Higher Copper and Sulfuric Acid Prices Absorb Arqueros Delay and Support a Dividend Hike; Next Focus Is the Power-Supply Permit and an In-Year Board Decision on Puquios Development

Summary

1H revenue and net income hit record highs, and operating income held roughly flat YoY. In smelting, higher sulfuric acid prices lifted by-product earnings, and the Atacama mine benefited from strong copper prices. Together these offset the absence of last year's real estate sale gains, lower limestone and copper concentrate volumes, and weaker earnings at the ore subsidiaries. For the full year, the company raised its copper price assumption to 620¢/lb. It also lifted its profit plan and dividend forecast, even after factoring in the delayed start of production at the Arqueros mine. Arqueros has entered no-load testing. The near-term milestone toward first production is obtaining the power-supply permit, targeted for end-November.

Key Points (Earnings Highlights and Growth Initiatives)

• Management Strategy and Market View
  • Copper prices are running above prior assumptions, so management raised its copper price assumption from 550¢/lb to 620¢/lb.
  • The company is selling down more cross-shareholdings. Gains from shrinking non-core assets will boost net income and fund the dividend increase.
  • Management is building a global pipeline of successors to Atacama and Arqueros. The project closest to the development stage is Puquios in Chile.
  • The ore business will keep pushing sales to secure volumes. The environmental business will continue price revisions to absorb rising costs.
• Current Business Progress and Drivers
  • Smelting profit rose despite worse ore purchase terms. Higher sulfuric acid prices lifted by-product earnings, and sales premiums improved.
  • Atacama sales volumes fell due to a 1Q plant breakdown and a gradual, age-related decline in ore grade. Higher copper prices more than offset this, and segment profit rose.
  • Limestone volumes declined for three reasons: customer equipment failures that halted operations, the closure of some small and mid-sized overseas customers, and shipping disruptions from successive typhoons.
  • Recurring profit declined mainly due to weaker results at equity-method affiliate Hibi Kyodo Smelting.
• Key Strategic Initiatives and Inflection Points
  • At Arqueros, crude ore production is established in the mining area. The plant area is in no-load testing.
  • Standalone test runs of conveyors and crushers are under way using generators. Testing of ball mills and other large equipment will follow once grid power is connected, targeted for end-November.
  • Management committed to announcing the production start date promptly once it is determined.
  • If the Puquios copper mine project stays on track, management intends to seek a board decision on development within this fiscal year.

Outlook and Strategy

• Full-year operating income guidance is JPY 15.8B (+JPY 1.8B vs. prior guidance). 1H progress stands at 53.9% (our estimate).
• Recurring profit guidance was revised to JPY 14.8B (+JPY 3.3B vs. prior guidance). Lower interest expense from the delayed Arqueros start also contributed.
• If Arqueros begins production in January–March 2027 local time, the full consolidated contribution would start in 2H FY27.
• The annual dividend forecast was raised to JPY 75 (interim JPY 38, year-end JPY 37), up from JPY 71.4 last fiscal year.
• Exploration will continue after production starts. The aim is to operate Arqueros beyond its expected 15-year mine life.
• Atacama was originally expected to operate for 11 years but has exceeded 20 years thanks to near-mine exploration. The company plans to replicate this approach.

Positive Factors

• Record 1H revenue and net income clearly show the metals segment's stronger earnings power in a high copper price environment.
• Arqueros has a copper grade of about 1%, above typical copper mines. Its clean, low-arsenic ore is another strength.
• Further technical upside exists. For example, mineral processing technology can be applied to raise recovery rates for ore containing multiple copper minerals.
• Gains on sales of shareholdings rose +JPY 3.6B YoY. Reducing cross-shareholdings is underpinning profits.
• Shareholder returns are proactive. The policy combines a payout ratio target of around 40% with a JPY 34 floor, and the company also executed JPY 5.9B of share buybacks.
• The pipeline includes projects in Chile, Peru and the US, giving the company a deep bench of next-generation mine candidates.

Concerns and Risks

• Arqueros has been delayed by heavy-rain damage to roads and bridges and by a prolonged power-supply permitting process. Key watch points are the timing of the permit and progress of plant testing.
• Full-year operating income guidance for the ore segment was cut from JPY 8.4B to JPY 7.4B as weak limestone volumes persist.
• Long-term borrowings rose JPY 17.7B on Arqueros development capex, while cash and deposits fell JPY 9.5B.
• Raw material cost inflation for Poritetsu is outpacing the benefit of price revisions. Improving profitability in the machinery and environment business remains a challenge.

Performance Highlights

1H revenue was JPY 113,293M (+21.7%), operating income JPY 8,520M (-0.8%), recurring profit JPY 8,550M (-10.6%), and net income attributable to owners of parent company JPY 7,608M (+14.9%). All YoY changes are our estimates. 2Q standalone operating income was only JPY 3,432M, below JPY 4,965M in the year-ago quarter.

Segment Performance

All YoY changes are our estimates.

• Copper Price (Period Average): 622.44¢/lb (+42.1% YoY, our estimate)
• Exchange Rate (Period Average): JPY 159.37/USD (+9.1% yen depreciation YoY, our estimate)
• Limestone Sales Volume: 10,525 kt (-4.4% YoY, our estimate)
• Electrolytic Copper Sales Volume: 21,311 t (-8.9% YoY, our estimate)
• Copper Concentrate (Own Production) Sales Volume: 16,423 t (-14.6% YoY, our estimate)
• Environmental Products Revenue: JPY 6,379M (+14.1% YoY, our estimate)

Q&A List

• Q

  A

  The briefing consisted solely of a video presentation by the President. No Q&A session was held.