Gold Mine Measure ‘to reflect true costs’

September 16, 2013 at 07:58


Gold is being mined by some of the world’s biggest producers at costs that are higher than the price of the precious metal, according to a new measure that may become a benchmark of industry efficiency for companies and investors.

Several miners reporting earnings in recent weeks have revealed “all-in sustaining costs” of production of more than $1,200 per troy ounce, the price to which gold dropped this year. Some have shown an AISC of more than $1,400. Gold ended last week at $1,314 per ounce, having fallen more than 5 per cent during the week.

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 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.

Goldminers, like other miners, have traditionally used “cash cost” – showing the cost of running a mine to produce a given amount of a metal – as a benchmark of their operating efficiency.

However cash cost measures have disregarded other expenses, from general office spending to some of the capital that must be spent to develop a mine, to keep it in production or to rehabilitate a site at the end of its life.

The new cost measures were finalised in June and set out to capture and to reflect some of this outlay.

“The economics of gold mining have not been as well understood as they could be by a broad range of people including governments, communities and even employees,” said Terry Heymann, of the World Gold Council, an industry body that endorsed and introduced the measure.

“Investors were seeking greater transparency and consistency across mining companies.”

A dozen of the 18 companies that are members of the gold council reported costs on an AISC basis for the second quarter of the year. African Barrick Gold and Gold Fields, whose chief executive Nick Holland has been an advocate of more comprehensive cost measures, reported an AISC of $1,416 per ounce. Gold Fields said its AISC was $1,280 without one-off impairments. Only five of the 12 companies said their AISC was less than $1,000 per ounce.

Keith Watson, an analyst for CQS New City, said: “Using all-in cost measures is a welcome development  . . . It has become glaringly obvious as the tide has gone out what the fundamental situation is.”

However, Mark Bristow, chief executive of Randgold Resources which operates a range of mines in sub-Saharan Africa, said the measure was irrelevant. Companies could report positive margins between sales price per ounce of production and “all in” production costs, yet, because of writedowns or impairments, still register losses, Mr Bristow said.

Barrick Gold, African Barrick’s parent company and the world’s largest gold producer, reported an AISC of $919 per ounce for the second quarter. Jamie Sokalsky, Barrick’s chief executive, said last week that ABG would be “aggressively optimising mine plans and operations” after replacing its chief executive last month.