AISC versus cost of sales: why depreciation comes out and capex goes in

AISC (all-in sustaining costs) is the cash cost of sustaining production at its current level, expressed per ounce of gold sold. It differs from accounting cost of sales in exactly one respect: depreciation is stripped out of the calculation as a non-cash item, and sustaining capital expenditure is added in as a real cash outflow. That is why AISC cannot simply be lifted from the income statement. It has to be assembled by hand from the financial statements and disclosures, and that is precisely what makes the metric useful and, at the same time, open to manipulation.

What the World Gold Council methodology counts

The industry standard for the calculation was put forward by the World Gold Council in 2013. Before that, companies were compared on so-called cash costs, a narrow measure that captured only the direct costs of mining and processing. The trouble with the narrow measure is that a mine cannot be kept running without continuous investment: stripping, development of new levels, fleet replacement, and near-mine exploration within the boundaries of the existing licence. A company with worn-out equipment could report an excellent cash cost and then, a few years later, shut down its processing plant.

AISC includes cash operating costs for mining and processing, mineral extraction tax and royalties, general and administrative expenses, sustaining exploration costs, reclamation provisions and sustaining capital expenditure. It excludes growth spending — building a new plant or developing a new deposit — as well as interest on debt, income tax, M&A transactions and dividends. For the full picture there is a broader measure, AIC (all-in costs), which adds growth capex back in; the gap between AISC and AIC shows how far the company is in an investment phase.

Where the metric loses comparability

AISC is not audited and is defined neither under IFRS nor under Russian Accounting Standards. It is a voluntary disclosure, and an investor has no mechanism to make a company calculate it the same way a competitor does. The line between sustaining and growth capex is drawn by the issuer itself, and there is no objective criterion for it: deepening an open pit can be classified either way. The lower management wants AISC to look, the more costs it tends to classify as growth.

The second source of divergence is by-product metals. If silver or copper is recovered from a deposit alongside gold, the revenue from them can either be deducted from costs (a by-product credit) or costs can be allocated between the metals proportionally (co-product accounting). The first approach produces a noticeably lower AISC per ounce of gold, and when the price of the by-product metal rises, the metric improves on its own, without any gain in efficiency.

The third is the denominator. Ounces sold and ounces produced differ by the change in concentrate inventories, and "gold equivalent" depends on the conversion ratio chosen. Before comparing two companies, it is worth opening the footnotes to their disclosures and making sure like is being compared with like. That is why it is better to work from primary documents: issuers' financial statements and the presentations accompanying them contain methodological caveats that will not appear in any aggregated table, ours included.

The currency lever of a Russian gold miner

For a company with Russian assets, AISC is structured asymmetrically: revenue is tied to the global metal price, while most costs — wages, electricity, diesel, contractor services — are denominated in roubles. A weaker rouble mechanically lowers dollar AISC without changing either the metal content of the ore or the throughput of the plant. The flip side is imported equipment, spare parts and foreign-currency finance costs, as well as domestic cost inflation, which catches up with the exchange rate with a lag.

Hence a practical rule: changes in AISC cannot be read as changes in efficiency until the currency effect has been separated out. The substantive drivers are the grade of the ore being processed, the stripping ratio, the transition from open-pit to underground mining and the logistics distance to the site. All of them move slowly and in one direction: as the richer zones are mined out, AISC rises, and that is a normal property of a depleting asset, not a failure of management.

Why it matters in a corporate model

The difference between the realised price and AISC is the margin from which the company simultaneously services its debt, pays income tax, funds development and distributes cash to shareholders. AISC therefore acts as a constraint on dividend policy: if the policy is linked to free cash flow, the cushion between the metal price and AISC is exactly where that cash flow comes from. Comparing an issuer's promises with actual payouts is easiest with the dividend calendar, and the publication dates of operating results, where AISC is usually updated, can be found in the corporate events calendar.

The second application is stress testing. Sector-wide AISC forms a cost curve: when the metal price falls, mines with a high AISC are the first to become unprofitable, and this concerns not only an individual company but market supply as a whole. An investor in gold-mining shares should know which part of the curve their issuer sits on and bear that in mind when comparing it with other securities from the list of Russian stocks.

Finally, a point of terminology. AISC is not a synonym for cost of sales: cost of sales includes depreciation and excludes capital expenditure, while AISC does the opposite. Nor should it be confused with a golden share, which describes a special right of the state in the governance of a company and has nothing to do with the metal.

How to read the disclosure

A sensible way to work with the metric looks like this. Step 1: find the AISC definition in the footnotes of the specific issuer and note how it treats sustaining capex and by-product metals. Step 2: check whether the methodology has changed since the previous period; after a revision, comparison with history is meaningless unless the base is restated. Step 3: separate the currency effect from the operating effect. Step 4: compare AISC with AIC to see the full cash requirement, not just the cost of maintaining current production.

One separate caveat: there is no ready-made AISC field in our database. The metric is not a standardised line item in financial statements, and it cannot be inserted through a directive the way a valuation multiple or a dividend can. Any specific value has to be taken from the company's own disclosure, with the period and methodology stated.