Gold mid-tiers’ Q2 2021 fundamentals

Mid-tiers are far-less-risky than juniors, and amplify gold’s uplegs much more than majors. Ironically the leading mid-tier gold-stock benchmark is the misleadingly-named GDXJ VanEck Vectors Junior Gold Miners ETF. It has evolved to be dominated by mid-tiers yielding quarterly outputs of 75k to 250k ounces. True juniors now only account for a smaller fraction of the weighting in this second-most-popular gold-stock ETF.

Just over a third the size of its big-brother GDX major-gold-miners ETF, GDXJ has certainly had a wild ride this year. Between late March and early June it surged 26.7% higher in a young upleg. Then in mid-June gold stocks were crushed after a distant-future-Fed-rate-hikes scare slammed gold. The resulting collateral damage to gold-stock psychology has festered ever since, forcing GDXJ 26.1% lower as of this week.

So the mid-tier gold miners are really out of favor now, plagued with serious fear and apathy. But once a quarter these companies report their latest operational and financial results, hard fundamental data that burns through obscuring sentiment fogs. For 21 quarters in a row now, I’ve painstakingly analyzed all this from each of the top 25 GDXJ holdings to better understand how mid-tier gold miners are actually faring.

This table summarizes the operational and financial highlights from the GDXJ top 25 during Q2’21. 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 Q2’20. The symbols are followed by current GDXJ weightings.

Next comes these gold miners’ Q2’21 production in ounces, along with their year-over-year changes from the comparable Q2’20. 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.

Production boldfaced in blue shows the actual juniors, primary gold miners that produced less than 75k ounces last quarter. Although you wouldn’t know it from their withered stock prices, GDXJ mid-tiers are thriving in this ongoing high-prevailing-gold-price environment. Fearful herd sentiment has driven a huge disconnect between the mid-tiers’ operating performances and their valuations. That anomaly can’t last long.

GDXJ’s weightings have seen tremendous changes during this past year, as evident in the big position swapping in these ranking shifts. Compare that to my similar essay last week analyzing the top 25 GDX gold majors’ latest quarterly results. GDXJ’s big-brother ETF experienced vastly less flux. This rejiggering is happening for good reason, GDXJ’s managers are pruning out super-major gold miners that don’t belong.

In the years I’ve been working on this quarterly-results research thread and writing these essays, my main ongoing criticism was GDXJ contained too many larger major gold miners. Those should be exclusive to GDX, where they belong. Over this past year, the super-majors Kinross Gold and Gold Fields were finally booted. Their Q2’21 gold production was enormous at 538k and 563k ounces, so they weren’t GDXJ material.

Another large GDXJ holding was rightfully kicked too, Sibanye-Stillwater which is now a primary platinum miner. Together these three companies accounted for a hefty 17.5% of GDXJ’s entire weighting a year ago in the comparable Q2’20. So removing them left a big vacuum to fill, which was done by boosting the weightings in the rest of GDXJ’s components. This is excellent news, really upping GDXJ’s utility going forward.

But such a massive component-and-weighting readjustment makes the GDXJ top 25’s quarterly results way less comparable year-over-year. So bear in mind that this analysis is more apples-to-oranges than usual. Further complicating that, changing market capitalizations have left GDXJ with more explorers in Q2’21 than a year earlier. Without any commercial production yet, they also naturally skew comparisons lower.

We can somewhat correct for this major GDXJ reshuffling by excluding those three jettisoned companies from comparable Q2’20 total results. To fill that void, I replaced those with the next-three-largest GDXJ components back then that are now top-25 ones in this just-completed Q2’21. These include Pretium Resources, Sandstorm Gold, and Coeur Mining. So this particular swapping is called “adjusted” in this essay.

The GDXJ top 25’s total gold production plummeted an ugly 38.2% YoY last quarter to 2,557k ounces. That sounds disastrous, far worse than the GDX top 25 enjoying strong 4.2% YoY output growth. But in adjusted terms, that mid-tier production decline moderates greatly to down 14.6% YoY. And there is one other big change that accounts for most of that, the merger of two larger Australian mid-tiers into a new major.

Northern Star Resources and Saracen Mineral were both GDXJ-top-25 components a year ago, yielding a combined 413k ounces of gold. The former gobbled up the latter, so the combined company is now in GDX exclusively and produced a near-super-major 451k ounces in Q2’21. So if we also exclude both the predecessor companies from Q2’20 results, that leaves the year-over-year essentially flat shrinking just 0.9%.

And without those explorers, most of the rest of the GDXJ-top-25 mid-tiers also enjoyed growing outputs. That’s evident in their individual year-over-year production results in this table. So the mid-tiers remain fundamentally-superior to the majors, despite that being masked by GDXJ’s colossal holdings shake-up in this past year. Northern Star and Saracen comprised another 7.5% of GDXJ’s total weighting back in Q2’20.

Together with the booted Kinross, Gold Fields, and Sibanye, these five larger miners commanded a huge 25.0% of the capital deployed in GDXJ! And since these major component changes happened gradually over the past year, the comparisons won’t stabilize for several more quarters yet. While Kinross came out between Q3’20 and Q4’20 results, Gold Fields was only recently pulled between Q1’21 and Q2’21 reporting.

The resulting reweighting as formerly-smaller GDXJ components climbed the ranks has really helped this ETF’s diversification. Last quarter its top 25 components only accounted for 61.7% of its total weighting. That was the lowest in the last 21 quarters, and way off peak-concentration of 75.9% back in Q4’19. It is good to see GDXJ’s managers take the gold-majors criticisms to heart and forge their ETF into a better one.

Yet this newer GDXJ is still mostly an expanded subset of its big-brother GDX. Fully 20 of these GDXJ-top-25 holdings are also GDX ones, clustered between this larger ETF’s 14th to 36th rankings. Those added up to 14.7% of GDX. So GDXJ essentially takes 1/7th of GDX’s holdings and expands their weightings to 5/8ths of GDXJ. Only 5 of GDXJ’s top 25 holdings are exclusive, while 10 are also GDX-top-25 ones.

This big overlap isn’t a problem, as GDXJ’s gold miners are still much smaller than GDX’s. In Q2’21 the GDXJ-top-25 producers averaged 122k ounces of output, near the lower quarter of mid-tier range. The GDX-top-25 producers I analyzed in last week’s essay more than tripled that averaging a massive 372k! So despite its common holdings with GDX, GDXJ still offers way-superior exposure to smaller gold miners.

It is wonderful to see GDXJ evolving into becoming ever-more mid-tier-centric. After years of criticizing GDXJ’s managers, I applaud them for making these changes. The more distinct GDXJ becomes from GDX, the more useful and popular both ETFs will ultimately be. GDXJ’s increasing 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 resumes marching higher over coming years. Their future gold-production growth will far exceed the majors’, and their earnings aren’t done soaring.

Long-term gold-stock price levels ultimately depend on miners’ profitability, which is directly driven by the difference between prevailing gold prices and gold-mining costs. In per-ounce terms these are generally inversely proportional to gold production. That’s because gold mines’ operating costs are largely fixed during planning stages. Their designed throughputs limit the amounts of gold-bearing ore they can process.

That doesn’t change quarter to quarter, and requires about the same levels of infrastructure, equipment, and employees. The only real variable is the ore grades run through the fixed-capacity mills. Richer ores yield more gold ounces to spread the big fixed costs of mining across, lowering unit costs which boosts profitability. With adjusted production flat, the GDXJ top 25 should’ve reported flattish unit costs in Q2’21.

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.

Unfortunately the GDXJ top 25’s average cash costs still blasted 16.0% higher from Q2’20 levels to $820 per ounce last quarter. That tied the 21-quarter peak, these costs are high. But they are really skewed there by a handful of outliers. Hecla Mining and Buenaventura have long struggled with high costs, while First Majestic Silver just bought a new gold mine it hasn’t optimized yet. Excluding them, the average is $731.

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 major gold miners’ true operating profitability.

The GDXJ-top-25 mid-tiers also saw their average Q2’21 AISCs surge up 12.8% YoY to a lofty $1,125. That was the second-highest on record, not far behind Q1’21’s worst-ever of $1,134. But again those same three extreme-cost gold miners are really torpedoing the mean. It plunges to $1,047 without them, which is right in line with the GDX majors and excellent relative to the ongoing high prevailing gold prices.

Despite mid-June’s sharp gold plunge sparked by individual Fed officials expecting to maybe see merely a couple rate hikes well over a couple years into the future, gold still averaged $1,814 last quarter. That was its third-best ever, making gold mining super-lucrative. A great proxy for mid-tiers’ collective profitability is found by subtracting the GDXJ-top-25 average AISCs from that average gold price, showing unit earnings.

Even with those skewed-high $1,125 AISCs, these elite mid-tiers were still earning fat profits of $689 per ounce last quarter! That was the third best they’ve ever seen, a stark contrast to the battered sentiment plaguing this sector. This metric did slump 3.9% YoY from Q2’20’s big number, which killed a long streak of strong unit profits growth. But that decline was trivial compared to the huge earnings jumps before it.

During the seven consecutive quarters ending in Q1’21, the GDXJ top 25’s unit profits by this measure soared 65.1%, 72.2%, 64.9%, 108.2%, 77.9%, 54.9%, and 17.4% YoY! This stellar fundamental track record is likely unparalleled anywhere else in the stock markets. It is amazing anyone can be bearish on gold stocks with that kind of earnings growth. GDX majors’ similar streak extended to eight quarters in a row!

And given gold’s awesomely-bullish backdrop, its own secular bull is highly likely to continue powering higher on balance so the gold stocks will amplify its gains. In just 17.0 months since March 2020’s stock panic on governments’ pandemic lockdowns, the Fed has mushroomed its balance sheet by a ridiculous 91.5% or $3,945b! And the FOMC continues to conjure up another $120b monthly to directly monetize debt.

The Fed nearly doubling the US-dollar supply in such a short span of time is wildly-unprecedented. This monetary hyper-inflation is directly driving the spiraling price inflation Americans are facing everywhere. As investors increasingly realize the Fed can’t unwind that extreme monetary excess without collapsing the stock markets it artificially inflated, they will flock back to gold. That will catapult gold-stock prices far higher.

Even the GDX major gold miners’ stocks tend to amplify material gold moves by 2x to 3x. Fundamentally superior mid-tiers and juniors well outperform that during gold uplegs, with most of their outsized gains compressing into late-upleg peakings when sentiment waxes greedy. Gold miners’ earnings soar way faster than gold prices, which fundamentally justifies the massive gains gold stocks enjoy during gold uplegs.

The GDXJ top 25’s hard financial results just reported to securities regulators under Generally Accepted Accounting Principles or other countries’ equivalents confirmed their fundamental strength last quarter. While raw numbers in this table are unadjusted, the following comparisons strip out those five jettisoned companies from Q2’20 results. The three just under the top 25 then, that climbed there in Q2’21, are added in.

In these more-comparable terms, the GDXJ top 25’s total revenues surged 20.3% YoY to $6,152m. That is impressive growth considering flat adjusted gold output and average gold prices climbing 5.8% YoY last quarter. As this table shows, the large majority of these elite mid-tier gold miners experienced very-strong sales growth. That was partially driven by gold production rebounding from Q2’20’s mine-shuttering lockdowns.

These leading mid-tiers’ hard accounting earnings exploded on that, rocketing 153.8% YoY in adjusted terms to $752m! That’s on the high side out of the last 21 quarters, despite most not being comparable since they included those kicked major gold miners. But like usual earnings are complex since the gold miners sometimes flush non-cash impairment charges through their bottom lines, muddying operating results.

When digesting gold miners’ latest quarterly income statements, I always check for big non-cash charges or gains that greatly impact their reported profits. Last quarter had more and bigger than usual. Yamana Gold had a $145m deferred-income-tax expense on Argentina’s government passing a retroactive tax hike. Alamos Gold suffered a $224m writedown on Turkey unjustly expropriating a new gold mine there.

Overall noncash charges big enough to catch my eye among the GDXJ top 25 totaled a huge $502m! So without them, accounting earnings would’ve been that much higher. But unusually they were offset by rarer big gains. Equinox Gold reported an immense $304m in other income which was led by a $186m gain on investment reclassifying! Wesdome Gold reversed a $48m impairment and gained $32m selling a property.

Together these added up to $384m of offsetting gains. When all these are adjusted out, it yields overall net income about $119m higher than reported. Including that, the GDXJ top 25’s hard accounting profits nearly tripled with a huge 193.8% YoY gain! Make no mistake, the mid-tier gold miners are faring vastly better than most traders imagine. Their battered stock prices are a sentiment thing, not a fundamental one.

These leading GDXJ gold miners’ adjusted operating cash flows did slump 10.3% YoY to $1,921m. That is mostly a function of the other mix changes within this ETF’s 25 largest components. Both the explorers and gold-royalty companies that climbed back into GDXJ’s lower ranks generate far less cash than real gold miners. Overall adjusted cash treasuries still surged 17.0% YoY to $8,085m as of the end of last quarter.

That big pile of cash the mid-tiers have amassed will help them continue to expand their production. It will help finance existing-mine expansions, new-mine builds, and acquisitions of other mines. The quarterly reports of these GDXJ-top-25 mid-tiers were full of all kinds of projects on that front. More gold mined will lead to bigger absolute profits supporting even-higher stock prices, a powerful virtuous circle in this industry.

So today’s prevailing woe-is-me gold-stocks-are-doomed psychology is totally unjustified fundamentally. The gold miners are thriving with these excellent gold prices, with many so hammered-down technically that their trailing-twelve-month price-to-earnings ratios are way down in the single digits or teens! The gold stocks are among the most-undervalued relative to gold that they’ve ever been, screaming buys today.

With GDXJ’s composition really improving, this mid-tier ETF will well outperform GDX as gold’s distant-future-Fed-rate-hikes-scare-interrupted upleg resumes powering higher. So there’s no shame in owning GDXJ. But it still has way too much deadweight compared to a handpicked portfolio of fundamentally-superior mid-tier and junior gold miners rapidly growing their outputs.

The bottom line is the mid-tier gold miners in the sweet spot for stock-price upside potential just reported another strong quarter. Many saw surging production out of the prior year’s pandemic-lockdowns quarter. While average mining costs rose, they were mostly skewed high by a few outliers. When adjusted for the big GDXJ composition changes, the mid-tiers’ revenues surged and their accounting profits nearly tripled!

And gold miners’ hefty earnings will continue growing as gold’s secular bull powers higher on balance. That flood of new dollars from the Fed nearly doubling the US money supply will bid up gold for years to come. As traders blinded by bearish sentiment realize this, the bludgeoned mid-tier gold stocks will soar much higher. Enjoying some of their best fundamentals ever, their stock prices are destined for all-time highs.

(By Adam Hamilton)