CPAC

Business Context and Reporting Period

Company: Cementos Pacasmayo S.A.A. (Pacasmayo Cement Corporation)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Nine months ended September 30, 2013 (Interim Condensed Consolidated Financial Statements)
Business Overview: The Company is a Peruvian open stock corporation primarily engaged in the production and marketing of cement, blocks, concrete, and quicklime in Peru's northern region. It is a subsidiary of Inversiones Pacasmayo S.A. (IPSA), which holds approximately 50.94% of the Company's shares.

Key Financial Metrics (Nine Months Ended Sept 30, 2013)

Note: All figures are in thousands of Peruvian Nuevo Soles (S/.). The 2012 debt figure reflects the pre-refinancing balance.

Material Changes vs. Prior Period

• Revenue Growth: Sales increased by approximately 8.2% year-over-year, driven primarily by the cement, concrete, and blocks segment.
• Profitability: Operating profit rose by 32% (S/.222M vs S/.168M), and net profit attributable to the parent increased slightly to S/.119.6M.
• Debt Restructuring: In February 2013, the Company issued US$300 million in Senior Notes (4.50% interest, 2023 maturity). Proceeds were used to prepay existing debt of S/.202.2M, significantly altering the debt profile from short-term borrowings to long-term fixed-rate notes.
• Liquidity: Cash and term deposits more than doubled to S/.1.06 billion, largely due to the Senior Notes issuance and strong operating cash flows.
• Foreign Exchange Impact: Significant volatility in the USD/PEN exchange rate resulted in a net loss from exchange differences of S/.45.99 million for the nine-month period, compared to S/.1.19 million in the prior year.

Outlook, Risks, and Contingencies

• Capital Expenditures: The Company is actively expanding capacity with commitments for a new cement plant in Piura (S/.218.4M), a diatomites brick plant (S/.1.3M), and phosphate development activities.
• Legal and Tax Contingencies:
  • Mining Royalty Dispute: The Company is contesting the application of the amended Mining Royalty Law to non-metallic mining activities (cement). Management believes the current interpretation is unconstitutional. If the literal regulation were applied, royalty expenses for the nine-month period would have been S/.8.49M instead of the recorded S/.305K. No provision has been made as the outcome is deemed not probable.
  • Tax Assessments: Tax authorities issued assessments for 2008 and 2009 totaling S/.15.27M based on the new royalty criteria. Management expects these will not succeed.
  • Other Claims: Third-party legal actions totaling S/.4.2M exist regarding coal import taxes and labor claims. No provision is recorded as success is deemed only possible, not probable.
• Covenants: The Company is in compliance with Senior Notes covenants, including a fixed charge ratio of at least 2.5:1 and a debt-to-EBITDA ratio not exceeding 3.5:1.

Investor Verification Checklist

• Debt Service Capacity: Verify the impact of the new US$300M Senior Notes on future interest coverage ratios, particularly given the 4.50% fixed rate.
• FX Exposure: Assess the sensitivity of future earnings to USD/PEN exchange rate fluctuations, given the significant USD-denominated debt and recent S/.46M exchange loss.
• Regulatory Risk: Monitor the status of the constitutional claim regarding the Mining Royalty Law, as an adverse ruling could materially increase tax liabilities retroactively.
• CapEx Execution: Track progress and cost overruns on the Piura cement plant and phosphate projects, which represent significant capital commitments.
• Segment Performance: Review the divergence in performance between the core cement segment (profitable) and the "Other" segment (loss-making due to development costs).