Transcription
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Hello folks. Um, my name is Grant Meenk. I'm a principal consultant with SRK in Denver. I'd like to thank Tim and the [inaudible] to present on one of my favorite topics. My focus would be a little more tactical, down to the project valuations, especially in the 43-101 space.
So, why this presentation? Well, uh, we've seen variations of this graph, uh, quite often during this, uh, conference and others. But let's just say the last five years have not been very kind to this industry. I mean, you've got the S&P 500 up here, Toronto Global Index down there. But we, we've all seen this before. So, what this means in a period of low metal prices and low market caps is that cost differentiation is a main driver for companies, uh, trying to, uh, attract interest for, um, investment. And I think Dave, this is Dave Cox, this is straight out of your SNL mine economics, a very good little tool. I just took Escondida, found the cost there on the cost curve for copper. And, um, again, this is really becoming a, you know, in this period of low metals, a main differentiator.
So, the problem is, how do we define these costs? You can see here, there's all sorts of different definitions. It's not a surprise, mining is quite a diverse industry, geography, commodity, histories. So, what we're going to try to do is just kind of go through these and just, uh, give some rules of thumb we use at SRK to perhaps simplify, um, especially in at looking at a project valuation at a 43-101, uh, level or JORC.
So, first of all, um, we'll review the all-in sustaining cost format and any and some reporting issues with them and how we deal with them. Then we'll discuss a total cost cash cost concept that we like to use for 43-101, or several of our clients like it as well. Then we'll reconcile the differences between the two.
So, a little commercial about at SRK. Um, been established in '74, so we had our 40th anniversary a couple of years ago with 1,400 staff, uh, 45 offices worldwide on six continents. And if global warming continues, we'll have one in Antarctica. So, so in terms of valuations, we run the gamut. But in particular, in Denver, half our work is split between the economic studies, PEA, PFS, FS, and, uh, transactional support, doing due diligence. So, we do a lot of valuations ourselves and we look at a lot. So, I feel it gives us quite a, a leg to stand on in, uh, talking about how to look at project valuations.
So, let's jump right in with the 43-101 and by inference, JORC guidelines as well. A, a lot of letters there, but let me assure you, stop reading. There's nothing in the 43-101 guidelines about cost reporting. Not a surprise, because the thing was written by geologists and it took them 14 sections to get to a mineral resource. So, the fact that they left out a cash cost format is not a surprise.
So, really, um, everyone talks about all-in sustaining cost, but there really are two. Okay? The World Gold Council, which Mark alerted to for the precious metal reporting. And you see, it's composed of three levels: um, adjusted operating costs, all-in sustaining costs, and all-in costs. And I point out that these kind of include some minor non-cash adjustments in them, but not overly, uh, too much. Then there's that Wood Mackenzie guidelines for base metal C1, C2, C3. And this one, my own personal opinion, because it contains so many non-cash items in it, like depreciation, amortization, when we're doing a valuation on a, a cash flow for a project, this really messes things up. It confuses people.
So, what I'd like to do in the rest of this talk, let's talk about the all-in sustaining costs and the World Gold Council. So, the first step here is the adjusted operating cost. You see here, pretty well captures everything. The, um, items in blue are more or less some stockpile adjustments, some non-cash adjustments right there. There's a bit of hedging there, but overall captures and includes byproduct by credits, by the way, but overall seems to capture most of your operating costs.
So, the sustaining cost is basically take those operating costs and add on, as Mark alluded to, the corporate G&A, you know, the bean counters and the lawyers and CEOs, and then reclamation, exploration, capital, you know, stripping, development. And that equals your all-in sustaining costs. And these are, when it comes to valuations, related to the operation. Because the next step in the World Gold Council is the all-in costs. Like I said, people mix up these terms. I'm trying to just here, kind of briefly outline what each one is. So, take all-in sustaining costs and add any off-mine or other mines at a, uh, corporate level to give you all-in costs right here.
And what we find with the main issues, like I said, we do a lot of them, we see a lot of them. And one of the first ones we, we see a lot of times are items are neglected. I mean, investors are complaining about the inconsistency in reporting. I think a lot of it just has to do with lack of standardization. So, one of the main ones we see, and matter of fact, uh, we have a client here, we did a due diligence for him, this happened. Well, it was, um, because TCCs were taken out of the revenue stream. Well, we don't have to count it. Well, in for with the all-in sustaining costs or cash reporting, you have to count those. So, a lot of times they'll neglect to put in, um, infrastructure costs. I think it's not related to mining. So, one of the big issues we find is there's a lot of things omitted.
So, some more stringent definitions are definitely needed for byproduct versus co-product. Mark alluded to that. I'll give you an example. But we, the way we kind of approach it, sustaining capital, G&A, and exploration. And as Mark said, right, it, it ignores some pretty important items here. And we have some suggestions near the end of this talk about that. So, hang tight.
So, the, um, byproduct by co-product rule. Byproduct, if one or more commodities is less than 20%, that's a rule of thumb we use. Mark, we can argue about it later. And the co-product is those two or more commodities, each contribute 20% of the revenue stream. So, the byproduct is credited against operating costs, whereas co-product is not. In this project here, we've got 1,000 ounces of gold and 10,000 silver. So, the silver is reporting 13.3% of the revenue. So, if your cash cost is $700,000, you subtract that revenue, silver revenue from there, gets $550, divided by the ounces of gold because that's the primary commodity. So, it's $550 per ounce. And co-product, 1,000 ounces gold, 50,000 silver. So, silver is contributing 43%, or it's past the 20% rule. Um, there's your cash cost. And then we convert the silver to gold. We've all done this. So, we get to an equivalent gold of $400 per ounce.
Now, with these other items that need a little more definition, the sustaining capex, rule of thumb for us is if it, it's if the capital expenditure expansion is greater than 5% of the nameplate capacity being increased, then that's development. It's not considered sustaining. Just a nice, simplifying, um, assumption. With G&A, of course, when you do a project valuation, you're not including G&A, corporate G&A. Sometimes though, if a, a project has a regional office, let's say Newmont as their mine operations, AO, and, uh, one, some companies would include that regional office in the capital, but it should all be included. Then exploration. If you are not, if your costs are, or your ounces, if you're spending money that is not producing the ounces in your business case, take them off. Like the off-mine costs.
Another one is taxation. You know, that income tax is not included in cost. I just, that's beyond me why it isn't. But we always know it's in the, um, always in the top 10, top five, uh, risks. This is Ernst & Young. And you see they never call taxation, it's resource nationalism. That's because there's three types of taxation that they say: one is the mandated export taxes that pre-ports finding in Indonesia. The second is just in-country ownership that, uh, countries like Venezuela is imposing, or just basically out and out nationalized the operation, or increased and newly imposed taxation regimes. And of course, this is the one that affects your cash costs. Especially. Luckily, we have definitions from the IMF of what taxation regimes mean. And we do know the first, uh, first one, royalty and, uh, seon, either is a production tax based on volume or an ad valorem tax based on the value of the minerals. Already in this cost reporting, generally most people we see don't, don't miss that. They'll include it. But what we don't, what is never included, and this is just seems by corporate or industry, uh, consensus, is the corporate income tax and any resource rent tax. Those are currently not in, as you know, included. Why it isn't, I don't know. Um, it should. I mean, the top line here is a pre-tax NPV curve at various discount rates. And there's your after-tax. And you need about three or 400 basis points to make up the difference. It's a significant impact to your operations.
So, okay, let's, let's talk about now this total cash concept, which we think kind of simplifies things. Okay? Composed of three types: direct cash costs, which are costs to incur to produce and sell the payable product, right, from beginning to end. The indirect is just the cost incurred, the legal license to operate, and the social license to operate, keep them in compliance. If you're not in compliance there, you're not going to be mining. And then, as we discussed, sustaining capital, with assets greater than one year of use of life, keep the lights or the pumps on at a designated nameplate capacity.
So, just diving a bit more, what you'll see in direct costs: mining, all the general activities you see here, smelting, refining, freight, insurance, selling, marketing costs, and the byproduct credits. What we mean by the indirects would be the royalties, which are already, most people include all already. Then this, um, permitting, environmental costs, social responsibility costs, and any concurrent cash reclamation. And you see here, sustaining mining, processing, infrastructure, and any capitalized, um, production costs. But what I'd like to point out here at the bottom is, um, rather than a World Gold Council for precious mining and a, um, Wood Mackenzie for base metal, this would kind of fit most industries, most commodity types when you keep it this simple. With that, and I'd like to reinforce Mark's point of, yeah, these things do not include corporate income taxes, working capital, financing, corporate G&A, all these non-cash adjustments that are necessary to get, I think, to a financial statement point of view as well.
So, what we found here with ASIC, go back here's our, the SRK total count cash concept. So, cash operating cost, sustaining. So, that's our total cash. But you see here, there is the adjusted operating cost, but it's including hedging, stockpile operational, which comes to that operating, uh, cost. Adds a sustaining, but you have the corporate G&A and off-mine expenses. So, that's giving you all-in sustaining costs. Again, reinforcing that this does not include these items.
And so, for the last one, stay tuned. We have this right now. Um, I'm trying to work on a presentation for later this fall. If you're in Denver Gold Forum, I've already been signed up for it. So, um, to give this kind of view where direct cash costs, the indirects including income tax, uh, interest payable, our financing charges, working capital, perhaps this is the way. Not sure about, still got to discuss on expansion or development capital, how that would all fit. But that would be, um, the next step, I think, to this. And with that, thanks for the opportunity to share my views on the subject. And, um, thank you very much.