Cost Inputs in a Mining Valuation

Author(s): 
Grant Malensek
Date: 
Tuesday, March 7, 2017
First presented: 
PDAC 2017
Type: 
Presentation
Category: 
Project Evaluation
Mining

Cost curve position remains an important value differentiator for mining companies, especially during periods of low metal prices. For precious metal companies, the standard (non-GAAP) cost reporting methodology are the World Gold Council (WGC) guidelines first published in 2013 and consist of three components: Adjusted Operating Costs, All-in Sustaining Costs (AISC), and All-in Costs (AIC).
 
While there is no formal guidance from regulatory bodies, such as the SEC, etc., most precious metal mining companies do provide some version of AISC and AIC metrics in their public disclosure. AISC is also quoted extensively for project valuations within NI 43-101 technical reports, but often with a number of discrepancies that occur. The discrepancies include exclusion of smelter/refinery TC/RC costs; uncertain definitions of by-product vs. co-product treatment; sustaining capital; General and Administrative costs; and exploration/study costs.
 
While it has been long recognized that the WGC guidelines currently exclude income taxes, working capital, and all financing costs, this presentation advocates the inclusion of these items into a Modified AIC structure. The presentation also proposes a methodology to capture the costs of streaming and royalty financing, while examining debt finance costs and the issues of dilution with equity financing. The main benefit of this Modified AIC makes it easier to determine the health of a company or project – either for a quick margin analysis per oz. of metal sold or if adding up positive cash transactions and subtracting AIC to determine how much cash the company has generated for a certain time period as “Distributable Cash Flow”.
 
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Feature Author

Grant Malensek

Grant Malensek is a geological engineer who specializes in economic modeling and mining project evaluation. More than 20 of his nearly 30 years of experience have focused on financial analysis, project management, and business development. Grant uses technical-economic models to assign a dollar value to the transformation of mineral reserves/resources into saleable products. For each project, he targets the issues pertinent to the valuation’s specific purpose and intended use and ensures that the model is verified and validated for a full range of input conditions. To determine the value range within which a data point is likely to fall, Grant relies primarily on the benchmarking of operational and sales data.  He also applies his extensive experience in project valuations and evaluations and in incorporating prior learnings into current evaluations.

Mining Economics Specialist
PEng, PGeo
SRK Denver
SRK Worldwide