The major gold miners just reported their best quarterly results ever! Record gold prices combined with lower mining costs catapulted unit earnings to dazzling new records. Yet despite exploding profitability, gold stocks continue to lag gold’s mighty upleg. This anomaly won’t last, as investors increasingly realize how seriously undervalued this sector remains. The resulting capital inflows will drive gold stocks way higher.
The GDX VanEck Gold Miners ETF remains this sector’s dominant benchmark. Birthed way back in May 2006, GDX has parlayed its first-mover advantage into an insurmountable lead. Its $14.0b of net assets mid-week dwarfed the next-largest 1x-long major-gold-miners ETF by nearly 25x! GDX is undisputedly the trading vehicle of choice in this sector, with the world’s biggest gold miners commanding most of its 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+. Those two largest categories account for nearly 4/7ths of GDX.
While GDX’s overall Q2’24 performance remained weak, it is improving. Last quarter this leading gold-stock ETF climbed 7.3% on a 4.7% gold rally, for 1.6x upside leverage. Normally the major gold miners of GDX amplify material gold moves by 2x to 3x. With gold and gold-stock gains mounting, traders are starting to take notice. In Q1 GDX had only edged up 2.0% on a 7.6% gold surge, for dreadful 0.3x leverage.
As a little contrarian sector usually overlooked, gold stocks have to achieve amazing feats before they win investors’ respect and capital. So they tend to underperform earlier in gold bulls, but way outperform later once they are well-established. Gold’s latest upleg has already powered up into mighty territory, rallying a massive 35.8% at best since early October! Gold just achieved its latest nominal record of $2,472 this week.
Gold’s hefty gains have certainly driven GDX higher, with its own upleg climbing 51.6% at best within this same span. But so far that has only amplified gold a still-anemic 1.4x, which is unusual well into a major gold upleg achieving new record-high streaks. The gold stocks remain fantastic buys relatively late in gold’s powerful run thanks to this unsustainable anomaly. Past precedent agues way-bigger gains are coming.
Gold’s last two uplegs attaining new records both crested in 2020, averaging monster 41.4% gains. GDX leveraged those by a good 2.5x, averaging 105.4% gains during them! Yet major gold stocks are up less than half that in today’s similarly-mighty gold upleg. They’ll catch up, so gold stocks remain a heck of an opportunity. Their glorious record Q2 results should really up sector interest among institutional investors.
For 33 quarters in a row now, I’ve painstakingly analyzed the latest operational and financial results from GDX’s 25-largest component stocks. Mostly super-majors, majors, and larger mid-tiers, they dominate this ETF at 87.5% of its total weighting! While digging through quarterlies is a ton of work, understanding the gold miners’ latest fundamentals really cuts through the obscuring sentiment fogs shrouding this sector.
This table summarizes the operational and financial highlights from the GDX top 25 during Q2’24. These 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 shifting market caps, which reveal both outperformers and underperformers since Q2’23. Those symbols are followed by their current GDX weightings.
Next comes these gold miners’ Q2’24 production in ounces, along with their year-over-year changes from the comparable Q2’23. 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.
At the end of June a few weeks before Q2’s earnings season even started, I wrote an essay called “Gold Miners’ Record Quarter”. I concluded then “...gold miners will soon report a record quarter. ... Amazingly major gold miners’ average Q2 profits are now tracking over an unprecedented $1,000 per ounce.” That indeed came to pass, well exceeding even my high expectations of “awesome unit profits of $1,013 per ounce!”
Before we get to the fantastic news, the major gold stocks’ Q2 output disappointed. 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.
Ominously the GDX-top-25 gold majors’ collective production plunged 7.8% YoY to just 7,465k ounces last quarter! That drop was the second-worst in this research thread, to the lowest levels seen in its entire long 33-quarter span! These elite gold miners way underperformed their smaller peers, as the World Gold Council’s comprehensive Q2 gold supply-and-demand data showed global mining output climbing 3.3% YoY.
Thankfully this is all due to lazy quarterly reporting. GDX includes super-major and major South African and Chinese gold miners. The former report in half-year increments, but on a more-relaxed schedule than American and Canadian gold miners. The latter only haphazardly report in English, and when they deign to their scant results can be delayed for many months. Q2’24 reporting proved even worse than usual.
South Africa’s Gold Fields didn’t release any Q2 results as of mid-week, which is atypical. Normally it at least publishes quarterly updates by now, if not full half-year results. GFI’s management has probably been distracted by their new buyout of Canada’s Osisko Mining, to consolidate ownership in a great gold deposit they jointly own. South Africa’s Harmony Gold’s fiscal year ends in Q2, so that report is always later.
China’s Zijin Mining and Zhaojin Mining haven’t reported any Q2 results yet either. Occasionally they put out something in the normal quarter-end reporting window, but mostly not. In the comparable Q2’23, the super-majors Zijin and Gold Fields had reported mining 1,091k ounces. But Zhaojin and Harmony had not issued any quarterly results yet back then. Excluding all four makes for a much-better annual comparison.
Without them, the GDX top 25’s aggregate Q2’23 production falls to 7,005k ounces. That would leave the latest 7,465k in Q2’24 up an excellent 6.6% YoY, double the WGC’s global-gold-mining rise! That being said, the super-majors and majors continue to struggle to overcome depletion. That’s been a vexing problem in gold stocks for many years now, and one key reason smaller gold miners way outperform larger ones.
The world’s largest gold miner Newmont remains the leading example. Last quarter its production soared 29.6% YoY to 1,607k ounces, which looks awesome. But that big growth only happened because NEM gobbled up Australian super-major Newcrest Mining for $16.8b last year, with that deal closing in early November. Mergers and acquisitions usually provide short-lived four-quarter production boosts in this sector.
Just a year ago in Q2’23, NEM and NCM as separate entities produced 1,796k ounces. So the combined Newmont’s output actually effectively plunged 10.5% YoY! Newmont has proven a serial disappointer on both the production-growth and mining-cost fronts for many years, really retarding GDX’s performance. NEM has long been the gold-stock mega-merger ringleader, which have always been quite bad for this sector.
Unable to organically grow production at their vast scales, super-majors spend tens of billions of dollars to buy smaller rivals. These acquired gold miners are usually fundamentally-superior, operating fewer gold mines at lower costs. Their resulting better profitability and lower market capitalizations give their stocks greater upside leverage to gold. But those advantages vanish once assimilated into the super-major Borg.
Newcrest, along with earlier Newmont prey including Goldcorp, had far-better fundamentals and stock-price performance when they were standalone companies. In Q2’23 for example, NCM’s all-in sustaining costs ran $1,196 per ounce mined. That was way more profitable than NEM’s $1,472 then. Despite often touting its supposed economies of scale, Newmont’s AISCs are usually among majors’ highest and worst.
You’d think with NCM’s pre-merger production running nearly a third of the combined NEM’s, the latter’s AISCs would retreat to reflect that new blend. Yet last quarter Newmont’s all-in sustaining costs still surged 6.1% to $1,562, the least-profitable among all reporting super-majors! Something is dreadfully wrong when acquiring superior lower-cost gold miners fails to drag down overall costs in the merged companies.
In addition to slaying fundamentally-superior smaller majors and larger mid-tiers with much-better upside potential, gold-stock mega-mergers taint this sector in other damaging ways. Both Newmont and Barrick Gold have long chronically overpaid to execute their competing buyouts, squandering their shareholders’ wealth. These deals are also mostly financed by huge share issuances, heavily diluting existing owners.
I sure wish that only hurt NEM and GOLD shareholders, but it really tarnishes this entire industry. These dominant super-majors accounting for 23.3% of GDX’s weighting are plagued by endless staggering goodwill writeoffs for their huge buyout overpayments. I saw a study as of the end of Q1 pegging those at $17.2b over the years for Newmont and a jaw-dropping $39.5b for Barrick! These devastate accounting earnings.
Fund managers often look at aggregate sector profitability before deciding to allocate capital to individual stocks. Colossal mega-merger writeoffs greatly taint that, masking awesome fundamentals of plenty of wildly-profitable mid-tier and junior gold miners. Newmont’s and Barrick’s mismanagement have left their stocks among the GDX top 25’s weaker performers, with their heavy weightings retarding gold-stock upside.
Distorted by often-floundering super-majors, it’s unfortunate GDX remains this sector’s most-popular benchmark. Settling for this ETF guarantees sector underperformance compared to researched stock picking, staying with better fundamentally-superior mid-tiers and juniors to avoid all that deadweight. They are consistently growing their outputs with organic expansions, often driving down mining costs for fatter profits.
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 GDX top 25 reported their highest-ever average cash costs in Q2, $1,020 per ounce which climbed 6.7% YoY! There were no extreme outliers skewing that, with nearly 3/4ths of these miners that reported cash costs seeing increases. Everything is getting more expensive in this inflation-ravaged world, thanks to central banks’ colossal debt monetizations. That includes most of gold mining’s necessary direct costs.
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.
Incredibly last quarter the GDX top 25 gold miners averaged just $1,239 AISCs, which plunged 10.2% YoY! That was the biggest annual retreat by far in this 33-quarter research thread, to the lowest GDX-top-25 average AISCs since Q1’22! Back in that late-June earnings-season-preview essay, I had predicted “...Q2 average AISCs could fall as low as $1,235”. The primary reason was one extreme low-cost outlier.
Astoundingly Peru’s Buenaventura reported deeply-negative AISCs last quarter of -$578 per ounce! This sorcery is only possible because of big silver, copper, zinc, and lead byproducts. Just 30% of BVN’s Q2 revenues came from gold, but like plenty of poly-metallic miners it chooses to report in gold-centric terms. That’s a shrewd decision, as gold stocks command higher interest and earnings multiples than base-metals miners.
Buenaventura has a big revamped silver-zinc-lead mine ramping back up. While BVN’s gold production fell 10.9% YoY last quarter, silver, zinc, and lead output skyrocketed 175.2%, 82.0%, and 134.8%! And in Q2 that mine was only operating at 80% capacity, and is expected to ramp to 100% by year-end. So this company could report super-low gold AISCs due to byproduct credits for years to come, dragging down averages.
As BVN had long languished as a super-high-cost gold miner, it is tempting to exclude its negative AISCs. Without them, the rest of the GDX top 25 averaged a much-higher $1,360 per ounce in Q2. Interestingly that still would’ve shrunk 1.5% YoY, the majors’ trend of mining costs grinding lower is real. For three of the last four quarters, GDX-top-25 AISCs have retreated. Before that they had risen for 19 quarters in a row!
For the great majority of the last 33 quarters, the GDX top 25’s average AISCs were skewed higher by a handful of extreme outliers. While I pointed that out in every results essay, I always still used the actual averages including outliers to calculate implied sector unit profits. BVN was often one of those super-high AISC ones, and for consistency its super-low negative AISCs now also have to be included in this analysis.
Q2’24’s average gold price blasted up 18.2% YoY to a dazzling record $2,337! That trounced all previous highwater marks including Q1’24’s $2,072 and Q2’23’s $1,978. Last quarter’s phenomenal gold prices less those GDX-top-25 average AISCs of $1,239 catapulted sector unit profits to a jaw-dropping $1,099 per ounce! That proved the best ever by far, shattering the last record of $884 achieved way back in Q3’20.
Those average unit earnings soared 83.7% YoY, leaving their four-quarter explosion running +93.8%, +42.3%, +34.9%, and that +83.7%! There’s almost certainly no other sector in all the stock markets seeing earnings surge as fast as the gold miners. This is going to increasingly attract fundamentally-oriented fund investors to deploy capital, and relatively-small institutional buying will catapult gold stocks way higher.
Potential upside targets are outside the scope of this essay, but I analyzed some of those in mid-July predicting gold stocks proportionally overshooting to the upside. I did more work on that a couple weeks ago looking at a gold-stock tipping point nearing. That’s when usually-ignored gold stocks’ popularity snowballs as gains mount, enticing traders to increasingly chase their strong momentum amplifying their gains.
And gold-mining earnings are set to continue growing, supporting much-higher stock prices. This current Q3 is half over, and gold has already averaged a stunning new record $2,406 so far! Meanwhile many of the GDX top 25 are forecasting higher production and thus lower AISCs in H2’24 than in H1’24. Newmont is a great example, declaring in its Q2 results it is “On track to deliver 2024 guidance for production, costs”.
NEM is still forecasting AISCs to average $1,400 this year, even though they were considerably higher in Q1 and Q2 at $1,439 and $1,562. In order to drag down full-year AISCs near $1,400, Q3 and Q4 would have to average just $1,300! I’m skeptical Newmont can achieve that given its dismal track record, but its AISCs still ought to trend lower. Higher Q3 gold prices with lower GDX-top-25 AISCs will make for fatter profits.
The major gold miners’ hard accounting results under Generally Accepted Accounting Principles or other countries’ equivalents were also very strong in Q2. The GDX-top-25 majors reporting revenues saw them soar 25.3% YoY in aggregate to $17,449m! Those were on the higher side of the last 33 quarters, mainly because total production was considerably higher in the past and Chinese miners sometimes reported sales.
The GDX top 25’s bottom-line accounting earnings matched their implied unit profits, skyrocketing 72.1% YoY to $2,905m last quarter! Those were understated too, due to unusual noncash items periodically flushed through income statements. These are typically impairment writedowns, and NEM didn’t fail to add another $246m of those on top of Q1’24’s $485m! Adjusting for such items, GDX-top-25 profits were $3,394m.
That soared an even-bigger 88.8% YoY from similarly-adjusted Q2’23 levels! These adjusted earnings were almost certainly gold miners’ best ever, but rarely bottom-line nets have been higher. Those were driven by unusual huge noncash gains like reversals of impairment charges or revaluing existing mines higher for new deals being done. As adjusted earnings are nebulous and subjective, I haven’t recorded them.
With record gold prices and good production, the GDX top 25’s total cash flows generated from their operations soared 46.1% YoY to $6,905m. That’s also among the highest ever, only exceeded when those Chinese gold majors randomly decided to grace investors with their quarterly financials. Total cash treasuries grew 4.5% YoY to $15,652m, which was also on the higher side of the last 33 quarters’ data.
And on that gold-stock-tipping-point front, there’s evidence investors indeed started paying attention to major gold miners’ Q2 results! Barrick reported on August 12th, with unimpressive 6.0%-YoY output shrinkage and AISCs surging 10.6% to a too-high $1,498. Yet its stock blasted 9.1% higher that day since earnings per share of $0.32 beat analysts’ estimates of $0.26, surprising fund managers not paying attention.
One of our trades IAMGOLD reported after the close on August 8th, and its stock rocketed up 16.3% the next day! IAG’s production soared 55.1% YoY, forcing its AISCs 15.4% lower. Incredibly it also upped its full-year production guidance by a huge 12.5% while slashing its AISC guidance by 5.2% from respective midpoints! Gold stocks’ phenomenal fundamentals are starting to get noticed, which is a super-bullish omen.
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The bottom line is major gold miners just reported their best quarter ever, with unit earnings skyrocketing to their highest levels on record by far! Enormous earnings were fueled by average gold prices dazzling at all-time highs while mining costs ground lower. These trends are likely to persist, yet gold-stock prices remain seriously undervalued relative to their super-bullish fundamentals. This anomaly can’t and won’t last.
Gold miners’ phenomenal Q2 results will help drive more investor interest. As sector gains increasingly mount, sentiment is nearing a tipping point where gold stocks return to favor. That will bring back traders in droves to chase growing gains, driving a massive mean reversion and overshoot to opposing extremes. There’s still time to add gold-stock allocations to portfolios before they grow more popular and soar again.
Adam Hamilton, CPA
August 16, 2024
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