The
major gold miners’ stocks have rallied dramatically out of
mid-March’s stock-panic lows, soaring to new bull-market highs.
Their just-reported Q1’20 operational and financial results reveal
whether today’s higher gold-stock prices are fundamentally
justified. They also illuminate whether this gold-stock upleg is
likely to continue powering higher, despite the catastrophic
economic damage from governments’ lockdowns.
With
officials around the world waging a scorched-earth war against this
COVID-19 pandemic, the gold miners’ latest quarterly results are
more important than ever. While this earnings season covered Q1’20,
most gold companies didn’t release their quarterly reports until the
last couple weeks. In them they had to disclose the ongoing impact
of governments’ COVID-19 lockdowns current to those quarterlies’
release dates.
US
securities regulations require American companies to report
quarterly results by 40 calendar days after quarter-ends, a deadline
that just passed this week. In Canada where the majority of the
world’s gold stocks trade, that deadline is looser at 45 days.
Unfortunately this year Canadian companies were granted the ability
to extend their reporting by an additional 45 days to help
cope with COVID-19’s impacts.
After many years of doing deep quarterly analyses of major gold
miners’ latest results, I’ve found there are always some Canadian
stragglers that push their reporting right to the legal limit. This
is seriously disrespectful to their shareholders, who deserve
timely quarterly results released as early as possible. There’s
no excuse for delaying quarterlies which don’t require independent
CPAs auditing and signing off.
While the great majority of gold miners’ Q1’20 results had been
released as of this essay’s data cutoff of Wednesday evening, not
all of them had. But it didn’t make sense to delay this critical
quarterly analysis since the usefulness of results for trading
quickly decays the deeper we get into the subsequent quarter. So I
went through everything available from the major gold miners
mid-week, and boy was Q1 fascinating!
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. Launched way back in May 2006, it
has an insurmountable first-mover lead. GDX’s net assets running
$14.2b this week were a staggering 32.9x larger than the
next-biggest 1x-long major-gold-miners ETF! GDX is effectively this
sector’s blue-chip index.
While GDX’s holdings were running an excessively-big 50 stocks this
week, every quarter I delve into the latest results from the top
34. That’s simply an arbitrary number that fits neatly into the
tables below. And it is a commanding sample, as these world’s
largest gold miners accounted for fully 94.0% of GDX’s total
weighting this week. They trade in stock markets across the globe,
with differing reporting requirements.
That
makes amassing this valuable dataset for analysis rather
challenging. In different countries, major gold miners report
different data in different ways. Every individual gold miner also
has its own unique reporting peculiarities, taking time to
understand. Some gold miners have excellent reporting formats that
are easy to understand and digest, while others seem to
intentionally obscure their results complicating analysis.
Half-year reporting instead of the superior quarterly reporting
found in the US and Canada is common around the world too. That
necessitates splitting some numbers in half for quarterly
approximations. The GDX-top-34 gold miners’ data available mid-week
is summarized into highlights shown in these tables. Blank fields
indicate a company hadn’t reported that particular data by this
essay’s late-Wednesday cutoff.
Each
company’s symbol and weighting within GDX is followed by its
quarterly gold production in Q1’20. Not all of these stocks trade
in the US, as GDX also hosts sizable Australian and Canadian
contingents. 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 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 Q1’19, or if
derived from two negative numbers. Then raw underlying data is
included instead.
While four GDX-top-34 gold miners dragged their feet so much they
hadn’t reported Q1 results by 43 days after quarter-end, they
collectively account for just 2.9% of GDX’s weight. So this is an
essentially-complete picture of how the major gold miners are faring
despite governments’ draconian lockdowns to fight the COVID-19
pandemic. This situation is so radically unprecedented I didn’t
know what I’d find.
While reading through the GDX top 34’s quarterlies, there were
definitely some common recurring themes on COVID-19. The great
majority of the major gold miners cited the extreme uncertainty to
withdraw their 2020 production and cost guidance. That is
certainly understandable and justified with the capriciousness of
government officials’ decisions to force businesses to shutter.
Those heavy-handed edicts change by the day.
While COVID-19 outbreaks are generally localized within countries,
most governments have taken a shotgun approach of issuing blanket
restrictions. So even though most gold mines are largely
self-contained remote operations far from civilization, they’ve been
hammered by countrywide orders to stop work. Gold miners still
operating today may be forced to suspend operations tomorrow, and
vice versa.
The
Canadian province of Quebec has been a great example of the inherent
unpredictability of all these lockdowns. In late March its
government mandated a province-wide COVID-19 shutdown which forced
Quebec’s major gold-mining industry offline. But just a few weeks
later in mid-April, provincial officials changed their minds and
reclassified mining as essential businesses! So Quebec’s
gold mines spun back up.
Quebec claimed it exempted miners from its lockdown because their
commodities are critical in medical-equipment supply chains. That
may be true, but I suspect the real reason was restarting the big
lost tax revenue from mining. Unlike the US Federal Reserve, most
governments simply can’t print the equivalent of trillions of
dollars to paper over their lockdown-imposed economic
catastrophes. So they are reopening mines.
Gold-mining operations are ideally suited for social distancing to
retard COVID-19’s spread. Being way out in the sticks, mining
employees are relatively isolated. They either live in small local
towns near the mines or in man camps working for multi-week shifts
onsite. One thing Quebec ordered is that fly-in shifts be extended
from 14 days to 28 days to minimize infection exposure. Gold mines
won’t stay closed for long.
While wading through the GDX top 34’s quarterly results, it was
interesting to see the managers of gold-mining companies are as
angry as everyone else about governments killing their businesses by
decree. But they have to be politically-correct, trying not to make
local officials mad who could hinder their return to operational
status. First Majestic Silver exemplified this, even though it
hadn’t reported Q1 by Wednesday.
On
April 3rd AG issued a news release explaining how it was trying to
convince Mexican officials “to support silver mining as an essential
business”. It was working with “other mining companies to make the
case to the Federal Government that mining, especially silver
mining, is essential and critical to the medical industry given
silver’s antibacterial properties which is proven to reduce the
spread of viruses.”
When
reporting on Q1 production results alone in mid-April, AG’s CEO
wrote “While we support the actions being taken, we continue to
engage in discussions with Federal and State authorities to raise
awareness on the importance of silver mining as an essential
business.” I saw this kind of thing in lots of quarterly reports,
managers saying they supported governments’ COVID-19 actions but
wanted to be exempt.
The
major gold miners are also trying to be good corporate citizens,
with most of the GDX top 34 declaring they were donating sizable
sums of money to help local communities fight this pandemic. This
included supporting medical workers and people who had lost their
jobs due to the lockdowns. The great majority of these elite gold
companies also declared they had identified no COVID-19 infections
at their mines.
With
most of the government-imposed economic lockdowns starting in the
second half of March, for a lot of the major gold miners their
impact was limited. Yet in addition to nearly-universally pulling
their 2020 output forecasts, there was also an industrywide move
to tap credit lines and build cash balances. That certainly
seems prudent given the epic uncertainties ahead with governments’
frantic and flailing decrees.
But
despite plenty of disruptions with Canada, Mexico, Peru, Argentina,
and Bolivia including gold mines in their countrywide lockdown
orders, the GDX top 34 still achieved impressive results in
Q1’20. And they are even better than the following analysis
suggests, as last quarter’s new totals don’t include most of the
results from those four companies that hadn’t reported yet as of
mid-week. They will further boost all this.
The
elite GDX-top-34 gold miners collectively produced 9.3m ounces of
gold in Q1, which still climbed a strong 5.7%
year-over-year! That’s super-impressive, as the largest gold miners
have struggled in recent years to grow their outputs. They are
already enormous, operating at scales where materially upping their
gold production is exceedingly difficult with big gold deposits
ever-harder to discover and develop into mines.
The
GDX top 34’s stunning output growth last quarter also bucked the
broader gold trend of declining mine supply. The World Gold
Council researches and publishes the best-available data on global
gold supply and demand quarterly in its outstanding Gold Demand
Trends reports. The new Q1’20 edition released early this month
showed worldwide gold-mine output actually fell 2.6% YoY last
quarter to 25.6m ounces!
One
reason the GDX top 34 did so well may be high-grading, when
mine managers choose to run better ore grades through their
fixed-capacity mills. That increases their quarterly gold outputs,
at the expense of leaving less high-grade ore available for future
quarters. At least one company explicitly reported that is what
they were doing, Australia’s Saracen Mineral. It’s been a long time
since I’ve seen high-grading admitted.
In
its quarterly report Saracen disclosed “Saracen has large ore
stockpiles exceeding 1.7Moz at 31 March; These will help insulate
the business should mining be restricted from any COVID-19 impacts;
Pro-active milling of higher-grade stockpiles underway at Carosue
Dam and Thunderbox to bring forward production ounces and cash flow
into FY20”. That high-grading strategy could’ve been used more
widely in Q1’20.
Interestingly silver production among the GDX top 34 fell sharply,
plunging 9.9% YoY to 25.6m ounces. That reflected the ongoing shift
of the precious-metals-mining industry to a more-gold-centric
focus. That has been fueled by silver’s relatively-poor
economics compared to gold. Silver prices have languished for
years, and the white metal hit an
all-time low
relative to the yellow one during mid-March’s stock panic!
With
the major gold miners greatly ramping 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 the 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. Surprisingly to me, First Majestic Silver reported in
early April its “staff consists of 17 full-time physicians and
several health care professionals”.
Expenses for travel and procuring supplies increased too with
borders being closed. Endeavour Mining, which was rare in
reaffirming its 2020 guidance despite the COVID-19 disruptions, had
an example of that. In its Q1 results it said, “Key expatriates
returned to site before suspension of commercial airline flights and
closure of borders, with shift rosters modified to ensure continuity
of staffing for several months.”
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.
In
Q1’20 the GDX-top-34 gold miners averaged cash costs of $653 per
ounce. That was up 6.0% YoY, and on the high side of the 16-quarter
range from $591 to $679. But obviously that’s far below prevailing
gold prices, proving miners have no problem keeping the lights on.
Q1’s impressive $1582 average gold price soared a massive 21.4%
YoY from Q1’19’s $1303! So it sure wasn’t a quarter where gold
miners struggled.
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
elite major gold miners dominating GDX’s ranks reported average
AISCs in Q1’20 of $932 per ounce. That was 4.4% higher than
a year earlier, which seems reasonable given the increased costs
involved in safely and responsibly operating in this
COVID-19-stricken world. And that number was skewed higher by the
new GDX inclusion of South Africa’s Harmony Gold in this past year,
which had outlying $1336 AISCs.
Like
the rest of the new gold stocks in GDX’s top-34 ranks, HMY’s symbol
is highlighted in light-blue in these tables. Without Harmony, the
rest of these major gold miners averaged $915 AISCs. That’s way
under prevailing gold prices, and still within the past 16 quarters’
GDX-top-34 AISC range of $855 to $942 per ounce. Naturally seeing
gold’s massive Q1’20 gains far exceed gold-mining cost growth
fueled huge profits.
This
industry’s overall profitability can be inferred based on the
difference between a quarter’s gold price levels and the major gold
miners’ all-in sustaining costs. Last quarter’s $1582 average gold
less those $932 GDX-top-34 AISCs yields hefty earnings of $650
per ounce! That continues the incredible stock-market-leading
profits growth in this small contrarian sector, trouncing the
general stock
markets’ falling earnings.
Sequentially from Q4’19, the major gold miners’ profits surged a
colossal 20.1% quarter-on-quarter! That would be awesome anytime,
but is particularly impressive given the COVID-19 impacts on plenty
of gold miners into the end of Q1. And the year-over-year profits
growth from Q1’19 is utterly breathtaking. Back then the GDX top 34
averaged better $893 AISCs but average gold prices that quarter were
far lower at $1303.
The
$650 per ounce they just earned in Q1’20 soared 58.5% YoY
from Q1’19’s $410! Putting up huge results like that should get the
major gold stocks on all institutional investors’ radars. And this
colossal stock-market-leading earnings growth is likely to persist
into Q2 and beyond. With
investors
flooding into gold as the disastrous economic impact of
governments’ lockdown orders becomes more apparent, it is surging.
With
Q2’20 halfway over, gold has already averaged a fantastic $1692!
That’s another 7.0% higher than Q1 at this point. The major gold
miners’ stock prices tend to amplify material gold moves by 2x to
3x because of their similar profits leverage to higher gold
prices. Assuming the GDX top 34’s Q2 AISCs are in line with their
trailing-four-quarter average of $920, that implies they are earning
$772 per ounce in Q2!
If
that holds into the end of this quarter, it would make for another
awesome 18.8% sequential gain in the major gold miners’ earnings.
Unfortunately it probably won’t, as Q2 has seen more gold mines
forced into care and maintenance for countrywide government
lockdowns than the end of Q1 did. But even if the GDX top 34 see
modest single-digit quarterly-profits growth, that’s far better than
other sectors’ deep bleeding.
The
major gold miners’ collective hard accounting results reported to
securities regulators proved Q1’20 was very strong. The following
numbers totally justify the powerful gold-stock upleg since
mid-March’s stock-panic lows. And realize these are even
understated, as financial results from those four straggling
GDX-top-34 components that hadn’t reported Q1 as of mid-week aren’t
included. The gold miners are thriving!
The
GDX top 34’s total sales soared 31.1% YoY to $12.1b! That makes
sense given their 5.7%-higher gold output with 21.4%-higher average
gold prices. Top-line revenues growth of that magnitude even dwarfs
that seen last quarter by the market-darling mega-cap tech stocks.
As discussed last week in my essay on
big US stocks’
Q1’20 results, the top 5 tech stocks dominating US markets saw
14.0% sales growth.
Operating cash flows generated by the GDX top 34’s gold mining
rocketed 68.7% higher YoY to $4.7b! Gold mining is spinning off
lots of cash at these gold levels, helping dramatically boost
treasuries. These elite major gold miners’ total cash balances
soared 52.3% YoY to $17.0b, the highest seen by far in the 16
quarters I’ve been doing this research! Their collective cash war
chests normally run $11b to $14b.
Surging cash hoards give the gold miners much more flexibility in
adjusting to the more-expensive reality of mitigating COVID-19,
giving them more survivability as heavy-handed governments
temporarily shutter their mines. They also leave gold miners better
resourced to fund future production growth fueled by mine
expansions, buying new mines, and acquiring entire companies.
Investors prize higher output above all else!
A
big contributor to this swelling cash was the GDX top 34 drawing
down credit lines to ensure maximum liquidity through this
COVID-19 crisis. Kinross Gold offered a great example in its Q1
results, “On March 20, 2020, Kinross drew down $750 million from its
$1.5 billion revolving credit facility as a precautionary measure to
protect against economic and business uncertainties related to the
pandemic.” That seems prudent.
Finally the GDX top 34’s actual hard accounting profits under
Generally Accepted Accounting Principles in the US or other
countries’ rules required by securities regulators skyrocketed. In
Q1’20, the major gold miners’ total accounting earnings soared an
epic 163.6% YoY to $1.9b! Sector earnings growth like that is
unheard of in normal markets, and absolutely astounding in this one
where lockdowns slaughter profitability.
But
this is overstated due to some big noncash gains flowing through to
bottom lines. The world’s two largest gold miners dominating GDX’s
ranks with a 30.1% total weighting are Newmont and Barrick. They
respectively reported a $593m gain on asset sales and $336m
impairment reversal in Q1, which both greatly boosted their net
incomes. Those were partially offset by Franco-Nevada’s $272m
impairment charge.
Even
adjusting for these big unusual items, the GDX top 34’s total
profits still soared 73.9% YoY last quarter! The gold miners are
making money hand over fist in this higher-gold-price environment,
despite their higher costs for mitigating COVID-19 risks. There’s
no doubt the gold miners are the most-attractive sector in
these dangerous stock markets as national economies plunge into
government-imposed depressions.
From
its brutal mid-March stock-panic low to last week, GDX has already
rocketed 84.4% higher out of that extreme anomaly! That included a
major bull-market
breakout for the gold stocks in late April, with GDX’s first new
bull highs achieved in 3.7 years. Yet this massive upleg still has
a long ways to run yet given the major gold miners’ colossal
earnings growth and resulting super-low valuations even this week.
Plenty of fundamentally-superior major and mid-tier gold miners
included in the GDX top 34 now have trailing-twelve-month
price-to-earnings ratios between 11x to 15x! That would be plenty
cheap for normal stocks, but is incredibly low for the high-flying
gold stocks. And these cheap valuations are set to fall even
farther as gold-mining earnings continue growing. The COVID-19
disruptions will prove a speed bump.
Q2
is going to be tougher than Q1 for the major gold miners suffering
shutdowns under governments’ draconian lockdowns. But all that gold
production is merely delayed a month or two, not lost forever
like sales in many other industries! As governments increasingly
struggle with lower tax revenues, they will rush to bring gold
mining back online. So this sector’s ultimate COVID-19 impact
should prove relatively modest.
At
Zeal we started aggressively buying and recommending
fundamentally-superior gold and silver miners in our
weekly and
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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 in coming months as this gold-stock upleg
keeps powering higher on big gold investment.
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The bottom line is
the major gold miners just reported awesome Q1 results despite
COVID-19 impacts. They achieved outsized gold production growth
bucking the global trend. And the much-higher prevailing gold
prices dwarfed the modest cost increases partially driven by
COVID-19 mitigation efforts. That fueled huge increases in
revenues, operating cash flows, cash in treasuries, and hard
accounting earnings!
While gold-mine
shutdowns have lasted longer in Q2, plenty of major gold miners
remain unaffected due to where their mines are located. And once
governments green-light those shuttered mines, miners will rush to
make up for lost production. With gold still powering higher on
mounting investment demand, the resulting better prevailing gold
prices this quarter should make for solid Q2 results despite this
crazy pandemic. | 
