The
mid-tier gold miners’ stocks have been rallying on balance in recent
months, carving a solid young upleg. They’ve mostly finished
reporting their latest fourth-quarter results, revealing how they
are faring fundamentally. Their operating and financial performance
is very important for investors, as the mid-tier realm is where most
of the gold-stock sector’s gains accrue. They fared really well in
a challenging quarter.
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.
While 10-Qs with filing deadlines of 40 days after quarter-ends are
required for normal quarters, 10-K annual reports are instead
mandated after quarters ending fiscal years. Most gold miners
logically run their accounting on calendar years, so they issue
10-Ks after Q4s. Since these annual reports are larger and must
be audited by independent CPAs, their filing deadlines are
extended to 60 days after quarter-ends.
The
global nature of the gold-mining industry complicates efforts to
gather this all-important fundamental data. Many mid-tier gold
miners trade in Australia, South Africa, Canada, 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 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 largely dominated by mid-tier gold miners and
not juniors. GDXJ is the world’s second-largest gold-stock ETF,
with $4.1b 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 gold stocks, 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!
Major gold miners are increasingly struggling 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, fueling big 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 82.1% of GDXJ’s total weighting this week, even though
it contained a whopping 71 stocks! 6 of the top 34 were majors
mining 250k+ ounces, 17 mid-tiers at 75k to 250k, 8 “juniors” under
75k, and 3 explorers with zero.
These majors accounted for 19.8% 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 44.3%
of GDXJ. The “juniors” among the top 34 represented just 14.8% of
GDXJ’s total. But only 4 of them at a mere 6.1% of GDXJ are true
junior golds, meaning they derive over half their revenues
from actually mining gold.
The
rest are primary silver miners, gold-royalty companies, and gold
streamers. GDXJ is overwhelmingly a mid-tier gold miners ETF, with
sizable small-major exposure. Investors and speculators need to
realize it is not a junior-gold investment vehicle as advertised.
GDXJ also has major overlap with GDX. Fully 28 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 82.1% of its total weighting also
represent 36.6% of GDX’s own total weighting! The GDXJ top 34
clustered between the 11th- to 40th-highest weightings in GDX. Thus
over 4/5ths of GDXJ is made up by almost 3/8ths 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 Q4’18 gold production among GDXJ’s top 34 was 164k ounces,
just over half as big as the GDX top 34’s 302k 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 gradually
powers higher. Thus it is important to analyze GDXJ miners’ latest
results.
So
after every quarterly earnings season I wade through all available
operational and financial results 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 Q4’18 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 Q4’17 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 drives 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 Q4’18 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. Finally production bold-faced in blue shows the handful of
junior gold miners in GDXJ’s higher ranks, under 75k ounces
quarterly with over half of sales from gold.
This
whole dataset together compared with past quarters offers a
fantastic high-level read on how mid-tier gold miners as an industry
are faring fundamentally. While Q4’18 proved challenging with lower
average gold prices, the GDXJ miners generally weathered it well.
These elite mid-tier miners did much better last quarter than the
major-dominated GDX elites. Their profits and stock prices are
ready to soar with higher gold.
GDXJ’s managers have continued to fine-tune its ranks over this past
year, making some good changes. For some inexplicable reason, one
of the world’s largest gold miners AngloGold Ashanti was one of this
ETF’s top holdings as discussed
last quarter.
AU was finally kicked out and replaced with a smaller major gold
miner Kinross Gold and a mid-tier Buenaventura. Together they now
account for 11.7% of GDXJ’s weighting.
Reshuffling at the top makes year-over-year changes less comparable,
particularly given KGC’s larger size relative to most of the rest of
the GDXJ top 34. Neither it nor BVN were included in GDXJ a year
ago, and are new additions since Q3’18 results. Both are sizable
GDX components, probably added to GDXJ to keep the weightings down
in its smaller Canadian components. 4 other stocks climbed into the
top 34.
Torex, Alacer, Hochschild, and Seabridge were already in GDXJ a year
ago but weighted below the top 34. GDXJ is largely-but-not-entirely
market-cap weighted, so it’s normal for components to rise into or
fall out of the top 34 as their stock prices move higher or lower.
All the following comparisons between Q4’18 and Q4’17 are across the
two slightly-different GDXJ-top-34 sets, not the exact companies
shown above.
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.
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. The top 34 GDXJ gold
miners excelled in that department, growing their aggregate output
by a big 12.8% YoY to 5.1m ounces! That’s really impressive,
trouncing both the major gold miners dominating GDX as well as the
entire world’s gold-mining industry.
Last
week I analyzed the
GDX majors’ Q4’18
results, which revealed they are still struggling with serious
challenges. The GDX top 34’s total production fell 3.9% YoY when
adjusted for a mega-merger. That was worse than total global output
slumping 0.9% YoY according to the World Gold Council. So GDXJ’s
mostly-mid-tier gold miners really stand out. They are bucking the
industry trend with strong production growth.
Again GDXJ’s top 34 components start at the 11th-highest weighting
within GDX. Most of the production problems occurred above that
threshold, in GDX’s top 10 components which include the world’s
largest major gold miners. Their immense average production of 630k
ounces in Q4’18 was nearly 4x the 164k average among GDXJ’s top 34!
Those GDX top 10 also accounted for a dominant 59.1% of its total
weighting.
GDXJ
excluding these depleting giants and reallocating their heavy
weightings across smaller majors and mid-tier gold miners makes all
the difference. The big majors’ waning production and large market
caps act as an anchor retarding GDX’s upside. GDXJ doesn’t share
that burden, which helped its top 34 show such strong production
growth. There’s no reason to own the large majors with their
serious challenges.
Also
interesting on the GDXJ production front last quarter was silver.
This “Junior Gold Miners ETF” also includes major silver miners,
both primary and byproduct ones. The GDXJ top 34’s silver mined
rocketed 53.8% higher YoY to 31.2m ounces! For comparison the GDX
top 34’s total reported output of 28.8m ounces actually slumped 1.5%
YoY. The smaller GDXJ mid-tiers are way better than majors at
growing their outputs.
The
mid-tier gold miners continue to prove all-important production
growth is doable 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 with the super-high production bases
they operate at. As long as the majors are struggling, it’s prudent
to avoid them.
GDXJ
investors would be better served if this ETF contained no major
gold miners producing over 250k ounces a quarter on average.
They still command nearly 1/5th of its weighting, which could be far
better reallocated in mid-tiers and juniors. If VanEck kept the
major gold miners in GDX where they should be, it could give GDXJ
much-better upside potential. That would make this ETF more popular
and successful.
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 with sharply-higher
YoY production in Q4’18, the GDXJ top 34 should’ve seen
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 Q4’18 these
top-34-GDXJ-component gold miners that reported cash costs averaged
$698 per ounce. That was up a sharp 10.8% YoY, and considerably
worse than the GDX top 34’s $655 average.
Those were the highest GDXJ cash costs seen since at least Q2’16,
when I started this research thread. But even $698 is far lower
than prevailing gold prices, showing the mid-tier gold miners face
no existential threat. And GDXJ’s high cash costs last quarter
aren’t righteous anyway, as they were skewed higher by an extreme
outlier. One of the new GDXJ companies Buenaventura reported crazy
cash costs of $1627 per ounce!
Excluding that wild anomaly, the rest of the GDXJ top 34 averaged
cash costs of $662 which was right in line with Q3’18’s $663.
They’d be even lower without Sibanye-Stillwater, a troubled
South-African major gold miner that saw cash costs soar 30.1% YoY to
an ugly $1167. If that too is excluded the overall average falls to
$642. So for the most part the mid-tier gold miners’ cash costs
remain really low relative to gold.
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 gold miners’ true
operating profitability.
The
GDXJ top 34 reporting AISCs averaged $932 per ounce in Q4’18,
which was also up a sizable 7.1% YoY. That was also barely the
highest seen since at least Q2’16, contradicting the big production
growth these miners achieved. But once again this was heavily
skewed by extreme outliers, including both BVN and SBGL. Hecla also
reported a stunning 52.3% YoY surge in its gold AISCs to a nosebleed
$1582 per ounce!
Both
BVN and SBGL reported sharply-lower YoY production, helping explain
their huge cost surges. HL’s is more temporary, as it expects 2019
gold AISCs to average a still-high-but-much-lower $1250. Without
these abnormal situations, the rest of the GDXJ top 34 averaged
excellent AISCs of just $863 per ounce. That would be down
0.8% YoY, and is close to the GDX majors’ $837 average also
excluding BVN and HL.
Yet
even at that skewed artificially-high $932 per ounce, the elite GDXJ
gold miners have great potential to enjoy surging profits and hence
stock prices. Gold was relatively weak last quarter, averaging
$1228 which was 3.8% lower YoY. That implied the mid-tier gold
miners as an industry were earning $296 per ounce. That’s still a
24% profit margin, proving Q4’18’s major GDXJ lows weren’t
fundamentally righteous.
Gold
is faring much better in this almost-over Q1’19, averaging $1303
which is up a big 6.1% quarter-on-quarter. Assuming GDXJ-top-34
AISCs are flat, these elite mid-tier gold miners are earning around
$371 per ounce this quarter. That implies enormous 25.3% QoQ
profits growth! We won’t know for sure until after Q1’s
earnings season, near mid-May. But the mid-tiers’ fundamentals
should’ve greatly improved.
Bigger profits driven by higher gold prices are sure to attract
investors back to the still-beaten-down gold-stock sector in a big
way. The gold miners will stand out even more with earnings growth
expected to be scarce in the general stock markets this year. If
gold continues marching higher on balance as it ought to, and GDXJ
average AISCs retreat as BVN and HL get anomalous costs under
control, GDXJ profits will soar.
The
GDXJ top 34’s hard accounting results in Q4’18 were mixed, but way
better than GDX on all fronts. These elite mid-tier gold miners
reported total sales of $7.4b last quarter, up a strong 12.1% YoY.
That is right in line with their 12.8% YoY total gold production
growth. That huge 53.8% YoY surge in their silver output helped
offset the 3.8% YoY decline in average gold prices. The mid-tier
gold miners’ revenues are strong.
Compare that to the GDX top 34, which saw sales plunge 10.3% YoY in
Q4 due to 3.9%-lower merger-adjusted gold output. Those strong
GDXJ-top-34 revenues kept operating-cash-flow generation solid,
totaling $2.2b which was down 9.2% YoY. That again crushed the
majors in the GDX top 34, which saw OCFs plummet 30.4% YoY. The
divergence between how mid-tiers and majors are faring these days is
gaping.
The
elite GDXJ mid-tier gold miners also invested in growing their
production, so their collective total cash on hand slid 14.3% YoY to
$5.9b. The GDX majors saw a similar 14.6% YoY decline in their
cash, yet they certainly didn’t spend enough to offset their
depleting mines. The only real blemish on the GDXJ top 34’s Q4
results came in hard GAAP profits. Their aggregate bottom line
collapsed to a $732m loss last quarter!
That
was far worse than Q4’17’s $26m loss. Much of this was due to big
non-cash impairment charges, writedowns of the carrying value
of gold mines and deposits due to lower gold prices and forecasts.
If gold miners expect lower gold prices going forward, they have to
flush the resulting expected economic losses through current-quarter
results when those impairments are perceived. That hammered overall
results.
Honestly the Q4’18 impairments seemed pretty unnecessary, with
average gold prices merely down 3.8% YoY. 2018’s full-year average
gold price actually rose 0.8% YoY. Major impairments usually happen
in years gold plunges sharply, like 2013’s brutal 27.9% plummeting.
Something like that really changes the economic assumptions
underlying gold mines. But gold only slumped 1.6% last year, which
is utterly trivial.
Some
of the bigger impairment charges came from First Majestic Silver and
Osisko Gold, which wrote off $168m and $166m. This primary silver
miner and gold-royalty company aren’t even mid-tier gold miners.
And the perpetually-troubled South African majors Gold Fields and
Sibanye-Stillwater which have long tainted GDXJ reported big
half-year losses implying $169m and $98m in Q4. These alone total
$601m of losses.
That
accounted for nearly 5/6ths of the GDXJ top 34’s total GAAP losses
last quarter. While many of the elite mid-tier gold miners reported
small losses, the great majority of the surge in losses came from a
handful of stocks. Overall the GDXJ GAAP profits looked relatively
decent compared to the majors. GDX’s top 34 reported a staggering
$6.0b in accounting losses in Q4’18! The mid-tiers are thrashing
the majors.
GDXJ’s mostly-mid-tier component list of great gold miners is really
faring well, especially compared to the struggling large gold
miners. Investors looking to ride this gold-stock bull should avoid
the world’s biggest gold producers and instead deploy their capital
in the mid-tier realm. The best gains will be won in individual
smaller gold miners with superior fundamentals, plenty of which are
included within GDXJ.
Despite being the world’s leading gold-stock ETF, GDX needs to be
avoided. The major gold miners that dominate its weightings are
struggling too much fundamentally, unable to grow their production.
Capital will instead flow into the mid-tiers, juniors, and maybe a
few smaller majors still able to boost their output and thus
earnings going forward. None of this is new, but the major and
mid-tier disconnect continues to worsen.
Again back in essentially the first half of 2016, GDXJ skyrocketed
202.5% higher on a 29.9% gold upleg in roughly the same span! While
GDX somewhat kept pace then at +151.2%, it is lagging GDXJ more and
more as its weightings are more concentrated in stagnant gold
mega-miners. The
recent big mergers are going to worsen that investor-hostile
trend. Investors should buy better individual gold stocks, or GDXJ.
One
of my core missions at Zeal is relentlessly studying the gold-stock
world to uncover the stocks with superior fundamentals and upside
potential. The trading books in both our popular
weekly and
monthly
newsletters are currently full of these better gold and silver
miners. Mostly added in recent months as gold stocks
recovered from
deep lows, our unrealized gains are already running as high as
74% this week!
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The
bottom line is the mid-tier gold miners are thriving fundamentally.
They are still rapidly growing their production while majors suffer
sharp output declines. The mid-tiers are holding the line on costs,
which portends strong leveraged profits growth as gold continues
grinding higher on balance. The performance gap between the smaller
mid-tier and junior gold miners and larger major ones is big and
still mounting.
Investors and speculators really need to pay attention to this
intra-sector disconnect. Gold and its miners’ stocks should power
far higher in coming years as the lofty general stock markets roll
over. But the vast majority of the gains will be concentrated in
growing gold miners, not shrinking ones. This means the mid-tier
and junior gold miners will far outperform the majors. The smaller
miners have superior fundamentals. | 
