All-in sustaining cash costs is the new gold mining industry byword. The measure (AISC for short) was finalized in June and is supported by the World Gold Council. Currently, gold miners use the cash cost per ounce figure to state their production costs per ounce of gold. However, many consider this figure to be unreliable, and the new AISC measure takes into account expenses such as general office spending and capital used in mine development and production as well as end-of-mine regeneration costs. This is designed to create a benchmark to compare efficiency across the industry.
This change is likely to have several significant effects on the gold mining industry. Firstly, investors will have better clarity when it comes to evaluating companies, especially when comparing across the sector as the AISC will be an easy benchmark and average. Secondly the new AISC measure will quickly highlight companies that are underperforming and investors will quickly be able to see which companies are mining with the greatest margins and which companies are spending cash unwisely.
There has been some criticism for the measure however. Randgold Resources' (NASDAQ: GOLD) CEO Mark Bristow called the measure irrelevant, pointing out that companies could get away with reporting "positive margins between sales price per ounce of production...yet, because of writedowns or impairments, still register losses."
First off the block
Goldcorp (NYSE: GG) was one of the first companies to adopt the AISC method of accounting at the beginning of this year. The company has already forecast that its 2013 cash costs (different to the AISC measure) would be around $525 and $575 per ounce, but AISC's are expected to be almost double. Goldcorp's AISC's are forecast to be between $1,000 and $1,100 for the full-year 2013. (This figure is actually varies depending on where you look; The Globe and Mail places Goldcorp's AISC at $1,279 during Q2 2013). This early adoption of the AISC method has, to some extent, put Goldcorp in the clear. Investors now have clarity on the company's financial position, while the shareholders in many other miners, which have not published their AISC measures, are left guessing company profitability while the gold price remains volatile.
In particular, according to the Financial Times, when the AISC measure comes into full effect, some companies are expected to report AISC's of above $1,400, indicating that some companies are actually cash-flow negative at current gold prices.
However, it remains to be seen if Randgold itself can afford to be so dismissive. The company produced 900,000-950,000 ounces of gold for the whole of 2012 at a cash cost of $700-$750 per ounce. The company's revenues were $1.2 billion and overall costs came to $677 million, giving an EBIT figure of around $547 million. But if we include capital expenditure spending, which AISC is designed to take into account, costs rise to $1.35 billion, or $1,421 per ounce of gold produced. Of course these are rough estimates and it remains to be seen what the company's true AISC will be.
Having said all of that, Randgold is one of the 'better' gold miners around. Randgold's business model is designed to deliver gold at a low cost of production and, unlike many miners, which have been forced to write down the value of their mines as gold prices drop, Randgold's mines are valued at $1,000 per ounce of gold contained, so the company has plenty of room for maneuver before writedowns occur. In addition, Randgold doesn't really have large head offices and high admin costs so overhead costs have been kept low.
Rising from the ashes
One of the company's that could benefit from the accounting change is Kinross Gold (NYSE:KGC). Kinross is a much unloved company, more so than the rest of the gold miners. The company's stock price has fallen 62% during the past five years, compared to the Market Vectors Gold Miners ETF, which has notched declines that are half of that at only 29%. However, it is estimated that Kinross' AISC of production was around $1,072 per ounce during the second quarter of this year. According to Bloomberg if the gold price drops below $1,300 per ounce, 30%-40% of global mine production is not cash-flow positive, indicating that Kinross is in the elite club of companies that are still cash generative below the $1,300 threshold. Barrick Gold's AISC for the second quarter of 2013 was $919 per ounce.
Indeed, it is possible that when the market realizes how efficient Kinross is, the company could be in for a rerating.
The new AISC measure for gold miners should give investors and shareholders more clarity when it comes to miners production costs. Moreover, the measure should quickly highlight inefficient companies and allow investors to select their investments with more conviction without having to worry about hidden costs.