The
gold miners are finishing reporting their latest quarterly results,
revealing how they are actually faring fundamentally. This reality
check is important, as sentiment is down in the dumps after this
sector was pummeled lower with gold in February. While the major
gold stocks’ Q4’22 results were mixed, they are doing much better
than traders are now giving them credit for. Their interrupted bull
run looks alive and well.
The
GDX VanEck Gold Miners ETF remains this sector’s dominant
benchmark. Birthed way back in May 2006, GDX has parlayed its
first-mover advantage into an insurmountable lead. Its $11.3b of
net assets mid-week dwarfed the next-largest 1x-long
major-gold-miners ETF by fully 30.6x! GDX is undisputedly the
trading vehicle of choice in this sector. But unfortunately it has
been sucking wind in recent weeks.
The
gold stocks were really building momentum and winning back traders
heading into February, with GDX blasting 52.1% higher in just
4.0 months on a parallel 20.2% gold upleg! But both the metal and
its miners’ stocks were getting short-term overbought, a healthy
mid-upleg pullback was due. It hit hard and fast, quickly
accomplishing its essential mission of eradicating bullish
sentiment. And it’s now tuckering out.
Three unusual
events converged to first slam gold then enable the driving
gold-futures selling to persist longer than usual. On February 2nd
the European Central Bank surprised dovishly, declaring it would
likely pause rate hikes after one more. The euro dropped 0.7% on
that, goosing the oversold US Dollar Index up 0.6% to ignite a
larger bounce. Gold-futures speculators sold hard on their
primary trading cue.
The
next morning the latest US monthly jobs report really accelerated
that USDX surge with a huge 1.2% rally. The US government reported
a shocking eight-standard-deviation upside surprise of 517k new jobs
created! That was super-Fed-hawkish, arguing the economy is
overheating necessitating even more rate hikes. Never mind that
epic beat only existed because a record +3,022k jobs seasonal
adjustment was applied!
The
Bureau of Labor Statistics’ raw underlying data included in that
same report showed 2,505k jobs had actually been lost in
January! Yet gold plunged 4.4% during those two days, bludgeoning
GDX a brutal 7.4% lower. Naturally that unsustainably-extreme
gold-futures selling quickly abated, but lesser selling festered
over the next several weeks. But the hyper-leveraged gold-futures
speculators were flying blind.
Their critical weekly positioning data in the Commitments of Traders
reports went dark
after a cyberattack on a major futures-clearing firm. So they
had no idea how much selling they had collectively done, or how
risky their aggregate gold-futures positioning was getting! Thus
gold’s sharp pullback extended to 7.2%, crushing GDX 19.4% lower by
mid-week. That 2.7x downside leverage to gold was in the normal
2x-to-3x range.
Gold-stock bearishness has flared dramatically during this past
selloff month, driving capitulation selling as traders flee in
disgust. That makes this latest Q4’22 earnings season especially
important, to see if the major gold miners’ latest fundamentals
justify their drubbing. Since most companies run their accounting
on calendar years, fourth-quarter reporting is delayed while big
complex audited annual reports are prepared.
American companies have 60 days after year-ending quarter-ends to
file their formal 10-K reports with the Securities and Exchange
Commission. But GDX includes the world’s biggest gold miners, some
of which trade on other national exchanges. Canadian companies have
a stunning 90 days after fiscal-year-ends to issue annual
reports! So most of the major gold miners have reported 2022
results, but not all of them yet.
Since looking at Q4s with Q2s nearly dawning gets really stale, I’m
ignoring two Canadian stragglers to further my gold-stock
fundamental research. For 27 quarters in a row now, I’ve
painstakingly analyzed the latest results from GDX’s 25-largest
component stocks. They now command a whopping 88.6% of this ETF’s
entire weighting! Digesting hard fundamental results really cuts
through obscuring sentiment fogs.
This
table summarizes the operational and financial highlights from the
GDX top 25 during Q4’22. 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 Q4’21. Those symbols are followed by their
current GDX weightings.
Next
comes these gold miners’ Q4’22 production in ounces, along with
their year-over-year changes from the comparable Q4’21. 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.
While the GDX major gold miners reported a mixed Q4, their
fundamentals remain strong with prevailing gold prices still
robust. Their aggregate gold production increased, helping offset
slightly-lower quarterly-average gold prices. Despite the raging
inflation unleashed by extreme central-bank money printing, the
majors did a good job holding the line on costs. But big
mine-impairment charges obliterated accounting profits.
 
As a
professional gold-stock speculator and financial-newsletter guy for
over two decades, I’ve never liked the major gold stocks. Operating
at their vast scales, they never seem to manage to consistently grow
their production. And their gigantic market capitalizations saddle
their stocks with too much price inertia to really soar during gold
uplegs. The smaller
mid-tiers and
juniors don’t suffer these serious problems.
But
much to their credit, the GDX top 25 actually nicely bucked that
shrinking-output trend in Q4’22. These major gold miners
collectively produced 8,723k ounces of gold last quarter, which
actually grew a strong 4.4% year-over-year! That wasn’t high
absolutely, about 55% up into their production range over the past
27 quarters. But it was still impressive, far outpacing world gold
mining as a whole last quarter.
The
World Gold Council publishes the best-available global gold
supply-and-demand data quarterly in its fantastic Gold Demand Trends
reports. The latest Q4’22 GDT released at the end of January
revealed that overall world mined gold production slumped 0.9% YoY.
So the GDX top 25 managing to achieve hefty 4.4% growth was big
outperformance. But that 371k-ounce jump was largely driven by just
two stocks.
The
Q4-production-growth crown was won by Agnico Eagle, which reported a
monster 59.3% rocketing in output to 799k ounces! But that growth
wasn’t organic, as AEM finished acquiring Kirkland Lake Gold in
Q1’22. KL was booted from GDX in anticipation a quarter earlier,
when it yielded 370k ounces of gold. That buyout alone
accounts for all of the GDX top 25’s increased production, but a
rejiggering also contributed.
Australia’s Perseus Mining climbed into these elite ranks over this
past year, adding 131k ounces. But that was more than offset by
Yamana Gold not reporting its Q4’22 results yet. Last year it did
that in mid-February like usual. But with that company in the
process of being acquired by Pan American Silver and AEM, it must
not be in any hurry to report. That deal should close in the coming
weeks, eliminating AUY.
It
had mined 217k ozs of gold in Q3’22, and likely had similar Q4
output. So adjust for all this, and the GDX-top-25’s real
production growth was probably around one fourth of that total.
That’s still growth, but not as outsized as implied. The major gold
stocks generally continue to struggle with boosting output enough to
overcome depletion. While that downward drift is bumpy, it is still
large gold stocks’ prevailing trend.
Gold
production is also interesting sequentially from the prior quarter.
Between Q3’22 to Q4’22, the GDX-top-25 miners grew their aggregate
production a massive 6.9% quarter-on-quarter! And AEM’s
buyout of KL doesn’t affect that short-term timeline. Sequential
output growth would’ve been even bigger had AUY gotten around to
reporting on time. So this is impressive operating performance from
the major gold miners.
Surprisingly global gold production isn’t consistent
quarter-to-quarter according to the WGC’s GDT data. Over the last
dozen years on average, worldwide mine output has run -8.5%, +4.5%,
+6.7%, and +0.3% QoQ in Q1s, Q2s, Q3s, and Q4s. So these elite GDX
majors, which accounted for only 29% of world gold mined last
quarter, fared much better than their peers. Global gold output
fell 1.6% sequentially in Q4’22.
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.
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. That’s where this
past year’s raging inflation really hit.
Energy is the biggest category, including electricity to power
ore-processing plants including mills and diesel fuel to run fleets
of excavators and dump trucks hauling raw ores to those facilities.
Other smaller consumables range from explosives to blast ores free
to chemical reagents necessary to process various ores to recover
their gold. So higher variable costs continue to heavily impact the
world’s gold miners.
Examples of this were legion in the GDX top 25’s latest
quarterlies. Mighty Newmont warned of “higher direct operating
costs as a result of inflationary pressures, driven by higher labor
costs and higher input commodity prices, notably fuel and energy
costs.” Barrick Gold blamed “higher input costs driven by
consumable and energy prices”. Regardless of their sizes, most
major gold miners shared these problems.
Kinross Gold said higher costs were “mainly due to inflationary cost
pressure on key consumables such as fuel, emulsion and reagents”.
Hecla Mining reported its “increase in total cash costs was due to
higher labor, contractor costs, and inflation in diesel, reagents,
and other key inputs”. I took plenty of notes on this, and could
quote on. But realize that inflationary cost pressures on the
variable side remain serious.
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 GDX-top-25 gold miners reported average cash costs surging
10.6% YoY to $945 per ounce last quarter! That’s the second highest
on record, but surprisingly that wasn’t all bad news. These cash
costs actually fell 3.1% QoQ from Q3’22. And that 10.6% YoY
increase was much slower than the prior two quarters’ giant 24.9%
and 22.4% YoY jumps! So we are seeing nascent cost disinflation
in gold mining.
We
won’t know if this trend continues until coming earnings seasons,
but the pivot is encouraging. These major-gold-miner cash costs are
also really overstated by three extreme outliers. Hecla Mining has
long been a high-cost producer, but lower production in Q4’22
catapulted its cash costs 48.4% higher way up to $1,696! Peru’s
Buenaventura has been a hot mess for years, and its cash costs are
running a lofty $1,241.
South African’s Harmony Gold is also a high-cost operator, mainly
due to its old super-deep gold mines. The deeper miners follow gold
veins, the more expensive extraction becomes. Its $1,331 cash costs
last quarter still actually retreated 3.7% YoY! But exclude this
trio of extreme outliers, and the rest of the GDX top 25 averaged
far-better Q4’22 cash costs of $842. That’s more
representative for major gold miners.
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 average AISCs last quarter looked better than cash
costs, only climbing 6.6% YoY to $1,267 per ounce. That’s
certainly not low, the third highest ever reported. But like cash
costs AISCs are seeing big disinflation, with Q4’22s modest 6.6%
increase far better than the scary 19.7% and 21.9% YoY rocketings
seen in Q2’22 and Q3’22! The major gold miners are holding the line
on costs fairly well considering.
We
are suffering the first and
worst inflation
super-spike since the 1970s on extreme central-bank money
printing! And those same three major-gold-miner outliers also
skewed these average AISCs much higher. If the crazy $2,132 from
HL, $1,961 from BVN, and $1,600 from HMY are excluded, the rest of
the GDX top 25 averaged much-better $1,141 all-in sustaining
costs last quarter. That’s really not too bad at all.
Still higher AISCs really cut into profit margins. A great proxy
for how gold miners are faring as a sector subtracts average AISCs
from quarterly-average gold prices to obtain implied unit profits.
For the entire GDX top 25 including those three high-cost miners,
that metric plunged 23.7% YoY to $463 per ounce. While still solid,
it is less than a fourth up into the past 27 quarters’ range.
Kicking out those outliers helps a lot.
With
those $1,141 adjusted GDX-top-25 AISCs, implied unit profits jump
dramatically to $589. That looks healthier, up 3/7ths into that
range seen in this entire research thread. And gold-mining profits
ought to improve in coming quarters. Nearly 3/4ths of the way
through Q1’23, gold is still averaging $1,873 on close
despite its sharp pullback in February. That is soaring 8.2%
sequentially from Q4’22’s ugly $1,731!
Moving on to hard accounting data reported to securities regulators
under Generally Accepted Accounting Principles or other countries’
equivalents, the major gold miners’ Q4 proved weaker. The GDX top
25’s total revenues slumped 6.3% YoY to $16,448m. That partially
reflected Q4’22’s average gold price retreating 3.6% YoY. But
Franco-Nevada, Wheaton Precious Metals, and AUY not yet reporting Q4
also contributed.
Their sales are included in the comparable Q4’21. But the
mysterious Chinese gold miners Zijin Mining and Zhaojin Mining never
timely report as far as I can tell. These are the two numerical
symbols in the GDX top 25, and I’ve been trying to find their
quarterly reporting for a long time. Sometimes they don’t do any,
at least in English. And sometimes their quarterly updates come
out years after the quarter being reported!
The
big, fat, hairy fly in the ointment in the GDX top 25’s Q4’22
results was their bottom-line earnings. Those collapsed to a dismal
$1,590m collective loss, the second worst out of the last 27
quarters! This would be troubling if it was driven by operational
problems, but thankfully it wasn’t. With gold weak last quarter,
the gold miners wrote down plenty of mines’ values resulting in
large non-cash impairment charges.
Accounting rules require these to be flushed through income
statements, offsetting operating earnings. NEM declared a gigantic
$1,317m impairment charge on three mines, and GOLD another huge
$950m for three of its own mines! Even smaller majors like
Endeavour Mining and KGC reported big $360m and $350m impairments.
Some other GDX-top-25 stocks also wrote down assets on their books
last quarter.
But
these four alone totaled a whopping $2,977m! Had those non-cash
accounting adjustments not happened, the GDX top 25’s total profits
would’ve looked radically better at +$1,387m. While that still
would’ve cratered 43.2% YoY on lower gold prices and higher costs,
the gold miners are still earning money operationally. Those
accounting earnings should rebound dramatically on higher gold going
forward.
These elite gold majors’ operating cashflows generated last quarter
also plunged 26.3% YoY to $5,042m. Had FNV, WPM and AUY reported,
that decline would moderate somewhat. Like the
big US stocks
dominating the S&P 500 I analyzed last week, the GDX top 25 burned
lots of cash last year. Their total treasuries fell a steep 31.5%
YoY to $14,808m. In inflationary times, surging input costs
inevitably cut into cash.
So
overall the major gold miners fared decent in Q4’22, though it
wasn’t a fantastic quarter by any means. The GDX top 25 did manage
to impressively grow their production, both sequentially and
year-over-year. And they started seeing welcome disinflation as
their costs increases moderated considerably. But sales fell while
earnings were wiped out by big non-cash impairment charges. That’s
definitely mixed in my book.
Despite this, the major gold miners certainly aren’t struggling
operationally. They are still mining gold for way less than
prevailing prices. That means their depressed stock prices have
fundamental justification to rebound sharply with gold in coming
months. The rampant bearishness fomented by February’s sharp gold
selloff isn’t righteous, it’s way overdone. So contrarian traders
can use this as a good buying opportunity.
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The
bottom line is the major gold miners just reported mixed quarterly
results. Uncharacteristically they enjoyed strong production
growth, which was impressive. And while their higher mining costs
fueled by this raging inflation kept climbing, the rate of increases
really moderated. If this disinflation proves a trend in coming
quarters, it along with higher prevailing gold prices should really
boost profitability going forward.
Despite seeing their accounting profits annihilated by some huge
non-cash impairment charges, the major gold miners continue to earn
solid unit profits. Those will really grow as gold’s interrupted
upleg resumes. So fundamentally the major gold miners’ operations
still support much-higher stock prices. That makes these recent
out-of-favor lows great buying opportunities, as this
excessively-bearish sentiment won’t last. | 
