Pacific Metals Co., Ltd.

The price of Ferronickel Products, which accounts for the majority of net sales, is linked to the LME nickel price, and a decline in this price directly squeezes profitability. In addition, a significant decline in the LME nickel price could lower the net realizable value of inventories, potentially leading to an increase in cost of sales due to write-downs of book value. As a countermeasure, the Company has entered into sales contracts for a portion of sales volume that consider risk hedging, but in the event of a sudden and significant market fluctuation, there is a possibility that expected profits cannot be secured.

The price of Ferronickel Products is linked to the USD/JPY exchange rate, and a progression of yen appreciation deteriorates profitability through a decline in product prices. The Company has a policy of hedging exchange rate fluctuation risk for a portion of sales amounts, and derivative transactions, etc. are limited to the scope of actual demand. However, in the event of sudden rate fluctuations, hedges may not function sufficiently, and there is a possibility that expected profits cannot be secured.

With the spread of nickel pig iron, which has a price advantage, the sales price of the Company's Ferronickel Products is constrained to a level that references not only the LME nickel price and exchange rates but also the price of nickel pig iron. As overseas stainless steel producers shift their raw material procurement toward nickel pig iron and other alternatives, the sales environment is becoming more severe, and it may become difficult to maintain planned sales volumes. A review of sales strategy in light of profitability may also become necessary.

The severe environment in the stainless steel industry, the Company's main demand source, has led to continued sluggish operating rates among stainless steel producers, creating a risk that Ferronickel sales volume will fall short of plan. A decline in sales volume directly affects net sales and could deal a major blow to the profitability of the Group. Depending on the progression of this environment and any review of sales strategy in light of profitability, there is a possibility that planned sales volumes cannot be maintained.

Nickel ore, the main raw material, is dependent on imports from the Philippines and New Caledonia, and there is a possibility that planned procurement volumes cannot be secured due to policy changes in each country resulting from the progression of resource nationalism, etc. To ensure stable procurement, the Company has entered into long-term purchase contracts with mining companies at each procurement source, and has made capital participation, technical assistance, and financial assistance, etc. to mining companies in the Philippines. However, because procurement sources are geographically limited, the impact would be significant if risks in a specific country were to materialize.

Inventories are valued primarily based on net realizable value, and if a decline in profitability is recognized due to a significant decline in the LME nickel price or other factors, it becomes necessary to record the amount of book value write-down as cost of sales. The recording of this valuation loss could affect the Group's business results and financial condition. In a phase of a sharp decline in market prices, there is a risk that valuation losses will temporarily significantly deteriorate business results.

If the fair value of fixed assets declines significantly or the profitability of the business deteriorates, the application of impairment accounting for fixed assets may result in an impairment loss, which could affect business results and financial condition. Because the Company holds a large amount of equipment specialized for the Ferronickel business, the impairment risk is relatively high if a deterioration in market conditions becomes prolonged.

If a serious industrial accident, equipment accident, or natural disaster occurs, the suspension or restriction of production activities could have a material impact on business results. The Company has established a Risk Management Committee and seeks to minimize damage and achieve early recovery through the development and continuous practice of a risk management system. However, because Ferronickel manufacturing is a plant-intensive industry requiring large-scale equipment, the impact of an operational suspension due to an equipment accident, etc. could be substantial.

Physical risks such as weather disasters associated with climate change, and transition risks such as emissions regulations associated with the transition to a decarbonized economy, may affect business results. The Company has established a Sustainability Promotion Council chaired by the President, expressed its support for the TCFD recommendations in May 2022, and continues efforts to address key issues. In the energy-intensive Ferronickel manufacturing business, the strengthening of carbon regulations could be a factor increasing manufacturing costs.

The surge in energy prices associated with the situation in the Middle East and Ukraine could increase manufacturing costs, and changes in product distribution are also a concern. There are concerns about supply chain disruption due to U.S. tariff measures, and depending on the economic countermeasures taken by each country, there could be a significant impact on demand and prices. The direct impact on business results is currently expected to be limited, but there is a risk that the impact could expand if the situation becomes prolonged or expands.