Document RJoBORZV7BL5G5nzQww1RJKKn

ASARCO INCORPORATED CONTENTS Letter to Stockholders Year in Review and Outlook Financial Review Financial Statements Notes to Financial Statements Business Segments Report of Independent Accountants Supplementary Financial and Statistical Information Unaudited Quarterly Data Metal Price Sensitivity Five-Year Selected Financial and Statistical Data Asarco Worldwide Operations Executive Officers, Directors and Committees of the Board Corporate Information 2 6 19 22 26 34 36 37 38 39 40 Inside Bade Cover Asarco is one of the world's leading producers ofnonferrous metals, principally copper, lead, zinc, silver and gold. Asarco also produces specialty chemicals, minerals and other industrial products and provides environmental services. Asarco has substantial interests in three mining com panies: a 17.4% stake in MIM. Holdings Limited (MIM) in Australia, a 52J% inter est in Southern Peru Copper Corporation (SPCC), and a 283% holding in Mexico Desarrollo Industrial Minero, SA. de C.V. (MEDIMSA). Asarco or its associated companies operate mines in the United States, Australia, Mexico and Peru. Asarco and its associated companies together in 1992 accountedfor about 13% of western world mine production ofcopper, 12% ofsilver, 14% oflead and 9% of zinc. All tonnages in this annual report are expressed in short tons. All ounces are troy ounces. Dollar amounts are expressed in VS. dollars unless otherwise indicated. "Asarco"or "the Company" includes Asarco and its consolidated subsidiaries. Cover: Asarco achieved its strategic objec tive in 1992 of integrating its nonferrous metals business, having once been princi pally a custom smelter and refiner ofores and concentrates. Pictured on the cover are elements that represent the raw materials and finished products ofan integrated min ing company. These elements include a geologic map for exploration, the metal bearing ores mined from the earth and refined copper, lead, silver and gold. Shown in the lower right-hand comer is a oneounce coin struck from Asarco silver. ri i 2 annual report FINANCIAL highlights ANMailONl. KJUArTFPHNAWC.WMPTMAM>aTOCKHOUMAMOIINTM FOR THE YEAR ENDED Sales Operating income Goss) Net earnings Goss) Net earnings Goss) per common share Dividends per common share 1 t2 $1,908.5 $ (41.8) $ (83.1) $ (2.01) $ 0.80 AT YEAR-END Assets Total debt Common stockholders' equity Common shares outstanding Book value per common share Common stockholders Employees $2,945.9 $ 868.8 $1,357.5 415 $ 32.74 11,000 8,900 i i $1,911.8 $ 61.1 $ 46.0 $ 1.12 $ 1.60 $2,953.8 $ 801.6 $1,474.8 41.2 $ 35.75 12,300 9,100 Results for the year include an after-tax provision of SI 22.1 million, which comprises S56.0 million in costs for the adoption of Statement of Financial Accounting Standards 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions", a $44.0 million charge for environmental costs, and a $21.1 million charge for the reduction in carrying value of certain facilities. In 1992, Asarco recorded a substan tial charge to earnings to adopt a new accounting standard for postretirement benefits, to add to the Company's reserve for envi ronmental costs and to write off certain facilities which will not be used following installation of new technology. Prior to giving effect to this spe cial provision, the Company's earnings declined about 15% from 1991 levels. This difference is accounted for by the decline in price of several of the Company's principal metals: copper, silver, and gold. There were, of course, other differences between the two years that reflect the changes we are making in the business and the problems we have sometimes encountered in that process. The most significant of these changes has involved the strategy begun seven years ago of restruc turing Asarco from a custom smelter and refiner into an inte grated copper and lead mining company. By the end of 1992, we had nearly completed that process. In doing so we have invested $1.3 billion in the acquisition and development of ore reserves and operating properties. The Company's copper ore reserves have been expanded eight fold during this period and its cop per mining production capacity quadrupled. In 1992, with the com pletion of the expansion projects at the Mission and Ray mines in Arizona, the Company became self sufficient in the supply of copper concentrates to its smelters. As recently as 1985, the Company supplied only 25% of its copper concentrate requirements from internal sources. Similarly in lead, the Company's ore reserve position has doubled in the last seven years and it now supplies 80% of the lead concen trates for its Glover, Missouri, smelter from its own mines. The major remaining step in this strategic development program is completion of the modernization and expansion of the El Paso, Texas, copper smelter. This project is scheduled for commissioning in the first quarter of 1993. Expansion projects at the Mission mine have more than dou bled production capacity since 1985 and at Ray the production capacity has been increased by two-thirds since it was acquired in late 1986. The start-up of the most recent and most significant phases of these expansions occurred in 1992. They were not trouble free. At Mission, we began mining in an area where the ore is hard and the grade low. It was not until mid year that we developed new tech niques to treat the hard ore and the mining plan had progressed to where higher grades were avail able. We lost about 28 million pounds of copper production dur ing this period. In a similar way equipment start-up problems and severe weather at the Ray mine caused a 12-million-pound shortfall in cop per production. These production shortfalls off set most of the benefit in 1992 of the increased production volume which became available from the expansion projects. In the future, as we resolve these problems, the Company's earnings should bene fit in a significant way from the increased production capacity now available. Some of the weather-related problems which affected the Ray mine in 1992 continued into the early part of the new year. Normal rainfall at Ray is about 171/2 inch es a year. In 1992,36 inches fell at the property, eight inches in December alone. In the early part of January 1993, another 14 inches were recorded at the mine. As a consequence, mining operations at Ray and milling operations at the Hayden, Arizona, concentrator were disrupted. The learning process for new projects and the effects of nature on existing ones are part of the mining business. They make it interesting, but they also make it unpredictable. From left to right, front to back, at the site of the new furnace at the El Paso, Texas, copper smelter. George W. Anderson, Francis R. McAllister, Augustus B. Kinsolving, Richard de J. Osborne, Robert M. Novotny, John R. Corbett, fames f. Kerr, Robert f. Muth, Robert f. Kupsch, Kevin R. Morano*, Robert J. Bothwell, ]r. 'Kevin R. Morano becomes vice president, finance and chieffinancial officer and will join the management committee on May 1,1993. 3 The other big variable in the mining business is the market. While strong growth in worldwide copper consumption has provided good support for the copper price, the prices of lead and silver have not been as favorable. The low price of silver, particularly, led to our decision to shut down current mining operations at the Galena silver mine in Idaho. It is being held on a care-and-maintenance basis as is the nearby Coeur mine which was shut in 1991. In February 1993, we decided that we should also shut down temporari ly, the Troy, Montana, silver-copper mine. Low prices for lead and sil ver also affected operations at our East Helena, Montana, lead smelter and our Omaha, Nebraska, refinery. These are the only smelt ing and refining plants left in the Asarco system which rely on ores and concentrates produced by oth ers for their feed stock. The closure of a number of lead, zinc and silver mines in the United States, Mexico and Peru is limiting the availability of such material for these plants. We have also been seeking ways to increase the cash return from some of our major invest ments outside of the United States. We made good progress in 1992 with Southern Peru Copper Corp oration (SPCC), a company 52.3% owned by Asarco. Following the resolution in late 1991 of a long standing dispute* between SPCC and the Govern ment of Peru, discriminatory tariffs, exchange rates, taxes and other practices were ended and a program of regular cash distribu tions to SPCC shareholders began. In December 1991, $60 million was distributed to shareholders, $31 million of that amount to Asarco. Three quarterly dividends, aggre gating $15 million were paid in 1992, $8 million to Asarco. SPCC operations were normal in 1992 and cash moved freely in and out of the country. SPCC also began its $300 million, 5-year investment program committed as part of the 1991 agreement with the govern ment. Loan commitments for $70 million have so far been received to support these investment proj ects. SPCC is seeking a total of $150 million of finance. This level of financing should assure that a share of earnings can continue to be paid out to the shareholders as dividends. M.I.M. Holdings Limited, Asarco's 17.4% owned associated company in Australia, made good progress in its program to reduce costs and improve productivity. M.I.M.'s earnings improved in fis cal 1992, ended June 30, and it paid out 65% of earnings as dividends. Asarco's share was $9 million. We continued to work on our program to generate cash from our investment in Mexico Desarrollo Industrial Minero, S.A. de C.V., in which we own a 28.3% interest. We have not been successful to date in finding a buyer for this invest ment, but we are still actively seek ing an alternative which will pro duce a better cash return. I referred at the beginning of this letter to the $122 million spe cial charge to earnings made in 1992. The requirement to account for postretirement benefits (SFAS 106) on an accrued-liability basis accounted for $56 million of the charge. With the completion of the expansion and modernization proj ect at El Paso, now planned for early 1993, we considered it appro priate to reduce the carrying value of certain assets which will not be used following completion of this project. Of the charge, $21 million relates to the write-down of these and certain other facilities. I have made note each year in this letter of the legacies which a ninety-three-year-old company, like Asarco, carries with it. These legacies are derived from an era when environmental perceptions, regulations and laws were differ ent and available control technolo gies were less effective than they are today. The remaining $44 mil lion of the special earnings provi sion was to add to the Company's reserve to meet its future environ- 4 mental obligations. As a result of developments during 1992, the Company is now able to estimate with the requisite accounting cer tainty, a substantial portion of the anticipated cost at the sites in which it is now involved. At year end 1992, the Company had a pre tax reserve balance of $141 million on its books for future environ mental obligations. Having restructured Asarco into an integrated mining, smelting and refining company in copper and lead, we will now turn our attention to reorganizing manage ment to better reflect the new oper ating structure and to improving the day-to-day operations. Capita! spending, which has totaled more than $850 million in the last five years, will be reduced in 1993 to about $120 million and the process of reducing our level of debt towards our long-term objective of 25% of total capitalization will begin. We have changed the culture at Asarco in a very fundamental way in recent years. Additional steps aimed at integrating our mining, smelting and refining operations will be completed in the second quarter of 1993. At that time, we will combine the operating man agement of our metals businesses under two senior executives, one responsible for copper operations and the other for lead, zinc, silver and mineral operations. These changes will complete the process begun two years ago of pushing the day-to-day operating responsi bilities down a level in our already quite flat organization. In this environment of change and continuous improvement, our people at all levels are adapting well and performing superbly. The Board of Directors joins me in thanking you, our shareholders, for your support during this peri od of rapid change and restructur ing. We believe our strategy has been sound, that our properties are good and that the payoff for share holders will become increasingly evident in the years ahead. For the Board of Directors, (/ Richard de J. Osborne Chairman of the Board February 19,1993 I i i i i !I i 5 YEA* IN REVIEW AND OUTLOOK AIETATA vPCO * P E It Asarco's mine production of copper rose 24% in 1992, compared with 1991. The higher production reflected the completion of the expansion projects at the Arizona mines. The projects were completed at Mission in late 1991 and Ray in early 1992. Smelter production rose 9%, reflecting the second consecutive year of record production at the Hayden smelter in Arizona and higher production at El Paso. In 1992, the Company became self sufficient in the supply of copper concentrates from its mines to its smelters. Asarco realized an average price for copper of $1.04 per pound in 1992,3% below the $1.07 a pound it realized in 1991. Results of the copper operations were adversely affected in 1992 by a decline in prices and lower-thanplanned throughput at the mines. which resulted from start-up difficulties with the expansion projects and weather-related problems. New techniques were developed in mid-1992 to address the harder ores encountered at the Mission mine during the year. In 1992, the Ray mine implemented programs to address the effects of the heavy rains. Construction of the new CONTOP furnace at the El Paso, Texas, copper smelter began in May 1992 following receipt of a final permit. Start up of the furnace is expected in early 1993. In late 1992, the Company announced that effective in May 1993, all cop per operations will be organized under a single manager with head quarters in Tucson, Arizona. Western world consumption of copper grew 1.3% to 10.0 million tons in 1992, the seventh consecutive year of record growth. Consumption grew 7.7% in the United States, 1.8% in Europe and declined 11.5% in Japan. Western world output of refined copper grew 4.7% to 9.8 million tons. The growth reflected a 1.7% increase in mine production from Chile, Indonesia and the United States and the conversion of previous accumulations of copper concentrates into refined form. Net east-west trade added 310,000 tons of refined copper to western world supply. Exports to the west of 325,000 tons from the Commonwealth of Independent States and 285,000 tons from Poland were partially offset by Chinese imports of 300,000 tons. resulting in a surplus in supply of 137,000 tons in 1992. Total copper in the hands of producers, consumers and terminal markets rose to a five and a half week supply at the end of 1992, compared with five weeks in 1991. Total stocks remained low by his torical standards. Consumption of copper is expected to increase by 2.5% in 1993 to 10.25 million tons as west ern world economies continue to recover from their recessionary lows. Production is expected to rise 1.5% in 1993 to 9.9 million tons. COPPER OPERATIONS Asarco intemt 1%) Production (Contained Metal n 000s tons* 1992 1991 1990 MINE Mission 100.0 103.2 Ray 100.0 t65.1 Continental 49.9 52.4 Others 17.7 Total 338.4 Asarco Share 308.4 885 117.3 504 23.7 279.9 249 4 798 121.8 40.9 23 9 266 4 240.5 SMELTER El Paso 100.0 107.9 Hayden 100.0 208.4 Total 316.3 105.9 184.7 290.6 103 8 181.5 285.3 REFINERY Amarillo 100 0 467.2 Ray (SX/EW) 100.0 42.2 Total 509.4 450.2 42.6 492.8 441 5 40.9 482 4 COPPER RESER VE S MINE Mission Ray Continental Mineral Reserves at 12/31/92 (tons tn mions) Grade 1*1 565 1.120 356 0.67 0.63 0.30 6 ****,- . Jimmy L Bales, general mager of the Eastern Mining department, oversees the operations of four underground zinc mines near Knoxville, Tennessee. Safety is a way of life in the mining business. It is also a team effort. We spend a great deal of time and attention at Asarco on employee safety. We emphasize the importance of safety at regularly scheduled classes and drills. We have a company-wide program that recognizes the safest operations. Our people appreciate that good safety is good business. At Asarco safety is a company-wide commitment that begins at the top. Jimmy L. Bales ''CUSTOMER SERVICE Curtis F. Bates (center), general manager of the Southwestern Copper Division, oversees the El Paso, Texas, smelter and the Amariilo, Texas, refinery. Mr. Bates and Micheal D. Owsley (right), Amarillo plant manager, are shown at the copper rod line operation. 8 a When we ask our customers what they think good service is, they answer that they want a quality product, delivered on time, at a fair price. Our goal is to make sure this happens. At the Asarco copper refinery in Amarillo, Texas, we produce more than 460,000 tons of copper annually in the form of cathode, rod, cake and billet. Every order of copper is different in terms of shapes, sizes and quantity. The way in which we respond to the customer, however, is the same. We listen carefully and provide what the customer wants promptly. Our employees share a common goal of providing the highest quality products and support to our customers. To me, that is what good service is all about. Curtis F. Bates METALS Asarco's mine production of lead rose 2% in 1992, compared with 1991, Asaroo began development of the south ore body at the Sweetwater mine in 1992. The Company's Missouri Lead busi ness increased the supply of con centrates from its own mines to its smelter to 80% in 1992. The Glover smelter/refinery had record pro duction in 1992. The Company's custom smelting and refining cir cuit in East Helena, Montana, and Omaha, Nebraska, was adversely affected in 1992 by the closure of a number of polymetallic lead-zincsilver mines in the United States, Mexico and Peru, which limited the availability of high-value lead concentrates. Asarco realized an average price of 26 cents for lead in 1992, the same as in 1991. In late 1992, the Company also announced that effective in May 1993, all of its lead, zinc, silver and mineral operations will be orga nized under a single manager, with headquarters in New York. Western world consumption of lead declined 3% to 4.95 million tons in 1992. Consumption de clined 5% in the United States, 35% in Europe and 3.4% in Japan. In 1992,84% of U.S. consumption of lead and 63% of western world consumption was in automobile batteries. Western world supply of refined lead increased .2% to 4.9 million tons in 1992, compared with 1991. Production in the U.S. declined by 3% to 15 million tons, reflecting lower mine output. Net exports of 90,000 tons from the former Socialist Bloc to the west caused a supply surplus of 15,000 tons in 1992. Refined lead in the hands of western world producers, con sumers and the terminal markets at the end of 1992 rose to the equiv alent of about seven weeks of sup ply, compared with five weeks in 1991. Western world consumption of lead in 1993 is expected to remain at the same 5.0 million-ton level as in 1992. Production of lead, how ever, is expected to decline by 170,000 tons because of lower mine and secondary production, and despite a continued flow of metal from the Commonwealth of Independent States, inventories are expected to decline in 1993. leao operations A.sa_r_co Intsrsst (%> Production (Contained Metal m 000s tons! 1992 1991 1990 MINE Leadville 52.5 6.1 64 54 Sweetwater 100.0 50.9 499 34.5 West Fork 100.0 56.2 54.5 56.5 Others Total 4.1 117.3 56 116 4 5.8 102.2 Asarco Share 113.6 111.7 98.1 SMELTER East Helena 100.0 71.6 Glover 100.0 130.1 Total 201.7 72.7 129.5 202.2 68.7 122.6 191.3 REFINERY Glover 100.0 130.1 Omaha 100.0 75.0 Total 205.1 129.5 78.5 208.0 123.1 66.9 190.0 LEAD RESERVES MINE Leadville Sweetwater West Fork Minoral Rosorvos Grade at 12131/32 (tons m millions) <%) 0.7 3.78 20.8 4.93 7.3 5.65 9 METALS: ZINC Asarco's mine production of zinc rose 1% in 1992. Results of the zinc operations improved in 1992 due to the higher price. The average price of a pound of zinc on the LME increased 10% to 56 cents, compared with 51 cents per pound in 1991. The Company placed the zinc mines in Tennessee on a seven-day schedule from five days in the first quarter of 1992. The schedule and the purchase of new mine equipment for the mines are expected to increase production and improve productivity in 1993. Western world zinc consump tion declined J5% in 1992 to 5.9 million tons. Consumption in the United States rose 12% and de clined 3.1% in Europe and 8.2% in Japan. Recovering automotive and construction markets in the U.S. were the major factors in higher US. consumption. On the supply side, western world production of slab zinc was 5.9 million tons in 1992, the same as in 1991. Production and con sumption of zinc were in balance in 1992. Because of exports by the Commonwealth of Independent States, the zinc market experienced a supply surplus of 225,000 tons. Reported stocks in 1992 increased to the equivalent of a nine-week supply, from six weeks in 1991. Western world zinc consump tion is expected to rise 3% in 1993. Western world supply of slab zinc is expected to decline about 1% in 1993 because of production cut backs in 199Z ZINC OPERATIONS Asarco Interest (%> Production (Contained Meill in 000s tons) 1SSZ 1SS1 ISM MINE Leadville 52.5 16.3 Missouri mines 100.0 15.3 Tennessee 100.0 74.9 Quiruvilca- Peru 80.0 13.6 Tots! 120.1 14.8 15.7 73.9 15.0 119.4 14.2 19.2 69.5 16.9 119.8 Asereo Share 109.6 109.0 109.3 ZINC RESERVES MINE Leadville Missouri mines Tennessee Quiruvilca-Peru Mineral Reserves et 12/31/92 (tons it millions) Grade (Sbl 0.7 8.10 28.2 0.83 5.5 3.22 5.4 4.24 e 10 Robert M. Novotny (left), vice president, operations, is shown above with IV. Hoyl Gill, president of Asarco's American Limestone Company subsidiary, at the Forks of the River Quarrv outside of Knoxville. Tennessee. 3.T?- We believe that all operations and activities of Asarco should be conducted responsibly and in a manner designed to protect the health and safety of employees, customers, the public and the environment. Our objective is not only to comply with existing laws, but to support other activities that contribute to environmental protection, responsible resource management and the safety and well-being of our employees, customers and local communities. We have a formal Environmental, Safety and Health Policy, which we take seriously. We are committed to responsible management of the natural resources entrusted to our care. Robert M. Novotny II iNvoivtuair Terry E. Ershne, general manager of the Missouri Lead Division, heads the Company's integrated lead business, including two lead mines and a smelter(refinery complex. 12 Continuously improving our business requires everyone's involvement. At the Asarco Missouri Lead Division the employees make a difference by contributing their knowledge and experience to the process of making lead. Employees work in teams at the Glover smelter/refinery and the Sweetwater and West Fork mines to identify problems and come up with solutions that result in measurable improvements. The collective commitment and teamwork of our people is represented in Asarco's quality statement, which was formulated by our employees and adopted in early 1992. The essential principles of the Asarco quality statement include commitment to continuous improvement, employee involvement, safety, environmental concern and customer satisfaction. The principles, together, add up to empowering people to get the job done and done well. Terry E. Erskine METALS: SILVER Asarco's mine production of silver declined 25% in 1992, as a result of the temporary closure of the northern Idaho-based Coeur mine in 1991 and Galena mine in mid1992. In mid-February 1993, the Company announced the tempo rary closure of its Troy silver-cop per mine near Libby, Montana, in mid-April 1993. Results of the sil ver operations in 1992 were also affected by the low price. Asarco's average realized price for silver declined 3.6% to $3.97 per ounce, compared with $4.12 in 1991. Western world industrial silver consumption increased 13% to 550 million ounces in 1992. It was the seventh consecutive year of growth and the third consecu tive year that industrial silver consumption exceeded supply. Consumption in the United States grew 1.9% to 121 million ounces. The photographic industry accounted for about 54% of indus trial consumption in the U.S. and 40% in the western world. On the supply side, western world output of newly mined and recycled refined silver in 1992 increased .1% to 495 million ounces. Visible refined stocks of silver at year-end 1992 were 275 million ounces, equal to a 26-week supply, compared with a 30-week supply in 1991. The price of silver often reflects speculative interest as well as market fundamentals. Because of the very substantial buildup in stocks of silver in the 1980's, a recovery may take several more years of inventory reductions before investor interest returns to the market. If current trends in industrial consumption of silver continue and the substantial num ber of mines that have closed in the last two years remain closed, the cumulative supply built up over the last 10 years is expected to be consumed before the end of the decade. SILVER OPERATIONS Asarco Infract {%) Production (Contained MeuI >n 0005 troy ounces) 1*92 1991 1*90 MINE Coeur 50.0 - 381 2.113 Galena 37.5 1.573 3.279 3,066 Mission 100.0 1,661 1.366 1.324 Troy 75.0 3.044 3,960 3.793 QuiruvilcaPeru 80.0 1314 2,454 2.400 Others 1,636 2,156 1.961 Total 9,728 13,586 14.657 Asareo Share 7,013 9,298 9.731 REFINERY Amarillo 100.0 39305 32.107 36.272 SILVER RESERVES MINE Coeur Galena Mission Troy Quiruvilca-Peru Mineral Reserve* Grade 12/31/92 ttons in millionsl (ounces/tonl 04 1.0 565.0 12.0 54 17.32 15.07 0.14 1.42 5.62 13 Asarco's mine production of gold declined 1% in 1992. Asaico's aver age realized price for gold declined 9.4% to $360.53 per ounce in 1992, compared with $397.85 in 1991. Results of Asairo Australia Limited, the Company's 60%owned subsidiary in Western Australia, were affected in 1992 by the lower gold price, heavy rains and low-grade ores from diminish ing oxide ore reserves at the Wiluna mine. In 1992, Asanco Australia began construction of a bacterial oxidation plant to treat sulfide gold ore at its Wiluna mine. The new processing plant, which will start up in early 1993, is designed to treat 400,000 metric tons of sulfide ore annually. In early 1993, Asanco Australia announced that it discovered an extension to the sulfide mineral ization at Wiluna as a result of a drilling program began in late 1992. Western world gold con sumption in 1992 was 813 million ounces, about the same as in 1991. The use of gold for jewelry accounted for 80% of western world consumption. Western world supply of newly mined and recycled refined gold in 1992 increased 7% to 86.7 million ounces. Western world mine pro duction of gold was 57.3 million ounces in 1992, about the same as in 1991. SOLD OPERATI Aaarco Interact <l Production (Contained Metal m 000s trov ouncesl tan 1M1 1M0 MINE Leadvilie 52.5 13.7 13.3 10.0 WilunaAustralia 60.0 74.4 98.7 137.6 JurtdeeAustrata Others 60.0 36.0 12.8 _ 0.7 1.2 19.4 Total Asarco Share 124.8 74.0 126.0 74.6 167.0 55.1 REFINERY Amarillo 100.0 22S.4 195.2 295.4 GOLD RESERVES Mineral Raaarvaa Grade at 12/31/92 Rons m millions} louncesAon) MINE Leadvilie 0.7 0.07 Wiluna-Australia 3.4 0.13 JundeeAustralia 0.6 0.08 14 -INVESTOR VALUATION Richard de J. Osborne (right), Asarco chairman of the board, and Thomas }. Findley, fr,, treasurer, are shewn in front of a drill at the Mission copper mine in Arizona during the recent tour ofanalysts. Asarco's investor relations program consists of frequent communications with analysts and other members of the financial community. We meet regularly with investors individually and in groups. We hold quarterly meetings in New York and periodically in other domestic and international financial centers. In November 1992, Asarco hosted 90 analysts, bankers and journalists on a two-day tour of its Arizona-based, Mission and Ray copper mines and Hayden smelter. We know from experience that tours are one of the best ways for an analyst to understand and value Asarco. There is no substitute for meeting the people and seeing the properties which produce the Company's results. We value the open two-way communications which result from these frequent contacts with our shareholders. Thomas J. Findley, Jr. 15 TECHNICAL SERVICES Vince Keller, an environmental laboratory coordinator, is shown at Asarco's Technical Services Center in Salt Lake City, Utah. Asarco's Technical Services Center provides in-house engineering' development, environmental and health resources to the Company's mines and plants. Among the many facilities available to the plants and mines, the inductively Coupled Plasma (ICP) spectrometer shown above can simultaneously detect minute concentrations of up to 32 elements in solids and liquids. This instrument is used to evaluate the content of soils and water. The Technical Services Center uses a variety of technologically advanced computer-based instruments to assure high quality in the Company's processes and in the metals produced at the mines and plants. SPECIALTY CHEMICALS. MINERALS SPECIALTY CHEMICALS Asaico's wholly owned EnthoneOMI, Inc, subsidiary, produces specialty chemicals for surface treatment and plating of metals. It serves the electronics, automotive, aerospace and jewelry industries worldwide. Enthone-OMI's earnings improved modestly in 1992. Oper ations in the United States were profitable in 1992, following a three-year period ofrationaliza tion. Operations in Asia were also profitable in 1992 and have been growing well for the last three years. Operations in Europe were not profitable in 1992 as markets weakened and specialty chemicals sales declined by 9%. In the fourth quarter of 1992, Enthone-OMI reorganized European operations and reduced costs by $4.4 million a year. When die European econo mies begin to recover, EnthoneOMI should have a growing, prof itable specialty chemicals business in all regions of the world. MINERALS Asarco, through its subsidiary American Limestone Company, Inc., is a producer of agricultural limestone, concrete and construc tion minerals. American Limestone had higher sales and earnings in 1992, com pared with 1991, despite a soft regional construction market. The improved results were due to a 9% increase in sales of stone, concrete and agricultural limestone and reduced costs from operating improvements. ASSOCIATED COMPANIES Asarco has significant investments in several leading nonferrous metal companies throughout the world. Mexico Desarrollo Industrial Minero, S.A. de G.V., (MEDIMSA), owns companies in Mexico that produce copper, lead, zinc, silver, gold, coal, coke, fluorspar and sul furic add. MEDIMSA owns and operates thirteen mines and nine metallurgical plants. In 1992, Asarco did not exercise a $40 mil lion option to purchase 16.7 mil lion shares of MEDIMSA, effective ly lowering its ownership interest to 283%. The option was held under a 1989 agreement with a bank which had provided financ ing for a MEDIMSA capital call. In mid 1991, the Company announced that it was considering alternatives for its investment in MEDIMSA, including the sale of its shareholdings. Asarco stopped equity accounting for its invest ment in the second quarter of 1991. While Asarco has not been success ful in finding a buyer for this investment, it is actively seeking an alternative which will produce a better cash return. In the year ended September 30, 1992, MEDIMSA had earnings of $873 million, compared with $66.5 million in 1991. Sales were $876.6 million in 1992, compared with $830.0 million in 1991. MEDIMSA has not paid a dividend since 1988. M.I.M. Holdings Limited (MIM), in Brisbane, Australia, produces copper, lead, zinc, silver, gold and coal. It also has interests in metals companies in Europe and North America. Asarco owns 17.4% of MIM and accounts for its invest 18 ment on the cost basis. MIM made good progress in 1992, in its program to reduce cost and improve productivity. Earnings during MIM's last fiscal year were A$106, including A$46 million in asset sales. MIM paid dividends of A$69 million, repre senting 65% of earnings. For the calendar year 1992, MIM paid $9 million of dividends to Asarco. Southern Peru Copper Corporation (SPCC) owns and operates two copper mines and a smelter. It also produces silver and molybdenum. Asarco owns 52.3% of SPCC and accounts for its investment on the cost method. SPCC made good progress in 1992. In late 1991, following the end of a long-standing dispute with the Government of Peru, SPCC began a program of regular cash distribu tions. In 1992, regular quarterly div idends aggregating $15 million for the year were paid, $7.8 million to Asarco. The year 1992 was SPCC's first full year of operations since the resolution of the dispute with the government. After-tax earnings were $45.6 million, compared with a $0.4 million loss in 1991, despite lower copper prices. SPCC is in the first year of a 5year, $300 million investment pro gram, including $100 million for environmental control, $100 mil lion for solvent-extraction/elec trowinning projects and $100 mil lion for equipment modernization. SPCC is seeking a total finance package of $150 million and $70 million of loan commitments have been received to date. This level of financing should assure a continu ing stream of dividends. ASSOCIATED COMPANIES Mint Production (Contained Metal in 000s tons. Silver and Gold <n 000s troy ounces! 1992 1991 1990 MIM Asarco Interest: 17.4% Copper 158.6 179.6 184.8 Lead 215.S 182.3 197.6 Zinc 251.8 263.3 2298 Silver 18475.0 15.629.0 16.479.0 Gold 1,592.6 814.5 68.6 SPCC Aaerco Interest: 82.3% Copper 267.9 274.6 207.1 Silver 2,675.0 2,794.0 2,019.0 MEDIMSA Atarco Interest: 28.3% Copper 260.3 287.2 224.6 Lead 39.4 43.9 46.1 Zinc 174.9 179.0 168.4 Silver 13.073.0 14,890.0 14,310.0 Gold 24.6 24.7 14 0 AiAhl-O INCOhl-WhAUu A*l> CUNbOUOATEO Su6i>>l>IAn>c6 FINANCIAL' REVIEW MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION Earnings: The Company reported a net loss for the year ended December 31,1992 of $83.1 million, or $2.01 per share. The loss includes an after-tax charge of $122.1 million consisting principally of $56 million in costs for the adoption of Statement of Financial Accounting Standards (SFAS) 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", a $44 million charge for environmental costs, and a $21.1 mil lion charge for the reduction in carrying value of certain facilities. The Company also adopted SFAS 109 "Accounting for Income Taxes" in 1992, which resulted in a reduction and restatement of prior-year earnings in the amount of $20 million ($13 million for 1990 and $7 million for 1989). Earnings for 1992 would have been $39.0 million, or $.95 per share, without the $122.1 million charge, com pared with net earnings of $46.0 million, or $1.12 per share, in 1991 and restated net earnings of $135.8 mil lion, or $328 per share, in 1990. Lower metal prices for copper, silver, and gold, reduced earnings in 1992, com pared with 1991. Expansions at the Company's Mission and Ray mines resulted in increased copper mine pro duction in 1992. Because of heavy rains at Ray and harder ores and lower ore grades at Mission, copper mine production fell below expectations, reducing earnings. The Company realized after-tax dividend income of $73 million from Southern Peru Copper Corporation (SPCC) in 1992, compared with no SPCC dividend income in 1991 and 1990. Lower prices for copper, lead, silver, gold and zinc reduced earnings in 1991, compared with 1990. Earnings for 1991 were also reduced by a charge of $6.6 million after-tax, to establish a reserve for a receivable from a copper customer which filed for bankruptcy pro tection. Earnings for 1991 benefited from an after-tax profit of $5.4 million from the sale of the Company's direct interest in Highlands Gold Limited. In the second quarter of 1991, the Company discontinued equity accounting for its investment in Mexico Desarrollo Industrial Minero, S.A. de C.V. (MEDIMSA), after announcing that it was considering the sale or other form of disposition of some or all of this investment. As a result, the Company's equity earnings from MEDIM SA include earnings for the first quarter of 1991 only. Earnings in 1990 included a provision which reduced after-tax earnings by $51.5 million, or $124 per share. This provision was for environmental costs asso ciated with current and previously closed facilities, and increased State of Arizona royalties applicable to the Company's Mission copper mine. Earnings in 1990 benefited from lower taxes on income, which were reduced by $6 million from a reduction of taxes payable for prior years. Prices: Prices for the Company's metals are established principally on the New York Commodity Exchange ("COMEX") or the London Metal Exchange ("LME"). Thus, it is not possible to estimate prices for future Company metal sales. For earnings sensitivity to metal prices, see "Supplementary Financial and Statistical Information". Realized prices in 1992 for copper declined 3 cents to $1.04 per pound from 1991's average of $1.07 per pound and declined 17 cents from 1990's average $1.21 per pound; for lead the price averaged 26 cents per pound in 1992 and 1991, a decline of 12 cents from the average realized price in 1990; for silver the realized price of $3.97 declined 15 cents from 1991 and declined 87 cents from 1990's average of $4.84 an ounce. The 1992 zinc price rose five cents to 56 cents per pound horn 1991's average of 51 cents and declined 19 cents from 1990's average of 75 cents per pound. Sales: Sales in 1992 were $1,908.5 million, compared with sales of $1,911.8 million in 1991 and $2210.3 mil lion for 1990. Increased sales volumes of copper, net of the effect of lower lead and silver sales volumes, par tially offset the decline in sales dollars caused by lower prices. Specialty chemical sales were also lower in Europe as a result of the continued recession while North America specialty chemical sales and mineral sales improved. In 1991, increased sales volumes of lead and copper partially offset the decline in sales dol lars caused by lower prices. Cost of Products and Services: Cost of products and services in 1992 were $1,647.3 million, compared with $1,6342 million in 1991 and $1,810.7 million in 1990. The increase in 1992 was from increases in copper sales volumes, net of the impact of lower lead and silver sales volumes and lower purchases of refined copper in 1992. The Company's cost for purchased refined copper approximates the market price at which it is sold. In 1991, operating problems at the Ray mine, including the effects of heavy rains during the third and fourth quarters of 1990 and the first quarter of 1991, and a scheduled biennial maintenance shutdown at the smelter for 24 days during the first quarter of 1991, resulted in reduced production and higher operating costs. ASARCO INCORPORATED AND CONSOLIOATEO SUBSIDIARIES Other Expenses: Selling and administrative costs decreased by $7.1 million in 1992 as a result of cost reduction programs. The 1991 provision for doubtful accounts includes the establishment of a $10.6 million bad debt reserve for receivables from Laribee Wire Manufacturing Company, Inc. and its affiliated compa nies. Depreciation and depletion expense increased by $11.8 million in 1992 primarily as a result of higher production following the completion of copper expan sion programs at Mission in October 1991 and Ray in February 1992. Increases in ore reserves, extended eco nomic lives which reduced the rate of increase. Research and exploration expense declined by $5.0 million in 1992 as a result of reduced levels of explo ration activity. Nonoperating Items: Interest expense was $5.0 million higher in 1992 than in 1991 as a result of higher average borrowings and decreased capitalized interest partially offset by a reduction in the average interest rate. Cap italized interest declined in 1992 by $4.9 million as a result of the completion of portions of the copper expansion program and lower interest rates. In 1991 interest expense was $82 million higher than in 1990 because of increased debt. Capitalized interest in creased in 1991 by $8.5 million as a result of the copper expansion projects. Other income increased to $23.9 million in 1992 from $22.9 million in 1991. Other in come in 1992 includes $7.8 million of dividends from Southern Peru Copper Corporation and in 1991 an $8.7 million gain on the sale of Highlands Gold Limited shares. Dividends from M.I.M. Holdings Limited included in other income were $8.8 million in 1992, $9.5 million in 1991 and $23.1 million in 1990. Taxes on Income: In 1992 the Company adopted SFAS 109, "Accounting for Income Taxes", which resulted in a reduction and restatement of prior-year earnings by $20 million ($13 million for 1990 and $7 million for 1989). The tax benefit in 1992 results from the operating loss and settlement of a Canadian tax assessment and other items. Taxes on income were reduced for 1991 as a result of percentage depletion, partially offset by the tax effect of the pro-rata repurchase of outstanding shares by SPCC. Equity in Earnings of Nonconsolidated Associated Companies: Equity earnings in 1991 and 1990 were pri marily from the Company's investment in MEDIMSA. During 1991, lower prices and discontinuance of equity accounting for the investment in MEDIMSA reduced equity earnings. Equity earnings for MEDIMSA were S10.2 million in 1991, compared with $48.1 in 1990. MEDIMSA paid no dividends during the past three years. Cz.^h Dov.t - Op^rslinc A rtjvifirr: Net cash provided from operating activities was $105.7 million in 1992, compared with $67.5 million in 1991 and $150.3 million in 1990. Setting aside the effect of the $122.1 million pro 20 vision, which is a noncash charge, and other noncash items, the $382 million increase in 1992 from 1991, results from $13.9 million from operating activities and $243 million from a reduction in operating assets net of liabilities. The $82.8 million decrease in 1991 from 1990, was from lower earnings due to metal prices and other factors noted above, net of a $71.5 million reduction in operating assets net of liabilities. Cash Flows - Investing Activities: The Company spent $134.6 million for property additions in 1992, including $703 million for the copper expansion and moderniza tion program at the Ray copper mine and El Paso cop per smelter and $9.5 million for participation payments on previously acquired properties. Capital expenditures were $282.9 million in 1991 of which $207.5 million was spent on the expansion and modernization program at the Mission and Ray copper mines and the El Paso cop per smelter. The expansion and modernization at Mission was completed in the fourth quarter of 1991 and at Ray in the first quarter of 1992. The Company's planned property additions in 1993 are estimated to be about $120 million. The El Paso modernization is sched uled for completion in early 1993. Asarco Australia Limited, a 60%-owned subsidiary of the Company acquired in 1991 the remaining 50% interest in the Wiluna gold mine owned by its former partner for $17.4 million. The Company acquired Industrias Oxy Metal, S.A. de C.V., a specialty chemi cals company in Mexico in 1990 for $4.8 million and two concrete plants in Tennessee for $1.5 million. In 1992 the Company did not exercise a $40 million option to purchase 16,705327 shares of MEDIMSA which it held under a 1989 agreement, effectively lower ing its ownership interest to 28.3%. Included in pur chases of investments in 1991 is $24.9 million for a stock subscription of MEDIMSA by a wholly owned sub sidiary of the Company. The Company received pro ceeds of $25.8 million from the sale of shares of Highlands Gold Limited and received $31.4 million in 1991 from a SPCC pro rata repurchase of outstanding shares which are included in proceeds from sale of securities. The Company reduced its carrying value in SPCC by the amount of these proceeds. Liquidity and Capital Resources: At December 31, 1992, the Company's debt as a percentage of total capi talization was 39.0%, compared with 35.2% at the end of 1991 and 26.7% at the end of 1990. Debt at the end of 1992 was $868.8 million, comparedwith $801.6 million in 1991 and $543.2 million at the end of 1990. Additional available credit under existing loan agreements totaled $180 million at the end of 1992. The Company expects that it will meet its cash requirements in 1993 and beyond from internally gener ated funds and from borrowings, if necessary, under its revolving credit agreements, or from additional debt financing. A shelf registration statement filed with the Securities and Exchange Commission in 1992 covers debt securities in the amount of $250 million available U*UO INCORPORATED AND CONSOLIDATED SUBSIDIARIES or issuance from time to time, of which $100 million vas issued in February 1993 as 7- 3/8% Notes which are iue in 2003. Dividends and Capital Stock: The Company paid divi dends of $33.0 million, or 80 cents per share, in 1992. In 1991, the Company purchased 67,314 shares of com mon stock at a cost of $1.8 million and paid dividends af $65.8 million, or $1.60 per share. In 1990 the Company purchased 557,117 shares of its common stock and 152,253 common stock purchase warrants at a total cost of $16.1 million and paid dividends of $66.3 million, or $1.60 per share. At the end of 1992, the Company had 41,467,000 common shares issued and outstanding, compared with 41,249,000 at the end of 1991 and 41,058,000 at the end of 1990. Closed Facilities and Environmental Matters: In 1992, the Company concluded that certain facilities, primari ly at the El Paso, Texas, smelter, were unlikely to be used following completion of its modernization and expansion program in early 1993. Accordingly, the Company recorded a pretax charge of $31.9 million to reduce the carrying value of these facilities. Developments in 1990 at a number of the Company's properties where it is probable that an envi ronmental liability has been incurred, increased the level of predictability of the future cost of these liabili ties sufficiently to make possible a reasonable estimate of such costs. Accordingly, in 1990, the Company recorded a charge to earnings which added $75.5 mil lion to its closed plant and environmental liability PRICE VOLUME ANALYSIS reserves. As a result of developments during 1992, the Company was able to further refine estimates with req uisite certainty for a substantial portion of the anticipat ed costs at sites at which it is involved. Accordingly, in 1992, the Company recorded a pretax charge of $66.7 million to provide additional reserves for these envi ronmental costs. At the end of 1992, such reserves totaled $141.0 million. Cash expenditures charged to these reserves were $36 million in 1992, $32 million in 1991 and $13 million in 1990. The increased expendi tures in 1992 and 1991 related to increased levels of remedial environmental activities at Leadville, Bunker Hill, Tacoma and other sites. It is the opinion of Management that the outcome of these environmental matters will not materially adversely affect the opera tions or financial position of Asarco and its consolidat ed subsidiaries. Tliis opinion is based upon reasonable estimates of costs of court judgments and settlements and of remediation costs and terms, where such esti mates could be made. The financial viability of other potentially responsible parties has been considered when relevant and no credit has been assumed for any potential insurance reimbursement to the Company when availability of insurance is not established. Accounting Matters: In November 1992, the Financial Accounting Standards Board (FASB) issued SFAS112, "Employers' Accounting for Postemployment Benefits". This Statement establishes accounting standards for employers who provide benefits to former or inactive employees after employment but before retirement. The Company has not yet determined the impact of the Statement on the consolidated financial statements. The following prices and volumes were realized during 1992,1991 and 1990. PRICE Copper (per pound) Lead (per pound) Silver (per ounce) Zinc (per pound) (1) Gold (per ounce) 1992 S 1.04 .26 3.97 .56 3t>0.53 1991 $ 1.07 .26 4.12 .51 397.85 1990 $ 1.21 .38 4.84 .75 410.70 VOLUME (IN THOUSANDS) Copper (pounds) Lead (pounds) Silver (ounces) Zinc (pounds) (1) Gold (ounces) 1,005,162 4u3,l IS 34,773 240,200 191 973,082 424379 37325 205,148- 189 962,268 328,788 37,063 207,282 314 (1) Zinc prices are per pound for refined zinc, which is sold in concentrate form. Volume is pounds of refined zinc contained in concentrate. Prices for the Company's metals are based on prices established on the New York Commodity Exchange or the London Metal Exchange. The pounds of copper sold in each year and the pounds of lead sold in 1991 increased as a result of higher production levels, inventory reductions and export sales. 21 ASARCO INCORPORATE!) AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEARS ENDED DECEMBER 11. UN THOUSANDS. EXCEPT PER SHARE AMOUNTS) Sales of products and services Operating costs and expenses: Cost of products and services Selling, administrative and other Provision for doubtful accounts Depreciation and depletion Research and exploration Provision to reduce carrying value of certain facilities (7) Provision for closed plant and environmental matters (8) Total operating costs and expenses Operating income (loss) Interest expense (9) Other income (2) Earnings (loss) before taxes on income and equity in results of nonconsolidated associated companies and cumulative effect of change in accounting principle Taxes on income (benefit) (3) Earnings floss) before equity in results of nonconsolidated associated companies and cumulative effect of change in accounting principle Equity in earnings of nonconsolidated associated companies, net of taxes on income of $0 in 1992, $3,473 in 1991 and $16,408 in 1990 (3) (6) Earnings floss) before cumulative effect of change in accounting principle Cumulative effect of change in accounting principle, net of taxes of $27300 (11) Net earnings floss) Per common share amounts: Earnings floss) before cumulative effect of change in accounting principle Cumulative effect of change in accounting principle Net earnings floss) Cash dividends Weighted average number of Asarco shares outstanding () See notes to financial statements. 1992 1991 1M0 $1,908,492 $1,911,806 $2310380 1,647,263 1,634,198 1310,705 87,195 94,258 93346 3,436 13,625 1,985 86,642 74,869 75,093 21,410 26,431 26,644 31,900 - - 72,400 1,950,246 (41,754) 51,230 23,911 7305 1350.686 61,120 46,227 22370 75327 2,083300 126,780 38,038 26361 (69,073) (37,371) 37,763 2,199 115303 15,910 (31,702) 35364 99393 2,575 10,393 36,451 (29,127) 45,957 135344 (53,964) - - S (83,091) $ 45,957 $ 135,844 t s (0.70) $ 1.12 $ 3.28 (1.31) s (2.01) $ s 0.80 $ - 1.12 $ 1.60 $ - 3.28 1.60 41,364 41,128 41,404 22 asarco incorporated and consolidated subsidiaries CONSOLIDATED BALANCE SHEET AT DECEMBER SI. (DOLLARS M THOUSANDS) ASSETS Current assets: Cash and cash equivalents Accounts and notes receivable, net of allowance for doubtful accounts of $4,232 and $3,326 Inventories (4) Other assets Total current assets Investments (6) Cost method Equity method Total investments Property (7) Less: Accumulated depreciation and depletion Net property Intangible and other assets TOTAL ASSETS LIABILITIES Current liabilities: Bank loans Current portion of long-term debt (9) Accounts payable Salaries and wages Taxes on income (3) Reserve for closed plant and environmental matters (8) Other liabilities Total current liabilities Long-term debt (9) Deferred income taxes (3) Reserve for closed plant and environmental matters (8) Accrued postretirement benefit obligation (11) Other liabilities and reserves TOTAL LIABILITIES Contingencies (8) PREFERRED STOCKHOLDERS' EQUITY (101 Authorized-10,000,000 shares without par value; none issued COMMON STOCKHOLDERS' EQUITY (101 Authorized-80,000,000 common shares without par value: Issued shares: 1992-45,039,878; 1991^15,039,878 Retained earnings Treasury stock (at cost) - common shares 1992-3,572,705; 1991-3,790,624 Total common stockholders' equity TOTAL LIABILITIES. PREFERRED AND CCMf/.CN STOCKHOLDERS' EGUITY () See notes to financial statements. 1992 1991 $ 33,248 $ 35,210 341,878 283,026 29,100 687,252 331,725 262,707 24,259 653,901 803,550 46,101 849,651 2,423,720 1,112,755 1,310,965 98,048 $2,945,916 838,131 42,174 880,305 2314,658 1,012,152 1,302306 117,125 $2,953,837 $ 20,574 63,868 208,688 15,985 42,879 39,997 28,720 420,711 784,327 104,240 100,962 90,214 87,969 1,588,423 $ 45,755 7,493 197356 16326 39,847 34,120 28,445 369,742 748,306 171318 70,058 -- 119,385 1,479,009 -- 679,991 821.072 (143,570) 1.357,493 679,991 950,791 (155,954) 1,474328 S2,94?,9io $2,953337 23 ASARCO INCORPORATED AND CONSOLIDATED SURSIOIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE TEARS ENDED DECEMBER II,________________________________ |M THOUSANDS) OPERATING ACTIVITIES Net earnings Goss) Adjustments to reconcile net earnings Goss) to net cash provided from operating activities: Depreciation and depletion Provision (benefit) for deferred income taxes Treasury stock used for employee benefits Undistributed equity earnings Net (gain) loss on sale of investments and property Provision to reduce carrying value of certain facilities Increase (decrease) in reserve for closed plant and environmental matters Provision for postretirement benefit obligation at adoption Cash provided from (used for) operating assets and liabilities, net of acquisitions: Accounts and notes receivable Inventories Accounts payable and accrued liabilities Other operating liabilities and reserves Other operating assets Foreign currency transaction losses Net cash provided from operating activities INVESTING ACTIVITIES Property additions Business acquisitions, net of cash acquired Proceeds from sale of securities and property Purchase of investments, principally marketable securities Net cash used for investing activities FINANCING ACTIVITIES Debt incurred Debt retired Retirement of common stock purchase warrants, net Net treasury stock transactions Dividends paid Net cash provided from financing activities Effect of exchange rate changes on cash Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 1992 1991 1990 S (83,091) $ 45,957 $ 135,844 ^y 'O xi 00i h-- 86,642 (60,200) 4,140 (1,772) (2,600) 31,900 81,764 74,869 2387 3318 (11,788) (10,125) - (24,944) _ 75,093 350 - (52,495) 7,906 - 67351 (5,255) (19,200) 13,553 6,960 15,620 447 105.689 53,759 (10,174) (7,762) (52,171) 3388 262 67,476 (69,481) (8,710) (15,140) 23,065 (15,171) 1,690 150302 (134,574) - 72,389 (73,374) (135,559) (282,917) (17392) 116,384 (77,998) (261,923) (236,962) (6,263) 65,838 (74363) (251,750) 84,781 (20,195) - 1,209 (33,043) 32,752 (4,844) (1,902) 33,210 33.248 267,654 (9,466) 766 (955) (65,796) 192,203 2,861 617 34,593 $ 35,210 241,764 (48331) (1,642) (14364) (66,298) 111,029 1348 11,129 23,464 S 34393 () See notes to financial statements. Descriptions of material noncash transactions and supplemental disclosures are included in Notes 3,6,8 and 9. 24 asarco incorporated and consolidated subsidiaries 1 CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS EQUITY _______ FOR THE TEARS ENDED DECEMBER SI, {COLLARS IN THOUSANOSI 1592 1M1 1M0 COMMON STOCK Balance at beginning of yean 1992-45,039,878 shares; 1991-44,992^72 shares; 1990-44,988,222 shares Issuance of47,606 shares in 1991; 4,050 shares in 1990 upon exercise ofcommon stock purchase warrants Balance at end of yean 1992-45,039,878 shares; 1991-45,039,878 shares; 1990-44,992^72 shares RETAINED EARNINGS Balance at beginning of year as previously reported Cumulative effect of accounting change-income taxes Balance at beginning of year Net earnings floss) Dividends declared and paid on common shares Treasury stock issued at less than cost Retirement of common stock purchase warrants Foreign currency adjustment Balance at end of year TREASURY STOCK Balance at beginning of year Purchased Used for employee benefits Balance at end of yean 1992-3,572,705 shares; 1991-3,790,624 shares; 1990-3,934,473 shares TOTAL COMMON STOCKHOLDERS* EQUITY S 679,991 $ 679,225 $ 679,159 - 766 66 679,991 679,991 679,225 950,791 _ 950,791 (83,091) (33,043) (7,035) . (6,550) 821,072 976,650 __ 976,650 45,957 (65,7%) (7,679) __ 1,659 950,791 910,802 (6,824) 903,978 135,844 (66,298) (235) (1,707) 5,068 976,650 (155,954) (166) 12,550 (165,996) (1,840) 11,882 (151,967) (14,430) 401 043,570) (155,954) (165,996) SI,357,493 $1,474,828 $1,489,879 () See notes to financial statements. 25 MARCO INCORPORATED AND CONSOLIOATEO SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements indude all significant subsidiaries in which the Company has voting control. Significant invest ments in the capital stock of associated companies and subsidiaries in which the Company does not have vot ing control are accounted for by the cost method or equity method. Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Inventories: Company-owned metals processed by smelters, refineries and other metal plants are valued at the lower of last-in, first-out (LIFO) cost or market. Other inventories are valued at the lower of first-in, first-out (FIFO) or average cost or market Property: Assets are valued at cost or less. Betterments, renewals, costs of bringing new mineral properties into production, and the cost of major development pro grams at existing mines are capitalized. Maintenance, repairs, development costs to maintain production at existing mines, and gains or losses on assets retired or sold are reflected in earnings as incurred. Plant assets are depredated over their estimated useful lives, gener ally by die units-of-production method. Depreciation and depletion of mine assets are computed generally by the units-of-production method using proven and prob able ore reserves. Revenue Recognition: Revenue is recognized on metals at the time a sales contract is executed and the sales price is fixed in accordance with the terms of the contract. Exploration: Tangible and intangible costs incurred in tire search for mineral properties are generally charged against earnings when incurred. When a commercial ore body is discovered, the related exploration costs pre viously charged against earnings are credited to earn ings and capitalized in Property. Hedge Contracts: The Company periodically uses fu tures and options contracts to hedge the effect of price changes on a portion of the primary metals it sells. Gains and losses on hedge contracts are reported as a component of the related transaction. Taxes on Income: The Company adopted Statement of Financial Accounting Standards (SFAS) 109 "Account ing for Income Taxes", in 1992. This statement super sedes SFAS 96, "Accounting for Income Taxes". De ferred income taxes reflect the future tax consequences of differences between the tax bases of assets and liabili ties and their financial reporting amounts at each yearend. No deferred income taxes have been provided for the income tax liability which would be incurred on repatriation of the undistributed earnings of the Com pany's foreign subsidiaries because the Company intends indefinitely to reinvest these earnings outside the United States. General business credits are account ed for by the flow-through method. Subsidiary Stock Issuance: Gains or losses arising from the sale of previously unissued shares to an unrelated party by a subsidiary are recognized as a component of Net Earnings to the extent that the net book value after the sale exceeds or is lower than the net book value per share immediately prior to the sale of the shares owned by the parent. Postretirement and Postemployment Benefits: The Company elected to adopt SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" in 1992. This statement required a change in accounting for postretirement benefits to the accrual method. In November 1992, the FASB issued SFAS 112 "Employers' Accounting for Postemployment Benefits". This pronouncement, which is effective for the year ending December 31,1994, establishes accounting stan dards for employers offering benefits to former or inac tive employees after employment but before retirement. The Company has not yet determined the impact of the statement on its consolidated financial statements. Other Certain reclassifications have been made to prior-year balances to conform to the current-year presentation. (21 OTHER INCOME Other income consists of the following: FOR THE YEARS ENDED DECEMBER 11, 1992 (IN MILLIONS) Interest income Dividend income Miscellaneous Total S 3.7 16.9 3.3 S23.9 mi $ 4.1 9.8 9.0 $22.9 ino $ 6.0 23.5 (2.9) $26.6 (3` *i\ES ON INCOME As discussed in Note 1, the Company adopted SFAS 109 in 12 and elected to apply the provisions of SFAS 109 retrv.odvely to January 1,1989. Accordingly, the begin ning balance of retained earnings as of January 1,1990 has beer, restated to reflect a decrease of $6.8 million to S9C~ i million. In addition, the financial statements for ASARCO INCORPORATED AND CONSOLIDATED SUBSIDIARIES the years ended December 1991 and 1990, the unaudited quarterly data presented in Supplementary Financial and Statistical Information section for 1991 and certain information contained in the Five Year Selected Financial and Statistical Data section for 1991,1990 and 1989 have been restated to comply with the provisions of SFAS109. The following summarizes the impact of applying SFAS 109 on net income and earnings per share: FOR THE YEARS ENDED DECEMBER 31. (IN MILLIONS. EXCEPT PER SHARE AMOUNTS) Net earnings as previously reported Effect of SFAS 109 As restated Net earnings per common share as previously reported Effect of SFAS 109 As restated 1931 1990 $46.0 - $46.0 $149.1 (13.3) $135.8 $1.12 - $1.12 $ 3.60 (0.32) $ 338 EARNINGS (LOSS) BEFORE TAXES ON INCOME: FOR THE YEARS ENDED DECEMBER 31. 1992 (IN MILLIONS) Domestic operations Foreign operations Total $(153.6) 5.3 $(148.3) 1991 $21.6 30.0 $51.6 1990 $ 79.4 88.8 $1683 TAX EXPENSE: The components of the provision for taxes on income are as follows: FOR THE YEARS ENDED DECEMBER 31. 1992 HN MILLIONS) U.S. Federal: Current tax provision (benefit) Deferred tax provision (benefit) US. Federal income tax provision (benefit) Foreign and State: Current tax provision Deferred tax provision (benefit) Foreign and state income tax provision Total income tax provision (benefit) $ (8.5) (60.0) (68.5) 3.5 (0.2) 3.3 5(653) 1991 $(l.l) 1.9 0.8 4.4 0.5 12 $ 57 1990 $21.7 0.3 22.0 10.2 0.1 10.3 $32.3 Total taxes paid (refunded) were: 1992-S2.6 million; 1991-($163) million and 1990-S26.4 million. RECONCILIATION OF STATUTORY INCOME TAX RATE: FOR THE YEARS ENDED DECEMBER 31. 1992 U.S. statutory income tax rate (benefit) (34.0%) Adjustment for entities for which no U.S. tax has been provided (0.2) Percentage depletion (6.8) Foreign taxes, net of federal benefit 0.5 Share repurchase by SPCC - Reversal of taxes previously accrued (4.7) Other 1.2 Taxes on income (benefitV-effective rate (44.0%) 1991 34.0%. 2.8 (34.2) 4.1 4.1 _ 0.2 11.0% 1990 34.0% (1.5) (11.4) 1.0 - (3.5) 0.6 193% Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities are as follows: DEFERRED TAX ASSETS (LIABILITIES) AT DECEMBER 31. (IN MILLIONS) Current: Reserve for closed plant and environmental matters Inventories Miscellaneous accrued expense Other Net current deferred tax asset 1992 $ li.i 6.6 (1.9) 4.9 20.7 Noncurrent: Tax effect of regular net operating losses 49.9 Reserve for closed plant and environmental matters 36.8 Postretirement benefit obligation 32.8 Alternative minimum tax credits . 25.9 Previously taxed income 6.2 Capitalized exploration expenses 3.5 Property, plant and equipment (115.8) Investment - MEDIMSA (90.1) Investment - MIM (58.9) Other 5.5 Net noncurrent deferred tax liability (104.2) Total net deferred tax liability S (83.5) 1991 $ 11.6 5.5 (5.5) 4.8 16.4 26.7 23.8 2.2 11.7 4.6 4.6 (105.2) (84.8) (58.9) 3.8 (171.5) $(155.1) At December 31,1992, the Company has $146.8 million of net operating loss carryforwards which expire, if un used, in 2006 and 2007. In addition, the Company has alternative minimum tax credits of $25.9 million which are not subject to expiration. The Company believes that these carryforwards will, more likely than not, be avail able to reduce future federal income tax liabilities and has recorded the tax benefit of these carryforwards as deferred tax assets. Because of shorter carryforward periods and other statutory differences, the Company's 27 ASARCO INCORPORATED ANO CONSOLIDATED SUBSIDIARIES net operating loss carryforwards for state purposes are not significant and, therefore, have not been recorded as deferred tax assets. U.S. deferred income taxes have not been recognized on approximately $167.0 million in 1992 ($174.6 million in 1991 and $209.7 million in 1990) of undistributed earnings of foreign subsidiaries and nonconsolidated associated companies more than 50% owned, because assets representing those earnings are permanently invested. It is not practicable to determine the amount of income taxes that would be payable upon remittance of assets that represent those earnings. The amount of foreign withholding taxes that would be payable upon remittance of assets that represent those earnings would be approximately $3.4 million in 1992 ($3.9 million in 1991 and $43 million in 1990). (41 INVENTORIES AT OECEMBER 31. (IN MILLIONS) Inventories of smelters, refineries, and other metal plants: LIFO cost or market Provisional cost of metals received for which prices have not yet been fixed Mine inventories at FIFO cost or market Materials and supplies (average cost or less) Other Total 1992 1991 S 30.0 $ 29.6 61.6 59.6 96.7 86.1 58.4 36.3 $283.0 53.2 34.2 $262.7 Replacement cost exceeds inventories valued at UFO cost by approximately $125.2 million in 1992 (1991$130.3 million). IS) ACQUISITIONS Asarco Australia Limited, a 60%-owned subsidiary of the Company invested $17.4 million in 1991 to acquire the remaining 50% interest in the Wiluna gold mine owned by its former partner. The Company spent $4.8 million in 1990 acquiring Industrias Oxy Metal, S.A. de C.V., a specialty chemicals company in Mexico and $1.5 million in acquiring two concrete plants in Tennessee. Acquisitions are accounted for as purchases and, accordingly, the acquired assets and liabilities have been recorded at their estimated fair market values at the date of acquisition. The operating results are included in the Consolidated Statement of Earnings from the acqui sition dates. The excess of the purchase price over the valuation of the net assets acquired for the above and prior-years' acquisitions, $61.3 million, is recorded as Goodwill in Intangible and Other Assets and is general ly amortized over either the mine life up to a maximum of 40 years on a units-of-production basis or over 40 years on a straight-line basis. Accumulated amortiza tion was $7.7 million and $5.6 million at December 31, 28 1992 and 1991, respectively. (6) INVESTMENTS The Company has substantial interests in associated companies in Mexico, Peru and Australia, which are engager principally in mining, smelting and refining nonferrous metals. These companies are Mexico Desarrollo Industrial Minero, S.A. de C.V. (MEDIMSA), Southern Peru Copper Corporation (SPCC) and M.I.M. Holdings Limited (MIM). The fiscal year for MIM ends June 30. MEDIMSA and SPCC report operating results on a calendar-year basis. MEDIMSA: In 1991, the Company announced that it was considering the sale or other form of disposition of some or all of its investment in MEDIMSA. In light of this action and other factors, the Company changed from the equity method of accounting for its interest in MEDIMSA to the cost method, effective with the second quarter of 1991. At December 31,1992, cumulative de ferred equity in profits totaled $7.6 million. In the sec ond quarter of 1991, a wholly owned subsidiary of Asarco invested an additional $24.9 million in MEDIM SA under a rights offering. As a result of not subscribing to its full share of the offering, the Company's interest in MEDIMSA declined to 31.2% from 34.0%. Pursuant to a financing and option agreement entered into in 1989 with a bank, the Company exchanged 16,705327 shares of MEDIMSA for $38.4 million of previously issued exchangeable preferred stock of a wholly owned sub sidiary of the Company in December 1992, lowering its ownership interest to 28.3%. In September 1990, ME DIMSA, through its subsidiary Mexicarta de Cobre, S.A. de C.V., purchased a 76.09% interest in Mexicana de Cananea, S.A. de C.V. for $475 million. SPCC: In 1988, the Company changed from the equity method of accounting for SPCC to the cost method. TTiis change followed the deterioration in the economy of Peru, inflation and level of foreign exchange reserves, the economic uncertainty for the near-term outlook and the foreign exchange restrictions on the remittance of profits then in place. At December 31,1992, the Company's equity in undistributed profits totaled $21.4 million. In December 1991, SPCC reached agreement with the Government of Peru on a dispute concerning the recovery of SPCC's investment in the Cuajone mine in Southern Peru. Under the terms of the agreement, SPCC commenced a five-year $300 million capital expansion and development program. The Peruvian Government has undertaken not to discriminate against SPCC in comparison with treatment given to other min ing companies. In December 1991, SPCC repurchased approximately 13.8% of its outstanding common shares pro rata from its shareholders, from which Asarco received proceeds of $31.4 million. The Company reduced its carrying value in SPCC by the amount of these proceeds. Dividends received in 1992 of $7.8 mil lion were recorded as income. ASARCO INCORPORATED AND CONSOLIDATED SUBSIDIARIES INVESTMENTS IN ASSOCIATED COMPANIES (COST METHOD) FINANCIAL POSITION AT DECEMBER >1.1M2 DOLLARS IN MILLIONS! Asarco's Interest Asarco's Investment (U3. GAAP) Market Value MEDIMSA 28.3% $298.4 (a) SPCC 523% $181.9 (a) FINANCIAL POSITION Current assets Property-net Other assets Total assets Current liabilities Long-term debt Other liabilities Deferred income taxes Minority interests Total liabilities Stockholders' equity Total liabilities and stockholders' equity 1991 DECEMBER SI. 1990 MEXICAN GAAP (b) S 555.7 2,504.5 65.6 S 3,125.8 $ 528.1 2,246.5 59.4 $ 2,834.0 S 597.9 170.7 - 6.4 208.2 983.2 2,142.6 $ 525.3 248.3 - 1.4 334.3 1,109.3 1,724.7 53,125.8 $ 2,834.0 1992 DECEMBER 31, 1991 U.S. GAAP s 299.6 390.2 33.5 S 723.3 $ 317.0 395.9 32.8 $ 745.7 s 78.2 6.0 26.6 167.0 56.7 334.5 388.8 $ 1113 10.0 45.4 1673 53.4 387.5 358.2 5 723.3 $ 745.7 FOR THE TEARS ENDED NET SALES 100% 1992 1991 1990 SEPTEMBER 30 MEXICAN GAAPICI S 876.6 830.0 791.4 DECEMBER SI U.S. GAAP S 550.5 527.1 395.0 NET EARNINGS (LOSSI 100% 1992 1991 1990 S 87.3 66.5 148.8 S 45.6 (0.4) (7.5) DIVIDENDS TO ASARCO 1992 1991 1990 - S 7.8 -- -- Asarco reported equity earnings from MEDIMSA of $10.2(d) in 1991 and $48.1(d) in 1990. MIM 17.4% $266.8 $409.4(a) 1992 JUNE 30. 1991 AUSTRALIAN GAAP S 645.4 1,933.7 1,588.9 $4,168.0 $ 580.5 1366.0 1,401.9 $3348.4 $ 408.0 1353.1 131.5 352.1 137.4 2382.1 1,885.9 $ 322.1 1,143.7 110.8 3543 138.5 2,069.3 1,779.1 $4,168.0 $3348.4 OECEMBER 31 AUSTRALIAN GAAP $1,435.5 1,4573 1352.4 S 93.7 14.8 121.8 S 8.8 9.5 23.1 GAAP - Generally Accepted Accounting Principles (a) Quoted market prices on Asarco's investments in MEDIMSA and SPCC are not available since the shares are not publicly traded. It is not practi cable to estimate fair value without incurring excessive costs; however, in management's opinion, the market value is equal to or exceeds the carrying amount. Market value for Asarco's investment in MIM is based upon the December 31,1992, dosing market pnce of MIM's ordinary shares on the Sydney (Australia) Stock Exchange. Market value is not necessarily indicative of an amount realizable in the event of a sale. (b) Translated into US. dollars at the rate in effect at December 31,1991 ($1 US. = MN$ 3073.88). December 31,1992 financial statements are not available. (c) Translated at the average exchange rates of $1 US. = MNS 3089.44 in 1992 (MNS 2,949.40-1991; MN$ 2,726.3 -1990). (d) Adjusted by $(4.6) and $(2.5) in 1991 and 1990, respectively, to reflect US. accounting standards. Effective with the second quarter of 1991, MEDIMSA is accounted for on the cost method. 29 asarco incorporated ano consolidated sursidiaries DIFFERENCES BETWEEN MEXICAN AND U.S. GAAP: MEDIMSA's consolidated financial statements are pre pared in accordance with Mexican GAAP, which differs in certain significant respects from U5. GAAP. The fol lowing reconciliations from Mexican to US. GAAP pre sent information in part prior to the reversal of the adjustments to the financial statements for the effects of inflation required under Mexican GAAP. The principal differences and adjustments are described below. Capitalized Interest: Mexican GAAP does not require the capitalization of interest on assets under construc tion as US. GAAP does. The adjustment for capitalized interest is based on MEDIMSA's average interest cost. Excess of Sellers' Book Value Over Cost of Assets Acquired: Mexican GAAP permits acquired assets to be recorded at the sellers' book value when the purchase price is less than the sellers' book value. U.S. GAAP requires the recording of acquired assets at the purchase price. Taxes: Deferred taxes are adjusted for the effect of capi talized interest. The adjustment is based on the differ ence between the book basis and tax basis and the statu tory tax rate. Net income and total stockholders' equity, adjusted to take into account the material differences between Mexican GAAP and US. GAAP, are as follows: FOR THE YEAR ENDED DECEMBER 11. 19*0 RN MILLIONS) Net income as reported under Mexican GAAP MN$ 503,805 Amortization of capitalized interest (14,718) Amortization of excess of book value over cost 52,019 Deferred taxes 19,149 Approximate net income under US. GAAP before eliminating effects of inflation accounting 560,255 Effect of inflation accounting (1) 111,879 Approximate net income under US. GAAP (1) MN$ 448,376 Approximate net income under US. GAAP (converted at average exchange rate of $1 US. = MN$ 2,829) (1) $ 158.5 Equity earnings (net of deferral for MEDIMSA shares underlying exchangeable preferred stock of $5.4) (1) $ 48.5 As a result of the one-quarter delay basis of accounting, these equity earnings were recorded as follows: (1) Second quarter 1990 Third quarter 1990 Fourth quarter 1990 First quarter 1991 $ Adjustment for one quarter lag by Asarco Equity earnings reported by Asarco - Audited (1) Unaudited $ 10.2 16.0 12.1 10.2 48.5 (0.4) 48.1 AT OECEMBEft St. (IN MILUONSI Total stockholders' equity under Mexican GAAP 1990 MN$ 5,301,640 Capitalized interest, net of amortization Excess of book value over cost Accumulated amortization Deferred taxes Approximate total stockholders' equity under U.S. GAAP before eliminating effects of inflation accounting Effect of inflation accounting (1) Approximate total stockholders' equity under U.S. GAAP (1) 110,637 (1,963,751) 114,647 (143,612) 3,419,561 776,333 MN$ 2,643,228 Approximate total stockholders' equity under U.S. GAAP (converted at year end exchange rate of $1 U.S. = MN$ 2,947) (1) $ 896.8 Asarco investment at 34% as of March 31,1991 (1) Deferral for MEDIMSA shares underlying exchangeable preferred stock (1) Additional shares purchased Asarco's Investment at December 31,1991 - Audited $ 304.9 6.5 298.4 24.9 $ 323.3 30 ASARCO INCORPORATED AND CONSOLIDATED SUBSIDIARIES (7) PROPERTY Property is stated at cost and consists of the following: AT DECEMBER 11._________________ (IN MILUONSI Buildings and equipment Equipment capital leases Mineral land Land, other than mineral Other Total property 1992 1991 $1,940.3 123.2 289.2 66.5 ___ 45 $2,423.7 $1,857.0 122.8 263.9 64.6 6A $2514.7 Accumulated depreciation applicable to capitalized leases amounted to $27.0 million in 1992, $165 million in 1991 and $10.0 million in 1990, including depreciation charged to earnings of $11.1 million in 1992, $65 million in 1991 and $1.7 million in 1990. An increase in the proven and probable ore reserves at the Ray mine resulting from normal reassessments had the effect of lowering depredation by $3.7 million in 1992. Exploration costs of $15 million in 1990 previously charged against earnings were credited to earnings and capitalized, as a result of the discovery of commercial ore bodies. In the fourth quarter of 1992, the Company recorded a pretax charge of $31.9 million to reduce the carrying value of certain facilities, primarily at the El Paso, Texas, smelter, which are unlikely to be used following the completion of the modernization and expansion pro gram at the copper smelter in early 1993. IS) CONTINGENCIES AND LITIGATION The Company and certain of its subsidiaries have received notices from the United States Environmental Protection Agency ("EPA") that they and in most cases numerous other parties are potentially responsible to remediate alleged hazardous substance releases at cer tain sites under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA" or "Superfund"). In addition, the Company and certain of its subsidiaries are defendants in lawsuits brought under CERCLA or state laws which seek substantial damages and remediation. Remedial action is being undertaken by the Company at some of the sites. The Company anticipates that it will make sig nificant capital and other expenditures over the next several years to comply with environmental laws and regulations, including required remediation at various Superfund sites. In connection with the sites referred to above, as well as at other closed plants and sites where the Company is working with the EPA and state agen cies to resolve environmental issues, the Company has made reasonable estimates, where possible, of the extent and cost of necessary remedial action and dam ages. As a result of feasibility studies, public hearings, engineering studies and discussions with the EPA and similar state agencies, for sites where it is probable that a liability has been incurred and the amount of cost could be reasonably estimated, the Company recorded pre-tax charges to earnings in the fourth quarter of 1990 of $75.5 million and in the fourth quarter of 1992 of $66.7 million. Recorded reserves for these matters total $141.0 million at December 31,1992. Cash expenditures charged to these reserves were $35.6 million in 1992, $32.2 million in 1991 and $13.0 million in 1990. The Company is a defendant in a lawsuit brought on behalf of classes of persons who live near or have lived near the Company's Globe plant, located in Denver, Colorado, seeking compensatory and punitive damages for damage to property due to substances allegedly emitted from the plant. The Company and two subsidiaries, as of December 31,1992, are defendants in 780 lawsuits brought by 5,151 primary and 3,813 secondary plaintiffs seeking substantial actual and punitive damages for personal injury or death allegedly caused by exposure to asbestos as well as 9 lawsuits for removal or containment of asbestos-containing products in structures. In addition, the Company and certain subsidiaries are defendants in product liability lawsuits involving various other prod ucts, including metals. The Company is a defendant in lawsuits in Arizona brought by Indian Tribes and some other Arizona water users contesting the right of the Company and numer ous other individuals and entities to use water and, in some cases, seeking damages for water usage and alleged contamination. The lawsuits could potentially affect the Company's use of water at its Ray Complex, Mission Complex and other Arizona operations. While the Company is unable to estimate the ulti mate dollar amount of exposure to loss, it is the opinion of management that the outcome of the legal proceed ings and environmental contingencies mentioned, and other miscellaneous litigation and proceedings now pending, will not materially adversely affect the opera tions or the financial position of Asarco and its consoli dated subsidiaries. This opinion is based upon reason able estimates of costs of court judgements and settle ments and of remediation costs and terms where such estimates could be made. The financial viability of other potentially responsible parties has been considered when relevant and no credit has been assumed for any potential insurance reimbursement to the Company when availability of insurance is not established. 31 ASARCO INCORPORATED ANO CONBOLIOATEO SUBSIDIARIES (S) DEBT AND AVAILABLE CREDIT FACILITIES LONG-TERM DEBT AT DECEMBER SI. IIN MILLIONS} BOOK VALUE Revolving credits $ 520.0 Pollution control bonds, 1993/2006- rates from 6-3/4% to 8.9% 171.1 Capital lease obligations 1993/2006-rates from 7.15% to 12.0% 109.5 9-3/4% Sinking Fund Debentures, 1996/2000 40.0 Foreign and other debt-rates from 5.0% to 1225% 7.6 Total long-term debt 848.2 Less, current portion 63.9 Long-term debt $784.3 1992 FAIR VALUE $ 520.0 185.9 109.5 40.8 7.6 863.8 63.9 $799.9 1*91 BOOK VALUE $425.0 171.1 1162 40.0 3.5 755.8 7.5 $748.3 (a) The fair value of the debt instruments was determined using quoted prices of publidy traded securities of similar maturities and credit ratings as of December 31,1992. Maturities of debt instruments and future minimum payments under capital leases as of December 31,1992 are as follows: (IN MILLIONS) 1993 1994 1995 19% 1997 Thereafter Less interest DEBT INSTRUMENTS $ 56.5 147.7 153.4 80.1 6.8 294.2 - $738.7 CAPITAL LEASES $ 16.7 16.5 16.4 16.7 18.5 73.8 (49.1) $109.5 Total interest paid (net of amounts capitalized of $7.4 million in 1992, $12.3 million in 1991 and $3.8 million in 1990) was $52.6 million in 1992, $41.7 million in 1991 and $37.8 million in 1990. The Company has two revolving credit agreements that permit borrowings of up to $700 million, of which $520 million was drawn down and $180 million was available at December 31,1992. One facility allows the Company to borrow up to $440 million until July 1993 after which the facility will decline by $36.7 million quarterly until 1996. The second facility expires in May 1993. Borrowings under these agreements bear interest based on LIBOR, the CD or the prime rate, and aver aged 3.86% at December 31,1992. Rates may vary based upon the Company's debt rating. A commitment fee of 1 /8% per annum on the unused portion of the revolv ing credit agreements is payable by the Company. The highest level of revolving credit borrowings dur ing 1992 was $535.0 million (1991-$450.0 million; 1990$290.0 million). Borrowings under these agreements averaged $465.4 million for 1992 (1991-$390.3 million; 1990-$168.1 million), with a weighted average interest rate of 42% (1991-65%; 1990-85%). Under the most restrictive terms of the agreements, the Company must maintain a tangible net worth, as defined, of at least $1 billion. Tangible net worth was $15 billion at December 31,1992. The ratio of current assets to current liabilities cannot be less than 125% and at December 31,1992, this ratio was 163%. During 1991 the Company entered into two sale and leaseback transactions for mobile mining equipment and railroad rolling stock. Proceeds from these transac tions were used principally to replace interim financing which was used to fund property additions. The Company has three agreements expiring 1993 to 1994 which fix the rate on a notional $112.4 million of its variable-rate debt. The effect of these agreements is to limit the interest rate exposure to 82% on $100 million of the debt and 12.7% on the balance, and is recorded as an adjustment to interest expense which resulted in 1992 in a $55 million interest charge (1991-$2.5 million; 1990-$0.3 million). The Company has exposure to credit risk but does not anticipate nonperformance by the counterparties to these agreements. A shelf registration statement filed with the Securities and Exchange Commission in 1992 covers debt securities in the amount of $250 million available for issuance from time to time (see Note 13). not STOCKHOLDERS' EQUITV The Company purchased 5,649 of its common shares in 1992 (1991-67514 shares; 1990-557,117 shares). In 1992, 223568 common shares (1991-211,163 shares; 1990-7280 shares) were used for savings, stock option and incen tive plans. The effect on the calculations of net earnings per common share of the Company's common stock equivalents (warrants and shares under option) was insignificant. Retained earnings at December 31,1992, included undistributed earnings of $142.7 million for nonconsolidated subsidiaries and $262.4 million for all other investments. Retained earnings has been increased by cumulative foreign currency adjustments of $0.1 million at December 31,1992 ($6.6 million in 1991; $5.0 million1990). Stock Options: The Company has a stockholderapproved Stock Incentive Plan and a Stock Option Plan. ITie Stock Incentive Plan replaces the Stock Option Plan. No additional options will be granted under the Stock Option Plan and unexpired options continue to be gov erned by, and exercised under, the Stock Option Plan. 32 ASARCO INCORPORATED ANO CONSOLIDATED SUBSIDIARIES The Stock Incentive Plan provides for the granting of nonqualified or incentive stock options, as defined under current provisions of the Internal Revenue Code, as well as for the award of restricted stock and bonuses payable in stock. The option price for options granted under the Stock Incentive Plan shall be not less than 100% of the fair market value of the Common Stock on the date of grant in the case of incentive stock options, or 50% in the case of other options. Options granted under the Stock Incentive Plan will expire on a date fixed by the Company's Organization and Compensation Committee but not more than 10 years from the date of grant in the case of incentive stock options or such later date as may be permitted under die Internal Revenue Code. In the absence of any contrary provision, no option will be exercisable for six months from the date of grant. Options granted under the Stock Option Plan are exercisable within 10 years from the date of grant. Each option granted under the Stock Incentive Plan or Stock Option Plan may provide for 'Stock Appreciation Rights" (SARs). An SAR permits an optionee, in lieu of exercising the option, to receive from die Company pay ment in an amount equal to the difference between the market value of the stock on the date of exercise of the SAR and the purchase price of the stock under the terms of the option. At December 31,1992, nineteen individu als held SARs covering options for 499,982 shares, rang ing in price from $20.57 to $38.13 per share, exercisable as either regular stock options or SARs. The authorized number of shares under the Stock Incentive Plan is 2,000,000 of which 300,000 shares may be awarded as restricted stock. As of December 31,1992, 1,418,450 shares are available for future grants under the Stock Incentive Plan. The table below summarizes stock option activity over the past three years under the Stock Incentive Plan and Stock Option Flan. Outstanding at January 1,1990 Granted Exercised Canceled or expired Outstanding at January 1,1991 Granted Exercised Canceled or expired Outstanding at January 1,1992 Granted Exercised Canceled or expired Outstanding at December 31,1992 NUMBER OF SHARES OPTION PRICE (RANGE PER SHARE) 643,577 171,750 (3,400) (46,150) $20.57 to $41.63 $26.07 to $26.50 $20.57 to $22.32 $22.32 to $41.63 765,777 182,100 (6,200) (80,000) $20.57 to $41.63 $24.82 to $27.88 $20.57 to $24.31 $20.57 to $41.63 861,677 163,000 (26,534) (64,557) $20.57 to $38.13 $22.31 to $22.31 $20.57 to $27.88 $20.57 to $38.13 933,586 $20.57 to $38.13 In 1989, the Company adopted a Shareholder Rights plan and declared a dividend of one Right for each of its Common Shares. In certain circumstances, if a person or group becomes the beneficial owner of 15% or more of the outstanding common shares (or in the case of MIM, more than 331/3%), with certain exceptions, these rights vest and entitle the holder to certain share pur chase rights. In connection with the Rights dividend, 800,000 shares of Junior Participating Preferred Stock were authorized for issuance upon exercise of the Rights. (11) BENEFIT PLANS The Company maintains several noncontributory, defined benefit pension plans covering substantially all employees. Benefits for salaried plans are based on salary and years of service. Hourly plans are based on negotiated benefits and years of service. The Company's funding policy is to contribute amounts to the plans sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such addi tional amounts as the Company may determine to be appropriate from time to time. Plan assets are invested principally in a commingled stock fund and United States government securities. Net pension costs consist of: FOR THE TEARS ENDED DECEMBER 11. (IN MILLIONS! 1992 1991 1990 Service cost Interest cost on projected benefit obligations Return on plan assets Other items Total net pension costs S 7.0 7.1 (6.2) 1.8 S 97 $6.4 6.1 (4.9) 1.3 $8.9 $5.6 4.7 (3.0) 0.8 $8.1 The funded status of the plans using the projected unit credit method is presented below: AT DECEMBER 31, 1992 (IN MILLIONSI Assets and obligations: Vested benefit obligation Nonvested benefits Accumulated benefit obligation Projected benefit obligation Less, Plan assets at fair value Excess of projected benefit obligation over plan assets Items not yet recognized in earnings: Unrecognized prior service cost Unrecognized initial net plan obligation Unrecognized loss Net accrued cost 5 ob.7 4.9 ' 7l.o 104.1) 7b.3 (27.7.) iu.4 14.7 Ul.4) 1991 $55.6 4.1 59.7 91.5 m (31.6) 11.4 2.6 12.2 $ (5.4) 33 ASARCO INCORPORATED ANO CONSOLIDATED SUBSIDIARIES The actuarial computations are based upon a discount rate on benefit obligations of 8% in 1992 and 1991 and 85% in 1990; an expected long-term rate of return on plan assets of 10%; and annual salary increases of 5% in 1992 and 1991 and 6% in 1990. Noncontributory postretirement health care cover age under the Asarco Health Plan is provided to sub stantially all retirees not eligible for Medicare. A cost sharing Medicare supplement plan is available for retired salaried employees and life insurance coverage is provided to substantially all retirees. In 1992 the Company adopted SFAS106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". The effect of adopting the new standard increased 1992 net periodic postretirement benefit cost by $3.2 million and decreased 1992 net income by $2.1 million. Post retirement benefit costs for 1991 of $5.1 million and 1990 of $4.7 million which were recorded on a cash basis, have not been restated. In addition, the projected benefit obligation of $54.0 million (net of tax benefit of $275 million) related to prior service cost was recog nized as the cumulative effect of the change in accounting principle as ofJanuary 1,1992. The following sets forth the plans' status reconciled with amounts reported in the Company's Consolidated Balance Sheet AT DECEMBER 31,1992 IM MILLIONS) Accumulated postretirement benefit obligation (APBO): Retirees Fully eligible active plan participants Other plan participants Total APBO Items not yet recognized in earnings: Unrecognized loss Accrued postretirement benefit obligation $50.0 14.4 27.7 92.1 (1.9) $90.2 Net periodic postretirement benefit cost included the following components: FOR THE TEAR ENOEO DECEMBER 31.1992 ON MILLIONS) Service cost Interest cost Net periodic postretirement benefit cost S 2.5 6.9 S 9.4 The weighted-average annual assumed rate increase in the per capita cost of covered benefits (i.e., health cost trend rate) is 11 % for 1992 and is assumed to decrease gradually to 5% for 1999 and remain at that level there after. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of Decembe- 31,1992 by $7.0 million, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1992 by $0.7 million. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 8.5% at December 31,1992. The plans are currently unfunded. (12) BUSINESS SEGMENTS The Company operates principally in the nonferrous metals industry, involving mining, smelting, refining and selling of copper, silver, lead, zinc, gold, and molyb denum. The Company is also engaged in specialty chemicals for metals plating and electronics industries and in minerals comprising limestone, sand and gravel operations. Included in the caption Other are the Company's polyvinyl chloride pipe and cement pipe businesses and its environmental services operations. Foreign operations are conducted by affiliates in Australia, Asia, Europe and North America. General corporate administrative expenses are allo cated among the segments generally in proportion to their operating expenses. Exploration expenses are attributable to the metals segment, while research expenses are attributable to metals and specialty chemi cals. Identifiable assets are those directly used in the operations of each segment. Corporate assets are princi pally cash and investments. Export sales from the United States to unaffiliated customers were $297.7 million in 1992, $246.3 million in 1991 and $224.5 million in 1990. There can be no assurance that operations and assets of the Company and nonconsolidated associated com panies that are subject to the jurisdiction of foreign gov ernments may not be affected adversely by future actions by such governments. METAL SALES. EXCLUDING INTERSEGMENT SALES FOR THE TEARS ENDED DECEMBER 31. 1992 1991 (IN MILLIONS) Refined Copper Refined Silver Refined Lead Refined Gold Services Other SI ,045 138 106 69 10 145 SI,518 $1,037 154 109 75 9 144 $1,528 1990 $1,165 179 124 129 12 188 $1,797 i 34 ASARCO INCORPORATED ANO CONSOLIDATED SUBSIDIARIES BUSINESS SEGMENTS ANO LINES OF BUSINESS FOR THE TEARS ENDED DECEMBER 31. 1992 1991 1390 ItN MILLIONS) Sales Metals Specialty Chemicals Minerals Other Total Domestic Foreign $1313 256 36 103 $1,908 1,722 186 $1328 253 33 98 $1,912 1,717 195 $1,797 273 36 104 $2,210 2305 205 Operating Income (Loss) (a) Metals Specialty Chemicals Minerals Other Total $ Domestic Foreign a) 7 (20) (42) (37) (5) 22 $ 69 - 6 (14) $ 61 66 (5) $ 165 7 5 (50) $ 127 116 11 Equity in results of nonconsolidated associated companies Specialty Chemicals Corporate Interest, taxes and other $ 4$ 5$ 4 (1) 5 32 10 (25) (27) Net Earnings doss) before cumulative effect of change in accounting principle $ (29) $ 46 $ 136 Identifiable Assets Metals Specialty Chemicals Minerals Other Corporate Total Domestic Foreign $1,749 236 29 123 809 $2,946 2,728 218 $1,694 245 30 140 845 $2,954 2,723 231 $1,486 252 39 142 871 $2,790 2360 230 Depreciation and Depletion Metals $ Specialty Chemicals Minerals Other Total $ 77 5 2 3 87 $ 65 5 2 3 $ 75 $ 67 5 2 1 $ 75 Capital Expenditures (b) Metals Specialty Chemicals Minerals Other Corporate Total $ 126 3 2 0n 1 S 135 $ 275 5 2 4 8 $ 294 $ 210 7 6 9 9 $ 241 <131 SUBSEQUENT EVENT On February 1,1993, pursuant to the shelf registration statement described in Note 9, the Company issued $100 million of 7-3/8% Notes due February 1,2003. The Notes will bear interest at 7-3/8% payable semiannually on February 1 and August 1 of each year, commencing on August 1,1993. The Notes are not redeemable prior to maturity. The net proceeds will be used to repay, in part, revolving credit bank borrowings which, at December 31,1992, totaled $520 million and had interest rates averaging 3.86%. (a) Includes provisions in 1992 ($58 Metals, $9 Other, $67 Total) and 1990 ($38 Metals, $37 Other, $75 Total) for closed plant and envi ronmental matters and a provision to reduce the carrying value of certain facilities in 1993 ($31.9 Metals). (b) Indudes the portion of business acquisitions attributable to prop erty ($11 in 1991 and $4 in 1990). 35 1992 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ASARCO INCORPORATED We have audited the accompanying consolidated balance sheets of ASARCO Incorporated and Consolidated Subsidiaries as of December 31,1992 and 1991, and the related consolidated statements of earnings, cash flows, and changes in common stockholders' equity for each of the three years in the period ended December 31,1992. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated finan cial position of ASARCO Incorporated and Consolidated Subsidiaries as of December 31,1992 and 1991, and the con solidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1992, in conformity with generally accepted accounting principles. As discussed in Note 3 to the financial statements, the Company changed its method of accounting for income taxes in 1992 and restated prior period financial statements to reflect the change. In addition, as discussed in Note 11 to the financial statements, the Company changed its method of accounting for postretirement benefits other than pensions effective January 1,1992. COOPERS & LYBRAND 1301 Avenue ofThe Americas New York, New York January 26,1993, except for Note 13, as to which the date is February 1,1993. 36 ASARCO INCORPORATED AND CONSOLIDATED 6USSIDIARIES SUPPLEMENTARY FINANCIAL AND STATISTICAL INFORMATION UNAUDITED QUARTERLY DATA (IN MILLIONS. EXCEPT PER SHARE AMOUNTS! QUARTERS 1ST 1992 1991 2ND 1992 1991 Sales $458.9 $465.7 $487.7 Operating income Goss): Prior to adoption of SFAS 106 14.3 (1.6) 11.2 After adoption of SFAS 106(b) 13.5 (1.6) 10.4 Net earnings Goss): Prior to adoption of SFAS 106 6.9 8.0 4.9 After adoption of SFAS 106(b) (47.6) 8.0 4.4 Net earnings Goss) per common share: Prior to adoption of SFAS 106 0.17 0.20 0.12 After adoption of SFAS 106(b) Dividends paid per (1.15) 0.20 0.10 common share 0.20 0.40 0.20 Stock market price per common share: High 28-3/4 30-1/2 31-3/8 Low 19-7/8 25-7/8 24-3/4 $459.1 21.5 21.5 15.4 15.4 037 037 0.40 29-1/4 23-5/8 9RD 1992 1991 $490.0 $494.0 31.2 22.1 30.4 22.1 18.6 103 18.1 103 0.45 0.25 0.44 0.25 0.20 0.40 30-1/2 28 23-3/4 23-5/8 4TH 1992(a) 1991 $471.9 $493.0 (96.1) (96.1) 19.1 19.1 (58.0) (58.0) 12.3 12.3 (1.40) (1.40) 0.20 0.30 0.30 0.40 25-1/4 27-1/2 22-1/4 18-1/4 TOTAL 1992 1991 SI ,908.5 $1,911.8 (39.4) (41.8) 61.1 61.1 (27.6) (83.1) 46.0 46.0 (0.66) (2.01) 0.80 1.12 1.12 1.60 31-3/8 30-1/2 19-7/8 18-1/4 (a) Indudes the effect of a pretax $66.7 ($44.0 after-tax)provision for dosed plant and environmental matters as well as the effect of a pretax $31.9 ($21.1 after-tax) provision to reduce the carrying value of certain facilities recorded in the fourth quarter of 1992. (b) In the fourth quarter of 1992 the Company adopted SFAS106 pertaining to accounting for postreorement benefits (see Note 11) requiring the restatement of reported operating income (loss) and net earnings (loss) for the first three quarters of 1992. METAL PRICE SENSITIVITY__________________________________________________________________ (ESTIMATES BASED ON 41.5 MILLION SHARES OUTSTANDING! Assuming that currently planned metal production and sales are achieved, that currently anticipated costs of produc tion and tax and royalty rates are unchanged, that the number of shares outstanding is unchanged and giving no effect to results of other business segments, metal price sensitivity factors would indicate the following estimated change in earnings per share resulting horn metal price changes in 1993. Change in Metal Price Annual Change in Earnings per Share COPPERLEADZINCSILVERGOLD MOLYBDENUM $.01/lb. $.01/lb. $.01/lb. $1.00/oz. $10.00/oz. $1.00/lb. $.11 $.05 $.02 $.14 $.02 $.05 ASARCO INCORPORATED AND CONSOLIDATED SUBSIDIARIES I FIVE-YEAR selected financial and STATISTICAL data {DOLLARS IN MILLIONS. EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF EARNINGS DATA Net sales Operating income (loss) Earnings Goss) before equity in results of nonconsolidated associated companies and cumulative effect of change in accounting principle Equity in earnings of nonconsolidated associated companies, net of taxes Cumulative effect of change in accounting principle, net of taxes Net earnings Goss) prior to adoption of SFAS 109 Net earnings Goss) after adoption of SFAS 109 Net earnings Goss) per share after adoption of SFAS 109 1992 IM1M lIRHil 19991*) 1999 S 1,908 $ 1,912 $ 2,210 $ 2314 $ 1,990 (42)(a) 61(b) 127(c) 238(d) 273 (32) 3 (54) (83) (83) S (2.01) 36 10(b) 99 36 _ 46 46 $ 1.12 149 136 $ 3.28 184 41 _ 231 224 $ 5.34 199 8 207 207 $ 4.92 Dividends per common share S 0.80 $ 1.60 $ 1.60 $ 1.50 $ 0.70 CONSOLIDATED STATEMENT OF CASH FLOWS Cash provided from operating activities Dividends paid on common stock Property additions Business acquisitions, net of cash acquired Depreciation and depletion S 106 33 135 - 87 $ 67 66 283 17 75 $ 150 66 237 6 75 $ 270 63 157 116 64 $ 160 29 43 120 59 CONSOLIDATED BALANCE SHEET DATA {END OF PERIOO) Total assets Inventories - replacement cost in excess of LIFO inventory costs Total bank loans and long-term debt Common stockholders' equity S 2,946 125 869 1,357 $ 2,954 130 802 1,475 $ 2,790 157 543 1,490 $ 2,456 165 348 1,431 $ 2,234 210 261 1,331 COMMON STOCK DATA Common shares outstanding Price - high -low Book value per common share Price/Eamings ratio Dividend payout ratio FINANCIAL RATIOS Current assets to current liabilities Debt as % of capitalization EMPLOYEES (AT YEAR-ENDI 41,467,000 S31-3/8 S19-7/8 S 32.74 - - 41,249,000 41,058,000 41,604,000 42,014,000 $30-1/2 $34-1/8 $35-7/8 $29-1/2 $18-1/4 $22-1/4 $26-1/8 $19-3/8 $ 35.75 $ 36.29 $ 34.40 $ 31.67 19.13 8.27 5.60 5.57 143.2% 48.8% 28.1% 14.2% 1.6 39.07c 8,900 1.8 35.2% 9,100 2.0 26.7% 9300 1.8 19.6% 9,000 2.1 16.4% 8,500 (a) Includes a $66.7 pretax provision for closed plant and environmental matters and $31.9 provision to reduce the carrying value of certain facili ties. (b) Includes $10.6 pretax provision for doubtful accounts for a copper customer receivable. Effective the second quarter of 1991, MEDIMSA is accounted for on the cost basis. (c) includes $755 pretax provision for closed plant and environmental matters and $7.0 for increased State of Arizona royalties. (d) Indudes $345 pretax loss on sale of businesses. (e) In the fourth quarter of 1992, the Company adopted SFAS109 pertaining to accounting for income taxes (see Note 3) requiring the restatement of previously reported data for 1991,1990 and 1989. 38 ASARCO WORLDWIDE OPERATION'S COPPER Continental Mine; Butte, Montana Mission Mine; Sahuarita, Arizona Ray Mine; Ray, Arizona Silver Bell Mine; Silver Bell, Arizona El Paso Smelter, Texas Hayden Smelter, Arizona Ray Electrowinning Plant; Ray, Arizona Amarillo Refinery, Texas LEAD Leadville Mine; LeadviDe, Colorado Sweetwater Mine; Reynolds County, Missouri West Fork Mine; Reynolds County, Missouri East Helena Smelter, Montana Glover Smelter and Refinery, Missouri Omaha Refinery, Nebraska ZINC Coy Mine; Jefferson County, Tennessee Immel Mine; Knox County, Tennessee New Market Mine; Jefferson County, Tennessee Young Mine; Jefferson County, Tennessee SILVER Coeur Mine; Wallace, Idaho* Galena Mine; Wallace, Idaho* Troy Mine; Troy, Montana Quiruvilca Mine (Corporation Minera Nor Peru SA.) (copper, lead and zinc); Peru GOLD Aquarius Mine, Timmins, Ontario, Canada* Asarco Australia Limited Jundee Mine, Western Australia Wiluna Mine, Western Australia PRECIOUS METALS PLANT Amarillo Refinery, Texas MINERALS American Limestone Company, Inc. construction aggregates, concrete, agricultural limestone Knoxville, Tennessee Tri-Cities, Tennessee Springfield, Tennessee Abingdon, Virginia SPECIALTY CHEMICALS ENTHONE-OMI. INC. specialty chemicals and equipment for metals finishing and electronics North America Bridgeview, Illinois Long Beach, California Mexico City, Mexico Orange, Connecticut Toronto, Canada Warren, Michigan West Haven, Connecticut Europe France, Germany, Italy, Netherlands, Spain, Sweden, Switzerland, United Kingdom Pacific Rim Australia, Hong Kong, Japan, Malaysia, People's Republic of China, Singapore, Taiwan OTHER High Purity and Other Metals Denver, Colorado Zinc Oxide Hillsboro, Illinois PVC Pipe Capco Pipe Company, Inc. Van Buren, Arkansas Evansville, Indiana Litchfield, Illinois Lead Fabrication Lone Star Lead Construction Corp. Houston, Texas Environmental Services Biotrace, Inc. Salt Lake City, Utah Encyde/Texas, Inc. Corpus Christi, Texas Hydrometrics, Inc. Helena, Montana Technical Services Center Salt Lake City, Utah associated companies M.I.M. HOLDINGS LIMITED I17.4%| copper, silver, lead, zinc, gold, coal Eight mines and eight metallurgical plants, including: Mount Isa, Australia Hilton, Australia Collinsville, Australia Oaky Creek, Australia Newlands, Australia Porgera, Papua New Guinea Ravenswood, Australia Tick HilL Australia Investments in resources companies include: Highlands Gold Limited (65%) ASARCO Incorporated (25.0%) Cominco Ltd. (223%) Metallgesellschaft AG (3.5%) MEXICO DESARROLLO INDUSTRIAL MINERO. S.A. DE C.V. IZt.3%) copper, lead, zinc, silver, gold, coal, coke, fluorspar, sulfuric add Thirteen mines and nine metallurgical plants in Mexico, including: Cananea, Mexico La Caridad, Mexico SOUTHERN PERU COPPER CORPORATION (S2.S%) copper, silver, molybdenum Cuajone mine, Peru Toquepala mine, Peru llo smelter, Peru *On standby (% ownership in parentheses) 39 EXECUTIVE OFFICERS. DIRECTORS AND COMMITTEES OF THE BOARD ' EXECUTIVE OFFICERS Richard de J. Osborne Chairman of the Board, President and Chief Executive Officer George W. Anderson Executive Vice President Francis R. McAllister * Executive Vice President and Chief Financial Officer Robert J. Bothwell, Jr. Vice President, Sales John R. Corbett Vice President, Industrial Relations and Personnel James J. Kerr Vice President, Commercial Augustus B. Kinsolving Vice President, General Counsel and Secretary Robert J. Kupsch Vice President, Operations Robert J. Muth Vice President, Government and Public Affairs Robert M. Novotny * Vice President, Operations Gerald D. Van Voorhis Vice President, Exploration Thomas J. Findley, Jr. Treasurer Ronald J. O'Keefe Controller James L. Wiers General Auditor * Effective May 1,1993, Francis R. McAllister becomes executive vice president, copper operations; Robert M. Novotny becomes vice president, lead, zinc, silver and mineral operations; and Kevin R. Morano becomes vice president, finance and chief financial officer. DIRECTORS Richard de J. Osbome Chairman of the Board, President and Chief Executive Officer Willard C. Butcher'* Former Chairman of the Board and Chief Executive Officer, The Chase Manhattan Bank, N.A. James C CottingliA Chairman of the Board and Chief Executive Officer, Navistar International Corporation Norman G Fussell Managing Director and Chief Executive Officer, M.I.M. Holdings Limited David C Garfield l3,c Former President, Ingersoll-Rand Company E. Gordon Gee13 President, The Ohio State University James R. Greene i3e Director and Consultant to various domestic and international corporations Harry Holiday, Jn14 Former Chairman of the Board and Chief Executive Officer, Armco, Inc. James W. Kinnear; III14 * President and Chief Executive Officer, Texaco Inc. Francis R. McAllister Executive Vice President and Chief Financial Officer Michael T. Nelligan3,4 President and Chief Executive Officer, Don Ward & Co.; former Chairman of the Board, President and Chief Executive Officer, Ideal Basic industries, Inc. John D. Ong1-3 Chairman of the Board and Chief Executive Officer, The BFGoodrich Company Peter R. Rowland Consultant, Feez Ruthning & Co.; Director, M.I.M. Holdings Limited; Director, Highlands Gold Limited James Wood1,3 Chairman of the Board, President and Chief Executive Officer, The Great Atlantic and Pacific Tea Company, Inc. COMMITTEES OF THE BOARD 1 Finance 3 Audit 3 Pension Advisory 4 Organization and Compensation CHAIRMEN OF THE COMMITTEES A Finance Audit c Pension Advisory D Organization and Compensation 40 CORPORATE INFORMATION Annual Meeting The annual meeting of stockholders of ASARCO Incorporated will be held on Wednesday, April 28,1993 at 2.-00 p.m. in the Ground Floor Auditorium, 1 Chase Manhattan Plaza, New York, NY. A transcript of the proceedings will be available after June 1,1993 to any stockholder upon request to the Secretary. The request should specify a proper purpose, and should include payment of $10.00 to cover the cost of postage and reproduction. Form 10-K Many of the Securities and Exchange Commission information require ments are contained in this 1992 Annual Report. A copy of Asarco's 1992 Form 10-K (excluding exhibits) will be available after May 1,1993, upon request to the Corporate Communications Department. World Headquarters 180 Maiden Lane New York, NY 10038 Phone 212/510-2000 FAX 212/510-1855 Transfer Agent, Registrar and Stockholder Services The Bank of New York 101 Barclay Street New York, NY 10286 Phone 800/524-4458 Dividend Reinvestment Program Asarco stockholders can have their dividends automatically reinvested in Asarco common shares. Asarco pays all administrative and brokerage fees. This plan is administered by The Bank of New York. For more information, contact The Bank of New York at 800/524-4458. Stock Exchange Listing The principal market for Asarco's Common Stock is the New York Stock Exchange. The Stock Exchange symbol for Asarco Common Stock is AR. Other Corporate Information For other information on the corporation or to obtain additional copies of the annual report, contact Gerard F. Corbett, Director, Corporate Communications Department, ASARCO Incorporated, 180 Maiden Lane, New York, NY 10038,212/510-1810. ^tAJCEvS. ^ IS3ESJDS! ilivtry F.O.3. Black Lake, P.Q., Cir.aca. Contir.ental deliveries bv rail or truck. Overseas ihiprr.enu from t.-.e loilowinc poirs^ . mmtrr Quebec Ciiv, Three Riven ar.d Mor.irsai. P.Q. nttr Halifax (Nova Scotia), St. John (New Bruniwick) .-Jv. * t-* unisas^JJ=- Several yean or experience with hundreds of customers have led us to standardize on the rollruing package: Style of package: Pressure-packed Weight of package: 100 pounds Package material: Jute, paper or polyethylene Size of package: 16" x 24-' x 9" Liters report the following as some c: the benefits from this popular styie of package: * The package is easy to hir.dl: and allows safer stacking. * The package tikes less roor.t for a given weight and is the best choice here storage spur is a: a premium. * Rail shipments are more economical because pres sure-packed bag: make more weight per car. (Being more compact, they hold almost twice as much Here :r. the same space as icose-packed bus.) Ocean freight rates -- computed bv volume -- work out to savings of S2.C0 to S2.5C per ton as compared with loose-packed bags. Pressure-packed asbestos f.br: can be easily pailetired on 4Q- x 43-ir.ch pailets. For situations in uhich moisture absorption in shioping ar.c storage may be a consideration. ue recommend the poiyethvier.e package. The poiyem-.ier.e bags are packed with asbestos hore at a moisture ie-.ti of approximately l.2ic. The bans are strong . . . don't tear or spiit uhder rough hanclins . . . eliminate rim-: arc build-up when stored indoors or outdoors regardless of humidity. The buver of Lake Asbestos hare has a choice i of other types of packaging including loose- packed jute and valve type paper bags. How ever. it is recommenced that buyers consult with Lake Asbestos Sales Serv ice Department on the packaging and shipping factors which atTect the ultimate cost or the finished product in which asbestos is used. Lnko A sbestos ASARCO Incorporated is one of the world's leading producers of nonferrous metals, principally silver, copper, lead and zinc. The Company was or ganized in 1899 as American Smelting and Refining Company, and the cur rent name was adopted in 1975. Asarco operates mines in the United States, Canada and Peru. In addition to mining and treating ore from its own mines, Asarco is a custom smelter and refiner of nonferrous metal ores mined by others. In 1986, ores and concentrates pur chased from others or processed for them on toll accounted for about 86% of the silver, 88% of the copper, and 81% of the lead produced by Asarco's primary plants. Asarco also produces nonmetallic minerals.Coal and limestone are mined in the United States, and the Company has an indirect interest in asbestos mines in Canada. Asarco is a major producer of sul furic acid which is produced as a by product of the environmental control systems at the Company's smelters. It also produces zinc oxide, an important raw material in the manufacture of rub ber tires and paint. Other subsidiaries and affiliated companies produce specialty chemicals and manufacture alloys, electronic solders, fluxes, cath odic protection anodes, other metal products and asbestos-cement and PVC pipe. Asarco has substantial interests in three of the world's great mining companies: M.I.M. Holdings Limited (MIM) in Australia, Southern Peru Copper Corporation (SPCC) and Mexico Desarrollo Industrial Minero, S.A. (MEDIMSA). MIM is engaged in Queensland in the production of cop per, silver, lead and zinc from its Mount Isa mine and of coal from three large surface mines. Outside of Australia, MIM operates a lead and silver refinery in England, has a 32.1% interest in Asarco, and important interests in metal-producing companies in Can ada and West Germany. SPCC oper ates two mines held under mining concessions from the Peruvian gov ernment covering deposits located on the western slopes of the Andes and operates a copper smelter located 60 miles away on Peru's Pacific coast. MEDIMSA is a holding company for several operating companies in Mexico engaged in mining, milling, smelting and refining of nonferrous metals and their by-products and in the production of coal, coke and fluorspar. Asarco and its associated com panies together in 1986 accounted for about 16% of Free World mine production of silver, 8% of copper, 13% of lead and 8% of zinc. CONTENTS Letter to Stockholders 2 Asarco at a Glance 4 Noteworthy Events of 1986 5 Metal Markets 8 Mineral Reserves 11 Metal Production 12 Financial Review 14 Financial Statements 17 Business Segments 29 Auditors'Report 31 Officers and Directors 32 Corporate Information Inside Back Cover Note: All tonnages in this annual report are expressed in short tons. All ounces are troy ounces Dollar amounts are expressed in U S. dollars unless otherwise indicated. `Asarco" or "The Company" includes Asarco and its consolidated subsidiaries. FINANCIAL HIGHLIGHTS FOR THE YEAR Net sales Earnings (Loss) before taxes and extraordinary items: Operations, exclusive of income from rights offering by M 1 M Holdings Limited and unusual items, . .............. Income from rights offering by M I.M Holdings Limited . Equity in results of nonconsolidated associated companies. Earnings (Losses), excluding foreign exchange translation gains and losses Foreign exchange translation gams (losses) Subtotal Unusual items(a) ,, Total.................................................................. Earnings (Loss) before extraordinary items Extraordinary items (b) Net earnings (loss) Primary net earnings (loss) per common share Earnings (Loss) before extraordinary items Extraordinary items (b) Net earnings (loss) Cash dividends per share Common Preferred Series A Preferred Series B Convertible Preferred Convertible Exchangeable Capital expenditures Depreciation and depletion AT YEAR-END Total assets .. Total debt (c) Redeemable preferred stock Convertible exchangeable preferred stock. Preferred shares outstanding Series A. Series B Convertible Convertible Exchangeable Common stockholders equity Common shares outstanding Asarco s pro rata interest in its shares held by M 1 M Holdings Limited Book value per common share (d) ^ommon stockholders of record employees (average for year) la) Fct i9H:> ,ri inn.; :>oi Bla!errtr>n's <>\ tesiihn^iofj cm; dv"i) ,}>/: ;fotj' rTi.-jf Ujf.i:. 1 jr.r w ; (jLi'i!', :r. aiC"'; ,, 1986 1985 1984 19S3 1982 (dollars and shares m usanas except per share amounts) SI ,056,538 $1 166,921 * SI.325 129 Si.512.236 S1.350.695 (16,164) 8,999 (35.723) -- (87.363) -- 19 320 - (90,491) 7 404 : : . (2,029) 22,600 20,571 -- 13,406 9,140 -- 9,140 (24.900) 5.200 (19.700) (4.500) (59.923) (62.184) -- (62.184) (7.783) 39,500 31.717 (254.000) (309.646) (306.080) -- (306.080) 15.501 42 400 57 901 -- 77 221 58 329 -- 56.329 (7.120) 50.700 43.580 (11.000) (50.507) (38.704) (35.376) (74.080) (0.46) -- (0.46) (2 87) -- (2 87) (12 56) -- (12 56) 1 54 -- 1.54 (2.40) (148) (3 88) -- 7.00 6.25 2.70 94,745 53,030 -- 7 00 6 25 -- 25.768 57.243 0 30 7 00 6 25 -- 34.570 64 147 0 40 7 00 6 25 105.172 54.956 0 50 7 00 6.25 - 145,052 60.94 7 $1,840,314 475,593 140,000 86,250 SI.745,432 472.636 140.000 _ t $1,945,893 579.532 140.000 _ S2.227 130 537,956 140 000 S2.153,064 563.731 140.000 1,550 1,250 862 S 655,274 32,236 1 550 1.250 $ 641 479 32.047 1.550 1 250 $ 692.588 28.375 1.550 1 250 $1 024.657 28.254 1.550 1.250 $ 967.068 27.352 3,862 S23.09 19,100 7,000 ........... ,;1 ................. 4.555 $23 33 20 800 8.200 2 467 $26 73 23 800 10.000 2 415 $39 66 26 600 9 900 2.401 $38 76 30.500 10.900 VV'dl- 'At .)nr; , ()u r. 4C L ,!' :1 ''!.)' w , j-tr] i(,rtrj 1 MM f|('hl ; '-I'..:.... -J ! ' .................... nr,,.(.m". .(fit ; - n;l "i (fit : :i; 'ntr) A ,.i r< t, c (, i/Ml M i | [ | 1 1 | i t 't I r ! * * f f moARCOstockholders Nineteen eighty-six was a better year for Asarco Not satisfactory, but better On a reported earnings basis, the Company was profitable for the first time since 1983. earning enough dur ing the last two quarters of the year to overcome the substantial losses recorded in the first half On an operating basis, however, the Company was not profitable. After eliminating the accounting effects of foreign currency translation gains and non-operating income from inventory sales and other transactions, the Com pany was not in the black for the year or in either of the last two quarters We are however, well along in our program of restoring Asarco to profita bility on an operating basis at current metal prices. A year ago when we de veloped the program Asarco was gen erating substantial and growing losses and there seemed little likelihood that a metal market recovery would turn the situation around In the preceding four 'ears the Company had closed and vritten off its high-cost plants and nines and had cut capital spending a the bone. It was clear by late 1985. owever, that this was not enough. It was also evident that as a result t the closure in recent years of more tan half of the copper mines m the S. and a number of domestic and reign silver-lead mines. Asarco s po tion as a custom smelter and refiner ores and concentrates from other :ople's properties was increasingly inerable. The strategy we developed was cut costs further in our operations, ninate all but essential support ser es. and change our marketing proim so as to improve the profitability rurrent sales. We also concluded t the Company s management icture should be simplified and management systems improved illy, we felt that we should seek s of reducing the Company s endence on short-term arrangelts for teed for its smelting and iing business e have said a good deal during the se of 1986 about our cost-reducorogram At its inception, weesti:d that savings of as much as S35 >n could be achieved without ad versely impacting Asarco s productive capabilities By mid-summer we had developed sufficient confidence in the program to raise our estimate to $75 million, and towards year-end to $85 million The program has involved an exami nation, with outside professional help, of all aspects of our business. Organi zational charts were redrawn and re sponsibilities redefined, eliminating as many as seven layers of management in certain parts of the Company The research, engineering and environ mental science departments were reduced in size and combined to form a single technical services unit in Salt Lake City. Exploration activities were reduced in North America and reorganized so as to be self-funding in Australia Other support services were cut again by substantial amounts Lower employment levels and better than anticipated investment results enabled the Company to reduce its pension costs. Labor agreements with unions rep resenting the workers at Asarco's principal domestic copper operations were renegotiated in mid-1986 and with the union representing certain of the Company's silver and lead proper ties in early 1987 The new agreements called for wage reauctions and sus pension of automatic cost-of-living adlustments for the three-vear terms of the contracts The Company also has sought and received substantial re ductions m charges for transportation services and energy After careful study we concluded that the results of the Company s sales program for copper and lead could be improved by increasing the proportion of sales made on an annual contract basis for specified delivery points In 1986 a little more than halt of the Company's lead was sold under such contracts, and in 1987 more than three-quarters of the Company s antic ipated supplies of lead and copper have been sold under annual contract In addition, a new sales organization was formed to market sulfuric acid which is now produced m substantial quantities as a by-product of tne en vironmental control systems at the Company's smeiters In early 1987 we began installing new job evaluation and performance management systems which were de veloped in conjunction with the organi zational restructuring m 1986 These systems should provide for a closer linking of pay leveis to relevant external job markets and. wnen appropriate, to individual performance These changes, together with the simpler organization and clearer definition of individual responsibilities, should, we believe, improve the performance of management at all levels In mid-1986 Asarco sold a new issue of convertible exchangeable preferred stock and common stock warrants, raising in the process approximately $93 million in new equity In early 1987 the Company comoieted the sale of $107 million of fixeo-rate debt which refinanced several issues of floatingrate. tax-exempt debt These two financings were very helpful in improv ing the Company's liquidity and debt maturity schedule In late 1986 Asarco purchased the Ray copper mine and smelter and the Ozark lead mine which it has renamed the Sweetwater mine These are two low-cost mining properties which also represent important strategic steps in assuring secure sources of material for the Company's smelting and refining plants With the purchase of Ray. Asarco can now provide 60% of the copper concentrates required by its operating smelters. The Sweetwater mine, together with the Company's new West Fork mine which is ex pected to reach full production in 1987 can provide all of tne feed required by the Glover lead smelter The Sweet water mine has been shut down and maintained on standby since 1983, and we have no plans to open it in 1987 as sufficient materials are cur rently under contract for Glover Looking to the future, our priorities are to complete the task of restoring Asarco's existing business to solid profitability at current metal prices. That task will continue to occupy a substantial portion of our time and attention in 1987 We will also seek op portunities to extend the use of existing assets and technical skills into new business areas. Beyond this effort, m a manner consistent with the Company's financial capacity, we will seek new opportunities in related basic mdusries which may be less vulnerable to he trade and economic pressures vhich have led to the prolonged reces,ion in nonferrous metals This has been an extraordinarily difcult year for Asarco people A great rany have retired or otherwise left the :ompany as a result of the necessary ost-reduction programs and most of tose who have remained have done o at reduced wages. It has also been very exciting year. Asarco is an old jmpany undergoing a process of iange and renewal A new culture is nerging, and it is one which we think better suited to today's more comtitive environment. The Board of Directors of Asarco n me in thanking you. our sharehoid- ,, for your support during this diffi!t period We believe that better es lie ahead the Board of Directors, 3 lard oe J Osborne, irman uary 27 1987 Chairman Richard de J Osborne (lowest step, right) and executives reporting directly to him Clockwise from Mr Osborne John R Corbett, vice president, industrial relations and personnel. George W Anderson, executive vice president; Robert J Bothwell. vice president, sales. Alexander J Gillespie. Jr. vice chairman. Robert J Muth. vice president government and public allairs, Francis R McAllister, vice president, finance and administration, and Thomas C Osborne, executive vice president 4 ASARCOATAGLANCE MINES1 SMELTERS AND REFINERIES Silver Coeur; Wallace. Idaho Galena. Wallace. Idaho Troy: Troy. Montana Quiruvilca (Corporacion Minera Nor Peru S A ) (Also Copper. Lead and Zinc). Peru Gold Aquarius'. I immins. Ontario, Canada Wiluna (Asarco Australia Ltd.): Wiluna. Western Australia Copper Mission Complex: Sahuarita. Arizona (includes Eisenhower, Mission, Pima and San Xavier mines) Ray: Hayden. Arizona Silver Bell': Silver Bell, Ariz. Lead and Zinc Leadville: Leadville. Colo Sweetwater'. Reynolds County. Missouri West Fork". Reynolds County. Missouri Quioma (Compama Minera Quioma S A ). Bolivia Zinc Coy. Jefferson County Tennessee Immel. Knox County, Tennessee New Market Jefferson County, Tennessee Young. Jefferson County Tennessee Tin (Compama Minera Quioma S A ): Bolivia Berenguela' Cerro Grande Asbestos (LAB and company limited) Thetford Mines district of Quebec. Canada Coal (Midland Coal Company) Rapatee Middlegrove. Ill Crushed Stone, Sand, Concrete and Agricultural Limestone (American Limestone Company) Knoxville. Tennessee Copper Amarillo. Texas (Refinery) El Paso. Texas (Smelter) Hayden. Arizona (Smelter) Ray: Hayden. Arizona (Smelter') (Electrowinning Plant) Silver and Gold Amarillo. Texas (Refinery) Lead East Helena. Montana (Smelter) El Paso*. Texas (Smelter) Glover. Missouri (Smelter. Refinery) Omaha. Nebraska (Refinery) Zinc Corpus Christi*. Texas (Refinery) Bismuth Omaha. Nebraska Cadmium, High Purity Metals Denver Colorado Palladium and Platinum (Crude) Amarillo. Texas Selenium Amarillo. Texas Tellurium Amarillo. Texas CHEMICALS AND MANUFACTURING Antimony Oxide Omaha, Nebraska Cadmium Oxide, Sulfide, Powder and C.P. Litharge Denver. Colorado Specialty Chemicals (Enthone, Incorporated) Chicago. Illinois West Haven. Connecticut Sulfuric Acid Corpus Christi? Texas East Helena. Montana El Paso. Texas Hayden. Arizona Zinc Oxide Hillsboro. Illinois Asbestos-Cement and PVC Pipe (Capco Pipe Company, Inc ) Van Buren. Arkansas Evansville. Indiana (PVC Pipe) Litchfield. Illinois (PVC Pipe) Cathodic Protection (Federated Metals Corporation) Houston. Texas Matamoros Mexico Industrial and Electronic Solders and Fluxes (Fry s Metals Inc ) (20%) Alpha Metals Jersey City, New Jersey Chicago, Illinois Federated-Fry. Altoona. Pennsylvania. San Francisco California Lead Fabrication (Lone Star Lead Construction Corp ) Houston, Texas Metal Products and Alloys (Federated Genco Limited) (60%) Burlington. Ontario Canada Montreal Quebec. Canada ASSOCIATED COMPANIES M.I.M. Holdings Limited (373%) Queensland. Australia Coiiinsvilie (Coal) Mount isa (Copper Lead Zinc. Silver) Newiancs (Coal) Oaky Creek (Coal) (79% MIM interest) Townsville (Copper Refinery) Western Australia Agnew' (Nickel) (40% MIM interest) Northfleet. Engiana Britannia Retineo Metals Limited. (Leaa and Silver Refineries. Secondary Lead Piant) Datteln. West Germany (Zinc Refinery) (50% MIM interest) (Zinc Products) (33%% MIM interest) Mexico Desarrollo Industrial Minero, S.A. (MEDIMSA) (34%) Eleven mines live metallurgical plants throughout Mexico (Copper Lead. Zinc. Silver Gold. Coal. Coke. Fluorspar) Southern Peru Copper Corporation (52 3%) Cuaione (Copper. Silver Molybdenum) Toauepaia (Copper, Silver. Molybdenum) Ho (Copper Smelter) intorec! in rcmc-c *. <Y, cfimv;': >: *'>i VhhiON, *L trniK'O proov.lK ! K'rQf;ni ow/r ' ,\ r,r ;r [ ,.j: u- - . ' * NOTEWORTHY EVENTS OF 1986 5 Major Mine Acquisitions Assure Supplies of Concentrates for Asarco Smelters : in November, Asarco purchased the Ray Mines Division from Kennecott Cor poration. The Ray mine, lo cated in Arizona produces 75.000 tons per year of cop per in concentrates and 30.000 tons per year of leached copper in the form of electrowon cathodes and precipitates. The purchase also included the Ray cop per smelter which is pres ently not operating. Since late 1983, the Ray mine con centrates have been pro cessed at Asarco's nearby Hayden copper smelter. Asarco also will complete the consolidation of all min eral interests in its Mission copper mining complex near Tucson in April 1987 when it acquires for $1.0 million Anamax Mining Company's inter est in operating equipment ind mineral reserves owned jy Eisenhower Mining Com pany, a partnership of Ananax and Asarco. In 1985 wsarco had acquired the `ima mine, the only other of re four mines comprising >e Mission open pit that was ot Asarco-controlled. These oves substantially increase Asarco's ore reserves at Mission. Acquisition of the Ray mine more than doubles Asarco's domestic copper mining capacity and enables the Company's mines to pro vide 60% of the copper con centrates treated at Asarco's operating smelters. Also, should conditions in the mar kets for concentrates and copper metai warrant, the Ray smelter can treat up to 400,000 tons per year of copper concentrates. The Ray smelter is modern and cost-efficient and complied with all significant environ mental regulations when it last operated in 1982. For the Ray Mines pur chase, Asarco paid Kenne cott $72 million in cash plus participation by Kennecott in future revenues of the Ray Unit resulting from increases in the price of copper. The price participation will be 25% of incremental revenues resulting from Comex cop per prices in excess of 68 cents a pound adjusted for cost inflation. The participa tion will be in effect for a 10-year period beginning in November 1988 and is limited to aggregate payments of $65 million. In 1987 Asarco plans to modernize the solvent extractioiVeiectrowinning plant at Ray at a cost of $1.1 mil lion. This will increase this plant's capacity to 40,000 tons per year of electrowon cathodes, eliminate the ex isting precipitation plant and further reduce the already low production costs. In December, Asarco pur chased the Missouri lead mine of the Ozark Lead Company division from Ken necott Corporation and re named it the Sweetwater Unit after the name of the princi pal ore body. The Sweet water Unit is capable of producing annually 100,000 tons of lead and 8,000 tons of zinc in concentrates. The operation was shut down in 1983 and has been main tained since then on a standby basis. In July, Asarco decided to bring its new West Fork lead mine, also in Missouri, into full production by mid-1987 at an additional cost of $3.3 million. The mine had started up on a limited production basis in September 1985. At full capacity, West Fork will be able to produce an nually 51,000 tons of lead, 7500 tons of zinc and 175,000 ounces of silver in concentrates. These two events provide the mine capacity to supply all of the lead concentrates required by Asarco's nearby Glover lead smelter and refin ery, which had been sup plied by the Ozark mine prior to its shutdown. For the im mediate future, however, the Glover Plant will continue to be adequately supplied by West Fork and raw materials under contract, and Asarco does not plan to reopen the Sweetwater mine. For the Sweetwater Unit, Asarco paid $850,000 plus assumption of certain liabili ties and participation by Kennecott in 25% of future revenues of the unit resulting from sales of lead at prices in excess of 29 cents a pound adjusted for cost inflation. The price participation will be in effect for a 10-year pe riod beginning two years af ter production resumes and will be limited to aggregate payments of $10 million. ining and Exploration The Wiluna gold mining nt venture m Western istraha completed conuction in December of an oanded treatment plant to rcess annually 440.000 s ot ore from its open-pit le and 880.000 tons of mgs from old dumps lainmg from previous terground mining In On er tne joint venture had :uired the tailings dumps ; an existing tailings treat- ment plant Commencing early in 1987 the A$14-million plant is expected to produce 52.000 ounces of gold annually During the year, Asarco reorganized its mining and exploration activities in Australia The Wiluna joint venture agreement was re negotiated in February to convey a 25% interest to Asarco s partner for $4 0 million thus leaving each partner with a 50% interest Ownership of Asarco's inter est was transferred to a new public company, Asarco Australia Ltd. Subsequently Asarco Australia Ltd sold 25% of its shares to Austra lian Diversified Resources Ltd a venture capital com pany for AS6 6 million Asarco Australia is actively pursuing exploration pro grams for gold and other metals in Australia and adjacent areas, including expiorat'on of large tracts ot prospective gold tenements in Western Australia The Wil una project is managed by Asarco Australia's partner in the joint venture At the Rock Creek project, applications tor patents for the mineral rights to a large silver-copper ore body were completed and will be sub mitted to (tie tederal govern ment m March 1987 Baseline environmental studies were also completed and work 6 NOTEWORTHY EVENTS OF 1986(contd ) commenced on the operat ing permit application The Rock Creek project is located in northwestern Montana near the Troy mine. The Tennessee zinc mines operated intermittently in order to control inventories of zinc concentrates during the period of weak demana before tne zinc market im proved in the second half of the year Asarco placed the New Market mine on stand by status from January 31 to September 15 and sus pended operations at the Young. Immel and Coy mines from March 28 to June 16 As previously scheduled, the Columbus zinc oxide plant, which used Tennessee zinc concentrates as raw mate rial. ceased production permanently in April A second zinc oxide plant, in Hillsboro, Illinois, continues in operation Asarco sold its 25 /o inter est m the Little River joint venture which had operated a lead-zinc mine m New Brunswick. Canada The mine ceased production in 1983 and Asarco wrote off its investment in 1984 Under the sales agreement Asarco will receive a royalty on future production if the mine reopens within the next 10 years LAB and company limited a limited partnership in which Lac d Amiante du Quebec. Ltee (LAQ). a wholly owned subsidiary of Asarco. has a 33' % inter est consolidated all asbes tos-producing operations including LAQ's. in the Thetford Mines area of Quebec as of July 1 The new entity significantly improved overall operations through rationali zation of facilities ana was profitable during its first six months However, world mar kets for asbestos remained depressed due to reduced demand, oversupply from overseas sources, and the foreign exchange problems of many consuming countries metal The antimony metal plant at El Paso has since suspended operations As in 1985. operations at East Helena were hampered by a shortage of lead con centrates resulting from the closing of mines which previ ously supplied the plant The plant curtailed production to five days a week on April 19 and resumed seven-day-aweek operations on August 1 Smelting and Refining At the modernized Hayden copper smelter, production was 66% greater than in 1982. the last full year of operation prior to installation of the new oxygen flash fur nace. despite a three-week shutdown in February to re pair furnace brickwork. The furnace will be shut down again late in the first quarter of 1987 for modifications costing $1.5 million which are expected to extend furnace refractory life, increase throughput, and consider ably lengthen the periods between maintenance shut downs Hayden's output of copper anodes is shipped to the Amarillo Copper Refinery which produced a record 439.600 tons of refined cop per in 1986 The East Helena iead smelter made good progress in developing a more efficient and less costly method of recovering antimony from silver-copper-antimony con centrates produced at the Coeur and Galena silver mines in Idaho Since May these concentrates have been treated at East Helena instead of being shipped to the El Paso Plant where the antimony was recovered as Labor Relations Asarco reached new three-year labor agreements without work stoppages at its principal domestic copper operations The agreements became effective on July 1 and include a first-year wage reduction of $3.50 per hour, suspension of cost-of-living adjustments, and minor reductions in benefits. They also provide a wage resto ration of $0 75 per hour on July 1. 1987 and an addition al restoration of $1.00 per hour on July 1. 1988 In early 1987 a three-year agreement effective Febru ary : was reached with the union representing workers at the East Helena lead smelter and Omaha lead re finery. the Globe high purity metals plant in Denver, and the Galena silver mine in Idaho The agreement in cludes a first-year wage re duction of $3 30 per hour, suspension of cost-of-living adjustments (COLA) for the term of the agreement, and minor reductions in benefits Also. 65 cents per hour ot a total 75 cents per hour of COLA accumulated since 1984 was rolled into the wage base The agreement pro vides a wage restoration of 70 cents per hour plus a 5- cent COLA roii-m m tne sec ond year of tne contract anc a wage restoration of 95 cents per hour plus another 5-cent COLA roll-in in the third year of the contract Technical Services The new Technical Ser vices Center began opera tion in Salt Lake City n comprises the former central engineering, central re search and environmental sciences departments The center provides engineering, environmental, applied re search and assets protection (security) services as well as analytical laboratory support to Asarco operations It also offers these services com mercially to industry and government A U S patent was granted to Asarco in December on a process for manufacturing high-strength battery grids from rolled antimomal lead alloys on a high-speed, con tinuous production line Until now antimony-lead alloys have required a less efficient grid casting process The new process should signifi cantly reduce the cost of producing batteries contain ing antimonial lead grids, and Asarco is working with a leading battery manufacturer to further develop the process Financial In August, Asarco com pleted the sale in a public offering of 3.450.000 $2 25 Depositary Convertible Exchangeable Preferred Shares, offered at $25 per share and 3.375.000 Com mon Stock Purchase War rants offered at $3125 per warrant The net proceeds of 7 $92.3 million from these ship in Asarco to 32.4% in sales were used principally - October 1985, Asarco had to reduce debt. agreed to reduce its interest in MIM to 40% within three In early 1987 the Company years, and this transaction completed the sale of $107 satisfied that commitment. million of fixed-rate debt Subsequently, MIM issued which refinanced several additional shares in connec issues of floating-rate, tax- tion with a small acquisition, exempt debt further diluting Asarco's in terest to 373%. M.I.M. Holdings Uni ted. Asarco's associated Associated Companies ;ompany in Australia, an- MIM in Australia was prof lounced a rights offering itable in its fiscal year ended i February to raise A$200 June 30 after reporting a loss nillion Asarco. which then in the previous fiscal year. iad a 44% interest in MIM, MIM maximized production xchanged its rights to pur- while containing costs, hase 44.2 million ordinary thereby achieving a 10% in hares of MIM for 6.3 million crease in sales revenue while ew shares thus diluting its costs of sales rose only iterest to 37.7%. While the 1 3%. MIM continued to re ansaction resulted in no port operating profits during iceipt or outlay of cash by the first half of its 1986/87 sarco, it did result in a fiscal year. 9.0-million credit to Asar- MIM continued its diversi )'s first quarter earnings fication program by acquir id an additional $16.4-mil- ing a 25% participation in a >n credit to stockholders holding company formed to tuity When MIM increased purchase a 31% interest in common stock owner Commco Ltd., a Canadian company which >s one of the world s largest v. ducers of zinc Cominc *: so pro duces substantia, quantities of lead, copper and fertil izers MIM also created a new company named High lands Gold Limited to hold its 33'/3% interest in the Porgera gold prospect and other as sets in Papua New Guinea As exploration progresses, Porgera is emerging as an important gold property. Southern Peru Copper Corporation had a smaller net loss than in 1985 due to more favorable tax and cur rency exchange effects. However, pre-tax operating earnings were significantly lower because of lower ore grades, some strike activity compared to a strike-free 1985, and lower copper prices Also, operating earnings continued to be adversely impacted by infla tion-driven cost increases combined with an exchange rate in Peru that remained frozen for the entire year The government nas announceo that it w:i devalue tne Peru vian currency in 1987 at tne rate of 2 2% per month Asarco s equitv in the earnings of MEDIMSA in Mexico increased in spite of lower metal prices The ef fects of tne lower prices were offset bv tne drop in the value of tne peso and by measures taken to control operating and administrative expenses, which increased consideraoiy less than the rate of inflation. Mine pro duction of silver, zinc, copper and iead benefited from the start-up in the first quarter of the new Rosario mine and the expanoed facilities at the Charcas mine. Refined silver production increased by 15% and electrolytic zinc production oy 20% over 1985. The magnitude of the combined impact of Asarco and its associated compa nies on worid mining is shown in the accompanying charts Asarco and Associated Companies Asarco Plus Eouftv Interest In the AssMtateri r.nmnanins ti J82. - ;63... :84^V85 - ;p6 ; ^ $0 32 :33 ,34 .;>85. 0 , '82 '83 . 84.35 V'86 T'T.. .%VT.- 1 8 METAL MARKETS Silver Average Domestic Sales Price tDottars Per Ounce) 1986 Domestic Consumption tn current dollars in B86 dollars, adjusted lor inflation using the 'GNP deflator Hmdy Honan Price a. Photographic/45% b. Electrical & Electronic Produds/27% e. Silverware/6% d. Jewetry/6% e. Brazing Alloys & Solder,6% f. Corns & Medallions/4% g. Catalysts/2% fi Miscellaneous5% Source Bureau of Mines, U S Oepartnanlallbelnlerioe Estimate based on lira 9 months ol 886. Copper Average Domestic Sales Price (Cents Per Pound) 150. 25 1986 Domestic Consumption ByUse 0- 77 1 I I I I I I I'86 l In current dollars In 1986 dollars, adjusted lor inflation using the GMP deflate eBsWeekUS Producer Pnoe. mode Composite Bass a. Building & Construction/41% b. Electric & Electronic Products/24% c. Industrial Machinery & Equipmenl/14% d. Transportation/!^ a Consumer & General Products/10% Source: Copper Development Association Eslimate based on first Tl months ol 1966. Silver Free Wona siiver output over The average price of silver aemana narrowed to 22 mil in 1986 was the lowest since lion ounces in 1986 This 1978. As quoted by Handy compares to a surplus of 71 & Harman, silver prices aver million ounces m 1985 ana aged $5.47 an ounce in over 50 million ounces in 1986. 11% lower than the each of the live preceaing 1985 average of $6.14 The years however, these statis high for the year of $6.20 was tics do not incluae demand reached on January 27 and bv investors tor silver m small the low of $4 87 on May 20 bars which is believed to Although the excess of world have been substantial silver production over con Looking ahead, the sur sumption narrowed signifi plus of silver output over cantly in 1986. a lack of demand should continue to speculative interest ana narrow in 1987. Neither mine large overhanging stocks nor secondary production of silver had a more pro is iikely to increase unless nounced effect on silver there is a substantial in prices. crease in silver prices. Con Free World mine produc sumption should benefit from tion of silver fell to 325 million expected modest economic ounces in 1986 from 330 expansion in the Free World million ounces in 1985, due and the growing worldwide primarily to the closing for popularity of siiver jewelry economic reasons of two and commemorative coins large domestic silver mines In this country alone the new which had a combined out one-ounce American Eagle put of 9 million ounces in silver com introduced by the 1985 Also, world production U S Mint in November is in of silver from secondary great demand and is ex sources, such as scrap and pected to consume 5 to 10 old coins, fell in 1986 to 80 million ounces per year of million ounces. 29% below government stockpile silver 1985 output. This. too. Also, the U S Congress has reflected low silver prices authorized the minting of which made it unattractive to 10 million 0 77-ounce silver sell scrap silver and caused coins in 1987 to commemo an estimated 5-million- rate the Bicentennial of the ounce drop in exports of U S Constitution secondary silver from India Free World consumption Copper of silver increased 2 4% over Free World stocks of re 1985 to 383 million ounces, fined copper continued to fall spurred by growing usage in 1986 for the third consecu in the photographic and tive year. Following a total de electronics industries, which cline of 700,000 tons in 1984 in the United States account and 1985. stocks held by re for about 72% of consump finers and fabricators and on tion, and in jewelry and com the commodity exchanges in memorative coins Although New York and London drop these latter two categories ped an additional 150,000 account for only 10% of do tons in 1986 to a level that in mestic silver usage, they prior periods of economic re represented 50% of the covery would have caused growth in U S stiver con concern among consumers sumption in 1986 about availability However, As a result, the surplus ol in recent years consumers seem to have learned to op erate on leaner inventories by employing computerized inventory control methods based on "just-in-time" delivery Free World copper con sumption increased slightly in 1986 to 8.1 million tons from 8.0 million tons in 1985. Demand in the United States, however, fell nearly 2%. Demand for domestic brass mill products was generally satisfactory, but this was offset by weaker demand in some wire and cable markets. Output of refined copper in the Free World increased for the second consecutive year to 8.0 million tons, al most 4% higher than two years ago. Thus, the shortfall Df production relative to consumption continued to narrow. Had it not been for strong exports of 280,000 ons of refined copper to socialist countries, the drawiown in stocks would have >een considerably less in 986. Over three-fourths of ne exports were tc China, /hich in recent years has re quired increasing quantities f imported copper With the perception mong copper users that nortages of copper are ot imminent despite the datively strong market funamentals and with a contined lack of interest in copper mong speculators, copper rices remained in the dolrums Asarcos average opper price for the year 'opped to 64 9 cents a xind from 66.3 cents in 185 Asarco s copper ices remained within a relively narrow range of 60 to i 5 cents a pound through;t 1986 Copper supply and demd are expected to be balance in 1987 as Free World refined production increases slightly. This as sumes a continuation of the relatively strong level of de mand which has prevailed since 1984 Inventories of refined copper, therefore, are expected to remain at the level of year-end 1986 With the world copper market in such delicate bal ance, it is vulnerable to dis ruptions in supply due to strikes or other causes, such as occurred in the lead and zinc markets in 1986. There is little spare copper mine capacity in the Free World that can be brought back into production quickly and economically to mitigate the effects of such disruptions. Lead and Zinc The markets for lead and zinc were buoyed during 1986 by major production in terruptions, causing supply to fall short of demand. Free World output of re fined lead fell to 4 3 million tons, 4% below the record level of 1985. while consump tion held steady at 4 4 million tons There was further ero sion in demand for lead by gasoline additive producers, but this was offset by in creased demand from the battery industry, by far the largest market for lead The supply shortfall was filled by a drawdown in re fined lead stocks. In the United States, inventories of refined lead held by domes tic primary producers de clined from 89,000 tons at the beginning of 1986 to 29,000 tons at year-end. These inventories had reached nearly 130,000 tons during the middle of 1985 The improved market fun damentals led to a sharp re bound in lead prices during the second half of 1986 Asarco s lead price opened IT* :v. a Bateries/W% 4 Pigments & Oher 0ndey9% j c. tonwnaioiV5% v 1986&BaR%srijiB6<iiliismQlhe .'* \ d.Sokfcr/2% - . a Mscefianeous/18% - 1908 - ' Sane dmnan Bureau otMetaSS&fci? asm* tradon ban tnonteplwe.?. --U - \ '. ZinC'-rfy'V.; :.;'y Average Domestic Sates Price f't^entsPerJtawlI^ A US'... - 'GSymIj^49VT 4 Zinc-Base Altoys/28% *.*if.4bb WnducSSwisM' as,; a 2K)cDxi*% Sj/Jpf tstanatetasMonHrsrtl 10 METAL MARKETS(cont'd ) the year at 18.5 cents a pound and fell to a low of. 1775 cents in February. Thereafter, it improved slowly to near the 20-cent level in the second quarter and then advanced strongly to a clos ing level of 28 cents a pound at year-end. The domestic producer price for lead aver aged 21 8 cents a pound for all of 1986 compared to the 1985 average of 19.1 cents, a 12-year low. Similarly supply disrup tions caused Free World pro duction of refined zinc to drop to 5.3 million tons in 1986, nearly 2% below the record level of 1985 The production interruptions occurred in the second half of 1986 and coincided with a rebound in demand. Free World consumption of slab zinc increased 2.8% in 1986 to a record 5.4 million tons, due largely to a 6% jump in domestic usage of zinc for galvanizing of steel The sheet galvanizing industry continued to demand in creasing quantities of zinc to provide corrosion protection to steel in numerous applica tions By the end of 1986. Free World stocks of slab zinc were at the lowest level so far in this decade The combination of lower production and higher con sumption led to a strong re covery of zinc prices, which had fallen sharply in late 1985 and early 1986. The domes tic slab zinc price rose from 30 cents a pound at the start of 1986 to 50 cents late in the year before softening to the mid-40 cent range at yearend following the settlement of a strike at a major Cana dian zinc refinery. Neverthe less, because zinc prices were much stronger in the first half of 1985 than in the corresponding period of 1986, the average domestic producer zinc price declined to 38.0 cents a pound in 1986 from 40.3 cents in 1985. The low year-end inven tory levels of lead and zinc throughout the Free World should provide some sup port to both markets in 1987. The disruptions in produc tion of lead and zinc were over for the most part by the end of 1986. Therefore, the strength of demand is ex pected to determine the course of the lead and zinc markets in 1987. The lead market depends heavily on the battery indus try. which in 1986 accounted for nearly three-fourths of do mestic consumption Since demand for replacement au tomotive batteries, the larg est part of the lead-acid battery market, is weatherrelated, it is difficult to fore cast. Demand for zinc in 1987 is expected to continue to benefit from increasing consumption by the galvan izing sector. MINERAL RESERVES--1 986(a) 11 i [ l asarco Coeur Galena Troy Mission Complex Ray Silver BellQuiruvilca Leadville Sweetwater West Fork. Ouioma . fennessee Aquarius Wiluna Oerro Grande (Tin) 3erenguela (Tin) Asarco Associated Interest Company's (%) Interest (%) 50 37 5 75 100(b) 100(c) 100 80 50 100(c) 100 51 100 100 37 5(d) 51 51 Mineral Reserves (Thousands of tons) 700 1.037 39,559 275,752 69J, 54 7 20 955 4 585 977 25 445 1 1.293 493 6 749 205 830 57 97 Silver (oz ton) 19 75 15 64 1 54 0 13 0.07 6 50 2 46 0 30 4 80 Average Mineral Content Copper Lead Zinc (%) (%) (o) 0 90 0 56 0 75 10 04 0 0 62 0 71 0 66 1 08 0 13 0 04 i 25 4 A4 4 C'4 ^ *6 3c 95 96 * 3 c5 3 35 Gold (ozton) 0 02 0 Of 0 53 0 `3 Other (%) 1 68 1 07 _AB and company limited (Asbestos) Midland Coal ASSOCIATED COMPANIES(a) 33 3(e) 100 51 762 20 130 3 63 4.I.M. Holdings Limited Mount Isa Copper Silver-Lead-Zinc Hilton(f) Agnew (Nickel) Mine#i Mine #2 (Undeveloped) Coal Collinsville Newlands Oaky Creek . Undeveloped Reserves 37 3 100 100 40 137 789 54 013 79.366 1 014 33 510 4.30 4 02 3 40 5 6: r. " 6 4- * 0 ' i 100 281 089 100 281 089 79 655 874 60 2 904 587 2 98 2 C>0 outhern Peru Copper Corporation Toquepala Cuajone EDIMSA(h) 52 3 100 91 34 100 100 745 308 490 01 8 74 a a 6 60 0 86 ) Mmerai reserves are as of December 3 1986 except tor M i M Ho'ding-, wmcn urn us u..r-.- 3 b i960 ;i.m MlC'iM:-'- . , represent the proven ana prooabie portion of controlled mineral deposits Rusc*:vm: a**.. dunm-nos .,i prpvu ,ma anticipated conditions may De economically mined and processed lor me extracm.1"o* me*' ti,;nnMi comem (-num., nr...*,, . optioned leased, or held under government concession Mission Complex comprises me Mission Eisenhower Pima and San xavm: mm*??, m-- m-1:, i',r - whim -tm ;'-ror...m.- 11j,j '* ; general partnership operated by Asarco which lies between me Mission and bar', A.ivtm m;o..c lo:,i; nt in-- fll1fr..-r- i ; 0.14 oz/ton silver, and 0.68% copper included are reserves of 10 287 000 tons cc-nmir-ng '.) 8;. 04 ion v.vm .mr: : i ,;/: . agreement, are scheduled to be delivered to Asarco In April 1987 Asarco w:i: acoui"* to: $i 0 rniinon mo pas.'inc.t- i-t tt>; of the Anamax Mining Company as a result of Anamax s exercise of an option to terminal*' trv partnership -n. 1 Purchased from the Kennecoti Corporation a subsidiary of T he Stanaarj U:i Comp.m.* Ra, Mines U'vcr.n pum.nnv*,-] /v No,.-; formerly Ozark mine, purchased December 30 1986 1 Wiluna is a joint venture which is 50% owned Dv Asarco Australia Ltd a 7f,%-uwnr.*a unPMdiarv <9 As.inm Mm.-r,,the Wnuna joint venture , **-t . Effective July i. 1986 the Com party's wnoiiv owned subsidiary Lac d Amiamo do (j- v-\><:: i u.nsti" m. j c.nnir r , m j . to a newly formed partnership 1 AB ana company limited tor a 33 /% iiimmci p,jMn`"<;t::p .nvmv Wi!iw,i: u-c^rv--, mi-.- - .. partnership interest m LAB and company nmited Reserves make no allowance tor material not recoverable by estabi'sneo mining pn-n.ccei Ores Irom Southern Peru s mines contain smart amounis of snve* m trie year ending Decerno*uat nr*-, -* -m-:! .in- ; 2.564,000 ounces ot siivef MEDfMSAana Its subsidiaries nave concessions granted by the Me<car Government wr*r;n g.v*- m.rr ..... .. .. . designated areas Tne proven arid probable reserves are as pubm.nod ov ML:jiMSA tome'/no"ceccior*, ,r : v-;., ores currently being mined at ih. various units imts operations /ear ende j uecemge' 8 1985 orr-. i"vjnr.. -: i ounces of silver 19 000 tons of copper 64 000 tons of ieao and 15R 000 ,f/'S ot /i'v. f-ssp'-r ! simsi ,i .'-c" t ,< - . *: 11 >t*: 81 two and ' - u'ld'-r and id-: m< is*1 owned [ r . -r i*n jW*,f r. (i . : 'i K) u )i ci jniamirK] ; ' in..,, 'xidnmr.hip Swi:*-iw,i!*`i n!11 1<; .' up",, nih.Tu-,1 II iini.nd ' n j*'i.11u>f is tn.nj armi.'d n; i-irai >i< , 099 dti'i t/` O't/' 12 METAL PRODUCTION MINES Metal Produced (in concentrates) Coeur Gaiena 1986 1985 1964 * 966 1985 1964 Asarco Interest (%) 50(a) 37 5ta) Ore Milled (Tons) 155.000 151 000 144.000 201.000 200 000 209 000 Silver (Ounces) 2 743 000 2,628 000 2 485 000 3 996 000 4 103 000 4 194,000 Copper (Tons) 1.200 1.200 1 200 1.100 1.200 1 400 Lead (Tons) Zinc (Tons) Gold Tin (Ounces) (Tons) 344 324 30? 463 585 '14 Trov Mission Compie> '986 '965 '984 * 966 '965 1984 75 tb) 100(C) 3 122.000 2.843.000 3 033 000 9.928.000 9 807.000 10 343.000 4 076 000 3 638.000 4 .269 000 1 296.000 1 073.000 867 000 19 000 16.800 19 000 61.600 59.000 56 900 1 751 - Ray Sacalor. '986 1984 lOOid) lOOiei 1.073.000 1,000.000 37.000 33 000 7,700 4 500 4 79 Snve' Be! 1986 '985 "'984 100(f) - 2 272.000 - - 102 000 3 600 4 400 10 400 Ouiroviica 9oc 985 1 GC.d 80(gt 419,000 438 000 395.000 2 609.000 2.035 000 1 780.000 1 100 2 900 2 700 3.900 3.900 3.900 12 000 11 200 i' 000 1,671 2.582 2 500 LeadviHe West Fofi' Bucnans Little River Quioma Tennessee Wi:;.na Berenque'a Cerro Grande Tola! 986 "985 1984 1986 ' 985 : 964 9c4 966 1965 '954 1986 ' 96 5 '384 986 " 966 f 98s ' 964 198c f96: 06-1 50(a) 220 000 217 000 214 000 100(h) 304 000 72.000 49 hi 102.000 25 (j) 144 000 51 (k) 04 000 25 000 loom 1 949 000 1 566 000 2 8T8 000 37 5(rr.i 816 000 51 (ki 52 000 60 000 45 000 1B 239 000 15 4 18 000 20 804 000 392.000 344 000 363 000 182 000 2,000 2J4 000 468 000 ooo 52 000 ' 5 332 00O 13 954 009 14 8 77 000 1 600 95.300 85 500 103 700 7,500 6 700 6.700 33 600 3.900 4 600 1 500 1.200 14 500 13 300 14 500 7 200 100 7 800 - i 600 1 300 47 700 37 500 67 300 45 000 16 000 16.400 81 400 63 700 101 900 17 700 17.195 17,950 1 140 14.900 8 983 30.932 20.686 37,991 382 299 203 382 299 203 rg:riAi. 11;;U' uG r<?l i';; St.-'',: fnfi'r a; : ji :.m . : O' As:i'CO 3 S' ' cS! c i..I'V't-e; e'me'ws;*' no '`.'J ;a: Operated ov Asarco tjncse it?ase ana jO>'n verv.jre ananaernenp- m Gome ,'mn LtVuivi As eco fa? a bOO interest m operating expenses and protils or losses '' 3a;ena Asarco recede*- "V-c or '>?:; sus remain mu uti?' mva- . p l.-munc;. s; '.'.> : < >* sSH; ot operating profits Detore depletion depreciation. and Idaho taxes i! O oo rated ov Asarco mmer a ;e a sc dsmmmun! Asarco 1 ola tv, 'bn, pi n.-; u'tx h-o ' .!!!? o; **r a: mo expenses Out ue'om depletion. depreciation and income I axe-, i C i Mission Comply comprises Mi i'- ; s- '-no At' jan a a v>e< am 5 l;.ma - rimer, f iri, -s ,, r. j,* r i or (i, partner smp opera led Dv Asarco T he properly is held undo' state o' AM/.ona >eases pan ni/.men m 0`m-cni.n:; ;i i rin.m ,n ton-,om aw-'mum o ' ocopom was contributed lo fne partnership pv Asarco Producliori includes '.H Asarco s snare of Lise nr ida-' in. A;,.- 'erG A s.rco as- uc uun e U>i S1 u mm..on On. omanr?.- o' mu L i so r'Mower general partnersrup'trom the Ana max Mining O'jmpanv 'errnrririimrj m>- pa-m--.' ....m / ,5. -r ,ou portions of Missmn ami 'Cma am "f-;n '.maer emo-term leases under which lessor has retained a royally interest on D ;:cnased Novompo' 'rt ) Vhr,:* -m -rj*' Gap) maiion :j subsidi if. of ' f'O Sundae: 0" Company Prodnc lion is for penod suoseciuent lo purchase date (o Operation cosed m Aptr 1 An 1 duu tr, o-o:i ot rif#* 'c>` <:vc- C j Con run mam prp-me,t>'>i * ': A:,;;. , ui . on-; v*- n- . m' -ml t HH-1 fM'.'aic'd 'indu' '1 *r 11.1, j;: ; - ` - r r ' . i'" `.'SS1. >' f)v L-f.r pr,r, i,p' f/:ri. ', j N< ;r f u :, ; , A .in a,( , owned SUPoKlldtV Of d WhU'y Owned Asarco SlJPSldiary if' ppmor ot in-.- mm*- ';(; amt- ' u < r -; r*-m: .-av- uiiw *-'.!** up m Shl;iemp*;: Vjrm ' i '< . . ' 'm ' 'fm'" : i.r v >;'!`.-rm,: Opera*inns havi.- t^uf?n on a Irmilea production pasts smee Ip Ur-mutm! t)v A-.ae../': -i iii- , ; ; -. \>p-nr m.i,'.); 'rj!;*'' ' -A-,.; upejn i )up'"li()i i id or,,> r >-ser vOS '!l Operated Pv Jo's^o/.'nrMi i .m - Hi v-e' io<.' : . iUc- As-i" '1 wr. < / i c .s,n i;,i >* u 0* -m-mpm' t 4HA (joura' ions were si j spent led Vrplemper ! 984 with only SOSS'i:: ore ; nor ji ;r |i< in > ' ()H 1 , \ s r iS < ; 1 -"A. , Pro' ' " I O t m f ci f 0 O Pv a bO"V:. jU Of p, jratH l nf r < *48 t ) I/, r ,.;u o , , J At ! >' I y.vr ; A '-..mr ; S.C;',U ; .j: , J [)'' rj [ i rj r;1, at III*- Ouioma [ [ 11 r) (; WS-'e Suspended Ifi 198b 1'' i:i f ^80. Opet a! ions .'if 'itinm- < >' u - ..;r r - . , , mp'-odOd trr two .mo' ri.C' mu: !-i , r !'*. red fjuridef a no at !'> t,s.;r'ri inin,; ,,-* re SuspenrJed tor eight months trirougn ff . rrurd ouam-: L/purvis.: s a' \h'-A /..- mm;' .umo .r, '48s t., -.m-u 1 m i Operated as a Iinr If von 11 jre .'P "j. 1.. .i f _ o '1 u s' , A . ji' 11 A i ; ` r i -i . :<; . - .,'' : -r , >1 As.m.' OoeS'it SO , s' ii 00: t ijl; ''May 1 98 b SMELTERS (a) Blister Copper (b) (Tons) Defined Capacity (c) 1986 1985 1984 El Paso Hayden . . Hayden-Ray (d) Tacoma 115.000 175.000 110.000 (e) 100.200 186.500 -- -- 94.200 166.900 -- 8.300 90.000 80.000 -- 58 000 Total ^ead Bullion (Tons) East Helena El Paso (f) . . Glover (g) 400.000 75.000 95.000 105 000 286.700 50 800 -- 132.500 269.400 65.600 33.700 123 500 228 000 69.300 48 200 86 100 Total 275.000 183.300 222.800 203.600 a) Ail smelters ana refineries are owned Dy Asarco j) An intermediaie product containing approximately 98co copper :) Asarco's estimate ol actual capacity unaer normal operating conditions witn allowance tor normal downtime tor repairs ana maintenance ana basea on the average metai content ol input material tor tne tnree years snown No adiustment is made tor shutdowns or production curtailments due to strikes or air Quality emissions restraints :) Purchased on November 18 1986 trom Kennecoti Corporation a subsidiary o' The Standard Oil Company Smelter operations nave oeen suspended smce 1982 Refinery operations are represented by a solvent extraction-eiectrowmnmg plant producing electrowon cathodes i Smelting operations were permanently ciosea in March 1985 i Paso lead department operations were indefinitely susoended in August 1985 due to lack of raw material affecting oroduction of tne Omana refmerv i -Glover's higher than capacity production in 1986 ana 1985 resulted from nigne: grade of available raw material and uninier'upted operations with minima; downtime for repairs ana maintenance REFINERIES i Denned Capaciiy ic 98c 1985 1984 Silver (Ounces) Amarillo (h) Copper (Tonsi Amarillo Hayden-Rayid) 60.000.000 324 73 000 42 295 000 4c 356 000 456.000 36 000 439 600 2 000 4 14 202' 2-12 400 Total Copper Lead (Tons) Omana (ti Glover (g! 492.000 156 000 110.000 -- - 60o 58.200 11 7 500 414 200 : 03.800 122 000 346 400 1 i 1 600 81 800 Total Lead Zinc (Tons! Corpus Christi (i) Zinc Oxide (j) (Tons) Columbus Hillsboro 266 000 107 000 (k) 22.000 i 75 '00 5 700 6.500 225 S00 12.600 15 100 5 dOO 199 400 3i 400 1 7 000 1 i 100 Total Zinc Oxide Gold (Ounces) Amaril'o 22 000 600 000 - 2 200 8c. "00 20 600 220 100 28 100 339 800 mi S-tver production oe emeu m 1986 UojP 'ti.rie , : 5 tot Hlfl.tt 'O .iv.'jiiaomiv ot silver-bearing raw matenais m tne %;. -- m.i'M:-: h; Plant ooeraiions were suspended -xir * `965 Pm.'cu..Ctior; riaj been temporarily suspended Ociobe- 1962 mroug ' Vj. 1964 in Meta'content ot zmc oxide (- 2'nc oxide operations were permanen* >. r csoo Vrio SSOCIATED COMPANIES 1M 'dings (1) 1986 1985 1984 Asarco Interesl (%) 37 3 Silver (Ounces) 19.230 000 18.192.000 17 755.000 jthern u (mi DIMSA (n) 1986 1985 1984 1986 1985 1984 52 3 34 0 2.564,000 2 798 000 2 471.000 25 635,000 22,866 000 21 230 000 Copper (Tons) 185.300 190 700 179 000 271 000 300 000 277 000 33 100 34 300 39 600 Lead ITons) 224.700 218 200 228 50G 69 300 83,000 75,600 Zinc 1 Tonsi 225 700 226 300 216 700 140 300 164 000 145 200 Gold lO.?S ! 60 600 62.700 40 900 Molybdenum (Pounds: 8 442 00O 8 1-12 000 6 793,000 KOV A *:; ;'r; entire '* kv As-v; - a scan.- ,,,v.y., : .-> -/aadcf;, to? hsca: Ac.-' r -H' t If' 1 : ; -..T c/.vto-'.; ot '.'CPP-.'i L-m.:t;j> - P %I*-' .'p'tpnt P'u% ... y'otv cm ato'.-. ' /- : .p'-"-'-i.iftn:: C'hH?i t ' - , ; :> ;ouO'. r ,jt c nnlen) v,M,; o a lusv.o soio ARCO REFINED METAL PRODUCTION BY SOURCE Silver Copper LU94 Mines Custom Toll Mines Custom Toll Mures Cuslom 3. 3 :. ! ' 14% 64% 22% 125 12 74 14 13 7- 15 71 14 26 59 14 69 17 28 48 17 70 13 30 33 21% 16 20 34 37 19% 69% 3 83 5 68 3 70 3 92 '.--Material from Asafco mines im--Materials purchased from others Materials refined lor ana returned to others >'js Christ* piant suspenoea production trom October 1982 through May 1984 arid suspended oomanons moot 11 tr-!v in Apr. rah , To'- 12 ... 1 -1 30 3` 11 Zinc Mines Cuslom 31r 69% 83 17 44 56 ERAL PRODUCTION AND METAL PRICE INFORMATION production information presented below represents Asarco's beneficial share of mine production as set forth on page 12 al price information is presented on pages 8 and 9 of this annual report________________ jral Produced (in thousands) (ounces) . er (ions) itons) ions) ounces). ;tos (ions) tons) 1986 9 276 89 0 40 5 3t 8 i36 80 3 500 1985 8 523 79 4 1* 1 54 0 `0 132 2 . 583 3 1984 H 91 i 90 i 8 ' '* *6 ; y m 11 1983 C 77A 'M* 4 '!)(} y-,; 8 ` *V 1982 9.337 106 5 11 3 64 6 13 6 :l; o U63 n FINANCIAL REVIEW OVERVIEW During 1984. 1985 and 1986 Asarco's earnings were ad versely aftected by generally lower prices for its major metal products and by the reduced spread between the cost to Asarco of acquiring metal concentrates from others for pro cessing and the payments it receives upon sale of the re fined metal. In 1986 Asarco reported net earnings of $9,140,000. compared with a net loss of $62,184,000 in 1985 after an unusual charge of $4,500,000 and a net loss of $306,080,000 in 1984 after unusual charges of $254,000,000. Operating cost reductions achieved in the period 1981 - 1985 reached an annual level of $115 million by the end of the period However, these reductions were more than offset by the decline in metals prices and processing fees, which re duced the Company's annual revenues by more than $180 million during the same period. In late 1985, the Company began a new cost-reduction program designed to achieve further annual cost savings, currently estimated to be $85 million per year. The program involves an examination of all aspects of the Company's business The organization was reduced in size. The research, engineering and environmen tal science departments were combined and reduced Ex ploration activities were reduced m North America and reorganized so as to be self-funding in Australia Lower em ployment levels and better than anticipated investment results enabled the Company to reduce its pension costs Labor agreements with the unions representing workers at the Company's copper plants were renegotiated in mid-1986 and with the unions representing workers at the Company's silver and lead properties in early 1987 The Company sought and received substantial reductions in charges for transportation services and energy. The Company made two acquisitions of mining properties in 1986: the Ray copper property in Arizona and the Sweet water lead property in Missouri. These acquisitions improved the Company's ability to supply its smelters and refineries with concentrates from its own mines The purchase of the Ray and Sweetwater properties for $79.2 million was the prin cipal reason the Company had a negative internal cash flow of $84,437000 in 1986 During 1985. the Company had a positive internal cash flow of $23,108,000, contrasted to a negative internal cash flow in each of the four previous years Net proceeds of $92 3 million from an issuance of con vertible exchangeable preferred stock and common stock purchase warrants in mid-1986 were used primarily to reduce debt Total debt outstanding was $475,593,000 at the end of 1986 compared with $472,636,000 at the end of 1985 and $579,532,000 at the end of 1984 Total debt levels at the end of 1986 and 1985 were lower than any year-end since 1981 r-FInancing Activities cv.{ln Millions) . alUM 0 77. . : 78 79 ,'80 . '81, ; '82 '83 Revotvlngcredit Pollution control financing Rod-rate debt. >, v^ ' -,2ii - SALES Asarco records as a sale of products the full market value of metals, ores and concentrates produced from its own mines and for materials purchased for treatment on a custom basis, whereas it records as a sale of services only the processing fees charged for treating similar materials on a toll basis Sales of products and services were $1,056,538,000 in 1986 compared with $1,166,921,000 in 1985 and $1,325,129,000 in 1984 The 1986 decline was caused primar ily by a decline in the volumes of silver, zinc and asbestos sold, which more than offset an increase in the volumes of copper and lead sold The 1985 sales decline was caused primarily by the declines in silver and lead prices and by lower processing fees, although the quantity of copper, silver, lead and zinc sold by Asarco in 1985 was higher than in 1984 Lower sales of asbestos, coal and recycled metals in 1985 also contributed to the sales decline Sales of services for the treatment of materials in Asarco's smelters and refiner ies on a toll basis decreased to $21,585,000 in 1986 com pared with $23,853,000 in 1985 and $30,653,000 in 1984 The full market value of materials treated on a toll basis at average prices in effect during the year was $182 million in 1986. $153 million in 1985 and $188 million in 1984 In 1986 sales of services declined primarily because of the decrease in toll lead treated at the Company's Glover lead plant In 1985 toll processing fees per ton declined and a greater proportion of material was purchased on a custom basis. resulting in the decrease in sales of services. In addition, U S. mine closings and curtailments in 1984 and 1986 re duced the amount of silver-bearing lead material available for toll treatment. COSTS The Company's cost-reduction program and LIFO-valued in ventory profits improved income from products and services in both 1986 and 1985. Costs of products and services decreased 11% in 1986 irom 1985, while sales decreased only 9%. As a result, ncome from products and services increased 1% to 5109.085.000. Costs of products and services decreased 15% in 1985 from 1984, while sales dropped 12%. As a re sult, income from products and services increased 31%, or 525.382.000, to $107786.000. Operating results for 1986 in cluded a $26.9 million decrease in the cost of goods sold esulting from profits realized on the liquidation of excess JFO-valued inventory; this compared with a $14.6 million iecrease in 1985 and no decrease in such costs from LIFOalued inventory liquidations in 1984 Total selling, adminis- ative, research and exploration expenses were reduced 7% in 1986 and 11% in 1985. million in 1986 compared with $700 million in 1985 and $800 million in 1984. The declines in 1986 and 1985 were due to low metal prices. NET EARNINGS (LOSS) For the year ended December 31. 1986 the Company re ported net earnings of $9,140,000, but a loss of $0 46 per common share after providing for preferred dividends, com pared with a net loss of $62,184,000. or $2 87 per common share, for 1985 and a net loss of $306,080,000. or $12.56 per common share, for 1984. Items affecting 1986 results were $8,999,000 of income from a rights offering by MIM, $3,136,000 of income from the placement of a 25% common stock interest in an Australian subsidiary and a charge of $4,248,000 for bad debts expense The 1985 net loss in cluded an unusual pre-tax charge of $4.5 million of costs to be incurred in closing the Company's Columbus, Ohio, zinc SSOCIATED COMPANIES sarco accounts for its nonconsolidated associated compaies by recording only its equity interest in the results of lese companies. Asarco's equity in the results of its associated companies, rincipally M.I.M Holdings Limited in Australia (MIM). South-n Peru Copper Corporation (SPCC) and Mexico Desarrollo idustrial Minero, S A (MEDIMSA). was a profit of $20.6 mil>n in 1986 compared with a loss of $19.7 million in 1985 and profit of $31 7 million in 1984. The results of MIM, SPCC and EDI MSA were adversely affected by low prices for nonrrous metals in each of these years. Equity in earnings of the associated companies was afoted by foreign currency translation gains of $22.6 million 1986. $5.2 million in 1985. and $39 5 million in 1984 Trans:ion gains resulted from the decline in the exchange rates the Australian Dollar, Peruvian Inti and Mexican Peso in ation to the U.S. Dollar. In 1985, there were substantial setting translation losses related to debt of MIM denomited in Japanese Yen, Swiss Francs, Deutschmarks and itish Pounds Sterling, all of which increased in value rela3 to the U.S. Dollar in late 1985 In both 1986 and 1984, arco would have reported a loss from its equity in earnings associated companies in the absence of foreign currency nslation gams. From August 1985 to January 1987 the exchange rate of Peruvian Inti relative to the U S. Dollar was fixed, which ant that the full effect of the high local inflation rate was ected in SPCC's domestic costs SPCC's costs remained h throughout the period also because of high internal fuel orices which have been maintained at levels approxitely double world prices. For a discussion of Peruvian Jign currency controls applicable to SPCC. see Note 7 he Notes to the Financial Statements Asarco's proportionate interest in the sales of the associd companies, which is not reflected in the Company s 3S revenues referred to earlier, was approximately $600 16 FINANCIAL REVIEW (cont'd ) oxide plant in 1986. The 1984 net loss included unusual pre tax charges of $254 million related to the closure or suspen sion of operations at several facilities, including a copper smelter, several zinc processing plants, a copper mine, a lead-zinc mine and certain oil and gas properties. CASH FLOW Cash flow provided from or used for operations was a positive $30,361,000 for 1986 compared with a positive $27500,000 for 1985 and a deficit of $9,391,000 in 1984. Dividends from the associated companies were $70 mil lion in 1986, $4.9 million in 1985 and $32.9 million in 1984 SPCC paid a dividend of $18.5 million to Asarco in 1984 but paid no dividends in 1986 and 1985. Depreciation and depletion expense, based on units of production, was $53 million in 1986. $57.2 million in 1985 and $64.1 million in 1984. The 1986 decrease resulted principally from suspension of operations of the Company's El Paso, Texas, lead smelter. The 1985 decrease was primarily attribut able to reductions in depreciable assets due to the 1984 write-offs described above. Working capital, exclusive of cash, marketable securities and debt, increased $9.1 million in 1986 compared with a decrease of $45.6 million in 1985 and a decrease of $12.1 million in 1984 The increase in working capital in 1986 was primarily due to an increase in inventories as a result of a change in the manner of sale of Troy mine concentrates and raw materials inventories acquired in the Ray Mines acquisi tion. The decline in working capital in 1985 resulted princi pally from liquidations of metal inventory and a change in sales policy which reduced the collection time of accounts receivable. In 1984. accounts receivable declined due to lower prices for copper and silver The Company paid no dividends on its common stock in 1986 and 1985. Dividends on the common stock of $7750.000, or $0.30 per share, were paid in 1984 Dividends on preferred stock of $20,992,000 were paid in 1986 com pared with dividends of $18,663,000 in each of the years 1985 and 1984 The increase in dividends in 1986 resulted from an issue of convertible exchangeable preferred stock in mid-1986 Property expenditures were $94 7 million in 1986, includ ing the acquisitions of the Ray and Sweetwater units for $79 2 million and other expenditures of $15 5 million, compared with total expenditures of $25 8 million in 1985 and $34 6 million in 1984. The other expenditures in 1986 included de velopment costs of the Aquarius gold mine and underground development of the West Fork mine The 1985 expenditures included development costs of the West Fork mine, acquisi tion of the Pima mine and expenditures for the Hayden Plant Expenditures for 1984 included the Hayden modernization project completed in 1984. LIQUIDITY Cash and marketable securities increased $15 0 million in 1986. compared with increases of $3 0 million in 1985 and $0.8 million in 1984 Total debt increased $3 0 million com pared with a decrease of $106 9 million in 1985 and an in crease of $41.6 million in 1984 The weighted average interest rate on all Company indebtedness was 8 6% in 1986. 8 8% m 1985 and 9 9% in 1984 compared with the average prime rate during those periods of 8.3%. 9 9%. and 12 0%. respectively At December 31. 1986. the Company s percentage of debt-to-capitalization was 35.0%. compared to 377% at December 31, 1985 and 41.0% at December 31.1984 At December 31. 1986, the Company would have been permit ted to borrow an additional $150 9 million under the debt limitation covenants of its existing loan agreements At that date, $155 million was available under its $350-milhon revolv ing credit agreement In 1987 the Company expects that it will meet cash requirements for operations and capital ex penditures from internally generated funds and, if necessary, from borrowings under its revolving credit agreement Under the terms of its revolving credit agreement, the Company is required to maintain tangible net worth in excess of $675 million through March 31. 1988. increasing to $700.0 million through March 31, 1991, and $725.0 million thereafter At December 31, 1986, the Company s tangible net worth was $869.5 million. Under the terms of the revolving credit agree ment, senior debt cannot exceed 75% of tangible net worth until March 31, 1988. and 65% of tangible worth thereafter CAPITAL STOCK In mid-1986 the Company sold 3.450.000 $2 25 depositary convertible exchangeable preferred shares and 3,375.000 common stock purchase warrants in a public offering. The net proceeds of $92.3 million were primarily used to retire debt. In 1985. the Company sold in a public offering 3.450.000 newly issued common shares. Asarco realized net proceeds from the sale of $75 7 million which were used to reduce debt On January 1. 1985, the Company instituted a salary re duction program under which shares of Asarco common stock equal in market price to the amount of each month s salary reduction were issued to a trust for employees The stock was distributed to employees at the end of September 1986 after the program was terminated A total of 107979 shares of common stock were issued during 1986 under provisions of the Company s Salary Adjustment Program and 81,241 shares were contributed to the Asarco Employees Savings Plan. A total of 32,236,063 shares were outstanding at year-end 1986 compared to 32,046,843 shares at year-end 1985 RETIREMENT PLANS In 1985. the Company adopted the principles ot Statement of Financial Accounting Standards No 87 and, accordingly, changed the actuarial cost method for determining pension costs, valuing plan assets and recognizing income to the required "projected unit credit method " Net pension costs included in operating results for Company-administered pen sion plans amounted to credits of $13 3 million in 1986 and $79 million in 1985, and an expense of $15.5 million in 1984 The credits to income in 1986 and 1985 result principally from investment performance and personnel reductions The value of the Company's trusteed pension plan assets as of December 31, 1986 were $400 9 million and the related protected benefit obligations were $314 2 million Retirement Plans are further discussed in Note 14 of the Notes to the Financial Statements ASARCO INCORPORATED AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS For The Years Ended December 31. Sales of products............................................................................ .... Sales of services............................................................................................ Total sales of products and services.............................................. Cost of products and services........................................... Income from products and services......................................... Other income: Income from rights offering by M.I.M Holdings Limited............................ Income from sale of subsidiary capital stock............................................ Miscellaneous....................................... ....................... Total other income....................................................................... Other deductions: Selling, administrative and other expense......................... Bad debts expense....................................................................... Depreciation and depletion expense................................................ Exploration expense.................................................. Research expense..................................................................................... Interest expense ........................... Unusual items....................... ....................... Total other deductions . .. Earnings (Loss) before equity in results of nonconsolidated associated companies.................. ... rquity in earnings (losses) of nonconsolidated associated companies Earnings (Loss) before taxes on income Taxes on income >let Earnings (Loss) Dividends on preferred shares 4et Earnings (Loss) Applicable to Common Shares 'rimary Net Earnings (Loss) Per Common Share Dash Dividends Per Share: Common........................... Preferred Series A . Series B Convertible . . Convertible Exchangeable notes to financial statements 198619851984 (dollars in thousands, except per snare amounts) $1,034,953 21,585 1,056,538 947,453 109,085 $1 143.068 23 853 1 166 921 1.059 135 107 786 Si.294,476 30.653 1.325.129 1.242.725 82 404 8,999 3,136 13,295 25,430 -- -- 13.768 13.768 -- -- 8.682 8.682 35,110 4,248 53,030 4,250 3,979 41,063 -- 141,680 40.000 868 57.243 6.141 6.034 46 991 4.500 161 777 41.541 421 64.147 10.231 6.738 55.371 254.000 432.449 (7,165) 20,571 13,406 4,266 9,140 21,962 5 (12,822) $ (0.46) (40.223) (19 700) (59.923) 2.261 (62.184) 18.663 S (80.847) $ (2 87) (341.363) 31.717 (309.646) (3.566) (306.080) 18.663 $ (324.743) $ (12.56) $ -- $ _ $ 0 30 7.00 7 00 7 00 6.25 6 25 6.25 2.70 _ ASARCO INCORPORATED AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEET At December 31. ASSETS Current Assets: Cash.............................. ................................. Marketable securities (at cost, which approximates market) Accounts and notes receivable Trade, less allowance for doubtful accounts Other.............................. .................... Inventories................................................................................. Materials and supplies (average cost or less)............................ Prepaid expenses.......................................................... Total Current Assets ...................................... Investments in Nonconsolidated Associated Companies (Equity Method)............... .............................................. Property: Buildings and equipment................................... ... Mineral land.................................................................................... Land, other than mineral ........................................... Other ...................................... Total Property ......................................... Less. Accumulated depreciation and depletion .... Net Property ................................. Other Assets TOTAL ASSETS ........................................... LIABILITIES Current Liabilities: Notes payable: Bank loans ..... Long-term debt due within one year Accounts payable. Trade Other ... Accrued liabilities' Salaries and waaes Taxes on income Other taxes Currrent portion of reserves for plant closings Other current liabilities Total Current Liabilities Long-Term Debt Deferred Income Taxes Reserves for Plant Closings Accrued Liabilities and Other Reserves TOTAL LIABILITIES Contingencies (Note 10) PREFERRED STOCK Authorized--10.000.000 shares without par value Redeemable--2.800.000 shares issued and outstanding . Convertible Exchangeable--862.500 shares issued and outstanding COMMON STOCKHOLDERS' EQUITY Authorized --80,000.000 common shares without par value Issued 34.928.223 shares . Additional Capital Retained Earnings Treasury Stock (at cost) -common shares 1986--2 692.160. 1985--2.881.380 Asarco s cost and pro rata interest in the cost of its shares held by M 1 M Holdings Limited TOTAL LIABILITIES. PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY 1986 1985 (dollars in thousands) S 11,192 40,020 S 14,644 21.518 $ 177,996 23,720 201,716 104,027 50,641 4,737 412,333 $ 210917 18.333 229.250 81.551 46.107 6.004 399.074 615,845 576.000 1,379,233 166,547 33,316 35,713 1,614,809 848,167 766,642 45,494 SI .840.314 1.330.008 171,701 26.681 35.967 1.564.357 835.410 728.947 41.411 SI.745 432 S 7,216 5,892 171,393 22,574 9,914 9,776 9,662 S 13,108 193,967 29,352 15,252 13,897 265,576 462,485 57,575 82,360 90,794 958,790 S 24.808 12.338 183,534 22 029 11.476 9 444 10 134 S 37.146 205.563 31.054 16.349 10,363 300.475 435,490 54,986 98,302 74,700 963,953 140,000 86,250 502,355 7,965 426,123 (151,484) (129,685) 655,274 $1,840,314 140,000 _ - 502.355 15.402 438 473 (162.131) (152.620) 641.479 $1 745.432 ASARCO INCORPORATED AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION For the Years Ended December 31. SOURCES (USES) OF CASH Operations: Net earnings (loss)............................................................................................................. Noncash elements in net earnings (loss): Depreciation and depletion.......................................................... .................. Deferred income taxes ............................ ............. Nonconsolidated associated companies: Equity in (earnings) losses........................................................ Dividends received................................................ .................... . . Income from rights offering by M l M Holdings Limited........................................... Reserves for plant closings and other items................................................................ Cash provided from (used for) operations.................... .................... Cash Dividends Declared and Paid: Common shares.................................................................... Preferred shares.......................................................................... ............... ............................ Cash used for dividends . ... ... Investment Activities: lnvestments.net............. ... . .. Asarco's cost and pro rata interest in the cost of its shares held by M I.M Holdings Limited. ......................................... Book value in excess of amount realized under the rights offering by M l M Holdings Limited ... ... Property. Acquisition cost of the Ray Mines Division . Obligations assumed net of working capital purchased .. Property acquired Other property expenditures Other, net . Cash used for investment activities Working Capital, Exclusive of Cash, Marketable Securities and Current Debt: Accounts and notes receivable Inventories. . Other current assets . . Accounts payable * Other current liabilities Cash provided from (used for) working capital Internal Cash Flow Financing Activities: Bank loan repayments, net Long-term debt incurred Long-term debt retired Debt proceeds released from escrow for construction Proceeds from sale of 862.500 convertible exchangeable preferred shares Proceeds from sale of 3.375,000 common stock purchase warrants Proceeds from sale of 3.450.000 common shares Treasurystocktransactions.net External cash flow Net change in cash and marketable securities Cash and marketable securities, beginning of year Cash and marketable securities, end of year See notes to financial statements 1986 1985 1984 tcoliars in tnousanas) $ 9,140 S (62.184) $(306,080) 53,030 2,064 57.243 (73) 64.147 (12.790) (20,571) 7,000 (8,999) (11,303) 30,361 19.700 4.891 -- 7.923 27.500 (31.717) 32.867 -- 244,182 (9.391) -- (20,992) (20,992) -- (18.663) (18.663) (7.750) (18.663) (26.413) (17,871) 22,935 (5,966) (73,320) (1,495) (74,815) (19,930) 10,911 (84,736) 51,168 (51 749) -- --- -- (25.768) (4.942) (31.291) (176) (1.534) -- -- -- -- (34.570) 6.856 (29.424) 27,534 (22,476) (3,267) (11,596) 735 (9,070) (84,437) 27.072 57.819 7.025 (15 364) (30,990) 45.562 23.108 23.642 51.650 6.480 (60.459) (9.249) 12,064 (53.164) (17,592) 62,037 (41,488) 1,104 82,348 9,950 -- 3,128 99,487 15,050 36,162 S 51,212 (1.009) 220.778 (325.297) - 4 156 -- 75.716 5.828 (19828) 3.280 32 882 S 36 162 (9,124) 92.302 (41.602) 9,397 -- ____ ___ 3.040 54.013 849 32.033 S 32 882 20 ASARCO INCORPORATED AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS'EQUITY For The Years Ended December 31. 1986 1985 (dollars in thousands) 1984 Common Stock Balance at beginning of year: 1986--34,928,223 shares: 1985 and 1984-- 31.478.223 shares......................... ................................. Sale of 3.450.000 shares ............... Balance at end of year 1986 and 1985--34. 928.223 shares. 1984-- 31,478,223 shares ... ...................................... Additional Capital Balance at beginning of year ........................................................ Charge for treasury stock sold and used . . ................................. Book value in excess of amount realized under the rights offering by M.l M. Holdings Limited ............................................................. Net proceeds from sale of 3.375.000 common stock purchase warrants Issue costs of convertible exchangeable preferred stock ....................... Balance at end of year .................................................................. .... Retained Earnings Balance at beginning of year . . .. . Foreign currency adjustment .............................................................. Net earnings (loss) .................... .................. Cash dividends declared and paid On common shares............ .................... On preferred shares. ... ... Adjustment for Asarco's pro rata interest in its dividends on common shares paid to M I.M. Holdings Limited .. Balance at end of year ... Treasury Stock Balance at beginning of year Purchased . . Used for additional compensation, stock option, bonus, savings and salary adjustment plans Balance at end of year 1986--2.692.160 shares. 1985--2.881.380 shares. 1984--3,103.487 shares . . Pro Rata Interest Asarco's cost and pro rata interest in the cost of its shares held by M 1 M Holdings Limited .. Total Common Stockholders' Equity See notes lo linanciai statements $ 502,355 -- 502,355 15,402 (7,519) (5,966) 9,950 (3,902) 7,965 438,473 99 9,140 -- (20,992) (597) 426,123 (162,131) -- 10,647 (151,484) (129,685) $ 655,274 S 426.639 75 716 502.355 22.072 (6.670) -- -- -- 15.402 519.377 (57) (62.184) -- (18.663) -- 438.473 (174.629) (25) 12.523 (162.131) (152.620) S 641 479 S 426.639 -- 426.639 25.651 (3.579) -- -- -- 22.072 852.952 (1.082) (306.080) (8 490) (18.663) 740 519.377 (181.248) (3) 6.622 (174.629) (100.871) $ 692,588 NOTES TO FINANCIAL STATEMENTS 21 summary of significant accounting policies Principles of consolidation: The consolidated financial stateLnts include all significant subsidiaries of which the ComKny has voting control. Significant investments of 20% or Imre in the capital stock of associated companies and subEjjaries of which the Company does not have voting control Ere accounted for by the equity method. Other investments Ee carried at cost or less. Inventories: Company-owned metals processed by smelters, fefineries and other metal plants are valued at the lower of Ipst-in. first-out cost (LIFO) or market. Other inventories are EaLed at the lower of first-in, first-out cost (FIFO) or market. Property: Assets are valued at cost or less. Betterments, jenewals, costs of bringing new mineral properties into pro duction, and the costs of major development programs at existing mines are capitalized. Maintenance, repairs, devel opment costs to maintain production at existing mines, and gains or losses on assets retired or sold are reflected in !earnings as incurred. Plant assets are depreciated over their estimated useful lives, generally by the umt-of-production method. Mine asset depreciation and depletion are com puted generally on the umt-of-production method using proven and probable ore reserves Exploration: Tangible and intangible costs incurred in the search for mineral properties are generally charged against earnings when incurred When a commercial ore body is discovered, the related exploration costs previously charged against earnings are credited to earnings and capitalized in "Property.'' Oil and gas activities are accounted for by the successful-efforts method Investment and energy tax credits: Such credits are ac counted for by the flow-through method Retirement plans: In 1985. the Company adopted the princibles of "Statement of Financial Accounting Standards No 87 imployers' Accounting for Pensions.'' which requires the use 3f the projected unit credit actuarial method for financial re coding purposes. Prior to 1985, the Company used the ag3regate cost method for financial reporting purposes and continues to use that method for funding purposes l UNUSUAL ITEMS (in millions) fourth quarter 1985 operating results were charged with >4.5 for the permanent shutdown in 1986 of the Company's tine oxide plant in Columbus. Ohio Operating results for 984 include total unusual charges of $276 0, partially offset ty a credit of $22.0 from changes to estimated costs for wevious plant closings The 1984 unusual charges include 'osts associated with the permanent shutdown of the Com'any's Tacoma, Washington, copper smelter, the write-down :nd indefinite suspension of operations at the Company's 'Orpus Christi, Texas, zinc plant and write-down of related inc fuming and zinc oxide facilities at other plants, the wnte`f and future holding costs of the Sacaton underground opper mine in Arizona, the write-down of the Company s 5% interest in the Little River joint venture, which owns a anadian lead-zinc mine, the permanent closing of a metal -Cycling plant in Houston, Texas, of Federated Metals Cororation, a wholly owned subsidiary, and the write-down of !|and gas assets 3. TAXES ON INCOME (in millions) Earnings (Loss) Before Taxes on Income From domestic operations From foreign operations Total 1986 $(13 7| s 13 4 1985 $(38 9) (2i 01 $(59 9i 1984 $(343 5) 33 9 $(309 6) Tax Expense (Credit) Current US Foreign and state . Deferred U.S Foreign and state Totai .. 1986 S- 2i $4 3 1985 $- 24 (0 1! $2 3 1984 S19 73 (9 21 (3 6) $(3 6! Reconciliation of Statutory Income Tax Rate U S statutory income tax rate Undistributed equity earnings on which tax was not provided at the statutory rate Foreign taxes and tax credits investment tax credits Depletion Minimum tax Net operating losses not utilized and carried forward Other Taxes on income-effective rale 1986 46 0% 1985 (46 0)% 1984 (46 or 10 i 53 (33 3) 3~ 3i 8C-. 11 4 J7 (2 81 36 7 (0 2) 3 8% (1 01 13 2 93 (2.0) 06 26 2 (1 4) (1 1)' Deferred Tax Expense (Credits) Depreciation expense versus tax deduction Tax deductions for current mine development costs versus amorti zation of capitalized costs on books Estimated costs of mine and plant closings versus tax deductions Undistributed equity earnings on which tax is accrued Pension expense versus tax deduction Capitalized interest costs versus ta> deduction Utilization of net operating losses Reversal (Use) of investment and foreign tax credits Other Total 1986 $(2 41 (1 3) 69 17 58 (2 7) < 1 6j (43) $2 1 1985 1984 $(0 7) $ 04 15 63 (4 1) 77 (2 8) (8 0) $(0 1) 02 (3 7) 46 22 (0 7) (68 8) 59 7 (6 7) $(12 8) Tax Carryforwards' At December 31. 1986. cumulative unused net operating loss (NOL) carryforwards on a tax and book basis amount to $211.6 and $211.7 respectively If not used, the NOL carryfor wards will expire between 1998 and 2001. At December 31, 1986. expiration dates and amounts of unused investment and energy tax credits and foreign tax credits are as follows. Expiration Dates 1987 1988. 1989 1990 1991. 1992 to 2001 Investment Tax Credits Tax Basis Book Basis $- 37 11 2 66 40 7 $- 37 11 2 6.6 40 7 Foreign Tax Credits Tax Basis Book Basis S 52 8.5 56 12 14 - S 52 138 60 12 32 - As a consequence of the Tax Reform Act of 1986. the above listed investment tax credit carryforwards will decline in ag gregate value on a tax and book basis by 175% if used in 1987 and by 35.0% if used thereafter. 4. PRIMARY EARNINGS (LOSS) PER COMMON SHARE Earnings or loss per common share are calculated by using the weighted average number of common shares outstand ing after deducting the Company's pro rata interest in its shares held by M l M Holdings Limited Weignted average number of Asarco shares outstanding (0001 Asarco's pro rata, weighted average interest in its shares held by M 1 M Holdings Limned (000) 1986 1985 1964 32.148 31 136 28321 4,025 3.008 2 463 The effect of the Company's Common Stock equivalents (warrants and shares under option) and Convertible Pre ferred Stock on the calculation of primary earnings (loss) per common share was anti-dilutive 5. FOREIGN CURRENCY (in millions) The net transaction gains (losses) included in determining pre-tax earnings were: 1986--$24.0: 1985--$8 7, and 1984--$44 0 The major portion of the gains or losses are reflected in "Equity in earnings (losses) of nonconsolidated associated companies " 6. INVENTORIES (in millions) At December 31 luveGio'ies of smelters refineries Find other rreia: plants LIFQ cos! or marke! Provisional cos! ol metals received lor winch prices nave not yet oeen fi/ea Mine inventories at FIFO cost or market 0;ne: lota: 1986 1985 $ 13 9 32 9 46 4 10 6 $104 0 $20 6 20 1 33 7 72 $8'. 6 Replacement cost exceeds inventories valued at LIFO cost by approximately $118 4 (1985--$1501) Year-end inventories used in determining cost of sales were. 1986--$104.0; 1985--$81 6. 1984-$139 4. 1983-- $191.0. Liquidations of LIFO inventories resulted in pre-tax earnings of $26.9 in 1986 and $14.6 in 1985 7. INVESTMENTS IN NONCONSOLIDATED ASSOCIATED COMPANIES Asarco has substantial interests in associated companies in Australia, Mexico and Peru which are principally engaged in mining, smelting and refining nonferrous metals These companies are M I.M. Holdings Limited (MIM). Mexico Desarrollo Industrial Minero. S.A (MEDIMSA). and Southern Peru Copper Corporation (SPCC) MIM also has major coal mining operations. The fiscal year for MIM ends June 30 MEDIMSA and SPCC report operating results on a calendaryear basis ending December 31. Taxes have not been provided on the undistributed earn ings of associated companies more than 50%-owned and accounted for on the equity method where earnings have been reinvested indefinitely. At December 31. 1986. the cu mulative amount of equity in such undistributed earnings on which income taxes have not been provided is $200.9 million At December 31, 1986, "Investments in nonconsolidated associated companies' included Asarco's equity of $1875 million in SPCC's restricted net assets of $358.5 million which restriction results from foreign currency controls es tablished in the third quarter of 1986 by the government of Peru. These controls suspend for a period of two years certain cash remittances of foreign exchange from Peru by companies operating in Peru as discussed below SOUTHERN PERU COPPER CORPORATION Peruvian law gives workers in mining companies an increasing participa tion in profits and management advisory committees and an interest in liquidation proceeds Profit participation is dis tributed in cash and in the form of ownership shares and interest-bearing obligations issued by the Peruvian branch of SPCC At the end of 1986. the workers participation in the Peruvian branch of SPCC was approximately 10 6% Eventu ally, through participation in future earnings, this percentage could increase to 3373% In general, the effect of Peru s new foreign currency con trol law on SPCC for the two-year period is that it suspends cash remittances from SPCC s Peruvian branch to its cor porate office in the United States tor earnings, depreciation and repatriation of capital, but permits cash remittances for certain loans, expenses and imports . M I M HOLDINGS LIMITED Al December 31, 1986. Asarco owned 373% (1985--44.0%) of MIM's common shares and MIM owned 10,353,363 (1985--10,353,363) common shares or 321% (1985--32 3%) of Asarco This reciprocal share holding results in Asarco having a pro rata interest of 12 0% (1985--14 2%) in its own shares Thus the Company's MIM investment carrying value and common stockholders' equity have been reduced by the cost lo MIM of this pro rata inter est in the Asarco shares Asarco's equity in earnings of MIM excludes any Asarco dividends included in MIM earnings The Company's MIM investment carrying value and retained earnings are adjusted to reflect Asarco's pro rata interest in its dividends paid to MIM In the first quarter of 1986, MIM made a rights offering to its shareholders, entitling each shareholder to purchase one common share of MIM at AS2.00 per share for each five common shares held. In the same period, Asarco disposed of its rights to purchase 44 2 million common shares of MIM for 6.4 million common shares of MIM. This action reduced Asarco's interest in MIM from 44.0% to 377%. thereby satis fying a provision of an agreement entered into in October 1985, whereby Asarco was to reduce its interest in MIM to 40% within three years. In the second quarter of 1986, MIM issued additional common shares for a minor acquisition and thereby further reduced Asarco's interest in MIM from 377% to 373% In October 1985, MIM purchased from a major shareholder of Asarco, 4.245,800 Asarco common shares at a cost of $23 per share plus expenses Details of the investment are as foiiows nn millions). Number of MIM common snares owned c, Asarco Carrying value Cost ol snares held Eauity in undistributed earnings Adjustment for Asarco s pro rata cumulative interest in Asarco divioends pa;a to MiM Eauity in premium over book vaiue rea izec under a rights ottering Dv MIM Asarco's pro rata interest in the cost ot its snares held by MIM Net carrying value '960 227 5 S 24 e 390.3 ;i2T 7i S262 6 96u 22t ' 530 0 59 3 74 0 : ' 50 6 5223 4 Major Investments Accounted for by the Equity Method (a) (in millions) Financial Position Current assets . . Current liabilities Working capital Property-net Deterred foreign exchange fluctuations Other assets Long-term debt . Other liabilities Deferred income taxes Minority interest Net assets . Asarco's Interest . Asarco's Investment Market Value MIM June 30, 1986 (b) S 451 0 M 86 3) 264 7 1 639 9 SPCC MEDIMSA Dec. 31, Dec. 31, 1986 1985 $222.8 (64 3) (b) $123 2 (36 9) 158 5 471 9 86 3 213 4 320 3 289 2 1' 342 1! 117 3) (89 9! 21 - (29 11 1112 71 (48 0) 30 (83 9i (0 9i (0 31 51.064 6 $442 7 $217 6 at December 31,1986 37 3% 52 3% $ 262 6 $223 3 344 2ici id) 34 0"c Si 15 6 (U! (al Asarco's investments m nonconso'-Odtec associated companies cameo o< Ine eauity methoa include oine* companies m aaoTion to tnose shown aDovrEauity m eammgs (tosses) tor those companies not separates oiscioseo wrnc.' are included m me Consoiiaatec Statement of Earnings were 198b--SfO ? 1985--SO 4 and 1984--S(0 4; Dividends received were 1986-- -S0 9 1985 $0 4. and 1984 -- $1 0 (0) Translated into U S dollars at rates in effect at December 31 1986 MIMAustralian $1 = USS0 6580 (rate at June 30 1986wasA$l - US$0 6669; MEDIMSA-Mexican MN$t - US$0 0011 Mexican government control1*?:) rat'1 )o' commercial transactions irate at Decemoef 31 1985 was MU$i - USSOOCOD The caosufe financial Dositions of MIM and MEDIMSA are as reported jncjm Australian and Mexican accounting standards respectively fc) Reoresents value of Asarco s investment m common slock cased upon me December 31. 1986 closing market price on me Sydney (Australia) StocExchange Value is not necessarily indicative of an amount reaii/ab^ m m*even! of a sale d) OuOted market prices on Asarco's mvesimenls lft common sfur> an- n.-v available smce the shares are not punhay ttaded e) Translated at the monthly averaae mmhanuo 1 no financin' iNformaho" o` MIM and MEDIMSA is as reported under Australian and Mexican ..oir't.u,; standards respective;*',- MIM SPCC MEDIMSA Net Sales 100% 1986 1985 1984 Net Earnings (Loss) 100% 1986 1985 1984 Equity Earnings (Loss) Reported by Asarco 1986 1965 1984 Dividends to Asarco 1986 1985 1984 for the Years Ended December 31, ie) S S7S 0 909 5 091 ? S294 7 335 1 31 b 0 tel (ti $29' 1 j; 2 3 39' 3 10 c. (6 3: 24 0 * O' S'16 ;20 51 53 (O' (9 $ 12 2 35 5 59 3 id) $ *Q G (9 3 1 O P. c 6f 1 5 97 S 110 01 HO 05 ig $ 18 5 (tVi S 1! U ; 8* $ 37 f * i Re^jJs lor V nion'fo: endod >-L.tf.-I-.I 3D AsJ'wd 'rxjs on a one-auader aeiav oasi'- u.ly .n min f.du'tv emnmgs reported tu Asam* nviude u*"t,v:`' adustnienl:'. ;o conform with 1. ''I'tec otairrs repodmg slanoafds ScpTl'C.-m! adjusinirrits include1 the recoil'1d jf- .n 1986 Of $13 4 m net loreicjn exchange gams 1iyB5 $73 1984- -$2H to. me $' 7 capita.nation 0' interest rest 1984 a 5,4 9 cost of sales cnaige ir. I9U6 to' nejn histonca! cost mvenmry produced P'm: 1 , dov.hf-j.'itM>n of the Australian doUar i i98h -$90 51 the ohrninatmi 1 c' $1 -l in 1UHt> 1 1985 $5 6i resulting iron 1 crianges m tne economic lives o: certain aeineutaO'e assets m accordance with MiM s mwew ppiicv arid tn* > $15 e ei.m'?,ation !' '986 ol MIM s r*-ported extraor dma'v 'css from me amortisation o' deleted irnn.-ai^n-o exchange tosses pnn cipanyonUS dcUai-denominated dec: Uoner Mexican accounting eta hoards Mu*.r a" companies are required to present financial statements on w > mhahou aohdU'd t>asis Asa 'esuU ol MEDIMSA s use nt mfiafirv' .tec Dueling .mg . ..vtnnn whi United St dUm n: pnrhng standards Asarco 'w, i-< r,Msr-g trieve.iimM 1 m. MEUiMBA CMfnmu` t j v $1 '* if i 1986. $(6 5) m 1985 ar;d $' 6 i m 1964 tor lhe rjif leronee beiwee') mhation tetsed ve'vub nish ,y r r/.f p.i'-.ed financial statement:. In aod-ticm toroiur' exrhanq.: uams Ci` V 19-6 * 11 (i 1965 and $5 p 1 r 1984 resu'triu from fore,go cu'u.fK , n vgvaSnn /..-e r<.< .gejm/.-g pv As;,e u fne 1985 hans'atii in qam way on cot by ee.'ia.uge losses n*-! of fa* ;,,un:....... . M[ UiM'SA . u.jpifaii/Md 8. ACQUISITION OF THE RAY MINES DIVISION On November 18. 1986..the Company purchased the assets of the Ray Mines Division, located in Arizona, from Kennecott Corporation, a subsidiary of The Standard Oil Company The purchase price was $72.0 million in cash plus assumption of certain liabilities. Asarco's costs associated with the acqui sition, and participation by Kennecott in an amount equal to 25% of the incremental revenues generated by the Ray mine from Comex copper price increases above 68 cents a pound adjusted for cost inflation. The price participation will be limited to a 10-year period beginning November 1988 and will also be limited in the aggregate to $65 0 million Sucn payments will be capitalized 3s an aaditional property cost The assets acquired are principally comprised of an oper ating open-pit copper mine, its related facilities and equip ment. and a copper smelter which is not presently operating The purchase price was allocated to the assets acauired based on their fair values at the date of acquisition For sev eral years prior to its acquisition by Asarco. the Ray Mines Division had sold its copper concentrate production to Asarco 9. DEBT AND AVAILABLE CREDIT FACILITIES (in millions) Long-Term Deb! al DecemDer 31 $350 0 revolving crecti! agreement dated October 1985 fully available until June 30. 1988. and declining thereafter in quarterly amounts of approximately S22.0 until March 31. 1992 7 /S% notes (authorized S70.0) due April 1 199-1 prepaid in July 1986 9V..% Sinking Fund Debentures (authorized S100 0! due 2000 Sinking Fund payments of $6.0 reauired annually Debentures have been purchased covering payments through 1993 $69 3 Industrial Development Authority ol the County o* Gna Arizona Pollution Control Revenue Refunding Bond Series 1985. due 2006 Obligations under Nueces River Authority (Texas! 7-.'.% Environmental Improvement Revenue Bonds Series 1976--A and B (authorized S55 0) due 2006 Payable in annual installments of $1 3 commencing in 2004 S3 0--2005 with balance payable at maturity Obligations under Lewis and Clark County (Montana) 6Vi% Pollution Control Bonds 1976 Series (authorized $370) due 2006 Payable in annua I installments of $0 6 commencing in 1992 through 2005 with balance payaoie al matunw Other obligations tvarious raies and maturities) 4 /=% Twenty-Five Year Suooramaied Debentures lauinorized $50 Oj due 1988 --Sinking Fund payment ol $1 2 reauired m 1987 with oaiance payable a> maturity Total long-term aebl Less, amounts due within one year Long-term debt -- not due within one year 1986 $195 0 51 3 69 3 7 37 0 62 4 468 4 59 $-162 5 1985 $137 0 35 5 51 7 69 3 - 37 0 83 l 6.5 44 7 6 12.3 $435 5 At December 31. 1986. total debt maturities were 1987-- $5.9. 1988--$6.9. 1989--$2 8. 1990--52 5. 1991--52 4 and $447 9 thereafter Borrowings under the $350 0 revolving credit agreement bear interest, at Asarco s option, through June 30. 1988. at either the prime rate. >4% over LIBOR (London Interbank Offering Rate), or %% over the CD Rate (the interest rate on certificates of deposit of certain major commercial banks), gradually increasing thereafter to 1 % over prime. 1 Vb% over LIBOR or 1 7k% over the CD Rate after March 31. 1991 The Company has agreed to pay a commitment fee of '/, % per annum on the unused portion An informal agreement also exists with respect to the maintenance of additional com pensating balances equal to 3% of the loan commitment and additional compensating balances of 2% on loan com mitments used in excess of $300 0 The highest level of borrowings during 1986 under the above-mentioned facilities was $210.0 (1985--$270 0) Al December 31. 1986, $195 0 (1985--$137 0) was out standing at a weighted average interest rate of 7 0% (1985--8 9%) Borrowings averaged $174 0 for 1986 (1985--$195.1) with a weighted average interest rate of 8 0% (1985-9 0%) The $69 3 Industrial Development Authority ol the County of Gila. Arizona. Pollution Control Revenue Refunding Bond agreement gave the Company the option to borrow funds either through a tax-exempt variable-rate loan agreement or through the tax-exempt demand note market Borrowings under the former bore interest at 73% of the prime rate with a per annum commitment fee payable on unused por tions, while borrowings under the latter bore interest al the current tax-exempt demand note rate At the Company's option, the interest rate can be converted to a fixed rate of interest, not to exceed 20%. at any time Prior to the interest conversion date, the Company has the option of redeeming the bonds at par The bonds were supported by an irrevoc able letter of credit, on which there was a 7h% per annum fee, expiring on January 15. 1990 In order to provide for the remarketing ol the bonds, the Company entered into a remarketing agreement on which there was a '/h% fee per annum In addition, the Company was paying '/i% per annum facing fee on the outstanding principal balance The outstanding balances under the above Gila County (Arizona) Pollution Control Revenue Refunding Bond had a weighted average interest rate at December 31,1986. of 4 9% (1985 - 7 0%) and a weighted average interest rale for I ' 1986 of 5.1% (1985--5.3%) At December 31. 1986. the obliga tion was financed entirely with tax-exempt demand notes. In January 1987 the Company converted the $69.3 bond issue from a variable interest rate to a fixed interest rate of 8.9% and also terminated the bank support agreements for the issue. The Company s debt agreements contain a number of restrictive financial covenants. The Company is required to maintain a tangible net worth of at least $675.0 through March 31, 1988, increasing to $700.0 through March 31. 1991. and $725.0 thereafter. On December 31.1986. the Compa ny's tangible net worth equaled $869 5. Another financial covenant prohibits the Company from incurring after October 31,1985, cumulative operating losses in excess of $70.0. The agreement defines cumulative operating losses incurred after October 31,1985, as net losses excluding foreign ex change translation gams or losses related to M.I.M. Holdings Limited, unusual items and extraordinary items, reduced by 50% of the proceeds from any sale of Company common or preferred stock. At December 31. 1986. the Company would be permitted to incur $98 8 of future operating losses as defined by the covenant The Company's senior debt is not permitted to exceed the lesser of 75% of tangible net worth or $650.0 until March 31. 1988. and 65% of tangible net worth thereafter. Under the most restrictive loan agreement cove nants at December 31, 1986. the Company could have bor rowed $150.9 in addition to its then-outstanding indebtedness. The Company has entered into three agreements to fix the rate on a portion of its variable rate debt The first two agree ments became effective in 1983 and 1984 with durations of 10 years each, and require the Company to make an average fixed interest payment of 12 8% per annum on an agreed orincipal amount of $12 4 against receipt of interest pay ments based on a floating rate at LIBOR on the same agreed orincipal amount. The third interest rate exchange agreement became effective April 26. 1986. and has a duration of seven 'ears, requiring the Company to make fixed interest pay ments of 8.2% per annum on an agreed principal amount of >100 0 against receipt of interest payments floating at LIBOR in the same agreed principal amount The effect of these tgreements is recorded in operating results as LIBOR moves above or below the fixed rates the Company has `.greed to pay. LIBOR averaged 70% during 1986 (8 4%-- 985, 10.8%--1984) resulting in $1 7 ($0.5--1985. $0.1 -- 984) of additional interest expense to the Company under uch agreements Asarco also has short-term bank loans outstanding. The ighest level of borrowings was $18 3 (1985--$50 4, 1984-- 50.9) At December 310986. $72 (1985--$24.8. 1984-- 272) was outstanding at a weighted average interest ite of 8.6% (1985--9 2%. 1984--8 8%) Borrowings veraged $151 (1985--$241. 1984 --$35 0) for the year, ith a weighted average interest rate of 79% (1985--10 6%. 984--11 8%) > litigation sarco received notices from the United States EnvironmenI Protection Agency (ERA) concerning releases or threat1ed releases of hazardous substances, pollutants or other mtammants at the following locations, in the years indi cated. Commencement Bay area m Tacoma Washington (1982). the Picrv Mining Field in Northeastern Oklahoma (1982). the Ya> drainage tunnel located near the Company s mine in Leadv:.- , Colorado (1983). and lead and zinc mining areas in Southeastern Cherokee County. Kansas (1985) These notices, issued under authority granted to the EPA by the Comprehensive Environmental Response. Compensation and Liability Act of 1980 (CERCLAj the supertund'' law state that EPA believes Asarco is potentially a responsible party as defined by CERCLA for sucn releases and may be liable for the costs, if any necessary to correct the problems at these locations. In 1983. the area around the Company's East Helena smelter was listed for study under CERCLA In January 1987 the State of Texas listed parts of Federated Metals' former Houston plant site on the state's "Supertund Registry" Corrective action is being undertaken by the EPA at the Picher Mining Field site The Company has insufficient information to determine whether corrective action at any of the other sites is necessary under CERCLA and, it so whether it has any liability with respect thereto Several other parties have been advised of their potential liability for the Picher Mining Field. Leadville and Tacoma sites The Com pany has received notices at two other sites in which it believes its aggregate financial exposure will be modest In 1983. the State of Colorado filed two lawsuits against Asarco. under CERCLA and state law. in federal court in Colorado, alleging emissions of hazardous substances from the Company's Globe Plant in Denver, and from the Yak drain age tunnel, referred to above. The suits claim substantial damages for each release into the environment, and the state law claims seek to compel clean-up of the sites In Septem ber 1985. the court, in ruling on a motion in the Globe case found the Company liable for two minor releases from the plant without permitting the Company to submit evidence that the releases did not occur The court also ruled in that case that under CERCLA the state could recover for damage to private lands, including the plant site, as well as for dam age to publicly owned lands In connection with the action, the state and the Company have entered into a joint program to study the environmental impact of the plant site The study is nearing completion In addition, in December 1986 the State of Colorado Department of Health served on the Com pany an order alleging non-compliance by the Globe Plant with State Hazardous Waste Management requirements The Company has requested an administrative hearing sched uled for April 1987 Additional parties have been joined as third-party defendants in the Yak drainage tunnel case, and in August 1986. the state brought a similar action in state court seeking remedial action under state' law This action has been stayed by the court Also in August 1986, the fed eral government brought a similar action in federal court seeking remedial action under CERCLA A motion to consoli date this case with the other federal court action is pending In 1983. Wickland Oil Terminals, a California corporation, sued Asarco and the State Lands Commission of California in federal district court in California seeking as to Asarco a declaration that Asarco is solely responsible tor clean-up costs due to emissions from the slag piles at the site of Asarco s former Selby California, smelter and $400,000 in damages lor CERCLA response costs allegedly incurred by Wickland at the site. Asarco's interest in the Selby site was sold to Wickland in 1977-and the site has been listed by the State of California as having the potential of requiring reme dial action as a result of hazardous substances found at the site. All claims in the action were dismissed by the dis trict court, but the dismissal was reversed by the United States Court of Appeals for the Ninth Circuit. The case was remanded to the district court for further proceedings. Lac d'Amiante du Quebec. Ltee (LAQ). a wholly owned subsidiary of Asarco, as of December 31, 1986, was one of several defendants in 522 lawsuits brought by 587 primary and 465 secondary plaintiffs in the state or federal courts in 21 states The primary plaintiffs seek substantial money damages for alleged personal injury or death allegedly caused by exposure to asbestos fibers. The secondary plaintiffs seek recovery for damages caused by the injury or death of another. In some instances, both primary and sec ondary plaintiffs also seek punitive damages. Asarco is a defendant or a co-defendant with LAQ in 20 cases brought by 20 primary and 14 secondary plaintiffs. As of December 31, 1986, LAQ has settled, and LAQ and Asarco have been dis missed from, a total of approximately 1,928 asbestos per sonal injury lawsuits brought by approximately 5.532 primary and approximately 2.239 secondary plaintiffs. Asarco has settled one lawsuit brought by one primary and one second ary plaintiff. LAQ is a defendant along with numerous other companies in lawsuits seeking removal or containment of asbestos-con taining products in buildings. One such action brought in federal court in Philadelphia. Pennsylvania, has been certi fied to proceed on behalf of a ciass of all public school districts and private primary and secondary educational in stitutions in the United States In addition, as of December 31. 1986. LAQ was in 56 additional lawsuits: three other pur ported nationwide class actions (hospitals, colleges and universities, private buildings under lease to the federal gov ernment), three purported statewide class actions (Pennsyl vania schools. Pennsylvania public buildings, California homeowners), and 50 actions brought on behalf of 165 indi vidual school districts in six states, public buildings in 11 cities, counties, states and universities, and one private reha bilitation center. In general, each of these actions also seeks substantial actual and punitive damages LAQ has been dismissed from 11 such actions, and Asarco has been dismissed from nine actions in which it was named As of December 31, 1986. Capco Pipe Company, Inc (Capco), a wholly owned subsidiary of Asarco. was a defen dant or third-party defendant in 10 actions brought by 14 dockworkers in federal court in Texas These actions allege personal injury or wrongful death from exposure to imported asbestos while unloading ships In addition, Capco has been sued in lawsuits alleging wrongful death or injury to three other persons due to exposure to asbestos-containing products In 1983. LAQ sued three insurers in federal court in New Jersey for (1) a declaration of rights and obligations under various umbrella and excess liability insurance policies as to claims asserted against it for personal injury and property damage alleged to have resulted from asbestos sold by LAQ. and (2) damages in excess of $7 million In 1985. the court granted LAQ's motion for partial summary judgment, ruling that LAQ's insurance policies should be interpreted to pro vide it with the comprehensive continuous theory of cover age. which it sought, for its asbestos-related personal injury and property damage litigation. In 1986. the court ruled that the insurers have defense-cost obligations in addition to their policy limits. In 1985, Asarco was served with writs joining it as an additional defendant in 49 lawsuits Drought during the period 1981 through 1984 by 49 individuals, and in most cases their spouses, in state court in Philadelphia, Pennsylvania The lawsuits are for alleged personal injuries due to workplace exposure to lead, other heavy metals and chemicals at a secondary lead smelter m Philadelphia Asarco is a defen dant in lawsuits brought by five other plaintiffs seeking damages for personal injury or death allegedly caused by exposure to lead In 1978, the Gila River Indian Community filed an action in the federal district court in Arizona against numerous water users, including Asarco and other mining companies, chal lenging the right of the defendants to use "waters of the San Pedro River Watershed." including the Company's use at its Hayden smelter and at farming operations located in that area. In 1980, in General Adjudication proceedings initiated by Asarco, the court ordered that the determination of the water rights be made in state court with the damage and injunctive portions of the Indian claims to be retained in fed eral court but abated pending the state court determinations The Company has been made a party to similar General Adjudication proceedings regarding the Salt River Watershed and the Gila River Watershed which potentially affect water used at the Company's Arizona copper mines It is expected that each of these proceedings will take several years to reach trial The Ray Unit formerly obtained from the Gila River Indian Community by settlement the right to use sufficient water for its operations upon payment of specified amounts The Settlement Agreement has been assigned to the Company subject to the tribe's consent which has been requested The Ray Unit is also involved in the San Pedro water litigation described above While Asarco is unable to estimate the ultimate dollar amount of exposure to loss, it is the opinion of Asarco's management that the outcome of the suits and proceedings mentioned, and other miscellaneous litigation and proceed ings now pending, will not materially adversely affect the operations or the financial position of Asarco and its consoli dated subsidiaries 11. REDEEMABLE PREFERRED STOCK At December 31, 1986 and 1985. Asarco had outstanding 1.550.000 shares of Series A Cumulative Preferred Stock and 1.250.000 shares of Series B Cumulative Convertible Pre ferred Stock The Senes A is a 15-year sinking fund preferred with an annual dividend of $700 per share The Series B is a convertible 15-year sinking fund preierred with an annual div idend of $6 25 per share and convertible into common stock at $4519 per share as of December 31 1986 (initially convert ible in 1981 at $60 00 per share) The terms of the preferred shares prohibit payment of divi dends on common shares in the event that dividends on the 27 preferred shares have not been paid The Company is re quired to redeem annually, at $50 per share, 155,000 shares of Series A beginning in 1987 and 178,572 shares of Series B beginning in 1990. If payment on preferred stock of either six quarterly dividends or two mandatory redemption payments are in arrears, the preferred stockholders of all issues, voting separately as a single class, have the right to elect two direc tors to the Company's Board of Directors. At December 31, 1986, aggregate annual redemption requirements in millions were $77 in 1987 through 1989, $16.7 in 1990 through 1991 and $83.5 thereafter. 12. CONVERTIBLE EXCHANGEABLE PREFERRED STOCK In a third quarter 1986 public offering, the Company sold 3,450,000 shares of $2.25 Depositary Convertible Ex changeable Preferred Stock, each representing ownership of one-fourth of a share, or a total of 862,500 shares, of $9 Convertible Exchangeable Preferred Stock. The net pro ceeds of $82.3 million were used to repay debt. The Convertible Exchangeable Preferred Stock has a liquidation preference of $100 per share in an involuntary liquidation, or $100 plus a premium per share in a voluntary liquidation. The preferred stock is convertible into common stock at the option of the holder at any time at a conversion price of $15 per share of common stock, subject to adjust ment in certain events, and will be exchangeable, as a whole, at the option of the Company on any dividend date beginning August 15,1989, for the Company's 9% Convertible Subordi nated Debentures due 2011 The debentures will also be convertible into common stock of the Company at the option of the holders If payment of six quarterly dividends on any series of preferred stock is in arrears, the preferred stock holders of all series, voting separately, as a class, have the right to elect two additional directors to the Company's Board of Directors 13. COMMON STOCKHOLDERS' EQUITY In a third quarter 1986 public offering of preferred stock, the Company also sold 3.375.000 common stock purchase warrants at a price of $3'/a per warrant The $10.0 million net proceeds may be used to purchase a portion of the Com pany's outstanding redeemable preferred stock, and at December 31, 1986. were invested in marketable securities Each warrant gives the holder the right to purchase one share of common stock of the Company at a cash price of $16 09. subject to adjustment under certain conditions, until August 15.1991. when the warrants expire During 1985. the Company sold in a public offering, 3.450,000 newly issued common shares at $22 vs per share, thereby generating cash proceeds of $75.7 million which were used to reduce bank borrowings under existing revolv ing credit and term loan agreements Stockholders approved in 1985 an amendment to the Company's Certificate of Incorporation increasing the author ized number of common shares from 40.000.000 shares to 80,000.000 shares The Company purchased for corporate purposes 1.012 common shares in 1985 (1984--100 shares) In 1986, 189,220 common shares (1985--223.119 shares. 1984-- 120,402 shares) were used for additional compensation, stock option, bonus, savings and salary adjustment plans "Retained Earnings" at December 31,1986, included un distributed earnings of $185 7 million for nonconsolidated subsidiaries and $4679 million for all other investments ac counted for by the equity method At December 31. 1986, "Retained Earnings" included Asarco s equity of $193.2 mil lion in restricted net assets of a nonconsolidated associated company, as described in note 7 and a consolidated Peru vian subsidiary The restriction results from foreign currency controls established in the third quarter of 1986 by the gov ernment of Peru "Retained Earnings" has been reduced by cumulative foreign currency adjustments of $5 4 million at December 31, 1986 ($5.5 million--1985. $5 4 million--1984) Stock Options Under a stockholder-approved, common stock option plan, as amended, options when granted are exercisable within 10 years and at a price equivalent to fair market value on date of grant. Options granted may be non qualified or incentive stock options, as defined under current provisions of the Internal Revenue Code. Stock options for 734,153 shares were outstanding at December 31, 1986, at prices ranging from $14 70 to $41 63 per share The Plan permits the granting of "Stock Appreciation Rights" (SARs) to officers holding options An SAR permits an optionee, in lieu of exercising his option, to receive from the Company payment in an amount equal to the difference between the market value of the stock on the date of exercise of the SAR and the purchase price of the stock under the terms of the option At December 31. 1986, twenty-seven indi viduals held SARs covering options for 385,565 shares, rang ing in price from $20 57 to $41 63 per share, exercisable as either regular stock options or SARs Shares under the plan. December 31 1984 Granted at $21 94 Exercised at $18 75 to $22 32 Cancelled at $21 94 to $41 63 Expired at $18 75 to $41 63 Shares under the plan December 31 1985 Granted al $14 70 to $20 57 Cancelled at $20 57 to $41 63 Expired at $18 75 to $41 63 Shares under the plan, December 31 1986 Authorized 1 815 663 1815 663 i 815 663 Number of Shares Granted 899 932 135 800 (26 840) MO 200l Regular 347 085 4.1 10 998 692 143 800 (17 307) (13 999) 351 195 1 i 1 i 186 351 196 Exercised SAR 25.838 25 838 25.838 Total 372.923 4 110 37 7 03.3 377 033 28 14. RETIREMENT PLANS (in millions) The Company and its subsidiaries maintain several noncontributory, defined-benefit pension plans covering sub stantially all employees. Normal retirement age is 65. but provision is made for earlier retirement. Benefits for salaried plans are based on salary and years of service, while hourly plans are based on negotiated benefits and years of service In December 1985. the Company adopted, retroactive to January 1. 1985. the principles of "Statement of Financial Accounting Standards No. 87 Employers' Accounting for Pensions." Accordingly, the Company changed its actuarial method for financial reporting purposes from the aggregate cost method to the projected unit credit method which attrib utes an equal portion of total projected benefits to each year of employee service In addition. SFAS 87 required a change in gam or loss recognition on the valuation of plan assets versus the projected plan benefit obligations. The effect of the changes resulting from the adoption of SFAS 87 reduced 1985 pension expense by $16.0 and increased the accumu lated benefit obligations of Company-administered pension plans by $71.6 The actuarial computations, using the projected unit credit method, assumed, a discount rate on benefit obliga tions in 1985 and 1986 of 9% declining to 8% at December 31. 1986; an expected long-term rate of return on plan assets of 10%; and annual salary increases of 6% over the average remaining service lives of salaried employees under the plans. Variances between actual experience and assump tions for costs and returns on assets are amortized over the average remaining service lives of employees in the plans The Company continues to use the aggregate cost method in determining its annual funding requirements for its largest pension plans. The aggregate cost method treats current changes in pension benefits, which are affected by credited past employment services, as future costs to be funded from future earnings Thus, under this actuarial method there is no unfunded prior-service liability The actu arial computations used with this method assume an interest rate return on plan assets of 8% (7'/?%--1985 and 1984) and 6% annual salary increases over the average remaining service lives of salaried employees under the plans Cost variances resulting from changes in other assumptions are spread over the average remaining service lives of the plans participants. Actual investment income in 1986 was immedi ately recognized and in 1985 and 1984 was averaged over three years. Benefits under the hourly plans are not based on wages and therefore no benefit escalation assumption be yond negotiated increases is allowed by I R.S regulations Net pension costs (credits) included in operating results for Company-administered pension plans amounted to $(13 3) in 1986, $(79) in 1985 and $15.5 in 1984 The net pension credits in 1986 and 1985 were comprised of; ___________ 1986 1985 Service cosl merest cosl on protected benefit obligalions return on plan assels \mortization ot excess plan nel assels at adoption of SFAS 87 Other items $ 47 26 2 (372) (4 5) (2 5) $ 47 25 8 1316 (4 5 (2 3, Total net pension credits S( 13 3i S (79 The table of actuarialiy computeo Denefit obligations and trusteed net assets for Company-administered pension plans is presented below at December 31. 1986 and Decem ber 31. 1985 Plan assets are stated at fair value and are composed primarily of U.S Treasury obligations and group annuity contracts with major insurance companies at De cember 31. 1986. At December 31. 1985. plan assets were composed primarily of corporate equity and debt securities and group annuity contracts with major insurance compa nies Unrecognized net excess plan assets ana previously accrued but unfunded pension costs at the adoption of SFAS 87 are being amortized against net pension costs over the remaining service lives of employees or approximately 12 years ___________ Dec 3i Dec -ii, 1986 1985 Actuarial presen] value ot Denefit obligations Vested Nonvested Total accumulated benefit obligations S 283 3 69 S 29 1- S 261 7 82 S 269 9 Projected benetit obligations tor services rendered to date Plan net assets at fair value Excess ot plan assets over protected benefit obligations Unrecognized net gams Unrecoamzed nel excess man assets and previously accrued but untunaeo pension costs to be amortized Net prepaid (accrued) pension costs S 314 2 (400 9> 86 7 (32 ' i (49 6i S 50 $ 291 2 (372 3) 81 1 (39 71 (54 1 1 S ((27) The hourly employees of the Company's coal mining operations are covered by a multiemployer defined-benefit pension plan which is administered by the United Mine Workers Operating results were charged with $0 9 in 1986 (1985--$0 9; 1984--$1 4) representing the Company's contributions to the plan In addition, the Company and certain of its consolidated subsidiaries provide post-retirement health care and life in surance benefits for retired employees Employees may be come eligible for these benefits if they retire while working for the Company These benefits are generally expensed upon receipt of life insurance premium invoices or upon receipt of valid health care claims Post-retirement benefit costs were expensed in the amount of $3 8 in 1986. $3 9 in 1985 and $4 1 in 1984 15. BUSINESS SEGMENTS Asarco and its subsidiaries operate principally in the pri mary metals industry The Company carries on other impor tant operations in two industry segments, asbestos and coal Operations in primary metals (copper, silver, lead, gold, zinc and related by-products) involve the mining, smelting and refining and selling of primary metals from nonferrous ores and concentrates Until June 30. 1986, as bestos operations were earned on principally by a wholly owned subsidiary in Canada where the asbestos fiber was mined and sold for international delivery Effective Business Segments (in millions) 1986 Sales of products and services Intersegment sales Total revenue Income (Loss) from products and services Depreciation and aeDienon Other income and aeductions ia.i Earnings (Loss) before equity in results o: nonconsondated associateo companies Equity in earnings of nonconsolidated associateo companies Earnings (Loss) before taxes on income Identifiable assets Properly expenditures Primar. Mefais S 909 7 07 S 910 4 S 94 9 (46 6) (37 6t 10 7 - $ 10 7 SI.011 2 92 7 Asbestos $69.6 ' S69 6 ' S 26 (1 7) !2 2) (1 3) - S (1 3) S50 6 02 Coa: $15.6 Si5 6 S 0.8 (1 6, (0 8: (1 6) - $ (1 6) $38-2 04 P'ha1 tG; 3 6*6 04 S 62 7 S '0 9 i2 3 ;2 r 3C S or S 39 6 09 Corporate lotai s 11 "- i' i * 1 S 10 I ] i 0 6' 119 9) Si 056 5 $1,056 5 S 109 1 (53 0! (63 3) (20 6) 20 6 S700 7 05 (7 21 20 6 $ 13 4 $1,840 3 94 7 1985 Sales of products and services Intersegment saies Total revenue Income (Loss) from prooucts and services Depreciation and depletion Other income and deductions (b) Earnings (Loss) oefore eauiiy in resuits of nonconsondated associated companies Equity in losses of nonconsoiioatea associateo companies Earnings (Loss) before taxes on income Identifiable assets Property expenditures SI.008 8 8 $1 009 6 S 90.2 (50 0: (49 9) (9 71 S (9 7) S 955 6 22 3 S77 5 - S77 5 S 89 (2 4) i3 7) 2e S 28 set 4 1c $15 8 $15 8 S 12 (1 9) (0 8) ll 5i . S (1 5t $41 5 15 i 64 8 12 S 66 C S 7e (2 9; i2 5 22 22 v .is 3 s ot s s: o' S i0 f i :33 9i (34 0i (IQ 7 ) S 133 7`i 3638 3 0t SI 1669 $1 166 9 S 107 6 (57 2) (90 8) (40 2' (19 7) S (59 91 $1 743 4 25 8 1984 Sales ot products ana services ic i Inierseameni saies si 087 4 7P S94 4 $31 6 3: " (i o \4 7\ $1,325 ; Total revenue St 09' 2 S94 4 $31 6 Sim 0 S 14 7 i $1 325 1 Income trom products and services Depreciation ana depletion Other income and deductions ibi Earnings (Loss) before eauiiy m results ot nonconsoiidated associated companies Equity in earnings of nonconsoiidated associated companies Earnings (Loss) before taxes on income S 52 4 3 3 /' ; '!278 ?! i282 01 S 1282 Ot $14 o (2 3i (4 Si 72 C 7C S 75 (3 2) !1 3) 33 - S 33 2 8` i 2' 9 ;30 6- i23 4. S !2f> 4 . S 01 (44 5) 144 4) 31 7 $112 7) $ 82 4 (64 1) (359 6) (341 3) 31 7 $ (309 6) Identifiable assets Prooeriv expenditures Si 068 0 94 8 S66 6 10 $45 6 02 S 59 ) 93 $706 6 53 $1,945.9 34 6 la i T ne Primary Metaii'. be amen; include:, inccme c* S3 1 Irorn ine sale oi a 2 i(ll*9lU`;l If- <]' i A c:4r<.i!ian exploration nn:3 rnmiaq mean.a-, f.'ime'iy wrin.iy owned The Cornoraie seamen! mcmoes mcnme ot S9 0 Kom a nuhts oltennq hy M 1 K* n< oi.'iqs L.miiid'J as aescnUera m note (Oi mciuaes unubiia. nre-!d cnarqeb db nesc/'ljt.-J in ^Oie 2 as follows 198:; s 1 9 P'frna:, MrCdib. 1984 - $228 7 m Primar v Mc:n. . n 523 3 in Oirier (c.i m 1988 a mapr cesiumer accounted lor Primary Mefais revenue ot $148 (a! Too O'hpi ceqrneni inrinaec certain onenesses tna: nistoacaiiv nav<i "loyr./ * i.'Of', t.,',)<,( fu 7 as seoarat*; <>oqmonn, m v*ho '1 c;'5 oi '.nos-: '.lusmeSSCi',exceeded ton 1CP: earrurvjb criterion :o< ta mb- riiSfco',que Uj a sohclantia' ir T:| >'t n c< >r. m'lCJaleC /Va.cifijifii}:v j . j ' -1 ` : 1 '.dK: Ot '.UCti tlUbinOb;be1; m not CQnbiCK*rt'<J iDi fr I'".-; ci'i.cr \ 30 July 1. 1986, the Company's wholly owned subsidiary trans ferred control and use of its asbestos mining operations to a newly formed partnership for a 33 V3% limited partnership interest The partnership resulted from an industry-wide ra tionalization of asbestos mining in Canada. Also included in the asbestos segment is a wholly owned subsidiary which produces and markets in the U S. asbestos-cement pipe and polyvinyl chloride pipe Coal production is sold principally to midwestern public utilities and industrial users Total revenue by industry segment, including both sales to unaffiliated customers and intersegment sales, is accounted for at the current market price when sold "Income from prod ucts and services" consists of total revenue less operating expenses. The computation of "Income from products and services" excludes "Other income,'' "Other deductions" and "Equity in earnings (losses) of nonconsolidated associated companies." General corporate administrative expenses are allocated among the segments generally in proportion to their operating expenses. Most research and exploration expenses are attributable to the primary metals segment. Identifiable assets by industry are those assets directly used in the operations of each segment. Corporate assets are principally cash, marketable securities and investments Export sales of products and services, primarily to Europe, were $128.6 million in 1986. $151 3 million in 1985 and $1378 million in 1984. It is not practicable to furnish information with respect to the relative profitability of sales of products and services to customers in foreign countries. At December 31. 1986. the book value of Asarco s invest ment in nonconsolidated associated companies with primary operations outside the United States amounted to approxi mately $6073 million. In addition, at December 31 1986. the identifiable assets attributable to foreign iocations amounted to approximately $116 0 million, of when $53 3 mill.cn were in Canada There can be no assurance that operations and assets of Asarco and nonconsolidated associated compa nies that are subject to the jurisdiction of foreign governments may not be adversely affected by future actions by such governments Primary Metal Sales, excluding intersegment sales (in millions) Copper Sliver Lead Gold Zinc Services Other Total primary melai sales ' 9S6 $474 3 150 5 SO 9 60 9 '05 2" G 120 0 sQ'Tu 1965 S 466 7 243 3 63 4 63 8 2S 0 23 9 i19 7 SI 008 8 196-: ? 423 t. 313 0 71 8 104 1 15 2 30 7 130.0 $1 087 4 16. UNAUDITED QUARTERLY DATA (in millions, except per share amounts) Sales of products and services Income from products and services (a) Earnings (Loss) Detore taxes on income (b) ici Net earnings (loss) Primary net earnings (loss) per common share is: 1986 1965 $291 6 S260 7 13 5 29 : (28 9) (29 2) (14 0; (14 1 n 22) f0 70) 2no 1986 1985 $25 7 4 S305 9 O6 ~ 29 0 l O <L r l 7 6j (15 5) { 1 6 0i |0 42; (0 71 : Quarters 3ra 1986 1985 S252 7 $291 4 30 0 16 2 18 5 176 (6 9) (7 2) 0 42 (0 40; 4|r 1986 1985 S254 3 $306 9 Tola) 1986 1985 $1 056 5 $1.1669 38 9 33 o 109 1 107 6 29 0 28 3 [23 5) >24.9) 13 4 91 (59 91 (62.2) 0 77 (1 06) (0 46) (2.87) (a) includes the recoanmon ot pre-ta* profits from me iiauidarion ol lJFO. m.enton,. of S4 0 J > me secona Quarte' 1986 $8 :" Quarter 1986 and $14 6 in ine lourlr iuuane:1985 (b> First duaner 1986 mciuaes income ol S3 6 from me sate of a 25% fom: venture merest ;r'' me Wcuna aoia oroiect m Australia S3 1 Irom ine sate ol a 25% interest m an Australiani exptoralion a no nnnuiq so!.J S10: <-i r V : 0r mon / a not \ owned (c) Refer to note 2 on Unusual Hems ' 'ii cmanm 1986, !*14 9 m the fourth irtr: O..drier 1 98t> includes income ol AUDITORS' REPORT To the Board of Directors and Stockholders of ASARCO Incorporated We have examined the consolidated balance sheets of ASARCO Incorporated and Consolidated Subsidiaries as of December 31,1986 and 1985, and the related consolidated statements of earnings, changes in financial position and changes in common stockholders' equity for each of the three years in the period ended December 31,1986 Our examinations were made in accordance with generally ac cepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing pro cedures as we considered necessary in the circumstances In our opinion, the consolidated financial statements referred to above present fairly the financial position of ASARCO Incorporated and Consolidated Subsidiaries at December 31,1986 and 1985. and the results of their opera tions ana n-: changes in their financial position for each of the three years in the period ended December 31. 1986 in conformity with generally accepted accounting principles consistently applied, except tor the cnange. witn which we concur, made as of January 1. 1985. in the metnoa of ac counting for pension costs, as aescnoed in Note 14 to the consolidated financial statements 1251 Avenue of the Americas New York, New York January 30, 1987 COOPERS & LYBRAND EXECUTIVE OFFICERS Richard de J. Osborne Alexander J. Gillespie. Jr George W Anderson Thomas C Osborne William A. Benms Robert J. Bothwell. Jr Richard L. Brown. Jr John R Corbett Augustus B Kinsolving Robert J. Kupsch W Scott Latimer Francis R. McAllister Stephen P McCandless Robert J. Muth Ronald J O'Keefe Harold E. Kelshaw. Jr Chairman of the Board. Chief Executive Officer and President Vice Chairman Executive Vice President Executive Vice President Vice President (Administration) Vice President (Sales) Vice President (Exploration) Vice President (Industrial Relations and Personnel) Vice President. Secretary and General Counsel Vice President (Mining) Vice President (Ore) Vice President (Finance and Administration) Vice President and Treasurer Vice President (Government and Public Affairs) Controller General Auditor DIRECTORS Richard de J Osborne Willard C. Butcher Fletcher L Byrom Sir James Foots David C. Garfield Alexander J Gillespie. Jr James R. Greene Ralph L Hennebach Harry Holiday. Jr Louis W Men'k Michael T Nelligan Sir Bruce Watson Cnairman of the Board Chief Executive Ofticer and President Chairman of the Boarc ana Chief Executive Ofticer The Chase Mannattan Bank NA Former Chairman of tne Board, hoppers Company, me Director, various corporations Former Chairman and Chief Executive Officer M.I.M Holdings Limited, now Deputy Chairman of tne Board. M I M Holdings Limited. Chairman of the Board. Westpac Banking Corporation Former President. Ingersoll-Rand Company Vice Chairman Director and Consultant to various international corporations, former President. American Express Bank Former Chairman of the Board and Chief Executive Officer Former Chairman of the Board and Chief Executive Officer. Armco Inc Former Chairman of the Board and Chief Executive Officer Burlington Northern Inc and International Harvester Corporation. Director various corporations President and Chief Executive Officer. Don Ward & Co . former Chairman ot the Board. President and Chief Executive Ofticer. Ideal Basic Industries. Inc Chairman ol the Board and Chief Executive Officer. M I M Holdings Limited V COMMITTEES OF THE BOARD CORPORATE INFORMATION Finance The Finance Committee reviews the plans of management relating to the Company's financial condition and present and prospective cash requirements and debt and equity financings out of the ordinary course of business. Fletcher L. Byrom, Chairman Willard C. Butcher Louis W. Menk Richard de J. Osborne Audit The Audit Committee recommends engagement of indepen dent auditors and reviews the plan and results of the audit. The Committee also reviews the Company's internal auditing function and the accounting and financial policies and pro cedures. The implementation and maintenance of the Com pany's system of internal control are recognized as primarily the responsibilities of management. James R. Greene, Chairman David C. Garfield Flarry Holiday, Jr. Michael T. Nelligan Pension Advisory The Pension Advisory Committee reviews pension fund matters and gives reports and recommendations on the subject to the Board of Directors. Louis W. Menk, Chairman David C. Garfield Alexander J. Gillespie, Jr. James R. Greene Ralph L. Hennebach Organization and Compensation The Organization and Compensation Committee considers and makes recommendations to the Board with respect to the nomination of directors and their compensation and com mittee assignments. It also considers organization matters and makes recommendations to the Board with respect to election of officers. The Committee determines compensa tion and benefits of officers, reviews compensation and bene its policy and administers the Company's additional and incentive compensation plans. Willard C. Butcher, Chairman Fletcher L. Byrom Harry Holiday, Jr. Michael T. Nelligan Annual Meeting The annual meeting of stockholders of ASARCO Incorporated will be held on Wednesday, April 22,1987 at 2.00 p.m. in the Ground Floor Auditorium, 1 Chase Manhattan Plaza, New York, NY A transcript of the proceedings will be available after June 2,1987 to any stockholder upon request to the Secretary. The request should specify a proper purpose, and should include payment of $10.00 to cover the cost of postage and reproduction. Form 10-K Many of the Securities and Exchange Commission infor mation requirements are contained in this 1986 Annual Report. A copy of Asarco's 1986 Form 10-K (excluding exhibits) will be available after May 1,1987 upon request to the Treasurer. General Office 180 Maiden Lane, New York, NY 10038 Corporate Office 28 West State Street, Trenton, NJ 08608 Transfer Agent and Registrar Morgan Shareholder Services Trust Company 30 West Broadway, New York, NY 10007-2192 Stockholder Services Office 180 Maiden Lane, New York, NY 10038 Phone 212-510-2000 Stock Exchange Listing The principal market for Asarco's Common Stock is the New York Stock Exchange. The Stock Exchange symbol for Asarco Common Stock is AR. The principal market for Asarco's $2.25 Depositary Converti ble Exchangeable Preferred Shares is also the New York Stock Exchange. The symbol is ARPr. The principal market for Asarco's Common Stock Purchase Warrants is NASDAQ and the symbol is ASRCW. Common Stock Price Ranges and Dividends Per Share 1986 1 st Quarter 2nd Quarter 3rd Quarter 4th Quarter Stock Prices High Low 22% 2274 171/, 1774 187s 14% 10 13% 1985 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 277s 27% 247/e 19% 17% 20 19% 15% Dividends Per Common Share . -- ASARCO Incorporated 180 Maiden Lane New York, New York 10038