Gold Mid-Tiers’ Q3’21 Fundamentals
Adam Hamilton November 19, 2021 3291 Words
The mid-tier and junior gold miners in their sector’s sweet spot for upside potential have been powering higher recently. They’ve blasted to several major breakouts after getting bombed out during gold-futures speculators’ taper tantrum on Fed-tightening fears last summer. These smaller gold miners just finished their Q3’21 earnings season, revealing whether their fundamentals support more big stock-price gains ahead.
Gold-stock tiers are defined by their production rates. Small juniors mine less than 300k ounces of gold annually, medium mid-tiers have outputs running from 300k to 1m, large majors yield over 1m, and huge super-majors operate at vast scales exceeding 2m. Mid-tiers offer a unique mix of sizable diversified gold production, considerable output-growth potential, and smaller market capitalizations ideal for outsized gains.
Mid-tiers are much-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 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. Showing mid-tiers’ huge potential, GDXJ skyrocketed 188.9% in a massive upleg over just 4.8 months into early August 2020! The extreme greed and overboughtness that spawned necessitated a normal and healthy major correction to rebalance sentiment, so the mid-tiers fell 32.0% into late March 2021.
That cleared the way for their next upleg to start marching higher, and it clocked in at young 26.7% gains by early June. But mid-month, gold-futures speculators started freaking out about coming Fed tightening. Several heavy-to-extreme bouts of gold-futures selling hammered the yellow metal on these traders’ fears of distant-future rate hikes and slowing quantitative-easing money printing. Gold stocks were collateral damage.
That anticipatory QE-taper tantrum prematurely truncated the mid-tiers’ young upleg, whacking GDXJ back down 32.2% by late September. That devastated herd psychology, leaving overwhelmingly-bearish sentiment in its wake. Heading into and soon after that deep capitulation low, I was pounding the table on getting or stayed deployed in deeply-undervalued gold stocks. Indeed that interrupted upleg has resumed since.
GDXJ has surged 28.2% at best since then, a good start for a major upleg. With mid-tiers’ mounting gains rekindling traders’ interest, it’s a great time for quarterlies. These reveal how gold miners are actually faring fundamentally, both operationally and financially. This hard data cuts through the obscuring and misleading fogs of herd sentiment. So I’ve been advancing this research thread for 22 quarters in a row now.
After every quarterly earnings season, I painstakingly analyze the latest results from each of the top 25 GDXJ component stocks. This week they commanded 60.2% of this ETF’s total weighting, the lowest yet seen in these last 22 quarters. Down from a 75.9% peak in Q4’19, this is good news for speculators and investors. GDXJ’s holdings are gradually diversifying in weightings terms, leaving smaller miners more influential.
This table summarizes the operational and financial highlights from the GDXJ top 25 in Q3’21. These gold miners’ stock symbols aren’t all US listings, and are preceded by their rankings changes within GDXJ over this past year. The shuffling in their ETF weightings reflects changing market caps, which reveal both outperformers and underperformers since Q3’20. Those symbols are followed by their current GDXJ weightings.
Next comes these gold miners’ Q3’21 production in ounces, along with their year-over-year changes from the comparable Q3’20. Output is the lifeblood of this industry, with investors generally prizing production growth above everything else. After are the costs of wresting that gold from the bowels of the earth in per-ounce terms, both cash costs and all-in sustaining costs. The latter help illuminate miners’ 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 data 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.
Despite Q3’s challenges led by those gold-futures selloffs and mounting inflationary cost pressures, the GDXJ gold miners are generally faring quite well. When adjusted for huge composition changes in this ETF, they generally enjoyed surging production. And many held the line on costs, although the usual-suspect outliers skewed the averages. Overall the mid-tier and junior gold miners are still thriving fundamentally!
Much to their credit, GDXJ’s managers have slowly forged their baby into the world’s best gold-stock ETF. For years it included larger super-majors, which are as far from junior-dom as miners get. Due to their big market capitalizations, they had disproportionally-high weightings compared to other smaller components. Moving some larger gold miners to the GDX major-gold-stock ETF where they belong has finally happened.
Super-majors Kinross Gold and Gold Fields are now rightfully left exclusively in GDX, along with the new Australian major Northern Star Resources after it gobbled up competitor Saracen Mineral. Those four companies alone accounted for 3/8ths of the GDXJ top 25’s gold production in Q3’20, and fully 21.4% of this ETF’s total weighting! So while their removal from GDXJ was good, it left Q3’21 not comparable with Q3’20.
The companies that climbed into the elite GDXJ-top-25 ranks to help fill that big vacuum left when those majors were booted are far smaller. They include MAG Silver, Osisko Gold Royalties, Seabridge Gold, and Wesdome Gold Mines. MAG is building a massive new silver mine, but will have no real production until next year. OR is a ludicrously-overvalued royalty play that only yielded a paltry 20k ounces last quarter.
SA has a colossal world-class gold deposit, but that may as well be vaporware as this project hasn’t been developed for decades. WDO is the only real gold miner among these replacements, but producing 29k ounces in Q3’21 it is still a smaller junior. So Q3’20’s huge 1,542k ounces of gold mined by those kicked-out majors has effectively been replaced with just 49k in Q3’21! We have to adjust our year-over-year comparisons.
Ignoring those vast composition changes, the GDXJ top 25’s production looks terrible plunging 23.9% YoY last quarter. But pulling those now-three majors from Q3’20 results to make them comparable with Q3’21’s reveals awesome production growth. The 3,149k ozs produced last quarter by these mid-tier and junior miners actually soared 21.4% YoY! That is phenomenal, far better than the GDX major gold miners.
There’s lots of overlap in GDXJ and GDX components. The former basically lops off the top 13 holdings of the latter, then greatly expands their weightings. As I explained in my essay last week on the GDX top 25’s Q3’21 results, the super-majors dominating its weightings are largely deadweight. They can’t grow output at their vast scales, and their enormous market caps saddle their stock prices with supertanker-like inertia.
Fully 20 of these GDXJ-top-25 components are also in GDX, but their total weighting in that major ETF is only 22.5% compared to 60.2% in GDXJ. Without the world’s largest gold miners and their perpetually-losing battle against depletion, the mid-tiers and juniors can really shine. Their 21.4%-YoY adjusted gold-output growth thrashes the GDX top 25’s mere 1.1% YoY last quarter! Smaller miners fuel new production.
After every quarter the World Gold Council publishes the best-available global gold fundamental data in its fantastic must-read Gold Demand Trends reports. In Q3’21, worldwide mined gold supply surged 4.4% YoY. While the GDX majors merely achieved a quarter of that growth rate, the GDXJ mid-tiers and juniors collectively nearly quintupled it! And gold-stock price gains are heavily correlated with output trends.
Whether mid-tiers or true juniors producing less than 75k ounces per quarter, fully 3/5ths of the GDXJ top 25 reported higher production in Q3’21. The handful of actual junior primary gold miners have production highlighted in blue. With more exposure to smaller mid-tier and junior gold miners, GDXJ’s usefulness for traders continues to improve. It has way more upside potential during gold uplegs than 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 continues 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 surging, the GDXJ top 25 should’ve reported lower unit costs in Q3’21.
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 cash costs bucked their sharply-higher output to blast 19.0% higher YoY to $862 per ounce! While still way below prevailing gold prices, that was the highest by far during the 22 quarters I’ve been advancing this research. Thankfully that average was heavily skewed by a handful of outliers including Hecla Mining, Harmony Gold, and Buenaventura which reported super-high cash costs in Q3’21.
HL has long been a higher-cost miner, and its anomalous cash costs actually improved considerably from Q3’20. South Africa’s HMY is operating old very-deep gold mines that are increasingly expensive to keep running. Peru’s BVN has been struggling on the operations front for years, weaker production forces costs higher. Excluding these usual-suspect outliers, the rest of the GDXJ top 25 averaged better $790 cash costs.
Even those were skewed high by Equinox Gold and IAMGOLD. The former is one of the fastest-growing mid-tier gold miners, constantly advancing projects and opening new mines. Its costs will retreat as more come online. IAG is dealing with lower ore grades and inflationary cost pressures in its expenses, but it is slowly transitioning to new mines that will lower costs in coming years. So GDXJ-top-25 cash costs are fine.
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 mid-tier gold miners’ true operating profitability.
For the same distorting reasons, the GDXJ top 25’s all-in sustaining costs in Q3’21 also surged 14.9% YoY to $1,131 contrary to much-higher adjusted production. That was just shy of the $1,134 22-quarter high seen in Q1’21. But last quarter’s average was also skewed high by those same always-outlying HL, HMY, and BVN. Excluding them the rest of these mid-tiers and juniors reported way-better $1,049 AISCs.
That would only be up 6.6% YoY, fairly-impressive given the raging price inflation unleashed by central banks’ epic money printing. And if EQX and IAG are also taken out due to their temporarily-outsized costs, that average plunges to $993 which is right in line with Q3’20’s $985. So the great majority of the elite mid-tier and junior gold miners are performing well in keeping costs under control. That is really bullish!
Subtracting the GDXJ-top-25 average AISCs from prevailing gold prices yields a great proxy for mid-tier unit earnings. Despite those bouts of heavy gold-futures selling on Fed-tightening fears, gold still fared quite well in Q3’21 averaging $1,789. That was down a modest 6.4% YoY, ending a magnificent nine-quarter streak of higher gold prices. Still gold remained far higher than even those elevated $1,131 AISCs.
Despite being pinched by both lower gold prices and higher costs, that still yielded excellent mid-tier profits of $658 per ounce! That remained the sixth-highest ever seen, after the five preceding quarters. The peak was $928 in Q3’20, but for three full years prior to Q2’20 this metric averaged $413. Gold mid-tiers are still thriving despite the inflationary cost pressures they face. And gold-price gains should outpace inflation.
Ultimately gold will follow the money, which has exploded under this profligate Fed. In just 20.5 months since March 2020’s pandemic-lockdown stock panic, this central bank has mushroomed its balance sheet by a radically-unprecedented and terrifying 108.3% or $4,504b! And despite finally starting to slow that ballooning with the QE4 taper, another $420b is still coming if the Fed sticks to the timeline the chair laid out.
With vastly more money competing for and bidding up prices on far-slower-growing goods and services, inflation is raging. The more investors experience it in their own lives, and see how it erodes earnings in these Fed-QE-levitated bubble-valued stock markets, the more they will prudently diversify stock-heavy portfolios with gold. So gold-price gains should way-outpace inflation, and miners’ earnings leverage those.
On the hard-accounting front, the GDXJ top 25’s Q3’21 results were mixed even adjusted for those now-three majors removed over this past year. These mid-tier and junior gold miners did enjoy strong 14.8%-YoY adjusted revenues growth to $6,937m last quarter! That’s right where you’d expect with that big adjusted-gold-output growth of 21.4% and 6.4%-lower quarterly average gold prices, certainly impressive.
But bottom-line earnings under Generally Accepted Accounting Principles still cratered 77.9% YoY on an adjusted basis to just $212m! That sounds like a disaster, not matching up with implied mid-tier earnings from that average-gold-less-average-AISCs proxy. That $658 in GDXJ-top-25 unit profits only retreated a far-milder 29.1% YoY. This discrepancy was driven by big mostly-non-cash items flushed through income statements.
In Q3’21 those included PAAS earning $28.5m selling other shares, IAG incurring a $40.4m charge for additional mine-reclamation expenses, EGO paying $21.4m to retire some bonds early, and CDE suffering a $35.7m unrealized loss on investments. There were other smaller non-cash items too, but I only flag the larger ones for my spreadsheet. Adjusted for these, GDXJ-top-25 profits were closer to $281m last quarter.
And Q3’20 saw even more extreme non-cash items distorting operating income, which adjusts the raw $959m excluding those now-three major miners booted out. BTG reversed a $174.3m impairment charge, AUY gained $241.9m selling a mine, while CG reported a $230.5m impairment charge due to problems getting essential water at one of its mines. Those big ones drop Q3’20 adjusted earnings near $773m.
Accounting for these major unusual items alone reduces the adjusted net-income collapse to 63.7% YoY to $281m. That’s still ugly, partially reflecting the rising costs of gold mining. It will be interesting to see how Q4’21 plays out, whether these losses persist. I was surprised to see so many GDXJ-top-25 gold miners report accounting losses last quarter. They should’ve fared better given gold prices and mining costs.
Nevertheless, their valuations generally remained fairly-low for high-potential smaller gold miners. Four of these elite mid-tiers and juniors had crazy-high trailing-twelve-month price-to-earnings ratios midweek due to low earnings or losses during the past four quarters. Excluding those 100x+ outliers, the rest of the GDXJ top 25 with profits over this last year averaged TTM P/Es of 24.3x. That’s low for smaller gold miners.
Cash flows generated from operations are often a more-stable measure of operating performances than accounting earnings, since they typically don’t contain unusual one-off items. The adjusted GDXJ top 25’s OCFs fell 44.0% YoY to $1,573m. But most of that was due to Peru’s endlessly-struggling BVN reporting OCFs plummeting to negative $464.3m due to a $544.2m “Payments for tax litigation” outflow!
Presumably the income-statement expense to go along with this huge legal settlement must have been already run through. But it isn’t apparent in my past-quarters Buenaventura data, which is strange. This settlement is with Peru’s government due to BVN apparently expensing certain things back in 2007 to 2010 that weren’t allowed. The $103.7m original claim more than quintupled to $585.4m due to penalties and interest!
Excluding BVN’s OCFs from both Q3’21 and Q3’20, along with those now-three-kicked majors from that year-ago quarter, the GDXJ top 25’s OCFs only fell 25.1% YoY to $2,037m. So operational performances look much better than the skewed total. These elite mid-tiers and juniors generated enough cash to grow their adjusted treasuries a massive 46.0% YoY to $9,197m. Those are big warchests to grow future production.
Unlike the majors which often have to buy entire companies at expensive premiums to offset depletion, the mid-tiers and juniors boost output by expanding existing mines and/or buying lone new ones from time to time. Major mine expansions and/or new mine construction is underway at a sizable fraction of these GDXJ-top-25 gold miners. $9.2b of cash is on the high side for them, lots of capital firepower for expanding outputs.
So the mid-tier and junior gold miners are generally continuing to thrive despite Q3’s challenges. Their upside potential in coming months and years remains huge. Their leveraged earnings will soar as gold powers higher on the vast torrents of new fiat money central banks are spewing. The smaller gold stocks will really amplify their metal’s gains like usual. So if you aren’t deployed in great ones yet, you should get going.
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The bottom line is the mid-tier and junior gold miners in the sweet spot for stock-price upside potential just reported a solid-if-not-strong quarter. Their production growth surged, far outpacing the majors’. While costs still rose on inflationary pressures, they remained far below prevailing gold prices which made for excellent profits. And these will grow amplifying gold’s gains as its bull follows the money printing higher.
GDXJ’s smaller gold miners make it way better than deadweight-major-dominated GDX. The mid-tiers and juniors will enjoy much-bigger gains than their larger peers as this Fed-tightening-fears-interrupted gold upleg mounts. But even GDXJ’s upside is still retarded by plenty of underperformers, so better gold-stock gains will be won in handpicked fundamentally-superior miners. Their latest run higher is only just beginning.
Adam Hamilton, CPA November 19, 2021 Subscribe at www.zealllc.com/subscribe.htm