Gold Mid-Tiers’ Q4’20 Fundamentals
Adam Hamilton March 26, 2021 3432 Words
The mid-tier gold miners’ stocks are in this sector’s sweet spot for upside potential. After a spectacular upleg out of last March’s stock panic, they have mostly been correcting since early August. That is doing its necessary work of rebalancing sentiment, paving the way for mid-tiers’ next bull upleg. These great miners are thriving fundamentally with higher prevailing gold prices, as their latest quarterly results again prove.
Mid-tier gold miners produce between 300k to 1m ounces of gold annually, more than smaller juniors but less than larger majors. Mid-tiers are far less risky than juniors, and amplify gold’s uplegs much more than majors. Their unique mix of sizable diversified gold production, material output-growth potential, and smaller market capitalizations is ideal for outsized gains. They are the best gold stocks for traders to own.
Ironically the leading mid-tier gold-stock benchmark and trading vehicle is the misleadingly-named GDXJ VanEck Vectors Junior Gold Miners ETF. It has evolved to be dominated by mid-tiers, miners yielding quarterly gold output of 75k to 250k ounces. The true juniors GDXJ now holds only account for a small fraction of its total weighting. With $5.0b in net assets, GDXJ is the second-most-popular gold-stock ETF.
That’s about 3/8ths the size of its big brother GDX, which is mostly controlled by larger major gold miners. GDXJ’s performance trounced GDX’s during this gold-stock bull’s latest upleg, which blasted higher over 4.8 months last year from mid-March to early August. GDXJ’s massive 188.9% skyrocketing in that short span easily bested GDX’s parallel 134.1% gains! That’s despite these ETFs sharing many component stocks.
That blistering run left gold stocks extremely overbought, necessitating a health correction to rebalance excessively-greedy sentiment. So over the next 7.1 months into early March this year, GDXJ gradually ground a major 30.2% lower. That naturally left this high-potential sector deeply out of favor, with traders convinced mid-tiers are doomed to spiral lower indefinitely. Boy is that universal bearishness misplaced!
For 19 quarters in a row now, I’ve painstakingly analyzed the mid-tier gold miners’ latest quarterly results right after they are reported. While GDXJ contained an absurd 98 component stocks this week, I’m limiting my analysis to its top 25 holdings. These include some of the greatest mid-tiers, which command a major 62.8% of GDXJ’s total weighting. Among these elite ranks are some of the best-performing gold miners.
Unfortunately Q4 results closing out calendar years arrive much later than normal quarterlies. Since the annual reports containing Q4 numbers are bigger, more complex, and must be audited by independent CPAs, securities regulators grant extended filing deadlines. Those are 60 days after year-ends in the US, and a ridiculous 90 days in Canada where most of the world’s gold stocks trade! So Q4 analysis runs later.
GDXJ’s top stocks trade in the US, South Africa, Australia, Canada, Peru, Indonesia, and Mexico making amassing this data somewhat challenging. There are different financial-reporting requirements around the world, and even within the same country miners report different data in different ways. Half-year reporting is common globally, so when only six-month data was available it is split in half to approximate Q4.
This table summarizes key operational and financial highlights from the GDXJ top 25 in Q4’20. These 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 GDXJ weightings from Q4’19. With GDXJ largely weighted by market capitalizations, relative ranking changes help illuminate this past year’s outperforming stocks.
Next are the current weightings this week, which are highlighted in blue for the handful of true junior gold miners. That is followed by each miner’s Q4’20 gold production in ounces, and its year-over-year change from Q4’19’s results. Then come cash costs and all-in sustaining costs per ounce mined along with their YoY changes, revealing how much it costs these miners to wrest their gold from the bowels of the earth.
Next quarterly revenues, GAAP 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 be either misleading or not meaningful, like comparing two negative numbers or data shifting from positive to negative and vice versa.
Despite gold’s correction running through Q4’20 which drove gold stocks’ parallel selloff, last quarter still enjoyed the second-highest average gold prices ever witnessed at $1,876! So GDXJ’s top mid-tier gold miners should’ve achieved blockbuster results last quarter. That indeed proved true, with plenty of these elite companies reporting record quarterly production, sales, profits, operating cash flows, and cash last quarter.
For decades now I’ve been actively speculating and investing in fundamentally-superior gold stocks, and writing financial newsletters explaining those trades in real-time. Being deeply immersed in this realm, I was really struck by sweeping changes to GDXJ’s top components in this latest quarterly research. This ETF’s managers seem to be working on addressing some of the main criticisms of GDXJ’s component list.
Promoted as a “Junior Gold Miners ETF”, GDXJ’s holdings should lean heavily towards smaller miners. There’s no reason to include larger mid-tiers and especially majors, which should instead be found exclusively in GDX. And the massive overlap in the same companies being included in both these ETFs really hobbled the utility and upside potential of GDXJ. I’ve written about these serious flaws for years now.
But GDXJ’s managers are increasingly resolving them, gradually forging it into a better mid-tier-gold-stock ETF. Since Q4’19, they’ve booted out two major gold miners. Those are Kinross Gold and South Africa’s Sibanye-Stillwater, which produced a gargantuan 624k and 294k ounces in Q4’20. Those are both well above that major threshold of 250k ounces per quarter. KGC indeed became a GDX-exclusive major miner.
SBSW didn’t, and is no longer included in either GDXJ or GDX. That is righteous, as this historical primary gold miner has grown into the world’s largest primary platinum-group-metals producer through big acquisitions. GDXJ’s managers also removed a couple larger Australian gold miners that just merged into a major one, Northern Star Resources and Saracen Mineral. They produced 253k and 155k ounces last quarter.
So now running in excess of 400k per quarter combined, the surviving Northern Star company is another major gold miner only included in GDX. These big changes among GDXJ’s upper ranks are great for this ETF. They allow overall component weightings to be redistributed lower, giving GDXJ more exposure to smaller gold miners. The GDXJ top 25’s 62.8% total weighting is now the lowest by far since at least Q2’16.
So GDXJ’s managers deserve praise for slicing out some of the major gold miners really holding back their ETF’s upside potential. Now if they’d boot out South Africa’s giant Gold Fields and Harmony Gold, big established majors that mined an enormous 593k and 373k ounces last quarter, GDXJ would almost be fixed. Most majors are dead-weight, their production and market capitalizations too large to grow rapidly.
A year ago in Q4’19, Kinross, Northern Star, Sibanye, and Saracen together accounted for a massive 22.0% of GDXJ’s total weighting! Now with them gone, the year-over-year comparisons of GDXJ-top-25 aggregate numbers are really skewed. So we have to consider how these elite mid-tiers are faring after adjusting for these sweeping component changes. Stripping their Q4’19 results makes for better comparisons.
Also the long-vexing overlap between GDXJ and GDX holdings has been majorly reduced. These GDXJ-top-25 gold miners again at 62.8% of its total weightings now represent just 21.9% of GDX’s total weightings as of last week. That compares to 69.0% and 33.8% in Q3’20, a big improvement! Now only 13 of GDXJ’s top 25 holdings are also GDX-top-25 ones, clustered even lower in GDX’s rankings from 12th to 35th.
Production is the lifeblood of the gold-mining industry. After prevailing gold prices which miners are at the mercy of, their output levels are the most-important driver of their long-term success. Generally the more gold miners can bring to market, the faster they can continue growing through expanding, constructing, or acquiring more gold mines. So investors and speculators have long prized production growth above all else.
Higher output boosts revenues, earnings, operating-cash-flow generation, and thus ultimately miners’ stock prices. Unfortunately the GDXJ top 25’s total gold production in Q4’20 plunged 21.0% year-over-year to 3,733k ounces. While ugly, that completely resulted from those four major gold miners being forced out of this ETF! Excluding them from Q4’19’s results, the elite mid-tiers’ total output actually grew 8.0% YoY.
That is super-impressive, far better than the 4.3%-YoY decline to 8,905k ounces from the GDX-top-25 majors last quarter. I analyzed their operating and financial results in depth in last week’s essay on those GDX majors. The GDXJ mid-tiers’ adjusted 8.0% production growth in Q4’20 also proved way better than overall global gold mined slumping 2.9% YoY, according to the World Gold Council’s comprehensive data.
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 major 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 in coming years. Their future gold-production growth will far exceed the majors’, and their earnings aren’t done soaring.
In gold mining, output levels and unit costs are usually inversely proportional. The more gold mined, the more ounces to spread this industry’s big fixed costs across. Those are generally determined when mines are being planned, then don’t change much. Quarter after quarter, individual mines require about the same levels of infrastructure, equipment, and employees to feed their fixed-capacity mills with ores to process.
Those fixed costs staying roughly steady regardless of prevailing gold prices is what gives gold miners’ earnings big leverage to the yellow metal. With overall GDXJ-top-25 unadjusted gold output falling lower last quarter, these gold miners’ unit costs should’ve risen proportionally. That indeed proved true, with both average cash costs and all-in sustaining costs surging sharply to their highest levels since at least Q2’16.
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.
These GDXJ-top-25 gold miners reported average cash costs of $759 per ounce in Q4’20, which surged 11.3% YoY. Those were the highest levels yet seen in this 19-quarter-old research thread, edging out Q1’20’s $749. They were also considerably higher than the GDX top 25’s $700. But interestingly the same trio of outlying companies that skewed GDX’s cash-cost average high are also among the GDXJ top 25.
Hecla Mining, Peru’s Buenaventura, and Harmony Gold reported extreme outlying cash costs of $1,019, $1,243, and $1,141 last quarter! HL blamed various COVID-19-lockdown disruptions, BVN has long struggled with declining output from endless operational problems, and HMY’s old and very-deep gold mines are expensive to run. Excluding these outliers, the rest of the GDXJ top 25 averaged $689 cash costs.
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 GDXJ-top-25 mid-tiers’ average AISCs surged a similar 11.5% YoY to $1,080 per ounce. That was also the highest by far in the 19 quarters since Q2’16, eclipsing Q1’20’s $1,016. That was again worse than the GDX-top-25 majors’ $1,038 average AISCs last quarter. But the mid-tiers’ all-in sustaining costs were also skewed high by those same three extreme outliers, along with a fourth Centamin mining gold in Egypt.
HL, BVN, HMY, and CEY reported extreme AISCs of $1,330, $1,559, $1,370, and $1,613 in Q4’20! If those outliers are excluded, the rest of the GDXJ top 25 averaged a far-better $970. Interestingly Hecla and Centamin are forecasting lower full-year-2021 AISCs, at midpoints of $1,250 and $1,200. So like usual, for most gold miners quarterly cost spikes are temporary anomalies rather than new long-term trends.
And that overall skewed $1,080 average still isn’t bad, far below these high prevailing gold prices. In the four pre-pandemic quarters ending in Q1’20, the GDXJ top 25’s AISCs averaged $976. But the average gold prices were much lower then, with a mean of just $1,461 in that span. So gold prices have climbed much faster than mining costs even with all the pandemic disruptions, greatly boosting mid-tiers’ profitability.
An excellent proxy for this sector’s earnings trends can be calculated by simply subtracting the GDXJ top 25’s average all-in sustaining costs from average gold prices. Gold again averaged a lofty $1,876 last quarter, way above those skewed-high $1,080 AISCs. That implies the mid-tier gold miners were earning about $796 per ounce mined! Soaring 54.9% YoY, that was the second-highest on record after Q3’20’s $928.
Such fantastic stock-market-leading profits growth is nothing new for the mid-tier gold miners either. In the last six reported quarters ending in Q4’20, the GDXJ top 25’s unit earnings per this proxy rocketed up 65.1%, 72.2%, 66.1%, 108.2%, 77.9%, and 54.9% YoY! That averages out to stupendously-awesome 74.1% quarterly profits growth over this longer-term span. Traders should be rushing to add gold-stock allocations.
Because of their outstanding profits leverage to gold, gold stocks are exceedingly lucrative to own during secular gold bulls. Yet dumbfoundingly, speculators and investors alike keep abandoning this sector after expected major corrections. Right when they should be aggressively buying low before the next major upleg likely doubles their capital deployed, they bury their heads in the sand wallowing in popular bearishness.
Prudent contrarian traders ignore always-pessimistic herd sentiment after corrections and instead focus on gold miners’ underlying fundamentals. Do they justify mean-reversion rebounds of gold-stock prices evolving into major bull uplegs? The GDXJ top 25’s hard Q4’20 accounting results reported to securities regulators certainly confirmed the mid-tiers’ super-strong fundamentals their stock prices aren’t yet reflecting.
On the revenues front, these elite GDXJ-top-25 gold miners reported $8.5b in total sales last quarter. That actually fell 8.6% YoY despite Q4’20’s average gold prices soaring 26.5% from Q4’19 levels. But remember these year-over-year comparisons are heavily distorted by GDXJ’s managers rightfully kicking out Kinross, Northern Star, Sibanye, and Saracen. So their Q4’19 results need to be adjusted out of that total.
Ex-removed-majors, these elite mid-tier gold miners’ total sales soared 37.6% YoY in Q4’20! That is right in line with 8.0%-higher adjusted production and 26.5%-higher average gold prices. Had those majors not been included in earlier quarters’ results, Q4’20’s revenues would’ve easily been the best ever reported by the rest of these mid-tiers. These sweet-spot gold miners are sure thriving in this higher-gold environment.
Their bottom-line earnings under Generally Accepted Accounting Principles in the US or their equivalents in other countries also proved outstanding. The GDXJ top 25 collectively earned $1,569m in profits in Q4’20, which skyrocketed 127.2% YoY! Those were also the highest earnings by far from the GDXJ top 25 in the 19 quarters I’ve been doing this research, and almost certainly ever. And they aren’t even adjusted.
Remove those kicked majors from the prior-year quarter, and that profits jump soars to 2,078% YoY! And unlike the GDX top 25’s Q4’19 earnings which were riddled with non-cash impairment-reversal gains and impairment charges, Q4’20’s looked fairly-clean. The mid-tier and junior gold miners are making money hand over fist in this environment, forcing their valuations lower leaving them ever-more-attractive to traders.
Their strong operational results also fueled excellent operating-cash-flow generation, with the GDXJ top 25 reporting $3.1b in OCFs last quarter. That surged 10.4% YoY unadjusted, and 57.6% if those four removed majors are excluded. The more cash flows gold miners generate, the more capital they have to grow their production levels by expanding existing mines along with constructing or purchasing new ones.
That will fuel higher stock prices, which ultimately mimic companies’ growth trajectories. All those OCFs pouring in filled up the GDXJ top 25’s coffers to their highest levels yet, totaling $10.1b in cash treasuries. That shot up 43.9% YoY unadjusted, and more than doubled at +105.1% YoY if those booted major miners are taken out. The mid-tier gold miners’ fundamentals have never looked stronger, which is super-bullish!
And the big numbers these elite gold miners are putting up aren’t ending because of this gold correction extending into Q1’21. With this current quarter almost over, gold has averaged $1,801 so far. That is down 4.0% quarter-on-quarter, which will indeed be a drag on gold miners’ earnings. But these Q1 gold levels will still prove the third-highest ever seen, only trailing Q3’20 and Q4’20. $1,800 is still great for miners.
If the GDXJ top 25’s AISCs this quarter come in near their last four quarters’ $1,020 average which was skewed high by all the pandemic disruptions, these mid-tiers would still earn $781 per ounce in Q1’21! That would prove their third-most-profitable quarter on record, behind the preceding couple. That would leave unit earnings up 38.2% YoY, and only down a trivial 1.9% QoQ from Q4’20’s impressively-massive levels.
With incredibly-strong fundamentals like these, investors and speculators should be stampeding back into undervalued gold miners. But they really aren’t yet, because most are momentum traders lacking the fortitude to fight the herd and buy low while sectors are out of favor. Yet as gold’s coming bull-market upleg powers higher and gold stocks amplify its gains like usual, this sector will increasingly attract new buying.
Gold stocks’ track record for multiplying wealth is unparalleled! Today’s middle-aged gold-stock bull has already seen four uplegs, which averaged huge 99.2% absolute GDX gains over 7.6 months! And the secular gold-stock bull before that had literally a dozen uplegs averaging 87.5% absolute gains over 7.8 months. So playing the contrarian to buy lower early in these before selling higher later on is fantastically lucrative.
And those massive upleg gains are in major-gold-miner terms. The fundamentally-superior smaller mid-tier and junior gold miners able to consistently grow their production will achieve gains way surpassing GDX and even GDXJ! Uncovering these best gold stocks to own is the goal of our painstaking multi-decade research campaigns, so we can deploy capital in these outperformers during gold-stock uplegs.
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The bottom line is the mid-tier gold miners in the sweet spot for stock-price upside potential just reported one of their best quarters ever. Adjusted for majors removed from GDXJ, the rest of its top components achieved production growth way better than their larger peers. That along with continuing high prevailing gold prices drove record revenues, earnings, operating cash flows, and cash hoards among these elite miners.
Despite these incredibly-strong fundamentals, traders have largely abandoned this high-potential sector due to its recent extended correction. That’s a huge mistake. Today’s anomalously-low gold-stock prices driven by popular bearish sentiment will mean revert dramatically higher during gold’s coming next upleg. Contrarian investors and speculators who can fight the herd to buy low now stand to earn massive gains.
Adam Hamilton, CPA March 26, 2021 Subscribe at www.zealllc.com/subscribe.htm