Document RByZK4wDRdDQJw4reOyNz22B

Saint Joe Annual Report -- 1978 America's Corporate Foundation; 1978; ProQuest Historical Annual Reports Pg- 0_1 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. ST, JOE MINERALS CORPORATION 1978 ANNUAL REPORT St. Joe Minerals Corporation is a diversified natural resource and energy company with significant interests in three areas: Minerals: St. Joe Lead Company operates the largest iead smelter in the United States and has extensive lead mining facilities in the New Lead Belt in Missouri. St. Joe Zinc Company's zinc smelter is also the largest in the United States and its mines are located in the Balmat-Edwards area of upper New York State. St. Joe has an interest in iron ore through its Pea Ridge mine and pelletizing plant in Missouri, During 1978, St. Joe organized St. Joe International Company.to manage its mineral properties and projects outside the United States. Projects are principally concentrated in Argentina, Australia, Brazil, Canada, Chile and Peru, Coal: A.T. Massey Coal Co., Inc. and its subsidiaries and affiliates operate 21 coal mining complexes in West Virginia, Kentucky, Tennessee and Colorado. Massey is also one of the largest exporters of coal in the United States, acting both for the sale of coal produced by Massey and by other domeptip producers. Oil and Gas: Three subsidiaries conduct St. Joe's oi! and natural gas operations. St. Joe Petroleum is the principal vehicle for petroleum exploration and development outside the United States and Canada. CanDel Oil Ltd., St. Joe's Canadian oil and gas subsidiary, holds interests in Canada and internationaliy.'Coquina Oil Corporation is active in the United States. The natural resource and energy industry is one beset by much government, public interest group, labor and international pressures. St. Joe believes in addressing the issues;directly as they relate to each of our operating groups. Within the operations review section of this annual report, we have presented discussions on the issues facing each of the industries and where St. Joe stands. We have described the status; the problems; and, finally, the opportunites for each group. These stories are superimposed in each case upon a photomicrograph. The abstract photos, combining the use of the micro scope with the camera--are used extensively in industrial, medical and scientific research, The natural resources with which St. Joe is involved, when treated under the microscope by John Daily of the McCrone Research Institute, Chicago, have yielded these pictures. PHOTOMICROGRAPHS Cover: Silver Page 6: Lead Page 10: Zinc Page 14: Coal Page 18: Oil Page 22: Gold Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Capital Expenditures 1979-19S3 (projected) Total: $971.0 (millions) Capital Expenditures 1974-1978 / Coal: Total: $604.3 (millions) / 5251'8 Minerals: $116.4 Oil & Gbs; $236.1 CONTENTS Financial Highlights To The Shareholders Operations Review Timetable of Major Projects and Developments Production and Financial Statistics Financial Section Auditors' Opinion Corporate Data 2 2 6 26 28 29 43 44 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. TO THE SHAREHOLDERS Results were mixed in 1978. It was the best year ever for our lead operation. FINANCIAL HIGHLIGHTS 1978 1977 % Change Zinc was unprofitable. Our oil and gas Net sales $798,435,000 $791,280,000 +0.9 business continued to improve. Coal was the major problem. Work continued Nonrecurring items -- $ 33,723,000 -- on a number of projects, with significant Income taxes ; payout and contributions to earnings $ 18,705,000 $ 42,786,000 -56.3 expected in 1979 and, particularly, Net income $ 43,645,000 $ 67,757,000 -35.6 1980. Below, John C. Duncan, Chairman and Chief Executive Officer, and D. Dividends $ 29,100,000 $ 28,687,000 +1.4 Broward Craig, President, summarize the present situation and assess the immediate future. Net income per share Dividends per share $1.95 $1.30 $3.03 $1.30 -35.6 -- 1978 Results Craig: Sales in 1978 were $798,435,000 compared with $791,280,000 in 1977. On an operating basis, net income Shares of common stock outstanding December 31 Number of shareholders 22,394,436 19,430 22,357,520 20,071 +0.2 -3.2 per share dropped by 12% to $1.95 from Shareholders' equity $2.22 in 1977, as the remaining 810 of $484,265,000 $469,181,000 +3.2 1977's $3.03 net income came from the Shareholders' equity per share sale of coal properties and the termina $21.62 $20.99 +3.0 tion of the Meramec iron ore jointventure with Bethlehem Steel. In the fourth quarter, earnings im proved dramatically for St. Joe. Net income was $21,857,000, or 980 per share, compared with $14,936,000, or 660 per share, earned in the fourth quarter of 1977, an increase of 48%. Net sales of $251,060,000 were 23% higher than the $204,487,000 reported in the comparable period of 1977. The fourth quarter benefited from near capacity operation of A. T. Massey Coal Company. Inc., St. Joe's principal coal subsidiary, with sales of coal produced by Massey totalling 3,097,000 tons, over one million tons higher than the produc tion of the fourth quarter of 1977. St. Joe's South American subsidiaries re mitted dividends during the fourth quarter of $6,045,000 and for the entire year of $7,040,000, compared with $4,349,000 in 1977. The net effect of such dividends after-tax was 130 per share for all of 1978. Coal was beset with problems and earned only $9,575,000 in operating profit in 1978. A United Mine Workers (UMW) strike lasted through the entire first quarter, and a Norfolk and Western Railway strike severely reduced our ability to deliver coal during July, Au gust, and September. These revenue losses were somewhat offset by the ex cellent performance of our Tennessee Consolidated Coal Company (TCC), which was not affected by the strikes. The depressed zinc market improved somewhat late in the year and permitted badly needed price increases. However, a high level of foreign imports and high domestic production costs combined to hurt American producers and produce a loss for St. Joe Zinc Company. In ad dition, hourly payroll workers at its Zinc Mining Division have been on strike since June 1,1978. St. Joe's lead operation had the best year in its history, with production up, costs within bounds, and sales and earnings at record levels. Sales were strong because of the heavy demand for batteries and the continued need for tetraethyl lead as a gasoline additive to improve motor performance and stretch fuel supplies. The auto industry had a good year, which meant a good year also for the original equipment battery CanDel had a record year despite Canadian cutbacks in the consumption of natural gas. Improved prospects for Coquina in the United States as well as developments in the Elmworth-Wapiti gas field in Canada should provide continued higher earnings for the oil and gas segment of our business in 1979 and 1980. Capital Program Impact on Earnings Craig: St. Joe spent $161,086,000 on capital projects in 1978, compared with $146,104,000 in 1977. Plans call for ex penditures of around $200 million in 1979. Fortunately, our balance sheet is strong and we can supplement our op erating cash flow with external financing to carry out these plans. Many of the projects that were in the planning or development stage in the past few years are being completed, with the favorable impact on earnings beginning to be felt in 1979 and becoming clear in 1980, when the following will take place: The Buchan field, in the U.K. Sector of the North Sea, will be in full produc tion in 1980, producing up to 50,000 market, while th^ replacement battery market benefited from the cold winter of 1977-78. 2 . - ; < Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Sales (millions) Earnings Per Share Funds Provided From Operations (minions) 1974 $718 6 1974 $4.33 1974 $134 7 barrels per day. St. Joe and CanDel have a combined 28% interest in this project. The Marrowbone Development Cor poration plant, being built in stages and costing $110,000,000, will be the largest coal preparation complex east of the Mississippi at its final production rate of four million tons per year. The plant's initial production rate will exceed one million tons per year, when it comes on-stream in the summer of 1979. The Elmworth-Wapiti area in north ern Alberta (in which CanDel Oil Ltd. has a 25% interest) should be produc ing gas at the rate of 30 million cubic feet per day beginning in late 1979. The Woodlawn mine/mill facility in Australia (in which St. Joe has a 33V3 % interest) should be in full operation, ex tracting 3,000 tons of ore per day for production of zinc, copper, silver and lead concentrates. Compania Minerales Santander's zinc mine in Peru will be more profitable as the grade of ore increases substantially. Total annual coal productive capacity should be at the rate of 16,000,000 tons by year end. Unrealistic Environmental Standards Duncan: Although the lead business has been exceedingly good for the past two years, we are facing a serious problem in the form of impossible environmental control regulations that are being im posed by the Environmental Protection Agency (EPA) and by the Occupational Safety and Health Administration (OSHA). The EPA issued standards in 1978 that set limits on the quantity of lead in air allowable at the fencelines of operating plants such as the Hercula neum lead smelter. The standard calls for no more than 1.5 micrograms of lead per cubic meter of air averaged over a ninety-day period. During the extensive hearings on this standard, the lead industry advised all branches of the state and federal government that this level was unattainable with existing technology. Supported by independent experts, the industry's position is that this standard is not required to protect the public health and that a limit of 5.0 micrograms per cubic meter of air would be sufficient. OSHA has issued regulations that would limit an efriployee's lead expo sure to no more than 50 micrograms per cubic meter of air averaged over eight hours. This was imposed despite OSHA's own analysis showing that the majority of firms in the lead-storage battery industry could not meet the pro posed standard and stay in business. Industry experts have proposed a meth od of protecting the worker's health that is both practical and economical: to monitor the workers rather than the ambient air, so in the event that a work er's blood level exceeds a safe mini mum, regardless of air content, the worker is removed from the plant. The EPA and OSHA standards are being challenged in the courts, because we believe they go beyond what is necessary to protect health. They were imposed in the face of compelling medi cal evidence against them and inflict an unjustified economic burden on the industry and the U.S. economy. Developing Non-polluting Processes Craig: In the long run, our answer to environmental improvement in lead re duction is the development of new processes. We are and will be devoting millions of research and development dollars to new reduction processes, primarily involving liquid metallurgy. We have been encouraged by progress to date, but one cannot expect entirely new processes such as these to be in com mercial operation before the late 1980's. Strategy for the Future Duncan: For the first time in our history, St. Joe has more projects than capital. This is an encouraging development because it points out the competence of our geologists, engineers, financial people, and skilled technicians who have discovered the ore bodies and conceived the projects. We now have to pick and choose how and where to allocate capital resources, and deter mine whether to bring in joint-venture partners. Decisions will be made in 1979 on allocating funds for a number of key projects, such as the El Indio gold/ silver/copper ore body in the Chilean Andes, the Alto Coite diamond property in Brazil, the Yuba gold dredging property near Marysville, California, the San Antonio de Poto gold property in Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 3 Peru, the Torrington tungsten property in Australia, and coal properties in the Appalachian area and near Durango, Colorado. We are also stepping up our oil and gas activities in Canada and the United States, and they demand in creasing portions of our capital. Proposed New Coal Acquisition Duncan: On February 9,1979, St. Joe announced that it had reached an agreement in principle with Slab Fork Coal Company to acquire all of the issued and outstanding shares of Slab Fork through a tax-free exchange of 16 shares of St. Joe common stock for each of the 93,393 outstanding shares of Slab Fork. The transaction is subject to certain conditions, including the satisfactory completion of further inves tigations, the execution of a definitive acquisition agreement and the approval of the St. Joe Board of Directors as well as the Board of Directors and share holders of Slab Fork. Slab Fork produces low-volatile, metallurgical grade coal and has an an nual production capacity of one million tons. The combination of Slab Fork's reserves with those of A.T. Massey will provide St. Joe with a full range of highquality metallurgical coal for the coke and steel industries worldwide. Future Outlook Duncan: During 1978 the United States economy has been wracked by a high rate of inflation, a continued devaluation of the U.S. dollar, and resulting high interest rates. President Carter has instituted corrective measures involving a reduced rate of federal expenditures, the protection of the dollar, and a vol untary program of wage and price controls. We wholeheartedly support the President in his efforts to counteract inflation and alleviate the balance of payments deficit through reduced im ports, particularly oil, and the expansion of U.S. exports. St. Joe intends to comply with the 7% pay guidelines of the Council on Wage and Price Stability. With respect to the price guidelines, it is St. Joe's view that substantially all of its products are excluded from coverage by the terms of such guidelines. Crude oil and natural gas are excluded because they are already subjected to government regula tion, under an entirely too complex sys tem of controls in our opinion. Coal has been declared excluded as well. Domestic prices of lead and zinc metals are closely tied to price movements on the London Metal Exchange, and, there fore, we interpret the COWPS price guidelines to exclude such metals from coverage. The prices of lead and zinc, and of most other non-ferrous metals, are determined by international supply and demand factors beyond the control of the company and also of the U.S. gov ernment. The U.S. market, the largest in the world, is open to the importation of these products with minimal duties and no quota restrictions. Attempting to control the prices of these metals in the U.S., while prices are uncontrolled in other countries, will cause serious dislocations in supply and may result in a shortage of availability in the domestic market, as was the case during the period of price controls in the early 1970s. The prices of lead and zinc, as well as copper, silver and gold, have been rising sharply on the world market. As a result, a basic natural resource company in the United States, such as St. Joe, has to take advantage of the periodic swings in metal prices in order to counteract the inevitable years when world oversupply depresses both world and domestic price levels. This has been the situation in 1978 for both copper and zinc. The capital costs tptreplace existing facilities have increased dt a more rapid rate than the rate of inflation. Add to these costs the environmental require ments of the regulatory agencies, and it is easy to,see that the U.S. mining industry has to be in a position to take full advantage of temporary periods of high metal prices in order to generate the funds necessary to maintain its John C. Duncan, Chairman and Chief Executive Officer, and D. Broward Craig, President, at St. Joe's corporate headquarters In New York. facilities, comply with governmental regulations, and expand for the future needs of our society. Modern industrial society requires a high rate of energy consumption per capita. St Joe has continually been adding to its capabilities to participate in this market. Since the early 1970's, the company has been transformed from a nonferrous mining and smelting com pany into an energy company through its program of acquisitions in coal, oil and gas. Even our nonferrous metals have increasing application in the field of energy. The principal market for lead is the lead-acid storage battery, a key source of power in our society without which airplanes and automobiles could not operate. Zinc and nickel, too, are finding energy applications. Our Energy Research Corporation was awarded a Department of Energy contract for a 32-month, $2.9 million research effort to develop nickel-zinc batteries for vehicle propulsion. Today, 80% of St, Joe revenues are derive .rom energy markets. Based on the growth potential of these markets, our aim is to double sales and earnings over the next five years. We are looking forward to a good year in 1979, and an even better year in 1980. John C. Duncan Chairman and Chief Executive Officer D. Broward Craig President February 15,1979 4 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Reproduced with permission of the copyright owner; Further reproduction prohibited without permission. '-IiVfl'. J.' ,/i/;eseh^Siafus--Lead en|qys strong Prbbfemsr-Workplace and environ BJjaemandl in the United States and * mental standards promulgated during ^fgS^Jitind theworld. Domestic consump- 1978 pose a threat to the very exist- - averaged over a 90-day period atihe fenceline.of lead operations. On j November,13t 197B, the Occupational |ion has grown 14% over the past ten ; ence of the U;S. lead industry. On . Safety and Health Administration ^^#irs,'and the'U.S: producers are satis- September 29,1978, the Environ * announced new rliles restricting expo InlyingJi.0%:bfthe' demand.'-The source.'''/' mental Protection Agehcy'anhounQed sure to lead .in the workplace. OSHA?s lv`|jo'fthis growth has been the increase in its ambient air duality standard^ : hew standard calls for reducing the fr-?use of lead for agroWing number artd I.. calling for a lead-in-air limit of 1.5 ' .maximum exposure from.200 micro-; j ; variety of batteries.Record product micrograms.per cubic meter of air, l(' grams.of. lead per,cubic meter of air ,`_ /"Vtibn,' sales and profitability have .. ' to 50 tnicrograms, averaged over an : resulted fpr the Sti Joe Lead ""'.W ejght hour period. .... : . , T Company in 1978; . -:v r Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. J3t, Joe and the industry Believe that efforts requires time and the assur- ` able supplier position- Xht'eleclrfc-S||i 'these two standards.cannot be met '' ance that existing plants may continue carls on the thres ofbeconiing; Jj*J with present technobgy, and that the operations unti! replacement tech- a reality, and, initiaiiy.atleast, the^m' standards are far more.stringent-than.;: nol.ogy can be tested and installed. ' 'lead acid battery wilt play'a 'crucial^ necessary io prolect the health of Opportunities-Demand for lead1. role in this development; ''v'; *'?>. workers and the general public40/Vhile ... should continue tojjrow'for battery' .... Ih.additipnf spciety's'need for i a':^ St, Joe is active indevelopment of *, *; use, and we see nothing in the short siience ehsures the growing use of y) , envirohmehtaiiy-preferable methods , term td threaten its inherent advan- . lead for sound attenuation ,of producing lead, success in such > - tages ove r compe ting Batlerfsysfe'msr "inBuetry^ahdin.the'hpme^ ' V v. We see dontinued increase Iri-the use of the mainten.ancerfree^baitery, in & * which St. Joe has an especially.favor- i. ... ,* f .t ..; i Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. St. Joe Lead Company the nation's largest lead producer, operates fGur mine/mill complexes in southeastern Missouri. The aggregate mine capacity of 20,000 tons of ore per day feeds lead concentrate to St. Joe's Herculaneum, Missouri, smelter, the largest lead smelter in the U.S., with a rated capacity of 230,000 tons of refined lead per year. The Lead Company is also responsible for the operation and administration of St. Joe's Pea Ridge iron mine and pelletizing plant located near Sullivan, Missouri. St. Joe's lead operation had a record year In 1978 with smelter production, sales and profitability reaching new highs. In 1978 St. Joe's Missouri mines produced 336,888 tons of lead con centrate. compared with 342,573 tons in 1977. Refined lead metal produced in 1978 totaled 240,305 tons, up from 228,780 tons in 1977. Sales reached $176,747,000, up from $147,280,000 in 1977. Operating profit amounted to $79,474,000, compared with $66,009,000 one year ago, 8 Battery Demand Up The sales record achieved by the Lead Company was primarily due to the strong demand for batteries. Sales to the battery industry accounted for over 60% of St. Joe's lead sales. Approxi mately 20% of St. Joe's sales to the battery industry are for units to be used as original equipment in new cars, while the remaining 80% are for replace ment battery applications, 1978 was a good year for the U.S. auto indus try with 9,300,000 cars being sold domestically, an increase of 200,000. Replacement battery sales generally increase as the thermometer drops, and the winter of 1977-78, one of the sever est on record, helped contribute to increased battery sales and lead consumption. Broadening Acceptance for Maintenance-Free Battery In 1978, an estimated 29% of all auto motive batteries utilized the mainte nance-free lead alloys promoted by St. Joe, up from 13% in 1976 and 20% in 1977. While in 1978 General Motors Corporation equipped all its new do mestic cars and light trucks with main tenance-free batteries, virtually all orig inal equipment automotive batteries in 1980 are expected to be of the new type. In addition to providing superior per formance, the maintenance-free battery allows manufacturers the option to trim battery weight, tying in with the auto industry program to improve gas mile age through weight reduction. St. Joe pioneered the development of the lead-calcium-tin alloys used in most maintenance-free batteries, and subse quently developed precision wrought alloys. Coils of the wrought alloys are used by battery manufacturers to feed battery grid fabrication processes many times faster than conventional cast grid manufacturing techniques. St. Joe is completing in mid-1979 a wrought lead strip plant at Herculaneum designed to produce up to 30,000 tons of lead strip per year. St. Joe's involvement in the cast and wrought alloy battery grid market repre sents an Increase in the market potential for its lead products. Previously St. Joe supplied lead to the battery industry only for production of the lead oxide active material, accounting for about 50% of the use of lead in batteries. Now, St. Joe supplies lead suitable for the needs of the entire battery. Growing Sales in Other Markets Sales of batteries for forklift trucks, golf carts, delivery vans and other "traction Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Lead Sales. $176 7 million vehicles" that run on electric batteries continue to grow. At present, one third of the sales are for the original equip ment market segment and the other twothirds are for replacement batteries. As the market matures, we expect the replacement market share to increase to 80% or more. Delays by the U.S. government in implementing regulations limiting lead in gasoline left sales of lead to the gaso line additive market in 1977 above what had been expected earlier. A significant drop did occur in 1978, with consump tion of refined lead for additives down to an estimated 190,000 tons from 233,000 tons a year earlier. Further declines are expected, with gasoline additive con sumption of refined lead leveling off at 110,000 to 115,000 tons in 1981. Only about 12% Of St. JOS 3 fSQG SulOS VVSTS made to the gasoline additive segment in 1978, about equal to the lead industry consumption percentage. Lead Inventories at Low Levels Supply and demand have been in bal ance throughout the free world. Some spot shortages have occurred, and east ern bloc countries, particularly the U.S.S.R. and China, have been net buy ers. Lead prices in 1978 tended to reflect the sales increases and inventory declines throughout the world. At the beginning of the year, St. Joe's price for lead was 330 per pound; it declined to 310 in May, and then rose in several steps to 380 by the end of the year. Additional increases in early 1979 have brought the price to its current level of 440. Strong sales in the U.S. market resulted in greatly reduced inventories of finished goods, but minor disruptions of production also contributed. St. Joe's smallest mill at Indian Creek suffered a disruption when the rough ore bin col lapsed in October 1978, rendering much of the control equipment inoperable. The mine went back in operation in January 1979. Pollution Control Problems and Opportunities The Environmental Protection Agency and the Occupational Safety and Health Administration promulgated during 1978 unrealistically stringent guidelines for allowable levels of lead. We believe that these limits cannot be met with the exist ing methods of production. If they are enforced, plant closings in both lead producing and consuming industries will likely result. St. Joe is opposing in the courts the implementation of the guidelines imposed by the ERA and OSHA. Lead kettle being skimmed at (he Herculaneum refinery In Missouri. St. Joe is furthering research in new technologies that promises to greatly reduce the inherent environmental prob lems of conventional lead production processes. This, we believe, is the proper approach to insure that St. Joe remains a major producer of lead and lead alloys. The price for reducing pol lution will not be small, with environ mental costs adding substantially to the price of lead in the next few years. Labor Agreements Signed At the end of the first quarter of 1978, labor contracts were entered into, cov ering all our lead mining and smelting operations for a three-year period. The agreement at the Herculaneum smelter runs until April 30,1981, while the agreement at the mines expires March 31 of that year. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. xp- J,Present Status?-Pomes\\ con$ump~ . Alihougli cxiSUng U.S. zinc smelt- to reduce domestic shipments, . . > ' _ phioifof zinc reached ah aii-time high ingcapacity is adequate to supply * , create.excessive stocks and.depress ' ; ' P|ih `1973 and has not y.et returned to , - approximately 60%- of domestic zinc prices. This threat is intensified by ' . l^jthat level or, even to the level of con- , consupiption, excessive imports of the relative ease of importing metal . ^sumptionin 1968/A niajor reason for. *. . low-cost foreign zinc have reduced . into the U.S., the barriersloexport .'. ' '-/the decline has been the.reduced ' .'iShiprneh! by U.'S: producers to about faced by American producers, and the ,, 7 ` -lutilization of zinc dje-castings in , $5%*of consumption. This has ... . assistance given to many jorei.gn pro- . '" '.. . ' automobiles due to the substitutipn'of severely reduced the profitability of ` ducers by their governments. Unnec- . , , aluminum and plastic. The subsfitu-, the U.S.zinc industry. Si. Joe is . , ' essa.riiy, restrictive environmeriial. , ,tion was undertaken to reduce overall '/ .particularly affected because its . vehicle Weight in an attempt to com- ; smelter employs a labor-'and energy- industry as they lead to large capital, v. 'ply with fe.d.eraHy..imposed fuel ' ; /'intensive process. -'v '. expenditures and increased economy standards. In addition, zinc . Problems--k majp.r threat to the ... operating, " uspd for galvanizing and brass has domestjozinc industry is excess not recovered to 1973 levels, primarily': world zinc productive capacity - A . because of reduced investment in. ` which tends ,. * ' ; non-residentiai construction. / : . . \ . ft y: : v * ` - : ' 'lU- -v'i/f "! , . \V v , V;"..j: ;>; Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. and maintenance costs. Standards . the zinc industry. Plastics, aluminum,' the U.S. automobile industry. Auto < with respect to lead, cadmium and .. aluminum/zihc alloysj.weathersng manufacturers are'alsojncreasing ' other by-products of zinc production- steels,ahdpaipfsaSi pose threats to . ; their use of zinc-rich pain! coatings1 may be particularly harmful in the zinc's historic markets.* . y . and one-sided galvanizing, both of ' . future. Foreign gdverhments'appear to .ppporfunffies--Thin-wali zinc die- which protect-steel from corrosion^ do more to help and less to hinder , ' castings have been combating.pfas__ ' thereby extending product life. ' - their mining and metals industries; lies and other materials for autorno- "Galvanized bridges ahd guard rails ' than'does the, U.S/ .. :..', '' ' " live and appHahce appticaiiohsylhe *' are becomin gmo re prevalenlas the, --- - Competition from substitute,mate~ *L~"tise;of these die-castings has led to a costs of maintaining painted steel , rials has played and will continue'to , 30-50% weight saving over tradi- \ structures become greater. Galvan-' play a role in creating problems for. ' tionai zinc parts, thereby rnaking zinc ized steel studs, joists, and wall pan- := more competitive fn applications ' fc''/41' f *' wheerree'wejighhtf.jiss'cciritical. This has, els are traditional materials in home and office construction and promise to . /i'Kr ; a'`lr--eaady resulted,in an increase iii the , make housing a now growth industry i; |ber of zinc cbmpdrierits.used by- for zinc. Nfckel/zinc batteries for electric vehicles and super-plastic , , . . .. . . _ _ . /: ' '' ` _ WUIl "-.-.if i j ",' ./ 7' ' ' tfc.-- ' .* . zinc for forming previously jjnattaihr able complex shapes offer additional c- y Opportunities for. the industry. ' ... : _ -.VK V* v ";V /.V 1.. ..-it,...................................... ; ,,<!`*v y . , ', v . , .. .v,# -. f \ n ,? I t* .. ,? `I .\V*- ; " ' Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 1978 was not a good year for the domes tic zinc industry. A weak world zinc mar ket and excessive imports caused all U.S. producers to operate well below capacity and to price their products be low the levels of recent years. Zinc is closely tied to non-residential construc tion, which has not yet recovered from the recession of 1973-74. For St. Joe Zinc Company, these factors, and a strike at our Baimat-Edwards Mining Division, combined to reduce sales to $135,957,000 from $141,091,000 in 1977 and resulted in an operating loss of $10,674,000 compared with an oper ating profit of $5,138,000 in 1977. The Baimat-Edwards mine complex, located in northern New York State, is the largest zinc mine complex in the U.S. Ore from the four mines is proc essed at our highly automated Baimai mill, which has a capacity of 4,300 tons per day. St. Joe's electrothermic smelter located in Monaca, Pennsylvania, about 35 miles northwest of Pittsburgh, is the largest zinc smelter in the U.S. Zinc Mining Mine production at Baimat-Edwards during the year was severely curtailed by a strike that began on June 1, upon termination of our collective bargaining agreement with the United Steelworkers of America. As a result* the zinc content of concentrates produced in all St. Joe mines in 1978 was only 44,854 tons, substantially less than the production of 96,897 tons in 1977. The major issues in the strike remain unresolved and it is still in progress. Arrangements have already been made, however, to supply the smelter with all of its anticipated concentrate requirements for 1979. Set tlement of the strike was hindered by New York State's policy of paying full unemployment benefits to striking workers Under normal operating conditions St. Joe-owned mines can supply only a portion of the feed required by our smelter. We are, therefore, continuing our exploration efforts to achieve greater self-sufficiency in zinc concen trates and to assure ourselves long-term sources of supply. A highlight of our effort in 1978 was the completion of an exploratory shaft at our Carthage, Ten nessee zinc property, and the Initiation of two development drifts to further delineate the ore reserves. Zinc Smelting During the year the smelter at Monaca produced 163,641 zinc equivalent tons of zinc metal, zinc oxide and zinc dust, a decrease of 11,619 tons of zinc equiva lent from last year's production level of 175,260 tons of zinc equivalent. In March 1978 the first commercial produc tion began at our new zinc dust facility at Monaca. This plant has the capacity of producing up to 4,000 tons per year of various grades of high quality zinc dust, 12 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Zmc Sales $136 0 million which will be used in corrosion protec tive coatings for such applications as automobiles, bridges, ships and oil drilling platforms. Present plans call for increasing capacity to 6,000 tons per year by 1980. A major objective of the Zinc Com pany in 1978 was to analyze the industry and St. Joe's role in it and to formulate a comprehensive plan of action to maxi mize return on invested capital. In con nection with this objective, St. Joe announced in August 1978 the initiation of a detailed technical and financial analysis of the feasibility of construct ing a new electrolytic refinery to replace the electrothermic facility at Monaca. This study was submitted to the manage ment of St. Joe Minerals Corporation in the first quarter of 1979, and steps are now being taken to engage an engineer ing firm for the engineering and design of a new refinery. Zinc Market In December ifethe Lead-Zinc Pro ducers Committee^, of which St. Joe is a member, instituted an action under the 1974 Trade Act seeking relief from ex cessive foreign imports of zinc. The In ternationa] TradejCommission denied the petition in June, stating that imports were not the primary cause of the indus try's problems. Imports of slab zinc for the year amounted to 681,000 tons, the second highest level of all time. Throughout the' first half of 1978 the domestic market for zinc was severely depressed, and St, Joe's prices were at their lowest level in five years. In recent months, however, St, Joe has been able to raise its price for Prime Western zinc to the current level of 37.50 per pound. The current price, however, is still 1.50 below our price in January 1976. Zinc oxide prices showed comparable move ments during thesame period. We expect the Free World and U.S. markets for zinc to grow slowly in the Flotation circuits at the Balmat-Edwards concentrator in New York State, years ahead and to provide opportuni ties for efficient producers. Opportuni ties for St. Joe should be particularly bright because it sells much of its pro duction for use in galvanizing, the mar ket segment expected to show the greatest growth. Future Outlook We intend to maintain our position as a leading supplier of zinc to U.S. industry and to return our zinc busi ness to its former status as a profit able and important part of St. Joe. For these reasons we are currently pro ceeding with a detailed engineering and design study, the next step in deciding whether or not to erect a new electrolytic refinery to replace our cur rent smelter at Monaca, Pennsylvania. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 13 (coal //". - - r';--. ' ; ; Present Status-Thfe present situation which St, Joe has a favoraWe position, ity.'This situation is furthercompii- for coal here in the United States is 1 isparlicularly firm. , V catetfby the shrinkage mcokeoven 1 improving, with production and trans*. Problems--The eastern.U.S.'coal in- . capacity in the U.S., and the purchase portalion back to normal after a dis- ' --'d us try Fidsjcqhtinued to have de-' , , , of-.foreign'produced bdke.for U.S. astrous.1978.;Whil(e'the metallurgical.% `'-clining_ productivity, due to high labor. ste.ejmakincj;fTtie'se factors-have corn- mdrket continues to be weak,-the < .costs; unsettled labor conditions and , biped to slow the* rate of growth' of the. ..steamcoaf.market'is''strong.Thenjar:`costl'y'.environmental-requirements.- U.S. toward self-sufficiency in energy,, kdt.for low sulfur`steam coal, in; "f- - *"_ln fhe.metailurgical sector, there is a,' : as well as further hurting this nation's ,. . , , . woridwide oversupply with the steel ,, 'v" ' . ` ' ... ' '* industryope'rafing well below capac- ... . v* . Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. balance;of Ihiernatfonarpayments/' ..... anced, with both low-sulfur steam and J/zalion which has to.comc'in the future'.. , Opportunities--Coal is the only neat metallurgical,quality coafs.lfs posi> ' ' Therefore, we are continuing'to : ' terin hdpe. for an irnprovementin U.S. , -tfon'as a major exporter of coal gives,. expand Massey's coal base through energy self-sufficiency. Therefore; its '* additional stability, inJh'e'abilitylo sel| development projects.artd judicious-, . .<use is certain to i'ncrease'su^tan--. ils product under varying interna- v- - 'acquisitions.. . * '-y\: . Hally: Sty Joe's A.T^Massey^CoaiGroup * `ttona.i anddomestic ma'rketcorsds- ; , ` ; ... *' is one of the fastestgrowing coal op-V tions. Wifh.'virtually all its steam coal V .. '"eratjqn'S inlhe U.S.an^S;well-bal-tihder.mdjdWn-escala^ . , " : > ; ;. "" ' ' Massey sHotifcTBFaBle'to tgke full ,V ;. : . . / ; ' ./ ' ... y.-'X ' '' '"adVahtage'oMhe growth in-coal litiH-- ; . ` . ,;. ' -. < t, , . ^ /.'.i `j,:"p?**.****?'', : " , ` /V- *, ' \ j. ?-^P-4ik^^***?**...' ;',rr ' ;/. v . . ,'v. ' 7 K . ' "l V . * -I. * . `.'i.-iV.;-, , . \T t. , t sr- !, I . ' ' -' .Vf t .r Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. COAL The A. T. Massey Coal Group includes numerous subsidiaries and affiliated operating companies engaged in coal mining development and sales. Coal is produced from twenty-one mining com plexes located in West Virginia, Ken tucky, Tennessee and Colorado. Massey also purchases coal from independent producers for resale to domestic and foreign customers. Massey is one of the largest exporters of coal in the United States. Massey produced 8,695,000 tons of coal in 1978, compared with 8,915,000 tons in 1977. In addition, 4,117,000 tons of coal were purchased for resale in 1978, compared with 4,631,000 tons in 1977. Coal sales were $435,256,000 in 1978 versus $430,274,000 in 1977 and operating profit totaled $9,575,000 in 1978 compared with $14,474,000 in 1977. Two strikes have major impact It was a difficult year for the coal industry with two labor strikes cutting deeply into production, sales and profitability. An industry-wide strike by the United Mine Workers of America lasted 111 days from December 6,1977, until March 28, 1978. On July 10,1978, the Railway Clerks Union struck the Norfolk and 16 Western Railway, affecting about 60% of Massey's production in Kentucky and West Virginia, as well as export business from Virginia ports, until the end of Sep tember. The stoppage was ended by a temporary 60-day court injunction. Due to the UMWA strike, Massey only produced 1,426,000 tons in the first quarter of 1978, which was approxi mately one third.of capacity and well below 1977 first quarter production of 2,539,0.00 tons. Following the return to work, second quarter production in creased to 2,981,000 tons, still below capacity but in excess of the 2,284,000 tons produced in the second quarter of 1977. In the third quarter, production again fell as a result of the N&W strike, to 1,261,000 tohs, or 30% of capacity. However, in the fourth quarter, Massey returned to near capacity and produced 3,027,000 tons during the period. OurTennessee Consolidated Coal Company subsidiary was not affected by either of the strikes. It had an excellent year, selling its output at attractive prices to Japanese and domestic customers. Because of the two strikes, St. Joe's coal business operated at a loss for the first nine months. But a strong fourth quarter put the business in the black for the year. Purchased coal market changes Coal purchased from independent pro ducers for resale totaled 4,117,000 tons in 1978, compared with 4,631,000 tons in 1977. The strikes also disrupted this profitable line of business. The domestic portion of these sales continues to grow. Three years ago, 85% of purchased coal sales were to foreign customers, but during 1978 the foreign share de clined to 55% of the total. The main reasons for this shift are a decline in steel production in Japan and Europe, and an increased opportunity to supply steam and stoker coal to domestic in dustrial users, such as cement and chemical plants, as well as utility cus tomers, Traditionally, industrial sales were spot purchases, but the trend is toward long-term contracts. Metallurgical coal market prospects The metallurgical coal market remains weak both domestically and abroad. Steel mills in the U.S. continue to be pinched by foreign imports and are not operating at capacity. Steel production in Japan is also down, leaving that coun try with a large inventory of coke. As a result, Japanese coal purchases in the U.S. in 1978 were down by 35% from the previous year. Only a modest im provement is expected in 1979. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Coat Sales5435 3 million / A number of domestic coking facili ties have shut down because of environ mental regulations while others are operating below capacity. As a result, an estimated 5.8 million tons of coke have been imported by U.S. steel companies in 1978 The coke has been imported from We , . many, Italy, and Japan. A decline in v 'c coking capability will sigmfk uce the growth in the U.S. me" ' coal market. Steam coal ma> . prospects Demand by e> itHities for future steam coal (. - s continues to ex pand. Wee fistic about the expectec 'e growth in this seg ment of ou v ,,.ness. During 1978 a new sales contrau vas signed with Florida Power Corporation for a minimum of 14 million tons of low sulphur coal over the next 20 years. Another new long-term sales contract is near finalization with Consumers Power Corporation. In addi tion, two existing contracts were rene gotiated during 1978 and extended under very favorable terms. Massey's contracted steam coal production is expected to increase by nearly 30% over the next five years. 1979 prospects Massey coal production in 1979 is esti mated to exceed 13 million tons. Steam coal production is estimated to be 9 mil lion tons, of which nearly all will be sold under long-term sales contracts. Metal lurgical coal production of 4 million tons will also be substantially sold to estab lished markets. An additional 4 million tons will be purchased from independ ents for resale. The general industry labor situation is expected to remain stable through the year. The Norfolk and Western Railway reached agreement on a new contract with the Railway Clerks Union in early January. Final federal surface mining regulations have become effective. However, compliance with final state regulations has been postponed to the summer of 1979. The effects of the 1977 Surface Mine Act will significantly increase mining costs and in some instances result in the complete elimina tion of surface mining. Massey has limit ed surface mining to only 13% of its production. The market for metallurgical coal is weak and Is not expected to improve significantly in 1979. The long term utility market for contracted steam coal con tinues to be both predictable and strong. We will endeavor to maintain a balanced position between steam and metallurgi cal coal production. We intend to expand coal holdings Coal being loaded at the Sprouse Creek preparation plant lacility in West Virginia. and production capacity to meet the requirements of our customers. We are especially interested in compliance quality, underground coal properties which can readily be sold under long term contracts. We will continue our efforts to augment Massey's position in the fast growing steel producing areas of the world such as Latin America, East ern Europe and Asia. Export marketing relationships have established Massey coals in these markets and we expect that we are and will be able competi tively to serve our customers. Impact on prices and profitability of coal strike settlement The United Mine Workers strike had a dire effect on profitability and costs. The contract, which is to run until December 6,1980, is inflationary, providing for improvements in wages and fringe ben efits amounting to more than 37% over the contract period. The effect of these items on other costs raises the total set tlement to an estimated 51 % increase. Ultimately, the price of coal will have to reflect these increased expenditures. It is clear that U.S. coal is losing its com petitive position in the world coal market. 17 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Present Status--The present situation under regulation. Unfortunately, the ' Unhappily, the U.S. is dependent on of the oil and gas business in the ;complexity of the Apt leads'to ca.n- \ imported energy and the percentage United States is very confused. With . \ fusion. For example, there are oyer of consumption seryed by imports the enactment of the.En'ergy Act in- . 20 different prices for natural gas, de- ` continues to rise. Our reliance on the 1978; das pricing.has been partially pending bn such variables as .when it Middle East isstlll a fact o? life leading cpntrqlledj witmgomplete decontrol, wasdiscovered,. where i}`is located, to record balance of payment deficits, scheduled for i`985. 0ii prices remain ' and how deep it lies. A year ago.there St. Joe's gas.production in;Canada, , ; : was said to bea shortage of natural and the U.S. has been.restrictedby ` . . gas; now. there is an alleged surplus. .. the dislocation 'problem.in both .c.ojuri- v_;; Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 3 : tries, with more supply than needed in way to get the job done. The Energy'* as the political problems are solved, theproducingareas and pricing prob. Act of 197Blakes a small, but only a-. Judicious use of capitaHor finding ferns in the areas of greatest potential . small, step'in that direction; The rta- , reserves througlVrexRlpr^tion.-devel-^ consumption. , : tionai policies'oj Canada, Mexico'apd bpmenland acquisition should bene , Problems--The U.S. needs to explore ' the U.S, also need to be accommo- \ . fit our shareholders enormously.:' ' for apddevelop oil and gas at a faster : dated in such a way as to permita- pverseas. thp.re^are areas less heavily ' rate than irs recent years. A less arti- . smooth flowofoil andoasfrom pro- explored where large reservoirs' are ~~ ` ficial pricing system would encourage . duction to user areas while protecting *yet uhtapped.and.6.ff.etjhe promise of . thip, and deregulation would be the,- j^the future economic health ofiToth. ' high return-for high'rtsk. There is a' ' most flexible, responsive Snd simple- Opporfun/ff'es--There is an.opportu- place for a s.mali, but nevertheless. : riity for St. Joe to develop a strong-oil 'meaningful, effort by St. Joe in some >base in the U.S. arrc(Canada ' - -.of.these > '' ' ' ' .;' : ' : . i.. ; f - v;,. . * vrtVCSsj v-. > ... . i .-*V r. , . 4,-: ' ' *.*', * .. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. OIL AND GAS St. Joe conducts its oil and gas opera tions through three subsidiaries: St. Joe Petroleum Corporation, operating inter nationally; Coquina Oil Corporation, active in the U.S.; and CanDel Oil Ltd., St. Joe's 93.5%-owned Canadian company. During 1978 these companies, com bined, produced a daily average of 4,060 barrels of oil and 50,418,000 cubic feet of gas. Sales of oil and gas totalled $40,758,000, down from $42,188,000 in 1977. Total funds pro vided from operations increased to $33,081,000 in 1978 from $28,666,000 in 1977. Operating profits totalled $11,822,000 in 1978, up from $11,120,000 in 1977. In 1978, North American oil and gas net reserves stood at 13.9 million barrels of oil and 276 bil lion cubic feet of gas, compared with 1977 reserves of 13.0 million barrels of oil and 264.6 billion cubic feet of gas. The sales decline was mainly due to the weakening Canadian dollar, on which two-thirds of St. Joe's oil and gas sales are based. In addition, revenues were affected by a cut back by CanDel's major gas purchasers. However, work ing capital was not reduced by this cut back due to the "take or pay" contracts that provide for payment whether or not production is taken. 20 CanDel'^ successful drilling program CanDeFs capital expenditure program of $32 million in 1978, was the largest in its history and was spent mainly on exploration for oil and gas in Canada and the development of the Buchan oil field in the U.K. sector of the North Sea. The results of the program were highly satisfactory, resulting in 22 successes out of 34 exploratory wells drilled in North America and a near perfect score of 40 out of 41 development wells. At year end, four exploration wells and two development wells were drilling in Canada. CanDel has an approximate 22% in terest in 219,000 gross acres of the Elmworth-Wapiti gas area in central Alberta. Fourteen successful gas Mel Is have been completed, and further exploration is continuing. Construction has com menced on a gas gatheringjsystem and a gas treatment plant with an initial capacity of 50 million cubic feet per day, in which CanDel has a 25% interest. A license to export gas has been applied for from the provincial government, and the plant is expected to be on stream in November, 1979, under an initial con tract with Trans Canada Pipeline at the rate of 30,000,000 cubic feet per day. It is hoped that the recent major addi tions to Canadian reserves at ElmworthWapiti and other areas will encourage the Canadian government to increase gas exports to the United States. Coquina concentrating on exploration and acreage acquisition In 1978, Coquina's major effort was directed toward development of high quality drilling prospects and lease acquisition. As a result, there are now over 50 drillable prospects in inventory, with an additional 70 prospects in a formative stage. At year-end, lease acre age inventory was more than 300,000 gross acres. Coquina also participated in 41 exploratory wells, of which two oil and six gas wells were completed. Of the 57 development wells drilled, 43 had positive results. In July, the Greens Creek Field in Mississippi came on production, with delivery of over 15,000,000 cubic feet of gas per day from wells in which Coquina has a 25% working interest. Three wells were completed in 1978, bringing to five the total number of wells in which Coquina has an interest. During the year, four additional gas wells were drilled offshore Louisiana in the South Timbalier area in which Coquina had an aver age interest of about 15%. All six wells completed to date are shut-in awaiting pipeline connections. In the Texas off shore area, Coquina was active in two Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Oil and Gas Sales $40 8 million separate areas and participated in drilling and completing three productive wells. These wells, plus five productive wells drilled earlier, are shut-in awaiting plat form installation. Coquina has an approximate 24% working interest in these areas. In the Foster Conger field in Texas, in which Coquina has a 17% working in terest, three additional wells were drilled and completed, for a total number of 30 wells in the field. In Texas, Coquina completed its first producing well in the Granite Wash section of the Mills Ranch and its eleventh well in the North Gin field in Dawson County. Development of Buchan Field in the North Sea continues In the U.K. sector of the North Sea, development of the Buchan Field con tinued, with six successful development wells drilled. A subsea production sys tem will be installed and initial production is anticipated to begin in the fourth quarter of 1979. Consent to produce for a four year period has been pro cured from the Department of Energy of the British Government, stipulating maximum allowable production to be an average of approximately 50,000 barrels of oil per day. St. Joe and CanDel have a combined 28% interest in the Field. When Buchan is in,full production in 1980, it should contribute approxi mately $J0;million in cash flow during the first year. In the Dutch sector of the North Sea, on Block P/6, a step-out well was drilled in the late fall, discovering a gas pro ducing area that should significantly increase the gas reserves discovered on the block in 1975. St. Joe and CanDel have a combined 12,5% working inter est in this and two adjacent blocks. With successful appraisal drilling, develop ment of the field could commence in late 1979. St. Joe and CanDel have equal inter ests in the Regnenses Basin, a Jurassic exploration play located south of Lon don. Our program for 1979 is to perform some seismic work and drill two explor atory wells. , St. Joe and CanDel are also joining a group that will, by means of a seismic survey during 1979, explore a 200,000 acre contract area in the Middle Magda lena Valley in Colombia. Currently, drill ing is anticipated during late 1979. In Papua New Gpihea, we have a 33 V3 % interest in a tjroup that has ap plied for a license under the new petro leum law to engage in frontier-type exploration. ,; A semi-submersible drilling rig in the U.K. sector of the North Sea. Oil and Gas Accounting Ruling The Securities and Exchange Commis sion set aside the implementation of the Financial Accounting Standards Board Statement No. 19 and said that full cost accounting (the method of accounting followed by St. Joe's oil and gas com panies) could continue to be used for the next three years, during which period a new method of accounting would be developed. This method termed "Re serve Recognition Accounting," will, for the first time, record as assets the values of the reserves owned. Expanding Involvement in Oil and Gas Capital expenditures for this group of companies totalled a record $68,025,000 in 1978. These funds were allocated to develop our strong exploratory effort in Canada, develop Buchan Field in the North Sea and explore and develop our position in the United States. In 1979, our capital expenditures for oil and gas activities are anticipated to increase to a new record of over $96 million, and will result in continued expansion of our oil and gas position worldwide. 21 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. ^INTERNATIONAL . Status--\n 1978,-S'L Jpo formed a new . were up substantially in 1978. andthe. ; such as.thoSe of polilicSI and eco: company, St. Joe International; v/iMT'; " new'Woqdlawn ziric'-Cbpp'er mine in' ... nomic Instability! repatriation of ;. LieroyK.Wheelock as its President.* to Australia was'dedicated in mid- - . funds,'expropriation arid foreign consolidate,the management of its ' 'December.^ . *v , . ` , irtyestnierit limitation. All play a role / ; expanding international rninerarbusi- : Rroblems.for Future--Operating in the . in making an international investment . ness. At present,'Ih'c company is in-'. internationa'larea presents special'^ . politically, and sometimes financially, volyed in Argentina, Brazil, Chile, / *.- .problems,for ap American enterprise, J '' ' Peru, Australia and Ca'rtada. Dividends ' . ; . '' ''y . ', " ..' . ; from unconsolidated subsidiaries ; ; '/ V/` V Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. | riskier than a similar investment in, - Opportunities--Si, Joe has been se- I .. United States. O'ri.the other, hand, .;; iective in its investments internation- |- higher grade mineral deposits occur ally, but has been aggressive,and'suc- I ''abroad compared with those found in cessful in seeking.opportunities of ` thS.'Cdritinentai United States. . - unusual promise in foreign countries. ' . ; Long-established positionsin Argen- ': > ' ... . - tina and Peru have continued lo be ; | ' ........ " ' ' 1 ' ' '' ' * beneficial to the Corporation. New involvement^ particularly, in the ' Woodlawn mine in Australia, the gold silver-copper property in Chile, dia- mond prospects in Srazil3;the Pachort copper orebody in Argentina arid non ' ferrous metals prospects in Canada: could all prove to be'ofgreat bene- / fit to S t. Joe. '' Ol Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. INTERNATIONAL In the second quarter of 1978, the Board approved the formation of St. Joe Inter national Company, which will provide a new organizational structure for the management of the corporation's metals and minerals operations outside the United States. Leroy K. Wheelock, Vice President of the Corporation, was appointed Presi dent, and Denis Acheson and Salvatore Ciccolella have been appointed Vice Presidents of St. Joe International Company. St. Joe's international mining and exploration activities are principally concentrated in Argentina, Australia, Brazil, Canada, Chile and Peru. Expen ditures for metals exploration outside the U.S. reached $5.7 million in 1978, compared with $6.3 million in 1977. In 1978, Si. Joe received $7,040,000 in dividends from its mineral operations, compared with $4,349,000 in 1977. Aguilar Results Satisfactory In Argentina, Compania Minera Aguilar, S.A. operated satisfactorily despite con tinued serious inflation and industrial recession leading to reduced consump tion of base metals in the country. In 1978, Aguilar produced 73,400 metric tons of zinc concentrates and 37,842 metric tons of lead-silver concentrates, compared with 77,767 metric tons and 42,371 metric tons, respectively, in 1977. Demand for metals was down in 1978, and only 59,876 metric tons of zinc concentrates were shipped (10% less than in 1977), while lead shiprhents (40,792 metric tons) were close to the 1977 levels, due to the export of 8,391 metric tons to Brazil. Plans were approved for a new lower level access ad it to be driven at the Aguilar mine to facilitate extraction of available ore reserves and to provide access to deeper mineralization that has been found as the south-plunging ex tension of the ore bodies. The project will be completed in the next two years at an estimated cost of $3,million. Pachon Development Continues Development work continued on the Pachon porphyry copper project, prin cipally through improving the perma nent access road, performing special studies at the tailings dam site and carrying out additional drilling at the mine. Discussions were held with fed eral and provincial authorities concern ing development plans and promotional legislation that have been under consid eration by the governments for some time. After specific investment condi tions are negotiated under such a legis lative framework, definitive investment and financing plans will be made. Santander Expects Improvement In Peru, our subsidiary, Compania Minerales Santander, Inc., despite im provement in mine production during the year, operated at a loss due to con tinued low zinc prices and low ore grade. Production of zinc concentrates 24 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. ' ': : ; .5, I International Sales $8 1 million was 42,451 metric tons, up 25% over 1977's 34,002 metric tons, and there were also minor quantities of iead and copper concentrates. During the year, development continued at lower levels in the mine where significantly improved zinc mineralization (from currently mined 8% to 12%) is expected to in crease production of zinc concentrates in 1979. The Peruvian government also cancelled for zinc producers an obliga tory one year non-indexed loan to the government that was imposed on all exporters based on 15% ad valorem of exports. Diamond Investigation Continues in Brazil, two promising alluvial diamond properties are under investigation. At the Alto Coite project, detailed bulk sampling is in progress, to be followed by a feasibility study for a dredging operation. The potentially much larger Araguaia Project is in an earlier stage of investigation: bulk sampling could be started in 1979. Discussions are pro ceeding with potential Brazilian partners for development of tHese projects, should they prove economically viable. Woodlawn Production to Begin The Woodlawn mine in Australia was formally' inaugurated in December 1978 and following a break-in period, is ex pected to attain normal production of copper, zinc and lead concentrates in the second quarter of 1979. Some in come will be derived from sales of silver gossan and supergene copper ore and pre-production concentrates, but significant income contribution from Woodlawn is not anticipated until 1980. The A $80 million, 3,000-ton-per-day facility is a joint venture of subsidiaries of Phelps Dodge Corporation, 'Austra lian Mining & Smelting Limited and St. Joe, each with a one-third interest. St. Joe's net investment for its one-third share will be approximately U.S. $24 million. When operating at capacity the mill will produce annually about 120,000 metric tons of zinc concentrates, 40,000 metric tons of lead concentrates and 35,000 metric tons of copper concentrates. Woodlawn mine/mill complex for producing zinc, copper, silver and lead concentraies in Australia Chilean Ore Discovery After three years of exploration in Chile, St. Joe announced in December the dis covery of a gold/silver/copper orebody at an elevation of about 14,000 feet, 300 miles north of Santiago. At the end of the season in mid-1978, there had been delineated in the orebody approxi mately 1.7 million short tons with an average grade of 2.25% copper, 0.47 oz./short ton gold and 7.4 oz./short ton silver. Exploration and development is continuing and significant additional reserves are expected to be blocked out before the end of this season's work in May, An early decision will be made on development of this orebody, in which St. Joe holds an 80% interest with the remaining 20% held by Chilean investors. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 25 TIMETABLE OF MAJOR PROJECTS AND DEVELOPMENTS A pair of charts on page one shows how St. Joe has made capital expenditures during the past five years and projects how it will make addi tional expenditures during the next five years. Included here Is a project timetable which summarizes the Corporation's present plans for certain projects over the next four years. It shows the many steps Involved In bringing a project from the prospect stage to produc tion. Each succeeding step Is based on the assumptions that exploration and develop ment activities will continue to yield positive results and that there will be no materially OIL AND GAS 1978 Coquina developed an Inventory of over 50 drillable prospects. Through acreage acquisi tion, lease inventory at year-end was more than 300,000 gross acres. Eight exploratory and 43 development wells were successful. Greens Creek field in Mississippi began producing at over three million cubic feet per day to Coquina's interest. Offshore-Texas and Louisiana wells were still awaiting completion of platform and/or pipeline connection. Foster Conger and North Gin fields continued develop ment, with Mills Ranch field completing first producer in the Granite Wash section. Four development wells drilled through sea floor template at Buchan field in U.K. sector of the North Sea. Two satellite wells in the soulhern flank of field also drilled (Si. Joe and CanDel interest is 28%). On Block P/6 in Dutch sector of the North Sea, successful appraisal well drilled which will increase gas reserves discov ered (St. Joe and CanDel working interest is 12.5%). Seismic work performed at Regnenses Basin onshore exploratory project in southern England (St, Joe and CanDel interest is 29%). CanDel participated in drilling 75 wells in Alberta and British Columbia, resulting in 45 gas and 17 oil successes. Lease holdings at Elmworth-Wapiti increased to 219,000 gross acres (14 successful wells have been drilled at Elmworth acreage). Gas export licenses have been applied for from Elmworth and construc tion of a 50 MMCFD gas plant and gathering system has started. Successful development programs were con tinued in Cessford, Little Bow and Castor areas. 1979 Activity increases in Coquina's exploration program and inventory of prospects and lease acreage. More drilling at Greens Creek field and offshore Texas. Gas sales to commence in first quarter from three wells in South Timbalier off shore Louisiana, with remaining wells on-stream in third quarter. More drilling in Foster Conger and Mills Ranch fields. At Buchan, development wells to be com pleted and tied into production facility, with pro duction commencing late in year. Appraisal drilling scheduled for Blocks 21 /2 and P/6 in the U.K. and Dutch sectors, respectively, of the North Sea. Seismic work continues for onshore U.K. project, with exploratory drilling anticipated. Perform seismic work with possible drilling in Middle Magdalena Valley in Colombia, and frontier exploration project in New Guinea. In the Egyptian Gulf of Suez venture, St. Joe farmed out a substantial part of its Interest for two exploratory wells. CanDel had previously farmed out all of its interest in the venture. CanDel plans participation in 85 wells in Alberta and British Columbia, concentrating on developing existing producing properties and exploring deeper basin areas of Central Alberta. Participation in 17 wells in Elmworth-Wapiti area planned Plant start-up is scheduled with CanDel's initial share of production to be 13 million cubic feet per day. Construction of waterflood facilities at Cess ford should be completed. CanDel's share of recoverable reserves is expected to increase by two million barrels. COAL 1978 Construction of the Marrowbone prepara tion plant and the development of the mine complex continued toward mid-1979 completion. A preparation plant and 20 million recoverable tons of additional metallurgical coal reserves were acquired in Wyoming County, West Virginia An environmental quality steam reserve totaling 56 million recoverable tons, known as Elk Run was leased in Boone County, West Virginia, and Will be jointly developed with a southern utility. It will be developed during the 1979-1981 period. An additional 10 million tons of recoverable compliance steam coal reserve were leased for the TCH complex in Pike County, Kentucky. Compliance steam coal utility sales contracts requiring shipments of 1.5 million tons per year by 1980 were signed with two new customers. = > 1979 Annual capacily increased by 0.6 million tons to 13.8 million tons, of which 9.5 million tons will be steam coal and 4.3 million Ions will be metallurgical coal. The mines which will provide additional capacity are the Sprouse Creek mines in Mingo County, West Virginia, and the Omar mine In Boone County, West Virginia. Also, expanded shipments under long term utility contract to begin at Marrowbone. MINERALS 1978 Exploratory shaft completed and two de velopment drifts initiated at Carthage, Tennessee zinc property to further delineate ore reserves. Initiated construction of new lead strip and alloy plant at the Herculaneum leaa smelter. New zinc dust plant comes on stream at Monaca, Pennsylvania with capacity of 4,000 TPY. Work continued on access road and tailings dam at Pachon (Argentina) orebody. The mining promotion law was not issued as anticipated, and further planning for investment and financ ing of the porphyry copper project was deferred. The gold-siiver-copper prebody at El Indio, Chile, was further delineated. An engineering feasibility study for a 1,250 metric ton per day mlne/mill complex was completed. Economic analyses for a possible investment were made and financing negotiations initiated, Construction of the Woodlawn (Australia) 3,000 ton-per-day complex was completed and inaugurated. The complex produces zinc, cop per, silver and lead concentrates. Bulk sampling continued at the Aito Coite diamond prospect in Brazil. Discussions were started with poten tial national investors. r 1979 Underground prospect drilling at Carthage, Tennessee zinc project to continue with evalua tion of future development potential. Lead strip and alloy plant to be completed and started-up by mid-year, with production capacity of 30,000 tons of lead strip per year. In Argentina, the mining promotion law Is Issued and negotiations held with the govern ment on investment conditions at Pachon. Equity Investments and loan financing is sought. Development of El Indio property is approved; engineering design and construction of 1,250 metric ton per day facility Is started. Woodlawn mine/mlll production facilities brought up to full capacity. Feasibility studies to be completed on the Alto Coite diamond project In Brazil and Investment decisions made and negotiations completed with Brazilian partners. Bulk sampling at the Aragunia diamond project is started. Oft Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. adverse change in other matters affecting the viability of the prefect. Thus, shareholders should keep in mind that the profects de scribed may be modified, delayed, or even terminated as a result of adverse geological or mining results or changes In prices, costs, operating conditions or governmental regula tions. Despite this degree of uncertainty, we believe that the Inclusion of a step by step description of these projects will give share holders a greater appreciation of the Corpo ration's activities and its present plans for these projects. 1980 Coquina continues efforts to increase in ventory of drilling acreage and prospects, as well as participation in drilling of exploratory and development wells. Offshore-Texas wells to start gas production early In year. Buchan Field in full production; St. Joe and CanDel share estimated at over 13,000 barrels per day. Development of P/6 continues. Appraisal drilling on Block Q/7 in Dutch North Sea continues. Further exploratory work scheduled for onshore U.K. and Colombia. CanDel plans increased participation in ex ploratory and development programs in Alberta and British Columbia. Gas processing facilities In recently contracted areas should be com pleted, with start of production late In the year. Gas deliveries from various properties will commence at 4 MMCFD, along with increased volume from Elmworth-Wapiti, 1981 Coquina continues expanding exploration and development programs. Buchan Field con tinues at full production. Block P/6 continues development; further appraisal drilling on Block Q/7, and onshore U.K. Exploration and development activities are expected to continue at record levels. 1982 Coquina continues expanding exploration and development programs. Buchan Field be gins production decline. Block P/6 development completed, with production commencing in mid-year. Q/7 development commences, with anticipated completion in 1984, U.K. onshore development commences, with completion expected in 1983. Record exploration and development activity is expected to continue with increased plant capacity and additional sales at ElmworthWapiti. 1980 Annual capacity expected to Increase to 16 million tons. Contracted utility coal sales from Omar and Marrowbone will Increase by another one million tons. Colorado production will increase by 0.6 million tons to one million tons with sales contract extensions. Additional high volatile metallurgical production will be avail able from TCH and newly acquired Wyoming County, West Virginia property. 1981 Completion ofrnew 0.6 million ton Elk Run compliance steam coal project in Boone County, West Virginia, Marrowbone increases contracted production by another 0.4 million tons. Con tracted steam production to ten utilities, under twelve separate contracts, increased to 11 mil lion tons. Metallurgical production balanced between high, medium and low volatile grades to domestic and foreign countries remains at 6 million tons. Total capacity 17 million tons. 1982 Production increases to meet contracted deliveries at the newly developed properties, namely, Marrowbone and Elk Run In the East and Sun and Anchor in the West, Efforts continue to identify and place into production new prop erties in the Appalachian Coal Region to serve existing and new customers. 1980 Definitive feasibility studies of Pachon copper project completed. Investment and financing arrangements are made. Construction of El Indio 1,250 tons per day mme/mill complex continues. A dredge is in stalled at the Alto Coite diamond project in Brazil. Bulk sampling continued at the Araguaia project. 1981 Engineering design of Pachon mine/mill/ smelter is completed find construction started. Mine/mlll construction at El Indio is com pleted and production of copper-gold-silver concentrates and gold-silver bullion is started. Production started at Alto Coite diamond project, Bulk sampling continues at the Araguaia prospect and feasibility studies are started. 1982 Capacity at zinc dust plant raised to 6,000 tons per year as demand warrants. Construction continues at Pachon, Feasibility and finance planning completed for the Araguaia diamond prospect. An investment decision with Brazilian partners Is made. ; i.V ' ' ! i,/ :r Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. : ` , . :J , fV 27 LEAD 1974 1975 1976 1977 1978 ZINC 1974 1975 1976 1977 1978 COAL 1974 1975 1976 1977 1978 OIL & GAS 1974 1975 1976 1977 1978 Tons Ore Mined 5,048,392 Average Ore Grade (%) 5.00 Tons Metal Produced 230,873 4,411,359 4.67 185,889 4,813,182 4.82 222,483 4,978,007 5.14 228,780 4,851,402 5.18 240,305 Tons Ore Mined 1,232,462 Average Ore Grade (%) 7.99 Tons Metal Equivalent Produced 223,968 1,246,733 7.03 142,406 1,239,456 6.71 206,844 1,194,510 6.79 175,260 433.1633 7.80 163,641 Tons Produced Steam Coal Metallurgical Coal Tons Produced Coal Sold 6,039,895 2,884,447 8,924,342 6,388,893 3,648,512 10,037,405 6,640,005 3,817,331 10,457,336 5,485,748 3,428,803 8,914,551 5,711,651 2,983,281 MCFGas Sold 8,675,541 Bbls. Oil & Gas Liquids Sold 26,063,400 1,871,100 23,263,000 1,471,000 22,055,000 1,587,300 20,328,100 1,603,900 17,724,500 1,408,300 Tons Metal Sold 281,424 182,340 237,177 238,352 250,749 Tons Metal Equivalent Sold 245,603 137,009 186,431 175,527 186,972 Tons Purchased Coal Sold 4,639,264 5,530,353 5,034,598 4,630,943 4,116,811 (In thousands) Net Sales' Operating Profit (Loss)12 $127,316 $47,369 84,278 21,074 115,882 39,539 147,280 66,009 176,747 79,474 Net Sales' $201,633 125,059 158,435 141,091 135,957 Net Sales $357,009 506,099 456,037 430,274 435,256 Net Sales $ 20,746 28,738 38,291 42,188 40,758 Operating Profit (Loss)1 $52,681 14,881 15,922 5,138 (10,674) Operating Profit (Loss)2 $54,490 93,470 44,549 14,474 9,575 Operating Profit (Loss)1 $ 8,857 11,606 15,736 11,120 11,822 1. Net Sales Includes by-products, 2. See Business Segment Information for definition of Operating Profit, 3. Five months production in 1970, : 28 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. FINANCIAL SECTION CONTENTS 30 Statements of Consolidated Income 31 Management's Review of Operating Results 32 Statements of Consolidated Financial Position 34 Statements of Changes in Consolidated Financial Position 35 Financing 36 Statements of Shareholders' Equity 37 Other Financial Information 40 Business Segment Information 42 Summary of Significant Accounting Policies 43 Auditors' Opinion Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 29 St, Joe Minerals Corporation and Consolidated Subsidiaries [STATEMENTS OF CONSOLIDATED INCOME _ -] For the years ended December 31, 1978 and 1977 1 978 Net Sales Costs and Expenses: Cost of sales Depletion, depreciation and amortization Administrative and selling Exploration Research Interest Amortization of goodwill Total Costs and Expenses Income From Operations Other Income: Dividends from unconsolidated subsidiaries Interest, royalties, etc. Income Before Nonrecurring Items Nonrecurring Items Income Before Income Taxes Income Taxes Net Income Per Share of Common Stock: Net income Cash dividends Average Number of Shares of Common Stock Outstanding $798,435 634,325 53,064 28,761 12,981 4,282 12,756 1,491 747,660 50,775 7,040 4,535 62,350 -- 62,350 18,705 $ 43,645 $1.95 $1.30 22,382 1978 vs 1977 Increase (Decrease) 1977 (Decrease) ............... Comparative information............ 1976* 1975* 1974* ---- (In thousands except per share data)....................................................... $ 7,155 $791,280 $ (128) $791,408 $772,366 $718,592 15,175 619,150 (546) 49 59 702 5,250 (19) 20,670 (13,515) 53,610 28,712 12,922 3,580 7,506 1,510 726,990 64,290 4,991 614,159 9,746 5,897 7,053 531 814 (42) 28,990 (29,118) 43,864 22,815 5,869 3,049 6,692 1,552 698,000 93,408 573,570 35,453 19,549 3,736 3,280 4,708 1,502 641,798 130,568 520,245 27,527 16,201 2,320 3,149 5,236 1,599 576,277 142,315 2,691 (3,646) (14,470) (33,723) (48,193) (24,081) $(24,112) 4,349 8,181 76,820 33,723 110,543 42,786 $ 67,757 (3,603) (1,825) (34,546) 33,723 (823) 3,314 $ (4,137) 7,952 10,006 111,366 -- 111,366 39,472 $ 71,894 2,000 10,231 142,799 6,504 149,303 57,466 $ 91,837 _ 7,585 149,900 -- 149,900 53,913 $ 95,987 $3.03 $1.30 22,332 $3.23 $1.27Vz 22,257 $4.14 $1.1716 22,184 $4.33 $ .9716 22,152 * Restated lor pooling-of-interests. Pages 33,35 and 37 to 42 are an Integral part ot these financial statements, 30 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. MANAGEMENT'S REVIEW OF OPERATING RESULTS Net Sales-Product Line (millions) Operating Profit--Product Line (minions) 1974 $718 6 Coal B Lead Zinc Oil & Gas International Other 1974 Operating losses were experienced m Zinc in 1978 $160 0 Sales Sales of $798.4 million during 1978 were slightly higher than the 1977 level of $791.3 million. Sales of lead increased $29.5 million, due largely to a very strong battery market, while sales of iron ore decreased $21.4 million, as a result of the suspension of the Pea Ridge operation in December 1977. Coal sales in 1978 were approximately the same as 1977 as higher prices offset lower volume. The lower volume resulted from strikes by both the United Mine Workers and the Railway Clerks Union. In spite of higher volume, zinc sales declined $5.1 million, principally due to depressed prices. Sales of $791.3 million during 1977 were almost identical to the 1976 level of $791.4 million. Coal sales declined $25.8 million as a result of lower volume due to adverse weather conditions and to the nationwide coal strike which began in December 1977. Lead sales increased $31.4 million as a result of strong battery industry demand. Zinc sales declined $17.3 million, principally as a result of depressed prices and lower volume due to a high level of imports. Costs and Expenses Cost of sales of $634.3 million in 1978 were $15.2 million higher than the 1977 level of $619.1 million. In spite of a decrease in sales volume, coal cost of sales increased $7.3 million, reflecting in part, higher labor costs associated with the new United Mine Workers contract. Lead cost of sales increased $17.3 million due to greater sales volume and increased production costs. Zinc cost of sales increased $11.6 million as a result of higher sales volume. Cost of sales of iron ore declined $21 =6 million due to the suspension of the Pea Ridge operation in December 1977. Cost of sales of $619.2 million in 1977 increased slightly over the 1976 level of $614.2 million. Unit cost increases oc~ curred in lead, zinc and coal because of inflation and, in the case of coal and zinc, lower sales volume. Depletion, depreciation and amortization expense has in creased in the 1976 to 1978 period as capital spending has increased. Capital spending has been concentrated ih the 1 areas of expanding and modernizing coal operations and in oil and gas exploration and development. The increase in administrative and selling expense in the 1976 to 1978 period is due to inflation and the increased scope and complexity of the Corporation's operations. The increase in exploration expense in the 1976 to 1978 period reflects the cost of the Corporation's expanded mineral exploration program. Interest expense has increased in the 1976 to 1978 period as a result of higher levels of borrowings and higher interest rates, Average outstanding borrowings have increased from $93.8 million in 1976 to $154.0 million in 1978, with an in crease in the average interest rate from 7.1% in 1976 to 8.3% in 1978. Other Income Dividends from the Corporation's unconsolidated Argentine subsidiaries were $7.0 million, $4.3 million and $3.8 million in 1978,1977 and 1976, respectively. These dividends reflect continued profitability by such subsidiaries. No dividends were received from the Corporation's Peruvian subsidiary in 1978 or 1977, due to unprofitable operations and currency ex change restrictions. Dividends from this subsidiary were $4.2 million in 1976. The decrease in the income recorded under the caption "Interest, royalties, etc." principally results from a reduction in royalty income due to the termination, in December 1977, of the Meramec joint venture operation at Pea Ridge. Royalties of $2.5 million were received from Meramec during 1977. Nonrecurring Items Nonrecurring items in 1977 Include pre-tax gains aggregating $33.7 million, resulting from the sale of an 80% interest in three coal subsidiaries, the termination of the Meramec joint venture operation and a write-down of certain Canadian mineral properties. Income Taxes The variations in the effective income tax rates from 35% in 1976, to 39% in 1977 and to 30% in 1978 are due primarily to changes in the amounts of statutory depletion and minimum tax, Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. St. Joe Minerals Corporation and Consolidated Subsidiaries [STATEMENTS OF CONSOLIDATED FINANCIAL POSITION December 31,1978 and 1977 Current Assets: Cash and marketable securities Trade accounts receivable Inventories Prepaid expenses and other current assets Total current assets Current Liabilities: Notes payable Long-term debt--current portion Accounts payable and accrued liabilities Income taxes Total current liabilities Working Capital Noncurrent Assets: Investments Property--net Goodwill Deferred charges and other assets Total noncurrent assets Total Assets Less Current Liabilities Noncurrent Liabilities: Long-term debt--less current portion Deferred income taxes Other noncurrent liabilities Minority interest Total noncurrent liabilities Excess of Assets Over Liabilities .. , Shareholders' Equity: Preferred stock, par value $50 per share, 2,000,000 shares authorized, none issued Common stock, par value $1 per share: Authorized Issued In Treasury--at cost Outstanding Other capital Retained earnings Total Shareholders' Equity ' r- Shares 1978 1977 60,000,000 60,000,000 23,250,214 855,778 22,394,436 23,250,214 892,694 22,357,520 Z7 1978 1977 (In thousands) $ 45,273 122,527 83,714 21,935 273,449 $ 31,148 86,299 87,527 45,444 250,418 12,853 5,217 109,719 26,760 154,549 118,900 40,410 5,947 83,949 33,677 163,983 86,435 14,004 585,506 24,189 14,654 638,353 757,253 7,251 481,546 25,680 15,177 529,654 616,089 169,803 78,185 13,321 11,679 272,988 $484,265 71,090 56,365 8,550 10,903 146,908 $469,181 $ 23,250 (9,478) 209,771 260,722 $484,265 $ 23,250 (9,887) 209,641 246,177 $469,181 Pages 33, 35 and 37 to 42 are an integral part ol these financial statements. 32 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Total Assets (millions) Total Debt (millions) 1974 $540.0 S Short-term debt and long-term debt-current portion Long-term debt-less current portion Marketable Securities Marketable securities are stated at cost which approximates market. Inventories Inventories, which are stated at the lower of cost (principally the last-in, first-out ["LIFO"] method) or market, comprise the following: Finished metals Coal Metals in process and concentrates Raw materials and supplies Total 1978 1977 (In thousands) $ 9,942 12,044 24,267 37,461 $ 24,082 8,710 19,553 35,182 $ 83,714 $ 87,527 The current cost of LIFO inventories at December 31,1978 and 1977 exceeds the related LIFO values by $29,514,000 and $26,169,000, respectively. Property Property (at cost) comprises the following: 1978 1977 (In thousands) Mining properties and mineral rights $ 9,475 Mine development 56,504 Oil and gas properties, including exploration and development thereon 277,751 Land, buildings, plant and equipment 569,097 $ 9,246 40,956 214,361 500,661 Total Less accumulated depletion, depreciation and amortization Property--net 912,827 765,224 (327,321) (283,678) $585,506 $481,646 Minority Interest Minority interest includes $8,000,000 of 8% cumulative pre ferred stock of Martin County Coal Corporation, a subsidiary of Massey. Dividends are paid quarterly and are deducted from other income. Short-Term Debt (Notes Payable) Information relating to the Corporation's short-term borrow ings in 1978 and 1977 follows: Balance at end of year Maximum amount of short-term borrowings outstanding at any month end during the year Average short-term borrowings outstanding during the year Weighted average interest rate on average short-term borrowings during the year (a) Weighted average interest rate on short-term borrowings at end of year 1978 1977 (In thousands) $12,853 $40,410 41,313 56,723 18,315 43,001 8.3% 11.7% 6.3% 7.3% (a) Calculated by dividing average short-term borrowings outstanding during the year by related interest expense. The Corporation has informal arrangements with various banks to maintain average cash balances of approximately 10% of its unused lines of credit. At December 31,1978 and 1977 such lines of credit (all unused) aggregated $32,500,000 and $50,000,000, respectively. -Coquina has a line of credit agreement with a bank aggre gating $22,000,000, of which $7,000,000 is for short-term borrowings and $15,000,000 is for long-term borrowings (see long-term debt for noncurrent portion, repayment terms and collateral agreement). CanDel has lines of credit with various banks aggregating $7,500,000. At December 31, 1978, $6,787,000 was unused. ! 1 33 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Sf. Joe Minerals Corporation and Consolidated Subsidiaries STATEMENTS OF CHANGES^ CONSOLIDATED FINANCIAL POSITION For the years ended December 31,1978 and 1977 1978 1977 (In thousands) Funds Provided: Operations: Net income Add (deduct) items not requiring (providing) working capital: Depletion, depreciation and amortization Deferred income taxes Liability for employee benefits Writedown of properties Cancellation of debt ^ Exploration projects abandoned Amortization of goodwill Other Total From Operations Disposals of property (excluding gains of $37,723,000 in 1977) Proceeds from long-term debt Proceeds from stock options exercised Total Funds Provided Funds Applied: Cash dividends Additions to property Reduction of long-term debt Other--net Total Funds Applied Increase (Decrease) in Working Capital Analysis of Increase (Decrease) in Working Capital: Cash and marketable securities Trade accounts receivable Inventories Prepaid expenses and other current assets , Notes payable Long-term debt--current portion Accounts payable and accrued liabilities Income taxes Increase (Decrease) in Working Capital . ; . :. ; $ 43,645 53,064 21,820 . 3,269 .-- ', -- 1,871 1,491 2,278 127,438 4,062 104,863 539 236,902 29,100 161,086 6,150 8,101 204,437 $ 32,465 $ 14,125 36,228 (3,813) (23,509) 27,557 730 (25,770) 6,917 $ 32,465 $ 67,757 53,610 4,647 2,393 9,633 (5,667) 2,128 1,510 290 136,301 15,376 23,234 1,184 176,095 28,687 146,104 6,996 1,694 183,481 $ (7,386) $ (14,990) (5,672) 5,509 26,275 (7,766) 3,078 3,026 (16,846) $ (7,386) Pages 33, 35 and 37 to 42 are an integral part of these financial statements. 34 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. FINANCING Long-Term Debt Long-term debt--less current portion at December 31,1978 and 1977 was as follows: ., . $60,000,000 loan agreement repayable in twelve equal annual Installments from April 1987 through April 1998 at 8.65% (a) Pollution control financing (b): $22,500,000 Beaver County (Pennsylvania) Industrial Development Authority 5.60% bonds, due December 1,1997 $7,000,000 State Environmental Improvement Authority (Missouri) 5.75% bonds, due December 15,1998 $21,100,000 Beaver County (Pennsylvania) Industrial Development Authority 6% bonds, due May 1,2007 $20,000,000 Eurodollar credit and guaranty agreement repayable in eight equal semiannual installments from January 1983 through July 1986 at %% above the London Interbank Offered Rate ("LIBO") (10.3% at December 31,1978) (a) $10,000,000 Eurodollar credit and guaranty agreement repayable in eight equal semiannual installments from February 1983 through August 1986 at %% above LIBO (a) $10,000,000 loan agreement repayable in ten equal semiannual installments from December 1979 through June 1984 at 8% to June 1982, thereafter at 128% of prime rate (a) $15,000,000 loan agreement repayable by Coquina in monthly installments (subject to certain minimum and maximum amounts) through September 1982 from 72% of the proceeds of Coquina's oil and gas sales at prime rate to September 1978, thereafter Vz % above prime rate, not to exceed 11 % (a) (c) (e) $36,000,000 credit agreement repayable by CanDel in ten equal quarterly installments from September 1980 through December 1982 at 1V* % above LlBO (a) (d) Notes payable to banks at Vz % to 1 % above prime rate (11% % at December 31,1978) repayable by CanDel Oil (U.S.) Inc. through 1982 Other notes (various rates and maturities) Long-term debt--less current portion 1978 1977 (In thousands) $ 60,000 _ 22,500 7,000 10,675 $22,500 7,000 4,559 9,500 10,000 9,000 1,500 900 6,900 15,000 12,500 5,074 8,554 $169,803 15,000 3,000 3,374 6,357 $71,090 (a) These liabilities represent the amounts drawn down under the above agreements. The agreements contain covenants relating to maintenance of financial ratios and/or limitations on borrowings and the payment of cash dividends. In 1979 cash dividends are limited to $59,916,000. The Corporation or its subsidiaries pay a Vz % annual commitment fee on the unused portions of such agreements. (b) These liabilities represent the portions of the proceeds from pollution control revenue bonds expended for pollu tion control facilities at the Corporation's lead and zinc smelters. The Corporation has agreed to make sufficient payments to Trustees in order to pay ail amounts due on these bonds. The bonds are subject to optional redemp tion commencing in 1982 and mandatory redemption in 1988. (c) Borrowings under this loan agreement are secured by the pledge of substantially all of Coquina's oil and gas properties and production equipment. (d) Borrowings under this credit agreement are collateralized by the pledge of Cancel's interest in certain petroleum and natural gas properties in Alberta, Canada. (e) This loan agreement is presently being renegotiated. No payments are required until such renegotiation is completed. The amounts of long-term debt repayable in each of the four years subsequent to December 31,1979 are $13,350,000 In 1980, $14,622,000 in 1981, $13,994,000 in 1982 and $10,465,000 in 1983. Interest expense relating to long-term debt was $11,104,000 and $4,636,000 for 1978 and 1977, respectively. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 35 St, Joe Minerals Corporation and Consolidated Subsidiaries [STATEMENTS OF SHAREHOLDERS'EQUITY Qommon Stock Par value $1 Per Share For the years ended December 31, 1978 and 1977 Balance, December 31,1976 ' Net income Cash dividends Employee stock options exercised (66,878 shares issued from treasury) Transfer to other capital in connection with reduction in par value from $10 to $1 Adjustment in connection with the pooling-ofinterests with Coquina Balance, December 31,1977 Net income Cash dividends Employee stock options exercised (36,916 shares issued from treasury) Balance, December 31,1978 Issued $232,502 In Treasury At Cost $(10,628) (209,252) 741 23,250 (9,887) $ 23,250 409 $ (9,478) . Other Retained Capital Earnings .. (In thousands) -- $207,053 67,757 (28,687) $ 443 209,252 (54) 209,641 54 246,177 43,645 (29,100) 130 $209,771 $260,722 ] Total Shareholders' Equity $428,927 67,757 (28,687) 1,184 469,181 43,645 (29,100) 539 $484,265 V" Pages 33,35 and 37 to 42 are an integral part of these financial statements. 36 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. OTHER FINANCIAL INFORMATION Shareholders' Equity (minions) Shareholders' Equity Per Share 1974 $313.9 1974 $14.17 Stock Option Plans The Corporation's qualified Stock Option Incentive Plan, which was adopted in 1967, expired in 1977 except with respect to outstanding options. Under this pian key manage ment employees were granted options to purchase the Corporation's common stock at fair market value on date of grant. Options granted become exercisable one year after date of grant at the rate of 25% each year. The Corporation also has a non-qualified Stock Option Plan, adopted in 1972, for its key management employees. Options granted under this plan are exercisable at prices which may be less than fair market value but not less than par value at date of grant; these options expire ten years from date of grant. Options granted become exercisable one year after date of grant at the rate of 25% each year. Options granted to date have been at fair market value at date of grant. In connection with the acquisition of Coquina, the Corporation assumed the Coquina stock options outstanding at the acquisition date. The assumed options provide for thepurchase of 46,364 shares of the Corporation's common stock. A summary of shares issuable under options outstanding during 1978 and 1977 follows: Options outstanding at beginning of year Granted or assumed Exercised Cancelled or expired Options outstanding at end of year 1978 1977 (Number of Shares) 905,752 109,000 (36,916) (51,223) 926,613 746,506 256,164 (66,878) (30,040) 905,752 The number of shares reserved for the granting of additional options under the non-qualified Stock Option Plan amounted to 12,400 at December 31,1978. CanDel has an Employees' Stock Option Plan whereunder 200,000 shares (approximately equal to 5% of Cancel's outstanding shares) were reserved for purchase by its officers and employees at fair market value on date of grant. As of December 31,1978, options were outstanding to purchase 92,075 shares at prices of $5.75 to $16.25 per share. Options to purchase 51,225 and 7,650 shares were exercised in 1978 and 1977, respectively. Acquisitions During 1977, in a transaction accounted for as a pooling-ofinterests, the Corporation acquired all of the capital stock of Coquina Oil Corporation in exchange for 1,084,342 shares of its common stock. The pooling-of-interests with Coquina increased 1977 net income by approximately $189,000 ($.01 per share) for the period in such year prior to acquisition. In connection with the 1976 pooling-of-interests with Tennessee Consolidated Coal Company, 48,565 shares remain in escrow pending resolution of certain contingencies. Foreign Operations The Corporation's subsidiaries operating in Argentina (Compania Minera Aguilar, S.A.) and Peru (Compania Minerales Santander, Inc.) are carried in investments at cost or less, and are excluded from the consolidated financial statements primarily because of unsettled economic condi tions and currency exchange restrictions. Dividends from such subsidiaries are recognized in income as they are remitted to the Corporation. Shares under option at December 31,1978 are exercisable at prices of $16.88 to $40.25 per share. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 37 OTHER FINANCIAL INFORMATION Pension and Profit Sharing Plans Pension expense for all plans, including amortization of prior service costs over periods of five to thirty years, was $12,043,000 and $10,598,000 in 1978 and 1977, respectively. Aggregate unfunded prior service pension costs of the companies were $44,227,000 at December 31,1978. The actuarially computed values of vested benefits of certain plans exceeded the total market values of the related pension funds by $35,537,000 at December 31,1978. The Corporation has a deferred profit sharing plan for salaried employees. Annual contributions to the plan are based on a formula involving consolidated net income and aggregate salaries of eligible employees. Profit sharing expense was $1,746,000 and $2,399,000 in 1978 and 1977, respectively. Nonrecurring Items In September 1977, Massey sold 80% of its interest in three coal subsidiaries for $33,683,000 in cash. The gain on the sale before provision for income taxes was $25,689,000. In December 1977, the Corporation and Bethlehem Steel Corporation terminated their joint venture operation of Meramec Mining Company. As a result of the termination of the joint venture, ownership of the mine and plant reverted to the Corporation and operations were suspended pending an evaluation of future economic conditions. In addition, the Corporation wrote down its carrying value in Meramec by $5,633,000 to an estimated realizable value and provided $4,200,000 for maintenance costs expected to be incurred during the suspension period. Bethlehem has cancelled $5,667,000 in notes issued to it by the Corporation and has agreed to pay the Corporation $16,200,000 in cash. The foregoing resulted in a gain before provision for income taxes of $12,034,000. During 1978, the mine was maintained in a stand-by condition, with only limited production of iron by-products. Iron pellet operations will not be resumed until market conditions improve. In December 1977, the Corporation wrote down certain Canadian mineral properties by $4,000,000. Income Taxes Income taxes for the years ended December 31,1978 and 1977 are comprised of: Current: Federal Investment tax credits Foreign State Total current Deferred: Federal Foreign Total deferred Total 1978 1977 (In thousands) $(2,950) (3,238) 1,278 1,795 (3,115) $32,613 (7,090) 6,550 6,066 38,139 16,486 5,334 21,820 $18,705 2,693 1,954 4,647 $42,786 Deferred income taxes for the years ended December 31, 1978 and 1977 relate to the following timing differences: , :! Accelerated depreciation Write-off of exploration and development as incurred Liability for employee benefits State income taxes Other-net Total 1978 1977 (In thousands) $ 4,058 $1,952 16,755 (1,489) (874) 3,370 $21,820 6,807 (1,076) (1,429) (1,607) $4,647 A reconciliation between income taxes at the statutory Federal income tax rate of 48% and the Corporation's income taxes follows: 48% of income before income taxes Statutory depletion Investment tax credits Capital gains State income taxes Minimum tax Foreign operation losses where benefits cannot be currently utilized Other--net income taxes Effective income tax rate 1978 1977 (In thousands) $29,928 (18,200) (3,238) -- 933 5,897 $53,061 (13,932) (7,090) (4,802) 3,154 3,921 998 2,387 $18,705 30% 4,158 4,316 $42,786 39% 38 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Capital Expenditures (millions) 1974 $115.7 .......$105.9 $75 5 Dividends Per Share $161.1 $146.1 1974 $.97 Vi Quarterly Financial Data (Unaudited) Summarized quarterly financial data for 1978 and 1977 follows: Period Net Sales Gross Profit Net Income 1978: 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year $153,268 230,494 163,613 251,060 $798,435 $ 32,240 44,798 33,248 53,824 $164,110 1977: 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year $205,004 195,605 186,184 204,487 $791,280 $ 40,598 45,588 38,228 47,716 $172,130 Stock prices as reported on the composite tape by The Wail Street Journal. $ 4,390 13,412 3,986 21,857 $43,645 $11,064 14,251 27,506 14,936 $67,757 Net Income Cash Dividends Per Common Per Common Share Share $ .20 .60 .17 .98 $1.95 $ .50 .63 1.24 .66 $3.03 $ .325 .325 .325 .325 $1.30 $ .325 .325 .325 .325 $1.30 Stock Prices* High Low 321/4 28i/2 29 29% 321/4 43/4 44% 34% 35% 44% 251/2 22% 22% 21% 21% 36/2 33% 29Y2 28% 28% Fourth Quarter 1978 Transaction (Unaudited) The Corporation received $6,045,000 in dividend income from its South American subsidiaries. Commitments and Contingent Liabilities The Corporation is contingently liable as guarantdr of leases to Quemetco, Inc. (a company sold in 1972), under which rental payments approximate $315,000 per year for the initial lease term ending in 1997. RSR Corporation, the purchaser of Quemetco has agreed to indemnify the Corporation against any loss which may be suffered as a result of such contingent liability. Subsequent Event On February 9,1979, the Corporation announced that it had reached an agreement in principle to acquire all of the capital stock of Slab Fork Coal Company, a producer of low-volatile metallurgical coal, In exchange for 1,494,288 shares of its common stock. The transaction is subject to certain conditions, including the satisfactory completion of further investigations, the execution of a definitive acquisition agreement, and the approval of the Corporation's Board of Directors as well as the Board of Directors and shareholders of Slab Fork. In connection with the acquisition of certain foreign oil explor atory rights, the Corporation is contingently liable for future payments aggregating $6,667,000. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 39 BUSINESS SEGMENT INFORMATION Net Sales: Domestic Operations: Domestic Sales Export Sales (a) Intersegment Sales (b) Foreign Operations (c) Total (d) Operating Profit (Loss) (e): Domestic Operations Foreign Operations (c) Total Assets at December 31 (f): Domestic Operations Foreign Operations (g) Total Depletion, Depreciation and Amortization Capital Expenditures Coal $283,783 149,511 1,962 -- $435,256 Lead 1978 Zinc Oil & Gas (In thousands}.. Inter national Minerals $168,252 5,873 2,622 -- $176,747 $133,055 1,711 1,191 ' -- : ' $135,957 $ 16,519 -- 24,239 $ 40,758 -- -- -- $ 8,080 $ 8,080 $ 9,575 -- $ 9,575 $ 79,474 -- $ 79,474 $(10,674) . .-- $(10,674) $ (749) 12,571 $ 11,822 -- $ 403 $ 403 $300,785 -- $300,785 $111,257 -- $111,257 $159,072 -- $159,072 $100,423 147,974 $248,397 -- $43,339 $43,339 $ 25,043 $ 57,516 $ 5,360 $ 7,381 $ 5,720 $ 12,338 $ 15,746 $ 68,025 $ 38 $14,905 Other $ 7,412 -- (5,775) -- $ 1,637 $(1,107) -- $(1,107) $48,952 -- $48,952 $ 1,157 $ 921 Total $609,021 157,095 _ 32,319 $798,435 $ 76,519 12,974 $ 89,493 $720,489 191,313 $911,802 $ 53,064 $161,086 (a) Export sales by geographical area are as follows: Far East Europe South America Other Total 1978 1977 (In thousands) $ 70,656 $104,941 47,320 67,597 37,428 38,147 1,691 1,707 $157,095 $212,392 T (b) Intersegment sales are based on prices approximating current market values. ; (c) Canadian operations (d) Net sales include coal sales to Duke Power Company of $85,380,000 and $79,848,000 in 1978 and 1977, respectively. (e) Operating profit Is calculated as net sales plus/minus all items of income/expense directly associated with the business segment. In computing operating profit, none of the following items has been added or deducted: corporate overhead expenses, exploration, interest income/expense, dividends from unconsolidated subsid iaries, income taxes and sundry income/ expense. A : reconciliation of operating profit to income before income taxes follows: Operating Profit Unallocated Income (Expense) Income Before Income Taxes 1978 1977 (In thousands) $ 89,493 $ 99,156 (27,143) 11,387 $ 62,350 $110,543 (f) Identifiable assets by industry are those assets that are used in the Corporation's operations in each segment of business. Corporate assets included under the caption "Other" are $40,837,000 and $32,760,000 for 1978 and 1977, respectively. 40 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Net Sales: Domestic Operations: Domestic Sales Export Sales (a) Intersegment Sales (b) Foreign Operations (c) Total (d) Operating Profit (Loss) (e): Domestic Operations Foreign Operations (c) Total Assets at December 31 (f): Domestic Operations Foreign Operations (g) Total Depletion, Depreciation and Amortization Capital Expenditures Coal Lead Zinc Oil & Gas Inter national Minerals (In thousands).. Other Total $223,360 $143,429 $139,464 $ 18,867 206,914 3,851 1,627 $430,274 $147,280 $141,091 23,321 $ 42,188 $ 1,063 $ 1,063 $29,384 $29,384 $554,504 212,392 24,384 $791,280 $ 14,474 -- $ 14,474 $ 66,009 -- , $ 66,009 $ 5,138 -- $ 5,138 $ 1,212 9,908 $ 11,120 -- $ (227) $ (227) $ 2,642 -- $ 2,642 $ 89,475 9,681 $ 99,156 $241,459 $111,069 ---- $241,459 $111,069 ------- $ 22,475 $ 5,163 $ 62,375 $ 2,621 $153,424 -- $153,424 $ 5,617 $ 19,916 $ 89,124 115,873 $204,997 $ 18,447 $ 48,094 -- $26,578 $26,578 $42,545 -- $42,545 $637,621 142,451 $780,072 $ 202 $ 9,993 $ 1,706 $ 3,105 $ 53,610 $146,104 (g) Assets of foreign operations by geographical area are as follows: Canada North Sea Australia Other Total 1978 1977 (In thousands) $ 94,583 $ 81,730 57,922 34,293 28,551 15,765 10,257 10,663 $191,313 $142,451 (h) Certain 1977 amounts have been reclassified to conform with 1978 reportable segment classifications. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 41 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Corporation and all subsidiaries except those operating in South America (see foreign operations). All significant intercompany transactions and balances are eliminated. Exploration and Development Oil and Gas Costs related to the exploration and development of oil and gas properties are capitalized by certain broad areas of interest under the full-cost method of accounting. Such costs include land and lease acquisition costs, geological and geophysical expenditures and costs of drilling productive and non-productive wells. Pending the discovery of commercial reserves in any area of interest, exploration and development expenditures are amortized generally over five years. When commercial reserves are discovered, the unamortized expenditures are depleted on the unit-of-production method based upon estimated recoverable reserves in the area of interest; when areas of interest are abandoned, the unamortized expenditures are charged to expense. Coal Development costs of specific coal properties when expected to be significant are capitalized in mine development and depleted on the unit-of-production method. Significant lease acquisition costs are capitalized in mining properties and mineral rights and depleted on the unit-of-production method. Metals Costs incurred for exploration of metals are generally expensed as incurred. Development expenditures to bring new mineral properties into production, comprising sub stantially all surface mine development expenditures and initial underground installations, are capitalized and,charged to expense on the straight-line method over 20 years. Subsequent maintenance and underground development expenditures are charged to expense. Pension Plan Costs The Corporation and its subsidiaries have several pension plans (principally non-contributory) covering substantially all of their employees. Pension costs consist of normal costs and amortization of prior service costs over periods ranging from 5 to 30 years and are generally funded as accrued. Income Taxes Deferred Federal and Canadian income taxes are provided for the tax effects of items reported in different periods for financial and income tax reporting purposes relating prin cipally to accelerated depreciation, and write-off for tax purposes of mineral and oil and gas exploration and develop ment expenditures as incurred. Deferred Federal income taxes on the accumulated undis tributed earnings ($34,083,000 at December 31,1978) of consolidated foreign subsidiaries are not provided because it is expected that such earnings will be reinvested by such subsidiaries. Investment tax credits are applied as reductions of Federal income tax provisions in years in which they arise. Net income Per Share Net income per share is computed based on the average number of shares of common stock outstanding during each year. The dilution in net income per share which would arise from the assumed exercise of stock options is not material. Auditing Committee The Corporation's auditing committee, which is composed of four outside members of the Board of Directors, meets a minimum of four times a year. The Committee has unrestricted access to the Corporation's independent auditors. Depreciation Buildings, plant and equipment are depreciated essentially by the straight-line method overestimated lives (ranging from 3 to 50 years). Upon disposal of depreciable assets, their costand related accumulated depreciation are cleared from the accounts and the resultant profit or loss is included in net income. Maintenance and repair expenditures are charged to expense as incurred; major renewals and betterments are capitalized. Replacement Cost (Unaudited) In compliance with rules and regulations of the Securities and Exchange Commission, the Corporation has calculated information related to the replacement cost of its productive capacity and the depreciation charges that would correspond with such replacement costs. Inventories and cost of sales have also been calculated on a replacement cost basis. The details of this information are available in the Corporation's 1978 Annual Report on Form 10-K to the SEC. Goodwill Goodwill arising from acquisitions is amortized over appro priate periods not exceeding 40 years. , The Corporation establishes the sales prices of its products primarily on the basis of competitive market conditions, rather than directly on costs incurred. Consequently, the impact on the Corporation's earnings of increased costs arising from inflation is not readily determinable. * 42 Reproduced with permission of the copyright owner Further reproduction prohibited without permission. AUDITORS'OPINION T*o BfO3bv*v NewYort 10004 The Shareholders of Sf. Joe Minerals Corporation: We have examined the statements of consolidated financial position of St Joe Minerals Corporation and consolidated subsidiaries as of December 31,1978 and 1977 and the related statements of consolidated income, shareholders' equity and changes in consolidated financial position for the years then ended. Our examinations were 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 circumstances. We have previously examined and expressed our unqualified opinions on the consolidated financial statements for the three years ended December 31,1976 (not presented herewith) from which the comparative information accompanying the statements of consolidated income was prepared. In our opinion, such consolidated financial statements present fairly the financial position of St. Joe Minerals Corporation and consolidated subsidiaries at December 31,1978 and 1977 and the results of their operations and the changes in their financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis. Also, in our opinion, the comparative information presents fairly in ail material respects the information set forth on a basis consistent with the financial statements referred to above. February 1,1979 (February 9,1979 as to the proposed acquisition described under Subsequent Event). Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 43 ST. JOE MINERALS CORPORATION Incorporated March 25,1864, under the lam of the State of New York, Corporate Headquarters: 250 Park Avenue, New York, N.Y. 10017 (212)953-5000 Annual Meeting The Annual Meeting of the Corporation will be held on Monday, May 14,1979, at 2:00 P.M. at the Auditorium of the Federal Reserve Bank of Richmond, 701 East Byrd Street, Richmond, Virginia. Stock Trading The stock of St. Joe Minerals Corporation is traded on the New York, Midwest, Pacific Coast and Toronto stock exchanges. Its symbol is SJO. Transfer Agents Morgan Guaranty Trust Company of New York 30 West Broadway New York, New York 10015 National Trust Company, Limited 21 King Street East Toronto, Ontario M5C 1B3 Registrars Morgan Guaranty Trust Company of New York 30 West Broadway New York, New York 10015 Crown Trust Company 312 Bay Street Toronto, Ontario M5H 2P4 Auditors Deloitte Haskins & Sells Two Broadway New York, New York 10004 BOARD OF DIRECTORS CORPORATE OFFICERS Gene K. Beare t Director of Various Corporations D. Broward Craig* President John C. Duncan Chairman and Chief Executive Officer D. Broward Craig President Bernard F. Desloge t Vice President Killark Electric Manufacturing Co. Electrical fittings JohnC. Duncan* Chairman and Chief Executive Officer Warren E. Fenzi* President Phelps Dodge Corporation Metal mining William R, Grant t Vice Chairman Endowment Management and Research Corporation Investment counselors Arthur Howe, Jr. t Educational Consultant Wing L. Lew Consultant James L. Broadhead Vice President--Zinc Charles R. Carlisle Vice President R. V. Cronin Vice President John W. Hanselman Vice President--Administration John C. Harned Vice President Marvin E. Lane Vice President--Mining L. Chase Ritts, Jr. Vice President--Petroleum Joseph G. Sevick Vice President--Technology Thomas N. Walthier Vice President--Exploration Leroy K.Wheelock Vice President Robert V. Lindsay* Chairman of the Executive Committee Morgan Guaranty Trust Company of New York Commercial banking i, E, Morgan Massey President and Chief Executive Officer A. T. Massey Coal Co., Inc. Joseph V. McKee, Jr.* Chairman and President National Union Electric Corporation Electrical appliances John A. Wright Vice President--Lead Charles E. Barnett General Counsel and Secretary Harold T. Read Controller Robert A. Sherman Treasurer John L. Afton Assistant Secretary Joseph J. Grzymski Assistant Vice President--Auditing Paul Kershon Assistant Controller Smiley Raborn, Jr. Chairman and Chief Executive Officer Canbel Oil Ltd. John T. Leyden Assistant Vice President--Taxes C. Patrick Sharpe Assistant Treasurer Lawrason Riggs III Former Chairman L. Chase Ritts, Jr. Vice President-Petroleum Member of Executive Committee fMember of Auditing Committee 44 Reproduced with permission of the copyright owner. Further reproduction prohibitec without permission. EXPLORATION AND DEVELOPMENT Thomas N. Walthler Vice President--Exploration J. W. Horton Vice President, St. Joe American Corporation Tucson, Arizona RESEARCH AND DEVELOPMENT Gardner L. Brown Director--Corporate Research Michael V. Rose Director--Commercial Development Stanley J. Kostman Director--Corporate Development ENVIRONMENTAL PLANNING Gary E. Welch Director--Corporate Environmental Planning COMMUNICATIONS AND SHAREHOLDER INFORMATION Robert W. Peckham : Director of Corporate Communications O SUBSIDIARY AND DIVISION EXECUTIVES Coal A. T. Massey Coal Company, Inc.--Richmond, Virginia E. Morgan Massey, President and Chief Executive Officer Tennessee Consolidated Coal CompanyJasper, Tennessee Paul V.Callis, Chairman and Chief Executive Officer Oil and Gas CanDel Oil Ltd.--Calgary, Alberta, Canada ; Smiley Raborn, ur,, Chairman and Chief Executive Officer Coquina Oil Corporation-Midland, Texas Pomeroy Smith, Chairman and Chief Executive Officer St, Joe Petroleum Corporation--New York, New York L, Chase Ritts, Jr., President and Chief Executive Officer Minerals St. Joe Lead Company--Clayton, Missouri John A. Wright, President St. Joe Zinc Company-Pittsburgh, Pennsylvania James L Broadhead, President St. Joe International Company--New York, New York Leroy K. Wheelock, President Cia. Minera Aguilar, S.A.--Buenos Aires, Argentina Marco J. Rossetti, Managing Director Cia. Minerales Santander, Inc.--Lima, Peru Harold E. Waller, Jr., Vice President and General Manager Energy Research Corporation--Danbury, Connecticut : Bernard S. Baker, President Formet Technology Corporation--Pittsburgh, Pennsylvania J. A. Young, President Jododex Australia Pty, Ltd.--Sydney, N.S.W., Australia Desmond F. O'Driscoll, Chairman Mineracao Sao Jose Ltda.--flio de Janeiro, Brazil Jan D. Koene, Manager Placer Service Corp.-New York, New York William H. Breeding, President St. Joe American Corporation--New York, New York Thomas N. Walthier, President St. Joseph Explorations Limited--Toronto, Ontario, Canada Robert M, Ginn, Vice President Form 10-K Copies of St. Joe's current Annual Report on Form 10-K to the Securities and Exchange Commission are available to shareholders upon written request to the Director of Corporate Communications, St. Joe Minerals Corporation, 250 Park Avenue, New York, New York 10017. St. Job Minerals Corporation Is an equal opportunity employer. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. St. Joe Minerals Corporation 250 Park Avenue New York, New York 10017 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission