Company Quick10K Filing
Loma Negra
20-F 2019-12-31 Filed 2020-04-30
20-F 2018-12-31 Filed 2019-04-30
20-F 2017-12-31 Filed 2018-04-27

LOMA 20F Annual Report

Part I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on The Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Change in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
EX-1.1 d871185dex11.htm
EX-2.2 d871185dex22.htm
EX-12.1 d871185dex121.htm
EX-12.2 d871185dex122.htm
EX-13.1 d871185dex131.htm

Loma Negra Earnings 2019-12-31

Balance SheetIncome StatementCash Flow

20-F 1 d871185d20f.htm 20-F 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(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, 2019

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: 001-38262

 

 

LOMA NEGRA COMPAÑÍA INDUSTRIAL ARGENTINA SOCIEDAD ANÓNIMA

(Exact name of Registrant as specified in its charter)

 

 

 

LOMA NEGRA CORPORATION   Republic of Argentina
(Translation of Registrant’s name into English)   (Jurisdiction of incorporation or organization)

Loma Negra C.I.A.S.A.

Cecilia Grierson 355, 4th Floor

Zip Code C1107CPG – Ciudad Autónoma de Buenos Aires

Argentina

(Address of principal executive offices)

Marcos Isabelino Gradin

Cecilia Grierson 355, 4th Floor

Zip Code C1107CPG – Ciudad Autónoma de Buenos Aires

Argentina

Tel: 54-11-4319-3048

Email: mgradin@intercement.com

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

    on which registered    

American Depositary Shares, each representing 5 Ordinary Shares of Loma Negra C.I.A.S.A.   LOMA   New York Stock Exchange
Ordinary Shares of Loma Negra C.I.A.S.A.   LOMA   New York Stock Exchange*

 

*

Not for trading, but only in connection with the registration of American Depositary Shares pursuant to the requirements of the New York Stock Exchange.

Securities registered or to be 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

The total number of issued and outstanding shares of each class of stock of Loma Negra C.I.A.S.A. as of December 31, 2019 was:

596,026,490 ordinary shares, nominal value Ps.0.10 per share

 

 

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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:

 

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 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  ☒

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to distribution of securities under a plan confirmed by a court.    Yes  ☐    No  ☐

 

 

 


Table of Contents

TABLE OF CONTENTS

 

TABLE OF CONTENTS      i  
CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS      iv  
PART I      1  
ITEM 1.  

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     1  

A.

 

Directors and Senior Management

     1  

B.

 

Advisers

     1  

C.

 

Auditors

     1  
ITEM 2.  

OFFER STATISTICS AND EXPECTED TIMETABLE

     1  

A.

 

Offer Statistics

     1  

B.

 

Method and Expected Timetable

     1  
ITEM 3.  

KEY INFORMATION

     1  

A.

 

Selected Financial Data

     1  

B.

 

Capitalization and Indebtedness

     4  

C.

 

Reasons for the Offer and Use of Proceeds

     4  

D.

 

Risk Factors

     4  
ITEM 4.  

INFORMATION ON THE COMPANY

     44  

A.

 

History and Development of the Company

     44  

B.

 

Business Overview

     46  

C.

 

Organizational Structure

     65  

D.

 

Property, Plants and Equipment

     65  
ITEM 4A.  

UNRESOLVED STAFF COMMENTS

     71  
ITEM 5.  

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     71  

A.

 

Operating Results

     72  

B.

 

Liquidity and Capital Resources

     106  

C.

 

Research and Development, Patents and Licenses, etc.

     113  

D.

 

Trend Information

     114  

E.

 

Off-Balance Sheet Arrangements

     115  

F.

 

Tabular Disclosure of Contractual Obligations

     115  

G.

 

Safe Harbor

     116  
ITEM 6.  

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     117  

A.

 

Directors and Senior Management

     117  

B.

 

Compensation

     121  

C.

 

Board Practices

     122  

D.

 

Employees

     126  

E.

 

Share Ownership

     126  
ITEM 7.  

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     126  

A.

 

Major Shareholders

     126  

B.

 

Related Party Transactions

     128  

C.

 

Interests of Experts and Counsel

     129  
ITEM 8.  

FINANCIAL INFORMATION

     129  

A.

 

Consolidated Statements and Other Financial Information

     129  

B.

 

Significant Changes

     135  
ITEM 9.  

THE OFFER AND LISTING

     140  

A.

 

Offer and Listing Details

     140  

B.

 

Plan of Distribution

     140  

C.

 

Markets

     140  

D.

 

Selling Shareholders

     140  

E.

 

Dilution

     140  

F.

 

Expenses of the Issue

     140  
ITEM 10.  

ADDITIONAL INFORMATION

     140  

 

i


Table of Contents

A.

 

Share Capital

   140

B.

 

Memorandum and Articles of Association

   140

C.

 

Material Contracts

   143

D.

 

Exchange Controls

   143

E.

 

Taxation

   144

F.

 

Dividends and Paying Agents

   151

G.

 

Statement by Experts

   151

H.

 

Documents on Display

   151

I.

 

Subsidiary Information

   152
ITEM 11.  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   152
ITEM 12.  

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

   154

A.

 

Debt Securities

   154

B.

 

Warrants and Rights

   154

C.

 

Other Securities

   154

D.

 

American Depositary Shares

   154
PART II    156
ITEM 13.  

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

   156
ITEM 14.  

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

   156

A.

 

Material Modifications to the Rights of Security Holders

   156

B.

 

Material Modifications to the Rights of any Class  of Registered Securities

   156

C.

 

Withdrawal or Substitution of a Material Amount of the Assets Securing any Class of Registered Securities

   156

D.

 

Changes in the Trustee or Paying Agents for any Registered Securities

   156

E.

 

Use of Proceeds

   156
ITEM 15.  

CONTROLS AND PROCEDURES

   156
ITEM 16A.  

AUDIT COMMITTEE FINANCIAL EXPERT

   157
ITEM 16B.  

CODE OF ETHICS

   157
ITEM 16C.  

PRINCIPAL ACCOUNTANT FEES AND SERVICES

   158
ITEM 16D.  

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

   158
ITEM 16E.  

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

   158
ITEM 16F.  

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

   158
ITEM 16G.  

CORPORATE GOVERNANCE

   159
ITEM 16H.  

MINE SAFETY DISCLOSURE

   160
PART III     160
ITEM 17.  

FINANCIAL STATEMENTS

   160
Not applicable.    160
ITEM 18.  

FINANCIAL STATEMENTS

   160
Our audited consolidated financial statements are included in this annual report beginning at Page F-1.    160
ITEM 19.  

EXHIBITS

   161

 

ii


Table of Contents

Market Data and Other Information

We obtained the market and competitive position data, including market forecasts, used throughout this annual report from internal surveys, market research, publicly available information and industry publications. We include data from reports prepared by ourselves; the Argentine National Association of Portland Cement Producers (Asociación de Fabricantes de Cementos Portland), or AFCP; the Argentine Central Bank; the Central Bank of Paraguay; the INDEC; and the International Monetary Fund, or IMF.

In January 2007, the INDEC, which is the only institution in Argentina with the statutory authority to produce official nationwide statistics, modified the methodology used to calculate certain of its indices. On January 8, 2016, the Macri administration issued Decree No. 55/2016 declaring a state of administrative emergency with respect to the national statistical system and the INDEC until December 31, 2016. As a result of this decree, the publication of certain macroeconomic figures was suspended. After the process of reorganization, on June 16, 2016, INDEC began releasing official measurements of its primary indication of inflation, the CPI. INDEC reported that the CPI increase was 24.8%, 47.6%, and 53.8% for the years ended December 31, 2017, 2018 and 2019, respectively. INDEC has also published inflation figures for the WPI for the year ended December 31, 2018, reporting an increase of 73.5%, and for year ended December 31, 2019 an increase of 58.5%. See “Item 3.D Key Information—Risk Factors—Risks Relating to Argentina—If the current levels of inflation do not decrease, the Argentine economy could be adversely affected, negatively impacting our results of operations and margins”

Industry publications generally state that the information presented therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. While we are not aware of any misstatements regarding the industry data presented herein, estimates and forecasts involve uncertainties and risks and are subject to change based on various factors, including those discussed under the headings “Special Note Regarding Forward-Looking Statements” and “Item 3.D Key Information—Risk Factors” in this annual report.

Rounding

We have made rounding adjustments to reach some of the figures included in this annual report. As a result, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.

 

iii


Table of Contents

CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS

We make forward-looking statements in this annual report within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, results of operations, liquidity, plans and objectives. In some cases, you can identify forward-looking statements by terminology such as “believe”, “may”, “estimate”, “continue”, “anticipate”, “intend”, “should”, “would”, “could,” “plan”, “expect”, “predict”, “potential”, “seek”, “likely,” “forecast”, or the negative of these terms or other similar expressions. The statements we make regarding the following subject matters are forward-looking by their nature:

 

   

general economic, political and business conditions, both in Argentina and Paraguay, including the policies of the new government in Argentina;

 

   

inflation, the devaluation of the Argentine Peso and the Paraguayan Guaraníes and exchange rate risks in Argentina and Paraguay;

 

   

restrictions on the ability to exchange Argentine Peso or Paraguayan Guaraníes into foreign currencies and transfer funds abroad;

 

   

the duration and severity of the 2019 novel strain of coronavirus disease (SARS-CoV-2, referred to as “COVID-19”) outbreak and its impacts on our business and on the global and Argentine economy;

 

   

our direction and future operation;

 

   

the implementation of our principal operating strategies;

 

   

our acquisitions, joint ventures, strategic alliances or divestiture plans, and our ability to successfully integrate the operations of businesses or other assets that we acquire;

 

   

the implementation of our financing strategy and capital expenditure plans;

 

   

the cyclical nature of the cement industry;

 

   

construction activity levels, particularly in the markets in which we operate;

 

   

industry trends and the general level of demand for, and change in the market prices of, our products and services;

 

   

the performance of the Argentine and global economies, including the impact of a longer than anticipated continuation of the current Argentine and global economic downturn;

 

   

private investment and public spending in construction projects;

 

   

existing and future governmental regulations, and our compliance therewith, including tax, labor, antitrust, pension and environmental laws and regulations in Argentina and Paraguay;

 

   

possible shortages of electricity and government responses to them;

 

   

the competitive nature of the industry in which we operate;

 

   

our level of capitalization, including the levels of our indebtedness and overall leverage;

 

   

the cost and availability of financing;

 

   

legal and administrative proceedings to which we are or become party (individually or jointly with our controlling shareholder);

 

iv


Table of Contents
   

the volatility of the prices of the raw materials we sell or purchase to use in our business;

 

   

the exploration and related depletion of our mines and mineral reserves;

 

   

other statements included in this annual report that are not historical; and

 

   

other factors or trends affecting our financial condition or results of operations, including those factors identified or discussed under “Item 3.D Key Information—Risk Factors”.

The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. In particular, you should consider the numerous risks provided under “Item 3.D Key Information—Risk Factors” in this annual report.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this annual report to conform these statements to actual results or to changes in our expectations.

 

v


Table of Contents

PART I

 

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

  A.

Directors and Senior Management

Not applicable.

 

  B.

Advisers

Not applicable.

 

  C.

Auditors

Not applicable.

 

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

 

  A.

Offer Statistics

Not applicable.

 

  B.

Method and Expected Timetable

Not applicable.

 

ITEM 3.

KEY INFORMATION

 

  A.

Selected Financial Data

You should read the following selected consolidated financial data in conjunction with “Item 5. Operating and Financial Review and Prospects” and our audited consolidated financial statements and the related notes included elsewhere in this annual report. The following tables set forth our selected consolidated financial information as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017, derived from our audited consolidated financial statements included elsewhere in this annual report. We have prepared our audited consolidated financial statements in accordance with IFRS, as issued by the IASB.

The selected consolidated financial information as of December 31, 2017 has been derived from audited financial statements that are not included in this annual report. Our audited consolidated financial statements for the years ended as of December 31, 2019, 2018 and 2017 comprehensively recognize the effects of variations in the purchasing power of currency through the application of the method to restate financial statements in constant currency established by the International Accounting Standard 29, or IAS 29. These figures have been restated in the last fiscal year’s end-of-period currency in the manner described below in order to permit comparability and without such restatement modifying the decisions made on the basis of the financial information for the previous fiscal year. See “Presentation of Financial and Other Information”.

 

1


Table of Contents
     For the Year Ended December 31,  
     2019      2018      2017  
     (in Ps.)  
     (amounts expressed in millions)  

Consolidated statements of profit or loss:

        

Net revenue

     38,952.0        41,237.7        38,209.8  

Cost of sales

     (28,142.0      (30,740.0      (28,474.2
  

 

 

    

 

 

    

 

 

 

Gross profit

     10,810.0        10,497.7        9,735.6  

Selling and administrative expenses

     (2,904.4      (2,975.2      (3,029.1

Other gains and losses

     37.0        168.1        179.0  

Tax on bank accounts debits and credits

     (403.8      (391.0      (468.9

Financial results, net

        

Exchange rate differences

     (1,190.5      (1,910.4      (191.4

Gain on net monetary position

     1,114.9        328.8        526.5  

Financial income

     60.4        41.3        43.5  

Financial expenses

     (1,793.3      (1,117.4      (796.1
  

 

 

    

 

 

    

 

 

 

Profit before tax

     5,730.3        4,741.9        5,999.1  

Income tax expense

        

Current

     (1,103.3      (1,614.3      (1,634.4

Deferred

     (583.2      (127.0      1,292.9  
  

 

 

    

 

 

    

 

 

 

Net profit for the year

     4,043.8        3,000.6        5,657.6  
  

 

 

    

 

 

    

 

 

 

Net income from operations per share

     6,4413        4,6454        9,4552  

 

2


Table of Contents
     As of December 31,  
     2019      2018      2017  
    

(in Ps.)

(amounts expressed in millions)

 

Consolidated statements of financial position:

        

Assets

        

Non-current assets

        

Property, plant and equipment

     45,021.2        33,655.4        28,166.7  

Right of use assets

     408.7        0.0        0.0  

Intangible assets

     128.2        336.2        345.6  

Investments

     2.5        2.5        3.8  

Goodwill

     25.5        25.5        25.5  

Inventories

     1,568.6        1,041.8        977.7  

Other receivables

     567.9        1,449.5        329.7  

Trade accounts receivable

     2.3        6.2        0.0  

Total non-current assets

     47,724.9        36,517.1        29,849.0  
  

 

 

    

 

 

    

 

 

 

Current assets

        

Inventories

     5,414.4        5,811.5        4,915.1  

Other receivables

     619.3        589.6        564.5  

Trade accounts receivable

     2,752.0        3,176.1        2,869.5  

Investments

     1,019.6        3,223.0        6,793.2  

Cash and banks

     1,547.6        1,241.0        428.8  
  

 

 

    

 

 

    

 

 

 

Total current assets

     11,352.9        14,041.2        15,571.1  
  

 

 

    

 

 

    

 

 

 

Total assets

     59,077.8        50,558.3        45,420.1  
  

 

 

    

 

 

    

 

 

 

Shareholders’ equity

        

Capital stock and other capital related accounts

     11,054.0        11,054.0        11,054.0  

Reserves

     11,873.5        3,507.9        210.5  

Retained earnings

     3,839.2        8,365.6        8,894.1  

Accumulated other comprehensive income

     330.2        422.2        52.2  
  

 

 

    

 

 

    

 

 

 

Equity attributable to the owners of the Company

     27,096.9        23,349.7        20,210.8  

Non-controlling interests

     2,230.7        2,114.5        1,527.2  
  

 

 

    

 

 

    

 

 

 

Total shareholders’ equity

     29,327.6        25,464.2        21,738.0  
  

 

 

    

 

 

    

 

 

 

Liabilities

        

Non-current liabilities

        

Borrowings

     6,689.0        4,011.0        5,915.0  

Accounts payable

     139.4        595.6        162.1  

Provisions

     566.4        450.2        365.9  

Tax liabilities

     0.0        0.0        0.8  

Other liabilities

     51.5        12.1        35.8  

Lease liabilities

     340.1        0.0        0.0  

Deferred tax liabilities

     5,482.7        4,901.2        4,768.9  
  

 

 

    

 

 

    

 

 

 

Total non-current liabilities

     13,269.0        9,970.1        11,248.5  
  

 

 

    

 

 

    

 

 

 

Current liabilities

        

Borrowings

     5,536.8        5,161.6        3,996.5  

Accounts payable

     9,063.9        7,465.8        5,363.7  

Advances from customers

     193.2        259.4        468.7  

Salaries and social security payables

     958.7        975.2        1,230.6  

Tax liabilities

     542.7        1,199.2        1,301.6  

Lease liabilities

     102.6        0.0        0.0  

Other liabilities

     83.3        62.8        72.5  
  

 

 

    

 

 

    

 

 

 

Total current liabilities

     16,481.2        15,124.0        12,433.6  
  

 

 

    

 

 

    

 

 

 

Total liabilities

     29,750.2        25,094.1        23,682.1  
  

 

 

    

 

 

    

 

 

 

Total shareholders’ equity and liabilities

     59,077.8        50,558.3        45,420.1  
  

 

 

    

 

 

    

 

 

 

 

3


Table of Contents
  B.

Capitalization and Indebtedness

Not applicable.

 

  C.

Reasons for the Offer and Use of Proceeds

Not applicable.

 

  D.

Risk Factors

Our business faces significant risks. You should consider carefully the risks described below and all other information contained in this annual report. If any of the following risks were to occur, our business, financial condition and results of operations would likely be materially adversely affected. In that event, the trading price of our ordinary shares or ADSs would likely decline and you might lose all or part of your investment. The following risks are not the only risks that we face; we are subject to various risks mainly resulting from changing economic, environmental, political, industry, business, financial and climate conditions. Our results could materially differ from those anticipated in these forward-looking statements, as a result of certain factors including the risks described below and elsewhere in this report and our other SEC filings. See also “Cautionary Statement with Respect to Forward-Looking Statements”.

For purposes of this section, the indication that a risk, uncertainty or problem may or will have a “material adverse effect on us” or that we may experience a “material adverse effect” means that the risk, uncertainty or problem could have a material adverse effect on our business, financial condition or results of operations and/or the market price of our ordinary shares or ADSs, except as otherwise indicated or as the context may otherwise require. You should view similar expressions in this section as having a similar meaning.

Risks Relating to Argentina

Most of our operations, property and customers are located in Argentina and a portion of our liabilities and assets are denominated in foreign currency. Consequently, the quality of our assets, property status and our results of operations depend on the macroeconomics, regulatory, social and political conditions of Argentina and on the exchange rates between the Argentine peso and foreign currencies, in particular, the U.S. dollar. These conditions include growth rates, inflation rates, exchange rates, taxes, foreign exchange controls, changes in the interest rates, changes of the state policies, social instability and other domestic and international political and economic events that may take place in Argentina or may affect it.

Investing in an emerging economy such as Argentina entails certain inherent risks.

Argentina is a developing economy and investing in such markets generally carries risks. These risks include political, social and economic instability that may affect Argentina’s economic condition. In the past, instability in Argentina was caused by many different factors, including the following:

 

   

aggravation of a financial crisis in several countries in the region;

 

   

abrupt changes in the monetary and fiscal policies of countries with prominent economies due to macroeconomic conditions;

 

   

increase in public expenses affecting the economy and fiscal deficits;

 

   

inconsistent fiscal and monetary policies;

 

   

uncertainty with respect to the Argentine public sector’s payment capacity and the potential for obtaining international financing;

 

   

low levels of investment;

 

4


Table of Contents
   

changes in governmental economic or tax policies;

 

   

high levels of inflation;

 

   

abrupt changes in currency values;

 

   

high interest rates;

 

   

wage increases and price controls;

 

   

exchange and capital controls;

 

   

political and social unrest;

 

   

the growing effects of labor unions;

 

   

the significant price drop of main commodities exported by Argentina;

 

   

fluctuations in the BCRA reserves;

 

   

widespread illnesses or epidemics, including the COVID-19; and

 

   

restrictions on exports and imports.

Any of the above factors either individually or taken together, could have material adverse effects on the Argentine economy and on our business, results of operations and financial condition.

Argentina’s economy may continue to experience volatility and may contract in the future due to political and economic uncertainty which may adversely affect our operations.

The Argentine economy has experienced extreme volatility in the recent decades, with uneven periods of economic growth, periods of high inflation and devaluation of the Argentine Peso against the U.S. dollar. Therefore, our business and operations may be affected by the economic and political events that may affect the Argentine economy, such as: price controls, foreign exchange controls, currency devaluations, high interest rates, increase in public expenses, tax increase or other regulatory initiatives that increase the Argentine government´s intervention in the economy.

During 2008 and 2009, the Argentine economy entered into a recession due to local and external events, including among others an extensive drought that affected significantly the agricultural sector, and the global economic crisis. Real GDP growth recovered in 2010 and 2011, increasing to 10.1% and 6.0%, respectively. However, GDP growth slowed to 1.0% in 2012, and then increased by 2.4% in 2013. In 2014, the INDEC, the only Argentine agency with legal capacity to publish official national statistics, published a real GDP growth of 0.5%. According to data published by INDEC between 2014 and 2015, the GDP for the first two quarters of 2015, increased by 2.1% and 2.3%, respectively, in comparison with the first two quarters of 2014, mainly due to an increase of public spending and investments. For the year 2016, the GDP variation was of -2.3% in relation to 2015. On the other hand, during 2017, the GDP increased by 2.9%, while in 2018 it dropped by 2.5% and in 2019 by 2.2%.

Argentina faced price increases since 2007, evidenced, among other indicators, by the significantly more expensive prices of fuels, energy and food. According to data published by INDEC, from 2010 to December 31, 2019, consumer price and wholesale prices increased significantly.

Since 2007, INDEC has undergone a process of institutional and methodological reforms that have led to controversies regarding the credibility of the information it publishes, including data on inflation, GDP and unemployment. Reports published by the IMF, using alternative measures to estimate price developments, showed considerably higher variations than those published by INDEC since 2007. The IMF also issued a statement of censure against Argentina in relation to the breach of its obligations before the IMF according to its Articles of Agreement for not achieving sufficient progress in the adoption of corrective measures to improve the quality of official data,

 

5


Table of Contents

including data on price increases and GDP. On November 9, 2016, on the occasion of the readjustment of the INDEC indexes (as described below), the IMF Executive Board announced on November 9, 2016 lifted its censure on Argentina since noting that Argentina resumed the publication of data in a manner consistent with its obligations under the Articles of Agreement with the IMF.

In February 2014, INDEC published a new price index, the National Urban Consumer Price Index (IPCNu), which measured the prices of goods in the country and replaced the CPI that only measured inflation in the urban sectors of the Autonomous City of Buenos Aires. Although the new methodology brought price statistics closer to those estimated by private sources, there were still differences between official data and private estimates.

On the other hand, since the beginning of 2015, international prices of certain commodities, relevant to Argentina’s primary product exports, have decreased, which has had an adverse effect on Argentina’s economic growth. In accordance with the implementation of certain methodological reforms by the government of Mauricio Macri, and the adjustment of certain indexes based on these reforms, the INDEC reviewed the real GDP of the Argentine Republic, from 2004 till 2015, and published on June 29, 2016 percentage variations of the real GDP of 10.4% in 2010, 6.2% in 2011, (1.1)% in 2012, 2.3% in 2013, (2.6)% in 2014 and 2.4% in 2015. These changes in the composition of the GDP resulted in a negative adjustment of approximately 12% for 2004. By previously underestimating inflation, the INDEC had overestimated real term economic growth. Its methodological adjustments led to a determination of real GDP growth of 48.6% for the 2004-2015 period, compared to 65% growth in real terms for the same period resulting from information used before June 2016. For the year 2016 the variation of the GDP was -2.2% in relation to the year 2015, it registered a rise of 2.9%, during 2017, while it proceeded to fall by 2.5% in 2018 and by 2.2% in 2019.

On August 11, 2019 the presidential and legislative primary elections were held in Argentina, in which Alberto Fernandez, member of the political party Frente de Todos, won with 47.65% of the votes, while Mauricio Macri’s party obtained 32.08% of the votes. Finally, on October 27, 2019, the presidential elections were held and Alberto Fernandez, candidate from Frente de Todos, won and took office on December 10, 2019.After the primary elections, the markets reacted negatively, and economic conditions continued to deteriorate. Due to, among other reasons, rising inflation, the continuous demand for wage increases, growing fiscal deficits, required payments on sovereign public debt, reduced industrial growth, generalized recession, and increased capital flight, the government of Mauricio Macri reintroduced, on September 1st, 2019, tight restrictions and exchange controls, which, among other things, significantly restricted access to the exchange markets by individuals and entities. For further information on this matter, see “Item 10. -D) Exchange Controls”.

On December 23, 2019, the Social Solidarity and Productive Reactivation Law No. 27,541 was published in the Official Gazette, which declared the public emergency in economic, financial, fiscal, administrative, social security, tariff, energy, health and social matters. The Social Solidarity and Productive Reactivation Law No. 27,541, regulated on December 27, 2019 by Decree No. 99/2019, introduced important foreign exchange restrictions and tax modifications. Decree No. 99/2019 provided measures regarding employer contributions, applicable rates for foreign goods and resolved that, in regard to the tax for an Inclusive and Solidary Argentina, digital services will be taxed by a 8% rate, and the acquisition of certain services abroad and passenger transport services destined outside the country at a 30% rate. As a consequence of these measures, the president of Argentina and the National Congress have gain considerable powers to alter governmental policies and measures related to the Argentine economy. Consequently, our operations and financial condition may be significantly affected.

Since the end of 2019, the Argentine government adopted measures regarding sovereign debt, including a “reprofiling” or restructuring of certain public debt bonds subject to Argentine law. On February 13, 2020, Law No. 27,544 was published in the Official Gazette, granting powers to the Ministry of Economy to carry out the restructuring of the external public sovereign debt. Likewise, such law authorizes the Ministry of Economy to issue new public securities to modify the maturity profile of interest and capital amortizations, as well as to determine terms and procedures for the issuance of such new securities, and to appoint institutions or financial advisors for the restructuring process. Following Law No. 27,544, on March 10, 2020, Decree No. 250/2020 issued by the Argentine Executive was published in the Official Gazette, which defined the universe of bonds subject to restructuring and provided that the nominal value of USD 68,842,528,826 or its equivalent in other currencies is the maximum amount of the operations of liability management and/or exchanges and/or restructurings of the Argentine public bonds issued under foreign law existing as of February 12, 2020 detailed in the annex of said decree. See “Item 3.D - Risk Factors - The Argentine

 

6


Table of Contents

government’s ability to obtain financing from international markets may be limited, which may negatively impact our financial condition and our ability to grow”.

On April 6, 2020, Decree No. 346/2020 issued by the Argentine Executive was published in the Official Gazette, that provided for the deferral of the payments of interest and amortizations of principal, of the Argentine public debt instrumented by bonds denominated in United States Dollars (USD) issued under Argentine law, until December 31, 2020, or until any previous date to be determined by the Ministry of Economy, considering the level of progress and execution of the process for the restoration of the sustainability of the public debt. See “—The Argentine government’s ability to obtain financing from international markets may be limited, which may negatively impact our financial condition and our ability to grow”. However, due to the COVID-19 pandemic, the timeline published initially by the Ministry of Economy for the restructuring of the public external debt which provided, among other steps, the launch of the offer to exchange bonds governed by foreign law, has been postponed.

Since December 2019, a novel strain of coronavirus (COVID-19) has spread throughout the world. The ongoing COVID-19 pandemic has negatively impacted global economy, disrupted financial markets and international trade, resulted in increased unemployment levels and significantly impacted global supply chains, all of which has had an adverse impact in Argentina’s economy and may negatively materially impact our industry and our business. See “-The measures taken or to be implemented by the Argentine government in response to the COVID-19 pandemic have had and will likely continue to have an adverse effect on our business and operations” and “-Public health threats or outbreaks of communicable diseases, including the COVID-19, have had and will likely continue to have an adverse effect on our operations and financial results”.

On April 16, 2020, the Argentine government announced an exchange offer with respect to outstanding debt securities issued by the Republic of Argentina in the international capital markets. Investors were asked to accept a 62% decrease in interest payments, which would represent savings of approximately U.S.$37.8 billion for the Argentina government, and a 5.4% reduction (or U.S.$3.6 billion) in the face value of the foreign debt securities. The Argentine government also proposed a grace period of three years (through 2023) with respect to payments of interest. As of the date of this annual report, the reaction of investors to the exchange offer were negative.

On April 21, 2020, Decree No. 391/2020, as amended, was published in the Official Gazette providing the restructuring of USD and EUR denominated bonds issued under foreign law and invites to exchange them for new bonds establishing the maximum amount of issuance for the aggregate series denominated in: i) U$S shall not be superior to nominal value U$S 44,500,000,000; and ii) EUR could not be superior to nominal value EUR 17,600,000,000. The prospectus for the exchange offer was already filed within the SEC and the bondholders will have until May 8, 2020, to accept the offer.Also, the Economy Ministry has confirmed that Argentina did not make fulfil US$500 million in debt repayments on three foreign bonds due on April 22, 2020, starting a 30-day countdown to a possible default. That could only be avoided should the government and bondholders reach a deal on restructuring Argentina’s foreign debt.We cannot estimate the impact that the measures currently adopted by the government, or those that it may implement in the future, will have on the Argentine economy as a whole and on our business, equity and results of our operations.

Continuing inflation, increase of unemployment, decline in GDP, peso depreciation, and/or other future economic, social and political developments in Argentina, over which we have no control, may adversely affect our financial condition or results of operations.

The impact of the Argentine congressional and presidential elections on the future economic and political environment of Argentina remains uncertain.

On August 11, 2019, presidential and legislative primary elections were held in Argentina, by which Alberto Fernández from the “Frente de Todos” coalition received 47.65% of the votes while Mauricio Macri’s party obtained 32.08%. On October 27, 2019, the presidential elections were held. Alberto Fernández of the Frente de Todos won and took office on December 10, 2019. After the primary elections, there was a considerable increase in the currency exchange rate. As a result, a “restructuring” of the maturities of certain local public debt securities was announced and foreign exchange restrictions were reinstated.

Since taking office in December 2019, the Alberto Fernández administration announced the following measures:

 

   

Law of Social Solidarity and Productive Reactivation. On December 23, 2019, Law No. 27,541 (the “Solidarity Law”) declaring the public emergency in economic, financial, fiscal, administrative, social security, tariff, energy, health and social matters was published in the Official Gazette. The Solidarity Law, which was regulated on December 27, 2019 by Decree No. 99/2019, introduced important foreign exchange restrictions and tax modifications. Decree No. 99/2019 provided measures regarding employer contributions, applicable rates for foreign goods and resolved that, in regard to the Tax for an Inclusive and Solidary

 

7


Table of Contents
 

Argentina, digital services will be taxed by a 8% rate, and a 30% rate for the acquisition services abroad and passenger transport services destined outside the country. Furthermore, the Solidarity Law fixed, for 180 days, electricity rates under national jurisdiction (of the companies that operate in the Buenos Aires metropolitan area (AMBA)) and gas rates throughout the country.

 

   

Price Control Program. On January 7, 2020, the national government of Alberto Fernández unveiled the 2020 price control program with the intention of fostering consumption and establishing reference prices for products with the highest consumption in households. The plan for 2020 had over 310 products and decreases of 8% on average.

 

   

Law of Sustainability of Public Debt under Foreign Law. On February 13, 2020, Law No. 27,544 was published in the Official Gazette, granting powers to the Ministry of Economy to carry out the restructuring of the external public sovereign debt. Likewise, the law authorizes the Ministry of Economy to issue new public securities to modify the maturity profile of interest and capital amortizations, as well as determine terms and procedures for issuance, and appoint institutions or financial advisors for the restructuring process. Following the Law No. 27,544, on March 10, 2020, the Argentine Executive published Decree No. 250/2020 in the Official Gazette. The aforementioned decree defined the universe of bonds subject to restructuring and provided that the nominal value of USD 68,842,528,826 or its equivalent in other currencies is the maximum amount of the operations of liability management and/or exchanges and/or restructurings of the Argentine public bonds issued under foreign law existing as of February 12, 2020 detailed in the annex of said decree. Due to the outbreak of the coronavirus pandemic, the original deadline (March 31, 2020) was postponed for at least two more weeks. On April 16, 2020, the Argentine government announced an exchange offer with respect to outstanding debt securities issued by the Republic of Argentina in the international capital markets. Investors were asked to accept a 62% decrease in interest payments, which would represent savings of approximately U.S.$37.8 billion for the Argentina government, and a 5.4% reduction (or U.S.$3.6 billion) in the face value of the foreign debt securities. The Argentine government also proposed a grace period of three years (through 2023) with respect to payments of interest. On April 21, 2020, Decree No. 391/2020, as amended, was published in the Official Gazette providing the restructuring of USD and EUR denominated bonds issued under foreign law and invites to exchange them for new bonds establishing the maximum amount of issuance for the aggregate series denominated in: i) U$S shall not be superior to nominal value U$S 44,500,000,000; and ii) EUR could not be superior to nominal value EUR 17,600,000,000. The prospectus for the exchange offer was already filed within the SEC and the bondholders will have until May 8, 2020, to accept the offer. Also, the Economy Ministry has confirmed that Argentina did not make fulfil US$500 million in debt repayments on three foreign bonds due on April 22, 2020, starting a 30-day countdown to a possible default. That could only be avoided should the government and bondholders reach a deal on restructuring Argentina’s foreign debt.

 

   

Deferral of payments of sovereign debt denominated in U.S. dollars issued under Argentine Law. On April 6, 2020, Decree No. 346/2020 issued by the Argentine Executive was published in the Official Gazette, providing the deferral of the payments of interest and amortizations of principal, of the national public debt instrumented by bonds denominated in U.S. dollars issued under the Argentine law, until December 31, 2020, or until any previous date to be determined by the Ministry of Economy, considering the level of progress and execution of the process for the restoration of the sustainability of the public debt. On April 16, 2020, the Argentine government announced an exchange offer with respect to outstanding debt securities issued by the Republic of Argentina in the international capital markets. Investors were asked to accept a 62% decrease in interest payments, which would represent savings of approximately U.S.$37.8 billion for the Argentina government, and a 5.4% reduction (or U.S.$3.6 billion) in the face value of the foreign debt securities. The Argentine government also proposed a grace period of three years (through 2023) with respect to payments of interest. The exchange offer will be valid for a 20-day period commencing on April 17, 2020 for creditors to accept its terms.

 

   

New Supermarket Shelves Law. On March 17, 2020, Supermarkets’ Shelves Law No. 27,545 was published in the Official Gazette, which had been previously approved by the Argentine Senate on February 28, 2020. This law establishes rules and restrictions for the display of products in certain commercialization centers´ shelves and also provides certain conditions that must be fulfilled in the commercial relationship between the commercialization centers and their suppliers, including compliance with the good commercial practices’ code which is also created by the law.

 

8


Table of Contents
   

Coronavirus measures. The Argentine government has taken and continues taking measures in response to the COVID-19 pandemic.

We have no control over the implementation of the reforms to the regulatory framework that governs our operations and cannot guarantee that these reforms will be implemented or, if implemented, that such implementation will benefit our business. The failure of these measures to achieve their intended goals could adversely affect the Argentine economy, which, in turn, may have an adverse effect on our business, results of operations and financial condition.

This political uncertainty in respect of economic measures could lead to volatility in the market prices of securities of Argentine companies, and could have a negative impact in domestic consumer markets such as ours, which, in turn, could have a negative effect on our business, results of operations and financial condition.

If current levels of fiscal deficits are not reduced, the Argentine economy could be adversely affected, negatively impacting our business and results of operation.

In the past, Argentina has had important macroeconomic imbalances, including frequent and critical fiscal deficits. Since 1961, the Argentine government has had yearly fiscal deficit in approximately 90% of the time (47 years out of 53), which has led to very vulnerable macroeconomic conditions. The Argentine government has financed its fiscal deficit mainly in two ways: (i) by issuing foreign debt, which has historically led to rapid increments in national debt levels; and (ii) by monetary emission through the BCRA, which has led to periods of high inflation and, even in some cases, hyperinflation.

The Macri administration took office in December 2015 and inherited a rising fiscal deficit that reached 5.2% of GDP in 2015, 5.8% of GDP in 2016, 6.0% of GDP in 2017, 5.2% for 2018, and 3.9% for 2019. The government of the Macri administration targeted a primary fiscal deficit (defined as the difference between current government spending on goods and services and total current revenue from all types of taxes net of transfer payments) of 0% of the GDP for 2019 and a primary fiscal surplus of 1% for 2020. Although the primary deficit seemed to have decreased by 2019, the financial deficit was still significant due to the lack of adoption of structural changes to reduce government’s spending, increase of inflation and the deficit of the balance of payment among others.

On February 12, 2020, the Minister of Economy appointed by President Alberto Fernandez, Martín Guzmán, stated that a reduction in the primary fiscal deficit in 2020 is neither realistic nor sustainable. Although Alberto Fernandez’s government may intend to stabilize the nation’s accounts, they also maintain expansionary policies that imply further increases in public spending. The Minister of Economy stated that the Alberto Fernandez’s administration will aim to achieve fiscal balance by the end of the current President’s term in 2023. See “Item 3.D Key Information—Risk Factors—Fluctuations in the value of the peso could adversely affect the Argentine economy, and consequently our results of operations or financial condition”.

Failing to reduce fiscal deficits could lead to growing levels of uncertainty regarding Argentina’s macroeconomic conditions. In particular, it could lead to growing inflation rates and unanticipated foreign exchange depreciation and balance of payments crisis, higher local vulnerability to international credit crisis or geopolitical shocks, higher interest rates and erratic monetary policies, a reduction in real salaries and as a consequence, in private consumption, and a reduction in growth rates. This level of uncertainty, over which we have no control, may adversely affect our financial condition or results of operations.

See “Argentina’s current account and balance of payment imbalances could lead to a depreciation of the Argentine peso, and as a result, affect our results of operations, our capital expenditure program and our ability to service our foreign currency liabilities”.

 

9


Table of Contents

If the current levels of inflation do not decrease, the Argentine economy could be adversely affected, negatively impacting our results of operations and margins.

Historically, inflation has materially undermined the Argentine economy and the Argentine government’s ability to create conditions for long-term economic growth. In recent years, Argentina has experienced high inflation rates.

In the past, and particularly in the Fernández de Kirchner administration, the Argentine government has implemented programs to control inflation and monitor prices for essential goods and services, including attempts to freeze the price of certain supermarket products by means of price support arrangements between the government and the private sector. These programs, however, did not address the structural causes for Argentina’s inflation and, consequently, failed to reduce inflation. Again, more recently, in April 2019, the Macri administration adopted similar programs, as further described below.

Since 2008, the Argentine economy has been subject to strong inflationary pressures that, according to private sector analysts, reached an average annual rate of 28.2% between 2010 and 2015. Given INDEC’s recent institutional and methodological reforms, controversy has arisen regarding the reliability of the information that it produced since 2007, including inflation estimates. On January 7, 2016, the Macri administration declared a state of administrative emergency with respect to the national statistical system and INDEC, which lasted until December 31, 2016. Since the declaration of the state of emergency, the INDEC ceased publishing certain statistical data and resumed publication of the CPI on June 16, 2016. Based on the new and revised information provided by INDEC, inflation reached an annual rate of 40.9% at the end of fiscal year 2016, an annual rate of 24.8% at the end of fiscal year 2017, and an annual rate of 47.6% at the end of fiscal year 2018. In 2019, the annual inflation rate in Argentina was of 53.8%. In the first three months of 2020, the accumulated annual inflation in Argentina was 7.8%.

In 2016, the government reported a primary fiscal deficit of 4.6% of GDP in 2017 reported a primary fiscal deficit of 3.9% of GDP, and in 2018 reported a primary fiscal deficit of 2.4%. Moreover, the primary fiscal balance could be negatively affected in the future if public expenditures continue to grow at a rate higher than revenues. For example, public expenditures grew due to social security benefits, financial assistance to provinces with financial problems and increased spending on public works and subsidies, including subsidies provided to the energy and transportation sectors. A further deterioration in fiscal accounts could negatively affect inflation rates and the government’s ability to access the long-term financial markets, which could, in turn, result in limited access to such markets by Argentine companies.

Due to several internal and external factors, including, but not limited to, the raising of the interest rate by the US Federal Reserve, the inability of the government to implement all required structural changes to reduce the fiscal deficit, the increasing need of international financing to finance the fiscal deficit, the increase of the government’s inflation target for 2018, a historical drought that affected the crops production (main export of Argentina) and the Turkish crisis, during the first half of 2018 the peso suffered a new sharp depreciation, which, as of December 31, 2018 accumulated 103.83% and that fostered the inflation levels again to 47.6% in 2018. In March 2019, the inflation reached 4.7%, and accumulated an aggregate of 22.4% during the first semester of 2019. On April 17, 2019 the Macri administration announced a series of economic measures to control inflation, including the temporarily freezing of retail prices for 60 basic products, the commitment to avoid tariffs increases above those already announced during 2019 and the freezing of the US Dollar intervention zones fixed as of April 16, 2019, equal to Ps.39.755 per U.S. dollar in the lower bound and Ps.51.448 per U.S. dollar in the upper bound. Nonetheless, in April 29, 2019, the committee of monetary policy (COPOM) of the BCRA announced that the BCRA will be able to sell foreign currency even if the exchange rate is below Ps.51.448, the amount and frequency will depend on the market dynamics, and if the exchange rate is above Ps.51.448, the BCRA will increase from US$ 150 to US$ 250 million the amount of the daily sale stipulated so far. Likewise, it may determine the performance of additional interventions to counteract episodes of excessive volatility if deemed necessary. Finally, the COPOM confirmed its decision not to buy foreign currency until June 2019 if the exchange rate was below Ps.39.755.

Inflation remains a challenge for Argentina and the Argentine government has announced its intention to reduce the primary fiscal deficit as a percentage of GDP over time and to reduce the Argentine government’s reliance on BCRA financing. If these measures fail to address Argentina’s structural inflationary imbalance, the current levels of inflation may continue to rise, which may have an adverse effect on Argentina’s economy, while also leading to an increase in Argentina’s debt levels.

 

10


Table of Contents

High inflation rates affect Argentina’s foreign competitiveness, increase social and economic inequality, negatively impact employment, consumption and the level of economic activity, and undermine confidence in Argentina’s banking system, which could further limit the availability of and access by local companies to domestic and international credit.

Inflation in Argentina has contributed to a material increase in our costs of operation, in particular labor costs; it also enables a reduction in the purchasing power of the population, thus increasing the risk of a lower level of product consumption from our customers in Argentina, which could negatively impact our financial condition and results of operations. Inflation rates could continue to grow in the future, and there is uncertainty regarding the effects that any measures adopted by the government could have to control inflation.

As of July 1, 2018, the Argentine peso qualifies as a currency of a hyperinflationary economy under IAS 29, and we are required to apply inflationary adjustments to our financial statements for the periods ending on and after December 31, 2018.

IAS 29 (Financial Reporting in Hyperinflationary Economies) requires that financial statements of any entity whose functional currency is the currency of a hyperinflationary economy, whether based on the historical cost method or on the current cost method, be stated in terms of the measuring unit current at the end of the reporting period. IAS 29 does not establish an absolute rate at which hyperinflation is deemed to arise but includes several characteristics of hyperinflation. The International Accounting Standards Board (“IASB”) does not identify specific hyperinflationary jurisdictions. However, in June 2018, the International Practices Task Force of the Centre for Quality, which monitors “highly inflationary countries”, among other activities, categorized Argentina as a country with projected three-year cumulative inflation rate greater than 100%. Additionally, some of the other qualitative factors of IAS 29 were present, providing prima facie evidence that the Argentine economy is hyperinflationary for purposes of IAS 29. Therefore, Argentine companies using International Financial Reporting Standard as adopted by the IASB (“IFRS”) are required to apply IAS 29 to their financial statements for periods ending on and after July 1, 2018.

Similarly, Argentine Generally Accepted Accounting Principles (“Argentine GAAP”) (Technical Resolutions No. 17, 39 and 41 (“TR 17”) also requires the adjustment of financial statements to reflect the changes in general price index in the context of hyperinflation. The Argentine Federation of Economic Sciences Professionals Bodies (Federación Argentina de Consejos Profesionales de Ciencias Económicas), after finding the presence of the qualitative requirements of Argentine GAAP for the adjustment, stated that the adjustment should be applied to all Argentine companies’ financial statements for periods ending on or after July 1, 2018.

Adjustments to reflect inflation, such as those required by IAS 29 and TR 17, were prohibited by law No. 23,928 (the “Law 23,928”). Additionally, Decree No. 664/03, issued by the Argentine government (the “Decree”), instructed regulatory authorities, such as the CNV, to accept only financial statements that comply with the prohibition set forth by the Law 23,928. However, on December 4, 2018, Law 27,468 abrogated Decree No. 664/03 and amended Law 23,928 indicating that the prohibition of indexation no longer applies to the financial statements. According to the foregoing, on December 26, 2018, the CNV amended its rules to adopt the adjustments to reflect inflation under IAS 29 for the periods ending on and after December 31, 2018, and on February 4, 2019, extended the term for the filing of the interim unaudited financial statements ended on December 31, 2018 until March 6, 2019. For purposes of the determination of the indexation for tax purposes, Law 27,468 substituted the Wholesale Price Index for the CPI, and modified the standards for triggering the tax indexation procedure. During the first three years as from January 1, 2018, the tax indexation will be applicable if the variation of the CPI exceeds 55% in 2018, 30% in 2019 and 15% in 2020. From January 1, 2021, the tax indexation procedure will be triggered under similar standards as those set forth by IAS 29 and TR 17. To the extent that the CPI increased by 47.6% in 2018 (below the statutory threshold for this year), the tax indexation procedure was not triggered for 2018.

As a result, beginning with the period ending on December 31, 2018, we and our Argentine subsidiaries prepare financial statements in compliance with IFRS or Argentine GAAP, adopting IAS 29 and TR 17 for regulatory purposes in Argentina. However, our and our Argentine subsidiaries’ interim financial statements as of September 30, 2018 were prepared, for regulatory purposes, to comply with IFRS or Argentina GAAP without adopting IAS 29 or TR 17, and will differ from our and our Argentine subsidiaries’ financial statements prepared in connection with IFRS or Argentine GAAP adopting IAS 29 and TR 17.

 

11


Table of Contents

We cannot predict the full future impact that the application of IAS 29 and TR 17 and the application of the tax indexation procedure and related adjustments will have on our and our Argentine subsidiaries’ financial statements or the effects on our business, results of operations and financial condition.

Devaluation of the peso may adversely affect our results of operations, our capital expenditure program and the ability to service our liabilities and transfers of funds abroad.

Argentina has a history of high volatility in its foreign exchange markets, including sharp and unanticipated devaluations, tight foreign exchange controls and severe restrictions on foreign trade. The devaluation of the peso may have a negative impact on the ability of certain Argentine businesses to service their foreign currency denominated debt. It could also lead to higher inflation rates, significantly reduce real wages and jeopardize our business, which depends on domestic market demand.

After a significant devaluation in the first half of 2002, the Peso stabilized around Ps.3 per US dollar in early 2003. Despite the positive effects of the real devaluation of the Peso in 2002, regarding the competitiveness of certain sectors in the Argentine economy, this had a negative impact in the long term, with a significant effect upon the Argentine economy and the financial situation of companies and the general Argentine population. The devaluation of the Peso had a negative impact on the ability of Argentine companies to honor their debts in foreign currency, generated high levels of inflation, reduced real wages significantly, and had a negative impact on companies oriented to the domestic market, such as public services and the financial industry. After several years of moderate variations in the nominal exchange rate, the peso depreciated 32.6% and 31.2% in 2013 and 2014, respectively, with respect to the U.S. dollar. In 2015, the peso lost 51.3% of its value with respect to the U.S. dollar, including a 10.1% devaluation from January 1, 2015 to September 30, 2015 and a 38.1% devaluation during the last quarter of the year ended December 31, 2015. This devaluation occurred mainly in the period after December 16, 2015 and before fiscal year end, which was when the Macri administration eliminated exchange controls imposed by the prior administration. In 2016, the peso lost 22.15% of its value with respect to the U.S. dollar and in 2017, the peso lost approximately 18.45% of its value with respect to the U.S. dollar.

Due to several factors, including but not limited to the raising of the interest rate by the US Federal Reserve, the inability of the Argentine government to perform structural changes and reduce the fiscal deficit, the Argentine government’s increasing need for international financing, the increase of the Argentine government’s inflation goals for 2018, a historical drought that affected the crops production (main export of Argentina) and the Turkish crisis, during the first half of 2018 the Argentine peso suffered a new sharp depreciation, which accumulated 103.83% in 2018.

On September 28, 2018, the U.S. dollar exchange rate reached a peak of Ps.40.8967 per U.S. dollar. Effective October 1, 2018, the BCRA defined foreign exchange intervention and non-intervention zones for the U.S. dollar exchange rate until the end of 2018, at Ps.34 per U.S. dollar in the lower band and Ps.44 per U.S. dollar in the upper band. Such rates were adjusted daily, provided that if the exchange rate was above the upper band, the BCRA could sell foreign currency for a daily amount of up to US$150 million, and below the lower band, the BCRA could increase the monetary base backed with the increase of the Argentine federal reserves. On April 16, 2019, the BCRA froze the non-intervention zones levels until December 31, 2019, and announced that until June 30, 2019, it would abstain from purchasing U.S. dollars below the lower band. As of April 29, 2019, the non-intervention zones were fixed at Ps.39.755 per U.S. dollar in the lower band and Ps.51.448 per U.S. dollar in the upper band. In addition, starting on April 15, 2019, the BCRA offered to sell up to US$60 million on two daily auctions up to an aggregate of US$9,600 from the funds disbursed by the IMF. See “—Fluctuations in the value of the peso could adversely affect the Argentine economy, and consequently our results of operations or financial condition” and “Additional Information—Exchange Controls”. However, on April 29, 2019, the committee of monetary policy (COPOM) of the BCRA also announced that the BCRA would be able to sell foreign currency even if the exchange rate was within Ps.51.448, the amount and frequency would depend on the market dynamics, and if the exchange rate was above Ps.51.448, the BCRA would increase from US$ 150 to US$ 250 million the amount of the daily sale stipulated so far. Likewise, the BCRA may determine the performance of additional interventions to counteract episodes of excessive volatility if deemed necessary. Finally, the COPOM also confirmed on April 29, 2019, its decision not to buy foreign currency until June 2019 if the exchange rate was below Ps.39.755. During 2019, the Argentine peso depreciated approximately 58.4% against the U.S. dollar.

 

12


Table of Contents

After the results of the primary elections were announced on August 11, 2019, the markets reacted negatively, and the dollar price jumped from Ps.45.2 to Ps.59 at the exchange rate published by the BCRA as of August 15, 2019. Consequently, the shares of Argentine companies in the New York stock exchanges and the value of national bonds dropped.

Given the political and economic landscape, the Government of former President Macri re-introduced rigid restrictions and foreign exchange controls in September 1, 2019, which among other things, significantly curtailed access to the official foreign exchange market (the “FX Market”) by individuals and entities. See “Additional Information—Exchange Controls”. Since these restrictions were implemented, until the date of this annual report, the Argentine peso depreciated against the U.S. dollar by 16.5%, but an unofficial U.S. dollar trading market developed in which the Argentine peso/U.S. dollar exchange rate is significantly higher than the one in the official one. We cannot predict future fluctuations in the Argentine peso/U.S. dollar exchange rate or further foreign exchange restrictions. We cannot predict future fluctuations in the Argentine peso/U.S. dollar exchange rate or further foreign exchange restrictions.

Despite the positive effects of the depreciation of the Argentine peso on the competitiveness of certain sectors of the Argentine economy, including our business, it has also had a negative impact on the financial condition of many Argentine businesses and individuals. The devaluation of the Argentine peso has had a negative impact on the ability of certain Argentine businesses to honor their foreign currency-denominated debt, and has also led to very high inflation initially and significantly reduced real wages. The devaluation has also negatively impacted businesses whose success is dependent on domestic market demand, and adversely affected the Argentine government’s ability to honor its foreign debt obligations. If the Argentine peso is significantly depreciated, the Argentine economy and our business could be adversely affected.

Additional volatility, appreciation or depreciation of the peso, or reduction in the BCRA’s international reserves due to currency interventions could adversely affect the Argentine economy, which in turn may have an adverse effect on our financial conditions and results of operations. Any further devaluation of the Argentine peso could have material adverse effects on the Argentine economy, which could have a material adverse effect on our results of operations and financial condition.

Given the economic and political conditions in Argentina, we cannot predict whether, and to what extent, the value of the peso may depreciate or appreciate against the U.S. dollar, the euro or other foreign currencies. We cannot predict how these conditions will affect our capital expenditure program, the consumption of products we provide to local costumers or our ability to meet our liabilities denominated in currencies other than the peso. Furthermore, our ability to transfer funds abroad and our ability to pay dividends to shareholders located abroad may be jeopardized if high exchange rate volatility continues and exchange controls are increased in Argentina. Finally, we cannot predict whether the Argentine government will further modify its monetary, fiscal or exchange rate policy in the future.

Government measures, as well as pressure from labor unions, could require private companies to implement salary increases or provide workers with additional benefits, all of which could increase our operating costs.

In the past, the Argentine government has enacted laws and regulations requiring private companies to maintain certain wage levels and provide added benefits to their employees. Additionally, both public and private sector employers have been subject to strong pressure from the workforce and trade unions to grant salary increases and certain additional benefits.

Labor relations in Argentina are governed by specific legislation, such as Labor Law No. 20,744 and Collective Bargaining Law No. 14,250, which, among other things, dictate how salary and other labor negotiations are to be conducted. Every industrial or commercial activity in Argentina is regulated by a specific collective bargaining agreement, or CBA, that groups companies together according to industry sector and trade union. Although the process of negotiation is standardized, each chamber of industrial or commercial activity separately negotiates the increases of salaries and labor benefits with the relevant trade union covering such commercial or industrial activity. In the cement industry, salaries are established on an annual basis through negotiations between the chambers that represent the cement producers and the cement industry employees’ trade union. The National Labor Ministry mediates between the parties and ultimately approves the annual salary increase to be applied in the cement industry. Parties are bound by the final decision once it is approved by the labor authority and must observe the established

 

13


Table of Contents

salary increases for all employees that are represented by the cement union and to whom the collective bargaining agreement applies.

In addition, each company is entitled, regardless of union-negotiated mandatory salary increases, to give its employees additional merit increase or variable compensation scheme. Argentine employers, in both the public and private sectors, have experienced significant pressure from their employees and labor organizations to increase wages and to provide additional benefits. In June 2017, the Ministry of Labor raised the minimum salary to Ps.10,000, effective in three tranches: Ps.8,860 as of July 2017, Ps.9,500 as of January 2018, Ps.10,000 as of July 2018, Ps. 10,700 as of September 2018 and Ps. 11,300 as of December 2018. The Argentine government has also approved additional increases of the minimum salary to Ps.12,500 as of March 2019, to Ps.14,125 as of August 2019, Ps.15,625 as of September 2019, and Ps. 16,875 as of October 2019 (all previous figures are nominal not adjusted per inflation). Due to high levels of inflation, both public and private sector employers are experiencing significant pressure from unions and their employees to further increase salaries. In 2015, the INDEC published the Coeficiente de Variación Salarial (Salary Variation Index), an index that shows the evolution of salaries. The Salaries Index showed an increase of approximately 33.0% and 27.3% in registered private sector salaries in 2016 and 2017, respectively, of 30.4% in 2018, and 44.3% in 2019. During this period, the average wages in the cement industry increased in line with the average of private sector salaries, according to the Argentine Ministry of Labor, Employment and Social Security. On January 2020, the Argentine government issued a decree imposing the payment of an extraordinary non-remuneratory bonus of Ps.4,000 to all workers in the private sector, payable in two installments in January 2020 and February 2020. This bonus and similar salary increases and additional payments could also have an effect on inflation, and, if, as a result of such measures salaries exceed local inflation and/or devaluation of the Argentine peso, whatever is higher, this could have a material and adverse effect on our costs and business, results of operations and financial condition. High inflation rates could continue to increase demand for wage increases. In the future, the Argentine government could take new measures requiring salary increases or additional benefits for workers, and the labor force and labor unions may apply pressure for such measures. Any such increase in wage or worker benefit could result in added costs and reduced results of operations for Argentine companies, including us. Such added costs could adversely affect our business, financial condition and result of operations.

By means of Decree No. 34/2019 issued on December 13, 2019, the Argentine Executive Branch duplicated the amount of the statutory severance payments payable to employees hired before December 13, 2019 and fired between December 13, 2019 and June 13, 2020.

On March 31, 2020, due to the COVID-19 pandemic, the Argentine government issued Decree No. 329/2020, which prohibits layoffs and dismissals due to force majeure or lack or decrease work during the next 60 days from the date of publication of the decree.

The Argentine Government may adopt new measures that determine salary increases or additional benefits for workers, and workers and their unions can pressure employers to comply with such measures. Any salary increase or additional benefit could result in an increase in costs and a decrease in the results of the operations of Argentine companies, including those of Loma Negra.

Argentina’s economy has undergone a significant slowdown, and any further decline in Argentina’s rate of economic growth could adversely affect our business, financial condition and results of operations.

After recovering from the 2001-2002 crisis, the pace of growth of Argentina’s economy diminished, suggesting uncertainty as to whether the growth experienced between 2003 and 2011 was sustainable. Economic growth was initially fueled by a significant devaluation of the peso, the availability of excess production capacity resulting from a long period of deep recession and high commodity prices. In spite of the growth following the 2001-2002 crisis, the economy has suffered a sustained erosion of direct investment and capital investment. The global economic crisis of 2008 led to a sudden economic decline in Argentina during 2009, accompanied by inflationary pressures, depreciation of the peso and a drop-in consumer and investor confidence.

Economic conditions in Argentina from 2012 to 2015 included increased inflation, continued demand for wage increases, a rising fiscal deficit and limitations on Argentina’s ability to service its restructured debt in accordance with its terms due to its ongoing litigation with holdout creditors. In addition, beginning in the second half of 2011, an increase in local demand for foreign currency caused the Argentine government to strengthen its foreign exchange controls. During 2013, 2014 and 2015, the government implemented price controls on certain goods and

 

14


Table of Contents

services to curb inflation. Starting in December 2015, the Macri administration has maintained certain price controls over necessary goods, such as foods, cleaning products and toiletries. According to the revised calculation of the GDP published by the INDEC, Argentina’s real GDP decreased by 2.1% in 2016 and increased by 2.7% in 2017. However, due to the foreign exchange crisis suffered during the first semester of 2018, and the measures adopted by the Argentine government to control such crisis, according to the INDEC, Argentina’s real GDP decreased by 2.5% in 2018, while the decrease of GDP was 2.2% for 2019.

At the beginning of May 2018, following the rate increase in the United States and the taxation of financial income from foreign residents, until August 2018, the Argentine Peso depreciated 110.3% with respect to the U.S. Dollar. The Argentine Government reacted by consecutively raising interest rates from 27.25% to 60% annually.

As a way to alleviate the ensuing crisis, in June 2018, Argentina and the International Monetary Fund (IMF) agreed to a stand-by loan for US$50.0 billion with duration of 36 months from the approval by the board of directors of the IMF (the “Stand-By Agreement”). The IMF requested the Argentine Government to implement the following measures: (i) reduce the primary deficit to 1.3% in 2019 and achieve the primary fiscal balance by 2020; and (ii) strengthen the autonomy of the BCRA. The reduction of the deficit implied a cut in public spending, reduction of energy and transportation subsidies, reduction of public works, transfers to the provinces, among other measures.

The IMF released the first part, of US$15.0 billion, of the Stand-By Agreement. Due to the devaluation that occurred after the release, and in order to further stabilize the currency, the Argentine Government requested the IMF an additional release of the stand-by loan. On September 25, 2018, Luis Caputo, resigned from the BCRA presidency, being replaced on the same day by Guido Sandleris.

On September 26, 2018, Christine Lagarde, former president of the IMF, and Nicolas Dujovne, former finance minister of the Argentine Republic, announced the expansion of the stand-by loan by US$7.1 billion to US$57.1 billion, and advancing the delivery period to 2019. This implied, as explained by the former minister, that the delivery of US$6.0 billion planned for 2018 increased to US$13.4 billion, and from US$11.4 billion to US$22.8 billion in 2019.

In early September 2018, and for further control over inflation, the administration of the former president Mauricio Macri expanded price controls over necessary goods with the incorporation of 127 new products. Consequently, the price control program had over 550 products, with an average increase of only 3.1%. This agreement was valid until January 6, 2020 and included supermarkets, hypermarkets and wholesale stores.

On January 7, 2020, the national government of Alberto Fernández unveiled the 2020 price control program with the intention of fostering consumption and establishing reference prices for products with the highest consumption in households. The plan for 2020 had over 310 products and decreases of 8% on average. Our products are not included in the 2020 price control program.

Despite the measures adopted, we cannot assure you that the Argentine Government will successfully control inflation.

A decline in international demand for Argentine products, a lack of stability and competitiveness of the peso against other currencies, a decline in confidence among consumers and foreign and domestic investors, a higher rate of inflation and future political uncertainties, among other factors, may affect the development of the Argentine economy, which could lead to reduced demand for our services and adversely affect our business, financial condition and results of operations.

The implementation of new exchange controls and restrictions on capital inflows and outflows could limit the availability of international credit and could threaten the financial system, adversely affecting the Argentine economy and, as a result, our business.

From 2011 and until President Macri took office, the Argentine government increased controls on the sale of foreign currencies and the acquisition of foreign assets by residents, limiting the possibility of transferring funds abroad. Through a combination of foreign exchange and tax regulations, the Fernández de Kirchner administration significantly curtailed access to the MULC (single and free foreign exchange market) by individuals and private-sector entities. In addition, during the Fernández de Kirchner administration, the BCRA exercised a de facto prior approval

 

15


Table of Contents

power for certain foreign exchange transactions otherwise authorized to be carried out under the applicable regulations, such as dividend payments or repayment of principal of intercompany loans as well as the import of goods, by means of regulating the amount of foreign currency available to companies to conduct such transactions. The number of exchange controls introduced in the past and in particular after 2011 during the Fernández de Kirchner administration gave rise to an unofficial U.S. dollar trading market, and the unofficial peso to U.S. dollar exchange rate in such market differed substantially from the official peso to U.S. dollar exchange rate. Due to the foreign exchange crisis generated in August 2019 and the continued reduction of the BCRA’s foreign currency reserves, since September 1, 2019 the Argentine government imposed once again rigid exchange controls and transfer restrictions, substantially limiting the ability to obtain foreign currency or make certain payments or distributions out of Argentina See “Item 10.D Additional Information—Exchange Controls”.

Notwithstanding the measures adopted by the Argentine government in the recent months, in the future the Argentine government could reinstate further exchange controls, transfer restrictions, restrictions on the free movement of capital, and may implement other measures in response to capital flight or a significant depreciation of the peso, which could limit our ability to access the international capital markets and impair our ability to make interest, principal or dividend payments abroad. Such measures could lead to renewed political and social tensions, and could undermine the Argentine government’s public finances, which could adversely affect Argentina’s economy and prospects for economic growth and, consequently, adversely affect our business and results of operations, and could impair our ability to make dividend payments to holders of the ADSs, which may adversely affect the market value of the ADSs. See “Additional Information—Exchange Controls”.

Argentina’s current account and balance of payment imbalances could lead to a depreciation of the Argentine peso, and as a result, affect our results of operations, our capital expenditure program and our ability to service our foreign currency liabilities.

Between 2007 and 2015, Fernández de Kirchner’s administration significantly increased public spending. In the eleven-month period ended on November 30, 2015, the fiscal deficit increased by 363% annualized. During that period, the Fernández de Kirchner administration turned to the BCRA and the ANSES (Administración Nacional de la Seguridad Social) to finance part of the public administration. Inflation continues to be a challenge for Argentina given its persistent nature in recent years. The Macri Administration had announced its intention to reduce the primary fiscal deficit as a percentage of GDP over time and also reduce the government’s dependence on BCRA financing. Given the difficulties of the Argentine public finances, the administration of former President Macri adopted several measures to finance their public spending, for example, the revision of subsidy policies (in particular those related to energy, electricity and gas, water and public transport) and the implementation of an expansive monetary policy. These measures resulted in a further increase in prices and, therefore, adversely affected, consumer purchasing power and the overall economic activity.

In August 2018, the government of former President Macri announced the following measures to reduce public expenditure:

a) Decrease of subsidies. The decrease in public expenditures through the decrease of subsidies, reduction of public works and lower expenses in political structure;

b) Further cuts for the Administration;

c) Approval of new rates of export duties; and

d) Reduction of employee contributions, in other words, the reduction of the non-taxable minimum of said contributions.

As for the measures announced by the government of President Alberto Fernandez, among them the implementation of Law No. 27,541 called “Law of Social Solidarity and Productive Reactivation in the Framework of Public Emergency”, see “Risk Factors – Risks Relating to Argentina – Argentina’s growth and stability may not be durable” and “Additional Information – Taxation”.

According to INDEC, Argentina has a structural current account deficit that reached US$3.5 billion by the end of 2019, and reached US$27.3 billion in 2018, US$31.2 billion in 2017, US$15.1 billion in 2016, and US$17.6

 

16


Table of Contents

billion in 2015. The account deficit between 2015 and 2017 originates in the stagnation of exports of goods, which have only increased by 1.4%, taking into account the compounded average growth rate, CAGR, between 2015 and 2017; in contrast, imports of goods have been increasing at a much faster speed, reaching a CAGR of 5.8% in the same period.

The account deficit was financed in recent years with external debt issuances in the international debt markets by the Macri administration. According to BCRA statistics, net external debt issued and/or incurred by Argentina consisted of approximately US$28.3 billion, US$26.6 billion and US$25.5 billion in 2018, 2017 and 2016, respectively. In addition, the settlement of the disputes over the 2001 defaulted debt crisis has allowed several provinces of Argentina and certain Argentine private companies to issue new debt securities in foreign markets. This has contributed to offset the current account deficit and has allowed the BCRA to accumulate international reserves of US$10.7, US$16.3 billion and US$12.7 billion in 2018, 2017 and 2016, respectively.

Because foreign direct investment remains stagnant in Argentina, amounting to only US$3.2 billion, US$2.3 billion, US$2.5 billion and US$1.3 billion in 2018, 2017, 2016 and 2015, respectively, it may become impossible for Argentina and its provinces to meet their debts obligations in the future, since Argentina’s foreign currency needs would severely overcome its foreign currency sources. If this level of uncertainty prevails on international investors, Argentina may suffer a “sudden stop” event, where investors stop lending money to Argentinean institutions. This, in turn, may result in large capital outflows that could not only force the Argentine government to default on its debt, but also generate a rapid and unanticipated depreciation of the argentine peso, a hike in local interest rates and a probable banking system crisis if bank deposits are largely withdrawn following social unrest.

The events described above have already taken place in recent decades in Argentina, and although the actual administration intends to address the situation, as of the date of this annual report, the impact that the measures taken by the present administration will have on the Argentine economy as a whole cannot be predicted. As of the date of this report, the results of the measures already implemented and the Argentine government’s measures related to the outbreak of COVID-19, are unknown. On February 12, 2020, the Minister of Economy, Martín Guzmán, stated that a reduction in the primary fiscal deficit in 2020 is neither realistic nor sustainable. Alberto Fernández’s government measures aims to stabilize state accounts, but in principle they intend to maintain expansive policies that would mean initially even more increases in public spending. The economy minister said he would aim to reach fiscal balance by the end of the term of current president Alberto Fernández in 2023.

The failure to reduce fiscal deficits could increase the level of uncertainty regarding the macroeconomic conditions in Argentina. In particular, it could lead to an increase in the inflation index, devaluation of the Argentine peso with respect to foreign currencies and a subsequent crisis in the balance of payments, greater local vulnerability to the international credit crisis or geopolitical shocks, rising rates of interest, erratic monetary policies, reduction in real wages and, as a consequence, in private consumption and reduction in growth rates. This level of uncertainty, over which we have no control, can affect our financial condition or the results of operations.

If a balance of payments crisis were to occur, a large depreciation of the Argentine peso against the U.S. dollar could adversely affect our ability to meet our foreign currency obligations. Furthermore, the negative effect such a crisis could have on the growth rates of the Argentine economy and its consumption patterns could have a material adverse effect on our business, financial condition and result of operations.

The Argentine government’s ability to obtain financing from international markets may be limited, which may negatively impact our financial condition and our ability to grow.

The Argentine government’s ability to obtain financing from international markets has been limited:

 

   

The Argentina’s sovereign default in 2001 limited Argentina’s ability to access to international financing. Through exchange offers conducted between 2005 and 2010, Argentina restructured over 92% of the sovereign defaulted debt. However, holdout holders that declined to participate in the restructuring commenced litigation against Argentina. The Argentine government settled US$9.2 billion outstanding principal amount of the untendered debt held by some of these holdout holders in April 2016 with the proceeds from a US$16.5 billion international offering of 3-year, 5-year, 10-year and 30-year bonds. Although the size of the outstanding claims has decreased significantly, as of the date of this report, litigation initiated by bondholders that have not accepted Argentina’s settlement offer continues in

 

17


Table of Contents
 

several jurisdictions. However, after the settlement with the holdouts and offering Argentina regained access to the international capital markets.

 

   

Additionally, foreign shareholders of several Argentine companies, including those of our controlling shareholder, have filed claims before the International Center for Settlement of Investment Disputes or the ICSID alleging that the emergency measures adopted by the Argentine government since the crisis in 2001 and 2002 differ from the just and equal treatment standards set forth in several bilateral investment treaties to which Argentina is a party. The ICSID has ruled against Argentina with respect to many of these claims.

 

   

In July 2017, in a split decision, an ICSID tribunal ruled that Argentina had breached the terms of a bilateral investment treaty with Spain, alleging the unlawful expropriation by the Federal Government of Aerolíneas Argentinas and affiliates (including Optar, Jet Paq, Austral, among others). The ICSID tribunal has fined Argentina for an approximate amount of US$328.8 million, awarding plaintiffs about 20% of the US$1.6 billion they had initially claimed.

Future access to debt and equity financings in international markets may be limited as litigation with holdout bondholders as well as ICSID and other claims against the Argentine government continues, which in turn could limit economic growth, adversely affecting our business, results of operations and financial condition.

In late May 2018, the Macri administration requested the IMF financial support to help strengthen the Argentine economy in light of the financial market turbulence suffered in early 2018. In June 2018, Argentina and the IMF reached an agreement on an economic plan that could be supported by IMF financing in the form of a Stand-By Agreement for US$50 billion, and on June 20, 2018, the IMF’s Executive Board approved such plan and the consequent three-year Stand-By Agreement. On September 2018 the Argentine government negotiated an extension to the Stand-By Agreement from US$50 billion to US$57.1 billion. As of December 2019, the IMF disbursed an aggregate of US$44.70 billion and as of the date of this annual report there were additional disbursements pending for a total of US$12.40 billion.

The purpose of the Stand-By Agreement was to support the Argentine government’s economic priorities, which include strengthening the Argentine economy and protecting the living standards of the Argentine citizens. The Fernández administration announced that would not request the disbursements of the pending amounts under the Stand-By Agreement and is negotiating the extension of the repayment terms that mature in 2021 and 2022.

As of the date of this annual report, we cannot guarantee that the Argentine government and the IMF will reach an agreement on the restructuring of the Stand-By Agreement, nor are we able to predict the future consequences for the Argentine economy in general or our business in particular if such agreement fails.

Pursuant to a report issued by the Ministry of Economy of the Argentine government, as of December 2019, Argentina’s foreign debt amounted to US$311.25 billion, which represented 91.6% of Argentina’s GDP. In 2020 the Argentine government must make payments of about US$52 billion on sovereign debt in U.S. dollar and Argentine pesos, including about US$37 billion in foreign sovereign; and in 2021 the Argentine government must make payments of about US$37.1 billion on sovereign debt in U.S. dollars and Argentine pesos.

In addition, in January 26, 2020 the Province of Buenos Aires, the largest estate in Argentina, also had a maturity of provincial sovereign debt for US$277 million in principal amount and interests that, after the failure of the negotiations for an extension, cancelled within the curing period in February 5, 2020. The Province of Buenos Aires has additional payments under its sovereign debt for US$110 million maturing in May 2020 and US$750 million maturing in June 2020. The Province will seek to restructure its sovereign debt in U.S. dollars simultaneously with the restructuring of the Argentine sovereign debt.

Because the Argentine government is facing maturities of sovereign debt in U.S. dollars and Argentine pesos for about US$11 billion during the first quarter of 2020 and US$26 billion during the second quarter of 2020, the Argentine Executive Power proposed a restructuring deadline of March 31, 2020. The sovereign debt maturing has collective action clauses pursuant to which the restructuring of their maturities requires the consent of holders holding at least 75% of the aggregate principal amount of each of the bonds. It has been reported the existence of holders’ committees holding blocking positions in some or all of the bonds to be restructured.

 

18


Table of Contents

On February 13, 2020 the Argentine government had a maturity of principal and interest under the US$1.637 Million Dual Currency AF Bonds due 2020. During February the Argentine government launched an offer for the exchange of the AF20 Bonds by new Argentine Pesos Bonds due 2021, but only about 10% in principal amount of the AF20 Bonds were tendered. However, the Argentine government launched the placement of another Argentine Peso Bond due 2021 seeking to apply their proceeds to the cancellation of the remaining outstanding principal amount of the AF20 Bonds, but the placement was cancelled due to the lack of offers. Then the Argentine government issued Decree No. 141/2020 pursuant to which postponed the payment of principal and suspended the accrual of interest under the AF20 Bonds until September 30, 2020.

Due to these payment obligations and the lack of the Argentine government´s access to additional international or multilateral private financing, as of the date of this report, the country risk index published by JP Morgan amounted to 4055 basis points, which represents a high uncertainty on the ability of the Argentine government to make the payments due under its sovereign debt in the short and medium term.

On February 12, 2020, the Argentine Congress enacted the Law No. 27,544 for the Restoration of the Sustainability of the Public Debt issued under Foreign Law which granted the Ministry of Economy the powers to restructure the Argentine government external public debt. On March 9, 2020, the Executive Branch issued decree No. 250/2020 that authorizes the Ministry of Economy to restructure debt for US$68,842 million.

Following Law No. 27,544, on March 10, 2020, Decree No. 250/2020 issued by the Argentine Executive was published in the Official Gazette. Such decree defined the universe of bonds subject to restructuring and provided that the nominal value of USD 68,842,528,826 or its equivalent in other currencies is the maximum amount of the operations of liability management and/or exchanges and/or restructurings of the Argentine public bonds issued under foreign law existing as of February 12, 2020 detailed in the annex of said decree. However, due to the COVID-19 pandemic, the timeline initially published by the Ministry of Economy for the restructuring of the public external debt which provided, among other steps, the launch of the offer to exchange bonds governed by foreign law, has been postponed.

On April 6, 2020, Decree No. 346/2020 (“Decree 346”) issued by the Argentine Executive was published in the Official Gazette, setting forth: i) the deferral of interest payments and amortizations of principal, of the national public debt instrumented by bonds denominated in United States Dollars (USD) issued under the Argentine law, until December 31, 2020, or until any previous date to be determined by the Ministry of Economy, considering the level of progress and execution of the process for the restoration of the sustainability of the public debt; ii) that the Ministry of Economy is authorized to carry out the transactions of liability management and/or exchanges and/or restructurings of the instruments which payments are being deferred as provided by this decree, with the purpose of recovering and ensuring the sustainability of the public debt, which must be compatible with the recovering of the productive economy and with the improvement of the basic social indexes, in accordance with the provisions of Subsection a), Section 2 of the Solidarity Law within the framework of the Argentine public emergency; and iii) that the Ministry of Economy will issue the clarifying and complementary regulations necessary to implement the provisions set forth in Decree 346.

Furthermore, by means of Section 2 of Decree 346, certain intra-public sector public debt instruments issued under Argentine law and denominated in USD, were excluded from the deferral of payments. Decree 346 also provided that the payments under certain public debt instruments (mainly instruments held by the Argentine Central Bank and the Fondo de Garantía de Sustentabilidad, or the FGS) will be replaced, at their date of maturity, by new public debt instruments which conditions will be defined by the Secretariat of Finance and the Secretariat of Treasury, both within the scope of the Ministry of Economy.

On April 16, 2020, the Argentine government announced an exchange offer with respect to outstanding debt securities issued by the Republic of Argentina in the international capital markets. Investors were asked to accept a 62% decrease in interest payments, which would represent savings of approximately U.S.$37.8 billion for the Argentina government, and a 5.4% reduction (or U.S.$3.6 billion) in the face value of the foreign debt securities. The Argentine government also proposed a grace period of three years (through 2023) with respect to payments of interest.

On April 21, 2020, Decree No. 391/2020, as amended, was published in the Official Gazette providing the restructuring of USD and EUR denominated bonds issued under foreign law and invites to exchange them for new bonds establishing the maximum amount of issuance for the aggregate series denominated in: i) U$S shall not be superior to nominal value U$S 44,500,000,000; and ii) EUR could not be superior to nominal value EUR 17,600,000,000. The prospectus for the exchange offer was already filed within the SEC and the bondholders will have until May 8, 2020, to accept the offer.

Also, the Economy Ministry has confirmed that Argentina did not make fulfil US$500 million in debt repayments on three foreign bonds due on April 22, 2020, starting a 30-day countdown to a possible default. That could only be avoided should the government and bondholders reach a deal on restructuring Argentina’s foreign debt.

If the Argentine government does not restructure the sovereign bonds with the required majority of holders (at least 75% in principal amount) Argentina may default on the sovereign debt again. In such event, Argentina’s ability to obtain international or multilateral private financing or direct foreign investment may be limited, which may in turn impair its ability to implement reforms and public policies to foster economic growth, impair the ability of private sector entities to access the international capital markets or make the terms of such financing much less favorable that those accessible by companies in other countries in the region and may accelerate the depreciation of the Argentine peso, foster inflation and deepen the economic crisis and recession. In addition, Argentina may face again litigation from sovereign debt holdout holders.

 

19


Table of Contents

Lack of access to international or domestic financial markets could affect the projected capital expenditures for our operations in Argentina, which, in turn, may have an adverse effect on our financial condition or the results of our operations.

Government intervention may adversely affect Argentine economy, Argentine companies and, as a result, our business and results of operations.

During recent years, the federal government has exercised substantial control over the Argentine economy. The two administrations of President Fernández de Kirchner, who governed from 2007 through December 9, 2015, increased state intervention in the Argentine economy, including through expropriation and nationalization measures, price controls and pervasive exchange controls.

In 2008, the Fernández de Kirchner administration absorbed and replaced the former private pension system for a public “pay-as-you-go” pension system. As a result, all resources managed by the private pension funds, including significant equity interests in a wide range of listed companies, were transferred to a separate fund (Fondo de Garantía de Sustentabilidad), or the FGS, to be administered by the National Social Security Administration (Administración Nacional de la Seguridad Social), or the ANSES. The dissolution of the private pension funds and the transfer of their financial assets to the FGS have had important repercussions on the financing of private sector companies. Debt and equity instruments that previously could be placed with pension fund administrators are now entirely subject to the discretion of the ANSES. Since acquiring equity interests in privately owned companies, through the process of replacing the pension system, the ANSES is entitled to designate representatives of the Argentine government to the boards of directors of those entities. Pursuant to Decree No. 1,278/12, issued by the executive branch on July 25, 2012, the ANSES’s representatives must report directly to the Ministry of Economy and are subject to a mandatory information-sharing regime, under which, among other obligations, the representatives must immediately inform the Ministry of Economy of the agenda for each board of directors’ meeting and provide related documentation.

In April 2012, the Fernández de Kirchner administration decreed the removal of directors and senior officers of YPF S.A., or YPF, the country’s largest oil and gas company, which was controlled by the Spanish group Repsol, and submitted a bill to the Argentine Congress to expropriate shares held by Repsol representing 51% of the shares of YPF. The Argentine Congress approved the bill in May 2012 through the passage of Law No. 26,741, which declared the production, industrialization, transportation and marketing of hydrocarbons to be activities of public interest and fundamental policies of Argentina and empowered the Argentine government to adopt any measures necessary to achieve self-sufficiency in hydrocarbon supply. In February 2014, the Argentine government and Repsol announced that they had reached an agreement on the terms of the compensation payable to Repsol for the expropriation of the YPF shares. Such compensation totaled approximately US$5.0 billion payable by delivery of Argentine sovereign bonds with various maturities. The agreement, which the Argentine government ratified pursuant to Law No. 26,932, settled the claim filed by Repsol with the ICSID.

On September 28, 2014, Law No. 26,991 (“Supply Law”) came into effect. The Supply Law covers the economic process related to goods, facilities and services that directly or indirectly satisfy the basic or essential needs of the population. The Supply Law also grants broad delegations of powers on its enforcement authority. Moreover, the Supply Law provides that in a situation of shortage or scarcity of goods or services which satisfy basic or essential needs destined to the general welfare of the population, the governmental authorities may order their sale, production, distribution and delivery throughout the territory of the Argentine nation.

 

20


Table of Contents

In February 2015, the Fernández de Kirchner administration filed a bill to the Argentine Congress in order to revoke certain train concession and nationalize the train services. The bill also provides powers to examine concessions actually in course. This bill was passed by the National Congress on May 20, 2015 as Law No. 27,132.

Moreover, on September 23, 2015 the Argentine Congress passed Law No. 27,181 that deems as public interest the protection of the company shares owned by the Argentine Government as part of the Sustainability Guaranty Fund of the Argentine Integrated Social Security System and the company shares in which the Argentine Government is a minority partner, prohibiting its transfer or any action that may limit, alter, eliminates or modifies its destiny, domain or nature, or its outcome, without the previous authorization of two thirds of the members of the Argentine Congress except for the shares that the National Government owns in YPF S.A. This law also created the National Agency of share capital owned by the Argentine state as decentralized body in the orbit of the executive branch whose main activities are the implementation of policies to exercise the rights attached to the underlying shares. On July 22, 2016, Law No. 27,260 was passed by the Argentine Congress that repeals parts of the Law No. 27,181 and authorized the sale of shares owns by the Sustainability Guaranty Fund of the Argentine Integrated Social Security System when the sales are done in order to pay amounts due under the Argentine Integrated Social Security System.

As for our activities, in the 2008-2015 period, the former Secretariat of Interior Commerce, Guillermo Moreno, agreed with the most important cement manufacturers, including us, to limit to 8% the price increase of cement, in order to limit the price increase of the inputs that are used to build.

Since taking office in December 2019, the newly elected Fernández Administration also announced the following measures that increased the government intervention: i) the Solidarity Law published on December 23, 2019; ii) the Price Control Program announced on January 7, 2020; iii) the Law of Sustainability of Public Debt under Foreign Law, published on February 13, 2020; and iv) the Supermarkets’ Shelf Law published on March 17, 2020. As of the date of this report it is not possible to predict whether the current administration will promote actions related to price controls of products elaborated by us. In case it does, we cannot predict how these measures will affect our results of operations.

Expropriations and other interventions by the Argentine government similar to those described above can have an adverse impact on the level of foreign investment in Argentina, the access of Argentine companies to the international capital markets and Argentina’s commercial and diplomatic relations with other countries and, consequently, could adversely affect our business, financial condition and results of operations.

The Argentine economy could be adversely affected by economic developments in other markets and by more general “contagion” effects.

Weak, flat or negative economic growth in any of Argentina’s major trading partners, such as Brazil, could adversely affect Argentina’s balance of payments and, consequently, economic growth.

The Argentine economy may also be affected by conditions in developed economies, such as the United States, that are significant trading partners of Argentina or have influence over world economic cycles and over short-term evolution of commodity prices. If interest rates increase significantly in developed economies, including the United States, Argentina and its developing economy trading partners, such as Brazil, could find it more difficult and expensive to borrow capital and refinance existing debt, which could adversely affect economic growth in those countries. Decreased growth from Argentina’s trading partners could have a material adverse effect on the markets for Argentina’s exports and, in turn, adversely affect economic growth. Any of these potential risks to the Argentine economy could have a material adverse effect on our business, financial condition and result of operations.

The economy of Brazil, Argentina’s largest export market and the principal source of imports, is currently experiencing heightened negative pressure due to the uncertainties stemming from ongoing political crisis. After the economic crisis of 2015 and 2016, the Brazilian economy is slowly recovering. The real growth per capita has fallen 8% since the recession started, and the poverty and inequality are growing. Even though the unemployment rate has fallen this year, it is still high in comparison with the rate before the crisis. On January 1, 2019, Jair Bolsonaro assumed office as a neoliberal and conservative politician. The Brazil economy is showing slow signs of recuperation sustained principally by higher consumption, low interest rates, controlled inflation and the expansion of credit operations. Nevertheless, Brazil faces serious obstacles such as the high unemployment rate and the ongoing political crisis. While

 

21


Table of Contents

the impact of Brazil’s downturn on Argentina cannot be predicted, we cannot exclude the possibility that the Brazilian political and economic crisis could have a further negative impact on the Argentine economy.

In a referendum on membership of the European Union held on June 23, 2016, the United Kingdom voted in favor of the British government taking the necessary action for the U.K. to leave the European Union (commonly known as “Brexit”). On January 31, 2020, the U.K. left the European Union. There are still 11 months of transition that the parties will take to negotiate their future relationship. Even though it is expected that London will not continue to be the financial center of Europe, being probably replaced by Germany, we cannot predict the concrete impact that these circumstances will have for the European Union or which are the terms that the parties will agree on. As a consequence of the Brexit, the economic conditions in general and of the financial and capital market in particular of the European Union may be adversely affected, all of which may cause instability in the rest of the global financial markets, such as Argentina. Any of these effects or other that we cannot predict, may have a negative impact on our business, results of operations and financial condition.

Since Donald J. Trump took office in January 2017, the policies implemented by the Trump administration have tended to impose greater restrictions on free trade generally and immigration. Since Trump took office the unemployment rate of the U.S. has fallen to 3.5%, the lowest level in half a century, and the economy created approximately 266,000 in November 2019, according to the U.S. Department of Labor. On November 3, 2020, political elections will take place in the U.S. As of the date of this report, it is still unknown who the main candidate will be. Changes in social, political, regulatory and economic conditions in the United States, or in laws and policies governing foreign trade, could create uncertainty in the international markets and could have a negative impact on emerging market economies, including the Argentine economy, which in turn could have a negative impact on our business, results of operations and financial condition.

On February 5, 2018, Jerome H. Powell took office as the chair of the Federal Reserve of U.S., succeeding Janet L. Yellen. Mr. Powell has expressed its intention to continue with the policies of the Federal Reserve to gradually rise the interest rates as the economic conditions of the U.S. improve. In case that the U.S. economy improves, the recent tax reform that reduced the income tax rate may cause an overheat in the U.S. economy and that the Federal Reserve becomes more aggressive as to the rise of the interest rates. The Trump administration has recently passed tariffs on certain products that alter the international commerce, that with the rise of the interest rate, has created an additional volatility in the U.S. and internationally.

Finally, the ongoing COVID-19 pandemic has negatively impacted global economy, disrupted financial markets and international trade, resulted in increased unemployment levels and significantly impacted global supply chains, all of which has had an adverse impact in Argentina’s economy and may negatively materially impact our industry and our business. See “—The measures taken or to be implemented by the Argentine government in response to the COVID-19 pandemic have had and will likely continue to have an adverse effect on our business and operations” and “—Public health threats or outbreaks of communicable diseases, including the COVID-19, have had and will likely continue to have an adverse effect on our operations and financial results”.

The Argentine banking system may be subject to instability, which may affect our operations.

The Argentine banking system has experienced several crises in the past, and even collapsed in 2001 and 2002. However, in more recent years, the Argentine banking system has shown a recovery in credit activity, driven by increases in loans and deposits. However, most of the deposit growth is in short-term deposits and the sources of medium- and long-term funding for financial institutions are currently limited. As of December 2018, deposits in pesos to the private sector increased 42.4% over the prior year and loans in pesos to the private sector increased 19.0%. In particular, mortgage loans experienced a high growth rate in 2017, rising at an annual rate of 106% year over year and 71.5% in 2018; also expanding rapidly were consumer loans, which increased 60% year over year, according to BCRA. The average interest rate for fixed-term deposits of more than Ps.1,000,000 with maturities between 30 and 35 days paid by private banks in Argentina, as published by the BCRA, averaged 20.6% during 2017, 34.3% in 2018 and 48.8% in 2019. Despite improvements in stability, we cannot be certain that another banking system crisis will not occur in the future.

Financial institutions are particularly subject to significant regulation from multiple Regulatory Authorities, all of whom may, among other things, establish limits on commissions and impose sanctions on the financial

 

22


Table of Contents

institutions. The lack of a stable regulatory framework could impose significant limitations on the activities of the financial institutions and could induce uncertainty with respect to the financial system stability.

A new crisis or the consequent instability of one or more of the larger banks, public or private, could have a material adverse effect on the prospects for economic growth and political stability in Argentina, resulting in a loss of consumer confidence, lower disposable income and fewer financing alternatives for consumers. These conditions would have a material adverse effect on us by resulting in lower sales of products and the possibility of a higher level of uncollectible accounts or increase the credit risk of the counterparties regarding our investments in local financial institutions.

Exchange controls and restrictions on transfers abroad and capital inflows have limited, and could continue limiting, the availability of international credit. The continued limitation of international credit could have a material adverse impact on our financial condition, results of operations and cash flows.

Current investigations with respect to the involvement of politicians and several construction companies in the so-called Notebooks Investigation (“Escándalo de los Cuadernos”), may have a material adverse effect on construction activity and on the trading price of our ordinary shares and ADSs.

As of the date of this annual report, the Office of the Argentine Federal Prosecutor is conducting several investigations, which are ongoing, into allegations of money laundering and bribery of public officials. The largest of these investigations relates to Los Cuadernos de las Coimas, or the Notebooks Investigation. This investigation relates to notebooks kept by a driver who worked for public officials during the Kirchner Administration. The notebooks allegedly document a widespread corruption scheme involving illegal cash payments by businessmen to government officials in order to win government contracts.

As a result of these investigations, several businessmen (including construction company executives) and former public officials have been detained and prosecuted, including the former president of Argentina (and current vice president), Mrs. Cristina Fernández de Kirchner, who was prosecuted for illicit association.

On September 2019, judge Bonadío, who had been in charge of the Notebook Investigation, decided that a part of the case shall move on to an oral trial, including more than 50 defendants, former public officers and company’s officers, and another part would continue under investigation. As judge Bonadío passed away early this year, the criminal investigation will be now in charge of judge Marcelo Martínez De Giorgi. The part of the case that was sent to trial will be in charge of the Federal Oral Court no. 7.

Considering the change of government, the measures to be taken in corruption enforcement are unclear and we are not able to foresee if these changes would affect ongoing investigations such as the Notebooks Investigation. Moreover, the Notebooks Investigation and other subsequent investigations may affect: (i) the access of construction companies to local and international financing; and (ii) awards of public works contracts to several construction companies. We cannot predict what impact these investigations might have or what other measures may be adopted by the courts, the current administration or any future administration, each of which could adversely affect our business, financial condition and the results of our operations.

The measures taken or to be implemented by the Argentine government in response to the COVID-19 pandemic have had and will likely continue to have an adverse effect on our business and operations.

On March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. This pandemic, as well as the reality or fear of any other adverse public health developments, is having and will likely continue to have a negative and material effect on, among other things, our manufacturing and supply chain operations, including due to the reduction or closure of our production units and the interruption of the supply of raw materials. The local, national and international response to the pandemic continues to rapidly evolve. Responses have included voluntary and, in some cases, mandatory quarantines as well as shutdowns and other restrictions on travel and commercial, social and other activities. These and other responses have disrupted our transportation and logistics services. In the event the number of infected patients increases, or any sort of quarantine or shutdown prevails in the markets in which we operate, our financial condition and results of operations will be affected.

 

23


Table of Contents

The Argentine government has taken several measures to address the COVID-19 pandemic outbreak. On March 18, 2020, through Decree No. 287/2020 (“Decree 287”) and Administrative Decision No. 409/2020, the Executive Branch introduced amendments to Decree No. 260/2020 (“Decree 260”), which extended the public health emergency established by Law No. 27,541, following the pandemic declared by the World Health Organization in relation to the COVID-19 and its increasing spread in Argentina. Decree 287 authorized the direct contracting of goods, services and equipment necessary to attend to the public health emergency for jurisdictions and entities that comprise the Argentine Public Sector pursuant article 8, paragraphs a) and b) of Law No. 24,156. During the term of the public health emergency, such entities and jurisdictions would not be subject to the Federal Public Administration Procurement Framework approved by Decree No. 1,023/2001 (“Decree 1023”) or other specific procurement regimes, which provides public bidding as a rule. This measure reinforced and expanded the powers conferred by the Solidarity Law and the original text of Decree 260 to the Federal Ministry of Health, with the same scope and effects, to proceed with the direct contracting of goods, services or equipment necessary to deal with the public health emergency.

Subsequently, on March 19, 2020, through Disposition No. 48/2020, a complementary procedure was approved to speed up the practical implementation of the Emergency Procurement Framework and to facilitate the management of all stakeholders involved in such procedure.

On March 20, 2020, the Decree No. 297/2020 (“Decree 297”) was published in the Official Gazette by which the President of the Republic of Argentina implemented a social, preventive and mandatory isolation regime in Argentina, from March 20, 2020 until March 31, 2020, prohibiting the circulation of people on routes, roads and public spaces (the “Mandatory Isolation Regime”). By means of Decree No. 325/2020, such Mandatory Isolation Regime was extended until April 12, 2020. Later on, by means of Decree No. 355/2020 the Mandatory Isolation Regime was extended until April 26, 2020.

Pursuant to Decree 297, individuals must remain in their habitual residence or in the residence where they were at 00:00 hours on March 20, 2020. They must refrain from going to their workplaces and may not travel along routes, roads or public spaces, all with the aim of preventing the circulation and spread of the COVID-19 virus and the consequent effect on public health and other derived subjective rights, such as the life and physical integrity of persons. Those who are complying with the isolation ordered by the Decree 297 may only make minimal and indispensable displacements to stock up on cleaning supplies, medicines and food. During the period of “social, preventive and mandatory isolation”, no cultural, recreational, sports, religious or any other type of event involving the participation of people may be held. The opening of business premises, shopping centers, wholesale and retail establishments, and any other place requiring the presence of persons is also suspended.

The violation of the Mandatory Isolation Regime, or of any other regulations provided in order to maintain the framework of the health emergency, the offending conduct shall be immediately ceased and action shall be taken by the competent authority, within the framework of Sections 205, 239 and concordant of the Argentine Criminal Code, for the possible commission of crimes against public health, disobedience and/or resistance to authority.

According to Section 6 of Decree 297 businesses and individuals within the activities and services declared essential in the emergency are exempt from compliance with the Mandatory Isolation Regime if their circulation on routes, roads and public spaces is restricted to the compliance with those essential activities and services. The Chief of Cabinet of Ministers may extend or reduce the exceptions provided. The construction of public works, the transportation of goods, and urban hazardous, dangerous and pathogenic waste treatment activities were included as essential services in section 6 of Decree 297, therefore a marginal operational activity in some of our cement facilities, in Ferrosur Roca and in Recycomb remained active in order to supply this potential demand.

Pursuant to Decree 297, employers must guarantee the hygiene and safety conditions established by the Ministry of Health to preserve the health of their employees. Furthermore, during the Mandatory Isolation Regime all employees in the private sector shall be entitled to the full enjoyment of their normal income, under the terms to be established by the regulations of the Ministry of Labor, Employment and Social Security.

Furthermore, by means of Decree No. 329, published in the Official Gazette on March 31, 2020, the National Executive Branch prohibited for a period of 60 days from the date of its publication: (i) employment terminations without cause; (ii) employment terminations and/or suspensions for lack of workload; (iii) employment terminations and/or suspensions due to reduced workload; and/or (iv) employment terminations and/or suspensions for force majeure. Suspensions pursuant to Section 223 bis of the Employment Contract Law are exempt from this prohibition.

On April 3, 2020, Administrative Decision No. 450/2020 (the “Decision”) was published in the Official Gazette, expanding the list of activities and services declared essential during the health emergency, including the sale

 

24


Table of Contents

of building supplies and materials provided by building materials depots, and activities related to production, distribution and commercialization of forestry and mining.

On April 6, 2020, Resolution No. 135/2020 of the Ministry of Labor of the Province of Buenos Aires (the “Resolution”) was published in the Official Gazette of said Province, which establishes that employers must prepare and implement, within two working days, a Protocol on Health and Safety in the Workplace within the framework of the health emergency. The Resolution states that the Protocol must comply with the provisions in force and with the special needs of the activity developed by the company and/or the tasks performed by the workers in each of the employer’s premises and/or workplaces, such as, (a) social distancing, (b) frequent hand washing with soap and water, (c) provision of hand sanitizer when handling things because of or in the occasion of work, (d) ventilation of the workplace and/or the disinfection of frequently used objects and work tools, and (e) display at least one Protocol per establishment, in prominent places that allow easy viewing by all workers. The Protocol must be communicated within a 24-hour term to the Joint Health and Safety Committee at Work, or to the trade union representing the workers in the establishment. The penalty for non-compliance is up to 2,000% of the minimum wage for each affected employee may be imposed on employers. Additionally, inspectors may adopt measures of immediate application in the event of serious and/or imminent danger to the health or safety of the worker, including the suspension of work.

Moreover, on April 11, 2020, Decree No. 355/2020 and decision 490/2020 of the Chief of Cabinet of Ministers included the following activities and services as essential and therefore allowed under the current lockdown: (i) auto-repair shops, tire manufacturing and auto parts manufacturers, (ii) short outings for people with disabilities, (iii) banks, and (iv) stationery shops (only home delivery).

Risks Relating to Our Indirect Controlling Shareholder

Adverse events affecting affiliates of our indirect controlling shareholder, Mover Participações S.A., including with respect to the involvement by a subsidiary of Mover Participações S.A. in the so-called Operation Car Wash investigation in Brazil (“Operação Lava Jato”), may have a material adverse effect on our reputation and on the trading price of our ordinary shares and ADSs.

Construções e Comércio Camargo Corrêa S.A., or CCCC, a construction and engineering subsidiary of Mover Participações S.A. (formerly named Camargo Corrêa S.A.) and certain of its former senior management and employees have been the subjects of a Brazilian Federal Police investigation referred to as Operation Car Wash, which is an investigation into widespread allegations of corruption, including the Brazilian federal government controlled national oil company Petróleo Brasileiro S.A.—Petrobras, where certain of its employees accepted bribes from a number of construction companies, including CCCC.

In connection with the Operation Car Wash investigation and comprehensive internal investigations undertaken by CCCC with the assistance of external experts, CCCC and certain of its former senior management and employees entered into leniency and plea bargain agreements with the Brazilian authorities pursuant to which they admitted to violations of Brazilian antitrust and anti-corruption laws and agreed to pay compensation totaling more than 1,400 million Brazilian Reais, which included fines and other indemnification, and committed to continue to cooperate with Brazilian authorities. In addition, CCCC continues to conduct internal investigations on an ongoing basis regarding its anti-corruption compliance.

The news of Operation Car Wash also had repercussions in other Latin America countries where CCCC operates besides Brazil, including Peru, Argentina and Venezuela. According to certain media reports, government investigations are underway in those countries for alleged acts of corruption involving Brazilian construction companies. CCCC’s management has conducted internal investigations with the help of external experts and to-date has not identified evidence of any wrongdoing performed by CCCC in these countries.

Any additional violations of anti-corruption and/or antitrust laws involving CCCC may result in additional fines and/or indemnification obligations. In addition, any additional adverse events or developments could have a material adverse impact on CCCC and the Mover investment portfolio, which may subject us to reputational damage and could materially adversely affect the trading price of our ordinary shares and ADSs. Moreover, although we have been informed by Mover Participações and its counsels that CCCC should be solely liable for any violations by CCCC

 

25


Table of Contents

of antitrust and/or anti-corruption laws, no assurances can be given that affiliates of CCCC will not also be found to be liable for any such violations of law.

Risks Relating to Our Business and Industry

The cyclical nature of the cement industry may lead to decreases in our revenues and profit margin.

The cement industry is cyclical and sensitive to changes in supply and demand that are, in turn, affected by political and economic conditions in Argentina, Paraguay and elsewhere. This cyclicality may decrease our profit margin. In particular:

 

   

downturns in general business and economic activity may cause demand for our products to decline;

 

   

when demand falls, we may be under competitive pressure to lower our prices; and

 

   

if we decide to expand our plants or construct new plants, we may do so based on an estimate of future demand that may never materialize or may materialize at levels lower than we predicted.

The prices we are able to obtain for cement depend in large part on prevailing market prices. Cement is subject to price fluctuations resulting from production capacity, inventories, the availability of substitutes and other factors relating to the market such as the level of activity in residential construction markets, and, in some cases, government intervention. If the price of cement were to decline significantly from current levels, it could have a material adverse effect on us and our profit margin.

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 Argentina is competitive and is currently served by four principal groups which together supply substantially all of the cement consumed in the country. In the cement industry, the location of a production plant tends to limit the market that a plant can serve because transportation costs are high, reducing profit margins. Historically, we have been the clear leader in Argentina and the only player with a relevant presence across all regions in the country. However, competition could intensify if other players decide to try to enter our market.

We may face increased competition if the other Argentine cement manufacturers, despite incremental freight costs, decide to increase their existing capabilities (whether greenfield or brownfield) in the manufacturing and/or distribution ends of the cement market. Certain of our local competitors are executing investments to expand their production capacity levels in Argentina. According to available public information, Holcim Argentina S.A. is expanding the “Malagueño” plant, located in the province of Cordoba, by 0.73 million tons. In the case of Avellaneda S.A., a similar expansion capacity of 0.7 million tons is underway in the “El Gigante” plant in the province of San Luis.

We also face the possibility of competition in Argentina from the entry into our market of imported clinker, cement or other materials (such as slag) 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 face competition in our cement business in Paraguay by Industria Nacional de Cementos, or INC, a Paraguayan state-owned company, which is the largest producer and supplier and the historical market leader in the cement business in Paraguay, with a historical market share of around 47%. We are the second largest producer of cement in Paraguay with a market share of approximately 44%. We may also face additional competition in Paraguay either from imports or from incremental local production capacity.

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.

 

26


Table of Contents

Demand for our cement products is highly related to residential and commercial construction in Argentina and Paraguay and is dependent upon public infrastructure developments, which, in turn, is affected by economic conditions in those countries.

Cement consumption is highly correlated to construction levels. Demand for our cement products depends, in large part, on residential and commercial construction and infrastructure developments. Residential and commercial construction, in turn, is highly correlated to prevailing economic conditions in the country. An eventual decline in economic conditions would reduce household disposable income, cause a reduction in residential construction and potentially delay infrastructure projects, leading to a decrease in demand for cement. As a result, a deterioration in the economic conditions would have a material adverse effect on our financial performance. We cannot assure you that growth in Argentina’s GDP will rebound, or growth in Argentina´s and Paraguay’s GDP, or the contribution to GDP growth attributable to the construction and infrastructure sectors, will continue at the recent pace or at all.

A reduction in private or public construction projects in Argentina and/or Paraguay could have an adverse effect on our business, financial condition and results of operations.

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.

We cannot assure you that the Argentine and/or Paraguayan governments will execute the infrastructure plans as communicated. A reduction in public infrastructure spending in the markets in which we operate or delay in the execution of these projects could have an adverse effect on the general growth of the economy and, therefore, could adversely affect our business, financial condition and results of operations.

Volatility and uncertainty in fuel prices and availability may affect our operating costs and competitive position, which could materially and adversely affect our results of operations, cash flows and financial condition.

All of the locomotives we operate are diesel-powered, and our fuel expenses are significant. If increases in fuel prices cannot be passed on to our customers through our tariffs, our operating margins could be materially and adversely affected.

Fuel prices have historically been volatile and may continue to be volatile in the future. Fuel prices are subject to a variety of factors that are beyond our control, including, but not limited to, consumer demand for, and the supply of, oil, processing, gathering and transportation availability, price and availability of alternative fuel sources, weather conditions, natural disasters and political conditions.

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

We use certain raw materials in the production of cement, such as gypsum, slag, iron ore, steel slabs, clay, sand and pozzolana that we obtain from third parties. In 2019, our cost of raw materials supplied by third parties as a percentage of our total cost of sales was 9.9% and 10.4% in 2018 and 2017, respectively. Should existing suppliers cease operations or reduce or eliminate production of these by-products, sourcing costs for these materials could increase significantly or require us to find alternative sources for these materials, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

Energy accounts for a significant portion of our total cost of sales, so higher energy prices or governmental regulations that restrict energy available for our operation could materially adversely affect our operations and financial condition.

We consume substantial amounts of energy in our cement production processes and currently rely on third-party suppliers for a significant portion of our total energy needs. During the year ended December 31, 2019, in Argentina, thermal energy cost and electricity cost represented approximately 15.7% and 10.0% of our total cost of sales, respectively, and in 2018 and 2017, thermal energy cost and electricity cost represented approximately 15.9% and 10.2% and 13.3% and 8.4% of our total cost of sales, respectively. Our results of operations may be adversely affected by higher costs of electricity or unavailability or shortages of electricity, or an interruption in energy supplies.

 

27


Table of Contents

Electricity shortages have occurred in Argentina and Paraguay in the past and could occur again in the future, and there can be no assurance that power generation capacity will grow sufficiently to meet our demand. In recent years, the condition of the Argentine electricity market has provided little incentive to generators to further invest in increasing their generation capacity, which would require material long-term financial commitments. As a result, Argentine electricity generators are currently operating at near full capacity and could be required to ration supply in order to meet a national energy demand that exceeds the current generation capacity.

In addition, the 2001 economic crisis and the resulting emergency measures had a material adverse effect on other energy sectors, including oil and gas companies, which led to a significant reduction in natural gas supplies to generation companies that use this commodity in their generation activities. In an attempt to address this situation, in January 2016, the Argentine Government unified and increased wholesale energy prices for all consumption in Argentina. As a result of this and other measures implemented by the Argentine government, investments have been made in conventional and renewable energy, increasing the installed capacity almost 3500 MW in the last two years. This increase in capacity has occurred both in thermal and renewable energy (wind and solar), the latter being enhanced by the renewable energy tenders, reaching 6% of the Argentine generation matrix in 2019, with a peak of 8.17% in December 2019.

On December 21, 2019, the National Congress approved the Social Solidarity and Productive Reactivation Law (Ley de Solidaridad Social y Reactivación Productiva). This law grants powers to the national government to intervene the Electricity Regulating Entity (ENRE) and the National Gas Regulatory Entity (ENARGAS). Moreover, the national government has the power to maintain electricity and natural gas tariffs that are under federal jurisdiction and to initiate a comprehensive tariff revision process or to initiate a review of an extraordinary nature, aiming at a reduction of the real tariff load on households, businesses and industries by 2020. Finally, in March 2020, by means of an executive decree, the national government declared the government intervention of ENRE and ENERGAS.

Electricity generators may still not be able to guarantee the supply of electricity to distribution companies, which, in turn, could prevent these companies from experiencing continued growth in their businesses and could lead to failures to provide electricity to customers; and we may not have access to the gas necessary to maintain our cement production processes. Shortages and government efforts to respond to or prevent shortages may materially adversely impact the cost and supply of energy for our operations, which could materially adversely affect our operations and financial condition.

Public health threats or outbreaks of communicable diseases, including the COVID-19, have had and will likely continue to have an adverse effect on our operations and financial results

We may face risks related to public health threats or outbreaks of communicable diseases. The outbreak of communicable diseases could result in a widespread health crisis that could adversely affect the global economy and our ability and our business partners’ ability to conduct business in Argentina and Paraguay for an indefinite period of time.

Since December 2019, a novel strain of coronavirus has spread throughout the world. On March 3, 2020, COVID-19 was categorized as a pandemic by the World Health Organization. The COVID-19 pandemic has resulted in numerous deaths and the imposition of local, municipal and national governmental “shelter-in-place” and other quarantine measures, border closures and other travel restrictions, causing unprecedented commercial disruption in a number of jurisdictions, including Argentina and Paraguay. This outbreak has resulted in a global economic slowdown and a temporary shutdown of production and supply chains and disrupt international trade, all of which has negatively impacted our industry and our business. In addition, the COVID-19 pandemic poses risks that our employees, contractors, suppliers, customers and other business partners may be prevented from conducting business activities for an indefinite period of time, including shutdowns that have been requested or mandated by governmental authorities, which have had and will likely continue to have a material adverse effect on our results of operations, financial condition and liquidity.

Several measures have been undertaken by the Argentine government and other governments around the globe, including the use of quarantine, declaring state of national emergency, screening at airports and other transport hubs, travel restrictions, suspension of visas, nation-wide lockdowns, closing of public and private institutions,

 

28


Table of Contents

suspension of sport events, restrictions to museums and tourist attractions and extension of holidays, among many others. However, the virus continues to spread globally and, as of the date of this Annual Report, has affected virtually every country and territory around the world, including Argentina and Paraguay. To date, the outbreak of the COVID-19 has caused significant social and market disruption. For example, the Dow Jones declined by about 17% between February 20 and April 27, 2020. The long-term effects to the global and the Argentine economy and to us of epidemics and other public health crises, such as the on-going COVID-19 pandemic, are difficult to assess or predict, and may include a further decline in the market prices of our ordinary shares and ADSs, risks to employee health and safety, risks to our production process and operations and reduced sales in geographic locations impacted.

These and other responses could impact the ability to market our products, the availability of those who make the decision to purchase our products and the ultimate demand for our products. In the event the number of infected patients increases in the markets in which we operate, it is possible that these disruptions would affect the economy and the financial markets, consequently affecting our financial condition and results of operations. On a business level, this could mean that our or other companies’ operations may be suspended.

In response to the outbreak and business disruption, first and foremost, we have prioritized the health and safety of our employees and we have developed and implemented a plan covering several preventive measures required to minimize the effects of the pandemic. The main items of said plan are listed below:

 

   

Creation of an executive committee ad-hoc to address the challenges of COVID-19 and to manage and deploy our actions in response to the COVID-19 pandemic, which is closely monitoring the outbreak and ensuring that the company complies with guidance from the government.

 

   

Suspension or postponement of national and international business trips; and

 

   

Definition of staggered home office rotation for all employees as of March 17, 2020. The measure aims to safeguard our employees, reducing the number of people in the same workspace and the exposure to public spaces, such as buses, subways and elevators, to mitigate the risks of virus transmission.

In compliance with the Decree No. 297/2020 issued by the Argentine government on March 19, 2020, which provided for social, preventive and mandatory isolation, in the context of the COVID-19 pandemic, we undertook the following measures: (i) suspension of production and dispatch of cement, concrete and aggregates until the lockdown ends, (ii) temporary suspension of the construction of the second line of L’Amalí plant in Olavarría, Province of Buenos Aires, Argentina, (iii) home-office for all of our administrative staff

According to Section 6 of Decree 297 businesses and individuals within the activities and services declared essential in the emergency are exempt from compliance with the Mandatory Isolation Regime if their circulation on routes, roads, and public spaces is restricted to the compliance with those essential activities and services. The construction of public works, the transportation of goods, and urban hazardous, dangerous and pathogenic waste treatment activities were included as essential services in section 6 of Decree 297, therefore a marginal operational activity in some of our cement facilities, in Ferrosur Roca and in Recycomb remained active in order to supply this potential demand.

On April 3, 2020, Administrative Decision No. 450/2020 was published, expanding the list of activities and services declared essential in the emergency, including the sale of building supplies and materials provided by building materials depots, and activities related to production, distribution and commercialization of forestry and mining. However, at the time of this annual report the speed and extent of the recovery in cement demand in the markets where we are present is still unclear.

This situation is already causing a decline on the demand of our products. Over time, these measures may also have a negative impact on our activities including our revenue, supply and profitability but also on the recoverability of our receivables and long-lived assets. In light of the current situation and in addition to the measures above mentioned, we have initiated proactive cost management strategies and an action plan focused on liquidity and liability management, which consists mainly of securing our working capital needs, tightening our fixed cost structure, including labor costs, and reformulating our priorities regarding maintenance capital expenditure needs.

 

29


Table of Contents

We may also be affected by a decline in the demand of our products due to significant interruptions or delays in, or the termination of, private or public construction projects, or the need to further implement additional policies limiting our production or limiting the efficiency and effectiveness of our operations, including home office policies for a prolonged period of time. Furthermore, it is not possible to measure impacts on the health of our employees, even if the appropriate measures have been taken. It is unclear whether these challenges and uncertainties will be contained or resolved, and what effects they may have on the global political and economic conditions in the long term. Additionally, we cannot predict the duration of the pandemic, how the disease will evolve (and potentially, spread) in Argentina and Paraguay, or anticipate any additional protective measures or restrictions the Argentine government may impose. Given the uncertainty around the extent and timing of the potential future spread or mitigation and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact to our future results of operations, cash flows or financial condition. However, COVID-19 virus is having and will likely continue to have, for so long as the health crisis and the virus impact continue, a negative impact on our activities, the demand of our products and our results of operations, financial position and cash flows.

The deterioration of Argentine and global economic conditions could, among other things:

 

   

further negatively impact demand for cement, concrete and aggregates, or further lower market prices for our products, which could result in a continued reduction of our sales, operating income and cash flows;

 

   

make it more difficult or costly for us to obtain financing for our operations or investments or to refinance our debt in the future;

 

   

cause us to experience an increase in costs as a result of our emergency measures, delayed payments from our customers and uncollectable accounts;

 

   

impact our liquidity position and cost of and ability to access funds from financial institutions and capital markets;

 

   

cause delays and disruptions in the supply chain resulting in disruptions in the commercial operation dates of certain construction projects;

 

   

cause delays and disruptions in the construction of new cement facilities and the expansion of our existing facilities;

 

   

impair the financial condition of some of our customers, suppliers or counterparties, thereby increasing customer bad debts or nonperformance by suppliers or counterparties;

 

   

decrease the value of certain of our investments; and

 

   

cause other unpredictable events.

At the time of this annual report there is uncertainty around the duration of these disruptions, the possibility of any government intervention or other measures, or the possibility of other economic effects on the stock market, foreign exchange rates and otherwise. Any such negative impact could result in a material adverse effect on our business, liquidity, financial conditions and results of operations as well as our ability to achieve our previously disclosed expectations for the year of 2020. The extent to which COVID-19 could impact our business depends on future developments, which are highly uncertain and cannot be predicted and are outside of our control, including new information which may quickly emerge concerning the severity of the virus, the scope of the outbreak and the actions to contain the virus or treat its impact, among other developments.

Paraguay

On March 9, 2020, the national government took measures to mitigate the spread of the coronavirus (COVID-19) by means of Decree No. 3442, ordering all the institutions of the executive branch, the Armed Forces of the Nation, the National Police and other dependencies of the Central Administration, to collaborate with the Ministry of Public Health and Social Welfare, in order to put into practice the 2020 National Plan for Response to Respiratory Viruses.

The Ministry of Public Health and Social Welfare, in accordance with the Decree No. 3,442, which provides for the implementation of preventive actions against the risk of expansion of the COVID-19 into the national territory, has established sanitary measures to mitigate the spread of COVID-19, ordering the suspension of all kinds of public

 

30


Table of Contents

activities indoors and orders the implementation of hygiene, safety and sanitation measures to mitigate the circulation of the virus. These measures were initially ordered for a term of 15 days.

In order to alleviate the economic effects that the implementation of public and private preventive actions in view of the risk of expansion of COVID-19 could cause, different entities have issued extraordinary and transitory regulations to promote the economy, credit and, in general, consumption.

On March 26, 2020, Law No. 6524 was issued declaring a state of emergency in Paraguay and establishing measures with impact in various areas (the State of Emergency Law), labor and social security, tax, private contracts, and the financial system. On April 9, 2020, by Decree No. 3525, it was ordered the extension of general preventive isolation from April 13 to April 19, 2020. Exceptions were established to certain activities and services, including people affected by public works and their logistics chain, preserving social distancing.

In compliance with the aforementioned legal provisions, we have developed and implemented a plan that covers various preventive measures necessary to minimize the effects of the pandemic in our operations in Paraguay. Our industrial operation has remained active, although we have reduced maintenance tasks that are not critical to the industrial equipment.

We may be materially adversely affected if our transportation, storage and distribution operations are interrupted or are more costly than anticipated.

Our operations are dependent upon the uninterrupted operation of transportation, storage and distribution of our cement products. Transportation, storage or distribution of our cement products could be partially or completely shut down, temporarily or permanently, as the result of any number of circumstances that are not within our control, such as:

 

   

disasters or catastrophic events;

 

   

extreme weather conditions;

 

   

hostilities or political uncertainty;

 

   

strikes or other labor difficulties;

 

   

acts of terrorism;

 

   

widespread illnesses or epidemics, including the COVID-19 pandemic; and

 

   

other disruptions in means of transportation.

In addition, we rely on third-party services providers for the transportation of our products to our customers. Our ability to service our customers at reasonable costs depends, in many cases, upon our ability to negotiate reasonable terms with carriers, including trucking companies. To the extent that third-party carriers were to increase their rates, we may be forced to pay these higher rates before we are able to pass such increases onto our customers, if at all.

Any significant interruption at these facilities or an inability to transport our products to or from these facilities or to or from our customers for any reason would materially adversely affect us.

Our business strategies require substantial capital and long-term investments, which we may be unable to fund competitively.

Our business strategies to continue to expand our cement production capacity and distribution network will require substantial capital investments, which we may finance through additional debt and/or equity financing. However, adequate financing may not be available or, if available, may not be available on satisfactory terms, including as a result of adverse macroeconomic conditions. We may be unable to obtain sufficient additional capital in the future to fund our capital requirements and our business strategy at acceptable costs. If we are unable to access additional capital on terms that are acceptable to us, we may not be able to fully implement our business strategy,

 

31


Table of Contents

which may limit the future growth and development of our business. If our need for capital were to arise due to operating losses, these losses may make it more difficult for us to raise additional capital to fund our expansion projects.

The implementation of our growth strategies depends on certain factors that are beyond our control, including changes in the conditions of the markets in which we operate, actions taken by our competitors and laws and regulations in force in Argentina and Paraguay. Our failure to successfully implement any part of our strategy may have a material adverse impact on us.

Management’s plans to obtain sufficient funds to settle current liabilities may not be accomplished and hence we may continue to have negative working capital in the near future.

Our board of directors has the ultimate responsibility for liquidity risk management and has established an appropriate framework allowing our management to handle financing requirements for the short-, medium- and long-term.

Weaker economic conditions could adversely affect our business, results of operations and financial condition. In addition, if we are unable to access the capital markets to finance our operations in the future, this could adversely affect our ability to obtain additional capital to grow our business.

Delays in the construction of new cement facilities and the expansion of our existing facilities may materially adversely affect our operating results.

We may construct new cement production facilities or expand existing ones. The construction or expansion of a cement production facility involves various risks. These risks include engineering, construction, regulatory and other significant challenges that may delay or prevent the successful operation of a project or significantly increase its cost. Our ability to successfully complete any construction or expansion project on schedule also may be subject to financing and other risks.

The import of the capital goods and machinery to expand our production capacity are exempted from import duties under the Mining Investment Regime pursuant to Law No. 24,196 and the Large Investment Projects Regime set forth by Resolution No. 256/2000 of the Ministry of Economy. The loss of those benefits could significantly increase the project costs.

Our financial condition and results of operations may be adversely affected if:

 

   

we are not able to complete our construction or expansion projects on time or within budget;

 

   

our new or expanded facilities do not operate at their designed capacity or cost more to construct, expand or operate than we anticipated; or

 

   

we are unable to sell our additional production at attractive prices.

As of the date of this annual report, and in compliance with Decree No. 297/2020 issued by the Argentine Government, as amended and extended from time to time, which provides for social, preventive and mandatory isolation, we have temporarily suspended the construction project of the second line of cement production in our L´Amalí plant. Once the current restrictions are lifted, and the necessary conditions to resume the execution of the project are in place, we expect to set a new timetable to complete the expansion project. See “-The measures taken or to be implemented by the Argentine government in response to the COVID-19 pandemic may cause adverse effect on our business and operations” and “-Public health threats or outbreaks of communicable diseases, including the COVID-19, have had and will likely continue to have an adverse effect on our operations and financial results”.

 

32


Table of Contents

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 including by the Argentine Antitrust Commission, or the CNDC (see “Item 8. Financial Information—Legal Proceedings—Antitrust Proceedings”). 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.

In 2018, two investors who purportedly purchased our ADSs pursuant and/or traceable to our initial public offering, or IPO, commenced two different putative class actions before US courts on behalf of all persons and/or entities who purchased or otherwise acquired our ADSs pursuant and/or traceable to our prospectus and registration statement issued in connection with the IPO and, in the case of the Federal Class Action (defined below), on behalf of all persons and/or entities who purchased our ADSs on the open market between November 2, 2017 and May 23, 2018, inclusive. Loma Negra, its directors and some members of its senior management at the time of the IPO and Loma Negra Holding GmbH (now Caue Austria Holding GmbH) are named as defendants in both actions. A lawsuit does not become a class action unless and until the court enters an order certifying that the case satisfies certain criteria. As of the date of this annual report none of the complaints have been certified as class actions. See “Item 8.A. Consolidated Statements and Other Financial Information—Legal proceedings—Securities Complaints Commenced Against Loma Negra under US Jurisdiction”. On April 27, 2020, the United States District Court for the Southern District of New York issued an opinion granting defendants’ motion to dismiss in respect of the Federal Class Action. However, we cannot assure you that our position will prevail. If our position does not prevail, the case may have substantial adverse effects on our business, financial condition and results of operations.

We are subject to anti-corruption, anti-bribery, anti-money laundering and antitrust laws and regulations in Argentina and the United States and our internal policies and procedures might not be sufficient to ensure compliance with such laws and regulations.

The United States Foreign Corrupt Practices Act (FCPA), the Argentine Anti-Money Laundering Law (Ley de Prevención del Lavado de Activos), the Argentine Corporate Criminal Liability Law (Ley de Responsabilidad Penal Empresaria) and other applicable anti-corruption laws prohibit companies and their intermediaries from offering or making improper payments (or giving anything of value) to government officials and/or persons in the private sector for the purpose of influencing them or obtaining or retaining business and require companies to keep accurate books and records and maintain appropriate internal controls. In particular, the Argentine Corporate Criminal Liability Law provides for the criminal liability of corporate entities for criminal offences against public administration and transnational bribery committed by, among others, its attorneys-in-fact, directors, managers, employees, or representatives. In this sense, a company may be held liable and subject to fines and/or suspension of its activities if such offences were committed, directly or indirectly, in its name, behalf or interest, the company obtained or may have obtained a benefit therefrom, and the offence resulted from a company’s ineffective control.

Although we have a Compliance Program with internal policies and procedures designed to ensure compliance with applicable laws and regulations, potential violations of anti-corruption laws could be identified on occasion as part of our compliance and internal control processes. In case such issues arise, we plan to attempt to act promptly to learn relevant facts and take any appropriate remedial action to address the risk. Given the size of our operations and the complexity of the production chain, there can be no assurance that our internal policies and procedures will be sufficient to prevent or detect all inappropriate practices, fraud or violations of law by our employees, directors, officers, partners, agents and service providers or that such persons will not take actions in violation of our policies and procedures (or otherwise in violation of the relevant anti-corruption laws and sanctions regulations) for which we or they may be ultimately held responsible.

If we or individuals or entities that are or were related to us are found to be liable for violations of applicable anti-corruption laws (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others), we

 

33


Table of Contents

or other individuals or entities could face civil and criminal penalties or other sanctions, which in turn could have a material adverse impact on our reputation and business. Further, litigations or investigations relating to alleged or suspected violations of anti-corruption laws and sanctions regulations could be costly.

Environmental, health and safety regulation may adversely affect our business.

The pollutants generated by cement producers are mainly dust and gas emissions from the use of fossil fuels. Our operations often involve the use, handling, disposal and discharge of hazardous materials into the environment and the use of natural resources. Most of our operations are subject to extensive environmental, health and safety regulations.

In Argentina, regulations regarding gas emissions and air quality are enacted at both the national and provincial levels. We are required to obtain permits and licenses from governmental authorities for many aspects of our operations, and we may be required to purchase and install expensive pollution control equipment or to make operational changes to limit the actual or potential environmental, health and safety impacts of our operations to the environment and our employees. The Province of Buenos Aires, where our principal plants are located, requires that all production facilities have an environmental compliance certificate issued by the Provincial Organism for Sustainable Development, and similar certifications are required by relevant municipal authorities in the other provinces in which we operate. As part of these requirements, local environmental authorities ordinarily make information requests to each of our plants relating to their compliance with environmental laws and regulations and, in the ordinary course of our business, we collaborate with such national and provincial environmental authorities in the conduct of their regulatory activities.

If we were to violate these laws and regulations or the conditions of our permits and licenses, we may be subject to sanctions that may result in substantial fines or criminal sanctions, revocations of operating permits and licenses and possible closings of our facilities.

We could be subject to administrative and criminal sanctions, including warnings, fines and closure orders for our failure to comply with these environmental regulations, which, among other things, limit or prohibit emissions or spills of toxic substances that we emit in connection with our operations. We also may be required to modify or retrofit our facilities at substantial cost in order to comply with waste disposal and emissions regulations. We are subject to inspection by environmental agencies in the various jurisdictions that we operate, which may impose fines, restrictions on our operations or other sanctions. In addition, we are subject to environmental laws that may require us to incur significant costs to mitigate any damage that a project may cause to the environment, which costs may adversely impact the viability or projected profitability of the projects that we intend to implement.

In addition, as a result of possible changes to environmental regulations, the amount and timing of our future environmental compliance expenditures may vary substantially from those we currently anticipate. Certain environmental laws impose liability on us for any and all consequences arising out of exposure to hazardous substances or other environmental damage. We cannot assure you that the costs we incur to comply with existing current and future environmental, health and safety laws, and liabilities that we may incur from past or future releases of, or exposure to, hazardous substances will not materially and adversely affect us.

Compliance with mining regulations or the revocation of our authorizations, licenses and concessions could adversely affect our operations and profitability.

We engage in certain mining operations as part of our cement production processes. These activities are dependent on authorizations and concessions granted by the Argentine and Paraguayan governmental authorities or regulatory agencies. The extraction, mining and mineral processing activities are also subject to applicable laws and regulations, which change from time to time. Although we believe that we are in substantial compliance with applicable laws relating to these activities as well as the terms of our current authorizations and concessions, the effect of any future applicable regulatory changes regarding such matters on our mining activities or mining rights cannot presently be determined. In addition, if our authorizations and licenses are revoked, we may be unable to maintain or improve our cement production levels, which could adversely impact our results of operation and financial condition.

 

34


Table of Contents

Governmental agencies or other authorities may adopt new laws or regulations that are more stringent than existing laws or regulations or may seek to more stringently interpret or enforce existing laws and regulations that would require us to expend additional funds on environmental or other regulatory compliance or delay or limit our ability to operate as we intend. In addition, these actions could increase the costs associated with the renewal of our existing licenses and permits or the cost of seeking new licenses or permits. We cannot assure you that these additional costs will not be material or that our existing permits will be renewed.

Our railway concession operates in a regulated environment, and measures taken by public authorities may impact our activities.

Our transportation operation take place in a regulated environment. The Argentine federal government has the legal authority to regulate rail activities in the country (by means of the enactment of applicable laws and regulations). Therefore, actions taken by the public administration in general may affect the services rendered by us.

Law No. 27,132 in effect since May 20, 2015, provides for important changes in the regulatory framework of the railway system and empowered Argentina’s federal government to renegotiate and, if necessary, terminate concessions currently in force.

We cannot be certain of the effects on the terms of our concession or any changes to the current regulatory framework that the competent authorities of the federal government may issue and whether these changes will adversely affect our results of operations.

The early termination of our railway concession or our inability to extend our concession may have a material adverse effect on our business.

Argentina’s railway concessions are subject to early termination in certain circumstances, including the competent authorities’ decision to reassume control of the service or to terminate the concession for breach of contract. Upon termination of a concession, the leased or operated assets must revert to the federal government. The amount of the compensation may not be sufficient to cover all the losses suffered by us as a result of such early termination. In addition, certain creditors may have priority with regards to such compensation. Likewise, upon termination, the competent authority may claim compensation alleging a purported breach in the concession contract.

In addition, Law No. 27,132 (passed in April in 2015), inter alia, established that the Federal Executive Branch must adopt all necessary measures to recover the administration of railways infrastructure, provide for open access for the Freight Railroad Transportation system and empowers the Ministry of Transport to terminate and to renegotiate the railways concession contracts.

The full implementation of the open access scheme entails the re-assumption by the Government of the administration of the railways infrastructure and, once in place, would be a significant change in the Argentine railway system. This regulatory change may benefit those sectors which are interested in operating railways in Argentina, as well as those that wish to transport commodities and other products through them.

On November 2018, Decree No. 1027/2018 was enacted. Decree No.1027/2018 regulates several provisions of Law No. 27,132. On the one hand, it establishes that the renegotiation processes of the current railways concession contracts may allow for an extension of their terms for up to ten years and, inter alia, regulate the investments to be made by the concessionaires. On the other hand, Decree No. 1027/2018 establishes that the open-access scheme will be fully implemented once all the current railways concession agreements have expired, including, if it were the case, the term of their extension.

Ferrosur Roca’s concession expires in 2023. The Argentine government may, upon our request at least five years prior to the expiration of the concession, choose to extend this term once for an additional 10 years (based on the fulfillment of obligations related to the concession, such as investments, maintenance and fines imposed, among others). Ferrosur Roca is obliged to invest the equivalent to 10.7% of its gross revenues every year.

On March 8, 2018, Ferrosur Roca duly filed before the Ministry of Transport a request for an extension of the term of validity of the concession for ten more years. On March 20, 2019, the Ministry responded, informing

 

35


Table of Contents

Ferrosur Roca that the Special Commission created by Decree No. 1027/2018 would be in charge of the renegotiation of the concession agreement and that such process would include analysis of the concession term extension in order to enable the implementation of the open access scheme (as explained above).

In light of the provisions of Ferrosur Roca concession contract and the applicable legislation, we cannot guarantee that the Argentine authorities will not terminate our railway concessions prior to their stated terms in the future. Any such action by the Argentine authorities could have a material adverse effect on our business, financial condition and results of operations.

Our estimates of the volume and grade of our limestone deposits could be overstated, and we may not be able to replenish our reserves.

Our limestone reserves described in this annual report constitute our estimates based on evaluation methods generally used in our industry and on assumptions as to our production. Our proven and probable reserve estimates are based on estimated recoverable tons. We did not employ independent third-parties to review reserves over the five-year period ended December 31, 2019. Our mineral reserves data are prepared by our engineers and geologists and are subject to further review by our corporate staff. There are numerous uncertainties inherent in estimating quantities of reserves and in projecting potential future rates of mineral production, including many factors beyond our control. Reserve engineering involves estimating deposits of minerals that cannot be measured precisely, and the accuracy of any reserve estimate is a function of the quality of available data, as well as engineering and geological interpretation and judgment. As a result, we cannot assure investors that our limestone reserves will be recovered or that they will be recovered at the rates we anticipate. We may be required to revise our reserve and mine life estimates based on our actual production and other factors. If our limestone reserves are lower than our estimates, this may have a material adverse effect on us, particularly if as a result we have to purchase limestone from third-party suppliers.

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

Our cement 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. Any prolonged and/or significant disruption to our production facilities, whether due to repair, maintenance or servicing, industrial accidents, unavailability of raw materials such as energy, mechanical equipment failure, human error, natural disasters or otherwise, will disrupt and adversely affect our operations.

Additionally, any major or sustained disruptions in the supply of utilities such as water or electricity or any fire, flood or other natural calamities or communal unrest or acts of terrorism or disease outbreaks may disrupt our operations or damage our production facilities or inventories and could adversely affect our business, financial condition and results of operations. Our insurance may not be sufficient to cover losses from these events, which could adversely affect our business, financial condition and results of operations.

Our rail transportation and handling of cargo also exposes us to risks of catastrophes, mechanical and electrical failures, collisions and loss of assets. Fires, explosions, fuel leaks and other flammable products as well as other environmental events, cargo loss or damage, railroad, cargo loading and unloading terminal, accidents, business interruptions due to political events as well as labor claims, strikes, adverse weather conditions and natural disasters, such as floods, may result in the loss of revenues, assumption of liabilities or cost increases. Moreover, our operations may be periodically affected by landslides and other natural disasters.

We typically shut down our facilities to undertake maintenance and repair work at scheduled intervals. Although we schedule shutdowns such that not all of our facilities are shut down at the same time, the unexpected shut down of any facility may nevertheless affect our business, financial condition and results of operations from one period to another. 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

 

36


Table of Contents

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.

Our insurance coverage may not cover all the risks to which we may be exposed.

We face the risks of loss and damage to our products, property and machinery due to fire, theft and natural disasters such as floods. Such events may cause a disruption to or cessation of our operations. Our insurance may not be sufficient to cover losses from these events, which could adversely affect our business, financial condition and results of operations. We also face risks related to cyber security threats, however, as of December 31, 2019, our insurance does not cover losses associated with cyber security risks.

Our success depends on key members of our management.

Our success depends largely on the efforts and strategic vision of our executive management team. The loss of the services of some or all of our executive management 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. For a variety of reasons, particularly with respect to the competitive environment and the availability of skilled labor, 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 capitalize on growth opportunities and, as a result, our business, financial condition and results of operations could be adversely affected.

The introduction of substitutes for cement in the markets in which we operate and the development of new construction techniques could have a material adverse effect on us.

Materials such as plastic, aluminum, ceramics, glass, wood and steel can be used in construction to substitute cement. In addition, other construction techniques, such as the use of dry wall, could decrease the demand for cement and concrete. In addition, new construction techniques and modern materials may be introduced in the future. The use of substitutes for cement could cause a significant reduction in the demand and prices for our cement products and have a material adverse effect on us.

We are subject to restrictions due to our non-controlling interests in certain of our consolidated subsidiaries.

We conduct some of our business through subsidiaries. In some cases, other shareholders hold non-controlling interests in these subsidiaries. Non-controlling shareholders’ interests may not always be aligned with our interests and, among other things, could result in our inability to implement organizational efficiencies and transfer cash and assets from one subsidiary to another in order to allocate assets most effectively.

Changes in labor laws and in case law interpretations of labor laws in Argentina that tend to favor employees could negatively affect our results of operations.

In the past, the Argentine government has introduced laws, regulations and decrees requiring private companies to maintain certain minimum wage standards and provide specific benefits to employees. The Argentine government may implement again such policies in the future. We cannot guarantee that the Argentine government will not take measures that will increase wages or require us to provide additional benefits. This would result in an increase in our costs and expenses, which could have a material adverse effect on our financial condition and results of operations.

In addition to our own employees, we require third-party contractors to perform certain activities that are part of our business. Therefore, we maintain strict control policies on the compliance of these contractors with their activities. However, due to changes in the interpretation of labor laws made by case law that tend to favor employees, our labor and social security obligations to our employees and to the employees of its third-party contractors have increased significantly. As a result, the risk of being required to pay severance to our employees and to the employees of our third-party contractors has increased. Consequently, our labor and social security costs could increase to the

 

37


Table of Contents

extent that our severance costs and labor-related liabilities are increased by future changes in the interpretation of labor laws, adversely affecting our operating results.

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 and could impose substantial demands on outage time. 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. We are constantly implementing new technologies and solutions to assist in the prevention of potential and attempted cyber-attacks, as well protective measures and contingency plans in the event of an existing attack. We analyze the risks we face on an ongoing basis and, accordingly, strengthen our information technology infrastructure, update our policies, and raise awareness among our employees, to enhance our ability to prevent and respond to such risks. Although we take actions to secure our systems and electronic information and also have disaster recovery plans in case of incidents that could cause major disruptions to our business, these measures may not be sufficient.

As of December 31, 2019, we have not detected, and our third-party service providers have not informed us of, any relevant event that has materially damaged, disrupted or resulted in an intrusion of our systems. Any significant information leakages 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 operation. As of December 31, 2019, our insurance does not cover any risk associated with any cyber security risks. In addition, any significant disruption to our systems could adversely affect our business, financial condition and results of operations.

Risks Relating to Our Ordinary Shares and the ADSs

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

Volatility in the market price of our 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 our 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. The market price of our ADSs declined by 52% and 28% in 2018 and 2019, respectively. This decrease in value has been largely attributed to Argentina´s most recent macroeconomic crisis. Other factors include:

 

   

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

 

   

increased competition in our industry;

 

   

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

 

   

general economic trends in Argentina;

 

   

departures of management and key personnel;

 

   

catastrophic events, such as earthquakes and other natural disasters;

 

   

widespread illnesses or epidemics, including the COVID-19 pandemic; and

 

38


Table of Contents
   

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

Market fluctuations, as well as general political and economic conditions in the markets in which we operate, such as recession or currency exchange rate fluctuations, may also adversely affect the market price of our ordinary shares and the ADSs. Although our ADSs listed on the New York Stock Exchange are U.S. dollar-denominated securities, they do not eliminate the currency risk associated with an investment in an Argentine company. Following periods of volatility in the market price of a company’s securities, that company may often be subject to securities class-action litigation. This kind of litigation may result in substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect on our business, results of operations and financial condition.

The relative volatility and illiquidity of the Argentine securities markets may substantially limit your ability to sell shares underlying the ADSs at the price and time you desire.

Investing in securities that trade in emerging markets, such as Argentina, often involves greater risk than investing in securities of issuers in the United States. The Argentine securities market is substantially smaller, less liquid, more concentrated and can be more volatile than major securities markets in the United States and is not as highly regulated or supervised as some of these other markets. There is also significantly greater concentration in the Argentine securities market than in major securities markets in the United States. As of December 31, 2019, the ten largest Argentine companies in terms of market capitalization represented approximately 58% of the aggregate market capitalization of the Mercado de Valores de Buenos Aires S.A., or MERVAL, the predecessor market of Bolsas y Mercados Argentinos, or BYMA, which began trading in May 2017. Accordingly, although you are entitled to withdraw the shares underlying the ADSs from the ADR facility, your ability to sell such shares at a price and time at which you wish to do so may be substantially limited. Furthermore, new capital controls imposed by the Argentine Central Bank could have the effect of further impairing the liquidity of the BYMA by making it unattractive for non-Argentines to buy shares in the secondary market in Argentina. See “Item 10.D Additional Information—Exchange Controls”.

Interpretation of Argentine tax laws may adversely affect the tax treatment of our ordinary shares and the ADSs.

Argentine income tax law provides that the income resulting from the sale, exchange or other transfer of shares and other securities is subject to tax at a rate of 15% for Argentine resident individuals or 30% (25% as from 2020) for Argentine companies. Argentine residents are exempted from such tax in case of shares issued by Argentine companies which are listed in capital markets authorized by the CNV and have authorization for public offering by the CNV as long as such transactions are carried out through stock exchanges or stock markets authorized by the CNV.

Income obtained by non-Argentine residents is subject to income tax rate of 15% of the net income or 13.5% of the gross income. In case of a sale or other transfer between two non-Argentine residents, the law provided that the buyer was in charge of the payment of the tax but did not provide any payment mechanism. On December 29, 2017 the Law No. 27,430, or the Tax Reform, established: (i) that the income tax derived from transactions occurred between September 2013 and December 29, 2017 will be borne by the buyer through international wire transfer as indicated in General AFIP Resolution No. 4227/2018; and (ii) that the income tax derived from transactions occurred from December 29, 2017 will be borne by the seller through its legal representative in Argentina, by means of the following two payment mechanisms: (a) if the seller has a legal representative in Argentina, then such representative will pay the tax through the tax authority’s webpage in the terms of General Resolution No. 3726; and (b) if the seller does not have a legal representative in Argentina, then the seller itself should pay the tax through an international wire transfer as indicated in General AFIP Resolution No. 4227/2018.

The Tax Reform also exempted non-Argentine residents from the payment of the income tax on the sales, exchanges or other transfers of shares issued by Argentine companies which are listed in capital markets authorized by the CNV and have authorization for public offering by the CNV as long as such transactions are carried out through stock exchanges or stock markets authorized by the CNV. Also, non-residents are exempt from the income tax deriving from the sale or other kind of disposition regarding ADSs which underlying security are shares issued by Argentine companies that comply with the requirements described above.

 

39


Table of Contents

The holders of our ordinary shares and the ADSs are encouraged to consult with their tax advisers as to the particular Argentine income tax consequences of owning our ordinary shares and ADSs. See “Item 8. Financial Information—Dividends and Dividend Policy” and “Item 10.E Additional Information—Taxation—Material Argentine Tax Considerations”.

Restrictions on transfers of foreign exchange and the repatriation of capital from Argentina may impair your ability to receive dividends and distributions on, and the proceeds of any sale of, the shares underlying the ADSs.

Since the beginning of December 2001, the Argentine government implemented monetary and foreign exchange control measures that included restrictions on the withdrawal of funds deposited with banks and on the transfer of funds abroad, including dividends, without prior approval by the Argentine Central Bank, some of which are still in effect. The exchange controls were reinstated by the Argentine government in September 2019.

However, starting on January 17, 2020, local companies may transfer funds abroad in order to pay annual dividends only to foreign shareholders and the depositary for the benefit of the ADS holders, in an amount that (including the amount of the payment being made at the time of the access) does not exceed 30% of the value of new capital contributions of foreign direct investments. These contributions must be made to the local company and must be transferred to Argentina and sold for Argentine Pesos through the foreign exchange market as from such date. Access to the foreign exchange market for the payment of dividends in cases not above contemplated will require prior approval of the BCRA.

Furthermore, the Argentine Central Bank has exercised in the past a de facto prior approval power for certain foreign exchange transactions otherwise authorized to be carried out under the applicable regulations, such as dividend payments or repayment of principal of intercompany loans as well as the import of goods, by means of regulating the amount of foreign currency available to financial institutions to conduct such transactions.

Payments of cash dividends and distributions, if any, will be made in pesos, although we reserve the right to pay in other currency to the extent permitted by applicable law. The ADS depositary will convert such dividends received in pesos into U.S. dollars and pay such amount to holders of ADSs, net of any dividend distribution fees, ADS depositary´s fees and expenses, currency conversion expenses and taxes or governmental charges, if any. In the event that the ADS depositary is unable to convert immediately the amount in pesos received as cash dividends into U.S. dollars, the amount of U.S. dollars payable to holders of ADSs may be adversely affected by depreciation of the peso.

Since the foreign exchange controls were reinstated, the depositary for the ADSs is prevented from converting pesos it receives in Argentina into U.S. dollars for the account of the ADS holders. Since the conversion is not practicable, the deposit agreement allows the depositary to distribute the foreign currency only to those ADS holders to whom it is practicable to do so. If the exchange rate fluctuates significantly during a time when the depositary cannot convert the foreign currency, you may lose some or all of the value of the dividend distribution.

Your voting rights with respect to the shares are limited.

Holders may exercise voting rights with respect to the shares underlying ADSs only in accordance with the provisions of the deposit agreement. There are no provisions under Argentine law or under our by-laws that limit ADS holders’ ability to exercise their voting rights through the depositary with respect to the underlying shares. However, there are practical limitations upon the ability of ADS holders to exercise their voting rights due to the additional procedural steps involved in communicating with such holders. For example, Law No. 26,831 requires us to notify our shareholders by publications in certain official and private newspapers of at least 20 and no more than 45 days in advance of any shareholders’ meeting. ADS holders will not receive any notice of a shareholders’ meeting directly from us. In accordance with the deposit agreement, we will provide the notice to the depositary, which will in turn, as soon as practicable thereafter and subject to legal limitations, provide to each ADS holder upon the terms of the deposit agreement:

 

   

the notice of such meeting;

 

40


Table of Contents
   

voting instruction forms; and

 

   

a statement as to the manner in which instructions may be given by holders (including an express indication that such instructions may be deemed given upon the terms specified below).

To exercise their voting rights, ADS holders must then provide instructions to the depositary how to vote the shares underlying ADSs. Because of the additional procedural step involving the depositary, the process for exercising voting rights will take longer for ADS holders than for holders of shares.

If we timely request the depositary to distribute voting materials to the ADS holders and the depositary does not receive timely voting instructions from an ADS holder on or before the date established by the depositary for such purpose, the depositary shall deem such ADS holder to have instructed the depositary to give a discretionary proxy to a person designated by our board of directors with respect to the deposited securities represented by the holder’s ADSs. The cutoff time for ADS holders to provide voting instructions to the depositary bank is typically up to two business days prior to the cut-off date to vote shares in Argentina so as to enable the depositary bank to tally the ADS voting instructions received from ADS holders and to provide the corresponding voting instructions at the share level in Argentina through the custodian of the shares represented by ADSs.

Except as described in this annual report, holders will not be able to exercise voting rights attaching to the ADSs.

Holders of ADSs who wish to propose matters or vote on any matters directly should cancel their ADSs and withdraw their underlying ordinary shares to attend and vote at the shareholders meetings.

If we do not file or maintain a registration statement and no exemption from the Securities Act registration is available, holders of ADSs may be unable to exercise preemptive rights with respect to our ordinary shares.

Under the Argentine General Companies Law, if we issue new shares as part of a capital increase, our shareholders will generally have the right to subscribe for a proportional number of shares to maintain their existing ownership percentage, which is known as preemptive rights. However, pursuant to the Capital Markets Law, our shareholders will not be entitled to the right to subscribe for the unsubscribed shares at the end of a preemptive rights offering, known as accretion rights. We may not be able to offer our ordinary shares to holders of ADSs residing in the U.S., or U.S. holders, pursuant to preemptive rights granted to holders of our ordinary shares in connection with any future issuance of our ordinary shares unless a registration statement under the Securities Act is effective with respect to these shares and preemptive rights, or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file or maintain a registration statement relating to any preemptive rights offerings with respect to our ordinary shares, and we cannot assure you that we will file or maintain any such registration statement. If we do not file and maintain a registration statement and there is no exemption from registration, the depositary for our ADSs, may attempt to sell the preemptive rights and provide holders of our ADSs with their pro rata share of the net proceeds from any such sale. However, these preemptive rights may expire if the depositary does not sell them on a timely basis, and holders of ADSs will not receive any benefit from such preemptive rights. Even if a registration statement were effective, we may decide to not extend any preemptive or subscription rights to U.S. Persons (as defined in Regulation S under the Securities Act) that are holders of our ordinary shares and holders of ADSs. Furthermore, the equity interest of holders of shares or ADSs located in the United States may suffer dilution of their interest in us upon future capital increases.

We are entitled to amend and supplement the deposit agreement 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 and supplement 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 amendment or supplement that imposes or increases any fees or charges (other than charges in connection with foreign exchange regulations and taxes and other governmental charges, delivery and other expenses) or that otherwise materially prejudice any substantial rights of holders of ADSs will not become effective until the expiration of 30 days after notice of such amendment or supplement has been given to holders of outstanding ADSs. Any other amendments and supplements may be effective prior to the expiration of the 30-day period.

 

41


Table of Contents

The substantial share ownership position of our controlling shareholder will limit your ability to influence corporate matters.

Our controlling shareholder beneficially owns approximately 51.04% of our outstanding ordinary shares as of the date of this annual report. As such, 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;

 

   

cause us to issue additional equity securities;

 

   

whether we limit the exercise of preemptive and accretion rights to holders of our ordinary shares in the event of a capital increase to the extent and terms permitted by the applicable law;

 

   

sales and dispositions of our assets; and

 

   

the amount of debt financing that we incur.

Furthermore, our controlling shareholder’s interests may conflict with your interests as a holder of ordinary shares or ADSs, and it may take actions that might be desirable to it but not to other shareholders and may be able to prevent other shareholders, including you, 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 you with an opportunity to dispose of or realize a premium on your investment in our ADSs. We cannot assure you that our controlling shareholder will act in a manner consistent with your interests.

Our status as a “foreign private issuer” and as a “controlled company” allows us to follow alternate standards to the corporate governance standards of the NYSE, which may limit the protections afforded to investors.

The NYSE’s rules require domestic listed companies that are not “controlled companies” to have, among other requirements, a majority of their board of directors be independent and to have independent director oversight of executive compensation, nomination of directors and corporate governance matters. As a “foreign private issuer”, we are permitted to, and we will, follow home country practice in lieu of the above requirements.

Argentine law, the law of our home country, does not require that a majority of our board consist of independent directors or the implementation of a compensation committee or nominating/corporate governance committee. In addition, under the NYSE rules, a “controlled company” in which over 50% of the voting power is held by an individual, a group or another company is also not required to have a majority of its board of directors be independent directors and to have a compensation committee or a nominating/corporate governance committee, or to have such committees be composed entirely of independent directors.

We currently follow certain Argentine practices concerning corporate governance and intend to continue to do so. As a “controlled company”, we are eligible to, and, in the event we no longer qualify as a “foreign private issuer”, we intend to, elect not to comply with certain of the NYSE corporate governance standards, including the requirement that a majority of directors on our board of directors are independent directors and the requirement to maintain a compensation and a nominating/corporate governance committee consisting entirely of independent directors. Accordingly, holders of our ADSs will not have the same protections afforded to shareholders of companies that are subject to all NYSE corporate governance requirements and our status as a “foreign private issuer” and a

 

42


Table of Contents

“controlled company” may adversely affect the trading price for our ADSs. For more information, see “Item 16G. Corporate Governance”.

We are an “emerging growth company” and we cannot be certain whether the reduced requirements applicable to emerging growth companies will make our ADSs less attractive to investors.

We are an “emerging growth company”, as defined in the JOBS Act, and we may take advantage of certain exemptions from various requirements that are applicable to other publicly-listed companies that are not “emerging growth companies”. For so long as we remain an “emerging growth company”, we will not be subject to the provision of Section 404(b) of the Sarbanes-Oxley Act that requires our independent registered public accounting firm to provide an attestation report on the effectiveness of our internal control over financial reporting. This may increase the risk that we fail to be aware of and remedy any material weaknesses or significant deficiencies in our internal control over financial reporting. We have irrevocably elected not to avail ourselves of the election to delay adopting new or revised accounting standards until such time as those standards apply to private companies.

Nevertheless, as a foreign private issuer that is an emerging growth company, we are not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act for up to five fiscal years after the date of completion of the offering on October 31, 2017. We will remain an emerging growth company until the earliest of: (a) the last day of our fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of the offering on October 31, 2017; (c) the date on which we have, during the previous three-year period, issued more than US$1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act, with at least US$700 million of equity securities held by non-affiliates. When we are no longer deemed to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act.

We cannot predict if investors will find our ADSs less attractive as a result of our reliance on exemptions under the JOBS Act. If some investors find our ADSs less attractive as a result, there may be a less active trading market for our ADSs and our ordinary share price may be more volatile.

Under Argentine corporate law, shareholder rights and obligations may be fewer or less well defined than in other jurisdictions.

Our corporate affairs are governed by our by-laws and by the Argentine corporate law, as amended, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States (such as Delaware or New York), or in other jurisdictions outside Argentina. Thus, your rights or the rights of holders of our ordinary shares or ADSs under the Argentine corporate law to protect your or their interests relative to actions by our board of directors may be fewer and less well defined under Argentine corporate law than under the laws of those other jurisdictions. Although insider trading and price manipulation are illegal under Argentine law, the Argentine securities markets are not as highly regulated or supervised as the U.S. securities markets or markets in some other jurisdictions. In addition, rules and policies against self-dealing and regarding the preservation of shareholder interests may be less well defined and enforced in Argentina than in the United States, or other jurisdictions outside Argentina, putting holders of our ordinary shares and the ADSs at a potential disadvantage.

The protections afforded to minority shareholders in Argentina are different from and more limited than those in the United States and may be more difficult to enforce.

Under Argentine law, the protections afforded to minority shareholders are different from, and much more limited than, those in the United States. For example, the legal framework with respect to shareholder disputes, such as derivative lawsuits and class actions, is less developed under Argentine law than under U.S. law as a result of Argentina’s short history with these types of claims and few successful cases. In addition, there are different procedural requirements for bringing these types of shareholder lawsuits. As a result, it may be more difficult for our minority shareholders to enforce their rights against us or our directors or controlling shareholder than it would be for shareholders of a U.S. company.

 

43


Table of Contents

Investors may not be able to effect service of process within the United States limiting their recovery of any foreign judgment.

We are a publicly held corporation (Sociedad anónima) organized under the laws of Argentina. Most of our directors and our executive officers, and a significant part of our assets are located in Argentina. As a result, it may not be possible for investors to effect service of process within the United States upon us or such persons or to enforce against us or them in United States courts judgments obtained in such courts predicated upon the civil liability provisions of the United States federal securities laws. There is doubt whether the Argentine courts will enforce, to the same extent and in as timely a manner as a U.S. or foreign court, an action predicated solely upon the civil liability provisions of the United States federal securities laws or other foreign regulations brought against such persons or against us. In addition, the enforceability in Argentine courts of judgments of U.S. or non-Argentine courts with respect to matters arising under U.S. federal securities laws or other non-Argentine regulations will be subject to compliance with certain requirements under Argentine law, including the condition that any such judgment does not violate Argentine public policy (orden público).

Our shareholders may be subject to liability for certain votes of their securities.

Our shareholders are not liable for our obligations. Instead, shareholders are generally liable only for the purchase price of the shares they subscribe. However, shareholders who have a conflict of interest with us and who do not abstain from voting may be held liable for damages to us, but only if the transaction would not have been approved without such shareholders’ votes. Furthermore, shareholders who willfully or negligently vote in favor of a resolution that is subsequently declared void by a court as contrary to Argentine General Companies Law or our bylaws may be held jointly and severally liable for damages to us or to other third parties, including other shareholders. As a result, we cannot assure you that some shareholders may not be held liable for damages or other expenses under the Argentine General Companies Law.

 

ITEM 4.

INFORMATION ON THE COMPANY

 

  A.

History and Development of the Company

Loma Negra Compañía Industrial Argentina Sociedad Anónima, is a corporation organized as a Compañía Industrial Argentina Sociedad Anónima under the laws of Argentina. Our principal executive offices is located at Boulevard Cecilia Grierson 355, 4th Floor, Zip Code C1107CPG – Ciudad Autónoma de Buenos Aires, Argentina, and the telephone number of the office is 54-11-4319-3048.

We were founded in 1926 our date of expiration is July 3, 2116 and pursuant to section 4 of our bylaws, our corporate purpose includes engaging in commercial, industrial, real estate and financial activities. We are also authorized to carry out business in the mining and construction industries, and to operate transportation and public services.

We were founded in 1926 by Mr. Alfredo Fortabat and began our cement production operations in 1929 in Olavarría, Province of Buenos Aires. In the 1950s, we expanded our production capacity at our Olavarría plant through a new kiln and, in addition, we inaugurated a new plant located in the town of Barker, Province of Buenos Aires. During the 1960s, we continued our expansion, adding to our production a plant in the Province of San Juan and in the 1970s a plant in Zapala, in the Province of Neuquén. In the 1980s, we inaugurated a new plant located in El Alto, in the Province of Catamarca.

In 1992, we acquired Cemento San Martín S.A., an Argentine company that owned a cement producing plant in Sierras Bayas. Also, during that year, we diversified our business towards activities complementary to the production of cement. In this sense, we own other complimentary businesses, including Cofesur, which controls Ferrosur Roca S.A., a company that operates the Ferrosur Roca freight railway network under a concession granted by the Argentine government. With this acquisition we optimized the distribution network of our products in the Province of Buenos Aires, connecting plants and accelerating the constant flow of material and customer service. In 1995, we founded Recycomb S.A.U., a company designed to recycle industrial waste for its later use as fuel in cement kilns. Recycomb operates through a modern facility located in Cañuelas, Province of Buenos Aires.

 

44


Table of Contents

In 1998, we acquired the concrete operations of several producers in the Greater Buenos Aires area and in the city of Rosario. These companies were merged into Loma Negra in 2010. We operate our concrete business under the Lomax brand, and we are the leading concrete company in the Greater Buenos Aires area and Rosario, being specialists in large construction projects as this segment includes a broad product line of specialty concretes.

At the beginning of the 2000s, we finished the construction of L’Amalí, located approximately five kilometers from our Olavarría plant, and LomaSer, located approximately 50 kilometers from the City of Buenos Aires. These two plants are connected through the Ferrosur Roca railway, being a complement of each other, aiming to better serve the Greater Buenos Aires and the City of Buenos Aires area, Argentina’s most important cement consumption market.

In 2005, we became part of the InterCement Group. Since then, we have invested in several projects, which have allowed us to increase production and be more efficient and competitive in a demanding market context. In order to diversify our energy matrix, we invested in alternative fuels (petroleum coal-petcoke), which makes it possible to keep our kilns running throughout the year substituting natural gas.

In 2009, we acquired La Preferida de Olavarría S.A., or La Preferida de Olavarría, a quarry of stone crushing, thereby allowing us to strengthen our vertical integration. In 2015, this company was merged into Loma Negra.

In 2006, the Loma Negra Foundation was created with a vision of community development and toward the self-sustainability of projects through partnerships with several local actors or other public or private institutions. The Loma Negra Foundation primarily invests in projects related to education, capacity-building, entry of young people into the labor market and inclusive productive business.

In 2012, we acquired 35% of Yguazú Cementos’ outstanding shares from Votorantim Cimentos. Additionally, in 2016, we acquired an additional 16% of the company’s outstanding shares from InterCement Brasil, achieving control and 51% of ownership in the Paraguayan cement company.

On October 31, 2017, we completed our initial public offering and on November 1, 2017, our ADSs representing ordinary shares began to trade on the NYSE and MERVAL.

In July 2017, we accepted a proposal from the Chinese company Sinoma International Engineering Co. Ltd., or Sinoma, for the construction of a second line at our L’Amalí plant to increase the installed capacity of this facility by 2.7 million tons annually, involving a capital expenditure of approximately US$350 million. The execution phase of the L’Amalí plant expansion started in August 2017.

In the context of the L´Amalí expansion project, and considering the decline in demand, during 2019 we decided to reconvert Barker and San Juan plants, transforming both full cement lines into grinding and distribution centers, and we have adapted our cost structure to reflect the new scenario.

As of the date of this annual report, and in compliance with Decree No. 297/2020 issued by the Argentine Government, as amended and extended from time to time, which provides for social, preventive and mandatory isolation, we have temporarily suspended the construction project of the second line of cement production in our L´Amalí plant. Once the current restrictions are lifted, and the necessary conditions to resume the execution of the project are in place, we expect to set a new timetable to complete the expansion project. See “Item 3.D Risk Factors—Risks Relating to Argentina—The measures taken or to be implemented by the Argentine government in response to the COVID-19 pandemic may cause adverse effect on our business and operations” and “Item 3.D Risk Factors—Risks Relating to Our Industry and Business—Public health threats or outbreaks of communicable diseases, including the COVID-19, have had and will likely continue to have an adverse effect on our operations and financial results”.

 

45


Table of Contents
  B.

Business Overview

Founded in 1926, Loma Negra is the leading cement company in Argentina, producing and distributing cement, masonry cement, aggregates, concrete and lime, products primarily used in private and public construction. Loma Negra is a vertically-integrated cement and concrete company, with nationwide operations, supported by vast limestone reserves, strategically located plants, top-of-mind brands and established distribution channels. We also own a 51% equity stake in an integrated cement production plant in Paraguay, which is one of two leading cement producers in that country.

We produce and distribute cement, masonry cement, aggregates, concrete and lime to wholesale distributors, concrete producers and industrial customers, among others. We held a market share of 43% in terms of sales volume in Argentina for the year ended December 31, 2019, according to management estimates.

Over our 90-year history we have built Argentina’s sole pan national, vertically integrated cement and concrete business, supported by top-of-mind brands and captive distribution channels. As of December 31, 2019, our annual installed clinker and cement production capacities amounted to 5.2 million tons and 9.1 million tons, respectively. We hold significant, strategically located limestone reserves and we estimate that our existing quarries have sufficient reserves to support our operations for approximately 150 years, based on our 2019 cement production levels.

We also own 51% of an integrated cement production plant in Paraguay, another key growth market in South America, through our subsidiary Yguazú Cementos S.A. We are one of two leading cement producers in Paraguay where we held a 42% market share in terms of sales volume for the year ended December 31, 2019, according to management estimates, with annual installed clinker and cement production capacities of 0.3 million tons and 0.8 million tons, respectively.

For the year ended December 31, 2019 and the year ended December 31, 2018, we had net revenue of Ps.38,952 million and Ps.41,238 million, respectively, and net profit of Ps.4,044 million and Ps.3,001 million, respectively.

Our Products

We offer our customers a broad range of high-quality cement products and a diversified product portfolio aimed at meeting all of their cement needs. Since our inception, we have developed and expanded our product range, tailoring different mixtures and product lines for a wide variety of uses and client needs. We currently produce cement (compound cement, cement with calcareous filler, pozzolana cement, as well as other specialty type cements), masonry cement, lime and concrete. Both in 2019 and 2018, cement represented approximately 85% of our shipments.

In Argentina, we sell our products under the Loma Negra trademark, which we believe is the most well-known cement brand in Argentina, and which we believe is synonymous with “cement” in the country. We believe that our brand recognition is important, given that bagged cement represents a significant part of the cement sold in Argentina. We sell our products in bulk and in bags, with bagged cement representing approximately 60% of our sales both in 2019 and in 2018.

Cement

Through our brand name Loma Negra and our San Martín brand, a well-known brand for Portland cement and compound cement, we produce 11 different types of cement in bags and 16 types of cement in bulk. Our cement products meet all requirements and quality standards as outlined in the following Standard Specifications of the Instituto Argentino de Normalización y Certificación, or the IRAM Institute: IRAM-50000:2017, IRAM-50001:2017 and IRAM-50002:2009. These specifications were constructed based upon the European Cement Standards. The IRAM Institute is a member of the International Standard Organization, or the ISO.

 

46


Table of Contents

Masonry Cement

As part of our continued diversification of our product line, we entered the masonry cement market in 1973. Our masonry cement brand Plasticor is well-known in Argentina. In the masonry cement market we believe we are market leaders, followed by Hidralit of Cementos Avellaneda S.A., in a market that represents approximately 1 million tons per year.

Lime

We produce two different types of lime: (1) hydraulics, under the brands Cacique Plus and Cacique Max; and (2) industrial, under our brand Loma Negra Plus. These products are generally used for generic masonry, underpinning, interior and exterior plaster, interior and exterior subfloors and soil stabilization. The mixing process includes, cement, sand and lime.

The oldest and most traditional use of lime has been in mortar and plaster, because of its superior plasticity and workability. There are other applications of lime in construction. The dominant construction-related use of lime is soil stabilization for roads, building foundations and earthen dams. Lime is added to low quality soils to produce a usable base and sub base. Hydrated lime has long been acknowledged to be a superior anti-stripping addition for asphalt pavements. It also helps resist rutting and fracture growth at low temperatures, reduce age hardening and improve the moisture resistance and durability.

Concrete and Aggregates

We participate in the concrete market under our Lomax brand offering different types of concrete. We also sell granitic aggregates through our plant La Preferida in Olavarría, which is responsible for approximately 79% of the aggregates consumed by Lomax in their concrete production operations, as of 2019.

Lomax offers a highly recognized set of solutions to our clients, including quality control, in-place facilities and logistics solutions, among other features, which can be customized to our customer’s needs. Lomax concentrates its operations on the segments in which it can assert its differential attributes: focus on quality, operational and logistic capacity and development of customized solutions.

Production Process

Cement Production

We produce cement in a closely controlled chemical process. All our plants use the dry cement production process, incorporating state of the art technology. Below we set forth the standard phases of the cement production process, which consists of the following main stages: extraction and transportation of limestone from the quarry; grinding and homogenization to make the raw meal of consistent quality; clinkerization; cement grinding; storage in silos; and packaging, loading and distribution.

1. Mining

The extraction process of the principal raw materials (limestone and clay). Naturally occurring calcareous deposits such as limestone, marl or chalk provide calcium carbonate and are extracted from quarries, often located close to the cement plant. In the pre-operational phase, the extraction process begins with mining research and probing to identify the quality and quantity of limestone ore. Once economic feasibility is established, we begin planning the mining work to define final digging configuration as well as the size of the fleet of vehicles and equipment needed for the operation. In the operational phase, the blocs are marked, and the holes are made by punch presses. The holes are then loaded with explosives and detonated to obtain fragmented material, which is then transported to the crushing system to reduce the granulation level. Clay extraction does not normally require explosives.

2. Transportation

Limestone is loaded by large blades on dump trucks and carried to the crushing plant.

 

47


Table of Contents

3. Primary crushing

The primary crusher converts the rocks into small stones.

4. Pre-homogenization of the limestone and clay

Approximately 90% of the limestone is stored in a park, where the first homogenization of the chemical composition of the stone is achieved. At the crusher, the limestone rocks are reduced to fragments measuring approximately 10 centimeters. This crushed limestone is then transported to the cement plant by truck or conveyor belt. Clay is also transported by truck to the plants. At the clinker plant, crushed limestone is blended by reducing the variations in chemical properties in order to obtain a homogenized mixture of limestone and clay.

5. Grinding and homogenization (“raw meal” production)

The crushed pieces are then milled together to produce a powder called “raw meal”. 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.

6. Burning of raw meal to produce clinker (“clinkerization”)

A pre-heater is a series of vertical cyclones through which the raw meal is passed. In these cyclones, thermal energy is recovered from the hot flue gases and the raw meal is preheated before it enters the kiln, so the necessary chemical reactions occur faster and more efficiently. Calcination is the decomposition of limestone to lime. Part of the reaction takes place in the “pre-calciner” and part in the kiln. Here, the chemical decomposition of limestone typically emits 65% of total emissions. The pre-calcined meal then enters the kiln. Fuel is fired directly into the kiln to reach temperatures of up to 1,450 degrees Celsius. The intense heat causes chemical and physical reactions that partially melt the meal to form a mixture of calcium silicates and other silicates, which is called “clinker”.

7. Cooling and final milling of clinker to produce cement

From the kiln, the hot clinker falls onto a grate cooler where it is cooled to a temperature of approximately 200 degrees Celsius by incoming combustion air. A typical cement plant will have clinker storage between clinker production and grinding. Traditionally, ball mills have been used for grinding, although more efficient technologies like roller presses and vertical mills are used in many modern plants today. 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.

8. Storing in the cement silo

The final product is homogenized and stored in cement silos and dispatched from there to either a packing station (for bagged cement) or to a silo truck. Most of our product is sold in paper bags, which are generated through an industry standard automatic bagging process.

9. Cement dispatch

Cement is dispatched in bulk or in paper bags sacked on pallets.

 

48


Table of Contents

The chart below illustrates the different phases of our cement production process, as numbered above:

 

LOGO

To ensure an efficient production process, our plants use monitoring and control tools, including: (1) automated controls using specialized software for the operation and monitoring of the cement production process; (2) measuring and testing equipment that offer metrological reliability; and (3) SAP system support for management of production planning and maintenance.

Concrete Production

Concrete is produced either in concrete plants and transported directly to construction sites as concrete in trucks or produced at the construction sites. In the concrete industry, it is crucial to have a close network of concrete plants to meet customers’ delivery needs.

The concrete production process is a question of minutes. Cement mixed with water enters the hydrate phase. After a short period, a chemical reaction hardens the concrete into a permanent form of artificial stone. Tensile strength, resistance to pressure, durability, setting times, ease of placing, and workability under various weather and construction conditions characterize this building material.

 

49


Table of Contents

Lime Production

1. Mining, crushing and homogenization of the limestone

The extraction process of the principal raw material: limestone. See “—Cement Production”.

2. Burning of limestone to produce quicklime (“calcination”)

The limestone then enters the kiln. Fuel is fired directly into the kiln to reach temperatures of up to 1,150 degrees Celsius. The intense heat causes physical reactions that partially transform limestone into quicklime.

While there are multiple kiln types in use, we have a rotary kiln in our plants. A rotary kiln consists of a rotating cylinder that sits horizontal. Limestone is fed into the upper or “back end” of the kiln, while fuel and combustion air are fired into the lower or “front end” of the kiln. Limestone is heated as it moves down the kiln toward the lower end. As the preheated limestone moves through the kiln, it is “calcined” into lime to reach temperatures of up to 1,200 Celsius degrees. The lime is discharged from the kiln into a cooler where it is used to preheat the combustion air. Lime can either be sold as is or crushed to make hydrated lime.

3. Cooling and storing of quicklime

From the kiln, the hot lime falls onto a grate cooler where it is cooled to a temperature of approximately 200 degrees Celsius by incoming combustion air. A typical lime plant will have clinker storage between quicklime production and hydration and classification plant.

4. Hydration and classification plant to produce hydrated lime

Quicklime can be processed into hydrated lime by crushing the quicklime, adding water to the crushed lime (water accounts for approximately 1% of raw hydrate), and then classifying the hydrated lime to ensure it meets customer specifications before it is transported.

5. Storing in the lime silo and dispatch

The final product is homogenized and stored in lime silos and dispatched from there to either a packing station (for bagged hydrated lime) or to a silo truck. Most of our product is sold in paper bags, which are generated through an industry standard automatic bagging process.

Masonry Cement Production

The production of masonry cement is similar to cement production, see “—Cement Production”. However, the blending and final milling of the clinker processes vary in the production of masonry cement.

1. Blending

Masonry cement consists of a mixture of clinker, gypsum and plasticizing materials (such as limestone), together with other additions introduced to enhance one or more properties of the cement, such as: setting time, workability, water retention, and durability. We prepared our additions for masonry cement at our Olavarría plant.

2. Final milling of clinker to produce masonry cement

Ball mills are used for grinding. In this form, masonry cement is designed to be mixed with sand and water to produce a masonry mortar. Masonry mortar is specially formulated and manufactured for use in brick, block, and stone masonry construction. Masonry cements are also used to produce stucco.

3. Storing in the cement silos

 

50


Table of Contents

The final product is homogenized and stored in cement silos and dispatched from there to either a packing station (for bagged masonry cement) or to a silo truck. Most of our product is sold in paper bags, which are generated through an industry standard automatic bagging process.

Capacity and Volumes

In 2018, our sales volume reached 6.7 million tons of cement, masonry and lime, and in 2019, it reached 6.0 million tons. We had a cement installed capacity of 9.9 million tons annually (including Yguazú Cementos’ sales volume and installed cement capacity), a concrete installed capacity of 1.2 million m3, an aggregates installed capacity of 2.2 million tons annually and a lime installed capacity of 0.5 million tons annually. Annual installed capacity is based on a 365-day production per annum.

The following table sets forth certain data related to our operations in Argentina and Paraguay for the periods indicated.

 

     As of and for the Year Ended
December 31,
 
     2019      2018      2017  

Operating data (million tons annually)(1)

        

Installed cement capacity

        

Argentina

     9.1        9.1        9.1  

Paraguay

     0.8        0.8        0.8  
  

 

 

    

 

 

    

 

 

 

Total installed cement capacity

     9.9        9.9        9.9  

Installed clinker capacity

        

Argentina

     5.2        5.2        5.2  

Paraguay

     0.4        0.3        0.3  
  

 

 

    

 

 

    

 

 

 

Total installed clinker capacity

     5.5        5.5        5.5  

Installed concrete capacity in Argentina (in m3)

     1.2        1.2        1.2  

Installed aggregates capacity in Argentina

     2.2        2.2        1.2  

Installed lime capacity in Argentina

     0.5        0.4        0.4  

Production volume (millions of tons):

        

Cement, masonry and lime

        

Argentina

     5.4        6.1        6.4  

Paraguay

     0.6        0.6        0.6  
  

 

 

    

 

 

    

 

 

 

Cement, masonry and lime total

     6.0        6.7        7.0  

Clinker

        

Argentina

     3.5        4.0        3.9  

Paraguay

     0.4        0.4        0.4  
  

 

 

    

 

 

    

 

 

 

Clinker total

     3.9        4.4        4.3  

 

(1)

Annual installed capacity is based on a 365-day production per annum.

 

51


Table of Contents

The table below sets forth the name, location and annual clinker and cement production at each of our nine cement plants during the year ended December 31, 2019:

 

Name

   Location    Annual
Production of
Clinker
     Annual Production
of Cement and
Masonry Cement
 
          (in millions of tons)  

Argentina:

     

Barker

   Benito Juárez      0.1        0.1  

Catamarca

   El Alto      0.7        0.9  

L’Amalí / LomaSer

   Olavarría/Vicente
Casares
     1.7        2.2  

Olavarría

   Olavarría      0.7        1.1  

San Juan

   San Juan      0.1        0.1  

Zapala

   Zapala      0.3        0.4  

Ramallo

   Ramallo         0.2  

Sierras Bayas

   Olavarría         0.1  

Paraguay:

        

Yguazú

   Villa Hayes      0.4        0.6  
     

 

 

    

 

 

 

Total

        3.9        5.7  
     

 

 

    

 

 

 

The following table sets total production of each of our plants of cement, masonry cement and lime, our principal products, for each of the periods indicated:

 

Name

   Production for the Year Ended
December 31,
 
     2019      2018      2017  
     (in millions of tons)  

Argentina:

        

Barker

     0.1        0.3        0.3  

Catamarca

     0.9        1.1        1.3  

L’Amalí/ LomaSer

     2.2        2.2        2.4  

Olavarría

     1.4        1.5        1.5  

San Juan

     0.1        0.2        0.2  

Zapala

     0.4        0.3        0.4  

Ramallo

     0.2        0.2        0.1  

Sierras Bayas

     0.1        0.2        0.2  

Paraguay:

        

Yguazú

     0.6        0.6        0.6  
  

 

 

    

 

 

    

 

 

 

Total

     6.0        6.6        7.0  
  

 

 

    

 

 

    

 

 

 

Quality Control

We monitor quality control measures at each stage of the cement production process. At each of our plants, we review our production line, and periodically perform examinations of the raw material mix. These examinations include chemical, physical and x-ray tests. We perform similar examinations on the clinker we produce as it comes out of our kilns. In addition, we similarly test our finished products.

These examinations are performed by sampling the subject material from the various points on each production line. All of our plants have received ISO 9002 certification, which reflects the quality of our products and of our operating procedures. Our quality controls comply with the ISO 9000 rules.

 

52


Table of Contents

Raw Materials

The principal raw materials used in the production of cement include: (1) limestone, clay and gypsum for the production of clinker, and (2) clinker additions, including blast furnace slag, pozzolana, fly ash, and paper bag, since we package a substantial portion of our cement in bags. These items collectively represented 10% in 2019 and 10% and 13% in 2018 and 2017, respectively, of our total cost of sales.

Mineral Reserves

Our cement operations are supplied by limestone reserves that are located within close proximity to our production facilities. We own and operate exclusively operate seven open-pit quarries from which limestone can be extracted efficiently due to the proximity of the limestone deposits to the surface and the high quality of the limestone in the mines. We have total limestone reserves of approximately 1,211 million tons, which should be sufficient to supply us with approximately 150 years of cement production at our 2019 rate of consumption.

Our reserves are a sum of proven and probable reserves. Proven reserves are those mineral masses for which size, shape, depth and mineral content of reserves are well established, revealed by geological surveys, drilling campaigns, chemical analysis or geological modeling, to ensure exploitability and usage. All of these activities determine the quantity of minerals that matches the quality required by our production process. Our proven reserves contain suitable geological and chemical information density (drill holes) to guarantee their existence, continuity and the suitability of use. Proven reserves are constrained by a final pit configuration (effectively exploitable reserves). In addition to the foregoing, we consider reserves to be proven if they are present on land we own and if related environmental permits have been granted.

Probable reserves are mineral masses for which quantity or quality are computed from information similar to that used from proven reserves, but the sites for inspection, sampling, and measurement are farther apart. Our probable reserves contain similar suitable geological and chemical information density (drill holes) to guarantee their existence, continuity and the suitability of use than our proven reserves. The degree of assurance, although sometimes lower than that for proven reserves, is high enough to assume continuity between points of observation. In addition to the foregoing, we consider reserves to be probable if they are not present on land we own or if related environmental permits have not been granted.

Drilling or sample density information is not the key criteria we use to distinguish proven from probable reserves. Nevertheless, to analyze the drill hole data from our quarries we assume the following distance ranges between drill holes: for active quarries, between 60 and 150 meters, and for inactive quarries, between 150 and 300 meters. The density between drill holes (samples) used in the reserves estimation process is a function of the geological complexity of the deposits and the chemical heterogeneity of the materials used in the process; therefore, we do not have a single, fixed criteria for all of our mineral reserves.

We also do not use the price or cost of raw materials used in the cement production process as a variable in our reserves’ evaluation process because there is no global commodity market value for these raw materials, which prices depend on the cement local market value.

Our proven and probable reserve estimates are based on estimated recoverable tons. We did not employ independent third parties to review reserves over the five-year period ended December 31, 2019. Our mineral reserves data are prepared by our engineers and geologists and are subject to further review by our corporate staff. We believe that our engineers and geologists are qualified to prepare our mineral reserves data in Argentina and Paraguay. Given that we prepare our mineral reserve data in-house, our engineers and geologists have acquired important technical know-how, which helps us to maintain our cost competitiveness.

To further maintain our cost competitiveness, we obtain nearly all of our mineral resources from our own quarries, using, either third party services or our own mining equipment. For the year ended December 31, 2019, mostly all of our limestone was sourced from our own quarries. We own and exclusively operate our limestone quarries.

Each of our plants possesses and is responsible for several active and inactive mining licenses. Active mining licenses are those for which we hold all necessary permits and rights to actively exploit the mineral mass. Each of our

 

53


Table of Contents

plants also holds inactive mining licenses on areas for which we do not have the operational license that is required for its mineral exploitation.

We conduct annual operational governance, checking our mineral reserves and reviewing new production volumes and geologic aspects to maintain high safety standards and sufficient volume to guarantee our production without overburdening our activities.

Our mining capital expenditures are focused on developing new quarries and sustaining investments, and are used mainly for mining equipment, crushing systems, safety equipment and environmental compliance.

We do not classify our reserves by average grade.

We distinguish recoverable limestone from waste by evaluating whether the limestone rocks are adequate to be used in a raw mill, which is a powder composed of a clay and limestone mixture. In order to meet raw mill specifications, we generally use limestone with at least a 75% concentration of calcium carbonate (CaCO3). Although there is no specific cutoff grade for aggregates, we distinguish recoverable aggregates from waste by segregating the type of rock extracted from the quarry. The most common rocks used for aggregates production are granite, basalt, limestone, sand or gravel.

Depending on the type of cement product, we require approximately 1.5 tons of limestone to produce one ton of clinker. On average, we require approximately 1.2 tons of limestone to produce one ton of cement product. In addition, on average, we required approximately one ton of rock to produce one ton of aggregates product.

The table below sets forth our total proven and probable operating limestone and granitic aggregates reserves by geographic regions as of December 31, 2019:

 

Reserves

 
                   Active Mining Rights      Inactive
Mining
Rights
                             

Location

   Mining
Property
     Number of
quarries
     Proven
(R1)
     Probable
(R2)
     Probable
(R2)
     Total      Years to
Depletion
     2019
Annualized
Production
     5-year
Average
Annualized
Production
 
                   (in millions of tons)                    (in thousands of tons)  

Limestone:

                          

Argentina

                          

Catamarca

     Doña Amalía        1        64.5        56.2        —          120.7        84        1,323.1        1,431.4  

San Juan

    
Piedras
Blancas
 
 
     1        0.3        0.3        —          0.6        4        54.4        139.7  

Zapala

     El Salitral        1        18.6        29.7        —          48.3        182        448.5        443.0  
     Cerro Bayo        1        13.7        18.7        —          32.4           

Barker

     Barker        1        45.0        27.0        —          72.0        98        357.0        731.9  

Olavarría and L’Amalí

     La Pampita        1        600.9        35.3        —          636.2        136        4,652.3        4,663.9  
     Cerro Soltero I        —          —          —          53.5        53.5        —          —          —    
    
Cerro
Soltero II
 
 
     —          —          —          111.6        111.6        —          —          —    
     El Cerro        —          —          —          37.6        37.6        —          —          —    

Paraguay

                          

Itapucumi

     —          1        54.5        43.7        —          98.2        162        579.9        604.8  
        

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

           797.5        210.9        202.7        1,211.1        151        7,415.2        8,014.7  
        

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Granitic aggregates:

                          

La Preferida

        1        63.4        54.2        —          117.6        106        1,230.1        1,106.3  
        

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

           63.4        54.2        —          117.6        106        1,230.1        1,106.3  
        

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The reserves estimations presented do not consider losses by dilution, mining and process recovery issues, since they are considered to be marginal in the deposits in which they are being exploited. Also, the flexibility of the cement production process allows several types of materials to be partially blended into cement products, including materials that could otherwise be considered as waste products without blending.

 

54


Table of Contents

The map below shows the geographical location of each of our principal reserves:

 

LOGO

Energy Sources

We maximize the efficiency and flexibility of our operations by employing several energy sources in our production processes that may be used interchangeably, depending on price levels and adequacy of supply, such as thermal energy and electrical power. Energy is the largest single cost component in the production of cement and accounted for 26% of our total cost of sales in 2019 and 26% and 22% in 2018 and 2017, respectively.

Thermal Energy

Thermal energy is our most utilized source of energy for our operations having accounted for 16% in 2019 and 16% and 13% in 2018 and 2017, respectively, of our total cost of sales. Thermal energy is comprised of natural gas, mineral coal and petcoke, co-processing, and fuel oil (See “Co-processing”). Natural gas and petcoke are the most significant of these energy sources. Thermal energy cost is strongly impacted by the volatility of the price of natural gas and the international price of oil. Since 2006, we have diversified our fuel matrix in our main plants, so that we can optimize it at all times according to the cost of each energy source. This great versatility allows us to capture a very competitive price on the market.

 

55


Table of Contents

Historically, given the shortage of natural gas in wintertime the energy matrix of our kilns migrates to solid fuels. Currently, this flexibility to operate with different thermal energy sources, allow us to benefit from potential low thermal energy prices.

To ensure the supply of gas, we entered into supply contracts, for different volumes and basins, with producers (YPF and Tecpetrol), and marketers and distributors, such as Ecogas – Distribuidora de Gas del Centro S.A., SAESA, Energy Traders, Metroenergía, Gas Patagonia and Camuzzi. All these contracts have expirations between April 2020 and 2021.

The cost of petcoke varies in accordance with international market prices, which are quoted in U.S. dollars and fluctuate depending upon the supply and demand for oil and other refined petroleum products. We make spot purchases of petcoke or steam coal in order to capture market opportunities in the price of these solid fuels. Average petcoke prices increased by approximately 38% from 2016 to 2017 and 19% from 2017 to 2018 and decreased 39% from 2018 to 2019. This decline is not reflected in the greater use of solid fuels because the decrease in the cost of natural gas was even greater than 50% making more convenient to maximize the percentage of natural gas in the thermal energy matrix.

Electrical Power

Electrical power is one of the main drivers of our cost structure and represented 10% in 2019 and 10% and 8% in 2018 and 2017, respectively, of our total cost of sales. In 2016, the new administration in Argentina started a process to reverse subsidized electrical power rates and has implemented a series of measures to correct and normalized the electrical power tariff, which has had a direct negative impact on our cost structure.

Electrical power cost is highly influenced by the policy implemented for fuels used in electrical energy generation and by the growing share of thermal power generation in the electric matrix in Argentina.

Currently, the energy system in Argentina is still constrained by technical operating limits, especially in transportation and distribution, due to the lack of investment in the system during the 15-year period ended in 2016, mainly as a consequence of a price policy oriented towards residential demand subsidies.

In Argentina, the energy demanded that equals the level of consumption in 2005 is marketed by National Administrator of the Electric System (Compañía Administradora del Mercado Mayorista Eléctrico), or CAMMESA, approximately 60% of our demand. Since 2005, it was possible to contract the rest of the consumption (approximately 40%) through private contracts. Since 2018, through Law No. 27,191, we were permitted to contract renewable energy for up to 100% of our demand.

We have entered into annual contracts with Pampa Energía S.A. for the supply of approximately 20% of our current electrical power requirements. Additionally, we covered 35% of our current electrical power requirements with renewable energy sources, overachieving the percentage stipulated by the Law No. 27.191.

Pursuant to the Law No. 27,191, consumers with a demand higher than 300kW are required to source a minimum level of their electrical power demand from renewable sources pursuant to the requirements set forth by the Law No. 27,191 equal to 8% by December 31, 2017, 12% by December 31, 2019, 16% by December 31, 2021, 18% by December 31, 2023 and 20% by December 31, 2025; provided that any consumption of renewable energy for higher levels as of each cut-off date cannot be reduced in the following periods. For purposes of complying with these minimum level requirements of renewable energy, the consumers have the option to enter into individual power purchase agreements (PPAs) with renewable energy generators, marketers or distributors, or to buy the energy through CAMMESA. See “Item 5.F Operating and Financial Review and Prospect—Supply Contracts”.

In 2016, we signed a 20-year contract with Genneia S.A., and in 2018 we signed a 20 year contract with Aluar Aluminio Argentino S.A.I.C. to enhance the use of green energy in a cost efficient manner. With these contracts, we not only complied with the law limits but also surpassed them. See “Item 5.F Operating and Financial Review and Prospects—Supply Contracts”.

 

56


Table of Contents

Co-processing

We have increased the use of co-processing in our operations. Co-processing is the final disposal of waste (agricultural, urban and industrial waste) by its integration in the process of cement production as a secondary raw material or alternative fuel, as a source of energy. Co-processing is a technique used for permanently eliminating waste without generating environmental liabilities, harnessing the energy and/or mineral potential of the material.

Co-processing uses duly prepared waste at different stages of the production process as a substitute for natural raw materials and/or fossil fuels. The replacement of fossil fuels and raw materials with waste provides us with a dual advantage: (1) it allows us to meet thermal and non-renewable natural resources requirements in our production process; and (2) it presents a recognized benefit by disposing of waste that otherwise would have been deemed to be harmful and of environmental concern.

This process is conducted safely, monitored and environmentally correct, with quality assurance of the cement produced. We have utilized the highest industry standards and technological advances in developing our co-processing operations to ensure safety and efficiency.

In order to reinforce our commitment to sustainability, five of our plants are prepared for co-processing. The products we co-process are mainly municipal solid waste, or MSW, refuse-derived fuel, or RDF and shredded solid waste, or SSW.

At the end of 2018, we obtained the authorization to co-process the rejection of the urban waste, leading in Argentina the use of this waste stream in the co-processing, during 2019 we co-processed almost 1,000 tons of this alternative fuel in our plants in the region of Olavarría.

Sales, Marketing and Customers

We are supported by a commercial, sales and marketing team of more than 63 people focused on attending our customers’ needs. This team includes the technical center Loma Negra, focused on quality control, research and development of new products and technical support for clients. We serve more than 1,050 clients in Argentina through our dedicated sales teams. In the Greater Buenos Aires and the City of Buenos Aires area, our sales team is organized by customer category, namely distributors, concrete companies, industrial and construction companies, and public sector entities. Outside the Greater Buenos Aires and the City of Buenos Aires area, sales teams are organized by geographical region.

We have long-term relationships with many of our customers, with approximately 70% of our customer base (representing over 78% of our total cement shipments) operating under long-standing, exclusive relationships. No single customer represents more than 4% of our total net sales, while our top 20 clients represented approximately 34% of total cement volume sold during 2019. We have also built a diversified customer base by sectors.

Over the years, we have thoughtfully built a network of small- and medium-sized distributors throughout Argentina, and which we cultivate through a wide range of customer relationship programs, such as training and technical assistance, aimed at improving loyalty and customer service quality. We believe that we have forged, over a long period of time, a strong client relationship based on prioritizing service and product quality. In 2019, 59% of our total cement sales were made directly to our wholesale distributors, 30% to concrete producers, 6% to industrial customers and 5% to construction companies and others.

As a consequence of the activities in which we engage, our transactions do not have a significant cyclical or seasonal character. Nevertheless, during the second half of the year, historically the volume of sales in Argentina has shown a slight increase.

Since our inception, we have developed and expanded our product range, tailoring different mixtures and product lines for a wide variety of uses and client needs. We provide our clients with customized construction solutions with superior quality, proven reliability and uniform performance. 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.

 

57


Table of Contents

Client Loyalty

Throughout the years we have implemented a wide range of relationship programs focused on improving customer loyalty. Our average client is a medium-sized family-owned company mainly focused on the commercialization of cement, masonry and lime. We offer our customers technical support on a range of areas, including shops decoration, and even issues related to their business continuity. According to our 2019 annual customer satisfaction inquiry to evaluate our key competitive advantages, we outperformed our competitors in terms of overall satisfaction, cement quality, post-sales services, technical assistance and on-time delivery.

 

LOGO

Source: 2019 Loma Negra Customer Satisfaction Inquiry Results.

Technical Assistance

We offer technical and post-sales support to customers, focusing on enhancing each customer’s capacity. In order to provide this service, we have several technical advisers who are available for different customer segments, technical visits, workshops, seminars and in site demonstrations.

Marketing Efforts

We are expanding the scope of our brand image strengthening campaign, adding more points of sale and improving the image of the distribution centers of our clients and consolidating the participation of our brand in the main soccer matches of the Argentine Championship, reinforcing our brand as a synonym of cement in Argentina.

Distribution

We have a distribution system aimed at providing the broadest product range in Argentina’s most important cement markets, particularly in the Greater Buenos Aires and the City of Buenos Aires area. Our strategy has been to base our sales and marketing efforts on our brand name recognition, broad product portfolio, customer service, efficient and timely delivery and technical support

We divide our distribution platform into six regions: Buenos Aires, Central, Northwestern, Northeastern Patagonia and Cuyo. Each of these regions is served by our production facilities. LomaSer, our mixing, distribution and logistics facility is the center of our Buenos Aires’ distribution complex, or the Buenos Aires Complex. Our Buenos Aires Complex serves the main market of the Greater Buenos Aires and the City of Buenos Aires area and

 

58


Table of Contents

provides backup supply to other regions in the rest of the country. The Province of Buenos Aires is our principal market representing 48% of our total volume sold in 2019.

Our cement plants generally serve the geographic regions in which they are located. The table below shows the total market sales in each of Argentina’s regions as a percentage of total volume sold in Argentina in 2019.

Sales of Cement in Argentina in 2019

 

Region

   Sales      Cumulative Sales  
     (in percentages %)  

Buenos Aires

     48        48  

Center

     21        69  

Northwest

     12        81  

Patagonia

     9        90  

Northeast

     7        97  

Cuyo

     3        100  

 

Source: Loma Negra.

LomaSer is located approximately 50 kilometers from the City of Buenos Aires. Due to its close proximity to this important market and its mixing and bagging capacity, LomaSer enables us to respond quickly to our clients’ cement needs. For example, LomaSer has the capacity to deliver bagged or bulk cement to locations in the Greater Buenos Aires and the city of Buenos Aires area designated by its customers within 24 hours from the time a customer places its order. In addition, LomaSer is linked to our other production facilities via the Ferrosur Roca freight railway and is able to mix cement on-site that it receives from our other plants (L’Amalí, Barker and Ramallo).

Argentina’s Central Region is mainly served by the Catamarca plant. The Northwest area of the Patagonia region is served from our Zapala plant. The San Juan plant supplies demand from Cuyo, while Catamarca serves the Northwestern region of Argentina.

The Northeast region is serviced by our Catamarca plant, through our Resistencia distribution center. The Litoral area is serviced through our Buenos Aires Complex and our Paraná distribution center.

There are no exclusive sale contracts in Argentina or abroad, for a portion of or for total production, with the exception of the “Export and Distribution Contract” (Contrato de Exportación y Distribución) entered in 2008 with the Administración Nacional de Combustibles, Alcohol y Portland, or ANCAP, in which, with regards to the exportation of cement produced to Uruguay, we committed to the exclusive distribution through ANCAP and/or Cementos del Plata S.A. (of which ANCAP is the controlling shareholder) in Uruguay. Such contract will expire on March 31, 2023.

In addition, we operate the Ferrosur Roca freight railway network, which extends from the northeastern region of the City of Buenos Aires to several other regions of the country. Of the total distance of 3,100 kilometers that are part of this railway concession, approximately 2,500 kilometers are currently operational. We use the Ferrosur Roca freight railway network to ship our products and raw materials, as it is connected directly to six of our plants. In addition, third parties have access to this railway network in which we charge them freight railway fees to ship their goods.

Our Subsidiaries

The following chart shows our principal subsidiaries, including our direct or indirect equity ownership interest in each of them and their main business activities as of the date of this annual report:

 

Subsidiary

   Equity Ownership
Interest (%)
   Main activity

Ferrosur Roca S.A.(1)

   80.00    Rail freight

Recycomb S.A.U

   100.00    Waste recycling

Yguazú Cementos S.A

   51.00    Cement production and distribution

 

59


Table of Contents

 

(1) 

Indirect ownership (through Cofesur S.A.U., in which we have a direct 100% equity ownership interest).

Below is a brief description of our principal subsidiaries.

Ferrosur Roca S.A.

Through our subsidiary, Cofesur, we indirectly control Ferrosur Roca, a company that holds a concession to operate the Ferrosur Roca freight railway network, a 3,100 kilometer railway that runs from the northeastern region of the City of Buenos Aires to several other regions of the country and that is strategic to our business as it is linked directly to five of our plants (Ramallo, Olavarría, Barker, Zapala and L’Amalí) and also our LomaSer, Solá and Bullrich production and distribution centers. We own the total capital of Cofesur, which in turn owns 80% of the total capital of Ferrosur Roca. As of December 31, 2019, Ferrosur Roca had 1,221 employees.

The Ferrosur Roca concession expires in 2023 and could be extended by the Argentine government for an additional term of 10 years, based on the fulfillment of obligations related to the concession, such as investments, maintenance and fines imposed, among others.

On March 8, 2018, Ferrosur Roca duly filed before the Ministry of Transport a request for an extension of the term of validity of the concession for ten more years. As of the date of this report, the Ministry is analyzing such request. The Ministry responded on March 20, 2019, informing Ferrosur Roca that the Special Commission created by Decree No. 1027/2018 would be in charge of the renegotiation of the concession agreement, and that such process will include the analysis of the concession term extension in order to enable the implementation of the open access scheme.

On November 2018, Law No. 27,132’s regulation was published in the Official Gazette. It principally established that Freight Railroad Transportation’s system will have an open-access scheme and conferred to the Ministry of Transport the authority to renegotiate the concession contracts. Furthermore, the Ministry of Transport issued the Resolution No. 1112 through which it appointed a Renegotiation Committee.

During 2019 Ferrosur Roca participated in two preliminary meetings between the railway transport companies and the Special Commission. However, the agenda to be discussed during the negotiations is still under discussion.

Recycomb S.A.U.

We own 100% of the total equity capital of Recycomb, a company that was founded in 1995. Recycomb operates a blending facility for recycling industrial waste into alternative fuel sources. This blending facility has an annual production capacity of 106,000 tons (30,000 tons of liquid waste-derived fuel, 36,000 tons of solids waste-derived fuel and 40,000 tons of shredded solids waste-derived fuel) and has been operational since the end of 1996. This facility, which is located in the southern part of the Greater Buenos Aires area, is connected to Ferrosur Roca’s freight railway. As of December 31, 2019, Recycomb had 31 employees.

Yguazú Cementos S.A.

We own 51.0% of the total equity of Yguazú Cementos, our Paraguayan cement subsidiary. The remaining 49.0% is owned by Concret-Mix S.A. Pursuant to our participation in the total equity of Yguazú Cementos and the shareholders’ agreement with Concret-Mix S.A., dated July 4, 2017, we have control. As of the date of this annual report, Yguazú Cementos is the second largest producer of cement in Paraguay.

Yguazú Cementos has introduced bulk cement in Paraguay, which is positioned towards a specific segment of our clients and which accounted for 27.2% of our shipments in 2019. The other 72.8% of our shipments corresponds to cement dispatched in bags. Although Yguazú Cementos has had a comparatively short presence in the Paraguayan bulk cement market, we believe that its recognition among our clients has been growing as a result of its high quality products.

 

60


Table of Contents

Our Paraguayan operation is supported by our Argentine team in several areas, such as: technology transfer, know-how, sales and marketing expertise. For further information on the operations of Yguazú Cementos, see “—Our Production Facilities—Yguazú Cementos”.

Information Technology

We believe that an appropriate information technology infrastructure is important in order to support the growth of our business. Our data collection processes and software allow us to accurately monitor the quality of the products manufactured at our various facilities, ensuring consistency and enabling us to adjust quickly in the event of any variations. Furthermore, our enterprise resources planning software allows us to develop production, sourcing and pricing models based on anticipated consumer demand.

In addition, we have license agreements involving intellectual property rights with several companies, such as Oracle, Microsoft, SAP, Adobe, Novell and McAFee.

Insurance

We maintain insurance policies against damages to third parties, with coverage and conditions comparable to those of companies engaged in similar businesses in Argentina and Paraguay, respectively. We maintain insurance policies with reputable international insurance companies, covering property loss and business interruption risks to our plants, equipment and buildings for partial or total damages or losses. The coverage for total loss or damage is for an insured value that we have established using as a reference the replacement value of each plant’s kiln, which is the main asset subject to risk, as we consider the total destruction of any of our plants as unlikely. For partial loss or damage, we are insured for the value at risk. As of December 31, 2019, the aggregate value at risk of our plants was approximately US$ 1,377,270,376. These policies have a deductible of US$54,000 per claim. For loss of profit derived from material damages the coverage is 21 days.

We have not made any material claims on our insurance policies in recent years.

For our Paraguayan plant, we maintain insurance policies covering property loss and business interruption risks to our plant, equipment and inventory from operational risks and certain acts of God. For partial loss or damage, we are insured for the value at risk.

Sustainability and Social Responsibility

We are committed to sustainability and social responsibility, by creating value for our shareholders and avoiding and reducing the impact of our activities on the environment and society. Three principles drive our practices in the markets in which we operate: constant economic growth, protection of the environment and respect for our communities. By following these principles, we will continue to develop as a world-class company and operate our business in accordance with the principles of sustainability.

Together with other companies within the InterCement Group, we have been signatories to the Global Compact led by the United Nations since 2004 until 2010 and are members of the Cement Sustainability Initiative, or CSI, an initiative of the cement segment of the World Business Council for Sustainable Development, or WBCSD, since 2008, and currently transferred to the Global Cement & Concrete Association or GCCA. Furthermore, we are founding members of WBCSD’s local branch in Argentina. These programs have supported us in developing and implementing a social action strategy that contributes to the development of the communities in which we operate.

We believe that we are pioneers in the use of alternative fuels in Argentina and Paraguay. We intend to continue to explore the use of environmentally friendly techniques. We continuously monitor pollutants in all of our kiln stacks, enabling real time pollution control. In December 2012, we successfully registered our first clean development mechanism project with the United Nations Framework Convention on Climate Change, or UNFCCC. Our focus on improving energy efficiency at our Catamarca Plant has reduced carbon dioxide emissions by approximately 6,000 tons per year.

 

61


Table of Contents

Competition

Argentina

Cement

Following the consolidation of the cement industry in Argentina during the 1990s, LafargeHolcim, an international cement company, through its acquisition of Juan Minetti S.A. and Corcemar S.A., two Argentine cement producers, became the second largest cement producer in Argentina. Other Argentine cement producers include Cementos Avellaneda S.A., or Avellaneda, a company controlled by Cementos Molins, S.A. and Votorantim Cimentos S.A., and Petroquímica Comodoro Rivadavia S.A., or PCR. Given the high cost of transporting cement, our competitors are generally limited in competing in the regions where their production facilities are located. We are the only cement company in Argentina with production facilities located in several regions of Argentine and with nationwide reach.

The chart below sets forth the estimated cement market share in Argentina during 2019 for our company, Holcim Argentina, Cementos Avellaneda and Petroquímica Comodoro Rivadavia.

 

LOGO

Source: AFCP and Loma Negra.

Each of Argentina’s main cement companies have developed market strengths in specific areas driven primarily by the location of their facilities and their geographic focus resulting from high transportation costs which limit their ability to compete effectively over long distances. We are the only Argentine cement company to have nationwide coverage, as our facilities are located throughout the country, with particular focus on Argentina’s most important market, the Province of Buenos Aires. Our cement plants generally serve the geographic regions in which they are located. Holcim Argentina S.A. has a strong market position in the provinces of Córdoba, Mendoza and Jujuy.

Since 2016, the dispatch participation of bulk cement has been increasing, however, starting in the third quarter of 2019, this trend seems to have changed as cement demand for public and private infrastructure works has decreased, affecting industrial consumer more in comparison to other cement consumers that purchase cement in the bag format. In 2019, we supplied 60% of Argentina’s cement dispatch by bags and 40% of Argentina’s cement dispatch by bulk.

In July 2017, we accepted the proposal from the Chinese company Sinoma International Engineering Co., or Sinoma for the construction of a second line at our L’Amalí plant to increase the installed capacity of this facility by 2.7 million tons annually, involving a capital expenditure of approximately US$350 million. The execution phase of the L’Amalí plant expansion started in August 2017. As of the date of this annual report, and in compliance with Decree No. 297/2020 issued by the Argentine Government, as amended and extended from time to time, which provides for social, preventive and mandatory isolation, we have temporarily suspended the construction project of the second line of cement production in our L´Amalí plant. Once the current restrictions are lifted, and the necessary conditions to resume the execution of the project are in place, we expect to set a new timetable to complete the

 

62


Table of Contents

expansion project. See “Item 3.D Risk Factors—Risks Relating to Argentina—The measures taken or to be implemented by the Argentine government in response to the COVID-19 pandemic may cause adverse effect on our business and operations” and “Item 3.D Risk Factors—Risks Relating to Our Industry and Business—Public health threats or outbreaks of communicable diseases, including the COVID-19, have had and will likely continue to have an adverse effect on our operations and financial results”.

Likewise, our main competitors are executing investments to expand their production capacity in Argentina. According to available public information, Holcim Argentina S.A. is expanding the “Malagueño” plant, located in the province of Cordoba, by 0.73 million tons. In the case of Avellaneda S.A., a similar expansion capacity of 0.7 million tons is underway in the “El Gigante” plant in the province of San Luis.

Concrete

We participate in the concrete market under our Lomax brand. We have operations in the two principal concrete markets of Argentina: (1) the City of Buenos Aires and the Greater Buenos Aires area; and (2) the city of Rosario. The Olavarría region is the main supplier of granitic aggregates consumption for the Greater Buenos Aires and the City of Buenos Aires area. This area is responsible for approximately 50% of the national production of aggregates, according to our own estimates.

We also lead this dynamic and high potential growth market through the Nueva Propuesta de Valor, or NPV concept. NPV is a group of selected medium- and large-sized concrete companies that have been exclusive and loyal clients of Loma Negra for many years. We have entered into agreements with these companies to keep them in a continuous improving operational process, with several clauses related to loyalty and cement supply commitment.

The chart below presents the market share of concrete in the Greater Buenos Aires and the City of Buenos Aires area as of December 31, 2019. Our combined market share is 49% when we add Lomax share together with the NPV clients and other exclusive concrete producers.

 

LOGO

Source: Loma Negra.

Paraguay

Industria Nacional de Cementos, or INC, a Paraguayan state-owned company, is the largest producer and supplier and the historical market leader in the cement business in Paraguay, currently with a market share of 40%. In 2019 our market share was approximately 42%. Due to local scarcity, in Paraguay imports of cement have grown its participation in the market, almost reaching an 18% of total sales.

Legal and Regulatory Matters

Environmental Regulations

The pollutants generated by cement producers are mainly dust and gas emissions. In Argentina, regulations regarding gas emissions and air quality are enacted at both the national and provincial levels. The Province of Buenos Aires, where our principal plants are located, requires that all production facilities have an environmental compliance

 

63


Table of Contents

certificate issued by the Provincial Organism for Sustainable Development. The other provinces in which we operate, require similar certifications. We have obtained the most significant environmental certificates in relation to the Barker, LomaSer, Ramallo, Sierras Bayas and Zapala plants, while our Catamarca, L´Amalí, Olavarría and San Juan plants have delivered the documents required to renew their most significant environmental certificates. We expect that these renewals will be granted during 2020 and these plants are allowed to operate while the certificate renewal process is ongoing. Our concrete plants are either certificated or in process to obtain the certificates. We do not require any material technology licenses for our cement or concrete operations.

Mining Regulations

We extract limestone from quarries that we own, and quarries owned by third parties. The main statute that governs mining in Argentina is the Argentine Mining Code, which was enacted by Law No. 1,919 of 1886, as amended. The Argentine Mining Code establishes that the ownership of mineral substances existing in quarries, including limestone, is exclusively vested in the owner of the land where they are located and that provincial laws will regulate the operation of quarries. The owner may mine the quarries existing in its land or leave them inactive. However, the federal, provincial or municipal government where the quarry is located may declare that the exploitation of the mines is of public interest and expropriate the land where the quarries are located.

Pursuant to the Argentine Mining Code, as amended by Law No. 24,585, which regulates environmental aspects of the mining activity, parties involved in certain mining activities are required to file, prior to the commencement of mining activities on a tract of land, an environmental impact evaluation report with the relevant regulatory agency for its approval. If approved, the relevant regulatory agency issues an environmental impact declaration, which must be renewed every two years.

We are the owners of 7 limestone quarries throughout Argentina and currently conduct mining activities at 6 of them.

Professional Associations

As of the date of this annual report we are part of the following associations:

 

   

Argentine National Association of Portland Cement Producers (Asociación de Fabricantes de Cementos Portland).

 

   

Argentine Institute of Portland Cement (Instituto Argentino de Cemento Portland).

 

   

Argentine National Concret Association (Asociación Argentina de Hormigón Elaborado).

 

   

Argentine National Association of Industrial Gas Consumers (Asociación de Consumidores Industriales de Gas de la República Argentina).

 

   

Argentine National Association of Energy Power Major Users (Asociación de Grandes Usuarios de Energía Eléctrica de la República Argentina).

 

   

Latin - American Railway Association (Asociación Latinoamericana de Ferrocarriles).

 

   

American Chamber of Commerce of United States in Argentina (Cámara de Comercio de Estados Unidos en Argentina).

 

   

Argentine Business Council for Sustainable Development (Consejo Empresario Argentino para el Desarrollo Sostenible).

 

   

Argentine Chamber of Importers (Cámara Argentina de Importadores).

 

   

Chamber of environmental companies (Cámara de empresas de medio ambiente).

 

64


Table of Contents
  C.

Organizational Structure

The following organizational chart sets forth our simplified corporate structure as of the date of this annual report:

 

LOGO

 

 

(1)

Indirect ownership (through Cofesur SAU, in which we have a direct 100% equity ownership interest)

 

  D.

Property, Plants and Equipment

Our Production Facilities

As of December 31, 2019, we owned nine cement manufacturing plants in Argentina: Barker, Catamarca, L’Amalí, LomaSer, Olavarría, Ramallo, San Juan, Sierras Bayas and Zapala, eleven concrete plants operating under the Lomax brand and one granitic aggregates plant. As of December 31, 2019, we owned one cement plant in Paraguay, Yguazú Cementos.

The following table sets forth information regarding our production facilities in Argentina and Paraguay, as of December 31, 2019:

 

Production Facility

  

Type of Plant

  

Location

  

Commissioning

Year

Argentina:

        

North:

        

Resistencia

   Warehouse    Resistencia   

Center-east:

        

Barker

   Cement    Benito Juárez    1956

L’Amalí

   Cement    Olavarría    2001

LomaSer

   Blending/Distribution    Cañuelas    2000

 

65


Table of Contents

Olavarría

   Cement    Olavarría    1929

Ramallo

   Grinding Mill    Ramallo    1998

Sierras Bayas

   Grinding Mill    Olavarría    1919

Paraná

   Warehouse    Paraná   

Center-west:

        

Zapala

   Cement    Zapala    1970

North-west:

        

San Juan

   Cement    San Juan    1963

North:

        

Catamarca

   Cement    El Alto    1980

Concrete plants under the Lomax brand:

        

Don Torcuato

   Concrete    Greater Buenos Aires area    1998

Sola

   Concrete    City of Buenos Aires    1998

Llavallol

   Concrete    Greater Buenos Aires area    1998

Uriburu

   Concrete    Rosario    2010

Campana

   Concrete    Campana    2015

San Lorenzo

   Concrete    Santa Fe area    2016

Darsena F 1

   Concrete    City of Buenos Aires    2017

Darsena F 2

   Concrete    City of Buenos Aires    2018

Maldonado

   Concrete    City of Buenos Aires    2017

Vicente Casares

   Concrete    Greater Buenos Aires area    2018

L´Amalí Expansion project

   Concrete    Olavarría    2018

Aggregates plant:

        

La Preferida

   Aggregates    Olavarría    2004

Paraguay:

        

Yguazú

   Cement    Villa Hayes    2013

 

66


Table of Contents

The map below presents the location of our facilities in Argentina and Paraguay:

 

LOGO

Barker

The Barker plant began operations in 1956 and is located in the City of Benito Juárez, Province of Buenos Aires. The Barker plant currently has total annual cement production capacity of approximately 1.3 million, using one dry-process kiln. The Barker plant has capacity to produce cement and also produces filler, which is used for cement mixing by LomaSer. In the context of the L’Amalí expansion project, and considering the decline in demand, during 2019 we decided to reconvert our Barker and San Juan plants, transforming both full cement lines into grinding and distribution centers, and we have adapted our cost structure to reflect this new scenario.

Catamarca

The plant of Catamarca began operations in 1980 and is located in the City of El Alto, Province of Catamarca. The Catamarca plant, which uses a dry-process kiln, has annual installed cement production capacity of 2.18 million tons. This plant has modern automation technology and is equipped with pre-heating equipment. It also features automated quality control systems, which enhance the reliability of its finished products.

The Catamarca plant produces cement, as well as masonry cement. It serves the Province of Catamarca and certain neighboring provinces and regions.

 

67


Table of Contents

L’Amalí

The L’Amalí plant is located approximately five kilometers from our Olavarría plant, Province of Buenos Aires, where our largest limestone reserves are located, and is connected to the Ferrosur Roca freight railway. This plant, which became operational in August 2001, has an annual installed production capacity of approximately 1.9 million tons of clinker and approximately 2.2 million tons of cement and complies with the highest standards of cement production technology and applicable environmental requirements. The plant uses natural gas and solid fuels, together with alternative fuels from Recycomb. See “—Investments” and “Item 5.B Operating and Financial Review and Prospect—Liquidity and Capital Resource—Capital Expenditures” for more information regarding the planned expansion of the L’Amalí plant.

The L’Amalí plant has mobile equipment to extract and crush limestone mined from a quarry located nearby. The quarry is linked to the plant by a conveyor belt transporting system. The L’Amalí plant has a vertical mill to grind limestone and other raw materials, with an hourly capacity of approximately 493 tons, a single kiln to produce clinker with a daily capacity of approximately 5,960 tons and cement production, storage and bulk loading capabilities.

The L’Amalí plant produces cement in bulk. It also produces base cement that is used by LomaSer as a raw material for its cement production and clinker that is used by our other cement plants.

As of the date of this annual report, and in compliance with Decree No. 297/2020 issued by the Argentine Government, as amended and extended from time to time, which provides for social, preventive and mandatory isolation, we have temporarily suspended the construction project of the second line of cement production in our L´Amalí plant. Once the current restrictions are lifted, and the necessary conditions to resume the execution of the project are in place, we expect to set a new timetable to complete the expansion project. See “Item 3.D Risk Factors—Risks Relating to Argentina—The measures taken or to be implemented by the Argentine government in response to the COVID-19 pandemic may cause adverse effect on our business and operations” and “Item 3.D Risk Factors—Risks Relating to Our Industry and Business—Public health threats or outbreaks of communicable diseases, including the COVID-19, have had and will likely continue to have an adverse effect on our operations and financial results”.

LomaSer

LomaSer started operations in 2000 and it is located in the City of Vicente Casares, Province of Buenos Aires. LomaSer is our blending, distribution and logistics center and includes a cement mixing plant and distribution and logistics center. It is located approximately 50 kilometers from the City of Buenos Aires and is connected to our plants in the Province of Buenos Aires through the Ferrosur Roca freight railway. LomaSer’s proximity to Argentina’s principal cement market helps us to quickly respond to client needs, providing superior and reliable delivery services at competitive costs. It also allows customers to maximize fleet performance and minimize cement stock requirements.

LomaSer receives base cement filler and slag from the L’Amalí, Barker and Ramallo plants, respectively. These materials are stored in a multi-cell silo, which has a total capacity of 30,000 tons. The silo feeds a mixer, which has an annual installed cement production capacity of approximately 2.2 million tons.

 

68


Table of Contents

The map below presents the location and connections among our facilities with LomaSer in the Greater Buenos Aires area, as well as the Ferrosur Roca freight railway network, which we use to ship our products and raw materials, as it is connected directly to six of our plants.

 

LOGO

 

  (1)

Railway segment we actively use.

LomaSer has a flexible production facility that allows production to be switched rapidly between one type of cement to another. The ability to separate grinding and blending according to each additions’ characteristic enables us to produce superior quality cement while optimizing the usage of additions.

LomaSer operates over 35% of our total cement dispatches in Argentina. It ships cement in bags or in bulk depending on its customers’ needs.

Olavarría

The Olavarría plant began operations in 1929 and it is located in the City of Olavarría, Province of Buenos Aires. The plant currently has two active dry-process kilns with a kiln production capacity of approximately 0.4 million tons of lime, and a second kiln with an installed capacity of 1.0 million tons of annual production capacity of clinker and 1.62 million tons of annual production capacity of cement. In addition, the Olavarría plant has annual capacity to ship approximately 0.4 million tons of types of lime.

The Olavarría plant produces cement, as well as masonry cement and lime. It principally serves the Buenos Aires region.

Ramallo

The Ramallo plant was inaugurated in 1998 and it is located in the City of Ramallo, Province of Buenos Aires. Ramallo produces cement and also mills slag that is used by LomaSer. This plant has annual cement installed production capacity of 0.48 million tons. We acquire slag from Siderar S.A.I.C., Argentina’s largest steel company, which is located near this plant.

The Ramallo plant serves the northern portion of the Province of Buenos Aires and the Province of Santa Fe.

 

69


Table of Contents

San Juan

The San Juan plant began operations in 1963 and it is located in the City of Rivadavia, Province of San Juan. It has an annual installed clinker production capacity of 0.13 million tons and uses a dry-process kiln and 0.25 million tons. In 1993, a new facility was installed in this plant to enable it to store and process coal, enabling it to operate either using natural gas or a combination of natural gas, fuel oil and coal, together with liquid alternative fuels. The San Juan plant serves the Province of San Juan and certain neighboring provinces.

In the context of the L’Amalí expansion project, and considering the decline in demand, during 2019 we decided to reconvert our Barker and San Juan plants, transforming both full cement lines into grinding and distribution centers, and we have adapted our cost structure to reflect this new scenario.

Sierras Bayas

We acquired the Sierra Bayas plant, which is located in the City of Sierras Bayas, Province of Buenos Aires, in 1992 as part of the Cemento San Martín acquisition. This plant has annual cement production capacity of 0.66 million tons.

This plant received the clinker that it used for cement production from the L’Amalí and Olavarría plants. In the context of the L’Amalí expansion project, and considering the decline in demand, during 2019 we decided to reduce most of the production in this plant.

Zapala

The Zapala plant began operations in 1970 and it is located in Zapala, Province of Neuquén. This plant has a dry-process kiln, with annual installed cement production capacity of 0.39 million tons and annual installed clinker production capacity of approximately 0.23 million tons. This plant is equipped with energy-efficient wheel-type roller grinding equipment used to grind the clinker before it enters the production process.

The Zapala plant produces cement. It mainly serves the provinces of Neuquén and Río Negro and exports approximately 1% of its cement products to Southern Chile.

La Preferida

In 2009, we commenced operations in the aggregates market in Argentina with our acquisition of La Preferida de Olavarría, which is located in the City of Olavarría, Province of Buenos Aires. In 2018, a new crusher started to operate, and we expect it to further enhance the efficiency in our production. This plant has annual aggregates production capacity of 2.2 million tons.

We sell granitic aggregates through La Preferida de Olavarría, which is responsible for approximately 79% of the aggregates consumed by Lomax in their concrete production operations.

Yguazú Cementos

On December 22, 2016, we acquired control of Yguazú Cementos in Paraguay, which commenced operations in 2003. Through Yguazú Cementos we operate one integrated grinding facility in the city of Villa Hayes, located approximately 30 kilometers from Asunción, with a total annual installed cement production capacity of 0.81 million tons, sales volume of 0.57 million tons and 134 employees in 2019. This plant was inaugurated in 2014. We had a market share of approximately 42% in 2019 in terms of cement volume sold in Paraguay, positioning us as the second largest cement company in Paraguay, based on internal estimates. We may also face additional competition in Paraguay either from imports or from incremental local production capacity.

Investments

The duplication of the L’Amalí plant is expected to increase our annual installed cement production capacity by 2.7 million tons and requires a capital expenditure of approximately US$350 million (US$130 per ton). As of

 

70


Table of Contents

December 31, 2019 we have achieved 84% of progress in the construction of the L’Amalí plant second line, and we have invested approximately Ps.15,685 million.

The L’Amalí plant is strategically located in the Buenos Aires region and near our main distribution center, LomaSer, a region of Argentina that accounts for approximately 48% of the country’s cement consumption.

The expansion of the L’Amalí plant was planned during its construction, reducing execution complexity. Required production inputs are already in place with enough capacity to sustain additional demand, such as electric power and natural gas sources. The investment will optimize the maintenance plan of the plant and spare parts inventory. The contractor guarantees, among other technical features, a thermal consumption of 730 kcal/kg, representing approximately an 18% reduction from our average thermal consumption in 2016.

The installation will include state-of-the-art equipment, including, among others: five stage precalcination towers, a new 5,800 tons/day three-pier kiln, one 24,000 tons multi-chamber cement silo, two new packing lines and bulk facilities, one silo with a capacity to store 75,000 tons of clinker, one cement vertical mill, and one raw vertical mill.

Once the expansion is completed, L’Amalí is expected to become the largest cement plant in Argentina and one of the largest in Latin America, based on annual installed cement production capacity.

All imported material of the main equipment were received at site. In addition, civil works for main foundations, silos and buildings structures are completed, and the supply of local steel structures is almost fully completed. Regarding the electromechanical construction, the crusher was tested, the kiln system erection was completed, and the raw and cement mill erection presents good progress.

As of the date of this annual report, and in compliance with Decree No. 297/2020 issued by the Argentine Government, as amended and extended from time to time, which provides for social, preventive and mandatory isolation, we have temporarily suspended the construction project of the second line of cement production in our L´Amalí plant. Once the current restrictions are lifted, and the necessary conditions to resume the execution of the project are in place, we expect to set a new timetable to complete the expansion project. See “Item 3.D Risk Factors—Risks Relating to Argentina—The measures taken or to be implemented by the Argentine government in response to the COVID-19 pandemic may cause adverse effect on our business and operations” and “Item 3.D Risk Factors—Risks Relating to Our Industry and Business—Public health threats or outbreaks of communicable diseases, including the COVID-19, have had and will likely continue to have an adverse effect on our operations and financial results”.

 

ITEM 4A.

UNRESOLVED STAFF COMMENTS

Not applicable.

 

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this annual report. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those set forth in the section entitled “Key Information—Risk Factors” and elsewhere in this annual report. You should read the following discussion in conjunction with “Cautionary Statement with Respect to Forward-Looking Statements” and “Key Information—Risk Factors”.

 

71


Table of Contents
  A.

Operating Results

Principal Factors Affecting Our Results of Operations

Macroeconomic Conditions

Our business is highly sensitive to factors such as GDP growth (globally and in Argentina, the cement industry has a strong positive correlation with GDP growth). An economic slowdown can lead to a slowdown in the construction industry and consequently decreased cement demand and production. Likewise, an expansion of GDP is expected to drive incremental cement demand, above expected GDP growth.

During 2015, the Argentine economy grew by 2.7%; however, in 2016, the Argentine economy contracted by 2.1%. According to the INDEC, the Argentine economy expanded by 2.7% in 2017, contracted by 2.5% in 2018, and by 2.2% in 2019.

The following table presents key data of the Argentine economy for the periods indicated.

 

     As of and for the Year
Ended December 31,
 
   2019     2018     2017  

GDP (billions of Ps.)

     692.0       707.1       725.3  

Real GDP growth

     (2.2 )%      (2.5 )%      2.7

GDP per capita (in thousands of U.S. dollars)

     9.9       11.7       14.6  

Private consumption growth

     (6.4 )%      (2.4 )%      4.0

Average Ps./U.S. dollar exchange rate(1)

     48.2       28.1       16.6  

CPI inflation

     53.8     47.6     24.8

Private sector salary growth

     44.3     30.4     27.3

Unemployment rate(2)

     8.9     9.1     7.2

 

Source: BCRA, IDB and INDEC.

(1)

The average rate is calculated by using the average of the BCRA’s reported exchange rates on a daily basis.

(2)

As a percentage of Argentina’s economically active population.

The Paraguayan economy experienced real GDP growth of 0.2%, 3.7% and 5.0% in 2019, 2018 and 2017.

COVID-19 Pandemic

Since December 2019, a novel strain of coronavirus has spread throughout the world. On March 3, 2020, the COVID-19 was categorized as a pandemic by the World Health Organization. This outbreak has resulted in a global economic slowdown and a temporary shutdown of production and supply chains and disrupt international trade, all of which has negatively impacted Argentina, our industry and our business. In addition, the COVID-19 pandemic poses risks that our employees, contractors, suppliers, customers and other business partners may be prevented from conducting business activities for an indefinite period of time, including shutdowns that have been requested or mandated by governmental authorities, which have had and will likely continue to have a material adverse effect on our results of operations, financial condition and liquidity.

The disruptions caused by the COVID-19 had no impact on our financial performance for the period ended December 31, 2019, and they did not have a material impact on our operations during the months of January and February in 2020. However, as the global spread of the virus began to accelerate late in the first quarter of 2020, we began to experience an adverse impact to our financial results. We believe that we will continue to experience disruptions to our business due to the COVID-19 pandemic through the end of the second quarter and anticipate that the disruption caused by COVID-19 will likely extend into the second half of 2020. However, its trajectory remains highly uncertain and we cannot predict the duration and severity of the outbreak and its containment measures. Given the global macroeconomic situation as of the date of this annual report resulting from the spread of the COVID-19

 

72


Table of Contents

and government measures to address it, while we cannot foresee the impacts on our markets for 2020, we generally expect an adverse impact on the demand environment as compared to 2019.

In compliance with the Decree No. 297/2020 issued by the Argentine government on March 19, 2020, which provided for social, preventive and mandatory isolation, in the context of the COVID-19 pandemic, we undertook the following measures: (i) suspension of production and dispatch of cement, concrete and aggregates until the lockdown ends, (ii) temporary suspension of the construction of the second line of L’Amalí plant in Olavarría, Province of Buenos Aires, Argentina, (iii) home-office for all of our administrative staff.

This situation is already causing a decline on the demand of our products. Over time, these measures may also have a negative impact on our activities including our revenue, supply and profitability but also on the recoverability of our receivables and long-lived assets. In light of the current situation and in addition to the measures above mentioned, we have initiated proactive cost management strategies and an action plan focused on liquidity and liability management, which consists mainly of securing our working capital needs, tightening our fixed cost structure, including labor costs, and reformulating our priorities regarding maintenance capital expenditure needs.

We may also be affected by a decline in the demand of our products due to significant interruptions or delays in, or the termination of, private or public construction projects, or the need to further implement additional policies limiting our production or limiting the efficiency and effectiveness of our operations, including home office policies for a prolonged period of time. Given the uncertainty around the extent and timing of the potential future spread or mitigation and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact to our future results of operations, cash flows or financial condition. However, COVID-19 virus is having and will likely continue to have, for so long as the health crisis and the virus impact continue, a negative impact on our activities, the demand of our products and our results of operations, financial position and cash flows.

The deterioration of Argentine and global economic conditions could, among other things:

 

   

further negatively impact demand for cement, concrete and aggregates, or further lower market prices for our products, which could result in a continued reduction of our sales, operating income and cash flows;

 

   

make it more difficult or costly for us to obtain financing for our operations or investments or to refinance our debt in the future;

 

   

cause us to experience an increase in costs as a result of our emergency measures, delayed payments from our customers and uncollectable accounts;

 

   

impact our liquidity position and cost of and ability to access funds from financial institutions and capital markets;

 

   

cause delays and disruptions in the supply chain resulting in disruptions in the commercial operation dates of certain construction projects;

 

   

cause delays and disruptions in the construction of new cement facilities and the expansion of our existing facilities;

 

   

impair the financial condition of some of our customers, suppliers or counterparties, thereby increasing customer bad debts or nonperformance by suppliers or counterparties;

 

   

decrease the value of certain of our investments; and

 

   

cause other unpredictable events.

At the time of this annual report there is uncertainty around the duration of the disruptions caused by the COVID 19, the possibility of any government intervention or other measures, or the possibility of other economic effects on the stock market, foreign exchange rates and otherwise. Any such negative impact could result in a material adverse effect on our business, liquidity, financial conditions and results of operations as well as our ability to achieve our previously disclosed expectations for the year of 2020.

 

73


Table of Contents

Inflation

Our audited consolidated financial statements comprehensively recognize the effects of variations in the purchasing power of currency through the application of the method to restate financial statements in constant currency established by the IAS 29. See “Presentation of Financial and Other Information”.

Our audited consolidated financial statements as of and for the year ended December 31, 2019, including the figures corresponding to the previous fiscal year have been restated to consider changes in the general purchasing power of our functional currency (the Argentine peso) in accordance with the provisions in IAS 29 and the CNV’s General Resolution No. 777/2018. As a result, our financial statements are stated in the unit of currency that was current at the end of the fiscal year that is being reported.

In accordance with IAS 29, the amounts in the financial statements that have not been stated in current currency as of the end of the reporting period must be restated by application of a general price index. To that end and in the manner established in FACPCE´s Resolution JG No. 539/18, coefficients have been applied that are calculated on the basis of indices published by the FACPCE, resulting from combining national consumer prices published by the Instituto Nacional de Estadística y Censos (the National Statistics and Census Institute), or INDEC, starting on January 1, 2017 and, looking back, domestic wholesale prices, or IPIM prepared by INDEC or, if none is available, consumer price indices published by the General Directorate of Statistics and Censuses in the Autonomous City of Buenos Aires.

The variation, in the index applied to restate our audited consolidated financial statements for the years ended as of December 31, 2019, 2018, and 2017 has been 53.83%, 47.65% and 24.80%, respectively. See “note 2.2 of our audited consolidated statements”.

Foreign Currency Exchange Rate

Our liabilities that are exposed to foreign currency exchange rate risk are primarily denominated in U.S. dollars. To partially offset our risk of any depreciation of the peso against the U.S. dollar, from time to time we may enter into derivative contracts. Because we borrow in U.S. dollars in international markets to fund our operations and investments, we are exposed to market risks from changes in foreign exchange rates and interest rates.

Our foreign currency exposure gives rise to market risks associated with exchange rate movements. A significant portion of our borrowings are denominated in foreign currency. As of December 31, 2019, our consolidated foreign currency-denominated borrowings was Ps.6,014 million, 88% of which was denominated in U.S. dollars, and 12% was denominated in Euros. This foreign currency exposure is represented mainly by debt in the form of international loans and working capital loans from financial institutions.

As of December 31, 2019 we did not have foreign currency derivative financial instruments.

In the event that the peso was to depreciate by 25.0% against the U.S. dollar as compared to the peso/ U.S. dollar exchange rate as of December 31, 2019, our U.S. dollar-denominated indebtedness as of December 31, 2019 would have increased by approximately Ps.2,000 million.

Due to the foreign exchange crisis after the primary elections in August 2019 and the uncertainties on the presidential elections in October 2019 and the measures to be adopted by a new administration, since September 1, 2019 and effective until December 31, 2019, the Central Bank reinstated rigid restrictions and foreign exchange controls, for more information about said restrictions see “Item 10. Additional Information- D.Exchange Controls”.

In 2015, the Argentine peso lost approximately 52% of its value with respect to the U.S. dollar, including a 10% devaluation from January 1, 2015 to September 30, 2015 and a 38% devaluation during the last quarter of the

 

74


Table of Contents

year, mainly concentrated after December 16, 2015 when certain exchange controls were lifted. As of December 31, 2017, the official nominal exchange rate for Argentine pesos into U.S. dollars fell to Ps.18.7742 per US$1.00, a devaluation of approximately 18% as compared to the official exchange rate of Ps.15.8502 per US$1.00 as of December 31, 2016. As of December 31, 2018, the official nominal exchange rate for Argentine pesos into U.S. dollars fell to Ps.37.8083 per US$1.00, a devaluation of approximately 101% as compared to the official exchange rate of Ps.18.7742 per US$1.00 as of December 31, 2017. As of December 31, 2019, the official nominal exchange rate for Argentine pesos into U.S. dollars fell to Ps.59.8950 per US$1.00, a devaluation of approximately 58.4% as compared to the official exchange rate of Ps.37.8083 per US$1.00 as of December 31, 2018. In the first three months of 2020, the Argentine peso depreciated approximately 7.6% against the U.S. dollar.

The following table sets forth the annual high, low, average and period-end exchange rates for the periods indicated, expressed in pesos per U.S. dollar and not adjusted for inflation. There can be no assurance that the peso will not depreciate or appreciate again in the future. The Federal Reserve Bank of New York does not report a noon buying rate for pesos.

 

     Official Nominal Exchange Rates  
     High(1)      Low(1)      Average(1)(2)      Period-end(1)  

2015

     13.7633        8.5537        9.2689        13.0050  

2016

     16.0392        13.0692        14.7794        15.8502  

2017

     18.8300        15.1742        16.5665        18.7742  

2018

     40.8967        18.4158        28.0937        37.8083  

2019

     60.0033        37.0350        48.2423        59.8950  

2020

           

January 2020

     60.3312        59.8152        60.0110        60.3312  

February 2020

     62.2080        60.4325        61.3484        62.2080  

March 2020

     64.4697        62.2503        63.1227        64.4697  

April 2020

     66.5250        64.5295        65.5897        66.5250  

 

(1)

Reference exchange rate published by the Argentine Central Bank.

(2)

Based on daily averages.

Net Capital Expenditures and Other Investments

For the past two years, our capital expenditures have been principally directed to our expansion project in L´Amalí plant. In July 2017, we entered into an agreement with the Chinese company Sinoma International Engineering Co. Ltd., or Sinoma for the construction of the second line at our L’Amalí plant to increase the annual installed cement capacity at this facility by 2.7 million tons. This investment represented 73% of total capital expenditures during the year ended December 31, 2019 and 35% during 2018. The execution phase of the L’Amalí plant expansion started in August 2017. As of the date of this annual report, and in compliance with Decree No. 297/2020 issued by the Argentine Government, as amended and extended from time to time, which provides for social, preventive and mandatory isolation, we have temporarily suspended the construction project of the second line of cement production in our L´Amalí plant. Once the current restrictions are lifted, and the necessary conditions to resume the execution of the project are in place, we expect to set a new timetable to complete the expansion project. See “Item 3.D Risk Factors—Risks Relating to Argentina—The measures taken or to be implemented by the Argentine government in response to the COVID-19 pandemic may cause adverse effect on our business and operations” and “Item 3.D Risk Factors—Risks Relating to Our Industry and Business—Public health threats or outbreaks of communicable diseases, including the COVID-19, have had and will likely continue to have an adverse effect on our operations and financial results”.

On a consolidated basis, our capital expenditures incurred in property, plant and equipment were Ps.11,813 million during the year ended December 31, 2019 and Ps.6,493 million and Ps.3,410 million during the years ended December 31, 2018 and 2017, respectively.

 

75


Table of Contents

Our Cost Structure

The prices that we charge for our cement products are directly related to our production costs. Fluctuations in the price of our thermal energy sources and electricity impact our costs of goods sold and the prices that we charge our customers for our products. Significant increases in the price of natural gas, solid fuels or electricity and, consequently, in our production costs, could reduce our gross margins and our results of operations to the extent that we might not be able to pass a significant portion of these costs on to our customers and could result in reduced sales volumes of our products. Conversely, significant decreases in the price of natural gas, solid fuels or electricity and, consequently, in our production costs, would likely increase our gross margins and our results of operations. Our efforts on increasing the use of co-processing (use of waste as a source of a renewable energy, to replace natural mineral resources and fossil fuels such as coal, petcoke and gas) on our production process aims to decrease both our dependency on certain energy sources and reduce costs. In 2019, the percentage of co-processing used in our production process reached 3.8% and 14.2%, in Argentina and Paraguay, respectively.

Thermal Energy. Our operating income has been affected by energy price changes. Energy prices may vary in the future, mainly due to market forces and other factors outside our control. We protect ourselves from energy price inflation risks through the diversification of our fuel sources (including solid fuels and the use of co-processing as an alternative energy source) and our ability to transfer all or part of increased costs to our customers via price increases for our products. We also seek to produce different types of cement with lower clinker content, replacing it with other components such as fly ash, slag, pozzolana, and limestone, which reduce our overall energy costs.

Thermal energy is our most utilized source of energy for our operations, representing 16% in the year ended December 31, 2019 and 16% and 13% in the years ended December 31, 2018 and 2017, respectively, of our total cost of sales. Thermal energy is comprised of fuel oil, natural gas, mineral coal and petcoke. Natural gas and petcoke are the most significant of these energy sources. We enter into several contracts with suppliers, traders and distributors of natural gas. See “—Supply Contracts”.

The cost of petcoke varies in accordance with international market prices, which are quoted in U.S. dollars and fluctuate depending upon the supply and demand for oil and other refined petroleum products. We make spot purchases of petcoke or steam coal in order to capture market opportunities in the price of these solid fuels. In addition, we prioritize obtaining Argentine petcoke as opposed to imported petcoke since the petcoke we derive from Argentine sellers is generally of higher quality and at a lower cost. Average petcoke prices increased by approximately 19% from 2017 to 2018 and decreased by 39% from 2018 to 2019.

Electrical power. Electrical power is one of the main drivers of our cost structure and represented 10%, 10% and 8% in the years ended December 31, 2019, 2018 and 2017, respectively, of our total cost of sales.

Electrical power is one of the most expensive energy sources that we use. Given our consumption needs and the potentially high cost of electrical power, we have sought to mitigate the risks of supply interruptions and cost increases by contracting electrical power to private companies and entering into agreements to increase the use of renewable energy. Electrical power cost is highly influenced by the government policy applied to fuels used in electrical power generation and by the growing contribution of thermal power generation to the electrical power generation matrix in Argentina.

In Argentina, approximately 60% of the current energy demand that equals the level of consumption in 2005 is marketed by National Administrator of the Electric System (Compañía Administradora del Mercado Mayorista Eléctrico), or CAMMESA. Since 2005, it was possible to contract the rest of the consumption (approximately 40%) through private contracts.

Since 2018, consumers with a demand higher than 300kW are required to source a minimum level of their electrical power demand from renewable sources equal to 8% by December 31, 2017, 12% by December 31, 2019, 16% by December 31, 2021, 18% by December 31, 2023 and 20% by December 31, 2025; provided that any consumption of renewable energy for higher levels as of each cut-off date cannot be reduced in the following periods. For purposes of complying with these minimum level requirements of renewable energy, the consumers have the option to enter into individual power purchase agreements with renewable energy generators, marketers or distributors, or to buy the energy through CAMMESA See “—Supply Contracts”.

 

76


Table of Contents

In 2016, we entered into a 20-year agreement with Genneia S.A., and in 2018 entered into a 20-year agreement with Aluar Aluminio Argentino S.A.I.C. to enhance the use of green energy. With these contracts, we not only complied with the law limits but also surpassed the minimum levels required. See “Item 5.F Operating and Financial Review and Prospects—Supply Contracts”.

Co-Processing. We have increased the use of co-processing in our operations. Co-processing is the final disposal of waste (agricultural, urban and industrial waste) through its integration in the cement production process as a secondary raw material or alternative fuel, as a source of energy. Co-processing is a technique used for permanently eliminating waste without generating environmental liabilities, by harnessing the energy and/or mineral potential of the material. In Argentina, co-processing represented 3.8% in the year ended December 31, 2019 and 4.1% and 3.2% in the years ended December 31, 2018 and 2017, respectively, of our total thermal energy consumption.

For additional information related to our thermal energy, electrical power and co-processing needs and costs, see “Item 4.B Information on the Company—Business Overview—Energy Sources”.

Preservation and maintenance costs. Our industry is capital intensive, and we incur in maintenance costs necessary to preserve the productivity and durability of our cement facilities. In the year ended December 31, 2019 preservation and maintenance costs represented 9% and in the years ended December 31, 2018 and 2017, represented 10% and 11%, respectively, of our total cost of sales.

Freight. Our freight includes the cost of transporting raw materials to our production facilities from our quarries or the location of our suppliers. In the year ended December 31, 2019 freight represented 8% and in the years ended December 31, 2018 and 2017, freight represented 9% and 9%, respectively, of our total cost of sales, mainly as a result of lower volumes of cement and concrete demand in 2019, reducing outbound and inbound freight needs.

Salaries, wages and social security charges. Our salaries, wages and social security charges comprise mainly compensation, social contribution and employee benefits. In the year ended December 31, 2019 salaries, wages and social security charges represented 17% and in the years ended December 31, 2018 and 2017, salaries, wages and social security charges represented 17% and 18%, respectively, of our total cost of sales.

Raw Material Availability. Our long-term success depends in part on our ability to secure raw materials in sufficient quantities, including limestone, gypsum and other materials necessary for the production of clinker and cement, which are currently available to us from quarries located close to the different industrial units. We generally obtain limestone from the mining of quarries that we own. In some cases, however, we may face the risk of the exhaustion of raw materials in some quarries, most notably limestone, which would require us to find new quarry sources further away from our production units, and result in potential materially higher raw material extraction and freight costs. In the year ended December 31, 2019 raw materials represented 10% and in the years ended December 31, 2018 and 2017, raw materials represented 10% and 13%, respectively, of our total cost of sales.

Effects of Taxes on Our Income

We are subject to a variety of generally applicable Argentine federal and state taxes on our operations and results. We are subject to Argentine federal Income Tax at a rate of 30% (that will be reduced to 25% for fiscal years commencing from January 1, 2022 onwards), which is the standard corporate tax rate in Argentina. Dividends paid to argentine individuals and foreign beneficiaries (both individuals and entities) are subject to a 7% withholding tax made by the paying entity (that will be increased to 13% for dividends on profits corresponding to fiscal years starting from January 1, 2021 onwards). We are also subject to the following federal and state taxes:

 

77


Table of Contents
   

Turnover Tax. The Turnover Tax is a provincial tax and the rate applicable depends on each province. Currently, the Turnover Tax represents approximately 1,6% of our net sales.

 

   

Quarry Exploitation Fee. Municipalities establish certain taxes that may have incidence on mining developments. Each jurisdiction in which mining activities are developed has its particular legislation.

For example, Municipalites may charge a quarry exploitation quota equivalent to the amount of limestone contained in the cement dispatched or sold from the factory at a rate determined by each municipality. Typically, the rate is determined at a fixed amount, which is updated every year, although some municipalities can update in a monthly basis. This amount represented 1.4% of sales in 2019 of cement, masonry cement and lime.

 

   

Tax on Bank Accounts Debits and Credits. The general rate of the Tax on bank accounts debits and credits is 0.6% for each debit and each credit, while an increased rate of 1.2% applies in cases in which there has been a substitution for the use of a bank account. Taxpayers (whether at 0.6% or 1.2% rate) may compute 33% of the amounts paid under this tax as a payment on account of the income tax. Law 27,264, in force since August 2016, establishes that micro and small sized companies may apply 100% of this tax as an advance payment of income tax, medium industrial sized may apply 60% of this tax as an advance payment of income tax. Moreover, Law 27,432 establishes that the executive power may increase up to 20% per year the percentage of the payments of this tax that can be computed for as payment on account of Argentine income tax. The government has not exercised this faculty since 2018 and currently it is uncertain if an increase of the computable amounts will take place in the medium term.

 

   

Stamp Tax. Stamp tax is a local tax that is levied based on the formal execution of public or private instruments. Documents subject to stamp tax include, among others, all types of contracts, notarial deeds and promissory notes. Each province and the City of Buenos Aires have their own stamp tax legislation. Stamp tax rates vary according to the jurisdiction and agreement involved. In general, stamp tax rates vary from 0.5% to 3.5% and are applied based on the economic value of the instrument.

 

   

Personal Assets Tax. An annual net wealth tax applies on the net equity where the shareholder is a nonresident or a resident individual at a rate of 50%. We have the right to request reimbursement from the shareholder. The taxable base of the personal assets tax is the book value of the shares as stated in the last financial statements issued at December 31 on the relevant tax period.

We are also subject to certain other non-material duties and taxes.

Effects of Fluctuations in Exchange Rates between the peso, the Guaraní and the U.S. Dollar

Our results of operations and financial condition have been, and will continue to be, affected by the rate of depreciation or appreciation of the peso against the U.S. dollar and the Guaraní, because:

 

   

our revenues were mainly denominated in pesos and only a minor portion of those revenues were exposed to the exchange rate fluctuation of the Guaraní in the years ended December 31, 2019, 2018 and 2017;

 

   

we incur the cost of some of our raw materials and operating expenses in Argentina and Paraguay, our two markets, principally in pesos and Guaraníes, respectively;

 

   

thermal energy, electricity and costs of bags are mainly denominated in, or linked to, the U.S. dollar; and

 

   

we have significant amounts of foreign currency-denominated financial liabilities that require us to make principal and interest payments in U.S. dollars, Guaraníes, and Euros.

Our consolidated U.S. dollar-, Guaraní-, and Euro-denominated borrowings represented 43%, 25%, and 6% respectively, of our outstanding indebtedness as of December 31, 2019, excluding the effects of related party

 

78


Table of Contents

transactions and accrued interest. As a result, when the Peso depreciates against the U.S. dollar or the Guaraní or the Euro:

 

   

the interest cost on our U.S. dollar- Guaraní and Euro-denominated indebtedness increases in pesos, which negatively affects our financial income (expense), net in pesos; and

 

   

the aggregate amount of our U.S. dollar- Guaraní and Euro-denominated indebtedness increases in pesos, and our total liabilities and debt service obligations in pesos increase.

An appreciation of the peso against the U.S. dollar, Guaraní or Euro, has the converse effect.

Effect of Indebtedness Level and Interest Rates

As of December 31, 2019, our total outstanding borrowings on a consolidated basis were Ps.12,226 million. The level of our indebtedness results in financial results, that are reflected in our consolidated statement of profit or loss and other comprehensive income. Financial results consist of interest expense, exchange gains/losses on U.S. dollar and other foreign currency-denominated debt, and other items as set forth in Note 10 to our audited consolidated financial statements. During 2019, we recorded financial expenses of Ps.1,793 million, which included Ps.1,187 million in interest expense related to our loans and financings.

The interest rates we pay on our indebtedness depend on a variety of factors, including prevailing Argentine and international interest rates, any collateral or guarantees and risk assessments of our company, our industry and the economies in Argentina and other markets in which we operate made by our potential lenders, potential purchasers of our debt securities and the rating agencies that assess our debt securities.

Financial Presentation and Accounting Practices

Presentation of Financial Statements

We maintain our financial books and records in pesos. We have prepared our annual audited consolidated financial statements in accordance with IFRS, as issued by the IASB. We have adopted all new and revised standards and interpretations issued by the IASB that are relevant to our operations and that are mandatorily effective as of December 31, 2019. The application of these amendments has had no impact on the disclosures or amounts recognized in our audited consolidated financial statements.

Our audited consolidated financial statements have been prepared on a historical cost basis, which has been restated in end-of-period currency in the case of non-monetary items, except for the revaluation of certain non-current assets and financial instruments, which are measured at the revalued amount or at fair value at the end of each fiscal year.

Upon estimating the fair value of an asset or a liability, we take into consideration the characteristics of the asset or the liability when market participants do take these features into consideration when valuing the asset or the liability at the date of measurement. Fair value for purposes of measurement and/or disclosure in these consolidated financial statements is determined on that basis, except for the transactions consisting in share-based payments that are within the scope of IFRS 2, lease transactions within the scope of IFRS 16 and the measurements that have certain points in common with fair value but are not fair value such as net realizable value in IAS 2 or value in use in IAS 36.

Besides, for financial reporting purposes, fair value measurements are categorized as level 1, 2 or 3 on the basis of the degree to which fair value measurement inputs are observable and the impact of inputs for fair value measurements overall as described below:

 

 

Level 1: quoted (unadjusted) market prices in active markets for identical assets or liabilities that the entity can access at the measurement date;

 

 

Level 2: valuation techniques for which the lowest level input that is significant to their value measurement is

 

79


Table of Contents
 

directly or indirectly observable; and

 

 

Level 3: valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

Classification into current and non-current:

We present assets and liabilities in our consolidated statement of financial position classified as current and non-current.

Assets are classified as current when:

 

(i)

we expect to realize the asset or intend to sell or consume it during its normal operation cycle;

 

(ii)

we maintain the asset primarily for trading purposes;

 

(iii)

we expect to realize the asset within twelve months after the reporting period; or

 

(iv)

the asset is cash or cash equivalents unless the asset is restricted and may not be exchanged or used to settle a liability for at least twelve months after the reporting period.

All the other assets are classified as non-current

Liabilities are classified as current when:

 

  (i)

we expect to settle the liability during its normal operation cycle;

 

  (ii)

we maintain the liability primarily for trading purposes;

 

  (iii)

the liability must be settled within the twelve months after the reporting period; or

 

  (iv)

we do not have an unconditional rights to defer settlement of the liability for at least the twelve months after the reporting period.

All the other liabilities are classified as non-current.

Deferred tax assets and liabilities are classified as non-current assets and liabilities in all cases.

Use of estimates

The preparation of consolidated financial statements requires our Board of Directors to make judgements, estimates and assumptions that affect the reported amounts of the revenues, expenses, assets and liabilities and the accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.

The description of the estimates and significant accounting judgments made by our Board of Directors in the application of accounting policies as well as areas with a higher degree of complexity that require further judgment are disclosed in “note 4. of our audited consolidated statements for the year ended December 31, 2019 and 2018”.

The main accounting policies are herein below discussed.

Principal Accounting Policies

Standards and Interpretations issued but not yet effective

The following is a detail of the standards and interpretations that are issued but not yet effective up to the date of issuance of our consolidated financial statements. We intend to adopt these standards, if applicable, when they become effective.

 

   

New and amendments to the references of the Conceptual Frameworks of several standards

 

80


Table of Contents

The IASB introduced changes into a set of standards when it issued the Conceptual Framework in March 2018 establishing financial concepts and prepares a set of standards for financial reporting preparers in a manner such as to help financial information users to improve their comprehension of this information. Amendments are effective for the fiscal years starting on January 1, 2020. We do not anticipate that the application of these amendments will have a material impact on our consolidated financial statements.

 

   

Amendments to IFRS 3 - Business definition

In October 2018, IASB issued changes into the definition of a business in the IFRS 3 “Business Combinations” to help entities to determine if an acquired group of activities and assets is a business or not. These amendments clarify the minimum requirements for a business, suppress the evaluation of whether the market participants are capable of replacing missing elements, add guidance to help entities to evaluate if an acquired process is substantive, reduce the definitions of a business and of P&L and introduce an optional test of fair value concentration. The above-mentioned amendments are effective for the fiscal years starting on January 1, 2020. We do not anticipate that the application of this interpretation will have a material impact on our consolidated financial statements.

 

   

IFRS 17 - Insurance contracts

In May 2017, the IASB issued the IFRS 17 “Insurance contracts”, a new comprehensive financial reporting standard for the Insurance contracts which covers the recognition, assessment, presentation and disclosure. Once in force, IFRS 17 shall replace IFRS 4 which was issued in 2005. The IFRS 17 applies to all the types of insurance contracts (that is, life insurance, non-life insurance, direct insurance and reinsurance), irrespective of the type of entities that issue such policies as well as certain guarantees and financial instruments with certain characteristics of discretional participation. IFRS 17’s overall objective consists in the supply of an accounting model for the insurance contracts that should be more useful and systematic for the insurance companies. In contrast to the requirements of IFRS 4, which are based, to a large extent, on the enhancement of local accounting policies, the IFRS 17 provides a comprehensive model for the insurance contracts that deals with all relevant accounting aspects. The IFRS 17 is in force for the fiscal years starting on January 1, 2021. Since we are not engaged in insurance industry, we do not anticipate that the application of these standard will have impact on our consolidated financial statements.

 

   

Amendments to IAS 1 and IAS 8 - Definition of material information

In October 2018, the IASB issued amendments to IAS 1 “Presentation of Financial Statements” and to IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” to align the definition of “material information” through the standards and clarify certain aspects of the definition. The new definition lays down that “Information is material if omitting, misstating or hiding it could reasonably be expected to influence decisions that the primary users of general-purpose financial statements make on the basis of those financial statements. These amendments are effective as from the fiscal years starting on January 1, 2020. We do not anticipate that the application of this interpretation will have a material impact on our consolidated financial statements.

 

   

Amendments to IFRS 9, IFRS 7 and IAS 39

In September 2019, the IASB issued amendments to IFRS 9, IAS 39 and IFRS 7 “Financial Instruments: Disclosures”, which concludes Phase I of its work to respond to the effects of changes to interbank offered rates (“IBOR”) concerning financial information.

These amendments allow hedge accounting to continue during the period of uncertainty before the replacement of an existing benchmark interest rate for a risk-free alternative interest rate. These changes will be effective as from fiscal years starting on January 1, 2020. We do not anticipate that the application of this interpretation will have a material impact on our consolidated financial statements.

 

81


Table of Contents

New and amendment standards and interpretations

We have adopted all the improvements and new standards and interpretations issued by the IASB that are relevant to our operations and which were effective as of December 31, 2019.

Starting on January 1, 2019, we started to apply the following standards:

 

   

IFRS 16: Leases

IFRS 16 supersedes IAS 17 Leases, IFRIC 4, Determining whether and Arrangement contains a Lease, SIC 15, Operating Leases-Incentives and SIC 27, Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets forth out the principles for the recognition, measurement, presentation and disclosure of leases and requires leases to recognize most leases on the balance sheet.

Lessors accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors will continue to classify the leases as either operating or finance leases using similar principles as in IAS 17. Therefore, IFRS 16 does not have an impact for leases where we are the lessor.

We have adopted the IFRS 16 using the modified retrospective method of adoption as from January 1, 2019. We elected to use the practical expedient to not reassess whether a contract is, or contains, a lease as of January 1, 2019. Instead, we have applied the standard only to the contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application. The Group also elected to use the recognition exemptions for lease contacts that, at the commencement date, have a lease term of twelve months or less and do not contain a purchase option (short-term leases) and lease contracts for which the underlying asset is low-value (low-value assets).

 

   

IFRIC 23: Uncertainty over income tax treatments

The interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12, Income Taxes. It does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include the requirements relating to interest and penalties associated with uncertain tax treatments. The interpretation specifically addresses the following:

 

a)

Whether an entity has to consider tax uncertainties separately.

 

b)

The assumptions an entity makes about the examination of treatments by the tax authorities.

 

c)

How an entity determines taxable profit (tax loss), taxable bases, unused tax losses, unused tax credits and tax rates.

 

d)

How an entity considers changes in facts and circumstances.

We determine whether to consider each uncertain tax treatment separately or together with one or more additional uncertain tax treatments and use the approach that better estimates the resolution of uncertainties. We do not believe that we have significant uncertain tax treatments, therefore, the interpretation did not have an impact on our consolidated financial statements.

 

   

Amendments to IFRS 9: Prepayment features with negative compensation

Under the IFRS 9, a debt instrument can be measured at amortized cost or at fair value through other comprehensive income, provided that the contractual cash flows are “solely payments of principal and interest on the principal amount outstanding” (the SPPI criterion) and the instrument is held within the appropriate business model for that classification. The amendments to IFRS 9 clarify that a financial asset passes the SPPI criterion regardless of an event or circumstance that causes the early termination of the contract and irrespective of which party pays or receives reasonable compensation for the early termination of the contract. These amendments did not have an impact on our consolidated financial statements.

 

   

Amendments to IAS 28: Long-term interest in associates and joint ventures

 

82


Table of Contents

The amendments clarify that an entity applies IFRS 9 to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests). This clarification is relevant because it implies that the expected credit loss model in IFRS 9 applies to such long-term interests. The amendments also clarified that, in applying IFRS 9, an entity does not take account of any losses of the associate or joint venture, or any impairment losses on the net investment, recognized as adjustments to the net investment in the associate or joint venture that arise from applying IAS 28, Investments in Associates and Joint Ventures. These amendments had no impact on our consolidated financial statements as we do not have long-term interests in our associate and joint venture.

Improvements to the 2015 – 2017 cycle

 

   

Amendments to IFRS 3: Business combinations

The amendments clarify that, when an entity obtains control over a business that is a joint venture the requirements that apply are those of a business combination attained in stages, including the measurement of interests previously maintained in assets and liabilities in the joint venture at fair value. Upon doing as much, the acquirer conducts a remeasurement of the interest in a joint business owned before the transaction. These amendments did not have an impact on our consolidated financial statements because there is no transaction covered.

 

   

Amendments to IFRS 11: Joint arrangements

An entity that participates but does not have joint control over a joint arrangement could have joint control over the joint arrangement in which the activity of the joint arrangement is a business as defined in IFRS 3. The amendments clarify that the ownership interests maintained in that joint venture are not re-measured. These amendments did not have an impact on our consolidated financial statements in so far as there is no transaction covered.

 

   

Amendments to IAS 23: Borrowing costs

These amendments clarify that an entity must treat any borrowing originally taken for the development of an eligible asset that is pending payment after the asset is ready for prescribed use or sale as a part of generic borrowings. We are applying the provisions of this standard to the funding obtained for the construction of its new plant, all the borrowings are identified to an eligible asset until the settlement of the respective borrowing or the start-up of the plant expected during the second half of 2020. Our practice is in line with the new amendments.

Critical Accounting Policies

Critical accounting policies are those that are important to the presentation of our financial condition and results of operations and that require our management to make difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the possible future resolution of the uncertainties increases, those judgments become even more subjective and complex. For more information about our critical accounting policies, see the notes to our audited consolidated financial statements.

In order to provide an understanding of how our management forms its judgments about future events, including the variables and assumptions underlying the estimates, and the sensitivity of those judgments to different circumstances, we have identified the following critical accounting policies:

 

   

revenue recognition;

 

   

goodwill;

 

83


Table of Contents
   

investments in other companies;

 

   

Leases;

 

   

foreign currency and functional currency;

 

   

borrowing costs;

 

   

taxation;

 

   

property, plant and equipment;

 

   

intangible assets;

 

   

impairment of tangible and intangible assets;

 

   

inventories;

 

   

provisions;

 

   

financial instruments;

 

   

financial assets;

 

   

Ferrocarril Roca management;

 

   

Financial liabilities and equity instruments;

 

   

environmental restoration;

 

   

short- and long-term employee benefits; and

 

   

stripping costs and quarry exploitation.

Revenue recognition

We operate in the cement, masonry cement, concrete, limestone, aggregate production and sales business, in the operation of logistics services through the railway concession that it has been conferred and industrial waste recycling services. The goods to be delivered and the services to be provided arise from agreements (usually, non-written agreements) where we may identify the right of each of the parties, the terms of payment and the agreement are commercial in nature.

Sale of goods

Revenues from agreements with customers are recognized when control over goods is transferred to the customer for an amount that reflects the consideration that we expect to be entitled to in exchange for such assets or services. The customer obtains control of the goods when significant risks and rewards of the products sold are transferred in accordance with the specific terms of delivery that are agreed with the customer. Revenues from the sale of goods are measured at fair value of the consideration received or to be collected, which the price specified in the invoice, net of commercial discounts. No financing components are considered in the transaction since credit terms average from 20 and 35 days, depending on the specific terms agreed upon, which is consistent with market practices.

Some agreements with clients offer commercial discounts or volume-based discounts. If revenue cannot be reliably measured, we defer recognition of income until the uncertainty is resolved. However, in general, performance obligations are met upon the delivery of the goods sold, at which time, both the price and any discount are specifically agreed between the parties. Variable consideration is recognized when there is a high likelihood that there will not be

 

84


Table of Contents

a significant reversal in the amount of the accumulated revenues recognized in the agreement and measured using the expected method or the most likely amount.

The products sold by us in general are not returned by customers once they have been accepted and quality approved. Such approval is obtained the time of delivery.

Services rendered

We provide transportation services along with the sale of cement, concrete, limestone and aggregates. Revenues from transportation services is recognized at the time services are provided, which is usually when revenues from the sale of the transported good is recognized as transportation distance and time is very short. Revenue is measured on the basis of the consideration defined in the contract with customers.

Revenues from freight railway services and waste recycling services are recognized at the time such services are rendered.

Goodwill

Our goodwill corresponds to the acquisition of Recycomb S.A.U. and it is measured at cost restated at the end of the reporting period. See note 2.2 of our consolidated financial statements.

In accordance with IFRS 3, Business Combinations, goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interests and any previous interest held over the net identifiable assets acquired and liabilities assumed.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is not amortized, but rather tested for impairment on an annual basis. For purposes of conducting the impairment test, goodwill is allocated to each of our cash generating units (“CGU”) that expected to benefit from the synergies of the combination. Goodwill is tested for impairment annually as at December 31 and when circumstances indicate that the carrying amount may be impaired.

Impairment is determined for goodwill by assessing the recoverable amount of each CGU (or group of CGUs) to which the goodwill relates. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair value less costs of disposal and its value in use. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognized. Impairment losses related to goodwill cannot be reversed in future periods.

Any goodwill impairment loss is recognized directly as profit or loss.

Upon disposal of the cash generating unit to which goodwill has been allocated, such goodwill is included in the determination of the profit or loss on disposal.

For the years ended December 31, 2019, 2018 and 2017, goodwill has not suffered any impairment.

Investments in other companies

These are investments in companies in which no significant influence is exercised. Given that these investments have not got a market price quoted in an active securities market and its fair value may not be reliably measured, these investments are measured at the restated cost at the end of the fiscal year minus the impairment losses identified at the end of each fiscal year being reported.

Leases

We adopted IFRS 16 on January 1, 2019. The nature and the effect of the changes as a result of the adoption of this new accounting standard are described in note 14 of our consolidated financial statements.

 

85


Table of Contents

The following describes the accounting policy we applied to the lease agreements before the adoption of IFRS 16.

Leases were classified as finance leases whenever the terms of the lease substantially transferred all the risks and rewards of the ownership to lessee. All other leases were classified as operating leases.

Acting as the Lessor (before the adoption of IFRS 16)

Amounts due from lessees under finance leases are recognized as receivables at the amount of the Group’s net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group’s net investment outstanding in respect of the leases.

Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straight-line basis over the lease term.

Acting as the Lessee (before the adoption of IFRS 16)

a) Finance leases: assets held under finance leases were initially recognized as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor was included in the consolidated statement of financial position as a finance lease obligation.

Lease payments were apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognized immediately in profit or loss, unless they were directly attributable to qualifying assets, in which case they were capitalized in accordance with our general policy on borrowing costs. Contingent rentals are recognized as expenses in the periods in which they are incurred.

b) Operating leases: operating lease payments were recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases were recognized as an expense in the period in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives were recognized as a liability. The aggregate benefit of incentives was recognized as a reduction of rental expense on a straight-line basis, except where another systematic basis was more representative of the time pattern in which economic benefits from the leased asset are consumed.

Upon the application of IFRS 16, we have adopted a new accounting model for the recognition and measurement of all the leases, as described below.

We assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

Acting as the Lessee (under IFRS 16)

We apply a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. We recognize lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.

Right of use assets

We recognize a right of use asset at the inception of each lease (the date when such asset is available for use). Right of use assets are measured at cost, less any accumulated depreciation and impairment losses and adjusted to reflect any remeasurement of liabilities and to recognize the changes in the purchasing power of currency pursuant to the provisions of IAS 29. The cost of the right of use assets includes the amount of the lease liabilities recognized,

 

86


Table of Contents

initial direct costs incurred and lease payments made at or before the commencement date, less any lease incentives received. Right of use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets. If ownership of the leased asset transfers to us at the end of the lease term or the cost reflects exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset. The right of use assets are subject to impairment.

Lease liabilities

At the commencement date of the lease, we recognize lease liabilities measured at the present value of lease payments to be made over the term of the lease. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives received, variable lease payments that depend on an index or a rate and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by us and payments of penalties for terminating the lease, if the lease terms include our right of optional termination. Variable payments that do not depend on an index or a rate and are recognized in the consolidated statement of profit and loss and other comprehensive income (unless they are incurred to produce inventory) in the period in which the event or condition that triggers the payment occurs.

In calculating the present value of lease payments, we use the incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset.

Interest expense on the lease payments is recorded in our consolidated statement of profit or loss and other comprehensive income for fiscal year. See note 14 of our consolidated financial statements.

Acting as the Lessor (under IFRS 16)

As previously described, the adoption of IFRS16 had no impact on the recognition and measurement of the leases when we act as lessor.

Foreign currency and functional currency

For purposes of the consolidated financial statements, the income/ (loss) and the financial condition of each company are stated in Argentine pesos, considered to be functional currency (the currency of the primary economic environment in which an entity operates) for all the companies with domicile in the Argentina and this is also the currency of presentation of the consolidated financial statements. In the case of our subsidiary Yguazú Cementos S.A., located in Paraguay, its functional currency is the Guaraní.

For purposes of presentation of our consolidated financial statements, the assets and liabilities from our foreign operations are translated to Argentine pesos at foreign exchange rates prevailing at the end of the reporting period and their statement of profit or loss and other comprehensive income are translated at the average foreign exchange rate for each month, unless the corresponding foreign exchange rate has fluctuated significantly during the month, in which case, the exchange prevailing on the date of the transaction is used. Gain or losses on exchange differences on translation of foreign operations are recognized in other comprehensive income and are accumulated in shareholders’ equity (and are attributed to non-controlling interests, as applicable).

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the foreign exchange rate prevailing at the end of the reporting period.

On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is reclassified to profit or loss.

 

87


Table of Contents

Transactions in foreign currencies are initially recorded at their respective functional currency spot rates at the date the transaction first qualifies for recognition.

Our assets and liabilities denominated in foreign currency are translated to the Argentine pesos at the exchange rates at the end of the reporting period.

Foreign exchange gains / (losses) from monetary items are recognized in profit and loss for the year, net of the effect of inflation, except for those stemming from borrowings denominated in foreign currency to finance qualifying assets, such as construction in progress, in which case, they are capitalized as part of the carrying amount of the asset, as they are considered to be an adjustment to the costs for interest on said borrowings denominated in foreign currency.

Borrowing costs

Borrowing costs, net of the effect of inflation directly attributed to the acquisition, construction or production of qualifying assets, which are assets that take a substantial period of time to get ready for their intended use or sale, are capitalized as part of the cost of the asset until the assets are ready for use or sale.

Income earned on short-term investments in specific outstanding borrowings to finance the construction of qualifying assets is deducted from the borrowing costs that may qualify for capitalization.

All the other borrowing costs are recognized in profit or loss when incurred, net of the effect of the inflation on the liabilities that generated them.

Taxation

Income tax

Argentina

We assess the income tax charge to be booked in accordance with the deferred tax method, which considers the effect of timing differences originating in the different basis for measuring assets and liabilities according to accounting and tax criteria and of the existing net losses and unused tax credits susceptible of deduction of future taxable income computed by considering the tax rate in force which at present is 30% in Argentina. This tax rate had been set forth by Law No. 27.430 until the fiscal period ended on December 2019, dropping to 25% as from January 1, 2020. Pursuant to the reform introduced by Law No. 27.541, the changes in tax rates that had been prescribed were suspended and a decision was made to maintain the original 30% tax rate up to the fiscal years starting on January 1, 2021 inclusive. A literal interpretation of the reform would be that the last year-end dates that will be subject to the 30% tax rate would be the fiscal years ended on December 31, 2021 (that is, those beginning as from January 1, 2021, inclusive), and that the 25% tax rate would come into force for the fiscal years starting as from January 1, 2022, inclusive. See note 3.7.1 of our consolidated financial statements.

Paraguay

We recognize income tax applying the liability method, which considers the effect of temporary differences between the carrying amount and tax bases of assets and liabilities and the tax loss carry forwards and other tax credits, which may be used to offset future taxable income, at the current statutory rate of 10%.

Current taxes

Current tax payable is based on the taxable profit for the fiscal year. Taxable profit differs from profit before tax as reported in the consolidated statement of profit and loss and other comprehensive income because of items of income, or expenses that are taxable or deductible in other years and items that will never be taxable or deductible. Our liability for current tax is calculated using the tax rates that have been substantially enacted at the end of the reporting period.

Deferred taxes

Deferred tax is recognized on temporary differences between the carrying amount of the assets and liabilities included in the consolidated financial statements and the corresponding amount used in the computation of taxable

 

88


Table of Contents

profit. Deferred tax liabilities are generally recognized, for all the taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences that can be utilized. Such deferred tax assets and liabilities are not recognized if the temporary difference arises from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. In addition, deferred tax liabilities are not recognized if the temporary difference arises from the initial recognition of goodwill.

The carrying amounts of deferred tax assets are reviewed at the end of each fiscal year and derecognized to the extent it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the fiscal year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantially enacted at the end of the reporting period. Measurement of deferred tax liabilities and deferred tax assets at the end of fiscal year being reported reflects the tax consequences that would stem from the manner in which the entity expects to recover or settle the carrying amount of its assets and liabilities.

We offset deferred tax assets and deferred tax liabilities if and only if a) it has legally enforceable right to set off current taxes and current liabilities and b) the deferred tax assets and liabilities relate to income taxes levied by the same tax authority on either the same taxable entity or different taxable entities and we intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.

Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and associates, except where we are able to control the reversal of the temporary difference and it is probable that temporary differences will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments are only recognized to the extent that it is probable that there will be sufficient taxable profit against with we can utilize the benefits of temporary differences and they are expected to reverse in the foreseeable future period.

Current and deferred taxes

Current and deferred taxes are recognized in the statement of profit and loss and other comprehensive income. Current and deferred taxes are recognized in the profit and loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred taxes are also recognized in other comprehensive income or directly in equity, respectively. When current tax or deferred taxes arise from a business combination, the tax effect is included in the accounting for the business combination.

Personal asset tax - Substitute responsible

In Argentina, foreign individuals and entities, as well as their undistributed estates, regardless of whether they are domiciled or located in Argentina or abroad are subject to personal asset tax of 0.25% over of the value of any shares or the American Depositary Shares issued by Argentine entities, held as of December 31 of each year. The tax applies to the Argentine issuers of said shares, who must pay for this tax in substitution for the relevant shareholders and it is based on the equity value (following the equity method), or the book value of the shares derived from the most recent financial statements as of December 31 of each year.

In accordance with the Personal Asset Tax Law, we are entitled to obtain a reimbursement of the tax paid from the shareholders levied with the above-mentioned tax through the reimbursement mechanism that the we deem advisable.

Tax reform in Argentina

The Tax Reform Law No. 27,430, modified in turn by Law No. 27,468 prescribes in connection with the adjustment to reflect the effects of inflation for tax purposes to become effective for the fiscal years commencing on January 1, 2018: (a) the adjustment shall be applicable in the fiscal year in which a CPI variation in excess of 100% is verified during the thirty-six months previous to the closing date of the fiscal year being calculated; (b) as regards the first, second and third fiscal years as from its coming into effect, this procedure shall apply in the event of the variation in such index, calculated as from the beginning and until the close of each of such fiscal years exceeds a

 

89


Table of Contents

55%, 30% and 15% for the first, second and third year of application, respectively and (c) that the adjustment to reflect the effects of inflation for tax purposes —be it a gain or a loss— as applicable, corresponding to the first, second and third fiscal year commencing as from January 1, 2018 that has to be calculated if the hypotheses contemplated in the preceding sub-sections (a) and (b) are verified shall be computed as follows: one third in that fiscal period and the remaining two thirds, in equal parts, in the immediately following two fiscal periods.

With the enactment of Law No. 27,541 “Social Solidarity and Productive Reactivation in the framework of a Public Emergency Situation” on December 21, 2019, there was a change in the computation of the inflation adjustment for tax purposes, with it being fixed at one sixth in the fiscal period and in the remaining five sixths, in equal parts, in the immediately following five fiscal periods, which have been recognized as deferred liabilities to be charged against deferred tax in the consolidated statement of profit or loss and other comprehensive income.

Given that as of the closing date of the fiscal year ended on December 31, 2019, the conditions have been satisfied for application of the inflation adjustment for tax purposes, current and deferred income tax have been recorded incorporating the effects stemming from their application. See note 3.7.3 of our consolidated financial statements.

Revaluation of certain assets for tax purposes

The Tax Reform Law No. 27,430 signed into law by the Argentine Executive Branch on December 29, 2017 enables the exercise of the option to revalue, for tax purposes and on a one-off basis, certain assets owned by the taxpayer and existing at the end of the first fiscal year closed after December 29, 2017, the date of coming into force of the law, continuing afterwards with the adjustment of assets revalued on the basis of percentage variations in the consumer price index supplied by the Argentine Official Statistics Office (INDEC) in line with the scales prepared to that end by the Argentine tax authorities (AFIP). The exercise of the option entails payment of a special tax concerning all the revalued assets in accordance with the tax rates established for each type of asset and confers the right to deduct, upon calculating income tax, a depreciation that incorporates the installment corresponding to the amount of the revaluation.

Those who exercise the option to revalue their assets in accordance with the provisions in Law No. 27.430 must (i) waive their right to commence any court case or administrative proceedings whereby the petitioner claims, with tax purposes, the application of adjustment proceedings in any nature until the date of the first fiscal year whose closing date falls subsequent to the coming into force of this law, and (ii) abandon the actions and rights invoked in proceedings commenced in connection with previously closed fiscal years. Additionally, the computation of the amortization of the revaluation amount or its inclusion as the computable cost of a disposal in the income tax assessment shall entail, for the fiscal year in which such computation is performed, a waiver of any claim for adjustment.

Property, plant and equipment

Property, plant and equipment held for use in the production or supply of goods and services, including capitalized stripping and quarry exploitation costs, or for administrative purposes are recorded at cost restate in constant currency at the end of the reporting period, minus depreciation and any accumulated impairment loss.

We hold spare parts that are expected to be used to replace parts of property, plant and equipment and are expected to increase the related asset’s useful life for a period exceeding twelve months. These spare parts are classified in property, plant and equipment and not in inventories.

Construction in progress for administrative, production, supply or other purposes are carried at cost restated in constant currency at the end of the reporting period, minus any impairment loss already recognized. Cost includes professional fees and borrowing costs on qualifying assets, in accordance with our accounting policies. Depreciation on assets under construction only commences when such assets are ready their intended use.

Property, plant and equipment are depreciated, except for the land and assets under construction, over their estimated useful lives using the straight-line method. The estimated useful life, the residual value and the depreciation method are reviewed at the end of each year, with the effect of any changes in estimates being accounted for on a prospective basis.

 

90


Table of Contents

Right of use assets are depreciated on a straight-line basis over the shorter of the lease term or and the estimated useful life of the assets.

Land is not subject to depreciation.

Gain or loss from the disposal or write-off of an item of property, plant and equipment is determined as the difference between the net disposal proceeds and the carrying amount of the asset and it is recognized in the profit and loss.

Intangible assets

Intangible assets with finite useful lives, acquired separately, are carried at cost restated in constant currency at the end of the reporting period, less accumulated depreciation and any accumulated impairment losses.

The estimated useful life and the depreciation method are reviewed at the end of the reporting period, with the effect of any changes in estimates being accounted for on a prospective basis. Intangible assets with an indefinite useful life that are separately acquired are carried at cost restated in constant currency at the end of the reporting period, less accumulated impairment losses.

Intangible assets are derecognized when no future economic benefits are expected from their use or disposal. Gains or losses from the derecognized of an intangible asset, is determined as the difference between the net disposal proceeds and the carrying amount of the asset and it is recognized in the profit and loss when the asset is derecognized.

Impairment of tangible and intangible assets

At the end of the reporting period, we review the carrying amounts of our tangible and intangible assets in order to assess if there is any indication that an asset might be impaired.

If any indication exists, we estimate the asset’s or CGU´s recoverable amount. An asset’s recoverable amount is the higher of an assets or CGU’s fair value less cost of disposal and its value in use. 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 that are specific to the asset.

Intangible assets not yet available for use are subject to impairment tests at least once a year and in so far as there are indications that the asset may have been impaired.

When the carrying amount of an asset or CGU´s exceeds its recoverable amount, the asset or CGU´s if considered impaired and it is written down to its recoverable amount. Impairment losses are immediately recognized in profit or loss.

A previously recognized impairment loss is reversed, only if there has been a change in the assumptions used to determine the asset’s or of the CGU’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset or CGU´s does not exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset or CGU in prior years. Impairment loss reversals are immediately recognized in profit loss.

Inventories

Inventories are stated at the lower of cost restated in constant currency at the end of period and net realizable value. Costs of inventories are determined using the weighted average price method. The net realizable value is the estimated price of sale less estimated costs to conclude such sale. Costs incurred in bringing each product to its present location and condition are accounted for as follows:

 

 

Raw materials and spare parts: at cost using the weighted average price method. Cost is determined at each of our plants.

 

91


Table of Contents
 

Finished goods and work in progress: at the cost of direct materials and labor plus a proportion of manufacturing overheads based on normal operating capacity, but excluding borrowing costs.

The net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. In assessing recoverable amounts of inventories, slow-moving inventories are also considered.

Provisions

We recognize provisions when we have a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The expense relating to a provision is presented in the statement of profit or loss net of any reimbursement.

Estimated amounts of the obligation are based on the expected outflows that will be required to settle such obligation. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, when appropriate, the risks specific to the liability.

When we expect some or all of a provision to be reimbursed, the reimbursement is recognized as a separate asset (a receivable), but only when the reimbursement is virtually certain and the amount of the receivable can be reliably measured.

We use the opinion of our legal advisors to determine if a provision should be recorded as well as to estimate the amounts of the obligations.

Environmental restoration

According to legal provisions and internal policies and practices, the land used for mining and quarries are subject to environmental restoration.

In this context, provisions are recognized in those cases that they could be determined, in order to afford the estimated expenses for the environmental recovery and restoration of the mining areas. These provisions are recorded simultaneously with the increase in value in the underlying asset and the relevant depreciation of the assets involved is recognized in profit and loss prospectively.

The estimated present value of the asset retirement obligation is recorded as a long-term liability, with a corresponding increase in the carrying amount of the related asset, subject to depreciation. The liability recorded is increased each fiscal period due to the passage of time and this change is charged to net profit or loss. The asset retirement obligation can also increase or decrease due to changes in the estimated timing of cash flows, changes in the discount rate and/or changes in the original estimated undiscounted costs. Increases or decreases in the obligation will result in a corresponding change in the carrying amount of the related asset. Actual costs incurred upon settlement of the asset retirement obligation are charged against the asset retirement obligation to the extent of the liability recorded. We discount the costs related to asset retirement obligations using the discount rate that reflects the current market assessment of the time value of money and risks specific to the liabilities that have not been reflected in the cash flow estimates. Asset retirement obligations are remeasured at each reporting period in order to reflect the discount rates in effect at that time.

In addition, we follow the practice of progressively restoring the freed areas by the removal of quarries using the provisions recognized for that purpose.

Financial instruments

Financial assets and financial liabilities are recognized when we become a party to the contractual provisions of the instruments.

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financials assets and financial liabilities (other than financial assets and liabilities at fair value through profit or loss) are added or deducted from the fair value of the financial assets of

 

92


Table of Contents

financial liabilities, as appropriate, on initial recognition. Transactions costs directly attributable to the acquisition of financial assets of financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.

Interest and financial income are recognized to the extent the effective interest rate is accrued.

Financial assets

The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and our business model for managing them. With the exception of trade receivables that do not contain a significant financing component or for which we have applied the practical expedient, we initially measure a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing component or for which we have applied the practical expedient are measured at the transaction price.

According to the provisions under IFRS 9 “Financial instruments”, we classify for purposes of subsequent measurement our financial assets into two categories:

Financial assets at amortized cost

A financial asset is measured at amortized cost if both of the following conditions are met: (i) the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and (ii) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

In addition, for the assets that satisfy the conditions mentioned above, IFRS 9 provides the option of designating at the time of initial recognition, an asset as measured at reasonable value if in doing so it eliminates or significantly reduces an inconsistency in valuation or recognition that would have arisen if the valuation of the assets or liabilities or the recognition of their income or loss were effected on different bases.

We have not designated any financial asset at fair value using this option. As of December 31, 2019, our financial assets at amortized cost comprise certain cash and cash equivalent elements, accounts receivable, trade and other receivables.

Financial assets at fair value through profit or loss

If one of the criteria mentioned above were not satisfied, the financial asset is classified as an asset measured at “fair value through profit or loss”.

Financial assets at fair value through profit or loss are carried in our consolidated statement of financial position at fair value with net changes in fair value recognized in our consolidated statement of profit or loss and other comprehensive income.

As of December 31, 2019, our financial assets at fair value through profit or loss comprise mutual funds and government securities, classified as current investments.

Recognition and measurement

Financial assets at amortized cost are initially recognized at fair value plus transaction costs. Financial assets at amortized cost are subsequently measured using the effective interest rate method and are subject to impairment. Gains and losses are recognized in profit or loss when the asset is derecognized, modified or impaired. We reclassify all investments in debt instruments only when there is a change in the business model used to manage said assets.

Financial assets at fair value through profit or loss are initially recognized at fair value and transaction costs are recognized as expenses in profit or loss and other comprehensive income. Financial assets at fair value through profit or loss are carried at fair value, with net changes in fair value recognized in profit or loss. Gains and losses on the sale of financial assets at fair value through profit or loss are also recognized in profit or loss in “Financial results, net” in the statement of profit or loss or other comprehensive income. We typically use the transaction price to determine the fair value of a financial instrument at the time of initial recognition.

Derecognition

Purchases and sales of financial assets are recognized on the date when we undertake to purchase or sell the asset. The financial assets are de-recognized when:

 

93


Table of Contents
 

The rights to receive cash flows from the asset have expired, or

 

 

We have transferred our rights to receive cash flows from the asset or have assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either: a) we have transferred substantially all risks and rewards of the asset or b) we have neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Upon derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit or loss.

Upon derecognition of a financial asset other than in its entirety (e.g. when we retain an option to repurchase part of a transferred asset), we allocate the previous carrying amount of the financial asset between the part we continue to recognize under continuing involvement, and the part we no longer recognized on the basis of the relative fair values of those parts on the date of the transfer. The difference between the carrying amount allocated to the part that is no longer recognized and the sum of the consideration received for the part no longer recognized and any cumulative gain or loss allocated to it that had been recognized in other comprehensive income is recognized in profit or loss. A cumulative gain or loss that had been recognized in other comprehensive income is allocated between the part that continues to be recognized and the part that is no longer recognized on the basis of the relative fair values of those parts.

Financial asset impairment

At the end of each fiscal year, we assess if there is objective evidence of impairment of a financial asset or group of financial assets measured at amortized cost. Impairment is recorded only if there is objective evidence of the impairment as a consequence of one or more events occurred after the initial recognition of the asset and said impairment may be reliably measured.

For trade receivables, we apply a simplified approach in calculating expected credit losses. Therefore, we do not track changes in credit risk, but instead recognize a loss allowance based on lifetime expected credit losses at each reporting period date. We have established a provision matrix that is based on its historical credit loss experience. For this purpose, evidence of impairment includes hints that debtors or a group of debtors are experiencing major financial difficulties, non-performances or arrears in payments of principal or interest, the likelihood that they shall be declared bankrupt or in reorganization proceedings and when such observable details indicate that there is a decrease in the estimated future cash flows.

The amount of the impairment is measured as the difference between the book value of the asset and the present value of estimated future cash flows (to the exclusion of future loan losses not incurred) discounted at the original effective interest rate of the financial asset. The book value of the asset is written down and the amount of the loss is recognized in the consolidated statement of profit or loss and other comprehensive income. As a practical measure, we may measure impairment on the basis of the fair value of an instrument, using an observable market price. If, in a subsequent period, the impairment amount decreases and such reduction is related to an event taking place after the original impairment, the reversal of the impairment loss is recognized in the consolidated statement of profit or loss and other comprehensive income.

Offsetting of financial instrument

Financial assets and financial liabilities are offset if there is a currently enforceable legal right to offset the recognized amounts and when there is an intent to settle on a net basis, to realize the asset and settle the liability simultaneously.

Ferrocarril Roca Management Trust

The 100% ownership interest in the Ferrocarril Roca Management Trust is recorded at cost, which is the amount of the contributions made, net of trust expenses plus net financing profit or loss accrued until the end of the fiscal year. See note 3.15 of our consolidated financial statements.

 

94


Table of Contents

Financial liabilities and equity instruments

Classification as debt or equity

Debt and equity instruments are classified as financial liabilities or as equity in accordance with the substance of the contractual agreement and the definitions of financial liabilities and equity instruments.

Equity instruments

An equity instrument consists in a contract evidencing a residual ownership interest over an entity’s net assets. Equity instruments issued by us at the amount of proceeds receivable, net of direct issuance costs.

The repurchase of our own equity instruments is recognized and deducted directly in equity. No gain or loss is recognized in profit or loss stemming from purchases, sales, issuance or cancellation of our own equity instruments. See note 3.16 of our consolidated financial statements.

Short- and long-term employee benefits

Liabilities are recognized for the benefits accrued in favor of employees with respect to the salaries and wages, annual vacations and leaves of absence due to diseases in the period in which the service is rendered in connection with the non-discounted amount of the benefits expected to be paid in exchange for such service.

Liabilities are recognized in connection with short-term employee benefits measured at the non-discounted amount of the benefits that are expected to be paid in connection with the related service.

The liabilities recognized with respect to other long-term employee benefits (termination payment plans, which stem from plans that are specific to the employees who leave the company and receive a compensation agreed to be paid in installments) are measured at the present value of estimated future cash outflows expected to be realized.

On January 24, 2018, our Board of Directors approved the implementation of an incentive program calculated on the basis of our ADS (the “Program”). See “Item 6.B Directors, Senior Management and Employees – Compensation – Long-Term Incentive Program”. The purpose of this Program is to attract and retain certain high-ranking employees who satisfy certain admissibility criteria, in the search for aligning the company’s and its shareholders’ long-term interest.

At the end of the reporting period of these consolidated financial statements, such Program has been deployed and implemented. A liability has been recorded to reflect the fair value of the transactions involving stock-based payments as they are settled in cash. Such fair value is determined at the opening date and at every reporting period of the fiscal year until the date when the plan is settled. To calculate fair value, it is the Black-Scholes method that is used. Fair value is recorded as an expense in the period in which the right becomes irrevocable. Changes in fair value are recognized in the fair value in the “Salaries, wages and social security contributions” caption of the consolidated statement of profit or loss and other comprehensive income and the related liability in the caption “Salaries and social security payables” in the consolidated statement of financial position. See note 19 of our consolidated financial statements.

Stripping costs and quarry exploitation

As part of its mining operations, we incur stripping (waste removal) costs during the initial development phase of the open-pit quarries and production phase of our operations. Stripping costs incurred in the developments phase are capitalized as part of the cost of construction of the mine in property, plant and equipment, and are subsequently depreciated over its estimated useful life using the units of production method. Under the units of production method, we use the estimated proven reserves in the denominator. The proven reserves estimate is reviewed periodically, and any adjustment is applied prospectively. The capitalization of development stripping costs ceases when the mine / component is commissioned and ready for use as intended by management.

 

95


Table of Contents

Stripping activities undertaken during the production phase of a surface mine (production stripping) are considered part of the inventory production costs.

In the ordinary course of our business, we undertake several exploration and evaluation activities in order to search for mineral ore and determine the technical and commercial feasibility of the resources identified. Exploration and evaluation activities include research and analysis of historical exploration data, the compilation of exploration data through geological studies, exploratory drilling and sampling in several areas, the determination of volume and the qualification of the resources identified, among others. These costs are recognized as an expense in the period when these are incurred.

Mineral rights acquired in connection with the right to explore existing exploration areas are capitalized and amortized during the term of the right. As soon as a legal right has been acquired to explore, exploration and evaluation costs are expensed as incurred to profit or loss, unless the Group’s Management concludes that there is a highest likelihood of obtaining future profits; when this is the case, costs are capitalized. In assessing whether the costs satisfy the criteria to be capitalized several information sources are used, including the nature of the assets, the surface area explored, and the results of the samples taken, among others.

Capitalize stripping and exploration and evaluation costs are subject to impairment testing.

Components of Certain Statement of Profit or Loss and Other Comprehensive Income Line Items

Net Revenue

Our net revenue is derived by deducting discounts to clients from our gross sales revenue. Although gross sales revenues from Paraguay are in Guaraníes, most of our gross sales revenue is denominated in pesos and is derived primarily from our sale of cement products, concrete, aggregates and railway services.

 

96


Table of Contents

Cost of Sales

Our cost of sales consists of electrical power, manual labor, contractors, depreciation and amortization, freight, packaging and other costs. The following table sets forth the approximate percentage of our total cost of sales that each such component represented for the years ended December 31, 2019, 2018 and 2017.

 

     For the Year Ended December 31,  
     2019      2018      2017  
     (in percentages)  

Salaries, wages and social security charges

     17.5        16.9        18.3  

Thermal energy

     15.7        15.9        13.3  

Depreciation

     11.2        10.9        9.6  

Electrical power

     10.0        10.2        8.4  

Preservation and maintenance costs

     8.9        9.6        10.9  

Freight

     7.8        8.7        9.5  

Contractors

     7.4        7.5        6.5  

Packaging

     3.8        3.6        3.3  

Fees and compensation for services

     1.8        1.7        1.3  

Taxes, contributions and commissions

     1.6        1.5        1.5  

Transport and travelling expenses

     0.7        0.8        0.8