Business Risks

1. Risk Management

(1) How we approach risk

The definition of risk at our group includes both that which is beneficial to our goals and that which is detrimental to them. We see risk as something that will have an effect on the achievement of business and organizational goals and that makes the protection and creation of value uncertain. Through risk management, we are able to revise goals and measures to maximize those risks which are beneficial, and inspect and improve processes to minimize those risks which are detrimental. 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) system and framework

We took the criticality accident caused by JCO Co., Ltd., in 1999 seriously, and we manage each type of risk through a risk management system (refer to diagram below) with the president as the person ultimately responsible. The management and business risks that come with the carrying out of growth and business strategy are discussed at management meetings of executive officers, which include the president. For risks that are determined to be of particular importance, we discuss them at the board of directors and decide upon the courses of action to be taken and the divisions responsible for tackling them. Generally, the chief of each base is ultimately responsible for tackling risks that are unique to each of them and that could damage the stability of our company’s management foundation, such as industrial accidents, compliance violations, quality issues and environmental accidents. We established a Risk Management Working Group as a body responsible for promoting and monitoring company-wide initiatives for risk management, such as risk management policies and important measures, and have built a system that can respond to the risks surrounding our group and the changes thereof. Further, we have a company-wide crisis management system to handle emergencies, such as earthquakes, infectious diseases and industrial accidents that have a significant impact on society.

2. Business Risks

Among the matters relating to the status of business and financial conditions stated in our annual securities report, risks 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 this consolidated fiscal year.

(1) Fluctuations in the Business Environment

a. Fluctuations in 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, the state of the foreign exchange, political and economic circumstances, speculative trading, and competition with substitute materials. The state of fluctuations and the period effected by these can have either positive or negative results on the business performance of the SMM Group.

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. We also use commodity futures and commodity options to hedge the risks of fluctuations in non-ferrous metal prices.

b. Fluctuations in exchange rates

 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 our 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, depending on the state of fluctuations in the foreign exchange and when they occur, it could have a positive or a negative effect on the business performance of the SMM Group.

The SMM Group responds to fluctuations in the foreign exchange rate as necessary through forward foreign exchange contracts, currency options and the utilization of foreign currency accounts

In our earnings forecast for the fiscal year ending March 31, 2023, 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 2.7 billion yen
Nickel price ± ₵10/lb 1.7 billion yen
Gold price ± $10/toz 0.2 billion yen
Exchange rate (yen/U.S. dollar) ± 1 yen/$ 1.4 billion yen

Note: The monetary value of the impact of exchange rate fluctuations provided above is the sum of the revenue from smelting and refining operations in Japan and the exchange difference on foreign operations.

c. Changes in laws and regulations

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, trade and counterintelligence measures; limited protection or insufficient enforceability of intellectual property and other legal rights; exchange rate fluctuations; and confiscation or nationalization of property. Export bans on mineral ore through the materialization of these risks could lead to obstructions to the supply of raw materials and suspensions to operations at plants. These could not only affect our business operations and our profits, but also make it impossible to recover relevant investments.

As the SMM Group’s business expands globally, we are ensuring that each decision on overseas investment is based on a careful assessment of risks inherent to the country concerned. Furthermore, we are working with our local partners overseas to monitor how things are advancing after investing and take appropriate measures as necessary if there are any changes in the situation.

d. Destabilization of non-ferrous metal raw materials and equipment procurement

We are procuring non-ferrous metal raw materials, such as copper concentrates and nickel mattes, from mines in which we hold interest, as well as through long-term ore purchase agreements from mining companies in which we hold no interest. In the annual renewal negotiations for the raw material purchasing terms and conditions that we conduct in accordance with these long-term ore purchase agreements, we are not always able to secure the purchasing terms and conditions that we foresee through a variety of market factors and operational factors at mines. In addition to this, as the price of products is determined by the LME market and other factors, it is 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-scale natural disasters, operational accidents at suppliers, labor disputes, human rights violations, and non-compliance with laws and regulations, could suspend the supply of raw materials. These could lead to a suspension of operations at our plants 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., ore from mines in which we hold an interest) and a stable supply of conflict-free raw materials.

Furthermore, operational suspensions and supply chain disruptions at production bases due to various events beyond our control, such as the materialization of geopolitical risk related to international conflicts, extreme weather conditions, large-scale natural disasters, operational accidents at suppliers, labor disputes, human rights violations, and non-compliance with laws and regulations, could lead to difficulties in procuring equipment and increases to its prices.

In response to supply difficulties and price increases for the equipment we need, the SMM group is looking to increase our output intensity, investigating multiple purchasing and alternative materials in the material procurement division, and enacting suitable measures as changes deem necessary.

(2) Decrease in excellent mines and increase in uncertainty surrounding mining investments

As we move forward with our policy of securing a stable supply of raw materials by investing in mines, we are witnessing increasing resource nationalism, the formation of oligopolies by major resource company, and increasing difficulties in developing new mines, and the results of these are intensifying competition for interests in promising projects and increases to the cost of participating in mine development projects. In addition, we may be forced to delay the commencement of production for various reasons, such as procedures imposed by the relevant environmental administrations, opposition from the local community, and the spread of infectious diseases, 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 could 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 placing a great deal of importance on the acquisition of social licenses with a focus on coexistence with local communities while steadily continuing with mineral exploration. Additionally, we collaborate with our business partners in various locations overseas in new projects 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 doing so, we are working to reduce and avoid uncertain risk from the preparation stage of development projects.

(3) Sudden changes in market demands and the lengthening of new product development

While the target market for our materials business is undergoing rapid changes in terms of customer demands, technologies employed, 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. It is also possible that we invest in new product development only to find ourselves unable to collect returns on these investments as planned, as technical progression and changes in customer needs make newly developed products obsolete even while they are still under development or about to be introduced in the market.

The SMM Group is deepening relationships with customers and accurately ascertaining the needs of customers and the market. To engage in new product development based on these, we are establishing a sufficient operating and research and development system and are working to mitigate these effects. Additionally, we are accelerating development through utilization of governmental support schemes, joint development with other parties and industry-academia collaboration.

(4) Product liability and lawsuits

We have rigorous quality management to ensure that the products and services we manufacture and sell have a quality that satisfies the requirements of our customers. However, defects in in-vehicle products can lead to recalls of the vehicles with them and oblige us to provide compensation for damages. Additionally, there is a risk that there may not only be a general loss of trust in our company, but that we may also have to deal with a large financial burden in the event the amount demanded cannot be covered by our product liability insurance.

To offer products and services that satisfy our customers, the SMM Group has established a Quality Management System (QMS) based on the ISO9001 international standard, has set quality policies and company-wide quality goals, and is engaging in making improvements using the SMM Quality Standards that define what our QMS should be. Additionally, the SMM Group operates Quality Assurance Working Group to provide quality assurance and to improve quality management. assurance improvements. This subcommittee deliberates over measures and confirms their implementation. Based on these organizations and structures, we are effectively using our QMS to achieve even higher levels of quality and strengthen our quality traceability even more.

(5) Securing human resources and diversifying workstyle

The SMM Group is suitably working to secure, foster and utilize the human resources necessary to expand business, such as continuing stable operation and starting new projects. However, the current trend of workstyle reform, amidst a decrease in the working population through the decreasing birthrate and ageing population in the domestic labor market, may leave us facing a manifestation of a labor shortage unless we provide sufficiently diverse options through, among other things, the promotion of a labor that meets with the lifestyle of each employee, the prevention of various types of harassment, and a careful approach to mental health in the work place.

To deal with these social changes, the SMM Group is working to reduce working hours required by employing digital transformation and thereby rationalizing and streamlining operations. Additionally, we are engaging in workstyle reform and the reconstruction of a free and easy organizational culture, providing employees with work opportunities that are safe and sound, fostering human resources, encouraging and evaluating initiatives aimed at long-standing issues, crafting a corporate culture that continually challenges, changes and grows, and securing, fostering and utilizing diverse and excellent human resources.

(6) Corporate social responsibility towards climate change

As initiatives with the goal of reducing greenhouse gas (GHG) emissions, viewed as the cause of climate change and global warming, progress globally, we expect ourselves to fulfil our corporate social responsibility as producers of such gasses through measures such as investments in facilities necessary for environmental countermeasures, carbon footprint management, and carbon taxes. However, we also expect this responsibility to become greater in a low-carbon society than it previously has been.

Towards the realization of net zero GHG emissions by 2050 for the SMM Group, we are working to reduce GHG emissions by participating in the GX league, by utilizing clean energy at our production bases and by introducing energy conservation equipment. While doing this, we are also advancing research & development initiatives towards products that make contributions to the realization of a carbon neutral society.

(7) Intensifying natural disasters

The SMM Group has our 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, a natural disaster, such as an earthquake, storm, or flood, or an accident deriving from these, could suspend operations, lead to a significant drop in production, or cause costly damage to production facilities.

To better prepare against intensifying natural disasters and the accidents that derive from them, 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 extent that is reasonable and possible.

(8) Spread of infectious diseases

While the global spread of COVID-19 in the last few years have not forced us to deal with any major issues, such as the operational suspensions, other novel infectious diseases that may occur and spread in the future could quite possibly have a material impact on the business performance of the SMM Group by infecting employees, causing a sudden contraction in demand or forcing a suspension of operations due to supply chain disruptions.

With priority put on preventing employee infection, we are 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 to minimize the potential impact on our earnings. With top priority given to ensuring the safety of our business partners and employees, we will continue to implement such measures as reducing physical contact 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.

(9) Cyber security

In IT, which is a part of the management base, in addition to the leakage of confidential information due to the intentional or negligence of insiders, changes to the environment through teleworking and utilization of the cloud have led to an increase of cyber security risks, such as attacks against and entry into information systems, both intentional and nondiscriminatory. The ill effects of these can have an effect on plant operations and product quality, which can go on to cause industrial accidents that have a significant social impact and could lead to a loss of stakeholder trust in our company.

To deal with these, the SMM Group has employees undergo information security training, and is engaging in migration to a zero trust network, which allows employees to safely use internal and external systems regardless of their usage environment. Additionally, we are migrating to a cloud service that has advanced security functionality.

(10) Delays in protection of intellectual property or infringement upon another company’s intellectual property

The SMM Group recognizes the importance of acquiring and managing intellectual property rights, acquires intellectual property rights to our achievements in research and development, and protects them following the procedures in accordance with the relevant laws 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.