The global supply of gold is an essential factor in gold prices. As a result, investors and collectors are constantly monitoring changes in the global gold supply. One factor contributing significantly to such changes in gold supply but doesn’t get nearly enough attention is the all-in sustaining cost (AISC) of gold.
What are All-In Sustaining Costs (AISC)?
The all-in sustaining cost (AISC) is a metric used by gold mining companies to calculate the cost of their mining operations. The World Gold Council first introduced the metric in 2013.
The formula for AISC is as follows:
AISC = Cash Costs + Sustaining Capital + Exploration Expenses + G&A Expenses
In short, all-in sustaining costs measure how much it costs gold miners to dig up each ounce of gold from a particular mine. This cost can then determine how efficient mining companies are at extracting gold from the ground. Miners with low AISCs are said to be more efficient than miners with higher AISCs since all gold miners operate under the same market conditions.
It is important to keep in mind that miners in different locations around the world can have varying costs based on their location. For instance, equipment, exploration rights, and transportation might depend on how remote a specific mine is from roads or railheads.
The labor cost might be lower in underdeveloped countries or might be significantly higher if the mining company hires professionals from other countries and pays for relocation, etc. Additionally, a previously established mine costs less to further excavate than a completely brand-new mining operation.
Just to give you an idea of how variable this can be, in 2020, some of the lowest cost gold mining companies had AISCs between $604/ounce and $987/ounce.
Much like the spot price of gold itself, AISC is generally measured on a per-ounce basis to compare to the market price of gold. And while this metric has only been in use since 2013, almost all miners now report AISC in their quarterly financial reports.
Why AISC Matters to Mining Companies
The basic tenets of any business are easy to understand: keep costs low and work to increase profit as much as possible. When it comes to gold mining, this is no different. But gold mining is an expensive endeavor, making AISCs a vital measurement of miners’ profitability. The decision to increase or contract mining capacity is directly correlated with a miner’s profit potential at any given moment. But because the market price of gold fluctuates on a daily basis, so too do miners’ current and future revenues. Miners always seek to extract gold at the lowest cost. Where these two numbers, cost and spot price, meet is known as the miners’ breakeven price.
AISC can be used as a metric to help determine at what market price it is beneficial for miners to increase their mining capacity and at what price it is no longer worth the costs to mine. Therefore, AISC can be a primary factor in determining whether to open, expand, or even shut down mining production completely.
Additionally, increasing mining production is a time-intensive process. It can take many years to open a new mine and get it running at full capacity. Imagine you are a mining company that realizes you should increase production due to favorable ASICs. But to increase your production, it will take the next several years to open a new mine and bring it up to full capacity. Therefore, your decision today based on current ASICs has an impact on your immediate costs as well as the next several years of mining production.
What AISC Means to Gold Supply
Imagine a scenario where the price of gold is stagnant, but the AISC for miners rises. What would miners do in this situation? This gets to the heart of basic economics, namely, costs and their relationship to supply. When costs rise in any industry, it can be easily predicted that suppliers will decrease their production because they aren’t profiting as much from their output.
The same goes for the gold mining industry: when miners’ AISCs increase, their production slows, which in turn lessens the gold supply on the market.
When the price of gold doesn’t rise to compensate for increased ASIC costs, it puts downward supply pressure on gold, creating shortages in the market. On the flip side, if the price of gold rises to outpace AISCs, miners would work to increase production and take advantage of their increased profit potential.
What AISC Means to Other Precious Metals
Other metals like silver, platinum, and palladium come with costs per ounce of metal, just as gold mining does. Therefore, market participants — from dealers to purchasers — of all precious metals will want to keep in mind AISCs for their precious metals of interest because these costs will also affect precious metal supply. Similarly to gold, a rise in AISCs would put downward production pressure on other precious metals, while a reduction of AISCs in precious metals mining would lead to an increase in output.
Why You Should Keep an Eye on AISC For Your Own Sake
The price of gold is heavily influenced by its supply on the market. And since miners control gold production — and as a result, the new supply growth or contraction — it stands to reason that the profitability of gold miners plays an essential role in the gold market.
AISCs are one way for you to determine whether miners are likely to increase or decrease their gold production over the coming years. Having this information can help you estimate the anticipated growth or decline of gold production in the near future, which will not only matter to gold miners but also gold collectors and investors.
