Source: © Nadeesha5814 | Megapixl.com
The All-In Sustaining Cost (AISC) is an advanced metrics used by mining companies to report their cost of gold mining. AISC is an extension of currently existing “cash cost” metrics which includes sustainable production costs too. AISC includes all the varying costs incurred in gold production over the mine's life-cycle. However, the reporting of AISC purely depends on the company. AISC costing metric is usually adopted by gold mining companies that aim to reflect the complete cost of keeping the mine in business.
Mining is an integral part of the development of the civilization. Mining activity provides raw materials, jobs, essential fuels etc. The mineral extraction cost continuously increases as the mineral deposits reduce. However, the mining industry is constantly struggling to report the mining cost and selling price of ore accurately. The market determines the prices of the minerals, but the production costs remain in the hands of miners. In order to have a consistent reporting format of production costs, leading gold miners worked closely with the World Gold Council (WGC) to develop a new reporting framework, i.e. AISC.
The traditional cash cost reporting system only focuses on mining and processing cost and disregards various important aspects like site rehabilitation work, administrative expenses, general expenses, sustainable capital, etc. The objective of the traditional cost metrics was to attract more and more investors by representing a higher gross margin. But actually, the miners were not getting excessive income even at higher selling prices of gold because the traditional metrics omitted other costs.
The haziness of the traditional cash cost reporting system forced miners to look for an accurate cost reporting system that can win investors' confidence by providing more transparent economics of gold mining. The initiative was led by WGC and leading gold miners, including Barrick Gold Corp, Goldfields and Newmont Mining Corp., to publish June 2013 AISC and All-In Cost (AIC) reporting framework.
The journey of the gold cost reporting system started in 1976 with the establishment of the Gold Institute, which promoted common business interest by providing statistical data related to the gold industry and other important information to its members.
The Gold Institute published guidelines for standardizing the gold costs reporting system in 1996. The guidelines represented the basic division between cash costs and total costs of mining. Cash cost represented the direct cost involved in processing and mining the ore, while the total costs included reclamation, amortization and depreciation costs.
The need for an upgraded cost reporting system was felt by miners in 2008 when the gold prices reached US$800 per ounce as the basic cost reporting system was not reflecting the true cost of gold production. Many gold miners tried different approaches to represent the true cost of gold mining, but they were incapable of representing their profits accurately.
With the evolution in the reporting system, investors and miners worldwide understood the importance of AISC. Cash cost represented only a visible part of gold mining, whereas the AISC framework of reporting represented the complete picture of mining cost involved in the production of gold.
Gold miners across the globe masked their true mining cost for investors to make it look good, which created an impression that even at squeezed prices of gold, the industry is making profits, which was not actually true because the profits were marginal. The process was making it difficult for the gold miners across the globe to sustain in business for longer runs. But with the introduction of AISC, the investors understood the actual cost of producing a single ounce of gold. This also helped them understand how suppressed the margin for the miners was.
Nowadays, many gold miners, including Goldcorp, Newmont, Barrick, restate their historic costs on an AISC basis in their latest results.
Source: © Seoterra | Megapixl.com
There are numerous benefits of AISC over traditionally followed Generally Accepted Accounting Principles (GAAP) reporting. Let's have a look at the two most important benefits of AISC.
The newer reporting system provided a clearer picture of margin and actual sustaining cost of miners for gold mining, but it has several inherent confusions. Let's have a look at these disadvantages one by one: