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The smaller gold
miners and explorers have suffered catastrophic stock-price losses
in recent years. These extreme declines have led investors and
speculators to assume that much of this sector won?t survive lower
prevailing gold prices. But nothing could be farther from the
truth. The hated and left-for-dead junior-gold sector is not only
very strong financially today, but could still thrive at much lower
gold prices.
With many hundreds
of junior gold stocks trading around the world, this sector isn?t
easy to measure. They range from smaller producers with fantastic
operating mines, to explorers doggedly advancing their projects in
these dark times, to countless garbage shell companies that will
never do anything beyond fleecing the unwary. The proliferation of
junior golds is incredible, making it difficult to wade through the
morass.
For many years
contrarian analysts including me struggled with attempts to track
the performance of junior golds as a sector. Many proprietary
indexes were constructed, but they never caught on. Finally in
November 2009, a major ETF player solved this problem. That?s when
Van Eck Global launched the Junior Gold Miners ETF, which trades as
GDXJ. It has become the metric of choice for measuring this sector.
And per GDXJ, the
carnage in junior golds has been astounding. It peaked back in
April 2011 way up near $152 on a split-adjusted basis. But soon
gold crested so traders started fleeing its miners and explorers.
GDXJ?s bottom fell out. Things got so bad that GDXJ?s custodians
felt compelled to execute a 1-for-4 reverse split in July
2013. But with gold remaining weak since, the heavy junior-gold
selling continued.
By earlier this
month after that
extreme gold shorting attack spawned a
gold-stock panic,
GDXJ plunged to an all-time split-adjusted low around $18. Its
total loss over 4.3 years was a devastating 87.8%! There is little
doubt junior golds were the worst-performing sector in all the stock
markets, a terrible distinction. Such mind-boggling wealth
destruction led most investors and speculators to exit this cursed
sector forever.
Like everyone who
sells low after a long price decline, these traders attempted to
rationalize their fleeing decision as prudent and wise. There was a
growing consensus that most of the smaller gold miners and explorers
were doomed. Gold prices were too low to fuel profitable
operations for the miners, and the explorers didn?t have a prayer of
raising essential capital in these equity markets. The juniors had
no hope.
But as always when
literally everyone is convinced any sector will move in one
direction forever, this sentiment was dead wrong. While it?s been
an exceedingly-challenging couple of years for the junior gold
companies, they?ve ridden out this hellstorm surprisingly well. You
certainly wouldn?t know it from their epically-low stock prices, but
their operational performance and financials today
are actually quite strong!
This heretical
idea is so counter to popular opinion that few are even willing to
consider it. Anyone that is foolish enough to even assert that
junior golds have strong financials today will be laughed off of the
podium. But that?s exactly what the cold, hard data from the junior
golds? brand-new Q2 financial results proves. And the
definitive list of elite junior gold stocks is found in the holdings
of that GDXJ junior-gold ETF.
This week GDXJ?s
custodians held 61 ?gold stocks? in this ETF?s portfolio. The
quotation marks are because this ?Junior Gold Miners ETF? oddly
includes silver miners as well. It also has
exploration-stage companies, royalty companies, and streaming
companies, all of which aren?t technically gold miners. But
these other types of ventures are certainly within the wheelhouses
of junior-gold investors and speculators.
Reading through
quarterly reports is tedious and time-consuming, and I didn?t have
enough time or patience this week to read through all 61 of GDXJ?s
component companies? results. So I chose the 34 largest GDXJ
components, the stocks with the top weightings, to analyze their Q2
results. Why 34? That?s how many fit in these tables below.
Together they account for over 5/6ths of the entire weight of
GDXJ.
This deep-research
project actually started last week, when I did the same for the
major gold miners of the GDX Gold Miners ETF. Also strangely, some
of GDX?s components are also included in GDXJ. If I was
constructing these underlying indexes, I certainly wouldn?t allow
overlap. My thesis last week was that the popular notion that the
gold-mining industry?s costs today are around $1200 per ounce
is totally false.
The bears spent
last month using this fallacy to argue that selling gold stocks at
extreme lows was totally rational, since these companies couldn?t
survive for long under $1200. But the actual Q2 results from the
top 34 GDX components proved that this industry?s average all-in
sustaining costs were just $895 per ounce. As long as gold
is above those far-lower levels, their operations continue to remain
profitable.
Equally important,
the major gold miners of GDX had an average cash cost in Q2 of just
$635 per ounce! That means they could survive for a long time even
if gold was to miraculously plunge far under $800 as some of the
legions of bears still forecast. After that popular essay showing
today?s gold prices and far lower are no threat to gold miners, I
got a deluge of e-mails wondering about the juniors? precarious
position.
Theoretically the
larger gold miners should be much stronger than the smaller ones.
The big guys have multiple mines, with many having multiple
orebodies with different cost structures from which to mine gold.
Their diversified mine portfolios give them far more flexibility in
weathering extreme gold-price anomalies than single-mine operations,
which describes most junior miners. They should?ve looked worse.
So I was shocked
this week to find that the junior gold miners were actually looking
stronger than the majors in some ways! Their collective costs of
mining gold are slightly lower than the majors?, in both cash
and all-in-sustaining terms. Of the top 34 companies in GDXJ, the
gold miners had average cash and all-in sustaining costs of $613 and
$858 in the second quarter of 2015! They are actually thriving
today.
These tables
summarize the results from those 34 top-GDXJ-component quarterly
reports. Not all data was provided by every company, as they trade
around the world on different exchanges with different
financial-reporting standards. Whenever I couldn?t find information
for a company, I left that field blank. The explorers are evident
as the companies with zero production in Q2, shown in the final
column on the right.
Each company?s
cash cost per ounce, all-in sustaining cost per ounce, and AISC
guidance for all of 2015 is noted. I also looked at balance-sheet
strength in terms of cash on hand, cash?s percentage of the current
market capitalization, cash provided by operations, and debt
service. While the latter couldn?t fit on these tables, none of
these companies had any problems easily making debt payments
with operating cash flows.
The top
junior-gold companies? Q2 results revealed a vastly-healthier
industry than anyone believes with their stocks in the dumps.
Every company with the exception of Harmony Gold, a high-cost South
African deep miner, has cash and all-in sustaining costs well below
current gold prices. Again the averages were $613 and $858 in Q2,
slightly better than the GDX elites with their $635 and $895
averages.
This means the top
junior gold miners could survive indefinitely at $900 gold,
and even weather an anomaly under $650 for many quarters. The
latter cash-cost number includes all the costs of mining gold except
corporate-level administrative expenses. It is the acid test for
survival, and $650 gold is apocalyptic. All-in sustaining costs
include everything necessary to maintain current production levels,
including exploration.
As long as all-in
sustaining costs remain below gold prices, gold miners can endure
forever with little problem. So obviously the prevailing $1100
levels seen recently pose zero threat to these junior gold
miners. Thus the relentless selling of the past couple years, and
last month?s full-on panic exodus, was totally irrational.
The investors and speculators who succumbed to fear to sell low are
fools, as they will soon learn.
Last week when I
dug into the Q2
cost structures of the major gold miners of GDX, their
price-to-earnings ratios largely didn?t reflect their operating
profitability. This is because accounting rules forced most to mark
down their mines and projects due to the low prevailing gold
prices. These non-recurring and non-cash charges usually
dwarfed normal profitability, leading many of the majors to report
trailing-twelve-month losses.
But as soon as
these extreme write-offs roll off the books once they are over four
quarters in the past, the major gold miners? accounting earnings
will suddenly explode. These companies will look dirt-cheap on a
traditional fundamental basis, with trailing P/Es in the single
digits in many cases! Provocatively, the accounting-earnings
situation in the elite junior golds is already much better than that
in the majors.
6 of GDXJ?s top 34
components already have P/E ratios today under 14x earnings,
compared to just 5 in GDX. But of those 5 in GDX, 4 are also
included in GDXJ and their gold production levels definitely
classify them as junior miners. So as a whole, the smaller gold
miners are outperforming the major ones in P/E-ratio terms before
those one-off write-downs fade into history leading to accounting
earnings exploding higher.
The junior gold
miners? low operating costs today are confirmed by their large
operating cash flows. As these tables reveal, in Q2 2015 when gold
averaged just $1193 most of these small miners earned tens of
millions of dollars on their operations. Several earned more
than $100m! These are big numbers relative to their small market
capitalizations. As long as any business is cash-flow-positive, it
can never fail.
By definition, the
junior explorers have no mines so they can?t generate cash
from operations. They instead burn cash every quarter as they work
to advance their projects, and this usually comes from stock
offerings. All the elite junior explorers in GDXJ?s top holdings
had really modest cash burn rates in Q2 compared to their cash
balances. They could continue their work for years even without
issuing more stock.
And the cash in
the bank these elite juniors held was super-impressive on multiple
fronts. Almost all of them are cash-rich, holding large cash
balances relative to their stocks? market capitalizations. The
?%MC? column above shows each junior?s cash as a percentage of its
market cap. On average these junior precious-metals companies hold
cash equal to a quarter of their value. They are very
well-financed today.
Just like for
individuals, cash balances for businesses provide rainy-day funds.
They guarantee that operations can continue regardless of prevailing
gold prices or anomalous lows. And when you combine large cash
balances with high ongoing operating cash flows from mining gold at
costs far below current prices, many of the junior golds look
bulletproof. They are strong enough to survive a gold
apocalypse.
And the odds of
that are virtually zero despite the groupthink bearish sentiment
dominating traders? gold-stock outlook today. Just a few weeks ago,
gold was plunging so analysts came out of the woodwork to forecast
major new gold lows imminently. Even so-called gold bulls
threw up their hands in capitulation, calling for deep sub-$1000
lows before anything good could happen. But their herd mentality
was dead wrong.
As I wrote the
very week gold fell to $1084, gold?s recent lows were totally
artificial and unsustainable. They were driven by
epic record
shorting by American gold-futures speculators. And lows caused
by extreme futures shorting are never righteous or sustainable
because all those futures borrowed to be sold short must soon be
bought back to be repaid. Excessive gold-futures shorts are
guaranteed near-future buying.
And of course this
hardcore contrarian thesis that was universally ridiculed just a few
weeks ago is now coming to pass. This week gold has climbed
dramatically on short covering, and that is just the tip of the
iceberg relative to the extreme levels of speculator shorts. Recent
history has proven it takes
several months
to unwind excessive short positions, and the resulting gold-futures
buying catapults this metal higher.
Gold?s nascent
recovery and overdue mean reversion higher is super-bullish
for the junior-gold realm! A few weeks ago, the battered
junior-gold stocks were priced as if gold was going to imminently
plunge under $700. Investors and speculators alike were doubting
this sector?s ability to continue operating as a going concern. Yet
gold not only bottomed near $1084, but it has powered well into the
mid-$1100s since.
With gold-mining
costs being essentially fixed, higher gold prices translate directly
into higher profits for mining it. So the profitability of the
entire junior-gold sector is going to soar as gold recovers.
And gold-mining profits leverage this relationship, it certainly
isn?t linear. At average all-in sustaining costs of $858 per ounce,
the junior golds were earning operating profits of $226 per ounce at
those $1084 gold lows.
But a mere 6.1%
gold rally to $1150 boosts the elite junior golds? operating profits
to $292, a huge 29% jump! And the average
gold-futures-short-covering-driven gold rally in recent years was
16.2% in 10 weeks. Such a merely-average short-covering rally today
would blast gold back up to $1260 within a couple months on the
outside. That would lead to junior-gold profits of $401 per ounce,
a staggering 78% increase!
This incredible
profits leverage to gold is what makes all gold miners? stocks,
both majors and juniors, so incredibly bullish today. The gold
stocks were recently beaten down to
fundamentally-absurd levels not because their operating profits
collapsed, but because traders were scared. As that excessive fear
soon passes as always, aided by gold?s recovery, they are going to
rush back into this radically-undervalued sector.
This has already
started in the best of the junior golds, with many of their stocks
surging 5% to 10% a day this week! And since higher gold
prices will lead to exploding operating profits, operating cash
flows, and accounting profits, the gold-stock mean-reversion rally
has just begun. Higher profits relative to such low stock prices
will lead to collapsing trailing-twelve-month P/E ratios, attracting
value-investing funds.
Despite the
incredible carnage it has suffered in recent years, the
junior-gold-mining industry remains strong and healthy on a
fundamental basis. Its operating costs are very low, leading to
robust operating cash flows. And these are rapidly growing
already-massive-relative-to-market-caps cash hoards, which is
further fortifying the balance sheets of the elite juniors.
Investors and speculators will soon realize this.
They can certainly
play this emerging major junior-gold upleg in GDXJ. It is a fine
ETF, and a great way to track this sector?s fortunes. But like any
large overly-diversified portfolio of 60+ holdings, GDXJ?s
performance will greatly lag the best of its junior-gold
components. Vastly-superior returns will be won by those investors
and speculators prudently handpicking the fundamental best of the
elite junior golds.
We?ve long done
that at Zeal. Since late July when everyone else was panicking and
explaining how wise it is to sell into extreme lows, we?ve been
aggressively buying. We?ve added 20 amazing new gold-stock and
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newsletters since then, and their gains are already approaching +50%
at best! Fighting the herd to buy extreme fear always leads to huge
profits.
And with the gold
miners? financials and fundamentals so strong today, and vast
amounts of gold-futures short covering remaining, odds are the gold
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The bottom line is
the elite companies in the junior-gold-mining industry remain very
strong fundamentally despite all the naysaying. Their collective
costs for mining gold remain radically below prevailing gold levels,
even at the recent anomalous lows. This is fueling strong
operating-cash-flow generation that is overflowing coffers with
large hoards of cash. Fear, not fundamentals, drove their recent
extreme stock lows.
Investors and
speculators are already starting to realize their great folly in
getting caught up in popular fear to sell into a gold-stock panic.
The junior-gold stock prices were battered so low that they are
going to soar by multiples as capital returns and gold recovers.
There is no other sector in all the world?s stock markets with
anywhere near the incredible appreciation potential of the
left-for-dead junior gold miners.
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