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: Fiscal year ended December 31, 2013 (Comparative data for 2012 and 2011)
Submission Date: February 14, 2014
Business Overview: The Group is primarily engaged in the production and marketing of cement, concrete, blocks, and quicklime in northern Peru. It also holds interests in phosphate rock exploration (Fosfatos del Pacifico S.A.) and a brine project (Salmueras Sudamericanas S.A.). The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) and presented in Peruvian Nuevos Soles (S/.).
Key Financial Metrics (2013 vs. 2012)
| Metric (S/. in thousands) | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue (Sales of Goods) | 1,239,688 | 1,169,808 | +6.0% |
| Gross Profit | 523,449 | 456,750 | +14.6% |
| Operating Profit | 292,998 | 230,524 | +27.1% |
| Profit Before Tax | 234,678 | 229,343 | +2.3% |
| Net Profit (Consolidated) | 152,283 | 155,600 | -2.1% |
| Net Profit (Attributable to Parent) | 155,634 | 159,005 | -2.1% |
| EPS (Basic & Diluted) | S/. 0.27 | S/. 0.28 | -3.6% |
| Total Assets | 3,114,537 | 2,383,324 | +30.7% |
| Total Liabilities | 1,105,067 | 489,209 | +125.9% |
| Total Equity | 2,009,470 | 1,894,115 | +6.1% |
| Cash & Term Deposits | 976,952 | 473,785 | +106.2% |
| Net Cash from Operating Activities | 191,754 | 99,731 | +92.3% |
Material Changes and Drivers
- Debt Restructuring: In February 2013, the Company issued US$300 million (S/.762 million) in Senior Notes due in 2023. Proceeds were used to prepay existing bank loans (S/.202 million) and fund capital expenditures. This resulted in a significant increase in non-current liabilities (from S/.192 million to S/.824 million) and a corresponding surge in cash reserves.
- Foreign Exchange Impact: The Company recorded a net loss from exchange differences of S/.48.4 million in 2013, compared to S/.0.7 million in 2012. This was driven by the depreciation of the Peruvian Sol against the US Dollar, affecting the translation of US-denominated debt and monetary items.
- Revenue Growth: Sales increased by 6.0% to S/.1.24 billion, primarily driven by the cement, concrete, and blocks segment (S/.1.10 billion). Quicklime sales declined significantly (from S/.52.7 million to S/.31.9 million), while construction supplies also saw a decrease.
- Profitability: While Operating Profit increased by 27.1% due to higher gross margins and volume, Net Profit decreased slightly due to increased finance costs (S/.37.1 million vs. S/.23.8 million) and the aforementioned foreign exchange losses.
- Impairment: Unlike 2011, which saw a S/.96 million impairment charge on zinc mining assets, there were no impairment charges on mining assets in 2013 or 2012.
Outlook, Risks, and Contingencies
- Capital Commitments: The Group has significant capital commitments, including S/.280 million for a cement plant in Piura, S/.1.8 million for a diatomite brick plant, and a US$100 million commitment for the brine project (S/.14.6 million contributed as of year-end).
- Legal and Tax Contingencies:
- Mining Royalties: The Company successfully challenged the Peruvian government's application of the amended Mining Royalty Law to non-metallic mining activities (cement). The Constitutional Court ruled in November 2013 that the regulation was unconstitutional as applied to the Company. The Company continues to calculate royalties based on the mining component value rather than the final product value.
- Tax Audits: Tax returns for years 2009–2013 are open to review. Management believes any potential additional tax liabilities would not have a material effect on the financial statements.
- Legal Claims: Outstanding legal claims total S/.2.9 million (labor and tax assessments). Management deems it "only possible, but not probable" that these will succeed; no provision has been made.
- Financial Covenants: The Senior Notes include covenants requiring a fixed charge ratio of at least 2.5:1 and a debt-to-EBITDA ratio not exceeding 3.5:1. The Company was in compliance as of December 31, 2013.
- Market Risks: The Group is exposed to foreign currency risk (net liability position of US$157 million) and commodity price risk (coal). A 10% increase in the US Dollar exchange rate would reduce pre-tax profit by approximately S/.44 million.
Investor Verification Checklist
- Debt Service Capacity: Verify the Company's ability to service the new US$300 million Senior Notes, particularly given the sensitivity of profits to foreign exchange fluctuations.
- Capital Expenditure Execution: Monitor the progress and funding of the S/.280 million Piura cement plant and the US$100 million brine project commitments.
- Regulatory Environment: Confirm the stability of the mining royalty ruling and watch for any new regulatory challenges regarding non-metallic mining taxation in Peru.
- Segment Performance: Analyze the decline in the Quicklime segment revenue and its impact on overall diversification.
- Cash Flow Utilization: Assess how the significant increase in cash reserves (S/.977 million) will be deployed, whether for further debt reduction, dividends, or CAPEX.