CPAC

Business Context and Reporting Period

Company: Cementos Pacasmayo S.A.A. (Pacasmayo Cement Corporation)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2012
Accounting Standards: International Financial Reporting Standards (IFRS)
Primary Business: The company is the sole cement manufacturer in northern Peru, producing cement, quicklime, and construction materials. It operates two main facilities (Pacasmayo and Rioja) and is developing non-core phosphate and brine mining projects.

Key Financial Metrics (Year Ended Dec 31, 2012)

Note: US$ values are translated at the rate of S/.2.55 to US$1.00 as of December 31, 2012.

Material Changes vs. Prior Period (2011)

• Revenue Growth: Net sales increased 17.6% to S/.1,169.8 million, driven by a 16.6% increase in cement sales volume (2.2 million metric tons) due to higher construction activity.
• Profitability Surge: Net profit increased 137.6% to S/.155.6 million. This significant jump is largely attributable to the absence of the S/.96.0 million non-cash impairment charge on zinc mining assets recorded in 2011.
• Margin Compression: Despite higher profits, the gross profit margin declined from 42.8% in 2011 to 39.0% in 2012. This was caused by increased costs of sales (up 25.2%), primarily due to higher coal prices and the need to import clinker following corrective maintenance on the principal kiln.
• Capital Structure: The company completed an initial public offering (IPO) of ADSs in early 2012, raising significant capital. Consequently, cash and term deposits increased to S/.473.8 million, while total debt decreased significantly as the company prepaid a secured loan in early 2013 using proceeds from a new bond offering.

Guidance, Outlook, and Risks

Outlook and Strategy

• Expansion: The company is in the basic engineering stage of a new cement plant in Piura, expected to add 1.6 million metric tons of annual capacity. A supply agreement for key equipment worth US$113.4 million has been signed.
• Financing: In February 2013, the company issued US$300 million in 4.50% Senior Notes due 2023. Proceeds were used to prepay existing debt and fund capital expenditures for the Piura plant.
• Non-Core Projects: Development of phosphate and brine projects continues, though they remain in the engineering study phase. The company has partnered with Mitsubishi (phosphate) and Quimpac (brine).

Risks and Contingencies

• Regulatory/Tax: A new Mining Royalty Law (effective Oct 2011) increased tax burdens. The company has filed constitutional claims arguing the law is unconstitutional as applied to cement companies, but the outcome is uncertain.
• Operational: The business is highly dependent on the northern region of Peru. Risks include natural disasters (earthquakes, El Niño), energy price volatility (coal and electricity), and potential entry of competitors into the northern market.
• Development Projects: The phosphate and brine projects are speculative. The company has not established reserves, and there is no assurance these projects will be economically feasible or profitable.

Investor Verification Checklist

• Debt Refinancing: Verify the status of the US$300 million Senior Notes issued in February 2013 and the prepayment of the BBVA Banco Continental secured loan.
• Capital Expenditures: Monitor progress and cost overruns on the new Piura cement plant and the Rioia expansion.
• Tax Litigation: Track the resolution of the constitutional claims regarding the Mining Royalty Law, as a loss could materially impact future profitability.
• Energy Costs: Assess the impact of coal and electricity price fluctuations on margins, given the company does not hedge these commodities.
• Project Feasibility: Review the results of the basic engineering studies for the phosphate and brine projects to determine if they will proceed to full development.