Jan 25 - Fitch Ratings has assigned an expected rating of 'BBB-' to Cementos
Pacasmayo S.A.A.'s (Pacasmayo) proposed bond issuance. The target
amount of the proposed issuance will be up to USD300 million. Proceeds will be
used to finance cement capital expenditures, refinance existing debt, and to
improve the company's liquidity position.
Fitch currently rates Pacasmayo as follows:
--Long-term Issuer Default Rating (IDR) 'BBB-';
--Local currency IDR 'BBB-'.
The Rating Outlook is Stable.
The ratings reflect the company's solid business position, as the only cement
producer in Peru's northern region. This position has resulted in high margins,
low leverage and solid liquidity. The small size of the cement market in the
north, as well as the difficulty of logistics in this region, has limited the
impact of imports and the probability a global company will enter the region in
the near future. Further factored into the ratings is the favorable outlook for
Peru's cement industry over the medium term driven by Peru's positive
macro-economic and business environment.
The ratings incorporate the implicit support on Pacasmayo's operations from its
controlling shareholder, Inversiones Pacasmayo S.A. (IPSA), which is part of the
Hochschild group. They also build in an expectation that the company's two new
non-metallic mining projects - the phosphate and brine projects - will be
financed with non-recourse, project finance debt. The 30% equity participation
of a subsidiary of Mitsubishi Corporation & Co., Ltd. (Mitsubishi), a world
leading marketer of phosphate-derived products, in the phosphate project has
been positively incorporated.
For 2013 and 2014, Fitch projects a negative free cash flow (FCF) for Pacasmayo
due to its cement expansion project and its equity contribution to the phosphate
and brine projects. The Stable Outlook for Pacasmayo reflects Fitch's view that
Pacasmayo will maintain a positive trend for its underlying cement operations
during its current investment cycle. This trend, plus the non-recourse financing
of the two non-metallic mining projects, should result in Pacasmayo's total
debt-to-EBITDA ratio remaining at or below 2.5x.
Local Player with Solid Market Position:
Peru's cement industry is divided into three regions - the south, the north, and
the center, which includes the area surrounding Lima and Callao. Pacasmayo is
the dominant company in the northern region, which includes 23% of the
population and generates 15% of Peru's GDP. The company supplies substantially
all the cement consumed in Peru's northern region, as a result of important
entry barriers such as transportation costs - with cement imports representing
less than 0.5% of total shipments in the northern region - and significant
capital investments that would be required to build a new plant. In addition,
the company's market position is further supported by its retail distribution
network for construction material, known as DINO, which consists of
approximately 200 independent retailers with more than 270 hardware stores.
The company maintains two production facilities, located in the cities of
Pacasmayo and Rioja, with a total installed annual cement production of 3.1
million metric tons. During the last 12-month period ended in September 2012
(LTM September 2012), the company's cement shipments totaled 2.2 million metric
tons resulting in an installed capacity utilization rate of approximately 70%.
The company's existing quarries represent estimated reserves to cover the
company's operations for approximately 68 years.
Solid Margins, Low Leverage and Strong Liquidity:
The company has maintained EBITDA margins that compare favorably with industry
peers. Pacasmayo's EBITDA during LTM September 2012 was S/.275 million (USD103
million), resulting in an EBITDA margin of 24%. The company's margins were
negatively affected during the first half of 2012 by unexpected maintenance
costs. The ratings include the expectation that Pacasmayo will maintain EBITDA
margins of around 25% during the next several years.
As of Sept. 30, 2012, the company's total debt and cash positions were S/.202
million (USD78 million) and S/.603 million (USD232 million), respectively. The
company's total debt was primarily composed of a secured credit facility due in
2018; the company has no short term debt. Pacasmayo's gross adjusted leverage
(total debt/ total EBITDA) as of Sept. 30, 2012 was 0.8x. The company had a USD
154 million net cash position. The company's solid liquidity was primarily the
result of a USD254 million IPO during the first half of 2012.
Cement Operations Expected to Grow around 10% in 2013:
The company is expected to continue to benefit from solid business fundamentals.
The Peruvian economy is forecast to growth by about 6% per year during 2013 and
2014, after growing by 7% and 6% during 2011 and 2012, respectively. During the
last 10 years (2002-2012 period), the company's cement sales volume grew at a
compound annual growth rate (CAGR) of around 11%. Sales have been driven by the
rapid expansion of the construction sector.
Pacasmayo's revenues have grown to S/.1.1 billion during the LTM, from S/.995
million during 2011 and S/.898 million during 2010. The ratings incorporate the
expectation that the company's revenue growth during 2013 will be around 10% and
that total cement shipments will be about 2.5 metric tons. In the medium term,
the company's operations are expected to maintain annual growth rates in the 6%
to 8% range. Expectations of continued growth are supported not only by economic
growth but also by Peru's significant housing deficit of approximately 2 million
homes. Investments in infrastructure should also result in high demand for
Negative FCF during 2013-2014 Driven by Cement Capex Plan:
During the LTM ended Sept. 30, 2012, Pacasmayo's FCF was negative S/.111
million. This FCF calculation considers cash flow from operations (CFFO) of
S/.122 million minus capex and dividends of S/.198 million and S/.35 million,
respectively. The ratings incorporate the view that the company's cement
operations will generate negative FCF during 2013 and 2014. Pacasmayo's cement
operations are expected to become FCF positive in 2015. The ratings incorporate
expectations that the company's annual paid-dividend levels will be around S/.50
million during the 2013-2016 period.
Pacasmayo is planning to increase its cement production capacity by
approximately 50% through the building of a new cement plant in the city of
Piura; the new plant will add annual cement capacity production and clinker
production of 1.6 million of metric tons and 1 million of metric tons,
respectively. The new cement plant, which is estimated to cost about USD300
million, is scheduled to start operations during the first quarter of 2015. In
addition the company is also increasing in 240 thousand metric tons its Rioja
plant's cement production capacity, this expansion is expected to be completed
Expected Increase in Leverage and Implicit Support from Controlling Shareholder
The company is expected to complete its cement capex plan and the new projects
with a combination of cash, new debt and its own cash flow generation.
Pacasmayo's gross leverage for the cement operations only is anticipated to
increase and remain around 2.5x during the 2013-2015 period due to the
additional debt required to fund its cement capacity increase. On a consolidated
basis, including the non-recourse debt required to finance the new projects, the
company's total gross leverage is expected to be in the 3.0x to 4.0x range
between 2013 and 2015. Gross leverage on both an individual and consolidated
basis should decline in 2016 due to the growth of its cement business and
ramp-up of its phosphate project.
Positive incorporated in the ratings is the implicit support from the company's
controlling shareholder IPSA, which is part of the Hochschild group, which holds
a 52.6% of the common shares of Pacasmayo. In addition to the cement operations,
the Hochschild group has operations in the mining sector through Hochschild
Mining PLC, which has gold and silver production activities in Peru, Argentina,
and Mexico. The Hochschild group's consolidated mining operations generated
revenues and EBITDA of USD845 million and USD435 million during the LTM ended
June 30, 2012. This levels compare with only USD152 million of total debt and
about USD545 million of cash and marketable securities. On a consolidated basis,
the Hochschild group's mining and cement operations had USD542 million of EBITDA
during the LTM and a USD547 million net cash position.
Key Rating Consideration, New Projects to Be Funded with Project Finance
Structure, Non-Recourse Debt:
The ratings incorporate as a key consideration that the additional debt -
estimated at around USD440 million - required to finance the company's two
non-cement projects, the phosphate and brine projects, will be non-recourse. The
company's equity contribution to these two new projects is estimated to be
around USD380 million during the execution period.
Pacasmayo maintains a 70% participation in the phosphate project, while the
remaining 30% is owned indirectly by Mitsubishi. As part of the project
structure, Pacasmayo and Mitsubishi have signed a 20-year off-take agreement
equivalent to 80% of the estimated annual production and they have the right of
first refusal for the 20% remaining. The project should result in the production
of about 2.5 million metric tons of phosphate rock per year. The company has
already reached an agreement with the local community and the final feasibility
studies are expected to be concluded by mid-2013.
In addition, Pacasmayo is also in the initial stage of developing a smaller new
project, a brine project. The company's partner for this project is Quimpac S.A.
(Quimpac), a leading chemical company in Peru. Pacasmayo and Quimpac maintain
participations of 74.9% and 25.1%, respectively. The project is still in a
pre-operational stage and no agreements with the local communities have been
Positive Rating Actions: Pacasmayo's rating could be positively affected by
significant improvement - above expectations already incorporated - to its cash
flow generation and leverage and liquidity metrics. Any positive rating action
is unlikely to occur before the company completes its aggressive capital
Negative Rating Actions: Pacasmayo's rating could be negatively affected by some
combination of the following factors:
--Significant deterioration in Peru's macroeconomic and business environment;
--Increasing competition resulting in the company's EBITDA margin deterioration;
--Significantly higher levels of required equity contributions to fund the two
non-metallic mining projects; or
--Use of recourse debt for those two projects.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage