Nordgold: All-In Sustaining Costs

Abstract

Understanding the economics of gold mining had always been a challenge. Gold mines were long-lived assets that required substantial capital investments both to identify and gain access to mineral ore for future processing and to sustain output over the life of a mine. A typical investor might have looked at annual operating margins alone, ignoring these capital outlays, and set unrealistic return expectations. When firms fell short of these expectations, investors were perplexed and took a negative stance regarding the industry. Excerpt UVA-C-2412 Aug. 15, 2018 Nordgold: All-In Sustaining Costs In the summer of 2017, Nordgold was a major global player in the manufacture of gold and was steadily improving its economic position though continued enhancements in efficiency and careful positioning of its portfolio of mines. The company was clearly poised for success. However, the market seemed to not fully appreciate the favorable long-term outlook for the company. In fact, in March 2017, the company delisted from the London Stock Exchange and planned to return to the market when public trading of its shares would better impact shareholders. Understanding the economics of gold mining had always been a challenge. Gold mines were long-lived assets that required substantial capital investments both to identify and gain access to mineral ore for future processing and to sustain output over the life of a mine. A typical investor might have looked at annual operating margins alone, ignoring these capital outlays, and set unrealistic return expectations. When firms fell short of these expectations, as happened when cash flows did not rise when gold prices reached a high of $ 1,900 an ounce in 2011, investors were perplexed and took a negative stance regarding the industry. The central point of confusion was the lack of clear understanding about what it took to sustainably develop mining resources. To provide some clarity on these issues, the World Gold Council had adopted a framework for reporting costs, the all-in sustaining costs (AISC), which would supplement traditional accounting information generated under International Financial Reporting Standards (IFRS). Nordgold was a thoughtful adopter of this reporting standard. There was no doubt that AISC-based costs would exceed IFRS-based costs. Furthermore, there were certainly still judgment calls to be made under this standard. However, the hope was that enhanced understanding of mine economics would build confidence with investors over the long run. . . .