The
major gold miners’ stocks are drifting sideways with gold, their
early-year momentum sapped by the recent stock-market euphoria. But
they are more important than ever for prudently diversifying
portfolios, a rare sector that surges when stock markets weaken.
Their just-reported Q1’19 results reveal how gold miners are faring
as a sector, and their current fundamentals are way better than
bearish psychology implies.
The
wild market action in Q4’18 again emphasized why investors shouldn’t
overlook gold stocks. Every portfolio needs a 10% allocation
in gold and its miners’ stocks. As the flagship S&P 500
broad-market stock index plunged 19.8% largely in that quarter to
nearly enter a bear market, the leading gold-stock ETF rallied 11.4%
higher in that span. That was a warning shot across the bow that
these markets are changing.
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.
The
definitive list of major gold-mining stocks to analyze comes from
the world’s most-popular gold-stock investment vehicle, the GDX
VanEck Vectors Gold Miners ETF. Launched way back in May 2006, it
has an insurmountable first-mover lead. GDX’s net assets running
$9.0b this week were a staggering 46.6x larger than the
next-biggest 1x-long major-gold-miners ETF! GDX is effectively this
sector’s blue-chip index.
It
currently includes 46 component stocks, which are weighted in
proportion to their market capitalizations. This list is dominated
by the world’s largest gold miners, and their collective importance
to this industry cannot be overstated. Every quarter I dive into
the latest operating and financial results from GDX’s top 34
companies. That’s simply an arbitrary number that fits neatly into
the tables below, but a commanding sample.
As
of this week these elite gold miners accounted for fully 94.3% of
GDX’s total weighting. Last quarter they combined to mine 274.4
metric tons of gold. That was 32.2% of the aggregate world total in
Q1’19 according to the World Gold Council, which publishes
comprehensive global gold supply-and-demand data quarterly. So for
anyone deploying capital in gold or its miners’ stocks, watching GDX
miners is imperative.
The
largest primary gold miners dominating GDX’s ranks are scattered
around the world. 20 of the top 34 mainly trade in US stock
markets, 6 in Australia, 5 in Canada, 2 in China, and 1 in the
United Kingdom. GDX’s geopolitical diversity is excellent for
investors, but makes it more difficult to analyze and compare the
biggest gold miners’ results. Financial-reporting requirements vary
considerably from country to country.
In
Australia, South Africa, and the UK, companies report in
half-year increments instead of quarterly. The big gold miners
often publish quarterly updates, but their data is limited. In
cases where half-year data is all that was made available, I split
it in half for a Q1 approximation. While Canada has quarterly
reporting, the deadlines are looser than in the States. Some
Canadian gold miners drag their feet in getting results out.
While it is challenging bringing all the quarterly data together for
the diverse GDX-top-34 gold miners, analyzing it in the aggregate is
essential to see how they are doing. So each quarter I wade through
all available operational and financial reports and dump the data
into a big spreadsheet for analysis. The highlights make it into
these tables. Blank fields mean a company hadn’t reported that data
as of this Wednesday.
The
first couple columns of these tables show each GDX component’s
symbol and weighting within this ETF as of this week. While
most of these stocks trade on US exchanges, some symbols are
listings from companies’ primary foreign stock exchanges. That’s
followed by each gold miner’s Q1’19 production in ounces, which is
mostly in pure-gold terms. That excludes byproduct metals often
present in gold ore.
Those are usually silver and base metals like copper, which are
valuable. They are sold to offset some of the considerable expenses
of gold mining, lowering per-ounce costs and thus raising overall
profitability. In cases where companies didn’t separate out gold
and lumped all production into gold-equivalent ounces, those GEOs
are included instead. Then production’s absolute year-over-year
change from Q1’18 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. Companies with
symbols highlighted in light-blue have newly climbed into the elite
ranks of GDX’s top 34 over this past year. This entire dataset
together is quite valuable.
It
offers a fantastic high-level read on how the major gold miners are
faring fundamentally as an industry and individually. While
the endless challenge of growing production continues to vex plenty
of the world’s larger gold miners, they generally performed much
better in Q1’19 than today’s low gold-stock prices reflect. Last
quarter was also a big transition one as the recent gold-stock
mega-mergers continued to settle out.
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 output
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. But for several years now
the major gold miners have been struggling to grow production.
Large economically-viable gold deposits are getting increasingly
harder to find and more expensive to exploit, with the low-hanging
fruit long since picked.
Gold
miners’ exploration budgets have cratered since gold collapsed in
Q2’13, plummeting 22.8%! That was the yellow metal’s worst quarter
in an astounding 93 years, which devastated sentiment and
scared investors away from this sector. Much less capital to
explore shrank the pipeline of new finds to replace relentless
depletion at existing mines. That left major gold miners just one
viable option to grow their output.
They
either have to buy existing mines and/or deposits from other
companies, or acquire those outright. That’s unleashed a
merger-and-acquisition wave that culminated in recent quarters. In
September 2018 gold giant Barrick Gold announced it was merging with
Randgold. Not to be outdone, in January 2019 the other gold
behemoth Newmont Mining declared it was acquiring Goldcorp in
another colossal mega-deal.
I
wrote a whole essay
analyzing these
mega-mergers in mid-February, and believe they are bad for this
sector for a variety of reasons. For our purposes today, Q1’19 was
the first quarter fully reflecting the new Barrick including
Randgold. But Newmont’s acquisition of Goldcorp wasn’t finalized
until April 2019, so that isn’t included in NEM’s Q1’19 results.
And unfortunately Goldcorp’s weren’t published separately either.
That
makes analyzing the GDX top 34’s gold production last quarter more
complicated than usual. As far as I can tell, Newmont released
nothing on Goldcorp’s Q1 operations. As usual when one company buys
out another, the acquired company’s website is quickly effectively
deleted. It is replaced with a tiny new website largely devoid of
useful information, that redirects to the new combined company’s
main website.
So
Goldcorp’s Q1 results were apparently cast into a black hole, never
to be seen by investors. Across last year’s four quarters, Goldcorp
ranked as the 5th-to-7th-largest GDX component. So excluding it
from this leading gold-stock ETF skews all kinds of Q1 numbers.
This discontinuity will resolve itself over the next couple quarters
as Newmont and Goldcorp are fully integrated into the new, wait for
it, “Newmont Goldcorp”.
In
Q1’19 these top 34 GDX gold miners produced 8.8m ounces of gold,
which was down a sharp 6.3% from Q1’18’s levels. But Goldcorp
averaged 574k ounces of quarterly production in 2018. If that is
added in, Q1’19’s climbs to 9.4m ounces which is only off a slight
0.2% YoY. Stable gold output is a victory for the major gold
miners, as there have been plenty of recent quarters where their
production has
declined.
But
depletion is still a huge challenge for them, as they are losing
market share to smaller gold miners that aren’t so unwieldy to
manage. The World Gold Council publishes the best global gold
fundamental supply-and-demand data quarterly. According to its
latest Q1’19 Gold Demand Trends report, total world mine production
actually climbed 1.1% YoY in Q1. So the larger gold miners
continue to underperform.
On a
quarter-over-quarter basis since Q4’18, the GDX top 34’s gold
production plunged 8.8%! But again that is overstated by Goldcorp’s
missing-in-action Q1 output. Add in that 2018 quarterly
approximation, and that decline moderates to 2.8% QoQ. The
quarter-to-quarter output dynamics among the major gold miners are
somewhat surprising. Gold is not produced at a steady pace
year-round as logically assumed.
Going back to 2010, the world gold mine production per the WGC has
averaged sharp 7.2% QoQ drops from Q4s to Q1s! For many if not most
major gold miners, calendar years’ first quarters mark the low
ebb in their annual output. The gold miners attribute this Q1
lull to new capital spending that slows production as mine
infrastructure is upgraded. That weaker output in Q1s is regained
with big jumps in following quarters.
In
that same decade-long WGC dataset, Q2s saw world mine production
average big 5.4% QoQ surges from Q1s! That sharp acceleration trend
continued in Q3s, which averaged additional 5.3% QoQ growth from
Q2s. Then that petered out on average in Q4s, which were only 0.5%
better than Q3s. So it is normal for gold miners’ production to
fall sharply in years’ Q1s before rebounding strongly in Q2s and
Q3s.
There’s more to this intra-year seasonality than capital spending
though. Mine managers play a big role in how they plan their ore
sequencing. Individual gold deposits are not homogenous, but have
varying richness throughout their orebodies. Mine managers have to
decide which ore to mine in any quarter, which is fed through their
fixed-capacity mills for crushing and gold recovery. Ore
grade determines output.
The
more gold per ton of ore dug and hauled in any quarter, the more
gold produced. Mine managers choose to process more lower-grade
ores in Q1s, then move to higher-grade ore mixes in Q2s and Q3s.
That helps maximize their incentive bonuses. Q3 results are
reported in early-to-mid Novembers soon before year-ends. Higher
production boosts stock prices heading into that year-end
bonus-calculation time!
Realize that Q1 results reported from early-to-mid Mays generally
show a year’s weakest gold output. It is surprising to see
investors sell gold stocks hard when Q1’s production declines from
Q4’s, as this is par for the course in this industry. The bright
side is excitement later builds throughout the year as Q2’s and Q3’s
production grows fast. The gold miners look better fundamentally
later in years than earlier in them!
With
year-over-year gold production among the GDX top 34 effectively flat
in Q1’19 with Goldcorp’s likely output added back in, odds argued
against much of a change in gold-mining costs. They are largely
fixed quarter after quarter, with actual mining requiring the same
levels of infrastructure, equipment, and employees. These big fixed
costs are spread across production, making unit costs inversely
proportional to it.
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 Q1’19 these
top-34-GDX-component gold miners that reported cash costs averaged
$616 per ounce. That actually fell a sharp 7.7% YoY, down on the
low side of recent years’ cash-cost range.
Investor sentiment in gold-stock land has been really poor, as
recent months’ extreme stock euphoria has really
stunted interest
in gold. If stock markets seemingly do nothing but rally
indefinitely, then why bother prudently diversifying stock-heavy
portfolios with counter-moving gold? There’s been increasing
chatter lately about the gold-mining industry’s viability, which
isn’t unusual when psychology waxes quite bearish.
Those worries are ridiculous with the major gold miners’ cash costs
averaging in the low $600s even in Q1’s low-quarterly-output ebb.
As long as gold remains well above $616, this neglected sector faces
no existential threat. And Q1’s top-34-GDX-average cash costs are
even skewed higher by one struggling gold miner, Peru’s
Buenaventura. In Q1’19 it suffered a sharp 22.2% YoY plunge in gold
production.
That
was primarily due to the company stopping extraction operations at
one of its key mines in January to rejigger and centralize it. That
lower output to spread mining’s big fixed costs across was enough to
catapult BVN’s Q1 cash costs 33.1% higher YoY to an extreme $1049
per ounce. Those are expected to mean revert much lower in coming
quarters. Ex-BVN the rest of the GDX top 34 averaged merely $600.
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
GDX-top-34 gold miners reported average AISCs of $893 per ounce in
Q1’19, up merely 1.0% YoY. These flat AISCs are right in line with
flat production when Goldcorp’s likely output is added back in. The
big operational challenges at Buenaventura also rocketed its AISCs
an incredible 82.3% higher YoY to an anomalous $1382 per ounce.
Excluding BVN, the rest of the GDX top 34 averaged $874 AISCs in Q1.
That’s right in line with the past couple calendar years’ quarterly
average of $872. The major gold miners, despite still struggling to
grow their production enough to exceed depletion, are still holding
the line on all-important costs. Those stable costs regardless of
prevailing gold prices are what make the gold stocks so attractive.
They have massive upside potential as their profits amplify
the higher gold prices still coming.
The
gold price averaged $1303 in Q1’19. Subtracting the major gold
miners’ average $893 AISCs from that yields strong profits of $410
per ounce. While recent years’ universal stock-market euphoria has
capped gold at
$1350 resistance, it has still been grinding higher on balance
carving higher lows. Gold is getting wound tighter and tighter
towards a major upside breakout to new bull highs well above
$1350.
Like
usual gold investment demand
will be rekindled
when the stock markets inevitably roll over materially again,
propelling gold higher. A mere 7.7% upleg from $1300 would carry
gold to $1400, and just 15.4% would hit $1500. Those are modest and
easily-achievable gains by past-gold-upleg standards. During
essentially the first half of 2016 after major stock-market
selloffs, gold blasted 29.9% higher in 6.7 months!
At
$1300 and Q1’s $893 average AISCs, the major gold miners are earning
$407 per ounce. But at $1400 and $1500 gold, those profits soar to
$507 and $607. That’s 24.6% and 49.1% higher on relatively-small
7.7% and 15.4% gold uplegs from here! This inherent profits
leverage to gold is why the major gold stocks of GDX tend to amplify
gold uplegs by 2x to 3x or so. Investors enjoy large gains
as gold rallies.
Despite investors’ serious apathy for this sector, the gold miners’
costs remain well-positioned to fuel big profits growth in a
higher-gold-price environment. Investors love rising earnings,
which are looking
to be scarce in the general stock markets this year. The better
gold miners’ stocks are likely to see big capital inflows as gold
continues climbing on balance, which will drive them and to a lesser
extent GDX much higher.
The
GDX top 34’s accounting results weren’t as impressive as their flat
production and costs in Q1. The lack of Goldcorp’s operations being
accounted for last quarter again distorted normal annual
comparisons. So all these Q1’19 numbers are compared to Q1’18’s
excluding Goldcorp. Last quarter’s average gold price being 1.9%
lower than Q1’18’s average also played a role in weaker
year-over-year performance.
The
GDX top 34’s total revenues fell 5.2% YoY ex-Goldcorp to $9.2b in
Q1’19. That’s reasonable given the slightly-lower production and
gold prices. Lower byproduct silver output also contributed, as a
half-dozen of these elite major gold miners also produce sizable
amounts of silver. Again without Goldcorp, the total silver output
among the GDX top 34 fell 8.0% YoY to 27.3m ounces in Q1 weighing on
total sales.
Their overall cash flows generated from operations mirrored this
weakening trend, down 9.1% YoY to $2.8b last quarter. Still the
GDX-top-34 gold miners were producing lots of cash as the big
profits gap between their AISCs and prevailing gold prices implied.
Only two of these major gold miners suffered significant negative
OCFs, and one of those was naturally Buenaventura with all its
production struggles.
These elite gold miners remained flush with cash at the end of Q1,
reporting $11.1b on their books. That is 11.3% lower YoY without
Goldcorp. The gold miners tap into their cash hoards when they are
building or buying mines, so declines in overall cash balances
suggest more investment in growing future output. Investors
fretting about the gold-mining industry today aren’t following their
strong operating cash flows.
Last
but not least are the GDX top 34’s hard accounting profits under
Generally Accepted Accounting Principles. These are the actual
quarterly earnings reported to the SEC and other regulators.
Overall profits excluding Goldcorp only declined 7.2% YoY to $731m
in Q1’19. That’s really impressive in light of the 5.2%-lower
revenues. Prior quarters’ big mine-impairment charges on lower gold
prices also dried up.
So
the major gold miners included in this sector’s leading ETF are
doing a lot better than investors are giving them credit
for. There’s no fundamental reason for this critical
portfolio-diversifying contrarian sector to be shunned. Gold
stocks’ only problem is the lack of upside action in gold, which
will quickly change once the stock markets decisively roll over
again. December 2018 proved these relationships still work.
As
the S&P 500 plunged 9.2% that month, investors remembered the
timeless wisdom of keeping some gold and gold miners’ stocks in
their portfolios. So they started shifting capital back in, driving
gold 4.9% higher that month which GDX leveraged to a big 10.5%
gain! Gold and its miners’ stocks act like portfolio insurance
when stock markets sell off. Everyone really needs a 10% allocation
in gold and gold stocks!
That
being said, GDX isn’t the best way to do it. This ETF’s potential
upside is retarded by the large gold miners struggling to grow their
production. Investment capital will seek out the smaller mid-tier
and junior gold miners actually able to increase their output. It’s
far better to invest in these great individual miners with superior
fundamentals. While plenty are included in GDX, their
relatively-low weightings dilute their gains.
GDX’s little-brother ETF GDXJ is another option. While advertised
as a “Junior Gold Miners ETF”, it is really a mid-tier gold
miners ETF. It includes most of the better GDX components, with
higher weightings since the largest gold majors are excluded. I
wrote an entire essay in mid-January explaining why
GDXJ is superior
to GDX, and my next essay a week from now will delve into the
GDXJ gold miners’ Q1’19 results.
Back
in essentially the first half of 2016, GDXJ rocketed 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 super-majors. The
recent mega-mergers are going to worsen that investor-hostile
trend. Investors should buy better individual gold stocks, or GDXJ,
instead of GDX.
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, their prices remain relatively low with big upside
potential as gold rallies!
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The bottom line is
the major gold miners performed pretty well last quarter. Their
production held steady despite lower prevailing gold prices and
inexorable depletion. That led to flat costs right in line with
prior years’ average levels. That leaves gold-mining earnings
positioned to soar higher in future quarters as gold continues
slowly grinding higher on balance. Another major stock-market
selloff will accelerate that trend.
Stock investors
are making a serious mistake ignoring gold and its miners’ stocks.
The bearish sentiment plaguing this sector today is irrational given
miners’ solid fundamentals. Diversifying is best done before it is
necessary, buying low with gold-stock prices so beaten-down. This
is the only sector likely to rally fast amplifying gold’s upside
when stock markets inevitably swoon again. Don’t overlook the great
opportunity here! |