The
biggest gold-stock gains during major gold uplegs accrue in the
mid-tiers and juniors. These smaller gold miners in the sweet spot
for upside potential are just finishing reporting their latest
quarterly results. How they are faring fundamentally affects their
coming trajectory as gold powers higher. The mid-tiers’ overall
Q4’22 results are challenging to analyze, due to big composition
changes in their leading benchmark.
That
remains the GDXJ VanEck Junior Gold Miners ETF. With $3.6b in net
assets as of mid-week, GDXJ is 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 two ETFs’
holdings. GDXJ remains misleadingly named, as it is overwhelmingly
a mid-tier gold-stock ETF. True juniors are just a small
fraction of its weighting.
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, those thresholds shake out under
75k, 75k to 250k, 250k+, and 500k+. All majors and super-majors
should stay exclusively in GDX.
That
would leave the juniors and mid-tiers for GDXJ, making both ETFs
much more differentiated and useful for investors. These smaller
gold miners offer a unique mix of sizable diversified production,
great output-growth potential, and smaller market capitalizations
ideal for outsized gains. Mid-tiers in particular are really
the sweet spot. They are much less risky than juniors, and amplify
gold uplegs much more than majors.
This
outperformance was gathering steam into late January, when GDXJ
had blasted 57.4% higher in 4.0 months on a parallel
young gold upleg
surging 20.2%! But waxing short-term overbought, gold was then
crushed by
several unusual events I analyzed in depth in recent essays.
They included a dovish surprise from the European Central Bank, a
US-jobs record seasonal adjustment, and
gold-futures
reports going dark.
So
this dominant mid-tier benchmark was bludgeoned 21.2% lower into
early March. That gutted bullish sentiment, leaving gold stocks
really out of favor. But they’ve just resumed surging on the
extraordinary market events of this past week. With the Fed’s
most-extreme
tightening cycle ever now spawning full-blown crises of
confidence in larger banks, traders are remembering gold’s
legendary safe-haven status.
Fed-rate-hike-induced bank runs aside, gold is destined to power way
higher with inflation still raging out of control. The Fed’s
extreme money printing has fueled the
worst inflation
super-spike since the 1970s. In monthly-average-price terms
from trough to peak CPI inflation months then, gold nearly tripled
during that decade’s first inflation super-spike before more than
quadrupling in its second! Gold stocks shot stratospheric.
With
gold still far from reflecting the Fed’s still-doubled US money
supply since March 2020’s pandemic-lockdown stock panic,
speculators and investors should be aggressively upping their
gold-stock portfolio allocations. With mid-tiers and juniors still
trading at deeply-undervalued levels, traders should be paying
attention to their fundamentals and looking to buy low. So the
smaller gold miners’ latest results are important.
Unfortunately fourth-quarter reporting is delayed while the big
complex audited annual reports required by securities regulators are
prepared. American companies have 60 days after fiscal-year-ends to
file their annual 10-K reports with the Securities and Exchange
Commission. But in Canada which is the epicenter of global
gold-stock trading, companies aren’t required to report full-year
results until 90 days after Q4s end!
So
while most of the larger GDXJ gold miners’ Q4’22 operational and
financial results are out, there are still a handful of stragglers.
For 27 quarters in a row now, I’ve painstakingly analyzed the latest
reports from GDXJ’s 25-largest component stocks. They now account
for 63.5% of this ETF’s total weighting, the lion’s share of its
sprawling 98 different stocks. Hard fundamental data cuts
through obscuring sentiment fogs.
This
table summarizes the operational and financial highlights from the
GDXJ top 25 in Q4’22. 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 Q4’21. Those symbols are followed by their
current GDXJ weightings.
Next
comes these gold miners’ Q4’22 production in ounces, along with
their year-over-year changes from the comparable Q4’21. 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 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
reported a mixed Q4’22. While their collective production surged,
so did their mining costs which really cut into profitability.
Raging inflation forcing up variable costs was the latter’s main
driver. But big composition changes among the GDXJ top 25
components really distorted aggregate results, leaving
year-over-year comparisons challenging to analyze.
 
As a
professional gold-stock speculator and financial-newsletter guy for
over two decades now, I’m a big GDXJ fan. But despite being the
best gold-stock ETF out there, it still has serious shortcomings. I
can live with this being a mid-tier ETF despite its name. There are
only two true gold juniors among the GDXJ top 25, primary gold
miners producing less than 75k ounces per quarter. Their
outputs are highlighted in blue.
But
it still chaps my hide how much overlap GDX’s and GDXJ’s common
managers allow. These GDXJ top 25 stocks accounting for 63.5% of
its weighting also represent 24.9% of GDX’s! 13 of these
GDXJ-top-25 components are also GDX-top-25 ones, while fully 20 of
the GDXJ top 25 are included in GDX. The GDXJ top 25 are mostly
clustered between the 12th to 33rd weightings within GDX, which is
fairly high.
For
years I’ve argued that both GDX and GDXJ would be way more useful to
speculators and investors if their holdings were
mutually-exclusive. GDX should only include majors and
super-majors, leaving GDXJ with all the mid-tiers and juniors
producing less than 250k ounces per quarter. GDX would be a
blue-chip major ETF for pension funds, while GDXJ would have way
more upside potential unsaddled from majors’ inertia.
Majors’ large market capitalizations require much-bigger capital
inflows to materially boost their stocks, retarding their
responsiveness in gold uplegs. They also operate at large
scales making it very difficult to consistently bring on enough new
production to overcome relentless depletion. The majors in GDXJ are
like albatrosses chained around the necks of mid-tiers and juniors.
And that burden was just made worse.
During this past year, GDXJ’s managers added super-major
Kinross Gold which produced a whopping 596k ounces of gold in
Q4’22! While KGC is a good operator, it certainly doesn’t belong in
a “Junior Gold Miners ETF”. B2Gold, Endeavour Mining, and Harmony
Gold are also larger majors that mined 368k, 355k, and 370k ounces
last quarter. Together these four majors accounted for 13.9% of
GDXJ’s entire weighting.
Together all the GDXJ-top-25 gold miners produced 3,455k ounces in
Q4’22, which soared an impressive 13.5% year-over-year! I’d rave
about that big growth if it was righteous, as it trounced the GDX
top 25’s 4.4% YoY growth. I analyzed the elite
GDX majors’ Q4’22
results in depth in another essay last week. And the World Gold
Council recently reported overall world-gold-mine output slumped
0.9% YoY last quarter.
But
all that hefty GDXJ-top-25 production growth came from KGC’s
head-scratching inclusion. If that super-major’s output is removed
from Q4’22, these elite mid-tiers’ and juniors’ aggregate
actually shrunk by a disappointing 6.1% YoY. Some smaller gold
miners were forced out of the GDXJ top 25 over this past year, so
had their production been included it would have mitigated some of
that comparable decrease.
Another factor skewing this production comparison is explorers
and non-reporters flying up GDXJ’s ranks. Filo Mining is a
curious new addition, as it is advancing a large primary-copper
deposit in Chile with just byproduct gold. De Grey Mining is also
an explorer in Australia, which looks years away from bringing a
gold mine online. China’s Zhaojin Mining is a producer, but rarely
bothers reporting quarterly results in English.
The
Turkish gold miner Koza Altin skyrocketed up 40 GDXJ rankings on a
soaring market capitalization, yet it doesn’t look much better in
timely releasing quarterlies. So between a new super-major
inclusion and a bunch of non-producing explorers and non-reporting
foreign gold miners flooding GDXJ’s upper weightings, aggregate
results are challenging to compare with Q4’21’s. Individual gold
miners’ are more relevant.
The
mid-tiers’ and juniors’ average mining costs are also obscured by
some reporting issues. GDXJ’s largest component is Yamana Gold.
But since AUY is being purchased by Pan American Silver and Agnico
Eagle Mines, it hasn’t bothered reporting full Q4’22 results
yet! With this deal almost closed, odds are it never will. Yamana
gave an earlier operational production update, but no cost data or
financial results.
Yamana getting taken out is sad, as it is a great growing mid-tier
miner. Had its Q4 costs been included, they would’ve certainly
lowered the GDXJ-top-25 averages. In the preceding Q3’22, AUY
reported cash costs and all-in sustaining costs of $794 and $1,148
per ounce. And Canadian gold miner K92 Mining just edged into
GDXJ’s 25th slot, but it respects its shareholders so little it
isn’t reporting Q4 until March 30th!
We
have to wait until Q2 is dawning to see how this fast-growing junior
fared in Q4. KNT would’ve really helped drag down Q4’22 averages,
as in Q3 it achieved fantastic cash costs and AISCs of just $503
and $909. So Yamana’s buyout combined with composition changes
and late Canadian reporting definitely skewed the GDXJ top 25’s
average cost data. Again last quarter proved challenging to
properly compare.
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 costs 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 this
past year’s raging inflation really hit.
Energy is the biggest category, including electricity to power
ore-processing plants including mills and diesel fuel 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.
I
found plenty of examples of this while wading through the GDXJ top
25’s latest quarterlies. That new out-of-place super-major Kinross
warned higher costs were “mainly due to inflationary cost pressure
on key consumables such as fuel, emulsion and reagents”. Hecla
Mining reported its “increase in total cash costs was due to higher
labor, contractor costs, and inflation in diesel, reagents, and
other key inputs”.
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 major gold
miners. They illuminate the minimum gold prices necessary to keep
the mines running.
The
elite mid-tiers’ and juniors’ cash costs looked ugly in
Q4’22, rocketing up 21.9% YoY to a new record high of $1,011 per
ounce! There’s nothing good to say about that, but it does remain
far below prevailing gold prices. Thankfully these stunning cash
costs were heavily skewed by a trio of extreme outliers, on top of
Yamana and K92 Mining not reporting yet. Those are Hecla,
Buenaventura, and First Majestic Silver.
HL
has long been a high-cost producer, but lower Q4 production
catapulted its cash costs an epic 48.4% higher to $1,696! Peru’s
BVN has been a hot mess for years, and its cash costs ran a lofty
$1,241 last quarter. But the real jaw-dropper is AG’s mind-boggling
$2,519, which rocketed up 55.1% YoY! That isn’t companywide though,
those crazy costs are isolated at one troubled primary gold mine
First Majestic runs.
Thankfully that accounted for just over a fourth of AG’s total gold
production last quarter, with the great majority byproducts from
this company’s other three silver mines. That single gold mine
represented less than 0.5% of the GDXJ top 25’s total Q4’22
production, so its extreme costs shouldn’t be allowed to distort
averages so much. Excluding these outliers, mid-tiers’ cash costs
looked far better averaging $825.
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 the major gold
miners’ true operating profitability.
The
GDXJ top 25’s AISCs in Q4’22 looked even worse than their cash
costs, soaring 22.8% YoY to their own new record high of $1,442!
While still plenty profitable with gold averaging $1,731 last
quarter, that is still way too high for comfort. But these scary
average AISCs were also heavily distorted by those same three
outliers. Hecla, Buenaventura, and First Majestic had crazy $2,132,
$1,961, and $2,865 AISCs!
Remove those, and the rest of these elite mid-tiers and juniors
averaged way-more-reasonable Q4’22 AISCs of $1,223 per ounce. And
had Yamana and K92 reported yet, those would likely be considerably
lower still. So the smaller gold miners are faring fine
fundamentally, navigating though these inflationary waters fairly
well. And their collective AISCs are expected to improve this year,
per miners’ own guidances.
With
those unadjusted Q4 average AISCs again running $1,442, the
GDXJ-top-25 average AISC outlook for full-year-2023 is $1,339. And
that worst offender First Majestic is forecasting much-better AISCs
for its floundering primary gold mine, averaging $1,788 this year.
But take that with a grain of salt, as a year ago AG guided that
mine to full-year-2022 AISCs near a $1,555 midpoint. Yet last
year’s actual soared to $2,745!
These inflation-goosed and skewed-higher AISCs really cut into the
mid-tiers’ and juniors’ profitability last quarter. Subtracting the
GDXJ-top-25 average AISCs from quarterly-average gold prices yields
a great proxy for sector unit earnings. That plummeted 53.6% YoY in
Q4’22 to just $288 per ounce, shockingly a new low in this
long research thread! But again that was heavily distorted by that
trio of extreme outliers.
Using that adjusted average all-in sustaining cost of $1,223 without
them, the rest of these gold miners saw average unit profits
almost double to $508 per ounce! That looks a heck of a lot
better. And these gold-mining earnings are likely to improve in
coming quarters. Not only are these mid-tiers and juniors guiding
towards lower AISCs ahead, but Q1’s quarterly-average gold price so
far is way stronger than Q4’s.
With
the great majority of Q1’23 behind us, gold is averaging $1,874 on
close which is a full 8.3% better than Q4’22’s $1,731
average! Gold miners’ profits in this current quarter will really
amplify these $143-higher gold prices. So unit earnings should
surge dramatically in quarters ahead, greatly improving mid-tier and
junior fundamentals. Higher output later this year will likely
further erode lofty inflation-goosed costs.
With
super-major Kinross Gold intruding into GDXJ’s upper ranks and
being-acquired Yamana apparently not bothering with Q4’22 reporting,
the elite mid-tiers’ and juniors’ hard accounting results are also
difficult to compare with Q4’21’s. While we could certainly take
out Kinross, estimating Yamana involves way too many assumptions.
So we probably have to wait for stabilization in coming quarters to
get a better read.
Nevertheless, the GDXJ top 25’s total revenues merely slipped 1.3%
YoY to $7,334m. Hard accounting earnings under Generally Accepted
Accounting Principles or other countries’ equivalents plummeted by
49.9% YoY to $254m. Yet they would’ve looked far better without big
noncash impairment charges of $350m from KGC and $360m from
Endeavour Mining. Pan American Silver also dragged down profits.
Buying out most of Yamana’s mines, PAAS flushed $157m of
“Transaction and Integration” costs through its income statement
last quarter. Without these unusual one-off items, the GDXJ top
25’s collective bottom-line earnings would’ve proven way higher
in Q4’22. Cashflows generated from operations also plunged
41.7% YoY to $1,689m, while overall cash treasuries dwindled down a
similar 36.4% YoY to $6,408m.
In
general corporations can’t pass along all their inflation-fueled
higher input costs to their customers via price hikes. So they are
forced to absorb some of those rising costs,
leading to
burning cash. And gold miners are even more constrained, with
essentially no ability to dictate their selling prices. Excluding
the always-problematic hedging, they are forced to accept whatever
prevailing gold prices markets are offering.
So
the high-potential mid-tier and junior gold miners fared decently
fundamentally last quarter, though big GDXJ-top-25 composition
changes really distorted comparisons. But these smaller gold miners
continue to produce for well under prevailing gold prices, still
yielding solid unit and bottom-line earnings despite all their
inflationary cost challenges. With gold powering higher, mid-tiers
and juniors remain way undervalued.
If
you regularly enjoy my essays, please support our hard work! For
decades we’ve published popular
weekly and
monthly
newsletters focused on contrarian speculation and investment. These
essays wouldn’t exist without that revenue. Our newsletters draw on
my vast experience, knowledge, wisdom, and ongoing research to
explain what’s going on in the markets, why, and how to trade them
with specific stocks.
That
holistic integrated contrarian approach has proven very successful,
yielding massive realized gains during gold uplegs like this
underway next major one. We extensively research gold and silver
miners to find cheap fundamentally-superior mid-tiers and juniors
with outsized upside potential as gold powers higher. Our trading
books are full of them already starting to soar.
Subscribe today
and get smarter and richer!
The
bottom line is the mid-tier and junior gold miners just reported
mixed quarterly results. Their overall production surged, although
GDXJ throwing in a super-major drove that. Mining costs soared to
record highs, but a handful of extreme outliers heavily skewed
that. Still these smaller gold miners were able to earn solid
profits in both per-ounce and bottom-line terms, showing fundamental
strength in a challenging quarter.
And
with gold stocks still really undervalued relative to gold, mining
profits are likely to really improve in coming quarters. Gold’s
extreme-Fed-tightening-interrupted upleg has resumed and is
gathering steam. Resulting higher average gold prices will be
leveraged to much-higher gold-stock earnings. That sets up the
battered gold stocks for a massive upleg, making for great
contrarian buying opportunities today. | 
