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Great feedback on the Detour Gold ( post

After this humble corner of cyberspace ran a short'n'sweet post on Detour Gold ( and its 3q15 financials earlier this week, specifically on the subject of All In Sustaining Costs (AISC) and what that new-fangled phrase does and seemingly does not mean, I got a great feedback mail from regular reader BW (the very same who sent in this). He's just given me permission to publish it as long as I point out that his summary was simplified in order to get to the grain of the matter in a mail exchange, rather than run a full conference-level presentation and dissection.

Thanks BW, there's sharp insight here and it's good that more people can benefit. So without further ado...


It has been a while since I proffered a rant, but you hit a nerve with your piercing jab at Detour Gold.  Nicely done.

For some reason, the gold industry has been congratulating itself for finally providing a metric that properly reflects the “cost of business” – AISC. The base-metals industry ran with their C1, C2 & C3 costs which cover the cost of doing business beyond the cash costs routinely reported by precious-metals producers prior to 2013.

Based on the glories of the KISS principle, the only important aspect of any business is how much cash there is at the end of the day; the big thinkers then figure how to employ that cash for growth.  Because you are well versed on the topic, I only offer rhetorical questions regarding AISC:

1.       Why isn’t the initial CAPEX a part of the cost equation?  Is that a sunk cost?  DD&A reflects that.
2.       Why isn’t payment of debt principal and debt interest a part of the equation?  Debt principal and DD&A are, in a way, related, but not the interest.
3.       If a convertible bond is floated to provide working capital, when it is paid off, cash or shares, why isn’t that part of the cost?  Or amortized over its life to production?
4.       Aren’t taxes a part of the cost?

Note that any CFM for a proposed project is on a 100% equity basis; moreover, exploration & development costs are indeed considered sunk costs and are not part of the NPV and IRR calculations (given the timeline, only few projects would meet minimum hurdles if it were otherwise). So be it. However, it is absolutely amazing to see the effect of debt service on the NPV & IRR in a CFM, especially when payments are deferred during construction.  That is missing from nearly all analyses.

So, on a FCF-basis Detour Gold lost about $3M (includes tax payment); when the DD&A is included, they lost over $44M. The obvious conclusion is that the cost to make this mine was not worth it, at least based on this Q’s results.  Personally the -$3M is important to me, especially since this company is a 1-trick pony with a large debt payment coming due.