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FILE NAME: Kennecott (KENN) DATE: 1963 DOC#: KENN010 DOCUMENT DESCRIPTION: Kennecott Copper Corp. Annual Report 1963 Kenneco tt Copper Corporation ANNUAL REPORT Board of Directors ` CHARLES D. DICKEY, CHAIRMAN, Committee on Trust Matters, Morgan Guaranty Trust Company of New York LELAND B. FLINT, PRESIDENT, Zions First National Bank, Salt Lake City, Utah M. PETER GRACE, PRESIDENT, W. R. Grace & Company ALBERT GREEN, VICE PRESIDENT, The Murry and Leonie Guggenheim Foundation and The Murry and Leonie Guggenheim Dental Clinic (Charitable Organizations) M. M. HARDIN, PRESIDENT, American Gypsum Company R. STUART KEEFER, PRESIDENT, The Okonite Company CARL K. LENZ, PRESIDENT, Kennecott Sales Corporation ARTHUR FERDINAND MAYNE, EXECUTIVE VICE PRESIDENT, The Royal Bank of Canada ` FRANK R. MILL1KEN, PRESIDENT, Kennecott Copper Corporation WALTER H. PAGE, VICE PRESIDENT, Morgan Guaranty Trust Company of New York ` CLIFTON W. PHALEN, PRESIDENT, New York Telephone Company EDWARD L. STEINIGER, PRESIDENT, Sinclair Oil Corporation ` ROBERT G. STONE, TRUSTEE CHARLES G. STRADELLA, Retired ` ALBERT E. THIELE, PARTNER, Guggenheim Brothers WM. THAYER TUTT, PRESIDENT, Broadmoor Hotel, Inc. ` MEDLEY G. B. WHELPLEY, Retired M em ber o f Executive C om m ittee Transfer Agents Morgan Guaranty Trust Company of New York, New York, N. Y. Boston Safe Deposit and Trust Company, Boston, Mass. Registrars Bankers Trust Company, New York, N. Y. First National Bank of Boston, Boston, Mass. KENNECOTT COPPER CORPORATION EXECUTIVE OFFICES: 161 EAST 42N D STREET, NEW YORK, N. Y. 1 0 0 1 7 FO R TY-N IN TH AN NUAL REPORT--YEAR ENDED DECEMBER 31, 1963 The annual m eeting o f stockholders o f Kennecott Copper Corporation w ill be held Tues day, May 5, 1964, in The S ta tle r H ilton Hotel, 7th Avenue and 33rd Street, New York City. A form al notice of the m eeting and proxy statem ent, together w ith a form of proxy, w ill be m ailed to stockholders on or about April 3, 1964, at w hich tim e proxies w ill be solicited by the m anagem ent. Cover: The copper, silver, gold and black bars on the cover represent the colors of Kennecott's m ajor m inerals -- copper, the Company's principal product, and the by products, silver, gold and m olybdenite. C o n te n ts BOARD OF D IR E C T O R S .................................................................................. Inside Front Cover RESULTS AT A G L A N C E .................................................................................................................2 PRESIDENT'S L E T T E R .......................................................................................................................3 REVIEW OF O P E R A T IO N S ................................................................................................................. 7 M I N I N G ...............................................................................................................................................7 WESTERN MINING D IV IS IO N S ............................................................................................... 7 BRADEN COPPER COMPANY......................................................................................................9 TINTIC D IV IS IO N ....................................................................................................................... 9 QUEBEC IRON AND TITANIUM CORPORATION.................................................................. 9 TIN AND ASSOCIATED MINERALS L IM IT E D ................................... ...... . . . . 11 F A B R IC A T IN G .................................................................................................................................11 CHASE BRASS & COPPER CO. IN C O R P O R A T E D .......................................................... 11 THE OKONITE COMPANY......................................................................................................... 13 EXPLORATION AND DEVELOPM ENT............................................................................................. 13 RESEARCH AND D E V E LO P M E N T................................................................................................... 15 M I N I N G ............................................................................................................................................ 15 F A B R IC A T IN G ................................................................................................................................. 15 LEDGEMONT LABO R ATO R Y......................................................................................................... 17 COMPUTERS. .................................................................................................................................17 EMPLOYEE R E L A T IO N S ..................................................................................................................... 17 ORGANIZATION C H A N G E S ............................................................................................................... 18 FINANCIAL R E V IE W ...........................................................................................................................19 Equity in Operations of Unconsolidated Subsidiaries................................................................23 Working C a p ita l.......................................................................................................... 23 Schedule of In v e s tm e n ts ............................................................................................................... 26 Financial Statements ..................................................................................................................... 27 HISTORICAL T A B L E ........................................................................... 30 OFFICERS AND E X E C U T IV E S ......................................................................................................... 32 Results at a G lance 1963 1962 SALES AND OTHER INCOM E...................... COSTS AND EXPENSES (EXCEPT TAXES) . TAXES OF ALL T Y P E S ................................. DOLLARS PER SHARE ...................... $510,774,000 $362,038,000 $ 91,777,000 $ 8.30 $513,803,000 $358,721,000 $ 89,427,000 $ 8.09 NET IN C O M E ................................................. DOLLARS PER SHARE ...................... DISTRIBUTIONS TO STOCKHOLDERS . . DOLLARS PER SHARE ...................... $ 56,959,000 $ 5.15 $ 44,212,000 $ 4.00 $ 65,655,000 $ 5.94 $ 55,265,000 $ 5.00 DEPRECIATION AND RETIREMENTS . . CAPITAL EXPENDITURES........................... $ 20,771,000 $ 37,202,000 $ 20,570,000 $ 31,386,000 NET WORTH-- BOOK V A L U E ...................... DOLLARS PER SHARE ...................... AVERAGE NUMBER OF EMPLOYEES . . NUMBER OF STOCKHOLDERS . . . . $770,095,000 $69.67 25,176 89,976 $757,348,000 $68.52 26,133 93,976 2 THE 19 50' S Millions of Short Tons 0 1 2 THE 19 6 0' S 1960 m m m m 1961 1962 **1963 Copper Consumption of the Free World | Copper Production of the Free World U.S. Non U.S. U.S. Non U.S. * Consumption figures consistently exceed production figures because the latter do not include copper produced from scrap which currently is around 200,000 tons a year. * * Based upon Copper Institute figures for 1963 after adjusting for estimated Free World figures not included by the Copper Institute. Source: American Bureau of Metal Statistics. President's Letter Earnings and Dividends Consumption, Production and Prices Net income per share for the year 1963 was $5.15 compared with $5.94 in 1962. The principal reasons for this decline in earnings were: (1) increased costs at the Utah Copper Division, (2) a higher effective Chilean income tax rate, and (3) adverse adjust ments. Utah costs were up mainly because of extraordinary maintenance, higher prop erty taxes, stepped-up stripping in connection with the expansion program and lower by-product metal credits. A decrease in Braden Copper Company's production caused its effective income tax rate to increase from 83 per cent in 1962 to 86 per cent in 1963. (The Chilean income tax law applicable to Braden results in an income tax rate which varies in inverse proportion to Braden's copper production.) Adjustments result ing from domestic and foreign income tax accruals and other non-operating charges, all applicable to prior years, reduced 1963 net income by approximately 21 cents per share. Dividends paid in 1963 amounted to $4.00 per share compared with $5.00 in 1962. The percentage of 1963 earnings paid out in dividends was 78 per cent con trasted with a dividend payout rate of 84 per cent for the previous year. Statistics of the Copper Institute indicate that Free World consumption and production of refined copper were in relative balance during 1963, with deliveries to fabricators exceeding production by less than 1 per cent. Both Free World consumption and production of copper were up in 1963. Con sumption rose 2.7 per cent in the United States and 3.3 per cent outside the United States. Although domestic mine production was below 1962 by 1.8 per cent, foreign mine production increased 1.4 per cent. Kennecott's 1963 copper sales were slightly in excess of those in 1962. The Company's copper production in 1963 declined 6.8 per cent from the previous year's output, the deficiency between sales and output being made up from inventory. Our United States production decreased 3.3 per cent and Chilean output decreased 14.6 per cent. The reduction in domestic production reflects the curtailment instituted in September, 1962. The decline in foreign production reflects not only this curtail ment, but also the output lost by a month's strike at Braden during July, 1963. In order to meet our customers' requirements, Braden resumed capacity operations fol lowing the strike, and production at the Western Mining Divisions was stepped up during the fourth quarter of 1963. 3 In the decade from 1950 through 1950 a significant change in the Free World's copper consumption pattern occurred. Although the United States consumption remained about the same throughout this period, that of the rest of the Free World more than doubled. On an over-all Free World basis, consumption during this 10-year period increased 54.8 per cent. However, since 1960, a reversal of this consumption trend has occurred. United States consumption increased 22 per cent from 1960 through 1963, whereas in the other Free World countries, it showed no material change. On an over-all Free World basis, consumption during the 1960-1963 period increased 7 per cent. The 1963 estimated Free World copper consumption of 4,405,000 tons was 66 per cent greater than the 1950 consumption of 2,658,000 tons. Both statistical projections and detailed market studies indicate a continuing growth in consumption. The industry's production has kept pace with demand, and should continue to do so in the foreseeable future. The chart of page 2 of this report graphically illustrates the changes in the Free World copper consumption and production patterns. The United States primary producers' price for copper during 1963 remained stable at 31 cents per pound. The foreign price (London Metal Exchange) averaged 29.3 cents. Kennecott's average selling price, domestic and foreign, for 1963 was 30.1 cents compared with 30.0 cents in 1962. As mentioned in the fourth quarter report, for a number of years the basis for pricing our copper sales in Europe has been the London Metal Exchange. During the past two years this price fluctuated in a narrow range around 234 (sterling) per long ton (29^4 cents per pound). A pronounced upward price movement occurred in mid-January, 1964, and certain African producers, who also sold on the basis of the L.M.E., then offered to sell copper at 236 (29^2 cents per pound), which was below the L.M.E. quotation at that time. Kennecott subsequently offered to sell at either 236 or at the L.M.E. price. The situation remains unchanged at this writing. Additional Copper Output In the light of the growing demand for copper, Kennecott has planned increases in its output of the metal. In addition to the 100,000 tons per year increase in copper production resulting from the Utah Expansion Program, mentioned in previous reports to stockholders, the Chino Mines Division in New Mexico w ill increase its annual cop per output by approximately 24 per cent, or 21,000 tons a year. The latter increase, which w ill be obtained from expanded pit mining and enlarged leaching facilities for the production of precipitate copper, will become available during the year 1965. Fabrication Fabricating earnings for 1963 showed only a slight improvement compared with last year's small profit. Overcapacity in the copper fabricating industries (the copper and brass m ill in dustry and the wire and cable industry) has led to price cutting in an attempt to utilize such excess capacity. This has resulted in the deterioration of profit margins in some companies, including our fabricating subsidiaries, to a point where a fair return is not being realized on capital investment. 4 Outlook The return on the capital investment in our copper mining operations cannot be sufficient to justify investments in fabricating facilities that in themselves do not provide an adequate return. Nor can we afford to have the customers for our primary copper, the independent fabricators, operate unprofitably. Since they are outlets for our products, their financial well-being is as important to us as it is to them. The chaotic pricing situation in fabricating must ultimately right itself. In the meantime, our subsidiaries have been pursuing the only course available to them-- drastic cost reduction. To facilitate reduction in costs and improve the Company's competitive posi tion in one of its product lines, Chase Brass & Copper Co. Incorporated will construct a new single purpose, highly automated, and strategically located brass rod mill. The Federal antitrust suit charging Kennecott with violation of Section 7 of the Clayton Act by its acquisition of The Okonite Company in the year 1958 was tried in November before the United States District Court for the Southern District of New York. No decision is expected for several months. Current demand for copper is strong in the United States, Europe and the rest of the Free World. We expect this demand to remain firm during the first half of the year 1964. However, there may be some inventory buying because of possible work stoppages that might occur in the copper industry in connection with the negotiation of new labor contracts during the year. Free World copper production should be ade quate to supply the needs of the industry's customers. BY ORDER OF THE BOARD OF DIRECTORS, FEBRUARY 18, 1964 PRESIDENT 5 Symbolic of the dynamic expansion program at Utah Copper Division is this 110-hole blast that opens new areas to mining. In the foreground is one of two new 12-cubic yard shovels. 6 R eview of O perations MINING Lower copper-producing output at four of the five Divisions reflected the reduction in operating rate effected in September, 1962, to bring production into line with sales to our customers at that time. However, the production rate in the fourth quarter of 1963 was increased somewhat to meet im proved copper demand. The grade of ore at Kennecott's four U. S. mines in 1963 averaged .804 per cent cop per against .810 per cent the preceding year. The ore grade at our Chilean subsidiary, Braden Copper Company, was 1.937 per cent compared with 1.957 per cent in 1962. Production of the principal by-products in 1963 was: MOLYBDENITE GOLD SILVER (000 Pounds) (Fine Ounces) (Fine Ounces) 1963 . . . 1962 . . . 22,144 25.429 307,470 361,847 2,608,807 3,152,801 The decrease in by-product output re sulted principally from lower by-product content of the ore at Utah and the general cut in mine production. Western Mining Divisions CHINO MINES DIVISION Conversion from rail to the more eco nomical truck haulage was virtually com pleted during 1963, with the last train removed from pit ore haulage on September 5. The conversion required the purchase of 22 giant trucks, construction of mainte nance facilities and haulage roads, and the removal of rail facilities. The latter will not be completed until late in the second quar ter of 1964. Low-cost precipitate copper production rose 12.7 per cent over 1962, principally as a result of changes effected in the water circulation pattern in the pre cipitation plant. The mine dumps at this Division are readily amenable to leaching. To increase copper production from this source, plans were developed to expand stripping activi ties, increase the volume of leaching solu tions, enlarge the precipitation plant, and increase smelter capacity by installing a new precipitate dryer. These installations will increase copper output by approxi mately 24 per cent. NEVADA MINES DIVISION Although the Nevada Division has low grade ore, a high stripping ratio, and difficult metallurgical problems, improved mine per formance and other operating practices more than offset these problems and per mitted an over-all reduction in production costs. During the year, the Division set a new high average daily ore production and m ill ing rate. Divisions Chino Mines . . . Nevada Mines . . . . Ray Mines . . . . Utah Copper . . . Total Domestic . . Chilean . . . . Grand Total . . . PRODUCTION STATISTICS Refined Copper Produced (Net Tons) 1963 1962 1963 Ore Mined and Milled (Net Tons) 1962 80,629 39,672 62,930 197,858 73,683 43,369 66,475 210,375 6,648,058 7,064,745 7,123,102 26,235,400 7,071,800 7,176,488 7,695,757 29,175,000 381,089 393,902 47,071,305 51,119,045 154,916 181,306 9,447,410 11,537,521 536,005 575,208 56,518,715 62,656,566 Pounds of Copper Per Ton of Ore Mined 1963 1962 17.6 18.2 14.6 15.5 18.2 18.3 15.5 15.4 Avg. 16.1 16.2 38.7 39.1 Avg. 19.9 20.4 : * * L ' '- S -r>` ,T ^ - - ^ r* ,'j^" 1^ M an J ^V i-S W : B ^ H j f i k t JifHIVT i ih B $ji. r ' 'i 1 ^ \ i 1 i HS 1 r 'j Ja New m atte ta pp in g m ac h in e is instrumental in reducing costs at the Ray Mines Division smelter. The new fleet of 65-ton trucks for Utah Copper Division's expansion program being readied for final test runs. RAY M IN E S DIVISION Three 65-ton haulage trucks were purchased to replace smaller trucks, and resulted in significantly lower haulage cost per ton for the larger u n it A matte tapping machine in the smelter, developed in cooperation with a manufacturer, was successful in reducing costs of labor, tap hole maintenance, and oxygen lancing, and has provided a safer operation. A second machine is scheduled to be received early this year. A pilot plant for molybdenite recovery was constructed, and experimental work is being conducted in preparation for the production of molyb denite at this Division. Increased water in the leaching circuit aided in achieving a 21.3 per cent increase in precipitate copper production over the 1962 mark. The historic mining town of Ray, Arizona, from which Ray Mines Division derived its name, is being razed to make way for min ing progress. Eventually the open-pit opera tions of the Division will be expanded, elim inating the colorful landmark. Municipal facilities of Ray have been transferred to the new town of Kearny, 14 miles south. UTAH COPPER DIVISION The long-range mining plan required the mining in 1963 of hard and blocky areas that were low in precious metal content and molybdenite, and high in iron. As a conse quence, mining and maintenance costs were higher than normal. The contract stripping continued throughout the year, terminating in December. This, together with the strip ping necessary for the preparation of the mine for the expansion project, resulted in high advanced stripping costs for the year. The conversion to truck haulage required a great deal of driver and mechanic training which was conducted while maintaining reg ular operations. Gale force winds crippled the precipita tion plant on February 1, and fu ll normal production was not restored until April 5. Damage to plant installations and power lines by wind storms of unprecedented vio lence interrupted operations early in June. The high iron content of the mine ore was reflected in lower grade concentrates and increased quantities of smelter slag. As a result, the reduced smelting rate ad versely affected Division costs. A thermal oxidation plant for the treat ment of refinery slimes was completed and placed in production. An auxiliary plant for the production of tellurium is in the ad vanced engineering phase and construction w ill be initiated in the near future. The work on the Utah expansion program is progressing on schedule. Major contracts for construction will be let early this year. Braden Copper Company Plant operations were conducted at a rate to meet customer demand until a legal strike at the end of the contract in mid-year interrupted output for one month. Upon re sumption of production, the plant was operated at full capacity for the balance of the year. Projects for capital expenditures of ap proximately $1,400,000 were undertaken for industrial water development, renovation of electrical distribution systems, and fur ther enlargement of the precipitation plant which treats the overflow of decanted ef fluent of the tailings ponds. A new 28-ton per day pilot plant was in stalled in the concentrator to permit inves tigation of metallurgical improvements in the recovery of both copper and molybde nite and to develop cost reduction methods. Tintic Division Work at this lead-zinc-silver mine con tinues with the sinking of a production shaft, the construction of surface facilities, and the underground development neces sary for the mining of the orebody. Pro duction of limited tonnages of ore from horizons above the water table is continu ing. Quebec Iron and Titanium Corporation Production of this Canadian subsidiary, twothirds owned by Kennecott, was resumed in Apri 1,1963, after a seven-month strike which began late in August, 1962. Reduction plant operations continued at fu ll capac- 9 Precipitation plant at Chino Mines Division, with worker finishing a cleaning operation on one of the cells. In the background are the pipelines which take leach solution to the top of the clumps. 10 The 50-foot casting wheel at Kennecott Refining Corporation in Baltimore, Maryland, casts 700-pound anodes from blister copper. ity for the balance of the year and estab lished a record level of monthly throughput. In 1963, sales decreased 7 per cent from the previous year, and net profit was $962,900 (Cdn. Cy.) compared with $3,269,400 in 1962. This decrease in earnings was due mainly to start-up expenses following the strike, decreased profitability of 1963 iron sales, and a change in sales policy as reported in the 1962 Annual Report. Q.l.T. is not making provision for Cana dian income taxes since taxable income is presently offset by allowable deductions. When such deductions have been fully utilized, this Company's earnings may be reduced materially by the impact of Cana dian income taxes. The reduced income from iron sales was the result of a continued erosion in steel scrap price which reached an all-time low in 1963. Sorelmetal use in ductile iron and other high quality foundry applications con tinues to grow, but this rate of growth has not been sufficient to match that of pro duction, hence part of the iron sales must compete with scrap. The market for titanium slag continued strong. Repayment to date of advances previ ously made by the parent companies now amounts to $9,000,000 (U. S. Cy.) of which Kennecott has received $6,000,000. Production figures for the past five years follow: 1963 . 1962 , 1961 . . 1960 . 1959 . ORE TREATED 817,286 665,851 1,032,122 863,726 559,205 TITANIUM SLAG PRODUCED 338,679 269,150 413,715 345,213 217,589 IRON PRODUCED 224,949 184,991 277,107 221,945 145,990 Q. I. T. is anticipating continued capacity operations during 1964. It is estimated that approximately 1,200,000 tons of ore will be treated in order to meet the demand for slag. Despite the low level of scrap prices, it is believed that a reasonably favorable profit position can be maintained on over all iron sales. A new two-year labor agreement expiring March 18, 1965, was reached at the Sorel reduction plant and a three-year contract was signed in July at the Havre St. Pierre mine. The formation of a Human Relations Committee has resulted in a much improved labor climate. TIN AND ASSOCIATED MINERALS LIMITED Shipments of columbite in 1963 by this Nigerian subsidiary, 76 per cent owned by Kennecott, totaled 675,500 pounds com pared with 830,800 pounds in 1962, and 520,000 pounds in 1961. Shipments of zir con sands which declined in 1962 to 9,200 pounds rose to 3,008,600 pounds last year. The decline in columbite price which oc curred in 1962 continued during 1963 and the Company experienced a nominal loss. Sales demand for ferrocolumbium is not keeping pace with industry production of columbium concentrates and new sources of supply now reaching the market may be expected to exercise further pressure on the price of columbite in the immediate future until inventories are liquidated. Dur ing the year, additional equipment resulted in substantial improvement in operating costs. FABRICATING CHASE BRASS & COPPER CO. INCORPORATED Cost reduction efforts and increased produc tivity contributed importantly to strength ening Chase's earnings over 1962, despite intense competitive pressure with selling price reductions on practically all brass mill products. Shipments showed a 5.52 per cent in crease in poundage volume but net dollar sales increased only 1.27 per cent, reflect ing the effect of lower selling prices. New process and facility programs were developed during 1963 to better the Com pany's competitive position. To further this objective, construction of a new single pur pose and highly automated brass rod mill is scheduled to start this year near Mont pelier, Ohio. The plant, which will cover 113,600 square feet, w ill be devoted to the manufacture of Chase's successful " Blue Dot" rod. This free-cutting rod was intro duced in 1963 and has had wide customer acceptance. 11 Spectrometer in the Metallurgical Department at Chase Metal Works, Waterbury, Connecticut, determines the composition of copper alloys and records the results. Electrolytic tank house at Utah Copper Division refinery. (Right) Transfer of copper from converter at Ray Mines Division smelter. (Left) During the year, the Mill Division reor ganized its staff marketing organization, changing from a product-oriented to a market-oriented effo rt This modification, designed to recognize major consuming outlets for its products, w ill result in the Company's participating to better advan tage in areas offering the greatest opportu nity for both profit and growth potential. Markets thus far identified for this concen trated effort are: heat transfer, electrical, automotive, screw machines, and con struction. In 1961 Chase established its Metals Service Division to handle warehouse sales. In 1963 this Division registered a definite and steady growth as a distributor for cop per, brass, stainless steel, aluminum, and a wide range of alloys and forms of metals for servicing the needs of the metal-working and building industries. The Rhenium Division continued its ex pansion with sales increasing by one-third over 1962 as a result of continued promo tion and research activities. A larger pro portion of these sales is going into fabri cated products of various rhenium alloys. Late in 1963 the Rhenium Division an nounced the development of a seamless tubing of 50 per cent rhenium and 50 per cent molybdenum, made by powder metal lurgy. Previously, no tubing of a rheniummolybdenum alloy had been available. The unique features of the tubing are its duc tility, especially after recrystallization, and its weldability. It is usable in the elec tronic and nuclear industries, aerospace, chem ical, and a llie d high-tem perature fields. In respect of the 1962 Federal antitrust action against Chase and other companies, Chase and one other firm pleaded not guilty. A trial date has not been set. No proceed ings have taken place in the companion civil action brought by the Government against the indicted companies. THE OKONITE COMPANY Although volume of shipments held up well, the competitive pressure on prices in the ire and cable market had an adverse effect on the spread between production costs and selling prices, resulting in a small loss for the year. The expansion program for producing ex tra high voltage cable at the Paterson, New Jersey, plant was completed, and the na tion's first commercial 345,000-volt cables for the pioneer underground transmission line in New York City were shipped and installed on advanced schedule. Present promotion of a simplified splic ing device, known as the Electro-Lap* Seal, is expected to extend the use of paper cable products into portions of the u tility indus trial market hitherto untapped because standard splicing procedures were consid ered too complicated. New products included a smaller, tougher and less costly diesel electric locomotive wire known as Type DLO and improved oilbase insulation rated at 90C, which w ill give longer cable life and as much as 15 per cent greater operating efficiency. By introducing these and other improvements in cable insu la tio n and em ploying the searching test methods of its electronic Micro-Scanner, Okonite is now prepared to offer smaller diameter cables for power cir cuits. This development will permit custom ers to install more copper and attain greater circuit capacity in existing duct lines, an important economy in the count less installations where increasing power demands require major changes in electri cal systems. Exploration and Development As a result of the encouraging findings at the large lead deposits in Missouri men tioned in last year's Annual Report, plans for bringing the property into production are being prepared. Sinking of a develop ment shaft may be started in 1964. A wholly owned subsidiary, Ozark Lead Company, has been formed and would carry out this work. Although the economic evaluation of the phosphate deposits in North Carolina, in which Kennecott holds a 50-50 interest with American Agricultural Chemical Com- *A tra d e m a rk of The O konite C om pany 13 A 345,000-volt cable passes between mammoth 14-foot reels at Okonite's Paterson, N. J. plant as the final D-wire is applied. These reels, designed specifically for use with extra high voltage cable, can accommodate 3500 feet of four-inch diam eter cable. Focal points in The OKonite Company's new ultra-high voltage laboratory are two series resonant transformers capable of developing a total of 800,000 volts. Th e control console at the rear is screened to protect engineers during the rising voltage breakdown tests. pany Division of Continental Oil Company, has not been completed, results to date are promising. The evaluation work will be con tinued during 1964. A diamond drilling program was under taken on a molybdenite deposit near the head of Alice Arm, a fiord in British Co lumbia about 450 miles northwest of Van couver. Additional drilling and an evalua tion of all results are planned for 1964. Ownership of the property has been con veyed to a recently-established, wholly owned subsidiary, British Columbia Molyb denum Limited. Evaluation of the copper deposit at Safford, Arizona, has been completed and the property has been placed in stand-by status under the management of Ray Mines Divi sion. Kennecott exercised options to purchase for $3,000,000 a number of claims at Ruby Creek, Alaska, near the Kobuk River, and about 150 miles east of the village of Kotzebue. The work here during the past seven summer seasons, consisting largely of diamond drilling, has disclosed copper deposits which warrant mining operation. Present plans call for the construction of a permanent camp, sinking of a shaft, and the development of the ore body. Indications are this will be a small to medium tonnage operation. A major drilling and testing program was carried out on copper deposits at Galore Creek, British Columbia, about 40 miles east of Wrangell, Alaska. The deposits occur on claims owned by Stikine Copper Limited in which Kennecott has a 76 per cent inter est. The balance is held by Hudson Bay Mining and Smelting Co., Limited and Con solidated Mining and Smelting Company of Canada Limited. Numerous copper oc currences have been located to date, but considerable drilling will be required to determine whether the deposits would be commercial in this area of difficult access. The search for clues diagnostic of por phyry-copper deposits which would increase the efficiency of Kennecott's exploration continued throughout the year, and yielded promising results which are being further tested and incorporated into field practices. Research and Development M INING Systematic operational hydrometallurgical procedures to increase the production of low-cost copper from mine waste continued to be developed during 1963. These proce dures resulted from fundamental laboratory and pilot plant studies at the Kennecott Research Center, Salt Lake City, Utah, and leaching of an experimental dump at Utah Copper Division. The large-scale studies have been extended to mine dumps at all of the Western Mining Division properties, and the application of Research findings resulted in significant quantities of addi tional copper being recovered at Utah and at other Divisions. As lower grade and more complex ores are mined and processed, technologic im provement in milling assumes progressively greater economic importance. During 1963, studies were continued to improve recovery of copper and by-products from ores, to de velop methods of processing additional ores, and to improve milling practice and lower milling costs. Field work on the slope stability research project conducted by Kennecott and the U. S. Bureau of Mines at the Kimbley Pit at Nevada Mines Division was completed in 1963. The laboratory work and the proving of the results remain to be undertaken. A process was developed for the recovery and production of commercial tellurium at the Utah Copper Division. FABRICATING Automatic analysis equipment, a project of the Research and Development Department of Chase Brass & Copper Co. Incorporated, was installed at the Chase Metal Works. This replaces the wet chemical analysis process and provides the speed of analysis necessary to control properly modern cast ing facilities. 15 Cell and accessory apparatus used in an investigation of the electrochemical behavior of rhenium metal electrodes at the Ledgemont Laboratory. Two streams of molten metal are poured s im u lt a n e o u s l y in the semi continuous casting process at Chase Brass & Copper Co.'s Metal Works in Waterbury, Connecticut. Operating and control procedures have been developed for the newly-installed, semi-continuous casting equipment at the Chase Metal Works. Improved quality of cast billets at commercial production rates has been attained for the copper-nickel al loys and nearly all the high copper engineer ing alloys. LEDGEMONT LABORATORY The staff and facilities at the new Ledge mont Laboratory provide a major capability for scientific research on metals over a wide range of technical disciplines. Research on deformation at high pressures will provide further knowledge of the causes of fracture. Studies are in process on the basic chemis try of rhenium to aid Kennecott's position as the major supplier of that metal. A better understanding of alloy systems in general, including both the important refractory alloys of rhenium as well as the more familiar alloys of copper, is being fur thered by studies of superlattices formed by each component in an alloy, and of the electronic and magnetic properties pos sessed by metals and alloys. Basic studies are active on precipitation and oxidation phenomena to provide insight on the funda mental nature of these important processes. COMPUTERS The expansion of the use of computers for many phases of computations in mining, smelting, engineering, construction, tailings disposal and other phases of mining opera tions is under study at various Divisions. The Engineering Department, Western Min ing Divisions, has been assigned the respon sibility of coordinating the engineering com puter work within the Divisions. Computer programming for engineering usually calls for unique, untested ap proaches to problems of a scientific or en gineering nature. Considerable effort has been expended in the successful develop ment of sophisticated, usable programs for open-pit design and for reverberatory fur nace operations. Other programs have been refined to test the adequacy of electrical circuits and to compute critical path con struction schedules. Computers utilizing programs developed by Bear Creek Mining Company, Kennecott's exploration subsidi ary, and the Engineering Department of Western Mining Divisions are now being utilized in other phases of Kennecott's activities, among them studies of ore-grade distribution; computation of ore reserves and ore-grade cutoffs at the operating mines; determination of the sequence of mining to maximize ore grade and m ini mize stripping ratios; determination of most efficient use of loading and haulage equipment; analysis of the economics of projected mine operations and plant ex pansion with respect to capital investment, scale of production, discount rates, payout time, life of mine, and cash flow. Employee Relations The average number of employees at Kennecott and its wholly owned subsidiaries in 1963 totaled 25,176, as compared to 26,133 for the preceding year. LABOR RELATIONS A new 15-month contract which will run until October 2, 1964, settled a one-month strike on August 3, 1963, at Braden Copper Company. The settlement provided sub stantial wage and fringe increases due to the high rate of inflation which totaled 50 per cent during the 15-month period of the prior labor contract. A contract terminating November 15, 1964, was signed late in May with the prin cipal union at the Waterbury, Connecticut plant of Chase Brass & Copper Co. Late in August a one-year labor agreement was reached with the principal union at Chase's Cleveland, Ohio, plant. During 1964, negotiations for new labor contracts w ill be conducted at most of Ken necott's installations since existing agree ments w ill expire at Western Mining Divi sions in June and July, at Braden Copper Company in October, at Chase Brass & Copper Co. plants in August and November, and at The Okonite Company installations in July and September. 17 The true value of an industrial safety campaign lies not in slogans but in results. 18 SAFETY For the sixteenth consecutive year, Braden Copper Company won the Inter-American Safety Council's award. Nevada Mines Divi sion, Kennecott Refining Corporation, and the Waterbury and Cleveland plants of Chase Brass & Copper Co. established new all-time safety records. In addition, numer ous awards were made by the National Safety Council and other organizations to individual units of the Divisions for their safety programs and achievements. SUGGESTIONS The suggestion system is actively promoted, and continues to generate a large number of valuable suggestions for the improve ment of Kennecott's efficiency and com petitive position. During the year, 3,539 suggestions were submitted, of which 957 were approved, receiving $80,600 total awards in recognition of $397,629 esti mated annual savings to the Company. PERSONNEL DEVELOPMENT It is the continued objective of the Com pany to develop the talents of its personnel to meet the future needs of the enterprise. Utilization of apprentice, supervisory and management training programs, and Tuition Aid assisted progress toward this goal. The apprenticeship programs develop the skills needed for operations and during the year there were 240 employees enrolled and 53 graduated. Supervisory and presupervisory programs were conducted at the first-line and department head levels. A total of 487 employees participated in Tuition Aid. They completed 1,037 courses and were reim bursed for the major part of their ex penses covered by the Plan. This program requires that the course be applicable to the employee's present or possible future work and that it be taken at a recognized educational institution. In the development of top and middle management capabilities, selected mana gerial personnel attended a variety of pro grams and seminars conducted by leading universities and professional organizations. COM M UNICATIONS Management has long recognized the im portance of keeping all employees informed of Company policies, objectives, and activi ties. Toward this end constant attention is paid to communications, an example being the automatic telephone information serv ice which continues to be extremely popu lar. Under this program employees are able to receive messages of local interest. In addition, extensive use is made of such communications media as local television, radio, newspapers, and employee publica tions. Organization Changes Arthur Ferdinand Mayne, Executive Vice President and Director of the Royal Bank of Canada, Montreal, was elected a member of the Board of Directors in December. Herman H. Kremer, Vice President-- Metal Services Division, and Director of Chase Brass & Copper Co., Incorporated, was named Executive Vice President of Kennecott Sales Corporation in March. Gordon H. Fisher, formerly President, General Minerals, Houston, Texas, was ap pointed Assistant to the President in No vember. Dr. Herbert I. Fusfeld, form erly with American Machine & Foundry Company, was appointed Director of Research, suc ceeding Dr. Leslie G. Jenness, Vice Presi dent, Research, who retired September 1, after 13 years with Kennecott. Harold A. Krueger, formerly with National Lead Company, became Assistant to the Vice President--Mining in January, 1964. With profound sorrow we record the death on May 20, 1963, of Mr. William F. Macklaier, Q. C., of Montreal, Can ada, a member of Kennecott's Board of Directors since 1959, and of the Board of Quebec Iron and Titanium Corporation since 1962. His wise counsel will be sorely missed. Financial Review Kennecott Copper Corporation F in ancial R eview EARNINGS AND DIVIDENDS Net earnings in 1963 were $56,959,000 or $5.15 per share, down $8,696,000 from the $65,655,000 or $5.94 per share reported for 1962. Reduced output brought higher unit costs and smaller credits for by-prod ucts. Income tax provisions in 1963 took 53 per cent of pretax income as compared with only 49 per cent in 1962, the difference due mainly to adjustments for prior years. The distribution of $1.00 per share in each quarter of 1963 amounted to $4.00 per share for the year. DELIVERIES AND PRICES Stability was the keynote of copper de liveries and prices in 1963. For Kennecott, the 555,852 tons of copper delivered at an average price of 30.1 cents per pound repre sented a nominal increase over 1962 when deliveries were 555,334 tons and the aver age price per pound, 30 cents. This same stability was reflected in the statistics of the industry. The Copper Institute reports deliveries to fabricators by member companies rising approximately 3 per cent from 3,642,000 tons in 1962 to 3,753,000 tons in 1963. Prices were even more stable. Producers continued to sell electrolytic copper in standard shapes for 31 cents per pound in the United States with its 1.7 cents per pound tariff wall and for about 29.3 cents per pound in Europe. SALES AND COST OF GOODS SOLD The slig h t reduction in sales from $507,387,000 to $504,925,000 was due to a reduction in by-products available for sale. Ore processed in 1963 was down about 10 per cent in volume from 1962 and somewhat more in by-product content. The declines are indicated in the Historical Table (page 30). The increase in cost of goods sold is due principally to increased costs at the Utah Copper Division resulting from addi tional stripping for the expansion program, increased property taxes and the effect of lower output on unit costs. CHILEAN DIVISION (BRADEN COPPER COMPANY) The cost of living in Chile increased 45 per cent during the year compared to increases of 26 per cent and 10 per cent during 1962 and 1961, respectively. The dual system of exchange which was re-established early in 1962 continued in effect in 1963, during which period the free bank rate, which is the rate at which the Company is required to purchase escu dos for its current operating needs, in creased from 1.62 escudos to the dollar to 2.05 at December 31, 1963. During the same period the broker's rate increased from 2.33 escudos to the dollar to 3.02. In 1963 Braden Copper Company ac- Power shovel loading an ore train at Utah Copper Division's Bingham Canyon mine. counted for 29 per cent of Kennecott's total copper deliveries, but provided only 11 per cent of consolidated net income due principally to the extremely high Chilean income tax rate applicable to Braden. In the year 1963 intermittent strikes and work stoppages reduced production to the extent that the rate of tax applicable to 1963 output rose to 86 per cent as compared to 83 per cent on 1962 output. TAXES The dollar amount of domestic and foreign taxes based on income increased only slightly from the amount of this provision for the year 1962; however, due to lower pretax earnings the ratio of this amount to such earnings increased by approximately 4 per cent. The reasons for this increase are prior years' tax adjustments and a high er effective rate of tax for the Braden Cop per Company operations in Chile. Total tax provision for the year 1963 and comparable figures for 1962 are sum marized below: U nited States and Foreign taxes on income . . . . Other taxes included in op erating costs and other a c c o u n ts .......................... 1963 $64,035,306 27,741,672 1962 $63,951,465 25,476,462 T o t a l .................................... $91,776,978 $89,427,927 Taxes per share . . . . $8.30 $8.09 were for conversion to truck haulage at the Chino Mines Division in New Mexico, the initial expenditures in regard to the expan sion program at Utah, and the completion of the new facilities at Paterson, New Jersey, of The Okonite Company. Expendi tures in Chile amounted to $4,500,000, covering several programs to lower costs and improve medical, transportation and living facilities for our employees. Depreciation and retirement costs in 1963 amounted to $20,771,000 compared to $20,570,000 in the preceding year. The amount provided by depreciation was sig nificantly less than the amount required for capital outlays. GOVERNMENT AND OTHER SHORT-TERM SECURITIES During the year 1963, the Company con tinued to invest cash not immediately re quired for its operations and expansion program in marketable securities. At the year-end, the portfolio of short-term invest ments amounted to $98,659,000. Of this amount, $89,158,000 represented obliga tions of the United States Government, with the balance invested in securities of several municipal governments, certificates of deposit, and prime finance company com mercial paper. The approximate market value of the securities was $98,326,000 with an average maturity of approximately eight months. United States Federal income taxes pay able in the year 1964 applicable to 1963 w ill be reduced by approximately $1,100,000 as a result of the application of the in vestment credit provided for in the Revenue Act of 1962. PROPERTY, PLANT AND EQUIPMENT Capital expenditures in 1963 amounted to $37,202,000 compared to capital expendi tures of $31,386,000 in 1962. This repre sents an increase of approximately 19 per cent over the preceding year. The major items of expenditure in 1963 INVESTMENTS The details of the principal investments held by the Company at the year's end in the amount of $80,093,000 are shown on page 26. The major changes in 1963 are summarized as follows: Quebec Iron and Titanium Corporation repaid $5,000,000, representing a portion of the funds previously advanced by Kennecott. Repayments to date total $6,000,000 l eavi ng a bal ance to be r epai d of $ 20,000,000. In 1956 Allied Chemical Corporation and Kennecott Copper Corporation formed an equally owned company, Allied-Kennecott 21 Titanium Corporation, to produce and sell titanium metal. Since 1956 demand for titanium sponge (the primary form of the metal) has not grown at the pace originally anticipated and therefore in 1963 plans to build a processing plant were abandoned. Accordingly, Kennecott's net loss on this investment of approximately $1,200,000 was written off against consolidated income. Additional amounts totaling $1,125,000 were advanced to the John W. Galbreath Development Corporation to be used by it in construction of townsite facilities at Kearny, Arizona. EQUITY IN UNCONSOLIDATED SUBSIDIARIES Kennecott's investment in unconsolidated subsidiaries at December 31, 1963 amounted to $46,008,000, compared with $49,762,000 at December 31, 1962. This decrease reflects the reduction of our in vestment in Quebec Iron and Titanium, which repaid $5,000,000 in 1963, repre senting a portion of the amounts previously advanced to it by Kennecott. Also, a new company, Stikine Copper Limited, formed by Hudson Bay Mining and Smelting Co., Limited, Consolidated Mining and Smelting Company of Canada Limited and ourselves to explore and develop mining claims in northern British Columbia, is now included as an investment. Kennecott's equity in the net worth of these companies exceeded its investment therein by $10,160,000 at December 31, 1963, compared to $9,536,000 at December 31, 1962. Our equity in the respective earnings of these firms for years 1963 and 1962 are shown in the tabulation on page 23. The 1963 results, based on unaudited reports, indicate lower earnings than the previous year, principally because the in come of Quebec Iron and Titanium was sharply curtailed in the first half of the year by reason of a strike. Cash distributions from unconsolidated subsidiaries amounting to $150,000 for 1963 and $706,000 for 1962 are included in the caption " Dividends, interest and miscellaneous" in the consolidated state ments of income and earned surplus. EXECUTIVE INCENTIVE-COMPENSATION AWARDS No awards were made to employees in the year 1963, although $230,000 was avail able based on the formula provided in the Plan. Under the provisions of the Plan, unused amounts are retained by the Com pany and cannot be awarded in future years. PENSION PROGRAMS The Company and its consolidated sub sidiaries maintain several pension programs to afford future retirement benefits for employees. During 1963, $5,181,000 was provided for the maintenance of pension programs. At year-end there were 18,737 employees for whom funding of retirement benefits was being accomplished. In addi tion, there were 43 employees who were covered by other retirement arrangements in the United States and Chile for whom no current funding of benefits is being provided. Benefits of $3,561,000 were disbursed during the year with $3,358,000 paid from trust funds and $202,200 paid by the Company. At year-end there were 3,105 retired employees receiving pensions through these programs. STOCKHOLDERS At the end of November, 1963 the outstand ing shares of Kennecott were held by 89,976 stockholders as compared to 93,976 stockholders at approximately the same date in the preceding year. Equity in Operations of Unconsolidated Subsidiaries Percentage Of Ownership Quebec Iron and Titanium Corporation.................... . Tin and Associated Minerals L im ite d .................... . Quebec Columbium L im ite d .................................... . Garfield Chemical and Manufacturing Corporation . The Superior Wire Cloth C o m o a n y.......................... . Kenbestos Mining Company L im i t e d .................... . Stikine Copper Lim ited.............................................. . 66% 76 45.9 50 92.8 95 76 *Q .I,T. is not m a kin g p ro visio n fo r C anadian inco m e taxes since taxable incom e is p re se n tly o ffs e t by a llo w a b le deductions. When such d eductions have been fu lly u tilize d , the C om pany's earnings may be reduced m a te ria lly by th e im pa ct of Canadian inco m e taxes. Kennecott's Equity in Profits or (Losses) 1963 1962 $594,500* $2,024,000* (16,800) (50,600) In Development Stage 228,400 420,600 (2,700) 20,100 In Development Stage In Development Stage $803,400 $2,414,100 Working Capital Summary of Changes which Accounted for the Increase in Working Capital Working capital--December 31, 1962 ........................................................ Additions: Net income for the y e a r ............................................................................ Depreciation of plant and equipment........................................................ Repayment of advances--Quebec Iron and Titanium Corporation . . . Deferred U. S. income taxes....................................................................... Payments received on accounts receivable, noncurrent.......................... Investment tax credit on capital additions.............................................. Deductions: Distributions to s to c k h o ld e rs .................................................................. Expenditures for plant and e q u ip m e n t................................................... Decrease in long-term d e b t....................................................................... Net change in investments other than repayments received from Q.l.T. . Net change in other a c c o u n ts .................................................................. Net increase in working c a p i t a l .................................................................. Working Capital--December 31, 1963 ........................................................ ( ) Denotes red fig u re . $56,958,944 20,770,520 5,000,000 7,357,912 1,962,625 1,106,253 $93,156,254 $44,212,204 37,201,630 6,460,000 892,840 (2,120,566) $86,646,108 $250,653,348 6,510,146 $257,163,494 NET INCOME AND AMOUNT DISTRIBUTED TO STOCKHOLDERS-- PER SHARE OF STOCK During the period covered by this chart, 75 per cent of net income was distributed to stockholders. The remaining 25 per cent was reinvested in the business. GRADE OF COPPER ORE MINED 24 EXPENDITURES FOR PLANT AND EQUIPMENT COMPARED WITH AMOUNT PROVIDED FOR PLANT DEPRECIATION Millions of Dollars ,, 40 35 Expenditures | Depreciation JU 25 85.254 The chart shows the annual allowances for depreciation of plant and equipm ent as compared to the amounts expended for new plant and equipm ent. The difference was obtained by reinvesting a portion of retained earnings. PRICES OF COPPER IN THE UNITED STATES AND ON THE LONDON METAL EXCHANGE The U. S. price is the price of electrolytic copper delivered at customers' plants in the U. S. The L.M.E. price on which most of Kennecott's foreign sales are based is the monthly average of settlem ent quotations for electro lytic copper on the London Metal Exchange. 25 Schedule of Investments (Excluding Securities Carried As Current Assets) UNCONSOLIDATED SUBSIDIARIES: Quebec Iron and Titanium Corporation -- stock and advances (66%%) . . . Tin and Associated Minerals Limited -- stock and advances (76%) . . . . Quebec Columbium Limited -- stock and advances (45.9%) (controlled through voting a rra n g e m e n t).................................................................................. Garfield Chemical and Manufacturing Corporation -- stock (50%) (controlled through operating a rran ge m en t).................................................................. The Superior Wire Cloth Company -- stock ( 9 2 .8 % ) ......................................... Kenbestos Mining Company Limited -- stock and advances (95% ).................... Stikine Copper Limited -- stock ( 7 6 % ) ............................................................. $40,000,000 1,652,562 1,266,045 240,000 206,200 1,498,638 1,144,442 $46,007,887 OTHER INVESTMENTS (having market quotations): Kaiser Aluminum & Chemical Corporation 1,925,000 shares of common stock.................................................................. Molybdenum Corporation of America 120,116 shares of common s t o c k .................................................................. Compania de Acero del Pacifico -- 1,377,748 shares of Series " B" common stock; 40,000 shares of Series " D" preferred s to c k ........................................................................................... Market Value Dec. 31, 1963 $68,818,750 3,002,900 785,929 $72,607,579 $18,800,000 3,073,459 350,000 $22,223,459 OTHER INVESTMENTS (no market quotations): John W. Galbreath & Company -- notes receivable.............................................. John W. Galbreath Development Corp. -- notes re c e iv a b le ............................... Western Phosphates, Inc. -- stock and a d v a n c e s .............................................. North Carolina Phosphate Corporation -- stock................................................... Miscellaneous investm ents................................................................................. Balance -- December 31, 1963 ................................................... $ 2,127,290 5,475,308 1,680,000 1,742,789 835,784 $11,861,171 $80,092,517 KENNECOTT COPPER CORPORATION AND WHOLLY OWNED SUBSIDIARIES Consolidated Statements of Income and Earned Surplus fo r th e years ended D ecem ber 31, 1963 and 1962 1963 Sales of metals and metal p ro d u c ts ....................................................................... Dividends, interest and m iscellaneous.................................................................. Cost of goods so ld ...................................................................................................... Depreciation and retirem en ts.................................................................................. Selling and general administrative expenses........................................................ Shut-down expenses during s t r ik e s ........................................................................ Research, exploration and m isce lla n e o u s............................................................. Provision for U. S. and foreign taxes on income (Note 6 ) ......................................... Net incom e....................................................................................... Earned surplus at beginning of y e a r....................................................................... Exploration expenses previously written off now capitalized.................................... Deductions: Additional U. S. and Chilean taxes on income assessed against prior years' earnings ........................................................................................................... Adjustment of exploration expenses previously capitalized............................... Distributions to stockholders (1963, $4; 1962, $5 per s h a r e ) .......................... Earned surplus at end of year........................................................ $504,924,908 5,849,166 510,774,074 340,315,239 20,770,520 20,152,404 1,094,238 7,447,423 389,779,824 120,994,250 64,035,306 56,958,944 491,425,600 ............. -- 548,384,544 -- -- 44,212,204 44,212,204 $504,172,340 1962 $507,386,940 6,416,302 513,803,242 337,001,410 20,570,323 20,025,601 358,970 6,240,745 384,197,049 129,606,193 63,951,465 65,654,728 482,555,132 436,663 548,646,523 1,385,326 570,342 55,265,255 57,220,923 $491,425,600 See Notes to Financial Statements. KENNECOTT COPPER CORPORATION AND WHOLLY OWNED SUBSIDIARIES Consolidated Balance Sheets December 31, 1963 and 1962 Assets CURRENT ASSETS: C a s h ................................................................................. U. S. Government and other short-term securities, at cost Accounts receivable, less reserves.................................... Metals and metal products (Note 1 ) ............................... Ores and concentrates, at c o s t......................................... Materials and supplies, at or below c o s t.......................... Accounts receivable, noncurrent......................................... Investments, at or below c o s t.............................................. Deferred charges, prepayments, etc....................................... Mining properties (Note 2 ) ................................................... Plants, equipment and other properties............................... Reserves for d e p re cia tio n ................................................... Liabilities CURRENT LIABILITIES: Notes payable, due within one y e a r ......................... Accounts p aya ble ........................................................ Taxes a c c ru e d ............................................................. Long-term debt (Note 5 ) ................................................... Deferred U. S. income taxes (Note 6 ) .............................. Sundry reserves and deferred c r e d it s ......................... Capital Capital stock, no par value: Authorized 12,000,000, outstanding 11,053,051 shares Stated c a p ita l............................................................. Capital s u r p lu s ............................................................. Earned surplus ............................................................. See Notes to F in a n cia l S tatem ents. 1963 1962 $ 15,705,863 98,659,248 49,987,483 103,038,123 7,043,970 35,678,683 310,113,370 1,962,625 80,092,517 7,955,576 164,150,279 557,675,738 (274,868,329) $847,081,776 $ 24,099,857 79,025,115 44,930,399 108,263,649 7,409,125 37,898,440 301,626,585 3,925,250 84,199,677 7,130,051 161,353,980 536,381,524 (263,646,504) $830,970,563 $ 9,543,333 25,328,800 18,077,743 52,949,876 5,620,000 12,900,000 5,517,008 $ 2,843,333 25,976,418 22,153,486 50,973,237 12,080,000 5,542,088 5,027,086 74,806,424 191,116,128 504.172,340 $847,081,776 74,806,424 191,116,128 491,425,600 $830,970,563 Notes to Financial Statements 1. INVENTORIES: Inventories of metals and metal products are carried at the lower of cost or market. In general, cost is computed on a "firstin, first-out" method, but a " last-in, first-out" method is used for certain inventories of the fabricating divisions. 2. MINING PROPERTIES: Over the years the ore reserves have increased as a result of development work and improvements in methods of recovery of metals which make possible the treatment of lower grades of ore. Accordingly, no provisions for depletion have been considered necessary. 3. EQUITY IN UNCONSOLIDATED SUBSIDIARIES: Refer to comments and tabulation on pages 22 and 23. 4. FOREIGN CURRENCY AMOUNTS: Foreign currency amounts have been included in the consoli dated balance sheets at the U. S. dollar equivalents appropriate to the accounts translated: current assets and current liabilities at year-end exchange rates; property accounts and investments, etc., at the rates of exchange in effect at date of acquisition; re lated depreciation reserves are based on U. S. dollar costs. For eign currency amounts have been included in the statements of income at the U. S. dollar equivalents determined at the exchange rates in effect at the time of the related transactions. Approximately 9 per cent of net current assets and approxi mately 13 per cent of all other assets shown in the consolidated balance sheet at December 31, 1963 represent assets of consoli dated subsidiaries which are located outside the United States (principally in Chile) and the related net income represents ap proximately 11 per cent of consolidated net income. The Com pany's investments in unconsolidated subsidiaries and affiliates are almost entirely in foreign countries, principally Canada. 5. LONG-TERM DEBT: At December 31, 1963, long-term debt consisted of a 4V2 per cent promissory note of The Okonite Company, payable in annual instalments of $460,000 from 1964 through 1975 and $560,000 in 1976; the 1964 instalment is included in current notes payable. 6. DEFERRED INCOME TAXES: In computing depreciation for federal income tax purposes, the Company and certain of its subsidiaries have adopted the "Guide line Lives" permitted by the Internal Revenue Service and, in some instances, have adopted accelerated depreciation methods. The resultant reduction in Federal income taxes has been re flected under the caption Deferred U. S. Income Taxes in the accompanying consolidated balance sheets. Auditors' Certificate LYBRAND, ROSS BROS. & MONTGOMERY CERTIFIED PUBLIC ACCOUNTANTS TO THE DIRECTORS AND STOCKHOLDERS OF KENNECOTT COPPER CORPORATION: We have examined the consolidated balance sheet of KENNECOTT COPPER CORPORATION and WHOLLY OWNED SUBSIDIARIES as of December 31, 1963 and the related statement of income and earned surplus for the year then ended. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circum stances. We previously made a similar examination for the year 1962. In our opinion, the accompanying consolidated balance sheets and statements of income and earned surplus present fairly the consolidated financial position of Kennecott Copper Corporation and Wholly Owned Subsidiaries at December 31, 1963 and 1962 and the results of their operations for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis. New York, January 31,1964. LYBRAND, ROSS BROS. & MONTGOMERY 29 Historical Table 1944-1963 OPERATING INFORMATION Year 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 Copper Ore M ined and M illed (0 0 0 N et Tons] 51,023 42,421 27,502 48,154 46,971 39,816 55,018 56,168 59,015 56,147 44,611 51,589 61,203 58,292 50,628 42,577 60,734 60,628 62,657 56,519 M aterial Removed to Dumps (0 0 0 Net Tons) 40,865 41,858 30,137 48,468 58,467 56,158 78,612 87,318 81,673 79,746 66,715 74,641 98,955 100,859 72,419 75,506 107,340 120,047 124,018 122,382 In t h e U. S. (N et Tons) 406,107 329,239 203,489 369,256 350,330 296,649 418,123 430,187 444,582 429,052 338,749 370,487 402,309 387,291 318,732 235,228 384,088 401,169 393,902 381,089 Copper Produced In Chile (N et Tons) 174,688 164,899 93,725 138,472 164,252 139,592 157,910 171,247 184,813 140,347 108,330 156,228 179,896 172,707 191,578 182,017 187,221 173,269 181,306 154,916 Total (N et Tons) 580,795 494,138 297,214 507,728 514,582 436,241 576,033 601,434 629,395 569,399 447,079 526,715 582,205 559,998 510,310 417,245 571,309 574,438 575,208 536,005 Total C opper Sold (Net Tons) 601,721 485,226 280,330 509,829 538,345 407,999 589,694 605,473 634,360 524,322 509,754 533,820 495,219 552,944 543,845 434,566 540,598 591,734 555,334 555,852 FINANCIAL INFORMATION 30 Year 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 Total Revenue (0 0 0 Dollars) $253,651 211,217 157,025 318,820 351,100 249,438 400,153 455,485 476,740 482,808 429,131 555,939 578,067 480,200 404,998 444,903 503,341 506,809 513,803 510,774 C o st of Goods Sold Excl. Taxes (0 0 0 Dollars) D e p re c ia tio n and Retirem ents (0 0 0 Dollars) U. S. and Foreign Incom e Taxes (0 0 0 Dollars) Taxes Other Than U. S. and Foreign Inc. (0 0 0 Dollars) O ther Costs (0 0 0 Dollars) Net Incom e (0 0 0 Dollars) $157,569 143,567 104,503 159,804 185,181 157,798 231,206 254,708 287,957 269,416 261,429 252,392 250,435 275,653 250,961 263,909 273,655 303,450 311,526 312,573 $ 8,513 14,685 4,132 4,958 5,230 5,234 6,815 7,268 8,509 9,244 8,734 8,905 8,120 10,610 10,351 12,429 17,177 18,555 20,570 20,771 $ 35.481 13,512 11,163 49,723 52,344 24,247 58,726 83,036 73,580 90,069 54,323 122,429 138,072 80,368 55,286 63,263 85,633 70,356 63,951 64,035 $ 7,712 6,507 5,586 8,719 10,346 10,591 12,825 15,144 14,716 18,798 16,976 20,785 22,900 22,813 21,073 22,210 21,294 23,027 25,476 27,742 $ 5,512 2,692 8,594 3,734 4,192 3,458 2,420 3,982 5,827 6,527 9,763 25,912 15,386 11,504 7,206 25,752 28,220 29,524 26,625 28,694 $ 38,864 30,254 23,047 91,882 93,807 48,110 88,161 91,347 86,151 88,754 77,906 125,516 143,154 79,252 60,121 57,340 77,362 61,897 65,655 56,959 Retroactive to 1961 Copper Produced is reported on a refined basis. Net income figures are as reported annually to stockholders, without adjustment for surplus charges and credits. KENNECOTT COPPER CORPORATION AND WHOLLY OWNED SUBSIDIARIES Price Received Molybdenite Gold Silver for Copper Produced Produced Produced 1 (Cents Per Lb.) (000 Pounds) (Fine Ounces) (Fine Ounces) 11.7 11.6 14.0 21.0 21.9 19.5 21.0 24.4 24.3 28.0 28.0 36.6 41.6 28.9 25.4 30.0 31.0 29.3 30.0 30.1 25,071 21,437 12,335 25,777 22,253 19,895 29,407 30,837 34,480 35,224 28,200 31,960 32,538 28,756 23,626 20,967 27,426 25,814 25,429 22,144 3 1 3 ,3 8 6 2 5 8 ,5 5 6 155,749 3 9 1 ,4 9 7 3 3 8 ,2 2 8 2 9 6 ,8 1 8 450,174 430,515 4 3 0 ,1 3 9 487,335 387,039 414,444 403,381 377,367 3 1 3 ,3 8 0 2 4 0 ,1 7 9 396,839 3 6 3 ,5 8 6 361,847 3 0 7 ,4 7 0 2,693,558 2,183,964 1,305,283 3,128,766 2,823,068 2,384,043 3,586,763 3,441,549 3,679,035 3 ,9 1 1 ,9 2 8 2,852,744 3,445,762 3,213,559 3,295,170 2,821,364 2,167,469 3,700,784 2,926.993 3,152,801 2,655,164 Average Number of Employees 27,143 24,526 23,483 25,887 Grade of Copper Ore Mined ------------------------------------------------------ In the U. S. In Chile (Per Cent) (Per Cent) 1.005 .995 .965 .960 2.269 2.203 2.133 2.110 26,210 24,807 26,152 26,594 .946 .955 .958 .987 2.220 2.140 2.090 2.110 26,898 28,024 25,474 27,158 .952 .942 .943 .914 2.151 2.106 2.110 2.046 27,886 26,752 23,041 27,231 .843 .839 .851 .816 2.014 1.963 1.948 1.938 27,205 26,885 26,133 25,176 .809 .831 .810 .804 1.993 1.909 1.957 1.937 Capital Expenditures (000 Dollars) $ 6,370 2,990 9,900 12,037 10,329 18,023 13,960 13,126 14,908 16,170 8,748 16,006 21,244 27,332 39,667 85,254 25,342 32,892 31,386 37,202 Year 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 Total $ 3.59 2.79 2.13 8.49 8.67 4.45 8.15 8.44 7.96 8.20 7.20 11.60 13.23 7.32 5.44 5.19 7.00 5.60 5.94 5.15 Net Income Per Share By Quarters 1st 2nd 3rd $1.02 .78 .26 1.90 2.14 1.51 1.55 2.33 2.03 2.15 1.70 2.68 4.08 2.57 1.05 2.03 1.65 1.46 1.69 1.36 $ .97 .73 .16 2.36 2.32 .64 1.94 2.32 1.73 2.03 2.19 3.37 4.16 1.99 1.02 2.29 2.21 1.82 1.62 1.35 $ .90 .47 .59 2 .2 0 2.33 .83 2 .2 0 1.90 2 .0 3 1.87 1.47 1.53 2.48 1.45 1.34 .99 1.82 1.04 .96 1.16 4th $ .70 .81 1.12 2.03 1.88 1.47 2.46 1.89 2.17 2.15 1.84 4.02 2.51 1.31 2.03 (.12) 1.32 1.28 1.67 1.28 Distributed to Stockholders (000 Dollars) Per Share Total Assets (000 Dollars) Capital and Surplus (000 Dollars) Book Value Per Share $ 27,054 27,054 27,054 43,287 54,108 43,287 59,519 64,930 64,930 64,930 64,930 83,868 100,100 64,930 54,340 66,318 55,265 55,265 55,265 44,212 $2.50 2.50 2.50 4.00 5.00 4.00 5.50 6.00 6.00 6.00 6.00 7.75 9.25 6.00 5.00 6.00 5.00 5.00 5.00 4.00 $490,270 4 6 4 ,8 0 0 459,670 540,612 575,420 560,283 631,487 687,473 703,532 747,630 730.867 793,221 833,998 807,452 825,678 802,839 807,554 814,418 830,971 847,082 $409,955 412,875 4 0 8 ,8 6 8 4 5 7 ,4 6 3 497,683 502,507 551,667 578,084 600,567 620,593 637,893 679,542 723,200 737,521 764,909 755,931 741,821 748,478 757,348 770,095 $37.88 38.15 37.78 42.27 45.99 46.44 50.98 53.42 55.50 57.35 58.95 62.79 66.83 68.15 69.20 68.39 67.11 67.72 68.52 69.67 Year 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 Net incom e per Share and Book Value per Share are based on num ber o f shares ou tstanding at December 31st of each year. 31 Parent Company and Principal Subsidiaries Officers and Executives FRANK R. MILLIKEN. PRESIDENT C. HARRY BURGESS, VICE PRESIDENT (Exploration) C. D. MICHAELSON, VICE PRESIDENT (Mining) PAUL A. BAILLY, PRESIDENT, Bear Creek Mining Company JOHN C. KINNEAR, JR., GENERAL MANAGER, Western Mining Divisions C. J. SULLIVAN, PRESIDENT, Kennco Explorations, (Canada) Limited FRANK G. WOODRUFF, GENERAL MANAGER, Chino Mines Division PAUL DASHINE, MANAGER OF TECHNICAL SERVICES H. I. FUSFELD, DIRECTOR OF RESEARCH ROBERT G. RHETT, DIRECTOR OF PURCHASING GEORGE F. SHARRARD, DIRECTOR OF INDUSTRIAL AND MARKET RESEARCH LEON J. SOUREN, DIRECTOR OF TRAFFIC GORDON H. FISHER, ASSISTANT TO THE PRESIDENT M. J. O'SHAUGHNESSY, GENERAL MANAGER, Nevada Mines Division A. P. MORRIS, GENERAL MANAGER, Ray Mines Division J. P. O'KEEFE, GENERAL MANAGER, Utah Copper Division C. A. ZELDIN, REFINERY MANAGER, Kennecott Refining Corporation PAUL B. JESSUP, DIRECTOR OF CORPORATE RELATIONS ARTHUR S. CHEROUNY, DIRECTOR OF EMPLOYEE RELATIONS LESTER ZIFFREN, DIRECTOR OF PUBLIC RELATIONS ROBERT H. LOUNSBURY, GENERAL COUNSEL MALCOLM R. WILKEY, SECRETARY AND ASSOCIATE GENERAL COUNSEL HAROLD A. KRUEGER, ASSISTANT TO THE VICE PRESIDENT GORDON B. RUSSELL, TREASURER AND COMPTROLLER F. A. EGNER, ASSISTANT TREASURER W. R. KIMSEY, ASSISTANT COMPTROLLER MARVIN LYDING, ASSISTANT COMPTROLLER ROBERT L. WARD, ASSISTANT COMPTROLLER Kennecott Sales Corporation C. K. LENZ, PRESIDENT HERMAN H. KREMER, EXECUTIVE VICE PRESIDENT J. H. BOYD, VICE PRESIDENT F. B. MC KOWN, VICE PRESIDENT Braden Copper Company FRANK R. MILLIKEN, PRESIDENT C. D. MICHAELSON, VICE PRESIDENT R. M. HALDEMAN, VICE PRESIDENT (in Chile) B. E. GRANT, GENERAL MANAGER (in Chile) CARLOS TOLOSA, BUSINESS MANAGER (in Chile) MALCOLM R. WILKEY, SECRETARY GORDON B. RUSSELL, TREASURER AND COMPTROLLER Quebec Iron and Titanium Corporation (Two-thirds owned by Kennecott Copper Corporation and one-third by The New Jersey Zinc Company) WILLIAM L. WALSH, PRESIDENT LINDSAY F. JOHNSON, VICE PRESIDENT J. M. HERNDON, GENERAL MANAGER Chase Brass & Copper Co., Incorporated GLENN P. BAKKEN, PRESIDENT WILLIAM F. AYLARD, VICE PRESIDENT (Technical) RICHARD R. QUAY, SECRETARY DAVID S. SOLIDAY, JR., VICE PRESIDENT (Metal Service Division) ROBERT C. SMITH, TREASURER PAUL R. TOTTEN, VICE PRESIDENT (Manufacturing) JOHN F. VANLANDEGHEM, VICE PRESIDENT (Sales) The Okonite Company R. STUART KEEFER, PRESIDENT ELLIOT M. NESVIG, VICE PRESIDENT (Marketing) ROBERT B. BLODGETT, DIRECTOR OF RESEARCH RAYMOND V. TESTA, TREASURER AND COMPTROLLER A. JAMES HAMPARES, SECRETARY AND COUNSEL Nevada Northern Railway Company PAUL DASHINE, PRESIDENT H. M. PETERSON, VICE PRESIDENT AND GENERAL SUPERINTENDENT GORDON B. RUSSELL, TREASURER 32 P R IN T E D IN U . S . A. 1