The
mid-tier and junior gold-miners’ stocks in their sector’s sweet spot
for upside potential have been clubbed like baby seals since
mid-April. Sucked into the parallel serious stock-market selloff,
that’s left these smaller gold stocks deeply out of favor. Yet
their fundamentals remain strong as revealed in the just-finished
Q1’22 earnings season. That recent brutal
mid-tier-and-junior-gold-stock plunge wasn’t righteous.
Gold-stock tiers are defined by their production rates. Small
juniors mine less than 300k ounces of gold annually, medium
mid-tiers have outputs running from 300k to 1,000k, large majors
yield over 1,000k, and huge super-majors operate at vast scales
exceeding 2,000k. The mid-tiers offer a unique mix of sizable
diversified production, good output-growth potential, and smaller
market capitalizations ideal for outsized gains.
Mid-tiers are much-less-risky than juniors, and amplify gold’s
uplegs much more than majors. These mid-tiers are nicely tracked by
the GDXJ VanEck Junior Gold Miners ETF. Birthed in November 2009,
it now commands $3.8b of net assets making it the second-largest
sector ETF after its big-brother GDX. While GDXJ is way-superior on
multiple fronts, despite its name it is overwhelmingly comprised of
mid-tier gold miners.
They
are universally-hated now, after GDXJ was eviscerated in a merciless
30.0% plunge in less than a month into mid-May! Speculators and
investors alike have forgotten that mid-tier gold stocks were having
a good 2022 before that, rallying 21.7% year-to-date by mid-April.
They were nowhere near overbought then, and shouldn’t have
cratered. But they were sucked into a wider market maelstrom of
serious selling.
During that same span the flagship US S&P 500 stock index dropped an
ugly 10.5%. The resulting big fear spike, confirmed by its VIX
gauge blasting 40.4% higher, infected everything else. The
safe-haven exodus from stocks into cash catapulted the US Dollar
Index a monster 4.5% higher! That unleashed big leveraged
gold-futures selling, hammering gold 7.6% lower which the gold
stocks amplified to serious losses.
But
that heavy sector selling had nothing to do with fundamentals, it
was collateral damage from soaring bearish psychology. Like
a match being struck, after flaring brightly extreme sentiment never
lasts long. The battered mid-tier and junior gold stocks are
destined to recover fast as gold resumes powering higher. Its own
fundamental outlook remains super-bullish on raging inflation
unleashed by extreme money printing.
Right after 24 quarterly earnings seasons in a row now, I’ve
painstakingly analyzed the latest operational and financial results
reported by the top-25 GDXJ gold miners. This week they
collectively accounted for 62.8% of this ETF’s weighting. With a
whopping 100 component stocks, GDXJ’s capital is spread across most
of the better mid-tier-and-junior-gold-mining universe! Its larger
holdings show how mid-tiers are faring.
This
table summarizes the operational and financial highlights from the
GDXJ top 25 in Q1’22. These gold miners’ stock symbols aren’t all
US listings, and are preceded by their rankings changes within GDXJ
over this past year. The shuffling in their ETF weightings reflects
shifting market caps, which reveal both outperformers and
underperformers since Q1’21. Those symbols are followed by their
current GDXJ weightings.
Next
comes these gold miners’ Q1’22 production in ounces, along with
their year-over-year changes from the comparable Q1’21. Output is
the lifeblood of this industry, with investors generally prizing
production growth above everything else. After are the costs of
wresting that gold from the bowels of the earth in per-ounce terms,
both cash costs and all-in sustaining costs. The latter help
illuminate miners’ profitability.
That’s followed by a bunch of hard accounting data reported to
securities regulators, quarterly revenues, earnings, operating cash
flows, and resulting cash treasuries. Blank data fields mean
companies hadn’t reported that particular data as of the middle of
this week. The annual changes aren’t included if they would be
misleading, like comparing negative numbers or data shifting from
positive to negative or vice versa.
The
elite mid-tier and junior gold miners filling GDXJ’s upper ranks
reported good results last quarter. Many suffered weaker
production, which was largely the result of the COVID-19-omicron
wave forcing lots of mine employees to stay home early-on. But
these smaller gold miners still managed to mostly hold the line on
costs, which combined with better gold prices fueled very-profitable
fundamentally-strong operations.
Like
most exchange-traded funds, GDXJ is essentially
market-capitalization-weighted. That’s the most-logical way to
construct ETFs, reflecting relative capital amounts traders have
deployed in component stocks. But shifting market caps continually
alter ETF-component weightings and rankings, and there was a lot of
churn in GDXJ’s top-25 holdings over this past year. Chief among
that was an excellent pruning.
For
years one of this “Junior Gold Miners” ETF’s top components had been
South-African super-major Gold Fields. Last quarter it produced an
enormous 580k ounces of gold! There was never justification to
include a gigantic gold miner like that in GDXJ, and I railed
against that for years in these quarterly-results analyses. GDXJ’s
managers eventually saw the light, booting GFI in Q2’21 leaving it
exclusively in GDX.
Many
countries including South Africa only require half-year reporting
from publicly-traded companies, so GFI doesn’t release quarterly
financial data. But its vast gold output rightfully being removed
from this ETF over this past year greatly distorts production
comparisons. The GDXJ top 25’s total gold output cratered 20.9%
year-over-year in Q1’22 to 2,749k ounces. But Gold Fields’ removal
drove most of that decline.
Subtracting GFI’s huge output from the comparable Q1’21, and
replacing it with GDXJ’s then-26th-biggest stock’s, moderates the
mid-tiers’ production decline to a far-milder 5.9% YoY.
That’s still considerable, and worse than the GDX majors’
performance last quarter. Adjusted for another South-African major
reporting late, the GDX-top-25 output retreated 3.7% YoY. Much of
that weakness came from COVID-19-omicron.
Reading through these gold miners’ latest quarterly reports filed
with securities regulators, early 2022’s latest COVID-19 wave really
stuck out. In order to keep their mines open during the height of
pandemic hysteria, the gold miners instituted extensive employee
testing. Those programs are still in place, and generated
widespread positive-test results on the fast-spreading but
much-less-dangerous omicron variant.
GDXJ’s second-largest component stock Pan American Silver led off
its entire Q1’22 results warning investors that “...our operations
experienced high levels of workforce absenteeism in January and
early February due to the Omicron variant of COVID-19. Workforce
deployment is now back to more normal levels, and we are maintaining
our guidance for 2022 with production weighted to the second half of
the year.”
Plenty of other GDXJ-top-25 companies had similar disclosures,
saying their Q1 outputs were adversely impacted by widespread
positive COVID-19 tests. But nearly all of the affected also
reaffirmed their full-year-2022 production guidances. With
operations back up to full-speed with omicron passed, most of the
smaller gold miners expect to make-up those early-year losses. So
last quarter’s output declines are temporary.
In
last week’s essay I analyzed the
GDX-top-25
majors’ Q1’22 results. Many larger gold miners suffered the
same COVID-19-omicron-driven workforce shortages, which similarly
slowed their own operations. All that is in the rearview-mirror
now, so this currently-underway Q2 ought to see a big jump in
aggregate gold production from Q1. That should drive a return to
year-over-year production growth among the mid-tiers.
Interestingly the ranks of true primary junior gold miners
producing under 75k ounces per quarter swelled in Q1’22. Fully six
of these GDXJ-top-25 stocks qualified, deriving over half their
quarterly revenues from gold sales! Their productions are
highlighted in blue above. That’s the highest concentration of
actual juniors included in GDXJ’s upper ranks in years, since it was
forced to shift from a junior ETF to a mid-tier one.
As
gold stocks soared in price and popularity in 2016’s first-half,
capital flooded into GDXJ to chase huge gains. GDXJ skyrocketed
202.5% higher on a 29.9% gold surge in just 6.7 months! GDXJ plowed
that deluge of dollars into its holdings, threatening to run afoul
of Canadian securities laws on some juniors. Once any investor
including ETFs accumulated 20%+ stakes there, they were legally
deemed takeover offers!
While GDXJ was a passive shareholder with no intention of managing
operations, it diversified away from juniors to comply with that
archaic rule. Ever since mid-tiers were added crowding out the
juniors’ overall weightings, GDXJ and GDX have had large overlap
in holdings. Fully 21 of these GDXJ-top-25 stocks are also in GDX,
accounting for 22.5% of its total weighting. And 11 of these stocks
are also GDX-top-25 ones.
GDXJ
starts with the GDX component list, slices away its dozen-biggest
holdings dominated by larger majors, then ups the rest to higher
weightings. The GDXJ-top-25 gold stocks were mostly clustered
between the 13th- to 34th-biggest rankings in GDX this week. GDXJ
is effectively a subset of GDX, but a superior one since it
excises the majors’ deadweight. Their outputs and market caps are
way too big to grow fast.
The
dozen biggest GDX holdings not included in GDXJ averaged massive
514k-ounce Q1’22 production and $22.7b market capitalizations last
week! Meanwhile the GDXJ top 25 averaged merely $2.5b market
caps and 115k ounces of quarterly gold output despite being
mostly a GDX subset. Coming from much-smaller bases leaves the
mid-tier and junior gold miners way-bigger potential gains than the
far-larger majors.
These sweet-spot-for-upside-potential mid-tiers and juniors usually
only operate a few mines at most, so occasional expansions and
relatively-affordable mid-sized mine-builds really boost their
outputs. That helps them overcome depletion to consistently
grow their production on balance. Meanwhile most of the majors have
struggled with shrinking production for years, unable to find enough
gold and buy enough mines.
Long-term gold-stock price levels ultimately depend on miners’
profitability, which is directly driven by the difference between
prevailing gold prices and gold-mining costs. In per-ounce terms
these are generally inversely proportional to gold
production. That’s because gold mines’ operating costs are largely
fixed during planning stages. Their designed throughputs limit the
amounts of gold-bearing ore they can process.
That
doesn’t change quarter-to-quarter, and requires about the same
levels of infrastructure, equipment, and employees. The only real
variable is the ore grades run through the fixed-capacity
mills. Richer ores yield more gold ounces to spread the big fixed
costs of mining across, lowering unit costs which boosts
profitability. With COVID-19 hitting Q1’22 output, the GDXJ top 25
should’ve reported higher unit costs.
Cash
costs are the classic measure of gold-mining costs, including all
cash expenses necessary to mine each ounce of gold. But they are
misleading as a true cost measure, excluding the big capital needed
to explore for gold deposits and build mines. So cash costs are
best viewed as survivability acid-test levels for the mid-tier gold
miners. They illuminate the minimum gold prices necessary to keep
the mines running.
These GDXJ-top-25 gold miners’ average cash costs surged 8.6% YoY to
$894 per ounce, the highest on record! That’s still way below
prevailing gold prices, and a reasonable jump given lower outputs
and the mounting impacts of inflation on mining costs. Along with
COVID-19 absenteeism, higher input prices was another common
theme in these latest quarterly reports. First Majestic Silver’s
had a good example.
AG
warned that “Not only was Mexico hit hard with the Omicron COVID-19
variant which significantly reduced personnel and production rates
across our operations, we experienced increasing inflationary cost
pressure across the operating portfolio for reagents and consumables
such as diesel, cyanide and grinding media.” Costs spiraling out of
control at one of its mines in particular really skewed GDXJ-top-25
results.
Long
a major silver miner, First Majestic has joined its peers in
increasingly diversifying into gold which has superior economics.
About a year ago, this company bought its first dedicated gold mine
in Nevada. Its costs have proven crazy-high since, including
the eye-popping $2,120-per-ounce cash costs it suffered last
quarter! Excluding that extreme outlier, the rest of the GDXJ top
25 averaged better $829 cash costs.
All-in sustaining costs are far superior than cash costs, and were
introduced by the World Gold Council in June 2013. They add on to
cash costs everything else that is necessary to maintain and
replenish gold-mining operations at current output tempos.
AISCs give a much-better understanding of what it really costs to
run gold mines as ongoing concerns, and reveal mid-tier gold miners’
true operating profitability.
Impressively despite weaker production, the GDXJ top 25’s average
AISCs only climbed 6.8% YoY to $1,211 per ounce. That’s also a new
record high, but not greatly above the prior-four-quarter average of
$1,141. Remember adjusted for that massive Gold Fields getting
kicked out of GDXJ, these elite mid-tiers’ Q1’22 production slumped
5.9% YoY. So only 6.8%-higher AISCs in raging inflation is
quite an achievement.
And
those were also skewed high by First Majestic’s troubled gold mine,
which reported insanely-lofty AISCs of $2,488 last quarter! Remove
that anomalous distortion, and the rest of the GDXJ-top-25 gold
miners averaged just $1,141 in Q1’22 which was right at that
preceding year’s average. The mid-tier and junior gold miners
are really holding the line on costs. And those ought to
retreat again as production recovers.
Interestingly these companies also see AISCs improving as 2022
marches on. Other than Centerra Gold which saw anomalously-low $395
AISCs last quarter, 16 other GDXJ-top-25 companies reporting Q1
AISCs also have 2022 guidances on those. On average their outlooks
see full-year AISCs running 4.5% under Q1 levels. Even First
Majestic is forecasting greatly-improving $1,555 AISCs for its
vexing gold mine.
The
majority of these elite mid-tiers expect their 2022 production to be
weighted to the second-half. Even in normal years without
virus testing and severe price inflation, Q1s often prove output
troughs. Like over 2/3rds of the world’s land mass, most of its
gold mines are located in the northern hemisphere. There Q1s’
winter months consistently suffer the coldest-and-wettest weather
conditions, impairing operational efficiencies.
Miners often schedule annual maintenance during those dark slow
months, which can temporarily pause ore processing. According to
the latest global gold fundamental data from the World Gold Council,
during the last 12 years worldwide gold mine production soared an
average of 4.6% sequentially from Q1s to Q2s! So this current
quarter’s jump after the COVID-19-omicron wave’s passing should
prove even bigger.
Even
with those AG-distorted $1,211 average AISCs last quarter, the
mid-tier and junior gold miners are still very-profitable. In Q1’22
the average gold price climbed 4.8% YoY to $1,879, the
second-highest on record after Q3’20’s $1,912. Subtracting
GDXJ-top-25 AISCs from quarterly-average gold prices is the best
proxy for mid-tier unit earnings. That worked out to hefty
$667-per-ounce profits last quarter, up 1.2% YoY.
Those are the best unit earnings the smaller gold miners have
achieved since Q2’21, slightly ahead of the prior-four-quarter
average of $657. And those Q1’22 unit earnings were also skewed low
by those crazy-high costs at First Majestic’s gold mine. If the
adjusted AISCs excluding that are used instead, the rest of the GDXJ
top 25 earned $738 per ounce last quarter! That would’ve
impressively been the third-highest ever.
The
mid-tier gold miners themselves see full-year-2022 AISCs running
about 5% below their Q1 levels. Lower mining costs will make for
fatter profits going forward. And despite getting sucked into that
serious stock-market selloff between mid-April to mid-May, gold is
very likely to resume powering higher again too. History has
proven nothing is more bullish for gold investment demand and prices
than raging inflation.
This
profligate Federal Reserve mushroomed its balance sheet an absurd
115.6% or $4,807b higher in just 25.5 months into mid-April!
Effectively more than doubling the US money supply left far
more dollars chasing and bidding up the prices on
relatively-much-less goods and services. Serious inflation is going
to fester until the Fed unwinds the majority of that epic QE4 money
printing, which will take years if it ever happens.
The
last similar
inflation super-spikes erupted during the 1970s. Gold prices
nearly tripled during the first, then more than quadrupled
during the second! Contrary to gold-futures speculators’ paranoia,
Fed-rate-hike
cycles are little threat to gold either. In this modern
monetary era since 1971, the Fed has completed a dozen before
today’s. Gold’s average gains through the exact spans of all 12 of
those ran a strong 29.2%!
Fed
tightenings have proven so bullish for gold primarily because they
are so bearish for stock markets. As of mid-week, the S&P
500 has already rolled over 18.2% at worst since early January on
the threat of accelerating rate hikes and quantitative-tightening
monetary destruction. The bigger this stock-market selloff grows,
the longer inflation stays high, and the more the Fed tightens, the
more bullish gold’s outlook.
Gold
stocks tend to outperform their metal so well during its uplegs
partially because of their big profits leverage to gold.
Higher gold prices coming will fuel much-higher earnings among the
mid-tier and junior gold miners, helping catapult their stock prices
way higher. So the smaller gold miners’ own fundamental outlooks
remain very-strong. Their stocks certainly didn’t deserve to get
crushed with the stock markets!
On
the hard-accounting front, the GDXJ top 25’s total revenues slipped
1.0% YoY to $5,948m in Q1’22. That jibes with 5.9%-lower gold
production ex-GFI and 4.8%-higher average gold prices. These
mid-tiers’ bottom-line accounting earnings surged 31.1% YoY to
$836m, which is awesome. But like usual that was skewed by some
huge unusual items. Buenaventura and Eldorado Gold reported those
in this latest quarter.
BVN
declared an enormous $480m gain selling discontinued operations,
while EGO suffered a gigantic $365m impairment loss in preparation
to sell a non-core gold asset. Net these out, and GDXJ-top-25
earnings last quarter rose closer to 13% YoY. That’s still pretty
good, and quite the disconnect from the universal hate plaguing gold
stocks after their recent plunge. Their traditional valuations are
relatively-cheap too.
In
classic trailing-twelve-month price-to-earnings-ratio terms, the
GDXJ top 25 averaged 39.4x mid-week. Yet without the outlier MAG
Silver which is in the hundreds as its maiden silver mine ramps up,
the rest of these mid-tiers and juniors averaged a much-better
27.3x. That’s among the lowest aggregate valuation reads for the
smaller gold miners in these last 24 quarters where I’ve been
advancing this research thread.
The
GDXJ top 25’s total cash flows generated from operations fell 36.5%
YoY to $1,044m last quarter. Coping with fewer employees through
that COVID-19-omicron wave was a big factor. Still these elite
mid-tier and junior gold miners’ total cash hoards remained
unchanged at $9,346m. So they continue to have big cash
warchests available to expand their operations and keep growing
their outputs on balance.
The
smaller gold miners are also prime acquisition targets for the
majors, since those perpetually struggle to offset ongoing depletion
from their large-scale operations. Building occasional new mines
isn’t enough either, so most of majors’ growth comes from buying
out entire mid-tier and junior gold companies. Those offers
usually arrive at nice premiums, offering more upside for
contrarians deploying capital in these stocks.
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The
bottom line is the mid-tier and junior gold miners of GDXJ generally
reported a good quarter. Their overall production did slump in
Q1’22, but the COVID-19-omicron wave driving that has passed.
Despite lower outputs and severe price inflation, they still largely
held the line on costs. That fueled strong earnings, in both
per-ounce and bottom-line terms. Those profits are likely to grow
substantially in coming quarters.
Most
of the GDXJ-top-25 gold miners are forecasting growing production
and lower costs throughout this year. And gold prices are likely to
resume trending higher on balance with inflation raging and the
stock markets rolling over on aggressive Fed tightening. Gold and
its miners’ stocks are the best places to be invested in this
extraordinary time. Their recent plunge and bombed-out prices
aren’t fundamentally-justified. |