Under an agreement with Utah, the original owner of certain of the claims on which the Island Copper mine is located retains a royalty measured by net profits. Pursuant to its terms, he has a right to receive 10% of the net profits realized by Utah from operations of the Island Copper mine, increasing to 25% at such time as Utah has recovered from its share of the net profits all of its preproduction expenses. See "Pending Legal ProceedingsIsland Copper Mine, Canada." The Mineral Royalty Act adopted in British Columbia in 1974 provided for a two-part levy on mineral productiona basic royalty of 5% of the net smelter returns applicable to copper, gold, silver and molybdenum and an additional royalty of one-half the difference between the net smelter returns and 120% of a basic value set by the British Columbia government. In June 1976, the British Columbia Provincial Legislature abolished the additional royalty effective April 1, 1976 and the basic royalty effective January 1, 1977. In place of these royalties, the new Mineral Resource Tax Act imposes a tax of up to 17.5% on net income from mining operations earned after November 1, 1976. The new 17.5% tax represents a 2.5% increase over the rate which was in effect under the previously applicable Mining Tax Act. These changes are expected to have a favorable impact on future earnings. Cyprus Pima MineUnited States Utah owns approximately 25% of the outstanding stock of Cyprus Pima Mining Company ("Cyprus Pima") which is engaged in mining, by open-pit method, a copper deposit located approximately 25 miles south of Tucson, Arizona. The remaining outstanding stock of Cyprus Pima is owned by Cyprus Mines Corporation (50.01%) and Union Oil Company of California (25%). Cyprus Pima's mining properties consist of 34 patented royalty-free mining claims on United States government land and two mining leases from the State of Arizona. The two mining leases expire in 1990 and 1991. Each of the leases calls for a royalty of 5% of the net value of the minerals produced from the leased lands. Approximately 57% of Cyprus Pima's proven ore reserves are in lands covered by the patented mining claims, and the remaining 43% of such reserves are within the lease areas. According to the estimate of Cyprus Pima's staff engineers, its reserves of ore (all of which were in the proven category as of December 31, 1975) which could be mined and processed commercially at current copper prices and operating costs, totaled 181 million tons of ore averaging .49% copper content. Utah has made no independent verification of such reserves. Mine operations for the five years ended December 31, 1975 and the six months ended June 30, 1976 are summarized as follows: (in thousands except copper grade) Six Months Ended 1971 1972 1973 1974 1975 June 30, 1976 Production Tons ore milled............................... 14,617 18,698 20,321 20,018 19,631 9,775 Grade % of copper..........................537 .525 .513 .504 .476 .446 Products obtained: Copper concentrates (pounds of marketable copper contained)................................. 129,083 158,935 169,194 163,777 148,426 70,679 Molybdenum concentrates (pounds of molybdenum contained)........................... 1,429 1,021 1,876 1,735 1,814 1,335 Silver ounces........................... 675 908 863 840 817 378 Sales Statistics Volume sold: Copper pounds....................... 128,513 151,034 166,192 149,418 172,758 77,626 Molybdenum pounds............. 1,173 243 2,279 2,203 1,537 1,796 Silver ounces........................... 778 814 898 790 920 365 The ore mined from the deposit is processed in Cyprus Pima's mill (located at the mine site) by the flotation method and, by such processing, is reduced to copper concentrate with molybdenum concentrate as a by-product. Cyprus Pima's latest expansion program, which became operational in February 1972 at 54 a cost of approximately $17 million, increased the milling capacity from 39,500 tons to approximately 53,500 tons per day. Copper concentrates are shipped to two Arizona smelters owned by other companies for smelting and refining under long-term contracts. Cyprus Pima understands that the Environmental Protection Agency has requested the company owning one of these smelters to make substantial expenditures for emissions controls on the smelter. If such company should shut down its smelter, Cyprus Pima would be required to make alternative smelting arrangements for approximately 75% of its copper production. In such event, there is no assurance that acceptable alternative smelting arrangements could be made, and if such arrangements could not be effected, then the production at Cyprus Pima mine would be suspended indefinitely. About 65% of the refined copper and the silver are returned to Cyprus Pima for sale through normal channels while the balance of the copper is sold to one of the smelters and the balance of the silver to the other smelter. Concentrates containing molybdenum are sold in the open market by Cyprus Pima. On June 30, 1976, Cyprus Pima had 1,081 employees. All non-supervisory and non-clerical employees are represented for purposes of collective bargaining by a group of four labor unions. Cyprus Pima's contracts with such unions terminate on August 31, 1977. Relations with employees have been consistently satisfactory, and no work stoppage has been suffered since operations commenced in 1957. There are presently pending three separate suits related to the source of water heretofore utilized by Cyprus Pima in connection with its mine operations. See "Pending Legal ProceedingsCyprus Pima Mining Company, Arizona." Cyprus Pima's auditors are Coopers & Lybrand. Iron Ore Cedar City MineUnited States Iron ore operations in the United States are conducted by the processing and upgrading of ore from open pit mining and alluvial (low grade) deposits near Cedar City, Utah. Substantially all iron ore produced has been delivered under sales contracts to United States Steel Corporation's Geneva Works steel mill located near Provo, Utah. The current contract is scheduled to expire in 1981. The degree to which the remaining deposit will be mined is not known at this time. Production and shipments during the five fiscal years ended October 31, 1975 and the nine months ended July 31, 1976 were as follows: Tons Mined Grade (% Iron Content) Low Alluvium Low Alluvium Total Concentrate Grade Field Grade Field Shipped Fiscal Year Pit Run Low Grade Stock-pile Alluvium Field Concentrate Pit Run Low Grade Stock-pile Alluvium Field Concentrate 1971 ................... 244,289 617,793 303,235 40.0 29.3 48.5 527,615 58.4 1972................... 374,221 476,036 342,416 41.8 30.9 48.8 522,399 58.5 1973................... 403,519 338,515 174,314 43.7 29.7 46.4 579,956 58.5 1974................... 351,408 322,138 125,456 43.6 31.3 47.8 555,223 58.0 1975 ................... 183,607 300,535 160,188 44.1 30.2 45.6 430,877 58.3 1976 (nine months)......... 119,430 222,920 116,418 41.1 36.7 45.7 164,236 59.1 Reserves of iron ore at October 31, 1975 were: Tons of Ore Required Grade Per Ton of (%Iron Tons Concentrate Content) Pit Run................................................... 3,427,000 1.76 37.8 Alluvium................................................. 10,569,000 14.23 8.7 These reserve quantities were adjusted during 1975 to reflect current drilling information and economic conditions. 55