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, 2013
Accounting Standards: International Financial Reporting Standards (IFRS)
Primary Business: Leading cement manufacturer in northern Peru, producing cement, quicklime, and construction materials. The company operates two main facilities (Pacasmayo and Rioja) and is developing non-core phosphate and brine mining projects.

Key Financial Metrics (Year Ended Dec 31, 2013)

Note: US$ figures are translated at the year-end rate of S/.2.795 to US$1.00.

Material Changes vs. Prior Period (2012)

• Revenue Growth: Net sales increased 6.0% to S/.1,239.7 million, driven by a 13.4% increase in cement, concrete, and blocks sales (volume up 4.0%, price up 7.0%). This was partially offset by a 39.5% decline in quicklime sales due to lower mining demand.
• Profitability: Operating profit rose 27.1% to S/.293.0 million, and gross margin improved to 42.2% (from 39.0%) due to operational efficiencies. However, Net Profit decreased slightly by 2.1% to S/.152.3 million.
• Exchange Rate Impact: A significant foreign exchange loss of S/.48.4 million (US$17.3 million) occurred due to the depreciation of the Peruvian nuevo sol against the US dollar (9.6% depreciation). This loss largely offset the gains in operating profit.
• Debt Structure: The company issued US$300 million in 4.50% Senior Notes due 2023 in February 2013. Proceeds were used to prepay a secured loan with BBVA Banco Continental, resulting in a shift from short-term to long-term debt.

Guidance, Outlook, and Risks

Outlook and Strategy:

• Expansion: The company is constructing a new cement plant in Piura with an expected capacity of 1.6 million metric tons annually to meet regional demand.
• Non-Core Projects: Continuing development of phosphate (partnered with Mitsubishi) and brine (partnered with Quimpac) projects, though these remain in the engineering/study phase and are not yet revenue-generating.
• Dividends: Shareholders approved the 2013 financial statements and delegated authority to the Board to declare dividends for 2014 earnings. A dividend of S/.0.10 per share was paid in 2013.

Key Risks and Contingencies:

• Currency Risk: Approximately 40% of costs are denominated in US dollars (coal, electricity, debt service), while revenues are in nuevos soles. The company does not hedge foreign currency exposure.
• Regulatory/Legal: The company successfully challenged a new mining royalty tax regulation in the Peruvian Constitutional Court, which would have significantly increased its tax burden. The ruling rendered the new regulation inapplicable.
• Operational Risks: Dependence on the northern region of Peru for all operations; exposure to natural disasters (earthquakes, El Niño); and reliance on imported clinker until the Piura plant is operational.

Investor Verification Checklist

• Exchange Rate Sensitivity: Verify the impact of future nuevo sol depreciation on net income, given the significant unhedged US dollar debt and cost base.
• Capital Expenditure Execution: Monitor the timeline and cost overruns for the new Piura plant and the Rioia expansion, which are critical for future capacity and margin improvement.
• Non-Core Project Viability: Assess the feasibility studies and capital requirements for the phosphate and brine projects, as they represent significant future investment with no current revenue.
• Regulatory Stability: Confirm the continued applicability of the favorable Constitutional Court ruling regarding mining royalties and monitor for any new tax legislation.
• Debt Covenants: Review compliance with financial covenants in the 4.50% Senior Notes indenture (Fixed Charge Coverage Ratio and Debt-to-EBITDA ratio).