The
gold miners are likely to report blowout profits in this spinning-up
Q3’19 earnings season. Higher production, stable costs, and
much-higher gold prices should combine for some super-impressive
results. That’s going to leave the still-undervalued gold miners
much more attractive fundamentally, supporting bigger capital
inflows and much-higher stock prices. Q3 should prove the gold
miners’ best quarter in years.
Stock prices are ultimately dependent on underlying corporate
earnings. Over the long term all stock prices gravitate towards
some reasonable multiple of their underlying companies’ profits.
Herd greed and fear can force stock prices to disconnect from
fundamentals for some time, but eventually they trump sentiment. So
there’s nothing more important for stock-price-appreciation
potential than foundational profits.
Most
of the major gold miners trade in the US or Canada, and thus are
required to report their results quarterly. The SEC deadline for
filing 10-Q quarterly reports is 40 calendar days after
quarter-ends, or November 9th for the recently-finished Q3’19. The
major gold miners tend to report in the latter end of that window.
The definitive list of them comes from the leading gold-stock
trading vehicle and benchmark.
Of
course that is the GDX VanEck Vectors Gold Miners ETF. This week
its top holdings are Newmont Goldcorp, Barrick Gold, Newcrest
Mining, Franco-Nevada, and Wheaton Precious Metals. Together they
account for 39.7% of GDX’s total weighting. NEM is releasing its Q3
results on November 5th, GOLD on November 6th, NCM likely in late
October, FNV probably in early November, and WPM on November 14th.
Wheaton can get away with missing the US deadline because it is
Canadian, while Newcrest is based in Australia where public
companies report in half-year increments. It still publishes
partial quarterly data. The lion’s share of gold miners’ Q3’19
results will be released in the last week of October and the first
couple weeks of November. Once they’re all out in a month, I’ll dig
into all the GDX majors’ results as always.
But
heading into quarterly earnings seasons, it is prudent to consider
how the gold miners are likely to fare. Their stocks can see
strong upside if good operational and financial performances
surprise traders, or vice versa if they disappoint. This imminent
Q3 earnings season is likely to prove the gold miners’ best in
years, which is really exciting. Generally three major components
drive this industry’s overall profits.
They
are production, costs, and gold prices. The more gold mined, the
lower its mining costs, and the higher prevailing gold prices, the
greater the major gold miners’ earnings. For the first time in at
least several years, all these are lining up very favorably for Q3.
Speculators and investors who don’t closely follow this
relatively-obscure contrarian sector are likely to be surprised by
how good the gold miners are doing.
Gold-mining production levels are interesting. Traders don’t often
think about them from an industry-wide level, generally assuming
that existing gold mines’ outputs are largely steady states.
Individual mines can see big production surges periodically on
expansion projects, and all gold mines are inexorably depleting.
But quarter-to-quarter, there’s a perception that the mined gold
supply is relatively constant. But actually it’s not!
The
best global fundamental data available on gold is published
quarterly by the World Gold Council. The latest is current to
Q2’19, as the WGC’s comprehensive and must-read Gold Demand Trends
reports are typically published about a month after calendar
quarters end. That latest one has quarterly global mined supply
running back to 2010. Crunching those numbers reveals hidden
gold-supply trends few are aware of.
Since 2010, calendar Q1s, Q2s, Q3s, and Q4s have seen average
quarter-on-quarter production changes of -7.4%, +5.3%, +5.4%,
and +0.5%! Q1s tend to see a sharp QoQ drop in global gold-mining
output. It is then more than made up with big growth in Q2s and
Q3s. Q3’s +5.4% QoQ average makes it the best quarter of the
calendar year. Then in Q4s that growth largely ceases, and this
whole cycle begins anew.
Why
on earth does global mined supply fluctuate so wildly quarter to
quarter? I’ve talked with gold-mining executives about this over
the years, and they’ve offered a couple explanations. Most mining
companies operate on calendar years. So Q1s start new years with
new budgets to maintain and expand existing gold mines. These
freshly-funded projects often require operations to be temporarily
taken offline to implement.
Q1s
are also good times to work on gold mines since most of them are in
the northern hemisphere. Winter weather complicates mining
operations in multiple ways. Examples include essential water
inflows to mining sites dwindling as temperatures spend more time
below freezing, snow and ice slowing down haul-truck routes out of
mines, and ore processing being less efficient with big temperature
and moisture fluctuations.
Mine
managers also have to choose which areas of which ore bodies they
want to blast apart, haul, and run through their mills in any given
quarter. Mills’ throughput is fixed, they can only process
so many tons of ore per day. So the richer the ore being mined, the
more ounces of gold produced. Lower-grade ores seem to be more
often mined in Q1s, while higher-grade ores are saved for later in
Q2s and especially Q3s.
I
suspect compensation plays a big role in these decisions.
Mine managers are partially compensated in company shares or
options, which can make up the lion’s share of their income when
their stock prices are rising. Stock-based compensation is often
figured heading into or right after year-ends. Q1s’ results
reported by mid-Mays are far from year-ends, so that’s the time to
take production hits from lower-grade ores.
But
Q2s’ results reported by mid-Augusts are getting closer to
year-ends, so share-price appreciation is getting more important for
stock-compensation calculations. And mine managers are really keen
to show strong results in Q3s, which are released by mid-Novembers
just 7 weeks before year-ends. So they are probably
collectively making decisions to maximize ore grades mined in Q3s,
to boost their stock prices.
Between Q3’10 to Q3’18, the entire world’s gold-mine production has
never declined sequentially from the preceding Q2s’ results. Q3s’
best-of-the-year 5.4% average QoQ growth came from individual Q3s
that saw 8.1%, 4.5%, 5.4%, 9.0%, 8.9%, 3.6%, 3.4%, 3.8%, and 1.6%
QoQ growth since 2010. So there’s every reason to expect big
5%ish world-gold-mining-output growth to be revealed in the
coming Q3’19 results!
Q2’19’s big 4.1% QoQ gold production growth was roughly in line with
Q2s’ average of +5.3%. If Q3s’ gold-mining output continues that
trend, the gold miners’ earnings are going to enjoy a major boost
from it. Since mining costs are largely fixed quarter after
quarter, higher output produced profitably flows directly through to
miners’ bottom lines. 5%ish higher gold output in Q3’19 compared to
Q2’19 is a big deal.
I
haven’t yet done the daunting research project to try and quantify
how quarterly changes in gold-mining output alone affect earnings.
But after wading through countless quarterly reports over the
decades, I know the impact is material if not substantial. Q3’19’s
imminent earnings season is likely to see the best collective gold
production growth this year, and that’s going to translate into
higher profits for the miners.
Meanwhile the major gold miners’ average reported costs are likely
to remain flat in Q3. The premier measure of gold-mining costs is
all-in sustaining costs, which reveal how much it costs to
maintain current mining tempos indefinitely. That includes
replenishing depleting deposits. Every quarter I dig deep into the
GDX major gold miners’ latest results, and the most-recent available
are mid-August’s Q2’19 ones.
In
Q2 the top 34 GDX gold miners reported
average AISCs of
$895 per ounce. That was on the high side compared to recent
years, mostly due to anomalous outliers skewing it. Since Q2’16
when I started this particular quarterly research thread, the GDX
gold miners’ AISCs have averaged $876. And that is from a tight
range of $855 to $895. The quarterly production trends naturally
play into how AISCs shake out.
Again most gold-mining costs are fixed. No matter how rich the ore
being fed into mills, it generally takes the same levels of
infrastructure, equipment, and employees working quarter after
quarter. So the more gold produced, the more ounces to spread those
big fixed costs across. So higher gold output tends to lower
average AISCs. Q3s’ big average production growth tends to
reduce AISCs sequentially that quarter.
Thus
odds are the dominant GDX-top-34 major gold miners are going to
report Q3’19 average AISCs under Q2’s $895. If the outlying skewing
companies made progress in controlling their costs, $875ish is
totally doable. That is right in line with the last 13 quarters’
overall average of $876. But let’s remain conservative and assume
Q2’19’s higher $895 AISCs hold into Q3 despite its normal production
surge.
So
on the production front Q3’19 is likely to see 5%ish average
production growth. And conservatively on the cost front the major
gold miners of GDX should report average AISCs below $895 per
ounce. That leaves the most important factor which is going to
supercharge Q3 results, much-higher prevailing gold prices!
They would greatly goose gold-mining profits even if production was
falling and costs were rising.
Gold
stocks are effectively just leveraged plays on gold, since that
metal overwhelmingly drives their earnings and thus
stock-price-appreciation potential. Gold was relatively weak for
most of Q2’19, just averaging $1309. Back in early May heading into
the middle of Q2, gold slumped as low as $1271. It was largely
languishing and neither gold-futures speculators nor investors
wanted anything to do with it.
But
in late June at the very end of Q2, gold blasted higher after top
Fed officials’ collective outlook for the future rate trajectory
shifted from hiking to cutting. Gold shot higher on that, surging
to its first new bull-market high in 2.9 years the next day!
That long-awaited
decisive bull-market breakout rekindled traders’ flagging
interest in gold. So capital flooded back in through much of Q3,
driving gold sharply higher.
By
the time the dust settled on last quarter, gold’s average price had
rocketed an enormous 12.6% higher quarter-on-quarter to
$1474! That massive sequential gold-price surge is going to work
wonders for the major gold miners’ profits in their imminent Q3
earnings season. Simplified to an industry-wide overview, the gold
miners’ earnings-growth potential is easy to understand. It is
still going to surprise unaware traders.
Again in Q2’19 the top 34 GDX gold miners averaged $895 AISCs while
gold averaged $1309 per ounce. That yielded average industry
profits of $414 per ounce, which were already hefty profit margins.
With that conservative assumption Q2’s higher AISCs remain flat in
Q3, gold-mining earnings are ready to explode higher. Q3’s
far-higher $1474 average gold price less $895 AISCs yields fat
profits of $579 per ounce!
Thus
before even accounting for Q3’s usual production surge, the major
gold miners’ profits are likely to skyrocket 39.9% higher
quarter-on-quarter in Q3’19! That is stupendous earnings growth for
any sector, and will absolutely catch fundamentally-oriented
institutional investors’ attention. 40% sequential profits growth
in a world where the big US stocks of the S&P 500 are likely to see
shrinking earnings is incredible.
Still ignoring higher Q3 production, the GDX major gold miners’
earnings up 39.9% QoQ would leverage gold’s 12.6% QoQ surge by
3.2x. This awesome profits leverage to gold is why the major gold
miners’ stocks normally amplify gold’s upside by 2x to 3x.
During Q3 gold stocks started to reflect these wildly-better
fundamentals, but all that progress has been erased by the
currently-underway
gold-stock
correction.
This
GDX chart shows gold stocks’ progress throughout Q3’19. They surged
sharply higher during the first 2/3rds or so of Q3, but then
retreated to give up most of that ground in the final third. So the
big feast of massive earnings growth coming isn’t yet reflected
in prevailing gold-stock price levels! They are now trading as if
they might see minor profits growth, nothing close to that probable
huge 40%-or-so range.
From
the end of Q2 to gold’s dazzling early-September peak of $1554, it
blasted 10.2% higher. The gold stocks naturally rallied in that
span, with GDX powering 21.1% higher. That made for
relatively-minor 2.1x upside leverage. It takes some time for major
gold-stock uplegs to gather steam, to convince their ever-skeptical
traders that gold’s advance is sustainable. So 3x+ leverage tends
to come later in uplegs.
But
as I warned during that early-September exuberance, selling was
coming. Gold itself faced a huge
gold-futures-selling overhang, with speculators’ extreme
excessively-bullish gold-futures positioning needing to be unwound
and normalized. And gold stocks
were very
overbought after surging strongly since late May. All the
indicators pointed to an imminent correction, and it indeed started
to materialize.
From
their September 4th peaks, gold and GDX dropped 5.2% and 13.7% into
the end of Q3 just over several weeks later. That made for 2.6x
downside leverage for gold stocks, again totally normal within that
2x-to-3x range. Such a roller-coaster of a quarter still left gold
4.4% higher from the end of Q2 to the end of Q3. But GDX’s Q3
performance cratered to a pathetic +4.5%, merely keeping pace
with gold’s rally!
Gold-mining stocks are much riskier than gold, facing all kinds of
operational, geological, geopolitical, and other risks gold
doesn’t. So gold stocks are only worth owning if they outperform
gold enough to justify bearing their big additional risks. As
of the end of Q3’19, the gold-stock prices weren’t high enough to
reflect their massive 40% QoQ earnings surge these much-higher
prevailing gold prices probably drove.
Thus
the gold stocks remain very undervalued relative to these new
higher gold prices, with major upside likely after Q3’s great
earnings results are digested. It’s probably too early to deploy
capital aggressively, as gold and the gold stocks remain in
correction mode. Once the necessary gold-futures selling and the
resulting gold
investment selling run their courses normalizing positioning, a
big new upleg should start marching.
Regardless of whether that coming correction bottoming happens
during the gold miners’ imminent Q3 earnings season or tarries a bit
longer, the gold stocks are going to look much better
fundamentally after their Q3 results. That’s going to attract a
lot more capital going forward, giving the next gold-stock upleg
even better upside potential than the last one. And that was no
slouch, GDX soared 76.2% higher in 11.8 months!
So
speculators and investors need to carefully watch this upcoming
gold-miner earnings season, which is almost certain to prove the
best in years. Do your homework now, and be ready to redeploy
aggressively when this necessary and healthy gold correction
passes. The fundamentally-superior gold and silver miners,
especially in the
mid-tier realm, have far more upside to come as this secular
gold bull resumes.
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The bottom line is
gold miners’ earnings are likely to soar in their imminent Q3’19
earnings season. Q3s traditionally see big sequential production
surges, driving better profits. Mining costs are likely to contract
on that, or remain flat at worst. This combined with much-higher
prevailing gold prices after gold’s bull-breakout surge will
supercharge gold-mining profits growth. That will greatly improve
gold stocks’ image.
Speculators and
investors alike will take notice of this sector’s best earnings
reported in years. They will be much more willing to deploy capital
in this small contrarian sector as this gold bull’s future uplegs
march higher. Far-better gold-mining fundamentals will justify
far-higher gold-stock prices in the coming years. Higher prevailing
gold prices work wonders for the gold miners, as their Q3 earnings
will prove yet again. |