The
major gold miners’ stocks have soared in recent months, fueled by
gold’s decisive breakout to new bull-market highs. Nothing
motivates traders like performance, so interest in this
long-neglected sector has exploded. While gold stocks’ technicals
and sentiment have greatly strengthened, their just-reported Q2’19
results reveal whether their underlying fundamentals support their
powerful surge and further upside.
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
$11.8b this week were a staggering 44.0x larger than the
next-biggest 1x-long major-gold-miners ETF! GDX is effectively this
sector’s blue-chip index.
It
currently includes 44 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 94.5% of
GDX’s total weighting. Last quarter they combined to mine 297.6
metric tons of gold. That was 33.7% of the aggregate world total in
Q2’19 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 essential.
The
major 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 larger 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 Q2 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 Q2’19 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
but lumped all production into gold-equivalent ounces, those GEOs
are included instead. Then production’s absolute year-over-year
change from Q2’18 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. In Q2’19 the world’s
larger gold miners continued their longstanding struggle against
declining production. Last quarter was another major transition one
with this past year’s gold-stock mega-mergers finally settled out.
They’ve considerably altered major gold miners’ global landscape,
ramping concentration risks in GDX.
Since Q2’19 was effectively the first quarter with those gold-stock
mega-mergers complete, we have to start with them. In late
September 2018, the world’s second-largest gold miner Barrick Gold
rocked this small contrarian sector. It declared it was buying
competitor Randgold in an all-stock acquisition worth $6.5b! That
deal was to make Barrick the world’s largest gold miner, and was
finalized in early January 2019.
But
Barrick’s arch-rival Newmont wasn’t willing to lose the pole
position, so within weeks it responded with a bigger salvo. In
mid-January it announced it was buying its own major gold miner
Goldcorp, which was about twice as large as Randgold in gold-output
terms! Size does matter for elite gold-mining executives. This
massive $10.0b all-stock deal wasn’t consummated until mid-April,
encompassing most of Q2’19.
So
last quarter was the first one where these new bigger and badder
gold-mining behemoths dominated this sector and therefore GDX.
Understanding these mega-mergers and their implications is essential
for gold-stock traders. Back in mid-February I wrote a
comprehensive essay
explaining these
deals and why they were done. They were desperate and expensive
attempts to mask flagging production at both giants.
By
the end of 2018, Barrick had suffered colossal annual production
declines in 7 of the last 9 quarters averaging 12.4%
year-over-year! It had proven incapable of growing its own
operations organically, and thus had to resort to buying more.
While Newmont had done a far-better job of maintaining its massive
gold output, that too shrunk by an average of 5.9% YoY in 2018’s
first three quarters. That trend was concerning.
I
doubt Newmont’s managers would’ve bought Goldcorp if Barrick hadn’t
forced their hand. But seeing their largest competitor gobble up a
major gold miner was a shrill wake-up call. New gold deposits that
are large enough to support operations at these giants’ huge scales
are almost impossible to find, and take over a decade to develop.
So buying production is the only way they can maintain their
mining tempos.
But
sadly for Barrick and Newmont shareholders, these mega-mergers look
like an epic boondoggle! Both Randgold and Goldcorp were
also suffering shrinking production as I outlined in that
mega-merger essay.
Combining two sets of major gold miners where all four already
struggled to maintain their outputs wouldn’t fix this intractable
problem. The mergers just mask it, and only for the first four
quarters post-deals.
Narrowly the world’s largest gold miner by market cap, Barrick Gold
reported its Q2’19 results on August 12th. Its mega-merger was
trumpeted as “building a business that would be a model of value
creation for the mining industry.” Barrick’s Q2 gold production
rocketed 26.8% higher YoY. But if Randgold’s from Q2’18 is added in
to those comparable results, the combined giant actually saw a 2.0%
YoY decline in output!
The
inexorable depletion-driven shrinkage continues, which will become
glaringly apparent when Q1’20 rolls around after 2019’s four
quarters of pre-merger to post-merger comparisons. Barrick sure
looks to have squandered $6.5b of shareholders’ capital on four
quarters of production growth! They should have been furious.
If Barrick failed to grow its own output for years, how can it grow
that from Randgold’s mines?
So
in these tables the year-over-year comparisons show the new
post-merger Barrick versus the smaller pre-merger Barrick and
Randgold combined in Q2’18. I did the same thing for Newmont and
Goldcorp, comparing the newly-merged giant’s Q2’19 results with the
total of both its predecessors in Q2’18. It is really important
investors and speculators understand that these gold-mining
behemoths are not growing.
The
new Newmont Goldcorp released its Q2 results on July 25th, touting
its mega-merger as having “positioned Newmont Goldcorp as the
world’s leading gold business for decades to come.” And not
surprisingly Newmont’s quarterly gold production soaring 36.6% YoY
looked amazing. With gold stocks surging with gold in the month or
so before that release, the financial media celebrated Newmont’s
huge growth.
Yet
shockingly when this post-merger giant’s Q2’19 production is
compared to both its predecessors’ from Q2’18, it actually
plunged 8.4% YoY! One-upping Barrick, Newmont’s managers
apparently blew $10.0b of their investors’ holdings to show four
quarters of big trans-merger production growth through Q1’20. But
once Q2’20 arrives, all the comparisons will be post-merger and the
shrinkage will again become apparent.
These new gold-mining giants are dominating and really distorting
their sector. This week Newmont and Barrick commanded a total
market capitalization of $63.4b, or 28.7% of the GDX top 34’s
total! In terms of GDX weighting, they now account for 21.2%
together. That compares to 16.4% in Q2’18 for just the two
acquiring companies, and 26.1% for all four major gold miners. GDX
is very concentrated in these giants.
Together Barrick and Newmont controlled 30.7% of the total Q2’19
gold production of the GDX top 34. If either of these colossi
stumble in coming quarters hurting their stock prices, GDX will get
dragged down with them. Traders need to realize GDX is more risky
and less diversified than it was before these gold-stock
mega-mergers. If you have doubts that Barrick and Newmont can grow,
be wary of owning GDX!
Prior to last quarter, the primary theme of the major gold miners
was inexorably declining production. I’ve discussed it
extensively in earlier essays in this series, including the ones on
Q1’19’s and
Q4’18’s results
from the GDX top 34. The gist of their core problem is large
economically-viable gold deposits are getting ever-harder to find,
and increasingly-expensive and time-consuming to exploit. Gold’s
scarcity is mounting.
The
world has been scoured for gold for centuries, with the low-hanging
fruit long since picked. Really compounding these challenges, the
low gold-stock prices in recent years left these companies largely
starved of capital. So their exploration budgets cratered, further
pinching their pipelines of new deposits to develop into new mines
to replace current depleting ones. Thus Q2’s production growth
looked amazing.
Together these elite top-34 GDX majors reported mining 9.6m ounces
in Q2’19, which was up a big 5.6% YoY! If we could celebrate this
as the potential start of a new production-growth trend, these
latest results would have a very different tone. Unfortunately this
higher collective gold output is another distortion from the
mega-mergers. They combined four Q2’18 GDX component stocks into
two, making room for two more.
One
of the replacement GDX-top-34 components that climbed into these
ranks is Harmony Gold, South Africa’s third-largest gold miner. It
shot from being GDX’s 44th-largest holding a year earlier to 33rd
this week. Harmony produced 357k ozs of gold in Q2’19 now included
in the GDX-top-34 total, while none of its was in Q2’18’s.
Excluding it alone collapses the GDX top 34’s output growth to 1.7%
YoY, relatively flat.
The
silver miners First Majestic Silver and SSR Mining were also newly
included, producing 34k and 81k ozs of gold in Q2’19. Another
traditional major silver miner Pan American Silver diversified
heavily into gold over this past year,
buying Tahoe
Resources. So Tahoe’s former gold output not included in the
GDX top 34’s in Q2’18 was added to Pan American’s in Q2’19, which
nearly tripled it to 155k ozs last quarter.
Adjust for these new inclusions into GDX’s top-34 ranks, and their
total Q2’19 gold production among the comparable companies
actually shrunk a modest 0.7% YoY! The major gold miners’
long-vexing growth problems certainly haven’t gone away. And
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.
Sooner or later global peak-gold production will be reached, after
which it starts declining on balance as major gold miners fail to
find enough new deposits to replace depleting ones. That will leave
smaller mid-tier gold miners able to consistently grow their output
far more attractive for investors than the stagnating larger
majors. So the major-dominated GDX isn’t the best way to deploy
investment capital in this sector.
The
production-cost front in Q2’19 highlighted the majors’ challenges.
Gold-mining costs are mostly fixed quarter after quarter, with
production generally requiring the same levels of infrastructure,
equipment, and employees. These big fixed costs are largely
determined during mine-planning stages, when engineers and
geologists decide which gold-bearing ores to mine, how to dig to
them, and how to recover their gold.
Because these ongoing mining costs are spread across quarterly
production, gold output and unit costs are usually inversely
proportional. The richer the gold ores fed through
fixed-capacity mills, the more gold produced. The more gold
produced, the more ounces to bear mining costs which lowers
per-ounce costs and thus increases profitability. Q2’19’s
slightly-lower gold output should’ve led to slightly-higher costs.
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 Q2’19 these
top-34-GDX-component gold miners that reported cash costs averaged
$641 per ounce. Bucking the production trend, this was actually
up a sharp 5.2% YoY from Q2’18’s read!
Neither of the new mega-miners helped, with Barrick and Newmont
seeing cash costs climb by 7.6% and 1.1% YoY to $651 and $759
respectively. Dragging the average higher was Peru’s Buenaventura,
which continues to struggle with production issues. Its gold mined
in Q2’19 plunged 22.0% YoY, forcing cash costs up 16.7% to an
extreme $930! Excluding that wild outlier, the rest of GDX’s top 34
averaged $630.
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.
These GDX-top-34 gold miners reported average AISCs of $895 per
ounce in Q2’19, surging 4.6% higher YoY despite slightly-lower
production! Those were relatively high absolutely too, the highest
seen out of all 13 quarters since Q2’16 when I started this
deep-quarterly-results research thread. Plenty of major gold miners
are seeing their own costs rise as their production declines,
ratcheting up the industry average.
$895
certainly isn’t a problem with gold prices averaging $1309 in Q2’19,
enabling hefty profit margins around $414 per ounce. But the trend
of rising production costs among the majors leaves them relatively
less attractive going forward compared to their smaller peers
gradually lowering their costs through higher outputs. This
rising-cost trend needs to be watched, as it will retard the majors’
profits growth if it persists.
With
gold rocketing back over $1500 in the last couple weeks to hit
6.3-year secular highs, it is easy to assume the gold miners must be
thriving fundamentally. And they likely are. But realize the
lion’s share of the recent huge gold gains didn’t start until
late June when gold
decisively broke
out to new bull-market highs. So these Q2 results don’t yet
reflect these new higher gold prices. That will come in Q3’s
results.
Gold’s lofty $1436 average price so far this quarter is a whopping
9.7% higher quarter-on-quarter than Q2’s! So the current potential
profitability of the gold miners post-gold-breakout is far higher
than seen last quarter. Assuming the GDX top 34’s average all-in
sustaining costs hold flat near $895 this quarter, that implies Q3
profits running $541 per ounce. That’s up a massive 30.7% QoQ from
what was seen in Q2!
This
incredible profits leverage to gold is what makes gold stocks so
alluring during major gold uplegs. Their earnings grow so darned
fast, 3.2x gold’s advance in this example, that big stock-price
gains are usually fundamentally-justified. In Q2’19, GDX averaged
$22.03 per share. That’s when you should’ve been buying gold
stocks, when they were low and out of favor. I explained
their bullish
outlook in early April.
So
far in Q3’19 which is about half over, GDX has averaged $27.32 which
is 24.0% higher QoQ. That is right in line with expected profits
growth among the major gold miners this quarter given the
much-higher prevailing gold prices. So gold stocks’ strong gains in
recent months are likely fundamentally-righteous, supported
by underlying earnings growth and sustainable as long as gold holds
over $1436 into quarter-end.
The
GDX top 34’s accounting results in Q2’19 didn’t match their slight
production decline when adjusted for the mega-mergers.
Interestingly their total revenues of $11.0b were dead flat compared
to Q2’18’s, despite average gold prices being 0.2% better. A
material factor in the relatively-weak sales was silver, with the
GDX top 34 mining 11.3% less than they did in Q2’18. Miners are
increasingly
diversifying out of silver.
With
its price languishing at miserable lows compared to gold for years
now, it has been nowhere near as profitable to mine as gold. Silver
recently started
outperforming again after gold’s bull-market breakout, which
began to improve precious-metals sentiment. But silver’s upside
will have to exceed gold’s on balance for years to convince
gold miners to invest in gold deposits with significant silver
byproducts again.
Those $11.0b of sales the GDX-top-34 gold miners did yielded hard
GAAP earnings of $621m in Q2, for a pathetic 5.7% profits margin.
Some impairment charges contributed, led by Wheaton Precious Metals
writing down $166m on a streaming agreement it overpaid for.
Hedging was also a factor, as some of these major gold miners lock
in future selling prices. That’s going to kill their profits in Q3
after gold’s surge.
The
new monster gold miners had divergent earnings pictures last
quarter. Barrick reported $223m in net profits, 35.9% of the entire
GDX top 34’s! That was without any unusual gains either, clean
operating results after its second merged quarter. Its $869 AISCs
contributed, which were a long way below the average gold price in
Q2. That was a vast improvement from Q2’18, when Barrick and
Randgold lost $18m.
The
newly-merged Newmont on the other hand reported a $25m loss last
quarter, which was also clean with no unusual charges. Probably
thanks to that $10.0b buyout of Goldcorp, expenses skyrocketed 55.1%
YoY despite the flat gold prices! Shareholders should be getting
out the torches and pitchforks. In Q2’18, together Newmont and
Goldcorp reported decent profits of $161m. Did the merger impair
that potential?
The
operating-cash-flow front looked much better, with the GDX top 34’s
total climbing 10.5% YoY to $3.2b in Q2’19. Strong OCF generation
is essential to funding future growth, both expanding existing gold
mines and adding new ones. Every single GDX-top-34 component
reporting OCFs had positive ones, with 18 of those 29 seeing growth
despite the flat gold prices. That’s an encouraging sign for the
majors.
These elite gold miners collectively reported $10.1b of cash in
their coffers at the end of Q2. While that was down 20.0% YoY, it
is still a healthy treasury. 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
production. They desperately need to do that to slow their
depletion inexorably shrinking their output.
Overall the major gold miners of GDX reported a solid Q2’19, which
again was mostly before gold surged in its powerful breakout rally
of recent months. Unless gold collapses in the next 6 weeks, Q3’19
results should prove radically better. While the risks of a
normal healthy short-term gold correction are high due to
gold-futures speculators’
excessively-bullish positioning, gold-stock fundamentals support
higher prices.
A
quarter ago when I published my
GDX Q1’19 results
essay, GDX had slumped 1.6% year-to-date and no one wanted to buy
gold stocks low despite their huge opportunities. That has sure
changed as I forecast it would, with GDX soaring to 34.7% YTD gains
as of the middle of this week! Since traders love chasing winners,
gold stocks are way more popular. GDX definitely isn’t the best way
to own this sector though.
This
ETF’s potential upside is really retarded by large gold miners
struggling to grow their production. So the smart investment
capital will seek out the smaller mid-tier and junior gold miners
actually able to increase their outputs. Investing in excellent
individual miners with superior fundamentals has far-greater upside
potential. While some are included in GDX, their relatively-low
weightings seriously dilute their gains.
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The
bottom line is the major gold miners’ just-reported Q2’19 earnings
season was solid. Gold didn’t take off until late June, so they
hadn’t yet materially benefitted from its breakout surge. With the
recent mega-mergers finally settling out, gold stocks saw
slightly-lower production at materially-higher costs. That hit
accounting profits, but operating-cash-flow generation was strong.
Higher gold will greatly improve Q3 results.
That
being said, the major gold miners are still struggling to grow their
production. The mega-mergers will help mask that for one year, but
the intractable underlying problem persists. That leaves smaller
mid-tier gold miners with superior fundamentals much more attractive
for future upside potential. That is where investors should focus
their capital allocations to gold stocks, which should approach 10%
in all portfolios. |