Alfred Dawes | Royalties and republics – a cement saga

The folks back in Monterrey are probably wondering how long I will belabour the point of CEMEX taking royalties of up to four per cent from the earnings of Carib Cement Company Ltd (CCCL). The truth is that there is a legion of concerned Jamaicans that will make this a final stand against rapacious greed. I am merely here to stir the pot.

As expected, the motion to take up to four per cent of earnings from CCCL as royalty payments to CEMEX passed by over 90 per cent of the votes tallied at the annual general meeting. This is no surprise as the major shareholder had all the votes to carry the motion. With this development, we stand to see over $9 billion leaving the country as an expense over the next 10 years according to at least one analyst.

Minor shareholders are now left with a company that will return to being barely profitable, if at all. There are two ways in which individual investors and local institutional investors would have stood to benefit from their investment in CCCL. The prospects of dividend payments, which were last paid out in 2005, are now very dim. Capital appreciation, or the increase in share price, has been the only way there has been some benefit to minor shareholders. However, who in their right minds will want to buy a company that they know will struggle to be profitable because earnings are continuously given off?

LITTLE GROWTH IN STOCK PRICE

Experts expect little to no growth in stock price for CCCL. The only winner for us paying higher prices for cement in Jamaica will be CEMEX. If, as CEMEX would like us to believe, the intellectual property and expertise they gifted Trinidad Cement Ltd (TCL) and CCCL were responsible for the profitability of these companies, then it would be fair for them to reap some benefits from their input. That is expected for anyone doing business, but was CEMEX really responsible for the change in fortunes of CCCL and TCL?

When Trinidad Cement Ltd (TCL) bought majority shares in CCCL in 1999, they found a company on the brink of bankruptcy. Very little investment and modernisation had taken place since the Government of Jamaica divested the company a decade earlier. Production capacity was at a meagre fraction of what it could be, and inefficiencies in production and management plagued the plant. It was considered by many to be a money pit.

At that time, there was a technical services agreement in place, with CEMEX taking two per cent of revenue in return for technical input in the operations of the company. In spite of four technical experts from CEMEX guiding the operations, the company was haemorrhaging cash. The new board found that there was no value for money in the agreement. It was immediately terminated and the experts sent packing. With refinancing of high interest rate debt and significant investments in infrastructure, primarily a new mill and kiln put in at a cost of US$160 million, came the turning point in the affairs of CCCL.

Production capacity increased and production costs decreased, setting the company on the path that resulted in the record profits that we are seeing today. There was no technical services agreement or use of CEMEX intellectual property during this transformation period.

Fast-forward to 2015 when CEMEX became the ultimate owners of CCCL through their acquisition of TCL. In that year, the great technical and intellectual property experts continued their five-year string of losses with a Q1 loss of US$149 million. They had lost over US$5 billion over the previous five years. The much vaunted intellectual property and technical expertise they wielded were not helping the heavily indebted company, which had seen its market capitalisation plunge during the great recession.

TAKE CREDIT

On the other hand, the companies they bought that so desperately needed their technical expertise saw in that same quarter of 2015 record increases of 38 per cent and 100 per cent in the EBITDA (earnings before interest, taxes, depreciation, and amortisation) for TCL and CCCL, respectively. So a serial loss-making, heavily indebted entity was now the mentor to highly successful companies and proceeded to take credit for all their successes, like a deadbeat dad on graduation day. This is the situation as it exists today. You may accept the press releases from CCCL, or you may do cursory research and draw your own conclusions.

There are several questions that CCCL needs to answer to the Jamaican people and not just CCCL shareholders.

If CEMEX already has a technical services agreement with TCL for the use of intellectual property and expertise to the tune of four per cent of consolidated revenue, that includes revenue from CCCL, why is there a need to also put in place a similar technical services agreement with CCCL if it is the same intellectual property being used by the TCL group?

Is the intellectual property and technical expertise used by CCCL different from that provided to TCL for use across all its subsidiaries, which would already include CCCL?

Seeing that TCL and CCCL were already poised to increase production of cement and profits in 2015, what additional value has CEMEX brought to the companies that would warrant the recent increase in the value of the royalties paid by TCL to four per cent and the imposition of “double dipping” royalties now imposed on CCCL?

How is it going over at TCL with CEMEX expertise in charge?

Trinidad is a republic; Jamaica has a monarch. Forms of government do not matter if we cannot cry out to a prime minister, president, or a queen to end our exploitation. That truth is set in concrete.

Dr Alfred Dawes is a fellow of the American College of Surgeons, CEO of Windsor Wellness Centre, and medical spokesman for Lifespan Spring Water. Follow him on Twitter @dr_aldawes. Send feedback to columns@gleanerjm.com and adawes@ilapmedical.com.