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Guest Article by reader BW: “Lifting the Dress on All In Sustaining Costs” (from IKN339)

I've been asked to put this piece, part of IKN339, onto the blog. So here it is.


Guest Article by reader BW: “Lifting the Dress on All In Sustaining Costs”

(Alt. title “How things can grow out of virtually nothing when you run a blog”)

First a little background: In the last couple of weeks over at the blog, both myself and reader ‘BW’ have been playing on the theme of All In Sustaining Costs (AISC). It’s one of those subjects that’s itched at me for a while, because it doesn’t need much numbercrunching to see that AISC is a neat new way of spinning costs figures, rather than a useful metric that applies to all mining companies equally. Thing is, I haven’t really got round to throwing darts at AISC (even after being egged on by a couple of friends on more than one occasion) but then a couple of weeks ago I broke the ice with a very simple post and observation, it turned out to be the way in.

It all started on October 28th and my post “Understanding "All In Sustaining Costs", Detour Gold ( edition”, which as a missive was simplicity itself and to shed light on the “virtually nothing” sub-header above I’ll even tell you how it all happened. That day I was about 30 minutes early for an appointment in Lima and feeling a little drained after a long day, so I decided to pause for a coffee in a nearby Starbucks. While there it just so happened that the DGC 3q15 financials NR was published, I picked up the corporate NR on my (rather basic HP) tablet and, amused at the spin they gave the numbers, tapped out the straightforward post seen that day on the virtual keyboard. I didn’t look at the SEDAR filings at all, it took about 15 minutes start to finish, I hit Send, finished my latte and went to the meeting. By way of a reminder, here’s the main numbery bit of that post:

Detour Gold ( just reported its 3q15 and here's my favourite bit:

Gold sold: 126,241 oz
Average realized price per Oz Au: U$1,164
All In Sustaining Cost per Oz Au: U$1,071
Difference between two: U$93/oz
Total revenue difference: + U$11.74m

Net loss: US$44.3m
Adjusted net loss:U$13.3m

Hey, d'ya think that All In Sustaining Cost might not mean what you thought it meant? Perhaps?

It was meant as a quick snark-shot and I thought nothing else of it until a couple of days later when ‘BW’ (whose ID will remain out the public eye but I will say he’s an excellent financials person who’s modest to a fault about his undoubted ability) wrote in with the mail that became this post “Great feedback on the Detour Gold (” which took my basic idea on DGC and ran a lot further with it (it was very well done too, I recommend a (re) read).

From there and with all thanks to BW, the idea was lodged in my mind and last week I ran a couple of posts, the first one called “More "All In Sustaining Costs" baloney, Primero Mining ( (PPP) edition” which was basically the same as the DGC idea but applied to Primero, then finally on November 4th there was the post “Having your cake and eating it” which covered in conceptual style the reason why Deprecation Depletion and Amortization (DD&A) is important to include in operating costs models.

Now for the good news: Due to those last two amateurish efforts on my part, ‘BW’ wrote in again late last week and expanded a little on his original comments about Detour Gold (, but this time taking Primero Mining (PPP) ( as his example (and quarry). While his mail was obviously meant for my eyes and education, it was so good I asked him on Friday evening if he would let me run his mail as a Guest Article in this Sunday’s edition of The IKN Weekly. He kindly agreed and here we are, though he did insist that I add that his piece is a simple proxy for other metrics, e.g. EBITDA. The purpose behind his mail was to get ME (not anyone else) to apply it to show the true production costs of any given miner (not just his example of Primero) from the data published in an income statement. But me, I’m keen to let as many people as possible benefit from BW’s smarts on this subject which is why I asked BW if he’d let me run it here (some very slight editing and formatting done, but it’s really as-is). Therefore without further ado here’s BW:


Lifting The Dress on All In Sustaining Costs

By ‘BW’

Prompted by your piece on Primero as well as your response to a reader’s question regarding the “importance” of considering DD&A, you have provoked me to offer you consolidation of my thoughts regarding AISC and its noble goal to offer transparency, a.k.a. eloquent obfuscation, to the market (excerpt below from my database).  Well, lifting up that dress a bit more, we could consider AIC, but taxes, debt service, and dividends are not included there.  It baffles the mind why these items are not considered a part of a company’s sustainability.  I reckon we don’t want to pull that dress up any higher for fear of what is beneath!

Since you are one of the few who unabashedly exposes the BS out there concerning the mining industry, at the risk of being presumptuous, below I offer some suggestions as well as make some other observations.

In the case of Primero, for Q3, sales were 71,417AuEq oz for which revenues were $1,109/AuEq oz (low because they have 2 streaming deals, which can’t be conveniently buried somewhere)

1.       AISC = $775/AuEq oz  (includes $87/AuEq oz for G&A, marginally high at 11%)

2.       Finance charges                     = $43/AuEqoz

3.       Other (assumed not in AISC) = $75/AuEqoz

4.       Taxes                                      = $243/AuEqoz


Subtotal: $1,136/AuEq oz  (i.e. cash outlays)

5.       DD&A   = $273/AuEq oz

Subtotal: $1,409/AuEqoz (i.e. cash outlays + past cash outlays, of which only some sustaining capital was accounted for previously)

6.       5.75% Debenture    = $82/AuEq oz  ($75M over 38 months, so $5.921M/Q) – 38 months is earliest redemption date, which can occur up to 62 months

Subtotal: $1,491/AuEq oz (i.e. cash outlays + past cash outlays, of which only some sustaining capital was accounted for previously + future outlays)

7.       Mark-to-Market  = negative $126/AuEq oz (if debenture is amortized and applied to cost, which is only fair to include)

Final total $1,365/AuEq oz (i.e. what it really costs Primero to produce an ounce of gold or gold equivalent).

They also have some equipment leases, but appear to add only incremental cost on a per-Q basis and therefore not included.

They have $43.1M in cash, but $30.4M in payables – net cash = $12.7M.

They must pay off $49.684M for 6.75% Brigus debenture by March, 2016, which I suspect that they will do with shares.

But no worries – they have a $75M credit line. (otto note: I laughed hard at BW’s dry sense of humour here).

Finally, another note on Cash Flow Models (CFM) as applied to new projects and acquisitions. Once the project starts construction and/or is acquired, the investor focuses on margins, i.e., FCF; the NPV becomes irrelevant, but investors want to see the “profit” earned from the outlays. The CFMs are not updated for any financing for public purview; I have never seen a “forensic” pre-project/acquisition review available to the public. If there is debt on the project, this review essentially occurs every quarter in order to determine compliance with regard to covenants, but only general statements are made to the public regarding covenant compliance. This only points out that there is no “means test” in the public domain for the copious use of the word “accretive”.


IKN339 back and sincere thanks again to BW for first taking the time and effort to write to me, then allowing me to publish his musings to a wider audience. I’m fully aware that he considers them basic and ballpark (especially compared to what he usually does) but I also know that this type of insight is greatly appreciated by at least some of the IKN audience.

As well as BW’s model on Primero, which shows just why the company recorded a net loss of 3c/share despite claiming to have an AISC of $775/oz, I liked the last paragraph which looks at the question reader ‘DB’ asked me in the have-cake-eat-it post from a different and better angle. Again, if any given company had no debt (in real terms, we shouldn’t fret too much about payables as long as there are receiveable and/or cash to cover them) and had already raised all its required capex from the sale of equities (placements etc), fundies theory states that the company’s operational profitability, not just its net profitability will reflect directly in its share price. But when debt gets in the way it needs to be serviced from somewhere, then eventually principle needs to be paid off from somewhere and that doesn’t just happen from money created out of thin air.

When you (the investor) buy a share, you buy a part of the equity of the company in question. The definition of “equity” is straightforward, it’s “assets minus liabilities”. Therefore if your company’s main fixed asset is non-renewable, e.g. a mine with valuable rock that you pound into bits for its metal content, when the metal’s gone so is all the fixed asset value. The only thing you’re going to have left is the cash you generated from all that mining activity, minus any debt on the books. Therefore it stands to reason that if you use all (or even most) of the cash you generate to pay off the debt holders, there’s going to be precious little left for the people holding the shares at the end. No distributions, no dividends, no soup for you.

Which is why I love this cartoon so very much and use it on the blog when given a legitimate opportunity.