The
major gold miners’ stocks are still largely grinding sideways, mired
in a bearish sentiment wasteland. Traders tend to assume low stock
prices must be righteous, reflecting weak fundamentals rather than
poor psychology. But once a quarter earnings seasons’ bright
fundamental sunlight parts the obscuring fogs of popular sentiment.
The gold miners’ just-reported Q1’18 results prove they remain
deeply undervalued.
Four
times a year publicly-traded companies release treasure troves of
valuable information in the form of quarterly reports. Companies
trading in the States are required to file 10-Qs with the US
Securities and Exchange Commission by 45 calendar days after
quarter-ends. Canadian companies have similar requirements. In
other countries with half-year reporting, many companies still
partially report quarterly.
The
definitive list of major gold-mining stocks to analyze comes from
the world’s most-popular gold-stock investment vehicle, the GDX
VanEck Vectors Gold Miners ETF. Its composition and performance are
similar to the
benchmark HUI gold-stock index. GDX utterly dominates this
sector, with no meaningful competition. This week GDX’s net assets
are 25.7x larger than the next-biggest 1x-long
major-gold-miners ETF!
GDX
is effectively the gold-mining industry’s blue-chip index, including
the biggest and best publicly-traded gold miners from around the
globe. GDX inclusion is not only prestigious, but grants gold
miners better access to the vast pools of stock-market capital. As
ETF investing continues to rise, capital inflows into leading sector
ETFs require their managers to buy more shares in underlying
component companies.
GDX’s component list this week ran 49 “Gold Miners” long. While the
great majority of GDX stocks do fit that bill, it also contains
gold-royalty companies and major silver miners. All the world’s big
primary gold miners publicly traded in major markets are included.
Every quarter I look into the latest operating and financial results
of the top 34 GDX companies, which is just an arbitrary number
fitting neatly into these tables.
That’s a commanding sample, as GDX’s 34 largest components now
account for a whopping 92.1% of its total weighting! These elite
miners dominate world gold mine production, which ran 770.0 metric
tons in Q1’18 according to the World Gold Council’s
recently-released Q1 Gold Demand Trends report. The top 34 GDX gold
miners reported collectively mining 286.5t of gold last quarter,
nearly 3/8ths of the world’s total!
Most
of these top 34 GDX gold miners trade in the US and Canada where
comprehensive quarterly reporting is required by regulators. But
some trade in Australia and the UK, where companies just need to
report in half-year increments. Fortunately those gold miners do
still tend to issue production reports without financial statements
each quarter. There are still wide variations in reporting styles
and data offered.
Every quarter I wade through a ton of data from these elite gold
miners’ latest results and dump it into a big spreadsheet for
analysis. The highlights make it into these tables. Blank fields
mean a company had not reported that data for Q1’18 as of this
Wednesday. Looking at the major gold miners’ latest results in
aggregate offers valuable insights on this industry’s current
fundamental health unrivaled anywhere else.
The
first couple columns of these tables show each GDX component’s
symbol and weighting within this ETF as of this week. While most of
these stocks trade on US exchanges, some symbols are listings from
companies’ primary foreign stock exchanges. That’s followed by each
gold miner’s Q1’18 production in ounces, which is mostly in
pure-gold terms. That excludes byproduct metals often present in
gold ore.
These are mostly silver and base metals like copper, which are
valuable. They are sold to offset some of the considerable costs of
gold mining, lowering per-ounce costs and thus raising overall
profitability. In cases where companies didn’t separate out gold
and lumped all production into gold-equivalent ounces, these GEOs
are included instead. Then production’s absolute year-over-year
change from Q1’17 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, sales, 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. This whole
dataset together offers a fantastic high-level read on how the major
gold miners are faring fundamentally as an industry. And that was
really well in Q1’18!
As I waded through
all these gold miners’ new 10-Qs or their foreign equivalents this
week, the biggest surprise was production. The whole
business of gold mining is digging up and selling gold, so naturally
production is the mothers’ milk of this industry. Companies are
always striving to grow their production, which boosts their cash
generation and thus expansion opportunities available by finding or
buying other mines.
These elite gold
miners certainly had every incentive to boost their production in
Q1, since its average gold price surged 8.9% YoY to $1329.
Investors are always looking for rising production too, seeing it as
signs of good management and strong fundamental health. Since gold
stocks suffering flagging production are often punished with
selling, the major gold miners really hate reporting it. Yet Q1’18
was stuffed with declines!
This wasn’t
readily apparent to casual observers, as the major gold miners
carefully tailor their quarterly-results press releases to
accentuate the positive and intentionally mask the negative. Yet if
you look at the YoY changes in gold production above, fully 21 of
the 33 top GDX companies reporting it suffered steep average
declines of 9.6%! This lower production was so universal and
widespread it looks to be systemic.
Overall these top
34 GDX companies mined 9.2m ounces of gold in Q1’18, which was
down a sharp 4.6% YoY. This was actually contrary to the
industry trend too. The World Gold Council’s new read on Q1’s
fundamentals showed global gold mine production actually rising 1.4%
YoY! Yet the top 10 GDX stocks commanding 60.3% of this ETF’s total
weighting all saw gold declines averaging a major 7.4% YoY.
Most of these top
gold miners had explanations, which were often excluded from press
releases. I found them deep in quarterly regulatory filings most
investors will never bother looking into. Mine sequencing leading
to lower ore grades, individual-mine technical challenges, and
slowing production at older mines were mostly to blame. This wasn’t
a one-off dip though, as Q4’17’s GDX-top-34 production also fell
2.0% YoY.
Investors choosing
to buy GDX instead of individual gold stocks with superior
fundamentals must realize the lion’s share of their investments are
flowing into giant gold miners with slowing production. As
long as this proves true, their stocks have far-less appreciation
potential than their smaller peers still able to grow production.
What the top major gold miners are experiencing is increasingly
validating peak-gold theses.
Gold
deposits economically viable to mine are very rare in the natural
world, and the low-hanging fruit has largely been harvested. It is
growing ever more expensive to explore for gold, in
far-less-hospitable places. Then even after new deposits are
discovered, it takes up to a decade to jump through all the
Draconian regulatory hoops necessary to secure permitting. And only
then can mine construction finally start.
That
takes additional years and hundreds of millions if not billions of
dollars per gold mine. But because gold-mining stocks have been
deeply out of favor
most of the time
since 2013, capital has been heavily constrained. When banks
are bearish on gold prices, they aren’t willing to lend to gold
miners except with onerous terms. And when investors aren’t buying
gold stocks, issuing new shares low is heavily dilutive.
The
large gold miners used to rely greatly on the smaller junior gold
miners to explore and replenish the gold-production pipeline. But
juniors have been devastated since 2013, starved of capital.
Not only were investors completely uninterested with
general stock
markets levitating, but the rise of ETFs has funneled most
investment inflows into a handful of larger-market-cap juniors while
the rest see little meaningful buying.
So
even the world’s biggest and best gold miners are struggling to grow
production. While that isn’t good for those individual miners, it’s
super-bullish for gold. The less gold mined, the more gold supply
will fail to keep pace with demand. That will result in higher gold
prices, making gold mining more profitable in the future. Some
analysts even think peak gold has been reached, that world
mine production will decline indefinitely.
There are strong fundamental arguments in favor of peak-gold
theories. But regardless of where overall global gold production
heads in coming years, the major gold miners able to grow
their own production will fare the best. They’ll attract in
relatively-more investor capital, bidding their stocks to premium
prices compared to peers that can’t grow production.
Stock picking
is more important than ever in this ETF world!
With
major gold miners’ production sharply lower, their costs of mining
should be proportionally higher. Gold-mining costs are largely
fixed during mine-planning stages, when engineers and geologists
decide which ore to mine, how to dig to it, and how to process it.
The actual mining generally requires the same levels of
infrastructure, equipment, and employees quarter after quarter.
Little changes in throughput terms.
The
mills processing the gold-bearing ore and inevitable accompanying
waste rock have hard limits to tonnages they can chew through. When
richer ore is processed, more ounces of gold are produced to spread
the big fixed costs across. But when mine managers have to dig
through lower-grade ore, either on the way to higher-grade stuff
later or in depleting mines, fewer ounces of gold must bear the full
cost burden.
But
interestingly this often-ironclad inverse relationship
between gold production and per-ounce costs did not really play out
in Q1’18. Costs rose, but nowhere near as much as the lower gold
production implied they would. The major gold miners are getting
more efficient. They could’ve also chosen to sequence lower-grade
ore into their mills because higher prevailing gold prices would
offset some of the production declines.
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 Q1’18, these top 34
GDX-component gold miners that reported cash costs averaged $667 per
ounce. They indeed surged a sharp 7.1% YoY, the result of fixed
costs spread across lower production.
These industry-wide cash costs are the gold-price pain point where
miners’ viability and survivability is in jeopardy. Seeing gold
anywhere near those levels again is exceedingly unlikely. The last
time gold hit $667 was 10.7 years ago in August 2007, before
trillions of
dollars of central-bank money printing after 2008’s stock
panic. Provocatively the HUI gold-stock index was near 320 then,
80% higher than today’s levels!
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.
With
the top 34 GDX gold miners’ production down 4.6% YoY in Q1, I
would’ve bet their AISCs would’ve risen a proportional 4% to 5%.
Yet their cost control was outstanding, as these elite gold miners
reported average AISCs up just 0.7% YoY to $884 per ounce!
That’s roughly in line with the quarterly trend from 2017 seeing
$878, $867, $868, and $858 averages running from Q1 to Q4. Costs
are really being contained.
The
major gold miners have to manage costs exceptionally well to
maintain AISCs while production is also slowing. This argues
against the popular complaint that gold miners’ managements are
doing poor jobs. Because gold-stock prices are so darned low,
traders again assume the miners must be plagued with serious
fundamental problems. But it’s relentlessly-bearish herd
sentiment suppressing gold-stock prices.
Flat
AISCs combined with sharply-higher gold prices led to exploding
operating profitability among the major gold miners last
quarter! That certainly isn’t being reflected in their stock
prices. In Q1’17, gold averaged just $1220 against $878 average
AISCs. That yielded per-ounce profits of $342. But this past year
saw gold surge 8.9% to that $1329 quarterly average in Q1’18 while
AISCs only climbed 0.7% to $884.
That
drove fat operating margins of $445 per ounce, exploding 30.2%
higher YoY! That works out to excellent 3.4x upside profits
leverage to gold! In any other stock-market sector such massive
earnings growth would be crowed about from the rooftops and capital
would flood in. But that wasn’t enough to blow away the darkening
bearish pall over gold stocks. GDX’s average share price still fell
3.0% YoY in Q1’18!
Gold-stock profits as measured by the difference between average
gold prices and average AISCs even surged 6.3% quarter-on-quarter
from Q4’17. There is a
vast fundamental
disconnect between the left-for-dead gold-stock prices and gold
miners’ strong operational performances. This
bearish-sentiment-driven anomaly is very extreme and won’t last
forever. Investors will rush back in when they discover the value.
The
major gold miners’ fundamental health is reflected in their
operating-cash-flow generation. These top 34 GDX gold miners
reporting OCFs for last quarter collectively produced $3355m.
That’s up 3.9% YoY despite their 4.6% lower gold production, mostly
due to that sizable 8.9% average-gold-price rally. Most of these
elite gold miners saw big annual growth in cash generated from
operations, a very-bullish sign.
As
long as OCFs remain massively positive, the gold mines are
generating much more cash than they cost to run. That gives the
gold miners the capital necessary to expand existing operations and
buy new deposits and mines. Given how ridiculously low gold-stock
prices are today, you’d think the gold miners are hemorrhaging cash
like crazy. But the opposite is true, showing how silly this
bearish herd sentiment is.
These top GDX gold miners’ actual GAAP profits didn’t look as good,
plunging 48.5% YoY to $855m in Q1. While that was a huge
improvement over Q4’17’s $266m loss, it still seems incongruent with
those flat all-in sustaining costs and growing operating cash
flows. Of the 25 of these top GDX components reporting earnings in
Q1, just 3 had losses. The only big ones came from Royal Gold and
Yamana Gold.
Royal Gold’s $154m loss was the result of a gigantic $239m
impairment charge in its interests in gold royalties. That came
from Barrick Gold’s big Pascua-Lama project, which straddles the
border between Chile and Argentina. In Q1 Barrick decided the
current economic and geopolitical environment made the Chilean side
of this project not worthy of further investment. Chile’s
government is harassing Barrick on it.
Yamana Gold’s $161m loss was largely from a $103m impairment of a
majority investment it made in a smaller gold company. When a third
company agreed to acquire all the shares of that smaller miner in
Q1, Yamana had to write off its loss. These two impairments alone
battered overall GDX GAAP profits $342m lower! Without them, the
top 34 GDX gold miners’ earnings would’ve slid a much-smaller 27.9%
YoY.
It
doesn’t take many of these non-cash charges to greatly alter the
collective GAAP earnings of the elite gold miners. And there’s a
third huge one to consider. Back in Q1’17, Barrick Gold recorded a
colossal $1125m non-cash gain reversing previous impairment
charges on a gold project after Goldcorp agreed to buy a quarter of
it. That really inflated overall GDX GAAP profits in the comparable
quarter a year ago.
Just
excluding that huge Q1’17 impairment reversal and that pair of Q1’18
impairment charges radically changes the profits picture. Again
those were non-cash and had nothing to do with operations. That
yields Q1’18 GAAP profits of $1197m for these top 34 GDX gold
miners, a staggering $123% higher than Q1’17’s if its Barrick
impairment-reversal gain hadn’t happened! The major gold miners are
faring really well.
These surging accounting earnings are evident in the classic
trailing-twelve-month price-to-earnings ratios of these top gold
miners as well. They aren’t included in these tables, but averaged
37.3x in Q1’18 for the 24 of these companies that had net earnings
over the past year. While that’s not an accurate reflection of true
valuations due to non-cash things flushed through income statements,
it was still 28% lower.
On
the sales front these top 34 GDX gold miners’ revenues climbed 1.5%
YoY to $10.6b in Q1’18. That reflects the combination of higher
gold selling prices with lower gold production. Actual sales growth
was probably better, as 26 top-34 GDX companies reported sales in
Q1’18 compared to 28 in Q1’17. GDX saw three new companies climb
into the ranks of its top 34 over this past year, highlighted in
light blue above.
Two
of these are the great low-cost Australian gold miners Regis
Resources and St Barbara Limited. They report in half-year
increments, and gave no revenues data for Q1 which was an interim
quarter for both. The companies they knocked out of the top 34 had
reported sales a year earlier. So the sales growth in the elite
major gold miners was really good considering their sharply-lower
gold production.
Finally these top 34 GDX gold miners’ cash on their balance sheets
fell 4.2% YoY to $12.7b. That’s a big number for this small
contrarian sector, meaning these companies have lots of capital
firepower available to expand existing operations or buy gold mines
from other companies. The more cash on hand the gold miners have,
the more flexibility and resilience they have to grow their
businesses and weather challenges.
So
overall the major gold miners’ fundamentals looked really strong
in Q1’18, a stark contrast to the miserable sentiment plaguing
this sector. Gold stocks’
vexing
consolidation since early 2017 isn’t the result of operational
struggles, but purely bearish psychology. That will soon shift as
stock markets inevitably roll over and gold surges, making the
beaten-down gold stocks
a coiled spring
overdue to soar dramatically.
While investors
and speculators alike can certainly play gold stocks’ coming
powerful uplegs with the major ETFs like GDX, the best gains by far
will be won in individual gold stocks with superior fundamentals.
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The
bottom line is the major gold miners’ fundamentals are really strong
based on their recently-reported Q1’18 results. While production
declined fairly sharply, the miners still held the line on all-in
sustaining costs. That fueled fat operating profits and strong cash
flows. And many of the elite gold miners have forecast improving
production throughout 2018 on higher-grade ores, which will push
profits even higher.
Yet
gold stocks are priced today as if gold was half or less of current
levels, which is truly fundamentally-absurd! They are the last
super-undervalued sector in these euphoric, overvalued stock
markets. When gold investment demand resumes on weakening stock
markets and pushes gold higher, capital will flood back into the
forgotten gold miners. That buying will catapult them back to
far-higher fundamentally-righteous prices. |