Business Risks

1. Risk Management

(1) Approach to Risk

The definition of risk at our Group includes both positive and negative aspects in relation to our goals. We see risk as something that will have an effect on the achievement of business and organizational goals and that makes the protection or creation of value uncertain. Through risk management, we are able to revise goals and measures to maximize those positive risks and check and improve processes to minimize those negative risks. This helps us achieve our 3-Year Business Plan and ties into further ensuring the realization of our Vision for 2030 and our long-term vision.

(2) Risk Management (RM) Structure and Framework

We took the criticality accident that occurred at our subsidiary JCO Co., Ltd. in 1999 very seriously and established the Risk Management Working Group as an organization to implement and monitor Group-wide initiatives relating to risk management policies and priority measures and a structure (see Figure 1) with the President having the highest level of responsibility for changes and risks that the Group faces. The risk management structure is composed of three frameworks (see Figure 2). In the business risk management, particularly important risks are discussed by the President and other Executive Officers and identified for carrying out our growth and business strategies. Next, in operational risk management, site managers are responsible for addressing the inherent risks that exist at individual sites and could undermine the stability of the Company’s foundation, such as industrial accidents, compliance violations, quality issues, and environmental accidents. For company crises such as industrial accidents, earthquakes, infectious diseases, and overseas incidents that have a significant impact on society, we have a framework in place to deal with them through our Group-wide crisis management structure.

■ Group-wide Risk Management Promotion and Monitoring Framework (Figure1)

■ The Risk Management Structure (Figure2)

2. Business Risks

Among the items related to the status of business and accounting, etc. described in the Annual Securities Report, the following are risks that may have a significant impact on decisions by investors. Note that the items related to future events in the text are based on the decisions made by the SMM Group at the end of the current consolidated fiscal year.

(1) Rising Difficulty of Resource Development and Investment

As mine development and investment is carried out to ensure a stable supply of raw materials, the competition to acquire interests in high-quality deposits is increasing due to the higher elevation, remote location and low grade of newly discovered deposits, and development and entry costs are increasing. Such factors of uncertainty in mining investments may lead to additional investments, increased mining costs, or the abandonment of investments, which could result in a deterioration of the SMM Group’s financial position and business performance.
The SMM Group continues its exploration activities in various regions in order to acquire mining interests for the future, while also gathering information and evaluating candidate deposits. At the same time, we are working to expand our pipeline of candidate projects for development and investment by strengthening our collaboration with Business Partners overseas, etc. and enhancing our presence in the industry. We also aim to reduce and avoid the uncertainty and risk involved in the preparatory stages of development by selecting investments through careful profitability decisions based on our many years of experience in exploration and the accumulation of mining evaluation know-how.

(2) Prolongation of Development

In the market covered by the Materials businesses, while the demands of customers and the life cycles of products are changing rapidly, the development of new products and the improvement of existing products may be prolonged, possibly requiring a large investment of management resources such as funds and human resources. There is also a possibility that our technologies and products may lose competitive advantage in terms of cost and other factors due to new technologies and products developed by other companies, and this may affect the SMM Group’s financial position and business performance.
The SMM Group strives to reduce these impacts by establishing the necessary structures for sales and development to enhance relationships with customers, to accurately grasp customer and market needs, and to develop new products based on this understanding. We will also accelerate development through the use of support systems provided by the government, joint development with external organizations, and industry-academic collaborative initiatives.

(3) Delays in Human Capital Management Initiatives

The SMM Group engages in securing, training and making good use of human resources necessary to continue stable operations and expand our business, such as by entering into new projects. Meanwhile, the urgent issues facing Japan today include the decline in the working-age population, the intensification of the competition for new recruits due to changes in the attitudes of young people towards work, and the shortage of labor power caused by the increase in the number of people reaching retirement age.
In response to this situation, the SMM Group strives to reduce working hours by introducing digital transformation (DX) and other measures to promote rationalization and labor saving and reduce working hours. At the same time, in order to be an organization where diverse human resources can play an active role, we are working to develop a human resources strategy linked to management strategy, build systems and structures for human resources development that promote the autonomous growth and career development of each employee, and create an internal environment where diverse human resources can work comfortably. We are also actively engaged in strengthening our competitiveness in recruiting new graduates and mid-career hires through public relations and branding activities, promoting ways of working that suit employees’ lifestyles, promoting understanding and infiltration of DE&I, and promoting health management.

(4) Social Responsibility for Climate Change

Initiatives aimed at reducing GHG emissions, which are thought to be the cause of climate change and global warming, are being promoted worldwide. Businesses are expected to fulfill their responsibilities as emitters by implementing the necessary capital investment for environmental measures, reducing their carbon footprint, and paying carbon taxes. This could lead companies to take on even more social responsibility.
The SMM Group established a roadmap for reducing GHG emissions to net zero by 2050, with reduction targets for fiscal year 2030 and initiatives for 2050. In line with this roadmap, the Company promotes the reduction of GHG emissions through measures such as energy-saving and high-efficiency operation at plants, conversion to LNG and woody biomass fuels, and expansion of the use of renewable energy, while also engaging in research and development of products that contribute to the realization of a carbon-neutral society.

(5) Product Liability and Claim Litigation

It is our aim to ensure that the products and services we manufacture and sell meet the demands of our customers through strict quality control. However, there is a possibility that the Company’s credibility will fail and a huge financial burden will occur, for example, in the case of in-vehicle products, due to a defect resulting in a recall of the final installed product, or that we will bear compensation liability due to such factors, or that we will be required to bear compensation that cannot be covered by product liability insurance.
The SMM Group is committed to improving quality in accordance with the SMM Quality Standards, which represent the ideal state of the Quality Management Systems (QMS) that we seek, in the operation of QMS based on the international standard ISO 9001, in order to provide products and services that satisfy our customers. We have also established a Quality Assurance Working Group to promote quality assurance and improve quality control within the SMM Group, formulating quality policies and Group-wide quality objectives, and deliberating measures and monitoring their implementation. Under such an organization and mechanism, we make the SMM Group’s QMS operate effectively, and we strive to further improve quality and strengthen traceability.

(6) Changes in Political and Social Conditions

The SMM Group operates globally, seeking bases for manufacturing and markets of our products overseas. We also procure our main raw materials such as copper concentrates and nickel matte and some of equipment from overseas, such as copper concentrates and nickel matte. Therefore, changes in political and social conditions in countries where we do business, such as political instability, conflicts, changes in laws and regulations, or an increase in resource nationalism, could affect our supply chain and, in turn, affect our ability to continue business operations.
To respond to such risks, the SMM Group constantly monitors changes in political and social conditions and takes appropriate measures accordingly, in cooperation with our business divisions, overseas bases, and overseas Business Partners.

(7) Changes in Economic Climate

a. Non-ferrous metal price fluctuations

Prices of non-ferrous metals - copper, nickel, gold, etc. - are set by the London Metal Exchange (LME) and other international markets (prices set by those markets are referred to as LME market prices, etc.). LME market prices, etc. fluctuate due to the balance of international supply and demand, exchange rate conditions, political conditions, speculative transactions, and the competitiveness of alternative materials. Depending on the circumstances and duration of such fluctuations, they may have a positive or negative impact on the SMM Group’s business performance.
In addition to reducing costs in the Mineral Resources business and Smelting and Refining business, the SMM Group aims to stabilize earnings in the Materials business, which is relatively insensitive to the fluctuation of non-ferrous metal prices. We also use commodity futures and options transactions to hedge the risk of non-ferrous metal prices when necessary.

b. Exchange rate fluctuations

In addition to imported raw materials such as copper concentrates and nickel matte, domestic prices of non-ferrous metals are also set by LME market prices, etc. denominated in US dollars. Therefore, the margins we earn from the Smelting and Refining business are practically denominated in US dollars, and revenues from mining investments and exports of products, etc. to foreign countries are also denominated in foreign currencies. Thus, depending on the situation and duration of exchange rate fluctuations, there is a possibility of positive or negative impact on the SMM Group’s operating results.
The SMM Group deals with exchange rate fluctuations by using forward exchange contracts, currency options, and foreign currency accounts as necessary.
The following is the estimated impact of fluctuations in non-ferrous metal prices and exchange rates on consolidated profit before tax in the operating results forecasts in fiscal year 2024.

Note: The amount affected by the exchange rate fluctuations above is the sum total of revenue from domestic smelting and refining and overseas foreign exchange conversion differences.

(8) Accidents and Disasters at Business Bases

At the manufacturing bases in Japan and overseas operated by the SMM Group, there is a risk of leakage of hazardous substances, fire or explosion due to equipment or instrument failure, incorrect operation, or damage caused by accidents. There is also a risk of mine pollution due to factors such as intense rainfall and earthquakes at the closed mines we own in various parts of the country.
To counter these risks, the SMM Group thoroughly carries out regular inspections of equipment and gauges, secures spare parts, maintains and updates management procedure manuals, and provides regular training. We also ensure the maintenance of deposit sites, seismic reinforcement work, and management of the quality of mine effluent water. On top of daily patrols to check on the status of these measures, regular inspections and corrective guidance are also carried out by specialist divisions at the head office.
As part of the daily activities to manage risks, each base reviews risk-management measures when there are any changes or variations in the environment and conditions that serve as the premise for these risks, such as changes in business environment, work environment, people, equipment, work procedures, and quality standards. A periodic risk review is also undertaken Company-wide during Risk Management Promotion Month every September to reduce risks and prevent accidents and disasters.

(9) Large-scale Natural Disasters, New Highly Virulent Infectious Diseases, Overseas Emergencies

Manufacturing bases of the SMM Group are located in areas taking into account factors such as relationships with customers, advantages in terms of raw material procurement, collaboration with related businesses within the Group, and effective utilization of management resources. However, there is a possibility that our production equipment may be damaged by a major earthquake, storm and flood damage or other natural disaster in these regions, or that the physical and life safety of our employees may be affected by deterioration of public safety resulting from political instability, kidnapping, terrorism or other factors overseas, and that our operations may be suspended or productivity may be significantly reduced as a result of such incidents. There is also a possibility that the SMM Group’s business performance may be affected by new infectious diseases in the future, such as suspension of operations due to infection of employees, sudden contraction of demand, and disruption of the supply chain.
To deal with these extreme natural disasters, the SMM Group carries out measures such as reinforcing buildings against earthquakes, installing flood prevention constructions against tsunamis, increasing effluent treatment capacity, and installing extra water storage tanks, and takes out appropriate insurance to the extent possible in order to prepare a system to minimize secondary effects. We also establish Business Continuity Plans (BCP) to minimize supply disruptions due to reduced or suspended production, for example, by securing alternative suppliers of raw materials and other items to reduce the impact resulting also from infectious diseases and other emergencies on operations and the supply chain.
In preparation for situations where on-site handling is challenging, a standing Crisis Management Committee chaired by the officer responsible for crisis management was established as a permanent body. The Committee works towards the sharing of crisis information, the formulation and improvement of proactive measures, and the maintenance and strengthening of crisis management functions, for example, through drills assuming scenarios such as overseas terrorism, riots, and kidnappings.

(10) Cyber Security

In IT, a part of the foundation of business management, cyber security risks such as intentional or indiscriminate information system hacking or attacks by third parties are increasing and growing due to changes in the environment, such as the increase in remote work and cloud use, as well as the leakage of confidential information due to the intentional or accidental actions of insiders. These problems may have a significant impact on our operations in plants and product quality, and even cause industrial accidents with a major social impact, as well as resulting in a loss of trust in the Company from stakeholders.
To address these issues, the SMM Group conducts information security education for employees and promotes the use of a zero-trust network, a mechanism that allows safe use of internal and external systems regardless of the usage environment, as well as migration to cloud services with advanced security functions.