 33-97790 (the "Form S-4"), and incorporated herein by reference) 10.2 Tax Stability Agreement, dated August 8, 1994, between the Government of Peru and the Company regarding SX/EW facility (and English translation) (Filed as Exhibit 10.3 to the Company's Form S-4 and incorporated herein by reference) 10.3 Incentive Compensation Plan of the Company (Filed as Exhibit 10.11 to the Company's Form S-4 and incorporated herein by reference) 10.4 Supplemental Retirement Plan of the Company, as amended and restated as of November 4,1999 10.5 Stock Incentive Plan of the Company (Filed as an Exhibit to the Company's Registration Statement on Form S-8 dated March 25, 1996 (Registration No. 333-2736) and incorporated herein by reference) 10.6 Form of Directors Stock Award Plan of the Company (Filed as Exhibit 10.16 to the Company's Form S-4 and incorporated herein by reference) 10.7 Deferred Fee Plan for Directors, as amended and restated as of November 4, 1999 10.8 Form of Agreement Accepting Membership in the Plan, containing text of Retirement Plan and Trust for Selected Employees (Filed as Exhibit 10.17 to the Company's Form S-4 and incorporated herein by reference)
Southern Peru Copper Corporation Exhibit Index
Sequential Exhibit Page Number Document Description Number - ------ -------------------- ------ 10.9 Compensation Deferral Plan, as amended and restated as of November 4, 1999 10.10 Credit Agreement dated as of March 31, 1997 among Southern Peru Limited, as Borrower, Southern Peru Copper Corporation, as Guarantor, the several banks and other financial institutions from time to time parties to the Credit Agreement, Morgan Guaranty Trust Company of New York, as Administrative Agent, The Chase Manhattan Bank, as Documentation Agent, Citicorp Securities, Inc., as Syndication Agent, and Deutsche Bank AG, New York Branch, as Security and Collateral Agent. (Filed as Exhibit 10.9 to the Company's Registration Statement on Form S-4, File No. 333-3405, and incorporated herein by reference) 10.11 First Amendment to the Credit Agreement, dated July 14, 1997. (Filed as Exhibit 10.10 to the Company's Registration Statement on Form S-4, File No. 333-34305, and incorporated herein by reference) 10.12 Assignment and Assumption Agreement dated as of December 30, 1998, between Southern Peru Copper Corporation, a Delaware Corporation, and Southern Peru Limited (Filed as Exhibit 10.12 to the Company's 1998 Annual Report on Form 10-K and incorporated herein by reference) 10.13 Consulting Agreement between the Company and Mr. C. G. Preble dated March 18, 1999 (Filed as Exhibit 10.13 to the Company's 1998 Annual Report on Form 10-K and incorporated herein by reference) 21.1 Subsidiaries of the Company 23.1 Consent of Independent Accountants
EX-10.4 2 EXHIBIT 10.4 Exhibit 10.4 SOUTHERN PERU COPPER CORPORATION SUPPLEMENTAL RETIREMENT PLAN (As Amended and Restated as of November 4, 1999) SECTION 1. EFFECTIVE DATE. The effective date of the Supplemental Retirement Plan (the "Plan") as originally adopted is December 12, 1990. The effective date of the Plan as hereby amended and restated is November 4, 1999. SECTION 2. DEFINITIONS. 1. BENEFITS. The amount calculated under Section 4 for each Eligible Employee. 2. BENEFIT COMMENCEMENT DATE. The date benefits commence under the Pension Plan. 3. BOARD. The Board of Directors of Southern Peru Copper Corporation. 4. CODE. The Internal Revenue Code of 1986, as amended. 5. COMMITTEE. The Compensation Committee of the Board or any individual or individuals to whom it delegates authority. 6. COMPANY. Southern Peru Copper Corporation. 7. DEFERRAL AMOUNT. Any Benefit amount, including earnings thereon, receipt of which is deferred under Section 7. 8. DISABILITY. permanent and total disability as defined in the Pension Plan. 9. ELIGIBLE EMPLOYEE. Any employee who meets the eligibility criteria of Section 3. 10. INVESTMENT MANAGER. The investment company selected by the Company for deemed investment of deferred benefits. 11. PENSION PLAN. The Retirement Benefit Plan for Salaried Employees of Southern Peru Copper Corporation. SECTION 3. ELIGIBILITY. All salaried employees of the Company or of any subsidiary specifically designated by the Company, whose retirement benefits payable under the Pension Plan, are reduced: (i) due to the benefit limitations of Section 415 of the Code; or (ii) due to the requirement of Section 401(a)(17) of the Code that compensation in excess of the limit in effect for a particular year thereunder may not be taken into account for Pension Plan purposes; or (iii) due to participation in any Company plan or program that provides for elective pre-tax deferrals (the reductions under this Section 3(i), (ii), and (iii) hereinafter collectively referred to as "Code Reductions") shall be eligible as to Benefits under this Plan. SECTION 4. CALCULATION OF BENEFITS. The Company will pay or cause to be paid to each Eligible Employee or surviving spouse of such Eligible Employee (as defined in the Pension Plan), as the case may be, who receives payment under the Pension Plan (for purposes of this section 4 each a "Recipient"), a Benefit which is equivalent to the excess, if any, of (i) the amount such Recipient would have received under the Pension Plan for each calendar year, taking into account all provisions of the Pension Plan in effect and applicable from time to time to the Recipient, except for the Code Reductions; over (ii) the amount the Recipient is entitled to receive under the Pension Plan for such year, taking into account the Code Reductions. SECTION 5. PAYMENT OF BENEFITS. (a) Except as otherwise provided herein, Benefits under the Plan shall be paid in a lump sum, in cash, promptly upon the occurrence of the Eligible Employee's Benefit Commencement Date. (b) An Eligible Employee may elect to receive annuity payments under the Plan in the same form and at approximately the same time as payments are to be made to the Eligible Employee under the Pension Plan. Such an election must be made in writing at least twelve (12) months prior to the Benefit Commencement Date, except in the event of termination by reason of "Disability", in which case the election may be made at any time prior to the date of termination. An election under this subsection may be amended at any time provided that no such amendment shall be given effect unless it is made in writing at least twelve (12) months prior to the date of termination. SECTION 6. DEATH OF EMPLOYEE. Upon the death of an Eligible Employee: (i) Who has elected an annuity form of payment pursuant to Section 5(b), the Eligible Employee's beneficiary under the Pension Plan shall receive the Benefit described in Section 4 above, if any, in the same form and approximately at the same time as payments are made to such beneficiary under the Pension Plan. (ii) Who has not elected an annuity form of payment pursuant to Section 5(b), the Eligible Employee's surviving spouse, if any, shall receive any Benefits at the same time as provided in Section 5, except a valid election under Section 7 shall survive the death of the Eligible Employee. In such case, the surviving spouse shall have the same rights as are provided to the Eligible Employee pursuant to Section 7 below except that further deferrals will not be permitted. If there is no surviving spouse, the amount payable pursuant to this subsection shall be paid as soon as practicable in a lump sum to the Eligible Employee's beneficiary, or if none, to his estate SECTION 7. INVESTMENT OF DEFERRAL AMOUNTS. (a) Any Deferral Amount shall be deemed invested in accordance with an election to be made by the Eligible Employee in such investment vehicles as are provided under rules established by the Committee. SPCC will attempt to follow the Eligible Employee's elections, but will not be required to do so. Regardless of whether the Eligible Employee's elections are followed, the Deferral Amount shall be credited with deemed earnings, gains, losses, expenses, and changes in the fair market value of such Deferral Amount as if SPCC had followed such investment designations. All elections and amendments to elections shall be in accordance with rules, if any, as shall be established by the Committee. (b) The election of a deemed investment option is the sole responsibility of each Eligible Employee. Neither SPCC, nor the Committee that administers the Plan, nor any trustee of any trust that may be established in connection with the Plan are authorized or permitted to advise (or shall have any liability with respect to) an Eligible Employee as to the election of any option or the manner in which his Deferral Amount shall be deemed to be invested. SECTION 8. VALUE OF BENEFITS. The amount of the lump sum referred to in Section 5(a) shall be the present value of the Benefit amount determined under Section 4 (after taking into account, if applicable, any reductions as set forth in the Pension Plan to reflect the commencement of payments prior to age 65) by assuming that the Eligible Employee has elected a single life annuity under the Pension Plan and by using the following actuarial assumptions: (a) DISCOUNT RATE. The discount rate used in computing the present value of benefits payable under the Plan is the yield on 10-year treasury notes on the Eligible Employee's Benefit Commencement Date, or if a legal holiday, the first business day immediately following the Benefit Commencement Date. At any time during a thirteen month period ending with the Benefit Commencement Date, an Eligible Employee may designate an alternative date for fixing the interest rate (the Alternative Date) used to calculate the value of the lump sum distribution. The designation must be in writing, and the Alternative Date must be within 7 calendar days of the date the designation is received by the Company. The designation of the Alternative Date for fixing the interest rate, once made, may not be changed for any reason. Notwithstanding the foregoing, if an Eligible Employee designates an Alternative Date under this subsection in contemplation of commencing benefits under the Pension Plan, such designation will survive a subsequent postponement of the commencement of benefits under the Pension Plan by such Eligible Employee, except that, if the yield on 10-year treasury notes on the Benefit Commencement Date is higher than on the Alternative Date, the yield on the Benefit Commencement Date will be used. (b) MORTALITY TABLE. The Mortality Table used will be that contained in U.S. Internal Revenue Service Revenue Ruling 95-6 or any succeeding Revenue Ruling issued by the Internal Revenue Service for use in applying the provisions of Sections 415 and 417(e) of the Internal Revenue Code. SECTION 9. EMPLOYEE'S RIGHTS UNSECURED. The right of any Eligible Employee to receive benefits under the provisions of the Plan shall be contractual in nature only; however, the amounts of such benefits may be held in a trust, the assets of which shall be subject to the claims of the Company's general creditors in the event of bankruptcy or insolvency only. Any amounts paid from such trust shall reduce the amount of benefits owed by the Company. SECTION 10. SEVERABILITY. The provisions of this Plan shall be severable, and if any one or more provisions shall be considered or held to be invalid or unenforceable, or shall result in a portion of the Plan being treated as a pension plan under Title I of ERISA, the remaining provisions shall continue to be valid and enforceable. SECTION 11. PARTICIPATION IN OTHER PLANS. Nothing in this Plan will affect any right which an Eligible Employee may otherwise have to participate in any other retirement plan, or agreement, which the Company may have now or hereafter. SECTION 12. DISCRETION OF COMPANY AND BOARD. Any decision made or action taken by the Company or by the Board arising out of or in connection with the construction, administration, interpretation, and effect of the Plan shall lie within the absolute discretion of the Company or the Board, as the case may be, and shall be final, conclusive and binding upon all persons. SECTION 13. ASSIGNMENT. No right or interest of the Eligible Employee under this Plan shall be subject to voluntary or involuntary alienation, assignment or transfer of any kind. SECTION 14. COST TO BE BORNE BY SUBSIDIARY. If any payment under this Plan is to be made to an Eligible Employee on account of any employee's service for a subsidiary of the Company, the cost of such payment shall be borne in such proportions as the Company and such subsidiary shall determine. SECTION 15. AMENDMENT. This Plan may at any time or from time to time be amended, modified, discontinued or terminated by the Board if, in its sole discretion, such a change is deemed necessary and desirable. SECTION 16. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the Company has caused this Amendment to its Supplemental Retirement Plan to be duly adopted and executed by its duly authorized officers and its corporate seal affixed hereto as of November 4, 1999. Southern Peru Copper Corporation By: /s/ Oscar Gonzalez Rocha ------------------------ President By: /s/ Daniel Tellechea Salido --------------------------- Vice President Attest: /s/ Susana D. Delanney - ---------------------- Assistant Secretary [SEAL] EX-10.7 3 EXHIBIT 10.7 Exhibit 10.7 SOUTHERN PERU COPPER CORPORATION DEFERRED FEE PLAN FOR DIRECTORS (As Amended and Restated as of November 4, 1999) SECTION 1. EFFECTIVE DATE. The effective date of the Plan as originally adopted is March 1, 1996. The effective date of the Plan as hereby amended and restated is November 4, 1999. SECTION 2. DEFINITIONS. 1. BOARD. The Board of Directors of Southern Peru Copper Corporation. 2. COMPANY. Southern Peru Copper Corporation. 3. DEEMED RETIREMENT DATE. May 1 of the calendar year in which a Participant reaches his Normal Retirement Date. 4. DEFERRAL AMOUNTS. All compensation deferred by a Director under the Plan. 5. DIRECTOR. Any individual serving as a member of the Board. 6. FAIR MARKET VALUE. As to Company stock, Fair Market Value shall mean the average of the high and low prices of a single share of Company common stock as reported by the Wall Street Journal for New York Stock Exchange - Composite Trading as of the first trading day coincident with or next following the day as of which such value is to be determined. 7. INVESTMENT SUBACCOUNT. An account which earns interest pursuant to Section 5. 8. NORMAL RETIREMENT DATE. For purposes of this Plan, Normal Retirement Date for a Director is the date of the Annual Meeting of Stockholders next following the Director's 65th birthday. 9. PARTICIPANT. Any eligible Director or former Director with a Participant Account balance. 10. PARTICIPANT ACCOUNT. A bookkeeping account established in the financial records of the Company for each Participant. Participant accounts consist of an SPCC Stock Subaccount and an Investment Subaccount. Participant Accounts are credited with a Participant's Deferral Amounts, and deemed investment earnings or losses arising therefrom based on Participant elections pursuant to Sections 4 and 5. 11. SPCC STOCK SUBACCOUNT A phantom SPCC stock equivalent account consisting of deemed whole shares of Southern Peru Copper Corporation common stock and cash. SECTION 3. ELIGIBILITY. Any Non-employee Director is eligible to participate in the Plan. SECTION 4. PARTICIPATION. To become a Participant, a Director must file a written election to defer either 50 percent or 100 percent of cash compensation payable by reason of service on the Board. An amount equal to the compensation deferred will be credited to the Participant's Participant Account as soon as practicable after the date such compensation is otherwise payable. An election to participate must be received by the Company prior to January 1 of the calendar year during which the election is to be effective and shall be irrevocable for the entire year. Notwithstanding the foregoing, a Director may elect to become a Participant in the Plan for the calendar year in which he first becomes eligible by filing a written election to participate within 30 days of becoming eligible. The election will be effective on a prospective basis and only as to remuneration not yet earned. An election shall remain in effect for subsequent years unless amended or terminated in writing prior to January 1 of any subsequent year. An election can be revoked or withdrawn at any time with respect to amounts to be earned in years subsequent to the date of revocation or withdrawal. SECTION 5. DEEMED INVESTMENT PROVISIONS. The Company will establish a Participant Account for each Participant. Each Participant Account will have an SPCC Stock Subaccount and/or an Investment Subaccount. A Participant must allocate his Deferral Amounts, in increments of 25 percent, to one or both of the Subaccounts. (a) DEFERRAL AMOUNTS ALLOCATED TO SPCC STOCK SUBACCOUNTS 1) A Participant's SPCC Stock Subaccount shall be deemed invested in accordance with the Participant's election in whole shares of Company common stock which could be purchased at Fair Market Value with the Deferral Amounts credited to a Participant's SPCC Stock Subaccount on the last business day of each calendar quarter. 2) The Stock Subaccount also shall be credited with a bookkeeping entry indicating the number of additional whole shares which could be purchased at Fair Market Value with any dividends payable on the deemed shares held in the SPCC Stock Subaccount on the day such dividends are payable to shareholders of Company common stock. 3) Any amounts that are insufficient to permit the crediting of a whole share of Company common stock shall be carried as a cash balance bookkeeping entry in such Stock Subaccount. On any date on which new funds are available for deemed investment in Company stock (either due to an additional deferral or the availability of deemed dividends), the cash amount will be added to any such other funds, and the maximum number of whole shares that could be purchased at Fair Market Value will be deemed invested. The remaining amount, if any, will be held as cash. No interest shall be credited on any such Stock Subaccount cash balance. 4) The SPCC Stock Subaccount shall be adjusted to reflect any stock split, stock dividend, recapitalization, merger, consolidation, reorganization or other similar change in the Company's common stock. (b) DEFERRAL AMOUNTS ALLOCATED TO INVESTMENT SUBACCOUNTS A Participant's Deferral Amounts will be credited to his Investment Subaccount except to the extent he has elected in writing to credit his Deferral Amounts to his Stock Subaccount. Each Investment Subaccount will be credited with interest from the date on which deferred compensation would normally have been paid, until payment, at a rate equal to the yield rate for U.S. Treasury debt obligations with a 10-year maturity effective for the last business day in each quarter, on the first day of each calendar quarter in which such interest is credited to the Participant's Investment Subaccount. Interest will be compounded quarterly. SECTION 6. TRANSFERS. No election may be made to have amounts previously credited to a Participant's Investment Subaccount transferred to his Stock Subaccount. Amounts previously credited to a Participant's Stock Subaccount may not be transferred to his Investment Subaccount, except on or after the earlier in time of (a) one year prior to Normal Retirement Date, or (b) the date of termination. SECTION 7. PAYMENT OF DEFERRED COMPENSATION. (a) RETIREMENT AT NORMAL RETIREMENT DATE A Participant who retires at or following his Normal Retirement Date will receive the entire value of his Participant Account in cash on January 15 of the year following the year of retirement. (b) TERMINATION AT OTHER THAN NORMAL RETIREMENT DATE A Participant who terminates service as a Director at a date prior to his Normal Retirement Date will receive the entire value of his Participant Account in cash promptly following the date of termination. (c) FURTHER DEFERRAL Notwithstanding (a) and (b)of this section, a Participant may elect to further defer receipt of all or a portion of his Participant Account for a period of up to 10 years from the earlier in time of the Deemed Retirement Date or the date of termination. In order to defer a payment of benefits under the Plan, a Participant must file a written election at least one year in advance of the date that a payment of benefits under the Plan would otherwise be made. The Participant may elect to receive the amount deferred in a single cash payment or in annual cash installments. Any further elections to defer the receipt of benefits under the Plan must also be filed at least one year prior to the scheduled payment date. Acceleration of any benefits deferred pursuant to this paragraph can only be made by filing a request for payment at least one year in advance of the requested accelerated payment date. (d) FINANCIAL HARDSHIP OF PARTICIPANTS At any time a Participant may request a payment of all or a portion of the value of his Participant Account. Such a request shall be approved by the Company only upon a finding that the Participant has suffered a severe financial hardship which has resulted from events beyond the Participant's control ("Hardship Event"), and only in the amount reasonably needed to satisfy such Hardship Event. Whether a Hardship Event has occurred shall be determined in accordance with Treasury Regulation Sections 1.457- 2(h)(4) and (5). In the event such a payment is approved, payment of all or a portion of the value of the Participant Account shall be made as soon as practicable to the Participant. (e) OTHER WITHDRAWALS Absent a Hardship Event or adequate prior notice (in accordance with paragraph (c) above), a request for a payment of all or a portion of the value of a Participant Account may be made by a Participant subject to a 6% penalty of the amount of the requested payment, which penalty shall be deducted from the requested payment. The requested payment, less such penalty, shall be paid in cash in a single lump sum as soon as practicable after the requested payment date. SECTION 8. DESIGNATION OF BENEFICIARY. (a) A Participant may designate a beneficiary by giving written notice to the Company. If no beneficiary is designated, the beneficiary will be the Participant's estate. If more than one beneficiary statement has been filed, the beneficiary or beneficiaries designated in the statement bearing the most recent date will be deemed the valid beneficiary. (b) In the event of a Participant's death before he has received all of the benefits to which he is entitled hereunder, the value of the Participant's Participant Account shall be paid to the estate or designated beneficiary of the deceased Participant in one cash lump sum as soon as practicable after the first January 15 or July 15 following such date of death, unless the Participant has elected to continue without change the schedule for payment of benefits, in which case the beneficiary shall have the right to transfer amounts previously credited to a Participant's Stock Subaccount to his Investment Subaccount. (c) If a distribution is to be made to a beneficiary and such beneficiary dies before such distribution has been made, the amount of the distribution will be paid to the estate of the beneficiary in one lump sum. SECTION 9. PARTICIPANT'S RIGHTS UNSECURED. The right of any Participant to receive benefits under the provisions of the Plan shall be contractual in nature only; however, the amounts of such benefits may be held in a trust, the assets of which shall be subject to the claims of the Company's general creditors only in the event of bankruptcy or insolvency. Any amounts paid to a Participant from such trust shall reduce the amount of benefits owed by the Company. SECTION 10. ASSIGNABILITY. No right to receive payments hereunder shall be transferable or assignable by a Participant or beneficiary. SECTION 11. PARTICIPATION IN OTHER PLANS. Nothing in this Plan will affect any right which a Participant may otherwise have to participate in any other retirement plan or agreement which the Company may have now or hereafter. SECTION 12. DISCRETION OF COMPANY AND BOARD. Any decision made or action taken by the Company or by the Board arising out of or in connection with the construction, administration, interpretation and effect of the Plan shall lie within the absolute discretion of the Company or the Board, as the case may be, and shall be final, conclusive and binding upon all persons. SECTION 13. AMENDMENT. This Plan may at any time or from time to time be amended, modified or terminated by the Board. No amendment, modification or termination shall, without the consent of a Participant, adversely affect such Participant's accruals in his Participant Account. SECTION 14. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the Company has caused this Amendment to its Deferred Fee Plan for Directors to be duly adopted and executed by its duly authorized officers and its corporate seal affixed hereto as of November 4, 1999. Southern Peru Copper Corporation By: /s/ Kevin. R. Morano -------------------- Vice President Attest: /s/ Michael E. Smith - -------------------- Assistant Secretary [SEAL] EX-10.9 4 EXHIBIT 10.9 Exhibit 10.9 SOUTHERN PERU COPPER CORPORATION COMPENSATION DEFERRAL PLAN (As Amended and Restated as of November 4, 1999) SECTION 1 - EFFECTIVE DATE. The effective date of the Plan as originally adopted is January 1, 1998. The effective date of the Plan as hereby amended and restated is November 4, 1999. SECTION 2 - DEFINITIONS. 1) BOARD. The Board of Directors of Southern Peru Copper Corporation. 2) CODE. The Internal Revenue Code of 1986, as amended. 3) COMMITTEE. The Compensation Committee of the Board or any individual or individuals to whom authority has been delegated hereunder by the Compensation Committee. 4) COMPANY. Southern Peru Copper Corporation and any subsidiary of Southern Peru Copper Corporation that has adopted the Plan. 5) DEFERRAL AMOUNTS. A Participant's Salary Deferral Amounts, Incentive Compensation Deferral Amounts, Employer Provided Benefit, and Special Incentive Compensation Awards. 6) DIRECTOR. Any individual serving as a member of the Board. 7) INCENTIVE COMPENSATION PLAN. The Southern Peru Copper Corp. Incentive Plan for Select Management Payroll Employees, and the Logistic Services Incorporated Incentive Plan. 8) PARTICIPANT. An Eligible Employee, as defined in Section 3, who has a valid election in effect under the Plan. 9) PARTICIPANT ACCOUNT. A bookkeeping account established in the financial records of the Company to record the Deferral Amounts and deemed investment earnings or losses arising therefrom based on Participant elections pursuant to Section 5. 10) RETIREMENT. Retirement under the Retirement Benefit Plan for Salaried Employees of Southern Peru Copper Corporation. 11) SAVINGS PLAN. Savings Plan of Southern Peru Copper Corporation and Participating Subsidiaries. SECTION 3 - ELIGIBILITY. a) SALARY DEFERRAL For purposes of salary deferral, any employee eligible to participate in the Savings Plan who: 1) had compensation from the Company of at least $80,000 (or such other greater limit as may be established under Code Section 414(q)(1)(B)(1)) (the "HCE Limit") for the calendar year preceding the year for which the election is effective, or 2) has an annualized base salary equal to or greater than the HCE Limit for the year for which the election is effective shall be considered an "Eligible Employee". b) INCENTIVE COMPENSATION DEFERRAL For purposes of deferrals of incentive compensation received under the Incentive Compensation Plan ("Incentive Compensation Awards"), any exempt salaried employee of the Company who meets the compensation requirements of Section 3(a)(1) or 3 (a) (2) above, shall be considered an "Eligible Employee". SECTION 4 - PARTICIPATION. a) ELECTION TO DEFER 1) SALARY DEFERRAL. To become a Participant in the salary deferral component of the Plan for a particular calendar year, an Eligible Employee must elect, prior to the beginning of such calendar year, to defer receipt of a percentage of his base annual salary to be earned during the succeeding calendar year. Such an election shall be in writing on forms prescribed by the Committee, and shall include the percentage of base annual salary to be deferred. A Participant's election to defer with respect to a calendar year under this subsection (a)(1) shall continue in effect for all subsequent calendar years until changed in accordance with subsection (d). An employee of the Company who becomes an Eligible Employee during a calendar year may elect to become a Participant in the Salary Deferral component of the Plan for such calendar year by electing to defer a percentage of his base annual salary (in accordance with Section 4(b)) within 30 days of becoming an Eligible Employee. The election will be effective on a prospective basis beginning with the payroll period that occurs as soon as administratively practicable following receipt of the election by the Committee. 2) INCENTIVE COMPENSATION DEFERRAL. To become a participant in the Incentive Compensation Deferral component of the Plan for a particular calendar year, an Eligible Employee must elect, prior to the beginning of such calendar year, to defer receipt of an amount not to exceed 100 percent of his Incentive Compensation Award, payable during the calendar year to which the election relates. Such an election shall be in writing on forms prescribed by the Committee. A Participant's election to defer with respect to a calendar year under this subsection (a)(2) shall continue in effect for all subsequent calendar years until changed in accordance with subsection (d). b) DEFERRAL AMOUNT 1) SALARY DEFERRAL. A Participant who meets the requirements of Section 4(a)(1) for a calendar year may elect to have the following amounts (the "Salary Deferral Amount") credited to his account for such calendar year or portion thereof during which an election is effective (the "Deferral Period"): a) the product of (i) the Participant's elected salary deferral contribution percentage under this Plan (not to exceed the maximum contribution percentage permitted under the Savings Plan) and (ii) the lesser of the Participant's base annual salary for such year or the Compensation Limit (as defined below); reduced by the maximum contribution permitted for highly compensated employees under the Savings Plan due to the limitations imposed by Code Section 401(k)(3) or by the plan administrator for the Savings Plan for such calendar year; and b) the Participant's elected salary deferral contribution percentage under the Savings Plan as in effect on January 1 of such year, multiplied by the Participant's base annual salary in excess of the Code Section 401(a)(17) limit, as adjusted from time to time ($160,000 in 1999) (the "Compensation Limit"); provided, however, that the total amount of Salary Deferrals under this subsection cannot exceed the maximum contribution percentage as may then be permitted under the Savings Plan). 2) INCENTIVE COMPENSATION DEFERRAL. The amount of a Participant's incentive compensation deferral for a Deferral Period shall be any whole dollar amount or whole percent of his Incentive Compensation Award payable during the calendar year as elected by the Participant (the "Incentive Compensation Deferral Amount"). In the event the award payable is less than the dollar amount specified in the Participant's election, the full amount of the award shall be deferred (subject to Section 15). 3) EMPLOYER PROVIDED BENEFIT. With respect to each Deferral Period, the Company shall make a deemed matching contribution equal to 50% of each Participant's Salary Deferral Amount (each such deemed matching contribution, an "Employer Provided Benefit); provided, however, that no Participant's Employer Provided Benefit with respect to a particular year may exceed the amount by which 3% of such Participant's base salary for such year exceeds the matching contribution made by the Company on the Participant's behalf under the Savings Plan for such year. 4) SPECIAL INCENTIVE AWARDS. Notwithstanding anything to the contrary herein, the Committee, in its discretion, may provide for any amounts awarded to a Participant by the Board or the Committee as a special incentive award under the Incentive Compensation Plan to be deferred pursuant to the terms of this Plan and credited to a Participant's Account, subject to the terms and limitations of the award ("Special Incentive Awards"). c) IRREVOCABILITY OF ELECTION Subject to the provisions of subsection (d) of this Section 4, a deferral election hereunder shall be irrevocable. d) CHANGE OF ELECTION A Participant may change prior elections with respect to Salary Deferral or Incentive Compensation Deferral once in each calendar year. Changes shall be in writing, on forms prescribed by the Committee. Such change of election shall first be effective for the calendar year beginning after the date the change is received by the Committee. SECTION 5 - DEEMED INVESTMENT PROVISIONS. a) At the time of the election to participate in the Plan, the Participant must elect in writing to have his Deferral Amounts deemed invested, in increments of no less than 5%, in one or more of the investment funds as are provided under the Savings Plan, except; however, that the SPCC Common Stock Fund shall not be available as a deemed investment. Said election must total one hundred percent (100%) of his Deferral Amounts. b) The Participant Accounts shall be credited with deemed earnings, gains, losses, expenses and changes in the fair market value of such Participant Accounts as if the Company had followed such investment designations. c) Each Participant may elect in writing that his future Deferral Amounts be deemed invested in a proportion different from that previously elected, but the new election shall be prospective only and shall be made in accordance with paragraph (b) of this Section 5. Any changes in such deemed investments must be in accordance with rules, if any, as are established by the Committee. d) The election of a deemed investment option is the sole responsibility of each Participant. Neither the Company, nor the Committee, nor any trustee of any trust that may be established in connection with the Plan are authorized or permitted to advise (or shall have any liability with respect to) a Participant as to the election of any option or the manner in which his Deferral Amounts shall be deemed to be invested. e) Consistent with this Section 5, each Participant may elect in writing, that a whole percentage (no less than 5%) or specific dollar amount of his deemed investment in any fund may be transferred to any other fund available under the Plan. Such election will be prospective only and will be permitted in accordance with rules, if any, as are established by the Committee. SECTION 6 - PAYMENT OF BENEFITS. Each Participant shall receive the value of his Participant Account in cash promptly following the Participant's Retirement or other termination from the Company. In the event of the death of a Participant before receiving the value of his Participant Account, such distribution shall be paid to his beneficiary or beneficiaries designated pursuant to Section 7 as soon as practicable under the Plan. SECTION 7 - DESIGNATION OF BENEFICIARY. A Participant may designate one or more beneficiaries by giving written notice to the Committee. If no beneficiary is so designated, the Participant's beneficiary will be the Participant's estate. If more than one beneficiary statement has been filed the beneficiary or beneficiaries designated in the statement bearing the most recent date will be deemed the valid beneficiary. SECTION 8 - PARTICIPANT'S RIGHTS UNSECURED. The right of any Participant to receive benefits under the provisions of the Plan shall be contractual in nature only; however, the amounts of such benefits may be held in a trust, the assets of which shall be subject to the claims of the Company's general creditors only in the event of bankruptcy or insolvency. Any amounts paid to a Participant from such trust shall reduce the amount of benefits owed by the Company. SECTION 9 - PARTICIPATION IN OTHER PLANS. Nothing in this Plan will affect any right which a Participant may otherwise have to participate in any other retirement plan or agreement which the Company may have now or hereafter. SECTION 10 - NON-ALIENATION OF BENEFITS. No right to receive payments hereunder shall be transferable or assignable by a Participant or beneficiary. SECTION 11 - ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Committee. The Committee shall construe and interpret the Plan and may adopt rules and regulations governing the administration of the Plan, as well as exercise any duties and powers conferred on it by the terms of the Plan. The Committee shall act by vote or written consent of a majority of its members or otherwise as in accordance with its general procedures as in effect from time to time. SECTION 12 - AMENDMENT OR TERMINATION OF THE PLAN. This Plan may at any time or from time to time be amended, modified or terminated by the Board. No amendment, modification or termination shall, without the consent of a Participant, adversely affect such Participant's accruals in his Participant Account. SECTION 13 - NO ENTITLEMENT TO AWARDS OR RIGHT OF CONTINUED EMPLOYMENT. Neither the establishment of the Plan nor the payment of any benefits hereunder nor any action of the Company, a subsidiary of the Company, or the Committee shall be held or construed to confer upon any person any legal right to be awarded any amounts under the Incentive Plan or the Incentive Compensation Plan or to continue in the employ of the Company or a subsidiary of the Company. The Company and its subsidiaries expressly reserve the right to discharge any Participant whenever the interest of any such company in its sole discretion may so require without liability to such company or the Committee except as to any rights which may be expressly conferred upon such Participant under the Plan. SECTION 14 - DISCRETION OF COMPANY, COMMITTEE, AND BOARD. Any decision made or action taken by the Company or by the Committee or by the Board arising out of or in connection with the construction, administration, interpretation and effect of the Plan shall lie within the absolute discretion of the Company, the Committee or the Board, as the case may be, and shall be final, conclusive and binding upon all persons. SECTION 15 - TAX WITHHOLDING. There shall be deducted from all deferrals or payments made under this Plan the amount of any taxes required to be withheld by any Federal, state, local or foreign government, including any employment taxes required to be withheld under Code Section 3121(v). The Participants and their beneficiaries, distributees, and personal representatives will bear any and all Federal, foreign, state, local or other income or other taxes imposed on amounts paid under the Plan, and the Company may take whatever actions are necessary and proper to satisfy all obligations of such persons for payment of all such taxes. SECTION 17 - SEVERABILITY. In the event any provision of this Plan would serve to invalidate the Plan, that provision shall be deemed to be null and void, and the Plan shall be construed as if it did not contain the particular provision that would make it invalid. SECTION 18 - GOVERNING LAW; BINDING EFFECT; MISCELLANEOUS. The Plan shall be governed and construed and enforceable in accordance with the laws of the State of New York, except as superseded by applicable Federal law. Where appearing in the Plan, the masculine gender shall include the feminine gender. IN WITNESS WHEREOF, the Company has caused the Southern Peru Copper Corporation Compensation Deferral Plan to be duly adopted and executed by its duly authorized officers and its corporate seal affixed hereon as of November 4, 1999. Southern Peru Copper Corporation By: /s/ Oscar Gonzalez Rocha ------------------------ President By: /s/ Daniel Tellechea Salido Vice -------------------------------- President Attest: /s/ Susana D. Delanney - ----------------------- Assistant Secretary [SEAL] EX-21.1 5 EXHIBIT 21.1 Exhibit 21.1 SOUTHERN PERU COPPER CORPORATION Subsidiaries (More than 50% ownership) Percentage of voting securities owned Or other bases Name of Company of control --------------- ---------- PARENT: Southern Peru Holdings Corporation (Delaware) Registrant: Southern Peru Copper Corporation (Delaware) Los Tolmos S.A.(Peru) 99.99 Logistics Services Incorporated (Delaware) 100.0 LSI-Peru, S.A. (Peru) 98.18 Multimines Insurance Company, Ltd. (Bermuda) 100.0 Not included in this listing are subsidiaries which in the aggregate would not constitute a significant subsidiary. EX-23.1 6 EXHIBIT 23.1 Exhibit 23.1 Form 10-K Consent of Independent Accountants We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-02736 and 333-40293) of Southern Peru Copper Corporation of our report dated March 10, 2000, relating to the financial statements which appears in this Form 10-K. PricewaterhouseCoopers LLP New York, New York March 15, 2000 -----END PRIVACY-ENHANCED MESSAGE-----