On Wednesday, customs authorities of Dominican Republic imposed a fine of US$ 32,000 on Mexican cement maker Cemex S.A. de C.V. (CX). They believe that the company is attempting a tax-evasion scheme for acquiring 640 tons of petroleum coke from Generadora Itabo, an electricity producer in Dominican Republic.
The company also faces other problems. Recently, the state of Texas filed a lawsuit against Cemex for $558 million as royalty payments owed in the United States.
The company had drawn upon substantially big short-term loans to buy Australia’s Rinker in 2007, just before the U.S. housing crisis and the subsequent global financial disaster. It needs to repay $4.1 billion of debt by the end of 2009 and the remaining in 2010 and 2011. To stay afloat, Cemex is refinancing $14.5 billion of debt.
A steady fall in aggregate demand and employment in the U.S. is adversely impacting economic activities in Mexico since both the economies have very strong ties. Even worse, the outbreak of swine flu in Mexico during the second quarter has added more problems to the already difficult business environment. Gross Domestic Product (GDP) is expected to contract by 10% on a year-over-year basis in the quarter.
However, the Mexican economy has started showing signs of recovery. Rise in international raw material prices like oil and metal is a positive sign that will slightly aid the overall economy. Although the doemstic economy is expected to grow by 3% in 2010, 2009 will still remain challenging.
Thus, we maintain our Sell recommendation on Cemex for the time being, based on its high leverage coupled with tough market conditions worldwide.
Read the full analyst report on “CX”
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