The gold stocks’ latest earnings season is just getting underway, and should prove fantastic. The miners are set to report their most-profitable quarter in years, primarily driven by much-higher gold prices. These companies have also mostly forecast holding the line on costs, helping earnings amplify gold’s breakout surge. This sector’s strong-and-improving fundamentals should increasingly attract back institutional investors.
For 31 quarters in a row now, I’ve painstakingly analyzed the latest results reported by GDX’s major gold miners. This VanEck Gold Miners ETF dominates this sector, commanding 28.9x the assets of its next-largest 1x-long major-gold-miners-ETF competitor! Right after every earnings season, I dig into the latest quarterly reports from GDX’s 25 largest component stocks including the world’s biggest gold miners.
Their new Q1’24 earnings season starts this week and runs until mid-May. Gold stocks listing in the US have 40 calendar days after quarter-ends to file their latest quarterlies with securities regulators. Up in Canada which is the epicenter of the gold-mining universe, that deadline is 45 days. After many years of digging into gold miners’ quarterly and annual reports, some key sector results are predictable in advance.
While gold mining is complex and challenging, gold-mining earnings are fairly simple. Profits are just the difference between prevailing gold prices and the costs of producing gold. So a great proxy for sector earnings subtracts the GDX-top-25 gold miners’ average all-in sustaining costs from quarterly-average gold prices. That reveals the major gold miners’ collective profits per ounce, illuminating key earnings trends.
While the cost side of this equation requires some estimates, gold prices don’t. The yellow metal surged a hefty 7.6% higher in Q1, as its remarkable breakout surge gathered steam. After a mild pullback in the first half of Q1 on a US Dollar Index rally, gold blasted higher in the second half. Fully 10 new nominal all-time record highs were achieved in March alone! That boosted last quarter’s average gold price to $2,072.
That proved the highest ever witnessed, way over Q2’23’s $1,978 and Q4’23’s $1,976. Q1’24’s superior average blasted 9.5% higher year-over-year from the comparable Q1’23! Gold-mining profits naturally leverage prevailing gold prices, growing much faster than their metal climbs. So 10%-better gold prices ought to translate into way-higher gold-mining earnings. Anticipating how high requires some estimates.
A big majority of GDX’s 25 largest component stocks provide guidance for expected production and all-in sustaining costs. But that is almost always for entire calendar years. In their recent Q4’23 results that I analyzed in depth in mid-March, these major gold miners averaged forecasting $1,334 AISCs in 2024. Subtract that from Q1’s record average gold prices, and that implies unit earnings running $738 per ounce!
Those would make for fat profits, the best the major gold stocks have reported since Q2’21. They would also be the fourth highest on record, after Q3’20’s $884, Q4’20’s $838, and Q2’21’s $744. If that played out, the GDX top 25’s unit earnings over the past four quarters would experience 1.2%, 93.8%, 42.3%, and 27.5% YoY growth! A projected $738 more than doubles their recent quarterly ebb of $321 in Q3’22.
But odds are Q1’s AISCs will come in higher than full-year-2024 guidances. Plenty of gold miners have forecast production weighted to the back-half of this year. Unit mining costs are inversely proportional to gold output, as more ounces produced to spread mining’s big fix costs across lowers AISCs. Some of 2024’s ramping production is due to new expansions and mines coming online later this year, but not all.
Overall gold-mining output is considered constant, but is actually varies between quarters. The World Gold Council publishes the best-available global gold supply-and-demand data quarterly in its excellent Gold Demand Trends reports. The new Q1’24 edition is due soon, but hadn’t yet been released as I penned this essay. That is super-anticipated to see where demand fueling gold’s breakout surge came from.
The WGC tracks worldwide gold mine production every quarter, and it isn’t steady. Over the last decade, quarter-on-quarter mined gold output in Q1s, Q2s, Q3s, and Q4s has averaged -8.4%, +3.7%, +6.1%, and +0.4%. Q1s are the weakest quarters of the year, seeing big production declines from Q4s! Then that output builds again in Q2s and Q3s before peaking in Q4s. There are several reasons behind this trend.
Like most of the world’s land masses, most gold mines are found in the northern hemisphere. Winter weather peaking in Q1s adversely impacts operations, ranging from bitter cold up north to heavy seasonal rains down south. Both reduce efficiencies of necessary chemical reactions in heap leaching commonly used to dissolve gold from ores. Q1s are also when mine managers get new maintenance and upgrade budgets.
So they often schedule plant maintenance early in years, further slowing outputs. Sometimes they take advantage of winter weather impeding mining operations to expand throughputs. With much of that done and temperatures warming, gold mines often really hum in Q2s and Q3s. All of my gold-mine visits have been in summer months, and it’s always amazing seeing the beehives of activity with ore being moved.
AISCs inversely mirror production, so they are generally higher in Q1s before falling in Q2s and Q3s. So the GDX top 25’s full-year-2024 AISC guidance of $1,334 per ounce is very likely to be exceeded in Q1. It’s impossible to predict how much, but it almost certainly won’t exceed 5% more. That would make for $1,400 Q1 AISCs, which would be the second highest ever after Q3’22’s $1,405. $1,400 is likely worst-case.
That would definitely erode Q1 unit earnings, pulling them down to $671 per ounce up 16.0% YoY. But even that is substantial growth, and would still rank as the sixth-best GDX-top-25 profits on record! My best guess is those Q1 AISCs average around $1,365, which would yield still-fat $707 unit earnings surging 22.1% YoY. The gold miners are certain to soon report fantastic profits on much-higher gold prices.
This ongoing massive earnings growth is super-bullish because gold stocks remain deeply undervalued relative to gold. This chart looks at GDX and its key technicals over the past several years or so. While gold is blasting to record highs in its remarkable breakout rally, the gold stocks continue to languish. That is because American stock investors distracted by the recent AI stock bubble haven’t started chasing gold yet.
Despite the gold miners’ phenomenal fundamentals, midweek GDX was merely drifting near $33. The major gold stocks were trading at similar levels over three years ago in March 2021, when gold was only averaging near $1,725. At this span’s highwater mark in mid-April 2022, GDX was challenging $41 while gold was around $1,975. So with gold running over $2,300 today, gold stocks should be a heck of a lot higher.
It’s not just their implied unit profits that are surging, but hard GAAP earnings. Plenty of major gold stocks are now trading at absurdly-cheap low-double-digit and even single-digit trailing-twelve-month price-to-earnings ratios! Sooner or later this sector’s unparalleled earnings growth and massive cash flows generated are going to attract institutional investors including funds. Their buying will catapult gold stocks far higher.
This small high-potential contrarian sector has been deeply out of favor for years, mostly because gold was grinding sideways on balance. But its recent remarkable breakout surge changes everything. New record highs soon spawn momentum-chasing buying. The higher gold advances into record territory, the more the financial media covers it and the more bullish that coverage gets. That attracts in legions of new traders.
After learning about surging gold prices, speculators and investors flock in to chase its upside. Their buying accelerates that, fueling powerful virtuous circles. The higher gold rallies, the more traders rush to buy in, the faster gold surges, and the more the financial media reports on it. This new-record dynamic is responsible for some of the biggest gold uplegs ever witnessed, and was last seen in a pair cresting in 2020.
The first blasted to 42.7% gains over 18.8 months, while the second soared 40.0% in just 4.6 months! By those monster record-achieving standards, today’s gold upleg up 31.2% at best in 6.4 months still has a long way to run. Hitting 40% gains since early October’s major bottoming would carry gold way up near $2,550! And there are strong arguments for even higher with American stock investors not yet chasing gold.
Those monster gold uplegs drive huge gold-stock gains, with GDX soaring 76.7% during that first one peaking in 2020 then skyrocketing 134.1% in the second! Those averaged 105.4% gains, more than doubling. Unbelievably at best during today’s gold upleg, GDX has merely rallied 33.0%. That makes for pathetic 1.1x upside leverage to gold, far behind the 2x to 3x major gold stocks have historically achieved.
With another monster 40% gold upleg probable, overall GDX gains should extend to 80% to 120%. That would drive GDX way up between $47 to $57, far higher from current levels! And those still wouldn’t be anywhere near record gold-stock highs. GDX peaked at $66.63 in early September 2011 when gold was merely trading near $1,865. Make no mistake, with new record gold highs gold-stock upside potential is vast.
While American stock investors haven’t figured that out yet, Chinese ones have. Their buying is likely the primary driving force behind gold’s remarkable breakout surge. Gold miners listed in China have seen their stocks relentlessly bid up to dazzling new all-time record highs. When gold runs, gold stocks are the best way to amplify its gains due to their inherent profits leverage to their metal. Frenzied buying is coming.
Chinese stock markets are previewing this. Back in early April, one of China’s leading gold-stock ETFs actually had to halt trading. The reason was the premium on that ETF’s share price over its underlying gold-stock assets had ballooned over 30%! That won’t happen in GDX or GDXJ due to how they are run, but illustrates how crazy gold-stock demand can get. Big capital inflows launch this relatively-small sector.
Circling back to expected gold-mining profits, they aren’t done soaring. This current Q2’24 is almost a third over, and gold has already averaged a stunning record $2,336! The GDX top 25’s Q2 AISCs are likely to be closer to their full-year guidances averaging $1,334, due to the big surge in output between Q1s and Q2s. That implies mind-boggling sector unit earnings tracking $1,002 per ounce in this current Q2!
That would dwarf Q3’20’s previous record of $884, and make for epic 67.6% YoY unit-earnings growth for these major gold miners. Whether gold continues rallying from here or rolls over into a correction during the next couple months, gold-mining profits are going to keep soaring. That will make gold stocks even more undervalued relative to their metal and even more attractive to investors, who will start returning soon.
And the biggest gains certainly won’t be won in the majors dominating GDX. The very-large scales they operate at make achieving consistent material production growth impossible. And their stocks’ large market capitalizations have too much inertia to skyrocket, requiring big capital inflows to overcome. This sector’s best gains during gold’s bull will come in smaller fundamentally-superior mid-tier and junior miners.
They are better able to continually grow their outputs by expanding their handful of existing mines and building new ones. Those smaller mines also tend to be higher-quality, with lower operating costs than majors making for more-profitable operations. Mid-tiers’ and juniors’ much-smaller market caps make their stocks way easier to bid far higher, requiring much-less buying. These stocks are going to fly with gold.
Our newsletter trading books are currently full of handpicked fundamentally-superior smaller gold miners. While their unrealized gains during this gold upleg are already running as high as +69.8% midweek, these trades have the potential to double, triple, or even more! With American stock investors not yet starting to chase gold stocks, it isn’t too late to get deployed. The great majority of their huge gains are still coming.
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The bottom line is the major gold miners will soon report fantastic Q1 results. Despite higher mining costs likely in the usual Q1 production ebb, record average gold prices will still make for fat unit profits. Those should really boost accounting earnings, leaving gold stocks even more undervalued. Big fundamental strength will increasingly attract institutional investors, with their buying driving this neglected sector way higher.
And gold-mining earnings growth is set to accelerate even more dramatically in this current Q2. Gold’s remarkable breakout surge to dazzling new heights will fuel soaring mining profits, which are already on track to achieve big new records. As traders increasingly learn about gold stocks’ amazingly-bullish fundamental outlook, they will flock back. Contrarians buying in ahead of most will really multiply their wealth.
Adam Hamilton, CPA
April 26, 2024
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