Freeport-McMoRan: Why the Current Rally Could Be Unsustainable
(Continued from Prior Part)
Freeport-McMoRan’s unit production costs
As we noted previously, copper prices could drift lower in the short term. Falling copper prices have pressured copper producers to control their unit production costs. Copper producers, including Freeport-McMoRan (FCX), are cutting down on their high-cost capacity to tackle the low commodity price scenario.
Unit production costs have fallen
Lower crude oil prices have benefited copper producers by bringing down their unit production costs. A stronger dollar also helps copper producers. While most copper companies’ costs are denominated in currencies other than US dollars, copper is priced in US dollars (UUP). This has helped bring down the unit copper production costs for copper producers who mine outside the United States (VTI).
However, Freeport-McMoRan has major mining assets in the US. Almost half of Freeport’s sales in 2Q15 were from mines in North America.
Meanwhile, unit cash costs vary across major copper producers, as we’ll explore in this part of the series. Cash costs include the costs of goods sold (labor, energy, and consumables costs) and royalties.
Cash costs vary across producers
Unit cash costs vary across copper producers, as you can see in the chart above (note that these costs are after byproduct credits). Freeport had unit cash costs of $1.50 per pound in 2Q15 after all byproduct credits. Teck Resources (TCK) also had similar cash costs at $1.49 per pound in 2Q15. Codelco—the world’s largest copper miner—had cash costs of $1.36 per pound in 1Q15.
Southern Copper (SCCO), which is among the lowest-cost copper producers, had unit cash costs of $1.12 per pound in 2Q15. Southern Copper’s earnings haven’t fallen as much as its peers by virtue of being nimble on costs.
Meanwhile, there are multiple reasons behind the correction in metal prices. One is, of course, the general risk-off sentiment in the market. However, there are also other reasons that are adding fuel to the fire in this metals meltdown. In the next part of our series, we’ll explore why different industrial metals are falling.
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