Unit cash production costs are a key metric for investors in the metals and mining space (XME). This assumes additional significance in the face of the current low commodity price environment. BHP Billiton (BHP) (BBL) and its peers in the copper space are improving productivity in order to lower unit costs. In this article, we’ll explore this topic in detail.
Lower unit production cost
- Cash costs for copper fell 14% year-over-year (or YoY) in fiscal 2015.
- The improvement in truck utilization and productivity gains at Escondida led to an 8% decrease, to $1.07 per pound. Rio Tinto’s (RIO) costs for copper also declined YoY for 1H15 results that ended June 30, 2015, mainly due to cost savings at Oyu Tolgoi and Escondida.
- A 20% headcount reduction has been initiated at Escondida through a voluntary redundancy program at a one-off cost of $188 million.
What will drive copper costs?
At Escondida, additional material will be moved in fiscal 2016 to mitigate the impact of grade decline. Despite this, BHP expects unit costs to fall 15%, to $0.91 per pound, due to further productivity realizations.
In the longer term, BHP management sees a deficit emerging in copper supply as grades decline and scarcity of high-quality future development opportunities keep the industry’s supply constrained.
In the short to medium term, however, copper prices seem to be under pressure due to weaker-than-expected demand and the strengthening US dollar. This has caused share prices for Freeport-McMoRan (FCX), Teck Resources (TCK), and Southern Copper (SCCO) to hit multiyear lows in recent weeks. The slowdown in China (MCHI) (FXI), the biggest copper consumer, has weighed heavily on copper prices. FCX forms 3% of the SPDR Metals and Mining ETF (XME).