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: Three months ended March 31, 2013
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

Note: All figures are in Peruvian Nuevos Soles (S/.). Total debt includes S/.19,914 in current borrowings and S/.762,067 in non-current borrowings as of March 31, 2013.

Material Changes vs. Prior Period

• Revenue Growth: Sales increased by approximately 5.0% to S/.291.3 million, driven primarily by the cement, concrete, and blocks segment (S/.257.1 million).
• Profitability: Net profit attributable to equity holders of the parent rose by 13.5% to S/.46.1 million. Operating profit increased by 15.6% to S/.69.0 million.
• Debt Restructuring: In February 2013, the Company issued US$300 million (approx. S/.762 million) in Senior Notes with a 4.50% annual interest rate maturing in 2023. Proceeds were used to prepay a S/.202.2 million loan with BBVA Banco Continental.
• Liquidity: Cash and term deposits increased significantly from S/.473.8 million (Dec 31, 2012) to S/.1,005.9 million (Mar 31, 2013), largely due to the Senior Notes issuance.
• Operating Cash Flow: Improved from a net outflow of S/.15.7 million in Q1 2012 to a net inflow of S/.23.0 million in Q1 2013.

Outlook, Risks, and Contingencies

Management Commentary and Capital Expenditures

Management intends to use net proceeds from the Senior Notes for capital expenditures related to the cement business. Significant capital commitments as of March 31, 2013, include:

• Construction of a cement plant in Piura: S/.168.1 million.
• Development of phosphoric rock: S/.1.4 million.
• Brine project (Salmueras Sudamericanas S.A.): Commitment up to US$100 million; contributions made to date total US$16.9 million.

Risks and Contingencies

• Mining Royalty Dispute: The Company is contesting the application of the amended Peruvian Mining Royalty Law to non-metallic mining activities (cement production). Management believes the regulation is unconstitutional as it taxes industrial profit rather than just the mineral resource.
  • Financial Impact: If the literal interpretation of the regulation were applied, royalty expense for Q1 2013 would have been S/.2.6 million instead of the S/.93,000 recorded.
  • Legal Status: The Company has filed constitutional and anti-trust claims. Legal counsel advises that while success is possible, it is not probable that the authorities' actions will succeed; thus, no provision has been made for potential liabilities.
• Tax Audits: Tax returns for years 2009–2012 are open to review. Management believes any additional tax payments would not have a material effect on the financial statements.
• Legal Claims: Third-party actions totaling S/.5.1 million are pending (including tax assessments and labor claims). Management expects resolution within five years but notes no maximum term for authority resolution.

Investor Verification Checklist

• Debt Covenants: Verify continued compliance with Senior Notes covenants (Fixed charge ratio ≥ 2.5:1; Debt-to-EBITDA ≤ 3.5:1).
• Royalty Litigation Outcome: Monitor the status of the constitutional claim regarding the Mining Royalty Law, as an unfavorable outcome could significantly increase future expenses.
• Capital Project Progress: Track the execution and cost management of the Piura cement plant construction (S/.168 million commitment).
• Currency Exposure: Assess the impact of exchange rate fluctuations on the US$300 million Senior Notes and foreign currency denominated assets/liabilities.
• Segment Performance: Review the "Quicklime" segment, which reported a loss before tax of S/.197,000 in Q1 2013 compared to a profit of S/.2.1 million in Q1 2012.