By-Product Credits: When a Second Metal Pays the Bills

Introduction

A gold mine rarely produces only gold. Many also recover silver, copper, lead or zinc. A copper mine may sell gold, silver or molybdenum alongside its copper. That second stream of revenue is welcome, but it changes how costs are reported.

The usual approach is to treat the secondary metals as by-products and subtract their revenue from the cost of producing the main metal. The result is a lower cost per ounce or per pound, which can make one mine look much cheaper to run than another. This guide explains how the credit works, how the alternative co-product method differs, and what to check before comparing two cost figures.

A by-product credit does not lower what the mine spends. It changes which metal the spending is charged to.

Primary Metals and By-Products

The primary metal is the one that justifies the mine. It sets the mine plan, the processing method and, usually, the company's identity: a gold producer, a copper producer. A by-product is a metal recovered along the way because it sits in the same rock and the plant can capture it at little extra cost.

Plenty of the world's metal supply comes this way. In the United States, for example, the U.S. Geological Survey reports that silver is obtained primarily as a by-product of lead-zinc, copper and gold mines rather than from dedicated silver mines.

Which metal counts as primary is a judgment, and it can shift. If the price of a secondary metal rises far enough, it may bring in a large share of revenue. At that point some companies stop calling it a by-product and report it as a co-product instead.

How the Credit Works

Take a hypothetical example. Suppose a mine spends $1,500 for every ounce of gold it produces on mining, processing, site costs and royalties. The same rock also yields silver and copper, which sell for an amount equal to $400 per ounce of gold produced.

On a by-product basis, the company subtracts that $400 from its costs and reports a cash cost of $1,100 per ounce of gold. The spending is the same. The reported cost per ounce is about 27% lower.

The same treatment carries into all-in sustaining cost (AISC). The World Gold Council's guidance on non-GAAP metrics, updated in November 2018, includes by-product and co-product credits in the calculation of AISC as a credit to operating costs. If you want to see how a cost figure compares with a metal price, the AISC margin calculator shows the arithmetic, and we cover AISC itself in a separate guide.

Co-Product Reporting

The alternative is to treat two or more metals as co-products and divide the costs between them. A common method allocates costs in proportion to each metal's share of revenue. In the hypothetical mine above, if gold brings in 80% of revenue, gold carries 80% of the $1,500 per ounce in costs, and silver and copper carry the rest.

Co-product figures tend to look less dramatic than by-product figures, because no metal gets a free ride. They are also harder to compare, because the allocation method is a choice. The World Gold Council's guidance says a company that reports separate gold and co-product metrics should disclose the methodology it used to allocate costs between the metals.

Some companies publish both. That is useful: the gap between the two numbers shows how much the secondary metals are carrying.

Why Comparisons Get Tricky

By-product credits create three problems for anyone comparing mines.

1. Price sensitivity. The credit is revenue, so it moves with the price of the secondary metal. In the hypothetical mine, if silver and copper prices fell by a quarter, the credit would drop from $400 to $300 and the reported gold cost would rise from $1,100 to $1,200 per ounce, with nothing changed on site.
2. Negative costs. When secondary revenue exceeds the costs being measured, the reported cost of the main metal can fall below zero. A negative cash cost means the other metals pay for those costs. It does not mean the main metal is free, and it can reverse quickly if the other prices fall.
3. Different bases. One company may report by-product costs, another co-product costs, and a third may convert everything into "gold equivalent" ounces using its own price ratios. Put side by side without adjustment, the three numbers are not measuring the same thing.

The same caution applies to grades. Drill results and resources are often quoted as a single metal-equivalent grade that combines several metals using assumed prices and recoveries. The grade converter helps with units, but the equivalent grade is only as good as the price and recovery assumptions behind it.

The Disclosure Rules

Cash cost and AISC are non-GAAP measures. They are not defined by IFRS, and each company builds its own version. In Canada, National Instrument 52-112, in force since August 25, 2021, sets conditions for disclosing them. Among other things, an issuer must:

• label the measure appropriately and present it no more prominently than the most directly comparable figure in its financial statements;
• explain what the measure includes and why it is useful;
• reconcile it, with numbers, to that comparable figure; and
• state that the measure is not standardized and may not be comparable with similar measures from other issuers.

That reconciliation is where the by-product credit shows up as a line item. It is the fastest way to see how much of a low cost comes from the secondary metals.

For a development company, the same issue appears in studies. A PEA or feasibility study usually quotes costs net of by-product credits at assumed metal prices and assumed metallurgical recoveries. Those assumptions are listed in the study and the technical report filed on SEDAR+.

What to Check

• The basis. By-product, co-product or metal-equivalent. Compare like with like.
• The size of the credit. Find the by-product line in the reconciliation and compare it with total costs.
• The prices behind it. Which secondary metal prices were assumed, and how far would the reported cost move if they changed.
• The recoveries. In a study, how much of each secondary metal the plant is expected to capture, and on what testwork.
• Consistency over time. Whether the company changed its method from one period to the next, and whether it explained why.
• The filings. Read the MD&A and technical report on SEDAR+ rather than a headline cost. If you are making an investment decision, talk to your own adviser.