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: Fiscal year ended December 31, 2012 (Audited)
Filing Date: February 20, 2013
Business Overview: The Company is a Peruvian open stock corporation primarily engaged in the production and marketing of cement, concrete, blocks, and quicklime in Peru's northern region. It also holds interests in phosphate exploration (Fosfatos del Pacífico S.A.) and a brine project (Salmueras Sudamericanas S.A.).

Key Financial Metrics (Year Ended Dec 31, 2012)

Material Changes vs. Prior Period

• Revenue Growth: Sales increased by approximately 17.6% to S/.1.17 billion, driven primarily by the cement, concrete, and blocks segment (S/.972 million).
• Profitability Surge: Net profit attributable to the parent more than doubled to S/.159 million. This was significantly aided by the absence of the S/.96 million impairment charge on zinc mining assets recorded in 2011.
• Capital Structure Transformation: Total equity increased by 76% to S/.1.89 billion. This was largely due to a public offering of American Depositary Shares (ADS) in early 2012, which raised approximately S/.674 million in proceeds (recorded in capital stock and additional paid-in capital).
• Debt Reduction: Total liabilities decreased by 44% to S/.489 million. The Company aggressively prepaid borrowings totaling S/.388 million during 2012, reducing interest-bearing loans significantly.
• Investing Outflows: Net cash used in investing activities increased to S/.667 million, primarily due to a S/.404 million increase in long-term time deposits and S/.248 million in purchases of property, plant, and equipment.

Guidance, Outlook, Risks, and Unusual Items

• Subsequent Financing Event: On February 1, 2013, the Company issued US$300 million in Senior Notes (4.5% interest, due 2023) with net proceeds of US$295.8 million. Proceeds are intended to prepay existing debt and fund capital expenditures.
• Debt Prepayment: On February 11, 2013, the Company prepaid a loan of S/.202.2 million with BBVA Banco Continental.
• Regulatory Risk (Mining Royalties): The Company is contesting the Peruvian government's interpretation of the amended Mining Royalty Law. Management believes the regulation unconstitutionally applies mining royalties to non-mining industrial activities (cement production). While the Company has filed constitutional and anti-trust claims, a literal application of the regulation could have increased 2012 royalty expenses from S/.451,000 to S/.10.3 million. No provision has been recorded as management believes a favorable outcome is probable.
• Contingencies: The Company faces tax assessments from SUNAT for 2008 and 2009 totaling approximately S/.15.3 million related to the royalty law interpretation. Legal counsel deems success of these actions "possible but not probable," so no liability is accrued.
• Capital Commitments: Significant commitments remain for the construction of a new cement plant in the North of Peru (S/.123 million) and the development of the brine project (up to US$100 million).

Investor Verification Checklist

• ADS Offering Impact: Verify the dilution effects and long-term capital allocation strategy following the S/.674 million equity raise in early 2012.
• Debt Refinancing: Confirm the terms and utilization of the US$300 million Senior Notes issued in February 2013 and the subsequent prepayment of the BBVA loan.
• Regulatory Litigation: Monitor the status of the constitutional claim regarding the Mining Royalty Law, as an adverse ruling could materially impact future profitability.
• Capital Expenditures: Track progress on the S/.123 million commitment for the new cement plant in Northern Peru and the US$100 million brine project.
• Segment Performance: Review the "Other" segment (phosphates, zinc, etc.) which reported a loss of S/.12.4 million in 2012, to assess the viability of non-core mining assets.