Baker Steel Resources Trust — Key takeaways from the Cemos site visit

After peaking in 2011 at 16.1m tonnes, cement consumption in Morocco has been gradually declining and in 2022–23 stabilised at around 12.5m tonnes per year. With total production capacity of the members of the Moroccan Cement Association of over 24m tonnes per year, the Moroccan cement market is therefore characterised by significant excess capacity and some cement plants of Cemos’s competitors are operating at a moderate utilisation level.

That said, this still allowed the large players to generate a solid return on equity, which for LaFargeHolcim Maroc and Ciments Du Maroc stood at 13.6% and 28.8% in 2023, respectively (with EBIT margins of over 30%). Interestingly, rather than shutting down some of the plants, major Moroccan cement companies are looking to expand capacity in certain regions. We believe that the local players currently favour a less volatile price environment (characterised by gradual cement price increases over the long run) over aggressive buying of market share through price reductions.

Prospective demand for cement in Morocco should be driven by solid economic growth of c 3%+ in the coming years (according to the latest forecasts of the International Monetary Fund), supported by the recent onset of monetary easing by the local central bank. We also note the extensive infrastructure investments in the country. For instance, Morocco will host two important sports events in the coming years: the Africa Cup of Nations in 2025 and the World Cup in 2030 (together with Spain and Portugal). The estimated cost of co-hosting the World Cup is US$5bn and is mostly attributable to the construction and renovation of stadiums, training centres, as well as transport and infrastructure, according to a recent study by Sogécapital Gestion. We also note the latest edition of the direct housing aid (Daam Sakane) programme launched by the Moroccan government in January 2024 (covering the period 2024–28) to drive property ownership, especially for low-income and middle-class citizens (it aims to benefit 114,000 citizens per year).

The local cement market in Morocco is dominated by five major players. These include two listed companies that are part of international groups (LaFargeHolcim Maroc and Heidelberg-owned Ciments Du Maroc) and two local companies: CIMAT and Novacim. Cemos is a relatively small player in the sector, as its Tarfaya cement grinding line has a capacity of 280k tonnes per year (ie c 1.5% of total installed capacity across the Moroccan cement market) but with an ambitious growth objective.

We note that due to high transportation costs, the cement market is segmented into distinct regional markets. Cemos’s Tarfaya operations (see Exhibit 1) benefit from being situated in the southern part of Morocco, given the government’s emphasis on significant public infrastructure investments in Western Sahara in this large and underdeveloped region. This includes especially investments in and around Laayoune (the region’s main city) and along the coast down south, where Morocco is building the Dakhla Atlantic Port, a US$1.2bn megaproject scheduled for completion in 2028. There is also a high development potential for wind farm projects across Western Sahara, which may drive demand for concrete as a material for wind tower foundations, but also a potential alternative to steel for the construction of wind towers. Finally, OCP Group (Morocco’s state-owned phosphate and fertiliser company) is developing a large power-to-X green ammonia project in Tarfaya, featuring hydrogen and ammonia plants, a 2.8GW wind farm, a 1GW solar power plant and 2.7GWh of battery storage. All the above bode well for the demand for cement in the region in the coming years. At the budgeted sales volume for 2024 of around 200k tonnes, Cemos estimates its share in the Southern Moroccan/Western Saharan market at 25%, second to Ciments Du Maroc (63%), which has 1m tonnes of annual production capacity in the region, but ahead of LaFargeHolcim Maroc (12%), which has only 200kt of local production capacity.

An important project for Cemos at present is the construction of a compact calcination unit (CCU) next to the Tarfaya grinding line (scheduled for completion by end-2024 or early 2025), which will enable the company to produce its own low-CO2 and other hydraulic binders (which represent up to 70% of production costs), as well as supplementary cementitious materials that can be used in concrete as low-CO2 binders. This will significantly reduce Cemos’s production costs from 2025 and facilitate its growth strategy focused on the development and marketing of low CO2 ‘green cement’ products. The carbon footprint reduction will be achieved by lowering the clinker content in the cement product to as low as 45% compared to the current 70% through the use of alternative binders supplied by the CCU such as calcinated clay, oil shale ash and pozzolans. Cemos also sees potential to reduce the carbon footprint of the calcination process via the use of oil shale; oil shale deposits are located next to the Tarfaya site (Cemos was originally meant to be an oil shale project). Finally, we note that the electricity supplied to the site is mostly based on renewable energy, wind and solar in particular. Cemos is also preparing various quarry and mining permits for the materials used by the CCU.

Cemos’s strategic focus on low-carbon cement is aligned with the national agenda of addressing the carbon footprint of the local cement industry (which contributes more than 20% of the greenhouse gas emissions in Morocco). The Moroccan standards agency is currently following the EU initiative to establish a low CO2 cement category (expected to be approved in the coming months).

Cemos plans to set up a second grinding line (which it had acquired in 2022) in the Atlas mountain region and city of Errachidia, with the plant installation to commence in 2025 and first production planned in early 2026. The company estimates the investment value for the new grinding unit with current cost at around €15m (Phase 1 Cemos Errachidia), which it can fund internally (it bought the main cement plant in 2022 for this purpose). As a result of this investment, Cemos aims to double current production capacity to 560k tonnes pa. Cemos pursues a nimble approach to capacity expansion, favouring compact facilities over large-scale cement plants, as the former are characterised by lower capital expenditure and shorter construction time (around one to two years, vs five to 10 years for the large-scale facilities), allowing it to quickly capture regional demand as it arises. Cemos is considering further capacity expansion in the future based on the compact cement plants concept, also outside Morocco.

The expected EBITDA for the Tarfaya grinding line in 2024 stands at c €8m, according to BSRT. The company sees potential to reduce clinker costs in the best case by €5–6m per grinding line by utilising its CCU for various hydraulic binders. This would bring the annual EBITDA run rate for the first grinding line to up to €15m (in the best case and subject to full capacity use of the plants in plan), with further growth potential from the second grinding line and a new cement plant in the Atlas region. On completion of the current investments, BSRT expects Cemos to adopt a progressive dividend policy, and BSRT’s management earlier estimated the dividend potential at €3–5m per year on full ramp-up of the CCU and the second cement grinding line. This would imply a c 10–16% yield with reference to the end-June 2024 valuation of BSRT’s investment in Cemos at £26.4m, which consists of straight equity (c 24.0m shares valued at £12.6m) and convertible loan units (£13.8m), translating into a 31.1% stake on a fully diluted basis.

We believe there is a significant potential for a valuation uplift on successful execution and ramp-up of Cemos’s major investments over the next 12–18 months. One of the future development options the company is contemplating is an IPO in late 2026 or early 2027, which we believe would help further crystallise its value. The Moroccan equity market is characterised by a limited opportunity set (c 70–80 listed companies with an aggregate market cap of c £73bn). At the same time, there is a wide pool of local institutional capital (asset management, pension funds, insurance sector) with around US$100bn of assets under management, according to the Casablanca Stock Exchange citing the Supervisory Authority of Insurance and Social Welfare (ACAPS). Based on a discussion we had with a local broker, we understand that foreign investors play a limited role in the market with a c 15% share in trading volumes and 27% in total holdings. This translates into attractive valuations of listed businesses compared to foreign peers, as illustrated by LaFargeHolcim Maroc and Ciments du Maroc, which trade at multiples that are considerably higher than those of their parent businesses (see Exhibit 2). Based on a conversation we had with a local broker, we understand that any good quality deals of US$30–40m or more should attract local institutional capital. We believe that the value of shares offered in a potential IPO of Cemos Group could meet this threshold.

The main risks to Cemos’s investment case we identified include: