Digging deeper into all-in cost disclosure Mining’s new frontier

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Digging deeper into all-in cost disclosure Mining’s new frontier
Digging deeper
into all-in cost
Mining’s new frontier
January 2014
Investors and analysts are increasingly
calling for a more complete and
transparent disclosure of total costs of
production in the mining industry as
margins have been squeezed by the
recent decline in commodity prices.
Industry bodies have released reporting guidelines to address
issues of transparency and consistency in the disclosure of
non-GAAP all-in sustaining and all-in cost measures. These
frameworks however do not provide detailed direction and are
meant only to provide guidance, in order to allow situational
flexibility in interpretation for companies. This lack of
definitional clarity has resulted in ambiguous all-in sustaining
and all-in cost disclosures within the mining industry.
Classifying capital costs as sustaining or growth in nature
provides the greatest opportunity for “improved reporting”.
“Improved reporting” can be achieved by providing increased
transparency (e.g. more information), and consistency of
In lieu of a mining industry wide adopted reporting framework
to achieve consistency, it appears vital for miners to provide
clear definitional explanations within company reporting
to enable users to perform informed company analysis and
This report compiles findings from an analysis of 72 company
financial reports and numerous conversations PwC has held
throughout the global mining industry. We review shortfalls
in current disclosure practices, and highlight several ‘grey
areas’ in current industry guidance, contrasted with the
growing demand for increased disclosure to achieve “improved
Calum Semple
Mining Consulting Leader for the Americas
416 815 5325
[email protected]
The case for improved transparency and clear
definitions in all-in sustaining and all-in cost
Mine site cash costs have been the industry’s widely accepted
and disclosed yardstick of operational efficiency. In recent
times of high prices and high margins, few questioned the
transparency and comparability of non-GAAP disclosures
made by mining companies. Profits were being made and
growth targets being met. However, cash costs alone do not
capture many of the expenses required to maintain a long term
sustainable mining operation.
Capital required for sustaining and expanding operations,
typically not included within standard disclosures, are often
considered discretionary and dependent on available cash flow.
Due to the cyclical nature of the industry, in today’s
environment when cash flow is tight, growth capital to expand
the mine life, increase the production throughput, and upgrade
facilities may be deferred to conserve cash. However, these
investments cannot be eliminated entirely without posing a high
risk to a mine’s long term sustainability, productivity, and cost
base. For example, not addressing a need to replace a fleet of
ageing trucks on time will lead to a reduction in productivity
and an increase in maintenance costs due to more frequent and
unplanned breakdowns. Additionally, costs incurred to comply
with newly introduced safety, environmental, and governance
requirements cannot be removed without directly impacting a
company’s social license to operate.
Stakeholders are now calling for fuller disclosure of sustaining
and all-in costs in order to better assess long term company
viability and sustainability on a comparable basis.
“This year’s sharp fall in the
(gold) price has put the industry
under more pressure than it has
known for almost a decade and
heightened investors’ interest in
miners’ true profitability.”
— Financial Times, September 16 2013
Mining’s new frontier: Digging deeper into sustaining costs
Why is all-in sustaining and all-in cost reporting topical?
Pressure to provide disclosure transparency and consistency of definitions are driven by
increased shareholder information requirements, a need to identify marginal operations,
and management’s need to defend and highlight performance.
1) Increased shareholder information requirements:
A PwC global survey of 32 institutional investors and analysts titled “Extracting value – what do investment professionals
need from mining company reporting?” released in September 2013 highlighted the three key areas of improvement needed
from reporting in the mining sector. The following direct quotes were compiled from this survey:
All-in cost of production
Capital expenditure reporting,
including sustaining and growth capital
“The biggest weakness for me is the use of cash costs
instead of all-in costs. As an investor you want to
know what it costs in total per unit produced.”
“I need more information about what is under
‘investments’ and to be able to see capital
expenditure by asset, not type of spending; not just
what is expensed vs. capitalized.”
“Companies do a good job of reporting what they
produce, but a terrible job of disclosing how much it
cost to produce it.”
3) Companies want to defend or highlight performance:
Consistency of definitions across the
industry to allow sector benchmarking
“Sector benchmarking, particularly on cash costs, is
really hard due to the inconsistent definitions.”
Mining company executives who are already disclosing or
plan to disclose all-in sustaining or all-in costs indicate that
they want to:
Demonstrate to governments, who may be demanding
a bigger slice of profits in the form of taxes and
royalties, that low margins, or even losses, are being
realized in the low commodity price environment.
A truer measure of overall costs enables mining
companies to illustrate that margins are often more
slender than they appear when presented on a cashcost basis.
Make a clear case for executing on difficult decisions
such as workforce reductions, care-and-maintenance
announcements and divestitures.
Compare their company to other perceived higher
cost operations to demonstrate that effective cost
management has been achieved by management. Allin cost reporting and monitoring provides a tool for
management to demonstrate effective operating cost
control and improve capital spending discipline.
Highlight to the market that while current total costs
may be high due to peak expenditure in growth capital,
these growth costs will subside in future years once
projects have been completed.
“All the different definitions create layers of complexity
and uncertainty that end up disappointing investors.”
2) A need to identify marginal operations:
Weak commodity prices have highlighted a troubling
anomaly; several miners that have commenced disclosing
a more transparent and complete picture of costs to
operate have disclosed current all-in sustaining costs above
prevailing metal prices. In the case of gold, some companies
have reported all-in sustaining costs of over $1,400 an
ounce while the metal has traded well below that level
since the spring of 2013. Similarly for silver miners, analysts
reported many companies with all-in sustaining costs above
the silver price of $22/oz in the same period. Without allin cost reporting, it is difficult to clearly identify companies
who may be operating unprofitably in the current low
commodity price environment. As a non-GAAP measure,
if companies are ‘underwater’ there is little incentive to
disclose this level of detail as they will likely be punished, or
at minimum questioned, by investors and analysts.
It is also clear that a greater focus is being applied by
management on defining and measuring costs for internal
purposes. Loose internal definitions may not identify what is in
fact discretionary growth capital. Ultimately, tighter definitions
will lead to greater visibility in the capital allocation process in
order to avoid “wish lists” to the corporate office from mining
operational sites during the budget cycle.
“For decades, we have disguised our true costs to look better to
providers of capital by focusing solely on cash costs, rather than
reporting all the costs that go into mining. This created the impression
that, even at present depressed prices, the industry is making healthy
profits, when it is, in fact, marginal.”
— Nick Holland, Gold Fields chief executive, writing in Business Day (South Africa), August 15 2013
Current reporting transparency and
definitional guidance is lacking:
PwC conducted a survey of the top 40 global mining companies by market
capitalization as identified in the 2013 PwC publication “Mine: A confidence
crisis”, and found that as of Q3 2013:
Publish a figure for
of the
sustaining capital
largest mining
6 of 40
Disclose their
definition of
sustaining capital
7 of 40
9 of 40
Disclose all-in
sustaining costs
Disclose all-in
PwC expanded the survey sample to include a total of 72 companies including
the top 40 by market capitalization, 18 World Gold Council members,
and several other predominantly North American headquartered mining
companies. Of these 72 companies:
33 of 72
11 of 72
Publish a figure for
sustaining capital
20 of 72
Disclose all-in
sustaining costs
Disclose their
definition of
sustaining capital
28 of 72
Disclose all-in
As these numbers show, very few companies currently disclose their allin costs or a sustaining capital value, and even less provide a definition of
what is included within their categorisation of sustaining capital, making
comparable analysis between companies extremely difficult.
Mining’s new frontier: Digging deeper into sustaining costs
Addressing the disclosure gap
As with cash costs, there is no reporting
standard that requires companies to
disclose sustaining or growth capital.
However, the World Gold Council (WGC)
has taken a step towards formalizing
the concept with the publication in
June 2013 of a “guidance note” on the
components of “all-in sustaining costs”
and “all-in costs” that companies can
use as part of their overall reporting
The WGC noted that “it is up to
individual companies to determine
how they report to the market and
to decide whether their stakeholders
will find these new metrics of value in
understanding their businesses.” The
WGC expects that many may choose to
start using the new benchmarks from
January 2014 based on year end.
Other organizations such as the
Canadian Institute of Mining, Metallurgy,
and Petroleum (CIM) are also reviewing
production cost reporting with intent
to establish standard practices for
reporting of costs. Once established,
these standards may eventually be
incorporated into the NI 43-101
standards of disclosure and their global
‘Grey area’: What is a sustaining cost and what is a
growth cost? The WGC provided the following guidance to its members when
defining sustaining and growth costs:
“Non-sustaining costs are those costs
incurred at new operations and costs
related to ‘major projects’ at existing
operations where these projects will
materially increase production.
Companies need to publically disclose
those operations and ‘major projects’
which are considered non-sustaining.
All other costs related to existing
operations are considered sustaining.”
World Gold Council – Press release June 2013
This guidance allows for interpretation by companies. As a
result, companies categorize capital expenditures differently
based on how they apply the guidance, and how they foresee
growth versus sustaining activities at their mining operations.
The typical concept of “sustaining capital” used by the industry
captures capital costs incurred to sustain and maintain existing
assets to achieve constant planned levels of production. This
includes spending to ensure that assets retain their existing
productive capacity, and to enhance assets to minimum
reliability, environmental and safety standards.
Growth (non-sustaining) capital costs are typically those
that increase productive capacity of the operation or result in
increased financial benefit after a material investment has been
The challenge is that different companies - and even different
managers’ within those companies - can legitimately measure
“sustaining capital” and “growth capital” in different ways,
depending first on whether they adopt the WGC guidance,
and second on their interpretation of what a ‘major project’ or
‘material increase in production’ means for their company or
operation. For instance, if an owner invests a large capital cost
to buy a fleet of trucks in order to transition from a contractor
operated to an owner operated mine at same production levels,
should this be considered a sustaining cost or growth cost?
The variety of adopted definitions and interpretations have
resulted in a spectrum of disclosures; ranging from companies
treating any capital expenditure on a property that is in
operation being considered sustaining, to any capital that
increases the current life of mine plan or resource being treated
as growth in nature. Most companies fall somewhere in the
middle. Regardless, the lack of definitional consistency and
clarity has made disclosure of all-in sustaining cost and all-in
cost less insightful for users of these disclosures.
Investors and analysts increasingly
want more transparent disclosure
of total costs, specifically related
to sustaining and expanding
Development costs, exploration costs and general and
administrative (G&A) expenses are among the most challenging
grey areas:
• Development costs. For example, some companies classify
any underground development or above ground stripping
activity within the perimeter of existing operations as a
sustaining cost, whether or not the outlay extends the life of
the mine. But others specifically exclude costs that extend
mine life from sustaining costs, and treat them as growth
These costs can make up a significant component of a
mine site’s expenditure depending on the phase of mine
• Exploration costs. Our survey suggests that only 45% of
companies currently report exploration costs as part of their
sustaining capital line item. WGC members that follow the allin cost reporting guideline typically report exploration cost as
a separate line item to sustaining capital. However, companies
that do not provide an all-in cost reporting framework
generally provide no guidance as to whether their sustaining
capital number includes exploration expense or not.
The determination of whether exploration costs are
considered a sustaining capital item or a growth capital
items also varies widely from company to company. Like
development costs, exploration costs which extend the mine
life may or may not be treated as a growth capital item some companies consider any exploration occurring within
the boundaries of an existing mine lease as sustaining in
nature, while others specifically define any cost which results
in an increase in mine life as growth in nature.
Among other anomalies, junior companies often start
capitalizing exploration costs as soon as they have a legal
right to begin work. Yet bigger companies tend to capitalize
these costs only when a project is well underway.
Mining’s new frontier: Digging deeper into sustaining costs
• General and administrative (G&A) expenses. The WGC
guidelines suggest that G&A is a sustaining cost. However,
companies that are able to directly attribute specific portions
of G&A costs to growth projects argue that these costs should
be grouped with the growth capital project which they relate
to, and not within sustaining capital.
Additionally, analysts typically want costs provided on a per
site basis, which cash costs were able to provide. However,
this requirement provides challenges for the allocation of
G&A costs which are typically measured at an enterprise
level, with any attribution to site being arbitrary in nature.
The guidance provided by the WGC provides a strong start
towards improved reporting. However, disclosures on a line
item basis are still highly varied, and often there is disparity and
ambiguity between companies who treat costs as sustaining or
growth due to definitional differences or presentation choices.
The WGC guidance was directed towards its gold company
members, though some non-gold companies have already
adopted this guidance in their own external reporting in
the second half of 2013. Other methods of measuring and
comparing total production costs such as the “Brook Hunt”
method typically used by base metal producers has resulted
in some level of consistency and comparability between what
are termed as C1, C2, and C3 costs. However, it does appear
that more and more companies are moving towards the WGC
guidance, and it will be interesting to see if continued industry
discussion, comprehension and clarity of all-in sustaining and
all-in cost reporting leads more and more non-gold mining
companies to adopt this approach.
Pan American
A PwC global survey of
a cross section of 150
gold, silver, and copper
companies provide the
following insights into all-in
sustaining costs for 2014.
Coeur Mining
Metals mired in
global uncertai 2014
er price report
Gold, silver and copp
Financing activities
included in all-in costs?
One of the areas that the World Gold Council guidance
excluded from all-in-costs was certain financing activities:
interest and dividends. The main items that were
included in the reconciliation of all-in costs from the cash
flow statement were the investing cash flow on capital
expenditures. However, where a fleet of trucks is financed
through capital leasing arrangements, companies will
have to consider how they treat such cash outflows which
are financing cash flow activities, notwithstanding being a
capital addition on the balance sheet.
Differing methods could be determined such as including
the one-time value of the capital expenditure, as if the
equipment had been acquired “for cash”. Alternatively,
the financing payments may be included in each period
and added to the investing activities.
Either way, consistency in presentation will be important
as well as clear articulation of which path the company is
What is the Company’s overall approximate all-in
sustaining cost forecast for 2014? Per ounce for
gold companies
Greater than $1,300
Less than $900
What costs have you reduced and by how much to
address lower revenue levels?
James Lusby
Partner, Audit and Assurance Group, Mining
416 365 8181
[email protected]
Capital Project
Ambiguous disclosures make comparability difficult
The following illustrative disclosures are similar to a number of actual disclosures
presented in Q2 and Q3 2013 company reporting. These clearly illustrate the
challenges of inconsistent reporting formats, definitions, and labels.
All-in cost disclosure samples
Company A
There appears to
be development
costs within
all-in costs for
company A. Does
this infer that all
costs are growth
in nature and
no development
costs are required
to sustain the
Cash operating costs
Site rehabilitation
'000 US
General and administrative costs
Sustaining capital expenditures
All-in sustaining costs
Development capital
Capitalised evaluation and
exploration expenditures
Exploration expenditures
All-in costs
Typically, no further definitional guidance or discussion
about the inclusions or exclusions of the line items in the
disclosure table are provided anywhere within the MD&A
or financial report, leaving analysts to infer or attempt to
estimate various line items within their models and market
guidance. Consequently, analysts are increasingly pushing
management to provide clearer and consistent disclosure to
avoid assumptions having to be made.
According to PwC’s “Extracting value”
survey results released in September 2013,
84% of investor and analyst respondents
would gain comfort from knowing that
non-GAAP measures adhere to some basic
“ground rules”.
Mining’s new frontier: Digging deeper into sustaining costs
Are there any underground
development or open cut
stripping costs included in
the all-in sustaining costs
of either company?
It appears not.
Company B
Cost of sales
General and administrative
Sustaining capital expenditures
Exploration expense is
not a sustaining item
in company A, but is
in company B. Is this a
company policy to treat
all exploration as growth
for company A, or are
sustaining exploration
expenditures captured
in the sustaining capital
expenditures line item?
Exploration costs
Total all-in sustaining
cash costs
Company B has chosen
to only disclose all-in
sustaining cost, not total
all-in costs.
Challenges to reporting all-in sustaining
and all-in costs
Some companies indicate they are hesitant to adopt a nonGAAP or non-IFRS measure for reasons including:
• extra effort and cost during the reporting cycle is required
to comply with additional reporting measures;
• uncertainty and inconsistency in definitions and
applications lead to inaccurate and potentially
unfavorable benchmarking of companies;
• a current inability to measure and track sustaining capital
expenditures within existing IT systems and finance
processes; and
• management’s belief that all-in sustaining costs are
irrelevant to understanding and benchmarking the
“…Good corporate reporting
isn’t purely about following
the rules. It requires
management teams to think
specifically about how they
can best meet the needs of
the investment community.”
— PwC report: Extracting value, What do investment
professionals need from mining company reporting?
Perhaps the biggest hurdle is that the requirement for increased
transparency puts a spotlight on companies with a high all-in
sustaining cost profile which, until now, may not have been
evident to the market.
Many companies have indicated that they prefer to be followers
of their peers rather than pioneers in adopting new disclosure
formats. However, most companies are engaging in a dialogue
internally and within industry forums to explore the concepts.
They want to ensure they are prepared to clearly define and
disclose sustaining and all-in costs in the future, and be able to
respond to market queries in the meantime.
We expect a staged adoption of the WGC guidance will
continue. Some companies are being restrictive about how
transparent they wish to be by providing all-in sustaining costs
without the growth component shown to sum to all-in costs,
while others provide an all-in cost number without sufficient
granularity to understand the all-in sustaining component.
“Improving reporting” – the next steps
Building a better MD&A
With a focus on transparency, there is a need for companies
to not just comply with regulatory requirements around
disclosure, but to use Management’s Discussion and
Analysis (MD&A) as an investor relations tool to help
stakeholders interpret financial statements and provide key
insights to performance.
Pundits of the World Gold Council’s all-in sustaining and
all-in cost guidance highlight that the framework provides:
While the WGC has provided guidance on all-in costs,
companies need to consider this in the context of the
regulators. The Canadian Securities Administrators (CSA)
has provided guidance on disclosure of non-GAAP financial
measures to ensure that these are not misleading to
investors – “an issuer should clearly define the measure and
explain its relevance. “
• a clear and comprehensive breakdown of cost line items;
Within this guidance, CSA specifies that an issuer “should
explain why the non-GAAP financial measure provides
useful information to investors and the additional purposes,
if any, for which management uses the non-GAAP financial
measure”. In the case of disclosure of all-in costs, there
is little debate within investors and analysts regarding
the merit of understanding total costs of production
information to provide key insight.
which if followed, should provide a disclosure which is a
relevant and useful yardstick for the investment community
as well as for miners themselves to benchmark and compare
companies and operations.
However, the CSA also specifies that an issuer “should
state explicitly that the non-GAAP financial measure
does not have any standardized meaning”. This appears
to contradict the intent of disclosing all-in costs since,
as a non-GAAP financial measure, they are by definition
“unlikely to be comparable to similar measures presented by
other companies” per the CSA. This lack of comparability
compromises the utility for analysts and investors to gain
insight into performance and compare performance with
industry peers.
There exists a strong need in the mining industry to agree
on how to report and disclose all-in costs in support of
building a better MD&A.
Geoff Leverton
Partner, Capital Markets Group
416 815 5053
[email protected]
Despite these obstacles, a consensus is building that
sustaining and growth capital are relevant and useful data
points in providing improved reporting. Furthermore, a
culture that recognizes the benefits of more transparent
disclosure appears to be taking hold in the mining
Mining’s new frontier: Digging deeper into sustaining costs
• direction to be able to reconcile non-GAAP cost line
items to financial statements; and
• a clear demarcation between operating, sustaining and
all-in costs;
To get there, mining companies need to first ensure they
have clearly defined and can measure sustaining and nonsustaining costs internally. The next step is for companies to
disclose definitions and explanations of cost inclusions and
exclusions for all-in sustaining and all-in cost line items.
In lieu of an adopted standardized reporting framework,
the provision of clear definitions and explanations will
go a long way to removing the ambiguity and uncertainty
that is creating challenges for analysts and investors
when attempting to review companies production cost
The longer term question is whether companies continue to
desire and drive transparency around disclosing full costs.
If prices start to increase, will the focus from shareholders
and analysts be diminished? In a forecasted period of tight
margins, we should expect the focus to remain for a while
to come.
Mining companies need to first
ensure they have clearly defined
and can measure sustaining and
non-sustaining costs internally. The
next step is for companies to disclose
definitions and explanations of cost
inclusions and exclusions for all-in
sustaining and all-in cost line items.
PwC mining publications
Pan American
Coeur Mining
Metals mired in
global uncertainty
Extracting value
What do investment
professionals need from
mining company
Gold, silver and copper price report 2014
A confidence crisis
September 2013
Review of global trends in the mining industry—2013
Metals mired in global
Gold, silver and copper price
report 2014
Extracting value
What do investment
professionals need
from mining company
A confidence crisis
Deals in the dumps
Global mining deals: Mid-year
Calum Semple
Mining Consulting Leader for the Americas
416 815 5325
[email protected]
Dean Braunsteiner
Leader, Toronto Mining and National IPO
416 869 8713
[email protected]
Mark Platt
Leader, Vancouver Mining
604 806 7093
[email protected]
Nochane Rousseau
Leader, Quebec Mining
514 205 5199
[email protected]
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Key contributors
James Lusby
416 365 8181
[email protected]
Joe Rafuse
416 941 8447
[email protected]
Chris Sullivan
416 687 8005
[email protected]
Jessica Lewis
416 941 8383 ext. 13526
[email protected]
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