Record profit still targeted despite cutting the 2H gold price assumption to JPY 21,000; North American product business and ETF arbitrage underscore a less price-sensitive earnings structure

Summary

1H operating income hit a record for both the interim period and 2Q standalone. Drivers were higher electronics collection volumes in Japan and Asia and a strong North American refining business. Management said JPY 8.7B of the JPY 11.0B upward revision came from 1H results. It also noted that the 2H gold price assumption has been cut to JPY 21,000/g, a conservative stance. The North American upside came mainly from arbitrage trading using gold and silver ETFs, the annual stocktake, and product fabrication for financial institutions. Management stressed that none of it reflects one-off factors such as the tariff turmoil. On shareholder returns, the company raised its dividend and launched a share buyback. It also plans to revamp its medium- to long-term vision and cash allocation next spring.

Key Points

• Management Strategy and Market View
  • North American refining is fee-based and not linked to precious metal prices. Management said its rising share of earnings dampens the impact of price swings on results
  • Management classified last year's tariff-related profits as one-off. By contrast, it sees no one-off event-driven profit in this year's earnings growth
  • The medium- to long-term vision, ending FY3/2031, will be revamped next spring. Capital allocation will be re-presented with M&A factored in
• Current Business Progress and Drivers
  • ETF arbitrage was the main driver of the trading upside. The company buys ETFs when they trade below spot and sells via futures
  • The YoY profit increase in North America breaks down into three main items: trading, precious metal recovery from the stocktake, and product fabrication
  • Advance orders for fabricated products from financial institutions are strong. Take-or-pay contracts mean fees are collected even if orders are cancelled
  • AI data center demand continues to support the electronics segment. Customer utilization trends give no indication of a downturn
• Key Strategic Initiatives and Changes
  • Improved terms in the jewelry segment have been agreed with customers and will persist. The company aims to expand the customer base and improve margins
  • North American scrap terms were improved when silver lease rates spiked. With lease rates now lower, the business is shifting back into an expansion phase
  • The share buyback responds to certain shareholders' stated intention to sell their holdings. It will be executed via ToSTNeT-3
  • A new silver refinery building has opened in North America. It is expected to expand scrap intake, reduce work-in-process inventory, and lower financing costs

Outlook

• FY operating income guidance raised to JPY 52.0B (+JPY 11.0B vs. initial guidance). Of this, JPY 8.7B reflects 1H results and JPY 2.3B reflects 2H
• 2H operating income is projected at JPY 23.3B, below the JPY 28.7B achieved in 1H. The gold price assumption was cut from the 1H actual of approx. JPY 22,500/g to JPY 21,000/g
• North America's 2H plan does not assume trading and product sales will match 1H levels and builds in downside risk
• The Thailand plant starts operations in November, with a return to profitability targeted within 1–2 years. Together with the Asian subsidiaries, currently around JPY 1B in scale, it is expected to make a meaningful contribution by FY2030
• Bando Plant Phase 2 Building 3 comes on line in 2H, expanding PGM processing capacity. Rhodium recovery, which was weak in 1H, is expected to grow from 2H onward
• Annual dividend forecast raised to JPY 155 (+JPY 20 vs. previous forecast). The company intends to target a 40% payout ratio and maintain business operations and dividend policy that avoid dividend cuts

Positive Factors

• North America's share of operating income is expected to rise from 31.5% in FY3/2025 to 40.4% this fiscal year, advancing a less price-sensitive earnings structure
• ETF arbitrage requires large physical holdings and delivery capability. Management said it would be difficult to enter with just an office, implying high barriers to entry
• Management described its share of the North American mining market as dominant. Intake from silver mines is currently growing, and new contracts and renewals are being handled diligently
• Silver lease rates have normalized to around 1%, their usual level. This has cut financing costs and created conditions conducive to ETF arbitrage
• Earnings growth and enhanced shareholder returns are expected to lift ROE from the initially assumed 13.6% to 16.7%

Concerns

• ETF arbitrage depends on price gaps between ETFs and spot, which the company cannot engineer. Management declined to commit on its sustainability
• Precious metal price sensitivity is approx. JPY 50M in operating income per JPY 100 move. Management itself described this as a rough estimate
• In 4Q of the previous fiscal year, silver lease rates exceeded 5%, inflating financing costs on work-in-process inventory. A renewed rise in lease rates could pressure North American earnings
• Hedge valuation reduced deferred hedge gains/losses by JPY 43.7B, lowering the equity ratio from 37.5% at end-March
• Competition in the domestic automotive spent catalyst market has intensified amid yen weakness and other factors. 1H rhodium recovery reached only 31.9% of the full-year plan
• The Thailand plant is currently loss-making ahead of start-up. The pace of monetization after launch needs to be monitored

Performance Highlights

1H revenue was JPY 365.2B (+53.3% YoY), operating income JPY 28.7B (+87.6% YoY), and interim profit attributable to owners of the parent JPY 20.9B (+93.5% YoY) (all growth rates are estimates by this report). Precious metal prices came in below initial assumptions. Even so, Japan, Asia, and North America all posted record interim profits, and 2Q standalone operating income set a quarterly record. Operating CF was JPY 63.2B, helped by a reduction in inventories.

Segment Performance

*All YoY figures are estimates by this report

• Gold Recovery Volume: 14.0 tonnes (-11.9% YoY, estimate by this report)
• Platinum Recovery Volume: 3.8 tonnes (+15.2% YoY, estimate by this report)
• Palladium Recovery Volume: 2.6 tonnes (±0.0% YoY)
• Rhodium Recovery Volume: 90kg (-10.0% YoY, estimate by this report)
• Recovery Volume by Segment: Electronics – gold +11.6%, Catalysts – palladium +2.8%, Dental – gold -7.4%, Jewelry – gold -19.4% (all YoY)
• North American Refining 2Q Standalone Operating Income: JPY 9.5B (+86.3% YoY, estimate by this report)
• Average Gold Price for the Period: JPY 22,557/g (+42.4% YoY, estimate by this report)
• Equity Ratio (Adjusted, Excluding Highly Liquid Assets): 80.5% (+1.5pt vs. end-March)

Q&A List

• Q

  What drove the upward revision of the full-year operating income plan from JPY 41.0B to JPY 52.0B?

  A

  We raised the full-year operating income plan by JPY 11.0B, from JPY 41.0B to JPY 52.0B. Of this JPY 11.0B, JPY 8.7B came from 1H. Strong 1H results reflected higher electronics collection in precious metals recycling and improved margins in jewelry. In North America, a strong refining business and ETF trading profits that exceeded plan were also major contributors. The remaining JPY 2.3B comes from 2H. Our 2H plan fully reflects current precious metal prices. We still raised it, given declining silver lease rates in North America and the strength across our businesses.

• Q

  North American refining profit has risen sharply. How would you split this between temporary factors, such as more arbitrage opportunities, and sustainable factors, such as improved terms?

  A

  Last year, US tariffs imposed by executive order caused turmoil, and large volumes of gold and silver flowed into the US. Arbitrage opportunities across continents and markets also increased. We regarded the resulting profits as temporary, tied to a one-off event. This year's profit growth includes nothing earned from such apparently one-off events. Splitting it into temporary and sustainable factors would therefore be difficult, even for our heads of accounting and planning. In building the full-year forecast, however, we separated items with high sustainability and repeatability, such as higher intake and improved terms, from items where we assumed some downside risk, such as trading, gold and silver sales, and product sales. Either way, we see nothing one-off or temporary in this profit increase.

• Q

  Why is 2H operating income forecast at JPY 23.3B versus JPY 28.7B actual in 1H?

  A

  As noted earlier, we do not necessarily expect strong trading and product sales to continue in 2H at 1H levels. We therefore built our North American 2H assumptions off 1H actuals accordingly. For precious metals recycling, centered on Japan, we do not expect major changes in collection or sales. However, as mentioned at the outset, we lowered the 2H precious metal price assumption to JPY 21,000. We factored that in and took a somewhat conservative view. These are the main reasons for the decline from JPY 28.7B to JPY 23.3B.

• Q

  You attributed higher electronics collection volumes to AI data center demand. Is this sustainable?

  A

  We believe it is sustainable. Demand is very strong. Based on utilization at our semiconductor and electronic component manufacturer customers, we do not currently expect a sudden downturn or an end to this boom.

• Q

  Could you elaborate on the reasons for the trading income upside?

  A

  The biggest driver was trading using gold ETFs. When gold ETFs traded below the spot gold price, we bought them and sold via futures rather than physical, capturing the arbitrage. This was not driven by a major event such as a pandemic or trade policy shift. That is why I said earlier that it cannot be called one-off.

• Q

  How do you view the sustainability of trading income going forward?

  A

  We cannot engineer the price gap between ETFs and spot gold. For that reason, we could not build as much into the 2H forecast as we earned in 1H. Whether this is sustainable or somewhat less so is hard for us to say definitively. It is mainly ETF-driven, and it requires price fluctuations to push ETF prices below spot. That condition is one key factor for sustainability.

• Q

  North American refining operating income rose by JPY 5.5B in 1H. Could you break this down by refining, trading, products, and warehousing?

  A

  The JPY 5.5B increase is YoY. Trading, including the ETF activity mentioned earlier, rose substantially YoY. In addition, we have two main sites in North America where we conduct an annual inventory count (stocktake). A large volume of precious metals recovered in this stocktake also contributed YoY. The product fabrication business contributed YoY as well. The JPY 5.5B breaks down mainly into three items: trading centered on ETFs, the stocktake, and product fabrication.

• Q

  Is the margin improvement in the jewelry segment of precious metals recycling sustainable?

  A

  It is definitely sustainable. We requested improved terms, and customers agreed. We will not be the ones to worsen those terms again. The improved terms and resulting margin improvement are therefore sustainable.

• Q

  North American refining was originally planned to decline YoY. Why has the forecast swung to a sharp increase?

  A

  Last year we treated tariff-related gold and silver sales and gold and silver trading as one-off. This year, we offset them by developing new opportunities. In trading, ETF arbitrage was very active and highly profitable. The product market was also very buoyant, offering many sales opportunities. As a result, a planned decline turned into a 1H increase, and we now forecast growth in 2H as well. Compared with last year, the base level of refining intake, which underpins everything, has also risen. When lease rates were high, we improved terms, mainly with scrap customers, as we did in Japan. This has also lifted overall earnings.

• Q

  Could you elaborate on the impact of the North American stocktake on earnings?

  A

  The stocktake made a solid contribution to operating income last year, and this year's contribution exceeded it. This is entirely proportional to North American refining intake, which remains at very high levels. We expect intake to stay high, so the stocktake's contribution should remain stable.

• Q

  Page 18 of the earnings presentation states that a larger North American contribution has built a portfolio that can generate profit even when precious metal prices are weak. Could you explain?

  A

  Put simply, compared with domestic precious metals recycling, North American refining is fee-based, and those fees are not linked to precious metal prices. We wanted to show that a higher North American share of earnings dampens the impact of price swings on results.

• Q

  What would be the P&L impact if precious metal prices fell further below your assumptions?

  A

  This is a very rough calculation based on 1H conditions. We estimate that a JPY 100 rise or fall in precious metal prices would move operating income up or down by around JPY 50M.

• Q

  What are the direct and indirect effects of rising interest rates on earnings?

  A

  Both precious metals recycling and North American refining inevitably carry work-in-process inventory. Depending on the contract, we may bear the financing cost while gold, silver, platinum, or palladium is being processed at our plants. In that case, financing costs differ greatly at a 1% versus a 5% rate. For example, silver lease rates in North America exceeded 5% in 4Q last year. Refining intake was trending upward last year, and work-in-process inventory had risen somewhat. Silver lease rates, normally around 1%, jumped to 5% on inventory carrying financing costs, magnifying the impact. Contracts involving advances are structured so that higher financing costs do not create negative spreads or compress margins. Please understand that interest and lease rates affect us through work-in-process inventory.

• Q

  Please follow up on your shareholder return policy for FY3/2028 and beyond. What will your stance be next year? I ask because the market tends to dislike volatile shareholder returns.

  A

  We have held the same view for a very long time and are strongly committed to avoiding volatile shareholder returns. We will target a 40% payout ratio and strive for stable dividends. We cannot make absolute promises. However, we intend to continue business operations and a dividend policy that avoid dividend cuts.

• Q

  Your plan shows investment winding down from next year. How will you use cash going forward?

  A

  Time is running short on the medium- to long-term vision ending FY3/2031, and we plan to revamp it by next spring. As part of that, we will rework our cash flow allocation. As you suggest, we will reassess future capex and factor in M&A to some extent.

• Q

  Should we expect shareholder returns to increase?

  A

  After reassessing capex and factoring in M&A, we will set out the appropriate level of shareholder returns in the revised vision.

• Q

  Has the price gap between gold ETFs and spot widened recently, or did it exist before without your company accessing it?

  A

  I will answer to the best of my knowledge. I believe gaps between gold and silver ETFs and spot have existed ever since ETFs were introduced. We began targeting them for arbitrage about two years ago. From the second half of last fiscal year to today, there have been very many opportunities. Gaps likely existed between the creation of ETFs and the point when we began treating them as arbitrage opportunities. However, I cannot verify that historically, so please bear with me.

• Q

  Is trading income possible because you hold physical metal from your refining business, or could anyone with capital access it?

  A

  In short, it would be very difficult to run without a refining business. Holding large volumes of physical metal from refining and having reliable delivery capability are what make this trading possible. Attempting it with just an office in Tokyo, Toronto, or New York would be impossible or very risky.

• Q

  What business scale do you expect from the Thailand plant once it starts operations?

  A

  We have established Asahi Pretec Thailand, and the Thailand plant is starting operations. Frankly, profits are currently tough ahead of start-up. Our Asian subsidiaries together currently generate around JPY 1B. We plan for a scale that makes a meaningful contribution by FY2030, the final year of the medium- to long-term vision.

• Q

  Do you have a sense of the Thailand plant's growth trajectory?

  A

  We are launching the Thailand plant this month and expect it to turn profitable within 1–2 years.

• Q

  Please follow up on the factors behind strong mine-sourced intake in North American refining.

  A

  Intake from both mines and scrap has been very strong, with silver intake from mines growing particularly sharply recently. There is no special factor behind this. We believe customers' trust in our stable operations and high-quality refining is driving sustained growth. Not many new mines are coming to market, but we handle new mine contracts and renewals diligently. Strong trust from mines is driving steady growth. We have a dominant share among North American mines, and continuing to be chosen by customers is why mine-sourced feed keeps growing.

• Q

  Please follow up on the factors behind strong scrap intake in North American refining.

  A

  Last year, market turmoil from the Trump tariffs played to our advantage, and scrap intake rose sharply. Silver lease rates then rose significantly, as noted in our results, requiring margin improvement. We therefore temporarily controlled scrap intake. Silver lease rates have since fallen sharply, and terms with scrap suppliers have improved. We believe we are entering an expansion phase again and expect intake to keep growing steadily.

• Q

  Which had the larger earnings impact, gold or silver ETFs?

  A

  In 1Q and 2Q of this fiscal year, I believe silver ETFs contributed more.

• Q

  How has the average spot-versus-futures spread trended by quarter?

  A

  Spreads arise sporadically rather than persistently, and gaps can close after a while. We therefore do not track the average spread trend, and I apologize (President). To add, spreads fluctuate quite finely depending on conditions, but arbitrage opportunities exist on a relatively constant basis. We have engaged in ETF arbitrage for two years, but we stepped up efforts this year largely because silver lease rates fell. Silver lease rates, as a financing cost, affect arbitrage profitability, and their decline made ETF arbitrage viable. This differs from the arbitrage opportunities that emerged in one-off market conditions such as last year's Trump tariffs. Opportunities exist relatively constantly, and when we judge them profitable, we can capture them fairly consistently. As for the average spread trend, my answer would be that there has been no major change and spreads have remained consistently open (Head of Planning).

Some Q&A items have been omitted per company policy.