Gold mid-tiers’ Q4’19 fundamentals

The sheer carnage in gold-stock-land has been jaw-dropping!  In late February, the gold-stock sector per its leading benchmark GDX VanEck Vectors Gold Miners ETF edged up to a 3.5-year high slightly above early September’s.

That was fueled by gold’s $1600 breakout surge on COVID-19 fears.

Yet as I warned in an essay the trading day before GDX’s peak, gold’s surge was peculiar and precarious lacking normal drivers.

With popular gold-stock greed excessive, our subscription newsletters took the contrarian side shorting gold and its miners’ stocks via put options and leveraged ETFs. 

Over the subsequent 14 trading days, GDX plummeted an unthinkably-brutal 38.8%!

For prudently heeding the data rather than blindly following the herd, I suffered plenty of ridicule. But those trades were soon vindicated with big realized gains. Over the subsequent 14 trading days, GDX plummeted an unthinkably-brutal 38.8%!

That extreme capitulation-grade selling intensified this Monday morning, with GDX crashing yet another 14.8% on open. 

But from there it rocketed 39.0% intraday to a +18.4% close!  So the very next day in our weekly newsletter, I launched our long-awaited new gold-stock-buying campaign to ride gold’s next major upleg.

This sector looks wildly-bullish not just due to its technical thrashing, but its amazing fundamentals.

The sweet spot for gold-stock upside potential has always been the mid-tier gold miners. Unlike the large majors, mid-tiers’ lower gold-production levels leave room for big output growth. 

Investors prize that over everything else, since it leads to far-higher earnings and stock prices. Mid-tiers also have way-lower market capitalizations than majors, making it far easier for capital inflows to bid them higher to massive gains.

Surprisingly the world’s best mid-tier gold miners are found in the GDXJ VanEck Vectors Junior Gold Miners ETF. Despite its now-misleading name, GDXJ actually has very-little junior exposure today. Back in the first half of 2016 as gold stocks soared in a mighty upleg, this ETF was threatening to run afoul of Canadian securities laws for individual-stock ownership limits.  That forced GDXJ to shift its holdings to mid-tiers.

Mid-tier gold miners produce between 300k to 1m ounces of gold annually, which translates into 75k to 250k each quarter. The majors run above 1m per year, with the juniors below 300k. 

The percentage of GDXJ’s holdings that are true juniors, primary gold miners with sub-75k-ounce quarterly outputs, is well under 10%. But this leading ETF’s mid-tier focus is very beneficial, as that’s where most gold-stock gains accrue.

Because most gold miners logically run calendar financial years, Q4 reporting has an extended deadline up to 60 days after quarter-end in the US. 

In Canada where the majority of global gold stocks trade, the reporting deadline for full years extends out to 90 days. Annual reports including final quarters are bigger, more complex, and must be audited by independent CPAs. These results are still coming out this week.

But enough of the GDXJ component stocks have reported to see how the mid-tiers are faring as a whole. After every quarterly earnings season, I wade through the latest results from GDXJ’s largest 34 stocks. 

That’s just an arbitrary number that fits neatly into the tables below, but a commanding sample accounting for 85.4% of this ETF’s total weighting as of the middle of this week. Incredibly GDXJ is stuffed with 73 stocks!

Most traders probably assume that GDX Gold Miners ETF and this GDXJ Junior Gold Miners ETF have very-different holdings, but that’s not true.

Most traders probably assume that GDX Gold Miners ETF and this GDXJ Junior Gold Miners ETF have very-different holdings, but that’s not true. Of the top 34 GDXJ components this week, fully 24 are also GDX-top-34 holdings! GDXJ effectively lops off GDX’s 8 largest major-gold-miner stocks, and ups the relative weightings of the rest. 

GDXJ’s top 34 components totaling 85.4% collectively weigh in at 35.9% of GDX.

GDXJ takes the best gold miners of GDX, greatly expands their allocations and importance, and jettisons the top-heavy deadweight of the large majors. 

That makes GDXJ far superior to GDX in upside potential, rendering the latter obsolete! There’s no gold-stock fundamental research I look forward to more than this quarterly mid-tier analysis. These stocks trade in markets across the globe, with differing reporting requirements.

That makes amassing this valuable dataset for analysis challenging and tedious. In different countries, the mid-tier gold miners report different data in different ways. 

Half-year reporting rather than our superior US quarterly reporting is also common around the world. That necessitates splitting reported data in half for quarterly approximations. Every gold miner has its own reporting peculiarities, taking time to understand.

The more quarterly iterations of this complex research thread I run, the better the results get. Q4’19 was my 15th quarter in a row of this deep fundamental GDXJ-gold-stock analysis, adding on to our massive spreadsheets. 

The highlights of the mid-tier gold miners’ latest results make it into the tables below. Blank fields mean a company hadn’t reported that particular data as of this essay’s late-Wednesday cutoff.

Each company’s symbol and weighting within GDXJ is followed by its quarterly gold production in Q4’19. Not all of these stocks trade in the US, as GDXJ also hosts sizable Australian and Canadian contingents. 

The year-over-year change in miners’ gold outputs from Q4’18 to Q4’19 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 Q4’18, or if derived from two negative numbers. Then raw underlying data is included instead.

Symbols highlighted in yellow are the rare GDXJ components not also included in its big-brother GDX, while light-blue ones have newly climbed into GDXJ’s top-34 ranks over this past year. 

Both conditions being true are indicated with yellow-blue checkerboarding. The handful of true juniors GDXJ includes, those primary gold miners producing less than 75k ounces quarterly, have their production boldfaced in blue.

This entire dataset together offers a fantastic high-level read on how the mid-tier gold miners are faring. And they enjoyed massive fundamental improvements last quarter! 

Higher prevailing gold prices drove profitability sharply higher, forcing valuations sharply lower. The awesome GDXJ gold miners haven’t looked this great operationally in years, making this recent plunge I warned about an amazing buying opportunity!

While prevailing gold prices drive profitability, production growth is truly the lifeblood of the gold-mining industry. The more individual miners can grow their outputs, the more capital they generate to continue growing by expanding existing operations and building new mines. 

That makes the production growth investors always seek self-feeding, particularly for the mid-tier gold miners in that sweet spot of output.

The majors are so large with so many gold mines that bringing new expansions or mines online doesn’t move the needle much. They can usually only grow by buying mines or entire companies, which is very expensive. And juniors usually only operate single mines, leaving their cashflows simply too constrained to finance major growth. 

Mid-tier gold miners running several operations face neither growth-killing restraint.

That’s evident in the fantastic production numbers achieved by these GDXJ-top-34 companies. In Q4’19 they collectively produced 5.3m ounces of gold, which was up a strong 4.7% year-over-year! 

Contrast that to the GDX-top-34’s Q4’19 results, which I just analyzed in depth last week.  When adjusted for a couple of big mergers combining production, the GDX-top-34 actually saw aggregate output shrink by 2.0% YoY.

That jibes with the World Gold Council’s definitive worldwide-supply data, which revealed that global gold-mine production fell a similar 1.8% YoY last quarter. 

That was actually the fourth quarter in a row seeing contracting world output, unprecedented in modern times! In addition to buttressing peak-gold theories, that makes the strong production growth the mid-tiers are achieving all the more valuable to investors.

Usually the best-performing gold stocks in any given year or during any particular gold upleg are the ones enjoying the strongest production growth. 

They tend to attract outsized capital inflows, propelling their stock prices higher faster. As the mid-tiers have largely cornered the market on boosting their gold outputs, they often achieve the best and most-consistent stock-price gains.  They are where to allocate capital.

The GDXJ-top-34 averaged Q4’19 gold production of 167k ounces, a little over half the GDX-top-34’s 313k.  Of course output growth varied considerably within these mid-tier gold miners. 

Leading the pack was Pan American Silver which saw gold production skyrocket 367% higher YoY to 174k ounces! Most former major primary silver miners have been diversifying into gold for years due to its far-better economics.

Other mid-tiers were struggling, led by Yamana Gold which saw Q4’19 gold output plunge 24% from the comparable quarter a year earlier. 

But the really interesting thing about gold-production growth, and one of the main reasons the mid-tier realm has to be analyzed every quarter, is the leaders and laggards are constantly changing. 

Gold miners’ production levels naturally flow and ebb with the life cycles of their mines.

Gold deposits are finite resources, often depleted within 7 to 10 years after mines are built. Gold miners must constantly expand existing mines and add new ones to overcome that inexorable depletion. 

So mid-tier gold miners with major expansions or new mines being brought online in the coming year enjoy the best production growth, which investors reward them for.  After that production stabilizes at new higher levels.

And mid-tiers suffer production slumps when one of their existing mines nears the end of its operational life. Declining production can also result from unexpected operating difficulties. 

So trading mid-tiers is an ongoing research-intensive process, with the best subset of mid-tiers to ride gold uplegs shifting from one to the next.  Following the production-growth leaders is one important strategy for maximizing gold-stock gains.

These GDXJ-top-34 mid-tiers didn’t just achieve that sector-leading 4.7% YoY production growth in Q4, but they enjoyed far-higher prevailing gold prices. 

Last quarter’s $1483 average gold price soared by a whopping 20.8% YoY!  That portended massive profits growth for these leading gold stocks, since their mining costs are largely fixed regardless of gold levels.  This fuels gold stocks’ legendary leverage to gold.

Gold mines have fixed throughputs determined by their rock-crushing mills, how much gold-bearing ore they can chew through each day. 

Digging, hauling, and processing that ore generally requires the same levels of infrastructure, equipment, and employees quarter after quarter regardless of whether gold prices are low or high. 

These big fixed costs are largely determined way back when mines were being planned.

That’s when engineers and geologists had to decide which ores to mine, how to dig to them, and how to recover their gold. Not much changes after that unless major mine-expansion projects alter economics. With gold mining having mostly-stable costs, higher gold prices flow directly through to bottom lines really amplifying profitability. 

So mining costs are important to consider along with production levels and gold prices.

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 gold-price levels required to keep the mines running.  They were indeed flat in Q4.

The GDXJ-top-34 mid-tiers reported average cash costs of $701 per ounce last quarter, which was up just 0.5% YoY. That was towards the upper end of their 15-quarter range from $612 to $730. 

But it was heavily skewed higher by excessive cash costs reported by Buenaventura, Harmony, and Hecla. Each saw cash costs over $1000, crazy-high!  Excluding them, the rest of these GDXJ mid-tiers averaged $657.

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 mid-tier gold miners’ true operating profitability.

These GDXJ-top-34 mid-tiers reporting AISCs averaged $964 per ounce in Q4’19. That was also on the high side of their own 15-quarter range from $855 to $1002.  

But that same trio of struggling gold miners, along with South Africa’s Sibanye-Stillwater which doesn’t report cash costs, really distorted the average. Without them, the rest of the GDXJ-top-34 averaged $906 which is fantastic compared to prevailing gold prices!

But to be conservative, let’s use that skewed all-included $964 average AISC to get an idea about how profitable the mid-tiers are as a whole. That subtracted from last quarter’s $1483 average prevailing gold price yields implied earnings of $519 per ounce!  

Even though those average AISCs climbed 3.4% YoY, gold’s monster 20.8% average-price gain in Q4’19 dwarfed that.  So GDXJ gold miners’ profits skyrocketed.

Q4’19’s $519-per-ounce sector read soared a colossal 75.3% over Q4’18’s $296!  That is fantastic growth for any sector, but all the more impressive today given the rest of the stock markets’ flat earnings. 

The more mid-tier gold miners earn from a widening spread between their all-in sustaining costs and prevailing gold prices, the lower their valuations fall making them even more attractive.

The more mid-tier gold miners earn from a widening spread between their all-in sustaining costs and prevailing gold prices, the lower their valuations fall making them even more attractive.  This trend should persist in Q1’20.

With this current wildly-volatile quarter almost over, gold has averaged $1582 so far. 

That’s up another 6.7% quarter-on-quarter from Q4’s already-high levels!  Over the past four quarters, these GDXJ-top-34 mid-tier gold miners have averaged AISCs of $967. They aren’t likely to change much this quarter given the fixed nature of gold-mining costs. That implies these mid-tiers could be earning $615 per ounce in Q1’20!

That compares to merely $301-per-ounce sector profits a year earlier in Q1’19, because of much-lower gold prices and somewhat-higher mining costs then. 

That implies staggering profits growth of 104.3% YoY in the mid-tier gold miners!   More than doubling earnings in this brutal environment of burning stock markets will really catch investors’ attention. The GDXJ mid-tiers’ Q1’20 results will be out by mid-May.

With these sweet-spot gold stocks enjoying the best of all worlds with growing production, much-higher gold prices, and relatively-stable costs, their hard accounting results should’ve looked awesome in Q4. 

And indeed they did.  Overall the GDXJ-top-34 reported total revenues of $10.1b, which surged 31.0% YoY!  That exceeded the 5%ish-higher output and 21%ish-higher gold prices because of soaring silver mined.

These elite mid-tier gold miners also produced 42.9m ounces of silver, which was 37.5% higher YoY.  But that all came from GDXJ’s new inclusion of Mexico’s Penoles, which is one of the largest silver miners on Earth producing 15.6m ounces last quarter! 

Excluding it, the rest of the GDXJ-top-34’s total silver output dropped 12.5% YoY.  That reflects the waning interest mining companies have in perpetually-lagging silver.

Operating-cash-flow generation by these mid-tier gold miners naturally soared too, blasting 43.3% higher YoY to $3.1b. 

The bigger the cash flows these companies can spin off, the more capital they have to invest in further growing their outputs.  Their collective treasuries surged a proportional 30.6% YoY to hit $7.6b at the end of Q4.  That’s major potential investment for these relatively-small mid-tier gold miners.

The mid-tier gold miners’ hard accounting profits reported to their national securities regulators following those countries’ accounting rules improved radically last quarter! 

Overall the GDXJ-top-34 reported $388m in earnings in Q4’19, a massive +$1.1b swing from Q4’18’s ugly $699m loss. But unfortunately both these numbers are heavily skewed by noncash impairment charges and subsequent impairment reversals.

Accounting regulations require miners to write down the carrying values of their mines and deposits if falling gold prices make them look worth less.  Q4’18 saw many of these impairment charges with gold averaging just $1228, and most expecting it to keep grinding lower. 

In Q4’19 some of those impairment charges reversed with much-higher gold prices, but there were also new impairments on individual-mine problems.

Netting out just individual-company impairments and reversals around $100m+ in each quarter, Q4’19’s overall earnings were closer to $767m.  That compares to a $365m loss in Q4’18. 

So the GDXJ-top-34’s profits growth last quarter is even bigger when big non-cash charges and reversals are adjusted out.  The profitability these mid-tier gold miners are achieving is awesome!  And again it’s looking even better in Q1’20.

All those earnings have collapsed mid-tier gold miners’ valuations.  Of the GDXJ-top-34 with the earnings necessary to yield price-to-earnings ratios in Q4’18, they averaged a super-overvalued 77.2x then. 

Yet including these latest Q4’19 results, that average had plummeted by over 2/3rds to just 25.2x this week!  The mid-tier gold stocks are not just battered technically these days, but also really cheap fundamentally.

Thus there’s no doubt we are seeing the greatest gold-stock buying opportunity in years! Having a crazy exogenous black-swan event like this COVID-19-fueled stock-market panic crash the gold stocks right as their earnings are skyrocketing on higher gold prices is astounding. 

These anomalous annihilated gold-stock levels will mean revert radically higher in coming years as this secular gold bull’s upward march continues.

You could sure buy GDXJ to ride this mounting gold-stock bull higher, it’s way better than GDX hobbled by the stagnant majors. 

But while there are plenty of great mid-tier gold miners in GDXJ, there are lots of other ones I wouldn’t touch with a ten-foot pole based on their fundamental outlooks. Far-greater gains can be won by handpicking the best mid-tiers and avoiding the rest!  This is a gold-stock pickers’ paradise.

That’s why I started our long-awaited redeployment into gold stocks this week after they crashed. Buying low when few others are willing is necessary to maximize later gains. 

The bottom line is the mid-tier gold miners reported awesome results in Q4, directly driven by its much-higher prevailing gold prices. 

The mid-tiers also had far-better output growth than the majors, helping fuel soaring revenues, operating cash flows, and earnings.  And implied earnings growth continues to look massive with gold powering even higher still in Q1.  The mid-tiers’ fundamentals should continue improving.

Even at their relatively-high late-February levels, the mid-tier gold miners’ stock prices were seriously lagging their huge profits growth. 

But after this insane COVID-19 stock panic crashed this sector, these stocks are trading at some of their steepest discounts to current fundamentals ever! That gives them epic potential to mean revert radically higher as fear fades and gold recovers, yielding huge gains to early contrarians.

(Adam Hamilton, CPA – Zeal LLC – www.ZealLLC.com)