The
major gold miners’ stocks have been grinding lower on balance for a
few months now in a healthy correction. This necessary rebalancing
is achieving its mission of dampening enthusiasm, paving the way for
this contrarian sector’s next bull upleg. Rebounding from
governments’ COVID-19 lockdowns, the gold miners reported strong
operating and financial results last quarter that fully justify more
bull-market gains.
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 $16.0b of net assets this week, GDX commands a
staggering 32.9x more capital than its next-biggest 1x-long
major-gold-miners-ETF competitor! GDX is really the only game in
town.
GDX’s super-volatile price action this year reflects the wild ride
gold stocks have had. Over 4.8 months into early August, this ETF
rocketed 134.1% higher out of mid-March’s stock panic! That left
gold stocks extremely overbought, thus due for a correction
to rebalance sentiment. And that is exactly what has happened
since, with GDX’s total selloff extending to 17.9% at worst over 2.8
months so far by late October.
That’s still really mild by gold-stock-correction standards,
which I detailed
in an essay a few weeks ago. The current correction is the
fourth of this secular gold-stock bull. Its first three averaged
serious GDX losses of 36.5% over 8.0 months! Gold stocks’
overwhelmingly-dominant primary driver is the fortunes of gold. The
miners’ earnings that ultimately determine their stock prices really
leverage gold’s price moves.
Gold
stocks’ current correction has mirrored gold’s own, and this metal
itself isn’t out of the correction woods yet. The American stock
traders who fueled gold’s latest powerful upleg into early August
have been largely
missing in action since. Meanwhile speculators’ gold-futures
positioning is still excessively-bullish. That leaves them
lots of room to sell and hammer gold as the
oversold US
dollar mean reverts higher.
But
even if the parallel gold and gold-stock corrections haven’t matured
and climaxed yet, speculators and investors need to stay abreast on
the major gold miners’ fundamentals. The stronger they are, the
greater this sector’s upside potential in its next bull-market
upleg. And the just-reported Q3’20 results from the world’s biggest
gold miners proved super-impressive. They are thriving
operationally and financially.
For
18 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 52 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 85.6%
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, South
Africa, and China, 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. Half-year reporting is common outside the US,
and Q3s are off-cycle quarters. But most miners still give shorter
quarterly updates.
This
table summarizes the operational and financial highlights from the
GDX top 25 in Q3’20. 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 Q3’19. Then their current weightings as of this
week follow those stock symbols. This ETF essentially weights gold
stocks by market capitalizations.
So
relative ranking changes help illuminate outperformers and
underperformers over this past year. That data is followed by each
miner’s Q3’20 gold production in ounces, and its year-over-year
change from Q3’19’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, GAAP 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 be either misleading or not meaningful, like comparing
two negative numbers or data shifting from positive to negative and
vice versa.
Sporting the highest average gold prices ever seen, last
quarter promised to be a banner one for major gold miners. And they
didn’t disappoint, with production rebounding strongly from
lockdown-constrained Q2 levels. High gold prices and higher output
fueled big revenues, earnings, operating-cash-flow, and treasury
growth last quarter. The major gold miners’ fundamentals are
looking the best they’ve ever been!
There was no shuffling among GDX’s largest 8 holdings over this past
year, which together account for the majority of this ETF at 52.8%
of its total weighting. There were only a handful of stocks which
enjoyed sufficient market-cap gains since Q3’19 to climb into the
ranks of GDX’s top 25 gold miners. They weighed in at 85.6% of GDX,
which is normal concentration levels in line with recent years’
averages for this ETF.
Production is the lifeblood of the gold-mining industry, and these
major gold miners enjoyed solid output growth last quarter.
The 8.3m ounces they collectively produced in Q3’20 actually climbed
a slight 0.6% YoY. That’s quite an achievement given all the
challenging constraints imposed by governments’ orders to fight
COVID-19. The GDX top 25’s quarterly reports were clear this
pandemic is still impacting them.
Many
gold mines around the world are operating with reduced staffing.
As mine workers test positive for the virus, they must be
quarantined. Those sick employees usually can’t be temporarily
replaced. Gold mining is a highly-specialized industry already
employing the experienced people globally. Mining sites are often
remote, in rural areas with small labor pools. Healthy workers have
to take up the slack from sick ones.
Most
of the national lockdowns governments mandated to slow the spread of
COVID-19 ended in Q2 or the initial weeks of Q3. With these forced
shutterings lifted, the GDX top 25’s total gold output rebounded
strongly last quarter. Sequentially quarter-on-quarter, these elite
major gold miners’ output soared 10.2% from Q2 to Q3! They
certainly didn’t let moss grow under their feet once they could
resume operations.
And
that 0.6% YoY output growth to 8.3m ounces mined was much better
than global gold mining as a whole. The World Gold Council
publishes the best-available worldwide gold fundamental
supply-and-demand data quarterly. Its latest outstanding must-read
Gold Demand Trends report from Q3’20 was released in late October.
It revealed global gold-miner output actually fell a sharp 3.4%
YoY last quarter!
So
the GDX top 25 really outperformed their sector as a whole, ramping
operations back up faster than many of their smaller peers. A
larger acquisition and smaller merger also stuffed more gold
production into the top 25 over this past year. The best major gold
miner Kirkland Lake Gold bought Detour Gold earlier this year. And
SSR Mining recently merged with Alacer Gold, growing into a bigger
mid-tier producer.
But
these newly-combined companies’ higher production was partially
offset by a second Chinese gold miner surging into the rarefied
GDX-top-25 ranks. Zhaojin Mining joined the larger Zijin Mining in
this last quarter. These are the two companies above with numeric
symbols, trading in Hong Kong. Every quarter for years now, I’ve
looked for their operational and financial results in English. But
neither company ever bothers.
GDX’s managers probably shouldn’t include these Chinese gold
miners. Regardless of their size, they are far too opaque for
American traders. Even professional Wall Street reports on their
spartan quarterly results, coming from Chinese analysts working over
there, don’t discuss output and costs! After spending decades
wading through quarterly reports, I’m still shocked how useless
Chinese reporting standards are.
Had
Zhaojin not climbed into the GDX top 25’s ranks with its
apparently-secret non-disclosed gold output, the year-over-year
production gains of the major gold miners would’ve been even
larger. Another factor pinching their aggregate output growth was
substantial year-over-year declines seen by the two giants
dominating this industry. Newmont and Barrick Gold account for
fully 24.0% of GDX’s total weighting!
NEM
and GOLD saw their colossal quarterly production levels fall 6.3%
and 11.6% YoY in Q3’20, which really dragged down the gold majors’
total. Newmont attributed its production decline “due to ongoing
Covid-related impacts at Yanacocha, Cerro Negro and Eleonore as the
operations continued to ramp up in the third quarter from care and
maintenance”. That makes sense with these first two mines in Peru
and Argentina.
But
the other mega-gold-miner Barrick didn’t even attempt to explain its
sharp output drop. Instead it just blew smoke with misdirection,
talking about meaningless “beating our earnings consensus”. Then
its CEO claimed that “Barrick’s consistently strong performance
since the merger has more than validated our belief that a
combination of the best assets with the best people would deliver
the best returns.” Really?
He
was referring to Barrick’s acquisition of Randgold announced in
September 2018. In February 2019 I wrote a whole essay analyzing
why gold-stock
mega-mergers are bad for investors. For years before
that expensive $6.5b dilutive all-stock deal, Barrick had struggled
with declining output as shown in a table in that essay. Barrick
alone produced 1516k ounces in Q4’16, which had already shrunk to
1149k in Q3’18.
In
that same last pre-merger quarter, Randgold’s output was 309k
ounces. So these soon-to-be-merged major gold miners together
produced 1458k before consummating their corporate marriage. In the
just-reported Q3’20, this merged company’s output of 1155k
was right back down to where Barrick had been before it bought
Randgold! And this new Barrick enjoyed no rebound from Q2’20’s
lockdown-driven 1149k.
In
my mega-mergers-bad essay in February 2019 I warned, “Can bringing
two rapidly-depleting major gold miners together magically make a
stronger one? I doubt it. Barrick’s reported production will enjoy
a big temporary boost for its first four quarters as a merged
company, and then waning production will again be unmasked.” All
Barrick shareholders got for their $6.5b was a single-year reprieve
from inexorable depletion!
In
Barrick’s just-released Q3’20 results, its full-year-2020 production
guidance ran at a midpoint of 4800k ounces. That would be down
12.2% YoY from the 5465k ounces it mined in 2019. The biggest gains
in gold-stock prices come from miners growing their outputs. That
certainly isn’t Barrick despite grandiose claims of “consistently
strong performance since the merger”. Which gold stocks traders own
really matters.
While GDX is a good gold-stock trading vehicle, my beef with it for
years now has been it has too much deadweight. Barrick is
the leading example at 1/9th of this ETF’s total weighting. Major
gold miners not able to consistently grow their output heavily
retard the overall performance of GDX. The fundamentally-superior
smaller mid-tier
gold miners achieving growth enjoy stock-price gains trouncing
those of this ETF.
With
the GDX top 25’s gold production rebounding sharply from Q2’s
lockdown nadir, I really expected to see lower unit mining costs.
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. That gives gold
mining big leverage to gold.
Individual mines require the same levels of infrastructure,
equipment, and employees to feed their fixed-capacity mills quarter
after quarter. So higher outputs directly translate into lower unit
costs. In Q2’20 during those widespread lockdowns, the GDX top 25’s
cash costs and all-in sustaining costs surged to $646 and $984 per
ounce. They should’ve fallen sharply in Q3 in proportion to that
10.2% QoQ output growth.
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.
These elite GDX-top-25 gold miners reported average cash costs of
$725 in Q3, which soared a stunning 15.1% YoY! This not only defied
the expected cost plunge on much-better production, but these proved
the highest cash costs by far in the 18 quarters I’ve been doing
this research. The previous high was just $658 in Q4’19. While
cash costs aren’t too important, their counter-production surge was
a bit concerning.
Some
of this can be explained by all the extensive COVID-19 protocols the
gold miners have to follow to prevent outbreaks in their
workforces. But a bigger factor was two extreme outliers skewing
this average higher. South Africa’s long-struggling Harmony Gold
and the US’s Hecla Mining reported absurdly-high cash costs of $1156
and $1398 per ounce last quarter! Excluding them, the GDX-top-25
average fell to $667.
For
many years now, the troubled South African majors have had to
contend with hostile government regulations suffocating their
businesses. And the deeper those old gold mines tunnel, the higher
costs rise. Hecla took a page out of Barrick’s book on
misdirection, not even acknowledging plummeting output and
soaring costs in its latest quarterly report. Instead it touted
“our strong operating performance”. Seriously?
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 GDX-top-25 gold miners suffered that same counter-production
cost inflation in their AISCs. They soared a scary 16.4% YoY to hit
$1028 per ounce! That was also the highest in the last 18 quarters,
knocking out Q2’20’s $984. But again Harmony and Hecla were largely
to blame, as they reported extreme outlying AISCs of $1341 and
$1855! Excluding them, the rest of these elite majors averaged just
$965.
That
would still have been a hefty 9.2% YoY jump, but is much more
reasonable. The major gold miners that did honorably address rising
AISCs head-on in their quarterly reports generally cited lower
ore grades at individual gold mines. Again the tonnage
throughputs of mills grinding gold-bearing ores are fixed. So the
less gold contained in that rock in any quarter, the fewer ounces
produced and thus the higher unit costs.
Pan
American Silver, which is now overwhelmingly a primary gold miner
with this yellow metal accounting for 2/3rds of its Q3 revenues,
had an interesting explanation. It reported that it had to
replenish crushed-ore inventories sitting on heap-leach pads, which
were “drawn down during the mine suspensions in Q2 of this year”.
While I didn’t see that mentioned elsewhere, I suspect other gold
miners were in that same boat.
But
whether the major gold miners’ costs surged 16.4% or 9.2% YoY, they
didn’t outpace the amazing gains in gold. Q3’20’s stellar $1912
average gold price was the highest ever witnessed, soaring 29.8%
YoY! So the powerful gold-price gains in the wake of
mid-March’s lockdown-fueled stock panic far more than offset these
higher production costs. GDX-top-25 average AISCs are a great proxy
for industry profitability.
Last
quarter’s $1912 average gold less those unduly-skewed $1028 AISCs
still yield incredibly-fat profits of $884 per ounce! That’s
the highest by far in the years I’ve been working on this research
thread, and almost certainly an all-time record. That soared an
awesome 49.7% YoY from Q3’19 levels. While not as big of
unit-earnings gains as I’d expected given higher production, that
still trounced every other stock sector.
And
Q3’s huge gold-miner profits growth wasn’t some one-off isolated
anomaly, but the latest in a strong trend of soaring earnings. In
the four quarters leading into Q3’20, the GDX top 25’s unit profits
per this proxy blasted 53.5%, 56.0%, 55.5%, and 66.2% higher YoY!
So Q3’s 49.7% growth was right in line with this precedent. The
major gold miners’ fundamentals are super-strong with such
high prevailing gold prices.
And
those are lingering despite gold’s in-progress correction,
portending big earnings growth in this half-finished Q4.
Quarter-to-date, gold is still averaging an awesome $1901. And the
gold miners themselves are predicting declining AISCs. Their
average AISC guidance for full-year 2020 ran $1005 per ounce in
midpoint terms in their latest quarterly reports. Achieving that
would require Q4 AISCs under Q3’s $1028.
Including Q3’20, the last four reported quarters saw GDX-top-25
AISCs average $969. That is as good of estimate as any for Q4. And
even if gold keeps correcting, it is unlikely this quarter’s average
gold price will be dragged under $1850. So the major gold miners’
potential earnings per ounce in Q4’20 are still on track to hit
$881, almost matching Q3’s $884. That would make for another
massive 59.7% YoY gain!
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 31.2% YoY
to $13.9b! That outstanding top-line sales growth jibes with
average gold prices soaring about 30% YoY while GDX-top-25
gold-mining output edged up 1%ish.
Those would’ve been the highest quarterly sales on record, but fell
short because they don’t include Q3 revenues from most of the major
Australian and South African gold miners. They again report
half-years instead of quarters, and Q3 is an off quarter where they
usually just offer operational results. If average gold prices
remain high, the upcoming Q4 sales including all the half-year
reporters will definitely hit a record.
In
actual bottom-line accounting-earnings terms, these GDX-top-25 gold
miners collectively reported an enormous $3.8b in profits!
That doesn’t even include the half-year reporters. And the great
majority of that huge number was ordinary earnings from normal
gold-mining operations. In wading through all the quarterly income
statements, I only saw a single $0.2b noncash gain from a reversal
of an impairment charge.
Nevertheless these GAAP profits were still down 29.0% YoY, which
sounds weak. But Q3’19 included staggering non-cash gains
from a Nevada joint venture done by those behemoths Newmont and
Barrick. They recorded epic $2.4b and $2.7b gains in that
comparable quarter related to that big deal! These are one-time
items that should be backed out. Without them alone, Q3’19’s
GDX-top-25 earnings were less than $0.3b.
So
the major gold miners’ hard accounting profits actually skyrocketed
last quarter! The record prevailing gold prices were also reflected
in huge operating-cash-flow-generation growth. The GDX top 25’s
OCFs collectively totaled $7.8b in Q3’20, which soared 67.2% YoY!
That dwarfs the last 18 quarters’ previous best of $5.3b in Q4’19.
The major gold miners are spinning off cash hand over fist in this
environment.
Those massive OCFs helped fuel an 87.1% YoY rocketing in the GDX top
25’s collective cash hoards, to a record $17.7b at the end of Q3!
Almost all these elite major gold miners reported big jumps in their
treasuries, regardless of whether their gold outputs rose or fell.
These huge cash balances are going to be burning holes in
managements’ pockets, likely unleashing a big new wave of mergers
and acquisitions.
That’s not going to benefit the majors, which will be spending their
billions to buy up smaller gold miners. The fundamentally-superior
mid-tier and junior gold miners with consistently-growing
production will be the stocks the majors fight over. They will have
to offer big premiums to entice shareholders to sell. And the
gold-mining realm is fairly small, so bidding wars are likely as
majors spend their cash to offset their depletion.
With
the major gold stocks sporting such awesomely-bullish fundamentals
in Q3 and almost certainly Q4, their next bull-market upleg has
strong potential to balloon to more outsized gains. But
first this sector has to weather this necessary and healthy
in-progress
correction, which is controlled by gold’s own. This is the time
to do your gold-stock homework, crafting a buy list for the bargains
to come as this selloff climaxes.
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The bottom line is
the major gold miners reported outstanding Q3 results! Their
collective gold production not only rebounded sharply from Q2’s
lockdowns, but even grew from the comparable prior-year quarter.
That was much better performance than global gold miners as a whole.
Yet production costs did rise on ongoing COVID-19 mitigation
measures and lower ore grades, eroding some potential earnings
growth.
But with
record-high average gold prices, the major gold miners’ profits
still rocketed higher in both unit and bottom-line terms. Their
collective earnings from normal operations have never been stronger.
And with soaring operating cash flows and treasuries, these flush
majors are going to be looking to gobble up smaller gold miners.
These amazing fundamentals justify much-higher stock prices after
this correction ends. |