Gold Miners’ Q2’21 Fundamentals

The gold miners’ stocks have suffered a weak few months, pounded by a couple big gold-futures purges on distant-future-Fed-rate-hike scares.  The resulting bearishness flaring left this contrarian sector deeply out of favor.  But with prevailing gold prices still high, the gold miners are really thriving fundamentally.  Their just-reported Q2’21 results were impressive, driving their valuations even deeper into bargain territory.

The GDX VanEck Vectors Gold Miners ETF is this sector’s dominant benchmark and trading vehicle.  It commanded $13.9b in net assets this week, dwarfing its next-largest 1x-long major-gold-miners-ETF competitor by a whopping 25x!  GDX rallied a modest 4.6% in Q2 proper, but that sedate performance masks a wild ride within.  GDX blasted up 22.1% quarter-to-date by mid-May, then collapsed 14.4% into quarter-end!

The major gold stocks were enjoying a strong young upleg early on, with GDX powering 28.4% higher in 2.5 months.  Sentiment was really improving, starting to entice speculators and investors back to this little high-potential sector.  Then mid-June’s FOMC meeting acted like a sledgehammer to the skull for gold, and the gold stocks amplified its sharp losses.  That whole sorry episode certainly wasn’t justified at all.

The Fed didn’t slow its huge $120b per month of quantitative-easing money printing, nor did it raise the federal-funds rate.  That FOMC statement didn’t even hint at either coming QE tapering or rate hikes, it implied full QE and ZIRP would continue indefinitely.  Instead top Fed officials’ individual outlooks on future rates, which the Fed chair himself warned are a poor forecaster and not FOMC policy, changed slightly.

Just 6 out of 18 top Fed officials thought the Fed might have to hike the FFR a total of 50 basis points by the end of 2023!  That’s merely a couple quarter-point hikes well over a couple years into the future, an eternity away in market time.  Yet that total nothingburger unleashed such fierce leveraged gold-futures selling that it bludgeoned gold 5.2% lower in just three trading days.  So GDX plunged 9.2% in sympathy.

Ever since that ridiculous overreaction interrupted these latest uplegs, traders have widely assumed this sector is doomed.  Then bearishness surged again after the latest monthly US jobs report in early August.  A strong headline number solely due to colossal seasonal adjustments led gold-futures speculators to again fear distant-future rate hikes into 2023.  So gold and GDX plunged 4.1% and 5.4% in two trading days!

Price action drives sentiment, with traders extrapolating recent trends out into infinity.  How any sector is viewed depends on how it has just fared.  But that highly-emotional herd outlook based on popular greed and fear is very misleading.  Nothing cuts through that obscuring fog like the hard operating and financial results gold miners report after every quarter.  These core fundamentals reveal where gold stocks ought to go.

For 21 quarters in a row now, I’ve been painstakingly analyzing this key data released by the top 25 gold miners of GDX.  These include the world’s largest major gold miners, which accounted for 87.6% of that entire ETF’s weighting in the middle of this week.  Their quarterly results are mostly in, with securities laws requiring US companies to report by 40 days after quarter-ends while Canadian ones have 45 days.

This table summarizes the operational and financial highlights from the GDX top 25 during Q2’21.  These major gold miners’ stock symbols aren’t all US listings, and are preceded by their rankings changes within GDX over this past year.  The shuffling in their ETF weightings reflects changing market caps, which reveal both outperformers and underperformers since Q2’20.  The symbols are followed by current GDX weightings.

Next comes these gold miners’ Q2’21 production in ounces, along with their year-over-year changes from the comparable Q2’20.  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.

Given those couple recent gold-futures selling purges hammering gold and its miners’ stocks lower, you’d think they must be struggling fundamentally.  Nothing could be farther from the truth!  The GDX majors achieved big production growth last quarter, held the line on costs, and enjoyed soaring revenues and earnings.  That left the gold stocks seriously undervalued, great bargains for hardened contrarian traders.

The upper ranks of elite gold miners seldom change much, as it is exceedingly difficult to grow to the scale of the super-majors.  I’d define that as producing over 500k ounces per quarter.  Major-dom starts at 250k quarterly, junior-dom ends at 75k, and everything in between is the mid-tier realm.  One of the biggest problems at the major-plus level is material output growth is hard to achieve operating at those scales.

So it was amazing to see these GDX-top-25 gold miners grow their collective gold production 4.2% year-over-year to 8,188k ounces in Q2’21!  That is understated too, as top GDX component Wheaton Precious Metals hadn’t reported its latest results yet as of the Wednesday-evening cutoff for this essay.  So excluding WPM from the comparable Q2’20 totals, that major-gold-miner output growth climbs to a great 5.4%!

While impressive, unfortunately it’s an anomaly.  Remember that Q2’20 was the peak-lockdown quarter when governments shut down much of their economies to fight COVID-19.  Many gold mines were swept up in those shuttering orders, driving abnormally-low gold output.  According to the World Gold Council’s comprehensive global gold supply-and-demand data, Q2’20’s overall production was the lowest in 5.3 years.

So last quarter’s mean reversion out of that artificial pandemic low was bound to be massive.  Yet despite the majors’ big 5.4% output growth, that was still way worse than this industry as a whole.  The WGC’s latest Q2’21 Gold Demand Trends report reveals total worldwide gold output skyrocketed 16.4% YoY from Q2’20 to Q2’21 hitting 924.0 metric tons!  So the major gold miners’ production is lagging like usual.

The generally-shrinking output among the world’s biggest gold miners has been a key theme for many years now.  While the mix of gold miners in the GDX top 25 changes with stocks’ market capitalizations, their collective production peaked way back in Q4’16 at 9,525k ounces.  That’s about 1/6th higher than the latest Q2’21 total.  And overall global gold production per the WGC peaked at 954.4t back in Q3’18.

Evidence continues to mount that peak-gold has passed!  With the world picked over for centuries, the rare large economic gold deposits majors need to grow their outputs are increasingly harder to find.  And due to the extreme regulatory burdens of developing them into mines, that process often takes a decade or more.  So the global gold mined supply is highly constrained, unable to respond to higher prevailing prices.

That’s naturally very bullish for gold prices, but not so much for those major gold miners struggling with shrinking production.  Note in this table that the great majority of outsized output growth last quarter came from the smaller major, mid-tier, and junior gold miners.  Once miners grow to major or super-major levels of production, they often can’t even keep up with depletion at their existing mines let alone boost overall output.

That’s why the best gold-stock upside during gold uplegs comes from fundamentally-superior mid-tier and junior miners.  With much-smaller production bases, they are able to rapidly grow their outputs by adding new gold mines or expanding already-operating ones.  The larger major gold miners that dominate GDX can never achieve big production growth, which really retards their stock prices acting as a drag on this ETF.

Seven of these top 25 GDX gold miners qualified as super-majors last quarter, producing over 500k ounces.  Producing an average of 750k ounces each, they commanded a massive 43.7% of GDX’s total weighting.  Yet their collective output growth averaged just 4.2% YoY, only about a quarter of that global rebound rate per the WGC.  Those giant mega-miners are deadweight in stock-price-appreciation terms.

Contrast them to the fifteen other GDX-top-25 components that had reported Q2’21 gold output by mid-week.  They averaged a far-smaller 196k ounces of quarterly gold production, which is larger-mid-tier size.  And their average production growth proved literally an order of magnitude higher at 44.1% YoY!  Yet these companies only accounted for 36.0% of GDX, their superior fundamentals are way underweighted.

And it’s not only output growth from lower production bases that helps the smaller majors, mid-tiers, and junior gold miners far outperform their sector leaders.  These better gold stocks also have proportionally-smaller market capitalizations.  Those seven super-majors’ averaged $19.5b this week, while those other fifteen among the GDX top 25 were less than half as big averaging $9.2b.  Their stocks can be bid higher faster.

Any amount of capital inflows will drive up a smaller stock faster and higher than a larger one.  The GDX-dominating super-majors’ market caps are so massive that their inertia retards gains.  So for decades I’ve advocated for and actively traded smaller fundamentally-superior gold stocks.  Their gains trounce the larger majors’ during gold uplegs, so a hand-picked gold-stock portfolio has much greater potential than GDX.

Long-term gold-stock price levels ultimately depend on miners’ profitability, which is directly driven by the difference between prevailing gold prices and gold-mining costs.  In per-ounce terms these are generally inversely proportional to gold production.  That’s because gold mines’ operating costs are largely fixed during planning stages.  Their designed throughputs limit the amounts of gold-bearing ore they can process.

That doesn’t change quarter to quarter, and requires about the same levels of infrastructure, equipment, and employees.  The only real variable is the ore grades run through the fixed-capacity mills.  Richer ores yield more gold ounces to spread the big fixed costs of mining across, lowering unit costs which boosts profitability.  So with 5.4%-better gold production ex-WPM, the GDX top 25 should’ve reported lower costs.

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.

Despite rising gold output, the GDX top 25’s average cash costs still climbed 9.8% YoY to $716.  That is a big improvement from Q1’21’s $773, the highest seen in the last 21 quarters I’ve been working on this research thread.  And as usual it is skewed high by a couple of extreme outliers with crazy $1,000+ cash costs.  Excluding AngloGold Ashanti and Hecla Mining, the rest of the GDX top 25 averaged just $670.

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 gold miners reporting AISCs as of mid-week averaged $1,037 per ounce in Q2’21.  That also climbed contrary to production growth, but at a milder 5.3%-YoY rate.  And those same two miners long struggling with various operational issues including more-expensive-to-run older and deeper gold mines skewed AISCs higher too.  Without AngloGold and Hecla, the rest of the GDX top 25 averaged just $991.

Mining gold at $991 or $1,037 per ounce is exceedingly profitable with prevailing gold prices averaging a high $1,814 in Q2’21.  That was 5.8% higher than during the comparable Q2’20, and earnings leverage gold-price gains.  So while gold had a wild ride last quarter with that distant-future-Fed-rate-hikes scare interrupting a mounting upleg, its average levels left gold mining super-lucrative.  Traders are ignoring that.

Gold-stock traders are so caught up in the recent weakness that they are totally overlooking amazing sector fundamentals.  A great high-level proxy for industry earnings comes from subtracting these major gold miners’ average AISCs from that quarter’s average gold price.  $1,814 gold less $1,037 unit costs yields massive per-ounce profitability of $778!  That remained the third-highest on record for the gold miners.

And it wasn’t far behind Q3’20’s $884 and Q4’20’s $838.  Despite all the bearishness, fear, and apathy plaguing this high-potential sector thanks to those two recent gold-futures selling purges, the gold miners are making money hand over fist!  Per this unit-profitability measure, the GDX-top-25 gold miners have now enjoyed a fantastic eight-quarter streak of consecutive year-over-year earnings growth!  They are thriving.

While the GDX top 25’s unit profits merely grew 6.6% YoY in Q2’21, that caps that incredible run that saw stellar 53.5%, 57.8%, 39.0%, 66.2%, 49.7%, 50.3%, and 25.3% YoY growth!  So it’s not like gold-mining earnings are creeping higher after a deep trough, but continuing to improve out of phenomenal multi-year strength.  Myopic gold-stock traders fixated on technicals and ignoring fundamentals are really missing out.

These fat gold-mining profits are likely to persist given gold’s bullish backdrop, continuing to improve the gold miners’ fundamentals.  About halfway through the current Q3, gold is still averaging $1,798 despite early August’s upside-jobs-surprise gold-futures puking.  Inflation continues to run red-hot thanks to the Fed’s profligate money printing, the ideal environment for investors to boost super-low portfolio allocations to gold.

Despite being lowballed to mask true inflation for political reasons, US consumer prices and producer prices still soared 5.4% and 7.8% YoY in the latest CPI and PPI prints this week!  As anyone responsible for running a household or business is painfully aware, actual price inflation is well into the double-digits in the real world.  That’s the direct result of the vast deluge of new dollars the Fed has unleashed into the economy.

Since March 2020’s pandemic-lockdown stock panic, the Fed has mushroomed its balance sheet by an absurd 91.0% or $3,923b in just 16.8 months!  The US money supply has nearly doubled in that short span, leaving far more dollars chasing relatively way fewer goods and services and bidding up their prices.  Meanwhile the Fed still aggressively conjures up another $120b of new money every month for QE.

With this radically-unprecedented hyper-inflationary backdrop, gold is almost certain to trend higher on balance for years.  The more investors start to worry about this scary inflation the Fed has unleashed, the more they will buy gold.  The gold miners’ profits will leverage higher gold prices to much-bigger gains, creating much-greater gold-stock upside potential.  How can anyone be bearish on gold and gold stocks?

The hard Q2’21 financial results the GDX-top-25 gold miners just reported to securities regulators under Generally Accepted Accounting Principles or other countries’ equivalents again confirmed this sector’s fundamental strength.  Their total revenues surged 23.5% YoY to $22.2b, the highest yet seen!  But that is boosted by a huge Chinese copper, zinc, and gold miner that finally started reporting its results in English.

That is Zijin Mining, which surged to become the 8th largest stock in GDX this week.  While reported in Chinese yuan, its quarterly sales translated to an enormous $8.5b.  That mostly came from the colossal amounts of copper and zinc it mined, not gold.  Zijin is a major gold miner with 341k ounces produced last quarter, but well under super-major status.  Zijin’s numbers are also now included in the comparable Q2’20.

The GDX top 25’s bottom-line accounting profits actually slumped 5.5% YoY to $2,236m.  That seems to contradict that prevailing-gold-less-AISCs proxy showing such strong gold-mining earnings.  But this was totally the result of three super-unusual writeoffs dragging overall profits lower.  The worst was the horrific $926m loss Centerra Gold reported after the corrupt government of Kyrgyzstan literally stole CG’s main mine!

The current president took power in January, and has used political allies and abused the legal system to trump up false charges against that mine.  It is the largest gold mine, largest foreign investment, and largest private-sector employer in that country.  That makes it a juicy target for corrupt politicians.  While tragic for Centerra, the crazy plot twists in this unfolding travesty have read like something out of a novel.

Alamos Gold had something similar happen with Turkey, after that country expropriated a new gold mine by using bureaucracies to shut it down.  That was a $224m writedown last quarter.  Finally Yamana Gold had an unusual $145m deferred-income-tax expense after Argentina’s government hiked its tax rate from 25% to 35% in mid-June but retroactive to the beginning of 2021.  Those three big writeoffs totaled $1,296m.

Excluding those one-time anomalies alone, the GDX top 25’s accounting earnings soared 49.4% YoY to $3,532m!  Bottom-line profits are so darned strong that the major gold miners’ trailing-twelve-month price-to-earnings ratios dropped to the lowest I’ve ever seen!  The GDX-top-25 average was 29.1x, but that was skewed high by three outliers over 50x.  Without them, it fell to 20.2x.  Five stocks had single-digit P/Es!

Since their upside potential is so great as gold bulls power higher, it is normal for gold stocks to trade with relatively-high P/Es around 30x.  So seeing over half these major gold miners’ stocks trading around half that or less is amazing!  Despite all the hate fueled by those gold-futures selling purges, the gold miners are fantastic fundamental bargains today.  That dramatically boosts their potential gains as their upleg resumes.

The GDX top 25’s operating cash flows generated surged 24.0% YoY excluding that not-yet-reported WPM, hitting $6.1b last quarter.  And those massive amounts of cash gold mining operations are spinning off boosted their overall cash warchests 24.8% YoY to $19.5b.  That great sum will fund future production growth through plenty of mine expansions, builds, and outright purchases of smaller gold-mining companies.

So though gold stocks are heavily-beaten-down and universally-unloved these days, that bearish stance is wildly unjustified fundamentally.  The major gold miners dominating GDX are growing their production, keeping costs in line, and continuing to earn huge profits at these high prevailing gold prices.  The recent big gold-futures selling on distant-future-rate-hikes scares is exhausting itself, paving the way for gold to rebound.

That portends serious upside for the gold stocks, even the majors of GDX.  This ETF tends to amplify material gold moves by 2x to 3x, while the fundamentally-superior smaller gold miners able to consistently grow their outputs enjoy much-greater upside leverage.  The trading books in our newsletters are full of these great smaller majors, mid-tiers, and junior gold miners.  Their cheap stocks are big fundamental bargains.

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 has already led to realized gains in this current young upleg as high as +51.5% on our recent newsletter stock trades!

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The bottom line is the major gold miners just reported yet another excellent quarter.  Higher prevailing gold prices and recovering production drove surging revenues.  That continued the multi-year streak of unit profits growth, while hard accounting earnings soared dramatically excluding a handful of anomalous writeoffs.  Strong operational performances really boosted operating cash flows, swelling corporate coffers.

The gold miners’ fat profits forced their already-low valuations even deeper into serious-bargain territory.  Those earnings will only keep growing as gold powers higher on balance on this inflationary monster the Fed’s extreme money printing has unleashed.  Yet traders are ostriching, ignoring the unparalleled upside potential in gold stocks because unsustainable gold-futures selling just hit them.  That will prove a costly mistake.

Adam Hamilton, CPA

August 13, 2021

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