The
major gold miners’ stocks have plunged in recent weeks, obliterating
positive sentiment. They got sucked into the serious stock-market
selloff fueled by extreme Fed hawkishness, which spawned big fear.
But that is rash given this sector’s long record of powering higher
on balance through general-stock bear markets. The gold miners’
fundamentals remain solid-to-strong, as revealed in their
just-reported Q1’22 results.
The
most-popular major-gold-stock benchmark remains the venerable GDX
VanEck Gold Miners ETF. Launched way back in May 2006, it has since
parlayed its first-mover advantage into an insurmountable lead.
Even in its present battered state, mid-week GDX’s net assets of
$13.0b dwarfed those of the next-largest 1x-long gold-miners-ETF
competitor by a staggering 25.9x! GDX is effectively the only game
in town.
The
larger gold miners were actually having a great year until
the stock markets started crumbling several weeks ago. By mid-April
GDX had surged a smart 27.6% year-to-date! That amplified gold’s
parallel rally by a big 3.4x, better than GDX’s usual 2x-to-3x
gold-leverage range. And both the metal and its miners’ stocks were
trouncing the flagship S&P 500 broad-market index, which had dropped
7.9% in that same span.
That’s how gold and gold stocks usually work during material
stock-market selloffs, powering higher on balance as general stocks
weaken. Even major bear markets mostly unfold slowly, taking
a couple years or so to finish their maulings. But occasionally
downlegs cascade precipitously, fueling flaring fear that infects
everything including gold. Thus its miners’ stocks can get trapped
in those rare fear maelstroms.
Since gold stocks’ latest interim high in mid-April, the S&P 500 has
plunged a serious 10.4%! That heavy selling spawned big safe-haven
buying, fueling a monster 3.2% surge in the US Dollar Index in that
short span. That flight to cash unleashed massive gold-futures
selling, hammering the yellow metal a sharp 6.3% lower. The VIX
fear gauge soared 47.1%. All that bludgeoned GDX 22.6% lower in
only 17 trading days!
So
in just several weeks gold stocks have done an abrupt turn-one-eight
from mounting popularity as their gains grew to being mired in
universal bearishness. But dumping this sector given the
extraordinary market backdrop is a baby-with-the-bathwater type of
mistake. With inflation raging, gold and its miners’ stocks are the
best investments now. History has proven that true regardless of
stock bears and Fed rate hikes.
This
week’s latest US Consumer Price Index print remained red-hot,
soaring 8.3% over this past year! That’s slightly off the prior
month’s worst levels since December 1981, despite this inflation
gauge being intentionally lowballed by the government. Surging
general prices are the result of absurd Fed money printing. Over
25.5 months into mid-April, the Fed mushroomed its balance sheet an
insane 115.6% or $4,807b!
Effectively more than doubling the US money supply conjured up
vastly-more dollars to chase relatively-less goods and services,
bidding up their prices. Monetary inflation is wildly-bullish for
gold. During the only other two similar
mammoth inflation
super-spikes in the 1970s, gold prices nearly tripled during
the first before later more than quadrupling in the second! The
epic gold-stock gains then were truly life-changing.
And
gold-futures speculators’ fears of Fed rate hikes are
supremely-irrational. The Fed’s thirteenth hiking cycle of the
modern monetary era since 1971 is underway.
Gold actually
thrived in the previous dozen, averaging hefty 29.2% gains
during their exact spans! Fed tightenings are bullish for gold and
therefore its miners’ stocks because they are bearish for general
stocks, greatly
bolstering gold investment demand.
So
for hardened contrarians able to buck unreasonable herd fear, this
recent big-and-fast gold-stock drawdown is a fantastic buying
opportunity. Rather than succumbing to groupthink on this
sector, smart traders should consider the major gold miners’
fundamentals and outlook. We just got fresh updates on how they are
actually faring operationally and financially in their latest
just-finishing Q1’22 earnings season.
For
24 quarters in a row now, I’ve painstakingly analyzed the latest
results released by GDX’s 25-largest component stocks. These
include the world’s biggest gold miners, which now account for a
commanding 87.9% of this ETF’s entire weighting. Digesting hard
fundamental results as they are released is essential for cutting
through obscuring sentiment fogs. It helps traders rationally
understand gold stocks’ real outlook.
This
table summarizes the operational and financial highlights from the
GDX top 25 during Q1’22. These gold miners’ stock symbols aren’t
all US listings, and are preceded by their rankings changes within
GDX over this past year. The shuffling in their ETF weightings
reflects shifting market caps, which reveal both outperformers and
underperformers since Q1’21. Those symbols are followed by their
current GDX weightings.
Next
comes these gold miners’ Q1’22 production in ounces, along with
their year-over-year changes from the comparable Q1’21. 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 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.
Last
quarter proved solid-to-strong for major gold miners. While the
larger ones continue to struggle with depletion which is nothing
new, mining-cost rises moderated despite the severe inflationary
pressures festering from this profligate Fed’s vast deluge of new
money. The resulting higher prevailing gold prices in Q1’22 really
boosted implied sector profitability. The gold miners are still
making money hand-over-fist!
As
long-time readers know, I’m generally not a fan of the major gold
miners. After actively speculating in gold stocks and writing
popular financial newsletters about that for over two decades, their
best gains by far have been won in smaller mid-tier and junior
gold miners. I’ll cover their Q1’22 results in next week’s
essay on the far-superior GDXJ ETF. The largest gold miners have
been dead-weight for many years now.
They’ve mostly proven unable to overcome a crucial operational
challenge, seriously retarding their stock-price gains. Operating
from such large-scale production bases, the bigger gold miners have
long failed to replenish their gold mined. They simply can’t
find or purchase big-enough gold deposits to develop into new mines
to overcome depletion. That’s why I’d never trade the lion’s share
of heavier-weighted GDX stocks.
The
best-available global gold supply-and-demand data is published
quarterly by the World Gold Council in its awesome Gold Demand
Trends reports. The latest covering Q1’22 revealed worldwide
gold-mine output climbed a strong 2.6% YoY to 856.5 metric tons, or
27,537k ounces. Yet the GDX top 25’s collective gold production
last quarter plunged a steep 8.1% YoY to 7,729k ounces!
That’s despite gold surging.
Quarterly average gold prices blasted 4.8% higher to $1,879 between
Q1’21 to Q1’22! That’s certainly good incentive to maximize
production to take advantage of great gold prices. Last quarter
actually saw the second-highest gold prices ever witnessed
after Q3’20’s $1,912. Yet the GDX-top-25 output still fell to its
lowest levels in at least the last 24 quarters I’ve been advancing
this research thread! But that’s a bit skewed.
As
of mid-week, South Africa’s Harmony Gold hadn’t yet reported its
Q1’22 operational results. This is a major gold miner, a threshold
which starts at 250k ounces of quarterly production. Excluding
Harmony’s output from the comparable Q1’21 leaves overall GDX-top-25
gold production down a milder 3.7% YoY. That’s still shrinkage
though, way worse than overall world gold-mining output growth again
running 2.6% YoY.
Generally the only times large major gold miners temporarily enjoy
annual production boosts are in the four quarters after they
acquire competitors. That has long proved true for the mighty
industry behemoths Newmont and Barrick Gold, which dominate GDX at
26.4% of its total weighting! That’s because of their gigantic
market capitalizations.
Gold-stock
mega-mergers are bad, only briefly masking depletion problems.
Together NEM and GOLD produced a massive 2,334k ounces last quarter,
which is enormous. But as recently as Q4’19, these same two
super-majors collectively mined 3,269k! The only large major seeing
great production growth last quarter was Agnico Eagle Mines, with
impressive 27.8%-YoY growth to 661k ounces. Yet that’s only because
it acquired Kirkland Lake Gold. A year ago those two companies
mined 820k!
So
the production growth investors prize above everything else is
rarely seen in the major gold miners that overwhelmingly account
for GDX’s weightings. Smaller mid-tier and junior gold miners have
a far-better track record of growing output, which is way-easier
with their much-smaller production bases. Just bringing single new
smaller gold mines online periodically keeps their outputs generally
growing on balance.
Eleven of these GDX-top-25 component stocks qualify as majors,
producing 250k+ ounces in Q1’22. Together they command a majority
56.7% of this ETF’s total weightings. Excluding Harmony which again
dragged its feet on reporting, the remaining ten true majors saw
their total quarterly output fall 5.0% YoY to 6,317k ounces. Unable
to even replenish depletion, unfortunately most of the majors
aren’t worth owning.
Even
if they were, their upside potential is limited by their far-larger
market caps. The bigger any stock, the greater the capital inflows
necessary to drive it materially higher. Mid-week the true majors
averaged hefty $20.3b market caps, compared to just $6.9b for the
rest of the GDX top 25. And if Franco-Nevada which is just a
wildly-overpriced royalty play is excluded, the latter market caps
are even lower averaging $5.2b.
Unit
gold-mining costs are generally inversely-proportional to
gold-production levels. That’s because gold mines’ total operating
costs are largely fixed during planning stages, when designed
throughputs for mills that process gold-bearing ores are
determined. Their nameplate capacities don’t change
quarter-to-quarter, requiring similar levels of infrastructure,
equipment, and employees to keep running at full-speed.
So
the only real variable driving quarterly gold production is the
ore grades fed into the mills. Those vary widely even within
individual gold deposits. Richer ores yield more ounces to spread
the big fixed costs of mining across, lowering unit costs and
boosting profitability. So with the GDX top 25’s output falling
last quarter, per-ounce costs should’ve at least risen comparably
and likely more given the Fed’s raging inflation.
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
GDX-top-25 gold miners’ average cash costs shot up 10.1% YoY to $851
per ounce, just shy of their all-time high of $853 in the preceding
Q4’21. Hecla Mining proved a wild outlier, reporting eye-popping
$1,516 cash costs that skyrocketed 44.1% YoY! Management blamed
this on “inflationary cost pressures related to steel, reagents,
fuel for mobile equipment, other consumables, and increased
contractor costs...”
Excluding Hecla’s extreme, the rest of the GDX top 25 averaged
modestly-better $812 cash costs. And while this wasn’t true for
Hecla, many of these gold miners are forecasting improving gold
outputs as 2022 marches on. That ought to lower average cash
costs in coming quarters, with more ounces to bear the fixed costs
of mining. But even $851 remains far, far below prevailing gold
prices averaging $1,879 in Q1.
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.
Surprisingly given their weaker output and the inflationary
pressures on gold mining, these GDX-top-25 gold stocks reported a
comparatively-mild 6.2%-YoY AISC increase to $1,133 per ounce. That
actually was a considerable improvement quarter-on-quarter
from Q4’21’s all-time high of $1,188. Nevertheless, this latest
quarter proved the 14th in a row seeing average all-in sustaining
costs climbing year-over-year.
That’s not necessarily a problem though as long as gold-price gains
generally outpace rising costs. That AISC-inflation streak
began way back in Q4’18 when they ran $874. Yet back then gold only
averaged $1,228 per ounce. While AISCs are now 29.6% higher in this
latest quarter, average gold prices fared far better rallying
53.0%! Mining costs naturally trend with gold prices, which impact
the economics of gold deposits.
Higher-grade ore bodies usually have lower unit costs to exploit,
less waste rock to dig up and process compared to the contained
gold. When gold prices are powering higher on balance in secular
bulls, the mining companies can target other more-common lower-grade
deposits. Those have higher unit costs, but are much easier to find
and often develop. So better gold prices gradually reduce
average grades of mines.
And
Hecla’s crazy-high $1,810 AISCs also skewed the GDX-top-25 average
higher in Q1. Excluding that big outlier, the rest of these gold
miners averaged $1,094. Interestingly Hecla expects those AISCs to
moderate, with full-year-2022 guidance near a $1,525 midpoint. Out
of the 16 GDX-top-25 gold miners reporting both Q1’22 AISCs and 2022
forecasts, fully 11 see average full-year AISCs below last
quarter’s levels.
And
those improvements weren’t trivial, with AISC guidances across this
population averaging 7.0% lower than their AISCs last quarter! So
major gold miners are mostly forecasting both lower costs and
higher production in Q2, Q3, and Q4. That has big potential to
really boost the gold miners’ earnings this year, as long as
prevailing gold prices remain relatively-high. They certainly
should with the Fed’s inflation raging!
Gold-mining earnings are the difference between prevailing gold
prices and mining costs. The best sector proxy for gold-mining
profitability simply subtracts GDX-top-25 AISCs from
quarterly-average gold levels. That proved a pleasant surprise in
these latest results, with implied sector earnings actually
climbing 2.6% YoY to $746 per ounce in Q1’22 despite 6.2%-higher
average AISCs! Those are hefty profits by historical standards.
Way
back in Q4’18 when that 14-quarter-old streak of higher AISCs
started, major gold miners’ implied unit profits by this measure
merely ran $353 per ounce. Last quarter’s impressive $746 is more
than double that, and the fourth-highest on record after Q3’20’s
$884, Q4’20’s $838, and Q2’21’s $778. So the major gold miners
dominating GDX really are making money hand-over-fist with
these excellent gold prices.
Amazingly despite gold’s sucked-into-heavy-stock-market-selling
drubbing in recent weeks, its average price so far in Q2’22 is still
running $1,915! If gold bounces soon as it ought to on extreme
gold-futures selling reversing into big proportional buying, this
quarter’s average gold level could rival Q3’20’s record high of
$1,912. Couple that with lower AISCs on rising output, and gold
miners’ earnings could really surge.
So
despite recent weeks’ big-and-fast gold-stock plunge that decimated
sector sentiment, the major gold miners’ fundamentals remain
really strong. That’s also mostly reflected in their hard
accounting results, just reported to securities regulators under
Generally Accepted Accounting Principles or other countries’
equivalents. The GDX top 25’s total revenues edged up 1.3% YoY to
$13.9b despite their lower gold output.
Average gold prices surging 4.8% YoY certainly helped, as did some
companies boosting their byproduct outputs of base metals and
silver. Despite higher sales, overall bottom-line earnings still
plunged 23.1% YoY to just $2,162m. Accounting-earnings data is
noisy, skewed both ways by big unusual charges and gains. Major
sources include mine impairments and reversals, and gains and losses
on asset sales and hedges.
When
I wade through gold miners’ quarterly reports, I always look for
unusual one-time gains and losses on their income statements. Some
larger ones in this latest quarter included Kinross Gold’s huge
$671m impairment charge on trying to quickly sell its Russian
operations in response to that country’s invasion of Ukraine.
Endeavour Mining suffered a big $179m “loss on financial
instruments”, which included $130m of hedges.
This
company is hedging over half of its remaining forecasted 2022 output
around just $1,833 gold, which really irritates investors. They buy
gold stocks for leveraged upside exposure to gold, and
selling that via hedges robs shareholders in gold-bull
environments. Gold-stock management teams should be fired if they
hedge anything beyond limited requirements necessary to finance mine
expansions and new mine-builds.
Offsetting those unusual losses was an enormous $480m gain Peru’s
Buenaventura reported in selling discontinued operations. Net these
together, and GDX-top-25 accounting earnings in Q1’22 were closer to
$2,532m which is only down 10.0% YoY. The major gold stocks remain
relatively-cheap in valuation terms based on classic
trailing-twelve-month price-to-earnings ratios, with the GDX top 25
averaging 30.9x.
That’s close to their 24-quarter low of 29.1x seen in Q2’21. Eight
of these elite gold miners were trading with cheap P/Es below 20x
mid-week, and valuations are trending even lower given the recent
heavily-outsized gold-stock selling. Cash flows generated from
operations also proved solid last quarter, totaling $4,660m across
the GDX top 25 which slumped 8.0% YoY. Their total cash treasuries
edged up 0.4% to $20.6b.
That’s the third-highest on record, making for big cash warchests
these larger gold miners will use to try and stem their ongoing
depletion-driven output shrinkage. While they do expand existing
mines and build new ones, most of their growth at major-scale comes
from buying entire gold-mining companies outright. The
smaller mid-tier and junior gold miners are the prime targets,
feeding majors’ insatiable gold-supply pipeline.
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The
bottom line is the major gold miners fared pretty-well fundamentally
last quarter. Their long struggle failing to overcome depletion
continued, with more production shrinkage like usual. But despite
lower output and monetary-inflation pressures, the GDX top 25 still
held the line on all-in sustaining costs. Those didn’t climb
proportionally with weaker production, helping higher prevailing
gold prices really boost earnings.
Gold-mining profitability last quarter was among the highest on
record, and ought to improve further as this year marches on. The
gold miners are mostly forecasting improving outputs along with
lower costs in coming quarters. That is really-bullish for earnings
growth with gold prices highly-likely to keep climbing on balance in
this raging inflation. The beaten-down gold stocks are far too low
to reflect these strong fundamentals! |