The
mid-tier gold miners’ stocks are in this sector’s sweet spot for
upside potential. After a spectacular run since March’s stock
panic, they have been correcting since early August. That is doing
its necessary work of rebalancing sentiment, paving the way for the
next bull upleg. Higher prevailing gold prices have proven a huge
fundamental windfall for mid-tiers, as their latest quarterly
operating and financial results reveal.
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.
In
just 4.8 months between mid-March’s stock-panic nadir to early
August, GDXJ skyrocketed 188.9% higher! This ETF way
outperformed its major-dominated big-brother ETF, GDX. That powered
134.1% higher over that same span, which GDXJ further amplified by
1.4x. But ever since peaking in early August at
extremely-overbought levels, this mid-tier-gold-stock ETF has been
languishing in a healthy correction.
This
week that just slumped to a fresh low, extending GDXJ’s total
selloff to 19.8% over 3.5 months. This ongoing gold-stock
correction is mirroring and exaggerating gold’s own like usual.
Gold is selling off because American stock traders are
dumping gold-ETF
shares and gold-futures speculators’ positioning remains
excessively-bullish. Those guys closely watch the US dollar,
which is oversold and
due to mean
revert higher.
But
even if these parallel gold and gold-stock corrections haven’t
matured and climaxed yet, speculators and investors need to stay
abreast on the mid-tier gold miners’ fundamentals. The stronger
they are, the greater these stocks’ upside potential in gold’s next
bull-market upleg. And the just-reported Q3’20 results from the
world’s best mid-tiers proved super-impressive. They are thriving
operationally and financially.
For
18 quarters in a row now, I’ve painstakingly analyzed the mid-tier
gold miners’ latest quarterly results right after they are
reported. While GDXJ contained an absurd 84 component stocks this
week, I’m limiting my analysis to its top 25 holdings. These
include some of the greatest mid-tiers, which command a major 69.0%
of GDXJ’s total weighting. They are among the best-performing gold
miners on the planet.
These gold miners trade in the US, Australia, South Africa, China,
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. Half-year reporting is common outside the US,
and Q3s are off-cycle quarters. But most miners still give shorter
quarterly updates.
This
table summarizes operational and financial highlights from the GDXJ
top 25 in Q3’20. These 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 Q3’19. Their current weightings as of this week follow those
stock symbols. This ETF essentially weights gold stocks by their
market capitalizations.
So
relative ranking changes help illuminate outperformers and
underperformers over this past year. That data is followed by each
miner’s Q3’20 gold production in ounces, and its year-over-year
change from Q3’19’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 elite miners to wrest their gold
from the bowels of the earth.
Next
quarterly revenues, GAAP 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 be either misleading or not meaningful, like comparing
two negative numbers or data shifting from positive to negative and
vice versa.
Sporting the highest average gold prices ever seen, last
quarter promised to be a banner one for mid-tier gold miners. And
they didn’t disappoint, with stable output and higher gold prices
fueling monster revenues, earnings, operating-cash-flow, and
treasury growth in Q3! The mid-tier gold miners also largely held
the line on costs, further ramping exploding profits. These stocks’
fundamentals have never looked stronger.
 
GDXJ’s mid-tier holdings certainly aren’t unique. Of these top 25,
fully 22 are also components in that bigger GDX major-gold-miners
ETF! GDXJ’s top 25 stocks mostly clustered between ranking 9th to
31st in GDX. So GDXJ effectively slices away GDX’s top 8 gold
majors, which averaged massive Q3’20 gold production of 634k
ounces. That enables GDXJ to more-heavily weight these ETFs’ many
mutual holdings.
These top 25 GDXJ stocks that account for 69.0% of its total
weighting represent just 33.8% of GDX’s. So this mid-tier gold
miners’ ETF essentially takes a third of the positions from GDX and
doubles their importance. This largely cuts out the serious
deadweight of the major gold miners which have long struggled to
grow their outputs. And production is the lifeblood of this
industry, a critical driver of overall profits.
Last
quarter these elite mid-tier gold miners in the GDXJ top 25 actually
saw their collective gold output drop a sharp 10.3% year-over-year.
That poor performance was much worse than the GDX top 25 fared, with
their total quarterly production climbing a slight 0.6% YoY. The
largest GDXJ components’ output lagged way behind the entire world,
which showed a 3.4% YoY production drop per World Gold Council data.
That
very-weak GDXJ-top-25 output last quarter was surprising, as
mid-tiers’ production growth usually well outpaces the majors’. And
coming out of governments’ widespread national lockdowns in Q2 to
slow COVID-19’s spread, Q3’s production rebound should’ve been
strong as many shuttered mines were allowed to spin back up.
Fortunately this mid-tier output decline is misleading, heavily
skewed by ranking shufflings.
As
they’re based on market capitalizations, GDXJ’s weightings of
positions are forever changing. Over the past year the biggest
gainer in this ETF’s rankings is the Chinese gold producer Zhaojin
Mining, which soared 31 GDXJ ranks! It is listed above by its
numeric Hong Kong symbol, 1818. Finding quarterly data on Chinese
companies in English is all but impossible, since that country’s
reporting requirements are so opaque.
Every quarter I check the Chinese gold miners’ websites, looking for
their latest results. And for the years I’ve been advancing this
fundamental-research thread, these companies have never reported any
kind of operating results including production. So that is left
blank above, zero for calculation purposes. Zhaojin rocketing up
through GDXJ’s higher ranks knocked out another mid-tier gold miner
reporting production in Q3’19.
And
in that comparable year-ago quarter, GDXJ’s 4th-largest component
was South Africa’s Sibanye-Stillwater. While it mined a major-level
287k ounces of gold in Q3’19, GDXJ’s managers rightfully kicked it
out of this ETF over the past year since this company is a
primary platinum miner. So subtracting its big gold output from
the Q3’19 total makes that much more comparable with GDXJ’s top 25
stocks in Q3’20.
And
GDXJ’s 10th-largest component in Q3’19 was Detour Gold, which
produced 138k ounces of gold then. That company was bought out by
the best major gold miner Kirkland Lake Gold earlier this year. So
Detour Gold production is rolled into that larger company now, which
is too big to be included in GDXJ. So some key GDXJ-top-25
year-over-year comparisons are more meaningful excluding this pair
of stocks.
Backing out Sibanye’s and Detour’s production from a year ago, the
GDXJ top 25 merely saw their gold output contract 1.2% YoY.
And without some other ranking shufflings, the mid-tier gold miners
would have enjoyed production growth. Another example is IAMGOLD
ranking 17th in this ETF in Q3’19, when it produced 187k ounces of
gold. In Q3’20 this stock fell to 27th place, forcing exclusion of
159k ounces mined.
A
year ago the tiny gold streamer Sandstorm Gold ranked as 28th, but
it climbed to 25th last quarter due to relative market-cap changes.
It only “produced” a trivial 12k ounces of gold in Q3’20. So the
mid-tier gold miners’ overall output growth was much stronger than
that raw GDXJ-top-25 comparison indicates. And there are other
ranking changes across that 25th-place cutoff threshold also skewing
production lower.
But
with that headline output read down 10.3% YoY to 4,136k ounces in
Q3’20, unit production costs should’ve surged. 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. That gives gold mining big
profits leverage to gold.
Individual mines require the same levels of infrastructure,
equipment, and employees to feed their fixed-capacity mills quarter
after quarter. So lower outputs usually directly translate into
higher unit costs. But the mid-tier gold miners’ average costs
proved incredibly constrained last quarter, barely rising
absolutely and relative to their larger major-gold-miner peers!
Again shuffling GDXJ rankings proved a big factor in this.
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 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 $725 in Q3’20, which
surprisingly slipped a slight 0.7% YoY! And even that was skewed
high by a couple struggling miners. South Africa’s Harmony Gold has
long been a high-cost producer, forced to deal with expensive
ever-deeper mining operations and that country’s hostile
regulations. It reported really-high cash costs of $1156 last
quarter, way above industry norms.
And
American gold-and-silver miner Hecla reported astronomical cash
costs of $1398, truly an extreme outlying anomaly. This company
didn’t even bother explaining why its gold output plummeted and
costs soared in its quarterly report, apparently hoping investors
wouldn’t notice. Excluding those two high cash costs, the rest of
the GDXJ top 25 averaged a very-impressive $663! Kicking out
Sibanye-Stillwater also helped.
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 mid-tier gold
miners’ true operating profitability.
The
elite mid-tier gold miners in the GDXJ top 25 reported average AISCs
of $985 per ounce in Q3’20, which amazingly only rose 3.4% YoY!
That’s still on the high side for these companies, which saw their
average AISCs run in a range from $860 to $1016 since Q2’16. But
the mid-tiers’ average AISCs last quarter really bested the
major-gold-miner-dominated GDX top 25, which averaged $1028 soaring
16.4% YoY!
And
this latest GDXJ read was again skewed high by the out-of-control
costs at Hecla and Harmony. If those are excluded, the rest of the
GDXJ top 25 averaged just $912! Those kinds of unit costs are very
impressive and wildly profitable given the high gold prices.
Q3’20’s lofty $1912 average gold price proved the highest on record,
soaring an enormous 29.8% YoY. That radically improved mid-tiers’
fundamentals.
Subtracting the mid-tiers’ average AISCs from average gold prices
yields a great quarterly proxy for these miners’ collective
profitability. Q3’20’s record $1912 average gold prices less the
GDXJ top 25’s unadjusted $985 AISCs shows stellar unit profitability
running $928 per ounce! That’s the highest these mid-tier gold
miners have ever earned by far, making for epic 77.9% YoY growth
in this key earnings metric.
And
these soaring profits certainly aren’t isolated. Over the previous
four reported quarters leading into Q3’20, the GDXJ top 25’s
earnings per ounce by this measure soared 65.1%, 72.2%, 66.1%, and
108.2% YoY! That made for stupendous 77.9% average profits growth,
which Q3’20 was right in line with again. It is no wonder the
mid-tiers’ stocks nearly tripled in their latest upleg, their
fundamentals are incredibly strong.
The
major gold miners greatly benefitted from these record gold prices
too, as I explained in my essay on the
GDX top 25’s
Q3’20 results last week. But the mid-tier gold miners have two
huge advantages over the majors, greatly boosting their gains during
gold uplegs. The mid-tiers have both much-smaller market
capitalizations for their stocks and much-lower production bases
than majors, making for bigger growth potential.
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 634k ounces of gold
production in Q3. And their average market capitalization in the
middle of last week ran $24.8b. That compares to just 180k and
$4.4b 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 rarely 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.
When
mid-tiers’ smaller market caps and outputs are combined with
explosive profits growth from much-higher gold prices, their upside
potential during major gold uplegs trounces that of the majors. So
the mid-tiers are the best gold stocks to own as this secular
gold bull continues marching higher in coming years. Their future
gold-production growth will far exceed the majors’, and their
earnings aren’t done soaring.
Despite gold itself being in a necessary and healthy correction
which has dragged down all gold stocks in recent months, prevailing
gold prices remain stellar. In this current Q4’20 as of the middle
of this week, gold is still averaging $1898. With this quarter more
than half over, it is hard to imagine gold’s correction forcing Q4’s
average price under $1850. That would still yield big profits
growth even with conservative AISCs.
Over
the latest four reported quarters, the GDXJ-top-25 gold miners had
tight average AISCs of $992 per ounce. That implies the mid-tiers’
Q4’20 unit profitability could easily run $858 per ounce in this
current quarter, still soaring 67.0% YoY from Q4’19! So the
mid-tier gold miners’ powerful bull run on fantastic fundamentals
remains far from over. Once this correction ends, these gold stocks
are off to the races again.
On
the hard-financial-results front under Generally Accepted Accounting
Principles reported to securities regulators, or their foreign
equivalents, the mid-tier gold miners achieved an amazing quarter
financially. The GDXJ top 25’s total revenues surged 25.3% YoY
to $7.7b, which tracks with 10.3%-lower gold output and 29.8%-higher
average gold prices. And again that shuffling among GDXJ’s top
ranks skews those results.
Without Sibanye and Detour which make Q3’19 more comparable to
Q3’20, sales growth hit 29.6% YoY. And the real-accounting-profits
growth the mid-tiers are achieving is breathtaking. The $1201m in
total earnings the GDXJ top 25 reported last quarter was their
highest ever by far, skyrocketing 343.2% YoY! These spectacular
bottom-line results from the high-potential mid-tiers confirm that
gold-minus-AISCs proxy.
Last
quarter’s fat profits were overwhelmingly ordinary and normal
operating ones too, I only saw one big nonrecurring non-cash
gain. B2Gold reported a $122m reversal of an impairment charge on a
gold mine due to much-higher prevailing gold prices. Without that,
the GDXJ top 25’s accounting profits still soared 280.4% YoY. And
that’s understated too, as the comparable Q3’19 quarter saw bigger
one-off non-cash gains.
Soaring operating-cash-flow generation confirmed the wildly-bullish
fundamental impact these higher gold prices are having on the
mid-tier miners. Their total OCFs soared 85.1% YoY to $3580m, also
by far the highest they’ve ever achieved. That boosted their
collective cash hoards 57.2% YoY to $7.9b, a large sum that will be
used to fund plenty of gold-mine expansions along with some mine
builds and mergers.
While the mid-tiers will certainly be looking to invest this
windfall into production growth, they themselves will be targeted
for buyouts by the much-larger majors. The big gold miners
enjoyed huge profits growth leading to bursting treasuries last
quarter too. And they need to spend those fortunes to buy new mines
and gold deposits to offset their inexorable depletion. That should
fuel a feeding frenzy of gold-stock buying.
The
fundamentally-superior mid-tier and junior gold miners with
consistently-growing production will be the stocks the majors fight
over. They will have to offer big premiums to entice shareholders
to sell. And the gold-mining realm is fairly small, so bidding wars
are likely as majors rush to spend their cash before their peers.
They are desperately competing for a very-limited-and-shrinking
supply of gold mines globally!
With
mid-tiers sporting such awesomely-bullish fundamentals in Q3 and
almost certainly again in Q4, their next bull-market upleg has
strong potential to balloon to more outsized gains. But
first this sector has to weather this necessary and healthy
in-progress
correction, which is controlled by gold’s own. This is the time
to do your gold-stock homework, crafting a buy list for the bargains
to come as this selloff climaxes.
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The
bottom line is the mid-tier gold miners reported outstanding Q3
results. When adjusted for shufflings in GDXJ’s upper rankings, the
mid-tiers’ gold output was stable despite ongoing challenges from
COVID-19 mitigation. They also held the line on production costs,
doing far better than the majors. That combined with record-high
average gold prices to make last quarter mid-tiers’ most profitable
ever witnessed by far.
These sweet-spot gold miners have never been stronger fundamentally,
with sales, profits, and operating-cash-flow generation soaring.
And these super-bullish trends are continuing, as gold is staying
high even in this necessary rebalancing correction. So the mid-tier
gold miners’ stocks are again setting up to achieve more massive
gains during gold’s next bull upleg. Far-higher stock prices are
fully fundamentally justified. | 
