The
battered major gold miners’ stocks rocketed higher with their metal
in recent weeks, showing signs of life. That vertical breakout
started to rekindle traders’ interest in this left-for-dead
contrarian sector. Gold stocks’ upside potential in coming months
partially depends on how these companies are actually faring
fundamentally. Their latest quarterly results from the
just-wrapping-up Q3’22 earnings season illuminate that.
The
major gold stocks have had a roller-coaster ride of a year, as
evident in their leading and dominant sector benchmark. That
remains the venerable GDX VanEck Gold Miners ETF. Launched in May
2006, GDX’s first-mover advantage has grown it into a juggernaut.
Its net assets of $11.4b this week dwarfed those of the next-largest
1x-long gold-miners-ETF competitor by a huge 29.7x! GDX is the only
game in town.
The
larger gold miners responsible for most of this ETF’s weighting tend
to amplify material gold moves by 2x to 3x. Between late January to
mid-April, GDX soared 39.5% far outperforming a parallel 10.4% gold
surge. But those nascent uplegs in both gold and its miners’ stocks
were suddenly derailed by the
US dollar
rocketing parabolic on the
most-extreme
tightening the Fed has ever attempted! It was a bloodbath.
From
mid-April to late September, GDX cratered an exceedingly-painful
46.5% on gold plunging 17.9%! That scared everyone but the
most-hardcore contrarians out of this sector. Gold was slammed
lower by
heavy-to-extreme gold-futures selling as the US Dollar Index
soared 13.2% in that same span. Gold’s dismal reaction was even
more frustrating with inflation raging out of control, which is
historically
fantastic for gold.
GDX
leveraged that anomalous dollar-driven gold drop by a normal 2.6x,
but that slaughtered sentiment so traders abandoned this sector.
Since those brutal
wildly-oversold
and radically-undervalued lows, the gold stocks have
started
recovering sharply. As of last Friday, GDX had soared 29.4% at
best on gold mean reverting 8.9% higher! The USDX collapsed 6.7% on
Fed-dovish surprises from key economic data.
That
started with the latest US monthly jobs report released in early
November, which suffered multiple internal metrics deteriorating.
That lowered futures-implied Fed-rate-hike odds, clobbering the US
dollar. So gold-futures speculators flocked back, catapulting gold
8.4% higher over the next six trading days. GDX skyrocketed
24.8% in that same short span, amplifying gold 2.9x. Do
fundamentals support more upside?
For
26 quarters in a row now, I’ve painstakingly analyzed the latest
results released by GDX’s 25-largest component stocks. These
include the world’s biggest gold miners, which now account for a
commanding 88.7% of this ETF’s entire weighting. Digesting hard
fundamental results as they are released is essential for cutting
through obscuring sentiment fogs. It helps traders rationally
understand gold stocks’ real outlook.
This
table summarizes the operational and financial highlights from the
GDX top 25 during Q3’22. 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 Q3’21. Those symbols are followed by their
current GDX weightings.
Next
comes these gold miners’ Q3’22 production in ounces, along with
their year-over-year changes from the comparable Q3’21. 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.
Unfortunately the GDX major gold miners collectively reported a
weaker quarter in Q3, with most facing mounting inflationary
cost pressures cutting into their profitability. These elite gold
stocks are reporting their highest unit costs ever! And lower
production combined with lower gold prices certainly didn’t help
either. But while Q3’22 was disappointing, big gold-stock upside
potential remains as gold mean reverts higher.
 
The
world’s bigger gold miners have always struggled with production
growth. They operate at such huge scales that it’s almost
impossible to replenish their gold mined. They simply can’t
discover or buy enough gold deposits at necessary sizes to overcome
relentless depletion. And they can’t develop the ones they do find
or acquire into new mines rapidly enough. So major gold miners have
long suffered shrinking output.
Q3’22 offered no respite from this vexing trend, with the GDX top
25’s aggregate gold production falling 4.1% YoY to 8,162k
ounces. That was despite some sizable mergers combining major gold
miners and making way for more to climb into these rarefied ranks.
Over this past year, Agnico Eagle Mines bought out the wonderful
Kirkland Lake Gold while Australia’s mighty Newcrest Mining acquired
Pretium Resources.
Bigger gold-stock mergers have
always been
problematic for investors. Larger miners struggling with
shrinking production buy out smaller ones with far-superior
fundamentals and upside. Acquirees’ great gold mines are absorbed
and diluted by acquirers’ average ones, leaving the combined
entities’ stocks much-lower upside potential. And that new
production bought only masks ongoing depletion for a single year.
Agnico Eagle is a great example of this, with gold output rocketing
up a GDX-top-25-leading 56.0% YoY last quarter! But that’s only
because it bought out a smaller and way-better rival. Compared to
those two separate companies’ production in Q3’21, this new merged
miner actually produced 8.6% less gold in Q3’22! And
Kirkland Lake’s wildly-profitable $740 all-in sustaining costs
vanished into AEM’s $1,106 ones.
The
major gold miners’ endless production-growth struggles are even more
apparent when illuminated by overall gold-mining trends. The
best-available global gold supply-and-demand data is published once
a quarter by the World Gold Council, in its fantastic Gold Demand
Trends reports. The latest covering last quarter was just released
earlier this month. It revealed world gold mine output climbing
a strong 2.3% YoY.
So
the biggest-and-best gold miners dominating GDX are really
underperforming their smaller peers with that 4.1% YoY shrinkage.
Even more damning, the GDX top 25’s collective gold mined in Q3’22
plunged 3.9% sequentially from Q2’22! The WGC’s data has
long revealed that Q3s are the strongest quarters by far for
production growth. Total world output actually surged a strong 6.5%
quarter-on-quarter in Q3’22.
That’s actually not unusual at all. During the decade ending 2021,
on average Q1s, Q2s, Q3s, and Q4s saw sequential QoQ world gold
production running -8.5%, +4.1%, +7.0%, and +0.7%! If the major
gold miners can’t even grow their collective output in these strong
Q3s, they are seriously failing to overcome their own depletion.
This quarterly seasonality in global gold-mining output is explained
by several things.
As
new years dawn, mine managers get new budgets to maintain and
upgrade gold-mine infrastructure. A disproportional amount of that
work is done in Q1s, temporarily slowing or stopping production.
Q1s also see peak winter months in the northern hemisphere
where most of the world’s gold mines are found. The cold
temperatures slow the chemical processes used in heap leaching to
recover gold from crushed ores.
Conversely Q3s have the warmest months on the top half of the
planet, speeding up gold recoveries. By that time of the year any
maintenance and light expansion work is usually done, allowing
production to run uninterrupted. And mine managers often choose
to sequence higher-grade ores during Q3s, boosting their
outputs. That’s because Q3 results are the last-reported ones
before year-end bonuses are calculated.
Higher gold-stock prices heading into year-ends often increase
compensation for mine managers, so they game ore grades
accordingly. If they have to dig through lower-grade ores, they try
to schedule them for first halves of years so better grades are
available in second halves. Whatever the reasons, gold miners’
production usually swells considerably in Q3s. That 7.0%
Q2-to-Q3 average growth since 2012 is massive.
Since investment capital tends to migrate to gold miners with
superior growth, there’s no doubt the elite GDX top 25 would grow
their outputs if they could. But their aggregate production has
generally been grinding lower since Q4’16, when it peaked at
9,525k ounces. That’s one key reason smaller mid-tier and junior
gold miners generally have better fundamentals. It’s easier to grow
output at their lesser operating scales.
With
both lower production and mounting mining costs fueled by raging
inflation, the GDX top 25’s costs wouldn’t be pretty. In normal
times, 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 at full-speed. 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 costs 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. Energy is the biggest category,
including electricity to power ore-processing plants including mills
and diesel fuel to run excavators and dump trucks hauling raw ores
to those facilities. Other smaller consumables range from
explosives to blast out ores to chemical reagents necessary to
process various ores to recover their gold.
Most
of the major gold miners’ Q3’22 quarterly reports blamed
inflation for their higher mining costs. The world’s biggest
gold miner Newmont warned of “higher direct operating costs as a
result of inflationary pressures, driven by higher labor costs and
an increase in commodity input costs, including higher fuel and
energy costs.” The second-largest gold miner Barrick Gold echoed
Newmont in explaining higher costs.
Barrick’s quarterly warned of “higher site operating costs from
higher input prices driven by energy, labor and consumables due to
inflationary pressures.” The third-largest gold miner Agnico Eagle
reported the same, “inflation on production costs was largely driven
by higher input prices in key consumables (such as energy, cyanide
and steel), which have experienced increases above the 5% to 7%
general inflation rate”.
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’s average cash costs rocketed up 22.4% YoY
to a record $975 per ounce! That was pretty shocking, as before
Q1’20 these elite gold miners’ broader all-in sustaining costs had
never been higher than $925. While the great majority of miners
suffered surging costs, this lofty average cash cost was skewed by a
couple anomalous extreme outliers. They are SSR Mining and First
Majestic Silver.
SSRM
suffered a horrendous Q3, seeing its total gold production crash
51.5% YoY which was far worse than any of its peers! That was
because operations were temporarily suspended at its primary
gold mine in Turkey. In late June, a small cyanide leak was
discovered from a pipe running to its leach pad. That was quickly
cleaned and fixed, but local regulators didn’t authorize mining to
resume until late September.
That
mine being offline for a quarter catapulted SSR Mining’s cash
costs up 64.5% YoY to $1,051. They will collapse back to
inflation-adjusted norms in coming quarters with that mine running.
Even worse were First Majestic Silver’s insane $2,767 cash costs
which soared 59.5% YoY! This company operates three primary silver
mines that are thriving, and a fourth small gold one yielding under
a quarter of AG’s gold in Q3.
That
problematic mine has been plagued with sky-high costs ever since AG
bought it, and they continue to worsen despite guidance to the
contrary. The three-fourths of First Majestic’s gold production
coming from its silver mines is considered a byproduct, so reported
cash costs are only for that little gold mine’s 16k ounces in Q3.
That rounding error of a sliver of GDX-top-25 output shouldn’t
unduly taint the whole.
So
excluding SSRM’s temporarily-high cash costs and AG’s problematic
little gold mine, the rest of the GDX top 25 averaged a
much-healthier $865 per ounce. While still high, that would
only be up 8.6% YoY. That’s quite impressive given the major gold
miners’ lower output to spread mining costs across and this raging
inflation. And those cash costs remain far below Q3’22’s average
gold price of $1,727.
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.
Last
quarter’s GDX-top-25 AISCs looked much like cash costs, rocketing up
a colossal 21.9% YoY to hit a lofty record $1,391! But again those
were heavily distorted by the extremes reported by SSRM and AG,
which were $1,901 and a jaw-dropping $3,317. Pull those two
outliers, and the rest of the major gold stocks averaged a
far-better $1,239. That also just climbed 8.5% YoY, despite
lower output and surging input costs.
With
production down that 4.1% YoY, that should have driven unit costs a
proportional 4%ish higher. And an additional 4% to 5% on top of
that reflecting inflation-bloated variable costs is reasonable,
showing the major gold miners are trying to hold the line. Still
even these adjusted AISCs clocked in at the second highest ever
after the prior quarter’s $1,281. And two other outliers required
that too to be adjusted down to $1,161.
The
problem with high all-in sustaining costs is they cut into profit
margins. Considering the gold carnage this year on that
parabolic US dollar spike, gold actually fared pretty well last
quarter. It averaged $1,727 in Q3’22, which was merely down 3.5%
YoY. Subtracting average AISCs from prevailing gold levels is a
great proxy for sector unit profitability. Unfortunately that
utterly collapsed with gold slipping as costs soared.
The
GDX top 25’s implied unit profits cratered 48.2% YoY to just $335
per ounce, the worst seen in this entire research thread since way
back in Q2’16! But again that $1,391 AISC average wasn’t
righteous. Two miners with under 144k ounces of quarterly gold
output were unduly distorting the other major gold miners’ vastly
larger 8,018k production. Again excluding those SSRM and AG
anomalies, AISCs ran $1,239.
That
implies much-better unit profits of $487 per ounce last quarter.
While still down 24.7% YoY and the worst since Q2’19, those sure
aren’t great. But the major gold miners continue to earn healthy
profits even in these challenging times. Those should really
improve in coming quarters as gold mean reverts higher.
Interestingly the GDX top 25 expect lower AISCs too, as their
full-year-2022 guidances average $1,215.
These elite gold miners’ hard accounting data reported to securities
regulators under Generally Accepted Accounting Principles or other
countries’ equivalents also reflected Q3’22’s challenges. The GDX
top 25’s total revenues actually proved resilient, only slumping
2.6% YoY to $22,892m last quarter. With that quarterly-average gold
price being 3.5% lower and output down 4.1%, sales should’ve
retreated 7% to 8%.
But
gold miners’ quarterly gold sales often don’t match underlying
production. Some gold produced in a given quarter isn’t fully
processed until the following quarter. And occasionally managements
choose to hold on to recovered ounces to sell in future quarters,
usually in response to an oversold gold price. Production and
especially market prices of byproduct metals can really vary too,
impacting top-line revenues.
The
GDX top 25’s bottom-line accounting profits certainly reflected
their higher mining costs, plunging by 39.5% YoY to $1,699m! That’s
definitely weak, the lowest since Q2’19. The previous ten quarters
saw total earnings average $2,898m. To return near more-normal
levels, the major gold miners either have to lower their rising
AISCs or see better gold prices. Both are likely in coming
quarters, really boosting profits.
The
major gold miners’ cash flows generated from operations fell a
similar 33.0% YoY to $4,824m. That is actually just a two-quarter
low, not too bad given these inflationary times. Those OCFs helped
keep the GDX top 25’s collective treasuries full, with their total
cash only slipping 3.5% YoY to $20,464m. That will be used for
accelerating mine expansions and buying other companies’ mines
outright to help offset depletion.
That
makes the smaller
mid-tier and junior gold miners prime targets for majors to
acquire! These smaller gold miners have superior fundamentals and
much-greater upside potential than the majors. Operating at smaller
scales they can more easily consistently grow their production,
while their lower market caps make them easier to bid higher. They
also have lower-cost mines which the major miners desperately need.
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The
bottom line is the major gold miners just reported a weaker
quarter. Their collective production fell despite overall global
mined gold output rising, as they continue to struggle with
depletion. Less gold mined boosted unit costs proportionally, which
were further exacerbated by inflationary pressures on input costs.
That along with lower average gold prices slashed earnings to their
lowest levels in several years.
Nevertheless the major gold miners still continued to generate solid
profits and operating cash flows. They are forecasting lower all-in
sustaining costs in coming quarters, which will boost earnings. And
gold itself is overdue to mean revert way higher with that extreme
US dollar parabola collapsing. So gold miners’ fundamentals should
really improve, supporting much higher gold-stock prices as gold
powers higher. | 
