With the goal of increasing transparency when it comes to the costs associated with producing gold, the World Gold Council released two new cost-reporting metrics for gold miners last week - "all-in costs" and "all-in sustaining costs."
Terry Heymann, Director, Responsible Gold at the World Gold Council, talks to Minyanville about the new cost-reporting measures and how they may ultimately help investors better understand the economics of gold mining.
How long has the World Gold Council been working with its member companies [whichinclude Goldcorp ( GG ), Barrick Gold ( ABX ), Eldorado Gold ( EGO ), Kinross Gold ( KGC ) and Newmont Mining ( NEM )]on this new guidance on cost metrics?
Our members asked us to help work with them in developing the guidance note and these new metrics in September . So, from then until the release of the guidance note, there's been a high level of engagement from the member companies, with us really acting as a facilitator.
What prompted the member companies to ask for your help in the development of these measures?
I think there's a recognition across our members, and indeed the industry as a whole, that investors certainly have been looking for further insight into the economics of gold mining and have been looking for greater consistency and further transparency in the way in which gold mining companies report to the market. There is the GAAP reporting and the formal accounts that the companies file and will continue to file, but there's been a demand for, in addition, a non-GAAP measure that is consistently applied across the industry that is more meaningful than some of the historic non-GAAP measures in looking at the total costs associated with gold mining. That's a message that our members have certainly heard from investors and recognized and wanted to respond.
What do these new measures include for gold miners that weren't included before?
The new measures include, we believe, all the costs associated with producing gold. The all-in sustaining costs relate to, if you like, the day-to-day costs of producing gold from an existing gold mine and that includes costs like the mining costs but in addition, capital expenditure related to sustaining production, G&A costs - general and administrative costs that are incurred, costs associated with the stripping and those costs have not always been included in measures. Part of the challenge with the historic measure of cash costs was that its not universally applied in the same way and certain companies have modified it, so many of those cost items might not have been included.
Then, in addition, the all-in costs not only includes the costs associated with operating mines and with existing mine operations but also looks at the costs associated with non-sustaining gold production, and this is intended to reflect the costs that are incurred over the life cycle of a gold mine.
If some of those costs haven't historically been included, have investors and otherstakeholders been missing out on the true cost picture, to date, for many gold miners?
These are non-GAAP measures and the cash costs have been a helpful non-GAAP metric to supplement GAAP reporting and the financial accounts and reports that all listed companies and many other companies provide. So, I don't think that there's a case where investors have been misled; I think this is recognizing that there is a desire for further consistency, greater consistency, across the industry in use of a non-GAAP metric that's meant to be helpful, designed to be helpful and more meaningful in relating that to the specific costs of gold production.
How will the mining companies themselves benefit from using these new reporting measures?
Our hope is that investors will recognize the value of these metrics and in turn, that will become a helpful data point for them in making their decisions about investing in gold and indeed, in gold mining equities in addition to the other sources of information that they use in making those decisions. I also think that these metrics help with a range of stakeholders, in understanding the economics of gold mining, including governments, including communities, and that's helpful for gold mining companies. Gold mining companies want people to understand the economics of the business and that's important for a meaningful discussion around the value that the business creates and how that value is distributed across all the different stakeholders.
Is that level of understanding of particular importance, given the gold price's performance of late?
I certainly think that, with gold where it is, understanding the economics of gold mining is important and costs associated with producing gold. So, this is not a metric that's been designed as a response to the gold price and the movements in recent weeks. But, I think yes, helping investors, governments, communities understand the economics of gold mining and being able to link that to the price of gold, should help everybody understand where there is value created and indeed, some of the challenges that the industry is facing.
What has the response been like so far to these new measures from investors and from the gold miners themselves? To what extent do you expect the mining industry to adopt these new measures?
The response has been very positive. I think there's been a broad welcoming and recognition of the usefulness of these metrics. In terms of takeup and implementation and use of these metrics, that's absolutely for individual companies to determine for themselves, how they report to the market, bearing in mind what their investors and other stakeholders are looking for.
Broadly, to what extent are companies already using metrics similar to this?
There have been a number of companies that do already use some form of all-in costs. Our hope would be that putting out a guidance note with a very clear methodology around how these specific World Gold Council-defined metrics can be calculated, should be calculated, will help with that degree of consistency that we've certainly heard investors are looking for. So, there's already been a move toward reporting all-in costs, but there hasn't always been a clear or consistent methodology behind it. We think that this is an important step to help the industry align on a common approach by which they can report their all-in costs.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.