Document O1eDNRkqrY6BNwkoKERnGpVRe

often involved thousands of individuals and hundreds of companies. In some mining districts where multiple parties were often involved in the ownership chain of individual sites, Asarco is one of the few participants left; and the burden of responsibility under the flawed principles of Superfund falls disproportionately on the few successful survivors. We are well advanced in remediation programs at these sites and we believe that the identification ofnew sites and the rate of spending on identified sites has peaked and will be lower in 1998 than in 1997 or 1996. While it has been necessary to litigate insur ance coverage for environmental issues, we have begun to receive some recoveries. Review; of Operations hefocus ofour explorationprogram has shifted from the United States to Latin America and we have three projects in advanced stages of exploration and evaluation. We are in the feasibility study stage with a promising silver project in Potosi, Bolivia. We have a number of interesting drill sites testing gold anomalies in French Guiana. One ofthese, at Camp Caiman, is pro gressing particularly well and we expect to complete drilling and a feasibility study in 1998. We also are conducting exploration drilling at a potential SX/EW copper property in northern Chile. These three projects look promising. In early 1998, we made two significant organizational announcements. Francis R. McAllister was named President and Chief Operating Officer. He is also a Director and has been head of our copper operations since 1993. Kevin R. Morano was named an Executive Vice President and was elected a Director. He will continue as the Company's Chief Financial Officer. These appointments begin the process of orderly manage ment succession. As you should expect, Asarco employees continue to perform very well dealing with the many issues we confront. The one area where none ofus is satisfied is in the performance ofour stock. Senior management has an important personal stake in Company stock and you, our shareholders, may be assured that we and the Board of Directors will continue to focus our attention on strategies we believe will enhance the value ofAsarco to its shareholders. For the Board of Directors, j Richard de J. Osborne Chairman and Chief Executive Officer Francis R. McAllister President and Chief Operating Officer Building construction accounts for more than 40% of all copper used. The average new single family home uses 439 pounds of copper. 4 / ASARCO 1997 ANNUAL REPORT The $245 million expansion of SPCCs Cuajone mine (RIGHT) will increase SPCCsproduction ofcopper by 130 millionpoundsperyear. Asarco copper business SARCO IS ONE OF THE WORLD'S LEADING PRODUCERS OF COPPER. IN 1997, PRODUCTION OF COP PER FROM MINES MANAGED BY ASARCO WAS 1.4 BILLION POUNDS, 6.8% OF WESTERN WORLD COPPER MINE PRO DUCTION. ASARCO'S BENEFICIAL INTEREST IN COPPER PRODUCTION IN 1997 WAS 977 MILLION POUNDS. Above: Richard de J. Osborne Chairman and Chief Executive Officer Asarco's copper business includes its integrated copper operations in North America, which accounted for 63% of its beneficial copper production in 1997, and an integrated copper business in Peru conducted through a 54.1%-owned subsidiary, Southern Peru Copper Corporation (SPCC). The North American copper business includes the Mission and Ray mines in Arizona; copper smelters in Hayden, Arizona and El Paso, Texas; and a copper refinery in Amarillo, Texas. Asarco also owns a 49.9% interest in Montana Resources' copper-molybdenum mine in Butte, Montana, a 75% interest in the Silver Bell copper mine in Arizona and an 86.7% interest in the Minto mine project, a new coppergold mine which is currently under development in the Yukon Territory, Canada. The Company's Peruvian copper business, operated by SPCC, includes the Toquepala and Cuajone mines, the Ilo smelter and the Ilo refinery, all located in the southern part of Peru. The Company's beneficial interest in mined copper production in 1997 was slightly below the record production of 1.0 billion pounds achieved in 1996. Production declined in 1997 due to lower throughput as a result of the increased hardness of ore principally at 6 / ASARCO 1997 ANNUAL REPORT the North American copper operations. Partially offsetting this decline in production was increased production of solvent extrac tion/electrowinning (SX/EW) copper at Ray and at Silver Bell which started up in July 1997. Production at SPCC increased in 1997 due to operational improvements at the Cuajone concentra tor and higher SX/EW production. Production at the SX/EW plant now exceeds its original design capacity. The Company's beneficial interest in refined copper produc tion in 1997 set a new record of 1.4 billion pounds. The increase was a result of operating improvements at the Amarillo refinery, increased capacity at SPCC's Ilo refinery, and the SX/EW pro duction increases. ORE RESERVES One of the strengths of Asarco's copper business is its large cop per ore reserve position. The Company's beneficial interest in copper ore reserves at the end of 1997 was 3.4 billion tons con taining 38 billion pounds of copper. Ore reserves are the key to a mining company's future and Asarco's position, which repre sents a composite life of 38 years at current production rates, is one of the best in the industry. MINE DOMESTIC Mission Ray Concentrates SX/EW Montana Resources Silver Bell L.L.C. Minto and others Total Domestic copper mines Asarco interest (%) production (contained metal in millions ofpounds) 1997 1996 1995 mineral reserves (12/31797) (tons in millions) grade (%) 100.0 252.3 261.2 224.6 514.1 100.0 100.0 230.7 73.4 273.2 70.2 260.4 70.2 969.7 189.0 49.9 75.0" 86.7 91.4 19.3 - 667.1 104.8 4.8 - 714.2 112.8 6.8 1.2 499.4 178.9 20.8 676.0 2,371.9 0.70 0.62 0.44 0.33 0.38 1.15 SOUTHERNPERU Toquepala Concentrates SX/EW Cuajone Concentrates SX/EW Total Southern Peru 53.0(b) 246.8 87.9 340.6 10.2 685.5 252.9 88.6 332.0 4.6 678.1 256.2 10.0 313.1 664.9 291.0 - 557.2 1,422.3 15.0 2,415.3 0.83 0.19 0.64 0.95 Total Asarco Share 1,352.6 1,392.3 1,233.2 4,787.2 977.4 1,015.9 898.4 3,361.7 (a) Asarco sold a 25% interest in SilverBell L.L.C. in February 1996. Silver Bell LL.C. commenced SX/EW operations inJuly 1997. (b) Asarco's beneficial interest in SPCC was 432%o until April 1995, increasing to 52.3%o at December 1995, 52.6%> atDecember 1996, and 53.0% atDecember 1997. COPPERMARKET Demand for copper in 1997 was at a record level for the 12th sttaight year. Despite this robust demand, Western World copper inventories increased in 1997 principally as a result of a slowdown in the rate of growth in Southeast Asia and reduced imports by China which drew down its inventories to meet internal requirements. The copper price declined significantly in the second half of the year, ending the year at a four-year low of 77 cents per pound. The Company believes that supply and demand will be in balance in 1998 and that the price should recover from the oversold condition at year end 1997. In 1997, the copper price averaged $1.04 per pound on the New York Commodity Exchange (COMEX), $1.09 per pound for the first three quarters and $0.87 per pound in the fourth quarter. In 1996, the copper price averaged $1.06 per pound on Above: the COMEX. Frank McAllister, president The average price on the London Metal Exchange (LME) was $1.03 in 1997, and chief operating officer. compared with $1.04 in 1996. The outlook for continued growth in copper demand is very favorable. Increasing intensity of use of copper in industrialized coun tries continues to fuel demand. In the last 10 years, the use of copper in the average automo bile has increased over 55% to 61 pounds per Expansion of the car, reflecting the greater use of sophisticated electronics and motorized equipment. The aver Cuajone mine will increase age new home in the United States now con tains 439 pounds of copper, about 15% greater SPCC's mine output of than 10 years ago. Today's modern homes are being wired for multiple phone lines, intercoms low-cost copper by 19% and entertainment systems and increased elec tric power requirements. Commercial buildings beginning in 1999. ASARCO 1997 ANNUAL REPORT/ 7 NORTHAMERICAN COPPER OPERATIONS copper smelters There were a number of significant accomplishments at the Company's North American copper operations in 1997. Ore grades at the Mission mine improved as a result of a full year's operation of the higher-grade underground mine which began production in mid-1996. Construction was completed in late summer of a large overland conveyor SMELTER DOMESTIC El Paso Hayden Asarco interest (%) production (contained metal in millions ofpounds) 1997 1996 1995 100.0 100.0 239.5 423.9 230.0 429.8 253.0 387.0 designed to move 58 million tons of waste per year at Mission. The system will reduce total waste removal costs by eight cents per ton, or $9.5 million per year. Total Domestic 663.4 SOUTHERNPERU- Ilo 53.0 (a) 638.7 659.8 633.6 640.0 634.4 Production at the Ray Complex's Hayden concentrator was curtailed in the fourth quarter of 1996 to reduce concentrate inventory. Inventory levels returned to normal and the Hayden concentrator was restarted in May. The Ray mine replaced its remaining eleven 170-ton-capacity trucks with five 240-ton- Total Asarco Share 1,302.1 1,293.4 1,274.4 1,001.9 991.8 956.4 (a) Asarco's beneficial interest in SPCC was 43.2% until April 1995, increasing to 52.3% at December 1995, 52.6% atDecember 1996, and 53, at December 1997. capacity haul trucks in late 1997. Cathode copper production from the SX/EW operation at the Ray mine increased 5% in 1997 following application of a new leaching technology for low-grade sulfide material. The new leaching process provides both a quicker leach cycle and higher cop per recovery. The Hayden smelter processed a record level of concentrates in 1997 as a result of improved equipment availability and a more consistent and higher grade of concentrates processed. Modernization of the smelter's gas handling system and the process control system began in 1997 and is expected to be completed in the second quarter of 1998. These improvements are expected to further increase production rates and reduce oper ating costs. The El Paso, Texas copper smelter, which uses CONTOP flash smelting technolo gy, also set a record for concentrates smelted in 1997. In the fourth quarter of 1997, production rates were 10% over the original design capacity. Improved equipment avail ability and modifications to the Contop furnace feed system were the primary reasons for the production improvements. The Amarillo Copper Refinery achieved record copper cathode and rod production electrowinning tankhouse (BELOW) and further improved the quality of its product. Amarillo also received its second three- arepart of the 36 millionpounds year ISO 9002 certification. ofnew copper beingproduced annually at Silver Bell. PERUVIAN COPPER OPERATIONS Asarco conducts its Peruvian copper opera tions through SPCC, in which Asarco holds a 54.1% equity interest. SPCC's common shares are listed on the New York Stock Ex change and the Lima Stock Exchange. SPCC owns a 97.8% interest in its Peruvian Branch, which comprises substantially all of SPCC's operations. Labor shares which were issued to SPCC's workers under prior Peru vian law represent the remaining interest in the Branch. At the end of 1997, Asarco's beneficial interest in SPCC's operations, after the labor share interest, was 53.0%. In 1997, SPCC produced 686 million pounds of copper from its mines, a 1.1% in- ASARCO 1997 ANNUAL REPORT/ 9 These penalties are covered by existing environmental reserves. Asarco has also been active in developing and installing new envi ronmental technologies. Storm water recycling systems, dust sup pression equipment and gas collection facilities have been installed at Asarco Adopts New Environmental Management System a number of locations. The Company has developed an innovative biotreatment process for mine water and developed low-impact land reclamation methods using cattle to fertilize and stabilize soils. This investment of time and capital is paying off. For example, Asarco was in full compliance in 1997 with new restrictive standards for air emissions at its decades-old lead smelters in Missouri and This advanced management system includes: Environmental management procedures integrated into the Company's operating systems; Company facilities audited regularly to assure conformance with policy; Montana. Asarco is also very active in remediating environmental condi Annual environmental awareness training provided to employees; tions at current and former operating properties. Many ofthese pro jects are done in cooperation with state and Federal government agencies. Asarco is working with communities in Omaha, Nebraska Practices established to deal with each operation's environmental responsibilities. and Tacoma, Washington to transform its former industrial sites into parks and new commercial centers. In 1997, Asarco spent $63 million on remediation work related to historic operations. SAFETY AND HEALTH The safety and health of its employees is Asarco's most important operating objec tive. A Corporate Safety and Health Review Committee sets safety standards for each unit's operations, monitors performance and administers recognition programs which reward safety excellence. In 1997, a portion of each salaried operating employee's incentive compensation was directly linked to their operating unit's safety and health performance. The program has been very successful. In 1997, there were 28% fewer lost work day injuries in the Company's domes tic mines and 37% fewer lost work day injuries in its domestic plants. The Company believes that a safe and healthy workplace is an essential goal. While the programs in place have improved safety performance, management will continue to focus atten tion on safety and health issues and will continue with extensive training, education programs and recognition programs with the objective of creating an accident-free workplace. Below: Mike Varner, vice president, environmental operations exploration sarco's exploration effort is focused on the iden Atification and acquisition of advanced gold, copper and silver exploration projects. In 1997, the Company spent $32 million on an active mineral exploration program. Over 90% of expendi ................. Exploration drilling in French tures were directed at projects outside the united States, principally in French Guiana, Chile, Peru, Guiana has defined Bolivia and Australia. Work in the United States was mostly directed at identifying additional reserves at the Company's operating properties. In French Guiana, Asarco has interests in five large a 1.5 million ounce gold resource. ASARCO 1997 ANNUAL REPORT/ 17 ASARCO INCORPORATED AND SUBSIDIARIES financial review SARCO MADE SIGNIFICANT PROGRESS IN 1997 IN AACHIEVING ITS LONG-TERM OBJECTIVES OF GROW ING ITS COPPER BUSINESS, DEVELOPING ITS SPE CIALTY CHEMICALS AND AGGREGATES BUSINESSES, REALIZING VALUE FROM ITS INVESTMENTS IN FOREIGN MINING COMPANIES, REDUCING DEBT, REPURCHASING STOCK TO ENHANCE SHAREHOLDER VALUE AND IMPROVING AND ENHANCING ITS SAFETY, HEALTH AND ENVIRONMENTAL PERFORMANCE. financial contents 19 management's discussion and analysis 25 consolidated financial statements 25 CONSOLIDATED STATEMENT OF EARNINGS 26 CONSOLIDATED BALANCE SHEET 27 CONSOLIDATED STATEMENT OF CASH FLOWS 28 CONSOLIDATED STATEMENT OF CHANGES IN stockholders' equity 29 notes to consolidated financial statements 42 report of independent accountants 43 unaudited quarterly data 44 selected financial data management's discussion and analysis of financial condition and results of operations sarco reported 1997 net earnings of $143.4 million, or Adiluted earnings per share of $3.42. Earnings for 1997 include after-tax gains totaling $47.6 million ($73.3 mil lion pre-tax), or $1.13 per share, from the sale ofshares ofGrupo Mexico, S.A. de C.V. (Grupo Mexico), Mexico's largest mining company. Net earnings in 1996 and 1995 were $138.3 million and $169.2 million, respectively. Results for 1996 included an after tax gain of$39.0 million ($60.1 million pre-tax) from the sale of the Company's interest in MIM Holdings Limited (MIM), an Australian based mining company, and a $7.2 million after-tax gain ($11.1 million pre-tax) from the sale ofa 25% interest in the Company's Silver Bell project. Results for 1995 included a spe cial after-tax charge of $79.5 million ($122.3 million pre-tax) related to the termination of lead refining operations at the Company's Omaha, Nebraska plant, adoption of an account ing principle regarding the impairment of long-lived assets, and additions to the Company's reserve for costs associated with pre viously closed plants. The Company's earnings are heavily influenced by the prices for its metals as established on U.S. and international commodity exchanges. Asarco's fourth quarter 1997 earnings reflect the sharp decrease in copper prices which took place during the final months of1997. Asarco announced in January 1998 that it has instituted a company-wide cost reduction program to respond to the decline in metal prices. The program, which has already been imple- ASARCO 1997 ANNUAL REPORT / 19 ASARCO INCORPORATED AND SUBSIDIARIES mented, includes the purchase of higher productivity equipment, reductions in personnel and reductions in general and administra tive expenses, purchased services and other operating costs. In total, the cost reduction program is expected to result in savings of $50 million in 1998, and improve net earnings by approximately 80 cents per share. The Company provided for the severance costs associated with this program in the fourth quarter of1997. Asarco made significant progress in 1997 in achieving its long term objectives ofgrowing its copper business, developing its spe cialty chemicals and aggregates businesses, realizing value from its investments in foreign mining companies, reducing debt, repurchasing stock to enhance shareholder value and improving and enhancing its safety, health and environmental performance: The Company's beneficial interest in mined copper produc tion in 1997 was 977.4 million pounds. While 1997 produc tion was down 3.8% from 1996 primarily due to lower ore grades at the Company's North American copper operations and the partial curtailment of the Hayden concentrator at the Ray mine in Arizona during the early part of 1997, the Com pany's mine copper production is more than double that pro duced by the Company in 1985. In July 1997, the Company began production ofrefined cop per at its new solvent extraction/electrowinning (SX/EW) facility at the Silver Bell mine in Arizona. The new SX/EW plant, in which Asarco has a 75% interest, is designed to pro duce 36 million pounds ofrefined copper annually. The plant, which started up on schedule, has been producing copper at its designed capacity. In the second and third quarters of 1997, the Company sold all of its unrestricted shares of Grupo Mexico for $322.5 mil lion. The sales resulted in an after-tax gain of $47.6 million. With the sale ofthe Grupo Mexico shares, the Company has monetized the last of its historical minority investments. The proceeds from the Grupo Mexico sale, and the MIM sale in 1996, have enabled the Company to strengthen its balance sheet, reduce its interest expense, and undertake a major share repurchase program. Following the initial sale ofGrupo Mexico shares in June 1997, the Company undertook a $100 million share repurchase pro gram. In December 1997, the Company completed the pro gram after repurchasing 3.3 million shares and reduced the number of its outstanding shares by approximately 7.7% to slightly under 40 million shares. Southern Peru Copper Corporation (SPCC) arranged long term financing at favorable rates for its $1 billion expansion program. The program includes a 50% increase in production at SPCC's Cuajone mine which is expected to add 130 million pounds to SPCC's annual copper production, and the modernization ofits Ilo smelter. The expansion at Cuajone is currently on schedule and is expected to be completed in the first quarter of1999. In 1997, the Company's specialty chemicals and aggregates businesses continued their strong growth. Each ofthese busi nesses achieved record earnings, totaling over $43 million before tax, a level which now contributes significantly to Asarco's results, particularly at the bottom ofthe metal market cycle. In specialty chemicals, technical innovation and mar keting effectiveness were key factors contributing to a fourth consecutive year ofrecord sales and earnings. In aggregates, favorable weather and a good construction market in the Southeast increased sales by 15%. In April 1995, the Company acquired an additional 10.7% interest in SPCC and consolidated SPCC's results in its financial statements effective January 1, 1995. The Company's ownership of SPCC was 52.3% at January 1, 1995, and increased to 63.0% effective April 5, 1995. The Company had previously accounted for its investment in SPCC by the equity method. In November 1995, SPCC offered to exchange new common shares for labor shares issued by its Peruvian Branch to workers under prior law in Peru. These labor shares, which are traded on the Lima Stock Exchange, represented a 17.3% interest in the Peruvian Branch which comprises substantially all of the operations of SPCC in Peru. The offer was concluded in December 1995, with 80.8% of the labor shares tendered. As a result, SPCC owned 96.7% of the Branch at December 31, 1995. At December 31, 1997 and 1996, SPCC owned 97.8% and 97.2%, respectively ofthe Branch as a result of open market purchases of labor shares. The Com pany's equity interest in SPCC at December 31, 1997 and 1996 was 54.1% and at December 31, 1995 was 54.0%, and its voting interest was 63.1%, 62.6% and 61.0%, respectively. The Com pany's beneficial economic interest in the operations of SPCC, net ofthe remaining labor shares interest, was 53.0%, 52.6% and 52.3% at December 31, 1997, 1996 and 1995, respectively. sales Sales were $2.7 billion in 1997 and 1996, and $3.2 billion in 1995. In 1997, sales reflect higher copper, specialty chemicals and aggregates sales volumes offset by the lower metal prices in 1997 compared to 1996 and lower lead and silver sales volumes due to the termination of refining operations at the Omaha, Nebraska refinery in June 1996. The decrease in 1996 sales com pared with 1995 was principally attributable to a 29 cent reduc tion in the average selling price ofcopperpartially offset by higher copper sales volumes. The higher copper sales volume in 1996 was mainly due to a full year of sales ofproduction from SPCC's SX/EW plant and higher copper concentrate sales partially off set by lower sales due to the termination ofrefining operations at the Omaha, Nebraska refinery in June 1996. 20 / ASARCO 1997 ANNUAL REPORT ASARCO INCORPORATED AND SUBSIDIARIES consolidated balance sheet (DOLLARS IN THOUSANDS) AT DECEMBER 31, ASSETS Current assets: Cash and cash equivalents Marketable securities Accounts receivable: Trade, net ofallowance for doubtful accounts of$8,121 and $8,129 Other Inventories Other assets Total current assets Investments: Available-for-sale and other cost Equity Total investments Property, net Other assets including intangibles, net Total Assets LIABILITIES Current liabilities: Bank loans Current portion oflong-term debt Accounts payable: Trade Other Salaries and wages Taxes on income Reserve for closed plant and environmental matters Other Total current liabilities Long-term debt Deferred income taxes Reserve for closed plant and environmental matters Postretirement benefit obligation Other liabilities and reserves Total non-current liabilities Contingencies MINORITY INTERESTS PREFERRED STOCKHOLDERS' EQUITY Authorized--10,000,000 shares without par value; none issued COMMON STOCKHOLDERS' EQUITY Authorized--80,000,000 common shares without par value: Issued shares: 1997 and 1996--45,039,878 Unrealized gain on securities reported at fair value, net oftax Retained earnings Treasury stock (at cost)--common shares 1997--5,377,339; 1996--2,216,015 Total Common Stockholders' Equity Total Liabilities, Minority Interests, Preferred and Common Stockholders' Equity The accompanying notes are an integralpart ofthesefinancial statements. 1997 $ 210,559 205,317 375,904 71,062 362,119 74,967 1,299,928 126,843 61,337 188,180 2,418,810 203,484 $4,110,402 $ 204 28,712 289,234 63,605 35,788 62,565 43,238 50,131 573,477 849,991 118,289 78,827 104,491 157,543 1,309,141 533,911 679,991 11,654 1,159,799 (157,571) 1,693,873 $4,110,402 1996 $ 192,408 1,039 462,141 78,419 383,281 67,856 1,185,144 442,707 59,787 502,494 2,274,088 158,623 $4,120,349 $ 15,913 39,815 379,406 57,198 32,427 57,695 38,128 51,975 672,557 758,583 173,245 90,205 99,945 93,163 1,215,141 495,706 -- 679,991 56,311 1,066,191 (65,548) 1,736,945 $4,120,349 26 / ASARCO 1997 ANNUAL REPORT A SARC O INCORPORATED AND SUBSIDIARIES consolidated statement of cash flows (DOLLARS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1997 OPERATING ACTIVITIES Net earnings Adjustments to reconcile net earnings to net cash provided from (used for) operating activities: Depreciation and depletion Provision (benefit) for deferred income taxes Treasury stock used for employee benefits Undistributed equity earnings Net (gain) loss on sale ofinvestments and property Provision for asset impairment Increase (decrease) in reserves for closed plant and environmental matters Minority interests Cash provided from (used for) operating assets and liabilities, net ofthe consolidation ofSPCC: Accounts receivable Inventories Accounts payable and accrued liabilities Other operating assets and liabilities Foreign currency transaction (gains) losses $ 143,392 130,802 (12,074) 3,272 (3,934) (69,671) -- (6,268) 90,605 88,416 19,376 (87,981) 27,527 (2,196) Net cash provided from operating activities 321,266 INVESTING ACTIVITIES Capital expenditures Sale ofproperty Purchase ofinvestments Sale ofavailable-for-sale securities Purchase of available-for-sale securities Proceeds from held-to-maturity investments Purchase ofheld-to-maturity investments Release of restricted cash Acquisition of additional interest in SPCC Consolidation ofthe opening cash balance ofSPCC (322,436) 47,426 (12,650) 417,831 (93,945) 1,036 (204,590) -- -- -- Net cash (used for) provided from investing activities (167,328) FINANCING ACTIVITIES Debt incurred Debt repaid Escrow deposits on long-term loans Net treasury stock transactions Purchase ofminority interests Distributions to minority interests Contributions from minority interests Dividends paid to common stockholders 283,024 (218,184) (15,364) (99,561) (7,272) (49,417) 1,863 (33,604) Net cash (used for) provided from financing activities Effect ofexchange rate changes on cash (138,515) 2,728 Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning ofyear 18,151 192,408 Cash and cash equivalents at end ofyear $ 210,559 The accompanying notes are an integralpart ofthese.financial statements. 1996 $ 138,336 118,569 26,302 5,707 (438) (72,321) -- 12,807 88,331 (27,200) (23,742) 49,193 (41,527) (6,739) 267,278 (286,474) 20,109 (5,800) 371,058 (46,513) 42,455 (1,002) -- -- -- 93,833 53,303 (360,847) (10,064) 1,146 (5,280) (58,295) 4,000 (34,174) (410,211) 3,108 (45,992) 238,400 $ 192,408 1995 $ 169,153 118,827 97 4,775 (460) 4,124 34,864 (6,878) 129,543 (36,867) 48,842 19,671 8,915 (5,536) 489,070 (337,831) 9,966 (4,513) 20,953 (23,203) 76,877 (76,375) 60,450 (116,444) 93,348 (296,772) 234,449 (162,892) 10,809 6,754 -- (33,828) -- (29,645) 25,647 2,134 220,079 18,321 $ 238,400 ASARCO 1997 ANNUAL REPORT / 27 A SARC O INCORPORATED AND SUBSIDIARIES consolidated statement of changes in common stockholders' equity (DOLLARS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1997 COMMON STOCK Balance at beginning and end ofyear 45,039,878 shares $ 679,991 UNREALIZED GAIN ON SECURITIES REPORTED AT FAIR VALUE Balance at beginning ofyear Net increase (decrease) in fair value 56,311 (44,657) Balance at end ofyear 11,654 RETAINED EARNINGS Balance at beginning ofyear Net earnings Dividends paid to common stockholders Treasury stock issued at less than cost Foreign currency adjustment 1,066,191 143,392 (33,604) (4,266) (11,914) Balance at end ofyear 1,159,799 TREASURY STOCK Balance at beginning ofyear Purchased Used for corporate purposes (65,548) (101,366) 9,343 Balance at end ofyear (157,571) 1997-5,377,339 shares 1996--2,216,015 shares 1995--2,469,125 shares TOTAL COMMON STOCKHOLDERS' EQUITY $1,693,873 The accompanying notes are an integralpart ofthesefinancial statements. 1996 $ 679,991 131,600 (75,289) 56,311 976,107 138,336 (34,174) (7,813) (6,265) 1,066,191 (80,214) (568) 15,234 (65,548) $1,736,945 1995 $ 679,991 91,627 39,973 131,600 853,169 169,153 (29,645) (15,656) (914) 976,107 (107,400) (1,130) 28,316 (80,214) $1,707,484 28 / ASARCO 1997 ANNUAL REPORT ASARCO INCORPORATED AND SUBSIDIARIES notes to consolidated financial statements (1) summary of significant accounting policies PRINCIPLES OF CONSOLIDATION The consolidated financial statements of Asarco Incorporated and Subsidiaries include all significant wholly-owned and major ity-owned subsidiaries. Investments over which the Company has significant influence but does not have voting control are accounted for by the equity method. Certain prior year amounts have been reclassified to conform to the current year's presentation. USE OF ESTIMATES The preparation of financial statements in conformity with gen erally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets and lia bilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS Cash equivalents include all highly liquid investments with a maturity ofthree months or less, when purchased. MARKETABLE SECURITIES Marketable securities include short-term liquid investments with a maturity ofmore than three months, when purchased, and are carried at cost, which approximates market. INVENTORIES Company-owned metals processed by domestic smelters and refineries are valued at the lower oflast-in, first-out (LIFO) cost or market. Southern Peru Copper Corporation (SPCC) in-process and refined metal inventories are valued at the lower of average cost or market. All other inventories are valued at the lower of first-in, first-out (FIFO) or average cost or market. PROPERTY Assets are valued at cost or net realizable value. In accordance with SFAS No. 121, "Accounting for the Impairment of LongLived Assets and for Long-Lived Assets To Be Disposed Of", the Company reviews long-lived assets, certain identifiable intangi bles and goodwill related to those assets for impairment when ever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The impairment loss on such assets, as well as long-lived assets and certain identi fiable intangibles to be disposed of, is measured as the amount by which the carrying value ofthe assets exceeds the fair value ofthe assets (less disposal costs, if applicable). The Company evaluates the carrying value of assets based on undiscounted future cash flows and for its metals segment also considers expected metal prices based on historical metal prices and price trends. Betterments, renewals, costs of bringing new mineral proper ties into production, and the cost of major development programs at existing mines are capitalized as mineral land. Main tenance, repairs, normal development costs at existing mines, and gains or losses on assets retired or sold are reflected in earnings as incurred. Plant assets are depreciated over their estimated useful lives, generally by the units-of-production method. Depreciation and depletion ofmine assets are computed generally by the unitsof-production method using proven and probable ore reserves. SPCC computes depreciation on its buildings and equipment using the straight-line method over estimated lives from 5 to 40 years, or the estimated life ofthe mine, if shorter. Goodwill is amortized over the mine life up to a maximum of 40 years on a units-of-production basis or up to 40 years on a straight-line basis, for non-mining assets. REVENUE RECOGNITION Substantially all of the Company's copper and most of its lead production are sold as refined metal under annual contracts. To the extent not sold under annual contracts, production may be sold on a spot sale basis. The Company's zinc production and the balance ofits lead production are sold in the form ofconcentrates and bullion under contracts ofone to three years duration. Silver and gold are sold under monthly contracts or in spot sales. Rev enue is recognized primarily in the month product is shipped to customers based on prices as provided in sales contracts. Certain subsidiaries, principally SPCC, recognize revenue based on prices prevailing at the time ofshipment to customers with final pricing generally occurring within three months of shipment. Revenues with respect to these sales are adjusted in the period ofsettlement to reflect final pricing and in periods prior to settlement to reflect any decline in market prices which may occur between shipment and settlement. FINANCIAL INSTRUMENTS The Company may use derivative instruments to manage its exposure to market risk from changes in commodity prices, inter est rates or the value of its assets and liabilities. Derivative instru ments which are designated as hedges must be deemed effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception ofthe contract. Depending on the market fundamentals ofa metal and other con ditions, the Company may purchase put options or create syn thetic put options to reduce or eliminate the risk of metal price declines below the option strike price on a portion of its antici pated future production. The cost of options is amortized on a straight-line basis during the period in which the options are exer cisable. Gains or losses from the sale or exercise ofoptions, net of unamortized acquisition costs, are recognized in the period in which the underlying hedged production is sold. The Company also uses futures contracts to hedge the effect ofprice changes on a portion of the metals it sells. Gains and losses on futures con tracts are reported as a component ofthe underlying transaction. ASARCO 1997 ANNUAL REPORT / 29 ASARCO INCORPORATED AND SUBSIDIARIES As part ofits price protection program, the Company may use synthetic put options which consist ofa call option and a forward sale on the same quantity ofmetal. Each component ofa synthetic put option may be purchased or sold at different times. In those cases where the forward sale component has not been entered into or has been offset, call options are accounted for as trading activities and the carrying values of such call options are marked to market and any related adjustments are recorded in net earnings. The Company may enter into interest rate swap agreements to limit the effect ofincreases in the interest rates on any floating rate debt. The differential is accrued as interest rates change and is recorded in interest expense. EXPLORATION Tangible and intangible costs incurred in the search for mineral properties are charged against earnings when incurred. STOCK BASED COMPENSATION In 1996 the Company elected to apply the disclosure only provi sions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." IMPACT OF NEW ACCOUNTING STANDARDS In 1997, the Company adopted Statements of Financial Accounting Standards No. 128, "Earnings per Share" and No. 131, "Disclosure about Segments of an Enterprise and Related Information." Neitherstatement had a material impact on the Company's financial statements. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This statement which is effective for fiscal years beginning after December 15, 1997 requires the Company to make certain disclosures but has no impact on the Company's financial statements. ENVIRONMENTAL REMEDIATION COSTS The Company provides for costs associated with environmental remediation obligations when such costs are probable and rea sonably estimable and generally not later than completion ofthe remediation feasibility study. Such accruals are adjusted as new information develops or circumstances change and are not dis counted. Recoveries of environmental remediation costs from other parties are recorded as assets when the recovery is deemed probable. TheAmerican Institute ofCertified PublicAccountants issued Statement ofPosition 96-1, "Environmental Remediation Liabilities" (SOP 96-1), in October 1996. SOP 96-1 provides authoritative guidance on specific accounting issues in connec tion with recognizing, measuring and disclosing environmental remediation liabilities. The Company has applied the provisions ofSOP 96-1 as of December 31, 1996. TAXES ON INCOME Deferred income taxes reflect the future tax consequences of dif ferences between the tax bases of assets and liabilities and their financial reporting amounts at each year end. No U.S. deferred income taxes have been provided for the income tax liability which would be incurred on repatriation of the undistributed earnings ofthe Company's consolidated foreign subsidiaries and the undistributed earnings of SPCC prior to 1993 because the Company intends indefinitely to reinvest these earnings outside the United States. General business credits are accounted for by the flow-through method. SUBSIDIARY STOCK ISSUANCE Gains or losses arising from the sale ofpreviously unissued shares to an unrelated party by a subsidiary are recognized in net earnings to the extent that the net book value ofthe shares owned by the parent after the sale exceeds or is lower than the net book value per share immediately prior to the sale of the shares by the subsidiary. (2) interest in Southern Peru Copper Corporation ACQUISITION OF ADDITIONAL INTEREST On April 5, 1995, the Company acquired an additional 10.7% interest in SPCC for $116.4 million, increasing its ownership from 52.3% to 63.0%. The additional shares acquired enabled the Company to elect a majority ofthe directors ofSPCC. As a result, the Company consolidated SPCC in its financial statements based on its 52.3% ownership, effective January 1, 1995, and 63.0% ownership, effective April 5, 1995. The Company previously accounted for its investment in SPCC by the equity method. The acquisition has been accounted for as a purchase transaction. The excess of the purchase price over the Company's interest in the net book value of SPCC attributable to the shares acquired of $46.4 million has been assigned to proven and probable sulfide reserves, proven and probable leachable reserves and mineralized material and is being amortized based on production. The table below summarizes unaudited pro forma con solidated results of operations of Asarco for the year ended December 31, 1995, assuming that Asarco had acquired an addi tional 10.7% of the outstanding stock of SPCC on January 1, 1995. The unaudited pro forma financial information is based on management's estimates and assumptions and does not purport to represent the results that actually would have occurred if the acquisition had, in fact, been completed on the date assumed. PRO FORMA RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, (in millions, except per share amounts) Sales ofproducts and services Net earnings Net earnings per common share (Basic) Net earnings per common share (Diluted) 1995 $3,197.8 $ 172.2 $ 4.07 $ 4.05 30 / ASARCO 1997 ANNUAL REPORT ASARCO INCORPORATED AND SUBSIDIARIES COMMON SHARE EXCHANGE OFFER On December 29, 1995, SPCC completed an offer to exchange its common stock, par value of $0.01 per share, for any and all labor shares ofthe Peruvian Branch ofSPCC. These labor shares, which are traded on the Lima Stock Exchange, represented a 17.3% interest in the Peruvian Branch which comprises substan tially all of the operations of SPCC in Peru. The offer allowed holders ofthe labor shares in the Branch to exchange four Series-1 Labor shares or five Series-2 Labor shares for one share of com mon stock. Common shares are entitled to one vote per share. In connection with the offering, the Company exchanged its shares of SPCC for Class A shares which are entitled to five votes per share. As a result of this transaction, Asarco's equity interest in SPCC was reduced to approximately 54.0% at December 31, 1995 (54.1% at December 31, 1997 and 1996) and the Com pany's economic interest in the assets ofSPCC, net ofthe remain ing labor share interest was 52.3% at December 31, 1995 (53.0% and 52.6% at December 31, 1997 and 1996, respectively). The Company's voting interest in SPCC was 61.0% at December 31, 1995 (63.1% and 62.6% at December 31, 1997 and 1996, respectively). The common shares issued in exchange for the labor shares are listed on both the NewYork Stock Exchange and Lima Stock Exchange. The exchange ofcommon shares for labor shares was accounted for by SPCC as a purchase of a minority interest. The value of the common stock issued in the exchange (based on the average per share trading value for the three busi ness days ending January 9, 1996) plus issuance costs exceeded the carrying value ofthe minority interests acquired by $82.0 mil lion, net of tax. Of this amount, $4.1 million was assigned to metal inventory on hand at December 31, 1995 and charged to earnings in 1996. The remaining amount was assigned to proven and probable sulfide reserves, proven and probable leachable reserves and mineralized material and is being amortized based on production. Asarco's share ofthe increase in value ($30.4 mil lion, net of tax) has been eliminated in consolidation. (3) other income (expense) been determined for each company, in accordance with SFAS No. 109: Earnings (loss) before taxes on income and minority interests were: FOR THE YEARS ENDED DECEMBER 31, (in millions) Domestic operations Foreign operations Total 1997 1996 1995 $ 42.9 264.7 $307.6 $ 40.3 286.9 $327.2 $ 24.7 396.9 $421.6 TAX EXPENSE (BENEFIT) The components of the provision (benefit) for taxes on income were: FOR THE YEARS ENDED DECEMBER 31, (in millions) U.S. Federal: Current Deferred U.S. Federal Foreign and State: Current Deferred Foreign and State Total income tax 1997 1996 1995 $24.4 (4.8) 19.6 $ 3.4 14.5 17.9 $ 4.1 (3.1) 1.0 61.3 (7.3) 54.0 $73.6 70.9 11.8 82.7 $100.6 118.7 3.2 121.9 $122.9 Total taxes paidwere: 1997-- $54.2 million; 1996 -- $134.4 million; 1995 -- $65.8 million. RECONCILIATION OF STATUTORY INCOME TAX RATE FOR THE YEARS ENDED DECEMBER 31, (in millions) Interest income Equity earnings Dividends from MIM Dividends from Grupo Mexico Other Total 1997 $20.7 8.9 -- 5.4 (1.2) $33.8 1996 $20.0 4.5 5.3 -- (0.7) $29.1 1995 $16.5 2.3 9.2 -- (1.6) $26.4 (4) taxes on income Certain subsidiaries that have been consolidated for financial reporting purposes, principally SPCC, are not includible in Asarco's consolidated federal income tax return. The following tables combine the separate provisions for income taxes that have FOR THE YEARS ENDED DECEMBER 31, 1997 U.S. statutoryincome tax rate Adjustment for entities for which no U.S. tax is required Percentage depletion Dividends from non-includible subsidiaries Dividends received deduction Foreign taxes Foreign tax credit Reversal oftaxes previously accrued Other Effective income tax rate 35.0% (2.3) (9.5) 11.4 (9.4) 16.9 (13.5) (2.1) (2.6) 23.9% 1996 35.0% (1.1) (9.6) 10.4 (8.5) 24.6 (20.5) -- 0.4 30.7% 1995 35.0% (0.3) (12.3) 11.0 (8.8) 28.3 (25.2) -- 1.5 29.2% Temporarydifferences and carryforwardswhich give rise to deferred tax assets, liabilities and related valuation allowances were: ASARCO 1997 ANNUAL REPORT / 31 ASARCO INCO R P O RAT DEFERRED TAX ASSETS (LIABILITIES) AT DECEMBER 31, 1997 (in millions) Current: Reserve for closed plant and environmental matters Inventories Other $ 7.2 5.3 6.6 Net deferred tax asset $ 19.1 Noncurrent: Tax effect ofregular net operating losses Reserve for closed plant and environmental matters Postretirement benefit obligation Alternative minimum tax credit carryforwards Foreign tax credit carryforwards Previously taxed income Capitalized leases Pension obligation Property, plant and equipment Investments--Grupo Mexico Other Valuation allowance for deferred tax assets $ 119.0 22.2 36.6 28.3 -- 6.1 21.1 (17.5) (314.1) (12.8) (7.2) -- Net deferred tax liability (118.3) Total net deferred tax liability $ (99.2) 1996 $ 12.4 6.6 5.4 $ 24.4 $ 168.2 33.1 35.0 16.2 69.4 5.3 25.6 (19.8) (308.6) (120.4) (1.1) (76.2) (173.3) $(148.9) At December 31, 1997, the Company had $339.9 million ofnet operating loss carryforwards which expire, if unused, in years 2008 through 2010 and $28.3 million of alternative minimum tax credits which are not subject to expiration. These net operat ing loss carryforwards and alternative minimum tax credits are available solelyto Asarco and not to SPCC. The Company believes that these carryforwards will be available to reduce future federal income tax liabilities and has recorded the tax benefit ofthese car ryforwards as noncurrent deferred tax assets. The Company's net operating loss carryforwards for state purposes are not significant and, therefore, have not been recorded as deferred tax assets. The decrease in the valuation allowance of$76.2 million from 1996 to 1997 is attributable to the utilization offoreign tax cred its and alternative minimum tax credits by SPCC in 1997. In the first quarter of1997, the Government ofPeru approved a reinvestment allowance for a program of SPCC to expand the Cuajone mine. The reinvestment allowance provides SPCC with tax incentives in Peru and, as a result, certain U.S. tax credit carry forwards, for which no benefit had previously been recorded, were realized. The reduction in the effective tax rate as a result of the reinvestment allowance for the twelve months ended Decem ber 31, 1997 lowered consolidated tax expense by approximately $14.7 million. Pursuant to the reinvestment allowance SPCC has received tax deductions in Peru in amounts equal to the cost of the qualifying property (approximately $245 million). As quali fying property is acquired, the financial statement carrying value of the qualifying property will be reduced to reflect the tax ben efit associated with the reinvestment allowance (approximately D AND SUBSIDIARIES $73 million). As a result, financial statement depreciation expense related to the qualifying property will be reduced over its useful life (approximately 15 years). U.S. deferred tax liabilities have not been provided on approx imately $272.0 million in 1997 ($270.8 million in 1996 and $257.6 million in 1995) ofundistributed earnings offoreign sub sidiaries and nonconsolidated companies more than 50% owned, because assets representing those earnings are permanently invested. It is not practicable to determine the amount ofincome taxes that would be payable upon remittance ofassets that repre sent those earnings. The amount of foreign withholding taxes that would be payable upon remittance of assets that represent those earnings is approximately $1.2 million in 1997 ($1.2 mil lion in 1996 and $0.5 million in 1995). (5) inventories AT DECEMBER 31, (in millions) Inventories ofsmelters and refineries at lower ofLIFO cost or market Provisional cost ofmetals received from suppliers for which prices have not yet been fixed Mine inventories at lower ofFIFO cost or market Metal inventory at lower ofaverage cost or market Materials and supplies at lower ofaverage cost or market Other Total 1997 $ 7.4 51.5 88.9 45.6 138.2 30.5 $362.1 1996 $ 10.3 44.5 105.8 49.5 141.0 32.2 $383.3 Replacement cost exceeds inventories valued at LIFO cost by approximately $86.4 million in 1997 (1996-$115.2 million). Liquidation of LIFO inventories resulted in pre-tax earnings of $16.7 million in 1997, $5.3 million in 1996 and $0.7 million in 1995. (6) in-vestments During 1997 the Company sold 106.3 million shares of Grupo Mexico for proceeds of$322.5 million, resulting in a pre-tax gain of $73.3 million ($47.6 million after-tax). At December 31, 1997, the value of the Company's remaining interest in Grupo Mexico is $78.9 million representing the exercise price of shares subject to an option granted as part of the restructuring of the Company's investment in 1994. These shares are carried on the books of the Company at $50.2 million. The Company's results for the year ended 1996 include a $60.1 million pre-tax gain ($39.0 million after-tax) on the sale of its 15% interest in MIM Holdings Limited (MIM) and an $11.1 million pre-tax gain ($7.2 million after-tax) on the sale of a 25% interest in its Silver Bell copper mine to Mitsui & Co. In accordance with the provisions ofSFAS No. 115, availablefor-sale securities are carried at fair value. Unrealized gains at 32 / ASARCO 1997 ANNUAL REPORT ASARCO INCORPORATED AND SUBSIDIARIES amounts (not including the earnings effect ofoptions granted by SPCC for its stock, which is immaterial) indicated below: (in millions, except per share amounts) 1997 1996 1995 Net earnings--as reported Net earnings--pro forma Earnings per share (Basic)--as reported Earnings per share (Diluted)--as reported Earnings per share (Basic)--pro forma Earnings per share (Diluted)--pro forma $143.4 $138.3 $169.2 $141.0 $136.7 $167.7 $ 3.42 $ 3.24 $ 4.00 $ 3.42 $ 3.23 $ 3.98 $ 3.36 $ 3.20 $ 3.96 $ 3.36 $ 3.20 $ 3.95 For purposes ofcomputing earnings per share, basic and diluted, the dilutive effect of stock options on common shares outstanding is as follows: 1997Weighted Average Common Shares Outstanding: (in millions) Basic Dilutive effect ofstock options Diluted 41.9 0.1 42.0 1996 42.7 0.1 42.8 1995 42.3 0.1 42.4 The fair value of each option grant is estimated on the date of grant using a Black-Scholes option-pricing model with the fol lowing assumptions used for grants in 1997: dividend yield of 2.9% (2.6% - 1996, 2.4% - 1995); expected volatility of 29.2% (28.4% -- 1996, 27.6% -- 1995); risk-free interest rate of 6.5% (5.43% --1996, 7.8% --1995); and expected lives of7.0 years in 1997, 6.9 in 1996 and 1995. The total number of shares that may be optioned or awarded under the 1996 Stock Incentive Plan is 478,165 shares as of December 31, 1997, (475,076 shares at December 31, 1996) plus an additional number of shares on January 1 of each calen dar year for the 10 year duration ofthe Stock Incentive Plan equal to one percent of the number ofshares ofthe Company's Com mon Stock outstanding on the immediately preceding Decem ber 31. The weighted average remaining contractual life ofstock options outstanding as of December 31, 1997 was 6.6 years. Stock option activity over the past three years under the Stock Incentive Plan and Stock Option Plan was: Outstanding at January 1, 1995 Granted Exercised Canceled or expired Outstanding at January 1, 1996 Granted Exercised Canceled or expired Outstanding at January 1, 1997 Granted Exercised Canceled or expired Outstanding and exercisable at December 31, 1997 Number of Shares Weighted Average Price Option Price (range per share) 880,116 216,200 (304,321) (9,026) $25.41 $29.19 $25.00 $25.96 $20.57 to $29.38 $26.63 to $32.57 $20.57 to $29.19 $21.94 to $29.19 782,969 253,000 (39,306) (6,300) $26.60 $31.20 $26.01 $25.85 $20.57 to $32.57 $31.13 to $34.38 $20.57 to $29.19 $20.57 to $31.13 990,363 370,450 (71,815) (24,600) $27.81 $27.49 $26.47 $27.14 $22.31 to $34.38 $27.50 to $31.97 $22.31 to $29.19 $22.31 to $31.13 1,264,398 $27.88 $22.31 to $34.38 In 1989, the Company adopted a Shareholder Rights plan, which expires on August 7, 1999, and declared a dividend ofone Right for each of its common shares. In January 1998, the Company extended the Shareholder Rights plan, with certain minor mod ifications, for an additional ten year period effective upon the ear lier ofthe expiration ofthe existing Rights plan or the redemption of the existing Rights. In certain circumstances, if a person or group becomes the beneficial owner of15% or more of the out standing common shares, with certain exceptions, these rights vest and entitle the holder to certain share purchase rights. In con nection with the Rights dividend, 800,000 shares ofJunior Par ticipating Preferred Stock were authorized for issuance upon exercise ofthe Rights. (12) benefit plans PENSION BENEFITS The Company maintains several noncontributory, defined benefit pension plans covering substantially all domestic employees. Ben efits for salaried plans are based on salary and years of service. Hourlyplans are based on negotiated benefits and years ofservice. The Company's funding policyis to contribute amounts to the plans sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of1974, plus such additional tax deductible amounts as may be advisable under the circumstances. Plan assets are invested principally in commingled stock funds, mutual funds and securities issued by the United States. ASARCO 1997 ANNUAL REPORT / 37 ASARCO IN C O R P O RAT D AND SUBSIDIARIES Net pension costs consisted of: FOR THE YEARS ENDED DECEMBER 31, (in millions) Service cost Interest cost on projected benefit obligations Actual return on plan assets Net amortization and deferral Net pension costs 1997 $ 9.1 12.7 (41.0) 26.9 $ 7.7 1996 $ 8.6 11.0 (21.8) 10.7 $ 8.5 1995 $ 6.3 9.8 (30.8) 21.0 $ 6.3 The actuarial present value of benefit obligations and funded status for the Company's plans were: AT DECEMBER 31, (in millions) 1997 1996 Plans with Assets Exceeding Accum. Benefit Obligation Plans with Assets Exceeding Accum. Benefit Obligation Plans with Accum. Benefit Obligation Exceeding Assets(a) Assets and obligations: Vested benefit obligation Nonvested benefits $163.5 8.5 Accumulated benefit obligation Plan assets at fair value 172.0 227.5 Plan assets in excess of (less than) accumulated benefit obligation $ 55.5 Projected benefit obligation (PBO) Plan assets at fair value $204.0 227.5 Plan assets in excess of(less than) PBO Prior service cost Initial net plan obligation Effect ofchanges in assumptions and actuarial gains and losses Minimum liability 23.5 16.3 2.4 (11.9) -- Pension asset (liability) reflected in consolidated balance sheet $ 30.3 Actuarial assumptions: Discount rate Expected long-term rate ofreturn on plan assets(b) Expected annual salary increases 7.0% 10.0% 4.0% $139.4 7.8 147.2 174.3 $ 27.1 $175.4 174.3 (1.1) 18.1 0.9 8.6 -- $ 26.5 7.0% 10.0% 4.0% $ 5.3 0.5 5.8 5.0 $(0.8) $ 7.2 5.0 (2.2) (0.1) 2.1 (0.2) (0.5) $(0.9) 7.0% 8.0% 4.0% (a) Plans maintained by SPCC. (b) The expected long-term rate ofreturn onplan assets is8.0%forplans maintained by SPCC. POSTRETIREMENT BENEFITS Noncontributory postretirement health care coverage under the Asarco Health Plan, is provided to substantially all U.S. retirees not eligible for Medicare. A cost sharing Medicare supplement plan is available for retired salaried employees and life insurance coverage is provided to substantially all retirees. The tables below exclude the postretirement benefit obligation of SPCC, which is immaterial. Net periodic postretirement benefit costs include: FOR THE YEARS ENDED DECEMBER 31, (in millions) Service cost Interest cost Amortization ofloss Net periodic postretirement benefit costs 1997 $ 3.5 8.1 1.2 $12.8 1996 $ 3.4 8.0 1.3 $12.7 1995 $ 2.4 8.5 $10.9 The following sets forth the plan's status reconciled with amounts reported in the Consolidated Balance Sheet: AT DECEMBER 31, (in millions) Accumulated postretirement benefit obligation (APBO): Retirees Fully eligible active plan participants Other plan participants Total APBO Item not yet recognized in earnings: Effect ofchanges in assumptions and actuarial gains and losses Postretirement benefit obligation 1997 1996 $ 58.2 21.7 42.9 122.8 $ 60.7 20.0 41.1 121.8 (18.3) $104.5 (21.9) $ 99.9 The annual assumed rate ofincrease in the per capita cost ofcov ered benefits (i.e., health cost trend rate) is 6% for 1997 and is assumed to decrease to 5% by 1999 and remain at that level there after. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement bene fit obligation at December 31, 1997, by $10.8 million, and the net periodic postretirement benefit costs for 1997 by $1.2 mil lion. The discount rate used in determining the accumulated postretirement benefit obligation was 7% at December 31, 1997 and 1996. The plans are unfunded. 38 / ASARCO 1997 ANNUAL REPORT ASARCO INCORPORATE D AND SU B SID IARIE S EMPLOYEE SAVINGS PLAN The Company maintains employee savings plans for salaried and hourly employees which permit employees to make contribu tions by salary reduction pursuant to section 401(k) ofthe Inter nal Revenue Code. The Company matches contributions up to 3% ofcompensation. In connection with the required match, the Company's contributions charged against earnings were $4.6 million in 1997, $4.5 million in 1996 and $4.3 million in 1995. (13) business segments At December 31, 1997, the Company adopted SFAS No. 131, "Disclosure About Segments ofan Enterprise and Related Infor mation." This statement establishes standards for reporting infor mation about operating segments and related disclosures about products and services, geographic areas, and major customers. Prior year amounts have been restated to conform to the current year's presentation. The Company's copper segment includes integrated mining, smelting and refining operations in North America and in Peru, through its subsidiary, Southern Peru Copper Corporation. The Company's lead, zinc and precious metals segment consists of a fully integrated lead business in Missouri, a custom lead smelting business, a silver mining business and a zinc mining business. Enthone-OMI, a wholly-owned subsidiary, operates a world wide specialty chemicals business focused on functional and dec orative coatings for the electronics and metal finishing industries. American Limestone Company, a wholly-owned subsidiary, pro duces construction aggregates. The Company also maintains an active exploration effort focused on the identification and acquisition of advanced gold, copper and silver exploration projects. The segment labeled "All Other" includes environmental services, a specialty metals busi ness, and income and expenses associated with facilities previously operated by the Company. The Company's reportable segments are separately managed strategic business units that offer differ ent products and services. The accounting policies of the segments are described in the summary of significant accounting policies. The Company eval uates segment performance based on operating income or loss plus the equity in the net earnings of investments accounted for by the equity method attributable to each segment, where appli cable. Corporate and general administrative expenses are allo cated among the segments generally in proportion to operating expenses. Identifiable assets are those directly used in the opera tions of each segment. Unallocated corporate assets are princi pally cash, marketable securities, and investments. There can be no assurance that operations and assets of the Company subject to the jurisdiction of foreign governments will not be affected adversely by future actions by such governments. BUSINESS SEGMENTS --SALES FOR THE YEARS ENDED DECEMBER 31, (in millions) By Reportable Segment Copper Lead, Zinc & Precious Metals Specialty Chemicals Aggregates All Other Total By Country^ United States Japan Italy United Kingdom The Netherlands Foreign-- Other Total 1997 $2,022 304 324 54 17 $2,721 $1,501 219 166 146 109 580 $2,721 1996 $1,968 357 319 47 26 $2,717 $1,529 245 147 153 122 521 $2,717 1995 $2,329 489 309 44 27 $3,198 $1,781 264 189 157 217 590 $3,198 (a) Revenues are attributed to countries based on location ofcustomer BUSINESS SEGMENTS-- EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1997 (in millions) By Reportable Segment (a), (b), (c) Copper Lead, Zinc & Precious Metals Specialty Chemicals Aggregates Exploration All Other(d) $ 315 (15) 29 14 (32) (28) Total Interest and other Less: Equity Earnings $ 283 33 (9) Earnings before taxes on income and minority interests $ 307 Depreciation and Depletion Copper Lead, Zinc & Precious Metals Specialty Chemicals Aggregates All Other $ 108 17 3 3 0 Total $ 131 Equity in results of non-consolidated companies Copper $ Lead, Zinc & Precious Metals Specialty Chemicals 1 3 5 Total $9 1996 $ 326 (11) 24 10 (27) (14) $ 308 23 (4) $ 327 $ 99 14 3 2 1 $ 119 $1 (1) 4 $4 1995 $ 617 (62) 24 8 (15) (83) $ 489 (66) (2) $ 421 $ 96 16 4 2 1 $ 119 $-- (2) 4 $2 ASARCO 1997 ANNUAL REPORT / 39 ASARCO INCORPORATED AND SUBSIDIARIES (a) Includesprovisionfor asset impairment of$1.1for Copper, $36.3for Lead, Zinc &PreciousMetals and $8.2forAll Other in 1995. (b) Includes LIFOprofits of$16.7in 1997, $5.3 in 1996 and $.7in 1995 primarily reported in the Copper and Lead, Zinc and Precious Metals segments. (c) Includes equity in the net earnings ofinvesteesaccountedfor by the equity method. (d) Includes environmentaland other closedplant charges of$20.2 in 1997, $15.0 in 1996 and $76.3 in 1995. BUSINESS SEGMENTS-- IDENTIFIABLE ASSETS FOR THE YEARS ENDED DECEMBER 31, (in millions) By Reportable Segment Copper Lead, Zinc & Precious Metals Specialty Chemicals Aggregates Exploration All Other Total Reportable Segments Unallocated corporate assets Total Long-Lived Assets United States Peru Foreign-- Other Total Equity Method Investments Copper Lead, Zinc & Precious Metals Specialty Chemicals Total Capital Expenditures Copper Lead, Zinc & Precious Metals Specialty Chemicals Aggregates All Other Total 1997 $3,009 427 263 32 15 153 $3,899 211 $4,110 $1,547 919 142 $2,608 $2 9 50 $ 61 $ 295 18 4 3 2 $ 322 1996 $2,810 401 272 32 11 123 $3,649 471 $4,120 $1,820 872 84 $2,776 $2 5 53 $ 60 $ 233 42 7 3 1 $ 286 1995 $2,728 360 267 31 11 82 $3,479 848 $4,327 $2,123 796 75 $2,994 $2 3 57 $ 62 $ 287 30 3 3 15 $ 338 (14) financial instruments HEDGING The Company may use derivative instruments to manage its exposure to market risk from changes in commodityprices, inter est rates or the value of its assets and liabilities. Derivative instru ments which are designated as hedges must be deemed effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract. Depending on the market fundamentals of a metal and other conditions, the Company may purchase put options or create synthetic put options to reduce or eliminate the risk ofmetal price declines below the option strike price on a portion of its antici pated future production. Put options purchased by the Company establish a minimum sales price for the production covered by such put options and permit the Company to participate in price increases above the option price. The cost ofoptions is amortized on a straight-line basis during the period in which the options are exercisable. Depending upon market conditions, the Company may either sell options it holds or exercise the options at maturity. Gains or losses from the sale or exercise ofoptions, net ofunamortized acquisition costs, are recognized in the period in which the underlying production is sold. The Company also uses futures contracts to hedge the effect ofprice changes on a portion ofthe metals it sells. Gains and losses on futures contracts are reported as a component of the underlying transaction. Earnings include gains from option sales and exercises, primarily related to copper, of$25.8 million in 1997, $27.1 million in 1996 and losses of$5.6 million in 1995. At December 31, 1997, the Company held the following cop per put options: Pounds Percent of Strike Price Unamortized Estimated Period Per Pound Cost Production (in millions, except per pound amounts) Asarco 44.0 1/98-3/98 SPCC 44.0 1/98-3/98 $0.95 $0.95 $0.7 26% $0.6 27% TRADING As part ofits price protection program, the Company may use syn thetic put options which consist ofa call option and a forward sale on the same quantity ofmetal. Price protection programs utilizing syntheticputs may be implemented in steps. In cases where the step approach is used, the Company's objective is to take advantage of current market conditions to minimize its cost while at the same time limiting the Company's exposure should market conditions change before the synthetic put is completed. Until a synthetic put is completed, any calls not matchedwith a forward sale are marked to market with the gain or loss, ifany, recorded in earnings. Earn ings include gains of$0.5 million in 1997 from the sale or exercise ofcall options. Earnings also include gains of$3.6 million in 1997 and losses of $0.1 million in 1996 from unrealized mark to mar ket gains. At December 31, 1997, the Company held copper call options covering an aggregate of140.3 million pounds ofcopper, a portion of which are exercisable in each quarter of 1998 at an average strike price of 97 cents. The carrying value ofthese calls at December 31, 1997 was $0.4 million. 40 / ASARCO 1997 ANNUAL REPORT A SARC O INCORPORATED AND SUBSIDIARIES GAINS AND LOSSES The recognized pre-tax gains (losses) of the Company's metal hedging and trading activities, were as follows: The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: FOR THE YEARS ENDED DECEMBER 31, (in millions) Metal Copper Zinc Silver Lead Net Gain (Loss) 1997 1996 1995 $28.7 1.2 -- -- $29.9 $26.9 (0.1) -- 0.2 $27.0 $(5.7) (0.1) 0.5 (0.3) $(5.6) The Company may enter into interest rate swap agreements to limit the effect ofincreases in the interest rates on any floating rate debt. The differential is accrued as interest rates change and is recorded in interest expense. During 1995, the Company entered into three swap agreements, expiring 1998 to 2000, with an aggre gate notional amount of $115.0 million. The effect of these agreements is to limit the interest rate exposure to 6.6% on $100 million of the Company's revolving credit loans and 6.8% on its $15 million, 5 year term loan. As a result of these swap agree ments, interest expense was increased by $0.6 million in 1997, $0.7 million in 1996 and $0.2 million in 1995. The estimated fair values of the Company's financial instru ments are: CASH AND CASH EQUIVALENTS -- The carrying amount approximates fair value because of the short maturity of these instruments. MARKETABLE SECURITIES -- The carrying amount and fair value are reported at amortized cost, which approximates market, since these securities are to be held to maturity. PUT AND CALL OPTIONS -- Fair value is an estimate based on relevant market information such as: volatility of similar options, futures prices and the contracted strike price. Call options held at December 31, 1997, which represent trading securities had an average fair value of$1.3 million during the year ended December 31, 1997. AVAILABLE-FOR-SALE SECURITIES AND INTEREST RATE SWAPS -- Fair value is based on quoted market prices. LONG-TERM DEBT -- The fair value is based on the quoted market prices for the same or similar issues. AT DECEMBER 31, (in millions) 1997 1996 Carrying Value Fair Carrying Value Value Fair Value Assets: Cash and cash equivalents $210.6 Marketable securities-- held to maturity $205.3 Put options $ 1.3 Call options $ 0.4 Investments: Available-for-sale securities $ 73.5 Restricted investment in Grupo Mexico(a) 50.2 Other 3.1 $210.6 $205.3 $ 14.3 $ 0.4 $ 73.5 78.9 (b) $192.4 $ 1.0 -- $ 4.0 $387.9 50.2 4.6 Total investments $126.8 $152.4 $442.7 Liabilities: Long-term debt (excluding capital lease obligations) Interest rate swaps $816.9 $848.3 $723.6 -- $ (0.6) -- $192.4 $ 1.0 -- $ 4.0 $387.9 78.9 (b) $466.8 $736.9 $ (0.8) (a) At December 31,1997and 1996, 56.3 million shares ofGrupo Mexico weresubject to afixedprice option which limits thesale ofthe sharesfor a period ofmore than oneyear. Thefairvalueshown is equal to the exercise price ofthe option. (b) Nofair value was availablefor these investments as they represent an interest in companies whose stock is notpublicly traded. Accordingly, it is notpracticable to determine thefair value ofsuchsecurities. ASARCO 1997 ANNUAL REPORT / 41 ASARCO INCORPORATED AND SUBSIDIARIES report of independent accountants TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ASARCO INCORPORATED We have audited the accompanying consolidated balance sheets of ASARCO Incorporated and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, cash flows, and changes in common stockholders' equity for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsi bility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free ofmaterial mis statement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial state ments. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above pre sent fairly, in all material respects, the consolidated financial posi tion ofASARCO Incorporated and Subsidiaries as ofDecember 31, 1997 and 1996, and the consolidated results of their opera tions and their cash flows for each ofthe three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. New York, New York January 27, 1998 42 / ASARCO 1997 ANNUAL REPORT A SARC O INCORPORATED AND SUBSIDIARIES UNAUDITED QUARTERLY DATA (in millions, except per share data) 1997 1996 QUARTERS 1st 2nd(a),(b) 3rd(`) (d) 4th Total 1st<e) 2nd(f) 3rd 4th(g) Total Sales Operating income Net earnings Dividends paid per common share Stock market price: High Low Net earnings per share: Basic Diluted $715.6 $106.0 $ 40.6 $741.0 $ 96.5 $ 51.9 $661.3 $ 53.6 $ 45.8 $603.1 $ 18.6 $ 5.1 $2,721.0 $ 274.7 $ 143.4 $735.0 $ 92.6 $ 35.7 $682.5 $ 88.4 $ 72.4 $647.8 $ 51.7 $ 5.9 $651.5 $ 70.7 $ 24.3 $2,716.8 $ 303.4 $ 138.3 $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.80 $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.80 $ 321/2 $ 321/4 $ 34 $ 3178 $ $ 251/8 $ 261/2 $ 30 $ 2174 $ 34 $ 35/4 $ 35/8 $ 27/8 2174 $ 27/2 $ 27/8 $ 23/4 $ 28 $ 35/8 $ 24/8 $ 23/4 $ 0.95 $ 1.21 $ 1.10 $ 0.13 $ 3.42 $ 0.84 $ 1.70 $ 0.14 $ 0.94 $ 1.20 $ 1.09 $ 0.13 $ 3.42 $ 0.83 $ 1.69 $ 0.14 $ 0.57 $ 3.24 $ 0.57 $ 3.23 (a) Includes a $13.4 after-taxgain, $20.7pre-tax, on the sale of43.4million shares ofGrupo Mexico. (b) Includes a $10.3 after-taxgain, $15.9pre-tax, as a result ofliquidation ofLIFO inventories. (c) Includes a $34.2 after-taxgain, $52.6pre-tax, on the sale ofthe Company's remaining unrestrictedshares in Grupo Mexico. (d) Includes a $30.0pre-tax charge to increase reservesfor closedplant a,nd environmental matters, offsetentirely by a,nticipated insurance recoveries. (e) Includes a $7.2 after-taxgain, $11.1 pre-tax, on the sa,le ofa 25% interest in the Company's Silver Bellproject. (f) Includes a $39.0 after-taxgain, $60.1 pre-tax, on the sale ofthe Company's remaining 150% interest in MIM. (g) Includes apre-tax charge of$0.6 ($53.3 in charges, including $10.0 related to the application ofSOP 96-1, offset by $52.7in insurance and other recoveries)for environmenta,land other closedplantmatters. METALS PRICE SENSITIVITY Assuming that expected metal production and sales are achieved, tax and royalty rates are unchanged, that the number of shares outstanding is unchanged and giving no effect to results ofother business segments, hedging programs or changes in the costs of production, metal price sensitivity factors would indicate the fol lowing estimated change in earnings per share resulting from metal price changes in 1998. Estimates are based on 39.7 million shares outstanding. Copper Lead Zinc Silver Molybdenum Change in Metal Price Annual Change in Earnings per Share 16/lb. 16/lb. 17.56 4.86 16/lb. 1.96 $1/oz. 13.66 $1/lb. 14.16 CAUTIONARY STATEMENT Forward-looking statements in this report and in other Com pany statements include statements regarding expected com mencement dates ofmining or metal production operations, projected quantities of future metal production, anticipated production rates, operating efficiencies, costs and expendi turesaswell asprojected demand orsupplyforthe Company's products. Actual results could differ materially depending upon factors including the availability of materials, equip ment, requiredpermits or approvals and financing, the occur rence ofunusual weather or operating conditions, lower than expected ore grades, the failure ofequipment or processes to operate in accordance with specifications, labor relations, environmental risks as well as political and economic risk asso ciated with foreign operations. Results of operations are directly affected by metals prices on commodity exchanges which can be volatile. ASARCO 1997 ANNUAL REPORT / 43 ASARCO INCORPORATED AND SUBSIDIARIES selected financial data five-year selected financial and statistical data (IN MILLIONS, EXCEPT PER SHARE AND EMPLOYEE DATA) 1997 1996 1995(f) 1994 1993 CONSOLIDATED STATEMENT OF EARNINGS Sales Operating income (loss) Earnings (loss) before minority interests, equity earnings and cumulative effect of change in accounting principles Minority interests Equity earnings, net of taxes Net earnings Per common share: Net earnings--Basic Net earnings--Diluted Dividends to common stockholders $2,721 275(a) 234 (91) --(b) 143 (c) $ 3.42 $ 3.42 $ 0.80 $2,717 303(d) 226 (88) --(b) 138(e) $ 3.24 $ 3.23 $ 0.80 $3,198 487(g) 299 (130) --(b) 169 $ 4.00 $ 3.98 $ 0.70 $2,032 18(h) 17 (1) 48 64(i) $ 1.53 $ 1.52 $ 0.40 $1,736 (110)(j) (97) (1) 27 16(k) $ 0.38 $ 0.38 $ 0.50 CONSOLIDATED STATEMENT OF CASH FLOWS Cash provided from (used for) operating activities Dividends to common stockholders Capital expenditures Depreciation and depletion $ 321 34 322 131 $ 267 34 286 119 $ 489 30 338 119 $(10) 17 98 83 $ 39 21 112 81 CONSOLIDATED BALANCE SHEET Total assets Inventories--replacement cost in excess of LIFO inventory costs Total cash and marketable securities Total debt Common stockholders' equity $4,110 86 416 879 1,694 $4,120 115 193 814 1,737 $4,327 137 281 1,122 1,707 $3,291 143 18 933 1,517 $3,153 114 13 901 1,472 COMMON STOCK Common shares outstanding Price--high --low Book value per common share Price/Earnings ratio Dividends to common stockholders as a percent of earnings 39.7 $34 $213/4 $42.71 6.56 23.4% 42.8 $357/s $233/4 $40.56 7.68 24.7% 42.6 $361/2 $243/s $40.11 8.01 17.5% 42.1 $347/8 $213/8 $36.04 18.65 26.2% 41.7 $285/8 $165/8 $35.27 60.92 133.2% FINANCIAL RATIOS Current assets to current liabilities Debt as a % ofcapitalization Debt as a % ofcapitalization, net of excess cash Employees (at year-end) 2.3 28.3% 20.2% 11,800 1.8 26.7% 24.1% 11,800 1.9 34.1% 32.1% 12,200 1.6 38.1% 38.1% 8,000 1.5 38.0% 38.0% 8,500 Notes to Five-Year Selected Financialand StatisticalData. (a) Environmental charges of$20.2 include third quarter charges of$30.0 to increase reservesfor closedplantand environmental matters, offsetentirely by anticipated insurance recoveries. (b) Netearningsfrom investmentsaccountedfor by the equity method are included in earnings (above). (c) Includes a $47.6 after-taxgain ($73.3pre-tax)from the sale ofshares ofGrupo Mexico. (d) Includes a $15.0pre-tax charge ($67.7 in charges offset by $52.7in insurance settlements and other recoveries)for closedplantand environmental matters. (e) Includes a $39.0 after-taxgain ($60.1 pre-tax)from the sale ofthe Company's remaining interest in MIMand a $7.2 after-taxgain ($11.1 pre-tax)from the sale ofa 25% interest in the Company's SilverBellproject. (f) On April 5,1995, the Company acquired an additional 10.7% interest in Southern Peru Copper Corporation (SPCC)for $116.4 increasingitsownershipfrom 52.3% to 63%. The additionalsharesacquired enabled the Company to electa majority ofthe directors ofSPCC. As a result, the Company hasconsolidated SPCC in itsfinancialstatements based on its 52.3% ownership, effectiveJanuary 1,1995, and 63% ownership, effectiveApril 5,1995. The Company previously accountedfor its investmentin SPCC by the equity method. (g) Includes a $139.4pre-tax charge to add to the Company's reservefor closedplant and environmental matters, toprovidefor asset impairments andplant closures and to write down certain in-processinventory to net realizable value. (h) Includes a $65.5pre-tax charge to add to the Company's reservefor closedplant and environmental matters. (i) Includes a $31.9 after-taxgain ($58.5pre-tax)from the sale ofthe Company's remaining interest inAsarcoAustralia Limited. (j) Includes a $37.6pre-tax chargefor the valuation ofinventories and additions to reservesfor closedplant and environmental matters, $9.2 ofLIFOprofits and $8.2 ofpreviously unrecognized losses ofNorPeru. (k) Includes $26.4(netoftaxes of$0.4) ofpreviously unrecognized equity earnings ofSPCC and again of$86.3 as the result ofthe cumulative effect ofa change in accountingprinciple at SPCC. 44 / ASARCO 1997 ANNUAL REPORT Executive Officers, Directors and Committees of the Board EXECUTIVE OFFICERS Richard de J. Osborne Chairman of the Board and Chief Executive Officer Francis R McAllister President and Chief Operating Officer Kevin R Morano Executive Vice President and Chief Financial Officer Augustus B. Kinsolving Vice President and General Counsel RobertJ. Muth Vice President, Government and Public Affairs RobertM Novotny Vice President, Lead, Zinc, Silver and Aggregates William L. "Gus" Paul Vice President, Commercial Gerald D. Van Voorhis Vice President, Exploration Michael O. Varner Vice President, Environmental Operations David B. Woodbury Vice President, Human Resources Robert Ferri Secretary ChristopherF Schultz Treasurer William Dowd Controller James L. Wiers General Auditor DIRECTORS Richard de J. Osborne Chairman of the Board and Chief Executive Officer Willard C. Butcher 81 Retired Chairman of the Board and Chief Executive Officer, The Chase Manhattan Bank, N.A. Vincent A. Calarco2 Chairman, President and Chief Executive Officer, Crompton & Knowles Corporation James C. Cotting 5>2 Retired Chairman, Navistar International Corporation David C. Garfield 7a Retired President, Ingersoll-Rand Company E Gordon Gee 23 President, Brown University James W, Kinnear 24 Retired President and Chief Executive Officer, Texaco Inc. Francis R McAllister President and Chief Operating Officer Kevin R Morano Executive Vice President and Chief Financial Officer Martha T. Muse 3>4 Chairman, The Tinker Foundation Inc. Michael T. Nelligan 63 Chairman and Chief Executive Officer, Don Ward Transport, Inc.; Former Chairman of the Board, President and Chief Executive Officer, Ideal Basic Industries, Inc. John D. Ong 1 Chairman Emeritus, The BFGoodrich Company Manuel T. Pacheco 3 President, University of Missouri James Wood 1 Chairman and Co-Chief Executive Officer, The Great Atlantic & Pacific Tea Company, Inc. [1] Finance [5] Finance [2] Audit [6] Audit Committees of the Board [3] PENSiONADVisoKr [4] Organizationand Compensation Chairmen of the Committees [7] PensionAdvisory [8] OrganizationandCompensation Corporate Information ANNUAL MEETING The annual meeting ofstockholders ofASARCO Incorpor ated will be held on Wednesday, April 29,1998 at 2:00 p.m. in the Ricker Auditorium, 180 Maiden Lane, New York, New York. A transcript ofthe proceedings will be available afterJune 1,1998 to any stockholder upon request to the Secretary. FORM 10-K Many ofthe Securities and Exchange Commission information require ments are contained in this 1997Annual Report. A copy ofAsarco's 1997Form 10-K (excluding exhibits) will be available after May 1,1998 upon request to the Corporate Communications Department. HEADQUARTERS 180 Maiden Lane New York, New York 10038 phone 212/510-2000 Fax 212/510-1855 www.asarco.com TRANSFER AGENT, REGISTRAR AND STOCKHOLDERS SERVICES The Bank of New York 101 Barclay Street New York, New York 10286 Phone 800/524-4458 DIVIDEND REINVESTMENT PROGRAM Asarco stockholders can have their dividends automatically reinvested in Asarco common shares. Asarco pays all administrative and bro keragefees. Thisplan is administered by The Bank ofNew York. For more information, con tact The Bank ofNew York at 800/524-4458. STOCK EXCHANGE LISTING The principal marketfor Asarco's Common Stock is the New York Stock Exchange. The Stock Exchange symbolforAsarco Common Stock isAR. OTHER CORPORATE INFORMATION For other information on Asarco or to obtain additional copies ofthe Annual Report, contact the Corporate Communications Department, ASARCO Incorporated, 180 Maiden Lane, New York, New York 10038. 212/510-1810. ASARCO 1997 ANNUAL REPORT/ 45 ASARCO incorporated | 180 MAIDEN LANE, NEW YORK, NEW YORK 10038 | 212-510-2000 | www.asarco.com | NYSE Symbol: AR Copper Mines t Mission; Arizona Montana Resources; Montana Ray; Arizona Silver Bell; Arizona Minto; Yukon Territory, Canada Cuajone; Peru Toquepala; Peru Copper Plants Amarillo; Texas (Refinery) El Paso; Texas (Smelter) Hayden; Arizona (Smelter) Ray; Arizona (SX/EW) Silver Bell; Arizona, (SX/EW) Ilo; Peru (Smelter, Refinery) Toquepala; Peru (SX/EW) Lead Minest Leadville; Colorado Sweetwater; Missouri West Fork; Missouri Lead Plants East Helena; Montana (Smelter ) Glover; Missouri (Smelter, Refinery) Zinc Minest Coy; Tennessee Immel; Tennessee New Market**; Tennessee Young; Tennessee Leadville; Colorado Sweetwater; Missouri West Fork; Missouri metals Silver Minest Silver Valley Resources; Idaho Troy**; Montana Leadville; Colorado Mission; Arizona Ray; Arizona Montana Resources; Montana Cuajone; Peru Toquepala; Peru Silver and Gold Plants Amarillo; Texas (Refinery) Ilo; Peru (Refinery) Molybdenum Mines Montana Resources; Montana Cuajone; Peru Toquepala; Peru specialty chemicals Enthone-OMI North America West Haven, Connecticut; Bridgeview, Illinois; Orange, Connecticut; Warren, Michigan; Toronto, Canada; Mexico City, Mexico Europe Barcelona, Spain; sHertogenbosch, Netherlands; Woking, United Kingdom; Milan, Italy; Marne-La-Vallee, France; Luien, Austria; Solingen, Germany; Norrkoping, Sweden; Geneva, Switzerland Asia Melbourne, Australia; Tsuen Wan, Hong Kong; Singapore; Shen Zhen, People's Republic of China; Yokohama, Japan; Taipei, Taiwan; Punang, West Malaysia. t Interest in mines is shown in tables on pages 7, 13 and 15 **On Standby aggregates American Limestone Company Knoxville, Tennessee; Tri-Cities, Tennessee; Nashville, Tennessee; Abingdon, Virginia environmental services Encycle/Texas, Inc.; Corpus Christi, Texas Hydrometrics, Inc.; Helena, Montana other Specialty Metals; Denver, Colorado