Caribbean Cement to renegotiate expensive operating lease
Caribbean Cement Company plans to refinance its hefty operating lease for the Rockfort plant in Kingston.
At the same time, the cement maker will be investing US$24.7 million over the next 12 months to complete a coal mill and kiln and implement green energy programmes.
The capex aims to push cement production from 910,000 tonnes to 1.2 million tonnes annually by 2019.
Caribbean Cement will set up a dedicated advisory board to address its operating lease, payable to immediate parent company Trinidad Cement Limited, costing the company billions annually. Both companies are now ultimately owned by Cemex of Mexico.
Last year, Caribbean Cement paid $3.3 billion to TCL as operating lease for the assets it owns at Rockfort. This year, it projects to pay roughly $2.8 billion.
"The structure of the lease is not the most efficient and might have made sense five years ago when Caribbean Cement had no possibility to finance its assets," said Caribbean Cement General Manager Peter Donkersloot Ponce at the company's annual general meeting on Thursday.
The decision is a vindication for minority shareholders who have complained over the years that the arrangement was inefficient and robbed them of returns. Caribbean Cement last paid a dividend in 2005, amounting to a total distribution of around $60 million at seven cents per share.
In 2015, shareholder Michael Subratie formally complained to the Jamaica Stock Exchange that the lease appeared to contravene generally accepted accounting principles - GAAP - and should be replaced with a finance lease arrangement.
Donkersloot, who was appointed general manager by Cemex last November, says "times have changed" and that Carib Cement is now in a better position to seek financial options.
With Cemex's indirect acquisition of controlling interest in Caribbean Cement earlier this year, it allows the Kingston-based producer to seek out better financing options, but Donkersloot indicated that nothing has yet been determined.
"If we can leverage the Cemex group to find a better financial structure, and, say, lend us money at a cheaper rate, then we will definitely use Cemex's muscle to get a lower interest rate. But if Cemex's rate is higher than us going on our own, then we will not use Cemex," said Donkersloot.
"We are looking at the best financial structure that is possible. If it comes with Cemex's help, or not," he emphasised.
Caribbean Cement will negotiate new rates with TCL for the period January 2019 to December 2028, according to the annual report. TCL owns 74 per cent of Caribbean Cement, while Cemex owns 69 per cent of TCL.
Donkersloot is hoping to finalise the new arrangement within six months to a year, he told the meeting.
Caribbean Cement previously told the Financial Gleaner that it has two operating lease agreements with TCL, covering Clinker Kiln 5 and Cement Mill 5. Those structures were part of an expansion programme financed by TCL with a US dollar loan from external sources. The operating lease charge is accounted for on Caribbean Cement's financial statements as an expense.
Portions of Kiln 5, which was completed and commissioned in December 2008, are owned by TCL, and the rest by Caribbean Cement. The operating lease for that asset began on December 1, 2008, and runs for 20 years to 2028. The operating lease for the portion of Cement Mill 5 owned by TCL dates from its commissioning in January 2010.
"We are looking forward to solving the lease situation by bringing the assets to Caribbean Cement," Donkersloot said in discussions with the Financial Gleaner following the meeting.
"We are looking at options," he said.
Caribbean Cement made annual profit of $1.3 billion on revenues of $15.8 billion last year. It represented a shrinkage of the cement producer's bottom line by 16 per cent, despite a spike in volume sales of cement in its major market.