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Gold Mid-Tiers' Q1'20 Fundamentals

Adam Hamilton
Archives
May 22, 2020

The mid-tier gold miners in the sweet spot for stock-price upside potential have enjoyed a massive run since mid-March's stock-panic lows. They've already more than doubled in the couple months since! Their just-released Q1'20 operational and financial results reveal whether these huge gains are righteous fundamentally, whether this uptrend is likely to persist, and how COVID-19 shutdowns are affecting gold miners.

Interestingly the leading mid-tier gold-stock ETF is the famous GDXJ VanEck Vectors Junior Gold Miners ETF. Despite its misleading name, GDXJ is overwhelmingly dominated by mid-tier gold miners. They produce 300k to 1m ounces of gold annually, between the smaller juniors and larger majors. The mid-tiers offer an excellent mix of sizable diversified production, output-growth potential, and smaller market caps.

The high-potential mid-tier gold miners were coming back into favor in late February, with GDXJ hitting a 3.4-year high of $44.97. But gold and its miners' stocks were soon sucked into March's brutal stock panic, driven by economic fears from governments' COVID-19 shutdowns. Over the next several weeks, GDXJ plummeted a catastrophic 50.7% to $22.17 in mid-March! That violently eviscerated traders trapped unaware.

They didn't have to be though, we were all out gold stocks leading into that full-on crash. Weeks before GDXJ collapsed 33.7% in its final couple extreme capitulation days in mid-March, I warned about the big risks in gold and gold stocks. In mid-February I pointed out gold stocks had stalled, concluding "caution is wise given gold's situation, with selling much more likely than buying." The parallel gold surge looked peculiar.

The pre-panic gold buying into late February wasn't coming from normal capital inflows from investors and gold-futures speculators. Thus I warned "gold's staying power up here is questionable". While I sure didn't expect a stock panic, then we advised our subscribers to short gold stockswith specific gold-stock leveraged-inverse-ETF and GDXJ-puts trades. Those were great positions to have as gold stocks collapsed!

We started aggressively buying and recommending fundamentally-superior mid-tier gold stocks again two trading days after GDXJ's deep stock-panic low in mid-March. We've continued redeploying since, which has built gorgeous trading books with huge unrealized gains. By this week, GDXJ had skyrocketed an incredible 117.1% higher in just 2.2 months to hit $48.12! That's a fresh 3.7-year high for mid-tier gold miners.

While this violent post-panic V-bounce has proven exceedingly profitable, from late February to this week GDXJ is only up 7.0%. So the last couple months' extreme rally is mostly a mean-reversion recovery out of extreme lows. Nevertheless, reviewing the elite mid-tier gold miners' latest quarterly operational and financial results is super-important to see how they're faring fundamentally despite COVID-19 shutdowns.

The definitive list of elite mid-tier gold miners to analyze comes from GDXJ. Back in the first half of 2016 in this bull's maiden upleg, GDXJ enjoyed enormous capital inflows from investors chasing juniors. But its holdings grew so big that it risked running afoul of Canadian securities laws for owning individual stocks. So GDXJ was forced to shift its focus to the mid-tier realm, which translates to 75k to 250k ouncesmined quarterly.

Every quarter I wade through the latest results from GDXJ's 34 largest components to get a fundamental read on the leading mid-tiers' performances. That's simply an arbitrary number that fits neatly into the tables below, but a commanding sample at 80.3% of GDXJ's total weighting. This week GDXJ owned a whopping 79 stocks, which is way over-diversified. I couldn't hope to digest that many quarterly reports.

Further undermining GDXJ still being advertised as a "Junior Gold Miners ETF", its holdings are mostly a subset of the same mid-tiers included in its big-brother GDX gold miners ETF. Fully 23 of the GDXJ-top-34 components are also GDX-top-34 ones! The GDXJ top 34 accounted for 31.0% of the weighting of the GDX top 34. So GDXJ essentially takes nearly 1/3rd of GDX gold miners and expands their weighting to 4/5ths.

This is super-beneficial to investors, cutting out the top-heavy deadweight of the 8 largest gold miners that dominate GDX at 61.6% of its total weighting. Those giants have simply grown too large to enjoy superior upside during major gold uplegs. They can't rapidly expand their massive production bases, and their stocks' market capitalizations are so huge their inertia requires enormous capital inflows to move higher.

After having intensely studied and actively traded the gold miners full-time for over a couple decades now, I love the mid-tiers. They are truly in the sweet spot for gold-stock-price upside potential. Unlike smaller juniors, mid-tiers have multiple mines spinning off big cash flows and diversifying single-mine risks. And unlike majors, the mid-tiers can really boost their production by expanding existing mines or building new ones.

GDXJ's upper ranks are a diverse lot, with sizable contingents of gold miners trading in the US, Australia, Canada, and the UK. That makes amassing their quarterly results challenging, as they all offer different data presented in different ways. That includes half-year reporting instead of quarterly in many countries, necessitating splitting some data in half. Plenty of individual-company peculiarities take time to understand.

The more quarterly iterations of this complex research thread I run, the better the results get. Q1'20 was my 16th quarter in a row of this deep fundamental GDXJ-gold-stock analysis, adding on to our massive spreadsheets. The highlights of the mid-tier 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 GDXJ is followed by its quarterly gold production in Q1'20. Since not all of these stocks trade in the US, some symbols are primary listings from foreign exchanges. The year-over-year change in miners' gold outputs from Q1'19 to Q1'20 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 mid-tier 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 Q1'19, or if derived from two negative numbers. Then raw underlying data is included instead.

Symbols highlighted in yellow are the rare GDXJ components not also included in its big-brother GDX, while light-blue ones have newly climbed into GDXJ's top-34 ranks over this past year. Both conditions being true are indicated with yellow-blue checkerboarding. The handful of true juniors GDXJ includes, those primary gold miners producing less than 75k ounces quarterly, have their production boldfaced in blue.

Given the serious disruptions from governments' COVID-19 shutdowns, I've rarely been more eager and anxious to dig into the mid-tiers' quarterlies. But it turned out the GDXJ top 34 generally enjoyed strong operational and financial performances last quarter. Of course as I read through their quarterlies and gathered the latest data, my focus was on COVID-19 impacts. They proved way milder than many traders feared.

In last week's essay I did this same comprehensive quarterly analysis for the GDX-top-34 gold miners. Since the GDXJ top 34 are mostly a smaller subset of those same companies, I don't want to rehash that whole COVID-19-impact discussion here. The major recurring themes across the mid-tier gold miners' quarterlies on this pandemic remained the same. They included withdrawing guidance and tapping lines of credit.

The mid-tier gold miners face great uncertainty on their abilities to operate normally, since government officials in countries hosting their mines can capriciously lock down their economies at any time. So most miners can't offer 2020 production and cost guidance. Facing such unknowns, many are drawing down revolving lines of credit to boost their cash balances. More liquidity enables them to weather shutdown storms.

Whether GDXJ-top-34 gold miners were impacted by COVID-19 or not was mostly dependent on where their mines werearound the world. Plenty of countries either didn't shut down their economies or limited their shutdowns to not include usually remote and isolated gold-mining operations. An example is Turkey, which only locked down major urban environments for 4 days in late April. Several GDXJ stocks mine there.

Alacer Gold operates exclusively in Turkey, and reported in Q1 it was "able to manage COVID-19 without any material impact to our operations, logistics or financial position to date. This has also allowed us to maintain this year's production and cost guidance." Interestingly another GDXJ-top-34 stock SSR Mining just announced a buyout offer for Alacer in mid-May, proving mergers and acquisitions are still happening.

Pan American Silver on the other hand has mining operations in Mexico, Peru, Argentina, and Bolivia. All of these key gold countries' mines ceased producing after national lockdowns went live in the second half of March. While PAAS also mines in Canada, it warned it had "withdrawn its 2020 annual guidance ... We expect to update the 2020 Guidance once sufficient clarity on the operating circumstances becomes available."

Pan American's executive managers and board of directors "voluntarily agreed to a 20% reduction in remuneration until the situation normalizes." PAAS also joined most other mid-tier gold miners in trying to help local communities, donating millions of dollars for food and medical supplies. Nearly all the GDXJ gold miners reported no confirmed casesof COVID-19 at any of their operations as of quarterlies' release dates.

The national lockdowns affecting gold mining have cast a dark pall over this sector since late March. Like all businesses, how dire the impact for mid-tiers depends on how long their gold mines are shuttered by decree. Short shutdowns are easily weathered, but they become more problematic the longer they are enforced. But since late March I've argued most of these shutdowns wouldn't last long, they weren't a threat.

That's because most countries can't print effectively-unlimited money like the Fed to paper over the great economic devastation from their shutdowns. Between mid-March to mid-May, the Fed's balance sheet skyrocketed an absurd 60.8% or $2.6t higher to a crazy new all-time-record high over $6.9t! Countries that can't conjure new money out of thin air to pay their governments' bills desperately need tax revenue.

And gold mines are major taxpayers in many countries. Government officials can allow them to reopen, as they are far from big cities where COVID-19 risks are greatest. It's relatively easy for isolated mining operations to put enough COVID-19 mitigation efforts in place to keep their employees healthy. And the gold mines spinning back up brings in desperately-needed cash for governments teetering on insolvency.

As discussed in last week's GDX essay, the Canadian province of Quebec led the way on this. A late-March universal lockdown order was rescinded for the miners in mid-April, which were reclassified as essential businesses. But since only a handful of GDXJ-top-34 mid-tiers have gold mines in Quebec, that didn't have a sector-wide impact. Mexico is vastly more important, with many companies producing there.

Mexico declared a national emergency a bit later than many other countries, shutting down its economy on March 31st. There was no essential-business exemption for mining. That forced the many mid-tier and junior gold miners operating there to suspend production, putting their mines on care and maintenance. While it didn't affect Q1'20, the mid-tiers disclosed the Mexican mine closures were heavily impacting Q2.

Mexico could ill afford to starve its government of tax revenues though, as its peso had already collapsed during Q1. Emerging-market currencies were crushed as global stock markets rolled over into March's COVID-19 panic. From mid-February to late March, the Mexican peso plummeted 35.3%to an all-time-record low of 25.1 per US dollar! If the Banco de Mexico printed big money, it could ignite hyper-inflation!

So just over a week ago on May 13th, Mexican officials announced they were reopening key parts of that country's economy. That included the big taxpaying industries of car manufacturing, construction, and mining. The gold miners operating in Mexico were given the green light to restart operations on May 18th, this Monday! Other struggling countries are likely to follow suit soon, exempting mining from lockdowns.

Mexico's national shutdown still killed gold-mining output for the first half of this current Q2'20, so the mid-tiers' current quarterly results due to be released into mid-August are going to be scarred. But with most of governments' lockdown orders starting towards late March, their Q1 impact was relatively modest. So the GDXJ top 34 still collectively reported excellent Q1'20 results despite having to start fighting COVID-19.

Production growth is the lifeblood of the gold-mining industry, which investors and speculator prize above everything else. The more individual miners can raise their outputs, the more capital they generate to continue growing by expanding existing operations and building new mines. That boosts future earnings and stock-price upside potential. The mid-tiers didn't disappoint on their trademark production growth in Q1.

Collectively the GDXJ top 34 miners produced 5.1m ounces of gold last quarter, which surged a hefty 10.6% YoY! That doubled the GDX top 34's 5.7% YoY output growth, and trounced the worldwide 2.6% YoY mine-production decline in Q1 according to the World Gold Council. On average the GDXJ top 34 produced 154k ounces of gold last quarter, far smaller than the GDX top 34's 283k skewed higher by big majors.

Production growth is much easier to achieve off smaller bases. But the composition of the GDXJ top 34 also helped. A year ago in Q1'19, GDXJ's upper ranks included three explorers with zero production. By Q1'20, only a single one remained which is NovaGold. And the shakeup in GDXJ's top 34 was far more extensive than that, with a whopping 8 new top-34 components highlighted in light-blue in these tables!

Their total Q1'20 gold production was 876k ounces, compared to 591k for the 8 they replaced from the top 34 in Q1'19. Excluding them, the rest of the GDXJ top 34 grew their collective output by a more-modest 5.0% YoY last quarter. And interestingly 2 of these 8 new top components are the silver-mining giants of Fresnillo and Industrias Penoles. Together they produced a stupendous 28.4m ounces in Q1!

So the GDXJ top 34's total silver output skyrocketed 94.8% YoY to 51.6m ounces. Excluding them and the one larger silver miner they replaced from a year earlier, the rest of the GDXJ top 34's total silver output grew 4.9% YoY to 23.2m ounces. But interestingly both of these Mexican silver behemoths aren't primary silver miners, with only about 42% and 25% of their Q1'20 revenues from silver. They are gold miners.

With mid-tier gold miners nicely growing their total gold output last quarter, their unit costs should've fallen proportionally. Gold-mining costs are largely fixed quarter after quarter, with production requiring roughly the same levels of infrastructure, equipment and employees. The better the ore grades chewed through by mines' fixed-capacity mills, the more gold ounces yielded to spread mining's big fixed costs across.

These 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 process them to recover their gold. But that usual inverse relationship between output and per-ounce costs broke down last quarter. COVID-19 definitely played a role, as the gold miners had to implement costly procedures to protect their people.

Social distancing to minimize infection risks reduces efficiency while increasing costs. A big part of checking COVID-19's spread is cleaning everything relentlessly, which requires lots of expensive labor. And medical staff had to be hired to test and look for symptoms. Mining shifts were lengthened too, with employees spending more consecutive weeks onsite before heading home to minimize infection risks.

COVID-19 definitely pushed up costs. 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 necessary gold prices to keep mines running.

The GDXJ-top-34 mid-tier gold miners reported average cash costs of $768 per ounce in Q1. That was the highest seen in the past 16 quarters, which had run in a wide range from $612 to $730. But while COVID-19 contributed, a handful of troubled gold miners really dragged up this average. They include the perpetually-struggling South African Sibanye-Stillwater and Harmony Gold, as well as Peru's Buenaventura.

Already plagued with individual-mine problems, the latter was slammed by Peru's national lockdown that started relatively early in mid-March. Thankfully it is finally expected to be lifted this weekend. Without this trio of serious outliers, the rest of the GDXJ top 34 saw average cash costs of $700 last quarter. That is pretty normal, and would actually be down 4.1% YoY. Cash costs aren't too relevant when far under gold.

In Q1'20 the average gold price soared 21.4% YoY to $1582! These way-higher prevailing gold prices should have greatly increased the profitability of gold mining, which amplifies the upside potential of the mid-tier gold stocks. An industrywide proxy for gold miners' earnings is simply calculated by subtracting their average all-in sustaining costs from the average gold price in any given quarter. That was awesome in Q1.

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-34 mid-tier gold miners averaged AISCs of $1023 in Q1'20, which was only up a modest 2.1% YoY. That too was skewed way higher by that triad of struggling gold miners with crazy-high AISCs. Excluding SBSW, HMY, and BVN, the rest of the GDXJ top 34 averaged $947. That is near the middle of the 16-quarter range from $855 to $1023. The mid-tiers' costs stayed stable in Q1 despite the pandemic.

Last quarter's lofty $1582 average gold price less $1023 AISCs yields implied profits of $559 per ounce! Those are hefty levels, up 7.7% sequentially from Q4'19's $519 and skyrocketing a magnificent 85.7% YoY from Q1'19's $301! This has to be some of the best earnings growth seen in the entire stock markets, with the great majority of sectors struggling with shrinking profits on governments' economic shutdowns.

Despite all the GDXJ fireworks during and after March's stock panic, this dominant mid-tier gold-stock ETF actually saw its price plunge 33.5% in Q1 proper. Even as of the middle of this week, it was only up a modest 13.5% year-to-date. Are bigger gold-stock gains to come still justified? Hell yes with profits nearly doubling year-over-year! And excluding the COVID-19 shutdowns, that extreme-growth trend is persisting.

Quarter-to-date in the current Q2, the average gold price has soared another 7.4% quarter-on-quarter to $1699. And that's with over half of Q2 in the bag, so no matter what happens from here this quarter will see better gold prices. Assuming the GDXJ top 34's AISCs remain in line with their past-year average of $973, that implies the mid-tiers are running huge earnings of $726 per ounce in Q2'20! That's awesomely big.

Given the COVID-19 shutdowns plaguing many mid-tiers' operations, that mammoth 29.9% sequential earnings growth this quarter won't be achieved. But there's a good chance the GDXJ top 34 will still see impressive results given such high prevailing gold prices. A surprising number of quarterlies revealed the miners expect to make up some of their shut-in production later this year, minimizing the COVID-19 hits.

The collective hard accounting numbers from the GDXJ top 34 under US Generally Accepted Accounting Principles or other countries' accounting rules generally underscored what a great quarter the mid-tiers had in Q1. Their total revenues soared 41.9% YoY to $6.9b, which is even better than 21.4%-higher gold prices and 10.6%-higher gold output suggests! That colossal 94.8%-higher silver output drove most of the rest.

All that fueled monster growth in operating-cash-flow generation, with total OCFs among the GDXJ top 34 skyrocketing 90.6% YoY to $2.1b! In some ways cash flows are a better measure of companies' health than profits, since they aren't riddled with noncash adjustments distorting the results. The more cash the mid-tier gold miners can generate, the faster they can grow production by building new expansions and mines.

That huge OCF generation helped catapult the GDXJ top 34's total cash hoards 91.1% higher YoY to a massive $9.7b! That's far beyond anything seen in the last 16 quarters, further buttressed by the gold miners drawing on lines of credit to boost their liquidity. Normally these miners' total cash balances are running between roughly $5b to $7b. It sure seems prudent to have lots of cash to get through this tough time.

The glaring blemish on the GDXJ top 34's outstanding Q1'20 results was their hard accounting profits reported to securities regulators. Instead of soaring as that implied-profitability proxy indicated, they instead collapsed 52.9% YoYto a total of just $93m! But that plunge was largely due to the usual non-cash charges. There weren't many big ones as I analyzed income statements, but the smaller ones added up.

Normally net-income hits in this industry come from impairment write-offs as lower gold prices leave mines and deposits worth less. But there wasn't much of that in Q1 with much-higher prevailing gold prices. It was surprising to see lots of big losses on currencies, driven by their emerging-market collapse like the Mexican peso. There were also some weird outsized income-tax expenses that were previously deferred.

While the lower accounting earnings pushed up average price-to-earnings ratios, quite a few elite GDXJ mid-tiers were still trading really cheap in the teens. One of the keys to multiplying your wealth trading gold stocks is to cherry pick the fundamentally-superior ones to buy when this sector gets beaten down. The GDXJ top 34 includes many great winners that are fantastic to own, but is also burdened with lots of losers.

Overall the GDXJ mid-tiers' Q1'20 operational and financial results proved awesome! That fundamentally justifies not only these stocks' huge mean-reversion bounce out of mid-March's extreme stock-panic lows, but big additional gains in coming months. The mid-tier gold miners' stocks are certainly nowhere near yet reflecting their huge profitability at these high prevailing gold prices, even despite COVID-19's impact!

At Zeal we again started aggressively buying and recommending fundamentally-superior gold and silver miners in our weeklyand monthlysubscription newsletters back in mid-March right after the stock-panic lows. We've been layering into new positions ever since, with unrealized gains already growing huge. And they will likely get much bigger ahead as this gold-stock upleg keeps powering higher on big gold investment.

To profitably trade high-potential gold stocks, you need to stay informed about the broader market cycles that drive gold. Our newsletters are a great way, easy to read and affordable. 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 and take advantage of our 20%-off sale! Get onboard now and mirror our many winning trades before big buying catapults this sector way higher.

The bottom line is the mid-tier gold miners just reported outstanding Q1 results. They strongly grew their gold production last quarter, and costs only rose modestly despite the additional expenses of protecting employees from COVID-19. While government-imposed shutdowns affected many miners, plenty of other ones avoided them. The mid-tiers collectively reported huge growth in revenues and operating cash flows.

While their implied earnings skyrocketed with far-higher gold prices and essentially-flat costs, accounting earnings suffered on currency swings. But gold-mining profitability should keep surging dramatically on balance in future quarters as these COVID-19 shutdowns soon pass. Most governments can't afford to forgo the big tax revenues from gold mining, so they are reclassifying it as essential business to reopen mines.

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May 22, 2020
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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