Gold companies’ cash costs and all-in sustaining cash costs

Costs

It’s important to understand the costs of a particular company and the way they’re reported by different companies. This is one of the most important metrics to watch to gauge how profitable a company can be under a particular gold price environment.

In the gold industry, substantial discrepancies exist between the actual costs incurred and the costs reported by the companies. In this part, we’ll discuss different methodologies and how effective they are at representing a company’s true costs.

Gold companies’ cash costs and all-in sustaining cash costs

What does cash cost include?

Cash costs reporting was introduced in 1996. It focused on mining and processing costs, which included the costs of goods sold (labor, energy, and consumables costs) and royalties. But it ignored many important aspects, like sustaining capital and general and administrative expenses.

Need for a new framework

In recent years, gold companies witnessed rising gold prices and expanding gross margins but stagnant free cash flows. This disconnect led to a need for greater cost transparency.

Clearly, a more encompassing measure was needed to take care of this anomaly. In 2012, the senior gold miners, including Goldcorp Inc. (GG), Barrick Gold Corp. (ABX), and Newmont Mining Inc. (NEM), worked with WGC to come up with a new measure. This resulted in AISC, which was widely adapted by the sector last year.

How is AISC different from cash costs?

All-in sustaining costs or AISC focus on costs incurred in the complete mining lifecycle from exploration to closure. They’re an extension of cash costs and include costs relating to sustaining production. It’s important to note that costs are net of by-product credits. We’ll discuss this in more detail in the next part of this series.

AISC – A step in the right direction

So, the question now arises of whether investors would now know how much it costs to produce an ounce of gold for a gold producer. The answer to that question is a no. That’s because even AISC doesn’t include financing costs and taxes. These are genuine business cost that reduce cash flows, yet they’re excluded from AISC. These exclusions can favor companies with higher financial leverage or higher cost of capital and companies with higher taxation. Plus, sustaining capital should include is largely up to company discretion.

So even AISC doesn’t give a full picture. But it’s much better at representing the cost dynamics of a gold producer. Over time, it could improve to correct its subjectivity as much as possible.

Investors can also consider investing in gold-backed ETFs like SPDR Gold Shares (GLD) or gold producer–backed ETFs like the Gold Miners ETF (GDX) and Junior Gold Miners ETF (GDXJ).