MARCONA CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Note 2Extraordinary item(Continued): (b) Event (unaudited) subsequent to date of accountants' February 13, 1976 report 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 (see Note 3) and extending to March 31, 1977. 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. Note 3Ocean transportation operations: During 1975, Marcona, through wholly-owned subsidiaries, engaged in ocean transportation of iron ore, oil and other bulk commodities through the operation of 12 owned vessels totalling approximately 1,160,000 deadweight tons and 8 time chartered vessels (at December 31, 1975) aggregating approximately 650,000 deadweight tons. Four of the owned vessels were fully employed in New Zealand iron sands and aragonite transportation. Prior to the Peruvian expropriation described in Note 2, the balance of the owned and time chartered fleet was wholly or partially committed to the transportation of Peruvian iron ore. The discontinuance of Peruvian iron ore shipments occurred during a time of a depressed worldwide shipping market and created significant excess capacity in Marcona's owned and time chartered fleet, resulting in shipping losses in the last half of 1975. At December 31, 1975, Marcona has agreed to sell to an outside party in early 1976 all of the capital stock of three subsidiary companies, the only assets of which are three vessels, and, subject to obtaining certain consents, to assign its interest in an oil contract of affreightment. The agreement provides for total payments to Marcona of approximately $32,000,000 less the outstanding amounts due on the related vessel mortgage loans. Of the total payments, $5,000,000 has been received as a deposit in 1975 and the balance is to be received in cash and a short-term promissory note at closing. Completion of the transaction will result in the recognition of a gain of approximately $6,800,000. At December 31, 1975, the net book value of the vessels, related assets, the deposit and the outstanding amounts due on the vessel mortgage loans have been classified as current assets and liabilities. Marcona also presently contemplates the lay-up of two vessels at an estimated cost during 1976 of approximately $100,000 each per month and the possible sale or scrapping of two vessels (one of which has been employed in New Zealand iron sands transportation) having a net book value at December 31, 1975 of $4,631,000 at an estimated loss, if scrapped, of approximately $2,200,000. Three of the time chartered vessels were redelivered at expiration of their charters in early 1976. As of December 31, 1975, there continues to be excess capacity in the owned and time chartered fleet which is expected in the aggregate to incur ongoing losses in addition to those potential losses from lay-up and disposition of vessels referred to above. However, on December 11, 1975, Marcona entered into a contract of affreightment with Compania Peruana de Vapores, the Peruvian government shipping entity, under which Marcona has the right of first refusal through 1976 to transport Peruvian ore to its traditional receivers. The extent to which vessels will be employed under this contract is dependent upon the ability of the Peruvian government agency to market the iron ore. Vessel charters vary from single voyage to multi-year time charters. During the years ended December 31, 1971, 1972, 1973, 1974 and 1975 time charter costs totalling $24,500,000, $20,300,000, $20,500,000, $18,800,000 and $19,100,000 (net of charter-hire revenues relating to non-owned vessels of $2,800,000 in 1973, $5,300,000 in 1974 and $4,400,000 in 1975), respectively, were charged to expense. F-52 MARCONA CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Note 3Ocean transportation operations(Continued): At December 31, 1975 aggregate commitments for time chartered vessels were $52,506,000, payable in decreasing annual amounts to 1983 as follows: 1976$15,638,000; 1977$7,554,000; 1978$5,620,000; 1979$4,988,000; 1980$4,988,000; and 1981-1983$13,718,000. In addition, depending upon the ability to employ the vessels in Peruvian ore transportation, Marcona has tentatively agreed to recharter, during 1976, two vessels previously redelivered to the owners following the expropriation. Finalization of this agreement would increase the charter hire commitment for 1976 by approximately $4,000,000. Note 4Brazilian project and agreement with Utah International Inc.: (a) During 1974, Marcona entered into an agreement with a Brazilian firm, S.A. Mineracao da Trindade ("SAMITRI"), to develop a large iron ore deposit in the state of Minas Gerais, Brazil. A new Brazilian company, Samarco Mineracao S.A. ("SAMARCO") was formed to undertake the project. SAMARCO is owned 51% by SAMITRI and 49% by Marcona International, S.A. Initial plant construction has commenced and is expected to be completed in 1977. The project is expected to require initial capital expenditures of approximately $560,000,000, financed in part by debt of approximately $294,000,000 under long-term project loan agreements. Marcona and SAMITRI would be committed to provide 49% and 51%, respectively, of the balance of the total cost. At December 31, 1975, SAMARCO has borrowed $51,000,000. Marcona has made investments in and advances to SAMARCO and made reimbursable expenditures on behalf of SAMARCO as follows (in thousands): Investment at equity in net assets of SAMARCO.................................... $21,545 Predevelopment costs............................................................................... 1,458 Advances and reimbursable expenditures............................................... 41,018 $64,021 The long-term debt of SAMARCO is jointly and severally guaranteed by Marcona and SAMITRI during the construction period and thereafter until certain operating conditions are met. In 1975, Marcona entered into an agreement with Utah International Inc. under which it is provided that a subsidiary of Utah will acquire during 1976 Marcona's 49% interest in SAMARCO. The sale will be at book value of Marcona's investments and advances at the closing date and Marcona will receive reimbursement for designated expenditures ($19,904,000 at December 31, 1975) and the balance in long-term debentures which are expected to be redeemed in installments beginning in 1977. To finance expenditures related to this project, Utah has made advances to Marcona ($18,393,000 at December 31, 1975) which will be repaid upon closing. Project loan borrowings subsequent to the date of the agreement have been guaranteed by Utah. Utah, in succeeding to Marcona's interest in the project, will guarantee the repayment of all amounts borrowed under the SAMARCO agreements and guarantee the completion of the project although Marcona will remain a primary guarantor of the credits. The agreement also provides for Utah to acquire at book value Marcona's interest in a proposed steel production project in Saudi Arabia, which amounted to $602,000 at December 31, 1975 (classified as "Exploration and predevelopment costs"). Coincidental with the acquisition of the SAMARCO project, Utah is to assume Marcona's $18,000,000 long-term loan payable to banks in exchange for a refinancing note in the amount of $18,000,000 less Marcona's investment in the steel production project. The refinancing note and working capital loans of up to $13,000,000 made available to Marcona by Utah have repayment terms providing that the total of the refinancing notes and the working capital loans outstanding will not exceed the amount of debentures issued by Utah for the SAMARCO project. F-53 ?