The
mid-tier and junior gold miners just finished reporting their latest
quarterly results last week. These fundamentally-superior smaller
producers are in the sweet spot for upside potential in major gold
uplegs. And indeed their Q2’23 operational and financial results
proved much better than their larger peers’. The mid-tiers
generally enjoyed rising output and falling costs, boosting
profitability which is bullish for their stocks.
The
leading mid-tier-gold-stock benchmark is the GDXJ VanEck Junior Gold
Miners ETF. With $3.8b in net assets this week, it remains the
second-largest gold-stock ETF after its big brother GDX. That is
dominated by far-larger major gold miners, although there is much
overlap between these ETFs’ holdings. Still misleadingly named,
GDXJ is overwhelmingly a mid-tier gold-stock ETF with little
weighting allocated to juniors.
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, those thresholds shake out under
75k, 75k to 250k, 250k+, and 500k+. Only three of GDXJ’s 25 biggest
holdings are true juniors!
That
means they produce less than 75k ounces per quarter, and that gold
output generates over half their quarterly revenues. That
excludes primary silver miners producing byproduct gold, and the
royalty and streaming companies that buy future gold output for big
upfront payments used to finance mine builds. While we’ve traded
countless great juniors over the decades, mid-tiers are really in
the sweet spot for upside.
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 filled with
both fundamentally-superior mid-tiers and juniors, smaller gold
miners which we’ve long specialized in at Zeal.
GDXJ
has stumbled recently, dropping 15.5% from mid-July to mid-August.
That was right in line with GDX’s 15.9% retreat in that same span,
which was driven by gold pulling back 4.5%. Huge gold-futures
selling flared as the US Dollar Index blasted up 3.5% on Fed-hawkish
US economic data. But the mid-tiers remain in a powerful upleg,
which catapulted GDXJ 66.9% higher from late September to
mid-April.
While mid-tier gains usually well outperform the majors during gold
uplegs, much of their outsized rallies accrue later as those uplegs
mature. Gold and its miners’ stocks have to climb on balance for
some time before they generate widespread greed. That self-feeding
psychology increasingly entices traders to pour into smaller miners
to chase their upside momentum, really accelerating it as gold
uplegs near climaxes.
For
29 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 66.7% 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 Q2’23. 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 Q2’22. Those symbols are followed by their
current GDXJ weightings.
Next
comes these gold miners’ Q2’23 production in ounces, along with
their year-over-year changes from the comparable Q2’22. 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 Q2’23 performance proved quite
impressive! Unlike the larger majors, the mid-tiers
collectively grew their production. That helped force costs
significantly lower, which drove profits much higher! This was a
nice contrast to the
GDX-top-25
majors’ latest quarterlies I analyzed in another essay last
week, which were disappointing. The smaller gold miners are this
sector’s growth engine.
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. The GDXJ-top-25 mid-tiers achieved that, with
production edging higher.
Their collective output last quarter climbed 0.5% year-over-year to
2,927k ounces. While modest, it still trounced the GDX-top-25
majors which suffered ugly 4.7% YoY production shrinkage in
Q2’23! And due to some composition changes, these elite mid-tiers’
production growth is understated. Two producers that don’t seem to
report quarterly operational results surged into GDXJ’s upper ranks
during this past year.
They
are China’s Zhaojin Mining and Turkey’s Koza Altin Isletmeleri,
which both failed to add any reported production to the Q2 sector
total. They knocked Mexico’s Fresnillo and Canada’s K92 Mining out
of the GDXJ top 25 over this past year. Those companies mined 152k
and 31k ounces of gold last quarter. Add that in, and these elite
mid-tiers’ overall output growth was closer to 6.8% YoY which
is outstanding!
That’s much better than global gold miners as a whole according to
the World Gold Council. After every quarter, it publishes the
best-available global gold supply-and-demand data in its excellent
Gold Demand Trends reports. The latest Q2’23 GDT released as August
dawned revealed that overall worldwide gold-mining output grew 3.8%
YoY to 29,687k ounces. The fundamentally-superior mid-tiers are
leading that growth.
Our
newsletter trading books currently have open positions in seven of
these GDXJ-top-25 stocks. Their total production last quarter
blasted up 24.1% YoY to 1,069k ounces! Being selective in picking
the better gold stocks is essential for success trading this sector.
But that sure isn’t easy, requiring lots of research time,
knowledge, and experience to separate the wheat from the chaff.
GDXJ contains both winners and losers.
Deploying capital in the former while avoiding the latter really
increases portfolio returns during major gold uplegs. But those
losers aren’t GDXJ’s biggest drawback as a trading vehicle.
Inexplicably this mid-tier-gold-stock ETF has big overlap with that
GDX major-gold-stock ETF. Fully 14 of GDXJ’s top 25 stocks are also
GDX-top-25 ones! The GDXJ-top-25 stocks weighted at 66.7% also
comprise 26.8% of GDX’s weighting.
So
GDXJ essentially carves out about a quarter of GDX and expands it
near two-thirds. That still makes for a great improvement, as GDXJ
excludes GDX’s deadweight larger major and super-majors
dragging down sector performance. They’ve generally failed to grow
their production for years at the vast scales they operate. The
GDXJ-top-25 stocks that are also GDX ones rank from 12th to 33rd in
that major ETF.
I’ve
long argued that both GDX and GDXJ would better serve investors if
their holdings were mutually-exclusive. With one company
operating both, that shouldn’t be difficult to do. All the
super-majors and majors should only be in GDX, while the mid-tiers
and juniors alone populate GDXJ. These gold-stock ETFs would trade
differently then, greatly boosting their appeal by targeting
different segments of this sector.
Circling back to production, plenty of these mid-tiers are
forecasting better output during the second half of 2023. SSR
Mining for example declared “In the second half of the year, we
expect all four of our operations to deliver improved consolidated
production of approximately four hundred thousand gold equivalent
ounces at reduced costs...” That would be much better than SSRM’s
303.5k GEOs mined in H1’23.
The
odds of the GDXJ top 25 reporting still-bigger production in this
currently-underway Q3’23 are pretty good. According to that
comprehensive global gold data from the WGC’s GDT reports, quarterly
mine output tends to climb as calendar years march on. On
average during Q1s, Q2s, Q3s, and Q4s since 2010, sequential world
gold-mine output has run -8.6%, +4.8%, +6.9%, and +0.3%
quarter-on-quarter.
Those weaker Q1s mostly result from northern-hemisphere winters,
which adversely impact gold-mine operational efficiencies through
bitter cold up north and heavy rains down south. Most of the
world’s gold mines are found on the top half of the globe, which
contains over 2/3rds of this planet’s land. After winter lulls in
Q1s, production really ramps up sequentially in both Q2s and Q3s.
GDXJ mid-tiers should reflect that.
The
GDXJ top 25 appeared to break that mold last quarter, with Q2’s
2,927k ounces produced actually falling 8.6% QoQ from Q1’23. But
that was really distorted by two components. South Africa’s Harmony
Gold hasn’t yet reported its latest Q2 results that end its
fiscal year, but it yielded a big 346k ounces in Q1. And
IAMGOLD produced another 138k in Q1 but fell out of the GDXJ-top-25
ranks since. That totals 484k.
Remove that to make the last couple quarters more comparable, and
the GDXJ top 25’s aggregate output actually surged 7.6% QoQ
even besting Q2 sector averages! So these elite mid-tier gold
miners have a good chance of enjoying another average 7%ish QoQ
production surge in this currently-underway Q3. That would further
improve their already-impressive fundamentals, driving down costs
and boosting 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 really hit.
Energy is the biggest category, both electricity to power
ore-processing plants including mills and diesel fuel necessary to
run fleets of excavators and dump trucks hauling raw ores to those
facilities. Other smaller consumables range from explosives to
blast ores free to chemical reagents necessary to process various
ores to recover their gold. So higher variable costs continue to
heavily impact the world’s gold miners.
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 mid-tier gold
miners. They illuminate the minimum gold prices necessary to keep
the mines running.
These elite GDXJ-top-25 mid-tiers reported average cash costs of
$902 per ounce in Q2, which dropped a big 7.4% YoY! That was
their first annual retreat in 11 quarters, to their lowest level
since Q4’21 before inflation really went crazy. These smaller gold
miners are actually doing better than GDX-top-25 majors, which saw
their cash costs surge 4.0% YoY to $955 last quarter. And GDXJ’s
cash costs are skewed high.
Hecla Mining and Buenaventura have long reported unusually-high
costs, which they don’t even bother explaining anymore in their
quarterlies. Excluding these outliers, the rest of the GDXJ top
25’s cash costs plunge to just $836! Both these companies are also
GDX-top-25 ones, and excluding them the majors’ Q2 cash costs were
still higher at $896. The mid-tiers continue to report better
fundamentals than the 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.
The
GDXJ top 25’s AISCs also fell rather sharply last quarter, down
4.4% YoY to $1,319 per ounce. That was the first annual AISC
decline in a whopping 21 quarters, a very-welcome trend reversal!
The elite mid-tiers’ collective AISCs hadn’t been lower since Q1’22,
which was again before the brunt of inflation forced variable prices
much higher. Those GDXJ AISCs also easily bested the GDX top 25’s
$1,380 average.
But
again HL and BVN are extreme outliers, reporting lofty $2,147 and
$1,825 AISCs in Q2. Kicking them out, the rest of the GDXJ top 25
averaged a much-better $1,224. Without those same two
companies, the GDX top 25’s were still higher at $1,299. Again the
mid-tiers’ fundamentals remain superior to the majors’, which is a
key reason their stock prices’ upside potential is considerably
greater during big gold uplegs.
The
mid-tiers’ falling costs along with rising gold prices were really
amplified in earnings. A great proxy for how gold miners are faring
as a sector simply subtracts average AISCs from quarterly-average
gold prices. Despite gold pulling back in much of Q2 spooking
traders, the yellow metal still averaged an all-time-record high
$1,978! That less those $1,319 AISCs yielded big implied unit
profits of $659 per ounce!
That
not only soared 33.8% YoY, but was the highest absolutely for the
GDXJ top 25 in eight quarters! And without that pair of outliers,
the mid-tiers’ profits would’ve rocketed 53.2% higher to $754 per
ounce. Both are on the higher side of the past 29 quarters’ range
running from $288 to $928. The mid-tiers and juniors are actually
faring far better fundamentally than most traders imagine given
their battered stock prices.
And
these unit earnings are likely heading even higher. During these
last two quarters, the GDXJ top 25’s AISCs averaged $1,414 and
$1,319. Yet these companies’ average full-year
all-in-sustaining-cost guidance in Q2 reports ran much lower near a
$1,268 midpoint. H2’23 AISCs will have to come in well under
that to drag down 2023 averages around there. Rising production
should prove the primary driver.
Let’s conservatively assume the mid-tiers report $1,200 AISCs in Q3
and Q4, which is still way too high to achieve guidance. In next
week’s essay I’m going to analyze gold’s recent pullback driven by
massive gold-futures shorting, which has pummeled
Q3-to-date’s average price to $1,934. But gold is overdue for a
sharp bounce on short-covering buying, so recovering to a $1,950
average this quarter seems reasonable.
That
would yield huge implied unit profits of $750 per ounce in Q3, which
would skyrocket 132% YoY! The mid-tiers haven’t enjoyed such
fat earnings since Q4’20, again before extreme central-bank money
printing unleashed this raging inflation. The mid-tiers and juniors
will report their Q3 results leading into mid-November, which could
amplify their resumed major upleg that will likely be well underway
by then.
The
GDXJ top 25’s Q2’23 hard accounting data reported to national
securities regulators under Generally Accepted Accounting Principles
or their equivalents in other countries were also strong. Overall
revenues slumped 2.3% YoY to $6,829m, but that was skewed by Mexican
silver-and-gold giant Fresnillo getting kicked out of GDXJ over this
past year. Excluding it from the comparable Q2’22, sales grew 7.4%
YoY.
That’s more righteous, right in line with 0.5%-higher production and
5.6%-higher gold prices. Better sales are essential for growing
bottom-line earnings. Those soared 82.6% YoY across the GDXJ
top 25 to hit $561m last quarter! But there were a couple of big
unusual items flushed through income statements, led by Endeavour
Mining’s $178m loss on selling discontinued gold mines. Without
those, overall profits ran $662m.
Backing out other unusual items from the comparable Q2’22, the GDXJ
top 25’s adjusted earnings rocketed up 130.1% YoY! There’s no
fundamental justification for the weak gold-stock prices
following this recent selloff. Cash flows generated from operations
rose 9.1% YoY to $2,094m, but without Fresnillo a year earlier they
surged a much-better 21.6%. Strong OCFs help finance essential mine
expansions and builds.
These elite mid-tier gold miners have definitely been investing cash
in growing their production. Exiting last quarter, their collective
$6,689m cash hoards plunged 24.3% YoY. But without Fresnillo, that
looked much better down 12.9% YoY. So the GDXJ top 25 still have
billions to plow into boosting their output. They are also prime
acquisition targets for larger majors failing to overcome their
mines’ depletion organically.
These smaller mid-tier and junior gold stocks are poised to surge
sharply with gold in coming months as it mean reverts higher.
Improving trader sentiment on mounting upside momentum will be the
main driver. But strong fundamentals undergirding any upleg can
amplify its gains by attracting in more value-oriented investors.
Our newsletter trading books are currently full of still-cheap
smaller gold miners ready to soar!
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The
bottom line is the mid-tier gold miners just reported excellent
results last quarter. They achieved big production growth trouncing
the majors’ shrinkage, which forced all-in sustaining costs lower
for the first time in years. That greatly boosted the mid-tiers’
earnings, improving their already-strong fundamentals. This bullish
trend should persist in Q3 and Q4 with these companies forecasting
higher output and lower costs.
Combined with much-better average gold prices, mining profits are
likely to continue surging in coming quarters. That ought to
increasingly attract back investors, accelerating gold stocks’
resuming upleg as they follow gold higher. With these smaller gold
miners besting larger ones on all key fundamental fronts last
quarter, they should win more favor. The best gold-stock upside
potential remains in mid-tiers and juniors. |