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Gold Miners' Q3'20 Fundamentals

Adam Hamilton
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Nov 13, 2020

The major gold miners' stocks have been grinding lower on balance for a few months now in a healthy correction. This necessary rebalancing is achieving its mission of dampening enthusiasm, paving the way for this contrarian sector's next bull upleg. Rebounding from governments' COVID-19 lockdowns, the gold miners reported strong operating and financial results last quarter that fully justify more bull-market gains.

The leading and dominant gold-stock benchmark and trading vehicle today is the GDX VanEck Vectors Gold Miners ETF. Launched way back in May 2006, GDX's first-mover advantage has grown into an insurmountable lead. With $16.0b of net assets this week, GDX commands a staggering 32.9x more capitalthan its next-biggest 1x-long major-gold-miners-ETF competitor! GDX is really the only game in town.

GDX's super-volatile price action this year reflects the wild ride gold stocks have had. Over 4.8 months into early August, this ETF rocketed 134.1% higher out of mid-March's stock panic! That left gold stocks extremely overbought, thus due for a correction to rebalance sentiment. And that is exactly what has happened since, with GDX's total selloff extending to 17.9% at worst over 2.8 months so far by late October.

That's still really mildby gold-stock-correction standards, which I detailed in an essay a few weeks ago. The current correction is the fourth of this secular gold-stock bull. Its first three averaged serious GDX losses of 36.5% over 8.0 months! Gold stocks' overwhelmingly-dominant primary driver is the fortunes of gold. The miners' earnings that ultimately determine their stock prices really leverage gold's price moves.

Gold stocks' current correction has mirrored gold's own, and this metal itself isn't out of the correction woods yet. The American stock traders who fueled gold's latest powerful upleg into early August have been largely missing in action since. Meanwhile speculators' gold-futures positioning is still excessively-bullish. That leaves them lots of room to sell and hammer gold as the oversold US dollar mean reverts higher.

But even if the parallel gold and gold-stock corrections haven't matured and climaxed yet, speculators and investors need to stay abreast on the major gold miners' fundamentals. The stronger they are, the greater this sector's upside potential in its next bull-market upleg. And the just-reported Q3'20 results from the world's biggest gold miners proved super-impressive. They are thriving operationally and financially.

For 18 quarters in a row now, I've painstakingly analyzed the major gold miners' latest quarterly results right after they are reported. While GDX contained a crazy 52 component stocks this week, I'm limiting my analysis to its top 25 holdings. These are the world's biggest and best gold miners, which command a dominant 85.6% of GDX's total weighting. The lion's share of capital chasing gold stocks ends up in them.

These elite gold miners trade in the US, Australia, Canada, South Africa, and China, making amassing this data somewhat challenging. There are different financial-reporting requirements around the globe, and even within the same country miners report different data in different ways. Half-year reporting is common outside the US, and Q3s are off-cycle quarters. But most miners still give shorter quarterly updates.

This table summarizes the operational and financial highlights from the GDX top 25 in Q3'20. These elite 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 GDX weightings from Q3'19. Then their current weightings as of this week follow those stock symbols. This ETF essentially weights gold stocks by market capitalizations.

So relative ranking changes help illuminate outperformers and underperformers over this past year. That data is followed by each miner's Q3'20 gold production in ounces, and its year-over-year change from Q3'19's results. Then comes cash costs per ounce and all-in sustaining costs per ounce along with their YoY changes, revealing how much it costs these elite 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.

Sporting the highest average gold prices ever seen, last quarter promised to be a banner one for major gold miners. And they didn't disappoint, with production rebounding strongly from lockdown-constrained Q2 levels. High gold prices and higher output fueled big revenues, earnings, operating-cash-flow, and treasury growth last quarter. The major gold miners' fundamentals are looking the best they've ever been!

There was no shuffling among GDX's largest 8 holdings over this past year, which together account for the majority of this ETF at 52.8% of its total weighting. There were only a handful of stocks which enjoyed sufficient market-cap gains since Q3'19 to climb into the ranks of GDX's top 25 gold miners. They weighed in at 85.6% of GDX, which is normal concentration levels in line with recent years' averages for this ETF.

Production is the lifeblood of the gold-mining industry, and these major gold miners enjoyed solid output growthlast quarter. The 8.3m ounces they collectively produced in Q3'20 actually climbed a slight 0.6% YoY. That's quite an achievement given all the challenging constraints imposed by governments' orders to fight COVID-19. The GDX top 25's quarterly reports were clear this pandemic is still impacting them.

Many gold mines around the world are operating with reduced staffing. As mine workers test positive for the virus, they must be quarantined. Those sick employees usually can't be temporarily replaced. Gold mining is a highly-specialized industry already employing the experienced people globally. Mining sites are often remote, in rural areas with small labor pools. Healthy workers have to take up the slack from sick ones.

Most of the national lockdowns governments mandated to slow the spread of COVID-19 ended in Q2 or the initial weeks of Q3. With these forced shutterings lifted, the GDX top 25's total gold output rebounded strongly last quarter. Sequentially quarter-on-quarter, these elite major gold miners' output soared 10.2% from Q2 to Q3! They certainly didn't let moss grow under their feet once they could resume operations.

And that 0.6% YoY output growth to 8.3m ounces mined was much better than global gold mining as a whole. The World Gold Council publishes the best-available worldwide gold fundamental supply-and-demand data quarterly. Its latest outstanding must-read Gold Demand Trends report from Q3'20 was released in late October. It revealed global gold-miner output actually fell a sharp 3.4% YoY last quarter!

So the GDX top 25 really outperformed their sector as a whole, ramping operations back up faster than many of their smaller peers. A larger acquisition and smaller merger also stuffed more gold production into the top 25 over this past year. The best major gold miner Kirkland Lake Gold bought Detour Gold earlier this year. And SSR Mining recently merged with Alacer Gold, growing into a bigger mid-tier producer.

But these newly-combined companies' higher production was partially offset by a second Chinese gold miner surging into the rarefied GDX-top-25 ranks. Zhaojin Mining joined the larger Zijin Mining in this last quarter. These are the two companies above with numeric symbols, trading in Hong Kong. Every quarter for years now, I've looked for their operational and financial results in English. But neither company ever bothers.

GDX's managers probably shouldn't include these Chinese gold miners. Regardless of their size, they are far too opaque for American traders. Even professional Wall Street reports on their spartan quarterly results, coming from Chinese analysts working over there, don't discuss output and costs! After spending decades wading through quarterly reports, I'm still shocked how useless Chinese reporting standards are.

Had Zhaojin not climbed into the GDX top 25's ranks with its apparently-secret non-disclosed gold output, the year-over-year production gains of the major gold miners would've been even larger. Another factor pinching their aggregate output growth was substantial year-over-year declines seen by the two giants dominating this industry. Newmont and Barrick Gold account for fully 24.0% of GDX's total weighting!

NEM and GOLD saw their colossal quarterly production levels fall 6.3% and 11.6% YoY in Q3'20, which really dragged down the gold majors' total. Newmont attributed its production decline "due to ongoing Covid-related impacts at Yanacocha, Cerro Negro and Eleonore as the operations continued to ramp up in the third quarter from care and maintenance". That makes sense with these first two mines in Peru and Argentina.

But the other mega-gold-miner Barrick didn't even attempt to explain its sharp output drop. Instead it just blew smoke with misdirection, talking about meaningless "beating our earnings consensus". Then its CEO claimed that "Barrick's consistently strong performance since the merger has more than validated our belief that a combination of the best assets with the best people would deliver the best returns." Really?

He was referring to Barrick's acquisition of Randgold announced in September 2018. In February 2019 I wrote a whole essay analyzing why gold-stock mega-mergers are bad for investors. For years before that expensive $6.5b dilutive all-stock deal, Barrick had struggled with declining output as shown in a table in that essay. Barrick alone produced 1516k ounces in Q4'16, which had already shrunk to 1149k in Q3'18.

In that same last pre-merger quarter, Randgold's output was 309k ounces. So these soon-to-be-merged major gold miners together produced 1458k before consummating their corporate marriage. In the just-reported Q3'20, this merged company's output of 1155k was right back down to where Barrick had been before it bought Randgold! And this new Barrick enjoyed no rebound from Q2'20's lockdown-driven 1149k.

In my mega-mergers-bad essay in February 2019 I warned, "Can bringing two rapidly-depleting major gold miners together magically make a stronger one? I doubt it. Barrick's reported production will enjoy a big temporary boost for its first four quarters as a merged company, and then waning production will again be unmasked." All Barrick shareholders got for their $6.5b was a single-year reprieve from inexorable depletion!

In Barrick's just-released Q3'20 results, its full-year-2020 production guidance ran at a midpoint of 4800k ounces. That would be down 12.2% YoY from the 5465k ounces it mined in 2019. The biggest gains in gold-stock prices come from miners growing their outputs. That certainly isn't Barrick despite grandiose claims of "consistently strong performance since the merger". Which gold stocks traders own really matters.

While GDX is a good gold-stock trading vehicle, my beef with it for years now has been it has too much deadweight. Barrick is the leading example at 1/9th of this ETF's total weighting. Major gold miners not able to consistently grow their output heavily retard the overall performance of GDX. The fundamentally-superior smaller mid-tier gold miners achieving growth enjoy stock-price gains trouncing those of this ETF.

With the GDX top 25's gold production rebounding sharply from Q2's lockdown nadir, I really expected to see lower unit mining costs. In gold mining, output and costs are inversely proportional. The more gold mined, the more ounces to spread this industry's big fixed costs across. Those generally don't change much from quarter to quarter, regardless of prevailing gold prices. That gives gold mining big leverage to gold.

Individual mines require the same levels of infrastructure, equipment, and employees to feed their fixed-capacity mills quarter after quarter. So higher outputs directly translate into lower unit costs. In Q2'20 during those widespread lockdowns, the GDX top 25's cash costs and all-in sustaining costs surged to $646 and $984 per ounce. They should've fallen sharply in Q3 in proportion to that 10.2% QoQ output growth.

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 elite GDX-top-25 gold miners reported average cash costs of $725 in Q3, which soared a stunning 15.1% YoY! This not only defied the expected cost plunge on much-better production, but these proved the highest cash costs by far in the 18 quarters I've been doing this research. The previous high was just $658 in Q4'19. While cash costs aren't too important, their counter-production surge was a bit concerning.

Some of this can be explained by all the extensive COVID-19 protocols the gold miners have to follow to prevent outbreaks in their workforces. But a bigger factor was two extreme outliers skewing this average higher. South Africa's long-struggling Harmony Gold and the US's Hecla Mining reported absurdly-high cash costs of $1156 and $1398 per ounce last quarter! Excluding them, the GDX-top-25 average fell to $667.

For many years now, the troubled South African majors have had to contend with hostile government regulations suffocating their businesses. And the deeper those old gold mines tunnel, the higher costs rise. Hecla took a page out of Barrick's book on misdirection, not even acknowledging plummeting output and soaring costs in its latest quarterly report. Instead it touted "our strong operating performance". Seriously?

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.

These GDX-top-25 gold miners suffered that same counter-production cost inflation in their AISCs. They soared a scary 16.4% YoY to hit $1028 per ounce! That was also the highest in the last 18 quarters, knocking out Q2'20's $984. But again Harmony and Hecla were largely to blame, as they reported extreme outlying AISCs of $1341 and $1855! Excluding them, the rest of these elite majors averaged just $965.

That would still have been a hefty 9.2% YoY jump, but is much more reasonable. The major gold miners that did honorably address rising AISCs head-on in their quarterly reports generally cited lower ore grades at individual gold mines. Again the tonnage throughputs of mills grinding gold-bearing ores are fixed. So the less gold contained in that rock in any quarter, the fewer ounces produced and thus the higher unit costs.

Pan American Silver, which is now overwhelmingly a primary gold miner with this yellow metal accounting for 2/3rds of its Q3 revenues, had an interesting explanation. It reported that it had to replenish crushed-ore inventories sitting on heap-leach pads, which were "drawn down during the mine suspensions in Q2 of this year". While I didn't see that mentioned elsewhere, I suspect other gold miners were in that same boat.

But whether the major gold miners' costs surged 16.4% or 9.2% YoY, they didn't outpace the amazing gains in gold. Q3'20's stellar $1912 average gold price was the highest ever witnessed, soaring 29.8% YoY! So the powerful gold-price gains in the wake of mid-March's lockdown-fueled stock panic far more than offset these higher production costs. GDX-top-25 average AISCs are a great proxy for industry profitability.

Last quarter's $1912 average gold less those unduly-skewed $1028 AISCs still yield incredibly-fat profits of $884 per ounce! That's the highest by far in the years I've been working on this research thread, and almost certainly an all-time record. That soared an awesome 49.7% YoY from Q3'19 levels. While not as big of unit-earnings gains as I'd expected given higher production, that still trounced every other stock sector.

And Q3's huge gold-miner profits growth wasn't some one-off isolated anomaly, but the latest in a strong trend of soaring earnings. In the four quarters leading into Q3'20, the GDX top 25's unit profits per this proxy blasted 53.5%, 56.0%, 55.5%, and 66.2% higher YoY! So Q3's 49.7% growth was right in line with this precedent. The major gold miners' fundamentals are super-strong with such high prevailing gold prices.

And those are lingering despite gold's in-progress correction, portending big earnings growthin this half-finished Q4. Quarter-to-date, gold is still averaging an awesome $1901. And the gold miners themselves are predicting declining AISCs. Their average AISC guidance for full-year 2020 ran $1005 per ounce in midpoint terms in their latest quarterly reports. Achieving that would require Q4 AISCs under Q3's $1028.

Including Q3'20, the last four reported quarters saw GDX-top-25 AISCs average $969. That is as good of estimate as any for Q4. And even if gold keeps correcting, it is unlikely this quarter's average gold price will be dragged under $1850. So the major gold miners' potential earnings per ounce in Q4'20 are still on track to hit $881, almost matching Q3's $884. That would make for another massive 59.7% YoY gain!

On the hard-financial-results front under Generally Accepted Accounting Principles reported to securities regulators, or their foreign equivalents, the major gold miners achieved an amazing quarter financially. The GDX top 25's total revenues surged 31.2% YoY to $13.9b! That outstanding top-line sales growth jibes with average gold prices soaring about 30% YoY while GDX-top-25 gold-mining output edged up 1%ish.

Those would've been the highest quarterly sales on record, but fell short because they don't include Q3 revenues from most of the major Australian and South African gold miners. They again report half-years instead of quarters, and Q3 is an off quarter where they usually just offer operational results. If average gold prices remain high, the upcoming Q4 sales including all the half-year reporters will definitely hit a record.

In actual bottom-line accounting-earnings terms, these GDX-top-25 gold miners collectively reported an enormous $3.8b in profits! That doesn't even include the half-year reporters. And the great majority of that huge number was ordinary earnings from normal gold-mining operations. In wading through all the quarterly income statements, I only saw a single $0.2b noncash gain from a reversal of an impairment charge.

Nevertheless these GAAP profits were still down 29.0% YoY, which sounds weak. But Q3'19 included staggering non-cash gains from a Nevada joint venture done by those behemoths Newmont and Barrick. They recorded epic $2.4b and $2.7b gains in that comparable quarter related to that big deal! These are one-time items that should be backed out. Without them alone, Q3'19's GDX-top-25 earnings were less than $0.3b.

So the major gold miners' hard accounting profits actually skyrocketed last quarter! The record prevailing gold prices were also reflected in huge operating-cash-flow-generation growth. The GDX top 25's OCFs collectively totaled $7.8b in Q3'20, which soared 67.2% YoY! That dwarfs the last 18 quarters' previous best of $5.3b in Q4'19. The major gold miners are spinning off cash hand over fist in this environment.

Those massive OCFs helped fuel an 87.1% YoY rocketing in the GDX top 25's collective cash hoards, to a record $17.7b at the end of Q3! Almost all these elite major gold miners reported big jumps in their treasuries, regardless of whether their gold outputs rose or fell. These huge cash balances are going to be burning holes in managements' pockets, likely unleashing a big new wave of mergers and acquisitions.

That's not going to benefit the majors, which will be spending their billions to buy up smaller gold miners. The fundamentally-superior mid-tier and junior gold minerswith consistently-growing production will be the stocks the majors fight over. They will have to offer big premiums to entice shareholders to sell. And the gold-mining realm is fairly small, so bidding wars are likely as majors spend their cash to offset their depletion.

With the major gold stocks sporting such awesomely-bullish fundamentals in Q3 and almost certainly Q4, their next bull-market upleg has strong potential to balloon to more outsized gains. But first this sector has to weather this necessary and healthy in-progress correction, which is controlled by gold's own. This is the time to do your gold-stock homework, crafting a buy list for the bargains to come as this selloff climaxes.

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The bottom line is the major gold miners reported outstanding Q3 results! Their collective gold production not only rebounded sharply from Q2's lockdowns, but even grew from the comparable prior-year quarter. That was much better performance than global gold miners as a whole. Yet production costs did rise on ongoing COVID-19 mitigation measures and lower ore grades, eroding some potential earnings growth.

But with record-high average gold prices, the major gold miners' profits still rocketed higher in both unit and bottom-line terms. Their collective earnings from normal operations have never been stronger. And with soaring operating cash flows and treasuries, these flush majors are going to be looking to gobble up smaller gold miners. These amazing fundamentals justify much-higher stock prices after this correction ends.

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Nov 13, 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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