20-F 1 ea0203332-20f_cementos.htm ANNUAL REPORT

As filed with the U.S. Securities and Exchange Commission on April 29, 2024

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 20-F

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2023

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 001-35401

 

 

  

CEMENTOS PACASMAYO S.A.A.

(Exact name of Registrant as specified in its charter)

 

PACASMAYO CEMENT CORPORATION

(Translation of Registrant’s name into English)

 

Republic of Peru

(Jurisdiction of incorporation or organization)

 

Calle La Colonia 150, Urbanización El Vivero
Surco, Lima
Peru

(Address of principal executive offices)

 

Javier Durand, Esq., General Counsel
Tel. +51-1-317-6000
Calle La Colonia 150
Urb. El Vivero - Lima, Peru

(Name, telephone, email and/or facsimile number and address of company contact person)

 

Securities registered pursuant to Section 12(b) of the Act.

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Shares, par value S/1.00 per share, in the form of American Depositary Shares, each representing five Common Shares   CPAC   New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

 

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

At December 31, 2023

423,868,449 common shares

4,238,397 investment shares*

 

 

*Excluding 36,040,497 investment shares held in treasury.

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No

 

If this report is an annual or transition report, indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  Yes No

 

Note- Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 203.405 of this chapter) during the preceding 12 months (or for such other period that the registrant was required to submit and post such files).

 

Yes No

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer Accelerated filer Non-accelerated filer
    Emerging growth company

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the Registrant included in the filing reflect the correction of an error to previously issued financial statements.

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the Registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).

 

Indicate by check mark which basis of accounting the Registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP International Financial Reporting Standards as issued by the International Accounting Standards Board Other

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the Registrant has elected to follow. Item 17 Item 18

 

If this is an annual report, indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

 

 

 

 

 

PART I
INTRODUCTION

 

Certain Definitions

 

All references to “we,” “us,” “our,” “our company,” “Pacasmayo,” and “Cementos Pacasmayo” in this annual report are to Cementos Pacasmayo S.A.A., a publicly held corporation (sociedad anónima abierta) organized under the laws of Peru, and, unless the context requires otherwise, its consolidated subsidiaries. References to “our controlling shareholder” are to Inversiones ASPI S.A. The term “U.S. dollar” or “U.S. dollars” and the symbol “US$” refer to the legal currency of the United States; and the term “sol” or “soles” and the symbol “S/” refer to the legal currency of Peru.

 

Financial Information

 

Our consolidated financial statements included in this annual report have been prepared in soles and in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and audited in accordance with the standards of the Public Company Accounting Oversight Board (United States).

 

We have translated some of the soles amounts appearing in this annual report into U.S. dollars for convenience purposes only. Unless the context otherwise requires, the rate used to translate soles amounts to U.S. dollars was S/3.709 to US$1.00, which was the average accounting exchange rate (tipo de cambio contable) reported on December 31, 2023, by the Peruvian Superintendence of Banks, Insurance and Private Pension Fund Administrators (Superintendencia de Banca, Seguros y AFPs, or “SBS”). The Federal Reserve Bank of New York does not report a noon buying rate for soles. The U.S. dollar equivalent information presented in this annual report is provided solely for convenience of the reader and should not be construed as implying that the soles amounts represent, or could have been or could be converted into, U.S. dollars at such rates or at any other rate.

 

Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be arithmetic aggregations of the figures that precede them.

 

In this annual report, we present EBITDA, EBITDA margin, adjusted EBITDA and adjusted EBITDA margin, which are financial measures that are not recognized under IFRS. We refer to such financial measures as “non-IFRS” financial measures. A non-IFRS financial measure is generally defined as one that purports to measure financial performance, financial position or cash flows of the subject reporting company but excludes or includes amounts that would not be so adjusted in the most comparable IFRS measure. We present EBITDA and adjusted EBITDA, and EBITDA margin and adjusted EBITDA margin because we believe they provide the reader with supplemental measures of the financial performance of our core operations that facilitate period-to-period comparisons on a consistent basis. EBITDA, adjusted EBITDA, EBITDA margin and adjusted EBITDA margin should not be used as an alternative to profit or operating profit, operating margin as an indicator of operating performance, as an alternative to cash flow provided by operating activities or as a measure of liquidity (in each case, as determined in accordance with IFRS). EBITDA, EBITDA margin, adjusted EBITDA and adjusted EBITDA margin, as calculated by us, may not be comparable to similarly titled measures reported by other companies, including those in the cement industry. For a calculation of EBITDA and adjusted EBITDA and a reconciliation of EBITDA and adjusted EBITDA to the most directly comparable IFRS financial measure, see “Item 4. Information on the Company—B. Business Overview—Overview.” EBITDA margin is equal to EBITDA divided by sales of goods. Adjusted EBITDA margin is equal to adjusted EBITDA divided by sales of goods.

 

Market Information

 

We make estimates in this annual report regarding our competitive position and market share, as well as the market size and expected growth of the construction sector and cement industry in Peru. We have made these estimates on the basis of our management’s knowledge and statistics and other information available from the following sources:

 

the Central Bank of Peru (Banco Central de Reserva del Perú, or the “BCRP”);

 

the National Statistical Institute of Peru (Instituto Nacional de Estadística e Informática, or “INEI”);

 

the Association of Cement Producers of Peru (Asociación de Productores de Cemento, or “ASOCEM”);

 

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the Ministry of Housing, Construction and Sanitation (Ministerio de Vivienda, Construcción y Saneamiento);;

 

ADUANET, a website administered by the Peruvian Tax Superintendence (Superintendencia Nacional de Administración Tributaria, or “SUNAT”);

 

the Peruvian Chamber of Construction (Cámara Peruana de la Construcción); and

 

the Global Competitiveness Index prepared by the World Economic Forum.

 

We believe these estimates to be accurate as of the date of this annual report.

 

Forward-Looking Statements

 

This annual report contains forward-looking statements. Forward-looking statements convey our current expectations or forecasts of future events. These statements involve known and unknown risks, uncertainties and other factors, including those listed under “Item 3. Key Information – D. Risk Factors,” which may cause our actual results, performance or achievements to differ materially from the forward-looking statements that we make.

 

Forward-looking statements typically are identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “project,” “plan,” “believe,” “potential,” “continue,” “is/are likely to,” or other similar expressions. Any or all of our forward- looking statements in this annual report may turn out to be inaccurate. Our actual results could differ materially from those contained in forward-looking statements due to a number of factors, including:

 

political, economic and social risk inherent to conducting business in Peru;

 

exchange rates, inflation rates and interest rates;

 

the entry of new competitors into the market we serve;

 

construction activity levels, particularly in the northern region of Peru;

 

private investment and public spending in construction projects;

 

natural disasters, such as floods and earthquakes affecting the northern region of Peru, and global events, such as public health crises and epidemics/pandemics and the worldwide effects thereof and responses thereto;

 

availability and prices of energy, admixtures and raw materials;

 

changes in the regulatory framework, including tax, environmental and other laws;

 

the successful expansion of our production capacity;

 

our ability to compete with potential substitutes of cement products that may be introduced in the Peruvian construction industry;

 

our ability to maintain and expand our distribution network;

 

international conflicts, such as the current one between Russia and Ukraine and Israel and Hamas, and the worldwide effects and responses thereto

 

our ability to retain and attract skilled employees; and

 

other factors discussed under “Item 3. Key Information—D. Risk Factors.”

 

The forward-looking statements in this annual report represent our expectations and forecasts as of the date of the filing of this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this annual report.

 

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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

A. [Reserved]

 

B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

Global Macroeconomic Conditions

 

Global macroeconomic conditions may have an adverse effect on our business, financial condition and results of operations.

 

Our operations and customers are located in Peru. As a result, our business, financial condition and results of operations, like those of most companies in Peru, may be adversely affected by the level of economic activity in the country. However, economic activity in Peru is significantly affected by global factors. The United States, China and Europe are important recipients of Peru’s exports, and therefore a slowdown in one or more of these economies will affect Peru’s economic activity. Further, natural resources exports, particularly mining, are the main source of income of the Peruvian economy, and therefore any reduction in demand and/or pricing for these exports will have a significant effect on economic activity in Peru, and hence could adversely affect the demand for our products.

 

During 2023, world economic activity was affected by the continuing Russia-Ukraine war, as well as the war between Israel and Hamas, and by rising inflation rates. The world economy showed moderate growth, due in part to the dynamism of the economies of the United States and India, in spite of a sharp contraction in China and the unfavorable evolution of Europe. The global manufacturing sector remained stagnant during 2023, principally as a result of the lack of dynamism in global trade, particularly trade in goods, mainly due to the disruptions in maritime trade that raised transportation costs, particularly container shipping. Container shipping costs increased, in part, because the Panama Canal was affected by droughts, which led to restrictions and transportation delays. Separately, the attacks in the Red Sea area caused the major shipping companies to divert their ships away from transit through the Suez Canal to other routes, such as the circumnavigation of Africa through the Cape of Good Hope. Although these shipping transportation pressures have recently decreased, increases in shipping costs remains a risk factor for global growth. We produce and sell all of our products within Peru, and are therefore less exposed to these global factors, but an overall increase in freight costs could affect our ability to import some third-party raw materials and therefore affect our results of operations, and we may still experience indirect impacts, such as rising inflation rates.

 

The cement sector is closely related to the following main macroeconomic variables: (i) the expansion or contraction of the economy as measured by gross domestic product (“GDP”), (ii) domestic demand, (iii) private investment and (iv) public spending. In this regard, prolonged conditions, at the global level, that adversely affect one or more of these variables would negatively affect the cement sector, which may have an adverse effect on our business, financial condition and results of operations.

 

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International conflicts, such as the current war between Russia and Ukraine, and the war between Israel and Hamas, as well as other geopolitical tensions or conflicts have put upward pressure on international prices, increasing inflation, and therefore could adversely affect our business, financial condition, and results of operations.

 

Russia’s full-scale invasion of Ukraine in February 2022 and Israel’s invasion of Gaza in October 2023 have created economic uncertainty, volatility and disruption in global markets. Although the length and impact of these conflicts are highly unpredictable, to date, they have had an adverse effect on global economic conditions and business activity globally and have led to (i) credit and capital market disruptions, (ii) increases in interest rates and inflation in the market in which we operate and (iii) lower global growth, among others. In addition, the Russia-Ukraine war has caused interruptions in the trade flows of goods produced in those countries (mainly energy and grains) which, in turn, generated upward pressure on international prices of those goods.

 

Similar pressures have been observed in the price of energy. Russia is a major producer of natural gas, oil and coal. Production and commercial activities have been affected by direct and indirect sanctions. Peru is a net importer of oil, and as such it has been affected by increased prices, which led to above-average inflation levels in 2023. Moreover, we use coal in our operations that, although mostly sourced locally, has a price that is correlated to the global price of energy. Likewise, according to our electricity contracts, payments for electricity are based on a formula that takes into consideration certain market variables, such as the U.S. purchase price index, the global price of oil, the local price of natural gas and the import price of bituminous coal. If energy prices increase globally, our local price of energy will also increase, therefore affecting our results of operation.

 

Geopolitical and economic risks have also increased over the past few years as a result of trade tensions between the United States and China, and the rise of populism and tensions in South America and Europe. The foregoing conflicts and any other geopolitical tensions may lead, among others, to a de-globalization of the world economy, an increase in protectionism or barriers to immigration, a general reduction of international trade in goods and services, or a reduction in the integration of financial markets. For our company, the inflationary pressures generated by these conflicts and/or de-globalization could adversely affect our business, financial condition and results of operations.

 

Increases in global freight costs could adversely affect international prices, which, in turn, may increase inflation and therefore adversely affect our business, financial condition and results of operations.

 

Although global freight prices have decreased from the peak levels experienced in the past two years, during 2023, certain adverse developments continued to put pressure on these prices. During the second half of the year, attacks on commercial vessels in the Red Sea caused increases in costs relating to re-rerouting commercial vessels away from the Suez Canal. Although this route does not directly affect our business, prolonged increased freight prices on this route can affect prices on other routes and therefore our business and results of operations. In addition, global risks to the supply chain relating to climate effects, which impact maritime transport (such as the low water levels in the Panama Canal), continue to adversely affect global freight prices. Likewise, geopolitical tensions in Europe, the Middle East and China, as well as continued trade tensions between China and the United States, could generate new risks to the supply chain and corresponding increases in freight prices.

 

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Risks Relating to Peru

 

Political, social and economic developments in Peru including political instability, rates of inflation and unemployment could have a material adverse effect on our business, financial condition and results of operations.

 

All of our operations and customers are located in Peru. Accordingly, our business, financial condition and results of operations depend on the level of economic activity in Peru. Our business, financial condition and results of operations could be affected by changes in economic and other policies of the Peruvian government (which has exercised and continues to exercise substantial influence over many aspects of the private sector), and by other economic and political developments in Peru, including devaluation or depreciation, currency exchange controls, inflation, economic downturns, political instability, corruption scandals, social disturbances and terrorism.

 

During the 1980s and the early 1990s, Peru experienced severe terrorist activity targeted against, among others, the government and the private sector. Since then, terrorist activity in Peru has been mostly confined to small-scale operations in the Huallaga Valley and the Valleys of the Rivers Apurimac, Ene and Mantaro, or “VRAEM,” areas, both in the Eastern part of the country. The Huallaga Valley and VRAEM constitute the largest areas of coca cultivation in the country and thus serve as a hub for the illegal drug trade. Terrorist activity and the illegal drug trade continue to be key challenges for Peruvian authorities. Any violence derived from the drug trade or a resumption of large-scale terrorist activities which may occur could hurt our operations and could disrupt the economy of Peru and our business. In addition, Peru has recently experienced social and political turmoil, including riots, nationwide protests, strikes and street demonstrations, as well as overall lack of safety in the streets, extortions, among other crimes that affect personal security, and could therefore have an effect on demand for our products and services and affect our business and results of operations.

 

In the past, Peru has experienced political instability that included a succession of regimes with disparate economic policies and programs that created uncertainty for domestic and foreign investors. Pedro Castillo became President of Peru, after a disputed election result in 2021. He faced political opposition in the Peruvian Congress, which was highly fragmented, as no political party had achieved a clear majority and at least 10 political parties had minority representation, which led some groups in the Peruvian Congress to ask for his resignation. On December 7, 2022, President Castillo announced his decision to dissolve Congress, to intervene in the Judiciary, the Public Ministry, the Attorney General’s Office, and the Constitutional Court, in addition to the scheduling of an election of a new Congress. These efforts by President Castillo failed due to the immediate rejection by all government bodies, including the cabinet and the armed and police forces. President Castillo was impeached that same day by Congress and arrested in transit to the Mexican embassy in Lima to request political asylum. The then Vice President Dina Boluarte was sworn in as President in accordance with the line of constitutional succession.

 

The initial days of President Boluarte’s term were characterized by strong protests in certain areas of the country. Her mandate is currently scheduled to end in 2026. However, since the political opposition in the Peruvian Congress remains strong, no assurance can be given that impeachment motions will not be presented to the Peruvian Congress against President Boluarte during the remainder of her term. We can provide no assurance that protests will not escalate in the future. In addition, the Peruvian government may seek to modify and reform the Peruvian Constitution to expand the role of the government in activities currently undertaken by the private sector in accordance with statements made during the campaign of former President Castillo. Although it is expected that a majority of the Peruvian Congress would oppose certain new policies and reforms, we can provide no assurance that policymaking by the government will not be unpredictable. We cannot assure you whether President Boluarte or any of her successors will pursue business-friendly and open-market economic policies that stimulate economic growth and stability, and that measures negatively impacting private investment, such as higher taxation or exchange controls, will not be implemented.

 

Economic activity of Peru in 2023 was affected by climatic anomalies, such as Cyclone Yaku in the North of Peru, and the overall effects of coastal El Niño Phenomenon, which lasted during much of the year (between April and November), and materialized in the form of rain in the north and anomalies of marine and environmental temperatures. Variations in economic indicators such as inflation, “GDP”, the balance of payments, the appreciation and depreciation of the national currency, access to credit, interest rates, investment and savings, consumption, spending and fiscal income and employment rates, among other variables, over which we have no control, could affect the development of the Peruvian economy and, therefore, could adversely affect our business, financial condition and results of operations.

 

Despite Peru’s ongoing economic growth and continued stabilization, the social and political tensions and high levels of poverty and proper employment continue. Future government policies to preempt or respond to social disturbances could include, among other things, expropriation, nationalization, suspension of the enforcement of creditors’ rights and new taxation policies. These policies could adversely and materially affect the Peruvian economy and our business.

 

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A depreciation or devaluation of the sol could have a material adverse effect on our business, financial condition and results of operations.

 

A significant depreciation or devaluation of the sol may affect us due to the fact that our revenues are denominated in soles while 25.7% of our costs, as of December 31, 2023, was denominated in U.S. dollars. As a result, we are exposed to currency mismatch risks. We expect to continue reducing our U.S. dollar-denominated costs, since we stopped requiring imported clinker when our new kiln came on line during the second half of 2023. Nonetheless, a depreciation or devaluation of the sol against the U.S. dollar and increased exchange rate volatility would increase the cost of our debt service obligations which could have a material adverse effect on our business, financial condition and results of operations.

 

The implementation of restrictive exchange rate policies and other similar laws by the Peruvian government could adversely affect our business, financial condition and results of operations.

 

Since 1991, the Peruvian economy has undergone a major transformation from a highly protected and regulated system to a free market economy. During this period, protectionist and interventionist laws and policies have been dismantled. Currently, foreign exchange rates are determined by market conditions, with regular open-market operations by the BCRP in the foreign exchange market to reduce volatility in the value of Peru’s currency against the U.S. dollar.

 

We cannot assure you that the Peruvian government will not institute restrictive exchange rate policies in the future. Any such restrictive exchange rate policy could have a material adverse effect on our business, financial condition and results of operations and adversely affect our ability to repay debt or other obligations and restrict our access to international financing.

 

In addition, if the Peruvian government were to institute restrictive exchange rate policies in the future, we might be obligated to seek an authorization from the Peruvian government to make payments in U.S. dollars. We cannot assure you that such an authorization would be obtained. Any such exchange rate restrictions or the failure to obtain such an authorization could materially and adversely affect our ability to make payments under our U.S. dollar-denominated debt and to pay dividends on our common shares to holders of the American Depositary Shares (“ADSs”) representing our common shares.

 

Increased rates of inflation in Peru could have an adverse effect on the Peruvian long-term credit market, as well as the Peruvian economy generally and, therefore, on our business, financial condition and results of operations.

 

In the past, Peru has suffered through periods of high and hyper-inflation, which has materially undermined the Peruvian economy and the government’s ability to create conditions that support economic growth. In response to increased inflation, the BCRP, which sets the Peruvian basic interest rate, may increase or decrease the basic interest rate in an attempt to control inflation or foster economic growth. Increases in the base interest rate could adversely affect our results of operations, increasing the cost of certain funding. Additionally, a return to a high-inflation environment would also undermine Peru’s foreign competitiveness, with negative effects on the level of economic activity and employment, while increasing our operating costs and adversely impacting our operating margins if we are unable to pass the increased costs on to our customers. Although inflation was 3.1% for 2023, below the previous five-year average of 4.4%, inflation rates in Peru may rise in the future as a result of supply shocks, including rises in prices of energy, increased freight costs, and/or an increase in domestic demand. Conflicts, such as the war between Russia and Ukraine and Israel and Hamas are likely to exacerbate these effects. In addition, there has been an increase in interest rates globally, which may have an effect on the cost of financing and adversely affect our business and financial condition if we were to require financing

 

Changes in tax laws or their interpretation may increase our tax burden and, as a result, negatively affect our business.

 

The Peruvian Congress and government regularly implement changes to tax laws that may increase our tax burden, or the tax burden of our subsidiaries. These changes may include modifications in our taxable base, tax rates and, on occasion, the enactment of temporary taxes that in some cases have become permanent taxes or changes to VAT (value added tax) exemptions applicable to certain of our operations in the Amazonian region. We are unable to estimate the outcomes that these changes may have on business. In that sense, the Peruvian government recently introduced several changes related to transfer pricing rules and formal obligations in order to comply with BEPS (base erosion and profit shifting) Guidelines on transactions performed between related parties or with the intervention of low or no-tax jurisdictions, such as the obligation to file new local-files, master-files and country-by-country reports with the Peruvian tax authority, and to adjust taxable bases accordingly for income tax purposes.

 

The effects of any tax reforms that could be proposed in the future and any other changes that result from the enactment of additional reforms have not been, and cannot be, quantified. However, any changes to our tax regime or interpretations thereof (including in connection with the tax rates, tax base (base imponible), deductions rules, payments in advance regime (regimen de pagos a cuenta), time of payment or the establishment of new taxes thereof) may result in increases in our overall costs and/or our overall compliance costs, which could negatively affect our results of operations.

 

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Our operations could be adversely affected by an earthquake, flood or other natural disasters.

 

Severe weather conditions and other natural disasters in areas in which we operate may materially adversely affect our operations. Peru is affected by El Niño, an oceanic and atmospheric phenomenon that causes a warming of temperatures in the Pacific Ocean, resulting in heavy rains off the coast of Peru and various other effects in other parts of the world. The effects of El Niño, which typically occurs every two to seven years, and is occurring in 2024, include flooding and the destruction of fish populations and agriculture, and, accordingly, have a negative impact on Peru’s economy. For example, in March 2023, Cyclone Yaku generated intense rainfall, which resulted in flooding and landslides, which severely damaged some areas in the north of Peru. Although our facilities were not significantly affected, our ability to ship cement was compromised by the destruction of infrastructure. Moreover, the road between our quarry and our plant in Piura was flooded and became inaccessible, potentially causing increased logistics costs. Since we had inventory of seashells from our quarry, we were able to use it while repairing the road. During the first quarter of 2024, we officially inaugurated a new road between our quarry and our plant in Piura that was rebuilt in a manner that will allow water to pass below in the event of heavy rains.

 

Peru also is located in an area that experiences seismic activity and occasionally is affected by earthquakes. For example, in 2007, an earthquake with a magnitude of 7.9 on the Richter scale struck the central coast of Peru, severely damaging the region south of Lima. Although the North is not typically affected by earthquakes, we cannot assure you that such an event will not occur and if it does, it could adversely affect our business and results of operations.

 

Our operations could be adversely affected by government-mandated plant closures.

 

Public health crises, such as epidemics or pandemics, as well as other events deemed to be public emergencies, may result in the government requiring us to cease our operations. For example, in March 2020, the Peruvian government ordered a state of emergency due to the COVID-19 outbreak, and required us to close our operations for approximately two months in 2020. This closure had a materially adverse effect on our business, financial condition, and results of operations, in particular during the state of emergency. Although our business recovered well following the required period of closure, we cannot assure you that the government will not take similar measures in the future as a result of public health crises or other public emergencies that may have an impact on the Peruvian economy as a whole, the construction sector, our customers’ ability to purchase cement and cement-based products, and/or our customers’ ability to pay for products we have previously sold to them.

 

Our operations are subject to physical challenges related to climate change.

 

Climate change may have an adverse impact on the regions where our operations are located. Some of the risks of climate change include heavy precipitation. Extreme precipitation, leading to flooding, may damage the roads and potentially reduce our productivity and increase our costs. Roads blocked as a consequence of floods could also affect our ability to both ship our finished products and receive raw materials, negatively affecting our business and results of operation.

 

The Peruvian economy could be adversely affected by economic developments in regional or global markets.

 

Financial and securities markets in Peru are influenced by economic and market conditions in regional and global markets. Although economic conditions vary from country to country, investors’ perceptions of the events occurring in one country may adversely affect cash flows and securities from issuers in other countries, including Peru. For example, the announcement of rate increases by the U.S. Federal Reserve, the trade war between the United States and China, and, while our direct exposure to Russia is limited, Russia’s large-scale continued military invasion of Ukraine, the military conflict between Israel and Hamas, among other factors, had an impact on the Peruvian economy by adding inflationary pressures, including in respect of high food and energy prices.

 

Any interruption to the recovery of the developed economies, the continued effects of the global crises, a worsening or resurgence of the debt crisis in Europe, a new geopolitical tension in Europe resulting in economic and/or financial crisis, or a combination of the above, could affect the Peruvian economy, and consequently, materially adversely affect our business. In particular, the Peruvian economy recently has suffered the effects of fluctuating commodity prices in the international markets, a decrease in export volumes, a decrease in foreign direct investment inflows and, as a result, a decline in foreign reserves and an increase in its current account deficit. Additionally, adverse developments in regional or global markets or an increase in the perceived risks associated with investing in emerging markets in the future could adversely affect the Peruvian economy and, as a result, adversely affect our business, financial condition and results of operations.

 

7

 

 

A decline in the prices of certain commodities in the international markets could have a material adverse effect on our financial condition and results of operations.

 

In 2023, traditional exports, in particular mineral products, fishing products, agricultural products and petroleum and its derivatives, represented 72.4% of Peru’s total exports, according to the figures published by the BCRP. Changes in commodity prices in the international markets may have an adverse impact on Peruvian government finances, which could affect both investor confidence and the sustainability of government expenditure and social programs. Thus, a decline in commodity prices could, ultimately, affect the political environment in Peru, especially as regional and local governments are particularly reliant on tax revenue from mining operations. Lower commodity prices could also affect the retail sector, leading to, for example, a decline in purchasing power and consumer spending.

 

Corruption and ongoing high-profile corruption investigations may hinder the growth of the Peruvian economy and have a negative impact on our business and operations.

 

Starting in 2017, Peru has suffered a series of government institutional crises due to, among other things, several corruption scandals involving prominent political figures, mainly past Presidents, and some large construction companies. Some of these corruption scandals resulted in impeachments (Martin Vizcarra and Pedro Castillo) or resignation ( Pedro Pablo Kuczynski)

 

In addition, several corruption scandals regarding authorities at municipal, regional and national government levels are also ongoing, and former and current government officials have been detained. Peruvian authorities are currently conducting several high profile corruption investigations relating to the activities of certain Brazilian companies and their Peruvian partners in the construction and infrastructure sectors, which have resulted in suspension or delay of important infrastructure projects, which were otherwise operational and permitted. Additional investigations and/or corruption scandals may arise as a result of the cooperation agreement signed between the Peruvian government and Odebrecht S.A. in 2019. We cannot predict how these or future corruption scandals or investigations may affect the Peruvian economy, hinder the growth of the Peruvian economy and indirectly have a material adverse effect on our business, financial condition and results of operations.

 

Although recent history indicates that the macroeconomic stability of the country may remain unaffected by political turmoil, we cannot provide any assurance that political turmoil will not in the future have a material effect on the political or economic stability of the country. See “—Economic, social and political developments in Peru including political instability, rates of inflation and unemployment could have a material adverse effect on our business, financial condition and results of operations.”

 

Public health crises, including epidemics/pandemics, such as the COVID-19 pandemic, have adversely affected Peru’s economy and therefore our business, financial condition and results of operations.

 

The COVID-19 pandemic had a material adverse impact on the Peruvian economy in 2020, resulting in volatility in the financial markets, reduced international trade and lower activity in certain of the key drivers of the economy. In addition, social distancing and stay-at-home quarantine measures imposed to minimize pressure on the healthcare system and contain social costs, adversely affected dynamism of various productive sectors of the economy. Reduced activity in these economic sectors resulted in reduced employment and less income for families and companies.

 

We cannot assure you that the measures adopted by the Peruvian government to counteract the effects of public health crises, such as the COVID-19 pandemic, or others, will be sufficient over the long term to restore public confidence or to restore economic growth.

 

8

 

 

Risks Relating to our Business and Industry

 

We are subject to the possible entry of domestic or international competitors into our market, which could decrease our market share and profitability.

 

The cement market in Peru is competitive and is currently served mainly by three main groups, which together supply most of the cement consumed in the country, although there are two smaller producers and some imports. In the cement industry, the location of a production plant tends to limit the market a plant can serve because transportation costs are high, reducing profit margins. Historically, we have supplied the northern region of Peru while two other groups have supplied the central (which includes the Lima metropolitan area) and southern regions of Peru, driven principally by the location of production facilities and distribution focus. However, competition could intensify if other manufacturers decide to enter our market.

 

We may face increased competition if the other Peruvian cement manufacturers, despite incremental freight costs, expand their distribution of cement to the northern region of Peru, or if they develop a cement plant in the north, particularly if the cement markets in Lima or other areas of Peru become saturated. In the past, some foreign cement manufacturers have announced plans to build cement plants in the central region of the country. If competition intensifies in the central region of Peru due to the presence of foreign cement manufacturers or otherwise, it may have price repercussions in our market.

 

We also face the possibility of competition from the entry into our market of imported clinker for grinding facilities, cement or other materials or products from foreign manufacturers, which may have significantly greater financial resources than us, particularly as production capacity continues to exceed depressed demand in other parts of the world and transportation costs decrease.

 

We may not be able to maintain our market share if we cannot match our competitors’ prices or keep pace with the development of new products. If any of these events were to occur, our business, financial condition and results of operations could be adversely affected.

 

Demand for our cement products is highly related to housing construction in northern Peru, which, in turn, is affected by economic conditions in the region.

 

Cement consumption is highly related to construction levels. Demand for our cement products depends, in large part, on residential construction in the north of Peru, which consists mostly of low-income families gradually building or improving their own homes without technical assistance, which we refer to as auto-construcción. We estimate that in 2023, auto-construcción accounted for approximately 73.0% of our cement sales. Residential construction, in turn, is highly correlated to prevailing economic conditions in Peru. A decline in economic conditions would reduce household disposable income and cause a significant reduction in residential construction, leading to a decrease in demand for cement. As a result, a deterioration of economic conditions in the northern region of Peru would have a material adverse effect on our financial performance and results of operations. We cannot assure you that growth in Peru’s GDP, or the contribution to GDP growth attributable to the northern region of the country, will continue at the recent pace or at all, as the economy continues to be affected by external factors such as inflationary pressure, and political uncertainty continues.

 

A reduction in private or public construction projects in the northern region of Peru would have a material adverse effect on our business, financial condition and results of operations.

 

We estimate that in 2023, approximately 16.2% of our cement sales were derived from private construction (other than auto-construcción) and 10.8% from public construction in the north of Peru. Significant interruptions or delays in, or the termination of, private or public construction projects may adversely affect our business, financial condition and results of operations. Private and public construction levels in our market depend on investments in the region which, in turn, are affected by economic conditions.

 

The level of public infrastructure construction also depends, to a great extent, on the priorities and financial resources of the national, regional and local governmental authorities. Although the anticipated increase in Peru’s large infrastructure projects has been delayed, this remains an important growth driver for the country and also a necessity due to Peru’s significant infrastructure deficit. In the North, spending was directed towards reconstruction works to address the damage caused by Coastal El Niño, based on Peru’s “Reconstruction with Changes” Plan. This Plan had an approved budget of S/25.7 billion (US$7.6 billion), and in June 2020, the Peruvian government signed an agreement with the government of the United Kingdom, for the execution of a package of S/7 billion. Through the agreement, the United Kingdom provided the structure, strategy and governance processes necessary for the timely delivery of all works, promoting efficiency and avoiding corruption. This agreement expired on December 31, 2023. We cannot assure you that public spending for construction projects will continue in the upcoming years. A reduction in public infrastructure spending in our market would adversely affect our business, financial condition and results of operations.

 

9

 

 

Our business, financial condition and results of operations may be adversely affected by increases in energy prices or shortages in the supply of energy, as well as third-party raw materials.

 

Electricity and coal account for a significant percentage of our production costs. In 2023, the cost of electricity represented approximately 16.0% of our cement production costs, compared to 14.2% in 2022 and 13.5% in 2021, and coal represented approximately 23.1% of our cement production costs in 2023, compared to 16.8% in 2022 and 11.5% in 2021. The increase in the percentage of the total production cost that coal represents is related to an overall decrease in other costs, as we stopped using imported clinker and achieved overall savings in maintenance costs. We use a substantial amount of coal in our production process. Most of the coal we use is anthracite coal which we purchase from domestic suppliers and import a small amount of bituminous coal from suppliers primarily in Colombia, in each case, at market prices. We do not have long-term coal supply agreements, and we do not engage in hedging transactions in connection with the price of coal. Any shortage or interruption in the supply of coal could also disrupt our operations. In addition, the price of coal is largely driven by the price of oil, and, as a result, increases in international oil prices are likely to affect the price of coal and adversely affect our results of operations.

 

We have a long-term electricity supply agreement with Electroperú S.A. (“Electroperú”), a government-owned company, to serve the electricity requirements of our Pacasmayo and Piura facilities until 2026. We have also entered into a supply agreement with Electro Oriente S.A. (“ELOR”) to supply the Rioja facility until November 2024 (subject to extension). During 2023, there was a disruption in the energy supply in the Rioja facility, initially estimated as maintenance works that should have lasted 2 to 3 days, but that ended up lasting around seven weeks. During this period, we were unable to operate our plant and had to transport the cement from our coastal plants in order to satisfy demand, resulting in increased costs.

 

Our business, financial condition and results of operations could be materially and adversely affected by higher costs, interruptions, and unavailability or shortage of electricity. We have no back-up power system at our plants and cannot assure you that, in case of interruption or failure in Electroperú’s or ELOR’s operations, we will have access to other energy sources at the same prices and conditions, which could adversely affect our business, financial condition and results of operations. Moreover, electricity to our plants is transmitted through the Peruvian Electricity Interconnection System (Sistema Eléctrico Interconectado Nacional del Perú, or “SEIN”). Any interruptions or failures in SEIN’s system would also have a material adverse effect on our business, financial condition and results of operations.

 

In the recent years, we have experienced electricity rationing, limiting our use of electricity to certain times of the day. In such cases, we were forced to readjust our production schedules in order to ensure that our production process was not interrupted. In the event of any future rationing of electricity, we may not be able to readjust quickly enough, and our production process may be interrupted. Future shortages or efforts to respond to or prevent shortages, such as rationing, may adversely impact the cost or supply of electricity for our operations.

 

A significant increase in the prices of coal, gas or electricity would increase our costs of production. We may not be able to increase the prices of our cement products in the future if the prices of coal, gas or electricity rises, which would adversely affect our business, financial condition and results of operations.

 

Changes in the cost or availability of admixtures and raw materials supplied by third parties may adversely affect our business, financial condition and results of operations.

 

We use certain admixtures and raw materials in the production of cement, such as gypsum, blast furnace slag and iron that we obtain from third parties. In 2023, our cost of admixtures and raw materials supplied by third parties as a percentage of our cement production costs was approximately 5.3%, compared to approximately 5.1% in 2022. Moreover, although our need for imported clinker significantly declined in 2023, when compared to 2022, we still had to use some imported clinker, and the cost of this imported clinker as a percentage of our cement production costs was approximately 4.0%, compared to 16.3% in 2022. We do not have long-term contracts for the supply of admixtures or raw materials that we use and if existing suppliers cease operations or reduce or eliminate production of these products, our costs to procure these materials may increase significantly or we may be obligated to procure alternatives to replace these products.

 

10

 

 

We may undertake future acquisitions that may not achieve expected benefits.

 

Our strategic initiatives include pursuing acquisitions that tend to diversify our existing portfolio of products and services and expand our geographic footprint. In the future, we may decide to expand by acquiring other companies in Peru or abroad. Any future acquisitions will depend on our ability to identify suitable candidates, negotiate acceptable terms, and obtain financing for the acquisitions. If future acquisitions are significant, they could change the scale of our business and expose us to new geographic, political, operating and financial risks. In addition, each acquisition involves a number of risks, such as the diversion of our management’s attention from our existing business to integrating the operations and personnel of the acquired business, possible adverse effects on our results of operations during the integration process, our inability to achieve the intended objectives of the combination and potential unknown liabilities associated with the acquired assets.

 

We may not be able to obtain the funding required to implement future strategies.

 

Our strategies to continue to expand our cement production capacity and distribution network require significant capital expenditures. We cannot assure you that we will generate sufficient cash flow from operations, or that we will have access to external financing sources, to adequately fund such capital expenditures. Our access to external sources of financing will depend on many factors, including factors beyond our control, such as conditions in the global capital markets and investors’ risk perception of investing in Peru and in emerging markets generally. Any equity or debt financing, if available, may not be on terms that are favorable to us. If our access to external financing is limited, we may not be able to execute our strategy, which could adversely affect our business, financial condition and results of operations.

 

In addition, our local bonds due 2029 and 2034, and the “club deal” loan we entered into in 2021, contain covenants that limit our ability and that of our restricted subsidiaries to incur additional indebtedness if we do not meet certain financial ratios. If we are unable to incur additional debt to fund our future strategies, our business could be adversely affected.

 

We are subject to risks related to litigation and administrative proceedings that could adversely affect our business and financial performance in the event of an unfavorable ruling.

 

The nature of our business exposes us to litigation relating to product liability claims, labor, health and safety matters, environmental matters, regulatory, tax and administrative proceedings, governmental investigations, tort claims and contract disputes, among other matters. In the past, we have been subject to antitrust and tax proceedings or investigations. While we contest these matters vigorously and make insurance claims when appropriate, litigation is inherently costly and unpredictable, making it difficult to accurately estimate the outcome of actual or potential litigation. Although we establish provisions as we deem necessary, the amounts that we reserve could vary significantly from any amounts we actually pay due to the inherent uncertainties in the estimation process. We cannot assure you that these or other legal proceedings will not materially affect our ability to conduct our business, financial condition and results of operations in the event of an unfavorable ruling.

 

Our business is subject to a number of operational risks, which may adversely affect our business, financial condition and results of operations.

 

Our business is subject to several industry-specific operational risks, including accidents, natural disasters, labor disputes and equipment failures. Such occurrences could result in damage to our production facilities and equipment, and/or the injury or death of our employees and others involved in our production process. Moreover, such accidents or failures could lead to environmental damage, loss of resources or intermediate goods, delays or the interruption of production activities and monetary losses, as well as damage to our reputation. Our insurance may not be sufficient to cover losses from these events, which could adversely affect our business, financial condition and results of operations.

 

In addition, key equipment at our facilities, such as our mills and kilns, may deteriorate sooner than we currently estimate. Such deterioration of our assets may result in additional maintenance or capital expenditures and could cause delays or the interruption of our production activities. If these assets do not generate the cash flows we expect, and we are not able to procure replacement assets in an economically feasible manner, our business, financial condition and results of operations may be materially and adversely affected.

 

11

 

 

Our business depends on the continued operation of our Pacasmayo and Piura facilities.

 

Our production facilities in Pacasmayo and Piura are essential to our business. In 2023, approximately 91.2% of our total cement and all of our quicklime was produced at our Pacasmayo and Piura facilities. These plants are subject to normal hazards of operating any cement production facility, including accidents, natural disasters and unexpected malfunctioning of the equipment. Any interruption in our operation of our Pacasmayo or Piura facilities or a decrease in the effective capacity of these facilities would adversely affect our results of operations.

 

The introduction of cement substitutes into the market and the development of new construction techniques could have a material adverse effect on our business, financial condition and results of operations.

 

Materials such as plastic, aluminum, ceramics, glass, wood and steel can be used in construction as a substitute for cement. In addition, other construction techniques, such as the use of drywall, could decrease the demand for cement and concrete. In Peru, drywall has only been introduced into the housing construction market in recent years and it is not widely used. However, the use of drywall for housing construction could increase significantly in the future as it becomes more popular. In addition, research aimed at developing new construction techniques and modern materials may introduce new products in the future. The use of substitutes for cement could cause a significant reduction in the demand and prices for our cement products.

 

Our success depends on key members of our management and board of directors

 

Our success depends largely on the efforts and strategic vision of our executive management team and our board of directors. The loss of the services of some or all of our executive management team or members of our board of directors could have a material adverse effect on our business, financial condition and results of operations.

 

The execution of our business plan also depends on our ongoing ability to attract and retain additional qualified employees capable of operating our plants. Due to the limited pool of skilled workers in the north of Peru or workers from other regions willing to relocate to the north of Peru, we may not be successful in attracting and retaining the personnel we require. If we are unable to hire, train and retain qualified employees at a reasonable cost, we may be unable to successfully operate our business or reach full planned production levels in a timely manner and, as a result, our business, financial condition and results of operations could be adversely affected.

 

Our operations and sales are highly concentrated in the northern region of Peru.

 

All of our operations are located in the northern region of Peru, including our production facilities and the quarries from where we obtain limestone to produce cement. In addition, substantially all our cement products are sold to consumers in this market. As a result, any adverse economic, political, or social conditions affecting the northern region of Peru, as well as natural disasters and weather conditions, such as the El Niño climate pattern, among other factors that may affect this region, could have a material adverse effect on our business, financial condition and results of operations. For example, in March 2023, Cyclone Yaku generated intense rainfall, which resulted in flooding and mudslides, which severely damaged some areas in the north of Peru, particularly the city of Pacasmayo, where we operate. Although there was no severe physical damage to our properties, we were affected by temporary road interruptions, inadequate workforce turnout, temporary disruptions in the supply of products, delays in the delivery of our products.

 

We are subject to environmental regulations and may be exposed to liability and political cost as a result of our handling of hazardous materials and potential costs for environmental compliance.

 

We are subject to various environmental protection and health and safety laws and regulations that regulate, among other things, the generation, storage, handling, use and transportation of hazardous materials; emissions and discharge of hazardous materials; and the health and safety of our employees. Pursuant to Peruvian law, in order to conduct mining and industrial activities, we are required, among other things, to (i) submit an environmental impact assessment to the Ministry of Production (Ministerio de la Producción) and a mining closure plan to the Ministry of Energy and Mines (Ministerio de Energía y Minas, or “MINEM”) prior to initiating mining activities, (ii) comply with certain air emission and wastewater discharge standards, (iii) obtain approval from the water management authority to discharge wastewater into natural water sources or soil, (iv) dispose solid waste generated by us in special landfills exclusively through companies registered with the environmental agency, and (v) store fuel in compliance with environmental and safety standards. In addition, we are required to have a health and safety committee and develop an internal health and safety code. Although we believe we are in compliance with all these regulations in all material respects, we cannot assure you that we have been or will be at all times in full compliance with these laws and regulations. Any violation of such laws or regulations could result in substantial fines, criminal sanctions, revocations of operating permits and shutdowns of our facilities. In addition, current or future governments may also impose stricter regulations which may require us to incur higher compliance costs.

 

12

 

 

Pursuant to certain applicable environmental laws, we could be held liable for all or substantially all of the damages caused by pollution at our current or former facilities or those of our predecessors or at disposal sites. We could also be held liable for all incidental damages due to the health effects of exposure of individuals to hazardous substances or other environmental damage.

 

We cannot assure you that our costs of complying with current and future environmental and health and safety laws and regulations, and any liabilities arising from past or future releases of, or exposure to, hazardous substances will not adversely affect our business, financial condition and results of operations.

 

Evolving expectations and/or requirements for reporting on or implementing environmental, social and governance (ESG) programs could increase our costs, and failure to meet expectations or requirements could adversely affect our sales and results of operations.

 

Expectations from shareholders, customers, employees, and other third parties concerning ESG reporting have increased and are increasing, and our ability to meet those expectations may be dependent on third parties. Regulatory requirements are also increasing, including a new rule on the Enhancement and Standardization of Climate-Related Disclosures for Investors adopted by the U.S. Securities and Exchange Commission on March 6, 2024 which will require the disclosure of information including a registrant’s material climate-related risks, activities to mitigate that risk, oversight of climate-related risks, any material climate-related targets or goals, the financial statement impacts of severe weather events, and, for certain issuers, Scope 1 and 2 greenhouse gas emissions. Although this new rule was voluntarily stayed by the SEC on April 4, 2024, pending resolution of multiple challenges to be heard by the Eighth Circuit Court, we cannot assure you that the stay will not be lifted in the future. Meeting stakeholder expectations and regulatory requirements could require additional resources and compliance costs.

 

Social disturbances by local communities may have an adverse effect on our business and results of operations.

 

Mining is an important part of the Peruvian economy. As of December 31, 2023, mining and oil and gas accounted for approximately 11.6% of the country’s GDP, according to the BCRP. On several occasions, local communities have opposed these operations and accused them of polluting the environment and hurting agricultural and other traditional economic activities. In recent years, Peru has experienced protests against mining projects in several regions around the country. For example, since 2019, there have been on-and-off conflicts in Las Bambas between local communities and China Minmetals Corp, resulting in road blockages and halt in operations repeatedly throughout this period, and is still ongoing. We conduct some extraction activities in our quarries and operate in areas close to local communities. Although we have historically had very good relationships with the local communities where we operate and nearby, we provide no assurance that this will continue to be the case in the future. During 2022, certain local communities made social demands relating to agriculture, transportation, mining, which caused instability. Social disturbances, mainly in the center and south of the country after the impeachment of President Castillo, caused further instability and resulted in an overall slowdown in GDP growth until the first quarter of 2023.

 

Illegal mining has also generated conflicts. During the last three years, Compañía Minera Poderosa, a gold mining company operating in Peru, has suffered repeated attacks by illegal miners colluding with national and foreign criminal organizations. Although a state of emergency has been declared in the region, and Minera Poderosa has significantly increased its own security, there was a new attack on April 5, 2024.

 

Social disturbances, mainly in the center and south of the country after the impeachment of President Castillo, caused further instability and resulted in an overall slowdown in GDP growth until the first quarter of 2023. Further social demands and conflicts may have an effect on the Peruvian economy, and on our business and results of operations.

 

International agreements related to climate change may result in an increase in our costs.

 

There are ongoing international efforts to address greenhouse emissions. The United Nations and certain international organizations have taken action against activities that may increase the atmospheric concentration of greenhouse gases. Regulatory measures, such as the Kyoto Protocol, aimed at addressing greenhouse gas emissions and climate changes, are in various stages of negotiation and implementation. Such measures may result in increased costs to us for installation of new controls aimed at reducing greenhouse gas emissions, purchase of credits or licenses for atmospheric emissions, and monitoring and registration of greenhouse gas emissions from our operations. These measures, if adopted in Peru, could adversely affect our business, financial condition and results of operations.

 

13

 

 

Changes in regulations or in the interpretation of regulations may adversely affect our business, financial condition and results of operations.

 

Our business is subject to extensive regulation in Peru, including, among others, relating to tax, environmental, labor, health and safety, and mining matters. We believe that our facilities are currently operating in all material respects in accordance with all applicable concessions, laws and regulations. Future regulatory changes, changes in the interpretation of such regulations or stricter enforcement of such regulations, including changes to our concession agreements, may increase our compliance costs and could potentially require us to alter our operations. We cannot assure you that regulatory changes in the future will not adversely affect our business, financial condition and results of operations.

 

Any dispute with the labor unions that represent our employees could have an adverse effect on our business, financial condition and results of operations.

 

As of December 31, 2023, approximately 22.2% of our employees were members of employee unions. Although we consider our relations with our employees are currently positive, we cannot assure you that we will not experience work slowdowns, work stoppages, strikes or other labor disputes in the future, which could adversely affect our business, financial condition and results of operations.

 

New projects may require the prior approval of local indigenous communities.

 

On September 7, 2011, Peru enacted Law No. 29785, regarding the Prior Consultation Right of Local Indigenous Communities, in accordance with the International Labor Organization Convention No. 169 (Ley del Derecho a la Consulta Previa a los Pueblos Indígenas y Originarios, Reconocido en el Convenio 169 de la Organización Internacional del Trabajo). This law, which became effective on December 6, 2011, establishes a prior consultation procedure (procedimiento de consulta previa) that the Peruvian government must carry out with local indigenous communities, whose rights may be directly affected by new legislative or administrative measures, including the granting of new mining concessions. Local indigenous communities do not have a veto right; upon completion of this prior consultation procedure, the Peruvian government retains the discretion to approve or reject the applicable legislative or administrative measure. However, to the extent that in the future our new projects may require implementation of legislative or administrative measures that impact local indigenous communities, we may not be able to undertake such projects, unless the Peruvian government first conducts the foregoing consultation procedure. We cannot assure you that this law will not adversely affect our new projects and have an adverse effect on our business, financial condition and results of operations.

 

The instruments pursuant to which our principal indebtedness was issued contain financial and other covenants, and any default under any of these instruments may have a material adverse effect on our financial condition and cash flows.

 

In January 2019, we issued an aggregate of S/570 million in debt securities in two issuances under our local bond program: one in the aggregate principal amount of S/260 million bearing interest a rate of 6.68750% with a term of 10 years, and another in the aggregate principal amount of S/310 million bearing interest at a rate of 6.84375% with a term of 15 years. These issuances contain the same restrictions and covenants as our 4.50% Senior Notes due 2023. And, in 2021, we entered into a “club deal” loan, which also contains restrictive covenants, as well as financial covenants requiring us to meet certain financial ratios tests. Failure to meet or satisfy any of these covenants could result in an event of default under the indenture, the agreements governing our local bonds or our “club deal” loan.

 

Failures in our information technology systems and information security (cybersecurity) systems can adversely impact our operations and reputation.

 

Our operations are to a certain extent dependent on information technology and automated operating systems to manage or support our operations. The proper functioning of these systems is critical to the efficient operation and management of our business. In addition, these systems may require modifications or upgrades as a result of technological changes or growth in our business. These changes may be costly and disruptive to our operations. Our systems may be vulnerable to damage, disruption or intrusion caused by circumstances beyond our control, such as physical or electronic break-ins, catastrophic events, power outages, natural disasters, computer system or network failures, viruses or malware, unauthorized access and cyberattacks. Although we take actions to secure our systems and electronic information through cybersecurity tools, backup and recovery solutions, procedures and policies which are based on Cybersecurity framework NIST 1.1 and ISO/IEC 27001:2013, have disaster recovery plans in case of incidents that could cause major disruptions to our business, these measures may not be sufficient since cybersecurity threats continue to evolve. Any significant information leakage or theft of information could affect our compliance with data privacy laws and damage our relationship with our employees, customers and suppliers, and also adversely impact our business, financial condition and results of operations. Our insurance does not cover any risk associated with any cyber security risks.

 

14

 

 

We are incorporating artificial intelligence technologies into our processes. These technologies may present business, compliance, and reputational risks.

 

Recent technological advances in artificial intelligence and machine-learning technology both present opportunities and pose risks to us. If we fail to keep pace with rapidly evolving technological developments in artificial intelligence, our competitive position and business results may suffer. At the same time, use of artificial intelligence has recently become the source of significant media attention and political debate. The introduction of these technologies, particularly generative AI, into our operations may result in new or expanded risks and liabilities, including due to enhanced governmental or regulatory scrutiny, litigation, compliance issues, ethical concerns, confidentiality or security risks, as well as other factors that could adversely affect our business, reputation, and financial results.  In addition, our personnel could, unbeknownst to us, improperly utilize artificial intelligence and machine learning-technology while carrying out their responsibilities. The use of artificial intelligence can lead to unintended consequences, including generating content that appears correct but is factually inaccurate, misleading or otherwise flawed, or that results in unintended biases and discriminatory outcomes, which could harm our reputation and business and expose us to risks related to inaccuracies or errors in the output of such technologies and the risk that using such technologies could result in leakage of our confidential information.

 

Risks Relating to our Common Shares and ADSs

 

The market price of ADSs may fluctuate significantly, and you could lose all or part of your investment.

 

Volatility in the market price of the ADSs may prevent you from being able to sell your ADSs at or above the price you paid for them. The market price and liquidity of the market for the ADSs may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include, among others:

 

actual or anticipated changes in our results of operations, or failure to meet expectations of financial market analysts and investors;

 

investor perceptions of our prospects or our industry;

 

operating performance of companies comparable to us and increased competition in our industry;

 

new laws or regulations or new interpretations of laws and regulations applicable to our business;

 

general economic trends in Peru;

 

catastrophic events, such as earthquakes and other natural disasters; and

 

developments and perceptions of risks in Peru and in other countries.

 

Our controlling shareholder has significant influence over us and his interests could conflict with the interests of other shareholders.

 

As of March 31, 2024, our controlling shareholder beneficially owned 50.01% of our outstanding common shares. As a result, our controlling shareholder has the ability to determine the outcome of substantially all matters submitted for a vote to our shareholders and thus exercise control over our business policies and affairs, including, among others, the following:

 

the composition of our board of directors and, consequently, any determinations of our board with respect to our business direction and policy, including the appointment and removal of our executive officers;

 

determinations with respect to mergers, other business combinations and other transactions, including those that may result in a change of control;

 

whether dividends are paid or other distributions are made and the amount of any such dividends or distributions;

 

whether we offer preemptive and accretion rights to holders of our common shares in the event of a capital increase;

 

sales and dispositions of our assets; and

 

the amount of debt financing we incur.

 

Our controlling shareholder may direct us to take actions that could be contrary to the interests of our other shareholders and may be able to prevent other shareholders from blocking these actions or from causing different actions to be taken. Also, our controlling shareholder may prevent change of control transactions that might otherwise provide the shareholders with an opportunity to dispose of or realize a premium on their investment in our common shares and ADSs. We cannot assure you that our controlling shareholder will act in a manner consistent with our other shareholders’ best interests.

 

15

 

 

Holders of ADSs may be unable to exercise voting rights with respect to our common shares underlying the ADSs at our shareholders’ meetings.

 

Holders of ADSs may exercise voting rights with respect to the common shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs. Holders of our common shares will receive notice of shareholders’ meetings through publication of a notice 25 days in advance, pursuant to Peruvian law, in the official gazette in Peru, a Peruvian newspaper of general circulation, the bulletin of the Lima Stock Exchange and the website of the Superintendencia del Mercado de Valores (the “Peruvian Securities Commission”), and will be able to exercise their voting rights by either attending the meeting in person or voting by proxy. ADS holders will not receive notice directly from us. Instead, pursuant to the deposit agreement, we will notify the depositary, which will mail to holders of ADSs the notice of the meeting and a statement as to the manner in which voting instructions may be given. To exercise their voting rights, ADS holders must instruct the depositary how to exercise the voting rights for the common shares which underlie their ADSs. Due to these additional procedural steps involving the depositary, the process for exercising voting rights may take longer for ADS holders than for holders of our common shares.

 

Holders of ADSs also may not receive voting materials in time to instruct the depositary to vote the common shares underlying their ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of ADS or for the manner of carrying out such instructions, unless such failure can be attributable to gross negligence, bad faith or willful misconduct on the part of the depositary or its agents. Accordingly, holders of ADSs may not be able to exercise voting rights, and they will have little, if any, recourse if the underlying common shares are not voted as requested.

 

The ability of holders of ADSs to receive payments of cash dividends may be limited.

 

Our shareholders’ ability to receive cash dividends may be limited by the ability of the depositary to convert cash dividends paid in soles into U.S. dollars. Under the terms of our deposit agreement with the depositary for the ADSs, the depositary will convert any cash dividend or other cash distribution we pay on the common shares underlying the ADSs into U.S. dollars, if it can do so on a reasonable basis and can transfer the U.S. dollars to the United States. If this conversion is not possible or if any government approval is needed and cannot be obtained, the deposit agreement allows the depositary to distribute the foreign currency only to those ADS holders to whom it is possible to do so. If the exchange rate fluctuates significantly during a time when the depositary cannot convert the foreign currency, holders of ADSs may lose some or all of the value of the dividend distribution.

 

Holders of ADSs may be unable to exercise pre-emptive or accretion rights with respect to the common shares underlying their ADSs.

 

Under Peruvian corporate law, if we issue new common shares as part of a capital increase, unless otherwise agreed to by holders of 40% of our outstanding common shares, our shareholders will generally have the right to subscribe to a proportional number of common shares of the class held by them to maintain their existing ownership percentage, which is known as preemptive rights. In addition, shareholders are entitled to the right to subscribe for the unsubscribed common shares of either the class held by them or other classes which remain unsubscribed at the end of a preemptive rights offering, on a pro rata basis, which is known as accretion rights. Holders of ADSs may not be able to exercise the preemptive or accretion rights relating to common shares underlying the ADSs unless a registration statement under the U.S. Securities Act of 1933, as amended (the “Securities Act”), is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the common shares relating to these preemptive and accretion rights and we cannot assure you that we will file any such registration statement. Unless we file a registration statement or an exemption from registration is available, holders of ADSs may receive only the net proceeds from the sale of their preemptive and accretion rights by the depositary or, if the preemptive and accretion rights cannot be sold, they will be allowed to lapse. As a result, U.S. holders of ADSs may suffer dilution of their interest in our company upon future capital increases.

 

We are entitled to amend the deposit agreement under which the ADSs were issued, and to change the rights of ADS holders under the terms of such agreement, without the prior consent of the ADS holders.

 

We are entitled to amend the deposit agreement and to change the rights of the ADS holders under the terms of such agreement, without the prior consent of the ADS holders. Any change related to an increase in deposits or charges for book-entry securities services or any modification that might hinder the rights of the ADS holders will be effective within 30 days after the ADS holders have received notice of such change or modification and such holders will have no right to any compensation whatsoever.

 

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Our status as a foreign private issuer allows us to follow alternate standards to the corporate governance standards of the New York Stock Exchange, which may limit the protections afforded to investors.

 

We are a “foreign private issuer” within the meaning of the New York Stock Exchange corporate governance standards. Under New York Stock Exchange rules, a foreign private issuer may elect to comply with the practices of its home country and not to comply with certain corporate governance requirements applicable to U.S. companies with securities listed on the exchange. We currently follow certain Peruvian practices concerning corporate governance and intend to continue to do so. Accordingly, holders of ADSs will not have the same protections afforded to shareholders of companies that are subject to all New York Stock Exchange corporate governance requirements.

 

For example, the New York Stock Exchange listing standards provide that the board of directors of a U.S. listed company must have a majority of independent directors at the time the company ceases to be a “controlled company.” Under Peruvian corporate governance practices, a Peruvian company is not required to have a majority of independent members on its board of directors.

 

The listing standards for the New York Stock Exchange also require that U.S. listed companies; at the time they cease to be “controlled companies,” have a nominating/corporate governance committee and a compensation committee (in addition to an audit committee). Each of these committees must consist solely of independent directors and must have a written charter that addresses certain matters specified in the listing standards. Under Peruvian law, a Peruvian company may, but is not required to, form special governance committees, which may be composed partially or entirely of non-independent directors.

 

In addition, New York Stock Exchange rules require the independent non-executive directors of U.S. listed companies to meet on a regular basis without management being present. There is no similar requirement under Peruvian law.

 

The New York Stock Exchange’s listing standards also require U.S. listed companies to adopt and disclose corporate governance guidelines. In November 2013, the Peruvian Securities Commission and a committee comprised of regulatory agencies and associations prepared and published a list of suggested non-mandatory corporate governance guidelines called the “Good Corporate Governance Code for Peruvian Companies.” Although we have implemented a number of these measures, we are not required to comply with the corporate governance guidelines by law or regulation, only to disclose whether or not we are in compliance.

 

Minority shareholders in Peru are not afforded equivalent protections as minority shareholders in other jurisdictions and investors may face difficulties in commencing judicial and arbitration proceedings against our company or our controlling shareholder.

 

Our company is organized and existing under the laws of Peru, and our controlling shareholder is resident in Peru. Accordingly, investors may face difficulties in serving process on our company, our officers and directors or our controlling shareholder in other jurisdictions, and in enforcing decisions granted by courts located in other jurisdictions against our company, our officers and directors or our controlling shareholder that are based on securities laws of jurisdictions other than Peru.

 

In Peru, there are no proceedings to file class action suits or shareholder derivative actions with respect to issues arising between minority shareholders and an issuer, its controlling shareholders or directors and officers. Furthermore, the procedural requirements to file actions by shareholders differ from those of other jurisdictions, such as in the United States. As a result, it may be more difficult for our minority shareholders to enforce their rights against us, our directors, officers or controlling shareholder as compared to the shareholders of a U.S. company. The deposit agreement provides that the depositary has no obligation to commence or become involved in any judicial proceedings and any other legal actions relating to the ADSs or the deposit agreement, either on behalf of the ADS holders or on behalf of any other person.

 

The ability of investors to enforce civil liabilities under U.S. securities laws may be limited.

 

Most of our directors or executive officers are not residents of the United States. All or a substantial portion of our assets and those of our directors and executive officers are located outside of the United States. As a result, it may not be possible for investors in our securities to affect service of process within the United States upon such persons or to enforce in U.S. courts or outside of the United States judgments obtained against such persons outside of the United States.

 

We are a company organized and existing under the laws of Peru, and there is no existing treaty between the United States and Peru for the reciprocal enforcement of foreign judgments. It is not clear whether a Peruvian court would accept jurisdiction and impose civil liability if proceedings were commenced in a foreign jurisdiction predicated solely upon U.S. federal securities laws.

 

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ITEM 4. INFORMATION ON THE COMPANY

 

A. History and Development of the Company

 

Our History

 

Cementos Pacasmayo S.A.A. was incorporated in Lima, Peru in 1949, by a group of private investors that founded the company to serve the cement market in the northern region of Peru. Cementos Pacasmayo began its operations in 1957 and is a publicly held corporation (sociedad anónima abierta) organized under the laws of Peru. Our executive offices are located at Calle La Colonia 150, Urbanización El Vivero, Surco, Lima, Peru. Our telephone number at this location is + (511) 317-6000. Our website address is www.cementospacasmayo.com.pe. Information on or accessible through our website is not a part of, nor incorporated by reference in, this annual report.

 

Cementos Pacasmayo S.A.A. and Hochschild Mining plc together constitute the two businesses of the Hochschild Group, which has operated in Latin America for more than 100 years. Hochschild Mining plc is incorporated in the United Kingdom and its shares have been listed on the London Stock Exchange since 2006. Cementos Pacasmayo has been listed on the Lima Stock Exchange since 1995. As of March 31, 2024, Eduardo Hochschild, directly and indirectly, owned and controlled 38.32% of the shares of Hochschild Mining plc. Through Inversiones ASPI S.A. (“ASPI”), as of that same date, Eduardo Hochschild, directly and indirectly, owned and controlled 50.01% of the outstanding common shares of Cementos Pacasmayo. S.A.A.

 

The Hochschild Group traces its origins to 1911, when Mauricio Hochschild, a German mining engineer, founded a group of companies in South America that came to be known as the Hochschild Group. Following World War I, the Hochschild Group expanded into Bolivia where it developed significant interests in tin. The Hochschild Group commenced operations in Peru in 1925 and in 1945 Luis Hochschild, the nephew of Mauricio Hochschild (and the father of Eduardo Hochschild), joined the Hochschild Group’s Peruvian operations.

 

During the first decades of its operations, the Hochschild Group focused on the commercialization of minerals, although it later began operating its own mines and other industrial companies. During World War II, the Hochschild Group was a key supplier of tin and other metals to the allied forces.

 

The Hochschild Group acquired its initial ownership interest in us in 1956. Set forth below are key developments in our company’s history.

 

In 1957, we began our operations with the installation of our first clinker line with an installed production capacity of approximately 110,000 metric tons per year. In 1966 and 1977, we added a second and third clinker line, respectively, increasing our installed clinker production capacity to approximately 830,000 metric tons per year.

 

In November 1984, the South American mining and industrial operations of the Hochschild Group were sold to the Anglo American Corporation of South Africa which, in the same month, sold the Peruvian operations of the Hochschild Group, including its interest in Cementos Pacasmayo and predecessors of Hochschild Mining plc, to a group of companies controlled by Luis Hochschild.

 

In 1995, we launched our distribution network to commercialize and distribute our products throughout the northern region of Peru. In that same year, we also listed our common shares for trading on the Lima Stock Exchange, currently under the ticker symbol “CPACASC1.”

 

In 1998, we acquired from the Peruvian government our Rioja facility, located in the northeast of Peru. At the time, the Rioja facility had one clinker line with an installed cement production capacity of approximately 35,000 metric tons per year.

 

In 2003, we acquired Zemex Corporation, a U.S. company engaged in non-metallic mining and industrial activities in the United States and Canada, which we sold in 2007 in a series of transactions.

 

In 2009, we created Fosfatos del Pacífico in order to explore phosphate rock deposits from our concession at Bayóvar in the north of Peru.

 

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In 2010, we reached an aggregate total installed cement production capacity of 3.1 million in our Pacasmayo and Rioja facilities and completed the conversion of our Waelz kiln, retrofitting it to produce quicklime or calcine zinc interchangeably. That same year, we also sold our copper mining concessions in the central region of Peru known as “Mina Raul,” which were previously leased to a third party, for US$28.0 million.

 

In December 2011, we sold a minority equity interest in Fosfatos to an affiliate of Mitsubishi to develop our phosphate deposits in the Bayóvar fields, in the northwest of Peru.

 

In March 2012, we completed our initial equity offering of 22,296,800 ADSs in the United States and listed the ADSs on the New York Stock Exchange.

 

In February 2013, we issued US$300 million in our inaugural international bond offering. A portion of the proceeds from this offering were used to prepay amounts outstanding on our secured loan agreement with BBVA Banco Continental, and the remaining proceeds were used to fund a portion of the capital expenditures related to the construction and operation of our new Piura plant and our cement business.

 

In September 2015, we began producing cement at our new plant in Piura. This was a very important milestone for us, since we have been investing in this project since 2012 and we have begun to reap the benefits of this investment.

 

In January 2016, we began producing clinker at our new plant in Piura, finishing the start-up of the plant, adding one million metric tons of annual clinker production capacity.

 

In March 2017, we completed the spin-off of Fostatos del Pacífico.

 

In December 2017, our board of directors resolved to focus our strategy on our core business of developing cement and building solutions. In furtherance of this strategy, we have focused on disposing of our non-core investments. In the fourth quarter of 2017, we discontinued our brine project.

 

In March 2018, we launched our new brand image and updated its vision: to further enhance our position as a leader in developing building solutions and innovations that anticipate the needs of our clients and that contributes to the progress of our country.

 

During 2018, we implemented the ISO 37001 anti-bribery management systems, obtaining certification in January 2019. This certification confirms that our management systems are designed to help prevent, detect and respond to bribery and comply with anti-bribery laws and voluntary commitments applicable to our activities. This certification and related initiatives reiterate our commitment to global anti-bribery best practices and high standards of transparency and good corporate governance.

 

In November 2018, we launched an offer to purchase for cash a portion of the US$300 million principal amount of our outstanding 4.50% Senior Notes due 2023. The offer expired on December 7, 2018 and we purchased a total of US$168,388,000, or approximately 56.13% of the total outstanding amount of our 4.500% Senior Notes due 2023.

 

On January 8, 2019, the General Shareholders’ Meeting approved the creation of a local bond program in an aggregate principal amount up to S/1,000 million. On January 31, 2019, we issued an aggregate principal amount of S/570 million in debt securities under our local bond program: one in the aggregate principal amount of S/260 million accruing interest at a rate of 6.68750% per annum with term to maturity of 10 years, and the other in the aggregate principal amount of S/310 million accruing interest at a rate of 6.84375% per annum with a term to maturity of 15 years. The proceeds were used to purchase a portion of our 4.50% Senior Notes due 2023. The rates and terms obtained reduce our financial cost structure, with lower cost of capital, an extended maturity and less exposure to exchange rate fluctuations.

 

In 2020, we were included on the Dow Jones Sustainability (“DJS”) MILA Pacific Alliance Index for the second consecutive year. This index is made up of those companies that demonstrate superior performance among their peers based on social, environmental, and economic criteria.

 

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In 2021, given the exponential growth in the demand for cement, in October 2021, the optimization of the capacity of our Pacasmayo plant was approved, in order to produce an additional estimated 660,000 metric tons of clinker, and thus reduce the consumption of imported clinker.

 

In 2022, for the fourth consecutive year, we managed to be part of the annual DJS MILA Pacific Alliance Index, achieving a score of 79 points, which was an improvement of four points compared to the previous year. We were the only Peruvian cement company present in DJS MILA Pacific Alliance Index for 2022. In addition, to strengthen our sustainability strategy and especially our commitment to reducing emissions, in 2022, we designated a Sustainability Manager and a Climate Change Managing Director. During 2022, we implemented the ISO 37301 compliance management system, obtaining the certification in January 2023.

 

In 2023, we finished investing approximately US$ 83.5 million in a more efficient kiln for our Pacasmayo plant. This investment is fully aligned with our medium- and long-term strategy as it demonstrates on the one hand, our firm belief in the future growth of our country and, on the other hand, our commitment to carbon neutrality, as this new kiln lowers our emissions. In addition, for the fifth consecutive year we were part of the annual DJS MILA Pacific Alliance Index and for the fourth consecutive year we were included in The Sustainability Yearbook 2024. Finally, the Institutional Investor highlighted us within the top three in the construction sector in Latin America in the “2023 Latin American Executive Team” and in the categories: Best Investor Relations Program, Best Investor Relations Team, Best CEO, Best CFO, Best Investor Relations Professional and Best Board of Directors. We also achived the “Most Honored Company” distinction in Peru and Latin America, for having the highest cumulative success in the rankings.

 

Capital Expenditures

 

We expect to spend approximately S/ 75 million per year over the next three years on recurring capital expenditures necessary to operate our plants and equipment. During 2023, we incurred additional capital expenditures to finance the optimization of our plant in Pacasmayo. We financed these investments with our current and future cash flows.

 

The table below sets forth our total capital expenditures incurred in 2023, 2022 and 2021.

 

   Year ended December 31, 
(in millions of S/)  2023   2022   2021 
             
Pacasmayo plant projects   251.1    149.7    45.4 
Concrete and aggregates equipment   18.2    18.8    27.9 
Rioja plant projects   9.4    4.5    8.9 
Piura plant projects   17.6    17.1    15.1 
Other investing activities   3.0    -    - 
Total   299.3    190.1    97.3 

 

B. Business Overview

 

Overview

 

We are a Peruvian cement company, and the only cement manufacturer in the northern region of Peru. With more than 65 years of operating history, we produce, distribute and sell cement and cement-related materials, such as precast products and ready-mix concrete. Our products are primarily used in construction, which has been one of the fastest growing segments of the Peruvian economy in recent years. We also produce and sell quicklime for use in mining operations, although it represents a very small percentage of our overall revenues.

 

In 2023, our cement, concrete and precast shipments were approximately 3.0 million metric tons, representing an estimated 24.0% share of total cement shipments in Peru. Our sales volumes in 2023 decreased by 13.9% compared to 2022, but are still above pre-pandemic levels, as the variation between 2023 and 2019 was 13.0%. We believe the construction sector has significant potential to grow with the continued deficit in infrastructure and the persistent housing deficit in the country, as well as the reconstruction of northern Peru following Cyclone Yaku in the first half of 2023

 

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We own three cement production facilities, our flagship Pacasmayo facility located in the northwest region of Peru, our Piura facility located around 300 kilometers north of Pacasmayo, and our smaller Rioja facility located in the northeast. Our facilities have a total installed annual cement production capacity of approximately 4.9 million metric tons. We also have an installed annual production capacity of 240,000 metric tons of quicklime. We own concession rights to several quarries with reserves of limestone and other raw materials located near our facilities.

 

In 2023, we began producing clinker in our new kiln in Pacasmayo, optimizing our capacity in this plant and adding 660,000 metric tons of clinker capacity per year.

 

We provide consumers with high-quality and value-added cement products and, as a result, we believe we have developed strong brand recognition and customer loyalty in our market. We have developed one of the largest independent retail distribution networks for construction materials in Peru. Through our network of 285 independent retailers and 313 hardware stores as of December 31, 2023, we distribute our cement products as well as other construction materials manufactured by third parties, such as steel rebar, cables and pipes, in the northern region of Peru. We also sell our cement products directly to other retailers that are not part of our distribution network and to private construction companies and government entities.

 

The following table sets forth certain macroeconomic data for Peru and operating and financial data for our company for the periods indicated.

 

   As of and for the year ended December 31, 
   2023   2022   2021 
Economic data(1):            
Change in GDP   (0.7)%   2.9%   13.2%
Change in construction sector in Peru   (8.0)%   3.5%   34.7%
Operating data:               
Capacity (thousands of metric tons per year):               
Installed cement capacity   4,940    4,940    4,940 
Installed clinker capacity   3,035    2,780    2,780 
Production (thousands of metric tons):               
Cement production   2,946    3,436    3,632 
Clinker production   2,097    2,198    2,036 
Utilization rate at Pacasmayo plant(2):               
Cement   57.1%   61.0%   67.9%
Clinker   61.6%   62.3%   58.6%
Utilization rate at Rioja plant(2):               
Cement   58.8%   69.8%   76.8%
Clinker   69.0%   85.7%   94.4%
Utilization rate at Piura plant(2):               
Cement   64.5%   85.1%   82.7%
Clinker   80.7%   100.0%   89.3%
                
Gross profit (S/ million)   689.4    652.0    559.4 
Gross profit margin(3):   35.4%   30.8%   28.9%
EBITDA (S/ million)   481.8    493.9    453.9 
EBITDA margin (4)   24.7%   23.3%   23.4%
Adjusted EBITDA(5) (S/ million)   518.3    493.9    453.9 
Adjusted EBITDA margin(6)   26.6%   23.3%   23.4%
Profit (S/ million)   168.9    176.8    153.2 
Profit margin   8.7%   8.4%   7.9%

 

 

(1)Source: BCRP.
(2)Utilization rate is calculated by dividing production for the specified period by installed capacity of that period.
(3)Gross profit margin is equal to gross profit as a percentage of net sales.
(4)EBITDA margin is equal to EBITDA divided by sales of goods.
(5)Adjusted EBITDA excludes the effect of the impairment of our vertical kilns.
(6)Adjusted EBITDA margin is equal to adjusted EBITDA divided by sales of goods.

 

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Non-IFRS Financial Measures and Reconciliation

 

We define EBITDA as net profit minus finance income and plus finance costs, income tax expense, and depreciation and amortization, and plus or minus gain from exchange difference, net. We define adjusted EBITDA as EBITDA minus the impairment of our vertical kilns.

 

EBITDA and adjusted EBITDA should not be construed as alternatives to profit or operating profit, as indicators of operating performance, as alternatives to cash flow provided by operating activities or as measures of liquidity (in each case, as determined in accordance with IFRS). EBITDA and adjusted EBITDA, as calculated by us, may not be comparable to similarly titled measures reported by other companies, including those in the cement industry.

 

The following table sets forth the reconciliation of our profit to EBITDA and adjusted EBITDA:

 

   Year ended December 31, 
   2023   2023   2022   2021 
   (in millions of
US$)(1)
   (in millions of S/)   (in millions of S/)   (in millions of S/) 
                 
Net profit   45.5    168.9    176.8    153.2 
Income tax expense   20.7    76.8    85.6    70.9 
Finance income   (1.9)   (7.2)   (3.3)   (2.9)
Finance costs   28.0    104.0    95.2    89.0 
Net (loss) gain derivative financial instruments recognized at fair value through profit or loss           0.1    1.0 
(Gain) Loss from exchange difference, net   (1.3)   (4.9)   1.0    7.1 
Depreciation and amortization   38.9    144.2    138.5    135.6 
EBITDA   129.9    481.8    493.9    453.9 
Impairment of vertical kilns   9.9    36.6         
Adjusted EBITDA   139.7    518.3         

 

(1)Calculated based on an average exchange rate of S/3.709 to US$1.00 as of December 31, 2023.

 

Peruvian Cement Market

 

Peru had a negative 0.7% GDP in 2023, mainly due to the effects of social conflicts, unfavorable climatic conditions and the outbreak of avian flu, which affected production capacity and had a second round effect on private sector income and confidence. Addtionally, there was a decrease in the purchasing power of households due to the persistent and significant increase in food prices, as well as a lower demand for non-traditional products, mainly from the North American market. From 2019 to 2023 GDP grew at a compound annual growth rate, (“CAGR”), of 0.7%. Growth during this period was accompanied by low inflation, which averaged 4.4% per year. In addition, as of December 31, 2023, the government had accumulated foreign exchange reserves of approximately US$75.6 billion, and the sovereign long-term debt rating was investment grade from each of the three major international credit rating agencies. Although this economic growth had resulted, among other key trends, in significant poverty reduction, with a decrease in the percentage of the country’s population living below the poverty line from approximately 48.6% in 2004 to approximately 27.2% in 2022.

 

We sell substantially all our cement in the northern region of Peru, which in 2023 accounted for approximately 32.9% of the country’s population and 20.0% of national GDP. Two other groups sold most of the cement consumed in each of the central and southern regions of Peru, with 1.7% of all the cement consumed in the country coming from imports, and approximately 3.4% coming from a small domestic producer. From 2019 to 2023, total cement consumption in Peru increased 1.2% according to the INEI. Peru continues to have a significant housing deficit, estimated by the INEI at 1.9 million homes nationwide. In Peru, cement is mainly sold to a highly fragmented consumer base, consisting primarily of households that buy cement in bags to gradually build or improve their own homes without professional technical assistance,a segment known in our industry as auto-construcción. We estimate that in 2023 sales to the auto-construcción segment accounted for approximately 73.0% of our total sales of cement, private construction projects accounted for 16.2%, and public construction projects accounted for the remaining 10.8%. Approximately 88.5% of our total cement sales in 2023 were in the form of bagged cement, substantially all of which was sold through retailers.

 

Even though our ready-mix sales are still a small proportion of our sales, we expect this trend to change as infrastructure becomes a bigger driver of demand in the upcoming years.

 

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Impairment of Vertical Kilns

 

At the end of 2023, our board of directors, advised by management, recognized a specific impairment for the net value of the assets of the vertical clinker kilns located at the Pacasmayo cement plant for a net cost of S/36,551,000. This deterioration estimate was carried out as a consequence of replacing the old technology of these kilns due to the entry into operation of a new horizontal kiln in the Pacasmayo plant, which is more efficient and produces fewer emissions. This amount was recorded in the impairment of property, plant and equipment item in the consolidated statement of profit or loss.

 

Competitive Strengths

 

Our principal competitive strengths include the following:

 

Strong corporate governance standards and international recognition

 

Our common shares are listed on the Lima Stock Exchange and the ADSs are listed on the New York Stock Exchange. We are subject to the disclosure requirements of the U.S. Securities and Exchange Commission (the “SEC”) and the Peruvian Securities Commission and we must comply with and adopt internal compliance standards to increase transparency and improve corporate governance standards including an audit committee and appointment of independent directors. Since 2009, every year we have been selected as part of the Good Corporate Governance Index of the Lima Stock Exchange (recently renamed S&P/BVL Peru General ESG Index), designed to measure the performance of securities in the S&P/BVL Peru General Index that meet sustainability criteria. Furthermore, we were included for the fifth consecutive year as part of the 2023 DJSI MILA Pacific Alliance Index. This index is made up of those companies that demonstrate superior performance among their peers under social, environmental and economic criteria. This achievement comes as a result of Pacasmayo’s effort to improve in all of these criteria and to work towards ambitious goals in terms of long-term sustainability. We are committed not only to remain in the Index but to improve our performance, as we are convinced that the focus on sustainability is key to our business and our stakeholders. Additionally, Institutional Investor highlighted us within the top 3 in the construction sector in Latin America in the “2023 Latin American Executive Team” and in the categories: Best Investor Relations Program, Best Investor Relations Team, Best CEO, Best CFO, Best Investor Relations Professional and Best Board of Directors. We also obtained the “Most Honored Company” distinction in Peru and Latin America, for having the highest cumulative success in the rankings.

 

In February 2024, we were selected to be part of The Sustainability Yearbook 2024, for the fourth consecutive year. To appear in the Yearbook, companies must score within the top 15% of their industry globally and have a gap of less than 30% from the leader’s Global ESG score. With around 9,400 companies evaluated around the world, an inclusion in the yearbook is a true statement of excellence in corporate sustainability.

 

Track record of cash flow generation and strong results through multiple business cycles

 

We have historically generated strong cash flow and high profit margins mainly due to the following key factors:

 

our leadership position in the northern region of Peru; and

 

our extensive distribution network, operational flexibility and efficiency, and focus on innovation.

 

These factors helped us generate adjusted EBITDA of S/518.3 million during 2023, the highest in company history. This solid financial position and our ability to consistently generate operating cash flow also allows us to obtain relatively low interest rates.

 

Leader in attractive and expanding market with solid macroeconomic fundamentals

 

We are currently the only cement manufacturer in the northern region of Peru and we produce and sell substantially all of our cement in the region. In 2023, the northern region accounted for approximately 32.9% of the country’s population and 20.0% of its GDP. From 2019 to 2023, GDP in the northern region increased at a CAGR of 0.8%. During the same period, our cement sales volume grew at a CAGR of 3.1%, above northern region GDP mainly due to the resilience of the auto-construcción segment, driven by high employment levels in the agriculture, fishing and services sectors, which are prominent in the North.

 

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Best-in-class operating efficiencies with vertical integration and strong brand recognition

 

Our quarries are located in close proximity to our plants, enabling us to minimize transportation costs. We strive to enhance our operational efficiency by focusing on lowering costs and improving profitability. We also benefit from our vertically integrated operations, participating in the entire chain of production from the quarries, which we own directly, to the related products such as quicklime, ready–mix, precast and our large distribution network. We have developed one of the largest independent retail distribution networks for construction materials in Peru, known as “DINO,” consisting of 285 independent retailers and 313 hardware stores as of December 31, 2023, primarily small, local stores in the northern region, through which we distribute our cement products, as well as construction materials manufactured by third parties. We use our distribution network, together with our strategically located commercial offices, to promote our products and stay abreast of market developments. We have developed this network through years of fostering relationships with retailers in the region, which we believe would be difficult for a competitor to replicate. Our distribution network has enabled us to build strong recognition for our Pacasmayo brand among retailers and end-consumers in our market, which we believe is important to our business, particularly because our cement is principally sold in bags to retail consumers.

 

Disciplined capital expenditure plan with attractive risk / return profile

 

We seek to minimize risk while securing an adequate return on our development projects. In 2015, we completed construction of our new plant in Piura, the third largest city in northern Peru, which has an annual production capacity of 1.6 million metric tons of cement. The Piura plant improved our competitive position in the northern region of Peru. With production from three plants, we are able to serve our market more efficiently. This state-of-the-art plant is one of the most modern in Latin America. It also reduces transportation costs by enabling the dispatching of cement from plants within closer proximity to the point of sale.

 

In 2021, we decided to invest approximately US$83.5 million to optimize our current capacity at our Pacasmayo plant, in order to produce an additional estimated 660,000 metric tons of clinker per year. This optimization was completed during the second half of 2023, allowing us to stop using imported clinker, and therefore achieving higher margins.

 

Emphasis on innovation

 

We place significant emphasis on research and development to ensure our products meet the needs of consumers in our market and to improve the efficiency of our operations. For example, we have developed cement products suitable to coastal construction that tend to be more exposed to erosion from sulfate. We believe that, by educating retailers and end consumers of these attributes of our products, we have been successful in building demand and realizing higher margins for our differentiated product offering.

 

In July 2016, we created the Innovation Department with the main objective of systematizing the continuous transformation process of the business in order to ensure a sustainable growth for Cementos Pacasmayo and the improvement of its margins. To achieve this objective it is necessary to:

 

Put the customer at the center of all our processes.

 

Design a management innovation model.

 

Promote an organizational culture that encourages entrepreneurship and innovation.

 

Given that customers, and consumption patterns can change quickly and unexpectedly we must quickly adapt in order to retain our customers.

 

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During 2023, we continued developing, and in some cases, consolidating our digital platforms,shown in the following chart:

 

Name of the project   Description
MAVERICK   We have improved our concrete service to adapt to the unique needs of each client. We change the way of programming and create new tools to establish different prices according to what each client requires. Our digital transformation team is helping to lead and accelerate this process to achieve these goals.
APOLO   During 2023, we partially launched our new B2B ecommerce platform that will support our digital transformation and CX strategy.
Design System   We have developed and implemented the Pacasmayo “Bricks” Design System, a collection of reusable components, guidelines and resources used by designers and developers to create consistent and efficient user interfaces.
AYU   Project designed to help families in Peru build their dreams without incurring debt or interest. Through an intelligent purchasing method, families will be able to define their project and buy the materials that their project needs month by month. This year there were 500 registrations (potential self-construction projects).
DEDALO   Design and guide the implementation of a process automation model, accelerating the digital transformation of the company.
PACAS PRO   Is a digital platform aimed at the industrial segment. It aims to maximize the experience of construction companies during the execution of their projects through online and relevant information.

 

Strong relationship with local communities

 

Since we began operations over 65 years ago, we have been committed to improving the quality of life of the communities surrounding our plants, whose members we regularly employ. We have developed close and cooperative relationships with the local communities, which are supported by several social responsibility initiatives we have undertaken. For example, the family of our controlling shareholder founded, Asociación Tecsup, a leading non-profit institute in Peru that provides technical education to students as well as UTEC, a leading technical university. We provide scholarships and financial aid to local qualified students interested in studying at Tecsup.

 

As part of our Vision 2030 program, aimed at contributing to the progress of our country, in 2023, we built the Regional Archive of Cajamarca, through the mechanism of Works for Taxes (mechanism implemented by the Peruvian government that allows for quality public infrastructure and services executed by private sector companies, which are responsible for financing them through the payment of their income tax). This emblematic building was financed and built by our Company and stores all the historical documentation of the culture and tradition of the city.

 

In 2023, we also launched our “Sueños en Concreto” program to improve the infrastructure conditions of homes and thereby contribute to improving the quality of life and habitability conditions in the areas in which we operate. We started in 2022 with a pilot program and by the end of 2023 we have improved 296 homes.

 

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Highly experienced and professional management and board of directors

 

Our management team, with an average of 15 years of experience in the cement industry in Peru, has extensive technical and local market expertise and has led our company through our recent growth. We have developed a strong professional business culture and a team of highly qualified executives. We also have a well-regarded and experienced board of directors that includes some of Peru’s business leaders and former senior government officials.

 

Our Strategies

 

Our objective is to maximize shareholder value, while honoring our commitment to the environment and abiding by our social responsibility goals. We aim to be a leading company that provides building solutions anticipating the needs of our clients and that contributes to the continued development of our country. We intend to achieve our objective through the following principal strategies:

 

Continue to focus on our core business of supplying the demand for cement

 

We plan to continue to meet the demand for cement in our market, while controlling production costs. We intend to continue to serve the current cement market, as well as increasing cement demand through the production of new cement-based products. Our principal goal is to maintain our market share in the northern region of Peru without reducing the profitability of our business, as to continue developing building solutions to satisfy our clients’ needs.

 

Deepen our commercial relationship with retailers and end-consumers

 

We plan to enhance our commercial relationships with retailers and end-consumers in our market, both to maintain brand loyalty and to foster demand for our cement products. We will continue to support retailers in our DINO distribution network by providing product education, training sessions, rewards programs, and assistance in financing purchases of our products. In addition, we continue with our door-to-door commercial strategy for cement sales. We believe that these initiatives have been successful in strengthening our relationship with retailers and end-consumers.

 

Continue to focus on being the preferred provider of building solutions

 

We strive to be the supplier of choice for cement consumers in the northern region of Peru, whether its individuals building their homes or private construction companies or governmental entities undertaking projects of any size. We continue to focus on providing consumers with efficient and customized building solutions for their construction needs. Over the past several years, we have evolved from being a single type cement manufacturer to offering six different types of cement products, under two brands, and other building solutions, such as assembly gravity walls, sheet piles, precast beams, among others. Moreover, in 2018 we launched a new corporate image and future vision, transforming ourselves from a cement producer to a building solutions company. We focus on innovation and are constantly searching for ways to improve building practices, inspired by our culture based on sustainability. For example, we offer cement that contains special properties that protect against sulfate erosion, as well as other products designed to meet the needs of consumers in the northern region of Peru. For the industrial segment and under our PacasPro brand, we continue with the digitalization of the purchasing process and of the use of our products and services. For our mass channel and self-builders we have Mundo Experto, an ecosystem that integrates physical and digital solutions, improves the purchasing experience and contributes to the professionalization and formalization of the construction market. Our mission is to provide a comprehensive solution for all project types and thus respond to the unique needs of each client, generating savings and efficiencies in the construction processes. During 2023, the company began the reconstruction of the two runways and the perimeter fence of Piura Airport, not only as a cement and concrete provider, but with direct involvement in the construction as well as part of a consortium. The modernization of the airport aims to stimulate the tourism industry in the region and exceed the 1.09 million passengers transported during 2023.

 

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Selectively pursue acquisitions

 

We will continue to evaluate and may selectively pursue strategic acquisitions of cement and complementary businesses that expand our geographic footprint and diversify our portfolio of products. Our management team has significant operating experience and industry knowledge in the production and commercialization of cement and cement-related materials, and we believe this experience will enable us to identify and pursue attractive acquisitions that will maximize shareholder value.

 

Continue to strengthen our enterprise risk management

 

We continue to strengthen our enterprise risk management methods and processes that allow us to identify, assess and monitor the legal, commercial, operational, financial and reputational risks, as well as fraud, corruption, bribery and money laundering and financing of terrorism risks, determining the existing controls and establishing a plan along with other areas in order to mitigate existing risks. Along these lines, since 2018, we have implemented the ISO 37001 Anti-bribery management systems obtaining the certification every year since 2019. This certification confirms that our management system is designed to help prevent, detect and respond to bribery and comply with anti-bribery laws and voluntary commitments applicable to its activities. We believe this certification reiterates our commitment to global anti-bribery best practices and high standards of transparency and good corporate governance. Also, to continue to strengthen our management systems, during 2022 we implemented the ISO 37301 compliance management system, obtaining certification in January 2023, with a first audited follow-up in September 2023.

 

Maintain high environmental, social and governance standards

 

We are committed to maintaining high environmental, social and corporate governance standards. We are focused on developing and strengthening a favorable social environment for the continuity and growth of our operations, prioritizing our social investment in innovative education, health and local development programs in coordination with other stakeholders to contribute to sustainable development. Since 2009, every year we have been selected as part of the S&P/BVL Peru General ESG Index (formerly known as the Good Corporate Governance Index of the Lima Stock Exchange), designed to measure the performance of securities in the S&P/BVL Peru General Index that meet sustainability criteria. Furthermore, we were included for the fifth consecutive year as part of the 2023 DJSI MILA Pacific Alliance Index. This index is made up of those companies that demonstrate superior performance among their peers under social, environmental and economic criteria. This achievement comes as a result of Pacasmayo’s effort to improve in all of these criteria and to work towards ambitious goals in terms of long-term sustainability. We are committed not only to remain in the Index but to improve our performance, as we are convinced that the focus on sustainability is key to our business and our stakeholders.

 

In February 2024, we were selected to be part of The Sustainability Yearbook 2024, for the fourth consecutive year. To appear in the Yearbook, companies must score within the top 15% of their industry globally and have a gap of less than 30% from the leader’s Global ESG score. With around 9,400 companies evaluated around the world, an inclusion in the yearbook is a true statement of excellence in corporate sustainability. This achievement is a recognition of our extraordinary efforts to improve in all of these criteria and to work towards ambitious goals in terms of long-term sustainability. We are committed not only to remain in the Index but to improve our performance, as we are convinced that the focus on sustainability is key to our business and our stakeholders.

 

In 2023, we launched the EcoSaco, a cement bag that completely disintegrates within the concrete mix, generating zero waste. For us, this is much more than a cement bag, it’s a solution that has the potential to revolutionize the market, particularly the self-construction segment. As with any transformational change, it requires much effort in order to gradually change culturally established paradigms and consumer habits. This is precisely why we are so glad that the EcoSaco won the Semana Economica ESG Sustanaibility Price, both in the Sustainable Product Innovation Category and the Grand Prize, awarded to the project with the greatest environmental, social and economic impact. The EcoSaco also obtained the “Gran Effie”, as well as a Gold Effie that was awarded in the “Innovation in product marketing” category and a Silver Effie in the “Positive change in the environment” category. The Effie awards are a symbol of outstanding achievement, recognized worldwide, that honor all types of effective marketing.

 

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Our Products

 

Our core products are cement and other cement-related materials. We also produce quicklime. In 2023, cement, concrete, mortar and precast accounted for 92.8% of our net sales and quicklime accounted for 1.8%. We also sell and distribute construction materials, such as steel rebar, cables and pipes, manufactured by large third-party manufacturing companies, and others which in 2023 represented 5.4% of our net sales.

 

The following table sets forth a breakdown of our shipments by type of product for the periods indicated:

 

   Year ended December 31, 
(in thousands of metric tons)  2023   2022   2021 
Cement, concrete, mortar and precast   2,953    3,432    3,632 
Quicklime   30    46    69 

 

The following table sets forth a breakdown of our total net sales by product for the periods indicated:

 

   Year ended December 31, 
(in millions of S/)  2023   2022   2021 
Cement, concrete, mortar and precast   1,850.2    1,963.8    1,784.5 
Construction Supplies (1)   74.1    114.0    113.9 
Quicklime   25.7    37.9    39.1 
Others           0.3 
Total   1,950.1    2,115.7    1,937.8 

 

 

(1)Refers to construction materials manufactured by third parties that we distribute. Construction supplies include the following products: steel rebar, wires, nails, corrugated iron, electric conductors, plastic tubes and accessories, among others.

 

Cement

 

Cement is a powdered mixture of ground minerals that, when mixed with water, adheres to other materials and hardens to form a rock-like substance. Cement is generally mixed with other materials, such as gravel and sand, forming concrete with a high degree of compressive strength that is able to withstand substantial pressure.

 

Cement types are generally classified as either Portland cement or blended hydraulic cement. Portland cement is a hydraulic cement produced by pulverizing clinker, consisting essentially of crystalline hydraulic calcium silicates and calcium sulfate. Blended hydraulic cement consists of a mixture of Portland cement clinker and mineral admixtures, such as blast furnace slag, pozzolanic materials and limestone.

 

We produce predominantly blended cement, which represented 86.3% of our cement sales in 2023. This type of cement requires less clinker and reduces carbon dioxide emissions of our operations and production. Our global clinker/cement ratio is estimated at 72%, below the average value for similar producers globally of approximately 77.6%, according to “Getting the Numbers Right (GNR)” by the Global Cement and Concrete Association (the “GCCA”) in 2021.

 

We produce a range of cement products suitable for various uses, such as residential and commercial construction and civil engineering. We currently offer the following six types of cement products designed for specific uses:

 

Type ICo. This type of cement is used for general purposes or when not required for a specific special condition. It is widely used due to its excellent workability and good development of compressive strength.

 

Type MS(MH). This is the new formula for the type of cement that is used to protect against moderate sulfate action, such as drainage structures, with higher-than-normal, but not unusually severe, sulfate concentrations in groundwater. It is designed for sites and structures in humid areas that are exposed to sulfates and sea water. It also prevents thermal contraction cracking due to moderate heat hydration.

 

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Type I. This type of cement is for general purposes and suitable if special properties are not needed. It is generally used for constructing pavements, floors, reinforced concrete buildings, bridges, reservoirs, pipes, masonry units and precast concrete products.

 

Type V. Type V cement is used in concrete exposed to severe sulfate action, principally in places where soil or ground water has high sulfate content. It is generally used in hydraulic construction, such as irrigation canals, tunnels, water conduits and drains.

 

Type HS. Type HS cement is used in concrete that is exposed to severe sulfate action, principally where soil or ground water has high sulfate content. It is recommended for port construction, industrial plants and construction of sewage sites.

 

Type HE. Cement designed to provide high early strengths at early ages. It is a cement with strengths similar to Type I but has a lower carbon footprint.

 

We believe that our Type V, Type MS(MH) and Type HS cement products are particularly suitable for construction in the northern coastal region of Peru, where sulfate and chloride concentrations from soil, ground water and sea water affect the durability of construction structures. By educating retailers about the different cement characteristics and conducting marketing campaigns, we believe we have been successful in building demand for our cement products. Our research and development department is also equipped to produce custom-tailored cement products on demand. In addition, through our dedicated research and development team we have significantly reduced the amount of clinker required for cement production minimizing our capital expenditures and significantly reducing our carbon dioxide emissions (CO2).

 

We market and distribute our cement primarily in 42.5 kilogram bags. Most of our bagged cement is sold to the retail sector consisting primarily of households that buy bags of cement to build or expand their own homes over time with little or no formal technical assistance (commonly referred to as auto-construcción). The bags are made of Kraft paper to preserve the quality of the cement. Our bags include information relating to the composition of our cement, handling instructions, production dates and storage instructions. Our cement bags have different colors to easily identify the different types of cement. Once bagged at our Pacasmayo, Rioja and Piura facilities, our cement is loaded onto trucks operated by third parties. Cement in bulk is sold to large industrial consumers.

 

During 2023, we began certifying all of our products under the rigorous scheme 5 of ICONTEC, an international certification body for products, services and management systems. We obtained this certification for our entire cement portfolio, complying with the most rigorous level for products established by the Supreme Decree that regulates the commercialization of cement in Peru. Product certification is carried out based on the requirements of the Cement Technical Regulations, which establish the characteristics that cement must meet at the production and marketing level. Likewise, the Cement Technical Regulations require that all cement producing and importing companies in Peru comply with the requirements indicated therein in order to be able to market their products. The certification process consisted of a rigorous audit of the quality management system at the production, manufacturing and marketing level in our three plants and at authorized points of sale.

 

Concrete Products

 

We also produce and sell concrete products principally in the form of ready-mix concrete used in large construction sites, as well as precast, bricks, pavers and other precast materials.

 

Ready-mix concrete. Ready-mix is a blend of cement, aggregates (sand and stone), admixtures and water. It is manufactured and delivered to construction sites in a form that is ready to use. This mixture hardens to form a building material, ranging from sidewalks to skyscrapers. We have 19 fixed and mobile ready-mix plants.

 

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Concrete precast. We produce and sell concrete precast, such as paving units, or paver stones for pedestrian walkways, as well as other bricks for partition walls and concrete precast for structural and non-structural uses. Some examples of concrete precast are:

 

oNew Jersey Walls: safety barriers used to separate traffic flows.

 

oCorner block: a product that complements the structures built with our precast, giving better functionality to any corner.

 

oBeam block: a product that is used to confine the upper part of walls built with our precast.

 

oConcrete pipes: precast reinforced concrete pipes that are installed without the need to open pit ditches or dredging of maritime floors. The main use of concrete pipe is to collect seawater (inlet pipe) and to bring brackish water back out to sea (outfall pipe). We have built a 1.5 kilometer long underwater outfall project for the Talara Refinery, where it is necessary to build a water collection system for its fire and cooling system.

 

oSheet piles presented and assembled: concrete piles that can be pre-stressed or reinforced (they are two different types of manufacturing) that sink one alongside the other, forming a containment structure, used as riparian defenses. We manufacture pre-stressed and reinforced sheet piles that can form a coastal defense for rivers, ensuring the containment of water during rainy events, reducing the vulnerability of cities to floods.

 

New cement based products. We have developed, and are in the process of developing more cement-based products that are innovative and easy building solutions. Some of these products are:

 

Mortar for brick laying: Pre-dosed and bagged dry masonry mortar for block and brick laying.

 

Mortar for plaster: Pre-dosed mortar to plaster interiors and exteriors, walls and ceilings. Allows smooth finishes and thin applications

 

Caravista Concrete: Concrete designed to be exposed without any additional coating or paint.

 

Tremie Concrete: Concrete designed to be placed under water at depths greater than 1.5 meters.

 

Mortar for brick laying: Pre-dosed and bagged dry masonry mortar for block and brick laying.

 

Viaforte Type MH: Cement of moderate heat of special hydration for stabilization of soils and road bases. The cement provides greater workability and less risk of cracking on site, also ensuring greater durability to the structure

 

Bagged Dry Concrete: Pre-dosed mixture of cement, aggregates (Stone and Sand) and additives, that only requires the addition of water indicated on the package and mixing (manual or mechanical) to be used immediately

 

Quicklime

 

We produce and distribute quicklime, which has several industrial uses. Quicklime serves as a neutralizer, lubricant, drying and absorbing material, disinfectant, and as a raw material. Quicklime has various applications, including in the steel, food, fishing and chemical industries. It is also used in mining operations to treat water and industrial residues, in agriculture as a fertilizer enhancer and, to a lesser extent, in other industries. In Peru, quicklime is mainly used in the mining industry, as an additive to treat water residues. We produce quicklime in finely and coarsely ground varieties and sell it either in bags of one metric ton or in bulk, according to clients’ requirement. Quicklime currently represents a small percentage of our revenues.

 

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Production Process

 

Cement Production Process

 

The diagram below depicts the standard cement production process, which consists of the following main stages:

 

extraction and transportation of limestone or coquina (seashells) from the quarry;

 

grinding and homogenization to make the raw material of consistent quality;

 

clinkerization;

 

cement grinding;

 

storage in silos; and

 

packaging, loading and distribution.

 

 

 

Extraction of raw materials. To produce cement, limestone/coquina are extracted from our quarries. We use explosives to loosen the limestone and deploy bulldozers to remove dirt and the overburden covering the limestone. We crush the limestone in our primary and secondary cone crusher and the resulting limestone is loaded into trucks and hauled to our Pacasmayo or Rioja facilities from the adjacent quarry where it is stored. In the case of Piura, our surface miner drills out our coquina quarry and then it is also loaded into trucks and hauled to the Piura plant.

 

Grinding and homogenization. Limestone/coquina, clay and sand are mixed with iron that is acquired from third parties. The quality of the resulting raw meal is monitored by examining samples of each batch and processing them through our quality control x-ray software that automatically measures the mix of materials to confirm the blend is in compliance with our quality standards. Subsequently, the raw meal is sent to a blending silo and then to a storage silo from where it is fed into the pre-heater.

 

Clinkerization. The raw meal is heated at a temperature of approximately 1,450 degrees Celsius in our kilns. The intense heat causes the limestone and other materials in the mixture to react inside the kiln, turning the mixture into clinker. Clinker is then cooled to a temperature of approximately 200 degrees Celsius and stored in a silo or in an outdoor yard.

 

Cement grinding. After being cooled, clinker, together with gypsum and some admixtures, is fed into a ball mill or into a vertical roller mill where it is ground into a fine powder to produce cement. In this form, cement reacts as a binding agent that, when mixed with water, sand, stone and other aggregates, is transformed into concrete or mortar.

 

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Storage in silos. After passing through the ball mills, the cement is transferred on conveyor belts and stored in concrete silos in order to preserve its quality until distribution.

 

Packaging, loading and transport. Cement is transferred through another conveyor belt from the silo to be packaged in 42.5 kilogram bags and then loaded into trucks operated by third parties to be transported for distribution. Bulk cement may be transported (unpackaged) on especially designed trucks that deliver large amounts of cement directly to the work site.

 

Quicklime Production Process

 

Quicklime is produced by crushing limestone with a calcium carbonate content of at least 95% by calcinating it in a rotary kiln. The limestone for quicklime comes from our quarries. The crushing of the limestone is done at the quarry and the calcination process takes place only at our Pacasmayo facility. We produce quicklime in finely and coarsely ground varieties and sell both varieties in big bags as well as in bulk.

 

Raw Materials and Energy Sources

 

Limestone and Other Calcareous Resources

 

We obtain limestone required to produce clinker and quicklime principally from land where we have concession rights. For our Pacasmayo plant, we extract limestone from our Acumulación Tembladera quarry located approximately 60 kilometers from the plant, and for our Rioja plant, we extract limestone from our Calizas Tioyacu quarry which is adjacent to our Rioja plant. For our Piura plant, we extract coquina from Virrilá quarry, located approximately 120 kilometers from the plant.

 

Acumulación Tembladera. We have a concession with an indefinite term to extract limestone and other minerals from our Acumulación Tembladera quarry, a 3,390 hectares open-pit mine located in the district of Yonan, in the department of Cajamarca. We acquired this concession in November 2002.

 

Calizas Tioyacu. For our Rioja production, we have a concession with an indefinite term to extract limestone and other minerals from a 400 hectares open-pit mine near our Rioja facility in the district of Elias Soplin Vargas, in the department of San Martín. We acquired this concession in February 1998.

 

Virrilá. For our Piura production, we also have a group of concessions with an indefinite term to extract coquina and other minerals from our Virrilá quarry, a 931 hectares open-pit mine located in the district of Sechura, in the department of Piura. We acquired these concessions between 2000 and 2008.

 

In addition to our Acumulación Tembladera, Calizas Tioyacu, Bayovar 4 and Virrilá quarries, we also own concession rights to various other calcareous material quarries consisting, in total, of approximately 40,767 hectares located in the northern region of Peru. None of these quarries are in operation as of the date of this annual report.

 

Clay, Sand and Other Raw Materials and Admixtures

 

The other raw materials that we use to produce clinker are clay, sand, iron and diatomite.

 

Clay

 

For cement production in our Pacasmayo facility, we extract clay from our Cerro Pintura quarry, a 400 hectares open-pit concession located in the district and province of Pacasmayo, department of La Libertad. We were granted this concession by the MEM in 1996. The term of the concession is indefinite, provided we pay an annual concession fee and meet minimum annual production requirements.

 

For cement production in our Rioja facility, we extract clay from our Pajonal quarry, a 400 hectares open-pit concession located in the district and province of Rioja, department of San Martin. This concession was granted to us by the MEM in 1998. The term of the concession is indefinite, provided we pay an annual concession fee and meet minimum annual production requirements.

 

We have not calculated our clay reserves, as we believe there is an abundant supply of clay in our concessions and more broadly in the northern region where we operate.

 

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Sand

 

For cement production in our Pacasmayo facility, we use sand extracted from our Cerro Pintura quarry. Our Rioja facility does not utilize sand as a raw material given the type of cement it produces.

 

We have not calculated our sand reserves, as we believe there is an abundant supply of sand in our concessions and more broadly in the northern region where we operate.

 

Iron

 

We use small quantities of iron in our cement production, which we purchase from third parties at market prices.

 

Coal

 

We purchase mostly anthracite coal from local suppliers and import small amounts of bituminous coal from suppliers mainly in Colombia, in each case at spot market prices. Anthracite coal tends to be less expensive than bituminous coal. We store coal at our premises and in our warehouse facilities, adjacent to the Salaverry port and in Trujillo, where we have sufficient stock of coal to maintain our production levels for the next year.

 

In December 2009 and February 2010, we entered into option agreements to acquire coal mining concessions as a means to secure a steady and reliable source for our coal requirements and to reduce the volatility in costs related to coal. In 2011, we exercised certain options under these agreements to acquire coal mining concessions for 908.5 hectares near our Pacasmayo facility for a total purchase price of US$4.5 million. In 2013, we exercised our remaining options to purchase an additional coal mining concession for 501.2 hectares for US$1.0 million, thereby completing the acquisition of the related coal mining concessions.

 

Pozzolanic Materials and Other Admixtures

 

Our cement production also requires small amounts of other admixtures, such as pozzolanic materials, gypsum and blast furnace slag.

 

For cement production in our Pacasmayo facility, we use pozzolanic materials obtained from our Cunyac quarry, a 200 hectares open-pit concession located in the district of Sexi, province of Santa Cruz, department of Cajamarca. The concession was granted to us by the MEM in 2008. The term of the concession is indefinite, provided we pay an annual concession fee and meet minimum annual production requirements.

 

For cement production in our Rioja facility, we use pozzolanic materials obtained from our Fila Larga quarry, a 1,000 hectares open-pit concession located in the district of El Milagro, province of Utcubamba, department of Amazonas. The concession was granted to us by the MEM in 1998.

 

We also own several other concessions containing pozzolanic material which have not been exploited. In addition, our use of pozzolanic materials may be substituted with clinker or other admixtures. Other admixtures, such as gypsum and blast furnace slag, are purchased at market prices from third-party suppliers. If we are unable to acquire raw materials or admixtures from current suppliers, we believe that other sources of raw materials and admixtures would be available without significant interruption to our business.

 

Energy Sources

 

Electricity

 

As of December 31, 2023, all of the electricity requirements for our Pacasmayo and Piura facilities were supplied by Electroperú and for our Rioja facility by ELOR.

 

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We have a long-term electricity supply contract with Electroperú currently valid until 2026. Electroperú has agreed to provide us with sufficient energy to operate our Pacasmayo and Piura facilities at pre-determined maximum amounts during the term of the contract. Payments for electricity are based on a formula that takes into consideration our energy consumption and certain market variables, such as the U.S. purchase price index, the global price of oil, the local price of natural gas and the import price of bituminous coal.

 

In addition, we have a medium-term electricity supply contract with ELOR to supply the Rioja facility, valid until November 2024 ELOR supplies the Rioja facility with 6.7 megawatts of electricity at peak hours and eight megawatts at non-peak hours. Payments for electricity are based on a formula that takes into consideration our energy consumption and certain market variables, such as the U.S. dollar price, the local price of natural gas, the global price of oil and the import price of bituminous coal.

 

Other Production Materials

 

We use other materials in the cement production process, including paper bags to package cement, which we purchase principally from local suppliers; plastic bags used to package quicklime, which we purchase from local suppliers; and water to cool the kiln exhaust gases and for our crushing operations at our Acumulación Tembladera quarry, which we obtain principally from a well located at our Pacasmayo facility and from the Jequetepeque river. Water used in our production process is maintained in a closed system at our plants and re-processed for utilization in our production process.

 

Consumer Base

 

The retail cement sector in Peru is characterized by households that purchase single bags of cement to gradually build or improve their homes with little or no professional assistance. This sector is known as auto-construcción. Families in this sector tend to invest a large portion of their savings in building or improving their own homes. Auto-construcción is often conducted with the help of a foreman (maestro de obra) who generally has experience in construction. Our retail marketing plans typically target the maestro de obra who is usually the decision maker when buying cement and other related construction materials.

 

We also sell directly to small, medium and large private construction companies working on a variety of construction projects, from housing complexes to commercial developments. In the public sector, we provide cement for national, regional and local governments carrying out construction projects including housing complexes and public construction, ranging from local schools and hospitals to large infrastructure.

 

Sales and Distribution

 

Distribution

 

Our market extends from the Ecuadorian border in the north of Peru to the city of Barranca in the south (approximately 180 kilometers north of Lima), to the rainforest in the east and the Pacific Ocean in the west. Our market covers the provinces of Amazonas, Cajamarca, La Libertad, Lambayeque, Piura and Tumbes in the north; and San Martín and Loreto in the northeast.

 

Our Pacasmayo, Piura and Rioja facilities supply the entire northern region of Peru, interchangeably subject to where it is most efficient to ship from at the moment, depending on the distance and type of cement being produced, among other factors.

 

In 2023, approximately 88.5% of our total cement shipments were in the form of bagged cement, substantially all of which was sold through retailers both within and outside of our distribution network. The remaining 11.5% of our cement was sold in bulk or in shipments of precast products or ready-mix concrete directly to large construction companies.

 

We have developed one of the largest independent retail distribution networks for construction materials in Peru, consisting of 313 hardware stores, with which we have a distribution agreement. In addition, we also distribute to other independent retailers located throughout the northern region of Peru with whom we do not have contractual relationships. We have built our distribution network by investing in strengthening our relationship with retailers.

 

Even though our ready-mix sales are still a small proportion of our sales, we expect this trend to change as infrastructure becomes a bigger driver of demand in the upcoming years. Additionally, we sell and distribute other construction materials manufactured by third parties that are used alongside cement, such as steel rebar, plastic pipes and electrical wires, among others.

 

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Marketing and Brand Awareness

 

We use our distribution network, together with our strategically located local commercial offices, to promote our products and brands, as well as to keep us informed of market developments. We believe our distribution network has enabled us to build strong recognition for our Pacasmayo brand among maestros de obra, retailers and end consumers which we believe is important to our business, particularly because our cement is principally sold in bags to retail consumers.

 

Our marketing expenses in 2023 were approximately S/7.5 million, or 0.4% of our sales. Historically, our marketing strategy has been to develop brand loyalty by providing high-quality products, tailored to the needs of our customers, and customer service accompanied by complimentary training for the maestros de obra, who are typically the decision makers in the auto-construcción segment.

 

We develop strong ties with our distributors by promoting income generating opportunities for them. For instance, we give them priority when hiring transportation to distribute our cement throughout our territory. Also, our large salesforce has the ability to cover most of the construction sites in northern Peru generating business opportunities that are then channeled through our distributors. Finally, our distributors enjoy various commercial and marketing benefits such as rebates, special promotions, special credit conditions, and loyalty programs.

 

We have been working consistently in recent years to focus time and attention on our client’s needs, in an effort to go beyond just selling cement and its byproducts, to providing solutions and innovating. Consequently, we were well-positioned to leverage these initiatives during the ongoing pandemic period. The self-construction segment has been the primary driver behind the growth in sales volume during 2023. We have focused on several fronts to enhance the customer experience and to facilitate access to our solutions. We have developed Mundo Experto, which is a virtual ecosystem made up of digital solutions that serves to join supply and demand and offers a superior purchasing experience leveraged on intensive use of technology to generate more value for our users. The digital solutions are targeted and customized for the different users, such as foremen, hardware stores, and the self-builder.

 

Quality Control

 

In Peru, cement production is subject to standardization (normalización) regulations approved by the National Institute for the Protection of Competition and Intellectual Property (Instituto Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual, or “INDECOPI”). Although the standardization regulations are not mandatory, they are useful in achieving an optimum level of management. As of the date of this annual report, we comply with all standardization regulations applicable to our products.

 

We have established a quality assurance program in accordance with ISO Standard 9001-2008, certified by SGS del Perú S.A.C., a company that provides inspection, verification, testing and certification services. We monitor quality at every stage of the cement production process. In our facilities, we periodically test the quality of our raw materials. These tests include chemical, physical and x-ray tests. We perform similar examinations of the clinker we produce. Additionally, we also perform regular quality tests on our finished products.

 

We have a quality control area with computerized systems to access real-time information on the quality of our products. As part of our quality control process, we monitor the performance of our different cement products, monitor the performance of additives in our cement and review monthly statistical analysis on the resistance of cement, among other things.

 

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During 2023, we began certifying all of our products under the rigorous scheme 5 of ICONTEC, an international certification body for products, services and management systems. We obtained this certification for our entire cement portfolio, complying with the most rigorous level for products established by the Supreme Decree that regulates the commercialization of cement in Peru. Product certification is carried out based on the requirements of the Cement Technical Regulations, which establish the characteristics that cement must meet at the production and marketing level. Likewise, the Cement Technical Regulations require that all cement producing and importing companies in Peru comply with the requirements indicated therein in order to be able to market their products. The certification process consisted of a rigorous audit of the quality management system at the production, manufacturing and marketing level in our three plants and at authorized points of sale.

 

This certification is evidence that our corporate culture motivates us to exceed the quality standards of our products with focus on sustainability, as we are going above and beyond the legal requirements and using this certification as a tool for continuous improvement for the benefit of our clients and the sector as a whole.

 

Competitive Position

 

Peru’s cement production is segmented into three main geographic regions: the northern region, the central region, including Lima’s metropolitan area, and the southern region. We are the only cement manufacturer in the northern region of Peru. The central region is principally served by UNACEM (formerly known as Cementos Lima and Cemento Andino), some imports, Caliza Cemento Inca and Mixercon. The south is principally served by Cementos Yura. In 2023, our cement shipments were approximately 2.9 million metric tons, representing an estimated 23.9% share of total cement shipments in Peru.

 

Regulatory Matters

 

Overview

 

Although our core business is the production of cement, we hold a number of mining concessions granted by the Peruvian government for the supply of limestone and other raw materials required for cement production. As a result, we are subject both to the mining and the general industrial legal framework in Peru. The regulatory framework applicable to our cement production may be divided into rules and regulations relating to (i) the mining and crushing of limestone and clay, and (ii) the production process.

 

Mining Regulations

 

The General Mining Law (Texto Único Ordenado de la Ley General de la Minería) approved by Supreme Decree No. 014-92-EM, published in the Peruvian Official Gazette, El Peruano, on June 3, 1992, is the primary law governing both metallic and non-metallic mining activities in Peru and is supplemented by implementing guidelines and policies regarding mining and the processing of minerals enacted by the MEM. Under the General Mining Law, mining activities (except storage, reconnaissance, prospecting and trade) are carried out exclusively through various forms of concessions. Mining concessions are granted by the Geological, Mining and Metallurgical Institute (Instituto Geológico Minero y Metalúrgico, or “INGEMMET”), and all other concessions, including our mineral processing concessions, are granted by the Directorate General for Mining of the MEM. Any act, transfer, termination or agreement related to these concessions must be registered with the Mining Rights Registry, which is part of the National Public Registry System, to be effective against the Peruvian government and third parties.

 

Holders of concessions or mining claims must comply with several obligations, including the payment of an annual concession fee (derecho de vigencia) of US$3.00 per applicable hectare. The annual concession fee is due and payable on or prior to June 30 of each year. Failure to pay the annual concession fee for two consecutive years will result in the termination of the mining concession.

 

Mining activities require holders to obtain title to the surface land from individual landowners, peasant communities or the Peruvian government. Mining concessions are granted for an unlimited period, subject to the achievement of minimum annual production levels. Two different regimes apply depending on the date the concession was granted:

 

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Under Legislative Decree 1320 and Supreme Decree No. 011-2017-EM, since January 1, 2019, if the annual minimum production or investment has not been met, the annual penalty and the causes to terminate a mining concession will be determined by the General Mining Law for all concessions, as described below.

 

For concessions granted until 2008, the following rules apply:

 

the minimum annual production target is equivalent to one tax unit (approximately S/4,950 or US$1,335) per year per hectare, in case of metallic mining concessions, and 10% of one tax unit (approximately US$134) per year per hectare, in the case of non-metallic mining concessions;

 

the minimum production level is to be achieved no later than the end of the tenth year from the date of grant;

 

if the minimum production level is not achieved within that period, an annual penalty equivalent to 2% of the minimum annual production level is due until such level is achieved;

 

if the minimum production level is not achieved by the end of the fifteenth year, an annual penalty equivalent to 5% of the minimum annual production level is due until such level is achieved;

 

if the minimum production level is not achieved by the end of the twentieth year, an annual penalty equivalent to 10% of the minimum annual production level is due until such level is achieved; and

 

if the minimum production level is not achieved by the end of the thirtieth year, the mining concession expires.

 

Any penalty must be paid prior to June 30 of each year. Failure to pay the penalty for two consecutive years results in the termination of the mining concession.

 

Since January 1, 2020, these penalties will be applied for concessions granted in 2009 and thereafter.

 

The foregoing penalties and fines are not applicable to mining concessions granted by the government through private investment promotion initiatives, which will be subject to the minimum production and investment levels set forth in such contracts.

 

In addition to the payment of the annual concession fee and the penalty, holders of mining concessions must, pursuant to the Mining Royalty Law, pay a royalty for the exploitation of metallic and non-metallic resources. Prior to the amendment of the Mining Royalty Law described below, the amount of the royalty was determined on a monthly basis. For those minerals with an international market price (gold, silver, copper, zinc, lead and tin), the amounts were computed by applying the rates to the value of the concentrate or its equivalent, according to the applicable international market price. The historic rate scales were established in the Mining Royalty Law’s regulations as shown in the following table:

 

Annual sales
(in millions of US$)
  Rate 
Up to 60   1%
Between 60 and up to 120   2%
More than 120   3%

 

In case of minerals without an international reference market price (minerals other than gold, silver, copper, zinc, lead and tin), the mining royalty amounted to 1% of the value of the final product obtained from the mineral separation process, net of any costs incurred in the mineral separation process (componente minero).

 

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However, the Mining Royalty Law was amended on September 29, 2011 to increase the tax payable on metallic and non-metallic mineral resources. Effective October 1, 2011, the royalty for the exploitation of metallic and non-metallic resources is payable on a quarterly basis in an amount equal to the greater of (i) an amount determined in accordance with the following statutory scale of tax rates based on a company’s operating profit margin and applied to the company’s operating profit, as adjusted by certain non-deductible expenses, and (ii) 1% of a company’s net sales, in each case, during the applicable quarter. The royalty rate applied to the company’s operating profit is based on its operating profit margin according to the following statutory scale of rates:

 

Operating Margin  Applicable Rate (%) 
0% - 10%   1.00 
10% - 15%   1.75 
15% - 20%   2.50 
20% - 25%   3.25 
25% - 30%   4.00 
30% - 35%   4.75 
35% - 40%   5.50 
40% - 45%   6.25 
45% - 50%   7.00 
50% - 55%   7.75 
55% - 60%   8.50 
60% - 65%   9.25 
65% - 70%   10.00 
70% - 75%   10.75 
75% - 80%   11.50 
More than 80%   12.00 

 

Mining royalty payments will be deductible for income tax purposes in the fiscal year in which such payments are made.

 

We believed that certain portions of the regulations of the Mining Royalty Law were unconstitutional, because they impose a mining royalty tax on non-mining activities. For instance, for cement companies, the amended Mining Royalty Law and its regulations established that the mining royalty tax was calculated based on the total operating profit or net sales, as opposed to operating profit or net sales attributable exclusively to mining products, such as limestone, used to produce cement. Accordingly, in December 2011, we filed a claim to declare that the mining royalty tax applicable for the exploitation of non-metallic mining resources be calculated based on the value of the final product obtained from the mineral separation process, net of any costs incurred in the mineral separation process (“componente minero”).

 

In November 2013, the Peruvian Constitutional Court affirmed the constitutional challenge we filed against the new regulation of the Mining Royalty Law, in a final and unappealable ruling, on the grounds that the new regulation violates the constitutional right of property, as well as the principles of legal reserve and proportionality. Therefore, the new regulation is rendered inapplicable to our operation. As a result, we will continue to use as a basis for the calculation of the mining royalty the value of the concentrate or mining component, and not the value of the product obtained from the industrial or manufacturing process.

 

Finally, holders of mining concessions are required at the beginning of their operations to submit a mining closure plan that must contain a description of the steps to restore the areas and facilities of each mining operation area to pre-mining condition. Holders of mining concessions are required to secure completion of the restorative measures by means of the following guarantees: (i) banking guarantee or credit insurance; (ii) cash guarantees; (iii) trusts; or (iv) those indicated in the Peruvian Civil Code.

 

In August 2021, Law 31347, that modifies the Mine Closure Law (Law 28090), specifying aspects such as mandatory, administrative and oversight powers, opportunity for presentation and approval, applicable guarantees, periodic reports to be presented to various authorities, among others was approved.

 

As of the date of this annual report, we primarily owned non-metallic mining concessions and limited metallic mining concessions with respect to iron. Substantially all of our concessions were granted prior to 2008. Our mining rights and concessions are in full force and effect under applicable Peruvian laws. We believe that we are in compliance in all material respects with the terms and requirements applicable to our mining rights and concessions.

 

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Production Process

 

The cement production process along with other manufacturing activities are governed by General Industry Law (Ley General de Industrias), Law No. 23407, published in El Peruano on May 29, 1982, which establishes basic rules that promote and regulate activities in the manufacturing industry. The Ministry of Production is vested with authority to promote private investments in connection with industrial, processing and manufacturing activities, the surveillance of sustainable exploitation of natural resources (except for those extractive activities involving primary transformation of natural products), the protection of the environment, and the supervision of the quality of manufactured products. All industrial companies are subject to the General Industry Law and its regulations to the extent that the company’s gross income is primarily derived from industrial activities. Pursuant to Supreme Decree No. 009-2011-MINAM, the supervisory and monitoring functions of the Ministry of Production were transferred to the OEFA in 2013.

 

Technical Regulation on Hydraulic Cement

 

On January 21, 2022, the Government published D.S. 1-2022-PRODUCE, which approves the Technical Regulation on Hydraulic Cement Used in Buildings and Constructions in General, through which various aspects are regulated that will allow verification of compliance with the minimum safety requirements of cement. Originally, the Regulation entered into force six months after its publication, later extended to July 22, 2023 by D.S. 10-2022-PRODUCE, a period in which all the parties involved (public entities, national manufacturers, importers, laboratories, chain of supply, among others) must adapt their protocols to comply with the provisions of the Regulation.

 

Environmental Regulations

 

Industrial companies, and in particular those in the cement sector, are required to comply with various environmental regulations, such as the Law on the National Environmental Impact Assessment System approved by Legislative Decree No. 27446 and its regulations approved by Supreme Decree No. 019-2009-MINAM, which establish the environmental impact assessment process. Public and private investment projects that involve activities, constructions or works that may cause negative environmental impacts must comply with this law. Projects are categorized according to environmental risk under this law.

 

The Environmental Management Regulations for the Manufacturing Industry and Internal Trade, approved by Supreme Decree No. 017-2015-PRODUCE, as amended, promote and regulate environmental management, as well as the conservation and sustainable use of natural resources in the development of manufacturing and domestic trade activities. It also regulates the application of management instruments, procedures, environmental protection measures and promotes cleaner production agreements, giving priority to the principle of prevention.

 

In terms of air emissions, the Ministry of the Environment has adopted legally binding environmental quality standards (Maximum Permissible Limits) for cement industries (approved by Supreme Decree No. 001-2020-MINAM). These standards are legally enforceable and must be met by all operations in the cement industry.

 

Resolution Nos. 004-2018-OEFA/CD and 006-2018-OEFA/CD define administrative infractions and establish a scale of penalties related to environmental management instruments and obligations related to monitoring, environmental management, the development of industrial activities and the handling of hazardous materials and inputs. applicable to those administered in the manufacturing industry and domestic trade sector that are under the scope of competence of the Environmental Assessment and Control Agency. Infractions are classified according to their severity as minor, serious and very serious offenses and the monetary penalty imposed will depend on this.

 

By means of Board of Directors Resolution No. 023-2013-OEFA/CD and No. 0312015-OEFA/CD, of the Environmental Assessment and Control Agency (OEFA), the OEFA assumes the functions of monitoring, supervision, control and sanction in environmental matters in the Cement and Concrete Sector of the Manufacturing Industry, of the Industrial Subsector of the Ministry of Production - PRODUCE.

 

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The Law on Integrated Solid Waste Management approved by Decree Law No. 1278 and its regulations approved by Supreme Decree No. 014-2017-MINAM, seek to ensure the constant maximization of efficiency in the use of materials, and to regulate the management and handling of solid waste, which includes the minimization of the generation of solid waste at the source. the material and energy recovery of solid waste, as well as the proper final disposal of the same.

 

Law 30754, published on April 18, 2018, approved the Framework Law on Climate Change. This law establishes the principles, approaches, and general provisions for coordinating, articulating, designing, executing, informing, monitoring, evaluating, and disseminating public policies for the comprehensive, participatory, and transparent management of climate change adaptation and mitigation. It also established that the Ministry of the Environment will establish guidelines to incorporate climate risk and vulnerability analysis, as well as climate change mitigation and adaptation measures, in the evaluation of investment projects subject to the National Environmental Plan Impact Assessment System.

 

This law aims to reduce the country’s vulnerability to climate change, take advantage of low-carbon growth opportunities, and comply with the international commitments assumed by the government of Peru before the United Nations Framework Convention on Climate Change, with an intergenerational approach.

 

The Regulations of the Framework Law on Climate Change were approved on December 31, 2019, by Supreme Decree No. 013-2019-MINAM. The objectives set out in these Regulations will be achieved through the implementation of climate change adaptation and mitigation measures, the creation of systems that contribute to the accounting of carbon dioxide emissions, the reduction of carbon dioxide emissions and the promotion of private sector participation in implementation. of sustainable and low-carbon projects. To date, however, no concrete measures or targets have been set, nor have any deadlines been set for their implementation.

 

There is no type of emissions trading scheme in Peruvian law.

 

On January 25, 2022, Supreme Decree No. 003-2022-MINAM was published, declaring a climate emergency of national interest and establishing guidelines and priority actions for climate change mitigation and adaptation.

 

In September 2023, the International Sustainability Standards Committee issued the first international sustainability and climate standards: IFRS S1 General Requirements for the Information to be Disclosed on Sustainability related to Financial Information and IFRS S2 Weather-related Disclosures. The purpose of these standards is for entities to disclose information about their risks and opportunities related to sustainability and climate that is useful to the primary users of financial information for decision-making. The Company is currently assessing these standards and the methodology for their implementation.

 

Prior Consultation with Local Indigenous Communities

 

On September 7, 2011, Peru enacted Law No. 29785, Prior Consultation Right of Local Indigenous Communities. The law was enacted in order to implement Convention No. 169 of the International Labor Organization on Local Indigenous Communities in Independent Countries, previously ratified by Peru through Legislative Decree No. 26253. This law, which became effective on December 6, 2011, establishes a prior consultation procedure to be undertaken by the Peruvian government in favor of local indigenous communities, whose collective rights may be directly affected by new legislative or administrative measures, including the granting of new mining concessions. Regulation implementing this law was approved on April 3, 2012, by Supreme Decree No. 001-2012-MC, which defines the local indigenous communities that are entitled to the prior consultation rights and establishes the different stages that comprise the prior consultation procedure.

 

Consultation procedures for mining and processing concessions are carried out by the MEM prior to the granting of a new processing concession.

 

According to the recent practice of the Geologic Institute of Mining and Metallurgy (Instituto Geológico Minero Metalúrgico), the granting of mining concessions does not qualify as an “administrative measure” that potentially affects the rights of indigenous people because it does not grant per se a right to explore and exploit mineral deposits. Accordingly, the granting of mining concessions has not been included among measures that require consultation procedures with indigenous people. According to Ministerial Resolution No. 003-2013-MEM-DM, the MEM has established that consultation procedures are applicable prior to the commencement of: (i) exploration activities (Autorización de inicio de actividades de exploración); (ii) exploitation activities (Autorización de inicio o reinicio de las actividades de desarrollo, preparación y explotación - incluye plan de minado y botaderos); and (iii) processing concessions (otorgamiento de concesión de beneficio).

 

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Local indigenous communities do not have a veto right; upon completion of this prior consultation procedure, the Peruvian government can discretionarily approve or reject the applicable legislative or administrative measure. In addition, any sale, lease or other act of disposal of surface land owned by local indigenous communities is subject to the approval of an assembly composed of the members of such communities according to the following rules:

 

for local indigenous communities located on the coast, approval of not less than 50% of members attending the assembly is required; and

 

for local indigenous communities located in the highlands and the Amazon region, approval of at least 2/3 of all members attending the assembly is required.

 

Permits and Licenses

 

Mining Concessions

 

According to the General Mining Law, a mining concession is required in order to extract mineral resources needed to produce cement. The mining concession grants the right to explore and exploit the mineral resources located in a solid of indefinite depth, limited by the vertical plane corresponding to the sides of square, rectangle or polygon referred to by the Universal Transversal Mercator coordinates. The Geological Mining and Metallurgical Institute (Instituto Geológico Minero y Metalúrgico) is in charge of managing the procedure of granting mining concessions, which includes the receipt of the request, the granting and the termination of mining concessions.

 

Explosives.

 

Mining concessionaires are required to obtain the following permits to operate and store explosives:

 

Certificate of Mining Operation (Certificado de Operación Minera), granted by the MEM;

 

Semiannual Authorization for Use of Explosives, granted by the General Bureau of Explosives of the Ministry of Interior (Superintendencia Nacional de Control de Servicios de Seguridad, Armas, Municiones y Explosivos de Uso Civil, or “SUCAMEC”);

 

Manipulation of Explosives License for each individual that intends to handle explosives, granted by the SUCAMEC; and

 

Explosive’s Warehouse Operation License, granted by SUCAMEC.

 

Water and Wastewaters

 

To use water resources in cement industry activities, it is necessary to obtain a water right granted by the Water Management Authority (Autoridad Nacional del Agua, or “ANA”) prior to the use of underground or fresh water sources. If the proposed activities will generate domestic or industrial wastewaters, which will be discharged into natural water sources or soil, authorization from ANA is required, with a favorable opinion of the General Bureau of Environmental Health (Dirección General de Salud Ambiental, or “DIGESA”).

 

Hazardous Waste

 

Hazardous waste generated as a consequence of cement production activities must be disposed of in specialized landfills. The transportation of solid waste outside the limits of the industrial complex must be conducted exclusively through specialized companies registered with DIGESA and MINAM. Industries are free to contract with an EO-RS (a company that provides solid waste services such as transportation, treatment or disposal) or with an EC-RS (a company that carries out commercialization activities aiming at the reuse of solid waste). Yet in order to limit their liability in case of environmental harm, industries must make sure the EO-RS and EC-RS they retain count with all necessary permits to collect, transport and dispose of hazardous wastes.

 

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Chemical Feedstock

 

The commercialization, transportation and use of controlled chemical feedstock (Insumos Químicos y Productos Fiscalizados, or “IQPF”) is restricted, because of their potential use in the production of illegal drugs or controlled substances. Companies that require an IQPF must obtain an IQPF User Certificate (Certificado de Usuario de IQPF) from the General Bureau of Chemical Feedstock of the Ministry of Interior (Unidad Antidrogas de la Policía Nacional del Perú, or “DIRANDRO”). Companies such as ours are also required to register with the Ministry of Production any IQPF activities they plan to carry out (Registro Único para el Control de IQPF).

 

Fuel Storage

 

Any company that purchases fuels for its own activities and has facilities to receive and store fuel with a minimum capacity of one meter cubed (264.170 gallons) is required to (i) receive from the Mining and Energy Investment Supervision Body (Organismo Supervisor de la Inversión en Energía y Minería, or “OSINERGMIN”) prior permission to build and operate said installations, and (ii) be registered with the Registry of Direct Fuel Consumers, in order to obtain the SCOP Code (Código del Sistema de Control de Órdenes de Pedido) necessary to purchase fuel.

 

Cultural Heritage Protection

 

If the design and development of cement industry activities involves the removal of topsoil, a Certificate of Non-Existence of Archaeological Ruins (Certificado de Inexistencia de Restos Arqueológicos, or “CIRA”) from the Ministry of Culture (Ministerio de Cultura) with respect to the area under construction must be obtained. The CIRA will either certify that on the surface of the evaluated area no archaeological sites or features were discovered or will identify their exact location and extent in order to implement precautionary measures to protect the archaeological artifact. The CIRA is valid for an unlimited period but will become void should any archaeological artifacts be accidentally discovered during the construction works or due to any natural cause. In such an instance, the company must stop the construction work immediately and notify the Ministry of Culture. Failure to stop the construction work may generate civil and criminal liabilities. Under certain exceptional circumstances, Peruvian legislation allows the removal of archeological artifacts when the area is required for development of projects that are of national interest.

 

Labor Regulations

 

Peruvian legislation allows hiring employees through: (i) a fixed-term contract, (ii) a contract for an indefinite duration; or (iii) a contract for part-time employment.

 

The minimum wage established in Peru is S/1,025 per month. Peruvian labor legislation establishes a maximum 8-hour work day or 48 hours per week for employees older than 18 years. For overtime, employers must pay at least an additional 25% and an additional 35% over the regular hourly wage for the first two hours and for any additional hours, respectively. Employees are entitled to a minimum rest of 24 consecutive hours per week.

 

Regardless of the type of employment contract, pursuant to Peruvian law full-time employees are entitled to receive:

 

(i) an additional 10% of the minimum wage, provided that they are responsible for (a) one or more children under the age of 18 or (b) persons who are up to 24 years of age if they are pursuing higher education,

 

(ii) two additional months’ salary per year, one in July and one in December (pursuant to Law No. 29351, said payments were not subject to any social contribution, except for Income Tax; consequently, employers paid directly to their employees as an Extraordinary Bonus, the amount of the contribution to the Social Health Insurance (ESSALUD) for such payments, equivalent to 9% of the bonus paid),

 

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(iii) thirty calendar days of annual paid vacation per year,

 

(iv) life insurance, since the first day at work,

 

(v) a compensation for years of service (CTS) equal to 1.16% of a monthly salary and is deposited each year in May and November, provided they work an average of at least four hours per day for the same employer,

 

(vi) benefits from the Peruvian Social Health Insurance (ESSALUD) to which employers must contribute a rate equivalent to 9% of their employees’ income, and

 

(vii) a percentage of the company’s annual income net of taxes (10% in the case of income derived from industrial cement operations, and 8% in the case of income derived from our mining or commercial activities), provided the company has twenty or more employees.

 

On June 25, 2021, Law 31246 was published, which modified the current Law on Safety and Health at Work to guarantee the right of workers to safety and health at work in the face of epidemiological and health risk.

 

Free and Fair Competition Protection

 

In Peru, businesses are generally not required to receive the prior authorization of the antitrust authority, which in Peru is INDECOPI. However, in order to promote economic efficiency and protect consumers, anti-competitive behavior is subject to sanctions under applicable law. Behavior that is prohibited according to national law includes: (i) the abuse of a dominant market position, (ii) concerted horizontal practices and (iii) concerted vertical practices. Moreover, under the Unfair Competition Law it is illegal to act in a way that may hinder the competitive process. An unfair behavior is one that is objectively contrary to the entrepreneurial good faith, ethical behavior and efficiency in a market economy.

 

On January 7, 2021, Law No. 31112, Law that establishes the Prior Control of Business Concentration Operations, was published in the Official Gazette “El Peruano”, which entered into force in January 2021, together with its Regulations, approved by Supreme Decree No. 039-2021-PCM. This law establishes a system of prior control of business concentration operations in order to promote effective competition and economic efficiency in the markets for the welfare of consumers.

 

C. Organizational Structure

 

Cementos Pacasmayo S.A.A. is part of the Hochschild Group. As of March 31, 2024, Eduardo Hochschild, directly and indirectly, owned and controlled 38.32% of the shares of Hochschild Mining plc. Through Inversiones ASPI, as of that same date, Eduardo Hochschild, directly and indirectly, owned and controlled 50.01% of the outstanding common shares of Cementos Pacasmayo.

 

All of our operating subsidiaries are incorporated in Peru. The following chart sets forth our simplified corporate structure, operating subsidiaries only, as of the date of this annual report.

 

 

 

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The following is a brief description of the principal activities of our consolidated subsidiaries.

 

Cementos Selva S.A.C. is engaged in the production and marketing of cement and other construction materials in the northeast region of Peru. It also owns all of the equity shares of Dinoselva Iquitos S.A.C. (a cement and construction materials distributor in the north of Peru, which also produces and sells precast, cement bricks and ready-mix concrete)

 

Distribuidora Norte Pacasmayo S.R.L. is mainly engaged in selling cement produced by the Company. Additionally, it produces and sells precast, cement bricks and ready-mix concrete.

 

Empresa de Transmisión Guadalupe S.A.C. is mainly engaged in providing electric energy transmission services to the Company.

 

Other immaterial, non-operating subsidiaries

 

Salmueras sudamericanas S.A.C. (“Salmueras”) was engaged in the exploration of a brine project located in the northern region of Peru. In December 2017, the Company decided not to continue with the activities related to this project.

 

Soluciones Takay S.A.C is a platform that connects families that want to build with certified professionals.

 

150Krea Inc. seeks to develop a business in the United States relating to digital innovation in the construction industry
   
 Acuicola Los Paiches is a social venture that focuses on fish farming.

 

Corporación Materiales Piura S.A.C. is a non-operating company that owns some mining properties located in Piura.

 

Participation in Consortia

 

Consorcio Constructor del Norte del Perú began operating during 2023 and is mainly dedicated to the execution of the project for the improvement of runways and perimeter fence of the Piura airport.

 

D. Property, Plant and Equipment

 

Properties

 

We own our headquarters office in Lima, Peru, at Calle La Colonia 150, Urbanización El Vivero, Surco. We also own our plants, warehouses, transportation facilities and the office space at our production facilities, including our workers’ facilities occupying approximately 50,000 square meters at our Pacasmayo facility and a warehouse occupying approximately 25,000 square meters at the Salaverry port facility.

 

44

 

 

Area of Operation

 

We own and operate three cement production facilities. Our largest facility is located in the city of Pacasmayo, department of La Libertad, approximately 667 kilometers north of Lima. The second facility is located in the city of Piura, department of Piura, approximately 330 kilometers north of Pacasmayo. This facility started cement production in September 2015. We also own and operate a smaller cement facility, located in the city of Rioja, department of San Martín, approximately 468 kilometers east of the Panamericana Norte highway. From our Pacasmayo and Piura facilities we supply cement principally to the coastal and highland regions of northern Peru, including the cities of Piura, Chiclayo, Cajamarca, Trujillo and Chimbote. From our Rioja facility, we supply cement to the northeastern region of Peru, including the cities of Moyobamba, Tarapoto, Loreto, among others.

 

 

 

Pacasmayo Facility

 

As of December 31, 2023, our Pacasmayo facility had four horizontal kilns, which produce clinker (one of which also currently produces quicklime), and an additional Waelz rotary kiln that produces quicklime. One of these horizontal kilns with a total installed annual clinker production capacity of 660,000 metric tons was added in 2023. In addition,we formerly had six vertical shaft kilns with a total installed annual clinker production capacity of 465,120 metric tons. We made a provision for the impairment of these vertical shaft kilns at the end of 2023. As a result of these changes, the current clinker capacity at our Pacasmayo plant is 1,755,600 metric tons. Additionally, our facility has a primary and secondary cone crusher located near our Acumulación Tembladera limestone quarry. The main crusher has installed crushing capacity of 800 metric tons per hour and the secondary crusher has installed crushing capacity of 170 metric tons per hour. Our Pacasmayo facility also features three cement finishing mills with installed annual cement production capacity of 2.9 million metric tons. Our Pacasmayo facility is also equipped with silos containing storage capacity for 26,700 metric tons of cement.

 

As of December 31, 2023, our Pacasmayo facility had installed production capacity of approximately 240,000 metric tons of quicklime per year, including the annual installed capacity of one of our clinker kilns and our Waelz rotary kiln, which are equipped to also produce quicklime.

 

Piura Facility

 

Annual installed production capacity of our Piura plant is 1.6 million metric tons of cement and 990,000 metric tons of clinker. Our Piura plant operates with one horizontal kiln with installed clinker production capacity of 990,000 metric tons per year, as well as a cement mill with installed cement production capacity of 1.6 million metric tons per year. Our Piura plant also has three storage silos with storage capacity of 25,300 metric tons of cement.

 

45

 

 

Rioja Facility

 

Annual installed production capacity of our Rioja plant is 440,000 metric tons of cement and 289,080 metric tons of clinker.

 

Our Rioja facility currently operates with a small cone crusher and four vertical shaft kilns with total annual installed clinker production capacity of 289,080 metric tons and three cement finishing mills with total annual installed cement production capacity of 440,000 metric tons. Our Rioja plant is also equipped with silos with a storage capacity of 1,750 metric tons of cement.

 

Ready-Mix Concrete Facilities

 

We also have 22 fixed and mobile ready-mix concrete and precast facilities located in the northern cities of Chimbote, Trujillo, Chiclayo, Piura, Cajamarca, Pacasmayo and Tarapoto among others. These facilities allow us to supply ready-mix concrete and precast materials to small, medium and large construction projects throughout the entire northern region of Peru. As of December 31, 2023, our ready-mix operations had 167 mixer trucks, 34 concrete pumps and two pavers available to deliver ready-mix concrete.

 

Capacity and Volumes

 

The table below sets forth our clinker, cement and quicklime production capacity and volumes in our Pacasmayo and Rioja facilities for the periods indicated.

 

    As of and for the year ended December 31,  
    2023     2022     2021  
(in thousands of metric tons, except percentages)   Capacity     Production     Utilization rate(1)       Capacity     Production     Utilization rate(1)     Capacity     Production     Utilization rate (1)  
Cement:                                                      
Pacasmayo facility     2,900       1,656       57.1 %     2,900       1,768       61.0 %     2,900       1,970       67.9 %
Piura facility     1,600       1,032       64.5 %     1,600       1,361       85.1 %     1,600       1,324       82.8 %
Rioja facility     440       259       58.8 %     440       307       69.8 %     440       338       76.8 %
Total     4,940       2,946       59.6 %     4,940       3,436       69.6 %     4,940       3,632       73.5 %
Clinker(2):                                                                          
Pacasmayo facility     1,756       1,098       61.6 %     1,500       935       62.3 %     1,500       879       58.6 %
Piura facility     990       799       80.7 %     1,000       1,023       100.0 %     1,000       893       89.3 %
Rioja facility     289       200       69.1 %     280       240       85.7 %     280       264       94.3 %
Total     3,035       2,097       68.5 %     2,780       2,198       79.1 %     2,780       2,036       73.2 %
Quicklime(3):                                                                          
Pacasmayo facility
    240       29       12.1 %     240       46       19.2 %     240       69       28.8 %

 

 

(1)Utilization rate is calculated by dividing production for the specified period by installed capacity.
(2)Clinker capacity has been estimated using 330 production days.
(3)Our Rioja facility does not produce quicklime. In addition, one of our clinker kilns and our Waelz rotary kiln are equipped to produce quicklime.

 

46

 

 

Summary Disclosure (229.1303)

 

Map of Mining Concessions of Cementos Pacasmayo S.A.A. and subsidiaries.

 

Figure 1 shows the map of Peru and the location of the Peruvian mining properties of Cementos Pacasmayo and subsidiaries, in the northern part of the country. The mining properties are located in Piura, Lambayeque, Cajamarca, Amazonas, Ica, Cusco, San Martin, La Libertad and Ancash regions.

 

Figure 1 General map of the mining properties and industrial facilities of Cementos Pacasmayo S.A.A. and subsidiaries

 

 

General description of mining properties and operations

 

Cementos Pacasmayo’s access to its mining properties in Peru are obtained through mining rights granted by INGEMMET.

 

Mineral properties in Peru are classified according to the type of material (i.e. metallic and non-metallic).

 

Cementos Pacasmayo has mining properties in exploration, development and production stages. Cementos Pacasmayo has three material properties (Tembladera, Virrilá, and Tioyacu), all of which are in the production stage.

 

Cementos Pacasmayo acquired Corporación de Materiales Piura S.A.C., whose mining concessions are shown in Annex 1.

 

Table 1 provides an overview of Cementos Pacasmayo’s material properties, including relevant information for each quarry.

 

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Table 1 Main mining properties of Cementos Pacasmayo S.A.A. and subsidiaries

 

Mining Property  Mining concessions  Location of the mining concession  Percentage of ownership interests   Operator  Surface area (ha)   Stage of the mining concession  Permits   Key condition of permit  Type of mine / material  Beneficiation plant and other installations  Production 2023
(Ton)
   Production 2022
(Ton)
   Production 2021
(Ton)
 
Tembladera  Acumulación Tembladera   Cajamarca   100%  San Martin Contratistas Generales SA   3,391   Production  Yes   EIA(2) and others  Open Pit / Limestone  Industrial facilities(3)   1,842,375    1,727,182    1,629,895 
Virrila  UEA(1)  Virrila   Piura   100%  San Martin Contratistas Generales SA   38,226   Production  Yes   EIA(2) and others  Open Pit / Coquina  Industrial facilities(3)   932,933(4)    1,766,003    1,465,709 
Tioyacu   UEA(1)  Rioja   San Martin   100%  Cementos Selva S.A.C   9,600   Production  Yes   EIA(2) and others  Open Pit / Limestone  Industrial facilities(3)   351,644(5)    421,636    377,702 

 

(1)Unidad Economica Administrativa represents a grouping of two or more mining concessions incorporated to the National Mining Cadastre with definitive character, of the same kind of substance and of the same mining owner.
(2)Environmental Impact Assessment (EIA).
(3)Cement plants are governed by the laws of the industrial sector.
(4)Production at the Virrila quarry was affected in 2023 because operations were interrupted between May and September of that year due to the interruption of traffic caused by the overflowing of the La Niña lagoon caused by Cyclone Yaku.
(5)The 2023 production of the Tioyacu quarry was lower compared to 2022, because no blasting activities were carried out in April and May.

 

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A.Summary of Mineral Resources and Mineral Reserves

 

Tables 2 and 3 summarize the mineral resources and reserves, respectively, of the mining properties of Cementos Pacasmayo and its subsidiaries.

 

Table 2 Summary of Mineral Resources (exclusive of Reserves) of Cementos Pacasmayo S.A.A. and subsidiaries as of December 31, 2023.

 

   Measured Mineral Resources   Indicated Mineral Resources   Measured + Indicated Mineral Resource   Inferred Mineral Resources 
   Amount
(Million
Tonnes)
   Grades/
Qualities
(% CaO)
   Amount
(Million
Tonnes)
   Grades/
Qualities
(% CaO)
   Amount
(Million
Tonnes)
   Grades/
Qualities
(% CaO)
   Amount
(Million
Tonnes)
   Grades/
Qualities
(% CaO)
 
Limestone:                                
Acumulación Tembladera   122.6    49.33    34.5    50.32    157.1    49.55    75.9    50.33 
UEA Rioja   0.05    50.10    0.5    48.01    0.5    48.20    19.8    46.34 
Coquina:                                        
UEA Virrila   19.9    49.68    28.0    48.92    47.9    49.24    4.4    46.67 

 

*Table 2 is based on the following cement prices: Tembladera/Pacasmayo (S/616.7 per ton) and Virrila/Piura (S/687.8 per ton). The mineral resource estimates are at the point of delivery to the cement plant (point of reference). Also the assumptions (e.g., prices, costs and other economic assumptions) used to establish prospects of economic extraction during the mineral resources estimation can be found in the Cementos Pacasmayo S.A.A. Technical Report Summaries (TRS) 20-F 229.601 (Item 601) Exhibits 96.1, 96.2 and 96.3 of this 20-F filing.

 

Table 3 Summary of Mineral Reserves of Cementos Pacasmayo S.A.A. and subsidiaries’ properties at December 31, 2023.

 

   Proven Mineral Reserves   Probable Mineral Reserves   Total Mineral Reserves 
   Amount
(Million
Tonnes)
   Grades/
Qualities
(%CaO)
   Amount
(Million
Tonnes)
   Grades/
Qualities
(%CaO)
   Amount
(Million
Tonnes)
   Grades/
Qualities
(%CaO)
 
Limestone:                        
Acumulación Tembladera   65.5    49.66    12.3    49.63    77.8    49.65 
UEA Rioja   5.9    50.17    4.4    48.07    10.3    49.28 
Coquina:                              
UEA Virrila   40.3    51.87    2.7    49.78    43.0    51.73 

 

*Table 3 is based on the following cement prices: Tembladera/Pacasmayo (S/616.7 per ton), Virrila/Piura (S/687.8 per ton) and Tioyacu/Rioja (S/724.6 per ton). The mineral resource estimates are at the point of delivery to the cement plant (point of reference). Also the assumptions (e.g., prices, costs and other economic assumptions) used to establish economic viability during the mineral reserves estimation can be found in the Cementos Pacasmayo S.A.A. and Cementos Selva S.A.C Technical Report Summaries (TRS) 20-F 229.601 (Item 601) Exhibits 96.1, 96.2 and 96.3 of this 20-F filing.

 

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Annex 1. List of Cementos Pacasmayo and Subsidiaries new Concessions.

 

Name of mineral concession  Location of the properties  Type and amount of ownership interests   Operator   Surface (Has)   Stage of Property   Permits   Type of mine / material  Beneficiation plant and other installations  Production of 2023   Production of 2022   Production of 2021 
Gobernador 1  Piura   100%   NA    300    Exploration    No   Non Metallic  No   0    0    0 
Gobernador 2  Piura   100%   NA    400    Exploration    No   Non Metallic  No   0    0    0 
Gobernador 3  Piura   100%   NA    300    Exploration    No   Non Metallic  No   0    0    0 
La Roca I  Piura   100%   NA    900    Exploration    No   Non Metallic  No   0    0    0 
La Roca II  Piura   100%   NA    200    Exploration    No   Non Metallic  No   0    0    0 
Luna de Paita  Piura   100%   NA    500    Exploration    No   Non Metallic  No   0    0    0 
Meche 1  Piura   100%   NA    1,000    Exploration    No   Non Metallic  No   0    0    0 
Meche 2  Piura   100%   NA    500    Exploration    No   Non Metallic  No   0    0    0 
Meche 3  Piura   100%   NA    400    Exploration    No   Non Metallic  No   0    0    0 
Mercedes 2  Piura   100%   NA    1,000    Exploration    No   Non Metallic  No   0    0    0 
Mercedes 3  Piura   100%   NA    1,000    Exploration    No   Non Metallic  No   0    0    0 
Mercedes 4  Piura   100%   NA    1,000    Exploration    No   Non Metallic  No   0    0    0 
Mercedes 5  Piura   100%   NA    900    Exploration    No   Non Metallic  No   0    0    0 
Mercedes 6  Piura   100%   NA    900    Exploration    No   Non Metallic  No   0    0    0 
Mercedes 7  Piura   100%   NA    900    Exploration    No   Non Metallic  No   0    0    0 
Sol de Colán  Piura   100%   NA    900    Exploration    No   Non Metallic  No   0    0    0 

 

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Acumulación Tembladera Individual Disclosure (229.1304)

 

Property description

 

Location

 

The Tembladera property is located in Yonan district, Contumaza province, Cajamarca region, Peru at longitude -79.123393° and latitude -7.245671°. It is located 60 kilometers from the cement plant.

 

The area of the mining concession is 3,390.97 hectares. The mining rights are granted by INGEMMET through a Presidential Resolution.

 

Cementos Pacasmayo S.A.A. owns the mining concession and it is registered with the name Acumulación Tembladera as a non-metallic mining concession.

 

The Pacasmayo cement plant and Acumulación Tembladera mining concession are shown in Figure 1 while the locations of the Acumulación Tembladera and the Pacasmayo cement plant are shown separately in Figures 2 and 3, respectively.

 

Figure 1 Pacasmayo cement plant and Acumulación Tembladera

 

 

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Figure 2 Acumulación Tembladera

 

 

 

Pacasmayo cement plant is shown in Figure 3.

 

Figure 3 Pacasmayo cement plant

 

 

 

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Infrastructure

 

The Tembladera quarry has the necessary infrastructure for normal operations. Facilities for electric power, water supply, fuel, access and roads have been installed.

 

Energy is supplied by Hidrandina S.A. Company, which obtains energy from the national grid. Energy distribution is overhead and at medium voltage of 2.3 kilovolts. The quarry also has an electrical sub-station. The sub-station area is 1,062 square meters.

 

Water is obtained from the village canal, which flows near the quarry. The water is used for minor activities within the quarry, such as access and road watering, limestone watering in mining areas, post-blasting watering, watering of green areas, and consumption by restrooms.

 

A contractor manages the fuel system. The fuel storage and dispatch system has the necessary equipment to supply fuel to the mobile and fixed units within the quarry. Trained personnel and safety measures are in place to handle fuel safely.

 

The Tembladera quarry can be accessed by air from Lima to Trujillo (1 hour) and by land from Trujillo to Tembladera Quarry. The route is from Trujillo to Pacasmayo (112.6 kilometers), from Pacasmayo to Ciudad de Dios (14.3 kilometers) and from Ciudad de Dios to Tembladera (50 kilometers) and Tembladera - Security point (0.8 kilometers), for a total of 747.1 kilometers. The entire route is paved. Alternatively, the quarry can be accessed by air from Lima to Chiclayo, time average 1.15 hrs. of flight, and from Chiclayo to Ciudad de Dios (86.8 kilometers) and from Ciudad de Dios to Tembladera (50 kilometers) and Tembladera – Security point (0.8 kilometers). The entire route is paved.

 

The Tembladera quarry’s personnel come from the town of Tembladera, adjacent to the quarry. Others come from Cajamarca and La Libertad region.

 

Personnel from the town of Tembladera are transported to the quarry in buses and pickup trucks.

 

Mining Concession Ownership and Area

 

The Tembladera Accumulation was granted by Resolution No. 01989-2002-INACC/J of the National Institute of Concessions and Cadastre (Instituto Nacional de Concesiones y Catastro).

 

The procedure to obtain a mining concession is established in the General Mining Law (Supreme Decree 014-92-EM) and its Regulation Legislative Decree 020-2020-EM.

 

The mining concession is in the owner’s name of Cementos Pacasmayo S.A.A. and is also registered with the name Acumulación Tembladera as a non-metallic mine.

 

Cementos Pacasmayo S.A.A has the surface rights to the area of operation in the Tembladera quarry.

 

Cementos Pacasmayo S.A.A. pays the right of use for the concession Acumulación Tembladera with unique code 010001801L. These payments must be made from the first working day of January to June 30th of each year, providing the financial entities the unique code of its mining right. The Acumulación Tembladera concession payment is equivalent to US$3.00 per hectare.

 

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Royalties

 

Law No. 28258 approved the Peruvian Mining Royalty Law on June 24, 2004, which was amended by Law No. 29788 of September 28, 2011. Cementos Pacasmayo S.A.A. currently pays the Mining Royalty (see note 24 to the consolidated financial statements).

 

The payment to the Peruvian government is made through SUNAT, which is the entity designated to control this consideration for the use of natural resources. Such payment is made through an application that the tax authority has made available to those required to pay.

 

If the mining royalty is not declared or paid, penalties for infractions and default interest for non-compliance are incurred. However, failure to pay these fines is not a cause for the loss of the mining concession.

 

Mining activities on the property and industrial in the cement plant

 

Tembladera Quarry

 

The Tembladera quarry, located in the Acumulación Tembladera mining concession, is currently in the production stage. The Tembladera quarry is an open-pit mine that uses explosives to fragment the limestone rock. After crushing, the material is loaded onto trucks to be transported from the quarry to the cement plant located in Pacasmayo.

 

Figure 4 shows the flowsheet of mining processes at the Tembladera quarry. Further details of the process are provided in Exhibit 96.1 of this 20-F filing.

 

Figure 4 Diagram of mining process of the Tembladera quarry

 

 

 

The Tembladera quarry has been operating for 66 years. The amount of limestone to be mined is planned annually through the mining plan.

 

The equipment at the Tembladera quarry is in optimum condition to maintain continuity of operations. Maintenance and optimization of the equipment is carried out periodically and is supervised by the operator of the quarry. The equipment is in good condition and operational. Further details of the equipment are provided in Exhibit 96.1 of this 20-F filing.

 

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Pacasmayo industrial cement plant

 

The Pacasmayo cement plant is subject to the laws of the industrial sector, according to current Peruvian regulations.

 

The Pacasmayo plant is located at Pacasmayo District, Pacasmayo Province, La Libertad Region. This plant is 67.3 kilometers from Tembladera quarry. This facility receives material from the Tembladera quarry. The Pacasmayo plant produces various products for the construction industry, the main product being cement. Different types of cement are produced depending on their applications, using limestone, sand, iron and clays as raw materials. The specific mix of raw materials produces the clinker necessary to produce cement.

 

Extraction and transportation of limestone;

 

Raw material storage;

 

Grinding and homogenization to make the raw material of consistent quality;

 

Clinkerization;

 

Cement grinding;

 

Storage in silos; and

 

Packaging, loading and distribution.

 

Figure 5 shows the flowsheet for raw material processing, clinker and cement production. Further details of the process are provided in Exhibit 96.1 of this 20-F filing.

 

Figure 5 Pacasmayo industrial plant process block diagram

 

 

 

The Pacasmayo plant has been in operation for 66 years. The equipment at the Pacasmayo plant is in optimal condition to avoid any interruption in cement production. Maintenance and optimization of the equipment is carried out periodically and is supervised by Cementos Pacasmayo personnel. The Pacasmayo plant is currently being optimized with a modern, state-of-the-art clinker production line in order to increase production. The equipment is in good condition and operational. Further details of the equipment are provided in Exhibit 96.1 of this 20-F filing.

 

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Facilities

 

The total cost of the mining concession, mine development costs, land, buildings and other facilities, machinery and equipment, furniture and fixtures, transportation units, computer equipment and tools, quarry rehabilitation costs, capitalized interest and work in progress amounted to S/.738,667,041 as of December 31, 2023.

 

Tembladera Quarry

 

The Tembladera quarry has facilities such as offices, explosives magazine for blasting, electrical substation, maintenance shop, lubricant warehouse, gas station, oil tank, guardhouse, limestone field, dining room, laboratory, truck scale, ore belt, loading tunnel, meteorological station, safety trench and septic tank.

 

Pacasmayo Plant

 

The Pacasmayo plant has facilities such as maintenance workshops, warehouses, laboratories, administrative offices, and cement production lines that support cement production.

 

History

 

By means of Resolution No. 01989-2002-INACC/J dated November 4, 2002, the National Institute of Mining Cadastre and Concessions granted Cementos Pacasmayo S.A.A., the non-metallic concession title called “Acumulación Tembladera” with code No. 01-00018-01-L.

 

The property dates back to its oldest integral concession: “Norte No. 1” granted by the Regional Mining Office of Cajamarca by ministerial resolution No. 267 of June 30, 1950, for the benefit of Cementos Portland del Norte S.A., starting operations as Cementos Pacasmayo S.A.A., from 1957 until 2013 when Calizas del Norte S.A.C. (CALNOR) was incorporated. CALNOR started activities from January 2014 until May 2016. San Martin Contratistas Generales S.A. started activities from October 2016 to the present.

 

In December 2022, Cementos Pacasmayo started a diamond drilling campaign of eight drill holes to confirm mineral resources and reserves. Drilling activities continue in the first month of 2023.

 

Property Encumbrances

 

Cementos Pacasmayo S.A.A. does not make any payments with respect to encumbrances for the Acumulación Tembladera property. The Acumulación Tembladera mining concession currently has no outstanding payments with respect to infractions and penalties.

 

Concessions

 

The Acumulación Tembladera mining concession is a production stage property with estimated mineral reserves.

 

Geology

 

The ore deposit contains limestone with a grade suitable for cement production. The limestone is contained within the Cajamarca Formation, belonging to the Upper Cretaceous (Turonian floor, around 90 MA). This Formation overlies the Quilquiñan Group, and intrajacent to the Celendín Formation.

 

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Table 1 shows the stratigraphic column of the area of the Tembladera quarry and briefly describes the Cajamarca Formation and the Upper Cretaceous Celendín Formation that outcrop in the project area. Figure 6 shows the local geology of the quarry.

 

Table 1 Stratigraphic Column of the Tembladera quarry

 

System Series Stratigraphic Unit Intrusive rocks Lithologic Description
Quaternary Recent Fluvial Deposit Qr-fl     Fluvial origin
Alluvial Deposit Qr-al     Alluvial origin
Tertiary Lower     Andesite T-an Intrusion of andesitic dykes longitudinally into the deposit rock mass.
Cretaceous Upper Celendin Formation Ks-ce     Thin layers of clayey nodular limestone, interbedded with marls and lutites.
Cajamarca Formation Ks-c     Limestone of marine origin of whitish to light gray color.
Quilquiñan Group Ks-q     Lutites and marls with some calcareous intercalations.

 

Figure 6 Geological section of Tembladera quarry

 

 

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Resources and Reserves

 

Table 2 shows the mineral resources at the Tembladera quarry at the end of the 2023 fiscal year.

 

Table 2 Mineral Resources (exclusive of Reserves) at the end of the 2023 fiscal year based on cement price of S/616.7 per ton. The mineral resource estimates are at the point of delivery to the cement plant (point of reference)

 

   Amount
(Million
Tonnes)
   Grades/
 qualities
(% CaO)
   Grades/
 qualities
(% SO3)
   Grades/
 qualities
(% MgO)
   Grades/
 qualities
(% Al2O3)
   Cut-off grades
(% CaO)
 
Measured resources   122.6    49.33    1.83    1.82    4.76    48.60 
Indicated resources   34.5    50.32    1.68    1.44    3.85    48.60 
Measured + Indicated resources   157.1    49.55    1.80    1.74    4.56    48.60 
Inferred resources   75.9    50.33    1.62    1.45    3.93    48.60 

 

The mineral resources estimation considered the expected price of cement, the complete forecast horizon contemplates 30-year projection. Clinker is used for cement production through the addition of other non-metallic minerals.

 

Table 3 shows the mineral reserves at the Tembladera quarry.

 

Table 3 Mineral Reserves at the end of the 2023 fiscal year based on cement price of S/616.7 per ton. Mineral reserve estimates are at the point of delivery to the cement plant (point of reference)

 

   Amount
(Million Tonnes)
   Grades/
qualities
(% CaO)
   Grades/
qualities
(% SO3)
   Grades/
qualities
(% MgO)
   Grades/
qualities
(% Al2O3)
   Cut-off grades
(% CaO)
 
Proven reserves   65.5    49.66    1.52    1.54    4.60    48.60 
Probable reserves   12.3    49.63    1.57    1.56    4.91    48.60 
Total Reserves   77.8    49.65    1.53    1.54    4.65    48.60 

 

The mineral reserves estimation considered the expected price of cement. The complete forecast horizon contemplates a total of 30 years. Clinker is used for cement production through the addition of other non-metallic minerals.

 

Reconciliation of Mineral Resources and Reserves at the End of the Fiscal Year

 

Table 4 shows the difference between the mineral resource estimates at the end of 2023 and 2022.

 

Table 4 Resources for the last two fiscal years expressed in millions of tons.

 

   Resources as
at Dec. 31,
2023
   Resources as
at Dec. 31,
2022
   Discrepancy
Measured resources   122.6    127.4   The difference is due to the annual consumption of limestone used in the cement plant.
Indicated resources   34.5    35.7   The difference is due to the annual consumption of limestone used in the cement plant.
Measured + Indicated resources   157.1    163.1   The difference is due to the annual consumption of limestone used in the cement plant.
Inferred resources   75.9    74.1   The difference is due to readjustments in the calcareous horizons in the model update process.

 

*The prices assumed for the Mineral Resources estimation in the economic model can be found in the Cementos Pacasmayo S.A.A. Technical Report Summary (TRS) of the Tembladera Quarry and Pacasmayo Cement Plant 20-F 229.601 (Item 601) Exhibit 96.1 of this 20-F filing. All mineral resources are estimated at cement plant. The updated average price is S/616.7 per ton of cement at nominal values, perpetuity is included at the end of the 30-year projection.

 

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Table 5 shows the difference between the mineral reserve estimates at the end of 2023 and 2022.

 

Table 5 Reserves for the last two fiscal years expressed in millions of tons.

 

   Reserves as
at Dec. 31,
2023
   Reserves as
at Dec. 31,
2022
   Discrepancy
Proven reserves   65.5    62.1   Mineral reserve estimation for 2023 considered 30 years as Life of Mine (LOM) due to economic issues of price and cost forecast. Main differences are supported by annual limestone consumption to produce cement.
Probable reserves   12.3    12.2   There is no difference in tons.

 

*The prices assumed for the Mineral Reserves estimation in the economic model can be found in the Cementos Pacasmayo S.A.A. Technical Report Summary (TRS) Tembladera Quarry and Pacasmayo plant 20-F 229.601 (Item 601) Exhibit 96.1 filing. All mineral Reserves are estimated at cement plant. The updated average price is S/616.7 per ton of cement, average of the 30-year projection, at nominal values.

 

Cementos Pacasmayo has previously disclosed mineral resources and reserves at the Tembladera quarry in its annual report on Form 20-F filed on April 27, 2023. Cementos Pacasmayo previously filed a TRS to support its disclosure of mineral resources and reserves at the Tembladera quarry as Exhibit 96.1 of its annual report on Form 20-F filed on April 28, 2022. Cementos Pacasmayo is updating that TRS with the new TRS filed as Exhibit 96.1 of this 20-F filing to ensure the material assumptions are current. The main reasons for this update are prices, costs, cement demand, kiln 4 optimization and other economic assumptions. Further details are provided in Exhibit 96.1 of that 20-F filing.

 

Other Activities

 

Cementos Pacasmayo S.A.A. has carried out drilling at the Tembladera quarry to confirm the mineral reserves. New drilling data is not included in the 2023 reserves model.

 

Virrilá Individual Disclosure (229.1304)

 

Property description

 

Location

 

The Virrila property is located in the Sechura District, Sechura Province, Piura Region, Peru at longitude -80.758952° and latitude -5.933999°. The concessions are registered in INGEMET (Instituto Geológico Minero y Metalúrgico) as Virrila 3, Virrila 4, Virrila 6, Virrila 7, Virrila 8, Virrila 9, Virrila 10, Virrila 11, Virrila 12, Virrila 13, Virrila 14, Virrila 15, Virrila 16, Virrila 17, Virrila 18, Virrila 19, Virrila 20, Virrila 21, Virrila 22, Virrila 23 and Bayovar N° 4 with mining activity.

 

The area of the mining property is 38,226.00 hectares. The mining rights are granted by INGEMMET through a Presidential Resolution.

 

Cementos Pacasmayo S.A.A. owns the mining property and it is registered with the name Unidad Económica Administrativa (UEA) Virrila as a non-metallic mining property.

 

Cementos Pacasmayo currently has an agreement with the Fundación Comunal San Martin de Sechura for the use of the surface land associated with the production area of the Virrila quarry.

 

Piura Cement Plant and UEA Virrila are shown in Figure 1 while the locations of the UEA Virrila property and Piura cement plant are shown in Figures 2 and 3, respectively.

 

59

 

 

Figure 1 Piura cement plant and UEA Virrila

 

 

 

60

 

 

Figure 2 UEA Virrila property

 

 

Figure 3 Piura cement plant

 

 

 

61

 

 

Infrastructure

 

The Virrila quarry has the necessary infrastructure for normal operations. Facilities for electric power, water supply, fuels, accesses and roads have been installed.

 

Virrila quarry is supplied with fuel by diesel oil tanker trucks. Fuel distribution is the responsibility of an authorized contractor company.

 

The Virrila quarry is supplied with energy by electric generators.

 

The Virrila quarry can be accessed by paved road from Piura city, along the north Panamerican highway, to the Bayovar intersection and then to the Virrila quarry. Estimated travel time is 2 hours.

 

Personnel for the Virrila quarry come from the town of Sechura, near the quarry. Others are from Piura.

 

Personnel from the Sechura township are transported to the quarry in buses and pickup trucks. The contractor is responsible for the logistics of personnel operating in the quarry.

 

Mining Concession Ownership and Area

 

INGEMMET granted mining rights to Cementos Pacasmayo on March 31, 2016 by Presidential Resolution No. 0147-2016-INGEMMET/PCD/PM including nine (9) non-metallic mining rights in the ¨Unidad Económica Administrativa¨ (UEA) Virrila, with code No. 01-00011-00-U of Cementos Pacasmayo S.A.A.

 

Presidential Resolution No. 2869-2015-INGEMMET/PCD/PM dated September 30, 2015 added twelve (12) non-metallic mining rights to ¨Unidad Económica Administrativa¨ (UEA) Virrila, with code No. 01-00011-00-U of Cementos Pacasmayo S.A.A. bringing the total to 21 mining rights.

 

Royalties

 

Law No. 28258 approved the Peruvian Mining Royalty Law on June 24, 2004 and was amended by Law No. 29788 of September 28, 2011. Cementos Pacasmayo S.A.A. currently pays the Mining Royalty (see note 24 to the consolidated financial statements).

 

The payment to the Peruvian government is made through SUNAT, which is the entity designated to control this consideration for the use of natural resources. Such payment is made through an application that the tax authority has made available to those required to pay.

 

In case the mining royalty is not declared or paid, penalties for infractions and default interest for non-compliance are incurred. However, failure to pay these fines is not a cause for the loss of the mining concession.

 

Mining Activities on the Property

 

The Virrila quarry located in the Virrila EAU is currently in the production stage. This is an open-pit mine where surface miners are used to fragment the coquina, which is loaded onto trucks by front-end loaders and transported to the cement plant located in Piura which is 120 kilometers from UEA Virrila.

 

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Figure 4 shows the flowsheet of mining processes at the Virrila quarry. Further details of the process are provided in Exhibit 96.2 of this 20-F filing.

 

Figure 4 Diagram of mining process of the Virrila quarry

 

 

 

The Virrila quarry has been operating for eight years. The amount of coquina to be mined is planned annually through the mining plan.

 

The equipment in operation at the Virrila quarry is in optimum condition to maintain continuity of operations. Maintenance and optimization of the equipment is carried out periodically and is supervised by the operator of the quarry. The equipment is in good condition and operational. Further details of the equipment are provided in Exhibit 96.2 of this 20-F filing.

 

Piura Cement Plant

 

The cement plant is under the laws of the industrial sector, according to current Peruvian regulations.

 

The cement plant is located at Veintiséis de Octubre District, Piura Province and Piura Region. This facility receives material from the Virrila quarry. The cement plant produces various products for the construction industry, the main product being cement. Different types of cement are produced depending on their applications, and using coquina, sand, iron and clays as raw materials. The specific mix of raw materials produces the clinker necessary to produce cement.

 

The standard cement production process consists of the following main stages:

 

Extraction and transportation of coquina;

 

Raw material storage;

 

Grinding and homogenization to make the raw material of consistent quality;

 

Clinkerization;

 

Cement grinding;

 

Storage in silos; and

 

Packaging, loading and distribution.

 

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Figure 5 shows the flowsheet for raw material processing, clinker and cement production. Further details of the process are provided in Exhibit 96.2 of this 20-F filing.

 

Figure 5 Piura plant process block diagram

 

 

 

The equipment in operation at the Piura plant is in optimal condition to avoid any interruption in cement production. Maintenance and optimization of the equipment is carried out periodically and is supervised by Cementos Pacasmayo S.A.A. personnel. The equipment is in good condition and operational. Further details of the equipment are provided in Exhibit 96.2 of this 20-F filing.

 

Facilities

 

The total cost of the mining concession, mine development costs, land, buildings and other facilities, machinery and equipment, furniture and fixtures, transportation units, computer equipment and tools, quarry rehabilitation costs, capitalized interest and work in progress amounted to S/858,282,298 as of December 31, 2023.

 

Virrilá Quarry

 

The Virrila quarry has facilities such as offices, dining room, infirmary, vehicle parking lots, lubricant warehouse, chemical baths, maintenance shop, sample preparation laboratory, industrial water tank, truck scale, hopper for weighing, wastewater treatment pond, and satellite and radio antenna.

 

Piura Plant

 

The Piura plant has facilities such as maintenance workshops, warehouses, laboratories, administrative offices, and cement production lines that support cement production.

 

History

 

The quarry is a non-metallic deposit of coquina material, source of different types of cements for construction; Cementos Pacasmayo S.A.A. owns the deposit.

 

The Virrila quarry started operations in 2015. The mining contractor San Martin Contratistas Generales S.A. was in charge of the production from the beginning of operations until March 14, 2020. The mining contractor Posada Perú S.A.C started operations at the Virrila quarry on September 14, 2020 until December 30, 2021.

 

On January 3, 2022, the mining contractor San Martin Contratistas Generales S.A. was hired to transport the coquina from the Virrila quarry to the Piura plant.

 

From May to June 2023 Cementos Pacasmayo carried out a drilling campaign in order to confirm mineral reserves in Zone 2 and 4 (see Exhibit 96.2 of 20-F filing).

 

From May to September 2023, Virrila quarry stopped operations due to the interruption of traffic caused by the overflow of the La Niña lagoon provoked by Cyclone Yaku. Likewise, the Piura plant stopped its clinker production operations (raw meal milling, coal milling and reception of raw materials) from July to September of that year to avoid exceeding the strategic inventories (clinker). The cement grinding, receiving (cement additions), packaging and dispatching processes remained active to cover the cement demand.

 

Virrila quarry restarted operations in October.

 

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Property Encumbrances

 

Cementos Pacasmayo S.A.A. does not make any payments with respect to encumbrances for the UEA Virrila concessions. The UEA Virrila concessions currently have no outstanding payments with respect to infractions and penalties.

 

Concessions

 

The UEA Virrila is a production stage property with estimated mineral reserves.

 

Geology

 

The lithostratigraphy of the area consists of Cenozoic sedimentary units, locally formed by Tertiary units and covered by Quaternary deposits; the Tablazo Lobitos and Quaternary deposits of ancient alluvial, lacustrine and Aeolian origin form these units. Table 1 shows the stratigraphic column of the area of the Virrila quarry while Figure 6 shows a geologic section of the geology of the quarry.

 

Table 1 Stratigraphic Column of the Virrilá quarry

 

Era System Symbol Serie Stratigraphic Unit
Cenozoic Quaternary Qh-e Holocene Eolic deposits
Qp-tt Pleistocene Tablazo Talara
Tertiary Tm-zi Miocene Lower Zapallal Formation

 

Figure 6 Geological section of the Virrilá quarry

 

 

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Resources and Reserves

 

Table 2 shows the Mineral Resources at the Virrila quarry at the end of the 2023 fiscal year.

 

Table 2 Mineral Resources (exclusive of Reserves) at the end of the 2023 fiscal year based on cement price of S/687.8 per ton. The mineral resource estimates are at the point of delivery to the cement plant (point of reference).

 

   Amount
(Million
Tonnes)
   Grades/
qualities
(% CaO)
   Grades/
qualities
(% SO3)
   Grades/
qualities
(% MgO)
   Cut-off grades
(% CaO)
 
Measured resources   19.9    49.68    0.61    0.66    48.50 
Indicated resources   28.0    48.92    1.11    1.17    48.50 
Measured + indicated resources   47.9    49.24    0.90    0.96    48.50 
Inferred resources   4.4    46.67    2.15    1.61    48.50 

 

The mineral resource estimation considered the expected price of cement. The complete forecast horizon contemplates a total of 33 years of projection. Clinker is used for cement production through the addition of other non-metallic minerals.

 

Table 3 Mineral Reserves at the end of the 2023 fiscal year based on cement price of S/687.8 per ton. Mineral reserve estimates are at the point of delivery to the cement plant (point of reference).

 

   Amount
(Million
Tonnes)
   Grades/
qualities
(% CaO)
   Grades/
qualities
(% SO3)
   Grades/
qualities
(% MgO)
   Cut-off grades
(% CaO)
 
Proven reserves   40.3    51.87    0.35    0.70    48.50 
Probable reserves   2.7    49.78    1.08    1.42    48.50 
Total reserves   43.0    51.73    0.40    0.74    48.50 

 

The mineral reserves estimation considered the expected price of cement. The complete forecast horizon contemplates a total of 30 years of projection. Clinker is used for cement production through the addition of other non-metallic minerals.

 

Reconciliation of Resources and Reserves at fiscal year-end

 

Table 4 shows the difference between the mineral resource estimates at the end of 2023 and 2022.

 

Table 4 Resources for the last two fiscal years expressed in millions of tons.

 

   Resources as
of Dec. 31,
2023
   Resources as
of Dec. 31,
2022
   Discrepancy
Measured Resources   19.9    17.4   The difference is due to the annual consumption of coquina used in the cement plant.
Indicated Resources   28.0    29.0   The difference is due to the annual consumption of coquina used in the cement plant.
Measured + Indicated Resources   47.9    46.4   The difference is due to the annual consumption of coquina used in the cement plant.
Inferred Resources   4.4    3.9   The difference is due to updating the geological model.

 

*The prices assumed for the Mineral Resources estimation in the economic model can be found in the Cementos Pacasmayo S.A.A. Technical Report Summary (TRS) of the Virrila Quarry and Piura plant 20-F 229.601 (Item 601) Exhibit 96.2 of this 20-F filing. All Resources are estimated at cement plant. The updated average price is S/687.8 per ton of cement, average of the 30-year projection, at nominal values.

 

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Table 5 shows the difference between the mineral reserve estimates at the end of 2023 and 2022.

 

Table 5 Reserves for the last two fiscal years expressed in millions of tons.

 

   Reserves as
of Dec. 31,
2023
   Reserves as
of Dec. 31,
2022
   Discrepancy
Proven Reserves   40.3    42.6   The difference is due to the annual consumption of coquina used in the cement plant.
Probable Reserves   2.7    2.9   The difference is due to the annual consumption of coquina used in the cement plant.

 

*The prices assumed for the Mineral Reserves estimation in the economic model can be found in the Cementos Pacasmayo S.A.A. Technical Report Summary (TRS) Virrila Quarry and Piura Cement Plant 20-F 229.601 (Item 601) Exhibit 96.2 of this 20-F filing. All Reserves are estimated at cement plant.  The updated average price is S/687.8 per ton of cement, average of the 30-year projection, at nominal values.

 

Cementos Pacasmayo has previously disclosed mineral resources and reserves at the Virrila quarry in its annual report on Form 20-F filed on April 27, 2023. Cementos Pacasmayo previously filed a TRS to support its disclosure of mineral resources and reserves at the Virrila quarry as Exhibit 96.2 of its annual report on Form 20-F filed on April 28, 2022. Cementos Pacasmayo is updating that TRS with the new TRS filed as Exhibit 96.2 of this 20-F filing to ensure the material assumptions are current. The main reasons for this update are prices, costs and cement demand. Further details are provided in Exhibit 96.2 of that 20-F filing.

 

Exploration

 

Cementos Pacasmayo S.A.A. has carried out exploration drilling in the Virrila quarry to confirm the mineral reserves. This activity will improve the accuracy of mineral reserves estimation. The drilling results, by themselves, do not constitute material information as the exploration drilling results are included in the analysis for estimating mineral resources and reserves.

 

Tioyacu Individual Disclosure (229.1304)

 

Property description

 

Location

 

The Tioyacu property is located in Elias Soplin Vargas district, Rioja province, San Martin region, Peru at longitude -77.284376° and latitude -5.999057°. It is located 5 kilometers from the cement plant.

 

The mining rights registered with INGEMMET are as follows Moyobamba 98, Pajonal 2, Rioja 1, Rioja 2, Rioja 3, Rioja 5, Rioja 6, Rioja 7, Rioja 8, Rioja 9, Calizas Tioyacu, Arcillas el Pajonal, Pajonal 3 and Pajonal 4. The area of the mining property is 9,600 hectares.

 

The mining rights (the mining concession title) are granted by INGEMMET through a Presidential Resolution.

 

Cementos Selva S.A.C. owns the mining property and it is registered with the name Unidad Económica Administrativa (UEA) Rioja as a non-metallic mining property.

 

Rioja cement plant and UEA Rioja are shown in Figure 1 while the locations of the UEA Rioja property and Rioja cement plant are shown in Figures 2 and 3, respectively.

 

67

 

 

Figure 1 Rioja cement plant and UEA Rioja

 

 

68

 

 

Figure 2 UEA Rioja property

 

 

Figure 3 Rioja cement plant

 

 

69

 

 

Infrastructure

 

The Tioyacu quarry has the necessary infrastructure for normal operations. Facilities for electric power, water supply, fuel, access and roads have been installed.

 

The Rioja plant owned by Cementos Selva S.A.C., a wholly-owned subsidiary of Cementos Pacasmayo, currently has adequate infrastructure (such as workshops, service stations, restrooms, and others).

 

The Tioyacu quarry can be accessed from the coast by air from Lima to Tarapoto, time average 1.10 hours of flight, and from Tarapoto to Rioja (139 kilometers) and from Rioja to the Cementos Selva S.A.C. plant (15 kilometers). Alternatively, one can access the site by road from Lima to Rioja, a distance of 1107 kilometers on paved road.

 

The personnel at Tioyacu quarry come from the Elias Soplin Vargas district. Others are from Rioja and Nueva Cajamarca.

 

Mining Concessions Ownership and Area

 

Calizas Tioyacu concession was approved by Resolution 0960-96-RPM granted by the Public Mining Registry.

 

The procedure to obtain a mining concession is stipulated in the General Mining Law (Supreme Decree 014-92-EM) and its Regulation Legislative Decree 020-2020-EM.

 

Cementos Selva S.A.C. is the owner of the mining concession and is registered under the name Calizas Tioyacu as a non-metallic mine.

 

Tioyacu quarry has a Usufruct and Easement Agreement for the use and easement of the surface where mining activities are carried out. The agreement was signed with Corporación de Desarrollo de San Martin (COREDESAM).

 

Cementos Selva S.A.C. pays the concession fee for the Calizas Tioyacu concession with unique code 010912495. These payments must be made from the first working day of January to June 30th of each year, providing the Financial Entities the unique code of its mining right. In the case of the Calizas Tioyacu concession, the payment is equivalent to US$3 per hectare.

 

Royalties

 

The Peruvian Mining Royalty Law was approved on June 24, 2004 by Law No. 28258, which was amended by Law No. 29788 of September 28, 2011. Cementos Selva S.A.C. currently pays the Mining Royalty (see note 24 to the consolidated financial statements).

 

The payment to the Peruvian government is made through the SUNAT, which is the entity designated to control this consideration for the use of natural resources. Such payment is made through an application that the tax authority has made available to those required to pay.

 

If the mining royalty is not declared or paid, fines for infractions and late payment interest for non-compliance are incurred. However, failure to pay these fines is not a cause for the loss of the mining concession.

 

Mining Activities on the Property

 

Tioyacu Quarry

 

The Tioyacu quarry located in the Calizas Tioyacu mining concession is currently in the production stage. The Tioyacu quarry is an open-pit mine that uses explosives to fragment the limestone rock, which is then loaded onto trucks by front-end loaders and transported to the Rioja plant.

 

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Figure 4 shows a flowsheet of mining processes at the Tioyacu quarry. Further details of the process are provided in Exhibit 96.3 of this 20-F filing.

 

Figure 4 Diagram of mining process of the Tioyacu quarry

 

 

The Tioyacu quarry has been operating for 23 years for Cementos Selva S.A.C. The material extracted from the quarry is used to supply the Rioja Cement Plant, which has also been in operation for 23 years. The amount of limestone to be mined is planned annually through the mining plan.

 

The equipment in operation at the Tioyacu quarry is in optimum condition to maintain continuity of operations. Maintenance and optimization of the equipment is carried out periodically and is supervised by the operator of the quarry. The equipment is in good condition and operational. Further details of the equipment are provided in Exhibit 96.3 of this 20-F filing.

 

Rioja Cement Plant

 

It is important to mention that the cement plant is under the laws of the industrial sector, according to current Peruvian regulations.

 

The Rioja cement plant is located in the district of Elías Soplin Vargas, La Rioja province, San Martin region, 5 kilometers from the quarry. This facility receives material from the Tioyacu quarry. The cement plant produces various products for the construction industry, the main product being cement. Different types of cement are produced depending on their applications, using limestone, sand, iron and clays as raw materials. The specific mix of raw materials produces the clinker necessary to produce cement.

 

The standard cement production process consists of the following main stages:

 

Extraction and transportation of limestone;

 

Raw material storage;
  
Crushing and Drying of Raw Materials;

 

Grinding and homogenization to make the raw material of consistent quality;

 

Clinkerization;

 

Cement grinding;

 

Storage in silos; and

 

Packaging, loading and distribution.

 

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Figure 5 shows the flowsheet for raw material processing, as well as clinker and cement production. Further details of the process are provided in Exhibit 96.3 of this 20-F filing.

 

Figure 5 Rioja plant process block diagram

 

 

 

The equipment in operation at the Rioja plant is in optimal condition to avoid any interruption in cement production. Maintenance and optimization of the equipment is carried out periodically and is supervised by Cementos Selva S.A.C personnel. The equipment is in good condition and operational. Further details of the equipment are provided in Exhibit 96.3 of this 20-F filing.

 

Facilities

 

The total cost of the mining concession, mine development costs, land, buildings and other constructions, machinery and equipment, furniture and fixtures, transportation units, computer equipment and tools, quarry rehabilitation costs, capitalized interest and work in progress amounts to S/136,491,040 as of December 31, 2023.

 

Tioyacu Quarry

 

The Tioyacu quarry does not have maintenance and administrative facilities because the Cementos Selva S.A.C plant is near the quarry and provides the necessary facilities for quarry operations.

 

Rioja Plant

 

The Rioja plant has facilities such as maintenance workshops, warehouses, laboratories, administrative offices, and cement production lines that support cement production.

 

History

 

The Tioyacu quarry began operations as Cementos Rioja S.A. in 2000. Prior to this, Cementos Rioja S.A. had successfully won the bid for the “Cement Plant with Vertical Kiln of Rioja”, promoted by CEPRI Cemento Rioja at the Public Auction of February 6, 1998. Ownership was then transferred by the Regional Government of San Martin by public deed on March 28, 1988, to Cementos Rioja S.A.

 

The development of the project, and the non-metallic mining concession – Calizas Tioyacu, among others, were a part of the transfer in favor of Cementos Rioja S.A. by Empresa Minera del Perú, by public deed dated April 8, 1998.

 

According to the provisions of the ninth article of the General Mining Law (Supreme Decree No. 014-92-EM), the industrial cement plant is not an integral or accessory part of the mining concession, nor does it carry out mining activities, it is a different property dedicated to the industrial manufacturing of cement.

 

On March 1, 2022, Cementos Selva S.A. changed its corporate name to Cementos Selva S.A.C. (CSSAC).

 

In December 2023, Cementos Selva started a diamond drilling campaign of six drill holes to confirm mineral reserves.

 

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Property Encumbrances

 

Cementos Selva S.A.C. does not make any payments with respect to encumbrances for the Tioyacu quarry. Tioyacu quarry currently has no outstanding payments with respect to infractions and penalties.

 

Concessions

 

The Calizas Tioyacu is a production stage property with estimated mineral reserves.

 

Geology

 

The ore deposit contains limestone with a grade suitable for cement production. The limestone is contained within the Condorsinga Formation. This Formation is part of the Pucará Group. Figure 6 shows the stratigraphic column of the area of the Tioyacu quarry while Figure 7 shows the local geology of the quarry.

 

Figure 6 Rioja plant process block diagram

 

 

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Figure 7 Geological section of the Tioyacu quarry

 

 

Resources and Reserves

 

Table 1 shows the mineral resources at the Tioyacu quarry at the end of the 2023 fiscal year.

 

Table 1 Limestone Resources (exclusive of Reserves) at the end of the 2023 fiscal year based on cement price of S/724.6 per ton. The mineral resource estimates are at the point of delivery to the cement plant (point of reference).

 

   Amount
(Million Ton)
   Grades/
qualities
(% CaO)
   Grades/
qualities
(% SiO2)
   Grades/
qualities
(% K2O)
   Cut-off grades
(%CaO)
 
Measured resources   0.05    50.10    5.82    0.22    51.00(1)
Indicated resources   0.5    48.01    6.23    0.19    51.00(1)
Measured + Indicated resources   0.5    48.20    6.19    0.20    51.00(1)
Inferred resources   19.8    46.34    2.67    0.14    51.00(1)

 

Table 2 Limestone Reserves at the end of the 2023 fiscal year based on cement price of S/724.6 per ton. The mineral reserve estimates are at the point of delivery to the cement plant (point of reference).

 

   Amount   Grades/
qualities
(% CaO)
   Grades/
qualities
(% SiO2)
   Grades/
qualities
(% K2O)
   Cut-off grades
(%CaO)
 
Proven reserves   5.9    50.17    5.86    0.22    51.00(1)
Probable reserves   4.4    48.07    6.84    0.21    51.00(1)
Total reserves   10.3    49.28    6.28    0.22    51.00(1)

 

(1)The quality restrictions established may vary according to the requirements of the material balance, associated with limestone and other raw materials.

 

The estimation of mineral reserves considered the expected price of cement. The complete forecast horizon contemplates a total of 24 years of projection. Clinker is used for cement production through the addition of other non-metallic minerals.

 

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Reconciliation of Resources and Reserves at the end of the fiscal year

 

Table 3 shows the difference between the mineral resource estimates at the end of 2023and 2022.

 

Table 3 Resources for the two fiscal years expressed in millions of tons.

 

   Resources as at
December 31,
2023
   Resources as at
December 31,
2022
   Discrepancy
Measured resources   0.05    0.1   Due to the limestone production plan.
Indicated resources   0.5    0.1   Due to the limestone production plan.
Measured + Indicated resources   0.5    0.2   Due to the limestone production plan.
Inferred resources   19.8    19.8   The inferred resources are the same as last year.

 

*No economic analysis was performed for the Inferred Mineral Resources.

 

Table 4 Reserves for the last two fiscal years expressed in millions of tons.

 

   Reserves as at
December 31,
2023
   Reserves as at
December 31,
2022
   Discrepancy
Proven reserves   5.9    6.3   The difference is due to the annual consumption of limestone used in the cement plant.
Probable reserves   4.4    4.7   The difference is due to the annual consumption of limestone used in the cement plant.

 

*The prices assumed for the Mineral Reserves estimation in the economic model can be found in the Cementos Selva S.A.C. Technical Report Summary (TRS) of the Tioyacu Quarry and Rioja Cement Plant 20-F 229.601 (Item 601) Exhibit 96.3 of this 20-F filing. All mineral reserves are estimated as quantities at cement plant. The updated average price is S/724.6 per ton of cement, average of the 24-year projection, at nominal values.

 

Cementos Pacasmayo has previously disclosed mineral resources and reserves at the Tioyacu quarry in its annual report on Form 20-F filed on April, 2023. Cementos Pacasmayo previously filed a TRS to support its disclosure of mineral resources and reserves at the Tioyacu quarry as Exhibit 96.3 of its annual report on Form 20-F filed on April 28, 2022. Cementos Pacasmayo is updating that TRS with the new TRS filed as Exhibit 96.3 of this 20-F filing to ensure the material assumptions are current. The main reasons for this update are price, cost and cement demand. Further details are provided in Exhibit 96.3 of that 20-F filing.

 

Other Activities

 

Cementos Selva S.A.C has carried out drilling at the Tioyacu quarry to confirm mineral reserves. This activity will improve the accuracy of mineral reserves estimation. New drilling data is not included in the 2023 reserves model.

 

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Internal Control Disclosure (229.1305)

 

Cementos Pacasmayo S.A.A, as part of its corporate policies and through its Vice-President of Operations, has implemented the necessary controls and procedures for quality assurance (QA) and quality control (QC) of the company’s production activities and associated information for the estimation of mineral resources and reserves. Cementos Pacasmayo has also implemented quality management systems for its production activities and the quality management system has been ISO 9001 certified since 2015.

 

The QA and QC measures are applied to exploration, quarry production (mining), and cement plant processing activities. For laboratory analysis of exploration samples used in mineral resource and reserve estimates, Cementos Pacasmayo uses a program of duplicate samples, standards and blanks to evaluate the reliability of the laboratory results that its qualified persons rely on for mineral resource and reserve estimates. Its qualified persons also verify the data prior to using the data in their work.

 

As part of the quality control activities, Cementos Pacasmayo periodically hires an external laboratory to verify Cementos Pacasmayo’s laboratory results obtained during the exploration activities, which are part of the geological database and subsequently used in the estimation of resources and reserves.

 

In each of its operations, Cementos Pacasmayo, following the Quality Management System, applies the quality control procedures specific to each stage of the process such as exploration activities, limestone/coquina production, reception of raw materials in the cement plant, crushing of raw materials, coal grinding, cement grinding and raw materials or products in the Cement Plants (e.g., clinker, other materials and cement).

 

Quality control procedures include sample security such as chain of custody for reliable information.

 

Cementos Pacasmayo has a chemical analysis laboratory at each of its cement plants where procedures based on international standards are used for the chemical and physical analysis of raw materials, clinker, and other materials; mainly used in limestone and cement production. Methodologies including the insertion of blanks, duplicates, and standards are applied as part of the quality plan.

 

Cementos Pacasmayo has a data management department whose goal is to verify the quality of the information and its incorporation into the geological database, so that it can be used in studies and interpretations, geological modeling, and estimation of mineral resources and reserves.

 

Data verification activities apply to exploration, limestone/coquina production and cement processing data.

 

At the cement plant, the quality plan uses the PDCA (Plan, Do, Check, Act) cycle, which allows Cementos Pacasmayo to verify the quality of information during cement production activities.

 

Cementos Pacasmayo has implemented internal controls to ensure its mineral Resource and Reserves estimates are compliant with Regulation S-K 1300 requirements, including ensuring that mineral resource and reserve estimates are prepared by qualified persons who are members of the Peruvian Engineers Association, an organization that regulates the legal professional practice of engineers in Peru.

 

Mineral resource and reserve estimates at the end of each fiscal year are and will continue to be reviewed by our Mining Operations Department to ensure compliance with S-K 1300. Cementos Pacasmayo engineers and geologists reconcile actual production with estimates of mineral resources and reserves annually to verify accuracy of the estimates. The comprehensive risk inherent in Cementos Pacasmayo’s estimates of mineral resources and reserves are consistent with industry best practices.

 

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Insurance

 

We maintain a comprehensive insurance program that protects us from certain types of property and casualty losses. Our plants and equipment are insured against losses. Additionally, our insurance policy provides coverage for business interruption in our cement manufacturing facilities. We also purchase commercial insurance to cover risks associated with workers’ compensation and other general liabilities. We believe our insurance programs and policy limits and deductibles are appropriate for the risks associated with our business and are in line with the insurance policies of similar cement manufactures that operate in Peru.

 

Sustainability Performance

 

We report our sustainability performance information to the Getting the Numbers Right (“GNR”) database, inspired by the guiding principles of the Cement Sustainability Initiative (the “CSI”), a sector-project of the World Business Council for Sustainable Development (the “WBCSD”) among other cement companies in Latin America through the Inter-American Cement Federation (the “FICEM”).

 

In August 2018, we joined the GCCA and the GCCA announced the formation of a strategic partnership with the WBCSD to facilitate sustainable development of the cement and concrete sectors and their value chains. As part of a new agreement, the work carried out by the CSI and the GNR database was transferred from the WBCSD to the GCCA on January 1, 2019. In 2023, our CEO, Humberto Nadal was elected board member of the GCCA for the 2024-2026 period. 

 

In 2019, we became members of Innovandi Global Cement and Concrete Research Network which is GCCA’s Innovation arm, which runs key programs to develop innovations to help the industry decarbonize and produce carbon neutral concrete by 2050.

 

In 2020, member companies of the Global Cement and Concrete Association came together as leaders in the sector to commit to producing carbon neutral concrete by 2050, in line with global climate targets – accelerating the Co2 reductions.

 

In 2022, we were included for the fourth consecutive year as part of the DJS MILA Pacific Alliance Index. This index is made up of those companies that demonstrate superior performance among their peers under social, environmental and economic criteria. This achievement comes as a result of Pacasmayo’s effort to improve in all of these criteria and to work towards ambitious goals in terms of long-term sustainability. We are committed not only to remain in the Index but to improve our performance, as we are convinced that the focus on sustainability is key to our business and our stakeholders. We participated in the Carbon Disclosure Project (CDP) for the first time, and we are committed to participate every year in this project going forward. CDP is a not-for-profit charity that runs the global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts.

 

In 2023, we were included for the fifth consecutive year in the annual DJS MILA Pacific Alliance Index and remain the only Peruvian cement company in this prestigious index. In addition, this year we inaugurated a new kiln at our Pacasmayo plant, which, in addition to adding 660,000 metric tons of clinker capacity per year, will help us on our path to carbon neutrality and allow us to achieve energy efficiency. Cementos Pacasmayo and Dino SRL have been recognized by the Ministry of the Environment with the “Carbon Footprint Peru’’ seal. This is an official tool of the Peruvian State that acknowledges public and private organizations that manage their Greenhouse Gas Emissions (GHG) for the benefit of the environment. We are also part of the S&P/BVL Peru General ESG index, which recognizes us as one of the most sustainable companies in the Peruvian stock market.

 

In February 2024, we were selected to be part of The Sustainability Yearbook for the fourth consecutive year. To appear in the Yearbook, companies must score within the top 15% of their industry globally and have a gap of less than 30% from the leader’s Global ESG score. 2021 was the first year that Peruvian companies were included as part of the Yearbook, and we are the only cement company that has been part of the Yearbook for four consecutive years. With around 9,400 companies evaluated around the world, an inclusion in the yearbook is a true statement of excellence in corporate sustainability.

 

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Social Performance

 

We are committed to the development and quality of life of communities that surround the area where we operate. We have developed a good relationship with the local communities surrounding our plant facilities since we started operations in Pacasmayo. We have a number of social responsibility programs aimed at improving health and education in the area. Below is a brief description of a few of our social initiatives.

 

Tecsup. Tecsup is a leading not-for-profit institute in Peru that provides technical education. It was founded by the family of our controlling shareholder, and we support it by providing scholarships to promising students living near our plants to study at the Trujillo campus of Tecsup. Through its three campuses in Peru, Tecsup has graduated over 11,285 students in various technical fields, some of whom currently work for us and our affiliated companies.

 

Center for Technological Training. We have three training centers at our facilities where we teach students and adults business and technical skills. Our centers are staffed with instructors from Tecsup. The goal of the center is to help develop the professional skills of the local population, especially of students and teachers at the educational institutions in the towns of Tembladera, Pacasmayo and Sechura. In 2022, this program benefited over 1,909 stakeholders.

 

Abilities Strengthening. This program seeks to provide training to local stakeholders such as grassroots organizations, local entrepreneurs. The objective of the program is to strengthen their skills and knowledge by providing courses and seminars especially designed for that purpose. The program is funded by us and in 2022 benefited 186 stakeholders.

 

Universidad de Ingeniería y Tecnología. UTEC (University of Engineering and Technology) is an educational nonprofit proposal that since 2012 is aimed at the development of people in the engineering field, looking to satisfy the need for these types of professionals in the labor market by implementing a curriculum in line with the trends and demands that globalization poses to modern engineering, with an integrated approach to innovative teaching models. We support it by providing financial aid for its operations. To enhance students’ knowledge, UTEC also has various national and international alliances with top organizations.

 

Acuícola Los Paiches. Through our social venture, Acuícola Los Paiches S.A.C., we studied the reproductive forms of the “paiche” (arapaima giga), a native fish species that was on the edge of extinction. After years of studies and scientific testing, we have successfully bred this species in captivity, and we have obtained thousands of fingerlings.

 

Floor Improvement Project. To promote the urban development of our areas of influence, we set out to improve the infrastructure conditions of homes, through the substitution of dirt floors for concrete floors to contribute to the improvement of the quality of life and habitability conditions of the towns surrounding our operations. This is how 203 families joined this initiative and with our support they have managed to build concrete floors in their homes. Likewise, we have contributed 4,290 bags of cement to build a total of 7,052.14 square meters of concrete floors. This project has motivated the participants to invest financial resources and contribute labor to improve their homes.

 

Risk Management

 

Risk Management Description

 

Corporate Risk Management (GRC) is a structured approach that allows managing all of the important risks that could affect our long-term objectives. The purpose of this approach is to support senior management in the decision-making process, in order to reduce adverse impacts and take advantage of opportunities; as well as managing the action plans to mitigate the risks.

 

Therefore, Pacasmayo has processes and systems that analyze and evaluate the management of its business units, encouraging continuous improvement. Our management control systems include:

 

Mapping of new emerging risks and definition of impact, probability and design of controls;

 

Periodic review of current risks and update of impact probability and controls information;

 

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Quantification and effect of risk on EBITDA;

 

Evaluation of external factors; and

 

Periodic review of policies, procedures, regular internal audits and employee training.

 

Risk Management Process

 

The following are highlights of our risk management process.

 

The risks are mapped considering the impact on profit, revenues, resources, employees, communities where we operate and our suppliers.

 

An integrated risk management system and tools are used to collect information collaboratively with the functional areas and external sources of the company.

 

These processes include the evaluation of risks related to operations, human rights, sustainability, fraud and corruption, in different areas such as commercial, operations, environment, health and safety, among others.

 

The development of a risk management culture throughout the company in a decentralized manner, integrating the processes to the mapping of risks and the identification and mitigation of risks from the strategic level to the operational level.

 

The foregoing is reinforced with training for employees and suppliers and communication plans for the entire company.

 

Risk Management Organization

 

Managers responsible
for risk metrics

  Risk management team   Risks committee   Audit Committee

● Those responsible for the evaluation, management and prevention of the risk metrics of each area.

  ● Group responsible for the implementation of the corporate risk management strategy, which includes activities such as risk identification, evaluation, quantification, and promotion of a risk management culture, among others.  

● Group created to establish and supervise the implementation of the risk management strategy at th™e corporate level.

 

● Made up by 3 independent board members, reports directly to the Board

             
● Risk management coordinates with them for the development and monitoring of these metrics.       ● It is made up by the CEO, the VPs and the Risks Manager   ● The participants are the external auditors, the internal auditor, the compliance officer, the CFO and the Risk Manager
             
        ● the Risks Committee reports to the Audit Committee   ● Evaluates improvement opportunities and plans for the risk metrics.

 

Climate Related Risks

 

ESG risk management includes risks related to climate change. Therefore, they are analyzed through the same risk management stages and are part of Pacasmayo’s 2030 Sustainability Plan. This risk assessment includes risks that could occur in the short, medium or long term, and of different types, such as physical risks and transition risks, among others.

 

We have clear objectives to manage climate risks and opportunities, aiming to reduce our emissions by 20% and achieve more than 20% co-processing by 2030. All of this goes hand in hand with the implementation of operational contingency plans and the conditioning of plant infrastructure to ensure continuity, as well as the testing of emergency and crisis response plans.

 

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For this purpose, we are aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) for risks related to climate change. For example, one risk would be that our employees’ health would be affected by heat waves or lack of water, as well as the paralysis of our operations due to water stress, landslides or forest fires. We are also exposed to the possibility of not marketing finished products, as well as supplying raw materials to production plants due to disabled access roads.

 

In 2023, we have also identified and evaluated the risks and opportunities related to climate change and analyzed the impacts of these risks on our strategy. These risks have been incorporated into the risk matrix and our business continuity plan with measures for action and mitigation of impacts in the event of any of these risks.

 

The preparation of our business continuity plan has involved the development of a business impact analysis, the identification of risk scenarios, emergency plans, crisis management and response committees for each of the scenarios proposed. The scenarios include business interruptions as a result of the effects of climate change such as heavy rains and floods.

 

Emerging Risks

 

Emerging risks are those that have an impact in the long-term. The risks considered here include all recently identified risks that could have a long-term impact on the company’s business or industry, although in some cases they may have already begun to impact the company’s business.

 

Risk Description   Potential Impact   Mitigation Actions   Evidence of Mitigation Actions

Economic Risk:  

 

At the ministerial level of the Peruvian government, technical working groups are being developed to implement a possible change in the regulations relating to the weight of cement bags. The new national regulation would aim to improve the safety and health of construction workers, trying to prevent injuries caused by lifting heavy loads.

 

Medium to high:

 

Economic impact for Cementos Pacasmayo by changing the infrastructure of the dispatch process and adapting the capacity of each plant to comply with the standard. This new regulation would imply a total change in the process of bagging, handling, storage, distribution, and transportation of cement.

  Cementos Pacasmayo has developed The Napoleon Project, which aims to evaluate all the variables that would be impacted by the change in national regulations.  

  Impacts on the packaging management and commercialization process along the entire cement bag journey.

 

Expenditures, investments and returns on the different corporate fronts in the face of regulatory change.

 

Pilot industrial production of 85,000 bags of cement in compliance with the new regulations.  

             

Social Risk:

 

The exacerbated social climate due to the political crisis in the country in 2023, led to several stoppages, uprisings and obstructions at the level of roads, and access to operations of various companies nationwide.

 

Medium to high:

 

The impact on Cementos Pacasmayo was translated into constant uncertainty due to the stoppage of some of operations, not only affecting the continuity of Cementos Pacasmayo’s operations as a whole, but also, and very importantly, the people who work directly or indirectly in the different locations of our company and therefore, their right to work.

  Negotiation and signing of collective bargaining agreements with the different unions, regular meetings with union authorities, agreements and attention to their demands and claims. Work by the community relations group in neighboring communities.  

Community projects defined in the strategic plan for social management.

 

Talks and trainings to the communities with the program “Conociendo Pacasmayo”.

 

Monitoring of the social climate and assessment with the Social Information System (SIGS).  

 

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ITEM 4A.UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

A. Operating Results

 

Overview

 

We are a Peruvian cement company, and the only cement manufacturer in the northern region of Peru. With more than 65 years of operating history, we produce, distribute and sell cement and cement-related materials, such as precast products and ready-mix concrete. Our products are primarily used in construction. We also produce and sell quicklime for use in mining operations.

 

In 2023, our cement sales volume were approximately 3.0 million metric tons, representing an estimated 23.9% share of Peru’s total cement sales that year. That same year, we also sold approximately 46 thousand metric tons of quicklime.

 

We own three cement production facilities, our Pacasmayo and Piura facilities located in the northwest region of Peru, and our smaller Rioja facility located in the northeast. Our facilities have a total installed annual cement production capacity of approximately 4.9 million metric tons and 3.1 million metric tons of clinker capacity. We also have installed annual production capacity of 240,000 metric tons of quicklime. We own concession rights to several quarries with reserves of limestone/coquina and other raw materials located near our facilities.

 

In 2021, due to the exponential growth in cement sales, we decided to invest approximately US$83.5 million to optimize our current capacity at our Pacasmayo plant, in order to produce approximately 660,000 additional metric tons of clinker per year. This capacity came on line during the second half of 2023.

 

Factors Affecting our Results of Operations

 

Revenue Drivers

 

In 2023, approximately 88.5% of our total cement sales were in the form of bagged cement, substantially all of which was sold through retailers both within and outside of our distribution network. The remaining 11.5% of our cement was sold in bulk or in shipments of precast products or ready-mix concrete directly to large construction companies. Our retail sales are directed to both the auto-construcción segment and construction companies that buy cement for a variety of small construction works, including minor residential, commercial and infrastructure projects. Cement destined for large private and public projects, such as housing complexes, highways, irrigation channels, hospitals, schools, mining and industrial facilities, is typically sold in bulk or in shipments of precast products or ready-mix concrete.

 

We estimate that sales to the auto-construcción segment accounted for approximately 73.0% of our total cement sales in 2023, 73.6% in 2022 and 70.3% in 2021; private construction projects, both large and small, accounted for approximately 16.2% of our total cement sales in 2023, 12.7% in 2022, and 14.7% in 2021; and public construction projects accounted for the remaining 10.8% in of our total cement sales in 2023, 10.7% in 2022, and 15.0% in 2021. Since 2020, we have seen an increase in auto-construcción compared to other segments, mainly due to its resilience in times of crisis. As the Peruvian economy becomes less informal, and there is more stability and confidence from the private sector, private construction projects and infrastructure are expected to become increasingly more important to our business.

 

Our cement sales are largely driven by residential construction (both auto-construcción and small and large housing developments undertaken by construction companies), which is generally affected by economic conditions in the northern region of Peru. Auto-construcción is particularly affected by levels of disposable household income, as low-income families tend to invest most of their savings in developing their homes. Larger residential construction is more susceptible to the economic outlook, the availability of financing and prevailing investment levels in the region. GDP in the northern region of Peru is estimated to have increased by 0.8% in 2023, 1.7% in 2022, and 11.2% in 2021. Our cement volumes, which represented most of the cement sales in the northern region of Peru, contracted by 13.9% in 2023, contracted by 5.3% in 2022 and grew by 40.4% in 2021, in terms of metric tons.

 

Our cement sales are also driven, to a lesser extent, by commercial developments and infrastructure projects. Commercial and other private construction projects are also affected by the level of public and private investment in the region, while public infrastructure projects depend on the priorities and financial resources of the national, regional and local governments. Since 2020, there has been a significant reduction in activity relating to these projects, due initially to the economic impact of the COVID-19 pandemic, as well as subsequent political uncertainty. Private investment contracted by 7.4% in 2023, and public investment increased 1.4% in 2023.

 

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Cost Drivers

 

Coal is one of the main raw materials used in our production process, in particular in our kilns. We purchase anthracite coal from nearby coal mines and import a small amount of bituminous coal primarily from Colombia. We do not have long-term coal supply agreements, and we do not engage in hedging transactions in connection with the price of coal. In the past, the price of bituminous coal has been related to the international price of oil, as it is used as a substitute for oil. Coal accounted for an estimated 23.1% of our costs of production in 2023, 16.8% in 2022 and 11.5% in 2021.The increase in the percentage of the total production cost that coal represents is related to an overall decrease in other costs, as we stopped using imported clinker and achieved overall savings in maintenance costs.

 

Electricity is used in our facilities mainly to power our cement mills. We power our Pacasmayo and Piura facilities with electricity purchased from Electroperú, with which we have a long-term supply agreement expiring in 2026. Our Rioja facility is powered primarily with electricity from ELOR, with which we have a medium-term supply agreement expiring in 2024. Under these agreements, the price of electricity is based on a formula that takes into consideration our consumption of electricity and certain market variables, including the international price of oil. Electricity accounted for approximately 16.0% of our cost of production in 2023, 14.2% in 2022 and 13.5% in 2021. Electricity costs tend to be lower during the rainy season, from January to March of each year, as our region is served primarily by hydro-electric power plants.

 

In addition, we purchase from third parties admixtures and certain raw materials that we use in our production process, including gypsum, blast furnace slag, iron and other materials. Admixtures and raw materials used in our cement production process do not include construction supplies that we acquire from third-parties for resale through our distribution network along with our cement products. The cost of admixtures and raw materials purchased from third parties, excluding imported clinker, accounted for approximately 5.3% of our cost of production in 2023, 5.1% in 2022, and 4.2% in 2021.

 

Starting in 2021, due to a sharp increase in demand, we had to use imported clinker while our new capacity was being built. In 2023 our new kiln in Pacasmayo began operating, significantly reducing our need for imported clinker. The cost of imported clinker as a percentage of our cement production costs was approximately 4.0% in 2023, compared to 16.3% in 2022 and 21.3% in 2021.

 

Personnel expenses represented 18.7% of our total costs and expenses in 2023, 16.2% in 2022 and 15.0% in 2021.

 

Third-party Construction Supplies

 

In addition to selling our own products, we also sell and distribute construction supplies manufactured by third parties, such as steel rebar, wires and pipes that are typically used in construction along with our cement. Our profit margins from the sale of third party construction supplies are significantly lower than the margins on our cement products and they are affected by fluctuations in product prices and the exchange rate between the sol and the U.S. dollar between the time we purchase these products and the time we resell them. We sell these products primarily as a service to retailers in our distribution network in an effort to support the sale of our cement products.

 

Mining Royalty Tax

 

The mining royalty tax for the exploitation of metallic and non-metallic minerals is payable on a quarterly basis in an amount equal to the greater of (i) an amount determined in accordance with a statutory scale of tax rates based on a company’s operating profit margin that is applied to its operating profit, as adjusted by certain non-deductible expenses and (ii) 1% of a company’s net sales, in each case during the applicable quarter. These amounts are determined based on our unconsolidated financial statements and those of our subsidiaries with operations that are under the scope of the Mining Royalty Law. Mining royalty payments are deductible for income tax purposes in the fiscal year in which such payments are made. For additional information, see note 29 to our consolidated financial statements included in this annual report.

 

Operating Segments

 

We have three operating segments: (i) cement, concrete, mortar and precast, (ii) quicklime and (iii) sales of construction supplies. For additional information on our operating segments, see note 27 to our consolidated financial statements included in this annual report.

 

New Accounting Pronouncements

 

For a description of new interpretations and improvements to IFRS in effect since 2023, see notes 2.3.16 and 4 to our consolidated financial statements included in this annual report.

 

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Critical Accounting Policies

 

The following is a discussion of our application of critical accounting policies that require our management to make certain assumptions about matters that are uncertain at the time the accounting estimate is made, where our management could reasonably use different estimates, or where accounting changes may reasonably occur from period to period, and in each case would have a material effect on our financial statements. For additional information, see note 3 to our annual audited consolidated financial statements included in this annual report.

 

Determination of Useful Live of Assets for Depreciation and Amortization Purposes

 

Depreciation of mining concessions and mine development costs are charged to cost of production on a units-of-production basis using proved reserves. Other assets are depreciated on a straight-line-basis over their estimated useful lives, as follows:

 

  Years
Buildings and other construction:   
Administrative facilities  Between 20 and 51
Main production structures  Between 20 and 56
Minor production structures  Between 20 and 35
Machinery and equipment:   
Mills and horizontal furnaces  Between 24 and 45
Vertical furnaces, crushers and grinders  Between 23 and 36
Electricity facilities and other minors  Between 10 and 35
Furniture and fixtures  10
Transportation units:   
Heavy units  Between 5 and 15
Light units  Between 5 and 10
Computer equipment  Between 3 and 10
Tools  Between 5 and 10

 

The assets’ residual value, useful lives and methods of depreciation/amortization are reviewed at each reporting period, and adjusted prospectively, if appropriate.

 

An item of property, plant and equipment and any significant part initially recognized is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated statement of profit or loss when recognition of the asset is derecognized.

 

Revenue Recognition

 

Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment, discounts and excluding taxes or duty.

 

The following specific recognition criteria must also be met before revenue is recognized:

 

Sales of goods

 

Revenue from sale of goods is recognized at the point in time when control of the asset is transferred to the customer, generally on delivery of the goods.

 

We consider whether there are other promises in the contract that are separate performance obligations to which a portion of the transaction price needs to be allocated. In determining the transaction price for the sale of goods, we consider the effects of variable consideration, the existence of significant financing components, noncash consideration, and consideration payable to the customer (if any).

 

Rendering of services

 

In the operating segments of cement, concrete, mortar, precast, quicklime and construction supplies, we provide transportation services. These services are sold together with the sale of the goods to the customer.

 

Transportation services are satisfied when the transport service is concluded, which coincides with the moment of delivery of the goods to the customers.

 

Interest income

 

For all financial instruments measured at amortized cost and interest-bearing financial assets, interest income is recorded using the effective interest rate (EIR). EIR is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Interest income is included in finance income in the consolidated statement of profit or loss.

 

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Impairment of Non-Financial Assets

 

We assess at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, (goodwill and intangible assets with indefinite useful lives), we estimate the asset’s recoverable amount. An asset’s recoverable value is the higher of an asset’s or cash-generating unit’s fair value less costs of disposal and its value in use, and is determined for an individual asset, unless the asset does not generate net cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset’s cash-generating unit exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators.

 

As of December 31, 2023, 2022 and 2021, goodwill related to the acquisition of assets made by our subsidiary Distribuidora Norte Pacasmayo S.R.L. amounted to S/4,459,000. We have assessed the recoverable amount of our goodwill and have determined that there are no indicators of an impairment loss of this asset as of December 31, 2023 and 2022. Management recognized a specific impairment to retirement for the net value of the assets of the vertical clinker kilns located at the Pacasmayo cement plant for a net cost of S/36,551,000. This deterioration estimate was carried out as a consequence of replacing the old technology of these kilns due to the entry into operation of the Clinker Lines Optimization Project – Kiln 4 in the Pacasmayo plant, which is more efficient and produces fewer emissions. This amount was recorded in the impairment of property, plant and equipment item in the consolidated statement of profit or loss. As of December 31, 2023, management had not identified additional signs of impairment for long-lived assets.

 

We base our impairment calculation on detailed budgets and forecast calculations, which are prepared separately from our cash generation units to which the individual assets are allocated. Impairment losses of continuing operations, including impairment on inventories, are recognized in the consolidated statement of profit or loss in expense categories consistent with the function of the impaired asset.

 

An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or have decreased. If such indication exists, we estimate the asset’s or cash-generating unit’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statement of profit or loss. Exploration and evaluation assets are tested for impairment annually as of December 31, either individually or at the cash-generating unit level, as appropriate and when circumstances indicate that the carrying value may be impaired.

 

Deferred Tax

 

Deferred tax is provisioned using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date.

 

Deferred tax liabilities are recognized for all taxable temporary differences, except in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint arrangements, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

 

Deferred tax assets are recognized for all deductible temporary differences, the carry forward of unused tax credits and unused tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized, except in respect of deductible temporary differences associated with investments in subsidiaries, where deferred assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

 

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The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are re-assessed at each reporting date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.

 

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax related to items recognized outside profit or loss is recognized outside profit or loss. Deferred tax items are recognized in correlation to the underlying transaction either in other comprehensive income or directly in equity.

 

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

 

Derivative Financial Instruments and Hedge Accounting

 

Initial Recognition and Subsequent Measurement

 

We use derivative financial instruments, such as cross-currency swaps (CCS), to hedge our foreign currency exchange rate risk. Such derivative financial instruments are initially recognized at their fair value on the date on which the derivative contract is entered into and subsequently remeasured at their fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when fair value is negative.

 

For the purpose of hedge accounting, hedges are classified as follows:

 

“Fair value hedges” are those that hedge the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment.

 

“Cash flow hedges” are those that hedge the exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognized firm commitment.

 

“Hedges of a net investment in a foreign operation.”

 

At the inception of a hedge relationship, we formally designate and document the hedge relationship to which we wish to apply hedge accounting and the risk management objective and strategy for undertaking the hedge.

 

The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how our management will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.

 

A hedging relationship qualifies for hedge accounting if it meets all of the following effectiveness requirements:

 

there is ‘an economic relationship’ between the hedged item and the hedging instrument;

 

the effect of credit risk does not ‘dominate the value changes’ that result from that economic relationship; and

 

the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Group actually hedges and the quantity of the hedging instrument that the Group actually uses to hedge that quantity of hedged item.

 

Hedges that meet all the qualifying criteria for hedge accounting are recorded as cash flow hedges.

 

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Cash flow hedges

 

Any gains or losses arising from changes in the fair value of derivatives is taken directly to profit or loss, except for the effective portion of cash flow hedges, which is recognized in other comprehensive income (OCI) and later reclassified to profit or loss when the hedge item affects profit or loss.

 

For any other cash flow hedges, the amount accumulated in OCI is reclassified to profit or loss as a reclassification adjustment in the same period or periods during which the hedged cash flows affect profit or loss.

 

If the cash flow hedge is discontinued, the amount accumulated in other comprehensive income must remain in other comprehensive income accumulated if the covered cash flows are still expected to occur. Otherwise, the amount will be immediately reclassified to profit or loss as a reclassification adjustment. After discontinuation, once the covered cash flows are given, any amount that remains in other comprehensive accumulated results must be recorded considering the nature of the underlying transaction.

 

On February 8, 2023, we paid in full the outstanding US$131,612,000 aggregate principal amount of our 4.50% Senior Notes due 2023 at maturity using proceeds from the Club Deal credit line, and we also settled the US$132,000,000 in related derivative financial instruments.

 

Results of Operations

 

Comparison of Year Ended December 31, 2023 to Year Ended December 31, 2022

 

   Year ended December 31,     
(amounts in millions of S/)  2023   2022   Variation % 
Sales of goods   1,950.1    2,115.7    (7.8)%
Cost of sales   (1,260.6)   (1,463.7)   (13.9)%
Gross profit   689.5    652.0    5.7%
Operating income (expenses):               
Administrative expenses   (234.7)   (227.6)   3.1%
Selling and distribution expenses   (66.8)   (65.2)   2.4%
Other operating (expense) income, net   (13.8)   (3.9)   N/A 
Impairment of assets   (36.6)   -    N/A 
Total operating expenses, net   (351.9)   (296.7)   18.6%
Operating profit   337.6    355.3    (5.0)%
Other income (expenses):               
Finance income   7.2    3.3    N/A 
Finance costs   (104.0)   (95.1)   9.4%
Net (loss) gain on derivative financial instruments at fair value through profit or loss   -    (0.1)   N/A 
Loss from exchange difference, net   4.9    (1.0)   N/A 
Total other expenses, net   (91.8)   (92.9)   (1.1%)
Profit before income tax   245.7    262.4    (6.4)%
Income tax expense   (76.8)   (85.6)   (10.3)%
Profit for the year   168.9    176.8    (4.5)%

 

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Sales of Goods

 

The following table sets forth a breakdown of our sales of goods by segment for 2023 and 2022:

 

   Year ended December 31, 
   2023   %   2022   % 
Cement, concrete, mortar and precast   1,850.2    94.9    1,963.8    92.8 
Quicklime   25.7    1.3    37.9    1.8 
Construction supplies   74.1    3.8    114.0    5.4 
Other   0.1    0.0    -    - 
Total sales of goods   1,950.1    100.0    2,115.7    100.0 

 

Our total sales of goods decreased by 7.8%, or S/165.6 million, to S/1,950.1 million in 2023 from S/2,115.7 million in 2022. This decrease was primarily due to the following factors:

 

a 5.8%, or S/113.6 million, decrease in sales of cement, concrete, mortar and precast mainly due to decreased public and private investment;

 

a 32.2%, or S/12.2 million, decrease in quicklime sales, mainly due to decreased sales volume in 2023; and

 

a 35.0%, or S/39.9 million, decrease in the sale of construction supplies, mainly due to the contraction in demand from the construction segment.

 

The following table sets forth the composition of our sales of cement, concrete, mortar and precast for 2023 and 2022:

 

   Year ended December 31,     
   2023   2022   Variation 
   (in millions of S/)   % 
Cement   1,642.4    1,742.7    (5.8)
Concrete and mortar   161.2    189.9    (15.1)
Pavement   21.1    -    N/A 
Precast   25.5    31.2    (18.3)
Total   1,850.2    1,963.8    (5.8)

 

Our total sales of cement, concrete, mortar and precast decreased by 5.8%, or S/113.6 million, to S/1,850.2 million in 2023 from S/1,963.8 million in 2022. This decrease was primarily due to the following factors:

 

cement sales revenue decreased 5.8%, or S/100.3 million, in 2023 due to lower sales volume ((14.5)%), partially offset by an increase in the average prices of cement due to both a price increase and a more favorable sales mix, as we started selling more of our higher-priced cements (8.7%);

 

concrete and mortar sales revenue decreased 15.1%, or S/28.7 million, mainly due to a decrease in sales volume of concrete and mortar ((15.8)%), as public and private investment slowed down as a result of macroeconomic uncertainty, a low confidence levels from the private sector, partially offset by an increase in the average prices of concrete (0.7%); and

 

pavement sales revenue are mainly due to the contract for the reconstruction of the two runways and the perimeter fence of the Piura Airport; and

 

precast revenue decreased by 18.3%, or S/5.7 million, mainly due to a decrease in sales volume ((15.3)%) for the public sector, as well as a decrease in the average price of precast products ((3.0)%), mainly due to sales mix as we sold higher margin products during 2022.

 

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Cost of Sales

 

The following table sets forth a breakdown of our cost of sales by segment for 2023 and 2022:

 

   Year ended December 31, 
   2023   2022 
   (in millions
of S/)
   %   (in millions
of S/)
   % 
Cement, concrete, mortar and precast   (1,162.5)   92.2    (1,316.5)   89.9 
Quicklime   (24.2)   1.9    (35.9)   2.5 
Construction supplies   (73.4)   5.8    (110.4)   7.5 
Other   (0.5)   0.1    (0.9)   0.1 
Total cost of sales   (1,260.6)   100.0    (1,463.7)   100.0 

 

Our total cost of sales decreased by 13.9%, or S/203.1 million, to S/1,260.6 million in 2023, from S/1,463.7 million in 2022, primarily due to the following factors:

 

a 11.7%, or S/154.0 million, decrease in the cost of sales of cement, concrete, mortar and precast, mainly due to the lower production volumes, as well as the replacement of imported clinker with our own clinker, and to the decrease in the cost of coal;

 

a 32.6%, or S/11.7 million, decrease in the cost of sales of quicklime, mainly due to lower production volumes, as well as lower costs of raw materials, such as coal; and

 

a 33.5%, or S/37.0 million, decrease in the cost of sales of construction supplies, mainly due to sales lower volumes.

 

The following table sets forth the composition of our cost of sales of cement, concrete, mortar, pavement and precast for 2023 and 2022:

 

   Year ended December 31,     
   2023   2022   Variation 
   (in millions of S/)   % 
Cement   (966.1)   (1,111.5)   (13.1)
Concrete and mortar   (148.4)   (169.6)   (12.5)
Pavement   (21.8)   -    N/A 
Precast   (26.2)   (35.4)   (26.1)
Total   (1,162.5)   (1,316.5)   (11.7)

 

Our cost of sales represented 64.6% of our sales revenue in 2023, compared to 69.2% in 2022. Our total cost of sales of cement, concrete, mortar and precast decreased by 11.7%, or S/154.0 million, in 2023, primarily due to the following factors:

 

cost of sales of cement decreased by 13.1%, or S/145.4 million, mainly due to a decrease in volume sold ((14.5)%), partially offset by a slight increase in production costs (1.4%) due to the increased freight costs to final consumers;

 

cost of sales of concrete, and mortar decreased 12.5%, or S/21.2 million mainly due to a decrease in volume sold ((15.8)%), partially offset by an increase in production costs (3.3%);

 

cost of sales of pavement is mainly due to the contract for the reconstruction of the two runways and the perimeter fence of the Piura Airport; and

 

a 26.1% decrease in the cost of sales of precast, mainly due to decreased sales volume ((15.3)%) and decrease in production cost ((10.8)%).

 

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Gross Profit

 

The following table sets forth a breakdown of our gross profit and gross profit margin (gross profit as a percentage of net sales) by segment for 2023 and 2022:

 

   Year ended December 31, 
   2023   2022 
   Gross
profit
   Gross profit
margin
   Gross
profit
   Gross profit
margin
 
   (in millions
of S/)
   %   (in millions
of S/)
   % 
Cement, concrete, mortar and precast   687.7    37.2    647.3    33.0 
Quicklime   1.5    5.8    2.0    5.3 
Construction supplies   0.7    0.9    3.6    3.2 
Other   (0.4)   N/A    (0.9)   N/A 
Total gross profit   689.5    35.4    652.0    30.8 

 

Total gross profit increased by 5.8%, or S/37.5 million, to S/ 689.5 million in 2023, from S/ 652.0 million in 2022, mainly due to the reduction in the use of imported clinker, as we started operating our new, more efficient kiln in the second half of 2023, as well as more favorable costs of raw materials. Our gross profit margin for 2023 was 35.4% compared to 30.8% for 2022.

 

The following table sets forth a breakdown of our gross profit and gross profit margin for the cement, concreteand mortar, pavementmortar and precast segments for 2023 and 2022:

 

   Year ended December 31,     
   2023   2022     
   Gross
profit
   Gross profit
margin
   Gross
profit
   Gross profit
margin
   Gross profit
margin
variation
 
   (in millions
of S/)
   %   (in millions
of S/)
   %   percentage
points
 
Cement   676.3    41.2    631.2    36.2    5.0 
Concrete and mortar   12.8    6.6    20.3    10.7    (2.7)
Pavement   (0.7)   (3.3)   -    -    - 
Precast   (0.7)   (2.7)   (4.2)   (13.5)   10.7 
Total gross profit   687.7    37.2    647.3    33.0    4.2 

 

Gross profit margin for cement, concrete, pavement, mortar, and precast segment increased by 4.2 percentage points in 2023 compared to 2022. This increase was due mainly to an increase in cement margin (5.0 percentage points) mainly due to cost savings because of lower use of imported clinker and lower costs of raw materials, as well as higher average prices.

 

Operating Income (Expenses)

 

Our operating expenses primarily reflect administrative and selling and distribution expenses. In 2023, our operating expenses increased by S/55.2 million to S/351.9 million from S/296.7 million in 2022, mainly due to the impairment of our vertical kilns, a slight increase in administrative and selling expenses, and the expenses related to the reconstruction of La Niña road, explained below.

 

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Administrative Expenses

 

The following table sets forth the composition of our administrative expenses for 2023 and 2022:

 

   Year ended December 31, 
(in millions of S/)  2023   2022 
Personnel expenses   125.1    116.7 
Third-part services   68.3    72.2 
Board of directors compensation   6.8    6.1 
Depreciation and amortization   18.0    16.7 
Taxes   5.9    5.7 
Other   10.6    10.2 
Total   234.7    227.6 

 

Our administrative expenses increased by 3.1%, or S/7.1 million, to S/234.7 million in 2023 from S/227.6 million in 2022. Personnel expenses increased by S/8.3 million in line with increased inflation.

 

Administrative expenses related to the cement, concrete, mortar and precast segment accounted for approximately 98.1% of total administrative expenses for 2023 remaining in line with 2022. Administrative expenses related to the construction supplies and other segments accounted for approximately 1.1% and 0.8%, respectively, of total administrative expenses for 2023 compared to approximately 1.2%, and 0.7%, respectively, for 2022.

 

Selling and Distribution Expenses

 

The following table sets forth the components of our selling and distribution expenses for 2023 and 2022:

 

   Year ended December 31, 
(in millions of S/)  2023   2022 
Personnel expenses   41.6    42.3 
Advertising and promotion expenses   7.5    6.4 
Other   17.7    16.5 
Total   66.8    65.2 

 

Our total selling and distribution expenses increased by 2.5%, or S/1.6 million, to S/ 66.8 million in 2023 from S/65.2 million in 2022, primarily due to increased advertising expenses, as well as expenses related to the advancement of our digital strategy.

 

Selling and distribution expenses related to the cement, concrete, mortar and precast segment represented approximately 98.1% of total selling and distribution expenses for 2023 remaining in line with 2022. Selling and distribution expenses related to construction supplies and other segments represented approximately 1.1% and 0.8% respectively, of total selling and distribution expenses for 2023, compared to 1.2% and 0.7%, respectively, for 2022.

 

Other Operating (Expense) Income, Net

 

Our other operating income, net decreased S/9.9 million, to a net expense of S/13.8 million in 2023 from a net expense of S/3.9 million in 2022, mainly due to the expenses related to the reconstruction of La Niña road, which connects our main quarry and the Piura plant. During the first quarter of 2023, rains interrupted our ability to use this road normally and we therefore invested in its reconstruction in order to normalize transit between the quarry and our plant.

 

Impairment of Our Vertical Kilns

 

At the end of 2023, the board of directors, advised by management, recognized a specific impairment for the net value of the assets of the vertical clinker kilns located at the Pacasmayo cement plant for a net cost of S/36,551,000. This deterioration estimate was carried out as a consequence of replacing the old technology of these kilns due to the entry into operation of a new kiln in the Pacasmayo plant, which is more efficient and produces fewer emissions. This amount was recorded in the impairment of property, plant and equipment item in the consolidated statement of profit or loss.

 

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Total Other Expenses, Net

 

Our total other expenses, net decreased by S/1.1 million, to S/91.8 million in 2023 from S/92.9 million in 2022.

 

Income Tax Expense

 

Our income tax expense decreased by 10.3%, or S/8.8 million, to S/76.8 million for 2023 from S/85.6 million for 2022, mainly due to a decrease in profit before income tax. Our effective tax rate for 2023 was 31.0% and 33.0% in 2022.

 

Profit for the Year

 

As a result of the foregoing, our profit for 2023 decreased by 4.5%, or S/7.9 million, from S/176.8 million for 2022 to S/168.9 million for 2023, mainly due to the S/.36.6 million impairment of our vertical kilns.

 

For a comparison of our results of operations for the year ended December 31, 2022, to the year ended December 31, 2021, please see our annual report on Form 20-F, filed on April 29, 2023.

 

Liquidity and Capital Resources

 

Our main cash requirements are our operating expenses, capital expenditures relating to the maintenance and expansion of our facilities, the servicing of our debt, the payment of dividends and payment of taxes. Our primary sources of cash have been cash flow from operating activities, and our issuance of debt securities and, to a lesser extent, loans and other financings. We believe that these sources of cash will be sufficient to cover our working capital needs in the ordinary course of our business.

 

Cash Flows

 

The table below sets forth certain components of our cash flows for the years ended December 31, 2023, 2022 and 2021.

 

   Year ended December 31, 
(in millions of S/)  2023   2022   2021 
Net cash flows from operating activities   412.3    111.8    170.6 
Net cash flows used in investing activities   (289.4)   (176.2)   (91.8)
Net cash flows used in financing activities   (115.4)   (121.5)   (130.1)
Increase (decrease) in cash   7.4    (185.8)   (51.4)

 

Cash Flows from Operating Activities

 

Net cash flows from operating activities increased by 268.8% or S/300.5 million, to S/412.3 million in 2023 from S/111.8 million in 2022, mainly due to a decrease in inventory purchases, accounts payable and prepaid expenses.

 

Net cash flows from operating activities decreased by 34.5%, or S/58.8 million, to S/111.8 million in 2022 from S/170.6 million in 2021, mainly due to high inventory purchases and higher interest and tax payments as our results of operations and profits increased.

 

Cash Flows used in Investing Activities

 

Net cash flows used in investing activities were S/289.4 million for 2023, as compared to S/176.2 million for 2022, and were primarily related to the construction of the new kiln in our Pacasmayo plant.

 

Net cash flows used in investing activities were S/176.2 million for 2022, as compared to S/91.8 million for 2021, and were primarily related to purchases of property, plant and equipment for our cement plants.

 

Cash Flows used in Financing Activities

 

Net cash flows used in financing activities were S/115.4 million for 2023, as compared to S/121.5 million for 2022 and were primarily due to dividends paid to our shareholders.

 

Net cash flows used in financing activities were S/121.5 million for 2022, as compared to S/130.1 million for 2021 and were primarily due to dividends paid to our shareholders and a higher payment of bank loans offset by a higher income from banks loans received in 2022.

 

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Indebtedness

 

On February 8, 2023, we repaid in full at scheduled maturity the outstanding US$131,612,000 aggregate principal amount of our 4.50% Senior Notes due 2023 using proceeds from our “club deal” credit line described below, and we also settled the US$132,000,000 in related derivative financial instruments.

 

As of December 31, 2023, the Company’s total outstanding debt reached S/1,573.0 million (equivalent to US$424.1 million).

 

As of December 31, 2023  Amount
(in millions of S/)
   Interest Rate   Maturity Date
Mid-term promissory notes:           
Banco de Crédito del Perú   38.0    9.44%  January 22, 2024
BBVA Perú   38.0    9.78%  January 19, 2024
BBVA Perú   19.0    8.83%  March 15, 2024
BBVA Perú   19.0    8.83%  March 15, 2024
BBVA Perú   25.3    6.98%  December 12, 2024
BBVA Perú   25.3    6.98%  December 12, 2024
BBVA Perú   25.4    6.98%  December 12, 2024
BBVA Perú   19.0    7.32%  November 22, 2024
BBVA Perú   19.0    7.32%  November 22, 2024
Club deal:             
Banco de Crédito del Perú   387.9    5.82%  December 1, 2028
Scotiabank   387.9    5.82%  December 1, 2028
Senior Notes due:             
2029   259.7    6.69%  February 1, 2029
2034   309.5    6.84%  February 1, 2034

 

International Bonds. In February 2013, we issued US$300,000,000 aggregate principal amount of our 4.50% Senior Notes due 2023 in our inaugural international bond offering. A portion of the proceeds from this offering were used to prepay amounts outstanding on our secured loan agreement with BBVA Banco Continental, and the remaining proceeds were used in capital expenditures incurred in connection with the construction and operation of the new Piura plant and our cement business. The Senior Notes were issued pursuant to Rule 144A under the Securities Act and in compliance with Regulation S under the Securities Act and listed on the Irish Stock Exchange.

 

The indenture pursuant to which the Senior Notes were issued contains certain covenants, including restrictions on our and our restricted subsidiaries’ ability to incur further indebtedness or issue disqualified stock and preferred stock, unless the following conditions are met:

 

the fixed charge coverage ratio for our most recently ended four fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional indebtedness is incurred or such disqualified stock or such preferred stock is issued, as the case may be, would have been at least 2.5 to 1.0; and

 

the consolidated debt to adjusted EBITDA ratio for our most recently ended four fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional indebtedness is incurred or such disqualified stock or such preferred stock is issued, as the case may be, would have been no greater than 3.5 to 1.0, in each case, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional indebtedness had been incurred or the disqualified stock or the preferred stock had been issued, as the case may be, at the beginning of such four fiscal quarters.

 

The indenture also contains restrictions on our ability and that of our restricted subsidiaries to incur liens and to merge, consolidate or transfer all or substantially all of our assets.

 

In management’s opinion, we were in compliance with all of applicable covenants under the indenture as of the date of this annual report.

 

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The subsidiaries that guarantee the Senior Notes are those related to our cement business namely, Cementos Selva S.A.C., Distribuidora Norte Pacasmayo S.R.L., Empresa de Transmisión Guadalupe S.A.C., Dinoselva Iquitos S.A.C. and Calizas del Norte S.A.C. (liquidated during 2022).

 

In December 2018, we purchased US$168,388,000, or approximately 56.13%, of the total outstanding Senior Notes by means of a partial cash tender offer using proceeds from the issuance of debt securities in the local market.

 

In February 2023, the remaining balance of the Senior Notes matured and were paid using proceeds from the issuance of the debt securities in the local market described below.

 

Local Bonds. On January 8, 2019, the General Shareholders’ Meeting approved the issuance of a local bond program for up to S/1,000 million. On January 31, 2019, we issued two series of local bonds in the aggregate principal amount of S/570 million. One in the aggregate principal amount of S/260 million bearing interest at a rate of 6.68750% for a term of 10 years, and the other in the aggregate principal amount of S/310 million bearing interest at a rate of 6.84375% for a term of 15 years. The rates and terms obtained benefit our financial costs structure, with lower cost of capital, an extended maturity and less exposure to currency fluctuations.

 

Medium-term “Club Deal” Corporate Loan. On August 6, 2021, we entered into a medium-term corporate loan in a “Club Deal” format with Banco de Crédito del Perú S.A. and Scotiabank Perú S.A.A. The loan amounts to S/860,000,000 that allowed the payment of all the financial obligations that the Company maintains with a maturity until February 2023. The loan includes a grace / availability period of 18 months from August 6, 2021 and a payment term of seven years from the last disbursement in February 2023. The loan will be paid in 22 equal quarterly installments and amounts due under it accrue interest an annual rate of 5.82 percent.

 

Under this loan, the Company must comply with the following financial covenants:

 

a.maintain a debt ratio (Financial Debt / EBITDA) of no more than 3.50 to 1;

 

b.maintain a debt service coverage ratio (FCSD / SD) of at least 1.15 to 1; and

 

c.maintain a debt service coverage ratio (EBITDA / SD) of at least 1.50 to 1.

 

In addition, the Company is required to comply with certain customary restrictive and affirmative covenants. As of December 31, 2023 and 2022, the Company was in compliance with the ratios and other obligations contained in the Club Deal. 

 

Derivative Financial Instruments. In February 2023, we canceled the cross currency swaps when we paid all of the outstanding international bond in US dollars.

 

Short-term loans. As of December 31, 2023, we had obtained nine loans, each in the amount of S/228,000,000, one with Banco de Crédito del Perú S.A. and eight with BBVA Perú, for working capital. Each of these loans has a medium-term maturity and accrues interest at an effective annual rate of between 6.98 and 9.78 percent.

 

During 2023, the net gain generated by the exchange difference was approximately S/4,933,000 and, during 2022, the net loss from exchange difference amounted to S/1,040,000 All these results are presented in the caption “Loss from exchange difference, net” of the consolidated statement of profit and loss.

 

Capital Expenditures

 

See “Item 4—Information on the Company—A. History and Development of the Company—Capital Expenditures.”

 

B. Research and Development, Patents and Licenses, Etc.

 

Since 2016, Pacasmayo embarked on the path of innovation and digital transformation, a journey that has allowed us to explore new ways of doing things, interact with environments with a lot of uncertainty, as well as propose a cultural change. After all this time and with much experience gained, we were ready to rethink a new strategy, seeking to accelerate and extend the adoption of innovation and digital transformation initiatives in all areas of the company, making it necessary to decentralize their execution.

 

Pacasmayo has become a company that provides building solutions not only derived from cement, but that satisfy the needs of any actor in the construction sector. That is why today Pacasmayo complements its product research capacity with research focused on people. In other words, knowing who the hardware sellers, self-builders, construction foremen, transporters or construction residents really are, allows us to find new opportunities for Pacasmayo.

 

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C. Trend Information

 

Cement Market

 

The Peruvian Cement Market

 

Peru’s cement production is segmented into three principal geographic regions: the northern region, the central region, including Lima’s metropolitan area, and the southern region. The table below sets forth selected data with respect to each region in Peru and the corresponding cement manufacturers. Market share data is based on metric tons of cement delivered during 2023.

 

Geographic Breakdown

 

Northern Region (thousands of metric tons)

 

Plant  % share   2023   2022   2021   2020   2019 
Pacasmayo Group   23.9    2,951    3,437    3,614    2,576    2,615 
Imports   -    -    2    40    38    13 
Total   23.9    2,951    3,439    3,654    2,614    2,628 

 

Central Region (thousands of metric tons)

 

Plant  % share   2023   2022   2021   2020   2019 
UNACEM   45.4    5,617    6,297    5,838    4,172    5,316 
Caliza Inca   4.7    585    515    492    382    513 
Imports   1.2    145    202    691    493    663 
Total   51.3    6,347    7,014    7,021    5,047    6,492 

 

Southern Region (thousands of metric tons)

 

Plant  % share   2023   2022   2021   2020   2019 
Grupo Yura   20.9    2,581    3,047    2,904    2,019    2,584 
Imports   0.5    65    67    150    189    98 
Total   21.4    2,646    3,114    3,054    2,208    2,682 

 

Others   3.4    423    427    877    732    769 
Total Regions   100.00    12,367    13,994    14,606    10,601    12,571 

 

 

Sources: ASOCEM, INEI, ADUANET (SUNAT).

 

Although a large part of housing construction is mainly concentrated in the Lima metropolitan area, located in the central region of Peru, the housing market in the provinces of Peru, including the northern region, has grown significantly in recent years. Despite this trend, Peru continues to have significant shortages in housing, estimated by the INEI at 1.9 million homes nationwide. Economic growth, particularly in the mining and agribusiness sectors, rising employment levels and the implementation of real estate projects, resulted in the creation of higher paying jobs, which ultimately resulted in the expansion of the housing market. However, the COVID-19 pandemic took a toll on it and, in 2020, poverty levels increased 9.9 percentage points. Fortunately, poverty levels for 2021, which is the last available data, decreased by 4.2 percentage points, reaching 25.9%.

 

Peru continues to have a significant deficit in infrastructure. In recent years, significant efforts have been made to channel investments into the infrastructure sector through a series of initiatives that range from the creation of financial instruments (such as the infrastructure investment and trust funds) to regulatory changes, to promotion of more public private partnerships (for example “taxes for infrastructure” which allows private companies to use part of their tax payments to directly finance infrastructure works) to allowing for other executors, such as the government to government agreements that have recently been signed by Peru and other governments to ensure promptly execution without corruption.

 

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Distribution and Logistics

 

Peru’s cement market is divided into three regions circumscribed primarily by the location of established production facilities. Our facilities are located in the northern region of Peru, UNACEM is the main producer in the central region, and Yura in the southern region. Cement is mainly sold in bags of 42.5 kilograms (approximately 94 pounds). However, cement can also be sold in bulk according to customer requirements.

 

The transportation and storage of