Given current US market conditions, the recently commissioned Ste. Genevieve plant on the Mississippi will be hard-pressed to generate adequate returns for the foreseeable future. However, now that the capital is sunk, the plant is an advantaged player in its market – writes Elizabeth Collins, CFA, for the Morningstar website.
Following a near doubling of the originally estimated capital costs, the plant investment amounts to roughly 7.5 times to 10.1 times expected EBITDA, for a pretax return of 5%-9%.
Robust EBITDA margins driven by efficient production methods are outweighed by the high capital costs. Holcim made decisions in plant design that call for more expensive equipment that have lower operating costs.
The total capital cost for Ste. Genevieve was US$1.6bn (versus the original estimate of US$800 million to US900 million). The cost escalation was driven by price increases for steel and other commodities and a tight labour market in St. Louis, as well as additional environmental protection.
The plant’s annual production capacity is 4Mt of cement. Assuming 100% utilization and current realized prices (less distribution costs) of US$78 per tonne, the plant can generate US$312 million in annual revenue.
When producing at 4Mta, Ste. Genevieve’s cash costs are expected to be US$25 per tonne (including plant overhead expenses). Therefore, the plant can generate roughly US$212 million in EBITDA per year. This works out to a robust EBITDA margin of 68%.
Assuming full utilization, the capital costs of Ste. Genevieve amount to roughly 7.5 times EBITDA. Considering roughly US$64m per year in depreciation, this works out to a 9.3 per cent pretax return.
If instead Ste. Genevieve produces 3Mt per annum, revenue would total US$234m. Given operating leverage, cash costs per metric ton under this scenario are expected to amount to US$28/tonne. EBITDA would amount to roughly US$150m, or a still robust 64 per cent of sales. In this lower utilization scenario, the capital costs for Ste. Genevieve amount to roughly 10.1 times EBITDA, or a 5.4 per cent pretax return.
Thanks to its location on the Mississippi River, cement from Ste. Genevieve can reach as far south as Houston, as far north as Minneapolis, and as far east as Ohio. Shipping cement by barge is less expensive than by rail or truck.
The start-up of Ste. Genevieve, along with the closure or mothballing of four of Holcim’s less efficient cement plants in the US has lowered the emissions output of the company’s US cement fleet. In addition, a carbon dioxide cap-and-trade system, or carbon dioxide emission restrictions from the EPA, would increase Ste. Genevieve’s competitive advantage. However, any form of carbon dioxide regime in the U.S. looks unlikely in the near future.