The
mid-tier and junior gold miners recently finished reporting their
latest quarterly results. These smaller producers are
fundamentally-superior, in the sweet spot for upside potential in
major gold uplegs. Indeed their Q3’23 operational and financial
results proved spectacular, much better than their larger peers.
The potent combination of lower mining costs and higher gold prices
fueled huge profits growth for these companies.
The
leading mid-tier-gold-stock benchmark is the GDXJ VanEck Junior Gold
Miners ETF. With $4.4b 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, although there is much
overlap between these ETFs’ holdings. Still misleadingly named,
GDXJ is overwhelmingly a mid-tier gold-stock ETF with little
weighting allocated to juniors.
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+. Only four of GDXJ’s 25 biggest
holdings are true juniors!
Their Q3 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 both primary silver miners producing byproduct gold,
and royalty and streaming companies that purchase future gold output
for big upfront payments used to finance mine builds. But mid-tiers
often make better investments.
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.
While gains are mounting in these high-potential gold stocks, they
remain really out of favor. GDXJ has had a wild ride over the past
year or so. From late September 2022 to mid-April, GDXJ powered
66.9% higher in a strong upleg! But then the mid-tiers started
grinding lower on balance with their metal, and GDXJ fell 29.3% into
early October. That recent selloff rebalanced sentiment,
eliminating most bullishness.
Since then GDXJ has started clawing back, up 24.1% at best as of
late November. Gold-stock uplegs parallel and amplify gold’s, but
often start out slower. Traders remain skeptical after major gold
selloffs, not convinced of young uplegs’ staying power. But the
longer and higher gold runs, the more speculators and investors grow
bullish on its potential. So they increasingly flood into gold
stocks as gold uplegs mature.
For
30 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 65.9% 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 Q3’23. 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 Q3’22. Those symbols are followed by their
recent GDXJ weightings.
Next
comes these gold miners’ Q3’23 production in ounces, along with
their year-over-year changes from the comparable Q3’22. 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 mid-November.
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 Q3’23 performance proved
spectacular! These sweet-spot-for-upside smaller gold stocks
grew their production while slashing mining costs. That along with
surging prevailing gold prices fueled massive earnings jumps, both
per ounce and absolutely. Last quarter was undoubtedly one of the
best the mid-tier and junior gold stocks ever reported, which should
really attract back investors.
 
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 raises profitability,
lowering unit costs by spreading big fixed operational expenses
across more ounces. The GDXJ-top-25 gold miners delivered again
for the sixth quarter in a row!
Their collective production grew 2.5% YoY to 3,378k ounces last
quarter. That easily bested the GDX-top-25 majors’ Q3 output, which
shrunk slightly as I
analyzed in
another essay a couple weeks ago. The mid-tiers also
outperformed world gold mines as a whole, including all that produce
byproduct gold. The World Gold Council’s excellent Q3’23 Gold
Demand Trends report pegged overall global output growth at 2.3%.
And
interestingly the GDXJ top 25’s production is understated. Note in
this table that two new explorers climbed into this ETF’s upper
ranks over this past year, Australia’s De Grey Mining and Canada’s
Filo Corp. Both are worthy additions, advancing great gold
projects. De Grey’s has a massive 10.5m ounces of indicated and
inferred resources, while Filo’s huge primary copper deposit
contains 6.7m ounces of gold!
Both
should be developed into nice mines in the next decade or so. But
explorers in the GDXJ top 25 displace producers, lowering
aggregate output. A year ago in Q3’22, there was only one
non-producing explorer. Today’s next-biggest producer displaced by
a second explorer is Australia’s Ramelius Resources, which mined
55.5k ounces in Q3’23. If it was included, mid-tiers’ overall
output growth would surge 4.2% YoY.
Despite plenty of great gold stocks in GDXJ’s upper ranks, there are
many others I would never bother with. Our newsletter trading books
currently have open positions in seven of these GDXJ-top-25 stocks.
Their all-important production growth trounced their peers,
soaring 24.2% YoY to 1,099k ounces! This high-potential
mid-tier-gold sector really rewards carefully-researched stock
picking, owning the better miners.
Another good reason to handpick great smaller gold miners instead of
settling for GDXJ is its extensive overlap with GDX. Fully
14 of these GDXJ-top-25 stocks are also GDX-top-25 ones, and another
6 are in GDX below that upper threshold. These 20 common components
with a 57.9% weighting in GDXJ also account for 25.8% of GDX. Their
ranking range in that major gold miners’ ETF ran from 12th to 35th
places.
Run
by the same company, GDX and GDXJ desperately need
mutually-exclusive holdings. The larger majors producing over
250k ounces quarterly should only be included in GDX, while the
smaller mid-tiers and juniors alone should populate GDXJ.
Eliminating the unnecessary and huge overlap between these leading
gold-stock ETFs would make both way more useful for traders,
ultimately attracting in more capital.
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 really hit.
Energy is the biggest category, both electricity to power
ore-processing plants including mills and diesel fuel necessary to
run fleets of excavators and dump trucks hauling raw ores to those
facilities. Other smaller consumables range from explosives to
blast ores free to chemical reagents necessary to process various
ores to recover their gold. So higher variable costs continue to
heavily impact the world’s gold miners.
Yet
the fundamentally-superior smaller gold miners are increasingly
overcoming inflation, forcing mining costs lower. Q3’23 proved the
second consecutive quarter GDXJ-top-25 mid-tiers and juniors
reported lower cash costs and all-in sustaining costs! That’s the
primary ingredient in last quarter’s spectacular results. I did
expect that, as analyzed in a pre-earnings-season essay in
mid-October
predicting fat profits.
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’s average cast costs in Q3’23 fell 8.0% YoY to $908
per ounce! That was their steepest annual drop in the 30
quarters I’ve been advancing this research thread. $908 was also
better than the
GDX top 25’s $951 Q3 average. The smaller gold miners aren’t
just outperforming their larger peers on the production front, but
with operational efficiencies! And a couple outliers skewed cash
costs higher.
For
long years both Hecla Mining and Peru’s Buenaventura have failed to
overcome abnormally-high operating costs. Despite these gold
miners’ best efforts, their costs rarely seem to significantly
improve. Neither even bothers explaining high costs in their
quarterlies, since traders have come to expect them. If the
outlying HL and BVN are removed, the rest of the GDXJ top 25
averaged much-better $851 cash costs!
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.
Rather spectacularly, the GDXJ top 25’s AISCs plunged 10.3% YoY
to just $1,258 per ounce in Q3! That was considerably better
than my optimistic outlook, and trounced the GDX top 25 majors’
$1,304 reported last quarter. The elite GDXJ mid-tiers’ AISCs
dropped for a second quarter in a row, compared to just one for
GDX! And with the GDXJ top 25’s Q2’23 AISCs clocking in down 4.4%
YoY, cost cutting was accelerating.
The
mid-tiers hadn’t seen lower AISCs since Q1’22’s $1,241 six quarters
earlier. And that was before the Fed’s epic money printing
unleashed raging inflation, and panicking Fed officials attempted to
fight it with an unprecedented
monster rate-hike
cycle. For the last couple quarters, fundamentally-superior
smaller gold miners’ costs are returning to normal levels.
Lower costs are super-bullish, translating into higher earnings.
And
again without Hecla and Buenaventura pooping in the punch bowl,
these mid-tier AISCs were much better. The rest of the GDXJ top 25
averaged just $1,182 last quarter! That’s far below prevailing gold
prices, fueling fat profits for mid-tiers and juniors. Despite
gold’s recent selloff, Q3’23’s average closing price surged 11.6%
YoY to $1,926 which is the second-highest on record! Gold
miners are minting money.
Subtracting any quarter’s average AISCs from its gold prices offers
a great proxy for how smaller gold miners’ earnings are faring.
Q3’s $1,926 gold less $1,258 AISCs yields awesome unit profits of
$669 per ounce, which skyrocketed a fantastic 106% YoY! You read
that right, these elite mid-tiers and juniors literally more than
doubled their per-ounce earnings. And $669 was the biggest
achieved since Q2’21.
Yet
incredibly this earnings growth will likely continue accelerating
in this currently-underway Q4! About 2/3rds finished, gold is
already averaging an even-better $1,947 quarter-to-date. And with
recent prices being much higher than early-quarter ones after gold
plunged into an
anomalous quickly-reversed selloff, Q4’s average should shake
out considerably higher. Meanwhile the GDXJ top 25 are forecasting
lower AISCs.
They’ve already trended sharply lower this year, with Q1’s, Q2’s,
and Q3’s respectively running $1,414, $1,319, and $1,258. And in
their recent Q3 results, these elite mid-tiers’ full-year-2023
AISC guidances averaged just $1,225. Realize that’s not just for
Q4, but this entire year! To get anywhere near that, Q4 AISCs are
going to have to fall sharply. And without HL’s crazy $2,125, that
guidance average falls to $1,161.
But
to be conservative, let’s just assume the GDXJ top 25 end up
averaging $1,225 AISCs in Q4 really missing their forecasts. That
subtracted from quarter-to-date $1,947 gold yields fat $722 unit
profits. Those would skyrocket a record 151% YoY over
Q4’22’s depressed trough levels! The earnings growth these smaller
fundamentally-superior gold miners are achieving is mind-boggling,
investors will chase them.
Ultimately all stock prices must reflect some reasonable multiple of
underlying corporate earnings. Gold is grinding higher on balance
and approaching new nominal all-time-high territory over
August 2020’s $2,062 peak. As gold nears, challenges, then
surpasses that, bullish financial-media coverage will explode. That
will bring back traders in droves, who will flock to undervalued
gold stocks catapulting them higher.
The
GDXJ top 25’s hard accounting numbers last quarter certainly
reflected their spectacular operating results. Reported to national
securities regulators, these conform with Generally Accepted
Accounting Principles or other countries’ equivalents. These elite
mid-tiers’ total revenues surged 18.4% YoY to $7,761m in Q3’23.
That jibes with 2.5% output growth combined with 11.6% higher
average gold prices.
These would’ve been the GDXJ top 25’s best sales ever, but this ETF
has gone through plenty of growing pains. GDXJ was originally a
true junior ETF before it initially grew popular. But its stakes in
Canadian juniors in the epicenter of the gold-mining world grew too
large, running afoul of silly Canadian securities laws. So GDXJ’s
managers added in large majors and even super-majors for some time
to dilute the juniors!
They
really skewed this ETF’s accounting totals, so all the records come
from the 2019-to-2020 period when GDXJ was most tainted. In this
latest Q3’23, the GDXJ top 25’s total bottom-line accounting profits
ran $161m. That was a big improvement over the comparable Q3’22’s
$240m loss. But in the gold-mining industry, accounting earnings
are often distorted by unusual one-time items flushed through income
statements.
Those are generally non-cash expenses, often impairment charges as
mine carrying values are written down. Last quarter had an
interesting example, with B2Gold recording a $112m impairment on one
of its projects. BTG already owned half of it, then decided to
acquire the remaining half. That deal was done at a price revaluing
the original half, so a non-cash charge was recorded. I always
carefully look for unusual items.
Adjusting these latest Q3’23 GDXJ-top-25 results for those yields
earnings of $295m, still way better than Q3’22’s adjusted loss of
$128m! So the mid-tier and junior gold miners are also earning nice
accounting profits. That has already forced some of these stocks to
really-low valuations, with trailing-twelve-month price-to-earnings
ratios in the low double-digits. Better earnings will drive these
bargain multiples even lower.
The
mid-tiers’ operating-cash-flow generation was outstanding last
quarter, with total GDXJ-top-25 OCFs soaring 45.3% YoY to $1,952m!
That left their collective cash treasuries running $7,043m, which
did slump 9.9% YoY. But that decrease resulted from plenty of these
miners plowing capital into expansions to increase their
production. The mid-tiers are constantly investing to maintain
their best-in-sector growth.
Interestingly the biggest threat to mid-tiers isn’t investor apathy,
but buyouts by bigger major gold miners. Long failing to
overcome depletion at the large scales they operate, the majors have
long had to gobble up smaller gold miners to maintain and grow
production. While these periodic deals typically have solid
stock-price premiums, they ultimately really hurt investors. They
surrender mid-tier shares for major ones.
While mid-tier gold stocks often have high growth potential, the
majors rarely do. Great flagship mines for mid-tiers that fuel big
stock-price gains are highly diluted in majors’ larger stables of
many gold mines. I can’t count the number of times in recent
decades where we had excellent mid-tier or junior stocks acquired by
majors. Their inertia-bound shares weren’t worth keeping, so we
sold them to buy smaller miners.
By
advancing great gold projects into mines and growing relatively
fast, mid-tiers and juniors are the gold-production pipeline
ultimately feeding the majors. We research extensively to find
fundamentally-superior smaller gold miners, then ride them until
gold and gold stocks get unsustainably overbought or they are
acquired. Smaller gold stocks can easily double, triple, or more
during major gold uplegs, making traders rich!
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The
bottom line is the mid-tier gold miners recently reported a
spectacular quarter. They are winning the fight against inflation,
forcing their mining costs back lower. Those combined with higher
prevailing gold prices made for enormous earnings growth, led by
unit profits more than doubling. The mid-tiers’ hard accounting
results reflected their fantastic operational performances,
including continuing to grow output.
And
amazingly this soaring-earnings trend is set to continue. The
mid-tiers and juniors are forecasting even-lower mining costs in
this current quarter, which is already seeing even-higher average
gold prices. That should combine for record profits growth, driving
already-low sector valuations even deeper into bargain territory.
That will help attract investors to return in droves as gold
achieves new nominal records. | 
