The
mid-tier and junior gold miners in this sector’s sweet spot for
upside potential recently wrapped up their latest earnings season.
These fundamentally-superior smaller gold producers delivered big
last quarter, reporting spectacular results. The potent combination
of record gold prices, lower mining costs, and better production
fueled some of their richest profits ever. Yet mid-tiers still
remain way undervalued.
The
leading mid-tier-gold-stock benchmark is the GDXJ VanEck Junior Gold
Miners ETF. With $5.5b in net assets mid-week, it remains the
second-largest gold-stock ETF after its big brother GDX. That is
dominated by far-larger major gold miners, though there is much
overlap between these ETFs’ holdings. Still misleadingly named,
GDXJ is overwhelmingly a mid-tier gold-stock ETF with juniors
having little weighting.
Gold-stock tiers are defined by miners’ annual production rates in
ounces of gold. Small juniors have little sub-300k outputs, medium
mid-tiers run 300k to 1,000k, large majors yield over 1,000k, and
huge super-majors operate at vast scales exceeding 2,000k.
Translated into quarterly terms, these thresholds shake out under
75k, 75k to 250k, 250k+, and 500k+. Today only one of GDXJ’s 25
biggest holdings is a true junior!
Its
Q1 production is highlighted in blue in the table below. Juniors
not only mine less than 75k ounces per quarter, but their gold
output generates over half their quarterly revenues. That
excludes streaming and royalty companies that purchase future gold
output for big upfront payments used to finance mine-builds, and
primary silver miners producing byproduct gold. But mid-tiers often
make better investments than juniors.
These gold miners dominating GDXJ offer a unique mix of sizable
diversified production, excellent output-growth potential, and
smaller market capitalizations ideal for outsized gains.
Mid-tiers are less risky than juniors, while amplifying gold uplegs
much more than majors. Our newsletter trading books are now filled
with fundamentally-superior mid-tiers and juniors, smaller gold
miners which we’ve long specialized in at Zeal.
Mid-tier gold-stock outperformance accelerates as major gold uplegs
mature, increasingly attracting more traders to bid up stock
prices. That’s finally starting to happen again as gold-stock
sentiment shifts back to bullish. Gold’s driving upleg has powered
33.2% higher at best since early October. The major gold stocks
represented by GDX hit a new +44.5% highwater mark midweek, for
meager 1.3x upside leverage to gold.
Historically major gold stocks tend to amplify material gold moves
by 2x to 3x, with that upside leverage mounting later in uplegs.
That process is underway, as since mid-February GDX’s gains have
outpaced gold’s by 2.0x. The mid-tiers of GDXJ lagged their larger
peers for much of this upleg, as traders hadn’t started warming to
this sector. But GDXJ’s total upleg gains grew to 52.3% this week,
pulling ahead of GDX.
This
smaller-gold-stock outperformance should continue expanding on
balance. Fundamentally-superior mid-tiers’ gains during major gold
uplegs surge way ahead of the majors’, sometimes even doubling
them! The longer gold and gold stocks rally, the more bullish
speculators and investors wax on them, the more capital they deploy
to chase those gains, the more mid-tiers’ stock prices accelerate
way ahead of larger miners’.
For
32 quarters in a row now, I’ve painstakingly analyzed the latest
operational and financial results from GDXJ’s 25-largest component
stocks. Mostly mid-tiers, they now account for 66.0% of this ETF’s
total weighting. While digging through quarterlies is a ton of
work, understanding smaller gold miners’ latest fundamentals really
cuts through the obscuring sentiment fogs shrouding this sector.
This research is essential.
This
table summarizes the GDXJ top 25’s operational and financial
highlights during Q1’24. 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 Q1’23. Those symbols are followed by their
recent GDXJ weightings.
Next
comes these gold miners’ Q1’24 production in ounces, along with
their year-over-year changes from the comparable Q1’23. 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 disclosed 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
mid-tier gold miners’ overall Q1’24 performance again proved
spectacular! These sweet-spot-for-upside smaller gold stocks
slashed mining costs while boosting their production. Those strong
operations combined with record prevailing gold prices fueled
another massive per-ounce earnings jump, the fourth consecutive
quarter of those! Last quarter was among the best mid-tiers ever
reported, impressively bullish.
Production growth trumps everything else as the primary mission for
gold miners. Higher outputs boost operating cash flows which help
fund mine expansions, builds, and purchases, fueling virtuous
circles of growth. Mining more gold also boosts profitability,
lowering unit costs by spreading big fixed operational expenses
across more ounces. But for the first time in eight quarters, the
GDXJ top 25’s output shrunk!
They
collectively mined 3,692k ounces of gold in Q1’24, which slipped
0.8% YoY. But that is due solely to composition changes among these
elite ranks. Four stocks surged dramatically over this past year to
enter the GDXJ top 25, displacing four other stocks. Among the
ascenders is Aya Gold & Silver, a small silver miner that produces
no gold. That elbowed Lundin Gold to 26th place, which mined 112k
ounces in Q1.
Replacing a producer with a non-producer skewed overall output
lower. Had LUG been included instead of AYA, the GDXJ top 25’s
aggregate output last quarter would’ve climbed 2.2% YoY to
3,803k ounces! That’s pretty impressive, much better than the
GDX-top-25 majors’ 0.6%-YoY shrinkage I analyzed in an
essay on their
latest results last week. But both these elite mid-tiers’ and
majors’ production is still lagging.
Every quarter the World Gold Council publishes fantastic Gold Demand
Trends reports, containing the best-available global gold
supply-and-demand data. The recent Q1’24 edition revealed total
worldwide mine production grew 4.4% YoY. The GDXJ top 25
would’ve even bested that if not for output shortfalls in just two
of its larger producers, B2Gold and Endeavour Mining. But those
were both expected last quarter.
BTG
suffered a permitting delay for a sizable new gold project in Mali,
so it has guided 2024 to midpoint production around 900k ounces.
That would make for full-year shrinkage of 15.2%. But with that
project and another new mine coming online in 2025, next year is
already forecast to see production surge 21.1% to a record
1,090k-ounce midpoint. So this year is a temporary lull for B2Gold
before growth resumes.
EDV’s weaker Q1 mostly resulted from mining lower-grade ores. Mine
sequencing sometimes requires digging through lesser ores to reach
higher-grade ones underneath. Endeavour Mining is still forecasting
2024 output near a 1,200k-ounce midpoint, “strongly weighted towards
the second half”. Achieving that would make for modest 2.3% growth
this year, far better than Q1’s serious 27.1%-YoY output drop
suggests.
Among the mid-tiers there are plenty of great growth stories,
including Eldorado Gold. Last year it mined 485k ounces. Due to a
new gold mine ramping up in coming years, it has already forecast
midpoints of 530k ounces this year, 570k in 2025, 663k in 2026, and
705k in 2027! Investors will really reward such big production
growth, bidding EGO stock much higher. Mid-tiers with good growth
profiles make great trades.
So
we’ve always prioritized high-potential smaller gold miners that
have strong production growth coming, adding newsletter
trades before the driving expansions and new mine-builds go live.
These make for the most-compelling gold-stock trades and
investments. Interestingly since it takes much expertise to stay
abreast of many dozens of smaller gold miners, surging production
and falling costs tend to surprise most traders.
While handpicking great individual gold stocks yields the most
success, GDXJ is still far superior to GDX. Despite a big overlap
in these ETFs’ holdings, GDXJ cuts out the deadweight majors and
super-majors dominating GDX. They’ve long struggled to even
overcome depletion, let alone grow their production like mid-tiers
and juniors. GDXJ lops off GDX’s nine largest stocks, which
just commanded 4/7ths of its total weighing!
These GDXJ-top-25 components are clustered between the 10th to 40th
weightings in GDX. Again they represent 66.0% of GDXJ’s total
weighting, more than doubled from just 28.8% in GDX. So if you
aren’t willing to own fundamentally-superior individual gold stocks,
GDXJ is the next-best way to get great smaller-gold-miner exposure.
There’s little reason to allocate capital to major-dominated GDX
since GDXJ exists.
Unit
gold-mining costs are generally inversely proportional to
gold-production levels. That’s because gold mines’ total operating
costs are largely fixed during pre-construction planning stages,
when designed throughputs are determined for plants processing
gold-bearing ores. Their nameplate capacities don’t change quarter
to quarter, requiring similar levels of infrastructure, equipment,
and employees to keep running.
So
the only real variable driving quarterly gold production is the
ore grades fed into these plants. Those vary widely even within
individual gold deposits. Richer ores yield more ounces to spread
mining’s big fixed expenses across, lowering unit costs and boosting
profitability. But while fixed costs are the lion’s share of gold
mining, there are also sizable variable costs. That’s where
recent years’
raging inflation hit hard.
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 major gold
miners. They illuminate the minimum gold prices necessary to keep
the mines running.
The
GDXJ top 25’s average cash costs edged 0.3% lower YoY to $1,012 per
ounce in Q1’24. That was impressively the mid-tiers’ fourth
quarter in a row of declining cash costs. The smaller miners’
operational discipline is impressive, trouncing the GDX-top-25
majors which saw average cash costs climb in fully 21 of the last 22
quarters! Mid-tiers and juniors target smaller but-often-lower-cost
gold deposits than majors.
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
maintain gold mines as ongoing concerns, and reveal the mid-tier
gold miners’ true operating profitability.
Astoundingly the GDXJ top 25’s average AISCs plunged 8.4% YoY to
just $1,294 in Q1! That was also their fourth consecutive
quarter falling considerably, down 4.4%, 10.3%, 8.1%, and 8.4% YoY.
This is phenomenal performance considering inflation goosing mining
costs in recent years. But unfortunately the mid-tiers’ latest
quarterly AISC drop is really overstated, largely driven by a single
extreme outlier.
Peru’s Buenaventura has long been one of the higher-cost gold miners
included in GDXJ’s upper ranks. Its many operational challenges for
years have left BVN unworthy of the higher market capitalization
that investors have awarded it. Given its sorry track record, this
is one of many gold stocks I’ve never been interested in owning.
Yet unbelievably and contrary to pedigree, Buenaventura
reported negative AISCs in Q1!
How
is such sorcery even possible? BVN isn’t a primary gold miner, with
only 36% of its Q1 revenues from the yellow metal. It also produces
silver, copper, zinc, and lead. But like some poly-metallic miners,
Buenaventura reports in gold-centric terms since gold stocks
command higher multiples. So those other metals are considered
byproducts, despite being the big majority of output. Their sales
are credited to gold.
While BVN’s gold production only grew 7.8% YoY last quarter, its
silver, copper, zinc, and lead outputs rocketed up 149.7%, 26.4%,
418.6%, and 262.7% YoY! Those colossal jumps translated into
enormous byproduct credits offsetting gold-mining costs, slamming
Q1 AISCs to -$121. BVN’s non-gold production should remain much
higher with a new silver-zinc-lead mine just coming online, keeping
gold AISCs lower.
Excluding BVN’s negative Q1 AISCs, the rest of the GDXJ top 25
averaged a considerably-higher $1,389. Even that is still down 1.8%
YoY, preserving the mid-tiers’ awesome AISC-contraction streak.
Both are quite comparable to the
GDX-top-25
majors’ average AISCs, $1,277 including BVN and $1,370 without
it last quarter. Mid-tiers are achieving similar mining costs
despite lacking majors’ touted economies of scale.
In
the 32-quarter history of this GDXJ-top-25-results research, a
handful of outliers have often skewed the average AISCs higher.
While I pointed that out, I always still used the actual average
including them to calculate implied sector unit profits. So we
need to treat BVN’s stunning negative AISCs the same way this time
around. These elite majors averaged $1,294 AISCs in a quarter where
gold averaged a record $2,072.
That
made for fantastic unit profits of $777 per ounce, the fattest since
Q4’20 and the third-highest ever witnessed for smaller gold miners!
Those also blasted up 62.6% YoY, extending a
skyrocketing-earnings trend in the previous three quarters soaring
33.8%, 106.4%, and 125.7% YoY! No other sector in all the stock
markets has seen earnings rocket up as fast as these mid-tiers,
which will attract fundamental investors.
And
gold-mining profits aren’t done surging, with the best still
coming. Again gold averaged that record $2,072 in Q1, but its
remarkable
breakout surge has catapulted the Q2-to-date average all the way
up to $2,342! Even if gold suffers a pullback later in this quarter
to work off
extreme overboughtness, Q2’s average shouldn’t retreat under
$2,275. Even that would require $2,200ish gold for the entire rest
of this quarter.
And
the GDXJ top 25’s average AISCs are also likely to decline again in
Q2. Q1s have long proven the production ebb of the world
gold-mining industry. The WGC’s comprehensive fundamental data
reveals over the last decade quarter-on-quarter global output
fell 8.4% in Q1s, grew 3.7% in Q2s, surged 6.1% in Q3s, then edged
up 0.4% in Q4s. Again higher production generally proportionally
lowers mining costs.
But
let’s conservatively assume the mid-tiers’ average AISCs climb
slightly this quarter to $1,300. Those subtracted from $2,275
average gold would yield spectacular mid-tier unit profits of $975
per ounce! That would easily be an all-time record for both GDXJ
and GDX, and skyrocket another epic 104% YoY! So the smaller
gold miners’ already-awesome fundamentals will continue radically
improving in this current Q2.
Sooner or later fundamentally-oriented fund investors will figure
this out, and rush to deploy big capital in this small sector. That
buying will catapult smaller gold stocks way higher, accelerating
their usual big outperformance of larger gold stocks. Plenty of
mid-tiers could still double from here during this gold
upleg! That’s amazing considering our newsletter trades’ unrealized
gains are already running as high as +112%.
The
GDXJ top 25’s hard accounting results under Generally Accepted
Accounting Principles didn’t look as fantastic last quarter,
partially due to those composition changes. Total revenues only
climbed 2.1% YoY to $7,509m, which doesn’t jibe with 0.8%-lower
production and 9.5%-higher average gold prices. But again AYA’s
rise displaced LUG, which reported far-different Q1’24 sales of $5m
and $227m respectively!
Swap
them alone, and GDXJ-top-25 revenues instead grew 5.1% to $7,731m.
Other displacements in upper rankings also dragged down
year-over-year sales. Those also affected total bottom-line
earnings, which plunged 49.1% YoY to $229m. But AYA’s $3m loss
replaced LUG’s $42m profits. Still smaller gold miners’ earnings
dropped, even adjusted for unusual non-cash charges flushed through
income statements.
As a
longtime CPA, I pay special attention to financial statements in my
quarterly-results analyses. I take notes on any material unusual
charges or sometimes gains that affect net income. Not many caught
my eye in Q1, merely adjusting GDXJ-top-25 earnings near $250m. Yet
the comparable Q1’23 had a couple big ones, leaving its adjusted
earnings much higher around $641m. So mid-tiers’ bottom lines still
collapsed.
Lower production and accompanying higher mining costs for many of
these elite mid-tiers was the main reason. That should reverse in
coming quarters as outputs climb driving AISCs lower. Because of
everything forced through income statements, they tend to be noisy
and volatile. After decades of gold-stock analyses, I’ve found
average unit profits are a cleaner proxy for sector earnings
trends than net income.
The
GDXJ top 25’s operating cash flows generated last quarter rocketed
up 37.7% YoY to $1,920m! But that surge is entirely due to one
unusual situation. B2Gold decided to forward sell $500m
worth of gold that it will mine between July 2025 to June 2026, or
265k ounces. That’s about a tenth of expected outputs in both
years, working out to an average gold price of $2,191. The $500m
received was an upfront payment.
BTG’s accountants plunked that $500m hedging prepayment in Q1
operating cashflows, though it seems more like a financing activity
than an operating one. Reverse that unusual item out, and the GDXJ
top 25’s OCFs only grew 1.8% YoY in Q1 to $1,420m. Their collective
cash treasuries depleted 18.6% YoY to a still-flush $6,528m, with
plenty of mid-tiers investing in expanding existing mines and
building new ones.
Overall these elite mid-tiers’ latest quarterly results were
outstanding. These gold miners extended their powerful streak of
achieving output growth while driving down mining costs. That
combined with record gold prices catapulted per-ounce profits far
higher. Sooner or later investors will figure this out and flood
into these high-potential stocks. Major gold miners always
struggling with depletion also covet mid-tiers’ mines.
By
advancing great gold projects into mines and growing relatively
fast, mid-tiers and juniors are the gold-production pipeline
ultimately feeding the majors. They are always circling the smaller
gold miners like sharks, ready to gobble them up through buyouts.
This acquisition potential adds to mid-tiers’ upside. During major
gold uplegs, smaller gold stocks can easily double, triple, or
more, really multiplying wealth!
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The
bottom line is the mid-tier gold miners continued reporting
spectacular quarterly results. They kept growing their production
when adjusted for one GDXJ-upper-ranks composition change. That
helped force their average mining costs considerably lower for the
fourth quarter in a row. Combined with record gold prices, that
generated some of the fattest unit profits the smaller gold miners
have ever achieved.
And
their fantastic fundamentals are still improving. In this current
quarter, mining costs are likely to keep retreating as outputs
rebound or grow. Couple that with much-higher record gold prices,
and the smaller miners are probably now earning their biggest
profits ever. That will increasingly attract big fund investors to
this small still-really-undervalued sector. That portends
much-bigger gold-stock gains still coming. |