01—Abstract
Summary
Summary of the 10-K filed March 15, 2000. Cited figures are marked; the original filing is the authoritative source.
Southern Peru Copper Corporation (SCCO, NYSE: PCU) reported a sharp earnings decline for fiscal 1999, with net earnings falling to $29.4 milliona ($0.37 per diluted share) from $54.6 million ($0.68) in 1998 and $185.7 million ($2.32) in 1997.
Net sales dropped 7% to $584.5 millionb, driven primarily by the LME copper price averaging 71 cents per pound versus 75 cents in 1998 and 103 cents in 1997. Operating income fell 35% to $45.6 million, and the company's dividend was cut to $0.152 per share from $0.51. Management attributed the decline to lower copper prices and higher depreciation, partially offset by cost-reduction savings of roughly $29 million pre-tax.
Operationally, the company grew volumes: total mined copper rose 11.9% to 745.6 million pounds, driven by the Cuajone mine expansion (completed in 1999 at a cost of $245 millionc) and the Toquepala SX/EW expansion. Total refined copper production reached 662 million pounds. Capital spending remained heavy at $250 million, and the company plans roughly $269 million in 2000 capex, including the Ilo smelter modernization and feasibility work on Toquepala and Cuajone expansions that could lift output above 900 million pounds annually.
Cash fell sharply to $10.6 milliond from $198 million, and operating cash flow dropped to $90 million, leaving the company dependent on existing credit facilities and external financing to fund its expansion program. The filing also reports a major ownership change: Grupo Mexico acquired ASARCO in November 1999, indirectly gaining control of SPCC's 54.2% stake through Southern Peru Holdings Corporation. Investors should weigh the strong operational growth and long-lived reserve base against the earnings pressure from low copper prices, the cash depletion, the 2000 dividend policy review, the ongoing Peruvian litigation over investment shares, and the covenant constraints tied to ASARCO's voting interest.
02—Key points
Key Highlights
- Net earnings fell 46% to $29.4 million ($0.37/share) in 1999 from $54.6 million in 1998, as LME copper prices declined to an average of 71 cents per pound.
- Copper production rose: total mined copper increased 11.9% to 745.6 million pounds, led by a 20.4% increase at Cuajone following its $245 million expansion.
- Dividend cut sharply: 1999 dividends totaled $0.152 per share versus $0.51 in 1998; a $0.06 dividend was declared in February 2000, with policy under review.
- Liquidity tightened: cash and marketable securities declined to $10.6 million from $198.1 million, and operating cash flow fell to $90.3 million from $186.6 million.
- Heavy capital program continues: 1999 capex was $250 million, with approximately $269 million planned for 2000, including the Ilo smelter modernization.
- Ownership change: Grupo Mexico acquired ASARCO in November 1999, indirectly acquiring ASARCO's 54.2% stake in SPCC.
- Cost reduction savings: programs were estimated to add $29.2 million to pre-tax earnings in 1999 and are expected to contribute about $40 million to net earnings in 2000.
03—Questions
Frequently Asked Questions
Why did Southern Peru Copper's earnings decline so much in 1999?
The primary driver was lower copper prices, with the LME average falling to 71 cents per pound from 75 cents in 1998 and 103 cents in 1997. Higher depreciation from the Cuajone expansion also weighed on results. Cost-reduction programs and lower Peruvian taxes partly offset these pressures, but net earnings still fell to $29.4 million from $54.6 million.
Is the dividend safe for investors?
The dividend was cut substantially, with 1999 payments totaling $0.152 per share versus $0.51 in 1998. A $0.06 per share dividend was declared in February 2000, but the board stated it would review dividend policy against the company's heavy capital investment program and future cash flows. Debt covenants also limit dividends to 50% of quarterly net income, so future payouts depend on earnings and covenant compliance.
How much cash does the company have, and can it fund its expansion?
Cash and marketable securities fell to $10.6 million at year-end 1999, down from $198.1 million a year earlier, as the company funded its expansion. Management states it expects to meet 2000 cash requirements through internally generated funds, cash on hand, existing borrowings under its credit facilities, and additional external financing. Total debt was $222.5 million, and the company had $903.4 million of additional debt capacity under its most restrictive covenant.
What are the main growth projects, and what do they mean for future production?
The Cuajone mine expansion was completed in 1999 for $245 million. Feasibility studies are underway for a Toquepala concentrator expansion and a new SX/EW plant at Cuajone, which could begin in 2000 and would lift annual capacity to over 900 million pounds of copper. The Ilo smelter modernization is under review to lower its cost, which was budgeted at $875 million before being re-evaluated, with a decision expected in the second quarter of 2000.
Are there material risks investors should be aware of?
Key risks include copper price volatility, since results are directly affected by commodity prices; concentration of substantially all operations in southern Peru, exposing the company to Peruvian political, economic, and currency risks; a Peruvian New Sol devaluation of 11.2% in 1999; and ongoing litigation from former employees seeking investment shares, where a December 1999 lower-court ruling went against the company and is under appeal. Loan covenants also require a minimum stockholders' equity of $750 million and would be breached if ASARCO's voting interest fell below a majority.
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