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Japan-Update

Metal producer Dowa to beat profit guidance on higher prices

Smelting operations improve while mining brings higher earnings

Dowa Holdings' zinc smelting complex in Akita, Japan.

TOKYO -- Japanese metal producer Dowa Holdings's pretax profit for fiscal 2017 is expected to surpass the estimate by about 1 billion yen ($9.44 million) thanks to stronger metal prices.

Group profit is anticipated to climb 3% to roughly 37.5 billion yen for the full year ending March 31, a reversal from the slight decline anticipated earlier. Sales are seen rising 12% to about 460 billion yen. In February, Dowa assumed an average zinc price of $2,700 per ton for the January-March quarter. However, prices for three-month zinc futures are averaging over $3,400 on the London Metal Exchange.

For every $100 increase in the price of zinc, Dowa's quarterly operating profit gets a 130 million yen lift. Indium, a byproduct of the zinc smelting process, is also fetching higher prices.

In the electronic materials segment, demand for smartphone light-emitting diodes has recovered faster than expected in Asia. The segment, together with the smelting business, is helping offset weak earnings in the environmental management and recycling segment.

Higher metal prices are also outweighing the negative impact of a stronger yen. Dowa estimated the yen would trade for 115 per dollar during the January-March quarter, but the rate now hovers near 106 yen, which could translate to an average of about 108 for the quarter.

In addition, Dowa is on track to report equity-method investment earnings that are roughly 500 million yen better than anticipated. Because zinc and copper prices are rising, the Japanese group is pulling in stronger earnings from Mexico's Tizapa zinc mine and the Gibraltar copper mine in Canada.

The recovery in metal prices prompted six out of seven major Japanese nonferrous metal companies to upgrade fiscal 2017 earnings outlooks. Although Dowa's exposure to market swings is comparatively smaller as a result of ongoing diversification efforts, the surge in metal prices is still expected to provide a significant earnings bounce.

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