The
mid-tier gold miners just reported their results for a phenomenal
gold quarter. In Q3’19 this metal surged after its first
bull-market breakout in years, driving much-higher prevailing
prices. That should’ve led to soaring profits for these mid-tiers
in the sweet spot for stock-price upside potential. Last quarter’s
results are the most important this sector has seen in a long time,
a key fundamental test for gold miners.
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, Mexico, 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 fiscal 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 totally dominated by mid-tier gold miners and
not juniors. GDXJ is the world’s second-largest gold-stock ETF,
with $4.8b 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 soared 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 outputs, 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! 5 of the top 34 were majors
mining 250k+ ounces, 23 mid-tiers at 75k to 250k, 5 “juniors” under
75k, and 1 explorer with zero.
These majors accounted for 20.2% 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 53.6%
of GDXJ. The “juniors” among the top 34 represented just 6.9% of
GDXJ’s total. But only 1 of them at a mere 1.0% of GDXJ is a true
junior, meaning it derives over half its revenues from
actually mining gold.
The
rest include 2 primary silver miners, a gold-royalty company, and a
gold streamer. GDXJ is actually a full-on mid-tier gold miners ETF,
with considerable major and tiny junior exposure. Traders must
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 24 of them also
among GDX’s top 34 stocks.
The
GDXJ top 34 accounting for 82.7% of its total weighting also
represent 37.8% of GDX’s own total weighting! The GDXJ top 34
mostly clustered between the 10th- to 40th-highest weightings in
GDX. Thus nearly 5/6ths of GDXJ is made up by over 3/8ths of
GDX. But GDXJ is far superior, excluding the large gold majors
struggling with production growth. GDXJ gives higher weightings to
better mid-tier miners.
The
average Q3’19 gold production among GDXJ’s top 34 was 158k ounces,
a bit over half as big as the GDX top 34’s 303k 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 continues
powering higher. Thus it is important to analyze GDXJ miners’
latest results.
So
after each quarterly earnings season I wade through all available
operational and financial reports 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.
19
of the GDXJ top 34 primarily trade in the US, 5 in Australia, 8 in
Canada, and 1 each in Mexico and the UK. Those symbols are listings
from companies’ foreign stock exchanges. That’s followed by each
gold miner’s Q3’19 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 Q3’18 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 drive 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 Q3 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 scarce 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 any rare junior gold
miners in GDXJ’s higher ranks, under 75k ounces quarterly with
over half of sales from gold mining.
This
whole valuable dataset compared with past quarters offers a
fantastic high-level read on how mid-tier gold miners are faring
fundamentally as an industry. Their Q3 proved awesome, with
gold’s much-higher prevailing prices radically improving the
mid-tiers’ fundamentals. Revenues, operating cash flows, and
earnings all soared. The mid-tier gold miners’ stock prices
certainly don’t yet reflect that huge improvement.
After 14 quarters in a row advancing this challenging research
thread, I continue to be amazed at how much GDXJ’s top 34 holdings
remain in flux. Changes at the bottom of this range are
understandable, as GDXJ’s rankings are largely
market-capitalization-weighted. So as mid-tier gold miners’
relative sizes change with their stock prices, better-performing
stocks advance into the top 34 knocking out the laggards.
Eldorado Gold, Silvercorp Metals, and Wesdome Gold are all examples
of this normal index evolution. Between the ends of Q3’18 to Q3’19,
their stock prices soared 76.6%, 57.5%, and 68.6% higher! Big gains
like that are why the mid-tier and junior gold miners are so
alluring. But GDXJ’s managers are still manually shuffling larger
stocks higher up in their ETF’s ranks, trying to figure out which
gold majors to include.
That’s unfortunate, as they don’t need any. There are plenty of
mid-tier gold miners out there to spread GDXJ’s weightings across
without pushing into Canadian ownership limits. The newest big
additions in this past year came in Q4’18, when GDXJ added Kinross
Gold and Buenaventura. Kinross is one of the best major gold
miners, well outperforming its peers. Yet it does expect to mine
2.5m ounces of gold in 2019.
But
how such a large gold miner can lead a “Junior Gold Miners ETF” is
beyond me. Kinross is way into major-dom, not barely a major with
1m+ ounces of annual production. On the bright side, Kinross is far
superior to AngloGold Ashanti which was among GDXJ’s
highest-weighted components a year ago in Q3’18. It produced a
staggering 851k ounces that quarter, making it one of the world’s
largest gold miners.
Buenaventura and Industrias Peñoles are solid mid-tier additions,
producing 122k and 218k ounces of gold last quarter even though they
are better known as major silver miners. Q3’19 was the latter’s
first quarter included in GDXJ. But burdening a strong list of
mid-tier gold miners with the struggling South African majors
is utterly baffling. Sibanye Gold, Gold Fields, and Harmony Gold
have no place to be in this ETF.
They
mined 287k, 523k, and 361k ounces of gold in Q3’19, all well into
major-gold-miner territory over 250k ounces quarterly. And their
sizable collective 11.4% weighting in GDXJ is a serious burden for
its shareholders. The South African majors’ operational
performances are terrible, with their very-old and very-deep mines
being among the world’s highest-cost producers. Government issues
exacerbate that.
South Africa’s government is absurdly-corrupt, and is always
attacking the miners and their owners. This is not only squeezing
out more taxes and perpetually expanding a crushing regulatory
burden. Officials in that once-proud country are arbitrarily
shifting mine ownership based on skin color, an openly-racist policy
hostile to foreign shareholders. I wouldn’t invest in South African
gold miners if they were the last on Earth.
They
are really retarding GDXJ’s potential. In Q3 SBGL, GFI, and
HMY averaged 390k ounces of gold mined. That compares to 134k for
the rest of the GDXJ top 34. These South African majors’ cash costs
and all-in sustaining costs averaged $1112 and $1194 last quarter.
Those were a staggering 63.1% and 27.8% higher than the rest of the
GDXJ top 34’s averages! GDXJ’s managers really need to replace
them.
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.
Thus
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. In Q3’19 these GDXJ-top-34
gold miners collectively produced 5.2m ounces of gold, up a solid
2.7% YoY. The mid-tier production growth was actually far stronger
than that though, which was masked by those three ugly South African
majors.
Their average production declined 4.5% YoY in Q3, but the rest of
the GDXJ top 34 averaged awesome 21.1% YoY growth! But even with
those albatrosses around GDXJ’s neck, the overall 2.7% absolute
growth from Q3’18 was quite good. Last week I analyzed the Q3’19
performances of GDXJ’s big-brother
GDX
top-34-component gold miners. Their collective production
actually slumped 1.5% YoY absolutely.
According to the World Gold Council’s comprehensive quarterly data
on global gold supply and demand, overall world gold mined drifted
0.6% lower YoY in Q3’19. The majors dominating GDX fared worse than
that, while the mid-tiers of GDXJ did way better even despite those
South African majors. The mid-tiers have cornered the market on
gold production growth, again granting them superior stock-price
upside potential.
The
GDXJ mid-tiers were able to enjoy strong production growth because
this ETF isn’t burdened with many struggling major gold miners that
dominate GDX. GDXJ’s components start at the 10th-highest weighting
in GDX. The 9 above Kinross averaged colossal Q3 production of 585k
ounces, which is 3.7x bigger than the GDXJ top 34’s average!
Gold mining’s inherent geological limitations make it very difficult
to scale.
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.
The
majors don’t only face that large-base growth problem with their
production scales, but also with their stocks’ market
capitalizations. The GDXJ top 34 companies’ averaged $2.4b in the
middle of this week, compared to $6.3b in the GDX top 34 when I
analyzed their Q3 results last week. With the mid-tiers generally
around a third as big as the majors, their stock prices have
much less inertia restraining them.
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 super-high
production bases they operate at. As long as majors are struggling,
it is prudent to avoid them.
And
Q3’19 was a fantastic quarter to be a fundamentally-superior gold
miner, with gold’s average price soaring 21.7% YoY to $1474! While
gold only rallied 4.4% within Q3 proper, it had blasted up 10.2%
quarter-to-date by early September. That’s when gold’s best upleg
of this current secular bull peaked at a 32.4% gain over 12.6
months. Gold crested with gold-futures speculators’
buying firepower
exhausting.
GDXJ’s parallel upleg ran 61.6% over 11.8 months, peaking on the
same early-September day as gold. GDXJ had soared 22.3% QTD at that
point, although its subsequent correction with gold in Q3’s waning
weeks bashed GDXJ back to a mere 3.7% gain during Q3 proper. That
is really poor, even lagging gold’s advance. But the mid-tiers’
Q3’19 results proved they are wildly undervalued relative to
prevailing gold levels!
The
difference between gold prices and mining costs fuels profitability
for gold miners, and Q3’s spread was the biggest and best seen in
years. Gold-mining costs are largely fixed quarter after quarter,
with production generally requiring the same levels of
infrastructure, equipment, and employees. These big fixed costs are
largely determined during mine-planning stages, and don’t change
much with gold prices.
That’s when engineers and geologists decide which gold-bearing ores
to mine, how to dig to them, and how to recover their gold. The
ongoing mining costs are spread across quarterly production, making
gold output and unit costs usually inversely proportional.
The richer the gold ores fed through fixed-capacity mills, the more
gold produced. The more gold mined, the more ounces to bear those
big fixed 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 Q3’19 these
top-34-GDXJ-component gold miners that reported cash costs averaged
$713 per ounce. That actually rose a sharp 7.5% YoY, and was worse
than the GDX-top-34 majors’ $679 mean.
But
Sibanye Gold, Gold Fields, and Harmony Gold were solely to blame.
Again these troubled South African gold majors reported crazy
average cash costs of $1112 in Q3, 63.1% higher than the rest of the
GDXJ top 34’s $682 average! Both cash-cost measures are within the
past 13 quarters’ range of $612 to $730. With cash costs so far
below prevailing gold prices, obviously mid-tiers face no
existential threat.
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 companies’ true
operating profitability.
The
GDXJ-top-34 average AISCs also defied rising production to surge
5.8% higher YoY to $963 per ounce. That is on the high side,
and worse than the GDX majors’ $910 average. But it is still within
the past 13 quarters’ range of $855 to $1002. And again those South
African majors skewed that way higher, with their $1194 average
AISCs being 27.8% higher compared to the rest of the GDX top 34’s
$935 average!
But
$963 is still fantastic with current prevailing gold prices. The
GDXJ mid-tiers’ implied profitability last quarter is gold’s $1474
average price less their $963 average all-in sustaining costs. That
makes for fat profit margins of $511 per ounce. A year earlier in
Q3’18, gold averaged just $1211 while GDXJ-top-34 AISCs ran $911 for
$300-per-ounce profits. Thus the GDXJ miners’ implied earnings
rocketed 70.3% YoY!
That’s excellent 3.2x profits leverage to the 21.7% YoY
increase in the average gold price from Q3’18 to Q3’19! And the
sequential explosion in profits from Q2’19 is even more extreme.
That quarter gold was averaging $1309 with GDXJ AISCs of $941. That
made for $368 of implied earnings, meaning Q3’19 saw epic 38.9%
quarter-on-quarter growth! This is incredible absolutely, but even
more so relatively this year.
Overall US corporate profits have actually been shrinking, leading
to increasing fears that an earnings recession is underway. The 500
elite companies of the flagship
US S&P 500 stock
index likely saw their overall profits decline 2.4% YoY in Q3.
So the enormous earnings growth the gold miners are enjoying stands
out even more. Investors ought to seek out their
best-in-stock-markets fundamental performances.
And
the mid-tiers’ powerful earnings growth is likely to continue. Even
though gold is now in a necessary and healthy
bull-market
correction following that big latest upleg, it has averaged
$1487 so far in Q4’19. That’s even higher than that $1474 Q3
average! With over half of Q4 over, gold’s average price is going
to remain elevated even as it grinds lower. That portends massive
mid-tier earnings growth persisting in Q4.
The
hard GAAP accounting numbers of the GDXJ-top-34 mid-tier gold miners
confirm their fundamentals radically improved in Q3. Their
total revenues rocketed 76.8% higher YoY to $7.2b, which is amazing
top-line growth. Much of this has to do with the new additions of
Kinross, Buenaventura, and Peñoles though. The giant South African
company they replaced, AngloGold, didn’t bother reporting sales in
Q3’18.
But
even excluding these new additions entirely, without subtracting
Q3’18 sales from gold miners no longer in the GDXJ top 34, total
revenues still surged 22.5% YoY. That makes sense with 21.7%-higher
average gold prices and 2.7%-higher total gold production. All that
revenue led to exploding operating-cash-flow generation, with
GDXJ-top-34 OCFs rocketing a similar 79.2% higher YoY to $2.3b in
Q3’19.
Even
excluding KGC, BVN, and PENO again, OCFs still surged 35.7% YoY.
That boosted the GDXJ-top-34 mid-tiers’ total cash in their
treasuries by 7.5% to $5.8b. They spend a lot on expanding
production, as their 21.1% average output growth without those
infernal South Africa majors testifies to. The much-higher
prevailing gold prices indeed worked wonders for the mid-tier gold
miners’ fundamentals as a sector.
On
the bottom-line GAAP-profits front, the GDXJ top 34’s total earnings
of $189m in Q3’19 were vastly better than their $379m overall loss
in Q3’18. Excluding those new additions, the comparison is similar
at +$161m last quarter versus the same -$379m a year earlier. But
gold-mining earnings across this sector sometimes have large
one-off non-cash items that are flushed through income
statements, obscuring comparisons.
The
biggest example is large impairment charges when lower gold prices
make mines or deposits look like they’re worth less, and subsequent
reversals when gold heads higher again. Other one-off items include
gains and losses on selling existing mines, as well as hedges. So
as I wade through the GDXJ mid-tiers’ quarterly income statements
reported to regulators, I look for any big unusual items and record
them.
Q3’19’s biggest ones among the GDXJ top 34 included Yamana Gold
enjoying a $273m gain on selling a mine and Centerra Gold writing
off $231m due to water-supply problems at one of its mines.
Adjusting for all these, the GDXJ top 34’s overall profits were
closer to $265m in Q3’19. Making similar adjustments in the
comparable Q3’18 pared that loss to $1m. The mid-tiers’ core
earnings growth last quarter was still massive!
Despite all that, GDXJ’s average price of $38.81 in Q3’19 was only
30.8% higher than Q3’18’s. The mid-tier gold miners’ stock prices
certainly aren’t yet reflecting the radical fundamental improvements
driven by these higher prevailing gold prices. They will
eventually, but not until gold’s own next upleg gives the green
light for traders to pile back into gold stocks. Their next upleg
should prove an enormous catch-up one.
Even
with those vexing South African majors, GDXJ remains the easiest way
to ride it. But the gains to be won in the better
fundamentally-superior mid-tier gold miners will dwarf that of this
ETF. Again GDXJ rallied 61.6% over 11.8 months ending in early
September. But one its fast-improving components, Torex Gold, saw
its stock price rocket 171.6% higher in roughly that same span!
Good stock picking trounces GDXJ.
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The bottom line is
the mid-tier gold miners reported awesome results in Q3, directly
driven by its much-higher prevailing gold prices. The mid-tiers had
far-better output growth than the majors, which fueled soaring
revenues, operating cash flows, and earnings. And implied earnings
growth continues to look massive with gold largely holding at these
better prices. The mid-tiers’ fundamentals should keep improving.
The mid-tier gold
miners’ stock prices have greatly lagged their radically-better
results. Their recent upleg was truncated prematurely by gold
peaking. But once gold’s next major upleg gets underway after its
healthy correction runs its course, the mid-tier gold stocks have a
lot of catching up to do. Their coming upleg should prove really
outsized as they are bid much higher to better reflect fantastic
fundamentals. | 
