Anyone who closely follows the mining industry would be well aware that gold producers operating in Australia and Canada were given a large bottom-line boost over the past 18 months by large declines in the Australian Dollar (A$) and the Canadian Dollar (C$). In some cases, the favourable exchange-rate movements are hiding poor cost control.

Looking at the situation from one angle, the financial boost stems from a relatively high selling price for gold in local currency terms. Looking at it from a different angle, the financial boost stems from a lower reported cost when costs are converted to US dollars. For example, if a Canada-based gold producer has a stable cost per ounce in C$ terms during a year when the average C$/US$ rate falls by 10%, then in US$ terms its costs have declined by 10%. In such cases the decline in the US$ cost/ounce shouldn’t be portrayed as if it were due to smart management, but, perhaps not surprisingly, some management teams have given themselves public ‘pats on the back’ for cost improvements that were solely the result of the change in the exchange rate.

The example I’ll highlight is Lakeshore Gold (LSG), a junior gold producer operating in Canada. I’m picking on LSG because it’s a stock that almost everyone loves at the moment. I quite like it too, although I currently don’t own it and wouldn’t buy it at the current price.

All the information needed to figure out LSG’s cost performance in local currency (C$) terms is available in the financial statements issued by the company, but in its press releases LSG usually reports cost/ounce figures in US dollars only. For example, for 2014 it reported an AISC (all-in sustaining cost) of US$872/oz and for 2015 it reported an AISC of US$870/oz, which superficially looks like, and is certainly portrayed by the company as, evidence of good cost control. However, almost all of LSG’s costs are C$-denominated and the average C$/US$ exchange rate was about 13% lower in 2015 than it was in 2014. This means that LSG’s cost/ounce in US$ terms got a 13% benefit from 2014 to 2015, or, to put it another way, a stable cost/ounce performance in US$ terms masks a double-digit cost/ounce increase in C$ terms.

A similar conclusion (a double-digit deterioration in LSG’s mining efficiency from 2014 to 2015) is reached if the operating cost/ounce is determined by dividing the total C$-denominated production cost by the number of ounces produced.

The stock market often doesn’t care about declining efficiency as long as the bottom-line is improving or is expected to improve, but it’s something that investors should be aware of.