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Troubled Philippine nickel plant muddies Sumitomo Metal's outlook

Stock price plunges as Japanese miner misses out on boom

The Taganito HPAL Nickel processing center in the Philippines was beset by mechanical problems throughout fiscal 2018.

TOKYO -- Repeated operational problems at Sumitomo Metal Mining's nickel smelting site in the Philippines are threatening the company's reputation as a cost-competitive producer, with its tanking stock prices reflecting investor worries.

Facility breakdowns at Taganito HPAL Nickel forced multiple suspensions in the year through March, resulting in production declines. The trouble started after the Philippine smelting plant increased its annual production capacity from 30,000 tons to 36,000 tons to meet high demand for nickel, which is used in electric vehicle batteries.

Taganito HPAL employs a proprietary smelting technology that was first put to commercial use by Sumitiomo Metal, and the site was the embodiment of the company's technological prowess. Disappointed investors pummeled its stock, with the price at 3,269 yen on Tuesday, down sharply from the 2018 high of 5,500 yen.

The company said in February that the production issue had been solved, but the site again saw breakdowns during the January-March quarter. The production of nickel sulfides ended up shrinking 5% to 27,400 tons during fiscal 2018.

This comes amid a recent surge in nickel prices due to high demand.

In a meeting with investors in May, Sumitomo Metal President Akira Nozaki seemed as frustrated as investors. "The business foundation is showing signs of weakening, and the earning power may be on the decline," Nozaki said. The harsh words appeared to have been aimed at spurring employees into action.

The output out of Taganito and Philippine copper mines fell to a level below fiscal 2016, when the company reported a net loss of 18.5 billion yen ($171 million in today's money). The asset turnover ratio, which compares sales to operating assets, dropped to 0.16 in fiscal 2018 for its resources business, the lowest in the past decade.

"Whether or not refineries and other assets are operating smoothly is a key business indicator," said Yu Shirakawa at Morgan Stanley MUFG Securities. This is especially true for a company like Sumitomo Metal, whose earnings are exposed to swings in market prices.

The "HPAL" in Taganito HPAL Nickel stands for "high pressure acid leach," a process that can extract nickel from low-purity ores that were once difficult to refine.

Sumitomo Metal was the first company to achieve successful commercial output using HPAL. Although the equipment requires constant maintenance and thus is costly, the company leveraged its technological prowess to secure profitability.

The company is known for its cost competitiveness. Sales, general and administrative expenses accounted for less than 6% of revenues in the fiscal year ended in March. That is far below the 11%-plus recorded by domestic rival Mitsui Mining & Smelting, the 9% range at Mitsubishi Materials, and over 8% at Dowa Holdings.

Persistent problems in the Philippines would risk damaging Sumitomo Metal's reputation. "Taganito's operating condition will need to be checked every quarter," said Yuji Matsumoto at Nomura Securities.

Sumitomo Metal is scrambling to commit additional funds and install extra backup equipment. The group also shortened the number of days dedicated to twice-a-year inspections so that production volume can be secured even if the problems do recur.

The fixes appear to be working. "No major problems occurred during the April-June quarter," said a Sumitomo Metal representative.

The big question looming next month, when the company presents quarterly earnings, is whether Taganito is on track to operate at full capacity for the entire year. With the age of electric vehicles on the horizon "there is no threat to the growth scenario backed by the rise in nickel demand," said Atsushi Yamaguchi at SMBC Nikko Securities. Restoring investor confidence in its technology may be the first step in regaining ground in stock value.

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