The
gold miners’ stocks continue to rally on balance, after a major
upside breakout extended their strong upleg. That’s driving
mounting interest in this recently-forsaken sector. With the latest
quarterly earnings season underway, traders will soon enjoy big
fundamental updates from the gold miners. They are likely to report
good Q2 results, with improving operational performances supporting
further stock-price gains.
Four
times a year publicly-traded companies release treasure troves of
valuable information in the form of quarterly reports. Companies
trading in the States are required to file 10-Qs with the US
Securities and Exchange Commission by 40 calendar days after
quarter-ends. The gold miners generally release their quarterly
reports in the latter half of that window. So Q2’19’s will arrive
between late July to mid-August.
After spending decades intensely studying and actively trading this
contrarian sector, there’s no gold-stock data I look forward to more
than the miners’ quarterly financial and operational reports. They
offer a true and clear snapshot of what’s really going on,
shattering the misconceptions bred by ever-shifting winds of
sentiment. Nearly all fundamental analysis is based off the data
gold miners provide in quarterlies.
So
for many years I’ve delved deeply into gold miners’ quarterly
results. They are the dominant source of information I use to
winnow down the universe of gold stocks to the
fundamentally-superior ones with the greatest upside potential.
Every quarter after their latest earnings season ends, I research
and write essays discussing the newest results from the
major gold miners,
mid-tier gold
miners, and
silver miners.
Q2’19’s full analyses are coming starting in mid-August once that
40-day post-quarter reporting deadline has passed. But before that
I eagerly dive into individual companies’ results as they’re
reported, since there’s so much to digest. Even earlier soon after
a quarter ends, I start thinking about what gold miners’ latest
quarterly results are likely to show collectively. Their
aggregate trends can be somewhat predicted.
In
high-level fundamental terms, gold mining is a simple business.
These companies painstakingly wrest gold from the bowels of the
Earth, then generally sell all they can produce at prevailing market
prices. So their profits are effectively the difference between
current gold levels and operating costs. The former is easy to
calculate once a quarter ends, and the latter can be reasonably
estimated for this sector as a whole.
Gold’s dramatic
bull-market breakout a month ago and high consolidation since
have greatly improved sector psychology. But gold’s big surge came
late in Q2, minimizing its full-quarter impact. The early
quarter was rough, with gold slumping to a new year-to-date low near
$1271 in early May. The average gold prices in April, May, and June
were $1286, $1284, and $1361. Gold was mostly sucking wind last
quarter.
Thus
Q2’19’s overall average gold price of $1309 was just a meager 0.4%
better than Q1’s $1303. So the gold miners’ latest quarterly
results aren’t going to get much help from gold’s young surge. That
will really change in the current Q3 if gold can hold these high
levels. With Q3 about 1/5th over, gold has averaged an awesome
$1407 so far! So the higher-gold boost to gold-stock earnings is
coming, but not in Q2.
Gold
stocks really leverage higher gold prices because their mining costs
are largely fixed. Quarter after quarter mining operations
generally require the same levels of infrastructure, equipment, and
employees. The vast majority of any gold mine’s future cost
structure is actually determined during its planning phase, when
engineers decide which ore to mine, how to excavate it, and how to
process it to recover the gold.
Every quarter after results I analyze the all-in-sustaining costs
reported by the world’s gold miners. These are the best measure of
what it really costs to produce an ounce of gold. Over the past
four quarters, the major gold miners of the leading GDX VanEck
Vectors Gold Miners ETF reported average AISCs of $856, $877, $889,
and $893. That in turn yields a trailing-four-quarter mean of $879
per ounce, a key cost metric.
With
$1309 average gold in Q2’19 and AISCs likely near $879, that implies
the large gold miners as an industry likely earned $430 per ounce
last quarter. That’s actually a decent improvement considering the
flat quarterly gold prices. Though gold averaged a similar $1303 in
Q1, the GDX miners’ average AISCs that quarter came in a bit higher
at $893. That implied $410 profits, which Q2 results should easily
exceed.
$430
is up 4.9% quarter-on-quarter despite the relatively-flat
average gold price! This is really impressive sequential profits
growth relative to the broader stock markets, where earnings are
stalling out. But if that is all we could hope for, I would’ve
written on a different topic this week. The gold miners’ Q2’19
earnings are likely to well exceed expectations for an
entirely-different reason, portending even-higher gold-stock prices.
Most
traders assume gold miners produce their yellow metal at
fairly-steady rates year-round. That sure makes sense given how
capital-intensive gold mining is, how individual mines’ capacities
and throughputs to process ore are fixed, and how expanding mines’
outputs takes years of construction. But surprisingly global gold
mine production actually varies considerably
quarter-to-quarter! This should really boost Q2 earnings.
The
best global gold fundamental data is published by the World Gold
Council, also on a quarterly basis. These Gold Demand Trends
reports are essential reading for all gold-stock speculators and
investors, as these miners are ultimately just leveraged plays on
gold. The latest GDT covering Q1’19 was released in early May, with
Q2’s due out in early August. One key number GDTs report is
world gold mine production.
That
happened to run 852.4 metric tons in Q1, nearly a third of which
came from the
major gold miners of GDX. Analyzing global gold mine production
each quarter since 2010 reveals some fascinating quarter-to-quarter
output trends. Over the last 37 quarters, calendar Q1s have seen
gold mined average a sharp 7.2% QoQ plunge from the
immediately-preceding calendar Q4s! Not a single Q1 saw sequential
output growth.
From
2010 to 2019 Q1 gold mined fell 7.2%, 6.9%, 7.6%, 11.2%, 8.8%, 3.3%,
8.7%, 5.7%, and 5.6% from the respective Q4s. These drops and their
uniformity across radically-different gold-price environments is
stunning. For some reason the world’s gold mines suffer universal
declines in their outputs early in calendar years. Why? This
curious industrywide Q1 production slump results from an interplay
of several factors.
Most
gold miners run their accounting on calendar years. So early in new
years they have new capital budgets to spend on maintaining and
enhancing their existing operations. If they temporarily shut down
their mills for repairs or minor upgrades, Q1s are usually when they
do it. Weather plays a role too, as the majority of the world’s
gold mines are in the northern hemisphere with the majority of the
world’s land masses.
Winter creates operational challenges for gold mines, ranging from
extreme cold to heavy snow or rains depending on their latitudes and
elevations. So in addition to short planned shutdowns to work on
infrastructure, adverse weather can impair operational
efficiencies. But the main reason global gold-mine outputs plunge
in Q1s is due to ore-grade-management decisions made by mine
managers to maximize bonuses.
Gold
deposits are not homogeneous, ore grades vary widely within them.
So managers must choose which ore to mine, when to run it through
their mills, and how to mix it with ores from other locations. The
mills that crush the gold-bearing rock into small-enough chunks to
recover the metal have fixed capacities in tonnage-per-day terms.
So the less gold contained in the ore processed, the less gold the
mines recover.
Mine
managers often choose to dig through lower-grade ores, or run
lower-grade ores through their mills, in Q1s. They save the
higher-grade ores for later in calendar years. They often claim
these decisions are related to early-year capital budgets being
spent to improve outputs later in years. But there’s probably more
to it, since this happens so universally across the world’s gold
mines. Incentives have to play a role.
Gold-mine managers are often partially compensated based on how
their stock prices are faring. This is usually a big factor in
annual bonuses calculated near year-ends. These bonuses are the
most-variable part of compensation, and can greatly boost income.
After long years of study and talking with some of these guys, I’m
convinced they choose to take any gold-output hits early in years to
engineer strong finishes.
Q1
results are reported by mid-Mays, a long way out from year-ends.
That’s the least-beneficial time in bonus terms for strong output to
boost stock prices. Q2 results released by mid-Augusts and Q3
results published by mid-Novembers are far-more important. So mine
managers feed their fixed-capacity mills better-grade ore mixes in
Q2s and Q3s, after early-year maintenance is finished and summer
weather is favorable.
Thus
in calendar Q2s since 2010, global gold mine output according to the
World Gold Council surged an average of 5.4% sequentially
from Q1s! Over the past 9 years Q2s have seen huge QoQ
global-output gains of 6.7%, 7.7%, 6.3%, 7.1%, 6.1%, 5.7%, 0.7%,
4.9%, and 3.4%. There has not been a single down Q2 in this span
despite wildly-different gold-price environments. Such uniformity
reveals deliberate planning.
Over
roughly the past decade, world gold mine production has averaged
-7.2% QoQ in Q1s, +5.4% in Q2s, another hefty +5.3% in Q3s, then
just +0.5% in Q4s. That Q4 stalling is pretty telling too, as those
Q4 results are typically released by mid-Marches which doesn’t
affect annual bonuses when those quarters were underway. The gold
miners contrive their best output reporting from late Julies
to mid-Novembers!
So
in these upcoming Q2’19 results, the gold miners are likely to
report production about 5% higher than Q1’s! That big
sequential output boost really increases overall corporate
earnings. And it has another key benefit of reducing all-in
sustaining costs. AISCs are calculated by spreading the costs of
gold mining across all ounces produced. So the more gold mined, the
lower the unit costs of producing it that quarter.
A
year ago in Q2’18, the GDX gold miners’ average AISCs dropped a big
3.2% sequentially from the prior quarter’s to $856 per ounce. So it
is certainly reasonable to expect Q2’19’s AISCs to retreat 3% or so
from Q1’s $893, which yields $866 per ounce. Subtract that from
Q2’19’s average gold price of $1309, and it yields likely earnings
of $443 per ounce. That is 8.0% higher quarter-on-quarter
from Q1’s results!
That’s conservative too. As detailed in my essay on the
GDX gold miners’
Q1’19 results, that quarter’s average AISCs were skewed higher
by a single anomalous outlier. That company expects costs to
greatly retreat in Q2. Excluding it, the GDX gold miners averaged
considerably-lower $874 AISCs in Q1. A 3% reduction to that on
higher Q2 output leaves an excellent $848 AISC target, implying big
$461 profits!
That
represents a major 12.4% quarter-on-quarter surge, which
should excite traders anytime. And with gold-stock sentiment
already growing far more bullish thanks to gold’s bull-market
breakout, there’s a good chance Q2 earnings’ positive psychological
impact will be amplified. As long as gold hangs in there and
doesn’t sell off, the gold miners’ stocks have real potential to
rally considerably on good Q2 results.
A
couple charts offer some quick perspective. Gold’s breakout drove a
major decisive
upside breakout in gold stocks too as measured by their leading
GDX benchmark. That dominant ETF is rendered in blue here,
superimposed over its key technical lines. As of the Wednesday data
cutoff for this essay, GDX had powered 54.2% higher in 10.2 months
in its upleg to date. But gold-stock prices still remain
relatively low.
Mid-week GDX hit $27.09 on close, its best levels in 2.8 years. But
that remains well below gold stocks’ bull-to-date peak of $31.32 in
early August 2016. The gold stocks ought to at least exceed those
levels, which is another 15.6% higher from here. Good Q2 results
interpreted through the lens of increasing sector bullishness should
be enough to fuel a bull-market breakout. Gold argues for higher
gold-stock levels.
Back
in mid-2016 when GDX peaked at $31.32, gold merely hit $1365 at
best. That was just after a quarter when the GDX gold miners’ AISCs
averaged $886 per ounce. Gold was considerably higher this week,
hitting $1425. And it has averaged $1408 for nearly a month since
its bull-market breakout. So the higher prevailing gold prices this
summer, and lower AISCs, should support much-higher gold-stock
prices.
Showing just how strong gold stocks are and how unique today’s
situation is, this last chart looks at gold stocks’ average
performances in modern bull-market summers. I explained this
indexed chart in depth in an essay on
gold summer
doldrums a couple weeks ago. The yellow lines show where the
older HUI gold-stock index traded in past modern gold-bull-market
summers, and the red line averages them together.
This
year’s action is rendered in dark blue, revealing gold stocks’
best summer by far since 2016 after this gold bull’s massive
maiden upleg! In the middle of this week the HUI rocketed 32.3%
higher summer-to-date, literally off this seasonal chart I’ve
gradually built up over the years. If there was ever a summer where
gold stocks could punch out to new bull highs, this one is it.
Their upside momentum is incredibly strong.
All
this gold-stock bullishness aside, it is always wise to be wary when
everyone else is getting excited. The potential for gold stocks to
surge to new bull highs on good Q2 results is totally dependent on
what gold does over the coming 6 weeks or so. While gold has shown
awesome resilience in consolidating high and mostly holding $1400
over the past month, the
gold selloff risk
is high due to gold-futures positioning.
I
wrote a whole essay last week explaining this in depth. In a
nutshell, gold-futures speculators dominate short-term gold price
action. Their current bets on gold are excessively-bullish, warning
that their capital firepower to buy gold is nearing exhaustion.
They are effectively all-in on long upside bets, and all-out on
short downside bets. That leaves them vast room to sell hard on the
right catalyst, pushing gold sharply lower.
There’s a chance new-high psychology can ignite enough investor gold
buying to overpower and absorb any spec gold-futures selling. But
realize gold-stock fortunes are still slaved to gold as
always. Gold has to stay high to support new gold-stock highs. If
gold materially falters and slumps into a healthy pullback or
correction within an ongoing bull, the gold stocks will follow it
lower regardless of how good Q2 results prove.
Buying high on strong upside momentum is always tempting, as that’s
when traders feel the best about any sector. Bullishness and
capital inflows soar as stocks power higher. But over time
far-larger gains are won by instead buying low, adding positions
when sectors are out of favor. The later you buy gold stocks
in any upleg, the smaller their potential gains and the higher the
odds a major selloff is looming.
To
multiply your capital in the markets, you have to trade like a
contrarian. That means buying low when few others are willing, so
you can later sell high when few others can. In recent months well
before gold’s breakout, we recommended buying many
fundamentally-superior gold and silver miners in our popular
weekly and
monthly
newsletters. Mid-week their unrealized gains ran as high as 123.9%,
123.5%, and 116.5%!
To
profitably trade high-potential gold stocks, you need to stay
informed about the broader market cycles that drive them. Our
newsletters are a great way, easy to read and affordable. They 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. Subscribe
today and take advantage of our 20%-off summer-doldrums sale!
The biggest gains are won by traders diligently staying abreast so
they can ride entire uplegs.
The bottom line is
the gold miners’ just-starting Q2’19 earnings season should prove
impressive. That’s no thanks to gold, as its awesome bull-market
breakout came too late last quarter to push its average price
significantly higher. But the gold miners are still likely to
collectively report sharply-higher Q2 output, which is normal after
Q1’s deep production slump. That will also naturally lead to
proportionally-lower costs.
Growing production
combined with lower costs at slightly-higher gold prices should
yield big profits growth for the gold miners. Their Q2 results will
be more closely watched and better received since psychology is
shifting much more bullish in this sector. That should fuel big
gold-stock buying as long as gold holds up. The yellow metal has
proven resilient so far, but faces an ominous overhang of
gold-futures selling pressure. | 
