The
major gold miners just enjoyed a phenomenal quarter for gold, which
soared after its first bull-market breakout in years. Q3’19’s
much-higher prevailing gold prices should’ve driven soaring earnings
for the miners, due to their big inherent profits leverage to gold.
So this just-completed Q3 earnings season is the most important for
this sector in a long time. Did the gold miners’ fundamentals
indeed radically improve?
Four
times a year publicly-traded companies release treasure troves of
valuable information in the form of quarterly reports. Required by
the US Securities and Exchange Commission, these 10-Qs and 10-Ks
contain the best fundamental data available to traders. They dispel
all the sentiment distortions inevitably surrounding prevailing
stock-price levels, revealing corporations’ underlying hard
fundamental realities.
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
$11.8b this week were a staggering 40.2x larger than the
next-biggest 1x-long major-gold-miners ETF! GDX is effectively this
sector’s blue-chip index.
It
currently includes 45 component stocks, which are weighted in
proportion to their market capitalizations. This list is dominated
by the world’s largest gold miners, and their collective importance
to this industry cannot be overstated. Every quarter I dive into
the latest operating and financial results from GDX’s top 34
companies. That’s simply an arbitrary number that fits neatly into
the tables below, but a commanding sample.
As
of this week these elite gold miners accounted for fully 94.1% of
GDX’s total weighting. Last quarter they combined to mine 292.0
metric tons of gold. That was 33.3% of the aggregate world total in
Q3’19 according to the World Gold Council, which publishes
comprehensive global gold supply-and-demand data quarterly. So for
anyone deploying capital in gold or its miners’ stocks, watching GDX
miners is essential.
The
major gold miners dominating GDX’s ranks are scattered around the
world. 21 of the top 34 mainly trade in US stock markets, 5 in
Australia, 6 in Canada, 1 in China, and 1 in the United Kingdom.
GDX’s geopolitical diversity is excellent for investors, but makes
it more difficult to analyze and compare the larger gold miners’
results. Financial-reporting requirements vary considerably from
country to country.
In
Australia, South Africa, and the UK, companies report in
half-year increments instead of quarterly. The big gold miners
often publish quarterly updates, but their data is limited. In
cases where half-year data is all that was made available, I split
it in half for a Q3 approximation. While Canada has quarterly
reporting, the deadlines are looser than in the States. Some
Canadian gold miners drag their feet in getting results out.
While it is challenging bringing all the quarterly data together for
the diverse GDX-top-34 gold miners, analyzing it in the aggregate is
essential to see how they are doing. So each quarter I wade through
all available operational and financial reports and dump the data
into a big spreadsheet for analysis. The highlights make it into
these tables. Blank fields mean a company hadn’t reported that data
as of this Wednesday.
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 Q3’19 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 expenses
of gold mining, lowering per-ounce costs and thus raising overall
profitability. In cases where companies didn’t separate out gold
but lumped all production into gold-equivalent ounces, those GEOs
are included instead. Then production’s absolute year-over-year
change from Q3’18 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 drive 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. Companies with
symbols highlighted in light-blue have newly climbed into the elite
ranks of GDX’s top 34 over this past year. This entire dataset
together is quite valuable.
It
offers a fantastic high-level read on how the major gold miners are
faring fundamentally as an industry. The world’s larger gold
miners certainly thrived in Q3 with much-higher gold prices, but
they continued to struggle with declining production and rising
costs. Still their fundamentals are the best they’ve been in years
with better gold levels, portending big future gains as gold’s bull
continues marching higher on balance.
The
major gold miners’ claim to fame is their stock prices amplify
rising gold prices, usually by 2x to 3x. They are essentially a
leveraged play on gold, so the only great time to own this sector is
when gold is rallying and likely to continue. Gold surged 4.4%
higher in Q3’19 after its first
decisive breakout
to new bull-market highs in 3.0 years in late June. GDX’s relative
performance was poor, with a mere 4.5% gain in Q3.
That’s because gold’s strong 32.4% upleg,
the best yet
in this secular bull, peaked in early September. The gold-futures
speculators who dominate gold’s price action were effectively
all-in longs and all-out shorts, their
buying firepower
exhausted. And as goes gold, so go the gold stocks. So as gold
started correcting into late September, GDX was dragged down with
it. That cycle timing masked major gains.
Q3-to-date by early September as gold crested, GDX had soared 21.1%
higher to gold’s 10.2%. That was normal 2.1x leverage. GDX’s
entire upleg peaking in early September enjoyed massive 76.2% gains
over 11.8 months! That made for better 2.4x upside leverage to
gold’s 32.4% run, and shows why traders are willing to put up with
this sector’s considerable risks. When gold rallies, wealth
multiplies fast in gold stocks.
Gold’s average price last quarter near $1474 was up a stupendous
21.7% year-over-year from Q3’18’s average! Q3’19 also had the
highest prevailing prices of gold’s 3.9-year-old secular bull by
far, trouncing Q3’16’s $1334 and Q1’18’s $1329. So the major gold
miners couldn’t ask for a better environment to put some big numbers
on the fundamentals scoreboard! They’re in real trouble if they
couldn’t thrive in Q3’19.
Before we dig in, the year-over-year comparisons require some big
adjustments. This past year saw epic gold-stock mega-mergers. In
January 2019 the world’s second-largest gold miner Barrick Gold
finished acquiring Randgold in a $6.5b deal. That briefly made it
the biggest gold miner. But arch-rival Newmont Mining wasn’t ready
to surrender the pole position, so it spent $10.0b buying Goldcorp
consummating in April.
Back
in mid-February I wrote an entire essay
explaining these
mega-mergers and why they are bad for this sector. That
didn’t fix these miners’ inexorably-declining production, just
masked it for the first four quarters after the mergers. And the
new combined companies have such colossal market capitalizations
that their huge inertia retards their upside potential. Their GDX
domination weighs on this entire sector.
Together the new NEM and GOLD command fully 21.9% of GDX’s capital,
as much as the bottom 27 GDX components combined! So when NEM and
GOLD underperform because of their own issues, this whole sector
lags. If these mega-mergers aren’t adjusted for, they materially
distort comparisons from Q3’18 to Q3’19. So I combined these two
sets of companies in Q3’18 as if they had already merged.
Another problem is lazy Canadian managements who don’t
respect their shareholders. Both Wheaton Precious Metals and Detour
Gold were waiting until the last possible day legally to report
their Q3 results, 45 days after quarter-end. That happened to be
after this essay’s data cutoff of Wednesday evening. So WPM and DGC
numbers are excluded from Q3’18’s results to keep year-over-year
comparisons righteous.
In
this modern era of fully-automated real-time accounting systems,
there are no excuses for delaying quarterly results and making
shareholders wait. Those numbers should be released as soon as
possible, when they are fresher. Delaying them only makes traders
wonder what those companies are trying to hide. I’m more wary of
deploying capital in companies that continually drag their feet on
crucial reporting.
Production is the lifeblood of gold mining, and the only thing the
major gold miners can control. While they are at the mercy of
prevailing gold prices, they can grow their outputs through diligent
planning and hard work. In Q3’19 these top 34 GDX gold miners
without those couple Canadian stragglers produced 9,388k ounces of
gold. That was actually down 1.5% YoY from Q3’18’s total, proving
an outsized decline.
The
major gold miners have long been struggling with
relentlessly-shrinking production. The world has been scoured for
gold for centuries, with the low-hanging fruit long since picked.
The scale of the major gold miners necessitates they look for large
economically-viable gold deposits. But those are getting both ever
harder to discover and increasingly expensive to develop. So the
majors are failing to replace depletion.
According to the World Gold Council’s comprehensive data, Q3’19 saw
world gold mined drift 0.6% lower YoY. The majors’ production
shrinkage was 2.5x worse, despite them controlling most of
the capital that is available in this sector to bring new mines
online! That 0.6% overall retreat was the worst performance in Q3
global gold output in at least 9 years, buttressing peak-gold
theories. The majors are bearing the brunt.
Investors prize production growth above everything else, so
the gold miners growing their outputs are usually the best
performers in stock-price terms. That’s another reason why the
majors’ stocks almost always well-underperform their smaller
mid-tier peers still able to grow their production. Provocatively
the whole decline in the GDX top 34’s production overwhelmingly
comes from those mega-merged gold miners.
Together the new monster Newmont and Barrick saw their gold
production plunge a miserable 9.1% YoY from Q3’18 to Q3’19! Without
them, the rest of these GDX top 34 excluding WPM and DGC saw their
total gold output surge 6.8% higher YoY. Despite squandering
$16.5b of shareholder wealth to combine into behemoths, the
mega-merged NEM and GOLD are deadweight dragging down this entire
sector’s gains.
That’s the main reason GDX’s brother GDXJ mid-tier gold miners’
ETF is so
superior to GDX. It excludes the biggest majors struggling with
rapid depletion, enabling larger gains during gold uplegs. Next
week I’m going to extend this Q3’19 fundamental analysis to the
top 34 GDXJ
miners like usual. They are likely to see much better
collective results than the GDX majors. Smaller miners’ growth
outpaces depletion easier.
With
the GDX top 34 majors’ overall production slipping 1.5% YoY thanks
to NEM and GOLD, the mining costs crucial for driving profitability
should’ve risen proportionally. Gold-mining costs are largely fixed
quarter after quarter, with production generally requiring the same
levels of infrastructure, equipment, and employees. These big fixed
costs are largely determined during mine-planning stages, and don’t
change much.
That’s when engineers and geologists decide which gold-bearing ores
to mine, how to dig to them, and how to recover their gold. The
ongoing mining costs are spread across quarterly production, making
gold output and unit costs usually inversely proportional.
The richer the gold ores fed through fixed-capacity mills, the more
gold produced. The more gold mined, the more ounces to bear those
big fixed costs.
So
lower gold output generally leads to higher unit costs, pinching
profits. Thus majors’ earnings potential is doubly compromised
when their gold production shrinks. They have less gold to sell,
lowering profits. And that gold comes at higher costs, cutting
earnings even more. The drag Newmont and Barrick are exerting on
this sector with such massive production declines is enormous.
That’s reflected in the majors’ 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 Q3’19 these
top-34-GDX-component gold miners that reported cash costs averaged
$679 per ounce. That was a new high out of the 14 quarters I’ve run
this research thread now, since Q2’16.
Those cash costs were up a sharp 7.6% YoY, far worse than inversely
proportional to lower production. Barrick Gold was one of the
culprits as its cash costs soared 21.0% from Q3’18, since Randgold
which it bought was a high-cost producer. South Africa’s Harmony
Gold also saw cash costs surge to a crazy $1027 per ounce. The
once-world-leading South African gold mines are deteriorating with
each passing year.
But
despite gold majors’ higher cash costs, that $679-per-ounce average
was still far below Q3’19’s great average gold price of $1474. So
the gold miners, including the higher-cost ones, are certainly
facing no existential threats. That sharp 21.7% YoY gain in average
gold prices gives the major gold miners lots of breathing room on
the cost front. They can also mine lower-grade ores that previously
weren’t profitable enough.
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.
These GDX-top-34 gold miners reported average AISCs of $910 in
Q3’19. That was up 3.7% YoY, and also the highest average AISC read
seen in those 14 quarters of doing this deep fundamental research.
Barrick Gold again led the way, with its AISCs soaring 25.4% YoY
thanks to its ill-advised mega-merger. But AISCs generally rose
across all these majors, which averaged hefty 8.0% YoY gains on that
front.
That’s certainly not a problem given the high prevailing gold prices
though. Compared to that huge 21.7% average-gold-price gain in
Q3’19, 3.7%-higher all-in sustaining costs are minor. And $910 per
ounce isn’t much higher than the previous 4 quarters’ $889 average
among the GDX top 34. As long as gold-price appreciation far
outpaces rising production costs, the gold miners’ great profits
leverage to gold remains intact.
The
contrast between Q2’19 and Q3’19 on this sector’s potential earnings
is vast. Gold only averaged $1309 in Q2, which implied
major-gold-miner profit margins of $414 per ounce at that quarter’s
average AISCs of $895. The very next quarter after in Q3, that
$1474 average gold price coupled with that $910 average AISC yielded
$564 in implied profits. That’s up a staggering 36.2%
sequentially quarter-on-quarter!
That
amplifies the average gold price’s 12.6% QoQ gain by 2.9x, which is
excellent profits leverage. In year-over-year terms, the major gold
miners’ implied profits growth was even more amazing. Q3’18 saw
average gold prices of just $1211, while the GDX top 34’s AISCs
averaged $877. That left room for just $334 per ounce of earnings.
In Q3’19, that exploded 68.9% higher YoY! Talk about epic
profits growth.
Such
huge gains are fantastic absolutely, but also relatively. Overall
US corporate earnings have actually been shrinking, making gold
miners look all the more impressive. In Q3’19, the 500 elite
companies of the flagship US S&P 500 stock index saw their overall
profits decline about 2.5%. So investors ought to seek out
any earnings growth, and the numbers the major gold miners are
putting up are phenomenal.
In
wading through the GDX majors’ quarterlies this past week, another
serious problem became evident. Hedging! Investors and
speculators buy gold stocks because they want to leverage gold’s
gains. But some gold miners, particularly the Australian ones, are
substantial-to-heavy hedgers. They have sold big fractions of their
future gold outputs, and most of those hedges are way underwater
after Q3’s big gold surge.
While Aussie gold-miner reporting is limited for Q3s since it is
done on half-years, Saracen Mineral Holdings did publish its ugly
hedge book. SAR produced 96.3k ounces of gold in Q3’19, but 80.0k
of that was delivered to close out hedges at an average price of
A$1863 per ounce. That translates into US$1278, 13% below Q3’s
US$1474 average gold price! That robbed SAR shareholders of almost
all their due gains.
SAR’s hedgebook continues out for the coming 12 quarters, with the
next 4 committing 51.0k ounces at A$1866, 47.0k at A$1859, 48.5k at
A$1809, and 45.0k ounces at A$1827. That means SAR will have to
sell about half its production at US$1280, US$1275, US$1240, and
US$1253 over the next 4 quarters. That is assuming Q3’19’s average
exchange rates persist. Hedging locks in big losses during
gold-bull uplegs!
So
with gold powering higher again after that several-year hiatus, it
is more important than ever to look into the hedgebooks of any gold
miner you are interested in. Hedging sells away gold’s
future upside potential, and is incredibly irresponsible.
Gold-miner shareholders own these stocks because they want to ride
gold’s bull higher. Managements that choose to materially hedge
destroy that, avoid them like the plague!
As
you’d expect with Q3’19’s far-higher prevailing gold prices, the
hard GAAP accounting results of the GDX majors were impressive.
Their total revenues without those Canadian stragglers soared 31.8%
YoY to $12.2b last quarter! That is even still outsized considering
average gold’s 21.7% YoY gains and the GDX top 34’s 1.5% total
production decline. Those mega-mergers help explain that sales
outperformance.
When
Barrick and Newmont gobbled up 2 large peers, it made room for 2 new
gold miners to rise into the GDX-top-34 ranks. These gold majors’
operating-cash-flow generation in Q3’19 was massive, soaring an
incredible 56.7% YoY to $4.7b. The more capital their operations
spin off, the more they can spend on expanding existing mines and
building or buying new ones. Strong OCFs are crucial for future
growth potential.
The
major gold miners wasted no time in spending that cash windfall too,
funding operational upgrades. Their collective total cash hoard
declined 5.6% YoY to $10.8b without WPM and DGC. Interestingly much
of that came in NEM and GOLD, where total cash fell 7.7% YoY. The
rest of the GDX top 34 saw a more modest 3.7% decline in their
treasuries. Last quarter’s greatest financial results came on the
bottom line.
The
GDX-top-34 gold majors’ total GAAP profits in Q3’19 weighed in at an
astounding $5.3b, which was radically higher than Q3’18’s $566m
loss! That’s certainly an epic sector turnaround. But this
comparison is muddy, as bottom-line earnings also include unusual
charges and gains in addition to normal operating profitability. We
can adjust for the biggest of these to get a clearer picture of how
the majors are faring.
Q3’18’s low average gold prices led to several major impairment
charges, writing down the carrying value of mines on companies’
books. Newmont, Barrick, and Yamana Gold wrote off $366m, $431m,
and $89m in last year’s comparable quarter. Add those back in, and
the GDX-top-34 gold miners earned a lot closer to $320m in Q3’18.
Q3’19 swung to the other extreme, with monster one-time gains
shunted into profits.
In
this just-finished reporting quarter, NEM and GOLD reported
mind-boggling $2366m and $1852m gains on revaluing gold mines for a
joint venture in Nevada they are doing! GOLD had an additional
$872m gain on reversing an impairment charge. Yamana had a $273m
gain for selling a mine, while Centerra Gold wrote off $231m due to
problems getting sufficient water at one of its gold mines. Those
are big numbers.
Net
all that out, and the GDX top 34’s GAAP earnings in Q3’19 were
closer to $170m. That implies their actual operating profitability
somehow plunged about 47% YoY last quarter! That is shockingly bad,
but oversimplified. Once again the real problem is Newmont and
Barrick, with their colossal mega-merger net-income distortions.
Excluding them alone, the rest of the GDX top 34’s profits were
$689m in Q3’19.
That
was up massively from their $54m loss in Q3’18. The moral of this
story? These new monster gold miners resulting from those
mega-mergers are really retarding the rest of this sector.
Their production is rapidly shrinking, their costs are rising, and
they are really damaging their shareholders’ potential returns.
They would be far better served owning smaller mid-tier gold miners
actually able to grow their outputs.
GDX
contains plenty of great gold miners, but its overall upside
potential is greatly impaired by the largest major gold miners that
dominate it. They continue to struggle to grow their production, so
smart investors seek out smaller mid-tier and junior gold miners
with superior fundamentals. While some are included in GDX, their
relatively-low weightings greatly dilute their potential gains. A
simple example illustrates this.
NEM
is GDX’s largest component with a massive 11.1% weighting. In Q3
its gold production fell 8.1% YoY, pushing AISCs 6.5% higher to $987
per ounce. Meanwhile GDX’s 34th-largest component Torex Gold is
just 0.7% of that ETF. But in Q3 its gold output soared 36.1% YoY,
driving its AISCs 30.2% lower to $675 per ounce. Naturally TXG’s
stock price radically outperformed NEM’s during gold stocks’ latest
upleg.
Between mid-August 2018 to early-September 2019, TXG rocketed 171.6%
higher! But in roughly this same span, NEM was a total dog rallying
a mere 38.4% at best. Imagine how much mightier GDX’s big 76.2%
upleg would’ve been had ailing mega-miners like Newmont not been
weighing it down. Both investors and speculators alike can do far
better picking superior individual gold stocks than settling for
GDX.
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The bottom line is
gold majors generally did report outstanding results in Q3 on
much-higher prevailing gold prices. Revenues and
operating-cash-flow generation soared, but earnings were distorted
by many large one-off items. Overall the major gold miners’ implied
profitability based on the average gold price and their average
all-in sustaining costs blasted higher, which portends far better
fundamentals going forward.
But GDX continues
to be weighed down by the largest gold miners, which are still
seeing rapid production declines even after their insanely-expensive
mega-mergers. That leaves smaller mid-tier gold miners with
superior fundamentals far more attractive for future upside
potential. As gold’s breaking-out secular bull continues powering
higher on balance in coming years, the mid-tiers will enjoy the
lion’s share of the gains. | 
