Investor Relations
Business and Other Risks
Annual Report 2009 (Business and Other Risks)
PDF[48KB/4PAGES]
PDF[48KB/4PAGES]Matters that may have a material impact on the business of the Nippon Mining holdings Group include those summarized as follows. Forward-looking statements made in this section are, unless otherwise stated, judgments made by the Company as of the date of compilation of these materials.
Risks Affecting the Entire Group
-
Country risks relating to sources of raw material supplies
The Company Group procures large quantities of raw materials outside Japan. In particular, it is almost entirely dependent on limited crude oil reserves in the Middle East and Indonesia, and on limited copper concentrate sources in South America, Southeast Asia and Australia. Country risks in those countries and regions, for example, involving political instability, social unrest, deterioration in economic conditions or changes in laws or policies, may have an impact on the Company Group's business performance. -
Risks relating to business operations in East Asian countries, particularly China
Sales of products such as copper cathodes, petrochemical products, electronic materials and metal manufacturing products made by the Company Group depend heavily on demand in East Asian countries, notably China, and the Company Group expects to undertake further business expansion in those regions.
In the event that, for whatever reason, there is a decline or other changes in demand for the Company Group's products in these areas, it may have a material impact on the Company Group's financial position and business performance. -
Risks relating to foreign exchange rate fluctuations
Portions of the Company Group's receipts and payments arise from business transactions denominated in foreign currencies, and the Company Group also has substantial assets and liabilities denominated in foreign currencies. Consequently, fluctuations in foreign exchange rates may affect the value of assets, liabilities, receipts and payments when converted into yen.
In addition, fluctuations in foreign exchange rates may also have a material impact when the financial statements of overseas consolidated subsidiaries or affiliated companies accounted for by the equity method are converted into yen. -
Risks relating to collaboration with third parties and business investments
In a variety of business fields, the Company Group collaborates with third parties through joint ventures and other means, and also makes strategic investments in other companies. These partnerships and investments play an important role in the Company Group's business, and, in the event that, for various reasons, key joint ventures experience financial difficulties, or it is not possible to achieve the desired results from collaborative relationships or investments, this may have a material impact on the Company Group's financial position and business performance. -
Risks relating to business restructuring
The Company Group is taking steps to reduce costs, focus its business activities and enhance efficiency. However, it is possible that substantial special losses relating to restructuring may occur in the future.
In the event that the Company Group is unable to execute business restructuring appropriately, or that the restructuring does not achieve the envisaged improvements in the Company Group's business operations, this may have a material impact on the Company Group's financial position and business performance. -
Risks relating to capital expenditures and investments
Continuous capital expenditures and investments are necessary for the ongoing maintenance and growth of the Company Group's business. However, it is possible that, for such reasons as inadequacy of cash flow, it may become difficult to implement these plans. In addition, it is possible that actual investment amounts will greatly exceed projections, or that projected earnings will not materialize. -
Risks relating to environmental regulations
The Company Group's businesses are subject to a wide range of environmental regulations. These regulations impose expenses for environmental cleanups, and, if environmental pollution were to occur, the payment of fines and compensation would be required, making it difficult for the Company Group to continue its operations.
The Company Group's operations give rise to considerable quantities of wastewater, gas emissions and waste matter, and unforeseen circumstances may cause the volumes of these discharges to rise above their permitted levels. It is also possible that in the future environmental regulations will be applied more strictly or strengthened, and also that new environmental regulations will be implemented that give rise to additional cost burdens. The obligations and burdens imposed on the Company Group by these environmental regulations and standards may have a material impact on the Company Group's financial position and business performance.
The Company Group has made due provision to reserves based on its expectation of the cost of environmental measures relating to soil remediation, asbestos and PCBs (polychlorinated biphenyls), but if new or further measures become necessary due to toughened environmental laws or regulations, this could have a material impact on the Company Group's financial position or business performance. -
Risks relating to operations
The Company Group's business is exposed to a variety of risks relating to its operations, such as risks of fire, explosions, accidents, import or export restrictions, natural disasters, mine collapses, climatic or other natural phenomena, labor disputes and restrictions on the transportation of raw materials or products. If such accidents or disasters were to occur, considerable losses may ensue.
The Company Group obtains insurance cover for accidents, disasters, etc., to the extent possible and appropriate. Notwithstanding, it is possible that compensation may not cover the full cost of any damages that occur. -
Risks relating to intellectual property rights
In the execution of its business, the Company Group owns patents and other intellectual property rights of various kinds, but in certain circumstances it is possible that intellectual property rights may be difficult to obtain or their validity may be contested. It is also possible that the Company Group's corporate secrets may be disclosed or misused by a third party, or that owing to the speed of technical progress, the protection afforded by intellectual property rights becomes inadequate with respect to technologies vital to the Company Group's business.
In addition, a claim from a third party of infringement of intellectual property rights in regard to the Company Group's technologies may lead to the payment of substantial royalties or to the prohibition of use of the relevant technologies.
In cases such as those referred to above, in which the Company Group is unable to obtain, or make adequate use of intellectual property rights for the conduct of its business, the Company Group's business performance may be affected. -
Risks relating to the management of personal information
The Company Group manages personal information in relation to such services as petroleum product sales and precious metal installment purchases. The implementation of measures necessary to protect that information may necessitate considerable expense. Furthermore, the disclosure or misuse of customers' personal information may have a material impact on the aforementioned business activities. -
Risks relating to interest-bearing debt
The large size of the interest-bearing debt may restrict the business activities of the Company Group. In addition, to make repayments of principal and interest relating to this debt, it may be necessary for the Company Group to raise funds by such means as additional borrowings, equity financing or the sale of assets. However, the Company Group's ability to conduct such fund raising may depend upon a variety of factors, such as the state of financial markets, the Company's share price and whether or not there are buyers for the assets. Additionally, if interest rates rise - either within Japan or overseas - the resultant increase in interest burden may have a material impact on the Company Group's financial position and business performance. -
Risks relating to write-down of inventories owing to decreased profit potential
In the event that net selling price of inventories at the end of the fiscal period is lower than the corresponding book value owing mainly to declines in market prices of crude oil, petroleum products and rare metals, the book value must be reduced in line with net selling prices. The difference between book values and net selling prices must be charged to cost of sales. Such write-down of inventories may affect the Company Group's financial position and business performance. -
Risks relating to the impairment of fixed assets
In the future, if factors such as changes in the business environment cause the earnings potential of fixed assets to decline and make it unlikely that the amount of investment will be recovered, their book value will be reduced to reflect the likelihood of recovery, and it will be necessary to post the amount of the reduction as an impairment loss. This may affect the Company Group's financial position and business performance. -
Risks relating to the establishment of internal control systems
The Company Group is making every effort to enhance compliance and risk management and to strengthen its internal control systems including internal financial reporting systems by the establishment of the Internal Control Promotion Office and Group Internal Control Committee.
In cases where the Company Group's internal control systems do not function effectively, or situations arise in which the reliability of disclosure cannot be guaranteed, there is a risk that confidence among its stakeholders may be significantly impaired, and this may materially affect the financial position and business performance of the Company Group.
Risks by Segment
Petroleum (Japan Energy Group)
-
Risks relating to fluctuations in margins in the Petroleum business
The margins in the Company Group's Petroleum business are determined by factors beyond the control of the Company Group, largely by the relationship between crude oil prices and the prices of petroleum products.
Factors influencing crude oil prices include the Japanese yen to U.S. dollar exchange rate, the political situation in oil-producing regions, production adjustments by the Organization of the Petroleum Exporting Countries (OPEC) and global demand for crude oil. Factors that influence the prices of petroleum products include demand for petroleum products, overseas petroleum-product market conditions, domestic petroleum-refining capacity and capacity utilization ratios, and the total number of service stations in Japan.
Previously, the Company Group had decided to link the prices of petroleum products to fluctuations in crude oil prices, but in order to construct a fair and transparent price system that accurately reflects petroleum product demand and supply conditions and market trends, from November 2008 the Company Group changed to a price system linked to fluctuations in the petroleum product market. Accordingly, changes in crude oil prices or petroleum product market conditions may have a significantly adverse effect on margins, thereby resulting in a material impact on the Company Group's financial position and business performance.
Furthermore, margins for petrochemical products are affected by the relationship between prices for major raw materials, such as crude oil and naphtha, and prices for petrochemical products. These margins are determined by factors beyond the control of the Company Group, and it is possible that large fluctuations in these margins may continue over an extended period. Petrochemical product prices are affected by such factors as increases in supply capacity through the construction of new production facilities or the expansion of existing facilities, and demand trends for apparel, automobiles, home electronics and other goods. Owing to weak market conditions, it may be difficult to pass on cost increases stemming from higher crude oil and raw materials prices to product prices. This may have a material impact on the Company Group's financial position and business performance. -
Risks relating to the valuation of inventories
The Company Group values inventories, including crude oil and petroleum products, by the average cost method. During a phase of rising crude oil prices, inventories initially valued at a comparatively low level will act to increase profits by pushing down the cost of sales. However, in a phase of falling crude oil prices, inventories initially valued at a comparatively high level will act to decrease profits by pushing up the cost of sales. This may have a material impact on the Company Group's financial position and business performance. -
Risks relating to sources of procurement of crude oil and petroleum products
The Company Group procures all its crude oil from overseas, primarily in the Middle East. Some petroleum products are procured abroad and in Japan. Such factors as changes in the political situation in oil-producing countries, and changes in the supply and demand balance for petroleum products in Japan and abroad, may hamper procurement of crude oil and petroleum products. Inability to secure an appropriate alternative supply may have a material impact on the Company Group's financial position and business performance. -
Risks relating to competition
In the Petroleum business, the Company Group competes with numerous powerful oil companies, both domestically and overseas, including some that have more extensive operations, larger market shares, and greater funds and resources than the Company Group. Competition with such companies is intense, and the inability of the Company Group to conduct operations efficiently in this competitive environment may have a material impact on its financial position and business performance.
Metals (Nippon Mining & Metals Group)
-
Risks relating to market price fluctuations
The Company Group's copper business mainly derives its profit from its copper smelting and refining business and investments in overseas copper mines. Any changes in related market prices, as listed below, could have a material impact on the financial position and business performance of the Company Group.
Our copper smelting and refining business operates as a custom smelter that purchases copper concentrate from overseas copper mines and produces and sells refined copper. The gross margin mainly comprises smelting and refining margins and sales premium.
Smelting and refining margins are determined by negotiations with the mines that produce copper concentrate, but in recent years the supply of copper concentrate to the market has tended to be inadequate owing to such factors as a lower concentrate grade, the emergence of an oligopoly of mining majors, and increasing demand in China, India and other emerging economies. With these factors, copper concentrate remains in short supply, placing downward pressure on smelting and refining margins. In addition, the Company Group's treatment and refining charges have been concluded in U.S. dollars, and some of these contracts include stipulations that the computation of smelting and refining margins is required to partially reflect fluctuations in international prices of copper. Therefore, smelting and refining margins decline when the yen appreciates in value and when international copper prices fall.
Sales premiums, which are added to international prices of refined copper, are determined through negotiations with customers in consideration of a variety of factors, such as importation costs and product quality. Depending on the outcome of such talks, sales premiums could be adversely affected.
The Company Group is also exposed to the risk of reduced returns on equity-method investments in overseas copper mines, should there be any fall in international prices of refined copper, since prices of copper concentrate sold by mining companies in which we have invested are based on international prices of refined copper. -
Risks relating to the stable procurement of copper concentrate
In view of the tight demand and supply conditions for copper concentrate, the Company Group has been investing in and financing overseas copper mines with the objective of securing stable supplies of copper concentrate. However, the financial position and business performance of the Company Group could be materially affected if the Company Group is unable to procure the copper concentrate its smelting and refining business need at the appropriate time, owing to any disruption of operations of overseas copper mines, including those in which it has invested. -
Risks relating to factors such as demand fluctuations and technical innovation in the electronic materials business
Many customers of the electronic materials business are in the IT-related products and consumer electronics industries. Consequently, such factors as supply and demand conditions and price movements in those industries may have a material impact on the Company Group's business performance.
Additionally, if the Company Group is unable to respond appropriately to rapid technical innovation or changes in customer needs, this may have a material impact on the Company Group's financial position and business performance. -
Risks relating to competition in the electronic materials business
The electronic materials business is facing fierce competition, and some competitors in this field have powerful corporate strength in comparison with those of the Company Group. This competition may have a material impact on the Company Group's business performance. -
Risks relating to fluctuations in raw material procurement prices in the electronic materials business
The procurement prices of the raw materials used in the electronic materials business fluctuate in accordance with fluctuations in the market prices of metals and other materials.
If increases in the procurement costs of these raw materials cannot be passed on in the form of higher product prices, or if there is a decline in the market value of inventories compared with the corresponding book value at the start of the fiscal period, there may be a material impact on the Company Group's business performance. -
Risks relating to environmental issues surrounding
Gould Electronics inc. (U.S. subsidiary) In relation to environmental problems that arose in the past in its business activities, Gould Electronics Inc., a U.S.-based subsidiary, is a potential responsible party with regard to specific designated areas within the United States under U.S. environmental laws, such as the Superfund Act. The ultimate financial burden the subsidiary will bear may depend on numerous factors, including the quantity of the substance and its toxicity for which the areas were designated, the total number of other potential responsible parties and their financial position, and remedial methods and technologies.
In relation to this matter, Gould Electronics Inc. is providing reserves that it considers appropriate, but owing to the factors referred to above, the actual amount of the burden may exceed these reserves, in which case the Company Group's business performance may be affected.
Other Operations (Independent Operating and Functional Support Companies)
-
Risks relating to fluctuating demand in titanium business operations
The demand for titanium metals (titanium sponge and titanium ingot) primarily relates to demand for specific purposes, such as for aircraft, power plants, chemical plants and seawater desalination plants. Also, its use in catalyzes is almost entirely for propylene polymerization. If this specific-purpose demand substantially fluctuates, due to changes in domestic or overseas political and economic conditions, or to changes to conditions in the industries using titanium metals for these specific purposes, there may be a material impact on the Company Group's business performance.
Annual Report 2009 (Business and Other Risks)PDF[48KB/4PAGES]
PDF[48KB/4PAGES]
To read PDF files you will need a copy of the (free) Adobe Reader.Click on the logo to go to Adobe's website to download the reader.