Gold mid-tiers’ Q1 2021 fundamentals

Ironically the leading mid-tier gold-stock benchmark and trading vehicle is the misleadingly-named GDXJ VanEck Vectors Junior Gold Miners ETF. It has evolved to be dominated by mid-tiers, miners yielding quarterly gold outputs of 75k to 250k ounces. The true juniors GDXJ now holds only account for a small fraction of its total weighting. With $6.0b in net assets, GDXJ is the second-most-popular gold-stock ETF.

That’s about 3/8ths the size of its big-brother GDX, which is mostly controlled by larger major gold miners. GDXJ’s performance trounced GDX’s during this gold-stock bull’s last upleg, which blasted higher over 4.8 months from mid-March to early August 2020. GDXJ’s massive 188.9% skyrocketing in that short span handily bested GDX’s parallel 134.1% gains! That’s despite these ETFs sharing many component stocks.

In their current young uplegs since March 2021, GDXJ’s 23.7% gain at best so far is lagging GDX’s 28.4%. That’s not unusual, as mid-tiers’ and juniors’ massive gains often accrue later on in uplegs as they grow mature. Popular greed mounts the longer gold stocks climb on balance, motivating traders to increasingly shift capital into smaller individual miners. So the mid-tiers’ real gains are likely still coming.

For 20 quarters in a row now, I’ve painstakingly analyzed the mid-tier gold miners’ latest quarterly results right after they are reported. While GDXJ contained a ridiculous 96 component stocks this week, I’m limiting my analysis to its top 25 holdings. They command a major 63.2% of GDXJ’s total weighting, and among these elite ranks are some of the best-performing gold miners. Their quarterly results are important.

This table summarizes the operational and financial highlights from the GDXJ top 25 during Q1’21. The mid-tier miners’ stock symbols aren’t all US listings, and are preceded by their rankings changes within GDXJ over the past year. The shuffling in their ETF weightings reflects changing market caps, which reveal both outperformers and underperformers since Q1’20. The symbols are followed by current GDXJ weightings.

Next comes these gold miners’ Q1’21 production in ounces, along with their year-over-year changes from the comparable Q1’20. Output is the lifeblood of this industry, with investors generally prizing production growth above everything else. After are the per-ounce costs of wresting that gold from the bowels of the earth, both cash costs and all-in sustaining costs. The latter help illuminate miners’ overall profitability.

That’s followed by a bunch of hard accounting data reported to securities regulators, quarterly revenues, earnings, operating cash flows, and resulting cash treasuries. Blank data fields mean companies hadn’t reported that particular number as of the middle of this week. The annual changes aren’t included if they would be misleading, like comparing negative numbers or data shifting from positive to negative or vice versa.

GDXJ looked to have a rough first quarter, sinking 17.0% on gold’s 10.0% extended-correction loss. But the mid-tier gold miners actually enjoyed very-strong operating and financial performances, proving their weak stock prices weren’t justified. Their lengthy streak of double-digit earnings growth grew on still-high prevailing gold prices. These stocks remain way undervalued compared to their underlying businesses!

Before we dig into the GDXJ top 25’s quarterlies, this ETF’s managers made some major composition changes over this past year. Although wise decisions that have really increased GDXJ’s utility to traders, they seriously skewed year-over-year comparisons with Q1’20. Several larger components were booted out over this past year, making way for smaller ones better aligning with this ETF’s mid-tier and junior focus.

The major gold miner Kinross Gold was GDXJ’s largest position a year ago, weighing in at 7.1% of its total. KGC produced a colossal 558.8k ounces of gold in Q1’21, far above that major-miner threshold of 250k ounces per quarter. While a great miner, Kinross had no place in this “Junior Gold Miners ETF”. Now it is exclusively in the major-dominated GDX Gold Miners ETF, which certainly makes much more sense.

South Africa’s Sibanye-Stillwater was also removed, but not because it mined 249.4k ounces of gold last quarter. While historically a gold miner, SBSW has grown into the world’s largest primary platinum-group-metals producer through big acquisitions. Finally two larger Australian mid-tiers merged, Northern Star Resources and Saracen Mineral. Producing 368.3k ounces of gold in Q1’21, this new company is also a GDX exclusive.

Together these four companies accounted for 27% of the GDXJ top 25’s gold production a year ago in Q1’20! They were also responsible for 28% of total revenues, 88% of earnings, 28% of operating cash flows, and 32% of cash treasuries. The smaller mid-tier gold miners that climbed the ranks to replace them have much-lower numbers all around. So comparisons must consider these big composition changes.

The current GDXJ top 25 in this table only included three junior gold miners, with their quarterly outputs boldfaced in blue. They are primary gold miners deriving over half their sales from the yellow metal, and produced less than 75k ounces last quarter. So GDXJ still being marketed as a “Junior Gold Miners ETF” remains misleading. The average Q1’21 production of the GDXJ top 25 actually mining ran up at 151k ounces.

GDXJ also maintains much overlap with its big-brother GDX ETF. I analyzed the latest quarterlies from its 25 largest components last week. Of these GDXJ-top-25 stocks, fully 12 are also GDX-top-25 ones! And 21 are also GDX components, clustered between its 11th to 36th weightings. Surprising many traders, these GDXJ-top-25 components at 63.2% of its total weighting also account for 24.0% of GDX’s weighting.

For years I’ve argued that this shouldn’t be the case, that GDX and GDXJ inclusion should be mutually-exclusive. These ETFs’ common managers should take the universe of gold miners’ stocks, divide them up by production or market capitalization, then put the top half in GDX and the bottom half in GDXJ. That would make these ETFs unique, greatly increasing their utility and attractiveness compared to the current setup.

GDXJ is improving by removing companies like Kinross, Sibanye, and the now-merged Northern Star and Saracen. Together they accounted for 19.4% of its total weighting in Q1’20. The capital from those big positions was reallocated lower down the ranks, leaving GDXJ both more diversified and mid-tier-centric. This ETF’s managers also need to kick out the big South African majors Gold Fields and Harmony Gold!

Moving on, this current crop of GDXJ-top-25 gold miners produced a collective 3,476k ounces of gold in Q1’21. That plunged 20.4% year-over-year from Q1’20, but only because those four kicked miners were included. Excluding them from the comparable quarter, these elite mid-tiers’ gold output actually surged 9.7% YoY! That was far better than the GDX majors, which saw their total gold output slump 2.8% last quarter.

And despite all the overlap between GDXJ and GDX, the former’s gold miners are much smaller. The GDXJ top 25’s 151k average production in Q1 was less than half of the GDX top 25’s 350k average. So these are still very-different ETFs despite including so many common components. GDXJ’s exposure to smaller miners with superior fundamentals gives it bigger upside potential than the major-dominated GDX.

Unlike the majors simply too big to grow fast regardless of how well they are managed, the mid-tier and junior gold miners are coming from much-smaller bases. These sweet-spot-for-upside-potential mid-tiers usually have a few mines or less, so expansions and new mine builds really boost their outputs. And the mid-tiers also have way-smaller market caps, making their stock prices far more responsive to capital inflows.

When mid-tiers’ lower production and market caps are combined with leveraged profits growth from higher gold prices, their upside potential during big gold uplegs trounces that of the majors. So the mid-tiers are easily the best gold stocks to own as this secular gold bull continues marching higher in coming years. Their future gold-production growth will far exceed the majors’, and their earnings aren’t done soaring.

In gold mining, output levels and unit costs are usually inversely proportional. The more gold mined, the more ounces to spread this industry’s big fixed costs across. Those are generally determined when mines are being planned, then don’t change much. Quarter after quarter, individual mines require about the same levels of infrastructure, equipment, and employees to feed their fixed-capacity mills with ores to process.

Those fixed costs staying roughly steady regardless of prevailing gold prices is what gives gold miners’ earnings big leverage to the yellow metal. And despite gold’s extended correction vexing Q1, last quarter still enjoyed the third-highest average gold prices on record at $1,793 per ounce. So even if production costs rose at the mid-tiers and juniors, they were still likely to earn fat profits which indeed proved true.

Cash costs are the classic measure of gold-mining costs, including all cash expenses necessary to mine each ounce of gold. But they are misleading as a true cost measure, excluding the big capital needed to explore for gold deposits and build mines. So cash costs are best viewed as survivability acid-test levels for the mid-tier gold miners. They illuminate the minimum gold prices necessary to keep the mines running.

With gold production surging nicely excluding those booted components, the GDXJ top 25’s cash costs should’ve declined proportionally. Instead they surged 8.9% higher to $820 per ounce, a new record! That shattered the previous peak of $759 from Q4’20. While mining gold is getting more expensive as central banks’ massive deluge of money printing unleashes serious inflation, this cash-cost read is skewed.

Hecla Mining, Equinox Gold, Buenaventura, and IAMGOLD all reported very-high cash costs last quarter of $1,052, $1,141, $1,295, and $1,052. Excluding them, the rest of the GDXJ top 25 averaged just $730. Based on their cost guidances for this year and beyond, these outlying miners should see their cash costs trend lower in coming quarters and years. But even that $820 overall average is far below prevailing gold prices.

All-in sustaining costs are far superior than cash costs, and were introduced by the World Gold Council in June 2013. They add on to cash costs everything else that is necessary to maintain and replenish gold-mining operations at current output tempos. AISCs give a much-better understanding of what it really costs to maintain gold mines as ongoing concerns, and reveal the mid-tier gold miners’ true operating profitability.

These elite mid-tier GDXJ-top-25 components reporting AISCs last quarter averaged $1,134 per ounce. That was also the highest ever seen, surging 11.2% from Q1’20. But again that was skewed high by a different set of outliers. Equinox Gold, Peru’s Buenaventura, and Indonesia’s Merdeka Copper Gold had very-high AISCs of $1,482, $1,631, and $1,342. The rest of those mid-tiers averaged a more-reasonable $1,059.

Fast-growing mid-tier Equinox attributed its high AISCs to weaker output on lower ore grades. But this company will hit higher-grade ores in the second half of 2021, boosting production which lowers unit costs. EQX’s full-year-2021 AISC projection including that high Q1 is much lower at a midpoint of just $1,233 per ounce! Buenaventura may not see much relief, as it has long struggled with operational problems.

But Merdeka’s AISCs are also forecast to plunge dramatically on better production ahead. Its full-year guidance pegs all-in sustaining costs at a midpoint of just $863 per ounce in 2021! One of the big themes in this just-finished Q1’21 earnings season was gold miners seeing much-better production in the second half of this year. Having more ounces of gold to spread fixed costs across will lower AISCs and boost earnings.

Interestingly Q1s have generally proven calendar years’ production troughs and thus unit-cost peaks. A variety of factors contribute. Most of the world’s gold mines are in the northern hemisphere, where cold or wet winters can impair operational efficiencies. Mine managers also take advantage of new-year budgets to do mine maintenance and expansions, which raise costs while also temporarily disrupting production.

Ore-sequencing decisions also play a role. Gold deposits aren’t uniform, with ore grades varying greatly. Lower-grade ores must be dug through and processed on the way to higher-grade targets. Q1s are when mine managers often choose to mine the former and run it through their mills. They do this because adverse stock-price impacts are less important far away from bonus calculations which happen nearing year-ends.

So in most years, the lower production and higher costs in Q1s makes them the worst-looking quarters in fundamental terms for the gold miners. Rising output and resulting lower unit costs in Q2s, Q3s, and Q4s really boost profitability. Yet despite gold’s extended-correction weakness last quarter and the GDXJ top 25’s highest AISCs ever, Q1’21 still proved a fundamentally-strong quarter. These gold miners are thriving!

A great proxy for overall sector profitability is found in subtracting average AISCs from quarterly average gold prices. Last quarter’s still-high $1,793 average gold price less the GDXJ-top-25’s skewed-high $1,134 average AISCs yields fat profit margins of $659 per ounce. That was still the fifth-highest on record, still climbing an impressive 17.4% year-over-year from Q1’20! That added to a long streak of big growth.

For seven quarters in a row now from Q3’19 to Q1’21, the mid-tier gold miners enjoyed amazing unit-earnings growth. Per this average-gold-less-average-AISCs proxy, the GDXJ top 25’s per-ounce profits soared by 65.1%, 72.2%, 64.9%, 108.2%, 77.9%, 54.9%, and 17.4% YoY! That has to be unrivaled by any other sector in the stock markets, it is a fantastic run. And this will persist in the current underway Q2’21.

As of the middle of this week, gold is already averaging $1,787 quarter-to-date. And with gold’s young upleg accelerating, it’s hard to imagine Q2’s ultimate average gold price not exceeding Q1’s $1,793. But to be conservative, let’s assume gold slumps in the next month-and-a-half so the current average stands. And with mid-tiers mostly forecasting lower AISCs, Q2’s will likely be in line with the past four quarters’ average.

That is $1,049 for the GDXJ top 25. That implies these elite mid-tiers as a group should earn at least $738 per ounce in the current Q2’21! That would make for strong sequential 11.9% quarter-on-quarter growth from Q1’21’s levels. So the fundamental outlook for the mid-tiers remains very strong in coming quarters. And that really improves with higher prevailing gold prices as this upleg advances, and lower costs.

The mid-tier gold stocks need to mean revert dramatically higher to reflect their current fundamentals, let alone what they will be earning as gold’s secular bull continues marching higher on balance! And the GDXJ top 25’s hard financial results reported to their securities regulators under Generally Accepted Accounting Principles or other countries’ equivalents confirmed their strong performances last quarter.

Their nicely-higher production combined with 13.4%-higher average gold prices boosted their total sales 14.0% YoY to $5,959m. And that is not even excluding those four large gold miners kicked out over this past year. Without Kinross, Sibanye, Northern Star, and Saracen included in the comparable Q1’20, the GDXJ top 25’s total revenues soared 57.9% YoY! The mid-tier gold miners’ operations are impressive.

Their actual bottom-line accounting earnings blasted up 360.8% YoY to $644m! Those were on the high side of GDXJ-top-25 precedent despite all the composition changes. Excluding those same major miners, the rest of these mid-tiers’ profits skyrocketed 39.0x between Q1’20 to Q1’21. Such strong earnings will push the gold miners’ valuations even lower once they are added into the rolling-four-quarter totals for P/E ratios.

Historically mid-tier gold miners trade at higher valuations because of their superior potential for earnings growth. But in the middle of this week, fully 7 of these mid-tiers still sported cheap trailing-twelve-month price-to-earnings ratios under 20x. That subset averaged just 14.6x! And since this is a small obscure contrarian sector, I doubt those yet reflect the just-reported Q1’21 results. These stock prices are really low.

The GDXJ top 25’s operating cash flows slumped 8.7% YoY to $1,663m. But without those four major gold miners booted, that comparison gets far better at +27.2% from the adjusted Q1’20. The more cash spun off by gold mining, the more these companies can invest in growing future production through mine expansions, new-mine construction, and existing-mine acquisitions. Higher outputs drive bigger future profits.

And all that cash generated buoyed the GDXJ top 25’s collective treasuries 13.1% higher YoY to hit $9,343m. That growth was 66.3% excluding those four majors. $9.3b of cash on hand is the second-highest ever seen in these mid-tiers, only behind Q4’20’s $10.1b. So these sweet-spot gold miners have lots of room to grow, build, and buy additional production. Such catalyzing news should attract big capital inflows.

With gold stocks rallying on balance again as their young upleg strengthens, traders are starting to pay more attention. The longer and higher this gold-stock upleg runs, the more sector sentiment will improve. Speculators and investors will increasingly chase the fundamentally-superior mid-tier gold miners, really bidding up their stock prices. That’s where later-upleg buying is concentrated, versus earlier-upleg ETF buying.

Gold stocks’ track record for multiplying wealth is unparalleled! Today’s middle-aged gold-stock bull has already seen four uplegs, which averaged huge 99.2% absolute GDX gains over 7.6 months! And the secular gold-stock bull before that had literally a dozen uplegs averaging 87.5% absolute gains over 7.8 months. So playing the contrarian to buy lower early in these before selling higher later on is fantastically lucrative.

And those massive upleg gains are in major-gold-miner terms. The fundamentally-superior smaller mid-tier and junior gold miners able to consistently grow their production will achieve gains way surpassing GDX and even GDXJ! Uncovering these best gold stocks to own is the goal of our painstaking multi-decade research campaigns, so we can deploy capital in these outperformers during gold-stock uplegs.

The bottom line is the mid-tier gold miners in the sweet spot for stock-price upside potential just reported another strong quarter. Even with gold grinding lower in Q1 in an extended correction, the mid-tiers still achieved great results. Their production surged nicely, way outperforming the majors’ slump. And the mid-tiers’ revenues, earnings, operating cash flows, and cash treasuries also shot up sharply year-over-year.

Yet their stock prices remain deeply undervalued, with much room to mean revert dramatically higher to reflect their strong underlying fundamentals. As traders increasingly realize these young gold and gold-stock uplegs are real and sustainable, they’ll really start chasing the mid-tier gold miners’ stocks. So their biggest gains in this mounting upleg are likely still to come. It’s not too late to get deployed in great gold stocks.

(By Adam Hamilton)