Southern Peru Copper Corporation
Southern Peru Copper Corporation
Public Company (54% Owned by Grupo Mexico, S.A. de
Sales: $711.09 million (2000)
Stock Exchanges: New York Lima
Ticker Symbols: PCU; PCUC1
NAIC: 212234 Copper Ore & Nickel Ore Mining; 331411 Primary Smelting & Refining of Copper Ore; 551112 Offices of Other Holding Companies
Southern Peru Copper Corporation, a holding company, is Peru’s largest privately owned concern. It operates the Toquepala and Cuajone mines, some 10,500 to 10,900 feet above sea level in the Andes Mountains, about 610 miles southeast of Lima, Peru. It also operates a smelter and refinery in the Pacific coastal city of Ilo, Peru. Copper is the main mineral produced, but the mines also yield small amounts of molybdenum and silver as byproducts.
Southern Peru Copper Before the 1980s
Originally discovered by a German in the 19th century, Toquepala was a copper deposit in the mountains of extreme southern Peru that attracted relatively little interest because its ore contained only about 1 percent of the metal. Nevertheless, in the late 1930s a Peruvian engineer named Juan Oviedo persuaded the American Smelting and Refining Co. (ASARCO) to take, through its Northern Peru Mining Co. subsidiary, an option on the property and an adjacent one named Quellaveco. In 1945 another U.S.-based mining company, Cerro de Pasco Corp., purchased Cuajone, a similar property in the area. Cerro also challenged the ASARCO claim but lost in court. In 1955 both companies and two other American ones—Phelps Dodge Corp. and Newmont Mining Corp.—agreed to develop these properties through a new company, Southern Peru Copper Corporation, which had been incorporated in 1952. ASARCO took a 57.75 percent stake, Cerro and Phelps Dodge 16 percent each, and Newmont, 10.25 percent. (Cerro subsequently raised its stake to 22.25 percent, while ASARCO’s share dropped to 51.5 percent.)
An article in the 1950 mining code was the basis for the 1954 contract to exploit the Toquepala deposit. It provided for a sharing of 30 percent of Southern Peru Copper’s net income with the Peruvian government in place of other taxes. This represented a moderate reduction of the usual Peruvian corporate tax level for the length of time it took Southern Peru Copper to recoup its initial investment in the mine complex. The four companies financing Southern Peru Copper invested $108 million and received a $120 million loan from the Export-Import Bank, a U.S. government agency. The project eventually cost almost $250 million. The Toquepala mine, an open-pit operation, began production in late 1959. Southern Peru Copper also built a smelter in the coastal city of Ilo to producer blister (rough) copper from the ore. A railroad was constructed to link the mine to the smelter. The copper, about 140,000 metric tons a year, was then sent to ASARCO’s Baltimore refinery and another in Belgium for final processing.
Contention developed over Southern Peru Copper’s interpretation that depreciation and depletion allowances should not be considered profits for the purpose of computing when the company’s recovery of its investment had been made. This was poorly received among a population inclined to be hostile to a foreign company engaged in exploiting an extractive, nonrenewable asset, and a congressional commission accused Southern Peru Copper of keeping double or even triple sets of books. The company countered with an advertising campaign pointing out to the public that Southern Peru Copper was the biggest income tax payer in Peru. Moreover, Southern Peru Copper was able to put pressure on the government because it wanted the company to develop the bigger Cuajone copper deposit, only 12 air miles from Toquepala. In 1968 Southern Peru Copper dropped its interpretation of profit but in exchange received a further period of six years during which only taxes in effect at the time of the 1954 signing would be owed. This settlement was followed almost immediately by the announcement of a projected investment of $355 million in the Cuajone project by the four companies backing Southern Peru Copper, including a connection to the railway line, a system of roads, and an aqueduct.
A Peruvian military coup brought into power a nationalist regime that expropriated a subsidiary of Exxon Corporation in 1968 and also seized other U.S.-owned properties. The new government canceled Southern Peru Copper’s Quellaveco concession. It also established a government monopoly to market Peruvian copper and announced plans to build an Ilo copper refinery, which was completed in 1976. As a result of the expropriations, the Cuajone project did not qualify for low-interest Export-Import Bank loans until the United States and Peru reached a settlement in 1974. The government and Southern Peru Copper continued to negotiate, however, and in 1969 settled on a tax rate of 47.5 percent during the recovery period and a maximum rate of 54.5 percent during the six-year postrecovery period. By the time the project got underway, the cost had swelled to $620 million, with financing including $55 million from the Export-Import Bank and $404 million from 54 worldwide lending institutions. Work was completed about late 1976. Cuajone became the largest copper mine in Peru, with annual capacity of ore to produce 170,000 tons a year of blister copper. The eventual cost of the project reached $727 million.
Good Years and Bad: 1980-95
Southern Peru Copper’s sales reached $306.71 million in 1983 and $315.57 million in 1984. Its net earnings were slender, however, and the company lost money between 1985 and 1988 because of low world copper prices. The Peruvian government reduced Southern Peru Copper’s tax rate to 45 percent in 1986 and 40 percent in 1990. By then the price of copper had risen and Southern Peru Copper was in the black again, earning $7.55 million in net income on $395.03 million of net sales, but the company lost a small amount in 1991 before recovering in 1992 and 1993. The settlement in 1991 of a four-year-long dispute with the Peruvian government over profits taken out of the country by Southern Peru Copper allowed the company to move ahead with a $445 million expansion and renovation program. This included a secondary recovery operation at each mine using a leaching process to extract copper from rock wasted in traditional mining. Leaching was expected to raise Southern Peru Copper’s copper production by 15 percent.
Southern Peru Copper used some of its revenue to invest in Peruvian companies. In the early 1990s, for example, it held 20 percent of Textil Piura S.A., 30 percent of the shares in the textile enterprises of a group directed by Juan Francisco Raffo, and 30 percent of the shares of Cables y Conductores de Cobre S.A., an enterprise producing all types of wire, cables, and electrical and telephonic conductors made of copper. The company’s Peruvian critics said it was investing profits that it had first taken out of the country illegally.
Reporting from Peru in 1992, Nathaniel C. Nash of the New York Times wrote that Southern Peru Copper’s 5,000 workers and their 20,000 dependents received free housing, education, electricity, water, medical care, and food at the mines and Ilo. The company also was subsidizing college education for the children of its workers. “A tour through both Cuajone and Toquepala,” he continued, “found them to be more like modern rural United States towns, with manicured lawns, clean buildings and streets. The hospital in Cuajone is considered perhaps the most modern in Peru.” Nevertheless, he noted, “Recent surveys have found that 75 percent of the residents do not like the presence of this American corporate giant, dubbed by some as the ’gringo octopus.’” Calvin Sims, another Times reporter, in 1995 interviewed Southern Peru Copper workers in Ilo, dozens of whom said that they and their families suffered respiratory problems in reaction to smoke from the smelter. (Southern Peru Copper also purchased the Ilo refinery in 1994, paying $65 million, and installed a sulfuric-acid plant at the smelter in 1995.) The company denied that there was a health problem but said it would spend $151 million on environmental projects in the area. A lawyer representing Ilo residents said Southern Peru Copper had destroyed a 12-mile stretch of coastline by annually dumping 30 million metric tons of untreated mining waste into the Pacific Ocean.
- Four U.S. companies take stakes in Southern Peru Copper Corporation.
- Operations begin at a mine and smelter at Toquepala.
- A second, larger mine complex at Cuajone begins operations.
- Southern Peru Copper purchases its Ilo copper refinery from the Peruvian government.
- Southern Peru Copper sets records for revenues and profits as world copper prices peak; the company makes an initial public offering on the New York Stock Exchange.
- Grupo Mexico, Southern Peru Copper’s new majority owner, dismisses company managers.
Sustained by high copper prices, Southern Peru Copper was booming in this period. Net sales came to $661 million, of which northern Europe accounted for 34 percent; Asia, 30 percent; Italy, 17 percent; Latin America, 15 percent; and North America, 4 percent. Net income came to $99 million. Copper prices peaked in 1995, and Southern Peru Copper set records for revenue ($928.84 million) and income ($217.75 million). AS ARCO’s minority partners offered 13 million shares (17.3 percent of the total outstanding) that year on the New York Stock Exchange. Shortly thereafter, ASARCO purchased the Newmont stake in Southern Peru Copper for $116.4 million. In 1995 the company began work on a solvent extraction/electro-winning (SX/EW) facility at Toquepala. Southern Peru Copper was reorganized into a holding company structure, effective at the beginning of 1996. Although now nominally a U.S. corporation, Southern Peru Copper continued to maintain its executive headquarters in Lima.
Further Developments in the Late 1990s
In 1997 Southern Peru Copper secured $800 million in financing for a $1.24 billion, five-year expansion of the Cuajone mine and modernization of the Ilo smelter. Seventeen banks joined in the loan, which represented the largest capital-markets issue ever for Peru and also had the longest final maturity (ten years) and average life (seven years) of any capital-markets issue from Peru. The first phase, a $245 million expansion of the Cuajone open pit and concentrator plant, was completed in 1999, boosting the company’s copper output by 19 percent. The upgrading of the smelter would include a new, larger capture-acid plant that would catch 95 percent of all emissions from the smelter’s high chimneys and convert them to sulfuric acid, some of it used in the company’s own leaching operations. Southern Peru Copper confirmed in 1999 that a two-year drilling program at Toquepala had increased the mine’s reserves by more than 160 percent. Although the area would have to be stripped to reach the new reserves, beneath the mine, they would be suitable for leaching. The company also completed expansion of the Toquepala SX/EW facility in 1999 and was exploring many other areas of Peru, including a gold-copper project in the north being conducted as a joint venture.
AS ARCO’s stake in Southern Peru Copper, now 54.2 percent, passed to Grupo Mexico, S.A. de C.V., when the Mexican mining giant purchased ASARCO in 1999 for $2.2 billion. (The other stockholders at the end of the year were Cerro Trading Co. Inc., a subsidiary of Marmon Group, 14.2 percent; Phelps Dodge Overseas Capital Corp., 14 percent; and public shareholders, 17.6 percent.) The company’s top managers, consisting of U.S. executives, were promptly dismissed by German Larrea Mota-Velasco, Grupo Mexico’s chairman and chief executive officer, who also assumed these Southern Peru Copper posts himself.“Larrea seemed to be offended by the high level of compensation the ex-pats had, and the fact that they’re paid in U.S. dollars,” one executive told Robert C. Yafie of American Metal Market. Larrea said that Southern Peru Copper would continue with the Toquepala expansion, a planned Cuajone SX/EW facility, and Ilo smelter modernization, but he qualified plans for the latter, the centerpiece of the program. In a statement released to the press, Larrea said that his company was“reviewing time required to execute the investment commitment in the Ilo smelter, taking into consideration what is best economically and financially for Southern Peru Copper as well as the appropriate investment return.”
Southern Peru Copper produced 745.61 million pounds of copper in 1999, of which Cuajone accounted for almost 380 million, Toquepala for 256.39 million, and the Toquepala SX/EW facility for 109.23 million. All of these totals appeared to be records. Smelter production came to 638.14 million pounds. The Ilo refinery turned out 552.74 million pounds, for a total refinery output of 661.96 million pounds when adding the SX/EW production. Molybdenum production was (in concentrates) 12.06 million pounds, of which Toquepala accounted for nearly seven million and Cuajone for 5.07 million. Blister silver production came to 3.38 million ounces and refined silver to nearly 2.8 million ounces. Net sales for the year totaled only $584.55 million, a figure below 1997 and 1998 and indicative of a 12-year low for world copper prices. Net earnings were $29.41 million, also down from the figures of the previous two years. Long-term debt was $199.25 million at the end of the year.
Southern Peru Copper’s production and income were higher in 2000. Copper production came to 751.04 million pounds, of which Cuajone accounted for 394.55 million, Toquepala 232.89 million, and the Toquepala SX/EW plant, 123.6 million. The Ilo refinery turned out 583.66 million pounds, and the total refined production was 707.2 million pounds. Molybdenum production was (in concentrates) 15.88 million pounds, of which Toquepala accounted for 8.24 million and Cuajone for 7.64 million. Refined silver production came to 3.34 million ounces. Net sales reached $711.06 million, in large part because of higher copper prices and higher sales volume. Net earnings were $92.9 million. The company’s long-term debt at the end of 2000 was $322.91 million.
Logistics Services Inc.; Los Tolmos S.A. (Peru); Multimines Insurance Company, Ltd. (Bermuda).
Corporacion Nacional del Cobre de Chile; Phelps Dodge Corporation.
Bowen, Sally, “Peruvian Copper Group Caught in State of Flux,” Financial Times, October 15, 1999, p. 36.
Crespo, Mariana, “Southern Peru Copper: Buy on the Restructuring,” Financial World, June 20, 1995, p. 16.
Goodsell, Charles T., American Corporations and Peruvian Politics, Cambridge: Harvard University Press, 1974.
“Huge Peru Copper Mine Slated to Open Late ’76,” Journal of Commerce, March 3, 1975, p. 14A.
Macdonald, John, “The Big New Kicker at Asarco,” Fortune, January 1963, pp. 81–82.
—, “Why Peru Pulls Dollars,” Fortune, November 1956, pp. 178,183.
Malpica Silva Santisteban, Carlos, El poder economico en el Peru, Lima: PERUgraph Editores, 1992, Vol. 3, pp. 1307–08, 1310–12.
Nash, Nathaniel C, “Coup in Peru a Blow to Its Copper,” New York Times, April 28, 1992, pp. Dl, D22.
Sims, Calvin, “In Peru, a Fight for Fresh Air,” New York Times, December 12, 1995, pp. D1, D4.
Vandell, Jonathan, “Delay in Peruvian Copper Project Underlines Pragmatic Limits of Revolution,” New York Times, November 28, 1974, pp. 53, 55.
Watkins, Mary, “Introducing Peru,” Project Finance, February 1998, p. 38.
Yafie, Roberta C, “Grupo Mexico Cuts Cloud SPCC’s Return,” American Metal Market, December 14, 1999, p. 1.
——, “SPCC Execs Appointed: Grupo Mex Sets Tactics,” American Metal Market, December 21, 1999, p. 2.