The
mid-tier gold miners’ stocks have been annihilated with COVID-19
fears infecting traders’ sentiment. They crashed with gold getting
hammered on extreme gold-futures selling! With blood in the
streets, the buy-low opportunities are phenomenal. The
fundamentally-superior mid-tier gold miners have epic upside
potential during gold’s next upleg. This key sector just reported
outstanding Q4’19 results on higher gold.
The
sheer carnage in gold-stock-land has been jaw-dropping! In late
February, the gold-stock sector per its leading benchmark GDX VanEck
Vectors Gold Miners ETF edged up to a 3.5-year high slightly above
early September’s. That was fueled by gold’s $1600 breakout surge
on COVID-19 fears. Yet as I warned in an essay the trading day
before GDX’s peak, gold’s surge was
peculiar and
precarious lacking normal drivers.
With
popular gold-stock greed excessive, our subscription newsletters
took the contrarian side shorting gold and its miners’ stocks via
put options and leveraged ETFs. For prudently heeding the data
rather than blindly following the herd, I suffered plenty of
ridicule. But those trades were soon vindicated with big
realized gains. Over the subsequent 14 trading days, GDX
plummeted an unthinkably-brutal 38.8%!
That
extreme capitulation-grade selling intensified this Monday morning,
with GDX crashing yet another 14.8% on open. But from there it
rocketed 39.0% intraday to a +18.4% close! So the very next day in
our weekly newsletter,
I launched our long-awaited new gold-stock-buying campaign to ride
gold’s next major upleg. This sector looks wildly-bullish not just
due to its technical thrashing, but its amazing fundamentals.
The
sweet spot for gold-stock upside potential has always been the
mid-tier gold miners. Unlike the large majors, mid-tiers’ lower
gold-production levels leave room for big output growth. Investors
prize that over everything else, since it leads to far-higher
earnings and stock prices. Mid-tiers also have way-lower market
capitalizations than majors, making it far easier for capital
inflows to bid them higher to massive gains.
Surprisingly the world’s best mid-tier gold miners are found in the
GDXJ VanEck Vectors Junior Gold Miners ETF. Despite its
now-misleading name, GDXJ actually has very-little junior exposure
today. Back in the first half of 2016 as gold stocks soared in a
mighty upleg, this ETF was threatening to run afoul of Canadian
securities laws for individual-stock ownership limits. That forced
GDXJ to shift its holdings to mid-tiers.
Mid-tier gold miners produce between 300k to 1m ounces of
gold annually, which translates into 75k to 250k each quarter. The
majors run above 1m per year, with the juniors below 300k. The
percentage of GDXJ’s holdings that are true juniors, primary gold
miners with sub-75k-ounce quarterly outputs, is well under 10%.
But this leading ETF’s mid-tier focus is very beneficial, as that’s
where most gold-stock gains accrue.
Because most gold miners logically run calendar financial years, Q4
reporting has an extended deadline up to 60 days after quarter-end
in the US. In Canada where the majority of global gold stocks
trade, the reporting deadline for full years extends out to 90
days. Annual reports including final quarters are bigger, more
complex, and must be audited by independent CPAs. These results are
still coming out this week.
But
enough of the GDXJ component stocks have reported to see how the
mid-tiers are faring as a whole. After every quarterly earnings
season, I wade through the latest results from GDXJ’s largest 34
stocks. That’s just an arbitrary number that fits neatly into the
tables below, but a commanding sample accounting for 85.4% of this
ETF’s total weighting as of the middle of this week. Incredibly
GDXJ is stuffed with 73 stocks!
Most
traders probably assume that GDX Gold Miners ETF and this GDXJ
Junior Gold Miners ETF have very-different holdings, but that’s not
true. Of the top 34 GDXJ components this week, fully 24 are also
GDX-top-34 holdings! GDXJ effectively lops off GDX’s 8 largest
major-gold-miner stocks, and ups the relative weightings of the
rest. GDXJ’s top 34 components totaling 85.4% collectively weigh in
at 35.9% of GDX.
GDXJ
takes the best gold miners of GDX, greatly expands their allocations
and importance, and jettisons the top-heavy deadweight of the large
majors. That makes GDXJ far superior to GDX in
upside potential,
rendering the latter obsolete! There’s no gold-stock fundamental
research I look forward to more than this quarterly mid-tier
analysis. These stocks trade in markets across the globe, with
differing reporting requirements.
That
makes amassing this valuable dataset for analysis challenging and
tedious. In different countries, the mid-tier gold miners report
different data in different ways. Half-year reporting rather than
our superior US quarterly reporting is also common around the
world. That necessitates splitting reported data in half for
quarterly approximations. Every gold miner has its own reporting
peculiarities, taking time to understand.
The
more quarterly iterations of this complex research thread I run, the
better the results get. Q4’19 was my 15th 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 Q4’19. Not all of these stocks trade
in the US, as GDXJ also hosts sizable Australian and Canadian
contingents. The year-over-year change in miners’ gold outputs from
Q4’18 to Q4’19 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 major 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 Q4’18, 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.
This
entire dataset together offers a fantastic high-level read on how
the mid-tier gold miners are faring. And they enjoyed massive
fundamental improvements last quarter! Higher prevailing gold
prices drove profitability sharply higher, forcing valuations
sharply lower. The awesome GDXJ gold miners haven’t looked this
great operationally in years, making this recent plunge
I warned about
an amazing buying opportunity!
While prevailing gold prices drive profitability, production
growth is truly the lifeblood of the gold-mining industry. The
more individual miners can grow their outputs, the more capital they
generate to continue growing by expanding existing operations and
building new mines. That makes the production growth investors
always seek self-feeding, particularly for the mid-tier gold miners
in that sweet spot of output.
The
majors are so large with so many gold mines that bringing new
expansions or mines online doesn’t move the needle much. They can
usually only grow by buying mines or entire companies, which is very
expensive. And juniors usually only operate single mines, leaving
their cashflows simply too constrained to finance major growth.
Mid-tier gold miners running several operations face neither
growth-killing restraint.
That’s evident in the fantastic production numbers achieved by these
GDXJ-top-34 companies. In Q4’19 they collectively produced 5.3m
ounces of gold, which was up a strong 4.7% year-over-year!
Contrast that to the GDX-top-34’s
Q4’19 results,
which I just analyzed in depth last week. When adjusted for a
couple of big mergers combining production, the GDX-top-34 actually
saw aggregate output shrink by 2.0% YoY.
That
jibes with the World Gold Council’s definitive worldwide-supply
data, which revealed that global gold-mine production fell a similar
1.8% YoY last quarter. That was actually the fourth quarter in a
row seeing contracting world output, unprecedented in modern
times! In addition to buttressing peak-gold theories, that makes
the strong production growth the mid-tiers are achieving all the
more valuable to investors.
Usually the best-performing gold stocks in any given year or during
any particular gold upleg are the ones enjoying the strongest
production growth. They tend to attract outsized capital
inflows, propelling their stock prices higher faster. As the
mid-tiers have largely cornered the market on boosting their gold
outputs, they often achieve the best and most-consistent stock-price
gains. They are where to allocate capital.
The
GDXJ-top-34 averaged Q4’19 gold production of 167k ounces, a little
over half the GDX-top-34’s 313k. Of course output growth varied
considerably within these mid-tier gold miners. Leading the pack
was Pan American Silver which saw gold production skyrocket
367% higher YoY to 174k ounces! Most former major primary silver
miners have been diversifying into gold for years due to its
far-better economics.
Other mid-tiers were struggling, led by Yamana Gold which saw Q4’19
gold output plunge 24% from the comparable quarter a year earlier.
But the really interesting thing about gold-production growth, and
one of the main reasons the mid-tier realm has to be analyzed every
quarter, is the leaders and laggards are constantly changing.
Gold miners’ production levels naturally flow and ebb with the life
cycles of their mines.
Gold
deposits are finite resources, often depleted within 7 to 10 years
after mines are built. Gold miners must constantly expand existing
mines and add new ones to overcome that inexorable depletion. So
mid-tier gold miners with major expansions or new mines being
brought online in the coming year enjoy the best production
growth, which investors reward them for. After that production
stabilizes at new higher levels.
And
mid-tiers suffer production slumps when one of their existing mines
nears the end of its operational life. Declining production can
also result from unexpected operating difficulties. So trading
mid-tiers is an ongoing research-intensive process, with the best
subset of mid-tiers to ride gold uplegs shifting from one to the
next. Following the production-growth leaders is one important
strategy for maximizing gold-stock gains.
These GDXJ-top-34 mid-tiers didn’t just achieve that sector-leading
4.7% YoY production growth in Q4, but they enjoyed far-higher
prevailing gold prices. Last quarter’s $1483 average gold price
soared by a whopping 20.8% YoY! That portended massive
profits growth for these leading gold stocks, since their mining
costs are largely fixed regardless of gold levels. This fuels gold
stocks’ legendary leverage to gold.
Gold
mines have fixed throughputs determined by their rock-crushing
mills, how much gold-bearing ore they can chew through each day.
Digging, hauling, and processing that ore generally requires the
same levels of infrastructure, equipment, and employees quarter
after quarter regardless of whether gold prices are low or high.
These big fixed costs are largely determined way back when mines
were being planned.
That’s when engineers and geologists had to decide which ores to
mine, how to dig to them, and how to recover their gold. Not much
changes after that unless major mine-expansion projects alter
economics. With gold mining having mostly-stable costs, higher gold
prices flow directly through to bottom lines really amplifying
profitability. So mining costs are important to consider along
with production levels and gold prices.
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 gold-price levels required to keep the mines running.
They were indeed flat in Q4.
The
GDXJ-top-34 mid-tiers reported average cash costs of $701 per ounce
last quarter, which was up just 0.5% YoY. That was towards the
upper end of their 15-quarter range from $612 to $730. But it was
heavily skewed higher by excessive cash costs reported by
Buenaventura, Harmony, and Hecla. Each saw cash costs over $1000,
crazy-high! Excluding them, the rest of these GDXJ mid-tiers
averaged $657.
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 mid-tier gold
miners’ true operating profitability.
These GDXJ-top-34 mid-tiers reporting AISCs averaged $964 per
ounce in Q4’19. That was also on the high side of their own
15-quarter range from $855 to $1002. But that same trio of
struggling gold miners, along with South Africa’s Sibanye-Stillwater
which doesn’t report cash costs, really distorted the average.
Without them, the rest of the GDXJ-top-34 averaged $906 which is
fantastic compared to prevailing gold prices!
But
to be conservative, let’s use that skewed all-included $964 average
AISC to get an idea about how profitable the mid-tiers are as a
whole. That subtracted from last quarter’s $1483 average prevailing
gold price yields implied earnings of $519 per ounce! Even though
those average AISCs climbed 3.4% YoY, gold’s monster 20.8%
average-price gain in Q4’19 dwarfed that. So GDXJ gold miners’
profits skyrocketed.
Q4’19’s $519-per-ounce sector read soared a colossal 75.3%
over Q4’18’s $296! That is fantastic growth for any sector, but all
the more impressive today given the rest of the stock markets’ flat
earnings. The more mid-tier gold miners earn from a widening spread
between their all-in sustaining costs and prevailing gold prices,
the lower their valuations fall making them even more attractive.
This trend should persist in Q1’20.
With
this current wildly-volatile quarter almost over, gold has averaged
$1582 so far. That’s up another 6.7% quarter-on-quarter from Q4’s
already-high levels! Over the past four quarters, these GDXJ-top-34
mid-tier gold miners have averaged AISCs of $967. They aren’t
likely to change much this quarter given the fixed nature of
gold-mining costs. That implies these mid-tiers could be earning
$615 per ounce in Q1’20!
That
compares to merely $301-per-ounce sector profits a year earlier in
Q1’19, because of much-lower gold prices and somewhat-higher mining
costs then. That implies staggering profits growth of 104.3% YoY in
the mid-tier gold miners! More than doubling earnings in
this brutal environment of burning stock markets will really catch
investors’ attention. The GDXJ mid-tiers’ Q1’20 results will be out
by mid-May.
With
these sweet-spot gold stocks enjoying the best of all worlds with
growing production, much-higher gold prices, and relatively-stable
costs, their hard accounting results should’ve looked awesome in
Q4. And indeed they did. Overall the GDXJ-top-34 reported total
revenues of $10.1b, which surged 31.0% YoY! That exceeded the
5%ish-higher output and 21%ish-higher gold prices because of soaring
silver mined.
These elite mid-tier gold miners also produced 42.9m ounces of
silver, which was 37.5% higher YoY. But that all came from GDXJ’s
new inclusion of Mexico’s Penoles, which is one of the largest
silver miners on Earth producing 15.6m ounces last quarter!
Excluding it, the rest of the GDXJ-top-34’s total silver output
dropped 12.5% YoY. That reflects the waning interest mining
companies have in perpetually-lagging silver.
Operating-cash-flow generation by these mid-tier gold miners
naturally soared too, blasting 43.3% higher YoY to $3.1b. The
bigger the cash flows these companies can spin off, the more capital
they have to invest in further growing their outputs. Their
collective treasuries surged a proportional 30.6% YoY to hit $7.6b
at the end of Q4. That’s major potential investment for these
relatively-small mid-tier gold miners.
The
mid-tier gold miners’ hard accounting profits reported to their
national securities regulators following those countries’ accounting
rules improved radically last quarter! Overall the
GDXJ-top-34 reported $388m in earnings in Q4’19, a massive +$1.1b
swing from Q4’18’s ugly $699m loss. But unfortunately both these
numbers are heavily skewed by noncash impairment charges and
subsequent impairment reversals.
Accounting regulations require miners to write down the carrying
values of their mines and deposits if falling gold prices make them
look worth less. Q4’18 saw many of these impairment charges with
gold averaging just $1228, and most expecting it to keep grinding
lower. In Q4’19 some of those impairment charges reversed with
much-higher gold prices, but there were also new impairments on
individual-mine problems.
Netting out just individual-company impairments and reversals around
$100m+ in each quarter, Q4’19’s overall earnings were closer to
$767m. That compares to a $365m loss in Q4’18. So the
GDXJ-top-34’s profits growth last quarter is even bigger when
big non-cash charges and reversals are adjusted out. The
profitability these mid-tier gold miners are achieving is awesome!
And again it’s looking even better in Q1’20.
All
those earnings have collapsed mid-tier gold miners’ valuations. Of
the GDXJ-top-34 with the earnings necessary to yield
price-to-earnings ratios in Q4’18, they averaged a super-overvalued
77.2x then. Yet including these latest Q4’19 results, that average
had plummeted by over 2/3rds to just 25.2x this week! The
mid-tier gold stocks are not just battered technically these days,
but also really cheap fundamentally.
Thus
there’s no doubt we are seeing the greatest gold-stock buying
opportunity in years! Having a crazy exogenous black-swan event
like this COVID-19-fueled stock-market panic crash the gold stocks
right as their earnings are skyrocketing on higher gold prices is
astounding. These anomalous annihilated gold-stock levels will mean
revert radically higher in coming years as this secular gold bull’s
upward march continues.
You
could sure buy GDXJ to ride this mounting gold-stock bull higher,
it’s way better than GDX hobbled by the stagnant majors. But while
there are plenty of great mid-tier gold miners in GDXJ, there are
lots of other ones I wouldn’t touch with a ten-foot pole based on
their fundamental outlooks. Far-greater gains can be won by
handpicking the best mid-tiers and avoiding the rest! This is a
gold-stock pickers’ paradise.
That’s why I started our long-awaited redeployment into gold stocks
this week after they crashed. Buying low when few others are
willing is necessary to maximize later gains. During the last big
opportunity in the first half of 2019 before gold stocks soared
higher, we recommended buying many fundamentally-superior gold
stocks in our popular
weekly and
monthly
newsletters. Later that year we realized big gains up to 110%!
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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for gold’s next upleg.
The bottom line is
the mid-tier gold miners reported awesome results in Q4, directly
driven by its much-higher prevailing gold prices. The mid-tiers
also had far-better output growth than the majors, helping fuel
soaring revenues, operating cash flows, and earnings. And implied
earnings growth continues to look massive with gold powering even
higher still in Q1. The mid-tiers’ fundamentals should continue
improving.
Even at their
relatively-high late-February levels, the mid-tier gold miners’
stock prices were seriously lagging their huge profits growth. But
after this insane COVID-19 stock panic crashed this sector, these
stocks are trading at some of their steepest discounts to current
fundamentals ever! That gives them epic potential to mean revert
radically higher as fear fades and gold recovers, yielding huge
gains to early contrarians. | 
