Copper

Copper Prices Rise Amid Rate Optimism

Higher copper prices can lift Freeport and Teck revenue, but their own disclosures show why sales volumes and cash costs decide the payoff.

by Dominic Rhee3 min read

Copper cathode sheets descend from a steel lifting beam into a shipping rack beneath a single work lamp.
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Copper prices rose in London's overnight session amid optimism that central banks could hold off on further interest rate increases, according to MiningNews' October 13 report, published at 02:45 UTC. For those of us holding Freeport-McMoRan or Teck, a sustained increase in the prices they receive would lift copper revenue and widen margins if sales volumes and costs hold steady. The report describes an expectation about rates; it establishes no central-bank decision.

How much of that increase reaches the miners you own? The LME's copper contract page, checked October 13, describes its Official Price as a global benchmark used to index copper contracts. That gives an exchange price a route into producers' revenue, although the price received depends on their sales arrangements. We need the higher price to persist through the periods when their copper is sold and priced. A stronger trading session alone cannot establish the revenue or profit a company will report. We made the same distinction between a market quote and a miner's realized price in Gold and Silver Lose Ground as Yields Rise.

For Freeport, which trades as NYSE: FCX, the October 2 operating update provides a recent check on the copper available to sell. The company expected third-quarter copper sales to approximate its July estimate of 750 million pounds. Higher realized prices applied to that volume would support revenue, while weaker shipments would reduce the benefit. But the same update expected unit net cash costs to be 5% above its July estimate, principally because deferred gold sales reduced by-product credits. Those costs exclude idle-facility and restoration costs associated with the Grasberg ramp-up. You can own substantial copper-price exposure and still face a less favourable cost result.

Teck, traded as NYSE: TECK, gives us evidence of how prices and operating performance work together. In its second-quarter results released July 22, the company attributed stronger copper-segment earnings to higher copper prices and production. It reported copper net cash unit costs of US$1.64 per pound, supported by cost performance and increased by-product revenue. That is a non-GAAP measure for the second quarter, so we cannot treat it as today's cost or subtract it from a London quote to claim a current profit margin. If stronger realized copper prices coincide with sustained sales and controlled costs, Teck holders would have more earnings support.

We would therefore judge this rally through realized prices, shipments and the cost of delivering each pound. The rate optimism described by MiningNews could reverse, while either miner's operating performance could offset a favourable copper price. Freeport has already disclosed a reason its reported copper cash costs may rise; Teck's next results will show whether its earlier cost performance continued. For you, that means the upside from higher copper prices comes with company-specific evidence to check before assuming a matching improvement in earnings.

We will check realized copper prices, sales and unit costs when Freeport reports on October 27, as its October 2 update schedules, and when Teck reports on October 29, as announced October 6.

Seek the truth and be prepared,

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Disclaimer: This letter is for informational and educational purposes only and does not constitute investment advice. Past predictions and performance are not indicative of future results. Please see our full terms of use and disclaimer at equedia.com.

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