Carib Cement Says It May Not Be Able To Continue As A Going Concern

Caribbean Cement Company Limited (CCCL), despite its best performance to date on export sales, this week reported one of its worst years of operation in which cement supplied to the market hit a seven-year low and its operating losses climbed above J$2 billion.

Tax credits reduced the net loss to J$1.56 billion, or -J$1.83 per share, a result that was 10 times worse than the loss of J$144.5 million, or negative 17 cents per share, of 2009.

That result, some of it due to higher production costs linked to energy prices, as well as Caribbean Cement's lack of working capital, has forced the indebted company to acknowledge its vulnerability.

"CCCL's major productive assets, which are leased from TCL, and its own fixed and floating assets are included in the security for these loans, and should lenders enforce their security, there is a material risk that CCCL may not be able to continue as a going concern," said a note to the 2010 yearend financial statements.

The disclosure - which was similarly made by parent Trinidad Cement Limited - was repeated in the first-quarter statements, but Caribbean Cement said its directors "have a reasonable expectation" that deals being negotiated to open up new supply markets would pay off for the company.

Chairman Brian Young did not, up to press time, respond to questions left by phone and email to clarify the scope of the risk facing the company and its chances of emerging intact.

The losses have carried into the first quarter - at -J$249.5m - and CCCL's working capital position has opened up a wider gap of negative J$1 billion.

On the upside, the company has halved its bank overdraft and erased its J$14m operating cash deficit to report positive flows of J$71m at the end of March.

The 2010 results demonstrate Kingston-based CCCL's heavy reliance on domestic sales, which at 531,605 tonnes reflected decline of 121,000 tonnes in a year, and the worst cement sales performance in the past decade.

Exports, meantime, more than doubled from 88,912 tonnes to 195,163 tonnes at yearend December 2010, and Caribbean Cement has signalled that this trajectory is likely to be maintained. The company said it has finalised a new supply contract with Haiti and continues to negotiate entry into South and Central America, where it is finalising negotiations on a "significant" supply deal.

Caribbean Cement and TCL have offered no details on the new prospects, but the arrangements would have to be solid and substantial enough to keep TCL creditors from calling their loans.

"I'm sure they have something in their arsenal," said one New Kingston analyst, who requested anonymity. "The only question is whether it's enough."

Caribbean Cement began selling cement to Dominican Republic in the March quarter, but its entry in that market as a low-cost supplier has resulted in a strong push-back from cement manufacturers who have sought to bar the Jamaican company's product, sparking a trade war between the two countries.

This week, Jamaica's industry minister, Karl Samuda, responding to the roadblocks against Carib Cement, imposed a requirement for Jamaican importers of DomRep-produced cement - sold here by Buying House and Arc Systems - to first acquire a licence.

The restrictions are themselves an ironic twist on domestic market dynamics.

CCCL has been lobbying for years to have Jamaica drop its allocation of market quotas to importers, saying it needed a clear unfettered shot at full market share to pay off the debt incurred to modernise its Rockfort plant, but has not been able to convince Samuda to side with its position.

Caribbean Cement is J$6.3b in debt.

Its liability to parent Trinidad Cement Limited has climbed from J$2 billion to J$2.5 billion in a year, notwithstanding conversion of US$15 million to preference shares - "a situation that is not sustainable", said CCCL - while its debt servicing charges last year doubled to more than J$333 million.

Now the DomRep quarrel, if it persists, appears likely to curtail some of CCCL's home-based competition and position it to reclaim market share and revenue growth.

Last year, CCCL's turnover dropped 10.6 per cent to J$7.93 billion, a return to 2007 levels. Sales volumes in Jamaica fell 18.5 per cent, while volumes supplied to the region rose 121 per cent.

Caribbean Cement said signs that the recession is breaking could reinvigorate construction and cement demand.

But the company is seeking more immediate relief from its liabilities under a debt-restructuring programme that parent TCL group is finalising.

TCL 'owns' Caribbean Cement's upgraded Mill 5 and Kiln 5, for which the Jamaican subsidiary pays an annual leasing fee as part of its debt-servicing arrangement.

Caribbean Cement said the TCL debt-restructuring programme being developed by FTI Consulting will free it of some of the lease fees.

The restructuring became necessary after TCL acknowledged breaching covenants on its short-term debt.

The Trinidad company, which is TT$2.58b in debt - TT$2.16b of which is due for payment in the short term - has shed revenue and profit.

At December 2010, the company reported annual losses of TT$80m, which included a TT$4.25m write-off from discontinued business, compared to profit of TT$94m made in 2009.

TCL is also short on working capital, with short-term liabilities running TT$1.3b ahead of current assets.