November 2013

Finance

CIM developing production cost reporting best practices

By Graham Clow

In January 1999, the Toronto Stock Exchange, Ontario Securities Commission, and Canadian Securities Administrators (CSA), as a group, released Mining Standards Task Force – “Setting New Standards.” This report and its recommendations gave rise to what became the NI 43-101 Standards for Disclosure that set out requirements for dissemination of technical and cost information by mining reporting issuers on Canadian stock exchanges. One of the recommendations in the report was to research the possibility of standardizing production cost reporting for various commodities, and that CIM participate in this study.

Historically, producers and developers have used two standards for reporting unit costs of production. Those working with precious metals have relied on the Gold Institute standards that designate: cash operating costs as direct production costs less byproduct credits; total cash costs as cash operating costs plus royalties and production-based taxes; and total production costs as total cash costs plus depreciation, depletion/amortization, and closure/reclamation. For base metals, the guidelines developed by consultancy firm Brook Hunt are generally considered the standard. They label net direct cash costs (C1) essentially the same as the Gold Institute’s cash operating costs; determine production costs (C2) as C1, plus depreciation, depletion/amortization, and production based taxes; and determine the fully allocated cost (C3) as the sum of C2, corporate costs, royalties and financing charges.

Under these standards, there has been a wide range of reporting bases by producers and developers. In general, companies have reported Gold Institute cash operating costs and Brook Hunt C1, with some reporting Gold Institute total cash costs or Brook Hunt C2. The variations in reporting methodologies have led to some confusion and misunderstanding on the part of investors and other interested parties who struggle to determine the actual costs of a producing mine or development project.

Recent reporting of results by producers, particularly some precious metals producers, has shown that in many cases companies report only Gold Insitute cash operating costs or Brook Hunt C1 and do not include the related capital costs to construct a mine and sustain operation through equipment replacement and ongoing underground development or stripping, and closure costs. As a result, while they may look like low costs producers, they struggle to generate cash due to high capital investment requirements.

In consultation with and at the urging of CSA, CIM is leading a review of production cost reporting methods in the industry. It is the intention that this review will lead to the establishment of standard practices for issuers in reporting both gross and unit costs of production, thereby helping to clarify for investors current and potential profitability risks and opportunities. This sort of standardization of practices is similar to the CIM definitions developed and implemented for mineral resource and mineral reserve disclosure a number of years ago. These definitions, as part of NI 43-101, have become a worldwide standard.

A CIM committee was reconstituted earlier this year to prepare recommendations to CIM Council for the establishment of best practices for cost reporting. It is expected that, once adopted by CIM as a best practice, CSA will consider whether the cost reporting best practices should be incorporated into NI 43-101 Standards for Disclosure.

In June 2013, the World Gold Council published its “Guidance Note on Non-GAAP Metrics – All-In Sustaining Costs and All-In Costs.” This guidance is intended to provide a template for gold producers to voluntarily report standardized costs. Importantly, the component costs of these two measures will be directly reconcilable to a company’s financial statement.

The CIM committee is in the process of reviewing this for possible recommendation as best practice for precious metals producers and developers. For other producers and developers, the committee will prepare a similar guidance for consideration as best practice.

The process for the committee will be to prepare a draft report recommending best practices. This will be distributed to CFOs of Canadian mining reporting issuers for review and comment. Following that, a second draft will be submitted to CIM for a period of general comment by members and other interested parties. It is intended that the cost reporting best practices be finalized in 2014.


G_Clow_CIM croppedGraham Clow is chairman and principal mining engineer with RPA. He has more than 40 years’ experience in all aspects of the life cycle of mining properties and companies. In addition to providing strategy and direction for RPA, he leads the company’s due diligence and M&A practice, assessing and advising on projects worldwide.


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