Financials under the spotlight
At the end of March 08, Cemex had a net debt US$18,813m disclosed, and a further undisclosed amount of debt in the form of perpetual notes that were lumped together with minorities. Cemex has not yet published its accounts for 2007, but at the end of 2006, perpetual debt amounted to US$1250m. Assuming that in assessing the perpetual debt, this accounted for a similar portion of what is described as 'minorities' at the end of 2006, the actual net debt at the end of March 08 would read US$21,326m, suggesting a gearing level of 124.8%. This is, in fact, now a higher gearing level than the 120.6% seen three years earlier in the wake of the acquisition of RMC. Since then, Cemex has raised the equivalent of some US$257m through its sale of 9.5% financial stake in Axtel a Mexican telecommunications company.
The fall in US interest rates has helpfully reduced the cost of financing the acquisition of Rinker that became effective last July. The failure to conclude the proposed major sale of assets in Catalonia, Austria and Hungary; as well as two US cement plants and a large number of downstream businesses in the United States to CRH, has left Cemex with a stretched balance sheet, with only the sale of the assets that Cemex was under an obligation to sell to satisfy the US anti-trust authorities actually concluded. It could be argued that the assets that Cemex failed to sell are worth less now than they were at the time, at least as far as the US and Spanish operations are concerned.
The net result of buying RMC and now, Rinker, has been to reduce Cemex' dependence on developing markets, which, from an investment point of view at least, had been seen as the Mexican group's main point of attraction. While the other four of the five top global cement producers have been, and are, investing heavily in the two largest cement markets in the world, China and India, Cemex has tended to avoid these. While Russia, another major growing cement market, is now apparently off the radar, which must be disappointing to some Cemex insiders.
On a brighter note, the proposed nationalisation of the Venezuelan cement market, where Cemex is the largest operator, may be helpful to Cemex from a simple cash inflow point of view, but will leave the group increasingly dependent on its three largest markets of Mexico, the United States and Spain for its main cash generation. Returns from Great Britain and Germany still leave much to be desired and this is also not a good time to review Spain’s construction outlook, but the signs from Madrid are not favourable, at least over the short term.
Will Cemex run out of cash? Most certainly not! But if the US recession begins to deepen, with neighbouring Mexico then getting sucked in, plus some heavy clouds becoming more visible in southern Europe, it might need a bit more than the continuing sale of various financial instruments to keep this cement major in tip-top condition.
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