Cementos Pacasmayo: Cement

The Company

Cementos Pacasmayo is a cement company based in Peru, with more than 50 years of operating history producing, distributing and selling cement and cement-related materials, such as concrete blocks and ready-mix concrete in the northern region of the country. Its products are primarily used in construction, one of the fastest-growing sectors of the Peruvian economy in recent years. It also produces and sells quicklime for use in mining operations.

Cementos Pacasmayo is the second-largest cement producer in Peru, accounting for more than 22% of total cement sales in the domestic market in 2012. This market is very regionalised, as certain companies are responsible for satisfying demand in each part of the country. Cementos Pacasmayo owns two cement production facilities, one in Pacasmayo in the northwest and another in Rioja in the north-east. Both facilities have a total installed annual production capacity of approximately 3.34m tonnes. The company also owns concession rights to several quarries near its facilities with reserves of limestone and other raw materials.

The company has developed an independent retail distribution network, called DINO. This consists of more than 215 individual retailers with 322 local hardware stores in the northern region of the country, through which it distributes cement products and construction materials manufactured by third parties. The company’s distribution strategy has built it strong recognition among both retailers and end-consumers.

Cementos Pacasmayo has been listed on the Lima Stock Exchange since 1995 and listed on the New York Stock Exchange in February 2012. The company is majority-owned and controlled by Eduardo Hochschild and together with Hochschild Mining (listed since 2006 on the London Stock Exchange) it comprises the businesses of the Hochschild Group, which has operated in Latin America for the past 100 years.

Cementos Pacasmayo has experienced strong growth in its cement shipments over the past five years, which has led to a market share increase of 22% in 2012 with PEN785m ($307m) in revenues. The company has a solid balance sheet and high levels of liquidity.

Development Strategy

The company is focused on adding production capacity to meet increasing demand in the northern region. To this end, it has three different projects. First, the phosphate project (Fosfatos del Pacífico, 2016) represents a significant growth opportunity for the company. Second, the construction of a 1.6m-tonne facility in Piura will increase capacity by 48%. Finally, the brine project (Salmueras Sudamericanas) will be operational by 2016 and is part of the company’s medium-term diversification strategy.

The global phosphates market is booming, making the company’s entry into the sector significant. Phosphate is one of the three major nutrients required by plants, and has several uses in the fertiliser, feed and food industry. Currently, the US is one of the largest phosphate rock consumers and imports this inorganic material given the acceleration of consumption. These imports of phosphates reached 2.4m tonnes in 2010 from 450,000 tonnes in 1990.

Cementos Pacasmayo is also currently engaged in reducing its capital cost with an increasing reliance on debt to finance its projects. On February 1, 2013 the company sold a 10-year bond of $300m on the international market with a 4.5% coupon. The demand for this note was $1.2bn (four times the amount offered). The bond rating is BB+ and BBB- (Standard and Poor’s and Fitch Ratings, respectively), based on the company’s solid business position and the favourable outlook for Peru’s cement industry over the medium term. According to Fitch Ratings, an upgrade of Cementos Pacasmayo’s rating is unlikely to occur before the company completes its capital expenditure programme. Based on our estimates for economic growth as well as private investment, sales are expected to expand 11% in 2013. Furthermore, we believe that the forthcoming publication of the phosphate project basic engineering study in the last quarter of 2013 will also act as a positive catalyst for the company’s share price.