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What’s Driving BHP Billiton’s Copper Costs Now?

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Copper costs

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 volatile 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 part of the series, we’ll explore this topic in detail. Copper contributes 23% to BHP revenues and 18% of its EBITDA (earnings before interest, tax, depreciation, and amortization).

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Unit production costs

Total copper production fell 7% to 712,000 tons in 1H17. Most of the decline was due to the reduced volumes at Olympic Dam, maintenance at Pampa Norte and lower planned copper grades at Antamina.

Cash costs for copper decreased by 24% YoY (year-over-year) in 1H17 to $1.09 per pound due to the reduction at Escondida. For fiscal 2017, the company now expects costs to be around $1.15 per pound, which is higher than the previous guidance of $1.05 per pound.

The increase in cost guidance is mainly on the back of the power outage and unplanned refinery maintenance at Olympic Dam and a stronger Chilean peso and Australian dollar.

Escondida’s unit costs have remained unchanged at $1 per pound. It is, however, subject to the outcome of industrial action.

What will drive copper prices?

BHP believes that in the short-to medium-term, new production should keep pace with the demand and maintain a balance in the market.

In the longer term, BHP management sees a deficit emerging in copper supply. This could happen as grades decline and the scarcity of high-quality future development opportunities keep the industry’s supply constrained.

This should positively impact companies such as Freeport-McMoRan (FCX), Teck Resources (TCK), and Southern Copper (SCCO).

In the next part of this series, we’ll see how BHP is progressing on the cost front in its Petroleum division.

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