In a move designed to improve transparency in reporting, in June 2013, the World Gold Council (WGC) published a guidance note outlining the concepts of “all-in sustaining costs” (AISC) and “all-in costs” (AIC) as more accurate representations of the cost of producing an ounce of gold than had previously been the case.
As James Wilson and Michael Kavanagh described it in an article in the Financial Times in September that year, “the AISC measure intends to show more clearly the full costs of getting gold out of the ground. Its adoption comes as this year’s [2013] sharp fall in the price of the precious metal has put the industry under more pressure than it has known for almost a decade and heightened investors’ interest in miners’ true profitability.”
AngloGold Ashanti subsequently provided a helpful explanation on these non-GAAP measures in its quarterly reports. “‘All-in sustaining costs’ is an extension of the existing ‘cash cost’ metric,” the company said, “and incorporates all costs related to sustaining production. In particular, it recognizes the sustaining capital expenditures associated with developing and maintaining gold mines. In addition, this metric includes the cost associated with the corporate office structures that support these operations, the community and rehabilitation costs attendant on responsible mining, and any exploration and evaluation costs associated with sustaining current operations.”
All-in costs build on this foundation, to include additional costs that reflect the varying costs of producing gold over the life cycle of a mine, according to the WGC. These can include costs that are incurred but are not associated with current operations, such as permitting, community, exploration, capitalized stripping and underground development costs, and capex associated with major growth or expansion projects.
In general, the industry seems to have adopted the concept as being a necessary improvement over previous reporting practice, as the table shows. However, as the WGC pointed out when launching the system, “it is up to individual companies to determine how they report to the market and to decide whether their stakeholders will find these new metrics of value in understanding their businesses.” In other words, companies are free to interpret the way in which they include or exclude cost data from their AISC—and as PWC noted in its January 2014 publication, Digging deeper into all-in cost disclosure, “development costs, exploration costs and general and administrative expenses are among the most challenging grey areas.”
Whatever the shortcomings that still need to be ironed out, the AISC/AIC concept has already demonstrated that for the gold industry, the old “cash cost” measure can often provide an unrealistic picture of a company’s true financial performance. What is of even greater concern is that there are now plenty of companies out there for whom the squeeze between true costs and revenue is already precariously narrow, and it will not take much of a further price cut before capacity-shedding begins in earnest unless producers can get their cost structures under tight control.
