Gold miners’ fat profits

While gold prices are volatile, unit mining costs are relatively stable. They usually don’t change much from quarter to quarter. Gold mines’ operating costs are largely fixed during pre-construction planning stages, when engineers design throughputs for plants processing gold-bearing ores. Their nameplate capacities rarely change, requiring similar levels of infrastructure, equipment, and employees to keep operating.

While mine expansions boosting output can really affect production costs, they’re fairly rare for individual gold mines. After long decades painstakingly analyzing this contrarian sector, I’d guess gold mines may average one expansion over their decade-or-so average lifespans. So for the most part excluding some smaller variable expenses, producing gold costs about the same regardless of where it happens to be trading.

We’ve amassed lots of hard data over the years proving this. For the past 29 quarters in a row, I’ve dug into the latest results from each of the top 25 GDX gold miners. These include the world’s largest, which utterly dominate this flagship sector ETF. After every earnings season, I feed the key quarterly results reported by all these elite miners into a giant spreadsheet. That important data illuminates fundamental trends.

The gold miners will publish their latest quarterly reports between late October to mid-November, detailing how they fared in Q3’23. I can’t wait to explore that new data, and will write another essay analyzing it soon after this earnings season ends. But many years of hard-won experience from digesting quarterlies and collating results has given me great insights in anticipating sector earnings before they are reported.

Quarterly-average gold prices less the GDX top 25’s average all-in sustaining costs are a fantastic proxy for sector unit profits. The former are no mystery, set in stone on each quarter’s final close. In Q3’23, gold averaged $1,926 on close. That soared a massive 11.6% higher from Q3’22’s depressed average of $1,727. Remember what was happening in markets during that brutal comparable quarter about a year ago.

With inflation raging out of control, panicking Fed officials were frantically hiking rates by epic amounts. That included four monster 75-basis-point federal-funds-rate hikes in a row in the middle of 2022! That extreme Fed hawkishness along with higher yields launched the benchmark US Dollar Index parabolic. It skyrocketed 16.7% in just 6.0 months into late September 2022, hitting an extreme 20.4-year secular high!

Gold price action is dominated by gold-futures speculators, who punch way above their weights in bullying around gold due to the extreme leverage inherent in its futures. These guys can’t afford to be wrong for long, or they face ruin. They closely watch the US dollar’s fortunes for their primary gold-futures-trading cues, doing the opposite. So gold prices collapsed a miserable 20.9% in 6.6 months into September 2022!

That huge gold selloff that narrowly and briefly edged into new-bear territory crushed Q3’22’s average price. Though an unsustainable anomaly that soon had to mean revert sharply higher as I wrote at the time, that makes for impressive Q3’23 comps. Gold’s subsequent rebound upleg blasted 26.3% higher into early May 2023! Gold has mostly consolidated higher since, greatly boosting last quarter’s average price.

The yellow metal hasn’t seen bigger year-over-year quarterly-average-price gains since Q1’21, fully ten quarters ago. And they merely boosted gold to a much-lower average of $1,793. This latest Q3’23’s $1,926 is actually the second highest on record, only behind Q2’23’s $1,978! No matter what happened to gold majors’ mining costs, these much-higher prevailing gold prices alone will really boost profitability.

The GDX top 25’s average all-in sustaining costs are way harder to divine leading into earnings season. But the gold miners themselves offer plenty of clues for those willing to dig. A year ago in Q3’22, the GDX top 25’s AISCs averaged a record-high $1,391 per ounce! The $1,727 average gold prices less those lofty AISCs yielded sector implied unit profits of $335 per ounce, the worst seen in at least 29 quarters!

That makes for a low comparable-quarter base from which last quarter’s gold-mining earnings can soar. In the latest-reported Q2’23, the GDX top 25’s AISCs weren’t much better way up at $1,380 per ounce. But like usual that was skewed high by a couple serious outliers from usual-suspect very-high-cost miners. Without them, the rest of these gold majors averaged $1,299 AISCs. Those should come in lower in Q3’23.

These companies themselves generally predicted lower AISCs in 2023’s second half, mostly driven by higher production. Gold-mining unit costs tend to be inversely proportional to gold-output levels. The richer the ores fed into fixed-capacity mills, the more ounces recovered to spread mining’s big fixed costs across. Better ore grades forecast in Q3 mining plans, along with some mine expansions, should boost production.

A great example of this came from mighty Newmont, the world’s largest gold miner and GDX’s biggest component. Thanks to gold production collapsing 17.1% YoY in Q2’23, NEM’s AISCs that quarter soared 22.8% YoY to an ugly $1,472 per ounce! That was the worst Newmont ever reported by far, dragging up the entire GDX top 25’s average. And this super-major wasn’t even one of those two very-high-cost outliers.

Yet Newmont’s Q2’23 quarterly report explaining all this still predicted far-better H2’23 results. Although its AISCs were way too high at $1,376 and $1,472 in H1’23’s two quarters, NEM still affirmed it was “On track to achieve full-year guidance … with Gold AISC between $1,150 and $1,250 per ounce”. Since those averaged $1,424 in H1’23, pulling down full-year-2023’s to even $1,250 requires far-lower H2’23 costs.

We are talking NEM having to average just $1,075 per ounce through Q3 and Q4! That seems like a tall order, as this colossal gold miner hasn’t reported lower AISCs since Q4’21. But even if this company has to raise this year’s AISC guidance range, costs are still likely to be considerably lower. Plenty of other major gold miners joined Newmont in forecasting lower H2’23 AISCs right in their latest-reported Q2’23 results.

We could do similar math for all the GDX top 25 reaffirming full-year cost guidances. But conservatively their average AISCs ought to retreat at least 5% YoY from Q3’22’s record high. That yields a $1,322 target, or just $1,177 if that handful of serious outliers are excluded. It wouldn’t surprise me if the entire GDX top 25’s average warts and all comes in around $1,250 in Q3, which would be a six-quarter low.

But even if we use that conservative $1,322 AISC target, the gold miners are soon going to report fat profits last quarter. Q3’23’s high $1,926 prevailing gold prices less $1,322 AISCs yields implied unit profits of $604 per ounce. That would skyrocket a whopping 80.3% YoY above Q3’22’s depressed $335! That would prove the strongest major-gold-miner earnings growth seen in at least the last 29 quarters.

The previous record in this long research thread was a 66.2% YoY jump in Q2’20 to $730 per ounce. If my more-optimistic $1,250 average AISCs is correct, Q3’23’s GDX-top-25 average unit profits will more than double rocketing 101.7% YoY to $676! No matter how this upcoming Q3 earnings season plays out, the major gold miners are going to report massive earnings growth to fat profits. Key investors will take notice.

Individual investors mostly ape herd sentiment, crowding into gold stocks to chase their upside when they are already surging with gold. But professional investors, particularly fund managers controlling large amounts of capital, do endless research to temper their own greed and fear. If interested in this sector, they do the necessary analytical work on gold miners’ quarterlies to understand their fundamental trends.

I’ve heard from plenty of professional investors over the years on my quarterly gold-stock-fundamentals essays. Some can’t believe I’m freely sharing this valuable analytical work to help sell newsletters. If the GDX top 25’s average unit earnings merely best Q2’23’s $598 per ounce, that will make for the fourth consecutive quarter of improving profits. That should help attract in bigger-than-usual professional buying.

That won’t just come in the leading ETFs like GDX, but individual gold stocks. If Newmont or any other gold miner reports Q3’23 results way better than either expectations, the prior Q2’23, or the year-ago Q3’22, institutional investors should flock into those gold stocks. Their likely-sharp gains will amplify GDX’s upside, hastening the herd shift back to bullish psychology which will greatly increase buying.

Gold stocks have been battered technically in recent months, as this chart shows. That sure slammed sentiment, leaving this small contrarian sector really out of favor. If you need to get up to speed on why gold and gold stocks were pounded lower, my last couple weeks’ essays analyzed each causal chain in depth. But as I predicted, both the metal and its miners’ stocks have quickly recovered from their parallel breakdowns.

Gold was slammed by heavy gold-futures short selling to a violent breakdown into early October, as the USDX surged again on hawkish jawboning from top Fed officials. But that left speculators’ gold-futures positioning excessively-bearish, their capital firepower available for selling exhausted. That guaranteed big proportional mean-reversion buying was imminent, portending a sharp gold bounce back into its uptrend.

That’s indeed exactly what happened since, with both gold and GDX blasting back up into their briefly-interrupted uptrends. Gold stocks clawed back strongly, nearly erasing recent weeks’ anomalous losses! These rapidly-improving technicals are quickly reversing that recent bearish sentiment, shifting herd psychology back towards bullishness. Gold stocks starting to return to favor is a great backdrop for Q3 results.

The gold miners’ fat Q3 profits would be largely ignored if this sector was plunging to new lows. But with gold stocks surging back into this past year’s strong uptrend, way more speculators and investors will be paying attention. The higher and longer gold stocks rally, the more bullish herd psychology grows, the more traders will want to buy to chase those gains. Fantastic Q3 results are another great excuse to do that.

This latest quarter of record gold-mining profits growth is being reported while gold is soaring back on big gold-futures mean-reversion buying. And that ought to persist for at least a few months given how lopsidedly-bearish specs’ recent gold-futures positioning had become. Gold continuing to rally on balance is fertile sentimental ground for blowout earnings to stoke big gold-stock buying. Q3 results won’t be overlooked.

And there’s one more supremely-potent factor that should supercharge gold stocks’ coming upside. Gold-stock uplegs and corrections are defined by gold’s own, and GDX tends to amplify those material moves by 2x to 3x. After its last powerful 26.3% upleg peaked in early May, gold had been grinding lower in a sub-10% pullback. But as October dawned, gold’s violent breakdown stretched that selloff into correction territory.

Gold’s total retreat extended to 11.3%, bottoming just under $1,820. That mean’s this bull’s next major move higher which is already well underway is an entirely new upleg. And it won’t have to grow very big before gold challenges new all-time-record highs! Gold’s nominal closing peak of $2,062 was seen back in August 2020. Impressively gold only has to rally 13.3% from that recent low to achieve new record highs.

That’s nothing for gold uplegs. Again the last one soared 26.3% in 7.2 months into early May, and 2020 saw a pair of 40%+ monsters crest! As of mid-week, gold has already closed more than half that distance surging 7.1% to $1,949. So it only has another 5.8% to rally from here before surging back into nominal-record territory! That’s not much, and could easily happen in coming weeks as Q3’s earnings season unfolds.

Nothing is more bullish for herd psychology than challenging new record highs. The closer gold nears to that $2,062 all-time high-water mark, the more bullish financial-media coverage will explode. All that attention will fuel widespread greed to chase gold’s mounting gains, leading to big capital inflows in both the metal and its miners’ stocks. This coming gold-record hype could start building as Q3 results are reported.

That would really amplify their bullish sentimental impact, driving even bigger gold-stock buying that could quickly become self-feeding. There’s still time to get deployed in still-cheap gold stocks before far more traders start chasing them. Our newsletter trading books are currently full of fundamentally-superior mid-tier and junior gold miners that should enjoy way-better gains than the GDX majors as gold nears records.

The bottom line is the major gold miners are going to report fat profits in their imminent Q3 results. The combination of much-higher prevailing gold prices and forecast lower costs ought to make for some of this sector’s best earnings growth ever. Gold stocks’ rapidly-improving fundamentals should help attract back more professional investors including fund managers. Their big buying will really amplify sector gains.

And gold’s upcoming assault on nominal all-time-record territory could supercharge the impact of blowout Q3 results. The closer gold gets to new record closes, the more bullish financial-media coverage will fuel popular greed. Growing ranks of traders will flock back into the metal and its miners’ stocks to chase their strong upside momentum. That process could start in coming weeks before Q3’s earnings season ends.

(By Adam Hamilton)