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
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
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 cement.
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
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 during 2013.
Expected Increase in Leverage and Implicit Support from Controlling
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
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
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
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 reached.
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 expenditure program.
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
--Increasing competition resulting in the company's EBITDA margin
--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
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