a plague o both your houses

Capstone Mining (CS.to) and a cash costs explainer

Ever wondered why mining companies like to bombard you with different ways of calculating cash costs per unit of product? Here’s why.
Capstone Mining (CS.to) reported its 2q16 financials this evening and if you check out the NR, one of the first things you’ll see (in the very first paragraph in fact) is this:
“…C1 cash cost (1) of $1.51 per payable pound produced with copper sales for the quarter of 22,549 tonnes at a C1 cash cost (1) of $1.66 per payable pound sold.”
But in the very same paragraph one of the NR CS.to announces that it’s made a $13.4m net loss in the quarter and that’s exactly the kind of thing that confuses people, so easy to go “Huh! These guys produce copper at U$1.51/lb….and copper’s selling for plenty over U$2/lb these days…but they posted a 3c per share LOSS? Huh?“. So your humble scribe believes that a little explanation is in order and to get a handle on things, we need to go to the regulatory filings for the Q2 period rather than the puffy NR. Suddenly you’ll see there are eight ways (seriously) to cut and slice “cash cost per pound copper” and they are the following:
  • C1 for production
  • C1 for sales
  • AISC for production
  • AISC for sales
  • All-In for production
  • All-In for sales
  • Fully-Loaded All-In for production
  • Fully-Loaded All-In for sales
Sheesh, what a mess. Confused yet? Yeah me too once upon a time so to get to a place where it makes a little more sense, let’s first look at what those cash cost terms mean.
a) “production versus sales”. That’s fairly straightforward, as the amount a company produces is never the same as the amount it sells. To get a handle on why the company recorded a loss or a profit in any given quarter what it sells is more important, therefore I’m going with those sales number. 
b) “C1 cash costs”: These are the costs of production at the mine, plus the treatment and selling costs of its product minus any by-product metal credits. This is the baseline cost of production if you like and it’s also the lowest, so naturally a mining company will tend to highlight this one even though there are A LOT of other costs it needs to cover in order to do business (as you’re about to see).
c) “AISC”: This stands for “All-In Sustaining Costs” and it sounds like a more comprehensive number just from the title, but in fact it would be better understood as “Half-In” rather than “All-In”. To get AISC, you start with the C1 costs and then add a whole bunch of things including (deep breath) “NSR royalties, production phase capitalized stripping, capitalized brownfield exploration, sustaining capital, accretion of reclamation obligation, amortization of reclamation asset, corporate G&A, share-based compensation, greenfield exploration“. Yup, all those were missing from the “cash costs” number that CS.to preferred to highlight in its NR. Funny dat, innit?
d) “All-In costs”: But wait! There’s more! AISC isn’t the end of it all because to get to what they call “all-in costs” you then need to add the company’s development costs at its assets. In the case of CS.to you add in the money spent at Pinto Valley and Santo Domingo.
e) “Fully-Loaded All-In Costs”: But even the previous “all-in” is a misnomer, because it’s not everything a company needs to pay in order to stay in business. In the specific case of CS.to it has a crapload of debt on board (one of the basic reasons it trades at 0.3X book, the other reason being its huge overvaluation of Santo Domingo) and it has to pay interest on that. And of course, it needs to pay income tax and sorry, if you don’t include tax payments in your costs parameters you’ll never get to a real world number. And that’s “Fully-Loaded All-In Costs”, it’s “All-In” costs plus interest and tax.
Finally, by scraping through the quarterly filing small-print we find a number that’s a realistic reflection of the costs CS.to incurs in order to be a copper miner. And when we stick those four cash cost calculations in a chart and compare them to the price of copper this evening…
 NB: Please note the cut-down Y-axis
 …we get a better visual on why this company is a loss-making miner.

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