The
gold miners’ stocks remain deeply out of favor, trading at prices
seen when gold was half or even a quarter of current levels. So
many traders assume this small contrarian sector must be really
struggling fundamentally. But nothing could be farther from the
truth! The major gold miners’ recently-released Q4’17 results prove
they are thriving. Their languishing stock prices are the result of
irrational herd sentiment.
Four
times a year publicly-traded companies release treasure troves of
valuable information in the form of quarterly reports. Required by
securities regulators, these quarterly results are exceedingly
important for investors and speculators. They dispel all the
sentimental distortions surrounding prevailing stock-price levels,
revealing the underlying hard fundamental realities. They
serve to re-anchor perceptions.
Normally quarterlies are due 45 calendar days after quarter-ends, in
the form of 10-Qs required by the SEC for American companies. But
after the final quarter of fiscal years, which are calendar years
for most gold miners, that deadline extends out up to 90 days
depending on company size. The 10-K annual reports required once a
year are bigger, more complex, and need fully-audited numbers unlike
10-Qs.
So
it takes companies more time to prepare full-year financials and
then get them audited by CPAs right in the heart of their busy
season. The additional delay in releasing Q4 results is certainly
frustrating, as that data is getting stale approaching the end of
Q1. Compounding the irritation, some gold miners don’t actually
break out Q4 separately. Instead they only report full-year
results, lumping in and obscuring Q4.
I
always wonder what gold miners that don’t report full Q4 results are
trying to hide. Some Q4 numbers can be inferred by comparing
full-year results to the prior three quarterlies, but others aren’t
knowable if not specifically disclosed. While most gold miners
report their Q4 and/or full-year results by 7 to 9 weeks after
year-ends, some drag their feet and push that 13-week limit. That’s
very disrespectful to investors.
All
this unfortunately makes Q4 results the hardest to analyze out of
all quarterlies. But delving into them is still well worth the
challenge. There’s no better fundamental data available to
gold-stock investors and speculators than quarterly results, so they
can’t be ignored. They offer a very valuable true snapshot of
what’s really going on, shattering all the misconceptions bred by
the ever-shifting winds of sentiment.
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 24.4x larger than the next-biggest 1x-long
major-gold-miners ETF!
Being included in GDX is the gold standard for gold miners,
requiring deep analysis and vetting by elite analysts. And due to
ETF investing eclipsing individual-stock investing, major-ETF
inclusion is one of the most-important considerations for
picking great
gold stocks. As the vast pools of fund capital flow into
leading ETFs, these ETFs in turn buy shares in their underlying
companies bidding their stock prices higher.
This
week GDX included a whopping 51 component “Gold Miners”. That term
is used somewhat loosely, as this ETF also contains major silver
miners, a silver streamer, and gold royalty companies. Still, all
the world’s major gold miners are GDX components. Due to time
constraints I limited my deep individual-company research to this
ETF’s top 34 stocks, an arbitrary number that fits neatly into the
tables below.
Collectively GDX’s 34 largest components now account for 90.5% of
its total weighting, a commanding sample. GDX’s stocks include
major foreign gold miners trading in Australia, Canada, and the UK.
Some countries’ regulations require financial reporting in
half-year increments instead of quarterly, which limits local
gold miners’ Q4 data. But some foreign companies still choose to
publish limited quarterly results.
The
importance of these top-GDX-component gold miners can’t be
overstated. In Q4’17 they collectively produced over 10.3m ounces
of gold, or 321.5 metric tons. The World Gold Council’s
recently-released Q4 Gold Demand Trends report, the definitive
source on worldwide supply-and-demand fundamentals, pegged total
global mine production at 833.1t in Q4. GDX’s top 34 miners alone
accounted for nearly 4/10ths!
Every quarter I wade through a ton of data from these elite gold
miners’ 10-Qs or 10-Ks, and dump it into a big spreadsheet for
analysis. The highlights made it into these tables. Blank fields
mean a company did not report that data for Q4’17 as of this
Wednesday. Naturally companies always try to present their
quarterly results in the best-possible light, which leads to wide
variations in reporting styles and data offered.
In
these tables the first couple columns show each GDX component’s
symbol and weighting within this ETF as of this week. While most of
these gold stocks trade in the States, not all of them do. So if
you can’t find one of these symbols, it’s a listing from a company’s
primary foreign stock exchange. That’s followed by each company’s
Q4’17 gold production in ounces, which is mostly reported in
pure-gold terms.
Many
gold miners also produce byproduct metals like silver and copper.
These are valuable, as they are sold to offset some of the
considerable costs of gold mining. Some companies report their
quarterly gold production including silver, a construct called
gold-equivalent ounces. I only included GEOs if no pure-gold
numbers were reported. That’s followed by production’s absolute
year-over-year change from Q4’16.
Next
comes the most-important fundamental data for gold miners, cash
costs and all-in sustaining costs per ounce mined. The latter
determines their profitability and hence ultimately stock prices.
Those are also followed by YoY changes. Finally the YoY changes in
cash flows generated from operations, GAAP profits, revenues, and
cash on balance sheets are listed. There are a couple exceptions to
these YoY changes.
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
numbers instead of weird or misleading percentage changes. This
whole dataset offers a fantastic high-level read on how the major
gold miners are faring today as an industry. And contrary to their
low stock prices, they are thriving!
After spending days digesting these elite gold miners’ latest
quarterly reports, it’s fully apparent their
vexing
consolidation over the past year or so isn’t
fundamentally-righteous at all! Traders have mostly abandoned
this sector because the allure of the
levitating
general stock markets has eclipsed gold. That has left gold
stocks exceedingly undervalued, truly the best fundamental bargains
out there in all the stock markets!
Since gold miners are in the business of wresting gold from the
bowels of the Earth, production is the best place to start. The
10,337k ounces of gold collectively produced last quarter by these
elite major gold miners actually fell a sizable 1.7% YoY!
Interestingly that’s right in line with industry trends per the
World Gold Council, as overall world gold mine production also
retreated that same 1.7% YoY in Q4’17.
These biggest and best gold miners on the planet certainly had every
incentive to grow their gold production. The quarterly average gold
price surged 4.8% YoY in Q4’17, really boosting profitability. Of
course the more gold any miner can produce, the more opportunities
it has to expand thanks to higher cash flows. Investors often
punish flagging production too, so the major gold miners really hate
reporting it.
Most
investors won’t bother studying long and detailed 10-Qs, 10-Ks, or
the accompanying management discussions and analyses. So gold
miners often issue short press releases summarizing some of their
quarterly results. These sometimes intentionally mask
production declines by excluding year-ago production, looking at
quarter-on-quarter performance instead of year-over-year, or only
comparing results to guidance.
As a
professional speculator, investor, and newsletter writer for nearly
two decades now, I spend a huge amount of time analyzing quarterly
results. And I remain a CPA after my previous late-1990s gig
auditing mining companies for a Big Six firm. Yet even with this
exceptional experience and knowledge, I’m still surprised how deeply
I have to dig for some key results miners bury and hide in
hundred-plus-page-long SEC filings.
So
believe me, major gold miners don’t shout out shrinking gold
production from the rooftops. Yet of the 32 of these top-34 GDX
gold miners reporting Q4 production as of the middle of this week,
fully half saw declines. That was even with four different
gold miners climbing into GDX’s top 34 components over the past
year, which are highlighted in blue above. The average production
decline was a serious 9.5% YoY!
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 heavily 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 are 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 great 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 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 who can’t grow production. Stock picking is more
important than ever in this ETF world!
But
despite slowing gold production, these top-34 GDX-component gold
miners remained quite strong fundamentally in Q4! Their
viability and profitability are measured by the differences between
prevailing gold prices and what it costs to produce that gold.
Despite traders’ erroneous perception gold stocks are doomed, rising
gold prices and falling mining costs are making the major gold
miners much more profitable.
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 Q4’17, these top-34
GDX-component gold miners that reported cash costs averaged just
$600 per ounce. That dropped a sizable 4.4% YoY, showing serious
gold-miner discipline controlling costs.
Today the gold miners’ stocks are trading at crazy-low prices
implying their survivability is in jeopardy. This week the flagship
HUI gold-stock index was languishing near 174, despite $1325 gold.
The first time the HUI hit 175 in August 2003, gold was only in
the $350s! Gold stocks are
radically
undervalued today by every metric. And they collectively face
zero threat of bankruptcies unless gold plummets under $600.
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. AISC
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.
In
Q4’17, these top-34 GDX-component gold miners reporting AISC
averaged just $858 per ounce. That was down a significant
2.0% YoY, extending a welcome declining trend. In 2017’s four
quarters, these major gold miners’ average AISCs ran $878, $867,
$868, and $858. The elite gold miners are getting more efficient at
producing their metal, which is definitely impressive considering
their collective lower production.
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. So the more gold mined, the more ounces to spread
those big fixed costs across. Thus production and AISCs are usually
negatively correlated.
The
major gold miners have to manage costs exceptionally well to drive
AISCs lower 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.
These top-34 GDX gold miners are actually earning strong operating
profits today. Q4’17’s average gold price ran near $1276, again up
4.8% YoY. That remains far above last quarter’s low average all-in
sustaining costs among these major gold miners of $858 per ounce.
Thus industry profit margins are way up at $418 per ounce. Most
other industries would sell their souls to earn fat profit margins
at this 33% level!
A
year earlier in Q4’16, the top-34 GDX gold miners reported
average AISCs of
$875 in a quarter where gold averaged under $1218. That made
for $343 per ounce in operating profits. So in Q4’17, the major
gold miners’ earnings soared 22.1% YoY to $418 on that mere 4.8%
gold rally! Gold miners make such compelling investment
opportunities because of their inherent profits leverage to
gold, multiplying its gains.
But
this strong profitability sure isn’t being reflected in gold-stock
prices. In Q4’17 the HUI averaged just 189.4, actually 1.5% lower
than Q4’16’s 192.3! The vast fundamental disconnect in
gold-stock prices today is absurd, and can’t last forever. Sooner
or later investors will rush into the left-for-dead gold stocks to
bid their prices far higher. This bearish-sentiment-driven anomaly
has grown more extreme in 2018.
Since gold-mining costs don’t change much quarter-to-quarter
regardless of prevailing gold prices, it’s reasonable to assume the
top GDX miners’ AISCs will largely hold steady in the current
Q1’18. And it’s been a strong quarter for gold so far, with it
averaging over $1329 quarter-to-date. If the major gold miners’
AISCs hold near $858, that implies their operating profits are now
running way up near $471 per ounce.
That
would make for a massive 12.7% QoQ jump in earnings for the major
gold miners in this current quarter! Yet so far in Q1 the HUI is
averaging just 187.1, worse than both Q4’17 and Q4’16 when gold
prices were considerably lower and mining costs were higher. The
gold miners’ stocks can’t trade as if their profits don’t matter
forever, so an enormous mean-reversion rally higher is
inevitable sometime soon.
And
that assumes gold prices merely hold steady, which is unlikely.
After years of relentlessly-levitating stock markets thanks to
extreme central-bank easing,
radical gold
underinvestment reigns today. As the
wildly-overvalued
stock markets inescapably sell off on
unprecedented
central-bank tightening this year, gold investment will
really return to
favor. That portends super-bullish-for-miners higher gold
prices ahead.
The
impact of higher gold prices on major-gold-miner profitability is
easy to model. Assuming flat all-in sustaining costs at Q4’17’s
$858 per ounce, 10%, 20%, and 30% gold rallies from this week’s
levels would lead to collective gold-mining profits surging 43%,
75%, and 107%! And another 30% gold upleg isn’t a stretch at all.
In the first half of 2016 alone after the previous stock-market
correction, gold soared 29.9%.
GDX
skyrocketed 151.2% higher in 6.4 months in essentially that
same span! Gold-mining profits and thus gold-stock prices surge
dramatically when gold is powering higher. Years of neglect from
investors have forced the gold miners to get lean and efficient,
which will amplify their fundamental upside during the next major
gold upleg. The investors and speculators who buy in early and
cheap could earn fortunes.
While all-in sustaining costs are the single-most-important
fundamental measure that investors need to keep an eye on, other
metrics offer peripheral reads on the major gold miners’ fundamental
health. The more important ones include cash flows generated from
operations, actual accounting profits, revenues, and cash on hand.
They generally corroborated AISCs in Q4’17, proving the gold miners
are faring really well.
These top-34 GDX-component gold miners collectively reported strong
operating cash flows of $4529m in Q4, surging a huge 21.6% YoY!
Running gold mines is very profitable for the major miners, they
have this down to a science. Of the 26 of these major gold miners
reporting Q4 OCFs, every single one was positive. Most also proved
relatively large compared to individual company sizes, looking
really strong.
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.
The
top GDX gold miners’ actual GAAP accounting profits didn’t look as
good, coming in at a $266m loss in Q4’17. While a big improvement
over Q4’16’s $588m loss, that still seems incongruent with those
great all-in sustaining costs and operating cash flows. Of the 23
of these top-34 GDX components reporting earnings in Q4, 10 had
losses. Half of those were big, over $50m. I looked into the
reasons behind each one.
These handful of big gold-mining losses that dragged down overall
top-GDX-component earnings were mostly the result of
asset-impairment charges. Some of the world’s largest gold miners
led by Newmont and Barrick with $527m and $314m Q4 losses
continued to write down the carrying value of some gold mines. As
mines are dug deeper and gold prices change, the economics of
producing the metal change too.
That
leaves some of the major gold miners’ individual mines worth less
going forward than the amount of capital invested to develop them.
So they are written off, resulting in big charges flushed through
income statements that mask operating profits. But these writedowns
are something of an accounting fiction, non-cash expenses not
reflective of current operations. They are mostly isolated one-time
events as well.
In
addition to writedowns totally irrelevant to current and future cash
flows, there were also big losses recognized in Q4’17 due to the
new US corporate-tax law. With tax rates slashed, deferred tax
assets that were created by overpaying taxes in past years were
suddenly worth a lot less. These too were non-cash charges, another
accounting fiction. Finally some companies realized losses on
selling gold mines.
The
major gold miners all run portfolios of multiple individual gold
mines, each with different AISC levels. They’ve been gradually
pruning out their higher-cost operations by selling those mines to
smaller gold miners, usually at losses. While this hits income
statements in mine-sale quarters, it is one reason the major gold
miners have been able to drive down their costs. That will lead to
greater future profitability.
In
price-to-earnings-ratio terms, the major gold stocks are definitely
getting cheaper. Of the 23 of these top-GDX-component stocks with
profits to create P/E ratios, 7 had P/Es in the single or low-double
digits! There are some really-cheap gold miners out there today,
even adjusted for any dilution from past share issuances. Of course
P/E ratios automatically do that since stock prices are divided by
earnings per share.
On
the sales front these top-34 GDX gold miners’ revenues soared 13.9%
YoY to $12,236m in Q4. That looks suspect given that 1.7% YoY drop
in production and the 4.8% YoY rally in the average gold price. 26
of these gold miners reported Q4 sales, compared to 27 a year
earlier in Q4’16. The apparent growth came from some large gold
miners that didn’t disclose Q4’16 sales deciding to make that data
available in Q4’17.
Cash
on balance sheets is also an interesting metric to watch, because it
is primarily fed by operating profitability. Nearly all the
gold miners report their quarter-ending cash balances as well,
whether they report quarterly like in the US and Canada or in
half-year increments like in Australia and the UK. The total cash
on hand reported by these top GDX gold miners surged 7.0% YoY to a
hefty $13,974m in Q4’17!
That’s a big number for this small contrarian sector, and it’s
conservative. I just included the bank cash reported, excluding
short-term investments and gold bullion. The more cash gold miners
have on hand, the more flexibility they have in growing operations
and the more resilience they have to weather any unforeseen
challenges. Material drops in cash at individual miners were
usually spent to grow their production.
So
overall the major gold miners’ fundamentals looked quite strong in
Q4’17, a stark contrast to the miserable sentiment plaguing this
sector. Gold stocks’ vexing consolidation over the past year or so
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.
Their upside will far exceed the ETFs, which are burdened by
over-diversification and underperforming stocks. A
carefully-handpicked portfolio of elite gold and silver miners will
generate much-greater wealth creation.
At Zeal we’ve
literally spent tens of thousands of hours researching
individual gold stocks and markets, so we can better decide what to
trade and when. As of the end of Q4, this has resulted in 983 stock
trades recommended in real-time to our newsletter subscribers since
2001. Fighting the crowd to buy low and sell high is very
profitable, as all these trades averaged stellar annualized realized
gains of +20.2%!
The key to this
success is staying informed and being contrarian. That means
buying low before others figure it out, before undervalued gold
stocks soar much higher. An easy way to keep abreast is through our
acclaimed weekly
and monthly
newsletters. They draw on my vast experience, knowledge, wisdom,
and ongoing research to explain what’s going on in the markets, why,
and how to trade them with specific stocks. For only $12 per issue,
you can learn to think, trade, and thrive like contrarians.
Subscribe today,
and get deployed in the great gold and silver stocks in our full
trading books!
The
bottom line is the major gold miners’ fundamentals are quite strong
based on their recently-reported Q4’17 results. While production
declined, mining costs were still driven lower. That coupled with
higher gold prices generated fat operating profits and strong cash
flows. The resulting full coffers will help the gold miners expand
operations this year, which will lead to even stronger earnings
growth in the future.
Yet
gold stocks are now priced as if gold was half or less of current
levels, which is truly fundamentally absurd! They are the last
dirt-cheap sector in these euphoric, overvalued stock markets. Once
gold resumes rallying on gold investment demand returning, capital
will flood back into forgotten gold stocks. That will catapult them
higher, continuing their overdue mean reversion back up to
fundamentally-righteous levels. | 
