Freeport-McMoRan Stock Whipsawed after 4Q15 Earnings Release
(Continued from Prior Part)
Grasberg mine
Previously, we’ve seen that Freeport-McMoRan (FCX) expects its copper unit cash costs to fall steeply in 2016. Freeport-McMoRan owns the Grasberg mine in Indonesia (EIDO), and Rio Tinto (RIO) is Freeport’s partner in this mine.
Rio Tinto also owns the Oyo Tolgoi mine in Mongolia through its subsidiary Turquoise Hill Resources (TRQ). In this part of the series, we’ll explore why the Grasberg mine is so critical for Freeport’s 2016 operating plans.
2016 unit cash costs
The graph above shows Freeport’s 2016 unit cash costs guidance. In 2016, Freeport expects its copper unit cash costs to fall across all its mines expect for those in Africa. The company expects its unit cash costs to average $1.49 per pound in North America and $1.50 per pound in South America (ILF) this year. On a consolidated basis, Freeport expects copper unit cash costs to fall to $1.10 per pound in 2016 from $1.53 per pound last year.
However, most of the expected reduction in unit cash costs seem to be coming from the Grasberg mine, where Freeport expects unit cash costs after by-product credits to average only $0.17 per pound—down from $1.09 per pound in 2015. This 84% reduction in unit cash costs at the Grasberg mine is expected to help Freeport reduce its consolidated unit cash costs.
More gold
Freeport-McMoRan expects to produce more gold in 2016 from the Grasberg mine as it completes the open pit operations. This will lead to higher by-product credits and hence drive down the unit production costs. The Grasberg mine will need to be converted into an underground mine in the next two years.
However, Freeport must sign an agreement with the Indonesian government to extend its mining contract. In the next part of this series, we’ll discuss what the company’s management had to say about the progress in their talks with the Indonesian government.
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