The
mid-tier gold miners in the sweet spot for stock-price upside
potential have enjoyed a massive run since mid-March’s stock-panic
lows. They’ve already more than doubled in the couple months
since! Their just-released Q1’20 operational and financial results
reveal whether these huge gains are righteous fundamentally, whether
this uptrend is likely to persist, and how COVID-19 shutdowns are
affecting gold miners.
Interestingly the leading mid-tier gold-stock ETF is the famous GDXJ
VanEck Vectors Junior Gold Miners ETF. Despite its misleading name,
GDXJ is overwhelmingly dominated by mid-tier gold miners.
They produce 300k to 1m ounces of gold annually, between the smaller
juniors and larger majors. The mid-tiers offer an excellent mix of
sizable diversified production, output-growth potential, and smaller
market caps.
The
high-potential mid-tier gold miners were coming back into favor in
late February, with GDXJ hitting a 3.4-year high of $44.97. But
gold and its miners’ stocks were
soon sucked into
March’s brutal stock panic, driven by economic fears from
governments’ COVID-19 shutdowns. Over the next several weeks, GDXJ
plummeted a catastrophic 50.7% to $22.17 in mid-March! That
violently eviscerated traders trapped unaware.
They
didn’t have to be though, we were all out gold stocks leading
into that full-on crash. Weeks before GDXJ collapsed 33.7% in its
final couple extreme capitulation days in mid-March, I warned about
the big risks in gold and gold stocks. In mid-February I pointed
out gold stocks
had stalled, concluding “caution is wise given gold’s situation,
with selling much more likely than buying.” The parallel
gold surge looked
peculiar.
The
pre-panic gold buying into late February wasn’t coming from normal
capital inflows from investors and gold-futures speculators. Thus I
warned “gold’s staying power up here is questionable”. While I sure
didn’t expect a stock panic, then we advised our subscribers to
short gold stocks with specific gold-stock leveraged-inverse-ETF
and GDXJ-puts trades. Those were great positions to have as gold
stocks collapsed!
We
started aggressively buying and recommending fundamentally-superior
mid-tier gold stocks again two trading days after GDXJ’s deep
stock-panic low in mid-March. We’ve continued redeploying since,
which has built gorgeous trading books with huge unrealized gains.
By this week, GDXJ had skyrocketed an incredible 117.1% higher in
just 2.2 months to hit $48.12! That’s a fresh 3.7-year high for
mid-tier gold miners.
While this violent post-panic V-bounce has proven exceedingly
profitable, from late February to this week GDXJ is only up 7.0%.
So the last couple months’ extreme rally is mostly a
mean-reversion recovery out of extreme lows. Nevertheless,
reviewing the elite mid-tier gold miners’ latest quarterly
operational and financial results is super-important to see how
they’re faring fundamentally despite COVID-19 shutdowns.
The
definitive list of elite mid-tier gold miners to analyze comes from
GDXJ. Back in the first half of 2016 in this bull’s maiden upleg,
GDXJ enjoyed enormous capital inflows from investors chasing
juniors. But its holdings grew so big that it risked running afoul
of Canadian securities laws for owning individual stocks. So GDXJ
was forced to shift its focus to the mid-tier realm, which
translates to 75k to 250k ounces mined quarterly.
Every quarter I wade through the latest results from GDXJ’s 34
largest components to get a fundamental read on the leading
mid-tiers’ performances. That’s simply an arbitrary number that
fits neatly into the tables below, but a commanding sample at 80.3%
of GDXJ’s total weighting. This week GDXJ owned a whopping 79
stocks, which is way over-diversified. I couldn’t hope to digest
that many quarterly reports.
Further undermining GDXJ still being advertised as a “Junior Gold
Miners ETF”, its holdings are mostly a subset of the same mid-tiers
included in its big-brother
GDX gold miners
ETF. Fully 23 of the GDXJ-top-34 components are also GDX-top-34
ones! The GDXJ top 34 accounted for 31.0% of the weighting of the
GDX top 34. So GDXJ essentially takes nearly 1/3rd of GDX gold
miners and expands their weighting to 4/5ths.
This
is super-beneficial to investors, cutting out the top-heavy
deadweight of the 8 largest gold miners that dominate GDX at 61.6%
of its total weighting. Those giants have simply grown too large to
enjoy superior upside during major gold uplegs. They can’t rapidly
expand their massive production bases, and their stocks’ market
capitalizations are so huge their inertia requires enormous capital
inflows to move higher.
After having intensely studied and actively traded the gold miners
full-time for over a couple decades now, I love the mid-tiers. They
are truly in the sweet spot for gold-stock-price upside potential.
Unlike smaller juniors, mid-tiers have multiple mines spinning off
big cash flows and diversifying single-mine risks. And unlike
majors, the mid-tiers can really boost their production by expanding
existing mines or building new ones.
GDXJ’s upper ranks are a diverse lot, with sizable contingents of
gold miners trading in the US, Australia, Canada, and the UK. That
makes amassing their quarterly results challenging, as they all
offer different data presented in different ways. That includes
half-year reporting instead of quarterly in many countries,
necessitating splitting some data in half. Plenty of
individual-company peculiarities take time to understand.
The
more quarterly iterations of this complex research thread I run, the
better the results get. Q1’20 was my 16th quarter in a row
of this deep fundamental GDXJ-gold-stock analysis, adding on to our
massive spreadsheets. The highlights of the mid-tier gold miners’
latest results make it into the tables below. Blank fields mean a
company hadn’t reported that particular data as of this essay’s
late-Wednesday cutoff.
Each
company’s symbol and weighting within GDXJ is followed by its
quarterly gold production in Q1’20. Since not all of these stocks
trade in the US, some symbols are primary listings from foreign
exchanges. The year-over-year change in miners’ gold outputs from
Q1’19 to Q1’20 reveals whether they are growing or shrinking. Cash
costs and all-in sustaining costs per ounce show how much is spent
producing that gold.
Next
the YoY changes are shown in the mid-tier gold miners’ key financial
data including operating cash flows generated, accounting earnings,
revenues, and cash on hand. Percentage changes aren’t recorded if
they would be misleading or not meaningful. That includes data
shifting from positive to negative or vice versa from Q1’19, or if
derived from two negative numbers. Then raw underlying data is
included instead.
Symbols highlighted in yellow are the rare GDXJ components not also
included in its big-brother GDX, while light-blue ones have newly
climbed into GDXJ’s top-34 ranks over this past year. Both
conditions being true are indicated with yellow-blue checkerboarding.
The handful of true juniors GDXJ includes, those primary gold
miners producing less than 75k ounces quarterly, have their
production boldfaced in blue.
Given the serious disruptions from governments’ COVID-19 shutdowns,
I’ve rarely been more eager and anxious to dig into the mid-tiers’
quarterlies. But it turned out the GDXJ top 34 generally enjoyed
strong operational and financial performances last quarter. Of
course as I read through their quarterlies and gathered the latest
data, my focus was on COVID-19 impacts. They proved way milder than
many traders feared.
In
last week’s essay I did this same comprehensive quarterly analysis
for the
GDX-top-34 gold miners. Since the GDXJ top 34 are mostly a
smaller subset of those same companies, I don’t want to rehash that
whole COVID-19-impact discussion here. The major recurring themes
across the mid-tier gold miners’ quarterlies on this pandemic
remained the same. They included withdrawing guidance and tapping
lines of credit.
The
mid-tier gold miners face great uncertainty on their abilities to
operate normally, since government officials in countries hosting
their mines can capriciously lock down their economies at any time.
So most miners can’t offer 2020 production and cost guidance.
Facing such unknowns, many are drawing down revolving lines of
credit to boost their cash balances. More liquidity enables them to
weather shutdown storms.
Whether GDXJ-top-34 gold miners were impacted by COVID-19 or not was
mostly dependent on where their mines were around the world.
Plenty of countries either didn’t shut down their economies or
limited their shutdowns to not include usually remote and isolated
gold-mining operations. An example is Turkey, which only locked
down major urban environments for 4 days in late April. Several
GDXJ stocks mine there.
Alacer Gold operates exclusively in Turkey, and reported in Q1 it
was “able to manage COVID-19 without any material impact to our
operations, logistics or financial position to date. This has also
allowed us to maintain this year’s production and cost guidance.”
Interestingly another GDXJ-top-34 stock SSR Mining just announced a
buyout offer for Alacer in mid-May, proving mergers and acquisitions
are still happening.
Pan
American Silver on the other hand has mining operations in Mexico,
Peru, Argentina, and Bolivia. All of these key gold countries’
mines ceased producing after national lockdowns went live in the
second half of March. While PAAS also mines in Canada, it warned it
had “withdrawn its 2020 annual guidance ... We expect to update the
2020 Guidance once sufficient clarity on the operating circumstances
becomes available.”
Pan
American’s executive managers and board of directors “voluntarily
agreed to a 20% reduction in remuneration until the situation
normalizes.” PAAS also joined most other mid-tier gold miners in
trying to help local communities, donating millions of dollars for
food and medical supplies. Nearly all the GDXJ gold miners reported
no confirmed cases of COVID-19 at any of their operations as
of quarterlies’ release dates.
The
national lockdowns affecting gold mining have cast a dark pall over
this sector since late March. Like all businesses, how dire the
impact for mid-tiers depends on how long their gold mines are
shuttered by decree. Short shutdowns are easily weathered, but they
become more problematic the longer they are enforced. But since
late March I’ve argued most of these shutdowns wouldn’t last long,
they weren’t a threat.
That’s because most countries can’t print effectively-unlimited
money like the Fed to paper over the great economic devastation from
their shutdowns. Between mid-March to mid-May, the Fed’s balance
sheet skyrocketed an absurd 60.8% or $2.6t higher to a crazy new
all-time-record high over $6.9t! Countries that can’t conjure new
money out of thin air to pay their governments’ bills desperately
need tax revenue.
And
gold mines are major taxpayers in many countries. Government
officials can allow them to reopen, as they are far from big cities
where COVID-19 risks are greatest. It’s relatively easy for
isolated mining operations to put enough COVID-19 mitigation efforts
in place to keep their employees healthy. And the gold mines
spinning back up brings in desperately-needed cash for governments
teetering on insolvency.
As
discussed in last week’s GDX essay, the Canadian province of Quebec
led the way on this. A late-March universal lockdown order was
rescinded for the miners in mid-April, which were reclassified as
essential businesses. But since only a handful of GDXJ-top-34
mid-tiers have gold mines in Quebec, that didn’t have a sector-wide
impact. Mexico is vastly more important, with many companies
producing there.
Mexico declared a national emergency a bit later than many other
countries, shutting down its economy on March 31st. There was no
essential-business exemption for mining. That forced the many
mid-tier and junior gold miners operating there to suspend
production, putting their mines on care and maintenance. While it
didn’t affect Q1’20, the mid-tiers disclosed the Mexican mine
closures were heavily impacting Q2.
Mexico could ill afford to starve its government of tax revenues
though, as its peso had already collapsed during Q1.
Emerging-market currencies were crushed as global stock markets
rolled over into March’s COVID-19 panic. From mid-February to late
March, the Mexican peso plummeted 35.3% to an all-time-record
low of 25.1 per US dollar! If the Banco de Mexico printed big
money, it could ignite hyper-inflation!
So
just over a week ago on May 13th, Mexican officials announced they
were reopening key parts of that country’s economy. That included
the big taxpaying industries of car manufacturing, construction, and
mining. The gold miners operating in Mexico were given the green
light to restart operations on May 18th, this Monday! Other
struggling countries are likely to follow suit soon, exempting
mining from lockdowns.
Mexico’s national shutdown still killed gold-mining output for
the first half of this current Q2’20, so the mid-tiers’ current
quarterly results due to be released into mid-August are going to be
scarred. But with most of governments’ lockdown orders starting
towards late March, their Q1 impact was relatively modest. So the
GDXJ top 34 still collectively reported excellent Q1’20 results
despite having to start fighting COVID-19.
Production growth
is the lifeblood of the gold-mining industry, which investors and
speculator prize above everything else. The more individual miners
can raise their outputs, the more capital they generate to continue
growing by expanding existing operations and building new mines.
That boosts future earnings and stock-price upside potential. The
mid-tiers didn’t disappoint on their trademark production growth in
Q1.
Collectively the GDXJ top 34 miners produced 5.1m ounces of gold
last quarter, which surged a hefty 10.6% YoY! That doubled the GDX
top 34’s 5.7% YoY output growth, and trounced the worldwide 2.6% YoY
mine-production decline in Q1 according to the World Gold Council.
On average the GDXJ top 34 produced 154k ounces of gold last
quarter, far smaller than the GDX top 34’s 283k skewed higher by big
majors.
Production growth is much easier to achieve off smaller bases. But
the composition of the GDXJ top 34 also helped. A year ago in
Q1’19, GDXJ’s upper ranks included three explorers with zero
production. By Q1’20, only a single one remained which is NovaGold.
And the shakeup in GDXJ’s top 34 was far more extensive than that,
with a whopping 8 new top-34 components highlighted in light-blue in
these tables!
Their total Q1’20 gold production was 876k ounces, compared to 591k
for the 8 they replaced from the top 34 in Q1’19. Excluding them,
the rest of the GDXJ top 34 grew their collective output by a
more-modest 5.0% YoY last quarter. And interestingly 2 of these 8
new top components are the silver-mining giants of Fresnillo and
Industrias Penoles. Together they produced a stupendous 28.4m
ounces in Q1!
So
the GDXJ top 34’s total silver output skyrocketed 94.8% YoY to 51.6m
ounces. Excluding them and the one larger silver miner they
replaced from a year earlier, the rest of the GDXJ top 34’s total
silver output grew 4.9% YoY to 23.2m ounces. But interestingly both
of these Mexican silver behemoths aren’t primary silver miners, with
only about 42% and 25% of their Q1’20 revenues from silver. They
are gold miners.
With
mid-tier gold miners nicely growing their total gold output last
quarter, their unit costs should’ve fallen proportionally.
Gold-mining costs are largely fixed quarter after quarter, with
production requiring roughly the same levels of infrastructure,
equipment and employees. The better the ore grades chewed through
by mines’ fixed-capacity mills, the more gold ounces yielded to
spread mining’s big fixed costs across.
These fixed costs are largely determined during mine-planning
stages, when engineers and geologists decide which gold-bearing ores
to mine, how to dig to them, and how to process them to recover
their gold. But that usual inverse relationship between output and
per-ounce costs broke down last quarter. COVID-19 definitely
played a role, as the gold miners had to implement costly procedures
to protect their people.
Social distancing to minimize infection risks reduces efficiency
while increasing costs. A big part of checking COVID-19’s spread is
cleaning everything relentlessly, which requires lots of expensive
labor. And medical staff had to be hired to test and look for
symptoms. Mining shifts were lengthened too, with employees
spending more consecutive weeks onsite before heading home to
minimize infection risks.
COVID-19 definitely pushed up costs. Cash costs are the classic
measure of gold-mining costs, including all cash expenses
necessary to mine each ounce of gold. They are misleading as a
true cost measure though, excluding big capital needed to explore
for gold deposits and build mines. Cash costs are best viewed as an
acid test of survivability for the gold miners, revealing necessary
gold prices to keep mines running.
The
GDXJ-top-34 mid-tier gold miners reported average cash costs of $768
per ounce in Q1. That was the highest seen in the past 16 quarters,
which had run in a wide range from $612 to $730. But while COVID-19
contributed, a handful of troubled gold miners really dragged up
this average. They include the perpetually-struggling South African
Sibanye-Stillwater and Harmony Gold, as well as Peru’s Buenaventura.
Already plagued with individual-mine problems, the latter was
slammed by Peru’s national lockdown that started relatively early in
mid-March. Thankfully it is finally expected to be lifted this
weekend. Without this trio of serious outliers, the rest of the
GDXJ top 34 saw average cash costs of $700 last quarter. That is
pretty normal, and would actually be down 4.1% YoY. Cash costs
aren’t too relevant when far under gold.
In
Q1’20 the average gold price soared 21.4% YoY to $1582! These
way-higher prevailing gold prices should have greatly increased
the profitability of gold mining, which amplifies the upside
potential of the mid-tier gold stocks. An industrywide proxy for
gold miners’ earnings is simply calculated by subtracting their
average all-in sustaining costs from the average gold price in any
given quarter. That was awesome in Q1.
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
GDXJ-top-34 mid-tier gold miners averaged AISCs of $1023 in Q1’20,
which was only up a modest 2.1% YoY. That too was skewed way higher
by that triad of struggling gold miners with crazy-high AISCs.
Excluding SBSW, HMY, and BVN, the rest of the GDXJ top 34 averaged
$947. That is near the middle of the 16-quarter range from $855 to
$1023. The mid-tiers’ costs stayed stable in Q1 despite the
pandemic.
Last
quarter’s lofty $1582 average gold price less $1023 AISCs yields
implied profits of $559 per ounce! Those are hefty levels, up 7.7%
sequentially from Q4’19’s $519 and skyrocketing a magnificent
85.7% YoY from Q1’19’s $301! This has to be some of the best
earnings growth seen in the entire stock markets, with the great
majority of sectors
struggling with
shrinking profits on governments’ economic shutdowns.
Despite all the GDXJ fireworks during and after March’s stock panic,
this dominant mid-tier gold-stock ETF actually saw its price plunge
33.5% in Q1 proper. Even as of the middle of this week, it was only
up a modest 13.5% year-to-date. Are bigger gold-stock gains to come
still justified? Hell yes with profits nearly doubling
year-over-year! And excluding the COVID-19 shutdowns, that
extreme-growth trend is persisting.
Quarter-to-date in the current Q2, the average gold price has soared
another 7.4% quarter-on-quarter to $1699. And that’s with over half
of Q2 in the bag, so no matter what happens from here this quarter
will see better gold prices. Assuming the GDXJ top 34’s AISCs
remain in line with their past-year average of $973, that implies
the mid-tiers are running huge earnings of $726 per ounce in Q2’20!
That’s awesomely big.
Given the COVID-19 shutdowns plaguing many mid-tiers’ operations,
that mammoth 29.9% sequential earnings growth this quarter won’t be
achieved. But there’s a good chance the GDXJ top 34 will still see
impressive results given such high prevailing gold prices. A
surprising number of quarterlies revealed the miners expect to
make up some of their shut-in production later this year,
minimizing the COVID-19 hits.
The
collective hard accounting numbers from the GDXJ top 34 under US
Generally Accepted Accounting Principles or other countries’
accounting rules generally underscored what a great quarter the
mid-tiers had in Q1. Their total revenues soared 41.9% YoY to
$6.9b, which is even better than 21.4%-higher gold prices and
10.6%-higher gold output suggests! That colossal 94.8%-higher
silver output drove most of the rest.
All
that fueled monster growth in operating-cash-flow generation, with
total OCFs among the GDXJ top 34 skyrocketing 90.6% YoY to $2.1b!
In some ways cash flows are a better measure of companies’ health
than profits, since they aren’t riddled with noncash adjustments
distorting the results. The more cash the mid-tier gold miners can
generate, the faster they can grow production by building new
expansions and mines.
That
huge OCF generation helped catapult the GDXJ top 34’s total cash
hoards 91.1% higher YoY to a massive $9.7b! That’s far beyond
anything seen in the last 16 quarters, further buttressed by the
gold miners drawing on lines of credit to boost their liquidity.
Normally these miners’ total cash balances are running between
roughly $5b to $7b. It sure seems prudent to have lots of cash to
get through this tough time.
The
glaring blemish on the GDXJ top 34’s outstanding Q1’20 results was
their hard accounting profits reported to securities regulators.
Instead of soaring as that implied-profitability proxy indicated,
they instead collapsed 52.9% YoY to a total of just $93m!
But that plunge was largely due to the usual non-cash charges.
There weren’t many big ones as I analyzed income statements, but the
smaller ones added up.
Normally net-income hits in this industry come from impairment
write-offs as lower gold prices leave mines and deposits worth
less. But there wasn’t much of that in Q1 with much-higher
prevailing gold prices. It was surprising to see lots of big losses
on currencies, driven by their emerging-market collapse like
the Mexican peso. There were also some weird outsized income-tax
expenses that were previously deferred.
While the lower accounting earnings pushed up average
price-to-earnings ratios, quite a few elite GDXJ mid-tiers were
still trading really cheap in the teens. One of the keys to
multiplying your wealth trading gold stocks is to cherry pick the
fundamentally-superior ones to buy when this sector gets beaten
down. The GDXJ top 34 includes many great winners that are
fantastic to own, but is also burdened with lots of losers.
Overall the GDXJ mid-tiers’ Q1’20 operational and financial results
proved awesome! That fundamentally justifies not only these stocks’
huge mean-reversion bounce out of mid-March’s extreme stock-panic
lows, but big additional gains in coming months. The mid-tier gold
miners’ stocks are certainly nowhere near yet reflecting their
huge profitability at these high prevailing gold prices, even
despite COVID-19’s impact!
At
Zeal we again started aggressively buying and recommending
fundamentally-superior gold and silver miners in our
weekly and
monthly
subscription newsletters back in mid-March right after the
stock-panic lows. We’ve been layering into new positions ever
since, with unrealized gains already growing huge. And they will
likely get much bigger ahead as this gold-stock upleg keeps powering
higher on big
gold investment.
To
profitably trade high-potential gold stocks, you need to stay
informed about the broader market cycles that drive gold. Our
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catapults this sector way higher.
The
bottom line is the mid-tier gold miners just reported outstanding Q1
results. They strongly grew their gold production last quarter, and
costs only rose modestly despite the additional expenses of
protecting employees from COVID-19. While government-imposed
shutdowns affected many miners, plenty of other ones avoided them.
The mid-tiers collectively reported huge growth in revenues and
operating cash flows.
While their implied earnings skyrocketed with far-higher gold prices
and essentially-flat costs, accounting earnings suffered on currency
swings. But gold-mining profitability should keep surging
dramatically on balance in future quarters as these COVID-19
shutdowns soon pass. Most governments can’t afford to forgo the big
tax revenues from gold mining, so they are reclassifying it as
essential business to reopen mines. | 
