Commodity producers such as BHP Billiton (BHP), Teck Resources (TCK), and Southern Copper (SCCO) don’t have much control over commodity prices (XME). When commodity prices start falling, high-cost producers become unprofitable much sooner than peers that are placed more favorably on the cost curve.
Low-cost producers are able to ride out economic cycles better, and it becomes prudent for commodity producers to control their unit production costs. In this part of the series, we’ll look at Freeport-McMoRan’s (FCX) 2016 unit cash costs and the 2017 guidance provided by the company.
2016 cash costs
Freeport reported copper unit cash costs after by-product credits of $1.20 per pound in 4Q16, bringing its consolidated 2016 cash costs to $1.26 per pound. Freeport’s unit cash costs after by-product credits averaged $1.53 per pound in 2015.
Freeport’s 2016 unit cash costs fell compared to 2015 because the company curtailed its high-cost operations. Higher-grade ore at the Grasberg mine coupled with more gold production also positively impacted Freeport’s 2016 unit cash costs.
Freeport expects its unit cash costs after by-product credits to average $1.06 per pound in 2017. Its Indonesian operations are expected to be the key driver of the reduction in its 2017 unit cash costs. The company expects its unit cash costs after by-product credits to average -$0.03 per pound in its Indonesian operations.
Remember that Freeport’s Indonesian operations have faced labor issues over the last two quarters, negatively impacting the company’s production profile. We’ll look at Freeport’s Indonesian issues later in the series. In the next article, let’s look at Freeport’s 2017 earnings guidance.