Central Asia Cement Joint Stock Company and its related company Karcement Joint Stock Company form the cement manufacturing complex at Karaganda in central Kazakhstan. They are both wholly owned subsidiaries of Steppe Cement Ltd, a Malaysian-incorporated holding company, listed on the Alternative Investment Market in London. The Group is currently embarking on an expansion plan to increase its rated cement production capacity from the present 2 million tons to about 3 million tons transforming itself to one of the largest cement producer in Kazakhstan.

The final rating is contingent on the receipt of final documents conforming to information already received.

The rating reflects CAC’s solid competitive position, but also its high operational risk, as the company operates one single plant in the highly volatile Kazakhstan cement market, with no geographical and/or product diversification. The Stable Outlook reflects Fitch expectation that the group will be able to invest in the refurbishment of its cement production Line 5 maintaining a solid financial profile in the next three years (funds from operations – FFO – gross leverage constantly below 3.0×).

Fitch assigned the rating to CAC on the basis of the credit profile and the consolidated figures of the whole Steppe Cement group, as this is considered the most meaningful economic entity in view of both the strong operational ties between Steppe Cement, and its 100% controlled subsidiaries CAC and Karcement and the cross guarantees on the respective debts.

Steppe Cement is the leader in the Kazakh cement market with a market share of some 20%. Its plant has been partially renovated to the more efficient dry technology and is well located (close to the main end-markets and with access to transportation facilities and to coal and raw material sources), thus giving Steppe Cement a cost advantage over its competitors.

The Kazakh cement market has been recovering from the crisis in 2010-2011 and its trend is currently positive (in 9M12 volumes grew by 13% yoy and prices improved by +16% yoy). The long-term prospects are also positive, backed by solid GDP growth in Kazakhstan, strong potential for residential demand and by upgrades in infrastructure. However, cement prices have historically been extremely volatile and Fitch considers strong price pressure to be a major risk, given that a number of new cement plant projects have been announced in the region. If completed, these new plants would cause Kazakh production capacity to largely exceed internal demand in the next years, notwithstanding the expected 6%-8% annual volume growth. The demand/supply imbalance could cause pressure on prices and on industry margins, although the increased competitive pressure should mainly affect the less efficient producers.

The lack of geographical diversification and the fact that Steppe Cement, through its two operating subsidiaries CAC and Karcement, owns and operates one single cement production plant expose the group to high operational risk.

Steppe Cement plans to complete the refurbishment of its cement production Line 5 with an investment of US $34 mln (US $71 mln has been already spent in the project financed mainly by secured bank facilities from EBRD and HSBC). The new line will allow Steppe Cement to exploit the expected cement demand growth and to improve its cost base by substituting the production of some old and less efficient lines.

The new investment should be partially financed by a KZT 2.5 bln (equivalent to US $16 mln) five-year senior unsecured bond issued by CAC and guaranteed by Steppe Cement and Karcement. The remaining part of the investment should be financed by additional secured bank debt, internal cash flows and/or a possible capital increase. The B(kaz)(EXP) expected rating assigned to the prospective bond reflects its lower ranking compared to both long-term banking facilities (secured against the group assets) and short-term lines (secured against receivables and inventories).