Commodity prices are falling and as a result investors and analysts are calling for more complete and transparent disclosure of the total costs of production in the gold mining industry.
“This year’s sharp fall in the (gold) price has put the industry under more pressure than it had known for almost a decade and heightened investors’ interest in miners’ true profitability”
– Financial Times, Sept. 16, 2013
Mining in Canada
The Canadian economy relies on mining and resource extraction which accounts for over 8% of GDP according to Stats Canada. This compares to the United States, our biggest trading partner, whose mining sector registers at a scant 2% of GDP according to the US Bureau of Economic Analysis. It is no wonder investors are becoming concerned given the current falls in commodity prices.
New All-In Cost Measures
In 2013 the The World Gold Council (WGC) established a working group of its member companies to create a new cost framework. The Group developed a set of non-GAAP measures, which are intended to provide further transparency into the costs associated with producing gold. The most notable is guidance on “All-in Sustaining Costs” and “All-in Costs” metrics. Historically miners have focused only on the costs incurred in mining and processing. This WGC guidance focuses on costs incurred in the complete mining lifecycle from exploration to closure.
Unfortunately for investors there was great debate over what should be classified as “sustaining.” The Council decided not to lay out a specific definition because companies are dealing with so many unique circumstances. The Council encourages all companies to disclose their sustaining and non-sustaining capital spending as clearly as possible. The graph below provides a comparison of Cash Costs / ounce vs. All-in Sustaining Costs / ounce for seven major miners.
All-in Sustaining Costs (AISC)
All-in Sustaining Costs (AISC) are an extension of Cash Costs measures and incorporate costs related to sustaining production. Although they are a more complete measure than the basic mining and processing Cash Costs, they do not include:
- Non-Sustaining Project capital (included in a separate all-in cost measure see “All-in Costs” section Below)
- Working Capital
- Financing and Interest charges
- Costs related to business combinations, asset acquisitions and asset disposals
- Items needed to normalize earnings
- Dividends (which are discretionary)
In their 2013 guidance note the WGC provided a breakdown of what should be included in AISC as shown in the table below.
All-in Cost Disclosure
We have found that most mining companies tend to hide their AISC numbers deep inside the management discussion and analysis sections of their statutory reports. Occasionally a company will disclose their AISC on the first pages of their annual report but without any context or discussion of the breakdown. We believe complete and detailed visual disclosure of a company’s AISC with supporting discussion and comments will give mining companies a decided edge when competing for investor dollars and confidence.
AISC still don’t cover all the costs incurred by a mining company. The All-in Costs capture the Non-Sustaining costs of a mining operation which are defined as the additional costs incurred for new operations or by ‘major projects’ in existing operations that will increase production.
“Non-sustaining costs are those costs incurred at new operations and costs related to ‘major projects’ at existing operations where these projects will materially increase production. Companies need to publicly disclose those operations and ‘major projects’ which are considered non-sustaining. All other costs related to existing operations are considered sustaining.”
– World Gold Council, June 2013
This guidance clearly allows for significant interpretation by mining companies. As a result, we see a wide range of disclosure from miners. Investors and analysts suffer because one company’s AISC is not necessarily the same as another’s.
In addition to the AISC, mining management should also measure and track their All-in Cost per ounce to get a complete picture of their operation. The chart below shows the breakdown of the All-in Costs broken down by Sustaining and non-sustaining for a hypothetical miner.