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Keeping this relatively quick for one of my posts. The answer is – I don’t know – but I plan on trying to figure out a way that investors might be able to navigate this better than the AISC we use.

I wrote a recent thread about silver and in it, talked about how costs to produce gold may be $1500 and silver may be $20. I didn’t pull these out of thin air, I rely a lot on people smarter than me on the interviews on YouTube and some of the popular analysts that have been doing this 10x longer than me.

Why is this important? If our investment thesis in a company is they advertise $11 AISC and silver is $24, we then are led to believe that they are making $13 per oz profit. You can see how many oz they produce, then calculate the profit and thus see a potential P/E ratio. I did a deep dive on silver miners last year. It was not a perfect analysis – but I strictly looked at the books of these companies. As you can see – the length of that post was extraordinary, and could have been a 70 page book if printed. I also got to look a lot at the books of these companies – or at least what’s publicly reported for all to see. Side note: I was tough on Fortuna – and have since come around. Why? Because they are now a gold company and I LOVE them as a gold company. The dilution they had was more than made up for with screaming high revenues. More on that below.

I had many requests to go further with this – but I never found the time to do the quality of work I wanted to with this. Many were asking about something on pure junior miners, but the truth is so many of them had no revenue and I didn’t have an inside track to get information on how many oz they might have, the grade, the challenges, the cost to extract, etc.

AISC

The metric we all hear is AISC, or all in sustaining costs. What are “all in sustaining costs”? I don’t really know below surface level of this, as I had ASSUMED this covered the costs of mining.

When I did a search, a guy wrote a paper about it, and with this, it talks about “direct cost of mining and processing ore”….and “non-GAAP” which bothers me a bit. But DIRECT cost doesn’t count INDIRECT costs.

This can get very, very complicated in what I’m about to say, but let’s assume for sake of argument a company has 4 operating mines. Two are mostly gold, and two are mostly silver. Two of these are in Peru and Argentina, and 2 others are located in Mexico a mile apart.

When you think of direct costs – you think of:

1. Labor
2. Fuel
3. Maintenance costs

But how do you account for the equipment? Remember, in accounting you have depreciation. So perhaps your dozer has a 20 year life and had a capital cost of $1m. You may depreciate that equipment $50,000 per year, or about $12,500 per quarter. If that equipment is used solely on that mine in Peru, then for your quarterly operating costs, you would count that machine’s depreciation at $12,500. Do this for all of your machines. Your mill.

What you get out of this is an APPROXIMATION of how much it may cost to extract and run ore at your mine in Peru. The CFAs out there can go far more in depth on this than I can. But you get the idea. Maybe this gets more tricky if two of the mines in Mexico share a mill. Perhaps some of this equipment is shared between mines, and perhaps labor is shared across mines.

This can get way deep in the rabbit hole, but I get it.

Indirect costs

We covered perhaps the DIRECT costs – but consider this. Consider you were supposed to produce 1 million silver oz for the quarter but the equipment was down a lot. You had mining permit issues. You had a strike. You had a mine tunnel collapse. Perhaps you only produced 500k oz. However, your fixed costs of mill and equipment were unchanged, and your variable costs with fuel were much less. The end result drives up your costs per oz by 2x. So your AISC for that quarter, for that mine is double.

So we obviously want good mine guidance of production, efficient operations, and a very safe work environment – while having good relations with your community and labor force. None of this stuff is sexy on the investment slideshows, but you want a company that can deliver the guidance to keep costs in check.

But….what about exploration? Coming in a sec….

The below slide is a version of what I saw from Newmont in Feb 2020 which had my eyes light up.

I then saw a slide like this

My mind started racing. If gold goes up as much as I think it will, then I invest in (enter any gold company here) and they will be extremely profitable, and I will retire! I don’t want to pick on Newmont here, they are a favorite of mine, I just want to try and lead the horse to water here with all of you looking at AISC.

But what has happened was the price went WAYYYYY up…and here’s the earnings…

If you look at the earnings over the last two years, with a cost of $1150 (it was $950-$1000 when I first saw this) you must have anticipated CRAZY earnings like I did.

What happened?

Well, I think AISC are a great way to understand mine efficiency. If your AISC are higher than the price of the metal, you pretty much have to either stockpile metal or put mines on care and maintenance. When I first looked at AG in early 2020 or so, I believe I saw they had mines on care and maintenance that had like $35 AISC. Clearly at $50, these could be switched on, but when 2012 took the price down for 7 years, many of these mines had to be put on car and maintenance.

But what else happens? Well, AISC may tell you a metric about mining efficiency, but it may not cover indirect costs. Maybe it does and I’m 100% wrong. But given the definitions I’ve seen, mining execs who might have 10 mines can use this tool to see at the mine level how costs are being handled via production. If you come in over guidance and run more material at higher grades, your AISC for that mine shrinks. If you miss your tons per day and run lower grades, your AISC skyrocket – like what happened kinda sorta with Pure Gold (I’ll let the experts go further on that than me)

Here’s a second source on AISC

Now – I need to ask you about the other costs to your company?

In our example above, we had 4 mines. But we have a central office in Toronto where we employ 10 geologists, a CEO, and all of the back office HR people you need. Remember, as you are mining, you are depleting your existing assets. Most of these companies have drill programs to expand their existing mines. Perhaps they have brown fields exploration. Green fields exploration. Permitting costs for this. Development costs for other mines.

Where the AISC fails is that it makes an investor think that it cost the miner $11 to produce that oz of silver. The REAL COST is adding in all of the overhead, as well as the exploration costs. I’m sure there’s a million other costs I’m not thinking about.

All of what you are seeing above is all high level.

Newmont claims about 8m gold Equivalent Oz (GEO) each year. Let’s just simply divide ALL expenses by GEOs.

You get $10.8B expenses for 8m GEOs. This comes out to roughly $1,350 per oz TOTAL COST per GEO.

This is also your largest gold producer. Meaning, they may have the best back office efficiencies. If you start to do this for all of your favorite mid-tier miners who are claiming $1300 AISC, you may have $1500-$1600 per GEO as the TRUE cost of mining those oz.

GEO/SEO

Some have also said, “the cost to produce silver by a base miner is ZERO because it is a byproduct”. As much as I’d like to agree with you, it’s not the case at all. Just like above, a Zinc miner may have TOTAL costs, and then have a special formula for Zinc Equivalent Oz. Where, you can bet that this number is higher, the higher amount of silver and better grade that it is. Meaning, if silver was $25 or $15, it could impact the number of ZEOs the company produced, as silver would be a nice upside. But – it’s at the margins, and may be a difference of 6m ZEOs or 6.1m ZEOs. Likewise as grade declines, it also has an effect at the margins.

But it is not “free”.

If you look at FSM, my favorite mid-tier gold/silver play on the planet, you have now a company who was 60/40 silver to gold just a few years ago to a company who is 27% silver and 70+% gold to a company GOING to 19% silver soon enough. I LOVE gold miners with a high silver upside, which is one massive reason I backed Newmont many moons ago. Somewhere I did the math and reverse engineered their GEO to find the silver was something like 54m oz.

Where this is going
To wrap up here, you may see your favorite silver miner with a $15 or $17 AISC, but that’s not taking into account all of the overhead and exploration. Additionally, companies like First Majestic use SEOs (Silver equivalent oz) and when the price of gold dips a lot, it decreases the SEOs.

I think I’m going to try and do something where I look at total costs, then break out the oz/pound of metals produced to then try and come up with some metric of the true cost of the silver or gold produced.

Remember the Newmont example above? The GEOs were 8m. But are they producing 54m oz silver, 5m oz gold, 10m pounds of copper, etc? This starts to get a little sketch at this point, but you see where I’m going with this.

I think the point of writing this was to supplement my Tweet with the AISC and tell people I’m trying to look for a way to properly understand the cost of production for different types of widgets. If your costs were $1b and you made 750m blue widgets and 250m red widgets, it is reasonable to assume that the blue widgets were 75% of your costs and the red widgets were 25% of your costs.