The
major gold miners just wrapped up another quarterly earnings season,
reporting great results. Sector unit profits continued blasting
higher on stable production, lower mining costs, and record
prevailing gold prices. Yet individually plenty of majors still
struggled with rising expenses or lower output. So deploying
capital in miners to leverage gold’s remarkable breakout requires
handpicking fundamentally-superior stocks.
The
GDX VanEck Gold Miners ETF remains this sector’s dominant
benchmark. Birthed way back in May 2006, GDX has parlayed its
first-mover advantage into an insurmountable lead. Its $13.9b of
net assets mid-week dwarfed the next-largest 1x-long
major-gold-miners ETF by nearly 28x! GDX is undisputedly the
trading vehicle of choice in this sector, with the world’s biggest
gold miners commanding most 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, these thresholds shake out under
75k, 75k to 250k, 250k+, and 500k+. Those two largest categories
account for fully half of GDX.
GDX’s Q1 performance was poor, merely edging up 2.0% despite gold
powering 7.6% higher. Normally the major gold miners amplify
material gold moves by 2x to 3x, so their stocks should’ve
surged 15% to 23% last quarter! Traders have been slow to warm to
this sector, as it languished out of favor for years. Recent
months’ euphoric
stock-market bubble also overshadowed gold, stealing most of
markets’ limelight.
But
GDX’s dismal and super-anomalous 0.3x upside leverage to gold in Q1
has passed. Despite gold’s healthy and necessary high consolidation
over this past month, the major gold stocks just hit a new upleg
high mid-week. GDX has soared 39.2% since late February,
amplifying gold’s parallel 17.4% gain by 2.3x! Already back into
normal territory, the majors’ upside leverage to gold is
dramatically mean reverting.
Gold’s recent
nominal-record-high streaks are winning much-more bullish
financial-media coverage, so traders are increasingly noticing and
chasing. Q1’s earnings season had a great example, as the world’s
largest gold miner Newmont reported its latest results. Despite
that being the only gold stock included in the flagship S&P 500
benchmark index, normally institutional investors still don’t follow
NEM enough to care.
Yet
that day its stock rocketed 12.5% higher on that Q1 report!
NEM’s gains dragged the entire GDX up a big 3.7%, despite gold only
climbing 0.6% that day. But considered in proper comparable
context, those Newmont Q1 results actually proved weak as I’ll
explain below. Yet fund managers finally starting to pay attention
to gold and gold stocks again flooded in anyway. Sentiment is
definitely improving in this sector!
For
32 quarters in a row now, I’ve painstakingly analyzed the latest
operational and financial results from GDX’s 25-largest component
stocks. Mostly super-majors, majors, and larger mid-tiers, they
dominate this ETF at 86.0% of its total weighting! While digging
through quarterlies is a ton of work, understanding the gold miners’
latest fundamentals really cuts through the obscuring sentiment fogs
shrouding this sector.
This
table summarizes the operational and financial highlights from the
GDX top 25 during Q1’24. 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 Q1’23. Those symbols are followed by their
current GDX weightings.
Next
comes these gold miners’ Q1’24 production in ounces, along with
their year-over-year changes from the comparable Q1’23. 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.
A
few weeks ago as this latest earnings season was just getting
underway, I wrote an essay
previewing likely
Q1’24 results. I concluded “...the major gold miners will soon
report fantastic Q1 results. Despite higher mining costs likely in
the usual Q1 production ebb, record average gold prices will still
make for fat unit profits.” That proved true, although digging into
the actual quarterlies revealed some surprises like usual.
Production growth trumps everything else as the primary mission for
gold miners. Higher outputs boost operating cash flows which help
fund mine expansions, builds, and purchases, fueling virtuous
circles of growth. Mining more gold also boosts profitability,
lowering unit costs by spreading big fixed operational expenses
across more ounces. The GDX top 25’s collective Q1 output slipped
0.6% YoY to 7,999k ounces.
That
was the fifth quarter in row these major gold miners failed to grow
their production. Operating at large scales, they simply can’t find
enough new gold to overcome relentless depletion. These bigger gold
miners really underperformed their smaller peers last quarter.
According to the World Gold Council’s new Q1’24 Gold Demand Trends
report, global gold mine production actually grew an impressive
4.4% YoY in Q1!
And
the GDX top 25’s production would’ve been even worse if not for
Newmont’s soaring 32.3% YoY to a huge 1,680k ounces! That’s the
reason institutional investors bid up NEM’s stock 12.5% that day its
Q1 results were released. While sounding amazing, that big growth
is a short-lived merger boost. Newmont gobbled up Australian
super-major Newcrest Mining for $16.8b last year, with that deal
closing in early November.
Of
course this newly-merged company’s first full quarter would see big
output growth. But traders newer to gold stocks didn’t realize that
a year ago in Q1’23 NEM’s and NCM’s combined production totaled
1,780k ounces. So somehow now together as Newmont their Q1’24
output actually dropped a sizable 5.6% YoY! Gold-stock
mega-mergers have
always been bad for this sector, as I analyzed in a
February-2019 essay.
Unable to organically grow production at their vast scales,
super-majors spend tens of billions of dollars to buy smaller
rivals. These acquired gold miners are always fundamentally
superior, operating fewer gold mines at lower costs. Their
resulting better profitability and lower market capitalizations give
their stocks greater upside leverage to gold. But those advantages
vanish once assimilated into the super-major Borg.
Newmont’s latest acquisition in a long line of them again proves
this. A year ago in Q1’23, NEM’s all-in sustaining costs ran $1,376
per ounce while NCM’s were the best among super-majors at
just $1,012. These two companies’ production-weighted average then
was $1,272. Thus you’d think merging them would leave mining costs
in that ballpark, maybe 5% higher near $1,335 in Q1’24 due to
relentless inflation.
Yet
somehow like in most of its past deals Newmont managed to squander
Newcrest’s lower-cost mines’ advantage. NEM-NCM combined last
quarter reported lofty $1,439 AISCs, the second worst out of all
reporting super-majors! So while it was great to see institutional
investors respond to NEM’s Q1 results, they weren’t worthy of such a
blistering rally. Mergers only yield four quarters of
outsized output growth.
In
addition to slaying fundamentally-superior smaller majors and larger
mid-tiers with much-better upside potential, gold-stock mega-mergers
taint this sector in other damaging ways. Newmont and Barrick Gold
have long been the ringleaders of these buyouts, which they
chronically overpay for wasting their shareholders’ wealth.
These deals are also mostly financed by huge share issuances,
heavily diluting existing owners.
I
sure wish that only hurt NEM and GOLD shareholders, but it really
tarnishes this entire industry. These dominant super-majors
accounting for 19.6% of GDX’s weighting are plagued by endless
staggering goodwill writeoffs for their huge buyout
overpayments. I saw a study at the end of Q1 pegging those at
$17.2b over the years for Newmont and a jaw-dropping $39.5b for
Barrick! These devastate accounting earnings.
Fund
managers sometimes look at aggregate sector profitability before
deciding to allocate capital to individual stocks, bottom-line
earnings reported to securities regulators. Despite plenty of
mid-tier and junior gold miners being wildly profitable, those
colossal mega-merger writeoffs utterly gut sector earnings. They
mask awesome fundamentals of smaller miners, choking off
institutional capital inflows into this sector.
And
because of Newmont’s and Barrick Gold’s terribly-irresponsible
profligacy, their stocks have been among the GDX top 25’s worst
performers. But since they dominate this ETF’s weightings, that
makes it look like gold stocks as a whole are well underperforming
gold. Traders naturally look to GDX’s action for a righteous read
on how gold stocks are faring, but NEM’s and GOLD’s tens of billions
of writeoffs retard that.
So
while GDX is this sector’s benchmark of choice, it is heavily
distorted by huge often-floundering miners that aren’t
representative of this wider sector. Smaller fundamentally-superior
majors, and even-better mid-tiers and juniors, are crushing it on
the fundamentals front. They are consistently growing their outputs
largely through organic expansions, and often driving down mining
costs fueling increasingly-fat earnings.
Even
other super-majors are way outperforming Newmont and Barrick.
Agnico Eagle Mines is the third-largest gold miner, rivaling Barrick
with 879k ounces produced last quarter. That grew a strong 8.1%
YoY, partially because AEM acquired some of Yamana Gold’s mines when
Pan American Silver bought it out. Yet even at Agnico’s huge
operating scale, its AISCs last quarter were far more profitable
at just $1,190.
The
point here is settling for GDX is a suboptimal way to deploy capital
in gold stocks, guaranteeing underperformance. This sector requires
researched stock picking, staying with the best
fundamentally-superior gold miners while avoiding all the
deadweight. That’s not just NEM and GOLD, but also royalty company
Franco-Nevada which has a radically-inflated market cap far in
excess of the meager gold it “produces”.
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 expenses 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 recent
years’ raging inflation hit hard.
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.
Last
quarter the GDX-top-25 majors averaged cash costs of $1,013 per
ounce, a new record high for the 32 quarters I’ve been advancing
this research thread. The previous one was Q3’22’s $996. But with
gold so elevated, Q1’24’s difference between prevailing prices and
average cash costs was still the fifth highest ever witnessed. So
the major gold stocks’ direct mining expenses remain relatively low
compared to gold.
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.
A
few weeks ago in that GDX-top-25
Q1’24 earnings
preview essay, I wrote “My best guess is those Q1 AISCs average
around $1,365”. I explained the assumptions behind that estimate
then. So it was quite a shocker to see the actual average last
quarter retreat 2.0% YoY to just $1,277 per ounce! Those
were the lowest GDX-top-25 average AISCs in five quarters.
Unfortunately this was due to one extreme outlier.
Peru’s Buenaventura has long been one of the higher-cost gold miners
included in GDX’s upper ranks. Its many operational challenges for
years have left BVN unworthy of the higher market capitalization
that investors have given it. Like NEM, GOLD, FNV, and others, BVN
is another elite gold stock I would never personally own. Yet
unbelievably and contrary to pedigree, Buenaventura
reported negative AISCs in Q1!
How
is such sorcery even possible? BVN isn’t a primary gold miner, with
only 36% of its Q1 revenues from the yellow metal. It also produces
silver, copper, zinc, and lead. But like some poly-metallic miners,
Buenaventura reports in gold-centric terms since gold stocks command
higher multiples. So those other metals are considered byproducts,
despite being the big majority of output. Their sales are credited
to gold.
While BVN’s gold production only grew 7.8% YoY last quarter, its
silver, copper, zinc, and lead output rocketed up 149.7%, 26.4%,
418.6%, and 262.7%! Those colossal jumps translated into enormous
byproduct credits offsetting gold-mining costs, slamming Q1 AISCs
to -$121. BVN’s non-gold production should remain much higher
with a new silver-zinc-lead mine just coming online, keeping gold
AISCs lower.
Excluding BVN, the rest of the GDX top 25 averaged $1,370 AISCs in
Q1 right in line with my $1,365 preview estimate. And the majors’
AISCs should retreat as 2024 marches on. As explained in that Q1’24
preview essay, Q1s are the low-production ebb of the global
gold mining industry. This is mainly due to the winter impact on
gold mining in the northern hemisphere, where most of the world’s
land and mines are.
According to the WGC, over the last decade quarter-on-quarter
global mined gold has averaged changes of -8.4% in Q1s, +3.7% in
Q2s, +6.1% in Q3s, and +0.4% in Q4s. The strong output growth in
Q2s and Q3s tends to proportionally drive down mining costs. In
addition the GDX-top-25 miners giving full-year-2024 AISC guidances
averaged $1,324. That’s considerably lower than last quarter’s
$1,370 excluding BVN.
In
the 32-quarter history of this GDX-top-25-results research, a
handful of outliers have often skewed the average AISCs higher.
While I pointed that out, I always still used the actual average
including them to calculate implied sector unit profits. So we
need to treat BVN’s stunning negative AISCs the same way this time
around. These elite majors averaged $1,277 AISCs in a quarter where
gold averaged a record $2,072.
That
made for fat $795 unit profits, the highest since Q4’20 and the
third-richest on record! Those shot up an impressive 34.9% YoY,
adding to their massive 93.8%-YoY surge in Q3’23 and 42.3% in
Q4’23. There’s almost certainly no other sector in all the stock
markets seeing earnings surge as fast as in the gold miners. This
is going to increasingly attract fundamentally-oriented fund
investors to deploy capital.
And
the major gold miners’ implied unit profitability is still
soaring in this currently-half-over Q2’24. So far gold has
averaged an amazing record $2,333! Thus almost no matter what
happens over the coming six weeks, Q2’s gold prices will be way
higher than Q1’s record $2,072. And these GDX-top-25 gold miners
themselves are mostly predicting lower AISCs as outputs improve,
which will further expand profitability.
Conservatively though let’s assume GDX-top-25 average AISCs are
merely flat in Q2 near $1,275. And that average gold prices are 5%
lower in the second half of Q2 as
gold pulls back
to continue bleeding off April’s extreme overboughtness. That would
yield gold averaging around $2,275 in Q2, making for epic record
$1,000-per-ounce profits! Those would soar 67% YoY over
Q2’23’s, further improving fundamentals.
The
major gold miners’ hard accounting results under Generally Accepted
Accounting Principles or other countries’ equivalents were also
strong in Q1. The total revenues reported by the GDX top 25 grew
2.1% YoY to a record $25.1b. But that’s not as good as you’d expect
with average gold prices 9.5% higher and production off 0.6%. This
discrepancy is partially explained by China’s Zhaojin Mining going
dark on the web.
Zhaojin has always been a poor financial reporter in English, with
partial results only published erratically and often seriously
lagging. This week I can’t access its English website, despite
trying for multiple days using multiple web browsers on multiple
computers across our VPN. I don’t know if that site is down for
good, or just temporarily offline. But excluding Zhaojin’s Q1’23
revenue, the GDX top 25’s instead climbed 3.1%.
These elite majors’ bottom-line earnings looked far worse than their
implied unit ones, plunging 37.1% YoY to $2,645m. Of course
bumbling Newmont can hardly get past a quarter without some big
unusual loss, and Q1’24’s was another $485m non-cash impairment
from “classifying six non-core assets and one project as held for
sale”. Also the comparable Q1’23 GDX-top-25 total earnings were
grossly overstated.
Incredibly a year ago in Q1’23 Agnico Eagle Mines booked a colossal
$1,543m non-cash remeasurement gain! Newmont should be
taking notes. AEM owned half of a big gold mine, then bought the
other half from Yamana Gold when Pan American Silver acquired that
company. Thus Agnico had to revalue its existing first half at the
price paid for its newly-acquired second half, for a very-unusual
huge one-time gain.
Make
these two adjustments, and the GDX top 25’s bottom-line profits
actually surged 17.7% YoY to $3.1b. That’s more in line with
operating-cash-flow generation, which also grew a big 21.3% YoY to
$5.9b last quarter. Yet these elite majors’ total cash hoards still
shrunk 15.8% YoY to a still-big $15.8b, as they spent billions to
expand existing mines and develop new ones. The gold miners truly
are thriving!
But
again GDX is only up 39.2% at best so far in this upleg, merely
amplifying gold’s 31.2% at best by a weak 1.3x. The historical norm
is again 2x to 3x, with that top end exceeded as major gold uplegs
mature. Today’s specimen is the first achieving new
nominal-record-close streaks since a pair in 2020. During those
gold averaged 41.4% gains, which GDX leveraged by over 2.5x with
huge 105.4% average gains!
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The
bottom line is the major gold miners generally reported great Q1
results. Their perpetual struggle to overcome depletion continued,
with slightly-lower production. But their average mining costs
declined, combining with record quarterly-average gold prices to
fuel big unit-earnings growth. And these gold-mining profits are
almost certain to soar much fatter in this current Q2, fueled by
way-higher breakout gold prices.
Despite these fantastic fundamentals, the major gold stocks remain
seriously undervalued relative to their metal. Distracted by the
stock-market bubble, traders initially ignored gold’s remarkable
breakout surge. But they are starting to pay attention, buying in
rekindling gold-stock outperformance. That will fuel a big mean
reversion then overshoot in gold-stock prices, arguing the lion’s
share of this upleg’s gains are still coming. |