Fitch Rates Cementos Pacasmayo S.A.A.'s Unsecured Notes 'BBB-'
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 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 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 during 2013.
Expected Increase in Leverage and Implicit Support from Controlling Shareholder Incorporated:
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 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 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
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