The
gold miners’ stocks have corrected hard in recent weeks, hammered by
a gold pullback driven by soaring Fed-rate-hike odds. Like any
considerable selloff, this has spawned serious bearish sentiment.
But the gold miners’ underlying operating fundamentals remain quite
strong, proving the recent selling was purely psychological. This
sector’s just-reported fourth-quarter results are impressive, very
bullish.
Four
times a year publicly-traded companies release treasure troves of
valuable information in the form of quarterly reports. Required by
securities regulators, these quarterly results are exceedingly
important for investors and speculators. They dispel all the
sentimental distortions surrounding prevailing stock-price levels,
revealing the underlying hard fundamental realities. They
serve to re-anchor perceptions.
After spending decades intensely studying and actively trading this
contrarian sector, there is no gold-stock data I look forward to
more than their quarterly reports. They offer a true and clear
snapshot of what’s really going on, shattering all the
misconceptions bred by the ever-shifting winds of sentiment. If you
have capital deployed in this sector but don’t watch the
quarterlies, you’re shooting yourself in the foot.
Normally quarterlies are due 45 calendar days after quarter-ends, in
the form of 10-Qs required by the SEC for American companies. But
after the final quarter of fiscal years, which are calendar years
for most gold miners, that deadline extends out up to 90 days
depending on company size. The 10-K annual reports required once a
year are bigger, more complex, and require fully-audited numbers
unlike 10-Qs.
So
it takes companies more time to prepare full-year financials and
then get them audited by CPAs right in the heart of their busy
season. As a gold-stock trader this additional Q4 delay is
irritating, since the data is getting stale by Q1’s end. But as a
CPA and former Big Six auditor of mining companies, I have some
understanding of just how much work goes into an SEC-mandated 10-K
annual report. It is enormous!
This
extended Q4-reporting window naturally delays the analysis of Q4
results. While I can start digging into the first three quarters’
results 5 or 6 weeks after those interim quarter-ends, I have to
wait longer for the fiscal-year quarter-ends. Thankfully the great
majority of gold miners have reported by 8 or 9 weeks, so we don’t
have to wait until early Q2 to analyze Q4 results. The elite gold
miners’ Q4’16 was very interesting.
The
definitive list of major gold-mining stocks to analyze comes from
the world’s most-popular gold-stock investment vehicle, the GDX
VanEck Vectors Gold Miners ETF. Its composition and performance are
similar to the
benchmark HUI gold-stock index. GDX utterly dominates this
sector, with no meaningful competition. This week GDX’s net assets
are 53.6x larger than the next-biggest 1x-long
major-gold-miners ETF!
Being included in GDX is the gold standard for gold miners,
as it requires deep analysis and vetting by elite analysts. And due
to ETF investing eclipsing individual-stock investing, major-ETF
inclusion is one of the most-important considerations for
picking great
gold stocks. As the vast pools of fund capital flow into
leading ETFs, these ETFs in turn buy shares in their underlying
companies bidding their prices higher.
This
week GDX included a whopping 51 component “gold miners”! That term
is used somewhat loosely, as this ETF also includes major silver
miners, silver streamers, and gold royalty companies. Still, all
the world’s great gold miners are GDX components. For weeks I’ve
been digging into the 10-Ks of the top 34 GDX component companies,
an arbitrary number chosen because it fits neatly into the tables
below.
Collectively these top 34 stocks account for 90.8% of GDX’s total
weighting, a commanding sample by any standard. While the large
majority of these Q4’16 results have been released, a few are still
coming later in March. I didn’t want to delay this important
analysis for them alone. GDX also contains foreign miners from
Australia, South Africa, and the UK, which report in half-year
increments instead of quarterly.
I
waded through all available Q4’16 results released as of this
Wednesday and fed a bunch of data into a spreadsheet, some of which
made it into these tables. If a field is blank, that means a
company didn’t report that data for Q4. If a company’s entire line
is blank, that gold miner hasn’t released Q4 results yet. But with
31 of these top 34 GDX components already releasing at least some Q4
data, there’s plenty to analyze.
The
gold miners’ Q4’16 results collectively offer an amazing
fundamental snapshot of this now-battered contrarian sector.
They clearly reveal whether there is any fundamental justification
at all for the recent sharp selloff. In less than 3 weeks since
mid-February, that HUI gold-stock index has plunged 16.6% on a mere
2.5% gold drop! That’s wildly excessive and purely sentimental, as
the hard fundamental data proves.
In
these tables the first couple columns show each GDX component’s
symbol and weighting within this ETF as of this Wednesday. While
most of these gold stocks trade in the States, not all of them do.
So if you can’t find a symbol here, it’s a listing from a company’s
primary foreign stock exchange. Next comes each company’s Q4’16
gold production in ounces, which is mostly reported by them in
pure-gold terms.
Most
gold miners also produce byproduct metals like silver and copper.
These are valuable, as they are sold to offset some of the
considerable costs of gold mining. Some companies report their
quarterly gold production including silver, a construct called
gold-equivalent ounces. I included that instead if no pure-gold
numbers were reported. Financial and operational reporting
varies widely from company to company.
That’s followed by the quarter-on-quarter change, the
absolute percentage difference between Q3’16 and Q4’16. This offers
a more-granular read on companies’ performance trends than
year-over-year comparisons. QoQ changes are also listed for the
rest of the data, which includes cash costs per ounce of gold mined,
all-in sustaining costs per ounce, operating cash flows generated,
and actual accounting profits.
After spending lots of time digesting these elite gold miners’
latest quarterly reports, it is fully apparent that gold stocks’
recent sharp selloff wasn’t fundamentally righteous at all.
Gold-stock traders got scared because gold was sliding on an
extraordinary surge in futures-implied Fed-rate-hike odds, not
because of bad data from these miners. That means this anomalous
recent selloff will soon reverse with sentiment.
In
most businesses, the hardest thing is actually selling the products
produced. But gold miners don’t share that problem, as they can
easily sell every single ounce they’re able to wrest from the bowels
of the Earth. Despite the stragglers that haven’t reported Q4’16
results yet, the elite gold miners of GDX had an amazing quarter
production-wise. Their collective gold mined totaled a massive
10,317k ounces.
That
equals 320.9 metric tons of gold. To put this into perspective, the
World Gold Council which is the definitive arbiter of global gold
supply-and-demand data reported total Q4’16 mine supply of 810.9t.
Thus this handful of top GDX companies is responsible for almost
40% of worldwide gold production! Much gold is produced as a
byproduct at companies not specializing in this metal, making
primary miners valuable.
Incredibly these top GDX components’ gold production skyrocketed
4.2% quarter-on-quarter compared to Q3’16! And that’s not including
the miners that haven’t released Q4 results yet. So despite all the
extreme gold carnage last quarter, these elite gold miners still had
the capital to really boost production. 23 of these top 34 GDX
companies had an average QoQ production jump of 14.9%, which is
immensely strong.
Remember gold suffered one of its worst quarters ever in Q4’16,
plunging 12.7% on extreme
GLD
gold-ETF-share selling by stock investors thanks to that
post-election Trumphoria stock-market surge. The gold miners didn’t
produce more because of gold’s fall, those mine expansions were
long-planned. It takes many years and big capital investments to
grow production, gold supply can’t be turned on like a spigot.
This
coincidental much-higher quarterly gold production helped offset a
considerable fraction of the operating impact from much-lower gold
prices. After a strong Q3’16 where gold averaged $1334, it fell
8.8% to average $1218 in Q4. Incidentally so far in Q1’17, gold is
averaging a nearly-identical $1215 as of the middle of this
week. So last quarter’s strong gold-mining economics should apply
equally well to this quarter!
Gold
deposits certainly aren’t homogenous, with different areas in the
same ore bodies having major variations in gold mineralization. The
rates at which mines can process ore are fixed, so lower-grade or
higher-grade ore directly affects quarterly production. With new
mines ramping up to speed at some of these major GDX companies, odds
are their increased gold production will mostly prove durable going
forward.
The
main reason why gold-mining profits are so highly leveraged to gold
prices is mining costs are essentially fixed during
mine-planning stages. No matter where prevailing gold prices are,
running the actual mining operations requires largely-constant
costs. Miners generally employ the same number of people, operate
the same number of haul trucks and excavators, and run the same
mills quarter after quarter.
So
gold-mining profits, and thus potential stock prices, are determined
almost solely by the difference between mining costs and current
gold levels. Whenever gold stocks see a sharp selloff like in
recent weeks, the resulting bearish sentiment implies this sector
suffered a big fundamental impairment. But the excellent collective
Q4’16 cost data of these elite GDX gold miners decisively proves
this isn’t the case.
There are two major ways to measure gold-mining costs, classic cash
costs per ounce and the superior all-in sustaining costs per ounce.
Both are useful measures. Cash costs are the acid test of
gold-miner survivability in lower-gold-price environments, showing
the worst-case gold levels necessary to keep the mines running.
All-in sustaining costs reveal where gold needs to trade to maintain
current operations indefinitely.
Cash
costs naturally encompass all cash expenses necessary to
produce each ounce of gold, including all direct production costs,
mine-level administration, smelting, refining, transport,
regulatory, royalty, and tax expenses. In Q4’16, these top
GDX-component gold miners that reported cash costs averaged just
$628 per ounce. That’s a substantial 3.1% improvement from Q3, and
just around half current gold levels.
15
of the 24 top GDX components reporting cash costs last quarter saw
big average declines of 10.5%. That makes sense given their
collective sharply-higher gold production. The more gold ounces to
spread the largely-fixed mining costs across, the lower the final
per-ounce number. The gold miners are in no real fundamental peril
as long as gold prices remain above cash costs. And $628 gold isn’t
in the cards!
Way
more important than cash costs are the far-superior all-in
sustaining costs. They were introduced by the World Gold Council in
June 2013 to give investors a much-better understanding of what it
really costs to maintain a gold mine as an ongoing concern. AISC
include all direct cash costs, but then add on everything else that
is necessary to maintain and replenish operations at current
gold-production levels.
These additional expenses include exploration for new gold to mine
to replace depleting deposits, mine-development and construction
expenses, remediation, and mine reclamation. They also include the
corporate-level administration expenses necessary to oversee gold
mines. All-in sustaining costs are the most-important gold-mining
cost metric by far for investors, revealing miners’ true
operating profitability.
In
Q4’16, these top 34 GDX components reporting AISC averaged a level
of just $875 per ounce! So as long as gold stays above that
price, these gold miners can keep operating at current production
levels indefinitely. While this was up 2.4% from Q3’s $855, that
quarterly increase was largely due to a single outlier. Hecla
Mining finally started reporting gold AISC last quarter after
bucking that trend for years.
Hecla’s $1247 AISC was the highest by far among these
top-GDX-component gold miners. Without this one smaller gold
miner’s maiden AISC report, the average retreats to $860 which is
largely unchanged from Q3’s levels. I was kind of surprised to
see AISC not fall given the higher production to spread these costs
across. But that was offset by higher costs for new mine and
expansion builds at some of these companies.
Given the GDX major gold miners’ $875 average all-in sustaining
costs and Q4’s $1218 average gold price, gold mining was very
profitable. Despite gold’s sharp plunge, that still yielded
excellent average operating profits of $342 per ounce. That
equates to a 28% profit margin, fat levels that most industries
would kill for. Yet the flighty gold-stock traders often convince
themselves gold miners are in mortal peril.
While they never are, the gold miners’ profits do suffer serious
downside leverage to falling gold prices. This is the mirror image
of their huge upside leverage to rising gold prices, illustrating
the double-edged-sword nature of this core fundamental
relationship. In Q3’16 gold averaged $1334 while GDX miners’ AISC
averaged $855. That made for hefty gold-mining profits of $479 per
ounce among these elite companies!
While the average gold price only fell 8.8% in Q4, the major gold
miners’ per-ounce earnings plunged by 28.6%. So there was
fundamental justification for the HUI’s steep 21.1% Q4 slide, given
gold suffering one of its worst quarters ever. But sentiment in
late Q4, like now, was far too bearish given the still-good
operating profits from gold mining. Traders often wrongly
extrapolate gold falling indefinitely, which can’t happen.
Assuming Q4’16’s gold-mining costs carry into Q1’17, the gold-mining
industry is still thriving right now despite these
sentiment-depressed gold-stock levels! Q1’s average quarter-to-date
gold price of $1215 is nearly identical to Q4’s, naturally yielding
nearly-identical mining profits of $340 per ounce. So the
gold-stock traders should be salivating at the great buying
opportunity just presented by a psychology-fueled anomaly.
And
after suffering miserably in gold’s dark bear years of 2013 to 2015,
these elite GDX gold miners are hellbent on keeping costs in check.
22 of these top 34 GDX gold miners have given all-in-sustaining-cost
guidance for full-year 2017. And that averaged $927 per
ounce, which is only about 5.9% higher than Q4’s levels. As long as
gold rallies more than that this year, gold-mining profitability
will improve.
After studying gold miners’ quarterly results and press releases for
many years, I’ve found they tend to intentionally lowball their
outlooks. They conservatively forecast lower annual gold
production along with higher annual costs than they actually
achieve. That is prudent expectation management, setting them up to
exceed expectations later in years which drives their stock prices
higher. That makes everyone happy.
So
I’d be really surprised if AISC in 2017 rise materially from last
year’s levels between $850 and $875. And as gold inevitably
recovers majorly on the
big
mean-reversion buying coming from stock investors and
futures
speculators, gold-mining profits will explode higher. That will
entice capital back into these beaten-down gold stocks, catapulting
them sharply higher from here. We’re on the verge of a major new
upleg.
Q4’s
lower gold prices naturally hit operating cash flows, which totaled
just $3199m across the 22 top GDX companies reporting them so far.
That’s down 35.6% from Q3’s levels. But this decline is overstated
due to the year-end financial reporting. In my
Q3’16 analysis
of the major gold miners’ operating results, fully 30 of these 34
companies reported cash flows generated from operations. So the Q4
sample size is too small.
That
gap will close by the end of March when the stragglers report, but
one way to compare things now is with reporting companies’ average
OCF. That ran $145m in Q4, down just 12.1% from Q3’s $165m. That
makes more sense given the increased production among these elite
GDX gold miners last quarter, which helped to offset some of gold’s
weakness. The gold miners’ OCF generation in Q4’16 was still quite
strong.
But
largely because of non-cash writedowns due to lower gold prices, the
gold miners’ accounting profits didn’t fare well in Q4. Among the
20 top GDX components reporting so far, they actually totaled a loss
of $592m! That compares to Q3’16’s radically-larger $707m in
profits. But again those came from 27 GDX components that quarter,
as the quarterly reports come out much sooner than year-ending
annual reports.
Gold
mining has always been highly profitable in quarters with higher
prevailing gold prices, and far less profitable in other quarters
where gold is lower. Given their highly-leveraged relationship with
gold, this sector’s earnings can be very volatile
quarter-to-quarter. But smoothed over the past year, the gold
miners’ profitability rocketed higher in 2016. That’s why
the HUI soared 64.0% higher last year despite Q4’s plunge!
And
there’s no reason the gold miners aren’t going to enjoy another big
up year in 2017. Their latest operating results proved quite
strong considering the extreme gold selling in the wake of that
election surprise. Gold itself still needs to mean revert
dramatically higher as investors and speculators alike start to
migrate back in to re-establish prudent portfolio-diversifying
positions. That will lead to soaring gold-mining profits.
While investors
and speculators alike can certainly play gold stocks’ coming rebound
rally with the major ETFs like GDX, the best gains by far will be
won in individual gold stocks with superior fundamentals. Their
upside will trounce the ETFs’, which are burdened by
over-diversification and underperforming gold stocks. A
carefully-handpicked portfolio of elite gold and silver miners will
generate much-greater wealth creation.
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The key to this
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The bottom line is
the major gold miners’ fundamentals in just-reported Q4’16 remained
quite strong and bullish despite gold’s sharp post-election plunge.
While operating cash flows and profits suffered as expected, this
industry’s critical all-in sustaining costs remained far below
prevailing gold prices. That means the gold miners continue to
generate big operating cash flows to expand operations and pay down
debt.
And once gold
itself inevitably mean reverts higher, gold-mining profits are going
to soar again like they did last year. Investors and speculators
alike are radically underdeployed in gold thanks to their huge Q4
selling. So gold investment demand will surge as these extreme
Trumphoria-distorted stock markets roll over. That will fuel big
fundamentally-justified gold-stock buying, catapulting this sector
far higher. | 
