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, 2011
Jurisdiction: Republic of Peru
Accounting Standards: International Financial Reporting Standards (IFRS)
Cementos Pacasmayo is the leading cement manufacturer in the northern region of Peru, producing cement, concrete blocks, ready-mix concrete, and quicklime. The company operates two main facilities (Pacasmayo and Rioja) and is developing non-core mining projects for phosphate and brine. In 2011, the company completed an initial public offering of American Depositary Shares (ADSs) on the New York Stock Exchange.
Key Financial Metrics (2011)
| Metric | Value (S/. millions) | Value (US$ millions) |
|---|---|---|
| Net Sales | 995.0 | 369.1 |
| Gross Profit | 425.5 | 157.9 |
| Operating Profit | 118.9 | 44.1 |
| Profit for the Year (Net Income) | 65.5 | 24.4 |
| Adjusted EBITDA | 267.2 | 99.1 |
| Net Cash Flow from Operating Activities | 132.3 | 49.1 |
| Total Debt (Interest-bearing) | 590.6 | 219.1 |
| Cash and Short-term Deposits | 363.3 | 134.8 |
| Total Assets | 1,985.0 | 736.3 |
Note: US$ values are translated at the year-end rate of S/.2.696 to US$1.00.
Material Changes vs. Prior Period (2010)
- Revenue Growth: Net sales increased 10.8% to S/.995.0 million, driven by a 7.3% increase in cement volume sold and a 49.1% increase in third-party construction supplies sales.
- Profit Decline: Net profit decreased 70.6% to S/.65.5 million. This sharp decline was primarily due to a non-cash impairment charge of S/.96.0 million on zinc mining assets and the absence of a S/.75.9 million gain from the sale of copper mine concessions recorded in 2010.
- Operating Expenses: Total operating expenses increased significantly due to the zinc impairment and higher administrative costs (up 23.6%) and selling/distribution expenses (up 43.6%).
- Capital Expenditures: Capital expenditures rose to S/.240.6 million (US$89.2 million), reflecting investments in the expansion of the Pacasmayo and Rioja cement plants and the diatomite brick plant.
- Liquidity: Cash and short-term deposits increased significantly to S/.363.3 million, aided by proceeds from financing activities (including a new S/.202.2 million secured loan) and the sale of a minority interest in the Fosfatos subsidiary.
Guidance, Outlook, and Risks
Outlook and Strategy
- Capacity Expansion: The company expects to begin production from the Pacasmayo expansion in Q2 2012 and complete the Rioja expansion in H2 2012, adding significant cement and clinker capacity.
- Phosphate and Brine Projects: The company is advancing feasibility studies for phosphate (partnered with Mitsubishi) and brine (partnered with Quimpac) projects. These are not expected to be operational for 3-5 years but represent significant long-term growth opportunities.
- Cost Management: Strategy includes reducing the clinker/cement factor to lower energy costs and securing local coal sources to reduce reliance on imported bituminous coal.
Key Risks and Contingencies
- Regulatory/Tax Risk: A new Mining Royalty Law effective October 1, 2011, increased taxation on mining activities. The company estimates this could have added S/.5.7 million in incremental taxes for 2011 if applied for the full year. The company has filed a claim arguing the tax is unconstitutional as applied to cement production.
- Commodity Prices: The company is exposed to fluctuations in coal and electricity prices, which constitute a significant portion of production costs. It does not hedge these risks.
- Project Execution: The phosphate and brine projects involve significant capital requirements and technical risks; reserves have not yet been established, and profitability is not guaranteed.
- Political/Economic Risk: Operations are concentrated in Peru, subject to local economic conditions, political stability, and potential changes in government policy under the new administration.
Investor Verification Checklist
- Zinc Asset Impairment: Verify the assumptions used for the S/.96.0 million impairment charge on zinc mining assets given the volatility in zinc prices.
- Mining Royalty Tax Impact: Monitor the outcome of the legal challenge regarding the new Mining Royalty Law and its potential impact on future operating margins.
- Capital Expenditure Execution: Track the timeline and cost of the Pacasmayo and Rioja plant expansions to ensure they meet the projected Q2/H2 2012 completion dates.
- Phosphate/Brine Feasibility: Review upcoming feasibility study results for the phosphate and brine projects to assess the economic viability and capital requirements.
- Debt Covenants: Confirm continued compliance with financial covenants (liquidity, leverage, interest coverage) on the new S/.202.2 million secured loan and other credit facilities.