http://www.mineweb.com/mineweb/content/en/mineweb-gold-analysis?oid=174296&sn=Detail

The end of gold cash costs as we know them?

Recent announcements from Yamana, Goldcorp, Freeport and Newmont on the manner in which they present costs indicate that changes are afoot, finally.

2012 did not bring with it the end of the world, as was predicted, but if recent announcements by major gold companies are to be believed, it could be, to paraphrase R.E.M., the end of the world as we know it for the major gold miners.

And, many investors are applauding.

During 2012, calls for a change to the status quo from both miners and investors alike grew louder. No longer was growth at all costs an acceptable strategy. No longer were languishing share prices to be tolerated.

It may sound like I am over egging things somewhat but, it is worth rereading the comments of Gold Fields CEO,Nick Holland at the Melbourne Mining Club, those of Evy Hambro And Catherine Raw at London's Mines and money show and Chris Ecclestone and Frank Holmes in both print and on Mineweb's very own Gold Weekly podcast as they demanded, among other things, higher quality profits and that the industry find a better, more realistic measure of costs within the sector.

To reinforce the point, look at the reasons given for the departures of Aaron Regent from Barrick, Richard O'Brien from Newmont and Tye Burt from Kinross.

But, while 2012 saw heads rolling and some serious inward examinations, 2013 could have seen things returning to 'normal' in the hope that investors would be placated by the high profile sacrifices. Instead, it seems as though major gold companies are trying to make a change.

Earlier this month, both Goldcorp and Yamana released earnings updates and, within them, announced plans to adopt new measures of cost performance.

Goldcorp said, "Working with the World Gold Council, the Company is adopting an "all-in sustaining cash cost" measure that the Company believes more fully defines the total costs associated with producing gold. All-in sustaining cash costs include by product cash costs, sustaining capital, corporate general and administrative expenses and exploration expense. As the measure seeks to reflect the full cost of gold production from current operations, new project capital is not included in the calculation."

While Yamana, in the same week, announced, "The Company believes that an all-in approach to costs is a better way to evaluate and assess its cost structure and, consistent with existing internal practices, the Company includes in all-in sustaining cash costs: by-product cash costs, sustaining capital, corporate general and administrative expenses, and exploration expenses. All-in sustaining cash costs for 2013 are expected to be below $800 per GEO. "

Then, yesterday, both Newmont and Freeport McMoRan used their own versions of these measures when announcing their results. While Newmont didn't make any noises about the newness of the measure, the miner did define it in its press release and, it served as a good counterpoint to Newmont incoming CEO and current COO, Gary Goldberg's, comment that, "In 2013, we will focus on mining fundamentals – from technical competency to safety and social responsibility – to lay the groundwork for profitable growth and more robust cash flow generation."

But, why is it important.

Speaking to Mineweb.com's Gold Weekly podcast, Ralph Aldis explains that for a number of years gold companies have reported cash costs that do not actually represent a true picture of how much it costs, not just to mine an ounce of gold but, also to replace it. By excluding things like sustaining capital expenditure and the outlay for new projects, gold companies have provided the market with artificially low cost numbers which made them look better when gold prices were low and no-one was really making a lot of money.

Now, however, profits are being made but, the companies are continuing to use the same measures. the main problem with this, Aldis says is that governments "look at these companies coming out with a cost number of $800/oz or $300/oz or whatever cash cost number they quote and they think, well and you must be making windfall profits at our expense and we need to raise our tax rates on you."

He adds, "So for me as an investor we’ve seen taxes go up for these companies, either through royalties or a variety of different schemes but I think it’s bad for the companies and it certainly hurts their returns in the long run because governments have just looked at this and said this is why we need to raise taxes on you."

There other issue with all the various cash cost numbers floating around is that it becomes difficult to accurately compare these companies.

According to Aldis there is still a lot of work that needs to be done before investors will have a single number with which to understand the cost dynamics at play but, if the comments of these companies and the World Gold council are to be believed, then this work is now underway. But, it remains a step in the right direction.