COMPANY PROFILE Lepanto Consolidated Mining Company is the largest gold producer in the Philippines. With Headquarters in Makati City, we operate the Victoria gold mine in Mankayan, Benguet. Lepanto is a publicly owned Company providing investors with highly liquid exposure to gold. Lepanto A and B shares trade on the Philippine Stock Exchange under the symbols LC and LCB. Table of Contents Page Message from the Chairman and the President ........... 1 Financial and Operating Highlights ............................... 2 Report on Operations ................................................... 3 Special Feature – We are the Lepanto Team................ 5 Dividend Record and Stock Prices ............................... 6 Statement of Management's Responsibility.................. 7 Report of Independent Auditors.................................... 8 Consolidated Financial Statements .............................. 9 Notes to Financial Statements ...................................... 12 2003 Board of Directors ................................................ 26 Corporate Information ................................................... 28 ABOUT THE COVER We are the Lepanto Team We commit to preserve the environment for future generations. We believe in teamwork and consider every stakeholder as our committed partner. We provide leadership that allows everyone in our organization to be the best. We challenge the status quo and embrace change. We are passionate for growth and continuous improvement. 2003 Directory EXECUTIVE OFFICES 21st Floor, Lepanto Building 8747 Paseo de Roxas 1226 City of Makati Telephone No. 815-9447 ADDRESSES MAILING Domestic Surface Mail P. O. Box 1460 Makati Central Post Office 1254 City of Makati Domestic and Foreign Air Mail P. O. Box 7507 Domestic Airport Post Office 1300 Domestic Road, Pasay City Philippines FAX 63 (2) 812-0451 63 (2) 810-5583 E-MAIL ADDRESS mis@lepantomining.com WEBSITE www.lepantomining.com TRANSFER AGENT Bank of the Philippine Islands Stock Transfer Agency 4th Floor, BPI Main Building Ayala Avenue cor. Paseo de Roxas, City of Makati AUDITORS Joaquin Cunanan & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas, 1226 City of Makati GENERAL COUNSELS SyCip Salazar Hernandez and Gatmaitan Law Offices 4th Floor, SSHG Law Center 105 Paseo de Roxas, City of Makati Abello Concepcion Regala & Cruz Law Offices ACCRA Building, 122 Gamboa St. Legaspi Village, Makati City Romulo Mabanta Buenaventura Sayoc and Delos Angeles 30th Floor, Citibank Tower 8741 Paseo de Roxas, City of Makati BANKERS Australia and New Zealand Banking Group Limited Manila Branch, City of Makati Bank of the Philippine Islands Head Office and Ayala Avenue Branch, City of Makati Ormoc City Branch, Leyte NRA - Reclamation Area Branch, Cebu City Banco de Oro Valero Branch, City of Makati Bank of Commerce Legaspi - Makati Branch City of Makati China Banking Corporation Makati Main Branch, City of Makati Equitable PCI Bank Main Office Branch, City of Makati Paseo-Equitable Bank Tower Branch, City of Makati East-West Banking Corporation Sen. Gil Puyat Avenue Branch, City of Makati International Exchange Bank Main Office Branch, City of Makati Keppel Bank Salcedo Branch, City of Makati Land Bank of the Philippines Buendia Branch, Sen. Gil Puyat Avenue City of Makati Maybank Philippines, Inc. Legaspi Towers Center, Manila Metropolitan Bank and Trust Company Head Office, City of Makati Philippine Bank Of Communications Head Office, City of Makati United Coconut Planters Bank Head Office, City of Makati N M Rothschild and Sons (Australia) Limited Sydney, New South Wales, Australia Dresdner Bank AG Sydney, New South Wales, Australia STOCK EXCHANGE LISTING Philippine Stock Exchange Sanidad Law Office Suite 206 Laperal Building Session Road, Baguio City Villareal Rosacio Diño and Patag Law Offices 18th Floor, Penthouse, The Goldloop Towers One Goldloop Plaza Ortigas Center, Pasig City ANNUAL MEETING The Annual Meeting of Stockholders of Lepanto Consolidated Mining Company will be held on April 19, 2004, at 4:00 p.m. at the Rigodon Ballroom, The Peninsula Manila, corner Ayala and Makati Avenues, City of Makati. A copy of the Company’s Annual Report on SEC 17-A shall be provided without charge to any stockholder who makes a written request for such copy. ANNUAL REPORT 2003 A MESSAGE FROM THE CHAIRMAN AND THE PRESIDENT Stock Market Shows Sign of Life The quick end to the Iraq war in April boosted the stock market to regain about half of its losses of the previous two years. The value of the average market turnover increased by more than 100%. However, because of lack of interest in the mining equities, your Company’s share price remained range bound at P0.165 to P0.25 for the “A” and P0.18 to P0.35 for the “B” shares for most of the year after appreciating by an average of 40% in 2002. Gold Price Continues to Increase The gold price rally, which started in March 2002, gained momentum in 2003. By the end of the year, gold was trading in the $400 to $420/oz range. The surge in the gold price is attributed to the continued weakness in the U.S. dollar. The average gold price we received for the year was $368/oz, a 19% increase over last year. Illegal Strike Sets Back Recovery Plan The recovery plan put in place at the start of the year was derailed by the illegal strike in February that totally shut down the mine operation for 32 days. The underground mine could not get back to normal operation immediately after the strike because of safety concerns. All infrastructures and working areas had to be inspected and rehabilitated. Normal operations only resumed 15 days after the strike ended. Due to poor ground conditions at level 700, the 32day stoppage had a significant adverse effect on the development of stopes at this level. These stopes, which were scheduled to be in production in April, were delayed until June. Once in production, these stopes increased the mining rate by 36%, from an average of 1650 t/d in the first half to an average of 2250 t/d in the second half of the year. Level 700 is now contributing 600 t/d (25%) to the mine production. The increase in the mining rate during the second half of the year translated to a 40% increase in gold production, from 6750 oz/month during the first half of 2003 to 9440 oz/month during the second half. This year’s gold production, however, was 22% lower than in 2002 due to the strike and the 27% reduction in the head grade. Lepanto Swings Back to Profitability in the 2nd Half After incurring losses during the 1st half as a result of the crippling strike in February, your Company realized income from operations before extraordinary items of P168 million in the 2nd half. For the year, income from operations before extraordinary items was P54 million. However, deferred foreign exchange losses in the amount of P135 million were booked during the year because of repayment of long term dollar-denominated loans. Additional foreign exchange losses of P66 million were charged due to the revaluation of existing dollar loans. As a result, your company incurred a net loss of P143 million for the year. Despite the 22% decrease in gold production, this year’s gross revenue of P1.81 billion was only 2% lower than last year’s P1.85 billion. This was mainly due to the higher metal prices we received for our products. On the other hand, the production cost at P1.62 billion was 10% higher than last year due to the 8% increase in the tonnes milled. President & Chairman - Team Leaders Looking Ahead To sustain the productivity growth attained during the last two quarters of this year, we have invested in additional mobile mining equipment. Definition drilling is being accelerated to replace the ore that is being extracted to maintain a healthy mineable ore reserve. Despite the delay due to the strike, Victoria II development is still on schedule and ore delivery from this deposit will start in April 2004. Board Changes Mr. Arthur V. Ty retired after 6 years and Mr. Francisco C. Sebastian after 5 years of insightful service as Directors. We acknowledge with thanks their contributions to the Company’s growth. Ms. Theresita O.Turla, the Company’s first lady Director, and Mr. Eduardo R. Alvarez have been elected to replace them. In Closing The successful execution of the recovery plan, despite the strike, is mainly due to the hard work and dedication of our employees. We wish to thank them for their efforts. We would also wish to thank our suppliers and banks for their patience and support. Thank you for your continued interest in Lepanto. On behalf of the Board, Felipe U. Yap Bryan U. Yap Chairman and Chief Executive Officer President and Chief Operating Officer 1 LEPANTO CONSOLIDATED MINING COMPANY FINANCIAL AND OPERATING HIGHLIGHTS 2003 AVERAGE SELLING PRICES Gold - per ounce Silver - per ounce Copper - per pound OPERATIONS Gold production Silver production $ 310.20 4.63 0.67 19 13 (100) 114,614 143,475 (22) (7) $ $ 258.00 184.00 33 32 1,814 52 1,866 143) 2,574 P 1,852 50 1,902 177 2,717 (2) 4 (2) (181) (5) P P 7,440 4,713 P P 7,698 4,623 (3) 2 P 4,394 22,480 P 4,527 23,759 (3) (5) - ounces - ounces Cost per ounce of gold (in U.S. $) Cash cost per ounce of gold ( in U.S. $ ) FINANCIAL RESULTS ( in million pesos) Revenue Sale of metals Sales by subsidiaries, etc. Total revenue a Net Income (Loss) Retained Earnings INVESTMENT IN ASSETS (in million pesos) Total assets Property,plant and equipment, net STOCKHOLDER'S DATA Stockholder's equity (in million pesos) Number of stockholders Citizenship-% of ownership Philippines U.S.A. and others PER-SHARE DATA (in pesos) Par value a,b Earnings(Loss) c Book value NUMBER OF EMPLOYEES 368.52 5.21 - 2002 $ Percent Increase (Decrease) 89,417 133,209 $ $ P ( 344.00 242.00 82 18 P ( 0.10 0.0067) 0.2061 2,416 82 18 P - 0.10 0.0083 0.2123 (181) (3) 2,284 6 a. Using the equity method of accounting for investments. b. Computed on the basis of the weighted average number of shares subscribed and issued during the year. c. Computed on the basis of the total shares outstanding as of December 31. 2 ANNUAL REPORT 2003 REPORT ON OPERATIONS LEPANTO MINE DIVISION SUMMARY Despite the strike in February, total tonnes milled increased by 8%, from 610,100 t in 2002 to 657,710 t this year. However, due to the 27% decrease in mill head grade, gold production decreased by 22% from 114,600 oz in 2002 to 89,420 oz this year. Gold Price 5-Year Annual Average $ / oz 400 380 360 340 320 300 280 260 240 220 200 Despite the strike, the development of the Victoria II (now called Teresa) ore body is on schedule. Ore delivery from this ore body will start in the second quarter of the year. However, since most of the stopes in this ore body are replacement stopes, the increase in mining rate will not be significant. The grade of the ore delivered to the mill averaged 4.65 g/t Au. This was 1.70 g/t or 27% lower than last year’s average of 6.35 g/t Au. The mine development advance to access new stopes increased by 7%, from 21,060 m in 2002 to 22,480 m this year. MILLING OPERATIONS In April 2004, the Continuous Improvement Program will be 3 years old. At the end of 2003, the notable achievements of this Program were as follows: 1. Improved gold recovery by 1.5 percentage points. 2. Improved silver recovery by 10 percentage points. 3. Reduced power consumption by 4 kW·h/t of ore milled. 4. Reduced grinding media consumption by 8% or 0.10 kg/t from 1.34 kg/t to 1.24 kg/t. Income from operations before extraordinary items was P54 million. However, we booked deferred foreign exchange losses of P135 million because of repayment of long term dollar-denominated loans. Additional foreign exchange losses of P66 million were charged due to the revaluation of existing dollar loans. As a result, the company incurred a net loss of P143 million for the year. 5. Reduced liner consumption by 28% or 0.05 kg/t from 0.14 kg/t to 0.10 kg/t. 6. Reduced maintenance and services cost by P20 million per year, from an average of P57 million per year during the1998 to 2000 period to an average of P37 million per year during the 2001 to 2003 period. Capital spending increased by P29 million or 5%, from P567 million in 2002 to P596 million this year mainly due to the development of level 700. The improvement in gold and silver recoveries were the result of (1) the conversion of CIP to hybrid CIL, (2) the use of lead nitrate to neutralize the adverse effect of antimony on gold recovery and (3) the use of CN to Cu ratio to optimize cyanide addition. The improvement in recoveries translates to about 3% increase in revenue. 1999 2000 2001 2002 2003 The 22% decrease in gold production was partially offset by the 19% increase in the average gold price. As a result, the gross revenue at P1,814 million this year was only 2% lower than last year’s P1,852 million. Economic and political uncertainties pushed the Peso down to record lows toward the latter part of the year. The average foreign exchange rate for the year averaged P54.38 to $1.00. MINE OPERATIONS After a yearlong development effort, the level 700 stopes started to produce in June. At the end of the year ore extraction from this level was averaging 600 t/d. As a result, the average mining rate increased by 36% during the second half of the year, from 1650 t/d in the first half to 2250 t/d. The reduction in power consumption was achieved by optimizing the feed rate to the crushing and grinding circuits. This reduced the power cost by 15%. The reduction in grinding media and liner consumption was due to the change in the grinding ball size and the change in the design of the liners respectively. The annual saving in grinding steel cost was about 15%. The reduction in maintenance cost was due to our preventive/ predictive and lately our condition based maintenance (CBM) programs and the reengineering of chutes, pipes, etc. Underground Miners - Team Members Gold Refiner - Team Member 3 LEPANTO CONSOLIDATED MINING COMPANY EXPLORATION Mineable Ore Reserve Ore Reserve estimate as of January 1, 2004 follows: Ore Reserve Estimates Victoria / Teresa Proved Probable Total Tonnes Mt Grade g/t Au Content Moz Au 4.27 1.80 6.07 5.75 5.70 5.72 0.79 0.33 1.12 Company Doctor - Team Member At the current mining rate, this reserve is good for 8 years. LEPANTO ROASTER DIVISION The total mineral resource increased by 4% from 2.11 Moz at the beginning of 2003 to 2.19 Moz at the end of 2003. The roaster facility continued to be on “care and maintenance” status. Exploration drilling in 2003 was focused on defining the ore reserve at the 700 level. While confirming seven ore zones, the drilling program created enough reserve to allow full-scale mining at this level that enable the mine to extract ore at a rate of about 400 to 500 t/d or 20% of the total mine production during the second half of the year. SUBSIDIARIES HUMAN RESOURCE The manpower complement was gradually increased as more stopes from level 700 and from Victoria II (Teresa) were being developed. By the end of the year, manpower stood at 2126, 8% higher than in 2002. Although the strike in February was considered illegal, the Company negotiated with the Unions to end it. The labor dispute were thus settled to the satisfaction of all parties. ENVIRONMENT Tailings Dam In addition to ensuring the structural integrity of the dam, we maintained a minimum freeboard of 13.5 m throughout the year. This amount of freeboard would handle a one in 650-year flood event. This is 6.5 times higher than what government regulations require for an earth-filled dam. Reforestation DIAMOND DRILLING CORPORATION OF THE PHILIPPINES While there is little expectation that the exploration drilling activity will pick up in 2004 due to the adverse Supreme Court decision on the ownership issue in the Philippine Mining Act of 1995, the Company will continue to seek third party contracts. As we can no longer rely on increased drilling activity to drive our future growth, we shifted our focus on cost control to reduce our operating cost. SHIPSIDE, INCORPORATED Total tonnage handled during the year increased by 14%, from 20,160 t in 2002 to 22,930 t. Likewise, total production at the sawmill operation increased by 50% from 1.8 million board feet in 2002 to 2.7 million board feet this year. The increase was mainly due to the higher demand from the parent company. As a result of higher production, gross income this year increased by 40%, from P35.8 million in 2002 to P50.0 million this year. Net income also increased from P1.1 million in 2002 to P1.4 million this year. LEPANTO INVESTMENT AND DEVELOPMENT CORPORATION Through the cooperative efforts of the civic organizations, the barangays and the Company, another 157,000 tree seedlings were added to the two million already planted. With the help of DENRO and the barangay tanods, we were able to maintain a survival rate of 85%. Premium production at P23.0 million this year was a 33% improvement over last year. Net income at P1.6 million was also 45% better than in 2002. Unfortunately, about 12 ha or 5% of the total forested areas was lost to forest fires in 2003. These areas are now undergoing reforestation. Low levels of investment in mineral exploration and mine development and the closure of small-scale marble processors due to the influx of low-cost ceramic tiles drove net sales down by 7% and profit by 20%. DIAMANT BOART PHILIPPINES, INC. Community Development Despite incurring losses during the first and second quarters of this year, your Company continued to contribute to the various community projects in 10 barangays. The P8 million spent this year is 190% higher than the amount mandated under the Philippine Mining Act of 1995. 4 Product lines have been augmented by the assignment of exclusive agency agreements by two foreign-based companies, Electrolux Construction Products Pty Ltd and Roberlo of Spain. These gave the Company conveyor line products and a complete line of diamond tools and equipment for the construction industry. ANNUAL REPORT 2003 WE ARE THE LEPANTO TEAM business that took more than 50 years to build. This barrier is being taken down by our commitment to leadership and empowerment. We are continuously improving our people, our process, our environment and our cost by constantly challenging the status quo. Our continuous improvement program has paid handsome dividends in terms of additional revenue and savings in operating cost. The program works because it was created by people working together as a team. The focus of this program Board of Directors - Team Leaders was to empower the people to create a highly motivated and skilled workforce and to optimize the operation to improve Lepanto’s business model has been redesigned to give efficiency and reduce operating cost. responsibility for the day-to-day operational needs to the people most sensitive to local issues – the people on site – at our mine We are future-friendly. We are committed not only to and other business units. These business units work within the preserving our environment but enhancing it. Our sustainable strategy and policy set by the Board of Directors and senior development activities will ensure that our employees and the management. This structure places accountability for decisions people in our communities will continue to benefit from the with the people involved and ensures that all required corporate products we produce today long after the mine is gone. resources are available to achieve the best results. We are working in partnership with all our stakeholders to In the new model, each business unit produces a strategic ensure that our activities in support of our sustainable plan that identifies and addresses the financial, technical and development program will meet their approval as well as the social priorities of the operation. However, we realized that we could only be successful if we work together as a team. Therefore, under the leadership of our new President and COO, Bryan U. Yap and the Executive Council: We espouse a culture of Empowerment, which provides the environment for everyone in our organization to be the best. We believe that the greatest barrier to making changes happen in a company is organizational culture. We also believe that change or improvement is the engine of growth and without productivity growth; it is possible to lose in just a few years a LMD Staff - Team Members needs of everyone in the communities. We are the new Lepanto team. Makati Staff - Team Members 5 LEPANTO CONSOLIDATED MINING COMPANY DIVIDEND RECORD AND STOCK PRICES STOCK DIVIDEND RECORD Record Date Rate (%) November 28, 1949 August 22, 1950 April 4, 1954 April 6, 1957 April 30, 1962 April 30, 1964 December 19, 1966 December 27, 1968 September 13, 1969 November 20, 1970 April 28, 1972 April 27, 1973 November 16, 1973 January 10, 1975 September 30, 1975 May 2, 1978 May 16, 1980 May 16, 1983 September 26, 1986 February 23, 1989 October 13, 2000 50.00 66.66 100.00 33.33 4.51 43.00 40.00 50.00 33.33 20.00 25.00 25.00 75.00 25.00 20.00 12.50 20.00 20.00 20.00 50.00 25.00 TOTAL CASH DIVIDEND RECORD Amount P 1,000,000.00 2,000,000.00 5,000,000.00 3,458,333.40 1,630,999.42 6,000,000.00 8,000,000.00 14,000,000.00 14,038,900.00 11,265,439.70 16,928,759.50 21,250,359.40 79,876,497.75 46,688,310.33 46,712,804.70 35,193,442.25 63,674,667.10 77,002,748.00 92,421,009.60 277,263,028.90 423,271,296.10 P 1,246,676,596.15 QUARTERLY HIGH AND LOW MARKET PRICES OF LEPANTO “A” AND “B” SHARES. 2003-2002 LEPANTO “A” (P/SHARE) Low High 1Q02 0.14 0.23 2Q02 0.20 0.23 3Q02 0.16 0.20 4Q02 0.16 0.20 Low High 1Q03 0.17 0.24 2Q03 0.18 0.20 3Q03 0.17 0.21 4Q03 0.20 0.25 LEPANTO “B” (P/SHARE) 6 Low High 1Q02 0.15 0.24 2Q02 0.21 0.25 3Q02 0.17 0.23 4Q02 0.17 0.22 Low High 1Q03 0.18 0.25 2Q03 0.19 0.22 3Q03 0.18 0.23 4Q03 0.24 0.35 Dividend Nos. Year Declared Per Share 1 2-5 6-7 8 9-11 12-15 16-20 21-23 24-27 28-32 33-37 38-39 40-41 42-43 44-48 49-51 52-56 57-61 62-65 66-69 70-73 74-77 78-81 82-85 86-89 90-93 94-96 97-100 101-103 104 105-106 107-110 111 112 113-116 117-118 119-120 121 122 1939 1940 1941 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1978 1979 1980 1981 1986 1987 1988 1989 1998 1999 0.005 0.035 0.02 0.01 0.04 0.10 0.10 0.08 0.06 0.06 0.06 0.02 0.03 0.02 0.05 0.04 0.05 0.07 0.05 0.06 0.10 0.12 0.12 0.10 0.10 0.085 0.045 0.055 0.0225 0.005 0.01 0.02 0.005 0.0025 0.02 0.015 0.005 0.004 0.004 TOTAL AMOUNT P 52,500.00 577,500.00 350,000.00 200,000.00 1,800,000.00 5,000,000.00 5,000,000.00 4,000,000.00 5,000,000.00 6,000,000.00 6,000,000.00 2,418,333.34 4,150,000.02 2,766,666.68 6,928,666.67 5,405,333.38 6,939,566.71 9,800,000.00 9,400,000.00 12,000,000.00 20,000,000.00 33,600,000.00 33,600,000.00 45,597,250.00 56,284,298.80 57,527,182.40 38,149,138.92 63,309,214.88 41,982,124.95 15,844,913.85 31,763,953.36 70,019,939.43 19,140,369.90 11,552,654.39 110,905,279.45 83,178,952.05 41,158,324.98 66,613,920.76 66,918,503.47 P 1,000,934,588.39 ANNUAL REPORT 2003 STATEMENT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of Lepanto Consolidated Mining Company is responsible for all information and representations contained in the financial statements for the years ended December 31, 2003 and 2002. The financial statements have been prepared in conformity with generally accepted accounting principles in the Philippines and reflect amounts that are based on the best estimates and informed judgment of management with an appropriate consideration to materiality. In this regard, management maintains a system of accounting and reporting which provides for the necessary internal controls to ensure that transactions are properly authorized and recorded, assets are safeguarded against unauthorized use or disposition and liabilities are recognized. The management likewise discloses to the company’s audit committee and to its external auditor: (i) all significant deficiencies in the design or operation of internal controls that could adversely affect its ability to record, process, and report financial data; (ii) material weakness in the internal controls; and (iii) any fraud that involves management or other employees who have significant roles in internal controls. The Board of Directors reviews the financial statements before such statements are approved and submitted to the stockholders of the company. Joaquin Cunanan & Co., the independent auditors and appointed by the stockholders, has examined the financial statements of the company in accordance with generally accepted auditing standards in the Philippines and has expressed its opinion on the fairness of presentation upon completion of such examination, in its report to the Board of Directors and stockholders. FELIPE U. YAP Chairman of the Board and Chief Executive Officer RENE F. CHANYUNGCO Chief Financial Officer 7 LEPANTO CONSOLIDATED MINING COMPANY REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Lepanto Consolidated Mining Company We have audited the accompanying balance sheets of Lepanto Consolidated Mining Company (parent company) and the consolidated balance sheets of Lepanto Consolidated Mining Company and its subsidiaries as of December 31, 2003 and 2002, and the related statements of income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the parent 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 in the Philippines. 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 financial positions of Lepanto Consolidated Mining Company (parent company) and Lepanto Consolidated Mining Company and its subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with generally accepted accounting principles in the Philippines. Makati City March 15, 2004 8 ANNUAL REPORT 2003 LEPANTO CONSOLIDATED MINING COMPANY AND SUBSIDIARIES BALANCE SHEETS (Parent Company and Consolidated) DECEMBER 31, 2003 and 2002 (Amounts in thousands) Parent Notes Consolidated 2003 2002 2003 2002 ASSETS CURRENT ASSETS Cash and cash equivalents Receivables, net Inventories, net Prepayments and other current assets Deffered income tax assets,net 2,3 P 2,4,5 6,434 P 9,027 353,030 P 397,549 7,938 P 238,996 13,356 266,759 2,6 314,007 307,391 356,871 355,903 2,7,8 201,117 479,575 215,113 491,982 2,8 Total current assets 189,765 178,982 192,267 180,380 1,064,353 1,372,524 1,011,185 1,308,380 1,217,316 1,189,806 707,074 682,629 38,375 15,695 39,673 16,780 4,607,225 4,509,102 4,712,870 4,622,841 NON-CURRENT ASSETS Investments Deferred income tax assets 2,9,10 2,8 Property, plant and equipment, net 2,11,15 Unrecovered exploration costs 1,2,12 and other assets 15,22 291,618 389,354 968,808 1,067,584 6,154,534 6,103,957 6,428,425 6,389,834 P 7,218,887 P 7,476,481 P 7,439,610 P 7,698,214 P P Total non-current assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Trade payable and accrued expenses Notes and loans payable Income tax payable 2,13,19 P 735,880 P 638,629 14 252,860 182,740 1,2,8 - - 642,778 545,234 252,860 182,740 732 647 Dividends payable 2 27,081 27,092 27,081 27,092 Current portion of long-term debts 15 300,518 441,129 300,518 441,129 1,316,339 1,289,590 1,223,969 1,196,842 1,400,641 1,552,447 1,400,641 1,552,447 Total current liabilities NON-CURRENT LIABILITIES Long-term debts 15 Advances from stockholders Stock subscriptions payable 10 - - 56,084 56,084 107,784 107,784 111,309 111,309 Excess of book value over cost of investments in consolidated subsidiaries and affiliates 2 Total non-current liabilities Total liabilities MINORITY INTEREST 16 STOCKHOLDERS’ EQUITY 17 Total liabilities and stockholders’equity 6,669 7,491 1,508,425 - 1,660,231 - 1,574,703 1,727,331 2,824,764 2,949,821 2,798,672 2,924,173 - - 246,815 247,381 4,394,123 4,526,660 4,394,123 4,526,660 P 7,218,887 P 7,476,481 P 7,439,610 P 7,698,214 (See accompanying notes to financial statements) 9 LEPANTO CONSOLIDATED MINING COMPANY LEPANTO CONSOLIDATED MINING COMPANY AND SUBSIDIARIES STATEMENTS OF INCOME (Parent Company and Consolidated) FOR EACH OF THREE YEARS IN THE PERIOD ENDED DECEMBER 31,2003 (Amounts in thousands, except per share data) Parent Notes INCOME 2003 Consolidated 2002 2001 2003 2002 2001 2, 4, 5 Sales of gold, copper and silver Service fees and other operating income COSTS AND EXPENSES P 1,814,475 P 1,852,479 P 2,374,565 P 1,814,475 P 1,852,479 P 2,374,565 14,486 4,332 11,215 51,663 49,944 97,571 2 1,828,961 1,856,811 2,385,780 1,866,138 1,902,423 2,472,136 1, 2, 5, 11, 19, 20 (1,616,290 ) (1,452,343) (1,674,489) (1,648,762) (1,493,890) (1,755,660 ) 217,376 408,533 716,476 2, 21 ( 358,955 ) ( 230,308) ( 460,439) ( 362,633) ( 231,421) ( 465,762 ) 2, 9 ( 29,758 ) ( ( 118,376) ( ( ( 118,438 ) INCOME FROM OPERATIONS FINANCE COSTS, net 212,671 404,468 711,291 SHARE IN RESULTS OF OPERATIONS OF SUBSIDIARIES AND ASSOCIATES INCOME BEFORE MINORITY INTEREST MINORITY INTEREST 120,215 132,476 - - - ( 176,042 ) 120,215 132,476 16 INCOME (LOSS) BEFORE INCOME TAX (PROVISION FOR) BENEFIT FROM INCOME TAX 31,572) ( 176,829) 56,076) 121,036 ( 463 ( 176,366) 132,276 34) 776 121,002 133,052 1, 2, 8 ( Current Deferred NET INCOME (LOSS) FOR THE YEAR EARNINGS (LOSS) PER SHARE 53,945) ( 176,042 ) 156 ) ( 1,149) ( 892) ( 1,451 ) - - 33,463 56,675 52,300 34,780 56,780 53,175 33,307 56,675 52,300 33,631 55,888 51,724 176,890 P 184,776 P ( 142,735 ) P P ( 0.0067 ) P 176,890 P 0.0083 P P ( 142,735) P 0.0087 P ( 0.0067) P 0.0087 ( 0.0067) 184,776 2, 18 Basic ( 0.0067 ) Diluted 0.0083 0.0083 0.0083 P 0.0087 0.0087 (See accompanying notes to financial statements) LEPANTO CONSOLIDATED MINING COMPANY AND SUBSIDIARIES STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Parent Company and Consolidated) FOR EACH OF THREE YEARS IN THE PERIOD ENDED DECEMBER 31,2003 (Amounts in thousands) Notes Balance at December 31, 2000 Net income for the year Issuance of stock Unrealized loss on temporary decline in market value of non-current marketable equity securities for the year Balance at December 31, 2001 Net income for the year Unrealized loss on temporary decline in market value of non-current marketable equity securities for the year Balance at December 31, 2002 Net income for the year Unrealized loss on temporary decline in market value of non-current marketable equity securities for the year Balance at December 31, 2003 Capital stock at par value (Note 17) P 2,116,071 15,414 Retained Capital in Earnings excess of par (Note 9) P 84,608 P 2,354,914 184,776 4,932 - 2,10 2,131,485 - 89,540 - 2,539,690 176,890 ( 394,268 ) ( 394,268 ) - ( 394,268 ) 4,366,447 176,890 2,10 2,131,485 - 89,540 - 2,716,580 ( 142,735) ( 16,677 ) ( 410,945 ) - ( 16,677 ) 4,526,660 ( 142,735 ) 2,10 P 2,131,485 P 89,540 P 2,573,845 10,198 P ( 400,747 ) (See accompanying notes to financial statements) 10 Unrealized loss on non-current Marketable equity securities Total P P 4,555,593 184,776 20,346 10,198 P 4,394,123 ANNUAL REPORT 2003 LEPANTO CONSOLIDATED MINING COMPANY AND SUBSIDIARIES STATEMENTS OF CASH FLOWS (Parent Company and Consolidated) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2003 (Amounts in thousands) Notes CASH FLOWS FROM OPERATING ACTIVITIES Income (loss) before income tax P Adjustments for: Depreciation and depletion 11 (Gain) loss on disposal of: Property, plant and equipment 11 Other investments Expired portion of NOLCO Share in net loss of other investments 9 Minority interest 16 Unrealized foreign exchange losses (gains), net FSGRI operating expenses write-off MCIT written-off Provision for: Doubtful accounts Inventory obsolescence Retirement benefit costs Interest income 21 Interest expense 21 Dividend income Operating income before changes in working capital Changes: Receivables Inventories Prepayments and other current assets Trade payable and accrued expenses Cash generated from operations P Dividend received Interest received Retirement benefits paid 19 Income taxes paid Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property, plant and equipment 11 Investments 9 Dividends received Proceeds from disposal of: Property, plant and equipment 11 Other investments Decrease in unrecovered exploration costs and other assets 12 Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from (payments of): Short-term and long-term debts, net 14,15 Issuance of capital stock Cash dividends Trust fund Interest 14,15,21 Increase in advances from stockholders Net cash used in financing activities EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS NET DECREASE IN CASH AND CASH EQUIVALENTS FOR THE YEAR CASH AND CASH EQUIVALENTS January 1 2,3 December 31 P 2003 Parent 2002 2001 2003 Consolidated 2002 2001 ( 176,042 ) P 120,215 P 132,476 P ( 176,366 ) P 121,002 P 133,052 496,940 438,771 397,107 35 ) 29,758 65,270 - 111 53,945 244 - 542 118,376 918 - 373 ) 55,002 ( 221 ) 135,734 606,033 6,227 27,501 ( 709) 123,347 769,652 ( ( 38,751 ( 2,440) 216,777 902,507 506,913 450,797 416,202 ( ( 35 ) 157 ) 31,572 ( 566 ) 65,260 722 ( 110 ) ( 624) 1,011 56,076 34 ( 187) - 499 2,345 118,438 ( 776 ) ( 139 ) - 600 373 ) 55,972 ( 231 ) 136,126 ( 56 ) 619,271 671 6,524 ( 28,410) ( 729) ( 124,250) ( 59) 787,176 1,107 210 39,321 ( 2,487 ) 222,135 929,907 ( ( 79,985) ( 60,788) 44,546 45,760 27,190 179,711 6,243 ) 14,108 73,994 ( 595 ) 18,020 57,791 278,302 11,728 105,277 276,869 5,531 102,646 ( 28,838) 36,139 91,193 79,674 73,366 111,302 958,777 P 932,441 P1,100,664 P 996,101 P 961,600 P1,121,661 54 221 709 2,440 231 729 2,487 ( 5,632 ) ( 905) ( 11,965) ( 5,933 ) ( 1,172) ( 12,118) ( 927 ) ( 1,005) ( 1,453 ) 953,366 932,245 1,091,139 989,526 960,152 1,110,577 ( ( 596,122 ) ( 47,069 ) - ( 567,022) ( 30,373) - ( 516,361) ( 226,707) - ( 597,962 ) ( 48,912 ) 2 ( 574,122) ( 27,987) 753 ( 516,360) ( 226,739) 1,157 1,094 97,735 ( 544,362 ) 10,785 113,692 ( 472,918) 3,868 175,262 ( 563,938) 1,055 3,250 98,054 ( 544,513 ) 11,520 115,604 ( 474,232) 11,557 172,071 ( 558,314) ( 283,469 ) ( 11 ) ( 128,443 ) ( 411,923 ) 326 ( 2,593 ) ( 357,394) ( 103) ( 126,885) ( 484,382) 178 ( 24,877) ( 499,557) 27,022 ( 234,575) ( 707,110) 139 ( 179,770) ( 283,469 ) ( 11 ) ( 38,461 ) ( 128,826 ) ( 450,767 ) 336 ( 5,418 ) ( 367,394) ( 103) ( 14,082) ( 127,430) 432 ( 508,577) 187 ( 22,470) ( 508,002) 27,022 ( 2,712 ) ( 248,960) 2 ( 732,650) 139 ( 180,248) 9,027 6,434 P 33,904 213,674 9,027 P 33,904 P 13,356 7,938 P 35,826 216,074 13,356 P 35,826 (See accompanying notes to financial statements) 11 LEPANTO CONSOLIDATED MINING COMPANY LEPANTO CONSOLIDATED MINING COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Parent Company and Consolidated) AS OF DECEMBER 31, 2003 AND 2002 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2003 (All amounts in thousands, unless otherwise indicated) Note 1 - General information Lepanto Consolidated Mining Company (parent company) was incorporated and registered with the Securities and Exchange Commission (SEC) on September 8, 1936 primarily to engage in the exploration and mining of gold, silver, copper, lead, zinc and all kinds of ores, metals, minerals, oil, gas and coal and their related by-products. On January 29, 1985, the SEC approved the extension of the parent company’s corporate term for another fifty (50) years after the expiration of its original term on September 8, 1986. The parent company’s shares are listed and traded in the Philippine Stock Exchange. In January 1999, the parent company and the Bank of New York, as depository, formed a depository receipt facility to facilitate secondary market trading in the international capital markets of the parent company’s class “B” common shares. On January 14, 1997, the parent company was registered with the Board of Investments (BOI) under Executive Order No. 226 as a new export producer of gold bullion on a preferred non-pioneer status. This registration entitles the parent company to a four (4) year income tax holiday (ITH), which can be further extended for another three (3) years subject to compliance with certain conditions, and lower tariff rates on acquisition of capital equipment. The parent company is required to maintain a base equity of at least 25% as one of the conditions of the registration. On April 1, 1997, the parent company started the commercial operations of its gold mine (Victoria Project) and suspended its copper mining operations. Consequently, in October 1997, the parent company temporarily ceased operating its roasting plant facilities in Isabel, Leyte for an indefinite period. All costs incurred during the period of temporary cessation of operations from October 1997 to present were charged to operations. As of December 31, 2003, the net book value of the roasting plant facilities, included in unrecovered exploration costs and other assets, amounted to P187.7 million (2002 - P187.4 million), which is lower than the facilities’ net realizable value. On March 30, 2000, the parent company registered its copper flotation with the BOI under Executive Order No. 226 as a new producer of copper concentrates on a preferred non-pioneer status. This registration entitles the parent company to a four (4) year ITH, subject to compliance with certain conditions, simplified customs procedures, additional deduction for labor expense, and unrestricted use of consigned equipment for a period of ten (10) years. The parent company is required to maintain a base equity of at least 25% as one of the conditions of the registration. On April 10, 2001, the BOI approved the parent company’s request for ITH bonus year for a period of one year from April 2001 to March 2002 for its gold bullion project. The parent company has pending applications for two more ITH bonus years, from April 1, 2002 to March 31, 2003 and April 1, 2003 to March 31, 2004. Under the above BOI registrations and applications, the parent company has availed of tax incentives during the year amounting to P52.4 million (2002 - P47.2 million; 2001 - P76.5 million) which were in the form of foregone income taxes. On January 5, 2004, the parent company was registered with the BOI under Executive Order No. 226 as new export producer of gold bullion on a non-pioneer status, for its Victoria II (renamed Teresa) Project. This registration entitles the parent company to ITH for four (4) years, which can be further extended for another three (3) years subject to compliance with certain conditions, and lower tariff rates on acquisition of capital equipment. The parent company is required to maintain a based equity of at least 25% as one of the conditions of the registration. The parent company is scheduled to start commercial operation of its Teresa Project in April 2004. The parent company was also registered with the PEZA on December 17, 1985 pursuant to the provisions of P.D. No. 66, as amended, and Executive Order No. 567, as a zone export enterprise to operate a roasting plant for the manufacture of copper calcine at the Isabel Special Export Processing Zone. Two of its subsidiaries are also registered with the BOI as an existing producer of electroplated tools on a non-pioneer status and as a new domestic producer of copper concentrate on a preferred non-pioneer status under Executive Order No. 226. These registrations enable the parent company and its subsidiaries to avail of the rights, privileges, and incentives granted to all registered enterprises. The parent company has its principal office at the 21st Floor, 8747 Lepanto Building, Paseo de Roxas, Makati City. The parent company’s regular employees numbered 2,223, 2,070 and 1,999 as of December 31, 2003, 2002 and 2001, respectively. Total staff costs during the year amounted to P445,329 (2002 – P409,527; 2001 – P398,091). 12 ANNUAL REPORT 2003 The members of two labor unions at the parent company’s mine site in Mankayan, Benguet went on strike for one month starting on February 2, 2003. There were no mining operations during the period. The strike was settled upon the execution of a memorandum of agreement between the parent company’s management and the labor unions on March 2, 2003. Note 2 - Significant accounting policies The principal accounting policies and practices of the parent company and its subsidiaries (or collectively as LCMC Group) are set forth to facilitate the understanding of data presented in the financial statements. Basis of presentation The financial statements are prepared under the historical cost convention in accordance with generally accepted accounting principles in the Philippines. The preparation of the financial statements in conformity with generally accepted accounting principles in the Philippines requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of current events and actions, actual results may ultimately differ from those estimates. New accounting standards effective 2003 As applicable, the LCMC Group adopted the following Statements of Financial Accounting Standards/International Accounting Standards (SFAS/IAS) effective January 1, 2003. These new standards have been approved by the Accounting Standards Council (ASC) of the Philippines. SFAS 10/IAS 10, “Events after the Balance Sheet Date”, which requires the disclosure of the date of authorization for issue of the financial statements by authorized officers of the parent company and prescribes the accounting and disclosure related to adjusting and non-adjusting subsequent events. SFAS 22/IAS 22, “Business Combinations”, which requires that an acquisition where an acquirer can be identified should be accounted for by the purchase method. Any goodwill arising from the acquisition should be amortized generally over 20 years. SFAS 37/IAS 37, “Provisions, Contingent Liabilities and Contingent Assets”, which provides the criteria for the recognition and bases for measurement of provisions, contingent liabilities and contingent assets. It also specifies the disclosures that should be included with respect to these items. SFAS 38/IAS 38, “Intangible Assets”, which establishes the criteria for the recognition and measurement of intangible assets. Intangible assets that are recognized should be amortized generally over 20 years. The new standard also requires that expenditures on research, start-up, training, advertising and relocation be expensed as incurred. The adoption of the new standards in 2003 did not result in restatements of prior year financial statements. However, additional disclosures required by the new standards were included in the financial statements, where applicable. New accounting standards effective subsequent to 2003 The ASC has likewise approved the following applicable accounting standards which will become effective subsequent to 2003: SFAS 12/IAS 12, “Income Taxes”, which takes effect in 2004 prescribes the accounting treatment of income taxes and requires the recognition of deferred tax liability for taxable temporary differences and deferred tax assets for deductible temporary differences if it is probable that a tax benefit will be realized. SFAS 17/IAS17, “Leases”, which takes effect in 2004 prescribes the accounting policies and disclosures to apply to finance and operating leases. SFAS 21/IAS 21, “The Effects of Changes in Foreign Exchange Rates”, which takes effect in 2005 provides restrictive conditions for the capitalization of foreign exchange losses (Note 12). Principles of consolidation The consolidated financial statements include the accounts of the parent company and the following subsidiaries: Subsidiaries Lepanto Investment and Development Corporation (LIDC) Shipside, Incorporated Diamond Drilling Corporation of the Philippines Diamant Boart Philippines, Inc., a subsidiary of LIDC Far Southeast Gold Resources, Inc. % of Ownership 100 100 100 80 60 13 LEPANTO CONSOLIDATED MINING COMPANY Subsidiaries, which are those entities in which the parent company has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies, are consolidated. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the parent company controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the parent company and are no longer consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus costs directly attributable to the acquisition. Intercompany transactions, balances and unrealized gains on transactions between group companies are eliminated; unrealized losses are also eliminated unless cost cannot be recovered. Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the parent company. Cash and cash equivalents Cash and cash equivalents are carried in the balance sheets at cost. For the purposes of the cash flow statement, cash and cash equivalents consist of cash on hand, deposits held at call with banks and other short-term, highly liquid investments with original maturities of three months or less. Marketable securities Marketable securities included in cash and cash equivalents in the consolidated financial statements, are stated at the lower of cost or net realizable value. Receivables Receivables are carried at original invoice amounts less provisions made, if any, to reduce the amounts to net realizable values. Provision for impairment of receivables is established when there is an objective evidence that amounts due will not be collected according to the original terms of receivables. The amount of provision is the difference between the carrying amounts and recoverable amounts. Receivables arising from ordinary transactions of the business, which are reasonably expected to be collected within the next accounting period, are classified as current assets in the balance sheets. Bad debts are written off when identifiable. Inventories Inventories of concentrates, and parts and supplies, which are used in the parent company’s operations, are stated at the lower of cost or net realizable value. Costs of concentrates are determined using the weighted average method while those of parts and supplies on hand are determined at moving average. Parts and supplies in-transit are valued at invoice cost. Cost of certain parts and supplies is charged to prepayments account when issued and amortized over a period not exceeding one year. Gold and silver bullion inventories are valued at net realizable value on or about year-end and/or at estimated net realizable value based on London Metal Exchange quotations at year-end. Net realizable value is the estimated selling prices in the ordinary course of business, less the costs of completion and selling expenses. Investments Investments in stock of subsidiaries and associates are carried under the equity method in the parent company’s financial statements. Under this method, the parent company recognizes its share in the results of operations of subsidiaries and associates less dividends received, if any, since date of acquisition. Cost and book value differentials at dates of acquisition are amortized over a period of 20 years. Other stock investments and long-term investments, are stated at cost and are adjusted for any permanent impairment in their value. Non-current marketable equity securities are carried at the lower of its aggregate cost or market value determined at balance sheet date and the accumulated changes in valuation allowance are presented separately in the statement of changes in stockholders’ equity. Realized gains or losses on the non-current portfolio are recognized in the statements of income when the securities are sold. The long-term investments are written down to its net realizable value for any significant and apparently permanent decline in its value. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and depletion except for land which is stated at cost. Construction in progress is recorded at cost and the related depreciation starts upon transfer to the appropriate account of the completed project. Provision for depreciation is computed on the straight-line method based on the estimated useful lives of the related assets. Depletion is computed based on ore extraction over the estimated volume of ore reserves as certified by the parent company’s geologist. Repairs and maintenance are charged to the statements of income during the period in which 14 ANNUAL REPORT 2003 they are incurred. The cost of major repairs and maintenance is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the LCMC Group. Major repairs and maintenance are depreciated over the remaining useful life of the related asset. When an asset is retired or otherwise disposed of, its cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is credited or charged to operations. Mine exploration and development costs of mineral properties are capitalized as mine and mining property and are included in property, plant and equipment account. Annual depreciation/depletion rates for each category of property, plant and equipment are based on the useful lives of the related assets. Buildings and improvements, plant machinery and equipment, and office furniture and fixtures are depreciated over a period of 10, 5 and 7 years, respectively. Impairment of assets Property, plant and equipment and other long-lived assets are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of an asset’s net selling price and value in use. For purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. Unrecovered exploration and development costs Unrecovered exploration and development costs represent capitalized expenditures incurred on significant exploration projects. When, as a result of exploration work, recoverable reserves are determined to be present in commercially producible quantities, exploration expenditures and subsequent development costs are transferred to mine and mining property. A valuation allowance is provided for the estimated unrecoverable costs based on the assessment of the parent company of the future prospect of the mining property. Income recognition Income from the sale of metals is recognized upon shipment and in accordance with the pricing and other terms of the covering agreements with buyers. Service fees and other operating income are recorded when earned. Costs and expense Costs and expenses are charged to operations when incurred. Provisions Provisions are recognized when the LCMC Group has a present legal or contractual obligation as a result of past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Leases Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the statements of income on a straight-line basis over the period of the lease. Interest and other income Interest and other income are recognized when earned. Borrowing costs Borrowing costs are expensed in the period incurred except those which are directly attributable to the acquisition or construction of a qualifying asset which are capitalized as part of the cost of the asset up to the time the asset is put into its intended use provided the resulting carrying amount does not exceed its recoverable or net realizable value. Transactions in foreign currencies Items included in the financial statements of each entity in the LCMC Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (“the measurement currency”). The financial statements are presented in Philippine Pesos, which is the measurement currency of the parent company, as well as its subsidiaries. Transactions in foreign currencies are converted into Philippine Pesos at rates of exchange prevailing at transaction date. Foreign currency denominated monetary assets and liabilities are translated at exchange rates prevailing at balance sheet date. The resulting exchange differences from the settlements and conversions are credited or charged to operations. In the event of 15 LEPANTO CONSOLIDATED MINING COMPANY significant devaluation of the local currency, the foreign exchange difference resulting from translations of related liabilities arising directly from acquisition of assets is included in the carrying costs of such assets, provided the carrying amount of the asset does not exceed the lower of replacement cost and the amount recoverable from the use or sale of the asset, otherwise, this foreign exchange difference is deferred and amortized for a period not to exceed three (3) years. Deferred foreign exchange losses are presented as other assets in the balance sheets (Note 12). Earnings (loss) per share Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares subscribed, issued and outstanding during the respective years, with retroactive adjustments for stock dividends, if any. When potential common shares are dilutive, the unexercised portion of stock options is included as share equivalents in computing diluted earnings (loss) per share. Retirement benefit costs Retirement benefit costs are determined actuarially using the Projected Unit Credit Method. This method reflects service rendered by employees to the date of valuation and incorporate assumptions concerning employees projected salaries. Retirement benefit costs consist of normal cost and amortization of past service cost, experience adjustments and changes in actuarial assumptions over the expected average remaining working lives of the covered employees. Stock options Proceeds from the exercise of stock options issued under the stock option plan are credited to capital stock at par value upon exercise of the options. The excess of the option price over par value is credited to capital in excess of par value. Income taxes Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial and tax reporting bases of assets and liabilities. Deferred income tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for the portion of deferred income tax assets, which is not expected to be realized in the future. Provision for/benefit from deferred income tax is recognized for the changes during the year in the deferred income tax assets and liabilities and related valuation allowance. Business segments Business segments provide products or services that are subject to risks and returns that are different from those of other business segments. Business segments are identified as a reportable segment if majority of its revenues are earned from sales to external customers and its revenue, segment results or assets are 10% or more of the total revenue, combined results or total assets of all segments, respectively. Related party transactions and relationships Related party relationships exist when one party has the ability to control, directly, or indirectly through one or more intermediaries, the other party or exercise significant influence over the other party in making financial and operating decisions. Such relationships also exist between and/or among entities which are under common control with the reporting enterprise, or between and/or among the reporting enterprise and its key management personnel, directors, or its stockholders. Transactions between related parties are accounted for at arms’ length prices or on terms similar to those offered to non-related entities in an economically comparable market. Comparatives When necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. Note 3 - Cash and cash equivalents Cash and cash equivalents at December 31 consist of: Parent Cash on hand Cash in banks Marketable securities 16 2003 P 302 6,132 P 6,434 2002 P 276 8,751 P 9,027 2003 P 454 7,484 P 7,938 Consolidated 2002 P 551 9,713 3,092 P 13,356 ANNUAL REPORT 2003 Note 4 - Receivables Receivables at December 31 consist of: Parent Note Trade Non-trade and other receivables Officers and employees Creditable input VAT 5 Less allowance for doubtful accounts 2003 P 52,966 230,879 22,976 46,453 353,274 244 P 353,030 Consolidated 2003 2002 P 120,081 P 136,283 52,082 53,416 23,743 34,084 46,453 45,739 242,359 269,522 3,363 2,763 P 238,996 P 266,759 2002 P 68,276 251,026 32,752 45,739 397,793 244 P 397,549 By virtue of Revenue Memorandum Order 9-2000 dated March 29, 2000, all sales of goods, property and services made by a VAT-registered person to the parent company, being a 100% exporter, are automatically zero-rated for VAT purposes effective August 8, 2001. The parent company’s claims for refund or credit of input VAT during the year amounting to P46.5 million (2002 - P45.7 million) represent VAT on importation. Note 5 - Related party transactions In the normal course of business, the parent company transacts with companies which are considered related parties under SFAS 24/IAS 24, “Related Party Disclosures”. The significant transactions for the years ended December 31 with the Company’s subsidiaries and associate follow: Rent charges to parent Rent charges from parent Transfer of materials from parent Transfer of materials and spare parts from subsidiary Contract fees Hauling, saw milling, rent and warehousing Management fee P 2003 154 186 12,300 4,644 40,710 32,986 1,000 P 2002 154 195 32,403 6,649 42,914 26,710 1,000 P 2001 154 195 17,613 4,943 32,714 33,519 1,000 On April 17, 2000, the parent company entered into a Trust Agreement with LIDC for the latter to serve as a second trustee for the parent company’s retirement fund (Note 19). On March 31, 2003, the parent company entered into separate Trust Agreement with LIDC whereby the latter ceased to be the second trustee of the LCMC Employee Pension Plans and instead to become the principal trustee. Prior to the Trust Agreement, the actual disbursements of the fund for the Plans, or payments to the retirees or beneficiaries had been the responsibility of a local bank as the principal trustee. The parent company has decided to terminate the service of a local bank and consolidated to the LIDC the administration of the Plans. As authorized by the Board of Directors on June 18, 2001, the parent company with LIDC acting as a co-borrower, formally entered into a hold-out agreement with a local bank on June 28, 2001. The agreement grants the parent company a one-year Revolving Credit Line in the amount not exceeding P30 million subject, among others, on the condition that the local bank be granted hold-out rights over the Special Savings Account (SSA) of LIDC amounting to P20 million deposited with the same bank. Note 6 - Inventories Inventories at December 31 consist of: Parent Parts and supplies In-transit Less allowance for obsolescence 2003 P330,909 177 331,086 17,079 P314,007 2002 P324,842 2 324,844 17,453 P307,391 Consolidated 2003 2002 P375,112 P374,714 212 15 375,324 374,729 18,453 18,826 P356,871 P355,903 17 LEPANTO CONSOLIDATED MINING COMPANY Note 7 - Prepayments and other current assets Prepayments and other current assets at December 31 consist of: Parent Note Prepaid expenses Minimum corporate income tax Others 8 2003 P 200,600 236 281 P 201,117 2002 P 477,421 184 1,970 P 479,575 Consolidated 2003 2002 P 201,226 P 477,819 1,648 956 12,239 13,207 P 215,113 P 491,982 Note 8 - Income taxes The components of deferred income tax assets at December 31 are as follows: Parent 2003 Current Allowance for doubtful accounts Allowance for inventory obsolescence Accrual of pension cost Past service cost Unrealized foreign exchange loss Net operating loss carryover (NOLCO) Unrealized foreign exchange gain Deferred income Less valuation allowance Non-current Accrual of pension cost Past service cost Excess of depletion per books over allowable depletion P 78 5,465 63,297 1,162 20,887 197,751 288,640 98,875 189,765 Consolidated 2003 2002 2002 P 78 5,585 47,499 1,162 78 219,267 273,669 94,687 178,982 P 1,549 5,904 63,297 1,162 20,887 198,520 1 ( 178 ) 291,142 98,875 192,267 P 774 6,001 47,499 1,162 98 219,648 ( 115 ) 275,067 94,687 180,380 5,810 6,876 7,108 1,085 6,876 32,565 38,375 P 228,140 8,819 15,695 P 194,677 32,565 39,673 P 231,940 8,819 16,780 P 197,160 The parent company has available NOLCO from its non-BOI registered activities of P617.9 million (2002 - P685.2 million). The 2001, 2002 and 2003 NOLCO amounting to P211.2, P93.4 and P313.4 million, respectively, will expire on years 2004 to 2006. During the year, the related deferred income tax assets on NOLCO of P380.6 million was written-off as its deductibility for income tax purposes prescribed during the year. The parent company, although in a tax loss position, paid the minimum corporate income tax (MCIT) amounting to P70 (2002 P33; 2001 - P133). MCIT, which is shown as part of prepayments and other current assets in the balance sheet (Note 7), and can be claimed as tax credit against normal income tax within the three immediately succeeding taxable years until 2006. In 2003, the provision for income tax-current of the parent company pertains to MCIT written-off amounting to P156. The details of the parent company’s MCIT follow: Year incurred 2003 2002 2001 18 Amount P 70 33 133 Year of expiration 2006 2005 2004 ANNUAL REPORT 2003 The reconciliation of the parent company’s benefit from deferred income tax for the years ended December 31 computed at the statutory tax rate to actual benefit shown in the statements of income follows: 2003 ( P 56,333 ) Statutory tax at 32% Addition (reduction) in income taxes resulting from tax effects of: Interest income subjected to final tax Interest expense limitation Tax exempt dividend income NOLCO written-off Share in results of subsidiaries and associates Changes in valuation allowance for NOLCO Income tax holiday Accelerated depletion MCIT written-off Actual tax benefit 2002 ( P 38,469 ) ( 71 ) 33 ( 8) 121,804 9,523 4,187 ( 52,391 ) ( 60,207 ) 156 P ( 33,307 ) ( ( 2001 42,393 P 227 ) 107 4) - ( ( 17,262 ( 47,233 ) ( 65,049 ) P ( 56,675 ) 781 ) 371 8) - 37,880 33,785 ( 76,532 ) ( 89,408 ) P ( 52,300 ) Note 9 - Investments The parent company’s investments at December 31 consist of the following: Share in results of operations Notes Investments: Lepanto Investment and Development Corporation Shipside, Incorporated Diamond Drilling Company of the Philippines Far Southeast Gold Resources Inc. (FSGRI) (a) Manila Mining Corporation (MMC) (b) Due from subsidiaries and associates Others investments % of Acquisition ownership Cost Beginning 100.00 100.00 100.00 60.00 20.15 5 10 P 31,000 P 58,960 P 3,308 35,252 12,000 11,978 363,448 108,788 163,085 2001 409 957 928 (120,670 ) 2002 P 1,103 P 1,112 415 ( 56,575 ) 2003 End Adjustment (Note 10) Carrying value 1,508 P 61,980 P P 1,453 38,774 (2,489) 435 13,756 ( 474 ) ( 474 ) ( 32,680 ) ( 46,840 ) - 92,980 39,593 25,756 362,974 61,948 P 518,544 P 269,275 P (118,376 ) P ( 53,945 ) P ( 29,758 ) P 67,196 P (2,489) P 583,251 570,710 63,355 Net carrying value of investments as of December 31, 2003 P1,217,316 Net carrying value of investments as of December 31, 2002 P1,189,806 (a) FSGRI is a joint venture organized by the parent company and Pacific Mining Ltd. primarily to engage in exploring and developing mining properties. Under a separate Mining Services Agreement, the parent company as manager of FSGRI is entitled to certain fees. Since FSGRI is still in the preoperating stage since 1988, the fees are not yet due. As a manager, the parent company has made advances to the project in the form of mining equipment and supplies, technical services and disbursements in behalf of FSGRI. Certain cash advances are convertible as additional equity in FSGRI to maintain the 60% ownership of the parent company (Note 5). (b) The parent company adopted the equity method of accounting for its investment in MMC in view of the significant influence it exercises over the financial and operating policy decisions of MMC through interlocking directorships. The parent company's share in the results of MMC is based on its direct 16.17% equity plus the 3.98% equity in MMC held by two wholly-owned subsidiaries. The parent company’s investment in MMC is carried in the accounts assuming that MMC will continue as a going concern. Retained earnings at December 31, 2003, 2002, and 2001 include the parent company's accumulated share in results of operations of subsidiaries and associate of P67.1 million, P96.9 million, and P150.9 million respectively. The amount cannot be declared as dividends until fully realized. 19 LEPANTO CONSOLIDATED MINING COMPANY Following are the financial information (in thousands) related to hauling, insurance and investment activities reported in the financial statements of the parent company’s subsidiaries: Investment activities Current assets Non-current assets Current liabilities Non-current liabilities Gross income Net income 2003 P 23,991 100,669 28,156 3,525 5,057 1,508 P 2002 21,826 137,786 26,154 41,986 3,579 1,103 P 2001 20,305 151,156 25,384 56,068 5,279 409 Hauling activities Current assets Non-current assets Current liabilities Gross income Net income 2003 P 62,018 29,491 47,856 50,097 1,453 P 2002 65,086 34,935 60,670 35,843 1,112 P 2001 74,074 49,125 86,317 57,507 957 Insurance activities Current assets Non-current assets Current liabilities Gross underwriting income Underwriting income Net income 2003 P 213,728 103,070 181,572 62,837 17,440 3,592 2002 P 224,561 98,946 193,582 59,949 18,068 1,618 2001 P 173,345 150,075 191,406 70,705 22,920 7,235 Note 10 - Other investments Other investments at December 31 consist of investments in shares of stock of : Parent 2003 Prime Orion Philippines, Inc. (formerly Guoco Holdings Philippines, Inc.) Others Less allowance for market decline P 417,197 94,256 511,453 448,098 P 63,355 2002 P 417,197 94,256 511,453 456,236 P 55,217 Consolidated 2003 2002 P 419,757 128,660 548,417 450,709 P 97,708 P 419,757 128,781 548,538 461,029 P 87,509 With a combined interest of 26.4% and by virtue of a pooling agreement, the parent company and Guoco Assets (Philippines), Inc. (Guoco), as shareholders, exercise significant influence over the policies and operations of Prime Orion Philippines, Inc. (POPI). Accordingly, up to December 31, 1998, the parent company accounted for its investment in POPI using the equity method. On January 4, 1999, the pooling agreement between the parent company and POPI was suspended. Consequently, the investment in POPI is accounted for using the cost method in 1999 and has been reclassified as “other investments” while the unpaid balance is shown as “stock subscriptions payable” in the balance sheets, respectively. The parent company provides an allowance for temporary and permanent market decline in its investment in shares of stock based on the quoted market prices of the investee-companies’ shares at balance sheet date. The unrealized loss in temporary decline in market value of these investments amounting to P400,747,032 (2002 - 410,945,581) is shown as a separate component in the statements of changes in stockholders’ equity. 20 ANNUAL REPORT 2003 Note 11 - Property, plant and equipment The major categories of property, plant and equipment of the parent company at December 31 are shown below: Plant Machinery, Equipment, Mine and office mining Buildings & furniture & property improvements fixtures Cost January 1, 2003 Additions/transfers Disposal/Retirement December 31, 2003 Accumulated depreciation and depletion January 1, 2003 Depreciation/depletion Disposal/Retirement December 31, 2003 P 4,396,364 P 162,420 P 1,817,195 477,242 2,869 206,583 ( 15,998) 4,873,606 165,289 2,007,780 688,432 265,830 954,262 124,968 8,454 133,422 1,195,053 222,656 ( 14,939) 1,402,770 Land P 28,342 28,342 Construction in Progress P 113,234 ( 90,572) 22,662 - - Total P 6,517,555 596,122 ( 15,998) 7,097,679 2,008,453 496,940 ( 14,939) 2,490,454 Net book value at December 31, 2003 P 3,919,344 P 31,867 P 605,010 P 28,342 P 22,662 P 4,607,225 Net book value at December 31, 2002 P 3,707,932 P 37,452 P 622,142 P 28,342 P 113,224 P 4,509,102 On the other hand, the consolidated property, plant and equipment of the LCMC Group at December 31 are as follows: Plant Machinery, Equipment, Mine and office mining Buildings & furniture & property improvements fixtures Cost January 1, 2003 Additions/transfers Disposal/Retirement December 31, 2003 Accumulated depreciation and depletion January 1, 2003 Depreciation/depletion Disposal/Retirement December 31, 2003 P 4,474,710 P 177,945 477,242 2,869 4,951,952 180,814 688,433 265,830 954,263 P 1,983,919 208,195 ( 17,281) 2,174,833 136,747 8,890 145,637 1,336,024 232,193 ( 16,261) 1,551,956 Land P 34,105 34,105 Construction in Progress P 113,366 ( 90,344) 23,022 - - Total P 6,784,045 597,962 ( 17,281 ) 7,364,726 2,161,204 506,913 ( 16,261 ) 2,651,856 Net book value at December 31, 2003 P 3,997,689 P 35,177 P 622,877 P 34,105 P 23,022 P 4,712,870 Net book value at December 31, 2002 P 3,786,277 P 41,198 P 647,895 P 34,105 P 113,366 P 4,622,841 Fully depreciated property and equipment that is still being used by the parent company and the LCMC Group has a total gross amount of P928,923 and P884,099 respectively. Property, plant and equipment with a carrying value of P502,286 are used as collateral to the parent company’s long-term debts (Note 15). 21 LEPANTO CONSOLIDATED MINING COMPANY Note 12 - Unrecovered exploration costs and other assets Unrecovered exploration costs and other assets at December 31 consist of: Parent Roaster plant Deferred charges Other assets Notes 1,22 2,15 22 2003 P 187,705 69,420 34,493 P 291,618 Consolidated 2002 P 187,430 168,326 33,598 P 389,354 2003 P 187,705 69,420 711,683 P 968,808 2002 187,430 168,326 711,828 P 1,067,584 P As mentioned in Note 2, the ASC issued SFAS 21/IAS 21 “The Effects of Changes in Foreign Exchange Rates” which shall be effective for financial statements covering periods beginning on or after January 1, 2005. SFAS 21/IAS 21 will eliminate the deferral of foreign exchange losses or, alternatively, will allow the amortization of any remaining deferred foreign exchange losses until December 31, 2004. It will also allow the capitalization of foreign exchange losses under very stringent conditions effective January 1, 2005 and will require that all previously capitalized foreign exchange losses that did not meet those conditions prior to January 1, 2005 be completely amortized by December 31, 2004. The parent company’s practice has been to defer foreign exchange losses from the restatement of its long-term foreign currency denominated liabilities. The amount of deferred foreign exchange losses included in the deferred charges account amounted to P65 million and P162 million as of December 31, 2003 and 2002, respectively. The parent company expects the amount to be fully amortized by December 31, 2004. There are no foreign exchange losses capitalized to property, plant and equipment. Note 13 - Trade payable and accrued expenses Trade payable and accrued expenses at December 31 consist of: Parent Notes Trade payable Liabilities for retirement benefit costs Trust receipts payable Accrued expenses and other liabilities Consolidated 2003 2002 P 274,533 P 235,578 2003 P 274,533 2002 P 235,579 197,805 93,554 148,435 102,328 201,865 93,554 151,826 102,328 169,988 P 735,880 152,287 P 638,629 72,826 P 642,778 55,502 P 545,234 2,19 Note 14 - Notes and loans payable The account consists of unsecured short-term loans from local banks to finance working capital requirements. The loans have various maturities within one year from the date of issuance and carry annual interest at prevailing market rate. Note 15 - Long-term debts and current portion thereof The parent company’s long-term debts at December 31 consist of: 2003 NM Rothschild & Sons (Australia) Ltd. and Dresdner Bank AG, US$4,250 (2002 - US$11,500) Others, including US$24,431 (2002 - US$25,935) Less current portion P 235,875 1,465,284 1,701,159 300,518 P 1,400,641 2002 P 612,421 1,381,155 1,993,576 441,129 P 1,552,447 In December 1998, the parent company entered into a Loan and Hedging Facilities Agreement with NM Rothschild & Sons (Australia) Ltd. and Dresdner Bank AG which provides for borrowings up to US$30 million and hedging facility up to 300,000 ounces of gold bullion or equivalent amount as may be agreed upon by both parties up to December 2002. The agreement is intended to finance the working capital requirements of Victoria Project (Note 1). The principal is payable semi-annually after a grace period of one year and the initial installment of US$3.75 million on June 30, 2000. The loan is secured by real and chattel mortgages of all the parent company’s present and future property, and its rights, title and interests under the Mineral Production Sharing Agreement with the Philippine Government in connection with its Victoria Project. Pursuant to the Deed of Amendment signed on November 22, 2000, the principal is payable semi-annually in the amount of US$5 million starting June 30, 2001 with the balance of US$15 million due in December 2002. The amendment also includes the option available to the parent company, which management exercised, to extend the repayment of a certain portion of the loan amounting to US$10 million up to December 2003, subject to certain conditions. In addition, the hedging facility was increased to 600,000 ounces of gold bullion or equivalent amount. 22 ANNUAL REPORT 2003 Under the terms of the covering loan agreement, the parent company may also draw the amount of repaid borrowings from time to time provided that these will not exceed the unused portion of the loan facility. The loan agreement contains certain covenants which include, among others, maintenance of certain financial and project ratios such as debt service, loan life, total liabilities to net worth and current ratios; prohibition from incurring additional long-term indebtedness; limitation on certain advances or loans; and restrictions as to substantial assets sales, capital expenditures and cash dividends On December 18, 2002, the parties further amended the loan agreement and the significant provisions of this amendment are the decrease in borrowings and hedging facilities to $13.5 million and 300,000 ounces of gold bullion or equivalent amount, respectively. This deed of amendment also provides for the extension of the loan agreement up to September 30, 2007. Other long-term debts consist of various unsecured foreign currency denominated loans from foreign suppliers for the importation of various mining equipment. Importations were made through existing letters of credit lines maintained with certain local banks. These loans are payable upon maturity on various dates in the years 2004 and 2005. The above loans carry certain interest rates above LIBOR ranging from 2.5 to 4%. Interest expense, on the above loans, during the year of the parent company amounted to P25,945 (2002 - P42,766; 2001 P110,912). Non-cash financing activities of the parent company related to deferral of foreign exchange losses arising from translation of foreign currency denominated monetary liabilities amounted to Pnil (2002 - P54,374; 2001 - P46,097) (Notes 2 and 12). Note 16 - Minority interest Minority interest represents third parties' interests in Diamant Boart Philippines, Inc. and FSGRI. Note 17 - Stockholders’ equity On September 14, 2000, the SEC approved the parent company’s application to increase its authorized capital stock from P1.7 billion to P3.35 billion divided into 33.5 billion shares at P0.10 par value each consisting of 20.1 billion Class "A" and 13.4 billion Class "B" common shares. Only Philippine nationals are qualified to acquire, own, or hold Class "A" shares. The total number of Class "B" shares of stock subscribed, issued, or outstanding at any time shall in no case exceed four/sixth (4/6) of the number of Class "A" shares or 40% of the aggregate number of Class "A" and Class "B" shares then subscribed, issued, or outstanding. The details of the parent company's subscribed, issued and outstanding capital stock at December 31, 2003 and 2002 are shown below: Issued Class "A" Class "B" Subscribed Class "A" Class "B" Total shares issued and subscribed Less subscriptions receivable No. of shares Amount 12,779,909,036 8,524,268,540 21,304,177,576 P 1,277,991 852,427 2,130,418 14,109,808 5,072,371 19,182,179 21,323,359,755 1,411 507 1,918 2,132,336 851 P 2,131,485 Note 18 - Earnings (loss) per share The table below shows the summary of net income (loss) and weighted average number of common shares outstanding for the years ended December 31, as restated for the 25% stock dividends declared on April 17, 2000, which was used in the calculation of earnings per share: Notes Net income (loss) as shown in the statement of income Weighted average common shares - basic and diluted 2003 P ( 142,735 ) 2 21,323,359,755 2002 2001 P 176,890 P 184,776 21,323,359,755 21,239,978,505 The basic and diluted earnings (loss) per share are the same for the years presented as there are no dilutive stock options (Note 23). 23 LEPANTO CONSOLIDATED MINING COMPANY Note 19 - Retirement plan The parent company maintains a funded non-contributory retirement benefit pension plan (the Plan) covering the retirement and disability of all of its permanent employees. It specifies a normal retirement at age 60 and at least twelve (12) years of credited service. It also provides for optional or early retirement, with the consent of the parent company, at the age of 55 and completion of at least 12 years of credited service. The annual pension cost was determined using the “Projected Unit Credit” (PUC) method. The PUC method measures each year of service as giving rise to an additional unit of pension entitlement and values each unit separately to build up a total retirement benefit obligation. The actuarial present value of the retirement benefit obligation is measured in terms of actuarial assumptions for discount rate, mortality, disability and salary projection rates. Return on plan assets and salary increase rate were determined at 12% and 9% yearly, respectively. Actuarial valuation is updated by an independent actuary once every two years. Based on the latest actuarial valuation made by the Company’s actuary as of July 1, 2002, the fair value of plan assets amounted to P199,080 while the estimated actuarial accrued liability is P427,458. Retirement benefit costs for the year ended December 31, 2003 amounted to P55,001 (2002 - P27,501; 2001 - P38,751). Note 20 - Costs and expenses Costs and expenses for the years ended December 31 are as follows: Parent company Mining, milling, smelting, refining and other related charges Depreciation and depletion Changes in inventory of copper concentrates Administration, overhead and other charges Notes Consolidated Mining, milling, smelting, refining and other related charges Depreciation and depletion Changes in inventory of copper concentrates Administration, overhead and other charges Notes 2003 P 11 626,199 496,940 - 493,151 P 1,616,290 2002 P 372,147 P 1,452,343 2003 P 11 685,231 506,913 - 456,618 P 1,648,762 633,309 438,771 8,116 2001 P 382,019 P 1,674,489 2002 P 659,863 450,492 8,116 375,419 P 1,493,890 872,212 397,107 23,151 2001 P 914,535 416,202 23,151 401,772 P 1,755,660 The significant components of administration, overhead and other charges include salaries and wages and employee benefits, representation and entertainment, travel and transportation, office expenses and professional fees. Note 21 - Finance costs Finance costs for the years ended December 31 are as follows: 24 Parent company Interest expense Interest income Unrealized foreign exchange losses Other finance costs Notes 2,14,15 Consolidated Interest expense Interest income Unrealized foreign exchange losses Other finance costs Notes 2,14,15 24 24 2003 135,734 ( 221 ) 65,270 158,172 P 358,955 2002 123,347 ( 709 ) 244 107,426 P 230,308 2001 P 216,777 ( 2,440 ) 918 245,184 P 460,439 2003 P 136,126 ( 230 ) 65,273 161,464 P 362,633 2002 P 124,249 ( 726 ) 306 107,592 P 231,421 2001 P 220,312 ( 2,474 ) 918 247,006 P 465,762 P P ANNUAL REPORT 2003 Note 22 - Commitments, agreements and contingent liabilities; unused credit lines a) In an agreement entered into with PASAR on April 21, 1983, the parent company committed to deliver to PASAR and PASAR committed to take in a minimum quantity of its calcine production from its roaster plant in accordance with the pricing and payment terms defined in the agreement. The agreement is for an indefinite period unless otherwise terminated or cancelled pursuant to agreed terms or by the parties' mutual consent. In 1998, the agreement was suspended for an indefinite period in view of the temporary cessation of the parent company’s roaster plant operations. b) On March 3, 1990, FSGRI entered into a Mineral Production Sharing Agreement with the Philippine Government through the Department of Environment and Natural Resources (DENR) and the parent company pursuant to Executive Order No. 279. Under the terms of the agreement, FSGRI shall pay the Philippine Government a production share of 2% on gross mining revenues and 10% on net mining revenues payable within 30 days at the end of each calendar year and such will commence upon the start of FSGRI’s commercial operations. The initial term of this agreement shall be twenty-five (25) contract years from the effective date, subject to termination as provided in the agreement, renewable for another period of twenty-five (25) years upon such terms and conditions as may be mutually agreed upon by the parties or as may be provided for by law. c) Under a memorandum of agreement entered into on October 18, 1991 among residents of various barangays of Mankayan, Benguet, the municipal government of Mankayan, the Benguet provincial government, the DENR, and the parent company and a subsidiary (collectively as the company), the company, among other things, is mandated to abide by certain commitments to the barangays as contained in the said agreement in return for the continued implementation of the Far Southeast Project. The agreement likewise provides that (1) the implementation of the project is subject to the conditions imposed or may be imposed by the DENR specifically on certain environmental concerns; and (2) the residents shall not hinder the implementation of the project and shall assist the company and the DENR in the peaceful solution of conflicts relative to the company's operations. In April 1998, the parent company entered into a separate memorandum of agreement with the Office of Municipal Mayor and Sangguniang Bayan of Mankayan, DENR and Mine and Geoscience Bureau. Under the agreement, the parent company is mandated to establish and maintain a Monitoring Trust Fund and a Mine Rehabilitation Fund (MRF) amounting to P50 and P5 million, respectively. The funds are to be used for physical and social rehabilitation, reforestation and restoration of areas and communities affected by mining activities, for pollution control, slope stabilization and integrated community development. The rehabilitation fund to be maintained by the parent company in a mutually acceptable bank, subject to annual review of MRF committee, is payable in four (4) equal quarterly payment of P1,250 up to March 1999. As of December 31, 2003, the rehabilitation fund of P4.9 million (2002 - P5.5 million) is included in unrecovered exploration costs and other assets account in the balance sheet. d) The parent company is either a defendant or co-defendant in certain civil, administrative and labor cases which are now pending before the courts and other government bodies. In the opinion of management, any adverse decision on these cases would not materially affect the parent company's financial position and results of operations for the year ended December 31, 2003. e) The parent company leases the land where its roasting plant is constructed, and certain equipment, office spaces and warehouses at various periods up to January 1, 2009 with future annual rentals of P1.1 million. f) As of December 31, 2003, the parent company has unused credit lines with various banks amounting to P145.6 million (2002 - P228 million). These facilities can be availed of through short-term loans, opening of import letters of credit and outright purchase of negotiable bills. Note 23 - Stock option plan Under the parent company’s stock option plan, the officers and employees of the parent company and those of its subsidiaries may be granted options to purchase its shares of stock. The aggregate number of shares to be granted under the plan should not exceed 5% of the total number of shares of the parent company's outstanding capital stock. The option price is the average closing price of the stock for the ten (10) trading days following the approval of the grant by the SEC. An individual may be granted an option to purchase not more than 5% of the total number of shares set aside at the date of grant and may exercise the option up to a maximum of 20% of total number of option shares granted per year. Options are valid for five (5) years and are exercisable from the date of approval of the grant by the SEC. The last stock option award (16th award) given by the parent company expired on August 31, 2001. The parent company has no outstanding unexercised options nor stock options activities as of and for the years ended December 31, 2003 and 2002 (Note 2). Note 24 - Foreign currency denominated monetary assets and liabilities As of December 31, 2003, the parent company and LCMC Group had US dollar denominated current assets of $1,023 and $1,023, respectively (2002 - $1,362 and $1,365) current liabilities of $6,647 and $6,647 (2002 - $10,290 and $10,290) and longterm liabilities of $23,267 and $23,267 (2002 - $29,152 and $29,152). The net foreign currency denominated liabilities as of December 31, 2003 amounted to $28,890 and $28,891 (2002 - $38,080 and $38,077), equivalent to P1,603 and P1,603 (2002 - P2,028 and P2,028). At December 31, 2003 and 2002, the exchange rates were P55.50 per US$1 and P53.254 per US$1, respectively. Unrealized foreign exchange losses charged against income of the parent company and LCMC Group for the year ended December 31, 2003 amounted to P65,270 and P65,273, respectively, (2002 - P244 and 306; 2001 - P918 and P918) shown as part of finance costs in the statements of income. Exchange rate as of March 15, 2004 is P56.30 per US$1. Note 25 - Approval of financial statements The financial statements were approved and authorized for issue by the parent company’s Board of Directors on March 15, 2004. 25 LEPANTO CONSOLIDATED MINING COMPANY 2003 BOARD OF DIRECTORS BRYAN U. YAP FELIPE U. YAP Chairman and Chief Executive Officer Chairman and Chief Executive Officer, Manila Mining Corporation; Far Southeast Gold Resources, Inc.; Chairman of the Board, Prime Orion Philippines, Inc.; Pepsi Cola Products Philippines, Inc.; Director, Cyber Bay Corporation; Philippine Associated Smelting and Refining Corporation. 26 President and Chief Operating Officer Director and Vice president, Manila Mining Corporation; Director and President, Lepanto Investment and Development Corporation, Shipside, Inc., Diamant Boart Philippines, Inc. EDUARDO R. ALVAREZ ARTEMIO F. DISINI JOHN D. FAIRFIELD Director President and Chief Executive Officer, ORIX METRO Leasing and Finance Corporation Director Director, Manila Mining Corporation; Chairman, Chamber of Mines of the Philippines Director Consultant, Rio Tinto ANNUAL REPORT 2003 CIELITO F. HABITO Director Director, Metropolitan Bank and Trust Company, Ateneo Center for Economic Research and Development; Professor of Economics, Ateneo de Manila University WILFRIDO C. TECSON Director Director, J.G. Summit Inc., Robinsons Land Inc., International Exchange Bank; Trustee, Asian Institute of Management, Far Eastern University; Chairman Emeritus, Far Eastern University-IABF; Chairman, Far Eastern University Alumni Foundation THERESITA O. TURLA CRESENCIO C. YAP ETHELWOLDO E. FERNANDEZ Director Director, ORIX METRO Leasing and Finance Corporation Director Chairman. Rural Bank of Tagum; General Manager, Felcris Supermarket; Central Warehouse Club Corporate Secretary Corporate Secretary, Manila Mining Corporation; Oriental Petroleum and Minerals Corporation 27 LEPANTO CONSOLIDATED MINING COMPANY CORPORATE OFFICERS AND OPERATING STAFF CORPORATE OFFICERS FELIPE U. YAP Chairman of the Board and Chief Executive Officer CHERRY H. TAN Purchasing Manager REYNALDO R. FLORES Ventilation Superintendent LEPANTO ROASTER DIVISION BRYAN U. YAP President and Chief Operating Officer JOSE RAULITO E. PARAS Manager for Legal Services and Government Affairs GERARD P. CALPO Chief Mining Engineer EDMUND F. PACIO Officer-in-Charge AUGUSTO C. VILLALUNA Senior Vice-President and Resident Manager. RONALD REX S. RECIDORO Assistant Manager for Legal Services and Government Affairs GILBERTO G. SALAZAR Senior Mining Engineer SUBSIDIARIES/ AFFILIATES MA. LOURDES B. TUASON Vice-President and Treasurer LEPANTO MINE DIVISION DOMINADOR R. SISON, JR. Mine Information Management Officer AUGUSTO C. VILLALUNA Resident Manager DENNIS G. FRANCISCO Chief Geologist ERNESTO B. LAOAGAN Assistant Resident Manager LIMUEL A. RAFOLS Mill Superintendent ROLANDO C. OCUMEN Mine Manager FLORA D. BARTOLOME Chief Metallurgist EFREN A. LANIP Mill Manager MURPHY M. MALIS Mill Maintenance Superintendent LEPANTO INVESTMENT AND DEVELOPMENT CORPORATION NELSON B. VARILLA Finance Manager RODOLFO B. BRIOSOS (Col. Ret.) Security Superintendent BRYAN U. YAP President RENE F. CHANYUNGCO Vice-President for Marketing and Purchasing * ABIGAIL K. YAP Vice-President for Planning and Technology VIRGILIO G. MEDINA Vice-President for Project Development CHARLES L. BRADISH Vice-President ETHELWOLDO E. FERNANDEZ Corporate Secretary ODETTE A. JAVIER Assistant Corporate Secretary OPERATING STAFF EDGAR V. ARELLANO Metallurgical Services Manager FLORENDO F. FAJILAN Acting Administrative Services and Personnel Manager VICTORINO Z. NANA, JR. Acting Technical Services Group Manager MAKATI HEAD OFFICE MARIO L. LAVENTE Financial Controller ANTONIO S. CIELO Chief Accountant DANILO G. MARTIN Assistant Chief Accountant FELIPE N. SAYAMAN Aviation Department Head and Chief Pilot WILFREDO V. ISULAT Audit Manager FROILAN C. CONDE Exploration Manager JOSE A. LEE Manager, Operations Maintenance and Services Group GERMIDAS E. LASPIÑAS Mill General Superintendent JOHN C. FOMANEG Mine Services Superintendent JAKE G. FORONDA Environment and Project Development Manager MERVIN L. BALAGOT Mine Superintendent JOEY S. GARCIA JR. Chief Geologist ARTEMIO S. ANONGOS Mine Superintendent CRISANTO O. MARTINEZ Human Resource, Training and Administration Manager ALEJANDRO T. LOMIBAO, JR. Mine Superintendent PABLO T. AYSON, JR. Manager, Mining Claims Department 28 RAMON P. LEE Acting Safety, Environment and Social Development Manager NAPOLEON B. ROSITO Mine Mechanical and Electrical Superintendent FABIAN S. TOLETE, JR. Medical Superintendent MARK MARANES Manager for Legal Services and Government Affairs JESUS A. CASTILLO Environment Superintendent EFREN R. BUADA, JR. Chief Project Engineer ROGELIO P. GANABAN Mechanical/Transport Superintendent DANIEL R. JAVIER Civil Engineering Services Superintendent RUBEN C. ADRIANO Chief Foundry and Mechanical Workshop Superintendent RODOLFO M. LOMADILLA Power and Electrical Superintendent RICARDO A. TAMAYO Inventory Management Department Superintendent DIAMOND DRILLING CORPORATION OF THE PHILIPPINES CHARLES L. BRADISH Senior Vice-President MARIO L. LAVENTE Financial Controller SHIPSIDE, INCORPORATED BRYAN U. YAP President LORENZO D. BALBIN, JR. Resident Manager DIAMANT BOART PHILIPPINES, INC. BRYAN U. YAP President ALBERT M. MARAÑA General Manager FAR SOUTHEAST GOLD RESOURCES, INC. FELIPE U. YAP Chairman of the Board * Chief Financial Officer effective Feb 16, 2004