SCCO

Business Context and Reporting Period

Company: Southern Peru Copper Corporation (SPCC)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2002
Operations: Mining, smelting, and refining of copper, molybdenum, and silver in Peru. The functional currency of the Peruvian Branch is the U.S. Dollar.

Key Financial Metrics

Note: Q1 2001 debt figures are derived from the balance sheet comparison showing a current portion of $122.9 million and long-term of $273.1 million at Dec 31, 2001, which was largely repaid in Q1 2002.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased $26.2 million (16%) primarily due to lower copper prices (LME average $0.71/lb vs. $0.80/lb in 2001) and a shipping delay of 10,311 metric tons of copper and 645 metric tons of molybdenum, valued at $18.2 million, which will be recognized in April 2002.
• Production Increase: Despite lower sales, mine copper production increased 8.5% to 188.7 million pounds due to higher ore grades and throughput. SX/EW production increased by 1.8 million pounds following a plant expansion.
• Extraordinary Loss: Net earnings were significantly impacted by an $8.4 million after-tax extraordinary loss resulting from the early extinguishment of $150 million in Secured Export Notes. This included an $11.4 million premium and $1.0 million in unamortized commissions.
• Cost Reductions: Operating costs decreased $21.8 million. Depreciation and depletion dropped $4.6 million due to a change in estimated asset lives. Cost of sales decreased due to lower production costs and sales volume.
• Cash Flow Volatility: Operating cash flow decreased $51.4 million, largely because Q1 2001 included a $45.5 million reimbursement of pending I.G.V. drawbacks from the Peruvian government, which did not recur in 2002.

Outlook, Risks, and Management Commentary

• Capital Projects: The Toquepala concentrator expansion is 84% complete (budgeted $69.5 million) and expected to finish in August 2002, increasing milling capacity to 60,000 metric tons per day. The Cuajone leaching facilities expansion is 97% complete.
• Financing: The company prepaid $122.9 million of debt in February 2002 and issued $25.9 million in new Peruvian bonds (LIBOR + 3.0%) to fund expansion programs. Dividends paid were $0.07 per share in Q1 2002; a $0.04 per share dividend was declared for Q2.
• Litigation Risks: Significant pending litigation involves approximately 800 former employees seeking investment shares and dividends. A separate suit by 127 former employees is also pending. Additionally, 3,000 additional former employees intend to file similar lawsuits. Management believes these will not materially affect financial position but could impact quarterly results.
• Environmental Litigation: A federal lawsuit in New York seeks damages for alleged environmental releases in Peru. Management notes similar suits were previously dismissed in favor of Peruvian jurisdiction.
• Market Risk: Earnings are highly sensitive to copper prices. A $0.01/lb change in copper price is estimated to change annual EPS by $0.06.
• Accounting Changes: The company adopted SFAS No. 142 (Goodwill) and SFAS No. 144 (Impairment) effective Jan 1, 2002, with no material impact. SFAS No. 143 (Asset Retirement Obligations) is to be adopted in 2003.

Investor Verification Checklist

• Shipping Delays: Verify the recognition of the $18.2 million in sales delayed from March to April 2002.
• Debt Restructuring: Confirm the terms of the new $25.9 million Peruvian bond issuance and the full extinguishment of the $150 million Secured Export Notes.
• Litigation Exposure: Monitor the status of the labor share lawsuits involving ~3,900 former employees and the potential for future filings.
• Capital Expenditures: Track the completion of the Toquepala and Cuajone expansion projects against the $69.5 million and other budgeted amounts to ensure no cost overruns.
• Price Sensitivity: Assess current LME and COMEX copper prices against the $0.71-$0.72/lb Q1 2002 average to gauge future margin pressure.