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Gold Miners' Q1'21 Fundamentals

Adam Hamilton
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May 14, 2021

The gold miners' stocks have powered higher in recent months, solidifying a strong young upleg. But the extended-correction low leading into this latest rally has left sector psychology fairly bearish. Traders are skeptical about gold stocks' upside potential, wary of another serious selloff. The gold miners' just-reported Q1'21 operating and financial results reveal whether their fundamentals support further big gains.

The first quarter of 2021 was rough for the gold stocks. Their leading and dominant benchmark and trading vehicle remains the GDX VanEck Vectors Gold Miners ETF. Its $15.3b in net assets in the middle of this week ran 31x biggerthan its next-largest 1x-long major-gold-miners-ETF competitor. During Q1, GDX dropped a sizable 9.8%. The gold stocks were increasingly out of favor as gold itself also lost 10.0%.

The gold miners actually proved quite resilient last quarter, as the majors in GDX generally amplify gold's material moves by 2x to 3x. Still you couldn't give away gold stocks in early March as their last extended correction finally bottomed at GDX $30.90. As these miners' earnings leverage gold price trends, their stocks got sucked into gold's vexing momentum selloff. But as that passed, the gold miners caught a bid.

Over the next 2.3 months into this week, GDX powered up 21.8% to $37.65. About halfway up into that run in early April, I wrote a contrarian essay making the technical case for another gold-stock upleg being underway. We filled the trading books in our newsletters with fundamentally-superior gold stocks before that, straddling the sector lows. This week their unrealized gains are already running as high as +38.9%.

With GDX mean reverting 21.8% higher in a span where gold climbed 6.6%, making for outstanding 3.3x upside leverage, you'd think traders' sentiment would be improving. But it hasn't much yet based on the bearish feedback I'm getting. The gold stocks just haven't rallied long enough and high enough to overpower all the festering residual pessimism left in their last correction's wake. That sentiment shift is still coming.

While all the bearishness has left most traders convinced the gold miners are struggling, their strong just-reported Q1'21 results dispel that. For 20 quarters in a row now, I've painstakingly analyzed the latest operating and financial results reported by the top 25 GDX gold miners. These include the largest in the world, and now account for a commanding 88.1% of this entire market-capitalization-weighted gold-stock ETF.

Securities regulators require American companies to report their results by 40 days after quarter-ends, while Canadian ones have 45 days. The middle of this week marked 42 days since the end of Q1, so this earnings season is almost complete. While it takes a lot of time, effort, and expertise to dig into these reports, the resulting knowledge is well worth it. These are the only times gold miners' fundamentals are clear.

This table summarizes the operational and financial highlights from the GDX top 25 during Q1'21. These major gold miners' stock symbols aren't all US listings, and are preceded by their rankings changes within GDX over the past year. The shuffling in their ETF weightings reflect changing market caps, which reveal both outperformers and underperformers since Q1'20. The symbols are followed by current GDX weightings.

Next comes these gold miners' Q1'21 production in ounces, along with their year-over-year changes from the comparable Q1'20. 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.

By late in the first quarter of 2021, the gold stocks were pretty much despised. Other than a handful of hardened contrarians, the vast majority of traders wanted nothing to do with this sector. Yet despite gold and gold stocks correcting, the major gold miners were faring great fundamentally. They reported one of their best quarters ever, again proving why smart traders suppress their greed and fear to follow the data.

Last quarter the GDX-top-25 gold miners collectively produced 8,406k ounces of gold. That's on the lighter side over the last 20 quarters where I've been amassing this data, ranking as 12th. That also shrunk 2.8% year-over-year from the GDX top 25's output in Q1'20. Part of that is due to the changing rankings within this dominant sector ETF. One of the biggest climbers in GDX was China's Zhaojin Mining.

Two major Chinese gold miners have long been in or near the rarefied GDX-top-25 ranks in recent years, Zijin Mining and Zhaojin Mining which trade in Hong Kong under their symbols 2899 and 1818. I've spent way too much time trying to understand their very-limited quarterly reporting in English, which is maddeningly opaque. While the former company reported Q1 production, the latter didn't bother as far as I could find.

So the GDX top 25's collective output is one company short compared to the prior year, as Zhaojin wasn't in those elite ranks then. Still, the majority of the rest of these major gold miners reported declining output in Q1'21. And their 2.8% total drop last quarter is much worse than the industry trend. After each quarter, the World Gold Council publishes the best global gold fundamental data available in outstanding reports.

That latest Q1'21 Gold Demand Trends revealed total world gold-mining output surged a sharp 4.2% YoY to 851.0 metric tons! That's the equivalent of 27,360k ounces. Such strong production growth is really unusual, bucking the years-long generally-declining trend. But remember the tail end of Q1'20 was when governments started forcing economic lockdowns to slow the spread of COVID-19. That shuttered gold mines.

So with shrinking production against this rising-output backdrop, the GDX-top-25 major gold miners aren't performing optimally. This is nothing new, as they have generally suffered waning production for years now. Their gold mines are constantly depleting, and it is getting ever-more-challenging and expensive to find and develop new gold deposits into mines to offset that. Especially at the large scales majors run at.

The major gold miners' inability to grow their outputs is one big reason I don't trade their stocks. Most of this industry's growth is concentrated in smaller mid-tier and junior gold miners. As they each operate fewer gold mines, expanding existing ones and building or buying new ones can fuel strong production growth. The larger gold miners tend to have inferior fundamentals to smaller ones, which stock prices reflect.

Next week as usual I'm doing this same analysis with the top-25 GDXJ gold miners, the VanEck Vectors Junior Gold Miners ETF. While really comprised of mid-tier gold miners, their fundamentals usually prove better than the majors of GDX even though there is much overlap between these ETFs' component stocks. Typically the larger a gold miner, the more it struggles with depleting production and thus underperforms.

Interestingly the GDX top 25's total gold output peaked at 9,525k ounces way back in Q4'16. It has been grinding lower on balance since. One of these quarters I should include a chart of that. This major-gold-miner trend is buttressing peak-gold theories. With the world picked over for centuries, good economic gold deposits are getting harder to discover and develop. So total world gold output is doomed to shrink.

Gold-mining production trends are usually inversely proportional to unit mining costs, lower outputs lead to higher costs. That's because gold mines' operating costs are largely fixed. They can only process so much gold-bearing ore each quarter, which requires about the same levels of infrastructure, equipment, and employees. So less gold run through their fixed-capacity mills leaves fewer ounces to spread costs across.

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's average cash costs indeed climbed last quarter, way faster than their lower production would suggest. That number surged 10.6% year-over-year to $773 per ounce! That was the highest by far in the 20 quarters I've been working on this research thread, easily eclipsing Q3'20's $725. And that was when gold miners were spending lots of money to spin back up operations closed by COVID-19 lockdowns.

Normally the primary driver of higher mining costs is lower-grade ores, which mine managers have to dig through before getting to higher-grade targets. But the gold miners certainly aren't immune to the rising costs mounting around the world. Giant central banks led by the Fed have conjured up the equivalent of many trillions of dollars over this past year! That deluge of new money is bidding up prices of everything.

But the GDX top 25's cash costs last quarter were skewed high by a trio of outliers all reporting crazy-high ones in Q1'21. They were South Africa's AngloGold Ashanti, Hecla Mining, and Peru's Buenaventura. They are increasingly struggling with various operational issues including older and deeper gold mines that are more expensive to run. Excluding them, the rest of the GDX top 25 averaged better $704 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 GDX-top-25 major gold miners reporting AISCs last quarter averaged $1,067 per ounce. That was the highest on record, even exceeding Q4'20's $1,038. Surging 6.5% YoY, the major gold miners' AISCs also well outpaced what declining production can explain. Yet with gold still averaging a lofty $1,793 last quarter despite its extended correction, $1,067 AISCs are still super-profitable. And they were skewed high.

Those same three GDX gold miners dragging up cash costs also reported abnormally-high AISCs, led by the crazy $1,631 from Buenaventura. Excluding these outliers, the rest of the GDX top 25 averaged far-milder all-in sustaining costs of just $1,000 per ounce. That would've actually been a slight improvement over Q1'20's $1,002 average. So the major gold miners are largely holding the line on controlling costs.

That's really impressive given the soaring input prices hammering industries around the world. Supply-chain disruptions don't seem to be a real issue yet for the major gold miners, as I didn't see much mention of those in the GDX top 25's Q1'21 reports. That may become more of a problem in future quarters. But gold prices riding the tidal wave of monetary excess higher should let earnings growth far outpace costs.

In overall gold-mining-sector-earnings terms, this average AISC data yields the best proxy for tracking trends. Subtracting the GDX top 25's average all-in sustaining costs reported in a quarter from its average gold price reveals sector profitability. Last quarter's $1,793 gold price was still up 13.4% YoY despite this metal's extended correction. That remained far above these gold miners' $1,067 average AISCs.

That implies these companies earned $726 per ounce mining gold in Q1'21! That still surged 25.3% YoY from Q1'20 despite the gold-correction-fueled bearish sector sentiment. That made for very-strong profits growth, among the best in the entire stock markets. And had that trio of high-cost outliers not pooped in the punch bowl, the GDX top 25's unit profits would've soared 36.8% YoY to $793. Those are big numbers.

Even that unadjusted $726 per ounce proved the fourth-highest quarterly earnings in GDX-top-25 history, after Q3'20's peak at $884, Q4'20's $838, and Q2'20's $730. As I analyzed in an essay in mid-April, the gold miners' valuations remain really low. Their stock prices are far from reflecting their incredibly-strong fundamentals. And last quarter's double-digit profits growth was nothing new, it extended an amazing trend.

Since Q3'19, the GDX top 25's earnings per this proxy have skyrocketed dramatically. During the seven quarters ending in Q1'21, these major gold miners saw their profits soar 53.5%, 57.8%, 39.0%, 66.2%, 49.7%, 50.3%, and 25.3% YoY! That towering record has to reign supreme, unchallenged by the rest of the stock markets. There is zero fundamental justificationfor being bearish on this small contrarian sector.

Sadly most stock traders don't realize this. Recent technical price action stokes their greed or fear, and these dangerous emotions overpower their reason. That's why most gold-stock traders perpetually miss out on buying in relatively low. They don't get excited about this high-flying sector again until greed flares later in maturing uplegs. Then they rush to buy in high, soon before the next correction slaughters them.

Prudent traders always watching gold stocks earn fortunes trading their uplegs and corrections. This latest GDX surge since early March is actually its fifth upleg of this secular bull. The first four averaged massive 99.2% gains over 7.6 months each! With a track record like that, you'd think traders would never let herd bearishness cloud their judgment. But they do, and it does, so they miss out on doubling their capital.

The GDX top 25's hard financial results reported to their securities regulators under Generally Accepted Accounting Principles or other countries' equivalents confirmed their strong performances last quarter. Despite their collective production sliding that 2.8%, their total revenues surged 10.5% YoY to $13.7b in Q1'21. One of their best quarters ever, that jibed with lower output overcome by 13.4%-higher gold prices.

And these major gold miners' actual bottom-line accounting earnings proved way stronger than that gold-less-AISCs proxy. Collectively they blasted 47.1% higher YoYto $3.2b! And while wading through these quarterly reports, I didn't see any major non-cash losses or gains significantly skewing this comparison. A minor $89m impairment-reversal gain nearly half offset by a $39m investment loss was all that made my notes.

So the GDX top 25's soaring profits in Q1 were righteous, overwhelmingly fueled by normal operations. These higher accounting earnings will soon be reflected in conventional valuations as measured by gold stocks' trailing-twelve-month price-to-earnings ratios. The Es in P/Es are rolling-four-quarter totals. And this week even before Q1'21 is incorporated, fully ten of these major gold miners already had super-low P/Es.

Those ranged from an absurd 7.3x earnings to a still-really-cheap 18.6x! So there are plenty of serious fundamental bargains in this overlooked space, which will increasingly attract institutional investors. And the major gold miners' earnings will continue growing if not soaring. With gold rebounding sharply so far in Q2, this quarter's average price of $1,775 so far should soon best Q1's $1,793. These are great gold levels.

Also the GDX top 25's all-in sustaining costs should retreat this quarter on growing output. The biggest theme I saw in reading through all these quarterly reports was that production growth was expected to accelerate through the rest of this year. Many major gold miners reported their 2021 output was weighted to the second half as expansions come online. Higher output drives down costs, boosting profitability.

The big spread between prevailing gold prices and mining expenses last quarter helped the GDX top 25's total operating cash flows generated surge 22.0% YoY to $5.9b. That provides a lot of capital to expand operations, through mine expansions, builds, and purchases. And over time traders seek out and reward output growth by bidding up stock prices. Mergers and acquisitions in this realm are also already mounting.

The major gold miners' strong operations have left them flush with cash. At the end of Q1'21, the total treasuries of the GDX top 25 climbed another 15.4% YoY to $20.5b. Those huge cash hoards are the second-highest on record for this sector, only trailing Q4'20's $22.8b. And that quarter-end cash on hand doesn't include the big lines of credit many major gold miners keep available to tap. They are ready to spend.

Again the larger a gold miner, the more difficult it is to even offset depletion let alone grow output. As it takes well over a decade to fully explore, permit, and construct a mine on a new gold deposit, the majors are forced to buy existing mines to boost their production. The big beneficiaries of this are the smaller mid-tier and junior gold miners. We are going to see increasing buyouts as majors race to add output.

So the major gold stocks' strong rebound out of their recent extended-correction lows is totally justified fundamentally. In fact given the strong Q1 numbers the GDX top 25 put up, that dominant sector ETF's 21.8% gain at best so far over 2.3 months seems piddling. Gold stocks easily have the potential for yet another double in GDX terms off their early-March lows. Their setup here remains fantastically bullish.

Miners' valuations are way too low relative to their strong earnings power, which will force their stock prices to mean revert dramatically higher to reflect great fundamentals. And gold itself is likely to keep powering higher on balance on the deluge of extreme central-bank money printing. The soaring inflation increasingly evident everywhere is stabilizing gold investment demand, paving the way for an explosion higher.

In the months surrounding gold stocks' recent extended-correction bottoming, I've been pounding the table on the huge opportunities in this sector. I've examined this really-bullish gold-stock setup from different angles in many weekly essays. We layered into fundamentally-superior smaller gold miners at relatively-low prices straddling that correction. So our newsletter subscribers are already enjoying mounting gains.

At Zeal we walk the contrarian walk, buying low when few others are willing before later selling high when few others can. We overcome popular greed and fear by diligently studying market cycles. We trade on time-tested indicators derived from technical, sentimental, and fundamental research. That's why all 1178 stock trades recommended in our newsletters since 2001 averaged hefty +24.0% annualized realized gains!

To multiply your wealth trading high-potential gold stocks, you need to stay informed about what's going on in this sector. Staying subscribed to our popular and affordable weeklyand monthlynewsletters is a great way. They draw on my vast experience, knowledge, wisdom, and ongoing research to explain what's going on in the markets, why, and how to trade them with specific stocks. Subscribe today while this gold-stock upleg remains young! Our newly-reformatted newsletters have expanded individual-stock analysis.

The bottom line is the major gold miners just reported another outstanding quarter. Despite Q1 seeing gold mostly grind lower in an extended correction, the majors achieved great results. Even with waning production, their revenues and operating cash flows still surged on higher average gold prices. And their hard accounting earnings soared, exhibiting that potent profits leverage to gold this sector is famous for.

And even before those strong Q1 earnings feed into P/E ratios, many of the major gold miners already trade at really-low valuations. Their stock prices have to mean revert dramatically higher to reflect their fantastic underlying fundamentals. That means this young gold-stock upleg likely has a long ways to run higher yet. As always the earlier traders realize this and buy in, the bigger the upleg gains they'll win.

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May 14, 2021
Adam Hamilton, CPA

Thoughts, comments, or flames? Fire away at zelotes@zealllc.com. Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!

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