New metrics enhance transparency of gold miners’ cost reporting
By: Henry Lazenby
25th July 2014
The World Gold Council’s (WGC’s) supplementary ‘all-in’ cost metrics have helped gold miners to provide more external transparency regarding their cost reporting, while the metrics have enabled them to internally drive change by equipping employees to make better cost-related decisions.
A year after the market development organisation for the gold industry published its guidance note outlining the ‘all-in sustaining cost’ (AISC), which covers day-to-day operations, and an ‘all-in cost”, which includes all capital expenditure (capex), including growth projects, WGC director Terry Heymann says these metrics are powerful tools at the industry’s disposal to improve on existing reporting standards and to better manage organisations.
“The way companies are using the metrics to describe their performance and to educate employees about the real costs of mining, and assisting them to make better cost decisions, is really helping companies to improve their financial performances, while simultaneously improving cost disclosure to investors and interested parties,” Heymann told Mining Weekly in a recent interview.
Apart from the demands by governments for a greater share of mining profits, gold miners face a storm of rising costs and falling prices as the US reins in its ‘cheap money’ policies that have nursed a decade-long gold boom.
There has been a real focus in driving down costs among gold miners in recent years and metrics like this serve as powerful aids in helping companies change attitudes from the inside outward.
“I’ve heard several CEOs comment that while the metrics have been really helpful externally, they have enabled the company to effect significant internal changes too. This is because it allows them to manage the organisation and to communicate in a way that everyone can understand the economics of mining and to understand costs over the life cycle of mines,” he notes.
While the WGC began seriously working on formulating the all-in cost metrics in September 2012, it was preceded by other attempts to improve the way gold companies represent cash costs.
In 2008, South Africa’s Gold Fields started their own cash-cost reporting method known as notional cash expenditure (NCE), being operating costs plus capex, before switching to the AISC metric. Gold Fields and some of the major North American gold companies first suggested the AISC metric as a fairer way of representing the cash costs of gold companies.
In July 2012, Gold Fields CEO Nick Holland in a speech to the Melbourne Mining Club described NCE, alluding to the need for gold mining companies to pare back production if it was not profitable – a need for increased transparency.
The metrics were established in response to growing concerns and criticism by investors with regards to the cash costs traditionally reported by gold miners.
For many commentators, these reported cash costs represented only an incomplete picture of the true costs involved in mining gold. Mining companies themselves had also grown uneasy with their cash cost reporting as it suggested to governments and regulatory bodies keen to find arguments to take a bigger slice from perceived profits much higher margins than were actually achievable.
Goldcorp CEO Chuck Jeannes summed it up in the company’s 2012 full-year report: “The traditional measure of cash costs is not a realistic view. To produce an ounce of gold, we not only incur operating costs, but we spend sustaining capital at the sites, we spend [general and administrative costs] to keep the lights on, and we spend dollars to explore, to sustain our future.
“If you put all those together, that’s an all-in sustaining cash cost. It’s a much more transparent and accurate way of judging the real costs of getting an ounce of gold out of the ground,” he said.
Heymann agrees, saying that the all-in metrics focus more on how much it costs to fund existing operations and the costs of mining over the life cycle of the mine.
In the past, there has been some criticism of the industry regarding how much miners are spending to sustain a certain level of production.
Two Methods of Calculation
In June last year, the WGC published its two new methods of calculating and reporting gold-mining costs to improve clarity and provide greater investor understanding of the complete costs associated with the mining of gold.
The first method is an extension of the existing cash cost metrics and incorporates costs that are related to sustaining production, which the council refers to as the AISC.
The second method takes into account additional costs and reflects the varying costs of producing gold over the life cycle of a mine, which the WGC dubbed the all-in cost.
The different all-in cost metrics include all the other capex, which includes factors like growth, life extension and reclamation.
Up to now, the industry has been content to have a half-baked cost story because cash costs did not tell the real cost story; it only showed the operating cost without including capex and exploration and accurately telling what it costs to produce an ounce of gold.
The industry often spoke loosely about its low cash costs and the money it was making at the level of earnings before interest, tax, depreciation and amortisation, which failed to give investors the true cost picture, and sometimes shot the industry in the foot with governments wanting to slap windfall taxes on companies purporting to make huge profits, when in fact, they were not.
However, the WGC’s all-in cash costs reporting metrics have not been without critics. Early this month, Mining Weekly reported Randgold Resources CEO Dr Mark Bristow lashing out against the metrics, denouncing AISC as the refuge of companies that were not making any profit, saying it is “just jiggery-pokery”.
Non-mining public companies all over the world publish financials according to International Financial Reporting Standards or General Accepted Accounting Principles (GAAP).
“Why does the gold industry have to be different? What’s the reason? It’s because we are not profitable so we try to make ourselves look profitable,” he said, adding that the industry had gone bust when the gold price fell from $1 900/oz to $1 300/oz.
Bristow also noted that the gold-mining company that had promoted the AISC concept adopted by the WGC had since resigned from the council.
The gold-mining industry had failed to make sufficient money to cover its capital, even when the gold price had risen by $1 000/oz and the collective gold output had remained constant. All of the industry’s collective capital was thus sustaining. Some, like Randgold, made profit but many impaired billions of dollars worth of investment and produced less gold.
Heymann responds to this criticism, stressing that the WGC’s all-in metrics are in addition to the existing official accounting standards.
“These are explicitly non-GAAP measures that provide additional transparency and additional clarity on top of GAAP reporting. As an additional form of reporting, it has been a useful and a quick metric to understand what the real cost of gold mining is,” Heymann says.
It is about moving away from what’s operational and what’s capitalised, which, while important, does not provide a real example of the ‘cash going out the door’, both in the context of sustaining operations and for new-build gold mines.
He insists the metric is helpful, supplementing the existing reporting but not substituting it, and that the feedback from the users for which it has been designed has been very positive.
The metrics are also constantly being reviewed to verify that they are working well.
Heymann says an area most feedback had been “hammering on” pertained to what should constitute sustaining capital, as compared with nonsustaining capital.
He referred back to the official guidance note last year where the organisation spelled out how that should be considered – essentially saying that nonsustaining costs are those incurred while constructing a new operation, or when a company spends capital to materially increase production.
This is an area where the council would like to see improved disclosure, he said. “We’d certainly like to see more of this companies disclosing what they consider as nonsustaining costs. Companies using the guidance are required to specifically disclose nonsustaining capital projects.
“This will lead to a clear distinction between costs necessary to sustain production, and growth-related projects, [thereby] providing very useful information for investors,” he says, adding that if over time it becomes clearer what a whole group of companies consider nonsustaining, then the WGC will look at tightening and formalising that definition.
A year down the line, the feedback from role-players is encouragingly positive, Heymann says.
“There is real recognition that it is the WGC that initiated the project, and there was a response from the leading gold miners who understood and paid attention to what investors were looking for in terms of more transparency in the industry’s financial reporting,” he says.
Heymann reports that the uptake among gold industry participants has been really good.
“We’ve been impressed with the uptake among members, but also nonmembers. What has been clear is that a lot of companies have been adopting the AISC, with far fewer reporting the all-in cost. We’ve previously said that we encourage companies to implement both metrics, and we still recommend that companies implement both metrics. That is something we’d really like to see more of,” he says.
Heymann noted that the organisation is “delighted” to see that many nonmember companies have indeed adopted the new reporting metrics. He says, however, that the metrics also hold “real power” not only for the gold-mining industry, but for the whole mining industry.
“There’s been quite a lot of positive commentary on the way in which the mining industry is moving, indicating that there is huge support for the metric to be employed in other parts of the mining industry. It is voluntary but very helpful and important, and the more companies that use it, [the more it] would help everybody to better understand the cost of mining,” he says, referring to an industry report from early this year urging all miners to adopt the all-in cost reporting metrics.