The mid-tier gold miners’ stocks have soared in recent months on gold’s decisive bull-market breakout. They are this sector’s sweet spot for stock-price upside potential, with room for strong production growth which investors love. That’s an attractive contrast to the stagnating major gold miners. The mid-tiers’ recently-reported Q2’19 results reveal whether their fundamentals justify their strong surge this summer.
Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Required by the US Securities and Exchange Commission, these 10-Qs and 10-Ks contain the best fundamental data available to traders. They dispel all the sentiment distortions inevitably surrounding prevailing stock-price levels, revealing corporations’ underlying hard fundamental realities.
The global nature of the gold-mining industry complicates efforts to gather this important data. Many mid-tier gold miners trade in Australia, Canada, South Africa, the United Kingdom, and other countries with quite-different reporting requirements. These include half-year reporting rather than quarterly, long 90-day filing deadlines after year-ends, and very-dissimilar presentations of operating and financial results.
The definitive list of mid-tier gold miners to analyze comes from the GDXJ VanEck Vectors Junior Gold Miners ETF. Despite its misleading name, GDXJ is totally dominated by mid-tier gold miners and not juniors. GDXJ is the world’s second-largest gold-stock ETF, with $4.5b of net assets this week. That is only behind its big-brother GDX VanEck Vectors Gold Miners ETF that includes the major gold miners.
Major gold miners are those that produce over 1m ounces of gold annually. The mid-tier gold miners are smaller, producing between 300k to 1m ounces each year. Below 300k is the junior realm. Translated into quarterly terms, majors mine 250k+ ounces, mid-tiers 75k to 250k, and juniors less than 75k. GDXJ was originally launched as a real junior-gold-stock ETF as its name implies, but it was forced to change its mission.
Gold stocks soared in price and popularity in the first half of 2016, ignited by a new bull market in gold. The metal itself awoke from deep secular lows and surged 29.9% higher in just 6.7 months. GDXJ and GDX skyrocketed 202.5% and 151.2% higher in roughly that same span, greatly leveraging gold’s gains! As capital flooded into GDXJ to own junior miners, this ETF risked running afoul of Canadian securities laws.
Canada is the center of the junior-gold universe, where most juniors trade. Once any investor including an ETF buys up a 20%+ stake in a Canadian stock, it is legally deemed a takeover offer. This may have been relevant to a single corporate buyer amassing 20%+, but GDXJ’s legions of investors certainly weren’t trying to take over small gold miners. GDXJ diversified away from juniors to comply with that archaic rule.
Smaller juniors by market capitalization were abandoned entirely, cutting them off from the sizable flows of ETF capital. Larger juniors were kept, but with their weightings within GDXJ greatly demoted. Most of its ranks were filled with mid-tier gold miners, as well as a handful of smaller majors. That was frustrating, but ultimately beneficial. Mid-tier gold miners are in the sweet spot for stock-price-appreciation potential!
For years major gold miners have struggled with declining production, they can’t find or buy enough new gold to offset their depletion. And the stock-price inertia from their large market capitalizations is hard to overcome. The mid-tiers can and are boosting their gold output, which fuels growth in operating cash flows and profitability. With much-lower market caps, capital inflows drive their stock prices higher much faster.
Every quarter I dive into the latest results from the top 34 GDXJ components. That’s simply an arbitrary number that fits neatly into the tables below, but a commanding sample. These companies represented 83.2% of GDXJ’s total weighting this week, even though it contained a whopping 70 stocks! 3 of the top 34 were majors mining 250k+ ounces, 24 mid-tiers at 75k to 250k, 5 “juniors” under 75k, and 2 explorers with zero.
These majors accounted for 12.8% of GDXJ’s total weighting, and really have no place in a “Junior Gold Miners ETF” when they could instead be exclusively in GDX. These mid-tiers weighed in at 60.9% of GDXJ. The “juniors” among the top 34 represented just 6.6% of GDXJ’s total. But only 1 of them at a mere 0.9% of GDXJ is a true junior, meaning it derives over half its revenues from actually mining gold.
The rest include 2 primary silver miners, a gold-royalty company, and a gold streamer. GDXJ is actually a full-on mid-tier gold miners ETF, with modest major and tiny junior exposure. Traders need to realize it is not a junior-gold investment vehicle as advertised. GDXJ also has major overlap with GDX. Fully 29 of these top 34 GDXJ gold miners are included in GDX too, with 23 of them also among GDX’s top 34 stocks. Related: Beijing Backlash: Stocks Slammed, Gold Boosted
The GDXJ top 34 accounting for 83.2% of its total weighting also represent 39.8% of GDX’s own total weighting! The GDXJ top 34 mostly clustered between the 10th- to 40th-highest weightings in GDX. Thus nearly 5/6ths of GDXJ is made up by almost 4/10ths of GDX. But GDXJ is far superior, excluding the large gold majors struggling with production growth. GDXJ gives much-higher weightings to better mid-tier miners.
The average Q2’19 gold production among GDXJ’s top 34 was 157k ounces, a bit over half as big as the GDX top 34’s 299k average. Despite these two ETFs’ extensive common holdings, GDXJ is increasingly outperforming GDX. GDXJ holds many of the world’s best mid-tier gold miners with big upside potential as gold’s own bull continues powering higher. Thus it is important to analyze GDXJ miners’ latest results.
So after each quarterly earnings season I wade through all available operational and financial reports and dump key data into a big spreadsheet for analysis. Some highlights make it into these tables. Any blank fields mean a company hadn’t reported that data as of this Wednesday. The first couple columns show each GDXJ component’s symbol and weighting within this ETF as of this week. Not all are US symbols.
19 of the GDXJ top 34 primarily trade in the US, 5 in Australia, 8 in Canada, and 2 in the UK. So some symbols are listings from companies’ main foreign stock exchanges. That’s followed by each gold miner’s Q2’19 production in ounces, which is mostly in pure-gold terms excluding byproducts often found in gold ore like silver and base metals. Then production’s absolute year-over-year change from Q2’18 is shown.
Next comes gold miners’ most-important fundamental data for investors, cash costs and all-in sustaining costs per ounce mined. The latter directly drive profitability which ultimately determines stock prices. These key costs are also followed by YoY changes. Last but not least the annual changes are shown in operating cash flows generated, hard GAAP earnings, revenues, and cash on hand with a couple exceptions.
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 data rather than weird or misleading percentage changes. In cases where foreign GDXJ components only released half-year data, I used that and split it in half where appropriate. That offers a decent approximation of Q2 results.
Symbols highlighted in light blue newly climbed into the ranks of GDXJ’s top 34 over this past year. And symbols highlighted in yellow show the rare GDXJ-top-34 components that aren’t also in GDX. If both conditions are true, blue-yellow checkerboarding is used. Production bold-faced in blue shows any rare junior gold miners in GDXJ’s higher ranks, under 75k ounces quarterly with over half of sales from gold.
This whole valuable dataset compared with past quarters offers a fantastic high-level read on how mid-tier gold miners are faring fundamentally as an industry. This last quarter was interesting, as gold’s awesome breakout surge to major new secular highs didn’t get underway until just before quarter-end. So the mid-tier gold miners had to contend with flat gold prices, with Q2’19’s average of $1309 merely 0.2% higher YoY.
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(Click to enlarge)
The shuffling in the ranks of GDXJ’s top 34 components continued over this past year, with major gold miner Kinross Gold added. It, Gold Fields, and Harmony Gold really should be shifted exclusively into GDX since their production is way into major-dom. Gold miners of that scale just defeat the purpose of a “Junior Gold Miners ETF”, retarding its upside potential and eroding traders’ confidence in its managers’ competence.
Most of the other new additions are good though, including mid-tiers Buenaventura, Alacer Gold, and Torex Gold. While Hochschild Mining was technically a junior last quarter, it will likely soon grow into a mid-tier mining 75k+ ounces of gold quarterly. But there’s one GDXJ component that reported such an extreme quarter that it skews most of the year-over-year comparisons. That is South Africa’s Sibanye-Stillwater.
SBGL is actually a primary platinum-group-metals miner, which drove nearly 2/3rds of its implied revenue based on average metals prices in Q2! Its shrinking South African gold operations are a total mess, just emerging from a 5-month-long strike organized by a violent Marxist union. That crippled its gold mines, and left at least 9 people dead! Sibanye-Stillwater also has to fight South Africa’s absurdly-corrupt government.
Even though that hellish strike ended in mid-April, very early in Q2, SBGL’s gold production plummeted a catastrophic 47.9% YoY last quarter! That catapulted its all-in sustaining costs to a ridiculous $2110 per ounce, up an extreme 60.5% YoY from already-high levels. This shocking anomaly needs to be excluded in GDXJ comparisons. I wouldn’t invest in this company if it was the last miner on earth, it is a nightmare.
Production has always been the lifeblood of the gold-mining industry. Gold miners have no control over prevailing gold prices, their product sells for whatever the markets offer. Thus growing production is the only manageable way to boost revenues, leading to amplified gains in operating cash flows and profits. Higher production generates more capital to invest in expanding existing mines and building or buying new ones.
Thus gold-stock investors have long prized production growth above everything else, as it is inexorably linked to company growth and thus stock-price-appreciation potential. In Q2’19 these GDXJ-top-34 gold miners collectively produced 5.0m ounces of gold. That was actually down 1.2% YoY, which is worse than the 0.7% shrinkage the top 34 GDX majors reported last quarter after being adjusted for mega-mergers.
But excluding SBGL’s mayhem, the rest of the GDXJ top 34 actually managed to grow their total output by an impressive 1.7% YoY to 4.9m ounces! That not only trounced the majors, but narrowly bested the world’s aggregate production growth in Q2. According to gold’s leading fundamental authority, the World Gold Council, total world output grew 1.6% YoY last quarter to 28.4m ounces. The mid-tiers are thriving.
The GDXJ mid-tiers were able to enjoy strong production growth because this ETF isn’t burdened with many struggling major gold miners that dominate GDX. Again GDXJ’s components start at the 10th-highest weighting in GDX. The 9 above it averaged colossal Q2 production of 585k ounces, which is 3.7x bigger than the GDXJ top 34’s average! Gold mining’s inherent geological limitations make it very difficult to scale.
The more gold miners produce, the harder it is to even keep up with relentless depletion let alone grow their output consistently. Large economically-viable gold deposits are getting increasingly difficult to find and ever-more-expensive to develop, with low-hanging fruit long since exploited. But with much-smaller production bases, mine expansions and new mine builds generate big output growth for mid-tier golds. Related: Market Sentiment At Its Lowest In 10 Months
The majors don’t only face that large-base growth problem with their production scales, but also with their stocks’ market capitalizations. The GDXJ top 34 companies averaged $2.5b in the middle of this week, compared to $6.9b in the GDX top 34 when I analyzed their Q2 results last week. With the mid-tiers generally around a third as big as the majors, their stock prices have much less inertia restraining them.
With gold returning to favor since late June’s awesome decisive bull-market breakout, the mid-tier-filled GDXJ is already outperforming the major-dominated GDX. Since its year-to-date low in late May, GDXJ surged as much as 52.1% higher by early August! That was considerably better than GDX’s 46.2% rally in the same timeframe. The longer gold-bull uplegs persist, the bigger the mid-tier outperformance grows.
The mid-tier gold miners continue to prove all-important production growth is achievable off smaller bases. With a handful of mines or less to operate, mid-tiers can focus on expanding them or building a new mine to boost their output beyond depletion. But the majors are increasingly failing to do this from the super-high production bases they operate at. As long as majors are struggling, it is prudent to avoid them.
Also interesting on the mid-tier production front was silver. Last quarter the GDXJ-top-34 miners’ silver output blasted 42.8% higher YoY to 28.2m ounces! Some of these companies indeed saw exploding silver production, led by Yamana Gold’s rocketing up 65.8% YoY to 2.2m ounces and SSR Mining’s soaring a similar 55.8% YoY to 1.5m ounces. But new GDXJ-top-34 components drove most of the silver growth.
Buenaventura and Hochschild Mining produced 5.5m and 4.3m ounces of silver last quarter, and they weren’t in GDXJ’s top 34 in Q2’18. Excluding them, the rest of these mid-tier gold miners actually saw their total silver output slump 5.1% YoY. I’ll discuss the serious challenges silver mining faces in next week’s essay, which will wade through the results of the top silver miners of the leading silver miners’ ETF.
In gold mining, production and costs are generally inversely related. Gold-mining costs are largely fixed quarter after quarter, with actual mining requiring about the same levels of infrastructure, equipment, and employees. So the higher production, the more ounces to spread mining’s big fixed costs across. Thus Q2’19’s solid production growth among the GDXJ top 34 ex-SBGL should’ve yielded proportionally-lower costs.
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 Q2’19 these top-34-GDXJ-component gold miners that reported cash costs averaged $672 per ounce. That actually rose a sharp 6.6% YoY, and was worse than the GDX-top-34 majors’ $641 mean.
Sibanye-Stillwater didn’t report Q2 cash costs, so that wasn’t a factor. But a couple of other anomalous situations dragged up this average. Buenaventura has been struggling with weaker production, resulting in extreme $930 cash costs last quarter. And Harmony Gold, a South African miner facing that country’s miserable operating environment, had even-worse $965 cash costs in Q2’19! Those are crazy-high.
Excluding them, the rest of the GDXJ top 34 averaged $650. That’s towards the lower end of the GDXJ-top-34 average range of $612 to $730 in the 13 quarters I’ve been advancing this deep-quarterly-results research thread. As long as cash costs remain far below prevailing gold prices, which was certainly true in Q2, the gold miners face no existential threat. Gold returning to favor is really widening that key survival gap.
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. AISCs 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 companies’ true operating profitability.
The GDXJ-top-34 AISC picture in Q2’19 looked much like the cash-cost one, with average AISCs surging 6.1% YoY to $941 per ounce. That was on the higher side of the past 13 quarters’ range from $855 to $1002, but way below Q2’s average gold price of $1309. That implies GDXJ’s mid-tier gold miners were already earning sizable $368 profits last quarter. But this AISC read was heavily skewed by SBGL’s mess.
Again that cursed gold miner’s AISCs skyrocketed 60.5% YoY to an unbelievable $2110! That was as high as I’ve ever seen, and SBGL tried to bury this deep in its Q2 reporting. The strike was blamed, even though it ended in early Q2. But remove that wild outlier from the pool, and the rest of the GDXJ-top-34 gold miners averaged AISCs of $896 per ounce. That’s actually right in line with the GDX top 34’s $895.
With gold rocketing back over $1500 earlier this month to hit 6.3-year secular highs, it is easy to assume the gold miners must be thriving fundamentally. And they likely are. But realize the lion’s share of the recent huge gold gains didn’t start until late June when gold decisively broke out to new bull-market highs. So these Q2 results don’t yet reflect these new higher gold prices. But Q3’s are on track to look spectacular.
Gold’s lofty $1446 average price so far this quarter is a whopping 10.5% higher quarter-on-quarter than Q2’s! So the current likely profitability of the gold miners post-gold-breakout is far higher than seen last quarter. Assuming the GDXJ top 34’s average all-in sustaining costs hold flat near $941 this quarter, that implies Q3 profits running $505 per ounce. That’s up a massive 37.2% QoQ from what was seen in Q2!
This incredible profits leverage to gold is what makes gold stocks so alluring during major gold uplegs. Their earnings grow so darned fast, 3.5x gold’s advance in this example, that big stock-price gains are usually fundamentally-justified. In Q2’19, GDXJ averaged $30.46 per share. That’s when you should’ve been buying gold stocks, when they were low and out of favor. I explained their bullish outlook in early April.
So far in Q3 which is more than half over, GDX has averaged $38.43 which is 26.2% higher QoQ. That is still lagging big expected profits growth among mid-tier gold miners this quarter given the much-higher prevailing gold prices. So gold stocks’ strong gains in recent months are fundamentally-righteous, supported by underlying earnings growth and sustainable as long as gold holds over $1446 into quarter-end.
The mid-tier gold miners reported good accounting results last quarter even before gold reignited. The GDXJ top 34’s total revenues soared 23.0% YoY to $6.6b! While that is certainly overstated given the new inclusion of major gold miner Kinross Gold, without it the rest of these companies still saw strong 7.3% YoY growth. That’s impressive given Q2’19’s dead-flat average gold price, up a trivial 0.2% YoY.
These strong operations drove exploding operating-cashflow generation, with the GDXJ top 34’s total blasting 44.2% higher YoY to $2.3b! Even without KGC they still rose 23.6% YoY. And these elite mid-tier gold miners were investing some of this new capital in expanding their mines, which investors always like to see. Their collective cash hoards sunk 12.6% YoY to $6.0b, which remains healthy given mid-tiers’ sizes.
The GDXJ top 34’s profits under Generally Accepted Accounting Principles radically improved as well. Together they earned $291m last quarter, which was a colossal improvement from Q2’18’s $410m loss. Even though $384m of that resulted from an impairment charge by a single component miner that quarter, the mid-tiers’ profits picture still greatly improved. And that was even with last quarter’s still-anemic $1309 gold.
Imagine how awesome these numbers will look in this current quarter given all the gold fireworks since the end of Q2! The mid-tier gold miners generally report their results 4 to 6 weeks after quarter-ends, so Q3’19 fundamental performance will be revealed in the first half of November. As long as gold sentiment remains decent, these Q3 results should really impress and attract in legions of new investors to this sector.
That being said, gold and gold stocks have soared really far really fast this quarter. Sentiment quickly grew greedy as really-overbought levels were reached. Couple that with today’s menacing overhang of huge potential gold-futures selling, and a healthy bull-market correction is likely. But now is the time to do your homework before buying lower later, to ferret out the high-potential gold miners with superior fundamentals.
All portfolios need a 10% allocation in gold and its miners’ stocks! This is more important than ever with gold finally waking up from its long slumber while lofty central-bank-goosed stock markets are looking increasingly precarious. The better mid-tier gold miners are the place to be. Unlike the majors, they are actually growing their production and have far-higher upside coming from lower-market-capitalization bases.
The bottom line is the mid-tier gold miners are thriving fundamentally. Their Q2 results were good, even before gold’s powerful bull-market breakout. They are growing production while holding the line on costs. That means their earnings will soar as gold powers higher on balance in its resurgent bull market. That will support much-higher gold-stock prices in the future, and attract traders back to this long-neglected sector.
Gold’s bull market will flow and ebb as always, so gold-stock positions should be accumulated relatively low in post-selloff troughs. There’s no need to buy high at crests when everyone is excited. But you have to prepare in advance, monitoring the markets and researching the gold miners to be ready to pounce at opportune times. Capital allocations should be focused on mid-tier gold miners with superior fundamentals.
By Adam Hamilton
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