The
mid-tier and junior gold miners in their sector’s sweet spot for
upside potential have been powering higher recently. They’ve
blasted to several major breakouts after getting bombed out during
gold-futures speculators’ taper tantrum on Fed-tightening fears last
summer. These smaller gold miners just finished their Q3’21
earnings season, revealing whether their fundamentals support more
big stock-price gains ahead.
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 1m, large majors yield
over 1m, and huge super-majors operate at vast scales exceeding 2m.
Mid-tiers offer a unique mix of sizable diversified gold production,
considerable 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. Ironically the leading mid-tier
gold-stock benchmark is the misleadingly-named GDXJ Vectors Junior
Gold Miners ETF. It has evolved to be dominated by mid-tiers
yielding quarterly outputs of 75k to 250k ounces. True juniors now
only account for a smaller fraction of the weighting in this
second-most-popular gold-stock ETF.
Just
over a third the size of its big-brother GDX major-gold-miners ETF,
GDXJ has certainly had a wild ride this year. Showing mid-tiers’
huge potential, GDXJ skyrocketed 188.9% in a massive upleg
over just 4.8 months into early August 2020! The extreme greed and
overboughtness that spawned necessitated a normal and healthy major
correction to rebalance sentiment, so the mid-tiers fell 32.0% into
late March 2021.
That
cleared the way for their next upleg to start marching higher, and
it clocked in at young 26.7% gains by early June. But mid-month,
gold-futures speculators started freaking out about coming Fed
tightening. Several heavy-to-extreme
bouts of
gold-futures selling hammered the yellow metal on these traders’
fears of distant-future rate hikes and slowing quantitative-easing
money printing. Gold stocks were collateral damage.
That
anticipatory
QE-taper tantrum prematurely truncated the mid-tiers’
young upleg, whacking GDXJ back down 32.2% by late September. That
devastated herd psychology, leaving overwhelmingly-bearish sentiment
in its wake.
Heading into and
soon after
that deep capitulation low, I was pounding the table on getting or
stayed deployed in deeply-undervalued gold stocks. Indeed that
interrupted upleg has resumed since.
GDXJ
has surged 28.2% at best since then, a good start for a major
upleg. With mid-tiers’ mounting gains rekindling traders’ interest,
it’s a great time for quarterlies. These reveal how gold miners
are actually faring fundamentally, both operationally and
financially. This hard data cuts through the obscuring and
misleading fogs of herd sentiment. So I’ve been advancing this
research thread for 22 quarters in a row now.
After every quarterly earnings season, I painstakingly analyze the
latest results from each of the top 25 GDXJ component stocks. This
week they commanded 60.2% of this ETF’s total weighting, the lowest
yet seen in these last 22 quarters. Down from a 75.9% peak in
Q4’19, this is good news for speculators and investors. GDXJ’s
holdings are gradually diversifying in weightings terms, leaving
smaller miners more influential.
This
table summarizes the operational and financial highlights from the
GDXJ top 25 in Q3’21. 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
changing market caps, which reveal both outperformers and
underperformers since Q3’20. Those symbols are followed by their
current GDXJ weightings.
Next
comes these gold miners’ Q3’21 production in ounces, along with
their year-over-year changes from the comparable Q3’20. 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.
Despite Q3’s challenges led by those gold-futures selloffs and
mounting inflationary cost pressures, the GDXJ gold miners are
generally faring quite well. When adjusted for huge composition
changes in this ETF, they generally enjoyed surging production. And
many held the line on costs, although the usual-suspect outliers
skewed the averages. Overall the mid-tier and junior gold miners
are still thriving fundamentally!
 
Much
to their credit, GDXJ’s managers have slowly forged their baby into
the world’s best gold-stock ETF. For years it included
larger super-majors, which are as far from junior-dom as miners
get. Due to their big market capitalizations, they had
disproportionally-high weightings compared to other smaller
components. Moving some larger gold miners to the GDX
major-gold-stock ETF where they belong has finally happened.
Super-majors Kinross Gold and Gold Fields are now rightfully left
exclusively in GDX, along with the new Australian major Northern
Star Resources after it gobbled up competitor Saracen Mineral.
Those four companies alone accounted for 3/8ths of the GDXJ
top 25’s gold production in Q3’20, and fully 21.4% of this ETF’s
total weighting! So while their removal from GDXJ was good, it left
Q3’21 not comparable with Q3’20.
The
companies that climbed into the elite GDXJ-top-25 ranks to help fill
that big vacuum left when those majors were booted are far
smaller. They include MAG Silver, Osisko Gold Royalties,
Seabridge Gold, and Wesdome Gold Mines. MAG is building a massive
new silver mine, but will have no real production until next year.
OR is a ludicrously-overvalued royalty play that only yielded a
paltry 20k ounces last quarter.
SA
has a colossal world-class gold deposit, but that may as well be
vaporware as this project hasn’t been developed for decades. WDO is
the only real gold miner among these replacements, but producing 29k
ounces in Q3’21 it is still a smaller junior. So Q3’20’s huge
1,542k ounces of gold mined by those kicked-out majors has
effectively been replaced with just 49k in Q3’21! We have to
adjust our year-over-year comparisons.
Ignoring those vast composition changes, the GDXJ top 25’s
production looks terrible plunging 23.9% YoY last quarter. But
pulling those now-three majors from Q3’20 results to make them
comparable with Q3’21’s reveals awesome production growth. The
3,149k ozs produced last quarter by these mid-tier and junior miners
actually soared 21.4% YoY! That is phenomenal, far better
than the GDX major gold miners.
There’s lots of overlap in GDXJ and GDX components. The former
basically lops off the top 13 holdings of the latter, then greatly
expands their weightings. As I explained in my essay last week on
the GDX top 25’s
Q3’21 results, the super-majors dominating its weightings are
largely deadweight. They can’t grow output at their vast
scales, and their enormous market caps saddle their stock prices
with supertanker-like inertia.
Fully 20 of these GDXJ-top-25 components are also in GDX, but their
total weighting in that major ETF is only 22.5% compared to 60.2% in
GDXJ. Without the world’s largest gold miners and their
perpetually-losing battle against depletion, the mid-tiers and
juniors can really shine. Their 21.4%-YoY adjusted gold-output
growth thrashes the GDX top 25’s mere 1.1% YoY last quarter!
Smaller miners fuel new production.
After every quarter the World Gold Council publishes the
best-available global gold fundamental data in its fantastic
must-read Gold Demand Trends reports. In Q3’21, worldwide mined
gold supply surged 4.4% YoY. While the GDX majors merely achieved a
quarter of that growth rate, the GDXJ mid-tiers and juniors
collectively nearly quintupled it! And gold-stock price gains
are heavily correlated with output trends.
Whether mid-tiers or true juniors producing less than 75k ounces per
quarter, fully 3/5ths of the GDXJ top 25 reported higher production
in Q3’21. The handful of actual junior primary gold miners
have production highlighted in blue. With more exposure to smaller
mid-tier and junior gold miners, GDXJ’s usefulness for traders
continues to improve. It has way more upside potential during gold
uplegs than major-dominated GDX.
Unlike the majors simply too big to grow fast regardless of how well
they are managed, the mid-tier and junior gold miners are coming
from much-smaller bases. These
sweet-spot-for-upside-potential mid-tiers usually have a few mines
or less, so expansions and new mine builds really boost their
outputs. And the mid-tiers also have way-smaller market caps,
making their stock prices far-more-responsive to capital inflows.
When
mid-tiers’ lower production and market caps are combined with
leveraged profits growth from higher gold prices, their upside
potential during big gold uplegs trounces that of the majors. So
the mid-tiers are easily the best gold stocks to own as this
secular gold bull continues marching higher over coming years.
Their future gold-production growth will far exceed the majors’, and
their earnings aren’t done soaring.
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
adjusted production surging, the GDXJ top 25 should’ve reported
lower unit costs in Q3’21.
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.
Unfortunately the GDXJ top 25’s cash costs bucked their
sharply-higher output to blast 19.0% higher YoY to $862 per ounce!
While still way below prevailing gold prices, that was the highest
by far during the 22 quarters I’ve been advancing this research.
Thankfully that average was heavily skewed by a handful of outliers
including Hecla Mining, Harmony Gold, and Buenaventura which
reported super-high cash costs in Q3’21.
HL
has long been a higher-cost miner, and its anomalous cash costs
actually improved considerably from Q3’20. South Africa’s HMY is
operating old very-deep gold mines that are increasingly expensive
to keep running. Peru’s BVN has been struggling on the operations
front for years, weaker production forces costs higher. Excluding
these usual-suspect outliers, the rest of the GDXJ top 25 averaged
better $790 cash costs.
Even
those were skewed high by Equinox Gold and IAMGOLD. The former is
one of the fastest-growing mid-tier gold miners, constantly
advancing projects and opening new mines. Its costs will retreat as
more come online. IAG is dealing with lower ore grades and
inflationary cost pressures in its expenses, but it is slowly
transitioning to new mines that will lower costs in coming years.
So GDXJ-top-25 cash costs are fine.
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.
For
the same distorting reasons, the GDXJ top 25’s all-in sustaining
costs in Q3’21 also surged 14.9% YoY to $1,131 contrary to
much-higher adjusted production. That was just shy of the $1,134
22-quarter high seen in Q1’21. But last quarter’s average was also
skewed high by those same always-outlying HL, HMY, and BVN.
Excluding them the rest of these mid-tiers and juniors reported
way-better $1,049 AISCs.
That
would only be up 6.6% YoY, fairly-impressive given the raging price
inflation unleashed by central banks’ epic money printing. And if
EQX and IAG are also taken out due to their temporarily-outsized
costs, that average plunges to $993 which is right in line with
Q3’20’s $985. So the great majority of the elite mid-tier and
junior gold miners are performing well in keeping costs under
control. That is really bullish!
Subtracting the GDXJ-top-25 average AISCs from prevailing gold
prices yields a great proxy for mid-tier unit earnings. Despite
those bouts of heavy gold-futures selling on Fed-tightening fears,
gold still fared quite well in Q3’21 averaging $1,789. That was
down a modest 6.4% YoY, ending a magnificent nine-quarter streak
of higher gold prices. Still gold remained far higher than even
those elevated $1,131 AISCs.
Despite being pinched by both lower gold prices and higher costs,
that still yielded excellent mid-tier profits of $658 per
ounce! That remained the sixth-highest ever seen, after the five
preceding quarters. The peak was $928 in Q3’20, but for three full
years prior to Q2’20 this metric averaged $413. Gold mid-tiers are
still thriving despite the inflationary cost pressures they face.
And gold-price gains should outpace inflation.
Ultimately gold
will follow the money, which has exploded under this profligate
Fed. In just 20.5 months since March 2020’s pandemic-lockdown stock
panic, this central bank has mushroomed its balance sheet by a
radically-unprecedented and terrifying 108.3% or $4,504b! And
despite finally starting to slow that ballooning with the QE4 taper,
another $420b is still coming if the Fed sticks to the timeline the
chair laid out.
With
vastly more money competing for and bidding up prices on
far-slower-growing goods and services, inflation is raging. The
more investors experience it in their own lives, and see how it
erodes earnings in these Fed-QE-levitated
bubble-valued
stock markets, the more they will prudently diversify
stock-heavy portfolios with gold. So gold-price gains should
way-outpace inflation, and miners’ earnings leverage those.
On
the hard-accounting front, the GDXJ top 25’s Q3’21 results were
mixed even adjusted for those now-three majors removed over this
past year. These mid-tier and junior gold miners did enjoy strong
14.8%-YoY adjusted revenues growth to $6,937m last quarter! That’s
right where you’d expect with that big adjusted-gold-output growth
of 21.4% and 6.4%-lower quarterly average gold prices, certainly
impressive.
But
bottom-line earnings under Generally Accepted Accounting Principles
still cratered 77.9% YoY on an adjusted basis to just $212m! That
sounds like a disaster, not matching up with implied mid-tier
earnings from that average-gold-less-average-AISCs proxy. That $658
in GDXJ-top-25 unit profits only retreated a far-milder 29.1% YoY.
This discrepancy was driven by big mostly-non-cash items flushed
through income statements.
In
Q3’21 those included PAAS earning $28.5m selling other shares, IAG
incurring a $40.4m charge for additional mine-reclamation expenses,
EGO paying $21.4m to retire some bonds early, and CDE suffering a
$35.7m unrealized loss on investments. There were other smaller
non-cash items too, but I only flag the larger ones for my
spreadsheet. Adjusted for these, GDXJ-top-25 profits were closer to
$281m last quarter.
And
Q3’20 saw even more extreme non-cash items distorting operating
income, which adjusts the raw $959m excluding those now-three major
miners booted out. BTG reversed a $174.3m impairment charge, AUY
gained $241.9m selling a mine, while CG reported a $230.5m
impairment charge due to problems getting essential water at one of
its mines. Those big ones drop Q3’20 adjusted earnings near $773m.
Accounting for these major unusual items alone reduces the adjusted
net-income collapse to 63.7% YoY to $281m. That’s still ugly,
partially reflecting the rising costs of gold mining. It will be
interesting to see how Q4’21 plays out, whether these losses
persist. I was surprised to see so many GDXJ-top-25 gold miners
report accounting losses last quarter. They should’ve fared better
given gold prices and mining costs.
Nevertheless, their valuations generally remained fairly-low for
high-potential smaller gold miners. Four of these elite mid-tiers
and juniors had crazy-high trailing-twelve-month price-to-earnings
ratios midweek due to low earnings or losses during the past four
quarters. Excluding those 100x+ outliers, the rest of the GDXJ top
25 with profits over this last year averaged TTM P/Es of 24.3x.
That’s low for smaller gold miners.
Cash
flows generated from operations are often a more-stable measure of
operating performances than accounting earnings, since they
typically don’t contain unusual one-off items. The adjusted GDXJ
top 25’s OCFs fell 44.0% YoY to $1,573m. But most of that was due
to Peru’s endlessly-struggling BVN reporting OCFs plummeting to
negative $464.3m due to a $544.2m “Payments for tax litigation”
outflow!
Presumably the income-statement expense to go along with this huge
legal settlement must have been already run through. But it isn’t
apparent in my past-quarters Buenaventura data, which is strange.
This settlement is with Peru’s government due to BVN apparently
expensing certain things back in 2007 to 2010 that weren’t allowed.
The $103.7m original claim more than quintupled to $585.4m
due to penalties and interest!
Excluding BVN’s OCFs from both Q3’21 and Q3’20, along with those
now-three-kicked majors from that year-ago quarter, the GDXJ top
25’s OCFs only fell 25.1% YoY to $2,037m. So operational
performances look much better than the skewed total. These elite
mid-tiers and juniors generated enough cash to grow their adjusted
treasuries a massive 46.0% YoY to $9,197m. Those are big warchests
to grow future production.
Unlike the majors which often have to buy entire companies at
expensive premiums to offset depletion, the mid-tiers and juniors
boost output by expanding existing mines and/or buying lone new ones
from time to time. Major mine expansions and/or new mine
construction is underway at a sizable fraction of these GDXJ-top-25
gold miners. $9.2b of cash is on the high side for them, lots of
capital firepower for expanding outputs.
So
the mid-tier and junior gold miners are generally continuing to
thrive despite Q3’s challenges. Their upside potential in
coming months and years remains huge. Their leveraged earnings will
soar as gold powers higher on the vast torrents of new fiat money
central banks are spewing. The smaller gold stocks will really
amplify their metal’s gains like usual. So if you aren’t deployed
in great ones yet, you should get going.
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The
bottom line is the mid-tier and junior gold miners in the sweet spot
for stock-price upside potential just reported a solid-if-not-strong
quarter. Their production growth surged, far outpacing the
majors’. While costs still rose on inflationary pressures, they
remained far below prevailing gold prices which made for excellent
profits. And these will grow amplifying gold’s gains as its bull
follows the money printing higher.
GDXJ’s smaller gold miners make it way better than
deadweight-major-dominated GDX. The mid-tiers and juniors will
enjoy much-bigger gains than their larger peers as this
Fed-tightening-fears-interrupted gold upleg mounts. But even GDXJ’s
upside is still retarded by plenty of underperformers, so better
gold-stock gains will be won in handpicked fundamentally-superior
miners. Their latest run higher is only just beginning. | 
