The
gold miners’ stocks have suffered an extended correction in recent
months, leaving them deeply out of favor. Yet their underlying
fundamentals remain incredibly strong, thanks to continuing high
prevailing gold prices. These companies’ recently-released Q4’20
results revealed they are thriving, generating massive revenues,
earnings, and operating cash flows. Thus their stock prices need to
mean revert way higher.
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 $14.2b of net assets this week, GDX commands a
staggering 32.0x more capital than its next-biggest 1x-long
major-gold-miners-ETF competitor! GDX is really the only game in
town.
Yet
this sector’s challenging price action of late has cast GDX and the
major gold miners it contains off traders’ radars. This gold-stock
bull’s last upleg proved mighty, with GDX skyrocketing 134.1% higher
in just 4.8 months! In early August it peaked with gold, the gold
stocks’ overwhelmingly-dominant primary driver. Then GDX rolled
over into a necessary and healthy correction to rebalance sentiment
and technicals.
That
looked to bottom in late November at a 24.9% loss over 3.6 months,
paving the way for this sector’s next upleg. Indeed GDX surged
15.2% higher during the next 1.3 months,
decisively
breaking out above multiple major resistance zones in
early January. But then the markets threw a low-probability
curveball, and gold stocks started slumping again. GDX ground lower
until its original correction low failed in late February.
The
major gold stocks plunged into early March, their leading ETF
extending its correction to 30.5% over 6.8 months. That slaughtered
any remaining bullish psychology, unleashing universal bearishness.
This small contrarian sector was left forsaken again, an ideal
spawning ground for this bull’s next major upleg. It is likely
underway, with GDX already rebounding 10.7% higher at best. So
fundamentals really matter today.
For
19 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 51 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 86.3%
of GDX’s total weighting. The lion’s share of capital chasing gold
stocks ends up in them.
Unfortunately Q4 results closing out calendar years arrive much
later than normal quarterlies. Since the annual reports containing
Q4 numbers are bigger, more complex, and must be audited by
independent CPAs, securities regulators grant extended filing
deadlines. Those are 60 days after year-ends in the US, and a
ridiculous 90 days in Canada where most of the world’s gold stocks
trade! So Q4 analysis runs later.
Even
at this Wednesday’s essay data cutoff 76 days after year-end, one
key Canadian GDX component hadn’t yet reported its Q4 results. The
major gold miners trade in the US, Australia, South Africa, China,
and Canada, 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.
Some
annual reports are well-laid-out and easy to parse, while others
seem intentionally opaque requiring lots of digging and calculations
to tease out comparable data. Australia and South Africa require
half-year reporting instead of quarterly, although their gold miners
usually give supplemental quarterly updates. But in cases where
half-year data was all that was available, it is split in half to
approximate Q4’20 results.
This
table summarizes the operational and financial highlights from the
GDX top 25 in Q4’20. 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 Q4’19. 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 Q4’20 gold production in ounces, and its year-over-year
change from Q4’19’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 gold miners to wrest their metal
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.
Despite gold’s correction running through Q4’20 which drove gold
stocks’ selloff, last quarter still enjoyed the second-highest
average gold prices ever witnessed at $1,876. So the major gold
miners dominating GDX put up blockbuster results then. In many
cases these proved the best on record, with miners’ gold
output rebounding in Q4 after governments’ COVID-19-lockdown orders
hammered Q2 and early-Q3 production.
 
GDX’s component rankings stayed fairly static over this past year,
with only one gold miner Hecla Mining newly rising into the top 25.
Chinese gold miner Zijin Mining with that numerical symbol shot
higher, as did Canada’s Endeavour Mining and First Majestic Silver.
While I’ve looked every quarter for years, Zijin rarely updates the
English version of its website. Even its Chinese financials don’t
reveal gold production!
After prevailing gold prices which miners are at the mercy of, their
output levels are the most-important driver of their long-term
success. Investors and speculators prize production growth
above all else, since it boosts revenues, earnings, and
operating-cash-flow generation. Generally the more gold that miners
can bring to market, the faster they can keep growing by expanding,
constructing, or buying more gold mines.
This
powerful virtuous circle makes production the lifeblood of the
gold-mining industry. And output for the GDX top 25 was a mixed bag
last quarter. Overall these elite gold miners produced 8,905k
ounces of gold in Q4’20, which slumped 4.3% year-over-year
from the GDX top 25 in Q4’19. That’s certainly not optimal, so we
need to drill down on it for more context. The World Gold Council
is the best place to start.
After every quarter, the WGC’s analysts publish outstanding Gold
Demand Trends reports. These have the best-available data on global
gold supply and demand. Interestingly in Q4’20 overall gold mined
worldwide also fell 2.9% YoY to 28,817k ounces. So the GDX major
gold miners’ weaker production is mirroring the industry trend.
The good news is that has rebounded strongly from Q2’s
lockdown-spawned nadir.
With
national economies and their gold mines opened back up, the GDX top
25’s total production soared a massive 17.9% from Q2’20 levels!
According to the comprehensive WGC data, that quarter suffered the
lowest global gold mined since Q1’14. So the major gold miners’
recovery from the government-imposed mine shutdowns is going
strong. And the GDX top 25’s output is skewed low by the pair of
super-majors.
Newmont and Barrick Gold are in a league of their own, producing a
colossal 1,630k and 1,206k ounces of gold in Q4’20. Their extreme
outputs drive massive market capitalizations dwarfing all the other
major gold miners, granting NEM and GOLD a huge 23.3% combined
weighting in GDX. But operating at such outlying enormous baseline
scales, these two largest gold miners have long struggled with
depleting production.
A
couple years ago soon after both companies announced mega-mergers, I
wrote an essay
analyzing their usually-shrinking outputs. That vexing
and apparently-insurmountable problem along with NEM’s and GOLD’s
giant market caps guarantees their stock prices will always lag
smaller fundamentally-superior mid-tier and junior miners.
Excluding these super-majors, the rest of the GDX top 25 look much
better.
Their collective gold production actually edged up 0.5% YoY
in Q4’20 to 6,069k ounces! So generally the major gold miners of
GDX are faring better than this industry as a whole. Interestingly
the GDX top 25’s silver production surged 11.5% YoY to 27,961k
ounces last quarter. But that resulted from a changing component
mix, with major silver miners First Majestic Silver and Hecla Mining
newly climbing into these ranks.
In
gold mining, output levels and unit costs are usually inversely
proportional. The more gold mined, the more ounces to spread
this industry’s big fixed costs across. Those are generally
determined when mines are being planned, then don’t change much.
Quarter after quarter, individual mines require about the same
levels of infrastructure, equipment, and employees to feed their
fixed-capacity mills with ores to process.
Those fixed costs staying roughly steady regardless of prevailing
gold prices is what gives gold miners’ earnings big leverage to
the yellow metal. With overall GDX-top-25 gold output lower last
quarter, these gold miners’ unit costs should’ve risen
proportionally. But with average gold prices rocketing up 26.5% YoY
in Q4’20, 4%-ish higher costs wouldn’t have significantly impaired
profits growth at major gold miners.
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.
In
Q4’20, the average cash costs reported by these GDX-top-25 gold
miners climbed 7.8% YoY to $700 per ounce. That was on the high
side of the 19-quarter range since I started this research thread,
which ran from $594 to $725. And that $700 was skewed
excessively-high by three outliers reporting extreme cash costs last
quarter. They were Hecla Mining, Peru’s Buenaventura, and South
Africa’s Harmony Gold.
Hecla blamed COVID-19 for its higher costs, citing ramping back up
to full production in one mine after lockdowns and temporary
suspensions at others. Buenaventura has long struggled with
declining output caused by endless operational problems. And
Harmony’s old and very-deep gold mines are increasingly expensive to
run. Excluding these outliers, the rest of the GDX top 25 averaged
excellent $627 cash costs.
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.
The
GDX top 25’s headline average AISCs looked even worse than cash
costs, surging 12.2% YoY to $1,038 per ounce in Q4’20. While
still far below prevailing gold prices and thus super-profitable,
that was a new high over the last 19 quarters. But again this was
skewed high by that same trio of struggling gold miners, with HL,
BVN, and HMY reporting outlying extreme AISCs of $1,330, $1,559, and
$1,370 last quarter!
Their problems certainly don’t reflect this industry as a whole, so
excluding them the rest of these major gold miners in the GDX top 25
averaged much-better $971 all-in sustaining costs. That’s still
higher than they were pre-pandemic, as the GDX top 25 averaged $903
in the four quarters ending Q1’20. But gold prices were much lower
than too, averaging $1,461. Long-term gold-price trends
affect miners’ strategies.
After enough years of gold climbing on balance, gold-mine managers
start planning on higher prevailing gold prices being sustainable.
So their mine expansions and new mine builds start shifting towards
lower ore grades. Naturally the lower the ratios of payable gold to
waste rock in ores, the more expensive it is to produce each ounce
of gold. Better economics for gold mining over time gradually lead
to higher unit costs.
The
major gold miners’ average all-in sustaining costs can also be
subtracted from average gold prices for a great proxy of industry
earnings trends. Gold again averaged $1,876 last quarter, its
second-highest on record. And the GDX top 25’s headline AISCs
including that outlying triad averaged $1,038 per ounce in Q4’20.
That implies the major gold miners were earning about $838 per
ounce, which is utterly stellar!
That
makes for the second-highest unit profits ever seen, after Q3’20’s
$884 per ounce. Last quarter’s $838 achieved by the major gold
miners blasted 50.3% higher year-over-year! Prudent investors and
speculators should be scrambling to deploy capital in stocks
with earnings growth of that magnitude. And amazingly such
stock-market-besting profits surges haven’t even been unusual for
this abandoned sector.
Running into Q4’20, the last six quarters have seen GDX-top-25
earnings by this metric skyrocket 53.5%, 57.8%, 55.5%, 66.2%, 49.7%,
and 50.3% YoY! That averages out to incredible 55.5% YoY profits
growth over this longer-term span. After putting up phenomenal
sustained numbers like these, traders should be rushing into this
sector. Every investor and speculator should have a material
allocation to gold-mining stocks.
The
major gold miners’ super-strong fundamentals last quarter were
confirmed in their hard accounting results reported to
national securities regulators. These are conservative, based on
Generally Accepted Accounting Principles in the US or their
equivalents in other countries. The GDX top 25 knocked the ball out
of the park financially last quarter, which their battered stock
prices today certainly aren’t reflecting yet.
These elite gold miners reported a combined $17.9b in revenues in
Q4’20, which surged 18.3% YoY. That roughly jibes with 26.5%-higher
quarterly average gold prices combined with 4.3%-lower gold output.
These sales are the highest by far the GDX top 25 have ever
collectively reported in the 19 quarters I’ve been expanding this
research thread. In Q3’20 their total revenues only ran $13.9b on
lower gold output.
The
GDX top 25’s hard GAAP earnings were excellent too, blasting 27.7%
higher YoY to $4.9b. While that was only the second-highest on
record after Q3’19’s $5.3b, that earlier peak reflected huge one-off
non-cash gains. Accounting rules require many paper gains and
losses to be flushed through income statements in quarters they
happen. And gold miners have seen a lot of those in recent years on
gold volatility.
The
biggest non-cash gains this sector has reported lately are
reversals of impairment charges. When prevailing gold prices
trend lower for enough years, the gold miners have to write down the
values of their mines and gold deposits to reflect the deteriorating
economics that lower gold prices bring. But later after gold
reverses and climbs on balance again for enough years, those
impairment charges can be unwound.
Excluding the bigger ones I saw on the GDX-top-25 companies’ Q4’20
income statements, their adjusted earnings last quarter were closer
to $4.1b. But in the comparable year-earlier quarter of Q4’19, the
GDX top 25’s income statements were riddled with impairment
reversals and even a few new impairments. If those are adjusted out
accordingly, these major gold miners only earned about $1.5b in that
year-ago quarter.
That
means the GDX top 25’s adjusted profits growth is much closer to
165% YoY than that 28% masked by all the big non-cash charges
and unwinds! If anything, that quarterly
average-gold-prices-less-average-AISCs proxy for sector earnings is
really understated. Odds are there are no other sectors in the
entire stock markets enjoyed earnings growth anywhere close to the
gold miners. That will eventually attract big capital.
Fat
profits combined with weak stock prices naturally mean low
valuations evident through conventional trailing-twelve-month
price-to-earnings ratios. The GDX top 25 averaged P/Es of 29.7x
this week, which was the lowest by far in my 19 quarters of this
research. And that is skewed high by First Majestic’s outlying
155.7x. Without that, the rest of the GDX top 25 gold miners
earning money averaged even-lower 23.4x P/Es.
Four
of those companies are so dirt-cheap they have single-digit P/Es,
while another six are trading in the teens! These super-low
valuations by broader stock-market standards will help attract in
institutional investors, who check for expensiveness in their
screens. The major gold miners have never looked better
fundamentally than they did in Q4’20, and sooner or later their
stock prices must reflect this underlying reality.
Last
quarter’s high prevailing gold prices also enabled the GDX-top-25
gold miners to generate fantastic cash flows from operations. These
totaled a stellar $8.3b last quarter, the highest ever witnessed.
That even bested Q3’20’s $7.8b, before much of gold’s latest
correction. The big cash flows the gold miners are spinning off
will be largely used to expand their operations, upping their growth
trajectories and stock prices.
Those torrents of cash earned in Q4’20 piled up in the major gold
miners’ treasuries. The GDX top 25 ended last quarter with a
massive record $22.8b of cash and equivalents! That is going to
burn holes in their pockets, virtually guaranteeing a sizable
wave of acquisitions is coming. The larger gold miners unable
to grow their outputs organically have little choice but to buy
entire companies in the stock markets.
The
main beneficiaries of this are shareholders of smaller
fundamentally-superior gold miners, which we’ve long traded in
our newsletters. Like fish in a food chain, the bigger miners grow
by gobbling up the smaller ones. Merger-and-acquisition activity
has an additional sector benefit of getting gold miners back on more
mainstream traders’ radars. The financial media takes notice of and
reports on larger gold-stock deals.
With
incredibly-strong fundamentals like these, investors and speculators
should be stampeding back into undervalued gold miners. But they
really aren’t yet, because most are momentum traders lacking the
fortitude to fight the herd and buy low while sectors are out of
favor. Yet as gold’s coming bull-market upleg powers higher and
gold stocks amplify its gains like usual, this sector will
increasingly attract new buying.
Gold
stocks’ track record for multiplying wealth is unparalleled!
Today’s middle-aged gold-stock bull has already seen four uplegs,
which averaged huge 99.2% absolute GDX gains over 7.6 months! And
the secular gold-stock bull before that had literally a dozen uplegs
averaging 87.5% absolute gains over 7.8 months. So playing the
contrarian to buy lower early in these before selling higher later
on is fantastically lucrative.
The
sweet spot for gold-stock appreciation potential during uplegs isn’t
the large major miners dominating GDX. This ETF’s gains will be
trounced by smaller fundamentally-superior mid-tier and junior gold
and silver miners able to consistently grow their
production. Uncovering them is the goal of our painstaking
multi-decade research campaigns, so we can deploy capital in these
outperformers during gold-stock uplegs.
At
Zeal we walk the contrarian walk, buying low when few others are
willing before later selling high when few others can. We overcome
popular greed and fear by diligently studying market cycles. We
trade on time-tested indicators derived from technical, sentimental,
and fundamental research. That’s why all 1178 stock trades
recommended in our newsletters since 2001 averaged hefty +24.0%
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To
multiply your wealth trading high-potential gold stocks, you need to
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The
bottom line is the major gold miners’ recently-reported Q4’20
results revealed their best quarter ever per multiple key
fundamental benchmarks. Revenues, adjusted earnings, operating cash
flows, and cash treasuries surged to record highs. Last quarter was
this sector’s sixth in a row of strong mid-double-digit earnings
growth, which has to be unparalleled in all the stock markets!
Valuations collapsed to record lows.
Despite these incredibly-strong fundamentals, traders have largely
abandoned this high-potential sector due to its recent extended
correction. That’s a huge mistake. Today’s anomalously-low
gold-stock prices driven by popular bearish sentiment will mean
revert dramatically higher during gold’s coming next upleg.
Contrarian investors and speculators who can fight the herd to buy
low now stand to earn massive gains. | 
