Transcription
Hello everyone, WobblyGiraff here. I wanted to go ahead and review this article I found.
So, in the earlier video today, uh, I found that, who was it? Was it Mag Silver? No, it was, uh, Pan American Silver, had their top silver mine showing that cash cost per ounce. I was pretty sure that was not the all-in sustaining cost, the AISC, and I was a little suspicious of that because I know that Glenn See, who made some articles backed up by doctors, PhDs in the finance field, about valuing miners, talked about how AISC is kind of a gold standard, or silver standard depending on your perspective, for, uh, valuing a company's cost of mining silver per ounce. Okay.
So, I did some research because I was pretty sure that was not the same as AISC, the, the cash cost per ounce. Um, then I came across this article. Okay. Uh, so it's by MarketRealist.com. Reads pretty well, and it talks about gold companies' cash costs and all-in sustaining cash costs. Now, once again, this applies to all miners. Uh, the only difference is calculating it for gold versus silver. Okay.
So, it says, "Cost. It's important to understand the cost of a particular company and the way they're reported by different companies. This is one of the most important metrics to watch to gauge how profitable a company, uh, can be under a particular gold price environment." Okay. "In the gold industry, substantial discrepancies exist between the actual cost incurred and the costs reported by the companies. In this part, we'll discuss different methodologies and how effective they are at representing, excuse me, a company's true cost."
"What does cash cost include?" Okay. So, cash cost reporting was introduced in 1996. It's been around for a while, right? It focused on mining and processing costs, which included the cost of goods sold, so labor, energy, and consumable costs. Fair enough. And royalties. Okay. So, paid out to the government for the land, etc., etc. But ignored many important aspects like sustaining capital and general and administrative expenses. And that, that is a pretty big deal.
Um, I know Chris Ritchie talked about that quite a bit. Um, and and Glenn. That, that kind of seems to me like an accounting trick that we can make something look more profitable than it is if we're ignoring sustaining capital on an ongoing basis and general administrative expenses. Those are very real costs that can determine whether a company closes or continues to operate, right? Excuse me, allergies. Right.
"Need for a New Framework." In recent years, gold companies witnessed rising gold prices and expanding gross margins but stagnant free cash flows. And that goes back to what Glenn said, what those PhD people said, and what Chris Ritchie said. Uh, this disconnect led to a need for greater cost transparency. Okay.
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Now, when was this article written? 2014. Okay. Now we're seeing that new era potentially start for certain precious metal miners, especially gold and silver. Once again, I think silver is going to go far higher than gold. And even after this article was published, we definitely saw quite a few, rather, silver miners and gold miners, just miners in general, having negative free cash flow. Okay. Or at least stagnant. Okay. So, clearly, a more encompassing measure was needed to take care of this anomaly.
In 2012, the senior gold miners, including Goldcorp Inc., Barrick Gold Corp., and Newmont Mining Inc., which I think some people say it was involved in a scandal that it went under. I could be wrong. Let's see if that ticker is around. I'm getting crypto. Um, here we go. Nope, still around. Fair enough. Uh, let's take a quick peekaboo over here. Well, I mean, it's been around for a while. All right. Anyhow, worked with the WGC to come up with a new measure. This resulted in AISC, which was widely adopted by the sector last year.
"So, the All-In Sustaining Costs, AISC. How is AISC different from cash costs?" And this is going to go right back to it's trying to account for more of the overhead that these businesses have in their business operations. So, all-in sustaining costs, or AISC, focus on costs incurred in the complete mining lifecycle, from exploration to closure. Okay. They're an extension of cash costs and include costs related to sustaining production. It is important to note that costs are net of byproduct credits. We'll discuss this in more detail in the next part of the series. And this goes back to what Glenn C and other people are saying, that ignoring these costs paints a more rosy picture of the company than the reality of the situation.
"AISC: A Step in the Right Direction." So, the question now arises of whether investors would now know how much it costs to produce an ounce of gold for a gold producer. The answer to that question is no. That is because even AISC doesn't include financing costs and taxes. Okay. And we definitely want to look at those. These are genuine business costs that reduce cash flows, yet they're excluded from AISC. These exclusions can favor companies with higher financial leverage, which is not necessarily a good thing, or higher cost of capital. Companies with higher taxation plus sustaining capital should include, uh, plus sustaining capital should include, plus sustaining capital should include is largely up to company discretion. I guess they're they're missing a word there. So, it's probably plus what sustaining capital. What? Yes, plus what sustaining capital should include is largely up to company discretion. Okay. Fair enough, right? So, we can take out stuff, put in stuff as it makes our company better. So, even AISC doesn't give a full picture. Fair enough. It's still a much better starting point than the cash cost. Okay. But it's much better representing the cost dynamics of a gold or precious metal producer over time. It could improve to correct its subjectivity as much as possible. Um, and I'm very against this, so I'm not going to even bother there. Okay.
Well, that is a pretty good article. Gives a pretty short, but a very good, uh, idea of the kind of the issue of using cash costs. Look at this other article: "The Concept of AISC in the Gold Mining Industry: Strengths and Weaknesses." The all-in sustaining cost, or AISC, is a new metric now widely used in the gold mining industry and precious metals since the second half of 2013. It was introduced by the World Gold Council in 2013. It still needs more fine-tuning and standardization. Sure enough, it's a very good step toward cost of mining true transparency and should be generalized to the whole mining sector as soon as possible. Uh, interestingly enough, I mean, I'm still seeing some miners not give it very clearly, and this was written in 2015, so six years ago.
Um, let's see. So, one sensitive topic in particular has always puzzled many, and it is the true cost of mining. Right? What is the true cost of mining? Yet, the total cost of a miner puts on the negative side of the balance sheet against the revenue he realizes from the sale of the metal produced and shows a profit, right? Is that the true cost? Simple, we would say at first glance, isn't it? On second thought, can we really get this basic value from the official financial reports, which would be the SEC filings, the EDGAR filings for, uh, the Albertans? Was it? Well, there's the Toronto Stock Exchange, and it was the, um, drawn like the Albertan Exchange Commission in Canada, whatever that was.
"The Concept of All-In Sustaining Cash Costs." As we all know, gold is being mined, and silver, uh, by some small and large producers. The finances were not clear enough. We've seen that pretty, pretty much. So, um, so how do we fix that issue of getting the true cost of mining? Okay. There's the cash cost. Some miners are still releasing, and it's painting, most likely, a rosier picture than the AISC would show. So, it's not the cost incurred in the complete mining cycle. And remember, I showed that discounted cash flow graph where we're spending a lot of money to set up the mine and start drilling. We're not necessarily turning a profit. Okay. And then once we really ramp up production of the precious metal, in this case, silver, gold, but mainly silver, we then see a lot of profit. Okay. And it probably will do something like drop off for the remaining life of the mine until it's zero because the mine is depleted. Okay. So, we could really mess with these financial metrics and make the mine look more profitable than it is by using the AISC. We're showing a cost for the life of the mine. Okay. In short, the full cost of getting gold or silver out of the ground. Excuse me, I kind of that sense is building the other one, but, uh, where, uh, don't think that's a complete sentence either. Either way, um, they could highlight their profitability versus, say, their long-term, uh, like true value. Okay.
So, here we go. Um, here's a nice article from the people who made the AISC. So that's good. "It is expected that these new metrics, the all-in sustaining cost and the all-in cost, will be helpful to investors, governments, local communities, and other stakeholders in understanding the economics of a gold miner." Okay. "The all-in sustaining cost is an extension of existing cash cost metrics and incorporates costs related to sustaining production. The all-in cost includes additional costs which reflect the varying costs of producing gold or silver or any precious metal, I suppose, over the lifecycle of a mine." Okay.
So, most of the gold miners are now reporting AISC since quarter two of 2013. So, I mean, it's 2021. It seems like some of these silver producers, that's a very hard metric to find now. I will do my best to calculate it. That's for darn sure. Um, it's a step in the right direction. Sure. So, the formula I'm going to go ahead and add this to my formulas on my Excel spreadsheet to refer to so I can try and calculate it for these companies that are giving us probably the cash cost and then the sustaining capital is probably in their financial forms. That one might be a little tricky to find. And then we have our, what, general and administrative expenses, which would probably be on the financial forms. Okay. So, I'm going to keep this in my back pocket. First, it is important to know that these new metrics are non-GAAP, Generally Accepted Accounting Principles. Oh, I didn't see that on the next line, and there's no standardization, and gold miners use the AISC quite subjectively. Okay. Fair enough.
As we can see here, the AISC is an extension of the cash cost. It is given in US dollars per ounce of gold produced. In some cases, it is indicated in GEO, or gold equivalent troy ounces, if the primary metals are gold, silver, or other basic metals like copper, zinc. See, that's also not there. That would, okay. Some of these sentences are really confusing in the layout. Um, so we would convert silver, gold, or these other things to gold for that is what they're saying. I can't say I've seen that. Maybe the silver production, for example, translate into gold production using a ratio between 1 to 50 and 1 to 75, depending on the gold to silver ratio, which is the gold spot price. Once again, gold's much higher than that. Silver is almost double that. Let's actually see what the silver spot price ended up being today. Uh, it's getting high. It's about telling a little bit, but yeah, I mean, it's almost almost where was I? Almost double that. Almost.
So, this is, uh, another issue which needs to be clarified and generalized. At the last Yamana third quarter conference call, the question regarding the gold, the silver ratio was debated because the company used a ratio of 150 for the silver production, while the actual ratio is over 170. Yeah, so that would paint them as being more profitable in that case. And let's just look up the gold to silver ratio so we can, uh, see what it is today. Right? These are all good metrics to kind of keep at the back of our mind in this research. If it loads. So, it's 67.2. And it seems like quite a few of the miners will assume a ratio. And what does he say here? 151 is 75. It seems like I've seen 150, 175, and 190. That if that ratio deviates too much from what they have it set at, say, one to 50, right? This is 67. If it keeps going up, they'll switch to one to 75 for their accounting. Okay. So, that makes sense, right? That's logical. It's reflecting the true nature of the prices. But in this case, she's saying Yamana basically was legally, uh, kind of fudging, fudging the the books, right? So, ratio was off. So, if they were a lot more into, see how would this work? If they were more into gold, I believe I'd have to do the numbers on this. Uh, I'm not going numbers like right off the top, man, but definitely a calculator. But I'm assuming if they were mainly a gold producer, this would probably make them look better. Uh, or I, I'm pretty sure that's what it would be.
All right. So, Goldcorp, GG. Barrick Gold. I'm going to skip the tickers. Uh, are using are using a different way of presenting reserves and production. Okay. So, we have some good definitions here. Cash costs: cost of goods sold, labor, energy, consumables, plus royalties, net of byproduct credits. Okay. Total cash cost: cash costs, this head office cost, plus offsite costs. Okay. Then we have our all-in sustaining costs: cash costs, plus sustaining capital, plus exploration expenses, plus, uh, general and administrative expenses. Okay. All-in cash cost is cash cost, exploration expenses, head office expenses, plus sustaining capital. Okay. So, these are the two we're kind of looking at here. Uh, what's the difference? They both have cash costs. They both have sustained capital. They both have exploration expenses. And then you're looking at, I'm assuming, a more comprehensive expense versus just the head office. All right. So, total cost: total cash cost, plus depreciation and expenses, plus taxes, plus projecting CapEx. Cool.
"Byproducts and Co-products Accounting Consideration." Mostly gold producers are using a byproduct accounting. Okay. So, that, that's something to definitely look into. It is used generally if the single primary metal represents a significant percentage of the total production, 70% or more. Okay. Yeah. And a lot, there's definitely a lot of pure gold players. There's definitely a lot of pure silver players. Okay. Primary metal can also be two metals, gold and silver. In this case, the company can deduct the byproduct credits from the cash costs, whereas co-product accounting assigns operating costs to each metal product or produce, excuse me, based on its relative contribution or revenues. So, I'm assuming co-product accounting would be better, right? Um, I need to look into that more as well, because that's something to look out for. So, let's save that.
"Evident Advantage of the AISC Versus the Cash Cost." By using cash cost since 1996, the gold mining industry was presenting a misleading financial metric. Okay. With the, with a decrease in cash flow, whereas gold price was steadily rising, it was a clear disconnect that the industry decided to correct the second half of 2013 by introducing a more suitable cost calculation. So, it is much more transparent to the whole process from an investor's perspective, and it is appreciated. Yeah. So, there you have it, right? The question comes down to, since where's first, since I'm getting the cash cost per ounce here versus the all-in sustaining cost, do they have enough of those extra general and administrative, I believe it was, expenses that would put them above this all-in sustaining cost that takes more of the cost into account? And I mean, considering it's only eight cents behind, the answer is probably yes. Okay. I will try to calculate that, but we're looking at something that appears to be, uh, a bit of accounting wizardry. Okay. For Pan American Silver. Okay.
So, we can close the gold to silver ratio. We've looked at spot prices. Always a good place to start. Uh, uh, okay. However, we can we conclude that investors would know better how much it costs to produce gold or silver for a miner now? Um, so a lot of other financial parameters have been left out. And maybe we can take the AISC for these miners, particularly silver ones, and kind of build on that formula here, right? That's certainly something to look at. The most important is the financing costs, in his opinion. Okay. In some cases, the financing can be done by the sale of stocks, which translate to an increase of shares outstanding, but often looked in overlooked in the AISC calculation. Okay. Now, the only issue with that is you have shareholder dilution. More shares means we've raised capital, but people have less of a share, quite literally, or are getting less of a portion of those final profits that the company is receiving. Okay. There's the tax rate. So, yeah, if they had the same AISC, but one was, let's just say, Mexico, the other was in, well, I mean, we've had Morocco. Let's just, let's just say Morocco had higher taxes, right, hypothetically, than which would you rather have? Obviously, the one with lower taxes. The dividend paid, which increased the cost of mining. Sure. So, it's a form of royalty, sure, because they can't reinvest that back into the company. That's for any dividend for any company. The life of the mine, which is often poorly described by the sustaining capital. Okay. Yeah, that's, that goes back to what everyone else is saying, that we could have a very good-looking mine, and it has one year left of silver production, right? It's like, well, they gotta then go to or start another mine if they have no others, or they're not exporting, or they have to buy a mine from the explorers. So, yeah, that's a pretty big deal. How could we play with the AISC metric to, uh, determine the life of the mine? Add something in there? Kind of hard to do. I mean, we can do separate analysis and kind of gauge that. Doable. I mean, there is that, um, you could do the net present value of V. That actually might not be a bad idea, right? Because I know Glenn talked about we want to calculate the net present value of the mine since it is a depreciation and an asset that will be depleted. I mean, that takes care of the present value of the mine as it gets closer to, uh, to to being depleted, right? Its value goes to zero.
The currency fluctuation and the location of the mine can be a negative or a positive factor, which can influence the credit rating of the debt. Absolutely, right? So, a lot of these miners are doing business in other countries but are registered in Canada, America, wherever you are, and so they have to take those US dollars, those Canadian dollars, what have you, uh, uh, swapped them out, or what have you for those for foreign currencies, and they probably get, you know, some kind of payment to do that. Can't do that for free. You have to go to a bank. And then the issue is, what if some sort of economic factor or high inflation or or deflation or just something happens to that currency or that country that then affects that price of that, uh, currency relative to your own? And that's, that's the foreign exchange, that's FX, right? Kind of an interesting market, very dangerous to play in of itself. People will go long, like the Great British Pound to the US Dollar or the Japanese Yen to the US Dollar. A lot of money to be had there, but your asset is money itself. So, that's an easy way to also get absolutely destroyed in investing. Um, a lot of ways people play that though is diversified into companies and other countries, right? So, Japan had a major, uh, I'm not sure it was, yeah, I guess it was an asset bubble. It was in the '80s, I believe, where their federal, their federal reserve had run interest rates so low that the economy just went flat for a decade or two. Might still be kind of flat, and a lot of people lost a lot of wealth because they had built in these assumptions that the economy was going to keep going up, even though interest rates really messed it up. And apparently, there's stories that these people who had all their money, like in Japan, that probably were Japanese as well, ended up basically not being able to buy anything from, say, outside the country. And trade, trade gets affected by that too, at a national level. Um, and and someone had pointed out, I think it was John Bogle, who's a big fan of passive investing, he passed away recently, um, um, but he pointed out that if they had diversified and had 15, 20, 30% of their portfolio overseas, they would have been fine. So, that's kind of a way to play the the foreign exchange if you're worried about something happening to your currency that's not facing other currencies. Although, in my research, it seems like central banks around the world are really turning that currency printer up. Okay.
All righty. Uh, where were we? So, the currency fluctuation, the location of the mine could be a negative or a positive factor which influenced the credit rating of the debt. Absolutely, right? That's kind of what we covered here. Management execution track record. Absolutely. I think Glenn talked about that how there were some CEOs that were very, very shady. Okay. I'll make sure my mic is still being captured, just to make sure here. Uh, well, I'll assume I'm still being captured. All right. So, so they're indicating an AISC under the actual gold spot price. So, they would be making money using this metric versus the gold spot price. So, what they're getting paid, essentially, for gold, gold price, their AISC. We want gold or silver, and our key silver to be much higher than the AISC. Okay. So, apparently, the platinum and palladium, I really don't know, industry still indicates a cash cost, right? So, we would rather have AISC for the nearly bankrupt North American Palladium. Pal, is that a stock? Oh, may close. It's at zero percent. So, rip. See if some of these are still running. There you have it. Um, uh, the other hand, the only platinum and palladium profitable miner in the USA, still Stillwater Mining, SWC, is indicating AISC. So, there you go. They also closed. So, rip.
Um, all right. So, AISC indicated for seven co, seven companies. Let's make sure they're not going on with this article saying maybe their API doesn't work. Let's see. It's the font. Oh, okay. Where was I? Uh, I mean, two of these companies is to, so that's Stillwater Mining. Where are you not on here? Uh, Pal Agora. Which of these went out of business? Well, I mean, we can see that the ones typically that used AISC were still going. Um, it's a cool graph. So, cost of goods sold, COGS, that's in accounting term. That looks like that's the majority for all of them. Although Rents a little more for Goldcorp. Sustaining capital, sustaining capital, expiration. So, that's good. Very small for Goldcorp and Kinross. Very small. Okay. What else do we have? Remediation costs. I'd have to look that up. That's the GA, the general administrative cost. Okay. That's what we said was kind of left out in the cash cost. Now, part of that might be, uh, in the cash cost, but not all of it. Okay. And that kind of goes back to, uh, what Pan American Silver versus Silver Crest. Price, Silver Crest has a higher AISC to Pan American's, uh, cash cost, but some of that cost being left out. Okay.
So, the gold mining industry has been working hard to present a better financial statement to its shareholders. The recent introduction of the all-in sustaining costs was a very important initiative that helped establish a fraud, a strong framework for a better sector credibility. Sure, which has suffered greatly since the gold price has crashed, right? Now, however, because it is a non-GAAP metric without proper standardization, we'll have to be careful and always look seriously at what has been presented by the different companies. Sure enough. Can we be satisfied with this better financial transparency? Sure, but it needs more adjustments going forward. And I think he laid out some good points to kind of look at ways to improve it. So, financing cost, tax rate, dividends, life of the mine, which maybe we could use net present value. The currency fluctuation and location of the mine, and the management execution track. Right, right. Now, hard to boil that down into a number, but arguably you could do some sort of tax rate. You could include financing costs. Could include dividends. Could include the net present value of the life of the mine. Would probably be a little harder to do. Currency fluctuation, I guess you could average out the currency prices for like the last time period. It's kind of hard to do. And then, I mean, we're not going to get a number on management execution track record. Okay. Uh, what do we got here? All right. So, where are we? What do we have here? Um, more fine-tuning, more uniform throughout the whole industry. Do extra due diligence. Sure. Okay.
So, I mean, I kind of stumbled across this article in the process of making this video, but definitely a good read. Uh, I agree with most of the points there. Um, I think the last article we had that was very short that gave at least a good definition between the two was, uh, pretty good as well. So, I just thought I'd throw that out there because that makes me feel a little iffy about Pan-American Silver versus Silver Crest when Silver Crest's all-in sustaining costs, which includes more costs, is only slightly higher than Pan American's, uh, cash costs, which do not include some of the, uh, costs that AISC does. Okay.
So, thank you very much. Uh, hopefully, you've learned some interesting stuff from this video. I am not a financial advisor. I have to say that, so the SEC does not come shoot me, I guess. [Music] I'm just doing research for fun. I kind of enjoy this. It's interesting to learn this stuff. Hopefully, this has helped you. Have a good day. Please take care of yourselves. I worked out today for the first time in a while. Definitely feels pretty good to kind of be healthy, you know? Go for a walk, eat some nice food. Yeah. So, uh, have a good one. This is Wobbly Giraffe signing off. Bye.