The
mid-tier and junior gold miners in their sector’s sweet spot for
upside potential have powered higher in recent months. Amplifying
gold’s young upleg, they have already surged to major breakouts.
And the smaller gold miners’ gains are likely to grow much larger.
Their recently-reported Q4’21 earnings season revealed ongoing
strong fundamentals. Those along with inflation-driven higher gold
prices will fuel big buying.
With
Q1’22 already winding down, looking at the prior quarter’s
operational and financial reports seems dated. But because most
companies run on calendar years, the Q4 reporting deadlines are
extended. In the US companies don’t have to report full-year 10-K
results until 60 days after quarter-ends, compared to 40 days for
10-Q quarterlies. In Canada, the epicenter of the gold-mining
universe, year-ends extend to 90 days!
So
late March is about the earliest that enough mid-tier and junior
gold miners have reported their full Q4 results to analyze them.
Right after each quarterly earnings season, I dig into the latest
reports from the top-25 component companies of the excellent GDXJ
VanEck Junior Gold Miners ETF. With $5.1b in net assets midweek,
this is the second-largest gold-stock ETF after its big-brother GDX
major-gold-miners one.
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 1,000k, large majors
yield over 1,000k, and huge super-majors operate at vast scales
exceeding 2,000k. The mid-tiers offer a unique mix of sizable
diversified production, good 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. Despite its name, GDXJ is
overwhelmingly a mid-tier gold miners ETF. While it started
out as a true junior one, that market alone proved too small to
absorb the big capital inflows GDXJ attracted. I analyzed that
evolution in depth in previous essays in this deep-research thread,
which has been running for 23 quarters in a row now.
Speculator and investor interest in these smaller gold miners is
mounting after GDXJ’s big 30.8% surge between late January to early
March. But that only amplified gold’s parallel upleg in that span
by 2.1x, which is weak for these high-potential stocks. Mid-tiers
and juniors need herd sentiment to shift to bullish on gold,
which only happens after it has rallied high enough for long
enough. That key inflection point is nearing.
Much
to its managers’ credit, GDXJ continues to improve. Unlike GDX,
GDXJ isn’t saddled with the huge dead-weight super-majors
unable to grow their production. GDXJ is far-better-diversified
too, with its top-25 holdings only accounting for 61.4% of its total
weightings mid-week compared to 88.5% in GDX. While handpicked
fundamentally-superior individual stocks will easily best any ETF,
GDXJ is the cream of the crop.
This
table summarizes the operational and financial highlights from the
GDXJ top 25 in Q4’21. 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
shifting market caps, which reveal both outperformers and
underperformers since Q4’20. Those symbols are followed by their
current GDXJ weightings.
Next
comes these gold miners’ Q4’21 production in ounces, along with
their year-over-year changes from the comparable Q4’20. 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.
The
elite mid-tier and junior gold miners filling GDXJ’s upper ranks
generally reported good results last quarter, despite lower average
gold prices. Fundamentally these smaller gold miners
well-outperformed the major-dominated GDX stocks in Q4’21, a bullish
omen. The entire gold-stock sector is set up for far-greater gains
as gold powers higher on this raging inflation unleashed by the
Fed’s epic money printing.
Like
most exchange-traded funds, GDXJ is essentially
market-capitalization-weighted. That’s the most-logical way to
construct ETFs, reflecting relative capital amounts traders have
deployed in component stocks. But shifting market caps continually
alter ETF-component weightings and rankings, mixing up the bottom
end of the GDXJ-top-25 stocks. This past year’s striking changes
really affected data comparability.
Since Q4’20, two explorers have charged up into these rarefied
ranks. Seabridge Gold has an incredible monster gold deposit, but
may never build a mine after long decades of milking investors to
pay corporate salaries. SilverCrest Metals also has no production,
but is successfully making the rare transition from explorer to
producer. It is constructing a nice new silver-and-gold mine
scheduled to come online in Q2’22.
Traders bidding up these explorers’ market caps knocked out actual
gold miners IAMGOLD and Fortuna Silver Mines from the GDXJ-top-25
ranks since Q4’20. Another mid-tier gold miner, the British
Centamin, was displaced by the ascent of the tiny gold streamer
Osisko Gold Royalties. These big composition changes in the GDXJ
top 25 leave its aggregate Q4’21 data much-less-comparable to
Q4’20’s totals than usual.
After decades of intensely studying and actively trading gold
stocks, I’ve never understood the obsession with royalty and
streamer companies. Their stocks are radically-overvalued,
with high market caps way out of line with their meager underlying
gold outputs, revenues, and earnings. Fundamentally nearly all the
royalty and streamer plays are wildly-overpriced, way inferior to
actual gold miners generating big profits.
In
addition to these market-cap-driven component changes, GDXJ’s
managers also made a big and very-welcome one. For years one of
this “Junior Gold Miners” ETF’s largest components was Gold Fields,
a South African super-major miner. In Q4’21 alone it produced a
staggering 631k ounces of gold! A year ago in Q4’20 it mined 593k.
Such a colossal gold miner belongs in GDX alone, it never should’ve
been in GDXJ.
Gold
Fields was finally booted out of GDXJ over this past year. But its
massive production, sales, profits, operating cash flows, and cash
hoard greatly boosted Q4’20’s GDXJ-top-25 totals. So it really
needs to be excluded from that comparable quarter to get a clearer
fundamental picture of how mid-tier and junior gold miners
are faring. Thus adjusted Q4’20 means without Gold Fields, IAMGOLD,
Fortuna Silver, and Centamin.
Last
quarter these GDXJ-top-25 gold miners collectively produced 3,040k
ounces of gold, which plunged 18.6% year-over-year. But that was
heavily skewed by those four companies being included in Q4’20 but
not Q4’21. Excluding them, these elite mid-tier and junior gold
miners actually grew their total output an impressive 5.6%
YoY! That crushed the GDX majors’ 6.2%-YoY shrinkage to 8,352k
ounces of Q4’21 production.
Yet
GDXJ and GDX actually have large overlap in their holdings.
These GDXJ-top-25 stocks were mostly clustered between the
13th-to-35th-largest rankings in GDX. GDXJ effectively lops off the
dozen biggest GDX stocks dominated by super-majors, then greatly
expands the weightings of the rest. These GDXJ-top-25 stocks
accounting for 61.4% of this ETF also currently comprise 18.6% of
GDX’s total weightings.
I
just analyzed the
GDX-top-25 stocks’ Q4’21 results in last week’s essay if you
want to compare their holdings or performances. Fully 12 of these
GDXJ-top-25 stocks are also GDX-top-25 ones! I’ve long argued GDX
and GDXJ holdings should be mutually-exclusive, leaving
more-distinctive gold-stock ETFs that would better serve traders.
But the gold-stock universe is likely too small to make that work
for GDXJ.
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 Q4’21. 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 Q4’21.
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.
These elite mid-tiers’ and juniors’ average cash costs actually
surged 9.2% YoY to $829 per ounce last quarter. While worse than
expected, that is still better than the GDX top 25’s crazy 21.8%
catapulting to an even-higher $853! Most of the GDXJ-top-25 gold
miners were operating at much-lower cash costs than that $829
average implies. That was skewed way higher by extreme outlying
costs from a couple stocks.
For
years the major silver miners have been
increasingly
diversifying into gold, as it simply has far-better mining
economics. Last year First Majestic Silver acquired its first
pure gold mine to add to its stable of silver ones, but that has
been plagued with super-high costs. Harmony Gold Mining’s old and
very-deep South African mines are ever-more-expensive to run.
Excluding these, GDXJ-top-25 cash costs averaged $750.
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
run gold mines as ongoing concerns, and reveal mid-tier gold miners’
true operating profitability.
The
GDXJ-top-25’s AISCs also surged a similar 8.7% YoY in Q4’21 to
$1,175 per ounce, the highest on record! Again the smaller gold
miners outperformed the bigger ones, with GDX-top-25 AISCs coming in
up a hotter 14.5% YoY to a slightly-higher $1,188. Also again the
GDXJ-top-25 AISCs look better if those super-high-cost operations of
First Majestic and Harmony are excluded, averaging a much-milder
$1,090.
But
mining costs naturally creep higher during secular gold bulls, where
rising prices make less-economic gold deposits mineable. Q4’21 was
the 15th consecutive quarter where GDXJ-top-25 AISCs climbed
on a year-over-year basis! The preceding four quarters saw them
surge 11.5%, 11.2%, 12.8%, and 14.9% YoY, so Q4’21’s 8.7% jump was
actually a moderation. Even $1,175 remains far below prevailing
gold prices.
Those averaged $1,796 last quarter, slumping 4.3% YoY. The
difference between quarterly gold prices and gold-mining AISCs
offers a great proxy for mid-tier and junior profitability. That
implies these GDXJ-top-25 gold miners earned $622 per ounce in
Q4’21. Although that did fall 21.9% YoY, it was still better
than the GDX-top-25 majors’ $608 that dropped 27.5% YoY. And unit
earnings still remain high absolutely.
Q4’21’s $622-per-ounce sector mining profits are the
seventh-highest on record after the preceding six quarters’.
Those averaged $741, a stark contrast to the mere $413 average in
the dozen quarters before those. Despite higher costs and lower
gold prices, the mid-tier and junior gold miners continue to earn
money hand-over-fist. And their earnings are poised to surge back
higher in this current almost-done Q1’22.
Gold’s $1,873 average price so far this quarter is 4.2% better than
Q4’21’s. It is already the third-highest ever witnessed, and
should still be able to usurp Q4’20’s $1,876 to take second! And
mid-tier AISCs are expected to flatten from here. Fully 17 of these
GDXJ-top-25 miners gave full-year-2022 AISC guidance that averaged
$1,165 per ounce. Q1’22’s $1,873 average gold less $1,165 AISCs
would yield fat $708 profits!
Gold
stocks amplify material gold upside so effectively because their
earnings greatly leverage higher prevailing gold prices. If the
GDXJ-top-25 gold miners pull in $708 per ounce this quarter, that
would rank as their fourth-highest quarterly unit earnings ever.
The last time this metric came in over $700 was back in Q4’20, when
mid-tier and junior gold stocks and GDXJ itself were trading way up
at much-higher prices.
Gold
itself will almost certainly power way higher too. The reason even
lowballed headline-CPI inflation is soaring 7.9% YoY is extreme Fed
money printing. In just 24.6 months since March 2020’s
pandemic-lockdown stock panic, the Fed ballooned its balance sheet
by an absurd 115.3% or $4,796b! Effectively more than doubling
the US money supply conjured up far more dollars to compete for
and bid up price levels.
During the last similar
inflation
super-spikes in the 1970s, gold prices nearly tripled during
the first then more than quadrupled in the second! The gold
miners’ stocks shot stratospheric on that, generating life-changing
wealth for contrarians deployed in them. Gold has always been the
ultimate inflation hedge, as its supply growth is hard-limited by
geology unlike fiat-money supplies. Gold-stock earnings amplify
gold gains.
On
the hard-accounting front, the GDXJ-top-25 gold miners’ total
revenues fell 13.0% YoY to $7,435b. But when adjusted for those
four producers included in Q4’20 but now replaced with non-mining
explorers and royalty companies, overall sales actually grew 6.6%
YoY. That’s again much better than the 5.7%-YoY revenues decline
reported by the GDX top 25. The mid-tiers and juniors are
fundamentally-superior.
Yet
in Q4’21 their bottom-line accounting earnings under Generally
Accepted Accounting Principles or other countries’ equivalents
looked ugly. They plummeted 67.2% YoY to $507m, or 59.2% against
that adjusted Q4’20 total! But this was heavily distorted by
unusual items, one-off things flushed through income statements like
mine impairments and impairment reversals. I always look for any
larger ones.
Last
quarter saw plenty of big unusual items, which netted out to
offsetting another $446m of net income! That slashes the YoY
decline in GDXJ-top-25 operating profits to 38.4% absolutely or
23.3% adjusted for those four companies. Q1’22 earnings should look
much better, as managements often dump things like mine-impairment
charges into Q4 results. Those are forgotten by the time year-end
bonuses are calculated.
With
weaker accounting profits, mid-tier and junior gold-stock valuations
in classic trailing-twelve-month price-to-earnings-ratio terms shot
up to 62.5x. That was an anomaly mostly driven by two outliers with
extreme P/Es though, another explorer transforming into a miner MAG
Silver and Hecla Mining. Without their 100x+ P/Es, the rest of the
GDXJ top 25 averaged just 27.7x. Gold miners are generally
undervalued.
With
way-fewer estimates distorting operating cash flows than earnings,
the former often provide a clearer picture of how gold miners’
businesses are actually doing. The $2,898b total OCFs reported by
these elite mid-tier and junior gold stocks fell 8.8% YoY
absolutely, but climbed 11.3% when Q4’20 is adjusted. Those fed fat
cash treasuries totaling $10.1b, tying a record high for the
GDXJ top 25 despite composition changes.
That
slumped 0.7% YoY absolutely, but soared 27.7% when those four
companies are removed from the comparable Q4’20. The mid-tier and
junior gold miners will use those big cash hoards to grow their
future production. They will continue expanding existing mines
to boost their outputs, developing new mines, and buying other mines
and sometimes entire companies. Such projects are underway at many
of the GDXJ top 25.
The
smaller gold miners are also prime acquisition targets for the
majors, since those perpetually struggle to offset ongoing depletion
from their large-scale operations. Building occasional new mines
isn’t enough either, so most of majors’ growth comes from buying
out entire mid-tier and junior gold companies. Those offers
usually come at nice premiums, offering more upside for contrarians
deploying capital in these stocks.
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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 another strong
quarter. Their adjusted production growth surged, far outperforming
the majors’ drop. And these smaller gold miners still earned fat
profits, despite rising mining costs and lower average gold prices.
Those earnings will soar back higher in this current quarter on
better gold levels and stabilizing costs.
The
mid-tier and junior gold stocks still have lots of catch-up rallying
left to do, both to reflect their superior fundamentals and this
mounting gold upleg. That is destined to grow far larger too, as
gold prices nearly tripled and more than quadrupled during the last
similar inflation super-spikes in the 1970s. That naturally
launched gold miners’ earnings and stock prices stratospheric,
generating fortunes for contrarian traders. |