Fitch Assigns Initial 'BBB-' IDR to Cementos Pacasmayo SAA

Fitch Assigns Initial 'BBB-' IDR to Cementos Pacasmayo SAA
04 February 2013

Fitch Ratings has assigned the following initial ratings to Cementos Pacasmayo: Foreign currency Issuer Default Rating (IDR) 'BBB-'; Local currency IDR 'BBB-'. The Rating Outlook is Stable.

Fitch says the ratings reflect the company's solid business position, as the only cement producer in Peru's northern region. Pacasmayo's 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.

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 per cent of the population and generates 15 per cent 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 per cent 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 has two production facilities, located in the cities of Pacasmayo and Rioja, with a total installed annual cement production of 3.1Mt. During the last 12-month period ended in September 2012, the company's cement shipments totaled 2.2Mt resulting in an installed capacity utilisation rate of approximately 70 per cent. The company's existing quarries represent estimated reserves to cover the company's operations for approximately 68 years.

Cement operations expected to grow around 10 per cent in 2013

The company is expected to continue to benefit from solid business fundamentals. The Peruvian economy is forecast to growth by about six per cent per year during 2013 and 2014, after growing by seven and six per cent during 2011 and 2012, respectively. During the last 10 years (2002-12 period), the company's cement sales volume grew at a CAGR of around 11 per cent. Sales have been driven by the rapid expansion of the construction sector.

Pacasmayo's revenues have grown to PEN1.1bn during the 12 months to September 2012, from PEN995m during 2011 and PEN898m during 2010. The ratings incorporate the expectation that the company's revenue growth during 2013 will be around 10 per cent and that total cement shipments will be about 2.5Mt. In the medium term, the company's operations are expected to maintain annual growth rates in the 6-8 per cent range. Expectations of continued growth are supported not only by economic growth, but also by Peru's significant housing deficit of approximately 2 million of homes. Investments in infrastructure should also result in high demand for cement.

Increasing capacity

Pacasmayo is planning to increase its cement production capacity by approximately 50 per cent through the building of a new cement plant in the city of Piura. The new plant will add cement and clinker capacity of 1.6Mta and 1Mta, respectively. The new cement plant, which is estimated to cost about US$300m, 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.

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