A Quest For Profitability in PMs

Richard (Rick) Mills
Ahead of the Herd

Page 1 of 2


As a general rule, the most successful man in life is the man who has the best information


There’s an interesting interview done by Geoff Candy over on mineweb. com. In the interview Geoff asks Gold Fields CEO, Nick Holland “What went wrong with the gold industry?” Holland’s reply is very informative.

I think if you go back to the late ‘90s when gold was at a low of about $250 per ounce the industry at that time was really hanging on by its teeth and in order to do so was high grading and if you look at the average grades companies were mining it exceeded the reserve grade and that was never sustainable.


The other thing is exploration was cut back quite a lot and there’s typically a timeframe of anything up to ten years or even longer between initial grassroots exploration and discovery and construction of a new mine. We’re seeing the impact of some of that coming through the lower grades, grades have been declining steadily over the last ten to 20 years, against that backdrop we’ve seen cost inflation on a per ton basis - if you take out the grade effect – of anything between 10% to 15% per annum. That compounded means you would double your costs in five years, four to five years you’d double your costs. If you’ve got a grade decline on top of that you can see the overall impact on your total cost of producing an ounce."

A cash-cost standard was introduced by the Gold Institute in the 1990s and adopted by the gold mining industry. Cash operating costs only include:

  • Direct mining costs
  • Third-party smelting
  • Refining and transport costs, minus byproduct credits

Using minimal cash cost accounting was once beneficial to a hurting industry, but over the last few years this minimalist reporting metric has hurt investors and gold miners in two significant ways:

  • Cash cost reporting masks massive production cost escalation and almost flat profit margins despite gold’s price rise
  • The gold mining sector was targeted for new and higher taxes and royalties based on expected but unrealized profits

Using a different, more encompassing method of reporting costs would give investors a better, more accurate picture of the entire industry’s profitability.


All-in metrics would count expenses such as:

  • Sustaining capital
  • General and administrative expenses (G&A)
  • Exploration expenses
  • Royalties - other than profit-based royalties  
  • Production taxes
  • Total production costs which add in depreciation, amortization and reclamation and mine closure costs

An “all-in” cost measure would highlight the more investable, higher grade gold equities with better sustainable margins able to withstand the ups and downs of a cyclical industry with volatile prices.



A complete breakdown of costs, an “all-in” cost figure, courtesy of CIBC, shows cash operating costs pegged at $700 an ounce. Sustaining capital, construction capital, discovery costs and overhead at $600. Add in $200 for taxes and you get US$1500.00 as the replacement cost for an ounce of gold.


Scotiabank calculates “full cost reporting” (all-in cost plus development capital), at US$1,458 per gold oz for the companies it covers.


“Complete cost reporting”  is full cost plus corporate taxes, it’s forecast for 2013 at an average of US$1,690 per oz. gold.


Dundee Capital Markets reported that the average all-in cash cost in Dundee’s silver equities coverage universe was $22.96 per ounce during the second quarter. Dundee’s all-in cash cost calculation includes: site operating costs, exploration, corporate G&A, interest costs, royalties, taxes and sustaining capital.


Using the all-in figure provides a more accurate and definitive picture of actual mining cost and profit.







About Ahead of the HerdAbout Us

Aheadoftheherd.com is a community where investors trade ideas on the buying and selling of stocks

Ahead of the HerdSponsors List

Ahead of the HerdOur Location


Office Hours
5am - 4:30pm, M-F
9am - 12pm Saturday

Closed Sunday


To contact us please email rick.mills@aheadoftheherd.com

Ahead of the Herd