Sumitomo Metal Mining Co Ltd

TSE:5713

Earnings Call Transcript 2021-Q4

[Daiji Toyama, executive]

Now we'd like to start the telephone conference of Sumitomo Metal and Mining for the announcement of its financial results for the year ended March 31, 2021. My name is Daiji Toyama, Manager of PR and IR department. And I will moderate this teleconference. I believe you already have the materials to your hand, namely consolidated financial results for fiscal year 2020 and supplementary explanation for financial summary.

First, [ Kazuhiko Hotani ], General Manager of PR and IR, will talk on the highlights of financial results.

[Unknown Executive]

This is [ Hotani ] speaking. Thank you very much for your continued support, and I appreciate your participation today. We have 121 people joining this call. We are pleased with your active interest. I will explain some of the key highlights, then manager in-charge will explain the details based upon the materials.

Now I will explain the financial results of the year ended March 31, 2021, announced today. Please refer to the first page of the consolidated financial results. First, with regards to the consolidated operating results for the year ended March 31, 2021, both net sales and net profit increased year-on-year. Net sales was JPY 926.1 billion, JPY 74.2 billion higher year-on-year. Profit before tax was JPY 123.4 billion, JPY 44.4 billion higher year-on-year. Profit attributable to owners of parent was JPY 94.6 billion, JPY 34.0 billion higher year-on-year. This is the third highest level of net profit ever recorded by the company.

Now I will explain the overview of the results. Please refer to the first page of the consolidated financial results or at the top of the Page 1 of the supplementary explanation. First of all, metal prices in fiscal 2020. Copper and nickel prices dropped significantly at the end of the previous fiscal year due to the outbreak of COVID-19, but the prices recovered throughout the year against the backdrop of the recovery of the Chinese economy. Gold price was on the rise due to uncertainties of the world economy impacted by the pandemic, and the price peaked during the second quarter of the year. Copper, nickel and gold prices were higher than the previous year.

Next, this is regards to the overview of consolidated profit before tax for the fiscal 2020. Fiscal 2020 profit before tax increased due to the JPY 24.8 billion positive impact of overall metal price and exchange factors. Cost difference improvement mainly at overseas copper mines contributed JPY 11.6 billion, and the increase in Materials segment profit was JPY 6 billion. On the other hand, there were some negative factors such as the quantity impact of minus JPY 3.2 billion. Last year, there was a onetime positive factor of the sale of Taihei Metal Industry, which was JPY 9 billion, but we didn't have that benefit in fiscal 2020. And the cost associated with Quebrada Blanca 2 project suspension was JPY 6.4 billion.

But the positive factors outweighed the negatives, including the reversal of allowance for doubtful accounts for Sierra Gorda, which was JPY 6.3 billion; decrease in tax costs at the overseas copper mines, JPY 2.7 billion; and other unrealized profit of JPY 5.7 billion. All in all, consolidated profit before tax was JPY 123.4 billion, up JPY 44.4 billion from fiscal 2019.

Next, looking at the difference between the actual results and the forecast in February. Net sales was JPY 22.1 billion higher than the forecast. And the profit before tax was JPY 20.4 billion higher than the forecast. As for the breakdown of the increase of JPY 20.4 billion in profit before tax, while gold price lowered in the fourth quarter, copper, nickel and gold prices and exchange rate improved. Thus, overall metal price and exchange improved by JPY 5.5 billion.

Additionally, exchange factor improved by JPY 3.2 billion. Materials business profit also improved by JPY 2.3 billion. Quantity improved by JPY 22.3 billion, and other unrealized profit was JPY 8.2 billion higher, all of which pushed up the profit before tax.

Now I will give you some of the key topics of the businesses in the fiscal 2020. First of all, overseas copper mines. Production volume at the copper mines in the fiscal 2020 was in line with or better than the previous year, except for Cerro Verde mine, which was placed in the care and maintenance status in March through May when the government of Peru declared a national emergency in response to the pandemic; and the Candelaria, where operation was suspended due to labor strike in October through November. Profit and loss of respective mines were in line with or better than the previous year, except for Cerro Verde.

First of all, with regards to the Morenci copper mine, production decreased to 446,000 tonnes, down 15,000 tonnes as operational plan was received -- reviewed, rather, due to the pandemic. High level of copper production supported by leaching operations started to decrease in the fourth quarter.

Next, with regards to Sierra Gorda copper mine. Ore processing volume increased due to stable operation and better ore grade. Production volume increased by 41,000 tonnes year-on-year, up to 149,000 tonnes.

Next, Cerro Verde copper mine. The mine was placed in the care and maintenance status under the national emergency declared in response to the pandemic, and the production volume was down 83,000 tonnes year-on-year to 372,000 tonnes.

Next, Candelaria/Ojos. Candelaria copper mine was affected by the labor strike in October and November 2020. And the production volume decreased by 16,000 tonnes year-on-year, down to 95,000 tonnes.

Next, with regards to THPAL or Taganito HPAL. Planned plant shutdown was extended due to the COVID, then the operation resumed smoothly. But in the fourth quarter, ore shipment was affected by the heavy rainfall. So production volume in fiscal 2020 was down 2,900 tonnes year-on-year to 29,400 tonnes.

Next, CBNC, Coral Bay. Impact of COVID-19 was limited, and the smooth operation resulted in the production volume in line with the previous year at 19,100 tonnes.

Now I would like to talk about the forecast for fiscal 2021. So this is about the overview of fiscal 2021 consolidated forecast. Please refer to the bottom of the front page of consolidated financial results and the bottom of Page 1 and Pages 5 and 6 of the supplementary explanation.

In our forecast, net sales will be JPY 104.7 billion, JPY 120.9 billion better than fiscal 2020. Profit before tax will be JPY 138 billion, JPY 14.6 billion better than fiscal 2020. Profit attributable to owners of the parent will be JPY 104.0 billion, JPY 9.4 billion higher than fiscal 2020. Metal price and exchange rate assumptions we used for the forecast are on Page 1 of the supplementary explanation.

We consider the current metal price and considering the demand forecast. Copper price of $7,800 per tonne, gold price of $1,700 per ounce, nickel price of $7.00 per pound, cobalt price of $15.0 per pound and exchange rate of JPY 107 to the dollar. Assumption used for the 2021 full year forecast are the higher prices for all the metals, except gold and cobalt. And we forecast a significant increase in overall metal price and exchange at JPY 37.3 billion. As for other factors, Material business of minus JPY 0.3 billion and quantity of minus JPY 0.2 billion are negative factors, but the cost difference of positive JPY 4 billion and other exchange gain and loss of a positive JPY 1 billion will outweigh the negatives.

We expect worsening of contribution by onetime factors. There is no more cost associated with the QB2 project suspension in fiscal 2021, which means contribution of JPY 6.4 billion in fiscal '21. But we lose the benefit of reversal of doubtful account allowance for Sierra Gorda, which was JPY 8.6 billion, and tax costs will increase at overseas copper mines by JPY 16.6 billion. We forecasted increase of other unrealized profit of JPY 6.7 billion. But overall, stronger metal prices can cancel the negative impact. And full year consolidated profit before tax is forecast to go up to JPY 138.0 billion, JPY 14.6 billion higher year-on-year.

I will now outline some of the topics related to the forecast of fiscal 2021. First of all, overseas copper mines. Production volume at copper mines is forecast to be in line with or better year-on-year, except the Morenci mine where the production is expected to be lower after a period of brisk high-level production of cathode settling down. We expect significantly higher profit year-on-year mainly due to higher copper price. First of all, at Morenci, high-level cathode production will settle down. And we expect the production volume to be lower by 78,000 tonnes, down to 368,000 tonnes.

Next, Sierra Gorda. Full year production volume will be 180,000 tonnes, 31,000 tonnes higher year-on-year due to high throughput based on the favorable operation and the effect of debottlenecking. Ore grade is also expected to be better, too.

At the Cerro Verde copper mine, the care and maintenance status was lifted and the throughput will recover. Production volume is expected to be 409,000 tonnes, 37,000 tonnes higher year-on-year.

Next, Candelaria/Ojos. We expect normal operation stoppage due to the labor strike, and the production forecast is 148,000 tonnes, up 53,000 tonnes year-on-year.

Next, THPAL. There will be no more impact of prolonged plant shutdown we experienced in 2020 and the normal impact of the heavy rainfall, which affected ore shipment volume. Therefore, the production volume is expected to be 33,000 tonnes, 3,600 tonnes higher year-on-year.

Next, CBNC. We expect the production volume to be 20,000 tonnes, up 900 tonnes year-on-year.

Next, I'd like to explain about the dividend. Please refer to the bottom of consolidated financial results and the revision on fiscal 2021 dividend forecast, which we announced today. And we revised our dividend forecast based upon the consolidated financial results announced today. We plan to distribute year-end dividend of JPY 99 per share, which is JPY 21 higher than the previous year. The interim dividend was JPY 22. Therefore, the annual dividend amount will be JPY 121 per share.

Payout ratio will be 35.1%. Annual dividend of JPY 121 per share is the highest dividend ever paid out by the company. And based on this fiscal 2021 forecast announced today, we plan to distribute JPY 133 per share annually in fiscal 2021, JPY 71 at the end of the second quarter and JPY 62 at the end of the fiscal year, which means increase in annual dividend amount of JPY 12 per share year-on-year.

Now I would like to explain the -- based upon the supplementary explanation for financial summary. Please look at the Page 1 at the top, there is a table titled, Comparison. So the table at the top shows the fiscal 2021 results as compared to those of fiscal 2019. Please note the column titled, Difference 1-2. Bottom of the table shows metal prices and exchange rate.

As for the operating results, net sales was JPY 926.1 billion, JPY 74.2 billion higher year-on-year. As you see in the footnote, just below the top table, changes in the accounting policies regarding materials supplied for a fee were applied to the sales of fiscal 2020 and retroactively, to sales of fiscal 2019. This results in lower net sales and the cost of goods sold numbers by JPY 22.020 billion for fiscal 2020 and by JPY 20.669 billion for fiscal 2019 as compared to the current accounting standard. But this does not affect gross profit and other numbers. This change is applicable to battery materials business of the Materials segment. Profit before tax was JPY 123.4 billion, higher year-on-year by JPY 44.4 billion.

As per the footnotes for the table, a breakdown reveals that the impact of market factors was plus JPY 24.8 billion, which include metal price impact of JPY 28.7 billion. And of those, JPY 13.5 billion from copper, JPY 7.2 billion from nickel, JPY 1.2 billion from cobalt and JPY 6.5 billion from gold, accordingly. Exchange rate differential decreased by JPY 3.8 billion, and inventory evaluation resulted in a year-on-year decrease of JPY 0.1 billion.

Quantity difference aggravated by JPY 3.2 billion. This is due to a year-on-year decline of sales in Cerro Verde and the recruiting of loss in Sierra Gorda, which, by the way, saw a year-on-year sales increase that impacted still in the negative territory.

Cost differential turned better on the back of unit cost improvement in Sierra Gorda, which saw a year-on-year production ramp-up underpinned by a continued strong operation. Positive contribution unto unit cost also comes from electrolytic copper and Morenci, resulting in an overall improvement of JPY 11.6 billion.

In the Materials business, the impact of temporary sluggish demand for battery materials caused by the COVID pandemic decreased year-on-year sales. But due to year-on-year increase in sales for powder materials, in crystal materials and others, profit went up by JPY 6 billion year-on-year. For other special one-off factors, we already covered in the earlier part of the presentation.

Next, please see the right side of the same table for the comparison between FY 2020 results and the February forecast column showing Difference 1-3. Sales went up by JPY 22.1 billion on February forecast, and profit before tax was up by JPY 20.4 billion. I would like to remind you that the figures in February forecast is before applying the changes in accounting policies of materials supplied for a fee.

As per the footnote for the table, a breakdown of this reveals that the impact of market-related factors was plus JPY 5.5 billion, out of which metal price impact was plus JPY 3 billion. And of these, minus JPY 1.4 billion from copper, plus 2.2 billion from nickel, plus JPY 2.5 billion from cobalt and minus JPY 0.2 billion from gold, respectively.

Exchange rate differential was plus JPY 0.1 billion, and inventory evaluation was plus JPY 2.4 billion impact. Quantity difference turned better by JPY 0.8 billion. Other exchange gain and loss, plus JPY 3.2 billion. In Materials business, subsegment and its equity method entities improved by JPY 2.3 billion. Interest rate, plus JPY 0.4 billion; and unrealized profit and others, plus JPY 8.2 billion contribution.

Next, please look at the table at the bottom of the Page 1 for FY '21 forecast and FY 2020 results. Please note the metal prices and exchange rate assumptions in the lowest part of the table. So based upon these assumptions, FY '21 full year forecast is estimated at JPY 1.048 trillion, an increase of JPY 120.9 billion. And profit before tax is estimated at JPY 138 billion, which is up by JPY 14.6 billion. As per the footnotes for the table, a breakdown of this goes that the impact of market-related factors, plus JPY 37.3 billion, out of which metal price contributed plus JPY 49.7 billion. Of these, copper contributes to plus JPY 51.1 billion; nickel, plus JPY 3 billion; cobalt, minus JPY 3.1 billion; and gold, minus JPY 1.9 billion.

Exchange rate differential improved by JPY 0.6 billion, and inventory evaluation deteriorate by JPY 13 billion due to a difference in quotation prices. Quantity impact is minus JPY 0.2 billion, whereas other exchange rate gain and loss improved by JPY 1 billion. Unit cost differential was plus JPY 4 billion. While Morenci production will decline and give a negative impact, production ramps up in Sierra Gorda, Candelaria and THPAL, contributing to an improvement of unit cost.

In Materials business, the figure reached minus JPY 0.3 billion, but this is just due to a convenience of branding exercise of numbers. There is obviously no change in profit eventually. For other special factors, we already covered in the earlier part of presentation.

Let's turn to Page 3. This is a comparison of FY 2020 results by segment. First, gross profit in Mineral Resources segment was JPY 58.7 billion, up by JPY 17.3 billion. The center and downward on the same page show an explanation of changes. Hishikari mine saw a year-on-year improvement of JPY 6.7 billion. Main reason behind it is a stronger gold price that contribute to JPY 7 billion improvement. Production and sales of the mine was broadly in line with the plan.

Overseas copper mine, most of which consisting of Morenci, improved by JPY 9.5 billion on a strong gold -- copper price, which represent JPY 4.8 billion impact. And unit cost differential turned better by JPY 4.7 billion, resulting in a year-on-year sizable improvement overall.

Next, gross profit in the Smelting & Refining segment saw an increase of JPY 13.2 billion to JPY 64.6 billion. Please note the table at the bottom for the breakdown.

Copper-related entities overall improved by JPY 5.6 billion. Of this, quantity difference contributes to plus JPY 0.4 billion; metal price, minus JPY 3.1 billion; unit cost differential, plus JPY 3.4 billion; inventory evaluation, minus JPY 2 billion. Impact from others was plus JPY 6.9 billion, which include exchange rate factor of minus JPY 0.5 billion.

Nickel-related entities improved by JPY 10.3 billion. Quantity difference contributed plus JPY 1 billion; metal price, plus JPY 8.1 billion; unit cost differential, minus JPY 0.8 billion; inventory evaluation, plus JPY 1.8 billion; and others, plus JPY 0.2 billion. Out of others, impact from exchange rate was minus JPY 1.4 billion. Elimination of transactions within the group that included in others, that is with an asterisk, was minus JPY 2.7 billion.

Next, on Page 4. Table on the top, this shows a year-on-year comparison of sales in Materials business by product group. Net sales overall in this segment was JPY 211.5 billion, up by JPY 3.5 billion year-on-year. Sales for battery materials decreased by JPY 10.7 billion to JPY 95.6 billion due to the drop of sales volume and income occurred primarily in the first half.

Powder materials increased by JPY 7.9 billion to JPY 37.2 billion, whereas package materials decreased by JPY 0.1 billion to JPY 17.3 billion. Crystals and others increased by JPY 6.4 billion to JPY 61.4 billion. As in the note, changes in accounting policies regarding materials supplied for a fee were applied to the sales of battery materials.

Gross profit for Materials segment on Page 3 increased by JPY 4.9 billion year-on-year to JPY 25 billion, whereas segment profit increased by JPY 6 billion year-on-year to JPY 11.3 billion.

Next, I will explain the table at the bottom on Page 4, showing profit and loss in equity method companies. Equity method earnings overall was JPY 8.7 billion, which is up by JPY 2.5 billion year-on-year. Major contribution comes from copper-related businesses, which saw a profit increase of JPY 4.4 billion to JPY 6.2 billion. And now copper-related entity, Cerro Verde, was year-on-year down of JPY 4.4 billion to JPY 5.2 billion. Candelaria and Ojos was down by JPY 0.2 billion to JPY 1.9 billion, and Sierra Gorda was up by JPY 8.4 billion to minus JPY 3.5 billion.

PT Vale Indonesia and other nickel-related entities saw a profit increase of JPY 0.8 billion to JPY 3.4 billion. PT Vale Indonesia was excluded from equity method company from the third quarter. And in Chemcat and others saw a decrease of JPY 2.7 billion to minus JPY 0.9 billion, which, by the way, includes profits from Quebrada Blanca copper mine undertaking where QB2 project is ongoing right now.

Page 5. This is a comparison between the forecast for FY '21 and FY 2020 results, this time by segment. Please note that the figures for the forecast are rounded to the nearest billion yen. Gross profit in the Mineral Resources segment is projected at JPY 63 billion, an increase of JPY 4.3 billion. The table in the center and underneath explains the changes in gross profit.

For Hishikari, annual sales volume of 6 tonnes will remain unchanged, whereas price differential will deteriorate by JPY 2.4 billion due to a review of the gold price assumptions, leading to a profit decline by JPY 3.5 billion. Overseas copper mines, mostly consist of Morenci, as stated earlier, there are negative factors of minus JPY 8.1 billion in cost differentials and minus JPY 4.3 billion in quantity difference on the back of a decline in production and sales, but a stronger copper price overtops a negative impact by JPY 20.2 billion. Thereby, the profit is projected to rise by JPY 8.3 billion.

Gross profit of the Smelting & Refining segment is estimated at JPY 55 billion, down by JPY 9.6 billion. As shown in the table below, copper contributes to minus JPY 8.8 billion; nickel, minus JPY 4.1 billion, respectively.

As for copper-related businesses, a price difference contributes to an improvement of JPY 1.8 billion, whereas inventory evaluation and others deteriorated by JPY 7.3 billion and JPY 3.7 billion, respectively. So the profit is projected to decline by JPY 8.8 billion.

As for nickel, positive factors include unit cost differential of plus JPY 1.9 billion due to a year-on-year increase of production and sales in E-nickel and THPAL and quantity difference of plus JPY 2.6 billion, whereas inventory evaluation of minus JPY 5.6 billion and others, minus JPY 2.9 billion, pushed down the performance. Our overall profit will decline by JPY 4.1 billion. Out of minus JPY 2.9 billion in others, exchange rate impact is plus JPY 0.4 billion.

Please turn to the top of Page 6. This shows comparison of sales between FY '21 forecast and FY 2020 results in Materials business by product group. As for the net sales in the Materials business overall, both automobile and telecommunications sectors are feeling an underlying recovery trend in terms of market prices and demand despite our concern over the [ Sujisub ] semiconductor for auto applications.

Projection is JPY 252 billion for the segment, which is up by JPY 40.5 billion. Forecast of battery materials is JPY 118 billion, up by JPY 22.4 billion; materials, JPY 44 billion, up by JPY 6.8 billion; crystal and others, JPY 72 billion, up by JPY 10.6 billion; package materials, JPY 18 billion, up by JPY 0.7 billion, accordingly.

Gross profit in Materials segment shown on Page 5 is JPY 30 billion, which is an increase by JPY 5 billion. And segment profit is JPY 11 billion, down by JPY 0.3 billion.

I will now explain the comparison between FY '21 forecast and FY 2020 result for equity method affiliates. Please note that the figures are rounded to the nearest JPY 0.5 billion.

Earnings projection of equity method affiliate overall is JPY 40.5 billion, an increase of JPY 31.8 billion. Majority of contribution comes from copper-related entities with JPY 37.5 billion in profit, which is up by JPY 31.3 billion. Of copper-related, Cerro Verde is expected to improve by JPY 12.3 billion to JPY 17.5 billion year-on-year as the mine is under care and maintenance state and the production dropped significantly in FY 2020.

Sierra Gorda turned to profitability of JPY 8 billion, which is a year-on-year increase of JPY 11.5 billion due to a strong copper price, production ramp-up and improvement in ore grade. For Candelaria and Ojos, Candelaria production will [ surge ] substantially year-on-year as the mine was impacted by labor strike, thereby saw a production cutback in FY 2020. Profit estimated JPY 10.5 billion, up by JPY 8.6 billion.

Nickel, PT Vale Indonesia excluded from the equity method. Profit decreased by JPY 0.9 billion to JPY 2.5 billion. And Chemcat and others, expected to be JPY 0.5 billion, up by JPY 1.4 billion.

Finally, from the financial position presented on Page 9. Cash flow from operating activities for FY 2020 was JPY 91.5 billion. Cash flow from the investment activities was outlay of JPY 32.4 billion due to acquisition of tangible fixed asset, amongst others. Cash flow from financing activities saw outgoing of JPY 55.8 billion on repayment of borrowings, amongst others. The balance of cash and cash equivalents at the end of the financial year after incorporating the exchange rate difference increased by JPY 2.9 billion from the beginning of the year to JPY 158.4 billion.

[Unknown Executive]

So we have about 20 minutes left for Q&A session. [Operator Instructions] Mr. Yamaguchi of SMBC Nikko, please go ahead with your question.

[山口 敦 (やまぐち あつし), analyst]

I have a few questions about Materials, particularly on your numbers. First of all, Page 1 at the bottom. Overseas copper mines, are you talking about the JPY 116.6 billion negative for the tax cost increase? So it was included in the previous numbers, but is this now because of the increase in the loyalty? Could you please elaborate on this? So that's my first question.

Next question is on Page 5. At the top, Material -- the gross profit of the Materials business, so it is going to increase on a full year basis. And could you please explain on that more in detail? And number two, the Smelting & Refining and others. Well, the increase and decrease in the others is quite increased. Nickel, it is a positive 4. But as for others, well, there are -- well, there is a large number listed or they are posted as the others. So could you please elaborate on this?

In the Sierra Gorda, on the equity method, you expect a significant turnaround at the Sierra Gorda. So that's related to the first question. So could you please explain these numbers?

And second point, it is not included in your forecast, but in Peru or if on the -- well, the [indiscernible], well, the nationalization already mentioned by the one of the candidates, Mr. Castillo, for the presidential election. But he also made several comments about mining, and you have some mining operation in Chile. And the 3% royalty increase is another point you talked about during the election campaign. So could you please make some comment on this?

[Unknown Executive]

Thank you very much, Mr. Yamaguchi. So first of all, on Page 1, at the bottom, tax constantly increased on the minus JPY 16.6 billion. This is -- well, the tax cost at the overseas copper mines. This is a rather large number, which is unusual. So I'd like to explain.

So as far as this number is concerned, for Sierra Gorda, included in the equity method accounting as well as Cerro Verde and Candelaria, so these are the overseas copper mines included in the equity method accounting. So the cost difference, the quantity difference because of the difference in the prices, well, these are included in the consolidated account as one number. However, we have broken that down here. So the JPY 51.1 billion for the copper, that is rather significant. And the equity method number of nearly JPY 30 billion is included in that. So the price, the condition is improving, and that pushes up the metal price and the contribution. That means the higher tax because of the larger business. So in that sense, the tax cost -- well, we are not able to explain this -- the fluctuation of the number, unless we refer to the tax cost.

For the equity method of copper or the JPY 51.1 billion. And also -- that is positive and is also reflected on the increase in the tax cost, which is a negative number. So this does not -- this is not -- well, the other change in the explanation in the next -- well, the gross profit that you explained -- you asked, no significant change in the segment profit, the -- while the gross profit changes significantly. So on this point -- so as for gross profit, when the net sales increases, then gross profit increases accordingly. So that is reflected on this. But this -- well, the equity method portion is also related to Materials business. Equity method on the company as compared to 2020, we expect some deterioration in 2021.

But on Page 5, it's not difficult to see. But the N. E. Chemcat and the Nippon Ketjen and the MS Zinc, well, it is positive JPY 1.4 billion. So it is cost positive as against the -- between 2021 and 2020. But the N. E. Chemcat and the Nippon Ketjen that is related to the Materials business actually show some negative or the worsening of the performance. So that pushes down the performance of the Materials segment.

And this is for the internal accounting. But from 2021 accounting, well, the allocation of the head office costs, we are going to change the application of the head office costs. As a whole, it is the same. But the business unit by business unit, when the profitability of one business unit declines, and then -- and if the other part as well as the head office, the other part improves, then that significantly will be reflected on the changes of the numbers allocated.

So for Materials business, well, it is one such area that is affected by these fluctuations. And in fiscal 2020, because of the COVID, the SG&A cost or expense was rather low. But in 2021, we are going to spend as much as we used to in the usual years before COVID. So the -- that results in some of the worsening of the numbers as compared to 2020. So that is another point that is related to the change of the number.

And on Page 5, Smelting & Refining, the gross profit. And you asked about the others, copper, Smelting & Refining copper and others. So nickel, I mentioned that the differences are JPY 0.4 billion. And as for the copper, there was no -- well, the significant impact by the exchange factors. As for others, palladium and others are related, well, the negative minus factors. So that means the palladium price will be lower? Yes. So we expect some negative impact due to the palladium pricing.

And Sierra Gorda, on Page 6, Sierra Gorda turning around. So the -- I have already given you the numbers. In 2021, the production is 180,000 tonnes, sales is 176,000 tonnes. So the significant increase. And the debottlenecking, in 2020, debottlenecking was completed. And that resulted in 20% increase in the throughput. We have already established that. So the -- that impact will be fully reflected throughout 2021, that's one point. And also better ore quality and the copper price increase is another factor we expect. So thus, we expect a significant increase in the copper-related business.

And the big question number two about Peru. The presidential -- the impact of the presidential election in Peru, about that question. So there are 2 main candidates. And they are talking about the nationalization of the mines as well as the higher tax rate applied to the businesses. And no matter who wins the election -- presidential election, we expect some kind of impact. But well, the specific policy proposals or the agenda have not been clarified by either of the candidates. It will be announced sometime in the future more in detail. So we will keep an eye on what they are going to introduce as their policy.

[山口 敦 (やまぐち あつし), analyst]

So Sierra Gorda, it is producing a profit right now, but sensitivity, it is an impact to copper to $100, JPY 2.5 billion, that sensitivity. Does that -- is it incorporated into that?

[Unknown Executive]

So based upon the production volume, we're calculating this sensitivity.

[Operator]

Matsumoto-san, Nomura Securities.

[松本 裕司 (まつもと ゆうじ), analyst]

Matsumoto from Nomura Securities. First question is about the difference of copper prices. On Page 1, in the middle, the comparison against the forecast, minus JPY 1.4 billion, approximately JPY 1 billion. But the price, there will be a significant upside. How would you evaluate that?

In addition to that, on Page 5, Smelting & Refining, the price difference is in a positive territory. But generally, I saw that this is going to give you a negative impact. If you could expand a little bit.

And unrealized profit on Page 1, in the middle, against the forecast, plus JPY 8.2 billion was recorded. So what are the factors in it? Please explain. And also, we oftentimes discuss this same matter, but take for example, Page 1, the adjustment amount on Page 5 and there is a big difference between '21 and 2020. So what is it that change occurred in the segment profit?

[Unknown Executive]

So price difference, first of all, on Page 1, on February forecast, so the impact was in negative territory. Is that -- addressed the question?

[松本 裕司 (まつもと ゆうじ), analyst]

Yes.

[Unknown Executive]

So as for price, as you rightly pointed out, went up, it went up. But add the premiums and service, it gives a negative impact, including the production impact. So those impact, all-inclusive, resulted in a JPY 1.4 billion negative impact.

Second point is on Page 5, Smelting & Refining business segment. Copper-related price difference, that is in the positive territory, positive of JPY 1.8 billion. That is right.

Copper-related entities by product, including copper content, and also the sales conditions were all included here. TC/RC is going to an adverse direction right now, but outside of that, by product, credit, take for example, were all included in this figure.

[松本 裕司 (まつもと ゆうじ), analyst]

Palladium and others, I thought that they are included. But is that understanding correct?

[Unknown Executive]

Yes. That is the -- your understanding is correct.

[松本 裕司 (まつもと ゆうじ), analyst]

So next question is about the unrealized profit on year-on-year basis against February forecast. And the comparison between forecast '21 and result 2020 all have an impact and concern unrealized profit?

[Unknown Executive]

Comparison of the FY 2020 result year-on-year, outside of the unrealized profit per se, we take -- for example, we include market-related factors in the Materials business equity method -- outside of the Materials business equity method. Well, take for example, palladium impacts are included here.

On February forecast comparison, unrealized profit has an impact of JPY 8.2 billion. It also has an unrealized profit and the cancellation of inventory unrealized profit and market-related factors, and equity method companies as it is outside of the Materials business, and that all included, constitute other unrealized profit.

Forecast '21 and results 2020 also has an unrealized profit. But by the same token, inventory cancellation unrealized profit and market-related. And outside of the Materials business, we include the equity method companies' gains and loss and deterioration of palladium. Others impact are including minus JPY 6.7 billion.

And lastly, you talked about the adjustment amount. Segment profit, plus JPY 9.2 billion at 2019, JPY 3 billion, JPY 26.2 billion. Is that the intention of the question?

[松本 裕司 (まつもと ゆうじ), analyst]

Yes.

[Unknown Executive]

As I stated on the outset, we changed the allocation of the corporate expenses, meaning that the burden on the part of a business unit increased, whereas the adjustment amount in the part of the corporate gained, but total impact to me is unchanged. So that is the reason that the segment adjustment amount increased by JPY 9.2 billion, which is a significant amount we are aware.

[Operator]

Next Mr. Ozaki from Daiwa Securities, please.

[Shinichiro Ozaki, analyst]

This is Ozaki speaking. Can you hear me?

[Unknown Executive]

Yes. Please, over to you.

[Shinichiro Ozaki, analyst]

First question is related to Materials business. In the fourth quarter, the profit before tax, I think the JPY 5.1 billion, it was very high. But it's going to be JPY 11 billion in 2021. So why is it? Could you please explain? Is it because -- well, the difference in -- of our prices is related here?

The second question is related to the ore grade of Sierra Gorda. This year or next year, I understand that the ore grade will be built this year and next year, but it's going to be worse after that, beyond that. So is that how you see it right now?

And number three is about the leaching operation in Morenci. And you expect the lower production this year? Or is it going to continue what I mean is the lower production level at Morenci? Could you please explain more?

[Unknown Executive]

Thank you very much. So Materials business, you mentioned the JPY 5.1 billion, is that the gross profit for 2020? Sorry, I'm looking for the number. And then looking at the segment profit. Page 13 is what I'm looking at. And in the fourth quarter 2020, it was JPY 5.1 billion for the segment profit. For the fourth quarter, yes, JPY 5.1 billion, I found it.

[Shinichiro Ozaki, analyst]

And in 2021, your plan is JPY 11 billion. That's your plan?

[Unknown Executive]

Yes.

[Shinichiro Ozaki, analyst]

So the -- it looks a little weak. So could you please explain so that I can understand?

[Unknown Executive]

Well, this is also related to what I explained to Mr. Yamaguchi, the first speaker. So our forecast for 2021 in Materials profit and loss, JPY 40 billion positive is our forecast. And we have [ some ] gross profit. But when it comes to segment profit, so the equity method, the portion will lessen. So to be more specific, the N. E. Chemcat and the Nippon Ketjen are the companies related to this. N. E. Chemcat portion, because of that, well, there was some positive coming out from N. E. Chemcat in the first quarter. And then -- well, this is -- this involves some financial -- the accounting part of that will be the [ U.S. ] or the lower in 2021. So I explained that this is because of the lessening of the equity method. There are some changes in that. And the -- so that's how the forecast, the fiscal 2021 for the segment profit.

And SG&A in 2020, because of the COVID-19, the expenses were rather controlled or managed at the lower level. But in 2021, we are -- we expect that we are going to spend at usual level. So that's what we expect in 2021. And also allocation of the corporate cost is another factor. So it is applied to all the businesses, but the -- also to the Materials business. And that results in the lower profit. And so as compared to 2020, it looks lower. So these are what we see in the gross profit or the lower line, so despite the fact that the net sales increases.

So talking about the fourth quarter, N. E. Chemcat is the reason. There are somehow financial factors related to N. E. Chemcat in the fourth quarter, but that will not be repeated in 2021. So did I answer your question?

[Shinichiro Ozaki, analyst]

Yes. Well, the battery materials positive for the difference of applied price, it is not included in the forecast?

[Unknown Executive]

Well, it's the same level as 2020, and there were some negative factors, as we explained, for 2020.

[Shinichiro Ozaki, analyst]

So looking at 2020 against 2019, well, it looks the increase in the profits because of that factor. N. E. Chemcat, the one-off factor related to increase in the metal price?

[Unknown Executive]

Yes. And second question is about the Sierra Gorda and the ore grade at the Sierra Gorda. So in our 2018 midterm plan, Sierra Gorda 2021 production was expected to be 200,000 tonnes, and '21 will be the peak year for the Sierra Gorda. That's how we saw it. But the -- as a result of the most recent borrowing analysis, so now we can grasp the situation at the Sierra Gorda more precisely. So the 180,000 tonnes on 2021 and the ore grade will be lower. However, in 2022 and onwards, the ore grade is expected to be better. So it is a matter of a timing difference.

And you also asked about the leaching operation at the Morenci copper mine. Well, in 2019 and 2020, for 2 consecutive years, leaching operation also conducted, which supported a very high level of cathode production. So it exceeded significantly the original plan which made at the beginning of the year. And it -- well, they happen to be very high, but now it is settling down. And last year, well, the Freeport-McMoRan also announced with the pandemic how to handle the copper operation. Well, the most optimum -- well, the production plan with the cost control in mind and most optimal, efficient operation is what we analyze, and that is ongoing. So for 2021, for operational level, well, it will be in line with the level at the fourth quarter 2020. That's going to be the level of operation at the Morenci in '21.

[Operator]

So this is about time we're going to close Q&A session. So now on that note, a telephone briefing is waiting to close, telephone briefing. Thank you very much for your continued support. Recording services of today's briefing available by calling the number you would find in the email we sent to confirm the completion of the registration. Recording will be available until May 28. So this is the end of the briefing. You may hand up.