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, 2012 (Interim)
Filing Date: May 3, 2012
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).

Key Financial Metrics

Note: All figures are in Peruvian Nuevos Soles (S/.). Total Debt is the sum of current and non-current interest-bearing loans.

Material Changes vs. Prior Period

• Revenue Growth: Sales increased by 20.4% to S/.277.3 million, driven primarily by the cement, concrete, and blocks segment (up 23.1%).
• Equity Expansion: Total equity attributable to owners of the parent increased significantly from S/.1,040.6 million (Dec 31, 2011) to S/.1,758.4 million (Mar 31, 2012). This was primarily due to a public offering of American Depositary Shares (ADS) in February and March 2012, raising approximately US$245.4 million (net).
• Liquidity Surge: Cash and short-term deposits more than doubled to S/.932.4 million, largely reflecting the proceeds from the share issuance and a new credit line.
• Operating Cash Flow: Operating cash flow turned negative (S/.13.6 million outflow) compared to a positive S/.17.0 million in Q1 2011. This was due to a significant decrease in trade payables (S/.38.6 million) and increased inventory levels, despite strong profitability.
• Debt Reduction: Total interest-bearing debt decreased by approximately S/.30 million due to repayments, offset slightly by new borrowings.

Outlook, Risks, and Contingencies

• Capital Commitments: The Group has significant ongoing capital commitments, including the expansion of cement plants (S/.28.4 million), construction of a diatomite bricks plant (S/.2.5 million), and a major commitment for the development of a brine project (up to US$100 million).
• Debt Covenants: The Company maintains a US$75 million credit line with Banco de Crédito del Perú. Management confirmed compliance with financial covenants as of March 31, 2012, including a liquidity ratio >1.0x and a debt-to-EBITDA ratio <3.0x.
• Legal and Tax Contingencies:
  • Legal Claims: Third-party actions totaling S/.2.3 million (tax and labor claims) are pending. Management deems it "only possible, but not probable" that these will succeed; no provision has been recorded.
  • Tax Audits: Tax returns for years 2007–2011 remain open for review. Management believes any potential additional tax liabilities would not have a material effect on the financial statements.
• Related Party Transactions: The Group engages in transactions with its parent, IPSA, and affiliates, including land rentals and management fees. Balances are unsecured and interest-free.

Investor Verification Checklist

• Use of Proceeds: Verify the deployment of the ~US$245 million raised in the Q1 2012 ADS offering, specifically regarding the Salmueras brine project and plant expansions.
• Operating Cash Flow Reversal: Investigate the reasons for the shift from positive to negative operating cash flow, specifically the S/.38.6 million reduction in trade payables.
• Debt Covenants: Monitor compliance with the new US$75 million credit line covenants (Liquidity, Debt/EBITDA, EBITDA/Debt Service) in future quarters.
• Segment Performance: Review the "Other" segment, which reported a loss before tax of S/.2.3 million, to understand non-core operational drag.
• Legal Exposure: Track the resolution of the S/.2.3 million in pending legal claims to ensure no material provisions become necessary.