Gold mining companies like Goldcorp Inc. (GG), Barrick Gold Corp. (ABX), and Newmont Mining Inc. (NEM) report cash costs, total cash costs, total costs, and all-in cash costs. It can be very confusing for investors to understand exactly what’s what here.
Plus, since these numbers are non-GAAP (generally accepted accounting principles), there’s no standardization and companies can use these reports to further their interests if they wish. To confound the situation, there’s “co-product” and “by-product” accounting. It’s important that investors understand these nuances to make better investment decisions.
The above table provides a quick snapshot for the items generally included by gold mining companies in their cost reporting.
When can a company use by-product and co-product accounting methods?
The difference between by-product and co-product accounting depends on the contribution of each metal to overall revenues. Generally, to use by-product accounting, a single metal has to contribute at least 80% of revenues, while the other metals contribute 20% of revenues and can be considered by-products.
Under by-product accounting, companies can deduct the revenue received from by-products from the costs incurred in producing all the metals from a mine. This reduces the costs per unit for a company. All the companies reporting negative costs per unit of production use by-product accounting.
For example, say a mine produces both gold (1,000 ounces @ $1,200 per ounce) and silver (15,000 ounces @ $20 per ounce) at a total cost of $1 million. Under by-product accounting, the revenues from silver ($300,000) would be deducted from costs ($1,000,000) and divided by gold ounces, so the cost per ounce is $700. If we back-calculate, the company has booked $800.000 ($1.500.000 – $700 * 1,000 ounces) in profits, which should have been $500,000 ($1,500,000 – $1,000,000).
Co-product accounting, on the other hand, assigns operating costs to each metal produced based on its relative contribution to revenues. This is a more transparent method of reporting.
For example, say a mine produces both gold (1,000 ounces @ $1,200 per ounce) and silver (40,000 ounces @ $20 per ounce) at a total cost of $1 million. Under co-product accounting, the cost per ounce for gold would be $600 and for silver it would be $10 per ounce. The back-calculations also work in this case and investors are able to see the correct margins for each commodity.