Among the matters relating to the status of business and financial conditions stated in our annual securities report, those that could have a material effect on investment decisions are discussed below. Any statement concerning future events contained therein is based on judgment of the Sumitomo Metal Mining (SMM) Group as of the end of the fiscal year ended March 31, 2021.
Fluctuations in non-ferrous metal prices and exchange rates
Lower non-ferrous metal prices
The prices of non-ferrous metals such as copper, nickel, and gold are determined by the London Metal Exchange (LME) and other international markets (hereinafter collectively referred to as “LME reference prices”). LME reference prices are influenced by various factors including international supply and demand balances, political and economic circumstances, speculative trading, and competition with substitute materials. If LME reference prices for copper, nickel, gold, and other non-ferrous metals decline sharply due to the influence of these factors and the situation continues for a prolonged period of time, it could have a material impact on the business performance of the SMM Group.
Exchange rate (yen appreciation)
Not only the import prices of raw materials such as copper concentrates and nickel mattes but also the domestic prices of non-ferrous metal ingots are determined based on LME reference prices in U.S. dollars, meaning that margins earned by SMM in its smelting and refining business are effectively denominated in U.S. dollars. In addition, earnings from investment in overseas mines and the export of products are denominated in foreign currencies. Consequently, if the yen appreciates significantly and remains high for a prolonged period of time, it could have a material impact on the business performance of the SMM Group.
In our earnings forecast for the fiscal year ending March 31, 2022, we estimate the potential impacts fluctuations in non-ferrous metal prices and the yen-dollar exchange rate have on our consolidated profit before tax as shown below:
|Factor||Fluctuation||Impact on consolidated profit before tax|
|Copper price||± $100/t||2.5 billion yen|
|Nickel price||± ₵10/lb||1.5 billion yen|
|Gold price||± $10/toz||0.2 billion yen|
|Exchange rate (yen/U.S. dollar)||± 1 yen/$||1.8 billion yen|
Note: The monetary value of the impact of exchange rate fluctuations provided above is the sum of the revenue from metal processing operations in Japan and the exchange difference on foreign operations.
To address and cope with these risks, the SMM Group is working to reduce costs in the mineral resources business as well as in the smelting and refining business, while seeking to stabilize revenue and profit from the materials business, which is less prone to the effects of fluctuations in non-ferrous metal prices and exchange rates. We will also use forward foreign exchange contracts, commodity futures, and currency and commodity options to hedge the risks of fluctuations in non-ferrous metal prices and exchange rates.
Unfavorable changes in the terms and conditions for purchasing non-ferrous metal raw materials and supply disruptions
Our purchases of non-ferrous metal raw materials such as copper concentrates and nickel mattes include those made under long-term ore purchase agreements not backed by investment. Under the long-term ore purchase agreements, purchasing terms and conditions are subject to annual renewal negotiations, and we may not always be able to secure the necessary quantities of raw materials due to various market factors. Meanwhile, the prices of our products are determined primarily by factors related to non-ferrous metal ingots such as supply and demand situations. It is thus often difficult to pass on the impact of unfavorable changes in the purchasing terms and conditions for raw materials to the selling prices of our products. Furthermore, various events beyond our control—such as extreme weather conditions, large earthquakes, operational accidents at suppliers, labor disputes, human rights violations, and non-compliance with laws and regulations—could suspend the supply of raw materials until the situation is resolved. These factors could put constraints on our production and lead to a deterioration in the financial position and business performance of the SMM Group.
To address and cope with these risks, the SMM Group is seeking to invest in promising mines overseas and get involved in their management to secure a stable source of raw materials (i.e., mines in which we hold an interest) and a stable supply of conflict-free raw materials.
Uncertainty surrounding mining investments
As discussed above, the SMM Group is seeking to secure a stable supply of raw materials by investing in mines. However, in the face of the increasing level of difficulty involved in developing new mines, competition for interests in promising projects is intensifying and the cost of participating in mine development projects is rising. Furthermore, it may turn out after embarking on a mine development project that the quantity of recoverable reserves and the cost of mining are significantly different, or later begin to deviate, from the estimates based on the results of exploration drilling, and as a result, we may not be able to recover the investment in the project as planned. In addition, we may be forced to delay the commencement of production for various reasons—including procedures imposed by the relevant environmental administration and opposition from the local community—leading to an increase in the cost of development. Such additional investment or an increase in the cost of mining attributable to the uncertainty surrounding mining investments may cause a deterioration in the financial position and business performance of the SMM Group.
To address and cope with these risks, the SMM Group is seeking to invest in those projects that have been selected through strict screening for profitability based on our experience in mine exploration and mine evaluation know-how accumulated over the years. In addition, in undertaking a new mine development project, we seek to mitigate and avoid the risk of uncertainty from the preparatory stage.
Declining competitive advantage in the HPAL technology
The SMM Group was the first in the world to succeed in nickel and cobalt production using the high-pressure acid leach (HPAL) technology on a commercial basis and is currently operating HPAL plants in two locations in the Philippines. The HPAL technology, which has enabled the recovery of nickel and cobalt from low-grade nickel oxide ores that had previously not been utilized as resources, is one of the key technologies of the SMM Group. However, more than 15 years have passed since the start of commercial production using the HPAL technology, and other companies are embarking on the planning and operation of their HPAL projects, posing the possibility of undermining our competitive advantage. Other factors posing a potential threat to our competitive position include the possible emergence of an innovative new nickel refining method that would replace the HPAL technology.
To address and cope with these risks, the SMM Group is seeking to maintain its competitive advantage by further refining the existing HPAL technology and continuing efforts to ensure operational stability and reduce costs, while at the same time working on the research and development of new processes that would enable further utilization of low-grade nickel ores that still remain underutilized as resources.
Environmental protection and compliance
The SMM Group’s business operations, particularly those in the areas of mining as well as non-ferrous metal smelting and refining, are subject to a broad range of laws and regulations including those governing occupational safety and health, environmental protection, mining and other pollution control, mining and other industrial waste disposal, and toxic waste management. Under such laws and regulations, operators may be ordered to compensate for damage, whether with or without fault on their part, and/or to keep proper maintenance of closed mines, posing the possibility of incurring additional costs, for instance, as a result of new regulations. Also, companies engaging in the mining and non-ferrous metal smelting and refining business bear the risks associated with pollution and the disposal of mining and other industrial waste, and the responsibility for addressing them. Furthermore, with regard to environmental protection, they are being pressed to go beyond just complying with regulatory requirements to take more aggressive and proactive steps.
It may become necessary to bear a considerable amount of costs to operate our business in compliance with the applicable laws and regulations, or an unforeseen event may occur and prompt certain risks to materialize, causing us to incur greater-than-anticipated costs, or we may be called on to satisfy more demanding environmental standards but fail to respond in a timely and appropriate manner or otherwise delay our response. Each of these cases poses the possibility of not only incurring costs but also undermining the brand value of the SMM Group and resulting in the contraction or suspension of business activities, thereby having an impact on the financial position and business performance of the SMM Group.
Accordingly, the SMM Group is seeking to ensure environmental protection and compliance with the applicable laws and regulations by establishing and operating an environmental management system and a risk management system, while making efforts to minimize unexpected costs. We will also work to reduce potential risks by properly managing progress on the implementation of our “Vision for 2030” and taking appropriate measures as necessary.
Market changes and new product development
While the target market for our materials business is undergoing rapid changes in terms of technologies employed, customer demands, and product life cycles, the development of a new product may involve a prolonged period of time and hence a significant investment of financial and human resources. Furthermore, if the new product becomes obsolete due to technological advances subsequent to its introduction to the market, or if we fail to respond to changing needs of customers, or if a competitor’s equivalent product comes to dominate the market, we may not be able to recover the investment involved as planned. In addition, the sales volume of our core materials products is strongly influenced by the production levels of our customers manufacturing secondary batteries for automobiles, information and communication devices, and so forth, and thus is subject to change depending on such factors as cyclical changes in demand for these products manufactured by our customers, progress in technological innovation, and economic trends. If our materials business segment fails to proceed as planned with the development of new products and the sales of existing products due to the above discussed factors, it may have a material impact on the financial position and business performance of the SMM Group.
In a bid to mitigate the potential impact of these adverse factors, the SMM Group has established a research and development system designed to deliver results as quickly as possible. We have also decided to expand the Battery Research Laboratories and enhance their facilities to strengthen development of the next-generation battery materials. Meanwhile, in the area of powder materials, we have launched “X-MINING,” a website for disseminating information on our products, with the aim of developing new technologies and products that can help solve various social challenges by crossing our know-how on materials with ideas and insights provided by visitors to the website.
The SMM Group recognizes the importance of acquiring and managing intellectual property rights and has been seeking to acquire and protect intellectual property rights to our achievements in research and development, following the procedures in accordance with the relevant law and regulations. This, however, does not necessarily lead to the securing of rights, and we may not be able to fully enjoy the benefits derived from our research and development achievements, for instance, due to a dispute with or an abuse of rights by a third party.
The SMM Group is striving to secure the acquisition and protection of intellectual property rights by establishing a department dedicated to their management.
Expansion into overseas market
The SMM Group is operating business globally, establishing manufacturing bases in overseas locations and selling our products in overseas markets. Such overseas business activities are exposed to various political and economic risks unique to each country, including political instability; changes in laws and regulations concerning the environment, labor, taxation, currency control, and trade; limited protection or insufficient enforceability of intellectual property and other legal rights; exchange rate fluctuations, and confiscation or nationalization of property. If these risks become reality, for instance, in the form of intervention by national and local governments in the natural resources business or a move to increase taxes on the business against the backdrop of higher non-ferrous metal prices or in the form of growing calls for stricter environmental measures from various corners, it may become impossible to recover our investment in overseas operations.
As the SMM Group’s business expands globally, we ensure that each decision on overseas investment is based on a careful assessment of risks inherent to the country concerned. Furthermore, we continue to monitor the local situation after investing in the country and take appropriate measures as necessary if any changes in the situation.
Natural disasters and other contingencies
The SMM Group has its production sites located in regions selected in consideration of various factors including relationships with customers, advantages in procuring raw materials, collaboration with other related business units within the group, and effective use of management resources. However, in the event of a natural disaster—such as an earthquake, storm, or flood—or a major accident in any of these regions, it could cause costly damage and a significant drop in production at the affected site.
To better prepare against natural disasters and serious accidents, the SMM Group is working to establish and implement systems to minimize the secondary effects of such events by taking physical measures—such as seismic retrofitting of existing buildings for production facilities and enhancement of flood resilience in times of tsunami—as well as by insuring against such disasters and accidents to the reasonable extent possible.
Climate change response
Following the adoption of the Paris Agreement at the 21st Conference of Parties to the United Nations Framework Convention on Climate Change (COP21) and its ratification by a sufficient number of signatory nations, global efforts are now underway to implement the framework designed to reduce greenhouse gas emissions, which are the primary cause of climate change and global warming, and environmental regulations are being strengthened worldwide. Further tightening of environmental regulations in the future would result in an increase in the burden (carbon tax) we bear as an emitter of environmentally hazardous substances and have a negative impact on our earnings. Not only that, if we fail to adapt to stricter emission regulations, we may be forced to curtail or suspend our business operations, having an impact on the financial position and business performance of the SMM Group.
The SMM Group recognizes the significance of climate change and announced its support for the Task Force on Climate-related Financial Disclosure (TCFD) in March 2020. We will also actively promote measures to address climate change, one of the material issues raised in our “Vision for 2030,” and continue our efforts to achieve our goals.
Shortage of workers
The SMM Group has been maintaining the workforce needed to ensure business continuity by hiring additional workers where necessary. In Japan, however, it is expected to become increasingly difficult to secure a sufficient number of workers due to a shrinking working population resulting from persistently low fertility and population aging. If we become unable to secure the necessary number of workers, it will become impossible to maintain the production workflow at manufacturing sites and we will have to lower the level of production, posing a fundamental problem that could threaten the continuity of our business. Even if things do not get that point, we will quite possibly miss out on opportunities to participate in new projects due to lack of human capital and end up losing growth opportunities as a company.
In order to avoid such a turn of events, we are seeking to provide an attractive workplace by reforming the way we work and rebuilding an open and energetic organizational culture, and we will continue to strive to secure and develop human resources. At the same time, we will work to reduce the workforce required by employing digital technologies and thereby streamlining operations and saving labor.
The SMM Group holds confidential and personal information obtained from customers and business partners as well as such information originating from within the group in the course of or for the purpose of its business activities. The leakage, destruction, or falsification of such information could have an impact on the business performance and financial position of the SMM Group by incurring costs for the compensation of damage, etc. In addition, with more people working from home because of the COVID-19 pandemic, there has arisen a need to provide employees with an information-secure environment for communicating and working from home.
To address and cope with these risks, the SMM Group has introduced, updated, and reviewed a multi-layered security system, and has been providing information security training to its employees.
Spread of infectious diseases
Not only the ongoing COVID-19 pandemic but also other novel infectious diseases that may occur in the future could quite possibly have a material impact on the business performance of the SMM Group by causing a sudden contraction in demand or forcing a suspension of operations due to supply chain disruptions.
To minimize the potential impact on its earnings, the SMM Group is working to secure alternative sources of raw and other materials, and we will put in place a system designed to prevent, as much as possible, supply chain disruptions resulting from a curtailment or suspension of production. With top priority given to ensuring the safety of our business partners and employees, we will continue to implement such measures as reducing physical contacts by promoting teleworking, offering flexible commuting options such as flextime and staggered work hours, reviewing the existing business continuity plan (BCP), and implementing training and other programs.
Adaptation to digital transformation (DX)
As a result of technological evolution in the field of information and communication and communication technology (ICT), the remarkable advancement of big data analytics, artificial intelligence (AI), and simulation capabilities, and the progress of robotics technology, digital transformation (DX) is bringing sweeping changes to the business world, overhauling business processes and models. In some overseas mines, these new technologies have been put to practical applications such as remote monitoring of mining operations and automated transportation of ores. Successful adaptation to the changes would lead to an opportunity to maintain and enhance our competitive advantage. However, if we fail to invest sufficient resources in the DX field or if we are slow to act, we may not be able to take necessary steps, resulting in a loss of competitive advantage and/or a decline in earning power.
The SMM Group will establish a unit responsible for promoting DX to consider and implement specific steps to proactively adapt to the ongoing changes.