The
mid-tier gold miners in this sector’s sweet spot for upside
potential have had a spectacular run since March’s stock panic!
That catapulted them to extremely-overbought levels, necessitating a
correction to rebalance sentiment. The mid-tiers’ just-reported
Q2’20 operational and financial results reveal whether those big
gains were fundamentally-righteous, and whether more major upside is
likely in coming months.
Mid-tier gold miners produce between 300k to 1m ounces of gold
annually, more than smaller juniors but less than larger majors.
Mid-tiers are far less risky than juniors, and amplify gold’s uplegs
much more than majors. Their unique mix of sizable diversified gold
production, material output-growth potential, and smaller market
capitalizations is ideal for outsized gains. They are the
best gold stocks for traders to own.
Ironically the leading mid-tier gold-stock benchmark and trading
vehicle is the misleadingly-named GDXJ VanEck Vectors Junior Gold
Miners ETF. It has evolved to be dominated by mid-tiers, miners
yielding quarterly gold output of 75k to 250k ounces. GDXJ
actually holds few true juniors, which only account for a small
fraction of its total weighting. The mid-tier gold miners have
enjoyed outstanding performance this year.
But
it sure hasn’t come easy, as usual in the super-volatile gold-stock
realm. By late February 2020, this popular ETF had climbed 6.4%
year-to-date. But then heavy general-stock-market selling erupted,
which snowballed into a rare full-blown panic. That spawned an epic
maelstrom of fear that sucked in gold and thus its miners’ stocks.
Over the next few weeks into mid-March, GDXJ collapsed 50.7%
climaxing in a
crash!
But
those extreme gold-stock lows were fundamentally-absurd given the
high prevailing gold prices. So we started aggressively buying and
recommending gold stocks in our subscription newsletters. Those
were mostly mid-tiers with superior fundamentals, which are
the sweet spot for upside potential during major gold uplegs. And
the resulting gains out of that wild stock-panic anomaly indeed
proved massive.
Over
the next 4.8 months into early August, GDXJ skyrocketed a
spectacular 188.9% higher! Hardened contrarians who bought in early
and low had the opportunity to nearly triple their capital in
stocks, which is very unusual in such a short span of time. But the
mid-tiers’ blistering run blasted GDXJ to exceedingly-overbought
levels. This ETF was stretched 1.534x above its 200dma when it
carved its latest interim high!
Extremely-stretched technicals which always spawn extremely-lopsided
sentiment never last long. GDXJ soon started correcting out of that
euphoric peak, plunging 13.8% in just 4 trading days! Corrections
are healthy and necessary within ongoing bull markets to rebalance
sentiment, eradicating excessive greed and euphoria. GDXJ remained
up 30.6% YTD even after that. Do mid-tiers’ Q2’20 results justify
such gains?
Last
quarter was a strange one for the gold miners, with powerful bullish
and bearish forces warring. Its average gold price of $1714 was
the best on record, rocketing 30.9% YoY from Q2’19’s average!
Gold-mining profits really amplify higher prevailing gold prices.
But many gold miners around the world were forced to shutter for
weeks or months on end by governments’ draconian national lockdowns
to slow COVID-19.
So
many gold miners couldn’t fully capitalize on the phenomenal
windfall of the highest quarterly gold prices ever seen. That
called into question whether GDXJ’s huge 76.4% gain in Q2 proper,
over half of its colossal post-panic upleg, was
fundamentally-justified. So I couldn’t wait to see how the mid-tier
gold miners actually fared operationally and financially last
quarter, whether shutdowns or high gold prevailed.
I’ve
painstakingly analyzed the mid-tier gold miners’ latest results for
17 quarters in a row now. While GDXJ included a
ridiculously-bloated 79 component stocks this week, I limited my
analysis to its top 25 holdings. They collectively accounted
for 69.9% of its total weighting, certainly a commanding sample.
These larger GDXJ stocks include some of the best-performing gold
and silver miners in the world.
The
GDXJ top 25 trade in the US, Australia, the UK, Canada, and Mexico,
making amassing this data somewhat challenging. There are different
financial-reporting requirements around the globe, and even within
the same country miners report different data in different ways. In
the few cases where half-year results were all that was offered,
they were split in half to approximate what those companies did in
Q2.
This
table summarizes the Q2’20 operational and financial highlights from
the GDXJ top 25. These mid-tier gold miners’ symbols are listed,
some of which are from their primary foreign stock exchanges. That
is preceded by their ranking changes in terms of GDXJ
weightings from Q2’19. Then their current weightings as of this
week follow those stock symbols. GDXJ essentially ranks components
by market capitalizations.
So
relative ranking changes help illuminate outperformers and
underperformers over the past year. That data is followed by each
miner’s Q2’20 gold production in ounces, and its year-over-year
change from Q2’19’s results. Then comes cash costs per ounce and
all-in sustaining costs per ounce along with their YoY changes,
revealing how much it costs these mid-tiers to wrest their gold from
the bowels of the earth.
Next
quarterly revenues, earnings, operating cash flows generated, and
cash on hand are listed along with their YoY changes. Blank data
fields mean companies hadn’t reported that particular data as of the
middle of this week. Blank percentage fields indicate those changes
would either be misleading or not meaningful, from comparing two
negative numbers or when data shifts from positive to negative and
vice versa.
Because of that epic tug-of-war between record-high average gold
prices and COVID-19 shutdown orders plaguing mines, the mid-tier
gold miners have never seen a quarter like Q2’20. But they still
generated relatively-strong operational results despite many mines
hobbled by decree. And their financial results proved outstanding
with gold prices so darned high. This sector’s massive gains
were fundamentally righteous!
While GDXJ is the highest-performing gold-stock ETF out of the
larger popular ones, it is certainly no longer a junior-gold-stock
ETF as advertised. Only two of the GDXJ-top-25 components
qualified as junior golds, deriving over half their quarterly
revenues from sub-75k-ounce gold output! Their production last
quarter is highlighted in blue, and both these companies have long
been better known for silver mining.
Rather unusually, the GDXJ top 25 included three new components last
quarter. These included Mexican silver-mining giants Fresnillo and
Industrias Penoles. The former is the largest silver miner in the
world, producing 13.6m ounces in Q2 alone! That catapulted these
mid-tiers’ silver output 120.0% higher YoY to 41.7m ounces. But
neither company is a primary silver miner, it accounted for 42% and
27% of their Q2 sales.
They
added to the mid-tier gold miners dominating GDXJ’s ranks. Together
the GDXJ top 25 collectively produced 4.1m ounces of gold in Q2’20.
That was down 6.7% YoY from Q2’19, reflecting the impact of the
various government-imposed national economic lockdowns to slow the
spread of COVID-19. While that sounds like a big production hit, it
is actually surprisingly mild. Mid-tiers’ output well
outperformed their peers’.
In
last week’s essay
I analyzed the quarterly results from the top 25 components of the
GDX major-gold-miners ETF. Their total production actually plunged
11.0% YoY to 7.6m ounces, considerably worse than the GDXJ top 25.
And the World Gold Council reported that overall global mine output
collapsed 10.0% YoY in Q2 to 25.0m ounces. So the GDXJ top
25 were well ahead only seeing their total output fall 6.7%.
And
that production decline is considerably overstated, because
of Harmony Gold. It is the only GDXJ-top-25 miner that hadn’t
reported Q2 gold output as of the middle of this week. Largely
focused in South Africa, that government’s COVID-19 lockdowns hit
its miners hard. Underground gold mining was totally suspended from
late March to early May, when it was permitted to resume at 50%
capacity until early June.
Then
full operations could spin back up. But surface mining was largely
exempted from the lockdowns, with operations running at close to
100% capacity throughout those months. Because of Q2’s massive
disruptions, South Africa’s securities regulator extended Q2
reporting deadlines. Harmony’s fiscal year ends Q2, and full-year
results including last quarter have to be audited. They are
delayed at least a month.
While it is ridiculous this company didn’t report preliminary Q2
gold production, it did mention its “South African operations
managed to achieve up to 75% of planned production during the last
quarter of the financial year”. A year earlier in Q2’19, Harmony’s
gold output ran 357k ounces. 3/4ths of that works out to 268k, but
2/3rds is a more-conservative assumption since this company also
mines gold in Papua New Guinea.
If
Harmony produced 238k ounces of gold in Q2, that would boost the
GDXJ top 25’s total output closer to 4.4m. Amazingly that would
only be down 1.3% YoY, radically better performance than the
major gold miners! And interestingly the GDXJ top 25 are mostly a
subset of the GDX-top-25 gold miners, excluding the latter’s eight
largest components. Fully 17 of the GDXJ-top-25 companies are also
GDX-top-25 ones.
The
GDXJ-top-25 gold miners in this table account for both 69.9% of
GDXJ’s total weighting and 30.9% of GDX’s total weighting.
But GDXJ throwing out the world’s largest gold miners, and weighting
the smaller mid-tiers more heavily, drives its big outperformance.
During that post-panic upleg where GDXJ skyrocketed 188.9% higher,
GDX’s comparable 134.1% surge was much smaller. Mid-tiers trounce
the majors.
The
major gold miners are simply too big to grow fast, both in
gold-output and market-capitalization terms. The top 8 GDX
components that GDXJ doesn’t include averaged 570k ounces of gold
production in Q2. And their average market capitalization in the
middle of last week ran $30.5b. That compares to 180k and $5.2b for
the GDXJ top 25. Coming from much-smaller bases, growth comes much
easier for mid-tiers.
These sweet-spot gold miners usually have a few mines, so adding
another one really boosts their gold output. Yet the majors are so
big that mine expansions, builds, and acquisitions can’t even keep
up with depletion. They almost never show the output growth traders
prize above everything else. And the stock prices of smaller
companies in market-cap terms are much more responsive to capital
inflows than larger ones.
The
GDXJ top 25’s stable production was even more impressive considering
the impacts of lockdowns for some of its components. Pan American
Silver, which is GDXJ’s third-largest weighting this week, is an
excellent example. Despite its name, it is now overwhelmingly a
primary gold miner with only 18% of Q2 revenues coming from
silver. PAAS’s Q2 gold production plummeted 37.5% YoY, among the
worst in GDXJ.
That
was solely because Pan American had the misfortune of being heavily
concentrated in countries with some of the most-draconian national
economic lockdowns. Those include Peru and Mexico, where nearly
3/4ths of PAAS’s 2019 revenues came from. Other GDXJ-top-25
components with huge plummetings in Q2 outputs YoY, including
Buenaventura and First Majestic Silver, also do their mining in
these countries.
Normally such sharp output drops would cause serious concerns, since
production is the lifeblood of this industry. The more gold miners
produce, the greater their profits supporting higher future
stock-price levels. But profits leverage to gold works both ways,
so when output falls future earnings potential drops dramatically.
Thankfully those COVID-19 disruptions were temporary, quickly
reversing as lockdowns lifted.
Most
of the affected mid-tiers reported operating tempos at shuttered
mines were back up nearing full speed by the end of Q2. So the GDXJ
top 25’s gold production should rebound sharply in Q3, surging back
up near or even above normal levels as miners rush to make up for
lost output. Q2’20’s widespread national lockdowns shuttering gold
mines likely won’t be repeated, they proved far too costly for those
countries.
Any
future lockdowns are likely to be narrowly targeted to
COVID-19 outbreak areas, which will be much less damaging
economically, socially, politically, and medically. And regional
flare-ups of this virus aren’t likely to affect gold mines much.
They are usually remote out in the mountains, and have limited
highly-controlled access so workers can be screened. The worst of
COVID-19’s gold-mining impact has likely passed.
In
gold mining, output and costs are inversely proportional.
The more gold mined, the more ounces to spread this industry’s big
fixed costs across. Those generally don’t change much from quarter
to quarter regardless of prevailing gold prices. Individual mines
require the same levels of infrastructure, equipment, and employees
to feed their fixed-capacity mills quarter after quarter. So lower
outputs mean higher unit costs.
And
that doesn’t even include all the new costs for managing this
pandemic, something the gold miners have never had to do. Testing
for the virus, quarantining the afflicted, and relentlessly social
distancing and cleaning to limit its spread all require more
resources and people. So gold-mining operating costs had to
increase with these many new COVID-19 burdens, completely
independent from gold production.
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.
The
GDXJ top 25 reported average cash costs of $707 in Q2, which merely
edged up 2.2% YoY. That was on the higher side of their 17-quarter
range from $608 to $749, but still super-low relative to high
prevailing gold prices. Obviously with gold enjoying that record
quarterly average price of $1714 in Q2, the mid-tiers faced no
existential threat. Cash costs are really only relevant when gold
plumbs secular lows.
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.
The
GDXJ top 25 reporting AISCs averaged $998 per ounce last quarter,
which only climbed 3.4% YoY. And that was skewed high by
that Peruvian gold and silver miner Buenaventura. Peru’s
heavy-handed lockdown nearly slashed BVN’s gold output in half,
doubling its AISCs to an extreme anomalous high way up at $1598!
Excluding that crazy outlier, the rest of the GDXJ top 25 averaged
lower $966 AISCs in Q2.
Both
reads were lower than the last 17 quarters’ highest GDXJ-top-25
average AISC of $1016. That hit in Q1’20 as COVID-19 lockdowns
began. Even including BVN, the mid-tiers’ 3.4% YoY increase in
AISCs was far better than the GDX-top-25 majors seeing their own
average AISCs shoot 13.1% higher YoY! The mid-tiers holding the
line on costs despite all the pandemic challenges made for
spectacular profitability.
The
best quick proxy for sector gold-mining earnings is calculated by
subtracting quarterly average AISCs from quarterly average gold
prices. $1714 less $998 yields GDXJ-top-25 implied earnings of $717
per ounce last quarter! That skyrocketed an astounding 108.2%
YoY from the $344 profits this metric implied a year earlier in
Q2’19. Those massive mid-tier gold-mining profits were the highest
yet seen by far in this bull.
With
implied profits more than doubling, GDXJ’s huge 76.4% Q2’20 gain
seems modest. It was certainly justified by the vastly-improved
fundamentals that much-higher gold prices drive. And
super-bullishly for mid-tier gold miners’ stock prices going
forward, their earnings power continues to soar. The underway Q3
which is more than halfway over has already seen gold average a
dazzling new all-time-record $1899!
But
like gold stocks,
gold is extremely overbought and really needs to correct to
rebalance sentiment. Yet even if it falls sharply enough to drag
Q3’s average price down to $1825, that still dwarfs Q2’s $1714
average. And the GDXJ top 25’s AISCs aren’t likely to change much
from their four-quarter average now running $984. That’s
conservative, higher output with shut-in production rebounding
should push AISCs lower.
These cautious and sober Q3 projections yield potential GDXJ-top-25
earnings of $841 per ounce this quarter. That would keep
soaring another 61% YoY from Q3’19’s levels! And that’s nothing
new. During the last four reported quarters ending in Q2, mid-tier
gold-mining profits per this sector proxy soared 65%, 72%, 66%, and
108% YoY! With sustained earnings growth like this, traders should
be flocking in to the mid-tiers.
Their hard financial results reported to securities regulators,
under Generally Accepted Accounting Principles or their foreign
equivalents, proved outstanding in Q2 despite the operational
challenges from governments’ lockdowns. The GDXJ top 25’s total
revenues grew 15.7% YoY to $6.4b. And those are actually really
understated, because of that financial-reporting delay authorized by
South Africa’s regulators.
When
I did this same analysis a year ago for Q2’19, the major South
African gold miners Gold Fields and Harmony Gold had fully
reported. If their year-ago revenues are backed out, the GDX top 25
saw Q2’20 sales rocket 46.3% higher YoY. The mid-tiers’ bottom-line
accounting earnings soared 68.6% higher YoY to $454m, massive
growth in line with that implied-earnings proxy! Again GDXJ’s 76.4%
Q2 gain was righteous.
Excluding the South African gold miners’ Q2’19 profits doesn’t
materially change that, they proved a wash last year. But it does
affect operating cash flows. The GDXJ top 25 saw total OCFs surge
34.9% YoY to $2.7b. But without the prior-year OCFs reported on
time by GFI and HMY, that comparison blasts way up to +57.9% YoY.
That high OCF generation helped boost GDXJ-top-25 treasuries by
63.1% YoY to $8.9b.
Without that pair of South African miners, cash soared 83.4% YoY.
Given the unprecedented uncertainty gold miners face from
governments’ draconian overreactions to COVID-19, they also tapped
lines of credit to maintain ample liquidity to weather any
operational storms. That $8.9b in cash among the GDXJ top 25 was
the highest by far in the 17 quarters I’ve been doing this
analysis. Mid-tiers are ready for more lockdowns.
But
that lockdown threat is fading fast as governments realize garroting
their own economies is a cure far more damaging than the COVID-19
disease. So as gold miners’ lockdown fears wane, they will be flush
with cash to expand their outputs. The coming year will
likely see plenty of announcements of big mine expansions, new mine
builds, and mergers and acquisitions. That will generate lots of
sector interest!
Overall Q2’20 proved really strong for the mid-tier gold miners.
While they did face mine shutterings from governments’ national
lockdowns, their collective output only shrunk modestly. That far
outperformed the big drops from the major gold miners. Holding gold
production relatively stable combined with the record average gold
prices in Q2 to drive outstanding financial results. The mid-tiers
remain gold stocks’ sweet spot!
Given the enormous earnings these higher prevailing gold prices are
generating at mid-tier gold miners, additional massive gains
in their secular bull are certainly fundamentally-justified. Even
though GDXJ just enjoyed that huge 188.9% post-stock-panic upleg,
this gold-stock bull’s next upleg is likely to prove really big
too. But we first have to get through healthy gold and gold-stock
corrections following extreme overboughtness.
All
bull markets naturally flow then ebb, taking two steps forward
before retreating one step back. Their price action gradually
meanders around uptrends. This normal upleg-correction pattern
keeps sentiment balanced, extending bull markets’ longevity. And it
is a huge boon for traders, offering excellent mid-bull
opportunities to buy relatively low before later selling relatively
high. That greatly expands bulls’ potential gains!
At
Zeal we started aggressively buying and recommending
fundamentally-superior gold and silver miners in our
weekly and
monthly
subscription newsletters back in mid-March right after the
stock-panic lows. We layered into dozens of new positions before
gold stocks grew too overbought, which were stopped out recently at
huge realized gains running as high as +199%! Our subscribers
multiplied their wealth within months.
To
profitably trade high-potential gold stocks, you not only need to
understand their fundamentals but stay informed about what’s driving
gold. Our newsletters are a great way, easy to read and affordable.
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Corrections are the time to do your gold-stock homework, preparing
to redeploy as they pass.
The bottom line is
the mid-tier gold miners reported outstanding Q2 results. While
COVID-19 lockdowns did affect their operations, their output
shrinkage was much smaller than their larger peers’. That resulted
in smaller cost increases, fueling enormous earnings growth in both
sector-implied and hard-accounting terms. Revenues, operating cash
flows generated, and treasury cash also all soared dramatically last
quarter.
With the mid-tiers
rolling in liquidity, they will likely invest billions in boosting
their production as lockdown fears fade in coming quarters. And Q3
is shaping up to be another quarter seeing massive profits upside.
With national lockdowns over, gold output is rebounding pushing
costs lower. That along with much-higher-still record average gold
prices shows big additional gold-stock gains remain fundamentally
justified. |