Cost curves are legendary in the mining world and are very popular in corporate presentations across all commodities. Each cost-curve follows a similar format – with low-cost assets to the bottom left, and higher-cost assets to the top right.
Seldom however is a curve displayed by any company that does not claim its assets to sit within the lowest cost quartile of costs versus their competitors. In cost-curve terms at least, our industry is ‘left-leaning’ and in a ‘race to the bottom’.
Indeed, over many years of observation, your scribe has estimated that on average, some 75% of all companies in a sector will claim to sit within the lowest-cost 25% of all producers.
Clearly, that math does not work. What’s more is that those few companies who admit to not being in the lowest quartile of costs, then unveil ambitious plans for that situation to change. Project expansions and access to higher-grade feed among the most popular reasons given. The 25% that admit to not being in the lowest quartile assert that they will be there next year.
Few arms-length observers believe everything they see on such cost curves – although independent sources to verify the analyses do add a level of authenticity.
For those cost curves presented which are not quite so ‘authentic’, in particular, those curves which claim to depict the industry cost-curve of the future, it is not uncommon for a company claiming to have lowest-quartile costs and concurrently seeking new equity in order to survive!
Thankfully, moves over the last decade have sought to clarify the above irrational situation and add transparency and confidence. The World Gold Council, for example, introduced non-GAAP1 cost reporting standards including all-in sustaining costs. The AISC represents the cost required to sustain gold mining at an operation, with most gold producers now adopting the AISC cost metric.
That is, AISC are now reported for over 95% of primary Australian gold mines representing around 91% of all gold produced in Australia. Our AISC cost reporting coverage is extensive.
On the global stage, AISC reporting (2018) varies from ‘highs’ to ‘lows’ in terms of coverage with Canada >95%, USA >95%, Argentina 92%, South Africa 82%, Ghana 66%, Brazil 66%, Russia 53% but with China, the world’s number one gold producer, at only 17%.
But a seismic shift in cost reporting is now upon us. New types of cost curves are starting to appear across the mining world – not related to costs of production – but to the level of environmental costs incurred in production, specifically Greenhouse Gas (GHG) emissions intensity.
The era of the ‘Great New Cost Curve’ has dawned.
Your scribe is among those advancing the new approach in gold2, with emissions cost-curve reporting also well advanced in other commodities3.
We estimate that in gold, emissions reporting is roughly five years behind AISC cost reporting, with reporting of the latter having improved markedly over the last 18 months. Expect the same impetus going forward for GHG emissions cost-curves and related reporting.
GHG emissions data are currently available covering the following (primary, main product) gold production percentages globally: Australia 82% Canada 83%, USA 88%, Argentina 85%, South Africa 83%, Ghana 47%, Brazil 43%, Russia 45%, China 0%
One note of caution in gold, however.
Just like in cost-reporting – there are ways to present data that can put your asset in a positive or negative light. You can rest assured that you’ll be seeing the positive light when looking at public domain presentations. Let’s hope that 75% of companies don’t claim to sit within the lowest quartile of GHG emissions.
An obvious example is whether to report GHG emissions on a per tonne processed basis or on a per ounce produced basis.
Both have their uses internally of course, to track and improve operating efficiencies in a GHG emissions context – but externally we counsel that the value-based metric, i.e. emissions intensity per ounce produced – has the more relevance.
In environmental and economic terms it more accurately assesses the level of GHG emissions required to produce the final economic product.
Higher gold grades are typically associated with lower GHG emission intensity per ounce, thus underground mines perform well on this metric.
Conversely, open pit gold mines have the highest GHG emissions intensity per ounce, driven by the lower gold grades, but as a consequence can also have the lowest emissions intensity on a per tonne processed basis. Indeed, this once again raises the special maths formula familiar to mining engineers that waste plus ore equals more ore – or in this case, waste plus ore equals lower GHG intensity per tonne!
Underground miners, therefore, have an ‘incentive’ to report on an emissions per ounce basis whereas open pit miners will be tempted to report on a per tonne processed basis.
Watch that space to see what happens.
Rio Tinto recently depicted the relative positions of its alumina, aluminium, copper and iron ore operations on industry GHG emissions intensity cost curves per tonne of finished product4, so the big miners are clearly onboard already.
How about you?
Allan Trench is MBA Director and Professor at the UWA Business School, a non-executive director of several ASX-listed minerals companies – and the Perth representative for CRU Consulting, a division of independent metals and mining advisory CRU Group (firstname.lastname@example.org).
Sam Ulrich is a Principal Consultant with CSA Global an ERM Group Company in their corporate team, a director of Aurum Analytics and is undertaking a doctorate at the Centre for Exploration Targeting, UWA (email@example.com)
John Sykes is undertaking a multidisciplinary doctorate at the Centre for Exploration Targeting, UWA and a sessional lecturer on the MBA programme at UWA Business School. He is also a strategist for MinEx Consulting and a director of Greenfields Research, both consultancies specialising in the analysis of mining and exploration across the base, precious and specialty metals sectors (firstname.lastname@example.org).
1 – Sitting outside of Generally Accepted Accounting Principles (GAAP).
2 – S. Ulrich, A. Trench & S. Hagemann (2020, in press). Greenhouse Gas Emissions and Production Cost Footprints in Australian Gold Mines. Journal of Cleaner Production. https://doi.org/10.1016/j.jclepro.2020.122118
3 – Here acknowledging the considerable work of colleagues at CRU Group, in particular along the aluminium value chain, in iron ore and in steel production. E.g.
4 – https://www.riotinto.com/invest/presentations/2020/climate-water-seminar-2020
DATE: 1 June, 2020