Hi MrB,
Thanks for your explanation of ALL IN SUSTAINING COSTS (AISCs) but it goes a lot deeper than that. The first reality is that by far and away, the largest determinant of AISC is GRADE. In mining, the oldest axiom of all is that “GRADE IS EVERYTHING” and it really is. Why? It’s because profits are everything and GRADES determine the AISC (per ounce) and the AISC determines the MARGINAL PROFIT (per ounce) to produce each ounce of gold that is produced. In simplified terms, the MARGINAL PROFIT per ounce produced is basically equal to the price of gold minus the AISC.
We’ve been dealing with the concept of AISC since 2013 when the World Gold Council pretty much mandated that all “COSTS” for mining firms be reported on a “PER OUNCE” basis and the AISC should include SUSTAINING CAPITAL EXPENDITURES especially for the majors that need to take their annual profit and first of all drill out as many new ounces of MINERAL RESERVES/MINERAL RESOURCES to match the number of ounces of gold they just produced in the prior year. Auryn will never be forced to do this which is partly why their AISC (per ounce) is so low. They’re mining a somewhat “homogenous” VEIN SET of closely linked parallel veins with similar grades, widths, gangue components, etc. Diamond drilling is extremely expensive.
As mentioned, the primary determinant of AISC is GRADE. Extremely high-grade deposits, by definition, have extremely low AISC’s. Why is this? It’s because AISC is always reported on a “PER OUNCE” of gold basis.
Let’s look at the line-item entry for AISCs known as TRANSPORTATION COSTS. Let’s assume that it costs about $500 to ship a 20-tonne truckload of ore to the smelter or ore processing facility. The AISC TRANSPORTATION COST (per ounce transported) will be $500 divided by the number of ounces of gold in that truckload.
The average underground miner is mining 4.18 gpt gold worldwide. Since there are 31.1 grams in each Troy ounce of gold, this means that this 4.18 gpt figure converts into .134 ounces per tonne. Therefore a 20-tonne truckload of this ore would contain 2.68 ounces of gold (20-times .134). The AISC TRAANSPORTATION COST (per ounce transported) would therefore be $500 divided by 2.68 ounces per truckload or $186 per ounce for the miner mining “average grade” ore.
Let’s say that Auryn is mining 15.5 gpt gold which is one half ounce per tonne. This is about 4-times the average. If Auryn were shipping raw ore, each truckload of ore would have about 10 ounces of gold (20 tonnes times one half ounce per tonne) or about 3.7-times as many ounces as the average miner and therefore Auryn’s AISC TRANSPORTATION COST (per ounce transported) would be right at $50 per ounce transported or about one-fourth of that of the other miner JUST DUE TO GRADE ALONE.
BUT, Auryn is not going to be TRANSPORTING raw ore. They’re going to first froth float that raw ore and convert the grade from perhaps 15.5 gpt (one half ounce per tonne) to somewhere around 5-times that amount or, let’s say, 2.5 ounces per tonne. This means that a 20-tonne truckload will contain about 50 ounces of gold. Their AISC TRANSPORTATION COST (again per ounce transported) is going to be somewhere around $500 per truckload divided by 50 ounces per truckload is about $10 per ounce transported. This is as opposed to the “average miner” paying $186 per ounce transported. Why such a stark difference? Auryn’s ore started out about 3.7-times richer and then that got magnified another 5-fold because Auryn was smart enough and fortunate enough, to build their own FF plant. Auryn will not be transporting raw ore, they’re going to be TRANSPORTING a highly-enriched “float concentrate”.
Now you can appreciate why “GRADE IS EVERYTHING” whether it be the grade of the ore you mine or the grade of the “float concentrate” you TRANSPORT. HAVING NOT ONLY HIGH-GRADE ORE TO START WITH BUT ALSO YOUR OWN FF PLANT TO FURTHER CONCENTRATE IT, DRIVES DOWN YOUR AISC MARKEDLY. THIS DRIVES UP YOUR “MARGINAL PROFIT” PER OUNCE PRODUCED MARKEDLY. THIS DRIVES UP YOUR TOTAL ANNUAL PROFITS MARKEDLY. THE FACT THAT AURYN ONLY HAS 70 MILLION SHARES OUTSTANDING MEANS THAT THEIR “EARNINGS PER SHARE” WILL BE DRIVEN UP MARKEDLY. SINCE MINING STOCKS TRADE AT AN AVERAGE “MULTIPLE” OF 31 TIMES EPS, THIS MEANS THAT THE SHARE PRICE SHOULD BE DRIVEN UP MARKEDLY.
SINCE “TOTAL PROFITS” EQUALS THE NUMBER OF OUNCES PRODUCED ANNUALLY TIMES THE SOMEWHAT SUPERCHARGED “MARGINAL PROFIT” PER OUNCE FIGURE (due to high-grade raw ore plus your own FF plant) IMAGINE THE INCENTIVE FOR AURYN AND ASHMORE/STRACON TO AGGRESSIVELY RAMP UP THE NUMBER OF OUNCES PRODUCED ANNUALLY IN ORDER TO LEVERAGE THIS SITUATION.
Now let’s go back to what Mr. B just taught you about AISC and relate it to Auryn/Medinah specifically. He said that AISC=CASH COSTS+SUSTAINING CAPITAL+EXPLORATION EXPENSE+ GENERAL AND ADMINISTRATIVE EXPENSES.
In regard to CASH COSTS: Auryn’s CASH COSTS like on-site mining costs and TRANSPORTATION COSTS are going to be dirt cheap because of grades and having their own FF plant.
In regard to SUSTAINING COSTS like the need for the miners of open pits to constantly take the profits and drill out more ounces of MR/MR in order to replace the ounces they mine annually, Auryn’s not going to have to do that. They’re mining veins within “Homogenous Vein Sets” that are much more predictable than open pit “disseminated” deposits.
In regard to EXPLORATION EXPENSES: Auryn has 8 Main Veins that they are going to be mining. This will keep them plenty busy for decades to come.
In regard to GENERAL AND ADMINISTRATIVE EXPENSES: Maurizio is extremely frugal, and he tosses around nickels like manhole covers.
If I were Maurizio and I owned 62% of Auryn’s shares, I’d probably convert Auryn into an ATM machine that spins out nonstop cash dividends at the same time it aggressively ramped up production. Nobody knows how long the price of gold is going to be trading at these levels so the ramping up process needs to be aggressive.