The
mid-tier gold miners’ stocks in the sweet spot for
price-appreciation potential have been struggling in recent months,
grinding lower with gold. Their strong early-year momentum has been
sapped by recent stock-market euphoria. But gold-mining stocks are
more important than ever for prudently diversifying portfolios. The
mid-tiers’ recently-reported Q1’19 results reveal their fundamentals
remain sound and bullish.
The
wild market action in Q4’18 emphasized why investors shouldn’t
overlook gold stocks. All portfolios need a 10% allocation
in gold and its miners’ stocks! As the flagship S&P 500
broad-market stock index plunged 9.2% in December alone, nearly
entering a new bear market, the leading mid-tier gold-stock ETF
surged 13.7% higher that month. That was a warning shot across the
bow that these markets are changing.
Four
times a year publicly-traded companies release treasure troves of
valuable information in the form of quarterly reports. Required by
the US Securities and Exchange Commission, these 10-Qs and 10-Ks
contain the best fundamental data available to traders. They dispel
all the sentiment distortions inevitably surrounding prevailing
stock-price levels, revealing corporations’ underlying hard
fundamental realities.
The
global nature of the gold-mining industry complicates efforts to
gather this important data. Many mid-tier gold miners trade in
Australia, Canada, South Africa, the United Kingdom, and other
countries with quite-different reporting requirements. These
include half-year reporting rather than quarterly, long 90-day
filing deadlines after year-ends, and very-dissimilar presentations
of operating and financial results.
The
definitive list of mid-tier gold miners to analyze comes from the
GDXJ VanEck Vectors Junior Gold Miners ETF. Despite its misleading
name, GDXJ is largely dominated by mid-tier gold miners and
not juniors. GDXJ is the world’s second-largest gold-stock ETF,
with $3.6b of net assets this week. That is only behind its
big-brother GDX VanEck Vectors Gold Miners ETF that includes the
major gold miners.
Major gold miners are those that produce over 1m ounces of gold
annually. The mid-tier gold miners are smaller, producing between
300k to 1m ounces each year. Below 300k is the junior realm.
Translated into quarterly terms, majors mine 250k+ ounces, mid-tiers
75k to 250k, and juniors less than 75k. GDXJ was originally
launched as a real junior-gold-stock ETF as its name implies, but it
was forced to change its mission.
Gold
stocks soared in price and popularity in the first half of 2016,
ignited by a new
bull market in gold. The metal itself awoke from deep secular
lows and surged 29.9% higher in just 6.7 months. GDXJ and GDX
skyrocketed 202.5% and 151.2% higher in roughly that same span,
greatly leveraging gold’s gains. As capital flooded into GDXJ to
own junior miners, this ETF risked running afoul of Canadian
securities laws.
Canada is the center of the junior-gold universe, where most juniors
trade. Once any investor including an ETF buys up a 20%+ stake in a
Canadian stock, it is legally deemed a takeover offer. This may
have been relevant to a single corporate buyer amassing 20%+, but
GDXJ’s legions of investors certainly weren’t trying to take over
small gold miners. GDXJ diversified away from juniors to
comply with that archaic rule.
Smaller juniors by market capitalization were abandoned entirely,
cutting them off from the sizable flows of ETF capital. Larger
juniors were kept, but with their weightings within GDXJ greatly
demoted. Most of its ranks were filled with mid-tier gold miners,
as well as a handful of smaller majors. That was frustrating, but
ultimately beneficial. Mid-tier gold miners are in the sweet
spot for stock-price-appreciation potential!
For
years major gold miners have struggled with
declining
production, they can’t find or buy enough new gold to offset
their depletion. And the stock-price inertia from their large
market capitalizations is hard to overcome. The mid-tiers can and
are boosting their gold output, which fuels growth in operating cash
flows and profitability. With much-lower market caps, capital
inflows drive their stock prices higher much faster.
Every quarter I dive into the latest results from the top 34 GDXJ
components. That’s simply an arbitrary number that fits neatly into
the tables below, but a commanding sample. These companies
represented 82.7% of GDXJ’s total weighting this week, even though
it contained a whopping 72 stocks! 3 of the top 34 were majors
mining 250k+ ounces, 21 mid-tiers at 75k to 250k, 7 “juniors” under
75k, and 3 explorers with zero.
These majors accounted for 13.0% of GDXJ’s total weighting, and
really have no place in a “Junior Gold Miners ETF” when they could
instead be exclusively in GDX. These mid-tiers weighed in at 57.6%
of GDXJ. The “juniors” among the top 34 represented just 8.9% of
GDXJ’s total. But only 4 of them at a mere 4.4% of GDXJ are true
juniors, meaning they derive over half their revenues from
actually mining gold.
The
rest include a primary silver miner, gold-royalty company, and gold
streamer. GDXJ has become a full-on mid-tier gold miners ETF, with
modest major and tiny junior exposure. Traders need to realize it
is not a junior-gold investment vehicle as advertised. GDXJ also
has major overlap with GDX. Fully 29 of these top 34 GDXJ
gold miners are included in GDX too, with 23 of them also among
GDX’s top 34 stocks.
The
GDXJ top 34 accounting for 82.7% of its total weighting also
represent 37.4% of GDX’s own total weighting! The GDXJ top 34
mostly clustered between the 10th- to 40th-highest weightings in
GDX. Thus over 3/4ths of GDXJ is made up by almost 3/8ths of
GDX. But GDXJ is far superior, excluding the large gold majors
struggling with production growth. GDXJ gives much-higher
weightings to better mid-tier miners.
The
average Q1’19 gold production among GDXJ’s top 34 was 149k ounces,
a bit over half as big as the GDX top 34’s 267k average.
Despite these two ETFs’ extensive common holdings, GDXJ is
increasingly
outperforming GDX. GDXJ holds many of the world’s best mid-tier
gold miners with big upside potential as gold’s own bull resumes
powering higher. Thus it is important to analyze GDXJ miners’
latest results.
So
after every quarterly earnings season I wade through all available
operational and financial results and dump key data into a big
spreadsheet for analysis. Some highlights make it into these
tables. Any blank fields mean a company hadn’t reported that data
as of this Wednesday. The first couple columns show each GDXJ
component’s symbol and weighting within this ETF as of this week.
Not all are US symbols.
18
of the GDXJ top 34 primarily trade in the US, 5 in Australia, 8 in
Canada, and 3 in the UK. So some symbols are listings from
companies’ main foreign stock exchanges. That’s followed by each
gold miner’s Q1’19 production in ounces, which is mostly in
pure-gold terms excluding byproducts often found in gold ore like
silver and base metals. Then production’s absolute year-over-year
change from Q1’18 is shown.
Next
comes gold miners’ most-important fundamental data for investors,
cash costs and all-in sustaining costs per ounce mined. The latter
directly drives profitability which ultimately determines stock
prices. These key costs are also followed by YoY changes. Last but
not least the annual changes are shown in operating cash flows
generated, hard GAAP earnings, revenues, and cash on hand with a
couple exceptions.
Percentage changes aren’t relevant or meaningful if data shifted
from positive to negative or vice versa, or if derived from two
negative numbers. So in those cases I included raw underlying data
rather than weird or misleading percentage changes. In cases where
foreign GDXJ components only released half-year data, I used that
and split it in half where appropriate. That offers a decent
approximation of Q1’19 results.
Symbols highlighted in light blue newly climbed into the ranks of
GDXJ’s top 34 over this past year. And symbols highlighted in
yellow show the rare GDXJ-top-34 components that aren’t also in
GDX. If both conditions are true blue-yellow checkerboarding is
used. Production bold-faced in blue shows the handful of junior
gold miners in GDXJ’s higher ranks, under 75k ounces quarterly
with over half of sales from gold.
This
whole dataset together compared with past quarters offers a
fantastic high-level read on how mid-tier gold miners as an industry
are faring fundamentally. While slightly-lower gold prices made Q1
somewhat challenging, the GDXJ miners generally fared quite well.
They mostly kept costs in check, paving the way for profits to soar
and really amplify gold’s overdue-to-resume bull market. That’s
very bullish for their stocks.
GDXJ’s managers have continued to fine-tune its ranks over this past
year, making some good changes. For some inexplicable reason, one
of the world’s largest gold miners AngloGold Ashanti was one of this
ETF’s top holdings as
discussed in
Q3’18. AU was finally kicked out and replaced with a smaller
major gold miner Kinross and a mid-tier Buenaventura. Together they
now account for 12.3% of GDXJ’s weighting.
Reshuffling at the top makes year-over-year changes less comparable,
particularly given KGC’s larger size relative to most of the rest of
GDXJ’s stocks. 4 other smaller stocks also climbed into this ETF’s
top-34 ranks. As GDXJ is largely market-cap weighted, it is normal
for companies to rise into and fall out of the top 34’s lower end.
All these year-over-year comparisons are across somewhat-different
top-34 stocks.
Production has always been the lifeblood of the gold-mining
industry. Gold miners have no control over prevailing gold prices,
their product sells for whatever the markets offer. Thus growing
production is the only manageable way to boost revenues, leading
to amplified gains in operating cash flows and profits. Higher
production generates more capital to invest in expanding existing
mines and building or buying new ones.
Gold-stock investors have long prized production growth above
everything else, as it is inexorably linked to company growth and
thus stock-price-appreciation potential. The top 34 GDXJ gold
miners excelled in that department, growing their aggregate Q1
output by a big 15.6% YoY to 4.6m ounces! That’s impressive,
trouncing both the major gold miners dominating GDX as well as the
entire world’s gold-mining industry.
Last
week I analyzed the
GDX majors’ Q1’19
results, showing they are still struggling to replace depleting
production. The GDX top 34’s total output plunged a sharp 6.3% YoY
to 8.8m ounces, but if adjusted for a recent
in-process
mega-merger that decline moderates to 0.2% YoY. That’s still
much worse than the world gold-mining industry as a whole, as
reflected in the World Gold Council’s comprehensive quarterly data.
Total global gold production in Q1’19 climbed 1.1% YoY to 27.4m
ounces, which the majors still fell well short of. The GDXJ
mid-tiers were able to enjoy very-strong growth because this ETF
isn’t burdened by the struggling majors. Again GDXJ’s components
start at the 10th-highest weighting in GDX. The 9 above that
averaged huge Q1 production of 537k ounces, which is fully 3.6x
bigger than the GDXJ-top-34 average!
The
more gold miners produce, the harder it is to even keep up with
relentless depletion let alone grow their output consistently.
Large economically-viable gold deposits are getting increasingly
difficult to find and ever-more-expensive to develop, with
low-hanging fruit long since exploited. But with much-smaller
production bases, mine expansions and new mine builds generate big
output growth for mid-tier golds.
Their awesome Q1 production surge wasn’t just from the new
components climbing into the ranks of the top 34 over this past
year. The average growth rate of all these companies producing
weighed in at 16.1% YoY, right in line with the 15.6% total growth.
The law-of-large-numbers growth limitations also apply to gold
miners’ market capitalizations. The GDXJ top 34 averaged just $1.7b
in the middle of this week.
Last
week the GDX top 34 sported a far-higher average of $5.2b. With the
mid-tiers generally less than a third as big as the majors,
their stock prices have much-less inertia. Capital inflows as gold
stocks return to favor on gold rallying propel mid-tier stocks to
much-higher levels faster than majors. They truly are the sweet
spot of the gold-stock realm, not bogged down like the majors with
way less risk than the juniors.
Also
interesting on the GDXJ production front last quarter was silver.
This “Junior Gold Miners ETF” also includes major silver miners,
both primary and byproduct ones. The GDXJ top 34’s silver mined
surged 13.8% higher YoY to 26.5m ounces! For comparison the GDX top
34’s total reported silver output of 27.3m actually plunged 25.2%
YoY. Even mega-merger-adjusted their silver production still fell
8.0% YoY.
The
mid-tier gold miners continue to prove all-important production
growth is achievable off smaller bases. With a handful of
mines or less to operate, mid-tiers can focus on expanding them or
building a new mine to boost their output beyond depletion. But the
majors are increasingly failing to do this from the already-high
production bases they operate at. As long as majors are struggling,
it is prudent to avoid them.
GDXJ
investors would be better served if this ETF contained no major
gold miners producing over 250k ounces a quarter on average.
They still command over 1/8th of its weighting, which could be far
better reallocated in mid-tiers and juniors. If VanEck kept the
major gold miners in GDX where they belong, it would give GDXJ
much-better upside potential. That would make this ETF more popular
and successful.
In
gold mining, production and costs are generally inversely related.
Gold-mining costs are largely fixed quarter after quarter, with
actual mining requiring about the same levels of infrastructure,
equipment, and employees. So the higher production, the more ounces
to spread mining’s big fixed costs across. Thus with sharply-higher
YoY production in Q1’19, the GDXJ top 34 should’ve seen
proportionally-lower costs.
There are two major ways to measure gold-mining costs, classic cash
costs per ounce and the superior all-in sustaining costs per ounce.
Both are useful metrics. Cash costs are the acid test of gold-miner
survivability in lower-gold-price environments, revealing the
worst-case gold levels necessary to keep the mines running. All-in
sustaining costs show where gold needs to trade to maintain current
mining tempos indefinitely.
Cash
costs naturally encompass all cash expenses necessary to
produce each ounce of gold, including all direct production costs,
mine-level administration, smelting, refining, transport,
regulatory, royalty, and tax expenses. In Q1’19 these
top-34-GDXJ-component gold miners that reported cash costs averaged
$730 per ounce. That was up a sizable 5.4% YoY, and much worse than
the GDX top 34’s $616 average.
These were the highest average mid-tier cash costs seen in the 12
quarters I’ve been doing this research, which was potentially
concerning. Thankfully that was heavily skewed by some extreme
outliers relative to this sector and their own history. Peru’s
Buenaventura saw cash costs soar 33% YoY to $1049! That was a
one-off anomaly driven by the company halting one of its key mines
in January to centralize operations.
Two
major South African miners saw really-high cash costs too, Sibanye’s
eye-popping $1956 per ounce and Harmony’s $1017. South Africa’s
former gold juggernaut has been struggling for years, facing endless
government corruption and very-deep and expensive mines. Sibanye in
particular really needs to get kicked out of GDXJ, as it is now a
primary platinum-group-metals miner at well over 5/8ths of Q1
revenues.
Finally Hecla’s cash costs skyrocketed 54% YoY to $1277 in Q1,
mainly due to ongoing problems at its Nevada operations. It
actually suspended 2019 production and cost guidance on these, which
certainly isn’t a good sign! None of these 4 gold miners represent
mid-tiers as a whole. Excluding them, the rest of the GDXJ top 34
averaged excellent cash costs of just $622 last quarter. That’s on
the low end of the range.
Way
more important than cash costs are the far-superior all-in
sustaining costs. They were introduced by the World Gold Council in
June 2013 to give investors a much-better understanding of what it
really costs to maintain gold mines as ongoing concerns. AISCs
include all direct cash costs, but then add on everything else that
is necessary to maintain and replenish operations at current
gold-production levels.
These additional expenses include exploration for new gold to mine
to replace depleting deposits, mine-development and construction
expenses, remediation, and mine reclamation. They also include the
corporate-level administration expenses necessary to oversee gold
mines. All-in sustaining costs are the most-important gold-mining
cost metric by far for investors, revealing gold miners’ true
operating profitability.
The
GDXJ-top-34 AISC picture in Q1’19 looked much like the cash-cost
one. Average AISCs defied much-higher production to surge 6.0%
higher YoY to $1002 per ounce! While still far below Q1’s
average gold price of $1303, those were the highest AISCs seen by
far since at least Q2’16 when I started this thread of research.
But again that was heavily skewed by those same 4 gold miners
struggling with sky-high costs.
Excluding BVN’s $1382, SBGL’s insane $2030, HMY’s $1286, and HL’s
extreme $1760, the rest of the GDXJ top 34 averaged a far-better
$891 per ounce. That was 5.8% lower than Q1’18’s average,
indeed reflecting fast-growing output. It was also right in line
with the 2017-and-2018 quarterly average of $903, as well as the top
34 GDX majors’ Q1’19 average of $893. Most mid-tier golds are
keeping costs under control.
Interestingly gold-mining costs tend to peak in Q1s before
drifting lower in subsequent quarters. That’s because gold miners
often make capital improvements and sequence mining in such a way
that Q1s see the lowest ore grades and thus lowest production. I
discussed this in some depth last week in my
GDX Q1’19 essay.
Odds are the GDXJ mid-tiers’ costs will decline significantly in
coming quarters as output ramps.
Yet
even at that distorted artificially-high Q1 average AISC of $1002,
the elite GDXJ gold miners have great potential to enjoy surging
profits and hence stock prices as gold recovers. The average gold
price in Q1’19 drifted 1.9% lower YoY to $1303. That implies the
mid-tier miners were averaging profits around $301 per ounce. Gold
is due to head far higher as these
bubble-valued
stock markets face an overdue bear.
That
will rekindle
gold investment demand like usual, those new capital inflows
fueling a major gold upleg. A mere 7.7% advance from $1300 would
carry gold to $1400, and just 15.4% would hit $1500. Those are
modest and easily-achievable gains by past-gold-upleg standards.
During essentially the first half of 2016 after major stock-market
selloffs, gold blasted 29.9% higher in 6.7 months! Gold can
rapidly return to favor.
At
$1300 and Q1’s $1002 average AISCs, the major gold miners are still
earning a very-healthy $298 per ounce. But at $1400 and $1500 gold,
those profits soar to $398 and $498. That’s 33.6% and 67.1% higher
on relatively-small 7.7% and 15.4% gold uplegs from here! And if
the mid-tiers’ average AISCs retreat back near $900 without the
outliers, that profits growth rockets to 67.8% at $1400 and 101.3%
at $1500!
The
gold miners’ awesome inherent profits leverage to gold is why this
beaten-down forsaken sector is so darned attractive. The major gold
stocks of GDX tend to amplify gold uplegs by 2x to 3x, and
the mid-tier miners of GDXJ usually do much better. As gold rallies
on renewed investment demand as stock markets weaken, better
mid-tier gold stocks soar dramatically multiplying investors’
wealth. This is a must-own sector.
While investors continue to harbor serious apathy for gold stocks,
the mid-tier miners’ costs remain well-positioned to fuel monster
profits growth in a higher-gold-price environment. This is a
stark contrast to the rest of the markets, where rising earnings are
looking to be
scarce. Investors love higher profits, and few if any sectors
will rival the gold miners’ earnings growth. It was already
underway in Q1 on higher production.
In
terms of hard accounting numbers, the GDXJ top 34’s total sales grew
5.0% YoY to $4.9b in Q1’19. That was the result of 15.6%-higher
gold output easily offsetting the 1.9%-lower average gold price last
quarter. Again the mid-tiers just trounced the majors, with the GDX
top 34’s sales dropping a sharp 5.2% YoY when adjusted for the
in-progress mega-merger between elite gold majors Newmont and
Goldcorp.
The
higher sales among the top 34 GDXJ stocks also drove impressive
22.2% YoY GAAP profits growth to a total of $197m in Q1! That
again reveals the rising-cost problems are isolated in a handful of
GDXJ components, not mid-tier miners as a whole. The majors of GDX
again fared much worse last quarter, seeing earnings fall 7.2% YoY
when accounting for that mega-merger. Mid-tiers are really
outperforming.
The
one blemish on the accounting front was operating cash flows
generated, which fell 17.7% YoY in total among the
GDXJ-top-34-component stocks to $1.1b. There were no
individual-company disasters which stood out, just weaker cash flows
across the board. Still the mid-tier miners were producing healthy
amounts of cash as the big profits gap between their AISCs and
prevailing gold prices last quarter implied.
The
GDXJ top 34’s overall cash treasuries fell a similar 20.4% YoY in Q1
to $5.1b, reflecting lower OCFs. But less cash isn’t necessarily
negative, as gold miners tap their cash hoards when they are
building or buying expansions or mines. So declining cash balances
suggest more investment to grow production in future quarters, which
is always good news in this sector. The mid-tier golds’ Q1’19
results were bullish.
GDXJ’s mostly-mid-tier component list of great gold miners is really
faring well, especially compared to the struggling large gold
miners. Investors looking to ride this gold-stock bull should avoid
the world’s biggest gold producers and instead deploy their capital
in the mid-tier realm. The best gains will be won in individual
smaller gold miners with superior fundamentals, plenty of which are
included within GDXJ.
Despite being the world’s leading gold-stock ETF, GDX needs to be
avoided. The major gold miners that dominate its weightings are
struggling too much fundamentally, unable to grow their production.
Capital will instead flow into the mid-tiers, juniors, and maybe a
few smaller majors still able to boost their output and thus
earnings going forward. None of this is new, but the major and
mid-tier disconnect continues to worsen.
Again back in essentially the first half of 2016, GDXJ skyrocketed
202.5% higher on a 29.9% gold upleg in roughly the same span! While
GDX somewhat kept pace then at +151.2%, it is lagging GDXJ more and
more as its weightings are more concentrated in stagnant gold
mega-miners. The
recent big mergers are going to worsen that investor-hostile
trend. Investors should buy better individual gold stocks, or GDXJ.
One
of my core missions at Zeal is relentlessly studying the gold-stock
world to uncover the stocks with superior fundamentals and upside
potential. The trading books in both our popular
weekly and
monthly
newsletters are currently full of these better gold and silver
miners. Mostly added in recent months as gold stocks
recovered from
deep lows, their prices remain relatively low with big upside
potential as gold rallies!
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The
bottom line is the mid-tier gold miners are thriving fundamentally.
They are still rapidly growing their production while majors suffer
chronic output declines. Most mid-tiers are holding the line on
costs, which portends strong leveraged profits growth as gold
continues grinding higher on balance. The performance gap between
the smaller mid-tier and junior gold miners and larger major ones is
big and still mounting.
Investors and speculators really need to pay attention to this
intra-sector disconnect. Gold and its miners’ stocks should power
far higher in coming years as the lofty general stock markets roll
over. But the vast majority of the gains will be concentrated in
growing gold miners, not shrinking ones. This means the mid-tier
and junior gold miners will far outperform the majors as gold powers
higher on weaker stock markets. | 
