The
major gold miners’ stocks have skyrocketed since mid-March’s stock
panic, attracting in a deluge of new capital inflows. That recently
catapulted this normally-contrarian sector to extremely-overbought
levels, necessitating a rebalancing correction. The gold miners are
just finishing reporting their operating and financial results from
the challenging last quarter. Was gold stocks’ huge upleg
fundamentally justified?
The
leading and dominant gold-stock benchmark and trading vehicle today
is the GDX VanEck Vectors Gold Miners ETF. Launched way back in May
2006, GDX’s first-mover advantage has grown into an insurmountable
lead. With $16.8b of net assets this week, GDX commands a
staggering 31.7x more capital than its next-biggest 1x-long
major-gold-miners-ETF competitor! GDX is really the only game in
town.
The
major gold miners’ performance as seen through this GDX lens has
been breathtaking. Over several weeks into mid-March, GDX collapsed
38.8% to $19.00 per share. Widespread fears of the devastating
economic impacts of governments’ draconian economic lockdowns to
fight COVID-19 fueled a full-blown stock panic. Gold and its
miners’ stocks were temporarily sucked into that ultra-rare epic
fear maelstrom.
But
that anomaly birthed a major new upleg in gold stocks, which staged
a violent V-bounce and were off to the races. Over the next 4.8
months into early August, GDX skyrocketed 134.1% higher to
$44.48! Riding that massive gold-stock upleg was exceedingly
lucrative. But such big and fast gains weren’t sustainable. They
left this sector
extremely overbought, GDX stretched over 1.45x its 200-day
moving average.
So
in this past week or so, the overheated gold stocks entered a
correction with GDX plunging 12.2% in just 4 trading days. These
periodic selloffs are essential to keep bull markets healthy,
bleeding away the excessive greed and euphoria that mushrooms late
in gold stocks’ hot runs. The majority of that huge post-panic
upleg accrued in Q2 proper, where GDX soared 59.2%. How the gold
miners did last quarter is crucial.
Q2’20 proved curious for this industry, with powerful bullish and
bearish forces warring. Average gold prices blasted up 30.9%
year-over-year to $1714, which is an incredible boon for gold
miners’ financial results. Yet at the same time, many gold mines
around the world were forced to shutter for weeks on end last
quarter by governments’ heavy-handed national economic lockdowns to
slow COVID-19’s spread.
That
odd juxtaposition of the best of times and worst of times made for
one fascinating quarter. Q2’20 narrowly edged out Q3’11, when
gold’s mighty previous secular bull peaked, as seeing the best
average gold prices on record! Yet many gold miners couldn’t fully
capitalize on that phenomenal windfall since national governments
were forcing them to mothball mines. I’ve been on tenterhooks
awaiting the results.
While sentiment fueled by gold’s own price action drives gold
stocks’ major uplegs and corrections, it is still very important to
study the miners’ fundamentals. Their collective quarterly results
reveal how this industry as a whole is faring. And individual
companies’ quarterlies help stratify this sector, illuminating the
fundamentally-superior stocks best for trading. They
generally enjoy higher potential gains at lower risks.
So
for 17 quarters in a row now, I’ve painstakingly analyzed the major
gold miners’ latest quarterly results right after they are
reported. While GDX contained a crazy 53 component stocks this
week, I’m limiting my analysis to its top 25 holdings. These
are the world’s biggest and best gold miners, which command a
dominant 85.8% of GDX’s total weighting. The lion’s share of
capital chasing gold stocks ends up in them.
These elite gold miners trade in the US, Australia, Canada, China,
and the UK, making amassing this data somewhat challenging. There
are different financial-reporting requirements around the globe, and
even within the same country miners report different data in
different ways. In the few cases where half-year results were all
that was offered, they were split in half to approximate what those
companies did in Q2.
This
table summarizes the operational and financial highlights from the
GDX top 25 in Q2’20. These elite gold miners’ symbols are listed,
some of which are from their primary foreign stock exchanges. That
is preceded by their ranking changes in terms of GDX
weightings from Q2’19. Then their current weightings as of this
week follow those stock symbols. GDX essentially weights gold
stocks by market capitalizations.
So
relative ranking changes help illuminate outperformers and
underperformers over the past year. That data is followed by each
miner’s Q2’20 gold production in ounces, and its year-over-year
change from Q2’19’s results. Then comes cash costs per ounce and
all-in sustaining costs per ounce along with their YoY changes,
revealing how much it costs these elite miners to wrest their gold
from the bowels of the earth.
Next
quarterly revenues, earnings, operating cash flows generated, and
cash on hand are listed along with their YoY changes. Blank data
fields mean companies hadn’t reported that particular data as of the
middle of this week. Blank percentage fields indicate those changes
would either be misleading or not meaningful, from comparing two
negative numbers or when data shifts from positive to negative and
vice versa.
Because of that epic tug-of-war between record-high average gold
prices and COVID-19 shutdown orders plaguing mines, the gold miners
have never seen a quarter like Q2’20. Their operational results
indeed proved weak with many mines hobbled by arbitrary decree. Yet
gold was so darned high their financial results still came in
strong! That showed this sector’s massive gains last quarter were
fundamentally righteous.
 
Interestingly the capital concentrated in these GDX-top-25 major
gold miners actually moderated a bit, slipping from 88.6% in Q1’20
to 85.8% in Q2. That is a healthy sign that participation in the
massive post-stock-panic gold-stock rally is broadening.
Speculators and investors weren’t just buying the biggest gold
miners via GDX, but moving into the individual smaller mid-tier
ones lower down in GDX’s weightings.
The
more stocks participating in bull-market uplegs, the healthier that
bull and the greater its ultimate staying power. Excessive
concentration as evident in narrow breadth leading uplegs is very
unhealthy. That is exactly what has happened in the general stock
markets since mid-March’s stock panic, with big gains almost totally
driven by the handful of market-darling mega-cap techs. Gold stocks
don’t share that risk.
But
unfortunately last quarter proved weak operationally for these elite
GDX-top-25 major gold miners. They collectively produced just under
7.6m ounces of gold in Q2’20. That not only plunged 11.0% YoY
from Q2’19’s total, but was the lowest quarterly output this group
has seen in the 17 quarters I’ve been working on this research
thread! But that output drop fully resulted from governments’
economic lockdowns.
Each
quarter the venerable World Gold Council publishes the
best-available global gold fundamental data in its must-read Gold
Demand Trends reports. The latest one covering Q2’20 was released
at the end of July. It revealed overall world gold-mine output
collapsed 10.0% YoY last quarter to 25.0m ounces. That was an
extreme outlier, radically worse than the 2.8%-YoY average quarterly
growth over the past decade.
The
GDX-top-25 major gold miners’ shrinking production of 11.0% last
quarter was right in line with what this entire industry suffered at
the hands of alarmist bureaucrats. The WGC reported countrywide
gold output in Q2 plummeted 62% YoY in Mexico, 59% YoY in South
Africa, and 45% YoY in Peru! For these elite gold miners, Mexico
was the main problem. Its government shuttered gold mining
for 60 days in Q2!
Last
quarter’s production declines largely resulted from COVID-19
lockdown orders, with miners slammed in proportion to their
operations in affected countries. Hardest hit was Buenaventura, the
worst performer in GDX-rankings terms and Peru’s largest
publicly-traded gold miner. Its Q2 gold production cratered 46.2%
YoY due to its Peruvian mining concentration! That government’s
State of Emergency forced mines to close.
Pan
American Silver, which is now overwhelmingly a mid-tier gold
miner, was hit hard too with gold output plummeting 37.5% YoY.
There were no operational problems, PAAS just had the misfortune of
having most of its mines in countries imposing the most-extreme
economic lockdowns in Q2. 43% and 31% of this company’s 2019 sales
came from Peru and Mexico! But they weren’t the only ones attacking
miners.
The
far-larger Agnico Eagle also mines in Mexico, but most of its gold
is produced in a couple different regions of Canada. That country
also imposed COVID-19 shutdowns on gold miners, but quickly came to
its senses. Gold-mining operations are usually remote, with access
highly limited and tightly controlled. And workers often travel to
mine sites to work long multi-week shifts. Mining gold is
pandemic-resistant.
Still, AEM reported “During the second quarter of 2020, seven of the
Company’s eight mines experienced either temporary shutdowns or
reduced mining activities related to government mandated COVID-19
restrictions.” That’s why its Q2 output fell 19.7% YoY, a huge red
flag any other time. Even Newmont, the biggest and most-diversified
gold miner, saw five of its mines forced into care and maintenance
in parts of Q2.
Normally such sharp output drops would cause serious concerns, since
production is the lifeblood of this industry. The more gold miners
produce, the greater their profits supporting higher future
stock-price levels. But profits leverage to gold works both ways,
so when output falls future earnings potential drops dramatically.
Thankfully those COVID-19 disruptions were temporary, quickly
reversing as lockdowns lifted.
Most
of the major gold miners reported operating tempos at shuttered
mines were back up near full speed by the end of Q2. A surprising
number of these companies believe they can make up enough lost
output in the remainder of 2020 to achieve the lower ends of
their full-year guidances! So the GDX top 25’s gold production
should rebound sharply in this current Q3, and surge back to if not
above normal levels in Q4.
Odds
are Q2’20’s widespread economic lockdowns shuttering gold mines
won’t be repeated. COVID-19 is so virulent and tenacious that
governments are realizing we are all going to have to learn to live
with this virus. The economic, social, political, and health damage
caused by national lockdowns is extreme and far-reaching, vastly
worse than anything COVID-19 could do. So future shutdowns will be
narrowly targeted.
Dangerous outbreaks aren’t going to happen way out in the mountains
where small groups of workers are blasting out gold. In their Q2
results, the major gold miners universally reported implementing all
kinds of mitigation efforts to detect any COVID-19 infections and
stop them from spreading. That included setting up separate
living quarters for any necessary quarantines. The gold miners
are fighting this virus head-on.
In
gold mining, output and costs are inversely proportional.
The more gold mined, the more ounces to spread this industry’s big
fixed costs across. Those generally don’t change much from quarter
to quarter regardless of prevailing gold prices. Individual mines
require the same levels of infrastructure, equipment, and employees
to feed their fixed-capacity mills quarter after quarter. So lower
outputs mean higher unit costs.
And
that doesn’t even include all the new costs for managing this
pandemic, something the gold miners have never had to do. Testing
for the virus, quarantining the afflicted, and relentlessly social
distancing and cleaning to limit its spread all require more
resources and people. So gold-mining operating costs had to
increase with these many new COVID-19 burdens, completely
independent from gold production.
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 reported average cash costs of $646 in Q2, up
4.7% YoY. Surprisingly given the serious lockdown disruptions to
operations, that wasn’t a new high. The 17-quarter cash-cost range
has run between $594 to $658. And obviously with gold averaging
that record $1714 in Q2, there is zero existential threat to this
sector. Cash costs are really only relevant when gold prices plumb
secular lows.
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.
These elite GDX-top-25 major gold miners reported average AISCs of
$984 per ounce in Q2’20, which was a new 17-quarter high.
That surged 13.1% YoY from Q2’19’s levels, roughly proportional with
these miners’ 11.0%-YoY gold-output decline. The additional cost
increase beyond that was probably mostly related to those extensive
COVID-19 mitigation efforts. But these relatively-high AISCs were
skewed by BVN.
Buenaventura’s Peruvian operations suffered so much under that
country’s draconian shutdown orders that AISCs doubled as
production was slashed in half! The resulting $1598 BVN reported is
incredibly extreme and not reflective of normal operations. Exclude
that anomaly, and the rest of the GDX top 25 averaged $952 AISCs.
While still the top of the 17-quarter range, that would only be a
9.4% YoY jump.
But
even at $984, naturally the gold miners are exceedingly profitable
with gold averaging $1714. That implies this industry earned $730
per ounce last quarter, a princely sum. Those are easily the
highest unit earnings since I started this research thread in
Q2’16. That is up a stupendous 66.2% YoY from Q2’19!
Gold-mining earnings are exploding per this industry-wide
profitability metric, a super-bullish omen.
Quarterly profits skyrocketing 2/3rds higher, certainly some of the
best sector performance in all the stock markets, sure justifies
GDX’s 59.2% gain in Q2! And gold stocks’ massive outsized earnings
growth isn’t over. Most of the quarterly reports I read from these
major gold miners again said production had already mostly rebounded
after Q2’s lockdown decrees. So GDX-top-25 output in this current
Q3 will likely rise 10%+.
Of
course that will proportionally lower AISCs, which could retreat 10%
to $886 per ounce. So far in Q3, gold’s $1888 average price is
proving a major new record high. But gold is
extremely
overbought, and really needs to correct. So let’s assume it
drops far enough in the remainder of Q3 to hammer its average price
down to $1825. These conservative assumptions yield potential Q3
earnings of $939 per ounce.
If
that happens, the GDX top 25 as a whole would see profits soaring
59.0% YoY in Q3’20! That sure as heck fundamentally justifies big
ongoing gains in the major gold stocks. They likely have to correct
first and work off their serious overboughtness for a spell. But
following that healthy sentiment-rebalancing selloff, this bull’s
next upleg should also see massive gains on such strong
fundamentals. They are very bullish.
On
the hard financial-results front under Generally Accepted Accounting
Principles reported to securities regulators, or their foreign
equivalents, the major gold miners achieved an amazing quarter
financially. The GDX top 25’s total revenues surged 19.8% YoY
to $12.1b! That outstanding sales growth jibes with average gold
prices soaring about 31% YoY while gold-mining output fell 11%. 20%
is huge top-line growth.
Last
week I published a similar quarterly-results essay looking at
the 25 largest
companies in the flagship S&P 500 broad-market stock index.
Even including those mega-cap techs thriving in this crazy
stay-at-home world, the SPX top 25 saw total revenues plunge 9.6%
YoY. So the major gold miners’ sales soaring 19.8% YoY is
phenomenal outperformance that should really catch the attention and
capital of traders.
In
actual bottom-line accounting-earnings terms, these GDX-top-25 gold
miners collectively reported $2.1b in profits. That skyrocketed a
gargantuan 268.3% higher YoY! That compares to the S&P 500’s top 25
companies, the biggest and best in the US stock markets, suffering a
16.6% YoY profits decline. Gold-mining earnings are highly
leveraged to prevailing gold prices, and today’s records are fueling
huge profitability.
High
gold prices also drive big operating-cash-flow generation. The GDX
top 25’s total OCFs soared 59.8% YoY in Q2’20 to $4.6b. The major
gold miners use the surplus cash their mines spin off to boost their
future output, by expanding existing mines and building new ones.
Not surprisingly the gold miners’ soaring operating cash flows
dwarfed the 13.5% YoY OCF growth seen in the S&P 500’s top 25
companies.
The
gold mines producing so much cash helped catapult the GDX-top-25
gold miners’ cash hoards an astounding 89.6% higher YoY to $15.1b!
Their collective treasuries were almost as high as they’d ever been
over the last 17 quarters, only slightly bested by Q1’20’s $15.3b.
It wasn’t just OCFs that filled miners’ bank accounts. They also
prudently tapped lines of credit to build their liquidity to weather
Q2’s lockdowns.
But
if government officials indeed realize garroting their own
economies through national lockdowns is a foolish overreaction,
a cure far more damaging than the COVID-19 disease, the gold miners’
lockdown fears will fade. That will leave them flush with cash to
expand their outputs, both organically and through mergers and
acquisitions. They will also likely pay down those lines of credit,
improving their balance sheets.
So
Q2’20 proved really interesting for the major gold miners, with
much-higher prevailing gold prices more than offsetting gold-mine
shutterings imposed by national governments. Outstanding financial
results easily overshadowed forced weak operational ones. The
externally-decreed production shrinkage has already mostly reversed
according to the major gold miners’ quarterly reports. That is
super-bullish for this sector!
Given the enormous earnings these higher prevailing gold prices are
generating at the major gold miners, additional massive gains
in their secular bull are certainly fundamentally-justified. Even
though GDX just enjoyed that huge 134.1% post-stock-panic upleg,
this gold-stock bull’s next upleg is likely to prove really big
too. But we first have to get through healthy gold and gold-stock
corrections following extreme overboughtness.
All
bull markets naturally flow then ebb, taking two steps forward
before retreating one step back. Their price action gradually
meanders around uptrends. This normal upleg-correction pattern
keeps sentiment balanced, extending bull markets’ longevity. And it
is a huge boon for traders, offering excellent mid-bull
opportunities to buy relatively low before later selling relatively
high. That greatly expands bulls’ potential gains!
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The
bottom line is the major gold miners reported outstanding Q2
results. Their operations did get hit hard by governments’
draconian national lockdowns to slow COVID-19’s spread. Output fell
sharply, boosting operating costs proportionally. But record-high
quarterly gold prices far more than offset that decline in gold
production. Revenues, earnings, operating cash flows, and cash all
soared dramatically last quarter.
Once
those lockdown orders were lifted, the gold miners wasted no time in
spinning back up their affected mines. Most of them were already
running near normal output levels when Q2 results were reported. So
Q3 will see higher production and lower costs, amplifying
gold-mining profitability with gold trading at major new
all-time-record-high average prices. Further big gold-stock gains
remain fully justified fundamentally. | 
