MarconaPeru Marcona Mining Company ("Marcona Mining"), a wholly owned subsidiary of Marcona, had been mining iron ore in Peru since 1953 when it was formed by Utah and Cyprus Mines Corporation to develop and mine an extensive ore deposit located 250 miles south of Lima, Peru. On July 25, 1975, the Peruvian government expropriated the mining properties and facilities of Marcona Mining. As a result of the expropriation and in view of the uncertainties regarding any compensation for these assets, Marcona wrote off the net book value of its investment in the Peruvian properties in the amount of approximately $52.5 million after related income tax credits of $30.7 million. Negotiations between U.S. and Peruvian government representatives resulted in an intergovernmental agreement being reached on September 23, 1976. The agreement provides for a $37 million payment to Marcona in the form of an interest bearing promissory note to be paid from the proceeds of international financing being negotiated by the Peruvian government. In addition, the agreement provides for a quantity of iron ore pellets to be purchased by Marcona under a separate agreement for resale in the United States over a four year period and a contract of affreightment covering the transportation of Peruvian ore previously entered into on December 11, 1975 and extending to March 31, 1977such items have been valued by the Peruvian government at $24 million. Marcona does not confirm the Peruvian government's valuation, however, because there is no assurance that the iron ore pellets will be marketed profitably over the four year period or that profits will be realized on the contract of affreightment. Marcona has confirmed its acceptance of this agreement, when carried out, as full settlement of its claims against Peru arising out of the expropriation. The agreement also relieves Marcona of any liabilities for the payment of taxes or other obligations to the Peruvian government. MarconaNew Zealand In 1970 Marcona, through its wholly owned subsidiary Marcona (N.Z.) Company ("Marcona N.Z."), was granted a license to produce iron sand concentrate from extensive iron sand deposits on the west coast of New Zealand. Marcona N.Z. has a 75% interest in the project, the remaining 25% being held by a New Zealand firm. Production capacity after a recently completed expansion project is expected to increase to approximately 2 million dry long tons of iron concentrate annually. Marcona N.Z. and its New Zealand associate initially contracted to ship 11 million dry long tons of concentrate over a ten-year period to a group of seven Japanese firms. A total of 5.05 million dry long tons was shipped under this contract through June 30, 1976, including 1.0 million dry long tons in 1975 and 650,000 dry long tons during the six months ended June 30, 1976. Contract amendments were negotiated in 1975 increasing the total tonnage to be shipped from 1976 through 1981 to 9.8 million dry long tons. The license was initially granted to 1981 and is renewable for two additional terms, the first through 1986, the second through 1996. Reserves in the area covered by the present mining license at December 31, 1975, as estimated by Marcona N.Z.'s engineers, are approximately 150 million dry long tons of crude iron sands averaging approximately 9.2% recoverable iron content. Such reserves are estimated to be adequate to yield approximately 25 million dry long tons of concentrate at 56% iron content. Utah has made no independent verification of such reserves. Marcona's auditors are Price Waterhouse & Co. Ocean Shipping Marcona Marcona, through wholly owned subsidiaries, is engaged in ocean transport of ore, oil and other bulk commodities. At December 31, 1975 Marcona owned twelve vessels, totaling more than 1,160,000 deadweight tons, and had under charter additional ships aggregating approximately 650,000 deadweight tons. In early 1976, Marcona sold the stock of subsidiaries owning three vessels and two additional vessels were scrapped. Of the seven remaining owned vessels, aggregating more than 660,000 deadweight tons, two have been laid up indefinitely until the shipping market permits profitable redeployment. Vessels currently under charter aggregate approximately 700,000 deadweight tons. 58 The overall profitability of Marcona's shipping operations is affected by fluctuations in worldwide demand for bulk carriers and spot charter rates. In the months prior to the expropriation of the iron ore mining properties and facilities in Peru, approximately 60% of Marcona's shipping capacity was employed in the transport of ore from the Peruvian mine, providing flexibility in the utilization of its vessels and a consistent source of shipping income. The suddenness of the expropriation act and the generally depressed shipping market resulted in the idling of a substantial portion of Marcona's fleet and placed Marcona in a loss position. Consequently, Marcona classified a portion of its 1975 shipping losses as being directly related to the expropriation. Marcona has entered into a contract of affreightment with Compania Peruana de Vapores (an agency of the Peruvian government) for the transportation of all iron ore shipped from the former Marcona Mining properties in Peru to Marcona's traditional customers between December 1 1, 1975 and March 31, 1977. It is anticipated that Marcona will transport approximately 3.5 million tons under this contract of affreightment of which it has transported approximately 1,075,000 tons through June 30, 1976. The volume of Marcona's ocean shipping activity for the five years ended December 31, 1975 and the six months ended June 30, 1976 is summarized below: _Billions of Ton-Miles_ Calendar Year Peru Ore Other Total 1971 ..................................................... 73.7 61.4 135.1 1972..................................................... 72.8 54.7 127.5 1973..................................................... 68.9 54.2 123.1 1974..................................................... 73.9 48.0 121.9 1975..................................................... 48.5(a) 52.4 100.9 1976 (six months)............................... 9.4 16.1 25.5 (a) Shipments ceased upon expropriation of Peruvian mining assets on July 25, 1975 and resumed on a limited basis in 1976 pursuant to the contract of affreightment with Compania Peruana de Vapores as discussed above. Utah Utah Shippers Inc. (a wholly owned subsidiary of UDC) and MJ Shipping Corporation (jointly owned by Mitsubishi Corporation and Japan Line) own equal shares of Orco Shipping Corporation, a Liberian company. In 1973 contracts were signed with Japanese shipbuilders for the construction of two 127,000 deadweight ton dry bulk carriers for two Liberian ship-owning companies in which the ownership is identical to that of Oreo Shipping Corporation. The vessels are wholly financed by the Industrial Bank of Japan. The first of these vessels was delivered in January 1976 and the second was delivered in August 1976. Oreo Shipping Corporation, which Utah Shippers Inc. manages, will use these vessels to transport Queensland coal to European markets and iron ore from the Atlantic basin to Japan. Utah Transport Inc. ("UTI"), a wholly owned subsidiary of Utah, was formed in 1976 to own and operate vessels to be employed in the Samarco iron ore and Queensland coal trades. UTI also conducts other shipping activities, including chartering operations for UDC and Utah. The first vessel in a used vessel acquisition program was purchased by UTI in June 1976. To date, two combination carriers of 153,300 and 101,800 deadweight tons have been purchased, and conditional agreement has been reached to purchase two additional vessels: one, a 118,200 deadweight ton dry bulk carrier, and the other, a 142,800 deadweight ton combination carrier. Oil and Gas All of Utah's oil and gas activities are conducted through a wholly owned subsidiary, Ladd Petroleum Corporation, acquired in November 1973 which, together with its subsidiaries, is referred to as "Ladd" herein. During 1974, three other oil and gas companies, LVO Corporation, Clarcan Petroleum Corporation and Allen Oil Company, were also acquired. Ladd is engaged in the acquisition, exploration, development and operation of oil and gas properties. Ladd also explores, develops and operates oil and 59