The
gold miners’ stocks just surged to a major upside breakout, really
ramping up traders’ interest in this small contrarian sector.
Capital is flowing back into gold stocks to chase their strong
upward momentum, which fuels increasing bullishness. That buying is
fundamentally-justified based on the major gold miners’
recently-reported Q4’21 results. This latest earnings season
reveals how gold stocks are actually faring.
With
Q1’22 already winding down, looking at the prior quarter’s
operational and financial reports seems dated. But because most
companies run on calendar years, the Q4 reporting deadlines are
extended. In the US companies don’t have to report full-year 10-K
results until 60 days after quarter-ends, compared to 40 days for
10-Q quarterlies. In Canada, the epicenter of the gold-mining
universe, year-ends extend to 90 days!
So
mid-March is about the earliest that enough major gold miners have
reported full Q4 results to analyze them. Right after each
quarterly earnings season, I dig into the latest reports from the
top-25 component companies of the leading GDX VanEck Gold Miners
ETF. This benchmark dominates its sector, with $14.8b in net assets
mid-week running 26.9x larger than the next-biggest 1x-long
major-gold-miners-ETF competitor!
GDX
has blipped up on far more speculators’ and investors’ radars after
blasting 32.8% higher between late January to early March! Part of
a larger upleg born in late September, that big-and-fast rally
achieved a major
upside breakout for gold stocks. Yet with 34.6% gains at best,
their latest upleg remains small. GDX’s five previous uplegs during
this secular gold bull averaged massive 85.0% gains before
peaking!
Gold
stocks are ultimately leveraged plays on gold, with GDX majors
tending to amplify gold’s gains by 2x to 3x. Given the
extraordinarily-bullish fundamental backdrop for the yellow metal,
this latest gold-stock upleg ought to grow much larger than usual
before giving up its ghost. Chief among gold’s bullish drivers is
this raging inflation unleashed by the profligate Fed’s extreme
money printing, which is wildly-unprecedented.
In
just 24.4 months since March 2020’s pandemic-lockdown stock panic,
the Fed ballooned its balance sheet by a truly-insane 114.3% or
$4,752b! Effectively more than doubling the US-dollar supply
is why inflation is out-of-control. Even lowballed
government-reported inflation per the CPI is soaring 7.9%
year-over-year, its hottest increase since January 1982! Americans
increasingly realize the reality is even worse.
During the last similar
inflation
super-spikes in the 1970s, gold prices nearly tripled during
the first then more than quadrupled in the second! The gold
miners’ stocks shot stratospheric on that, generating life-changing
wealth for contrarians deployed in them. Gold has always been the
ultimate inflation hedge, as its supply growth is hard-limited by
geology unlike fiat-money supplies. Gold-stock earnings amplify
gold gains.
The
Fed’s crazy inflation problem will persist until its
QE4-mushroomed
money supply radically shrinks and the Fed hikes its
federal-funds rate well above headline inflation. But either would
utterly crash these
QE-levitated
bubble-valued stock markets, forcing the US economy into a
severe recession if not a full-blown depression. The Fed won’t risk
that, so gold and gold stocks have a long inflation-fueled runway
ahead.
Speculators and investors wanting to multiply wealth in this
high-potential sector should understand gold miners’ fundamentals,
which are only revealed in quarterly earnings seasons. I’ve
painstakingly analyzed the GDX-top-25 gold miners’ latest results
for 23 quarters in a row now. Including the world’s largest gold
miners, they accounted for 88.5% of this ETF’s total weighting
mid-week. That’s certainly a commanding sample.
This
table summarizes the operational and financial highlights from the
GDX top 25 during Q4’21. 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 Q4’20. Those symbols are followed by their
current GDX weightings.
Next
comes these gold miners’ Q4’21 production in ounces, along with
their year-over-year changes from the comparable Q4’20. 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 reported 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.
Last
quarter proved somewhat challenging for gold miners, with
mounting inflationary cost pressures and lower average gold
prices squeezing profitability. Yet the major gold miners are still
earning money hand-over-fist with these high prevailing gold
prices. And profits will power dramatically higher as the Fed’s
colossal deluge of freshly-conjured US dollars continues to bid up
all prices in coming years, including gold’s.
After actively speculating in gold stocks and writing popular
financial newsletters about that for over two decades now, not much
in this sector surprises me. But the GDX top 25’s Q4’21 results
still managed to on multiple fronts. They were solid if not good,
but still below my expectations given what was happening in gold.
The gold miners earned nice profits, but those were hobbled by costs
surging far faster than usual.
Starting on this table’s left and working our way to the right,
GDX’s holdings have become increasingly-concentrated. This
leading sector ETF’s top-25 components accounting for 88.5% of its
weighting is just shy of the 23-quarter high of 88.6% seen just
after Q1’20’s earnings season. But the top-five companies alone
commanding 51.9% of this ETF is unprecedented in this dataset, GDX
has become really top-heavy!
Another
major-gold-stock mega-merger is one reason. Back in late
September, Canadian major Agnico Eagle Mines announced it would
purchase smaller rival Kirkland Lake Gold for $10.7b in stock. The
latter had the best fundamentals by far among major gold miners, so
it getting taken out was a sad day for gold investors. That old KL
ranked below the GDX top five, but is now effectively included in
AEM’s gorged weighting.
More
importantly with gold miners’ latest bull upleg remaining small and
young, much of the recent capital inflows have poured into ETFs led
by GDX. The major gold stocks haven’t yet run high-enough for
long-enough to generate sufficient bullishness to fuel big
individual-stock buying by institutional and individual
investors. Differential ETF-share demand requires ETFs to buy
underlying stocks proportionally to their weightings.
Thus
ETF capital inflows mostly benefit their larger holdings,
growing them even bigger. That leaves less money moving into their
smaller holdings, which are relatively-starved for capital.
Outsized ETF buying exceeding individual-stock buying leaves sectors
increasingly-concentrated, which boosts selloff risks. The bigger
any company becomes compared to its peers, the more sector damage a
selloff in it will wreak.
GDX’s high concentration risk makes it even less attractive compared
to its little-brother GDXJ VanEck Junior Gold Miners ETF. Actually
mostly a mid-tier
gold-stock ETF, I’ll analyze its top-25 stocks’ latest Q4’21
results in next week’s essay. The mid-tier and junior gold miners
have long been superior to the majors for stock-price-upside
potential. They have better production growth along with smaller
market caps.
Mid-tier gold miners produce between 300k to 1,000k ounces per year,
with juniors mining less and majors mining more. Super-majors
double the latter, running at 2,000k+ ounces of annual output. The
higher gold miners’ production bases, the harder it is for them to
outpace resource depletion and grow. That leaves their stocks less
desirable to investors, since production growth heavily fuels
stock-price gains.
In
Q4’21 these GDX-top-25 gold miners produced 8,352k ounces, which
fell a rather-sharp 6.2% YoY. That would be ominous if it wasn’t
skewed by that AEM-KL mega-merger. This deal wasn’t consummated
until early February, so AEM’s Q4 production didn’t yet include the
380.5k ounces KL mined last quarter. If that is added on to AEM’s
501.9k, the GDX top 25’s collective output only shrunk a much-milder
1.9% YoY.
And
with Kirkland Lake Gold gobbled up by Agnico Eagle, China’s Zhaojin
Mining climbed into the GDX-top-25 ranks to take its place.
Unfortunately it and its larger compatriot Zijin Mining follow that
country’s terrible financial-reporting standards. Represented by
their numeric Hong Kong Stock Exchange symbols in GDX, these major
Chinese gold miners rarely report anything timely in English. So
they have no data.
Over
the years I’ve even limped through their Chinese filings, both using
translating software and having a Chinese friend wade through them
with me. While half-year financial statements are presented, they
usually don’t include gold production or costs. So had another GDX
component actually reporting output taken the 25th-largest GDX spot
on KL’s demise, the major gold miners’ collective output would’ve
been flatter.
But
stable production still isn’t growth, which is what investors prize
most since it leads to bigger profits and higher share prices.
Provocatively way back in Q2’16 when I launched this quarterly
deep-research thread, the GDX-top-25 gold miners produced 8,788k
ounces of gold. Fully 5.8 years later in Q4’21, that was still
running 8,733k with KL added back in. The major gold miners have
long failed on the growth front!
With
inflation raging across the world thanks to the epic money printing
by the Fed and other big central banks, I was really attuned to gold
miners lamenting it in their Q4’21 results. Higher general price
levels were indeed cited quite a bit as a key reason production
costs are climbing. But the actual magnitude of cost increases was
shocking. Q4’21 saw some of the biggest mining-cost jumps in at
least the last 23 quarters!
Normally per-ounce mining costs are generally
inversely-proportional to gold production. That’s because gold
mines’ total operating costs are largely fixed during planning
stages, when designed throughputs for mills that process
gold-bearing ores are determined. 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 the mills. Those vary widely even within
individual gold deposits. Richer ores yield more ounces to spread
the big fixed costs of mining across, lowering unit costs and
boosting profitability. So with the GDX top 25’s output slumping
between 2% to 6% last quarter depending on KL’s inclusion or not,
costs should’ve climbed in a similar range.
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 major gold miners reporting cash costs last
quarter averaged a staggering $853 per ounce, which soared 21.8%
YoY! That dwarfed the previous high over the last 23 quarters of
$773 in Q1’21. While the raging inflation certainly contributed to
higher costs, thankfully a couple of ugly outliers really skewed
this metric high. They were First Majestic Silver’s extreme $1,624
and Harmony Gold’s $1,382.
For
years the major silver miners have been
increasingly
diversifying into gold, as it simply has far-better mining
economics than silver. Last year AG purchased its first pure
gold mine to add to its stable of three silver mines, but that
operation has been plagued with super-high costs. HMY’s old and
very-deep South African gold mines are ever-more-expensive to run.
Excluding these, GDX-top-25 cash costs averaged $780.
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 major gold miners’ AISCs also blasted up 14.5% YoY in
Q4’21 to hit $1,188! That too was the last 23 quarters’ peak,
and a new record. The previous high-water mark of $1,085 came in
the preceding Q3’21, where inflationary cost pressures were
mounting. But these AISCs were again skewed high by those same two
outliers First Majestic Silver and Harmony Gold, which reported
$2,048 and $1,660!
That
South African major’s AISCs aren’t heading lower, with
full-year-2022’s forecast near a midpoint of $1,652. But AG’s
experienced management is making progress reining in costs at its
new gold mine. They are projected to average a
still-high-but-much-better $1,555 this year. Excluding AG and HMY,
the rest of the GDX top 25 averaged $1,114 AISCs. Still a record,
those would’ve climbed a more-reasonable 7.4% YoY.
I
had expected the major gold miners’ all-in sustaining costs to come
in more in-line with their four-quarter average of $1,057. Had
GDX-top-25 production been stable and cost inflation run around 3.0%
YoY, their AISCs would’ve shaken out around $1,088 per ounce.
That’s fully $100 lower than the actual. Next week’s GDXJ essay
will show whether these surging costs are also infecting the
mid-tier and junior gold miners.
Gold-mining profits are the difference between prevailing gold
prices and mining costs. So higher costs naturally lead to lower
earnings. The best sector proxy for gold-mining profitability
subtracts GDX-top-25 AISCs from quarterly-average gold levels. Last
quarter the latter came in at $1,796, down 4.3% YoY. With
major-gold-miner AISCs soaring 14.5% YoY to that lofty $1,188,
sector earnings ran $608 per ounce.
That
plunged 27.5% YoY, the worst drop over the last 23 quarters of this
research thread. That eclipsed the preceding Q3’21’s 20.4%-YoY
decline. So higher mining costs really slice into earnings, which
sounds bad. And unfortunately GDX-top-25 AISCs aren’t expected to
improve much this year, higher costs are here to stay. Fully
17 of these majors provided 2022 AISC guidance, which averaged
$1,159 per ounce.
That’s still hovering near Q4’21’s record $1,188 read. But higher
mining costs certainly aren’t bearish for gold miners with the
yellow metal’s prices remaining high. Those $608-per-ounce profits
these elite miners were collectively earning last quarter remained
the seventh-highest on record, only behind the preceding six
quarters. And those averaged $777 of unit earnings, not greatly
higher than last quarter’s levels.
Before Q2’20, peak GDX-top-25 per-ounce profits ran $591 in Q3’19.
And even with higher mining costs, the same raging inflation forcing
gold much higher will colossally boost gold-mining earnings.
Remember gold nearly tripled and more than quadrupled during the
last similar inflation super-spikes in the 1970s. Today’s current
one started accelerating a year ago in April, when the headline CPI
first exceeded 4.0% YoY.
That
month gold averaged $1,761, so at best by early March it had only
rallied 16.5% so far. Because the gold market today is far larger
than during the 1970s, gold prices probably won’t triple or
quadruple again. But they ought to at least double, implying
$3,500+ gold before the Fed unwinds enough QE money and hikes
rates high enough to slay its inflation monster. Even at
much-higher average AISCs, profits would be huge!
As
long as gold’s secular bull keeps powering higher on balance, so
will gold miners’ earnings. Ultimately stock prices gravitate to
some reasonable multiple of underlying corporate profits. And with
gold-mining earnings amplifying higher gold prices, way-higher
profits are coming as gold continues marching higher. This is the
strong fundamental foundation undergirding gold stocks’
secular bull, which will grow way bigger.
On
the hard-accounting front, the GDX-top-25 gold miners’ $16.9b of
total revenues reported last quarter fell 5.7% YoY. That’s
congruent with their 6.2%-lower output and 4.3%-lower average gold
prices. But sales were actually better, partially because Chinese
gold miner Zhaojin now included in the GDX top 25 doesn’t report
them. The great British major Endeavour Mining also dragged its
feet on reporting Q4 results.
Those finally came in after the Wednesday-evening data cutoff for
this essay. EDV’s Q4’21 revenues ran $697m. With those added in,
the GDX-top-25 sales only retreated 1.8% YoY to $17.5b. That’s
pretty impressive given the lower gold production and average gold
prices last quarter. But actual bottom-line earnings under
Generally Accepted Accounting Principles or other countries’
equivalents fared much worse.
The
$2,552m earned by these elite major gold miners plunged 47.8%
YoY! But that was again distorted by unusual items. Last
quarter’s included an $874m reclamation-and-remediation charge by
Newmont Mining, a $106m noncash writedown on a mine by Kinross Gold,
and a $301m loss on discontinued operations by Buenaventura. These
one-time charges dragged the overall GDX-top-25 profits
sharply-lower.
Those were partially offset by big gains including a $157m
impairment reversal at Wheaton Precious Metals and a $286m gain at
Centerra Gold on a similar reversal that also created a deferred tax
asset. Net these out, and GDX-top-25 operating earnings last
quarter were closer to $3,090m. That was only down 24.5% YoY from
Q4’20’s similar earnings running near $4,093m adjusted for big
one-time unusual items.
So
the major gold miners’ cleaner operating earnings fared better in
Q4’21 than that sector unit-earnings proxy of average gold prices
less average all-in sustaining costs. Gold-miner valuations in
trailing-twelve-month price-to-earnings-ratio terms still generally
remained quite low this week, with seven of these GDX-top-25
companies just trading under 20x. Gold mining remains very
profitable despite those climbing costs!
That
was also evident in these major gold miners’ cash flows generated
from operations only dropping a milder 22.2% YoY to $6,488m. If
Endeavour Mining’s straggling OCFs are added in, that moderates to a
17.9%-YoY decline to $6,844m. That’s again reasonable based on the
GDX top 25’s lower production coupled with lower average gold
prices. These strong operating cash flows helped keep treasuries
full.
The
GDX top 25 reported cash balances totaling $21.6b ending Q4’21,
which slumped 5.3% YoY. But that was only because the comparable
Q4’20 saw the highest on record of $22.8b! So the major gold miners
are flush with cash from their hefty profitability over the past
seven quarters, starting when gold’s average price first surged over
$1,700. Their big warchests should fund plenty of expansion in
coming years.
Operating at major and vast super-major scales, the GDX-top-25 gold
miners have long struggled to grow their production organically.
While they do expand existing mines and build new ones, that growth
is usually outpaced by depletion at existing mines. Most of majors’
output growth comes from buying other mines and mining companies,
which really benefits the smaller mid-tiers and juniors feeding
gold’s supply pipeline.
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The
bottom line is the major gold miners continued to thrive
fundamentally in Q4, despite higher costs fueled by the raging
inflation unleashed by the Fed and other big central banks. These
companies still earned good profits last quarter with prevailing
gold prices remaining high. While inflation-goosed mining costs are
here to stay, gold’s coming gains on that same monetary deluge will
drive mining profits way higher.
With
its hard-limited supply growth, gold has always been the ultimate
inflation hedge. Yet it has barely budged so far in the Fed’s
latest inflation super-spike, implying much catch-up rallying to
do. Gold prices nearly tripled and more than quadrupled during the
last inflation super-spikes in the 1970s, launching gold miners’
earnings and stock prices stratospheric. A similar fundamental
windfall should play out in this inflation. |