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How accurate is AISC?

 -- Published: Friday, 14 August 2015 | Print  | Disqus 

By Chris Marchese

Senior Equity Analyst, The Morgan Report


The wide acceptance of reporting all in sustaining costs (AISC) is a dramatic improvement over reporting “Cash Costs” but it doesn’t tell the whole story. Instead there are two additional reporting measures which would paint a much clearer picture if they were to be reported in conjunction with AISC. We will refer to AISC as AISC1, with the two additional measure that will be discussed termed “AISC2” and “AISC3”.


All in sustaining costs is intended such that all cost associated with a company’s current operations are reflected. But this is missing two important items that should be taken into account. The first is taxes as this is unavoidable and calculated largely based upon line items relating to a company’s current operations. The whole point of reporting is to reflect the cost structure of a company such that ceteris paribus, a company will generate roughly the same dollar amount or monetary units in the future. In other words, not only should AISC1 + Taxes = AISC2 be reported but possibly adjusted such that statutory tax rate is used, not the effective tax rate, which allows companies to defer taxes into the future. The argument whether the effective tax rate and the statutory rate could definitely be argued but there is no reason to exclude taxes altogether. We are much closer but the true costs of current operations.


AISC1 was an improvement over “Cash Cost” reporting as it takes general and administrative, royalty, interest, brownfields exploration expenses into account as well as “cash costs” and sustaining capital costs, the latter located in the statement of cash flows. It fails to take taxation into account as well as changes in non-cash working capital, which can be found a couple places in a 10-Q/K. So, AISC2 = AISC1 + Taxes + ΔNCWC. I contend this would make for a better measure for reporting all costs associated with operations either using the statutory or effective tax rate.


Now that a case has been made for a stronger or more accurate reporting measure, there is another measure which would be a great supplement to AISC1 and/or AISC2. This will be termed “AISC3” and we just need to start with the question, why are there required reporting standards? We all know the answer, to provide investors and potential investors with as much information about the company as possible, specifically in order to make investment decisions. Then we ask ourselves what the value of any asset is? And we know it’s the present value of all future (free) cash flow generated over the life of the asset. This of course is very subjective and assuming there is no market intervention is determined by the collective assumptions market participants make about a company including production, production growth, commodity price deck, discount rate and of course free cash flow. These inputs are constantly changing hence the daily fluctuations but any valuation makes assumptions about such things as a changing cost, commodity price deck, etc. in the years ahead, therefore those which understanding the industry and company the best will be the most successful.


For those unaware with what free cash flow is, it is cash flow generated above and beyond that needed for reinvestment back into the company. Companies which are shareholder friendly, pay this out as dividends if they can’t reinvest the money back into the company with the same rate of return or higher. Providing a measure of all the costs of a company would be the most advantageous to the less educated investor or average investor in order to calculate the true profit that can be paid out to investors would be the most beneficial and most definitely a welcomed reporting metric by the marketplace. This, AISC3 = AISC2 + Greenfields exploration/oz. + other reoccurring expenses/oz. + Expansionary Capital/oz.


AISC2 and AISC3 alone or in conjunction with AISC1 (AISC) would benefit many shareholders and prospective shareholders but realistically, it won’t ever be reported by companies. This was written more as reminder of how to analyze a company’s operations to a greater degree relative to current reporting as well as making it much easier to calculate the Net Asset Value of an asset and thereby company. It would also allow for some stronger relative valuation metrics such as free cash flow yield.


AISC2 is discussed in the book I’m currently writing which deals with security analysis and appraisal of natural resource based stocks and will also be discussed in the 2nd edition of The Silver Manifesto, which David Morgan and myself are expanding and updating for release Spring-Summer 2016.


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