The
mid-tier gold miners’ stocks have soared in recent months on gold’s
decisive bull-market breakout. They are this sector’s sweet spot
for stock-price upside potential, with room for strong production
growth which investors love. That’s an attractive contrast to the
stagnating major gold miners. The mid-tiers’ recently-reported
Q2’19 results reveal whether their fundamentals justify their strong
surge this summer.
Four
times a year publicly-traded companies release treasure troves of
valuable information in the form of quarterly reports. Required by
the US Securities and Exchange Commission, these 10-Qs and 10-Ks
contain the best fundamental data available to traders. They dispel
all the sentiment distortions inevitably surrounding prevailing
stock-price levels, revealing corporations’ underlying hard
fundamental realities.
The
global nature of the gold-mining industry complicates efforts to
gather this important data. Many mid-tier gold miners trade in
Australia, Canada, South Africa, the United Kingdom, and other
countries with quite-different reporting requirements. These
include half-year reporting rather than quarterly, long 90-day
filing deadlines after year-ends, and very-dissimilar presentations
of operating and financial results.
The
definitive list of mid-tier gold miners to analyze comes from the
GDXJ VanEck Vectors Junior Gold Miners ETF. Despite its misleading
name, GDXJ is totally dominated by mid-tier gold miners and
not juniors. GDXJ is the world’s second-largest gold-stock ETF,
with $4.5b of net assets this week. That is only behind its
big-brother GDX VanEck Vectors Gold Miners ETF that includes the
major gold miners.
Major gold miners are those that produce over 1m ounces of gold
annually. The mid-tier gold miners are smaller, producing between
300k to 1m ounces each year. Below 300k is the junior realm.
Translated into quarterly terms, majors mine 250k+ ounces, mid-tiers
75k to 250k, and juniors less than 75k. GDXJ was originally
launched as a real junior-gold-stock ETF as its name implies, but it
was forced to change its mission.
Gold
stocks soared in price and popularity in the first half of 2016,
ignited by a new
bull market in gold. The metal itself awoke from deep secular
lows and surged 29.9% higher in just 6.7 months. GDXJ and GDX
skyrocketed 202.5% and 151.2% higher in roughly that same span,
greatly leveraging gold’s gains! As capital flooded into GDXJ to
own junior miners, this ETF risked running afoul of Canadian
securities laws.
Canada is the center of the junior-gold universe, where most juniors
trade. Once any investor including an ETF buys up a 20%+ stake in a
Canadian stock, it is legally deemed a takeover offer. This may
have been relevant to a single corporate buyer amassing 20%+, but
GDXJ’s legions of investors certainly weren’t trying to take over
small gold miners. GDXJ diversified away from juniors to
comply with that archaic rule.
Smaller juniors by market capitalization were abandoned entirely,
cutting them off from the sizable flows of ETF capital. Larger
juniors were kept, but with their weightings within GDXJ greatly
demoted. Most of its ranks were filled with mid-tier gold miners,
as well as a handful of smaller majors. That was frustrating, but
ultimately beneficial. Mid-tier gold miners are in the sweet
spot for stock-price-appreciation potential!
For
years major gold miners have struggled with
declining
production, they can’t find or buy enough new gold to offset
their depletion. And the stock-price inertia from their large
market capitalizations is hard to overcome. The mid-tiers can and
are boosting their gold output, which fuels growth in operating cash
flows and profitability. With much-lower market caps, capital
inflows drive their stock prices higher much faster.
Every quarter I dive into the latest results from the top 34 GDXJ
components. That’s simply an arbitrary number that fits neatly into
the tables below, but a commanding sample. These companies
represented 83.2% of GDXJ’s total weighting this week, even though
it contained a whopping 70 stocks! 3 of the top 34 were majors
mining 250k+ ounces, 24 mid-tiers at 75k to 250k, 5 “juniors” under
75k, and 2 explorers with zero.
These majors accounted for 12.8% of GDXJ’s total weighting, and
really have no place in a “Junior Gold Miners ETF” when they could
instead be exclusively in GDX. These mid-tiers weighed in at 60.9%
of GDXJ. The “juniors” among the top 34 represented just 6.6% of
GDXJ’s total. But only 1 of them at a mere 0.9% of GDXJ is a true
junior, meaning it derives over half its revenues from
actually mining gold.
The
rest include 2 primary silver miners, a gold-royalty company, and a
gold streamer. GDXJ is actually a full-on mid-tier gold miners ETF,
with modest major and tiny junior exposure. Traders need to realize
it is not a junior-gold investment vehicle as advertised. GDXJ also
has major overlap with GDX. Fully 29 of these top 34 GDXJ
gold miners are included in GDX too, with 23 of them also among
GDX’s top 34 stocks.
The
GDXJ top 34 accounting for 83.2% of its total weighting also
represent 39.8% of GDX’s own total weighting! The GDXJ top 34
mostly clustered between the 10th- to 40th-highest weightings in
GDX. Thus nearly 5/6ths of GDXJ is made up by almost 4/10ths
of GDX. But GDXJ is far superior, excluding the large gold majors
struggling with production growth. GDXJ gives much-higher
weightings to better mid-tier miners.
The
average Q2’19 gold production among GDXJ’s top 34 was 157k ounces,
a bit over half as big as the GDX top 34’s 299k average.
Despite these two ETFs’ extensive common holdings, GDXJ is
increasingly
outperforming GDX. GDXJ holds many of the world’s best mid-tier
gold miners with big upside potential as gold’s own bull continues
powering higher. Thus it is important to analyze GDXJ miners’
latest results.
So
after each quarterly earnings season I wade through all available
operational and financial reports and dump key data into a big
spreadsheet for analysis. Some highlights make it into these
tables. Any blank fields mean a company hadn’t reported that data
as of this Wednesday. The first couple columns show each GDXJ
component’s symbol and weighting within this ETF as of this week.
Not all are US symbols.
19
of the GDXJ top 34 primarily trade in the US, 5 in Australia, 8 in
Canada, and 2 in the UK. So some symbols are listings from
companies’ main foreign stock exchanges. That’s followed by each
gold miner’s Q2’19 production in ounces, which is mostly in
pure-gold terms excluding byproducts often found in gold ore like
silver and base metals. Then production’s absolute year-over-year
change from Q2’18 is shown.
Next
comes gold miners’ most-important fundamental data for investors,
cash costs and all-in sustaining costs per ounce mined. The
latter directly drive profitability which ultimately determines
stock prices. These key costs are also followed by YoY changes.
Last but not least the annual changes are shown in operating cash
flows generated, hard GAAP earnings, revenues, and cash on hand with
a couple exceptions.
Percentage changes aren’t relevant or meaningful if data shifted
from positive to negative or vice versa, or if derived from two
negative numbers. So in those cases I included raw underlying data
rather than weird or misleading percentage changes. In cases where
foreign GDXJ components only released half-year data, I used that
and split it in half where appropriate. That offers a decent
approximation of Q2 results.
Symbols highlighted in light blue newly climbed into the ranks of
GDXJ’s top 34 over this past year. And symbols highlighted in
yellow show the rare GDXJ-top-34 components that aren’t also in
GDX. If both conditions are true, blue-yellow checkerboarding is
used. Production bold-faced in blue shows any rare junior gold
miners in GDXJ’s higher ranks, under 75k ounces quarterly with
over half of sales from gold.
This
whole valuable dataset compared with past quarters offers a
fantastic high-level read on how mid-tier gold miners are faring
fundamentally as an industry. This last quarter was interesting, as
gold’s awesome breakout surge to major new secular highs didn’t get
underway until just before quarter-end. So the mid-tier gold miners
had to contend with flat gold prices, with Q2’19’s average of $1309
merely 0.2% higher YoY.
The
shuffling in the ranks of GDXJ’s top 34 components continued over
this past year, with major gold miner Kinross Gold added. It, Gold
Fields, and Harmony Gold really should be shifted exclusively into
GDX since their production is way into major-dom. Gold miners of
that scale just defeat the purpose of a “Junior Gold Miners ETF”,
retarding its upside potential and eroding traders’ confidence in
its managers’ competence.
Most
of the other new additions are good though, including mid-tiers
Buenaventura, Alacer Gold, and Torex Gold. While Hochschild Mining
was technically a junior last quarter, it will likely soon grow into
a mid-tier mining 75k+ ounces of gold quarterly. But there’s one
GDXJ component that reported such an extreme quarter that it skews
most of the year-over-year comparisons. That is South Africa’s
Sibanye-Stillwater.
SBGL
is actually a primary platinum-group-metals miner, which drove
nearly 2/3rds of its implied revenue based on average metals prices
in Q2! Its shrinking South African gold operations are a total
mess, just emerging from a 5-month-long strike organized by a
violent Marxist union. That crippled its gold mines, and left at
least 9 people dead! Sibanye-Stillwater also has to fight South
Africa’s absurdly-corrupt government.
Even
though that hellish strike ended in mid-April, very early in Q2,
SBGL’s gold production plummeted a catastrophic 47.9% YoY last
quarter! That catapulted its all-in sustaining costs to a
ridiculous $2110 per ounce, up an extreme 60.5% YoY from
already-high levels. This shocking anomaly needs to be excluded in
GDXJ comparisons. I wouldn’t invest in this company if it was the
last miner on earth, it is a nightmare.
Production has always been the lifeblood of the gold-mining
industry. Gold miners have no control over prevailing gold prices,
their product sells for whatever the markets offer. Thus growing
production is the only manageable way to boost revenues, leading
to amplified gains in operating cash flows and profits. Higher
production generates more capital to invest in expanding existing
mines and building or buying new ones.
Thus
gold-stock investors have long prized production growth above
everything else, as it is inexorably linked to company growth and
thus stock-price-appreciation potential. In Q2’19 these GDXJ-top-34
gold miners collectively produced 5.0m ounces of gold. That was
actually down 1.2% YoY, which is worse than the 0.7% shrinkage the
top 34 GDX majors
reported last quarter after being adjusted for mega-mergers.
But
excluding SBGL’s mayhem, the rest of the GDXJ top 34 actually
managed to grow their total output by an impressive 1.7% YoY to 4.9m
ounces! That not only trounced the majors, but narrowly bested the
world’s aggregate production growth in Q2. According to gold’s
leading fundamental authority, the World Gold Council, total world
output grew 1.6% YoY last quarter to 28.4m ounces. The mid-tiers
are thriving.
The
GDXJ mid-tiers were able to enjoy strong production growth because
this ETF isn’t burdened with many struggling major gold miners that
dominate GDX. Again GDXJ’s components start at the 10th-highest
weighting in GDX. The 9 above it averaged colossal Q2 production of
585k ounces, which is 3.7x bigger than the GDXJ top 34’s
average! Gold mining’s inherent geological limitations make it very
difficult to scale.
The
more gold miners produce, the harder it is to even keep up with
relentless depletion let alone grow their output consistently.
Large economically-viable gold deposits are getting increasingly
difficult to find and ever-more-expensive to develop, with
low-hanging fruit long since exploited. But with much-smaller
production bases, mine expansions and new mine builds generate big
output growth for mid-tier golds.
The
majors don’t only face that large-base growth problem with their
production scales, but also with their stocks’ market
capitalizations. The GDXJ top 34 companies averaged $2.5b in the
middle of this week, compared to $6.9b in the GDX top 34 when I
analyzed their Q2
results last week. With the mid-tiers generally around a
third as big as the majors, their stock prices have much less
inertia restraining them.
With
gold returning to favor since late June’s awesome
decisive
bull-market breakout, the mid-tier-filled GDXJ is already
outperforming the major-dominated GDX. Since its year-to-date low
in late May, GDXJ surged as much as 52.1% higher by early August!
That was considerably better than GDX’s 46.2% rally in the same
timeframe. The longer gold-bull uplegs persist, the bigger the
mid-tier outperformance grows.
The
mid-tier gold miners continue to prove all-important production
growth is achievable off smaller bases. With a handful of
mines or less to operate, mid-tiers can focus on expanding them or
building a new mine to boost their output beyond depletion. But the
majors are increasingly failing to do this from the super-high
production bases they operate at. As long as majors are struggling,
it is prudent to avoid them.
Also
interesting on the mid-tier production front was silver. Last
quarter the GDXJ-top-34 miners’ silver output blasted 42.8% higher
YoY to 28.2m ounces! Some of these companies indeed saw exploding
silver production, led by Yamana Gold’s rocketing up 65.8% YoY to
2.2m ounces and SSR Mining’s soaring a similar 55.8% YoY to 1.5m
ounces. But new GDXJ-top-34 components drove most of the silver
growth.
Buenaventura and Hochschild Mining produced 5.5m and 4.3m ounces of
silver last quarter, and they weren’t in GDXJ’s top 34 in Q2’18.
Excluding them, the rest of these mid-tier gold miners actually saw
their total silver output slump 5.1% YoY. I’ll discuss the serious
challenges silver mining faces in next week’s essay, which will wade
through the results of the top silver miners of the
leading silver
miners’ ETF.
In
gold mining, production and costs are generally inversely related.
Gold-mining costs are largely fixed quarter after quarter, with
actual mining requiring about the same levels of infrastructure,
equipment, and employees. So the higher production, the more ounces
to spread mining’s big fixed costs across. Thus Q2’19’s solid
production growth among the GDXJ top 34 ex-SBGL should’ve yielded
proportionally-lower costs.
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 metrics. Cash costs are the acid test of gold-miner
survivability in lower-gold-price environments, revealing the
worst-case gold levels necessary to keep the mines running. All-in
sustaining costs show where gold needs to trade to maintain current
mining tempos 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 Q2’19 these
top-34-GDXJ-component gold miners that reported cash costs averaged
$672 per ounce. That actually rose a sharp 6.6% YoY, and was worse
than the GDX-top-34 majors’ $641 mean.
Sibanye-Stillwater didn’t report Q2 cash costs, so that wasn’t a
factor. But a couple of other anomalous situations dragged up this
average. Buenaventura has been struggling with weaker production,
resulting in extreme $930 cash costs last quarter. And Harmony
Gold, a South African miner facing that country’s miserable
operating environment, had even-worse $965 cash costs in Q2’19!
Those are crazy-high.
Excluding them, the rest of the GDXJ top 34 averaged $650. That’s
towards the lower end of the GDXJ-top-34 average range of $612 to
$730 in the 13 quarters I’ve been advancing this
deep-quarterly-results research thread. As long as cash costs
remain far below prevailing gold prices, which was certainly true in
Q2, the gold miners face no existential threat. Gold returning to
favor is really widening that key survival gap.
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 gold mines as ongoing concerns. AISCs
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 companies’ true
operating profitability.
The
GDXJ-top-34 AISC picture in Q2’19 looked much like the cash-cost
one, with average AISCs surging 6.1% YoY to $941 per ounce.
That was on the higher side of the past 13 quarters’ range from $855
to $1002, but way below Q2’s average gold price of $1309. That
implies GDXJ’s mid-tier gold miners were already earning sizable
$368 profits last quarter. But this AISC read was heavily skewed by
SBGL’s mess.
Again that cursed gold miner’s AISCs skyrocketed 60.5% YoY to an
unbelievable $2110! That was as high as I’ve ever seen, and SBGL
tried to bury this deep in its Q2 reporting. The strike was blamed,
even though it ended in early Q2. But remove that wild outlier from
the pool, and the rest of the GDXJ-top-34 gold miners averaged AISCs
of $896 per ounce. That’s actually right in line with the GDX top
34’s $895.
With
gold rocketing back over $1500 earlier this month to hit 6.3-year
secular highs, it is easy to assume the gold miners must be thriving
fundamentally. And they likely are. But realize the lion’s share
of the recent huge gold gains didn’t start until late June
when gold decisively broke out to new bull-market highs. So these
Q2 results don’t yet reflect these new higher gold prices. But Q3’s
are on track to look spectacular.
Gold’s lofty $1446 average price so far this quarter is a whopping
10.5% higher quarter-on-quarter than Q2’s! So the current likely
profitability of the gold miners post-gold-breakout is far higher
than seen last quarter. Assuming the GDXJ top 34’s average all-in
sustaining costs hold flat near $941 this quarter, that implies Q3
profits running $505 per ounce. That’s up a massive 37.2% QoQ
from what was seen in Q2!
This
incredible profits leverage to gold is what makes gold stocks so
alluring during major gold uplegs. Their earnings grow so darned
fast, 3.5x gold’s advance in this example, that big stock-price
gains are usually fundamentally-justified. In Q2’19, GDXJ averaged
$30.46 per share. That’s when you should’ve been buying gold
stocks, when they were low and out of favor. I explained
their bullish
outlook in early April.
So
far in Q3 which is more than half over, GDX has averaged $38.43
which is 26.2% higher QoQ. That is still lagging big expected
profits growth among mid-tier gold miners this quarter given the
much-higher prevailing gold prices. So gold stocks’ strong gains in
recent months are fundamentally-righteous, supported by
underlying earnings growth and sustainable as long as gold holds
over $1446 into quarter-end.
The
mid-tier gold miners reported good accounting results last quarter
even before gold reignited. The GDXJ top 34’s total revenues soared
23.0% YoY to $6.6b! While that is certainly overstated given the
new inclusion of major gold miner Kinross Gold, without it the rest
of these companies still saw strong 7.3% YoY growth. That’s
impressive given Q2’19’s dead-flat average gold price, up a trivial
0.2% YoY.
These strong operations drove exploding operating-cashflow
generation, with the GDXJ top 34’s total blasting 44.2% higher YoY
to $2.3b! Even without KGC they still rose 23.6% YoY. And these
elite mid-tier gold miners were investing some of this new capital
in expanding their mines, which investors always like to see. Their
collective cash hoards sunk 12.6% YoY to $6.0b, which remains
healthy given mid-tiers’ sizes.
The
GDXJ top 34’s profits under Generally Accepted Accounting Principles
radically improved as well. Together they earned $291m last
quarter, which was a colossal improvement from Q2’18’s $410m loss.
Even though $384m of that resulted from an impairment charge by a
single component miner that quarter, the mid-tiers’ profits picture
still greatly improved. And that was even with last quarter’s
still-anemic $1309 gold.
Imagine how awesome these numbers will look in this current quarter
given all the gold fireworks since the end of Q2! The mid-tier gold
miners generally report their results 4 to 6 weeks after
quarter-ends, so Q3’19 fundamental performance will be revealed in
the first half of November. As long as gold sentiment remains
decent, these Q3 results should really impress and attract in
legions of new investors to this sector.
That
being said, gold and gold stocks have soared really far really
fast this quarter. Sentiment quickly grew greedy as
really-overbought levels were reached. Couple that with today’s
menacing overhang of
huge potential
gold-futures selling, and a healthy bull-market correction is
likely. But now is the time to do your homework before buying lower
later, to ferret out the high-potential gold miners with superior
fundamentals.
All
portfolios need a 10% allocation in gold and its miners’
stocks! This is more important than ever with gold finally waking
up from its long slumber while lofty central-bank-goosed stock
markets are looking
increasingly
precarious. The better mid-tier gold miners are the place to
be. Unlike the majors, they are actually growing their production
and have far-higher upside coming from lower-market-capitalization
bases.
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The bottom line is
the mid-tier gold miners are thriving fundamentally. Their Q2
results were good, even before gold’s powerful bull-market
breakout. They are growing production while holding the line on
costs. That means their earnings will soar as gold powers higher on
balance in its resurgent bull market. That will support much-higher
gold-stock prices in the future, and attract traders back to this
long-neglected sector.
Gold’s bull market will flow and ebb as always, so gold-stock
positions should be accumulated relatively low in post-selloff
troughs. There’s no need to buy high at crests when everyone is
excited. But you have to prepare in advance, monitoring the markets
and researching the gold miners to be ready to pounce at opportune
times. Capital allocations should be focused on mid-tier gold
miners with superior fundamentals. | 
