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Adam Hamilton

Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing…

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Is The Gold Miner Bull Run Coming To An End?

Gold Miners

The major gold miners’ stocks have skyrocketed since mid-March’s stock panic, attracting in a deluge of new capital inflows. That recently catapulted this normally-contrarian sector to extremely-overbought levels, necessitating a rebalancing correction. The gold miners are just finishing reporting their operating and financial results from the challenging last quarter. Was gold stocks’ huge upleg fundamentally justified?

 

The leading and dominant gold-stock benchmark and trading vehicle today is the GDX VanEck Vectors Gold Miners ETF. Launched way back in May 2006, GDX’s first-mover advantage has grown into an insurmountable lead. With $16.8b of net assets this week, GDX commands a staggering 31.7x more capital than its next-biggest 1x-long major-gold-miners-ETF competitor! GDX is really the only game in town.

 

The major gold miners’ performance as seen through this GDX lens has been breathtaking. Over several weeks into mid-March, GDX collapsed 38.8% to $19.00 per share. Widespread fears of the devastating economic impacts of governments’ draconian economic lockdowns to fight COVID-19 fueled a full-blown stock panic. Gold and its miners’ stocks were temporarily sucked into that ultra-rare epic fear maelstrom.

 

But that anomaly birthed a major new upleg in gold stocks, which staged a violent V-bounce and were off to the races. Over the next 4.8 months into early August, GDX skyrocketed 134.1% higher to $44.48! Riding that massive gold-stock upleg was exceedingly lucrative. But such big and fast gains weren’t sustainable. They left this sector extremely overbought, GDX stretched over 1.45x its 200-day moving average.

 

So in this past week or so, the overheated gold stocks entered a correction with GDX plunging 12.2% in just 4 trading days. These periodic selloffs are essential to keep bull markets healthy, bleeding away the excessive greed and euphoria that mushrooms late in gold stocks’ hot runs. The majority of that huge post-panic upleg accrued in Q2 proper, where GDX soared 59.2%. How the gold miners did last quarter is crucial.

 

Q2’20 proved curious for this industry, with powerful bullish and bearish forces warring. Average gold prices blasted up 30.9% year-over-year to $1714, which is an incredible boon for gold miners’ financial results. Yet at the same time, many gold mines around the world were forced to shutter for weeks on end last quarter by governments’ heavy-handed national economic lockdowns to slow COVID-19’s spread.

 

That odd juxtaposition of the best of times and worst of times made for one fascinating quarter. Q2’20 narrowly edged out Q3’11, when gold’s mighty previous secular bull peaked, as seeing the best average gold prices on record! Yet many gold miners couldn’t fully capitalize on that phenomenal windfall since national governments were forcing them to mothball mines. I’ve been on tenterhooks awaiting the results.

 

While sentiment fueled by gold’s own price action drives gold stocks’ major uplegs and corrections, it is still very important to study the miners’ fundamentals. Their collective quarterly results reveal how this industry as a whole is faring. And individual companies’ quarterlies help stratify this sector, illuminating the fundamentally-superior stocks best for trading. They generally enjoy higher potential gains at lower risks.

 

So for 17 quarters in a row now, I’ve painstakingly analyzed the major gold miners’ latest quarterly results right after they are reported. While GDX contained a crazy 53 component stocks this week, I’m limiting my analysis to its top 25 holdings. These are the world’s biggest and best gold miners, which command a dominant 85.8% of GDX’s total weighting. The lion’s share of capital chasing gold stocks ends up in them.

 

These elite gold miners trade in the US, Australia, Canada, China, and the UK, making amassing this data somewhat challenging. There are different financial-reporting requirements around the globe, and even within the same country miners report different data in different ways. In the few cases where half-year results were all that was offered, they were split in half to approximate what those companies did in Q2.

 

This table summarizes the operational and financial highlights from the GDX top 25 in Q2’20. These elite gold miners’ symbols are listed, some of which are from their primary foreign stock exchanges. That is preceded by their ranking changes in terms of GDX weightings from Q2’19. Then their current weightings as of this week follow those stock symbols. GDX essentially weights gold stocks by market capitalizations.

 

So relative ranking changes help illuminate outperformers and underperformers over the past year. That data is followed by each miner’s Q2’20 gold production in ounces, and its year-over-year change from Q2’19’s results. Then comes cash costs per ounce and all-in sustaining costs per ounce along with their YoY changes, revealing how much it costs these elite miners to wrest their gold from the bowels of the earth.

 

Next quarterly revenues, earnings, operating cash flows generated, and cash on hand are listed along with their YoY changes. Blank data fields mean companies hadn’t reported that particular data as of the middle of this week. Blank percentage fields indicate those changes would either be misleading or not meaningful, from comparing two negative numbers or when data shifts from positive to negative and vice versa.

 

Because of that epic tug-of-war between record-high average gold prices and COVID-19 shutdown orders plaguing mines, the gold miners have never seen a quarter like Q2’20. Their operational results indeed proved weak with many mines hobbled by arbitrary decree. Yet gold was so darned high their financial results still came in strong! That showed this sector’s massive gains last quarter were fundamentally righteous.

Interestingly the capital concentrated in these GDX-top-25 major gold miners actually moderated a bit, slipping from 88.6% in Q1’20 to 85.8% in Q2. That is a healthy sign that participation in the massive post-stock-panic gold-stock rally is broadening. Speculators and investors weren’t just buying the biggest gold miners via GDX, but moving into the individual smaller mid-tier ones lower down in GDX’s weightings.

The more stocks participating in bull-market uplegs, the healthier that bull and the greater its ultimate staying power. Excessive concentration as evident in narrow breadth leading uplegs is very unhealthy. That is exactly what has happened in the general stock markets since mid-March’s stock panic, with big gains almost totally driven by the handful of market-darling mega-cap techs. Gold stocks don’t share that risk.

But unfortunately last quarter proved weak operationally for these elite GDX-top-25 major gold miners. They collectively produced just under 7.6m ounces of gold in Q2’20. That not only plunged 11.0% YoY from Q2’19’s total, but was the lowest quarterly output this group has seen in the 17 quarters I’ve been working on this research thread! But that output drop fully resulted from governments’ economic lockdowns.

Each quarter the venerable World Gold Council publishes the best-available global gold fundamental data in its must-read Gold Demand Trends reports. The latest one covering Q2’20 was released at the end of July. It revealed overall world gold-mine output collapsed 10.0% YoY last quarter to 25.0m ounces. That was an extreme outlier, radically worse than the 2.8%-YoY average quarterly growth over the past decade.

The GDX-top-25 major gold miners’ shrinking production of 11.0% last quarter was right in line with what this entire industry suffered at the hands of alarmist bureaucrats. The WGC reported countrywide gold output in Q2 plummeted 62% YoY in Mexico, 59% YoY in South Africa, and 45% YoY in Peru! For these elite gold miners, Mexico was the main problem. Its government shuttered gold mining for 60 days in Q2!

Last quarter’s production declines largely resulted from COVID-19 lockdown orders, with miners slammed in proportion to their operations in affected countries. Hardest hit was Buenaventura, the worst performer in GDX-rankings terms and Peru’s largest publicly-traded gold miner. Its Q2 gold production cratered 46.2% YoY due to its Peruvian mining concentration! That government’s State of Emergency forced mines to close.

Pan American Silver, which is now overwhelmingly a mid-tier gold miner, was hit hard too with gold output plummeting 37.5% YoY. There were no operational problems, PAAS just had the misfortune of having most of its mines in countries imposing the most-extreme economic lockdowns in Q2. 43% and 31% of this company’s 2019 sales came from Peru and Mexico! But they weren’t the only ones attacking miners.

The far-larger Agnico Eagle also mines in Mexico, but most of its gold is produced in a couple different regions of Canada. That country also imposed COVID-19 shutdowns on gold miners, but quickly came to its senses. Gold-mining operations are usually remote, with access highly limited and tightly controlled. And workers often travel to mine sites to work long multi-week shifts. Mining gold is pandemic-resistant.

Still, AEM reported “During the second quarter of 2020, seven of the Company’s eight mines experienced either temporary shutdowns or reduced mining activities related to government mandated COVID-19 restrictions.” That’s why its Q2 output fell 19.7% YoY, a huge red flag any other time. Even Newmont, the biggest and most-diversified gold miner, saw five of its mines forced into care and maintenance in parts of Q2.

Normally such sharp output drops would cause serious concerns, since production is the lifeblood of this industry. The more gold miners produce, the greater their profits supporting higher future stock-price levels. But profits leverage to gold works both ways, so when output falls future earnings potential drops dramatically. Thankfully those COVID-19 disruptions were temporary, quickly reversing as lockdowns lifted.

Most of the major gold miners reported operating tempos at shuttered mines were back up near full speed by the end of Q2. A surprising number of these companies believe they can make up enough lost output in the remainder of 2020 to achieve the lower ends of their full-year guidances! So the GDX top 25’s gold production should rebound sharply in this current Q3, and surge back to if not above normal levels in Q4.

Odds are Q2’20’s widespread economic lockdowns shuttering gold mines won’t be repeated. COVID-19 is so virulent and tenacious that governments are realizing we are all going to have to learn to live with this virus. The economic, social, political, and health damage caused by national lockdowns is extreme and far-reaching, vastly worse than anything COVID-19 could do. So future shutdowns will be narrowly targeted.

Dangerous outbreaks aren’t going to happen way out in the mountains where small groups of workers are blasting out gold. In their Q2 results, the major gold miners universally reported implementing all kinds of mitigation efforts to detect any COVID-19 infections and stop them from spreading. That included setting up separate living quarters for any necessary quarantines. The gold miners are fighting this virus head-on.

In gold mining, output and costs are inversely proportional. The more gold mined, the more ounces to spread this industry’s big fixed costs across. Those generally don’t change much from quarter to quarter regardless of prevailing gold prices. Individual mines require the same levels of infrastructure, equipment, and employees to feed their fixed-capacity mills quarter after quarter. So lower outputs mean higher unit costs.

And that doesn’t even include all the new costs for managing this pandemic, something the gold miners have never had to do. Testing for the virus, quarantining the afflicted, and relentlessly social distancing and cleaning to limit its spread all require more resources and people. So gold-mining operating costs had to increase with these many new COVID-19 burdens, completely independent from gold production.

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 major gold miners. They illuminate the minimum gold prices necessary to keep the mines running.

The GDX-top-25 gold miners reported average cash costs of $646 in Q2, up 4.7% YoY. Surprisingly given the serious lockdown disruptions to operations, that wasn’t a new high. The 17-quarter cash-cost range has run between $594 to $658. And obviously with gold averaging that record $1714 in Q2, there is zero existential threat to this sector. Cash costs are really only relevant when gold prices plumb secular lows.

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.

These elite GDX-top-25 major gold miners reported average AISCs of $984 per ounce in Q2’20, which was a new 17-quarter high. That surged 13.1% YoY from Q2’19’s levels, roughly proportional with these miners’ 11.0%-YoY gold-output decline. The additional cost increase beyond that was probably mostly related to those extensive COVID-19 mitigation efforts. But these relatively-high AISCs were skewed by BVN.

Buenaventura’s Peruvian operations suffered so much under that country’s draconian shutdown orders that AISCs doubled as production was slashed in half! The resulting $1598 BVN reported is incredibly extreme and not reflective of normal operations. Exclude that anomaly, and the rest of the GDX top 25 averaged $952 AISCs. While still the top of the 17-quarter range, that would only be a 9.4% YoY jump.

But even at $984, naturally the gold miners are exceedingly profitable with gold averaging $1714. That implies this industry earned $730 per ounce last quarter, a princely sum. Those are easily the highest unit earnings since I started this research thread in Q2’16. That is up a stupendous 66.2% YoY from Q2’19! Gold-mining earnings are exploding per this industry-wide profitability metric, a super-bullish omen.

Quarterly profits skyrocketing 2/3rds higher, certainly some of the best sector performance in all the stock markets, sure justifies GDX’s 59.2% gain in Q2! And gold stocks’ massive outsized earnings growth isn’t over. Most of the quarterly reports I read from these major gold miners again said production had already mostly rebounded after Q2’s lockdown decrees. So GDX-top-25 output in this current Q3 will likely rise 10%+.

Of course that will proportionally lower AISCs, which could retreat 10% to $886 per ounce. So far in Q3, gold’s $1888 average price is proving a major new record high. But gold is extremely overbought, and really needs to correct. So let’s assume it drops far enough in the remainder of Q3 to hammer its average price down to $1825. These conservative assumptions yield potential Q3 earnings of $939 per ounce.

If that happens, the GDX top 25 as a whole would see profits soaring 59.0% YoY in Q3’20! That sure as heck fundamentally justifies big ongoing gains in the major gold stocks. They likely have to correct first and work off their serious overboughtness for a spell. But following that healthy sentiment-rebalancing selloff, this bull’s next upleg should also see massive gains on such strong fundamentals. They are very bullish.

On the hard financial-results front under Generally Accepted Accounting Principles reported to securities regulators, or their foreign equivalents, the major gold miners achieved an amazing quarter financially. The GDX top 25’s total revenues surged 19.8% YoY to $12.1b! That outstanding sales growth jibes with average gold prices soaring about 31% YoY while gold-mining output fell 11%. 20% is huge top-line growth.

Last week I published a similar quarterly-results essay looking at the 25 largest companies in the flagship S&P 500 broad-market stock index. Even including those mega-cap techs thriving in this crazy stay-at-home world, the SPX top 25 saw total revenues plunge 9.6% YoY. So the major gold miners’ sales soaring 19.8% YoY is phenomenal outperformance that should really catch the attention and capital of traders.

In actual bottom-line accounting-earnings terms, these GDX-top-25 gold miners collectively reported $2.1b in profits. That skyrocketed a gargantuan 268.3% higher YoY! That compares to the S&P 500’s top 25 companies, the biggest and best in the US stock markets, suffering a 16.6% YoY profits decline. Gold-mining earnings are highly leveraged to prevailing gold prices, and today’s records are fueling huge profitability. Related: The U.S. Has The Tech To Go Green, But Will It Use It?

High gold prices also drive big operating-cash-flow generation. The GDX top 25’s total OCFs soared 59.8% YoY in Q2’20 to $4.6b. The major gold miners use the surplus cash their mines spin off to boost their future output, by expanding existing mines and building new ones. Not surprisingly the gold miners’ soaring operating cash flows dwarfed the 13.5% YoY OCF growth seen in the S&P 500’s top 25 companies.

The gold mines producing so much cash helped catapult the GDX-top-25 gold miners’ cash hoards an astounding 89.6% higher YoY to $15.1b! Their collective treasuries were almost as high as they’d ever been over the last 17 quarters, only slightly bested by Q1’20’s $15.3b. It wasn’t just OCFs that filled miners’ bank accounts. They also prudently tapped lines of credit to build their liquidity to weather Q2’s lockdowns.

But if government officials indeed realize garroting their own economies through national lockdowns is a foolish overreaction, a cure far more damaging than the COVID-19 disease, the gold miners’ lockdown fears will fade. That will leave them flush with cash to expand their outputs, both organically and through mergers and acquisitions. They will also likely pay down those lines of credit, improving their balance sheets.

So Q2’20 proved really interesting for the major gold miners, with much-higher prevailing gold prices more than offsetting gold-mine shutterings imposed by national governments. Outstanding financial results easily overshadowed forced weak operational ones. The externally-decreed production shrinkage has already mostly reversed according to the major gold miners’ quarterly reports. That is super-bullish for this sector!

Given the enormous earnings these higher prevailing gold prices are generating at the major gold miners, additional massive gains in their secular bull are certainly fundamentally-justified. Even though GDX just enjoyed that huge 134.1% post-stock-panic upleg, this gold-stock bull’s next upleg is likely to prove really big too. But we first have to get through healthy gold and gold-stock corrections following extreme overboughtness.

All bull markets naturally flow then ebb, taking two steps forward before retreating one step back. Their price action gradually meanders around uptrends. This normal upleg-correction pattern keeps sentiment balanced, extending bull markets’ longevity. And it is a huge boon for traders, offering excellent mid-bull opportunities to buy relatively low before later selling relatively high. That greatly expands bulls’ potential gains!

The bottom line is the major gold miners reported outstanding Q2 results. Their operations did get hit hard by governments’ draconian national lockdowns to slow COVID-19’s spread. Output fell sharply, boosting operating costs proportionally. But record-high quarterly gold prices far more than offset that decline in gold production. Revenues, earnings, operating cash flows, and cash all soared dramatically last quarter.

Once those lockdown orders were lifted, the gold miners wasted no time in spinning back up their affected mines. Most of them were already running near normal output levels when Q2 results were reported. So Q3 will see higher production and lower costs, amplifying gold-mining profitability with gold trading at major new all-time-record-high average prices. Further big gold-stock gains remain fully justified fundamentally.

Adam Hamilton

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