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A scan of major gold producers’ earnings suggests the cost of mining gold has risen dramatically over the past few years. Part of that is a true increase, owing to inflation and the expense of digging out tough-to-reach grades. But most of it is due to a change in the cost metric that gold miners emphasize in their reports to the investing community.
For years, miners liked to talk about “cash costs,” the mine-level expenses of pulling an ounce of gold from the ground. For the most part, cash costs ran from $500 (U.S.) to $800 per ounce, depending on a miner’s properties.
There was a problem, however: Even as the price of gold skyrocketed to nearly $1,900 per ounce, miners weren’t reporting wild windfall profits on their bottom lines. That’s because cash costs left out a host of expenses, from the costs of running the company to annual spending on equipment.
The new “all-inclusive” measures attempt to solve that. The most frequently used metric, “all-in sustaining costs,” puts the cost of extracting an ounce of gold at more than $1,000 industrywide – and explains why miners are having a rough go at profitability when gold sells for a couple hundred dollars more than that.
“The old [cash cost] led to a lot of misunderstanding about the ability of cash flow that would be there for equity holders,” says Jorge Beristain, an analyst for Deutsche Bank.
“People aren’t really in the weeds on metrics and how they’re calculated, so when a company tells you, ‘Our cash cost is $600,’ and the price of gold is $1,200, you do quick math and say, ‘Hey, they must be earning $600 an ounce of cash flow.’”
“As the gold price went up, investors started to realize there was far less cash flow than they’d guesstimated using that [cash cost] as a simple metric. So there was increasing pressure on the industry to explain to all stakeholders where the cash was really going.”
The evolution could be seen over time at the Denver Gold Forum, one of the premier investment conferences for gold equities. In 2012, when few companies emphasized the metric, Nick Holland, the CEO of Gold Fields Ltd., strongly endorsed the measure.
“We sit here and talk about how wonderful our cash costs are, but at the end of the day, that’s only half the equation,” he said. “The real equation is look at the all-in costs. We stand up and talk about cash costs and how much money we’re making at the EBITDA level, but the real picture is, we don’t really make that much money.”
There was also a matter of self-interest, Mr. Holland said: Governments wondered why the royalties and taxes miners paid weren’t higher, if they were so profitable.
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