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Why Are BHP’s Copper Volumes Falling?

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Copper volumes

Companies that produce copper, including BHP Billiton (BHP) (BBL), Freeport-McMoRan (FCX), Teck Resources (TCK), Southern Copper (SCCO), and Newmont Mining (NEM), are taking steps to increase production in order to lower costs.

Lowering costs is vital in price environments wherein copper prices are hitting multiyear lows, and copper volumes are key for these companies’ copper segment revenues.

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Fall in copper volumes was expected

BHP’s total copper production for fiscal 1H16 was 6% lower YoY (year-over-year), at 762,000 tons. This was expected, as grade declines at Escondida had kicked in, according to the guidance of BHP’s management during its fiscal 2015 earnings conference call. Here are a few contributing factors:

  • At Escondida, production during the half-year ending in December 2015 fell by 18% to 452,000 tons, as record metals mined and improvements in truck utilization were offset by a 25% grade decline.
  • Production at Pampa Norte was broadly unchanged for the quarter at 126,000 tons. Higher grades and recoveries at Spence were offset by lower grades and recoveries at Cerro Colorado.
  • Copper production at Olympic Dam rose by 37% YoY to a record 112,000 tons. This mainly reflects the completion of planned smelter maintenance in the prior period.

Drop in copper production

BHP’s management maintained its copper production guidance of 1.5 million tons for fiscal 2016. This would be a fall of 12% YoY and would mainly be driven by the 27% grade decline at Escondida. However, we should take into account the following:

  • Production guidance for Escondida was also maintained at 940,000 tons for fiscal 2016. In the medium term, the Escondida Water Supply project and a potential life extension of Los Colorados may enable a recovery in volumes.
  • Pampa Norte production is expected to remain at a similar level, while production at Olympic Dam is expected to have increased following the full ramp-up of the mill at the end of July 2015.
  • Higher copper grades should support production at BHP’s Antamina copper mine in Peru in fiscal 2016. The production is expected to be 136,000 tons.

Investors looking for diversified exposure to the materials sector can consider the iShares US Basic Materials ETF (IYM). Almost 12% of IYM’s holdings are invested into metals and mining companies.

Continue to the next part of this series for a look at why BHP Billiton expects weaker petroleum production in fiscal 2016.

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