This post has been excerpted from a letter by Matthew Fine, Lead Portfolio Manager of the Third Avenue International Value Fund.
During the [second] quarter we established a position in GCC, a cement producer headquartered in the state of Chihuahua, Mexico. GCC is the dominant cement producer in its home state and additionally meets U.S. demand for cement imports from its three Mexican plants, which are each in close proximity to the Texas border.
Additionally, over recent decades, GCC has accumulated a portfolio of four U.S. cement plants and an impressive array of ready-mix mix facilities, terminals and rail assets to serve its distribution needs. In total, the company has built an integrated portfolio of cement production and distribution assets specifically focused on the geographic corridor from Northern Mexico, through Texas and New Mexico and into Colorado and South Dakota.
As an added attraction the company has a captive coal mine in Colorado, serving several of its plants’ energy needs, and some attractive tax assets with which to shelter income.
Recent corporate activity gave rise to the opportunity to purchase shares of GCC. Specifically, the global cement heavyweight Cemex, which has long been a partner of GCC’s founding and controlling family, sold a sizeable portion of its stake in GCC. Roughly coincident with that transaction, GCC purchased an Odessa, Texas cement plant from Cemex that primarily serves cement needs of the oil drilling industry in the Permian basin. Each transaction was driven by Cemex’s long-running effort to reduce its debt burden. GCC’s ownership of the Odessa plant is a recent development but early signs suggest that history may show this to have been a very shrewd purchase.
Further, one must also appreciate that, in the vast majority of circumstances, the U.S. is a very large-scale net importer of cement and is incapable of producing the amount of cement it consumes. GCC’s U.S. plants, like most U.S. plants, are currently running at very high levels of utilization. Its Mexican plants, even though they are impressively profitable, have a considerable amount of slack capacity, which is likely to be gradually taken up as U.S. markets continue to demand more cement over time. This gradual progression should continue to produce improving volumes and prices across GCC’s entire asset portfolio.
Finally, the company’s relative obscurity has left it shares priced at an unjustifiable discount to either Latin American or U.S. cement producing peers as well as simply very attractive in an absolute sense of valuation.
This publication does not constitute an offer or solicitation of any transaction in any securities. Any recommendation contained herein may not be suitable for all investors. Information contained in this publication has been obtained from sources we believe to be reliable, but cannot be guaranteed.
The information in this portfolio manager letter represents the opinions of the portfolio manager(s) and is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed are those of the portfolio manager(s) and may differ from those of other portfolio managers or of the firm as a whole. Also, please note that any discussion of the Fund’s holdings, the Fund’s performance, and the portfolio manager(s) views are as of June 30, 2017 (except as otherwise stated), and are subject to change without notice. Certain information contained in this letter constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe,” or the negatives thereof (such as “may not,” “should not,” “are not expected to,” etc.) or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of any fund may differ materially from those reflected or contemplated in any such forward-looking statement. Current performance results may be lower or higher than performance numbers quoted in certain letters to shareholders.
Date of first use of portfolio manager commentary: July 19, 2017
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Current performance results may be lower or higher than performance numbers quoted in certain letters to shareholders.