With the major gold miners’ stocks getting bludgeoned, smart contrarian traders are salivating at coming great buy-low opportunities! With the COVID-19 pandemic’s extreme fear terrifying the markets, it’s very important to stay grounded in the gold stocks’ underlying fundamentals. Just this week they are finishing reporting their Q4’19 results, which were incredibly impressive thanks to recent higher prevailing gold prices.
With the sheer market chaos this week, suddenly everyone is rightfully interested in COVID-19. I have covered that outbreak’s daily progress in much depth since January in our subscription newsletters. The early revelations out of China were very troubling, which complacent American traders foolishly ignored. So if you want to understand this pandemic’s evolution, and what is really happening, read our newsletters.
I also warned in late February when gold blasted over $1600 on COVID-19 fears that gold’s surge was peculiar and precarious. Speculators’ gold-futures trading and gold investment buying, which are this metal’s primary drivers, were signaling an imminent sharp selloff rather than a sustainable upleg! So we were short gold and gold stocks via put options and leveraged ETFs, which I was ridiculed for at the time.
Those contrarian trades soon yielded excellent realized gains! When everyone else is excited about gold stocks is exactly the wrong time to be, because they’ve already won the majority of their near-term gains. But with this sector growing hated again after plummeting, we need to be licking our chops and getting ready to redeploy in force! So this is an exceedingly-opportune time to dig in to their latest fundamentals.
Because most gold miners logically run calendar financial years, Q4 reporting has an extended deadline up to 60 days after quarter-end in the US. In Canada where the majority of global gold stocks trade, the reporting deadline for full years extends out to 90 days. Annual reports including final quarters are bigger, more complex, and must be audited by independent CPAs. These results are still coming out this week.
The definitive list of major gold-mining stocks to analyze comes from the world’s most-popular gold-stock investment vehicle, the GDX VanEck Vectors Gold Miners ETF. Launched way back in May 2006, it has an insurmountable first-mover lead. GDX’s net assets running $11.2b this week were a staggering 31.4x larger than the next-biggest 1x-long major-gold-miners ETF! GDX is effectively this sector’s blue-chip index.
While GDX’s holdings were running a ridiculously-large 47 stocks this week, every quarter I delve into the latest results from the top 34. That’s simply an arbitrary number that fits neatly into the tables below. But it is a commanding sample, as these world’s largest gold miners accounted for fully 94.4% of GDX’s total weighting this week. They trade in stock markets across the globe, with differing reporting requirements.
That makes amassing this valuable dataset for analysis challenging and tedious. In different countries, the major gold miners report different data in different ways. Half-year reporting rather than our superior US quarterly reporting is also common around the world. That necessitates splitting reported data in half for quarterly approximations. Every gold miner has its own reporting peculiarities, taking time to understand.
The more quarterly iterations of this complex research thread I run, the better the results get. Q4’19 was my 15th quarter in a row of this deep fundamental GDX-gold-stock analysis, adding on to my massive spreadsheets. The highlights of the major gold miners’ latest results make it into the tables below. Blank fields mean a company hadn’t reported that particular data as of this essay’s late-Wednesday cutoff.
Each company’s symbol and weighting within GDX is followed by its quarterly gold production in Q4’19. Not all of these stocks trade in the US, as GDX also hosts sizable Australian and Canadian contingents. The year-over-year change in miners’ gold outputs from Q4’18 to Q4’19 reveals whether they are growing or shrinking. Cash costs and all-in sustaining costs per ounce show how much is spent producing that gold.
Next the YoY changes are shown in the major gold miners’ key financial data including operating cash flows generated, accounting earnings, revenues, and cash on hand. Percentage changes aren’t recorded if they would be misleading or not meaningful. That includes data shifting from positive to negative or vice versa from Q4’18, or if derived from two negative numbers. Then raw underlying data is included instead.
This entire dataset together offers a fantastic high-level read on how the major gold miners are faring. And they enjoyed massive fundamental improvements last quarter! Higher prevailing gold prices drove profitability sharply higher, forcing valuations much lower. The elite GDX gold miners haven’t looked this great on an operational basis in years, making this recent plunge I warned about an amazing buying opportunity.
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The gold miners’ stocks are ultimately just leveraged plays on gold. The yellow metal’s prices dominate their current profits and future earnings potential, so major gold stocks tend to amplify gold’s material price swings by 2x to 3x. While gold enjoyed a solid 3.0% gain in Q4’19, its average price stayed high near $1483. That was a whopping 20.8% above Q4’18’s average, which was a huge boon for gold miners!
The GDX-top-34 collectively produced 10.0m ounces of gold last quarter, which was 2.7% better than the prior year’s Q4. The equivalent of 311.5 metric tons, that was 35% of total world mine production in Q4’19 per the World Gold Council’s definitive data. But that impressive aggregate production growth from these major gold miners is somewhat misleading due to a couple of GDX-top-34 mergers over this past year.
In mid-January 2019, super-major miner Newmont Mining announced it was acquiring major miner Goldcorp for $10.0b in stock. That followed another colossal acquisition of Barrick Gold buying Randgold in late September 2018. Unfortunately these mega-mergers are bad for this industry, as I explained in depth shortly after. In late November 2019, Kirkland Lake Gold said it was spending $4.9b to acquire Detour Gold.
As both acquired companies were GDX-top-34 ones in Q4’18, merging them made room for two other miners to climb into those elite ranks. The biggest are Harmony Gold and Eldorado Gold, which have their symbols highlighted in light-blue showing they are new among GDX’s top 34. Together these two companies mined 463k ounces of gold in Q4’19, which is 4.6% of the GDX-top-34 total production last quarter.
Excluding just these two new additions, the GDX-top-34’s aggregate gold output actually shrunk by 2.0% from Q4’18. So production growth remains elusive for this industry as a whole, with individual miners’ performances varying widely. For better comparisons in that pair of newly-merged companies, I added their predecessors’ production and financial results in Q4’18 before computing the YoY changes last quarter.
Gold-stock investors prize production growth above everything else, as it is the lifeblood of this industry. The more gold individual companies produce, the more capital they have to grow by expanding existing operations and building new mines. And the recently-merged Newmont and Kirkland Lake both saw sharp production declines in Q4’19 compared to their predecessor companies’ total outputs achieved in Q4’18.
Newmont’s production plunged 11.8% YoY while Kirkland Lake’s plummeted 28.2%! That highlights yet again how major-gold-stock mergers usually fail to yield overall output increases despite their big dilution to acquiring shareholders. The merged companies’ gold produced tends to deteriorate from their earlier separate totals. Mergers also tend to increase per-ounce costs, as evident in Newmont’s climbing ones.
Interestingly the GDX-top-34’s 2.0% gold-output decline excluding those largest newest stocks is right in line with the overall global data from the World Gold Council. It reported worldwide production fell 1.8% YoY in Q4’19. That was the fourth quarter in a row of contracting output, which is utterly unprecedented in modern times! Gold is getting harder to find and more-expensive to extract, buttressing peak-gold theories.
With the major gold miners as an industry suffering waning production for an entire year now, it makes the companies still growing their outputs all the more valuable. If I had room in these tables, I’d include the change in each miner’s relative rank in GDX’s weightings over this past year. Those are based on market capitalizations. Gold miners able to grow their production generally see proportionally-outsized stock gains.
So when I pick individual gold stocks to buy, current and projected-near-future production growth is always an important consideration. Generally the more gold individual companies mine, the larger the cash flows they generate and the faster they can expand in the future. But once miners grow too big like the super-majors Newmont and Barrick commanding 26.5% of GDX’s total weighting, boosting outputs is very hard.
Prevailing gold prices and gold production aren’t the only key drivers of gold-stock earnings and thus their ultimate stock-price-appreciation potential. Mining costs are equally important. It doesn’t matter how big a miner gets if it sells its product at a loss, like many horribly-flawed tech-stock IPOs in recent years. So how much miners have to spend to wrest their metal from the bowels of the earth is also critical to watch.
Gold-mining costs are largely fixed quarter after quarter, with production requiring roughly the same levels of infrastructure, equipment, and employees. These big fixed costs are largely determined during mine-planning stages, when engineers and geologists decide which gold-bearing ores to mine, how to dig to them, and how to recover their gold. That makes rising gold prices really potent in catapulting earnings higher!
So Q4’19’s average gold price soaring 20.8% YoY had to fuel outstanding profits growth. But that is complicated by individual mine operations. Every gold mine has a finite limit on the ore throughput that it can process, measured in tons per day. Even with mills chewing through the same amounts of rock every day, gold produced varies considerably with ore grades. They differ greatly even within individual gold deposits.
Lower-grade ores must be blasted and excavated on the way to higher-grade targets. Mine managers have to decide how to mix these ores to feed into their mills, governing the amounts of gold they are able to recover. These decisions are made based on new-fiscal-year capital budgets, seasonal construction windows, and managers trying to maximize their share-based compensation. This really affects production. Related: Short Sellers Are Piling Into Oil
According to the World Gold Council’s comprehensive data, on average since 2010 calendar Q1s, Q2s, Q3s, and Q4s have seen global gold output running -8.1%, +5.7%, +5.9%, and -0.2% from the preceding quarter. Production falls sharply in Q1s, before surging back up in Q2s and Q3s. Then Q4s tend to start shrinking again. This is relevant because gold-mining costs are inversely proportional to production levels.
With mining costs largely fixed, the more gold recovered from processed ores the lower per-ounce costs since there are more ounces to spread them across. So Q4’19s lower gold output among the GDX-top-34 after adjusting for those big mergers portended higher costs. That’s not a problem when costs are relatively low compared to and rising slower than prevailing gold prices, which sure proved the case last quarter.
Cash costs are the classic measure of gold-mining costs, including all cash expenses necessary to mine each ounce of gold. They are misleading as a true cost measure though, excluding big capital needed to explore for gold deposits and build mines. Cash costs are best viewed as an acid test of survivability for the gold miners, revealing gold-price levels required to keep the mines running. They indeed rose in Q4.
These GDX-top-34 gold miners reported average cash costs last quarter of $672 per ounce. That’s up on the high side compared to the prior 14 quarters’ range from $591 to $679. But it’s still only up 2.6% YoY, in line with the production decline. And Harmony Gold’s new inclusion in the GDX-top-34 is skewing this number high, as its deep South African mines are very expensive to operate. Ex-Harmony, the average is $657.
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 GDX-top-34 gold miners reporting AISCs in Q4’19 averaged $942 per ounce. That surged a sharp 6.0% higher YoY, and was the highest by far in the 15 quarters I’ve been laboring on this research thread. Harmony again dragged this average higher, with its $1283 AISCs. So did Peru’s troubled Buenaventura, with an even-higher $1311 on falling production. Excluding those outliers, the average climbed 2.7% YoY.
But gold-mining costs are definitely rising, just like everywhere else thanks to central banks’ incessant inflationary money printing. With gold prices rising far faster than all-in sustaining costs though, the major gold miners’ earnings still soared. Subtracting quarters’ average GDX-top-34 AISCs from their average prevailing gold prices shows implied gold-mining-industry profitability. And it has been rocketing higher.
Q4’19’s $1483 average gold less $942 average AISCs yields major-gold-miner earnings of $541 per ounce. That skyrocketed a staggering 59.6% YoY compared to Q4’18’s $339 derived from $1228 average gold and $889 average GDX-top-34 AISCs! Even before COVID-19 fears started slowing down the world economy, the major gold miners were showing the best sector earnings growth in the entire stock markets.
And this trend isn’t over, with Q1’20 almost certain to look even better. So far this quarter gold’s average has soared way up to $1589, blasting 7.1% higher quarter-on-quarter. Assuming the past four quarters’ average GDX-top-34 AISCs of $910 hold, sector implied profitability is off the charts at $679. That would be another 65.6% YoY gain from Q1’19’s levels! Profits growth will be huge even if Q1’20 AISCs surge again.
So as gold-stock prices have been crushed in recent weeks on plummeting stock markets and weakening gold, their underlying fundamentals are looking awesome. That makes this coming bottoming a fantastic opportunity to buy low in a pricing anomaly driven by extreme sentiment. Our newsletter subscribers who wisely kept their powder dry in the recent euphoric unsustainable runup are looking forward to buying big.
All we need are green lights on gold from gold-futures speculators’ positioning and gold investment capital flows. Those are likely coming soon, giving us a valuable window to skim off this sector’s dross to uncover the gold miners with the best upside potential. That’s determined by both their fundamental outlooks and current technical levels. Buying low when others are scared will yield the best gains in gold’s next upleg.
With average gold prices 20.8% higher YoY in Q4’19 and adjusted GDX-top-34 gold output down 2.0%, these major gold miners’ total sales growth should’ve been near 19%. It actually came in up 19.6% YoY last quarter to $16.1b of revenues. That was buoyed by these elite gold miners’ collective silver output rising 6.5% YoY to 30.9m ounces. That is righteous, with none of the new GDX-top-34 stocks mining silver. Related: Coronavirus Won’t Stop Luxury Buying
These higher sales naturally drove big gains in operating cash flows generated. The GDX-top-34 saw their total OCFs rocket 51.2% higher YoY to $6.0b! The more cash their operations are spinning off, the more they can spend on expanding existing mines and building new ones to grow their outputs. And they are certainly investing and doing that, as their total cash war chests only grew 15.0% YoY to a hefty $14.1b.
The major gold miners’ hard accounting profits reported to their national securities regulators per those countries’ accounting rules improved radically last quarter. The GDX-top-34’s total earnings in Q4’19 ran $3.6b, vastly better than the $5.9b loss they collectively reported in Q4’18. These fat profits forced the trailing-twelve-month price-to-earnings ratios on some of these stocks into the low teens or single digits!
That proves the gold miners are cheap absolutely, and will be picked up by institutional investors using computers to screen for low valuations. The world’s two largest gold miners that mutual funds are most likely to buy, Newmont and Barrick, were running dirt-cheap P/Es of 12.3x and 8.9x in the middle of this week! That’s exceedingly-low for this often-high-flying sector, a heck of a fundamental bargain to buy.
Unfortunately both last quarter and the comparable one saw gold-miner accounting earnings heavily skewed by non-cash charges. Accounting rules require mines to be written down if falling gold prices make them look worth less, and these non-cash impairment charges are flushed through the miners’ income statements. In Q4’18 the gold-stock mega-mergers and lower gold prices made impairments flare.
Then Barrick reported a $0.9b impairment charge, while Goldcorp which Newmont was buying wrote off an unbelievable $4.7b in assets! It was kitchen-sinking all possible impairments so they wouldn’t have to be run through the acquiring company’s earnings later. Excluding those two impairment charges alone, and there were plenty other smaller ones, slashes Q4’18’s GDX-top-34 losses from $5.9b to a far-better $0.3b.
While impairment charges are understandable, accounting rules also allow them to be reversed. That adds even more volatility to bottom-line profits when gold has powered higher considerably. Every time I wade through income statements in this sector, I look for and record any large and unusual charges or gains. Q4’19’s blowout profits among the GDX-top-34 were heavily skewed by impairment reversals.
Together Newmont, Barrick, Agnico Eagle, and Kinross Gold reported a staggering $1.6b in gains from impairment reversals and other unusual things that don’t represent operating income. So even that alone excluding the rest of the GDX-top-34’s noncash weirdness slashes Q4’19’s accounting earnings to $1.9b. So instead of that epic headline -$5.9b to +$3.6b YoY swing, the reality is a lot closer to -$0.3b to +$1.9b.
That’s still nothing to sneeze at, especially with prevailing gold prices remaining high indicating that gold-mining profitability should continue exploding higher. The COVID-19 impact on gold-mining operations is likely to be minimal compared to other sectors too. Gold mines are usually way out in the sticks away from civilization, and mine employees are generally spread out across operations not exposed to many people.
While the recent COVID-19-fear-fueled gold-stock plunge was brutal for those trapped unaware, it is working to create awesome buying opportunities. Near-panic selling as the stock markets plummeted and gold seemingly-paradoxically rolled over in the midst of that carnage crushed gold-stock prices. Yet at the same time the major gold miners’ underlying fundamentals are greatly improving, these stocks are cheap!
The bottom line is the major gold miners just reported outstanding Q4 results. Much-higher prevailing gold prices dwarfed slightly-declining production and proportionally-rising costs. That fueled big revenues growth, soaring operating-cash-flow generation, and radically-higher accounting profits. All this left some of the world’s biggest gold miners trading at dirt-cheap price-to-earnings ratios in the low teens and single digits
And with gold prices even higher in the currently-winding-down Q1, the major gold miners’ stock-market-leading explosive profits growth is likely to persist. That will force valuations even lower, enticing in big institutional value investors. Once gold mostly finishes correcting and battering miners’ stocks, the buy-low opportunities resulting should be awesome. Low prices with fast-improving fundamentals are crazy-bullish.
Adam Hamilton, CPA
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