The
major gold miners’ stocks remain mired in universal bearishness,
largely left for dead. They are just wrapping up their
third-quarter earnings season, which proved challenging. Lower gold
prices cut deeply into cash flows and profits, and production-growth
struggles persisted. But these elite companies did hold the line on
costs, portending soaring earnings as gold recovers. Their
absurdly-cheap stock prices aren’t justified.
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 40 calendar days after
quarter-ends. Canadian companies have similar requirements at 45
days. In other countries with half-year reporting, many companies
still partially report quarterly.
These quarterlies offer the best fundamental data available for
individual major gold miners, showing how their operations are
really faring. That helps dispel the thick obscuring fogs of
sentiment that billow up the rest of the time. While I always
eagerly anticipate perusing these key reports, I worried what this
Q3’18 earnings season would reveal. Lower gold prices, flagging
production, and weak sentiment are a witches’ brew.
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 50.5x 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.
My
earnings-season trepidation soared on October 25th. The gold stocks
were doing fairly well then, with GDX rallying 14.4% out of
mid-September’s
deep forced-capitulation lows. Sentiment was slowly improving.
But that day GDX plunged 4.4% out of the blue, and the flat gold
price at upleg highs certainly wasn’t the driver. The
most-loved major gold miner had plummeted after reporting
shockingly-bad Q3 results.
Goldcorp has always been one of GDX’s top components. It reported
mining just 503k ounces of gold last quarter, which plunged 11.9%
sequentially quarter-on-quarter and 20.5% year-over-year! That
forced its all-in sustaining costs a proportional 20.8% higher YoY
to $999 per ounce. Investors panicked and fled, hammering GG stock
18.7% lower. That was the worst down day in the 24.6-year history
of this company.
That
left it at an extreme 16.2-year low! GG hadn’t been lower since
August 2002 when gold was still in the low $300s, it was
apocalyptic. That really torpedoed still-fragile sentiment in this
sector, even though GG’s woes looked short-lived. It was
bringing a new expansion online at one of its big mines, which was
what caused the shortfall. Now in Q4’18 Goldcorp expects production
to rebound to 620k ounces at $750 AISCs.
After GG’s Q3 disaster, I worried frayed investors would dump other
gold stocks on any hints of less-than-optimal quarterly results.
But GDX has ground sideways on balance since that GG shock,
weathering this risky earnings season with sentiment so fragile.
Ever since I’ve been anxious to analyze the collective Q3 results of
the major gold miners as a whole, to see if GG’s travails were
unique to it or more systemic.
GDX’s component list this week ran 48 “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 93.5% of its total weighting! These elite
miners that reported Q3’18 results produced 296.4 metric tons of
gold, which accounts for fully 33.9% of last quarter’s total global
gold production. That ran 875.3t per the recently-released Q3’18
Gold Demand Trends report from the World Gold Council. I’ll discuss
production more below.
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 major 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 Q3’18 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 Q3’18 production in ounces, which is mostly in
pure-gold terms. That excludes byproduct metals often present in
gold ore.
Those are usually 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, those GEOs
are included instead. Then production’s absolute year-over-year
change from Q3’17 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, 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. This whole
dataset together offers a fantastic high-level read on how the major
gold miners are faring fundamentally as an industry. Was Goldcorp’s
disaster systemic?
Production has always been the lifeblood of the gold-mining
industry, since the gold miners can easily sell every ounce they can
wrest from the bowels of the earth. While the gold price is also
important, generally the more gold they mine the greater their
operating cash flows and profits. That generates more capital to
invest in future production, which comes from expanding existing
mines and building or buying new ones.
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. But for some years now the
major gold miners have been struggling to grow production. Large
economically-viable gold deposits are getting increasingly harder to
find and more expensive to exploit, with the low-hanging fruit long
since picked.
More
and more gold-industry experts believe peak gold is nearing,
after which global mine production will start declining. For many
years now new deposit discoveries and mine builds have failed to
keep pace with depletion at existing mines. So production growth is
slowing. According to the World Gold Council’s latest fundamental
data, global mine production only edged 0.8% higher in 2017 compared
to 5.3% in 2013!
GDX’s major gold miners are the biggest and best in the world, with
access to many billions of dollars of capital to expand their
operations. Yet many of them are still having trouble finding and
adding enough new production to offset the normal declines in their
aging operations. So while Goldcorp’s Q3 production plunge was
extreme, it certainly wasn’t unique. Out of GDX’s top 10 miners by
Q3 ounces, 9 saw YoY declines!
GG’s
anomalous 20.5% was definitely the worst. But the 4 largest gold
miners last quarter Newmont, Barrick, AngloGold, and Kinross
suffered production drops of 2.0%, 7.6%, 14.6%, and 10.4% YoY in
Q3. Excluding Goldcorp, those other 8 of the top 10 still averaged
hefty 8.2% YoY declines last quarter. That’s pretty serious by any
standard. Overall the top 34 GDX miners’ gold production
retreated 2.9% YoY to 9.5m ozs!
So
on the production front they are doing worse than this industry as a
whole. That latest Q3 GDT data from the WGC reports overall global
mine production actually grew 1.9% YoY last quarter. So the majors
are really lagging their peers and dragging down the average. And
seeing their production declines mount is even more striking in a
third quarter. Q3s tend to see strong production growth heading
into year-ends.
Mine
managers want to maximize their annual bonuses, which are often tied
to the performances of their companies’ stocks. With Q3 results
released 6 to 9 weeks before year-ends, they can really help fuel
big late-year stock rallies if good enough. So the managers tend to
sequence their processing to ensure that higher-grade ores are fed
into their mills in Q3s, yielding more ounces produced
despite fixed mill throughputs.
Within individual gold deposits, ore grades vary considerably. Mine
managers have to decide which parts of the deposits they are going
to dig and haul in any given quarter, and when to run that ore
through the mills. They seem to like to process their higher-grade
ores in Q3s when bonus calculations are nearing, and their
lower-grade ores in Q1s when year-ends are far away. This
surprising herd behavior is well-documented.
Again per that comprehensive fundamental data from the WGC, over the
last 8 years including 2018 global gold mine production has dropped
an average of 9.0% QoQ from Q4s to Q1s! Every one of these
transitions was negative, ranging from -6.7% to -12.0%. The mine
managers collectively want to take the lower-ore-grade production
hits early in years. They stockpile their better higher-grade ore
for processing in Q3s.
In
that same span between 2011 to 2018, global gold mine production has
surged an average of 6.6% higher QoQ from Q2s to Q3s! Every single
year saw positive growth between +4.4% to +9.1%. There’s no doubt
the top GDX gold miners really wanted to show big Q3’18
production growth as well, to maximize Q4 stock-price gains and
managers’ compensation. But ominously they still couldn’t pull it
off last quarter.
Three big South African gold miners AngloGold, Gold Fields, and
Sibanye Gold didn’t break out their Q2’18 gold production in
that prior earnings season. They instead lumped it into half-year
reporting, likely to mask slowing production. But they did report
it in Q3’18 in their quarterly operational updates. So if we
exclude them, the rest of the GDX top 34’s gold production merely
grew 1.1% QoQ in Q3 which is really slow.
If
the world’s top gold miners couldn’t scrounge up enough higher-grade
ore to report strong Q3s, they are really hurting on the
production front! As I’ve warned for years, investors can and
should avoid most of the majors because of this. Growing gold
production is always challenging, but incredibly difficult off of
really-high bases. The best production growth and stock-price
upside comes from the smaller mid-tier miners.
Unfortunately the majors’ flagging production is a vexing problem
for this entire sector because these large companies dominate GDX
and the gold-stock indexes. Speculators and investors alike look to
their performances to gauge how gold stocks are faring, which
heavily colors their psychology and perceptions on gold miners’
potential. So the majors’ production struggles weighing down the
indexes exacerbates bearishness.
Q3’s
disappointment wasn’t something new either, as the top 34 GDX gold
miners also reported sharp
Q2’18 production
declines of 7.7% YoY. The majors are starting to get desperate
since they can’t bring their own new projects online fast enough to
offset existing-mine depletion. So they are looking to buy other
operating mines and even entire companies at high premiums to
restore their flagging production growth.
We
just saw a huge example late in Q3, when Barrick announced it was
merging with Randgold! The world’s 2nd-largest gold miner and GDX
component was effectively buying the 10th-largest gold miner and
7th-largest GDX component in an all-stock deal. The combined
company would’ve been the world’s largest gold miner in Q3 at 1458k
ozs. But with production waning at both ABX and GOLD, the problem
remains.
While Q3’18’s underperformance by the biggest gold miners dominating
GDX was striking, it is nothing new. That’s why I’ve long
recommended investors avoid many of the largest gold miners.
Mid-tier miners with growing production as they bring new
mines online and much-smaller market caps have far-greater upside
potential during gold uplegs. They are bucking the
increasingly-evident peak-gold predicament.
Peak
gold is likely bearish for the largest gold miners that drive GDX.
Capital inflows from investors will wane along with their shrinking
production. But lower gold mined supply on balance going forward is
wildly bullish for the mid-tier and junior gold miners
growing their production! The resulting higher gold prices will
catapult their profits and thus stock prices far higher, attracting
investors fleeing the struggling majors.
The
only way to reap these massive gains is directly investing in
the best individual gold miners. Their fundamentals are far
superior to their sector’s as a whole. While buying GDX is easy,
the lion’s share of that capital is funneled into the major gold
miners with slowing production. Their underperformance will dilute
away any outperformance among mid-tier miners in this ETF, leading
to mediocre overall gains.
With
many of the major gold miners’ seeing lower or stagnant production,
their mining costs should’ve risen proportionally. Gold-mining
costs are largely fixed quarter after quarter, with actual mining
requiring the same levels of infrastructure, equipment, and
employees. So the lower production, the fewer ounces to spread
mining’s big fixed costs across. The silver lining to the gold
majors’ Q3 is they held the line on 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 Q3’18, these top 34
GDX-component gold miners that reported cash costs averaged $631 per
ounce. That was indeed up 6.8% YoY, but still radically below even
gold’s $1174 mid-August low.
That
was an anomaly driven by all-time-record
gold-futures
short selling by speculators. The gold miners face no
existential peril as long as prevailing gold prices are well above
their cash costs of production. Interestingly much of that extreme
gold-futures short selling has yet to be unwound, which means
gold-upleg fuel
still abounds. The gold stocks leverage gold’s moves since its
price levels drive their profitability.
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.
Back
in late October when Goldcorp’s horrible Q3 wrecked gold-stock
sentiment, I feared soaring AISCs might be the norm last quarter.
Remember GG’s AISCs soared 20.8% YoY on its 20.5% production drop,
perfectly inversely proportional. So it was a pleasant surprise to
see these top 34 GDX gold miners even including GG fully contain
their average AISCs in Q3. They only rose 1.0% YoY to $877
per ounce, a big victory!
That’s right in line with the previous four quarters’ $868, $858,
$884, and $856 averaging $867. So while the gold majors have
production-growth problems, they are not manifesting on the cost
front. These elite companies are optimizing existing mines to lower
production costs and choosing new mine builds that are cheaper to
operate. That bodes well for this industry going forward,
portending surging profits as gold recovers.
Gold-mining earnings are simply the difference between prevailing
gold prices and all-in sustaining costs. In Q3 gold averaged $1211
per ounce, implying average profits of $334 at $877 average AISCs.
That is still pretty impressive, implying solid 28% profit margins
even in a weak quarter for gold prices. So GDX getting pounded to
a 2.6-year low in mid-September on
forced selling
as stops were run wasn’t justified.
Those recent gold-stock lows were actually
fundamentally
absurd, resulting from irrational excessively-bearish
sentiment. They had nothing to do with fundamentals. GDX was back
down near its stock-panic lows from October 2008, when gold was
languishing under $750. Seeing gold-stock prices revisit those
levels in recent months with gold prices over 55% higher made
no sense at all! Gold stocks are far too low.
That’s true even though Q3 was a tough quarter. It wasn’t just the
production challenges, but that $1211 average gold price in Q3’18
was 5.3% under its Q3’17 average. Gold miners’ earnings
leverage both upside and downside gold-price moves, really hurting
profitability. In Q3’17 these top 34 GDX miners were earning $411
per ounce on average, so industry profits fell 18.7% YoY making for
3.6x downside leverage.
The
lower prevailing gold prices along with flat-to-lower gold
production certainly weakened the normal accounting metrics of major
gold miners’ health. The cash flows generated from operations by
these top GDX components plunged 29.0% YoY to $3155m. Revenues
dropped 7.4% YoY to $9599m, mostly due to lower gold prices but also
reflecting 9.2% lower byproduct silver production among these major
gold miners.
And
their hard GAAP earnings reported to regulators looked ugly,
weighing in at a considerable $566m collective loss in Q3’18
compared to $854m of profits in Q3’17! While lower gold prices
naturally lead to lower profits, that was far beyond what gold’s
drop warranted. But thankfully this latest quarter’s profits were
greatly skewed to the downside by a couple of huge mine-impairment
charges from GDX’s biggest components.
When
gold deposits look less economically viable due to weaker gold
prices or tougher geology than was originally expected, miners write
down their carrying values which flushes big non-cash losses
through their income statements. Newmont reported a $366m
impairment charge in Q3 on some of its exploration properties in
North America. Barrick ran through an even-larger $431m writedown
in Q3 on a mine in Peru.
Both
of these big impairment charges turned operating profits at the
world’s two biggest gold miners into deep losses. If they are
excluded, the top 34 GDX gold miners earned $231m in Q3’18. While
still down an ugly 73.0% YoY, at least the major gold miners were
still earning money last quarter. So there was nothing particularly
troubling on the hard-GAAP-earnings front in Q3, but it was still
really weak for gold miners.
But
they remain ready to expand, collectively sitting on a big $11.7b
cash hoard at the end of Q3’18. That was merely down 0.4% YoY,
reflecting relatively-solid operating cash flows and access to
financing capital. I suspect some of this will be deployed in
buying up smaller gold miners with operating mines, since it takes
over a decade to bring new deposits into production. The major gold
miners will fight to show future growth.
Left
for dead and neglected, the gold miners’ stocks are
the last cheap
sector in these lofty
bubble-valued
stock markets. Their fundamental upside as gold mean reverts higher
on speculators’ gold-futures buying and
new investment
demand as stock markets roll over is enormous. This is
easy to understand with a simple example. In the last four quarters
including Q3’18, the top GDX gold miners’ AISCs averaged $869.
During gold’s last major upleg in essentially the first half of
2016, it powered about 30% higher driven by surging investment
demand after stock markets suffered back-to-back corrections. That
was even small by historical gold-bull-upleg standards. If we
merely get another 30% gold advance from its recent mid-August low
of $1174, we’re looking at $1525 gold. That would work
wonders for gold-mining profits and stock prices.
At
$1525 gold and $869 AISCs, the major gold miners would be earning
$656 per ounce. That’s 96% higher than Q3’18’s $334! If
gold-mining profits double, gold-stock prices will soar. Indeed
during that last 30% gold bull in the first half of 2016, GDX
rocketed 151%
higher! So the gold-stock outlook is wildly bullish with
gold itself due to power higher as the stock markets roll over on
the Fed’s record
tightening.
While gold-stock sentiment remains overwhelmingly bearish, the major
gold miners’ fundamentals are still solid. They are still
struggling with flat-to-shrinking production, but their mining costs
remain far below the prevailing gold prices. They are still
generating strong operating cash flows and some profits without the
inevitable non-cash writedowns sparked by weaker gold prices. OCFs
and earnings will soar as gold prices recover.
So a
big mean-reversion rebound higher is inevitable and imminent. While
traders can play that in GDX, that is mostly a bet on the largest
gold miners with slowing production. The best gains by far will be
won in smaller mid-tier and junior gold miners with superior
fundamentals. A carefully-handpicked portfolio of elite gold and
silver miners will generate much-greater wealth creation than ETFs
dominated by underperformers.
The
key to riding any gold-stock bull to multiplying your fortune is
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The
bottom line is the major gold miners’ fundamentals remain far
stronger than implied by their left-for-dead stock prices. While
they are still struggling to grow production, they are holding the
line on all-in sustaining costs. That fueled solid operating cash
flows in Q3 despite weaker gold prices. Both those and GAAP profits
will surge dramatically in coming quarters as gold mean reverts
higher on big investment buying.
Gold
stocks are not only unloved and dirt-cheap today, but they are a
rare sector that rallies strongly with gold as general stock markets
weaken. While virtually no one was interested in these leveraged
plays on gold upside in recent months, that will change fast as
these lofty stock markets roll over. And the major gold miners’
just-finished Q3 earnings season proved they remain ready to
fundamentally amplify gold’s gains. |