Email of the day on volcanos and all-in-sustaining-costs
Comment of the Day

July 07 2022

Commentary by Eoin Treacy

Email of the day on volcanos and all-in-sustaining-costs

Best wishes and greetings from Australia.  The e-mail covers 2 topics:


Several years ago (it might have been 10+ years ago) FullerTreacyMoney used to publish occasional articles and comments from ??? concerning the impact of the various volcanoes around the world on temperatures, crops etc.  I have not seen any articles lately.  Do you remember this newsletter?  Is this service still around and do you still follow it?

The reason I ask is that we have been having some weird weather in Australia recently (e.g. raining in winter when it never rains in winter) and it has been suggested to me that the volcano that erupted in Tonga at the start of 2022 is the cause.  (as opposed to global warming that seems to be the cause for everything bad these days).  It would be nice to get some more authoritative back-up before I use the example more widely.   If you still follow this line of thought, could you please point me to the reference site?  Thanks.


As you know I am the author of the textbook "Mining Economics and Strategy" which you have quoted on occasions.  I am in the process of revising and extending it for republication in 2024 (it will just be titled "Mining Economics").  Amongst the topics will be some discussion on All-in-Sustaining-Cost, not covered in the current book.  I agree there is insufficient definition of this term.

The term started to be used because investors (who knew nothing about mining) used to get perennially upset when some mining company was seemingly doing well, but then needed cash just to sustain production.  Just when the patient investors were lining up for dividends the dividends wouldn't materialize because the mining companies needed the cash themselves.  (Terms like "profitless prosperity" were common).  So mining companies - mostly gold mining companies - started to use this AISC term as an alternative to "cash" costs to indicate to investors what sort of overall margin they had over the published gold price going forward.   Now, it seems, investors are regarding this with more weight than it was ever intended.  And, according to the article you referenced, it seems some mining companies are creatively using the AISC term to present their situation in a more-favourable light than it deserves.  But you are right - the term is not well defined.  Even if the mining company is not deliberately misrepresenting their situation, there are two major short-comings in common application:

1)  A mining company might be planning a steady reduction in output over the ensuing few years as reserves get depleted, so the AISC would include (for example) replacement capital and other capital needed to fulfill this plan, but this doesn't necessarily mean that production will be sustained at current rates.  The AISC doesn't necessarily imply output will remain constant (but I'm sure that many investors think this is the case).

2)  Mines seldom produce just one product.  A gold mine almost always produces silver, for example.  But in an attempt to present things in "gold" terms - overly simplified for anyone who don't want to take the time to understand the economics properly - the silver "credits" will be subtracted from the price of gold necessary for the mine to remain viable ... with the absurd situation (if there are many by-products) where sometimes a gold mine could have an AISC of close to zero ... depending on the price of silver or other by-products used in the analysis.  Often, the selling price used for these by-products may not even be shown and probably not highlighted.

Lesson: as you highlight, investors should be wary of putting too much weight on any published AISC numbers.

Eoin Treacy's view

Thank you for this informative email and I look forward to reading the updated version of Mining Economics. 

The Browning Letter was written by Evelyn Browning-Garriss until 2016. Unfortunately, she died of cancer in 2017. Her son, James took over the publication and is still producing it. I reached out and they kindly forwarded the June issue. (subscription details). I don’t see mention of the Tonga volcano, but he has been predicting a wet winter in eastern Australia because of the strengthening La Nina. Here is a section:

The Pacific is going to continue pushing warm water up against the east coast of Australia through winter. This will increase precipitation for the entire season in New South Wales and Victoria as well as southern Queensland. Early in the season, rainfall will also move along the southern borders of South Australia and Western Australia. Some typhoon activity could also occur thanks to the westerlies coming from Antarctica.

 This article from may be of interest. Here is a section:

The volcano — known as Hunga Tonga-Hunga Ha'apai, or just Hunga — lies about 40 miles (65 kilometers) northwest of the Tongan capital of Nuku'alofa and sits within a line of volcanoes called the Tonga-Kermadec volcanic arc. On Jan. 15, Hunga erupted and sent a towering plume of gas and particles billowing into the mesosphere, the third layer of the atmosphere above Earth's surface. The plume reached 36 miles (58 km) tall at its highest point, making it the largest volcanic plume in the satellite record.

The big difference is the 2010 Eyjafjallajökull eruptions caused a massive, long-running ash cloud. The Tonga eruption appears to have been big and high, but with less material emitted.

The points you raise about AISC are very useful. The dilemma for investors is mining operations are uncertain by definition and that is when the resources are in place. You have the added uncertainty of capital requirements that are difficult to estimate in building, sustaining and running down a mining operation. Then you have the uncertainty about running costs like labour, energy and the availability of the necessary equipment and materials. Declining ore grades, geopolitical uncertainty, the reality of environmental and local activism and the threat of national expropriation are ever present concerns too.

To compensate for those uncertainties, investors need a margin of error generated by the promise of an outsized return on capital. For that you need the price of mined products to rise and stay high for a prolonged period to give investors the confidence to take on these risks. That’s the primary reason mining is such a cyclical business. AISC is a useful short-term barometer, but price action is a better indicator of what investors are doing with their money.
The S&P/ASX All Ordinaries Gold Index pulled back sharply with the gold price yesterday and is deeply oversold as its tests the early 2020 low. A clear upward dynamic, similar to that posted in March 2020 will be required to check momentum.

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