Unit cash costs
Commodity producers, including Freeport-McMoRan (FCX) and BHP Billiton (BHP), don’t have much control over commodity prices (DBB). When commodity prices start falling, high-cost producers become unprofitable much sooner than their peers that are placed more favorably on the cost curve.
Low-cost producers are better able to tide over economic cycles. It becomes prudent for commodity producers to control their unit production costs. In this part of the series, we’ll look at Freeport’s 4Q15 unit cash costs and 2016 guidance.
Unit production costs fell
- Freeport-McMoRan’s unit copper cash costs after by-product credits were $1.45 per pound in 4Q15. The unit production costs fell 4.6% as compared to 3Q15.
- In 3Q15, Southern Copper (SCCO) had reported unit cash costs of $1.07 after by-product credits while Teck Resources (TCK) reported unit production costs of $1.44 per pound.
- In the energy business, Freeport-McMoRan’s consolidated unit cash costs fell to $16.17 per boe (barrels of oil equivalent) from $18.85 per boe in the previous quarter. Freeport-McMoRan’s unit cash costs in its energy operations have been on a steady decline, as you can see in the above graph.
Freeport-McMoRan expects its unit production costs to fall steeply in 2016. In the energy business, Freeport expects its unit cash costs to average $15 per boe in 2016—a 19% decline over the 2015 cash costs.
Furthermore, Freeport-McMoRan expects its copper unit cash costs after by-product credits at $1.10 per pound in 2016. This would mean a year-over-year reduction of more than 28%. However, the company’s ability to reduce the unit production costs would rely heavily on how events progress in its Indonesia operations. We’ll discuss this in more detail the next part of this series