AISC: Why it's the best Mining Metric, and why it still Sucks!

Mining companies have a lot of moving parts. Extracting and processing minerals isn’t simple—it involves everything from drilling and blasting to transportation, refining, and site administration.

Each stage has its own set of costs, which can swing up or down depending on things like energy prices, regulations, and labor conditions. These variables mean mining costs are always in flux. Understanding these costs is the key to knowing if a mining project will ever be profitable.

Or if you're better placed to take that Christmas bonus to the casino and throw it all on lucky red 27.

Let's break down the key metrics: C1 costs and AISC, where they appear on financial statements, and why they matter to you as an investor. We'll explore how these metrics impact a mine's profitability and ultimately help you decide if it's worth your money.

C1 Costs: The Direct Costs of Production

C1 costs are the basic measure of what it takes to get the metal out of the ground and ready for sale.

They include mining, milling, concentrating, on-site admin, and refining. Basically, the "bare minimum" costs needed to produce the metal.

C1 costs are often the first thing people look at to judge a mine’s efficiency. They’re all about the direct production expenses a company can control.

Where does it show up?

You’ll find C1 costs under "Cost of Goods Sold" (COGS) on the income statement. They’re directly tied to production, so they help show how efficiently the mine turns rocks into metal.

A mine with low C1 costs is more efficient than others. This can be a big advantage, especially when commodity prices drop.

But C1 costs don’t tell the full story. There are plenty of other expenses you need to consider to get the real picture of a mine's health.

The BIG problem with focusing on C1 Costs

Here’s the catch: capital investments aren't counted as immediate expenses. When cash is spent, it shifts to an asset on the balance sheet instead of being immediately deducted. This accounting treatment hides the real impact on cash flow, which can make profitability look better than it really is.

Only when these assets are depreciated or amortized do they become expenses. This takes time and creates a lag, which makes it hard to get a real-time, accurate picture of a mine's profitability.

This ongoing investment is crucial to replace equipment, maintain infrastructure, and keep the mine efficient.

So for our purposes as investors, sustaining capital is a real and immediate expense. Forget accounting standards for a moment—what really matters is understanding the actual cash flowing out of the business. This is what truly shows whether a mine is generating sustainable value.

All-In Sustaining Costs (AISC): The True Cost to Keep the Lights On

AISC gained popularity after the World Gold Council introduced it in 2013 to address the shortcomings of C1 costs. Investors and analysts needed a more comprehensive view of a mine's true operating costs over the long term.

It quickly became the industry standard as it offered a clearer view of ongoing costs. Companies adopted it because it gave stakeholders a better understanding of financial health and helped manage expectations on profitability.

Using AISC

AISC is best thought of as a hybrid figure. It includes the C1 expenses but also the investment into assets that keep the mine operational.

This includes sustaining capital, corporate General and Administrative (G&A) expenses, and exploration to keep the mine going.

It’s basically the "all-in" number to keep the mine running smoothly.

Exploration costs to extend mine life are about keeping production going well into the future. This often means drilling to find new resources or expand reserves. So it makes sense that we consider them as an ongoing expense, as investors.

Risks and Downfalls of Using AISC

While AISC provides a more complete cost picture than C1, it comes with some serious limitations. The definition of AISC is not set in stone, meaning companies have a lot of flexibility in what they include or exclude.

This flexibility can make AISC misleading. Companies might tweak their reported AISC by shifting costs or excluding certain expenses—like capital projects that really should be considered part of sustaining production.

Companies sometimes use byproduct credits to improve their AISC. For example, a 'gold miner' making significant profits from copper and silver might treat this revenue as credits to offset gold mining costs, rather than accounting for them as separate product lines.

This accounting trick can even lead to negative AISC figures for certain mines, making comparisons between companies highly unreliable. So, we always have to read the fine print to understand exactly what it is they're telling us.

So much for standard metrics. There’s always a way to make the numbers dance!

Another issue is that AISC leaves out key costs like taxes, interest on debt, and costs related to mergers or asset acquisitions—all of which can have a significant impact on profitability.

So it's important to keep in mind that AISC tells a very specific story about the ongoing costs of running a mine.

Other Related Costs

Initial Capital Expenditure (Capex) 

This is the money spent to build the mine, including equipment and infrastructure. Capex hits the balance sheet and is then depreciated over time, which is when it shows up on the income statement as an expense.

The initial investment is important because it’s the basis for Return On Investment (ROI), Internal Rate of Return (IRR) and Net Present Value (NPV).

These metrics help the board and investors understand the attractiveness of a project. But it’s important to understand that these can still be manipulated. Sometimes a company will rework a project design to minimise up-front spend.

While this might allow them to claim better return metrics, that extra spend might still be required at some point. Sometimes it comes with an unpleasantly unexpected capital raise, right when first revenues are coming in the door, leaving shareholders frustrated.

A delayed investment on say more mill capacity might improve the IRR, but it could also increase the ongoing AISC as those costs show up down the track.

Again, there is a lot of room for companies to play with these figures to tell the story that they want to.

Exploration Costs 

Exploration costs can be split into two categories: exploration for new projects and sustaining exploration. Exploration for new projects, aimed at discovering entirely new resources, is usually recorded under operating expenses. This type of exploration is crucial for a mining company's growth, as it helps identify new mining opportunities beyond the existing sites.

Sustaining exploration, on the other hand, is included in AISC. These costs are essential to extend the life of current operations by finding additional ore within the existing mine area. Without ongoing sustaining exploration, a mine will eventually run out of ore, making these expenses critical for maintaining production continuity and ensuring a sustainable mine life.

Sustaining exploration often involves drilling to better define the ore body, expanding known reserves, and ensuring that production can continue at economically viable levels. Investors should recognize these costs as ongoing investments directly tied to a mine's future output and longevity.

But where is the line between a new mine site and an extension to mine life? If they are in different countries, it's obvious. But what if they are neighbouring tenements that could utilise the same production equipment?

Tying It All Together

So, how do we get to mining profit?

Start with the revenue from metal sales. Subtract C1 costs, and you’re left with gross profit.

Subtract AISC from revenue, and you get a better sense of the sustainable operating margin.

True profitability (net profit) comes after taking out other costs like interest, taxes, and depreciation.

A mine might have low C1 costs, but if AISC is high because of big sustaining capital needs or heavy admin costs, the mine could struggle to generate positive cash flow.

Understanding both C1 and AISC gives a much clearer picture of whether a mining company is viable for the short and long term.

Why This Matters for Investors

These costs help you determine if a mining company is truly profitable or just scraping by.

Mines with lower AISC relative to metal prices are better positioned to weather downturns. When prices drop, high AISC mines might struggle, while those with lower AISC can still churn out cash.

AISC is also a great metric to judge management. If they can keep AISC stable or reduce it while keeping production steady or growing, it shows they’re good at managing costs and keeping things running.

For investors, analyzing AISC alongside metrics like free cash flow and net profit margins provides a comprehensive view of a mine's financial health.

Another important point is that AISC includes sustaining exploration. Companies with lower AISC are not only running efficiently but are also investing smartly to extend the mine’s life. This matters a lot for investors who want profitability now and potential for the future.

There’s no value in a low AISC if a mine is about to run out of resources to mine. So AISC needs to be balanced with a view of the sustainability of the project. The longer the mine life, the better. And the cost effective conversion of exploration expenses to mine reserves and mine life extensions is key.

Reality Check: Analyzing AISC

If you’re trying to get a more realistic view of a company’s cost structure, a good reality check is to go beyond AISC and look at the Cash Flow Statement.

Take the cash generated from operations (including changes in working capital), subtract the cash used for investing activities, and divide it by the ounces of gold sold. This step-by-step calculation gives you a more realistic view of the cash cost per ounce.

Keep in mind that companies might shuffle expenses around or classify them differently. Be wary of any big differences between reported AISC and what the cash flow analysis tells you—this can reveal whether the company is understating its costs or classifying expenses to make their operation look more efficient than it actually is.

Mining companies love to use AISC to tell a positive story, but cash flow doesn’t lie. By combining AISC with cash flow statement analysis, you get a more transparent and honest picture of the company’s financial health.