The mid-tier and junior gold miners in this sector’s sweet spot for upside potential recently wrapped up their latest earnings season. These fundamentally-superior smaller gold producers delivered big last quarter, reporting spectacular results. The potent combination of record gold prices, lower mining costs, and better production fueled some of their richest profits ever. Yet mid-tiers still remain way undervalued.
The leading mid-tier-gold-stock benchmark is the GDXJ VanEck Junior Gold Miners ETF. With $5.5b in net assets mid-week, it remains the second-largest gold-stock ETF after its big brother GDX. That is dominated by far-larger major gold miners, though there is much overlap between these ETFs’ holdings. Still misleadingly named, GDXJ is overwhelmingly a mid-tier gold-stock ETF with juniors having little weighting.
Gold-stock tiers are defined by miners’ annual production rates in ounces of gold. Small juniors have little sub-300k outputs, medium mid-tiers run 300k to 1,000k, large majors yield over 1,000k, and huge super-majors operate at vast scales exceeding 2,000k. Translated into quarterly terms, these thresholds shake out under 75k, 75k to 250k, 250k+, and 500k+. Today only one of GDXJ’s 25 biggest holdings is a true junior!
Its Q1 production is highlighted in blue in the table below. Juniors not only mine less than 75k ounces per quarter, but their gold output generates over half their quarterly revenues. That excludes streaming and royalty companies that purchase future gold output for big upfront payments used to finance mine-builds, and primary silver miners producing byproduct gold. But mid-tiers often make better investments than juniors.
These gold miners dominating GDXJ offer a unique mix of sizable diversified production, excellent output-growth potential, and smaller market capitalizations ideal for outsized gains. Mid-tiers are less risky than juniors, while amplifying gold uplegs much more than majors. Our newsletter trading books are now filled with fundamentally-superior mid-tiers and juniors, smaller gold miners which we’ve long specialized in at Zeal.
Mid-tier gold-stock outperformance accelerates as major gold uplegs mature, increasingly attracting more traders to bid up stock prices. That’s finally starting to happen again as gold-stock sentiment shifts back to bullish. Gold’s driving upleg has powered 33.2% higher at best since early October. The major gold stocks represented by GDX hit a new +44.5% highwater mark midweek, for meager 1.3x upside leverage to gold.
Historically major gold stocks tend to amplify material gold moves by 2x to 3x, with that upside leverage mounting later in uplegs. That process is underway, as since mid-February GDX’s gains have outpaced gold’s by 2.0x. The mid-tiers of GDXJ lagged their larger peers for much of this upleg, as traders hadn’t started warming to this sector. But GDXJ’s total upleg gains grew to 52.3% this week, pulling ahead of GDX.
This smaller-gold-stock outperformance should continue expanding on balance. Fundamentally-superior mid-tiers’ gains during major gold uplegs surge way ahead of the majors’, sometimes even doubling them! The longer gold and gold stocks rally, the more bullish speculators and investors wax on them, the more capital they deploy to chase those gains, the more mid-tiers’ stock prices accelerate way ahead of larger miners’.
For 32 quarters in a row now, I’ve painstakingly analyzed the latest operational and financial results from GDXJ’s 25-largest component stocks. Mostly mid-tiers, they now account for 66.0% of this ETF’s total weighting. While digging through quarterlies is a ton of work, understanding smaller gold miners’ latest fundamentals really cuts through the obscuring sentiment fogs shrouding this sector. This research is essential.
This table summarizes the GDXJ top 25’s operational and financial highlights during Q1’24. 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 shifting market caps, which reveal both outperformers and underperformers since Q1’23. Those symbols are followed by their recent GDXJ weightings.
Next comes these gold miners’ Q1’24 production in ounces, along with their year-over-year changes from the comparable Q1’23. 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 disclosed 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.
The mid-tier gold miners’ overall Q1’24 performance again proved spectacular! These sweet-spot-for-upside smaller gold stocks slashed mining costs while boosting their production. Those strong operations combined with record prevailing gold prices fueled another massive per-ounce earnings jump, the fourth consecutive quarter of those! Last quarter was among the best mid-tiers ever reported, impressively bullish.
Production growth trumps everything else as the primary mission for gold miners. Higher outputs boost operating cash flows which help fund mine expansions, builds, and purchases, fueling virtuous circles of growth. Mining more gold also boosts profitability, lowering unit costs by spreading big fixed operational expenses across more ounces. But for the first time in eight quarters, the GDXJ top 25’s output shrunk!
They collectively mined 3,692k ounces of gold in Q1’24, which slipped 0.8% YoY. But that is due solely to composition changes among these elite ranks. Four stocks surged dramatically over this past year to enter the GDXJ top 25, displacing four other stocks. Among the ascenders is Aya Gold & Silver, a small silver miner that produces no gold. That elbowed Lundin Gold to 26th place, which mined 112k ounces in Q1.
Replacing a producer with a non-producer skewed overall output lower. Had LUG been included instead of AYA, the GDXJ top 25’s aggregate output last quarter would’ve climbed 2.2% YoY to 3,803k ounces! That’s pretty impressive, much better than the GDX-top-25 majors’ 0.6%-YoY shrinkage I analyzed in an essay on their latest results last week. But both these elite mid-tiers’ and majors’ production is still lagging.
Every quarter the World Gold Council publishes fantastic Gold Demand Trends reports, containing the best-available global gold supply-and-demand data. The recent Q1’24 edition revealed total worldwide mine production grew 4.4% YoY. The GDXJ top 25 would’ve even bested that if not for output shortfalls in just two of its larger producers, B2Gold and Endeavour Mining. But those were both expected last quarter.
BTG suffered a permitting delay for a sizable new gold project in Mali, so it has guided 2024 to midpoint production around 900k ounces. That would make for full-year shrinkage of 15.2%. But with that project and another new mine coming online in 2025, next year is already forecast to see production surge 21.1% to a record 1,090k-ounce midpoint. So this year is a temporary lull for B2Gold before growth resumes.
EDV’s weaker Q1 mostly resulted from mining lower-grade ores. Mine sequencing sometimes requires digging through lesser ores to reach higher-grade ones underneath. Endeavour Mining is still forecasting 2024 output near a 1,200k-ounce midpoint, “strongly weighted towards the second half”. Achieving that would make for modest 2.3% growth this year, far better than Q1’s serious 27.1%-YoY output drop suggests.
Among the mid-tiers there are plenty of great growth stories, including Eldorado Gold. Last year it mined 485k ounces. Due to a new gold mine ramping up in coming years, it has already forecast midpoints of 530k ounces this year, 570k in 2025, 663k in 2026, and 705k in 2027! Investors will really reward such big production growth, bidding EGO stock much higher. Mid-tiers with good growth profiles make great trades.
So we’ve always prioritized high-potential smaller gold miners that have strong production growth coming, adding newsletter trades before the driving expansions and new mine-builds go live. These make for the most-compelling gold-stock trades and investments. Interestingly since it takes much expertise to stay abreast of many dozens of smaller gold miners, surging production and falling costs tend to surprise most traders.
While handpicking great individual gold stocks yields the most success, GDXJ is still far superior to GDX. Despite a big overlap in these ETFs’ holdings, GDXJ cuts out the deadweight majors and super-majors dominating GDX. They’ve long struggled to even overcome depletion, let alone grow their production like mid-tiers and juniors. GDXJ lops off GDX’s nine largest stocks, which just commanded 4/7ths of its total weighing!
These GDXJ-top-25 components are clustered between the 10th to 40th weightings in GDX. Again they represent 66.0% of GDXJ’s total weighting, more than doubled from just 28.8% in GDX. So if you aren’t willing to own fundamentally-superior individual gold stocks, GDXJ is the next-best way to get great smaller-gold-miner exposure. There’s little reason to allocate capital to major-dominated GDX since GDXJ exists.
Unit gold-mining costs are generally inversely proportional to gold-production levels. That’s because gold mines’ total operating costs are largely fixed during pre-construction planning stages, when designed throughputs are determined for plants processing gold-bearing ores. Their nameplate capacities don’t change quarter to quarter, requiring similar levels of infrastructure, equipment, and employees to keep running.
So the only real variable driving quarterly gold production is the ore grades fed into these plants. Those vary widely even within individual gold deposits. Richer ores yield more ounces to spread mining’s big fixed expenses across, lowering unit costs and boosting profitability. But while fixed costs are the lion’s share of gold mining, there are also sizable variable costs. That’s where recent years’ raging inflation hit hard.
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 GDXJ top 25’s average cash costs edged 0.3% lower YoY to $1,012 per ounce in Q1’24. That was impressively the mid-tiers’ fourth quarter in a row of declining cash costs. The smaller miners’ operational discipline is impressive, trouncing the GDX-top-25 majors which saw average cash costs climb in fully 21 of the last 22 quarters! Mid-tiers and juniors target smaller but-often-lower-cost gold deposits than majors.
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 mid-tier gold miners’ true operating profitability.
Astoundingly the GDXJ top 25’s average AISCs plunged 8.4% YoY to just $1,294 in Q1! That was also their fourth consecutive quarter falling considerably, down 4.4%, 10.3%, 8.1%, and 8.4% YoY. This is phenomenal performance considering inflation goosing mining costs in recent years. But unfortunately the mid-tiers’ latest quarterly AISC drop is really overstated, largely driven by a single extreme outlier.
Peru’s Buenaventura has long been one of the higher-cost gold miners included in GDXJ’s upper ranks. Its many operational challenges for years have left BVN unworthy of the higher market capitalization that investors have awarded it. Given its sorry track record, this is one of many gold stocks I’ve never been interested in owning. Yet unbelievably and contrary to pedigree, Buenaventura reported negative AISCs in Q1!
How is such sorcery even possible? BVN isn’t a primary gold miner, with only 36% of its Q1 revenues from the yellow metal. It also produces silver, copper, zinc, and lead. But like some poly-metallic miners, Buenaventura reports in gold-centric terms since gold stocks command higher multiples. So those other metals are considered byproducts, despite being the big majority of output. Their sales are credited to gold.
While BVN’s gold production only grew 7.8% YoY last quarter, its silver, copper, zinc, and lead outputs rocketed up 149.7%, 26.4%, 418.6%, and 262.7% YoY! Those colossal jumps translated into enormous byproduct credits offsetting gold-mining costs, slamming Q1 AISCs to -$121. BVN’s non-gold production should remain much higher with a new silver-zinc-lead mine just coming online, keeping gold AISCs lower.
Excluding BVN’s negative Q1 AISCs, the rest of the GDXJ top 25 averaged a considerably-higher $1,389. Even that is still down 1.8% YoY, preserving the mid-tiers’ awesome AISC-contraction streak. Both are quite comparable to the GDX-top-25 majors’ average AISCs, $1,277 including BVN and $1,370 without it last quarter. Mid-tiers are achieving similar mining costs despite lacking majors’ touted economies of scale.
In the 32-quarter history of this GDXJ-top-25-results research, a handful of outliers have often skewed the average AISCs higher. While I pointed that out, I always still used the actual average including them to calculate implied sector unit profits. So we need to treat BVN’s stunning negative AISCs the same way this time around. These elite majors averaged $1,294 AISCs in a quarter where gold averaged a record $2,072.
That made for fantastic unit profits of $777 per ounce, the fattest since Q4’20 and the third-highest ever witnessed for smaller gold miners! Those also blasted up 62.6% YoY, extending a skyrocketing-earnings trend in the previous three quarters soaring 33.8%, 106.4%, and 125.7% YoY! No other sector in all the stock markets has seen earnings rocket up as fast as these mid-tiers, which will attract fundamental investors.
And gold-mining profits aren’t done surging, with the best still coming. Again gold averaged that record $2,072 in Q1, but its remarkable breakout surge has catapulted the Q2-to-date average all the way up to $2,342! Even if gold suffers a pullback later in this quarter to work off extreme overboughtness, Q2’s average shouldn’t retreat under $2,275. Even that would require $2,200ish gold for the entire rest of this quarter.
And the GDXJ top 25’s average AISCs are also likely to decline again in Q2. Q1s have long proven the production ebb of the world gold-mining industry. The WGC’s comprehensive fundamental data reveals over the last decade quarter-on-quarter global output fell 8.4% in Q1s, grew 3.7% in Q2s, surged 6.1% in Q3s, then edged up 0.4% in Q4s. Again higher production generally proportionally lowers mining costs.
But let’s conservatively assume the mid-tiers’ average AISCs climb slightly this quarter to $1,300. Those subtracted from $2,275 average gold would yield spectacular mid-tier unit profits of $975 per ounce! That would easily be an all-time record for both GDXJ and GDX, and skyrocket another epic 104% YoY! So the smaller gold miners’ already-awesome fundamentals will continue radically improving in this current Q2.
Sooner or later fundamentally-oriented fund investors will figure this out, and rush to deploy big capital in this small sector. That buying will catapult smaller gold stocks way higher, accelerating their usual big outperformance of larger gold stocks. Plenty of mid-tiers could still double from here during this gold upleg! That’s amazing considering our newsletter trades’ unrealized gains are already running as high as +112%.
The GDXJ top 25’s hard accounting results under Generally Accepted Accounting Principles didn’t look as fantastic last quarter, partially due to those composition changes. Total revenues only climbed 2.1% YoY to $7,509m, which doesn’t jibe with 0.8%-lower production and 9.5%-higher average gold prices. But again AYA’s rise displaced LUG, which reported far-different Q1’24 sales of $5m and $227m respectively!
Swap them alone, and GDXJ-top-25 revenues instead grew 5.1% to $7,731m. Other displacements in upper rankings also dragged down year-over-year sales. Those also affected total bottom-line earnings, which plunged 49.1% YoY to $229m. But AYA’s $3m loss replaced LUG’s $42m profits. Still smaller gold miners’ earnings dropped, even adjusted for unusual non-cash charges flushed through income statements.
As a longtime CPA, I pay special attention to financial statements in my quarterly-results analyses. I take notes on any material unusual charges or sometimes gains that affect net income. Not many caught my eye in Q1, merely adjusting GDXJ-top-25 earnings near $250m. Yet the comparable Q1’23 had a couple big ones, leaving its adjusted earnings much higher around $641m. So mid-tiers’ bottom lines still collapsed.
Lower production and accompanying higher mining costs for many of these elite mid-tiers was the main reason. That should reverse in coming quarters as outputs climb driving AISCs lower. Because of everything forced through income statements, they tend to be noisy and volatile. After decades of gold-stock analyses, I’ve found average unit profits are a cleaner proxy for sector earnings trends than net income.
The GDXJ top 25’s operating cash flows generated last quarter rocketed up 37.7% YoY to $1,920m! But that surge is entirely due to one unusual situation. B2Gold decided to forward sell $500m worth of gold that it will mine between July 2025 to June 2026, or 265k ounces. That’s about a tenth of expected outputs in both years, working out to an average gold price of $2,191. The $500m received was an upfront payment.
BTG’s accountants plunked that $500m hedging prepayment in Q1 operating cashflows, though it seems more like a financing activity than an operating one. Reverse that unusual item out, and the GDXJ top 25’s OCFs only grew 1.8% YoY in Q1 to $1,420m. Their collective cash treasuries depleted 18.6% YoY to a still-flush $6,528m, with plenty of mid-tiers investing in expanding existing mines and building new ones.
Overall these elite mid-tiers’ latest quarterly results were outstanding. These gold miners extended their powerful streak of achieving output growth while driving down mining costs. That combined with record gold prices catapulted per-ounce profits far higher. Sooner or later investors will figure this out and flood into these high-potential stocks. Major gold miners always struggling with depletion also covet mid-tiers’ mines.
By advancing great gold projects into mines and growing relatively fast, mid-tiers and juniors are the gold-production pipeline ultimately feeding the majors. They are always circling the smaller gold miners like sharks, ready to gobble them up through buyouts. This acquisition potential adds to mid-tiers’ upside. During major gold uplegs, smaller gold stocks can easily double, triple, or more, really multiplying wealth!
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The bottom line is the mid-tier gold miners continued reporting spectacular quarterly results. They kept growing their production when adjusted for one GDXJ-upper-ranks composition change. That helped force their average mining costs considerably lower for the fourth quarter in a row. Combined with record gold prices, that generated some of the fattest unit profits the smaller gold miners have ever achieved.
And their fantastic fundamentals are still improving. In this current quarter, mining costs are likely to keep retreating as outputs rebound or grow. Couple that with much-higher record gold prices, and the smaller miners are probably now earning their biggest profits ever. That will increasingly attract big fund investors to this small still-really-undervalued sector. That portends much-bigger gold-stock gains still coming.
Adam Hamilton, CPA
May 24, 2024
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