The
junior gold stocks corrected hard in recent weeks, setting them up
to blast higher on Wednesday’s less-hawkish-than-expected Fed. That
started to dispel some of the serious bearish sentiment that has
been mounting in this sector. The junior gold miners’ fundamentals
justify much-higher stock prices, as evidenced in their
recently-reported fourth-quarter operating and financial results.
They remain 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 banish all the
sentimental distortions surrounding prevailing stock-price levels,
revealing the underlying hard fundamental realities. This
greatly helps in re-anchoring 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. These offer a true and clear
snapshot of what’s really going on, overcoming 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’s 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 junior gold
miners’ Q4’16 was quite strong!
The
definitive list of elite junior gold stocks to analyze comes from
the world’s most-popular junior-gold-stock investment vehicle, the
GDXJ VanEck Vectors Junior Gold Miners ETF. Born in November 2009,
GDXJ is the second-largest gold-stock ETF after its big brother GDX
which tracks the larger major gold miners. This week GDXJ’s net
assets ran about 46% of GDX’s, testifying to the gold juniors’
relative popularity.
Being included in GDXJ is the gold standard for gold juniors,
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 GDXJ included a whopping 53 “junior gold miners”! That term is
used rather loosely, as this ETF also includes advanced-stage
explorers not yet mining gold, primary silver miners, and
gold-royalty and mine-finance companies. GDXJ’s component stocks
trade primarily in the US, Canada, Australia, and the UK. But this
junior gold miners’ ETF includes one major component that undermines
its credibility.
Rather dumbfoundingly, GDXJ’s third-largest component this week is
actually that GDX major-gold-miners ETF! This decision makes no
sense at all. Investors don’t buy GDXJ because they want major
exposure, they would buy GDX for that. They are fully expecting to
own junior gold miners like GDXJ is advertising. It’s
unacceptable for GDXJ’s managers to include GDX as a top component
regardless of the reason.
This
issue first arose
a quarter ago in Q3’16, when I assumed GDX was a temporary
placeholder. Even that wasn’t justified though. If GDXJ’s managers
had to remove a top component, they could’ve simply shifted up all
the component weightings underneath it. But now after well over an
entire quarter of GDX tainting GDXJ’s mission, its ongoing
inclusion is troubling. GDX’s own components are far from gold
juniors.
There’s no universal definition of gold-production levels that would
qualify individual miners as juniors, mid-tiers, or majors. But
after decades of analyzing this sector, I think a
300k-ounce-per-year maximum cutoff for junior-dom is a
generous limit. That translates into 75k ounces per quarter. Out
of 31 of the top 34 GDX components reporting gold production in
Q4’16, only 3 had less than 75k. Two were major silver miners.
So
GDX should’ve never been included as a GDXJ component, it is
misleading and makes GDXJ’s very name false advertising. Many of
GDXJ’s normal components are bigger than junior-tier too. Out of 27
of GDXJ’s top 34 components that have reported Q4 gold production as
of this week, fully 12 produced over 75k ounces last quarter! There
is also significant overlap in holdings terms between GDXJ and GDX.
Last
week I dug into the
Q4’16 results
of the top 34 GDX components, the elite major gold miners. GDX and
GDXJ together have 104 component companies across the past couple
weeks. Fully 20 of these gold miners are included in both GDX and
GDXJ! With the same fund company running both these leading
ETFs, great value would be added for investors by making GDX and
GDXJ inclusion mutually-exclusive.
Anyway, I’ve been wading through the Q4’16 results of the top 34
GDXJ components in recent weeks. That arbitrary number was chosen
because it fits neatly into the tables below. These elite junior
gold miners account for 84.9% of this ETF’s total weighting, which
is certainly a commanding sample. Not all of these companies have
reported yet due to the delayed fiscal-year-end reporting window,
but most have.
I
fed all available data as of this Wednesday into a spreadsheet, some
of which made it into these tables. Unfortunately some companies
don’t sufficiently break out Q4, rolling it into full-year annual
results. It’s not surprising this is more common after weak fourth
quarters, like Q4’16. GDXJ plunged 28.8% then, driven by the
Trumphoria stock-market surge
blasting gold
to one of its worst quarters ever at a 12.7% loss.
So
when GDXJ components only reported full-year results to mask Q4
weakness, some fields had to be left blank. Other companies hadn’t
reported Q4 yet, while the foreign ones trading in Australia, the
UK, and South Africa only report in half-year increments.
Since Q3’16 and Q4’16 were such wildly-different quarters for gold
miners, half-year results can’t simply be divided by two. Clean Q4
data can’t be inferred.
In
these tables the first couple columns show each GDXJ component’s
symbol and weighting within this ETF as of 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. Operational and financial 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 juniors’
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 news from these miners. That means the recent
anomalous pre-Fed selloff needs to fully mean revert.
Despite GDXJ managers’ fast-and-loose definition of junior gold
miners, GDXJ’s components definitely collectively operated on a
much-smaller scale than GDX’s. The top 34 GDXJ miners that have
reported so far produced 2190k ounces of gold last quarter. That is
just over a fifth of the 10,317k ounces mined in Q4 by the
top 34 GDX components. So GDXJ remains quite different from GDX
despite the component overlap.
According to the World Gold Council which is the definitive arbiter
of global gold supply-and-demand data, the total world mine supply
in Q4’16 was 810.9 metric tons. GDXJ’s top 34 components produced
just 68.1t, or about 1/12th of the total. That compares to almost
4/10ths for GDX. On average the GDXJ junior gold miners are much
smaller than the GDX majors, but GDXJ’s component list could still
improve.
The
collective top-GDXJ-component gold production in Q4 was amazingly
strong. Because this leading junior-gold-stock ETF had plunged
22.0% between early February and early March, traders assumed this
stricken sector must have some serious fundamental problems. Never
mind that GDXJ had rocketed 50.1% higher between late December and
early February, already regaining over 5/6ths of Q4’s losses!
The
gold juniors have always been exceptionally volatile, which is a key
reason they are so attractive to contrarian investors. These elite
GDXJ components’ Q4’16 results prove that they were suffering no
fundamental impairment operationally. Their 2190k ounces of gold
produced last quarter soared by an incredible absolute 10.9%
quarter-on-quarter from
Q3’16’s results!
The junior gold miners continue to thrive.
Much
of GDXJ’s quarterly production jump was due to mine expansions and
new mines ramping up at a fair number of these companies. Whenever
you see double-digit quarterly increases in production at a miner,
odds are major new operations are being brought online. The junior
gold miners couldn’t grow at such a scale if they were in any
fundamental peril, like severely-constrained cash flows stressing
them.
The
most-important ongoing measure of gold miners’ fundamental health is
their per-ounce costs. As long as they can produce gold for
well under prevailing prices, they will generate strong operating
cash flows and ultimately profits. Gold averaged $1218 per ounce in
Q4, which was down a sharp 8.8% from Q3’16’s $1334 average. But as
long as the junior gold miners’ costs are well under gold levels,
they fare fine.
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 GDXJ gold juniors 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
GDXJ-component gold miners that reported cash costs averaged just
$615 per ounce. That’s a major 6.3% sequential improvement from Q3,
and just around half current gold levels!
Rather impressively, the junior gold miners of GDXJ actually
reported lower cash costs last quarter than the major gold miners of
GDX at $628. Larger operational scale, running more mines, allows
for more sharing of company-wide costs which improves operational
efficiencies. Yet juniors’ excellent cost control enabled them to
best the majors in cash-cost terms last quarter despite running
fewer and smaller gold mines.
These elite juniors’ exceptional cash costs in Q4’16 were largely a
function of their rapidly-increasing production. As those big fixed
costs of gold mining are spread across more ounces, naturally the
per-ounce cost drops. And with cash costs so darned low even
compared to gold’s deep Q4 low of $1128 in mid-December right after
the previous Fed rate hike, the junior gold miners were in no
fundamental danger at all.
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.
The
top GDXJ components’ much-higher production last quarter also led to
outstanding all-in sustaining costs. They averaged just $855 per
ounce among the gold miners reporting as of the middle of this
week! That is a major 6.2% absolute QoQ decline from Q3’s $911,
which is amazing. The juniors’ AISC were well under the GDX majors’
as well, which reported average AISC in Q4 of $875 as
discussed last
week.
With
gold again averaging $1218 last quarter, and the elite juniors able
to mine it indefinitely at $855 per ounce, they were still
generating a hefty $363 per ounce in operating profits in
Q4’16! That’s still a margin of nearly 30%, levels most industries
would kill for. These Q4 profits were only down 14.2% from Q3’s
$423 per ounce, which was driven by GDXJ’s top components’ AISC and
gold averaging $911 and $1334.
This
reveals how fundamentally-absurd it was for the junior gold stocks
as represented by their leading benchmark GDXJ to plummet 28.8% in
Q4! That was over twice the drop in operating profits,
exposing how irrational and excessively-bearish sentiment was a
bigger factor in the juniors’ steep selloff than deteriorating
fundamentals. This was true both last quarter and in recent weeks
before Wednesday’s Fed surge.
So
far in Q1’17, gold is averaging over $1214 which is stable from Q4’s
$1218. Assuming juniors’ all-in sustaining costs remain consistent
with last quarter’s, the economics of mining gold this quarter
are virtually identical. At the top GDXJ components’ latest
average $855 AISC, these elite juniors ought to be collectively
earning $359 per ounce this quarter. There was no fundamental
justification to dump them!
These GDXJ gold miners themselves have largely verified this with
their all-in-sustaining-cost outlooks for full-year 2017. Of these
34 top GDXJ components, 14 had given current-year cost guidance as
of the middle of this week. That averaged $902 per ounce in AISC
terms, which is likely overstated. The gold miners have big
incentives to overestimate costs early each year so they can
exceed expectations later on.
So
this year’s all-in sustaining costs among the top junior gold miners
are unlikely to rise from last year’s levels between $850 and $900.
Thus when gold inevitably mean reverts dramatically higher as
stock investors
and futures
speculators return, gold-mining profits will explode higher.
That will really entice capital back into these still-beaten-down
junior gold stocks, catapulting them much higher from here.
Given Q4’s sharply-lower gold prices on that
Trumphoria-stock-rally-fueled mass exodus, I expected to see lower
operating cash flows among these top GDXJ juniors. And indeed that
was the case, as they fell 18.7% QoQ to $747m among the ones
reporting. This drop was mitigated by Q4’s sharply-higher gold
production, as well as the constantly-shifting composition and
weightings of GDXJ’s component companies.
But
these latest operating cash flows are still understated
considerably due to the delays in Q4 reporting to compile
full-year results. When I did my
Q3’16 analysis
on GDXJ’s top components, 29 of the 34 had reported total operating
cash flows of $919m. In this latest Q4’16 iteration, only 18 of
these 34 have reported as of the middle of this week. So the final
fourth-quarter GDXJ OCF number is still heading higher.
The
same is true of the top GDXJ components’ accounting profits. They
actually totaled a $10m loss last quarter. This is partially due to
non-cash writedowns of asset values due to gold’s sharp, anomalous
Q4 plunge. But I could only find net profits for 17 of the top 34
GDXJ companies due to the Q4-reporting limitations, compared to 27
of 34 in Q3’16. So the junior gold miners’ collective profits are
likely understated too.
As I
had explained to our subscribers in recent weeks, the sharp drop in
gold-stock prices between early February and early March was not
fundamentally-righteous. Gold-stock traders spooked by gold’s
retreat on soaring Fed-rate-hike odds fueled way-disproportional
gold-stock selling. And as usual, the high-flying juniors bore the
brunt of this sector’s fear-fueled dumping. They plunged to
seriously-oversold levels.
Despite gold
thriving in Fed-rate-hike cycles historically, gold-futures
speculators have long irrationally feared them. So it wasn’t
surprising gold surged and the thrashed gold stocks soared following
the Fed’s latest rate hike this week. Gold stocks’ pre-Fed lows
also coincided with a major seasonal lull before their usual
big spring rally.
This battered sector is due for a strong new upleg
in the coming months!
This
week’s less-hawkish-than-expected-Fed surge was only the start. And
these recently-reported Q4 results from the elite junior gold miners
of GDXJ prove big gains are fundamentally justified. The
juniors are earning big operating profits even at today’s low
prevailing gold prices. And as gold itself continues to mean revert
higher out of Q4’s Trumphoria anomaly, the junior-gold-mining
profits will rocket again.
While investors
and speculators alike can certainly play gold juniors’ coming
rebound rally with this leading GDXJ ETF, 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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trade and when. As of the end of Q4, this has resulted in 906 stock
trades recommended in real-time to our newsletter subscribers since
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The key to this
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The bottom line is
the elite gold juniors’ 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. | 
