The
major gold miners’ soon-to-be-reported Q3 profits are poised to
skyrocket. Gold stocks’ imminent earnings season detailing last
quarter has high potential to achieve record profits growth for this
sector. Much-higher prevailing gold prices coupled with lower
production costs should fuel a massive jump in miners’
profitability. Far-better fundamentals ought to greatly improve
gold-stock sentiment, attracting traders.
Gold
stocks are ultimately leveraged plays on gold, slaved to its
fortunes. Speculators and investors alike only get interested in
deploying capital in this high-potential sector when gold is
rallying on balance. Although this immutable link is mostly
psychological, it has strong fundamental underpinnings. Generally
the higher gold prices, the fatter the profits gold miners earn.
This dynamic is largely driven by mining costs.
While gold prices are volatile, unit mining costs are relatively
stable. They usually don’t change much from quarter to quarter.
Gold mines’ operating costs are largely fixed during
pre-construction planning stages, when engineers design throughputs
for plants processing gold-bearing ores. Their nameplate capacities
rarely change, requiring similar levels of infrastructure,
equipment, and employees to keep operating.
While mine expansions boosting output can really affect production
costs, they’re fairly rare for individual gold mines. After long
decades painstakingly analyzing this contrarian sector, I’d guess
gold mines may average one expansion over their decade-or-so average
lifespans. So for the most part excluding some smaller variable
expenses, producing gold costs about the same regardless of
where it happens to be trading.
We’ve amassed lots of hard data over the years proving this. For
the past 29 quarters in a row, I’ve dug into the latest results from
each of the top 25 GDX gold miners. These include the world’s
largest, which utterly dominate this flagship sector ETF. After
every earnings season, I feed the key quarterly results reported by
all these elite miners into a giant spreadsheet. That important
data illuminates fundamental trends.
The
gold miners will publish their latest quarterly reports between late
October to mid-November, detailing how they fared in Q3’23. I can’t
wait to explore that new data, and will write another essay
analyzing it soon after this earnings season ends. But many years
of hard-won experience from digesting quarterlies and collating
results has given me great insights in anticipating sector
earnings before they are reported.
Quarterly-average gold prices less the GDX top 25’s average all-in
sustaining costs are a fantastic proxy for sector unit profits. The
former are no mystery, set in stone on each quarter’s final close.
In Q3’23, gold averaged $1,926 on close. That soared a massive
11.6% higher from Q3’22’s depressed average of $1,727. Remember
what was happening in markets during that brutal comparable quarter
about a year ago.
With
inflation raging out of control, panicking Fed officials were
frantically hiking rates by epic amounts. That included four
monster 75-basis-point federal-funds-rate hikes in a row in the
middle of 2022! That extreme Fed hawkishness along with higher
yields launched the benchmark US Dollar Index parabolic. It
skyrocketed 16.7% in just 6.0 months into late September 2022,
hitting an extreme 20.4-year secular high!
Gold
price action is dominated by gold-futures speculators, who punch way
above their weights in bullying around gold due to the extreme
leverage inherent in its futures. These guys can’t afford to be
wrong for long, or they face ruin. They closely watch the US
dollar’s fortunes for their primary gold-futures-trading cues, doing
the opposite. So gold prices collapsed a miserable 20.9% in 6.6
months into September 2022!
That
huge gold selloff that narrowly and briefly edged into new-bear
territory crushed Q3’22’s average price. Though an
unsustainable anomaly that
soon had to mean
revert sharply higher as I wrote at the time, that makes for
impressive Q3’23 comps. Gold’s subsequent rebound upleg blasted
26.3% higher into early May 2023! Gold has mostly consolidated
higher since, greatly boosting last quarter’s average price.
The
yellow metal hasn’t seen bigger year-over-year
quarterly-average-price gains since Q1’21, fully ten quarters ago.
And they merely boosted gold to a much-lower average of $1,793.
This latest Q3’23’s $1,926 is actually the second highest on
record, only behind Q2’23’s $1,978! No matter what happened to
gold majors’ mining costs, these much-higher prevailing gold prices
alone will really boost profitability.
The
GDX top 25’s average all-in sustaining costs are way harder to
divine leading into earnings season. But the gold miners themselves
offer plenty of clues for those willing to dig. A year ago in
Q3’22, the GDX
top 25’s AISCs averaged a record-high $1,391 per ounce! The
$1,727 average gold prices less those lofty AISCs yielded sector
implied unit profits of $335 per ounce, the
worst seen in at least 29 quarters!
That
makes for a low comparable-quarter base from which last quarter’s
gold-mining earnings can soar. In the latest-reported Q2’23, the
GDX top 25’s AISCs weren’t much better way up at $1,380 per ounce.
But like usual that was skewed high by a couple serious outliers
from usual-suspect very-high-cost miners. Without them, the rest of
these gold majors averaged $1,299 AISCs. Those should come in lower
in Q3’23.
These companies themselves generally predicted lower AISCs in
2023’s second half, mostly driven by higher production.
Gold-mining unit costs tend to be inversely proportional to
gold-output levels. The richer the ores fed into fixed-capacity
mills, the more ounces recovered to spread mining’s big fixed costs
across. Better ore grades forecast in Q3 mining plans, along with
some mine expansions, should boost production.
A
great example of this came from mighty Newmont, the world’s largest
gold miner and GDX’s biggest component. Thanks to gold production
collapsing 17.1% YoY in Q2’23, NEM’s AISCs that quarter soared 22.8%
YoY to an ugly $1,472 per ounce! That was the worst Newmont ever
reported by far, dragging up the entire GDX top 25’s average. And
this super-major wasn’t even one of those two very-high-cost
outliers.
Yet
Newmont’s Q2’23 quarterly report explaining all this still predicted
far-better H2’23 results. Although its AISCs were way too high at
$1,376 and $1,472 in H1’23’s two quarters, NEM still affirmed it was
“On track to achieve full-year guidance ... with Gold AISC between
$1,150 and $1,250 per ounce”. Since those averaged $1,424 in H1’23,
pulling down full-year-2023’s to even $1,250 requires
far-lower H2’23 costs.
We
are talking NEM having to average just $1,075 per ounce
through Q3 and Q4! That seems like a tall order, as this colossal
gold miner hasn’t reported lower AISCs since Q4’21. But even if
this company has to raise this year’s AISC guidance range, costs are
still likely to be considerably lower. Plenty of other major gold
miners joined Newmont in forecasting lower H2’23 AISCs right in
their latest-reported Q2’23 results.
We
could do similar math for all the GDX top 25 reaffirming full-year
cost guidances. But conservatively their average AISCs ought to
retreat at least 5% YoY from Q3’22’s record high. That yields a
$1,322 target, or just $1,177 if that handful of serious outliers
are excluded. It wouldn’t surprise me if the entire GDX top 25’s
average warts and all comes in around $1,250 in Q3, which
would be a six-quarter low.
But
even if we use that conservative $1,322 AISC target, the gold miners
are soon going to report fat profits last quarter. Q3’23’s high
$1,926 prevailing gold prices less $1,322 AISCs yields implied unit
profits of $604 per ounce. That would skyrocket a whopping 80.3%
YoY above Q3’22’s depressed $335! That would prove the
strongest major-gold-miner earnings growth seen in at least the last
29 quarters.
The
previous record in this long research thread was a 66.2% YoY jump in
Q2’20 to $730 per ounce. If my more-optimistic $1,250 average AISCs
is correct, Q3’23’s GDX-top-25 average unit profits will more than
double rocketing 101.7% YoY to $676! No matter how this upcoming Q3
earnings season plays out, the major gold miners are going to report
massive earnings growth to fat profits. Key investors will
take notice.
Individual investors mostly ape herd sentiment, crowding into gold
stocks to chase their upside when they are already surging with
gold. But professional investors, particularly fund managers
controlling large amounts of capital, do endless research to temper
their own greed and fear. If interested in this sector, they do the
necessary analytical work on gold miners’ quarterlies to understand
their fundamental trends.
I’ve
heard from plenty of professional investors over the years on my
quarterly gold-stock-fundamentals essays. Some can’t believe I’m
freely sharing this valuable analytical work to help sell
newsletters. If the GDX top 25’s average unit earnings merely best
Q2’23’s $598 per ounce, that will make for the fourth consecutive
quarter of improving profits. That should help attract in
bigger-than-usual professional buying.
That
won’t just come in the leading ETFs like GDX, but individual gold
stocks. If Newmont or any other gold miner reports Q3’23 results
way better than either expectations, the prior Q2’23, or the
year-ago Q3’22, institutional investors should flock into those gold
stocks. Their likely-sharp gains will amplify GDX’s upside,
hastening the herd shift back to bullish psychology which will
greatly increase buying.
Gold
stocks have been battered technically in recent months, as this
chart shows. That sure slammed sentiment, leaving this small
contrarian sector really out of favor. If you need to get up to
speed on why gold and gold stocks were pounded lower, my last couple
weeks’ essays analyzed each causal chain in depth. But as I
predicted, both the metal and its miners’ stocks have quickly
recovered from their parallel breakdowns.
Gold
was slammed by heavy gold-futures short selling to
a violent
breakdown into early October, as the USDX surged again on
hawkish jawboning from top Fed officials. But that left
speculators’ gold-futures positioning excessively-bearish, their
capital firepower available for selling exhausted. That guaranteed
big proportional mean-reversion buying was imminent,
portending a sharp gold bounce back into its uptrend.
That’s indeed exactly what happened since, with both gold and GDX
blasting back up into their briefly-interrupted uptrends.
Gold stocks
clawed back strongly, nearly erasing recent weeks’ anomalous
losses! These rapidly-improving technicals are quickly reversing
that recent bearish sentiment, shifting herd psychology back
towards bullishness. Gold stocks starting to return to favor is
a great backdrop for Q3 results.
The
gold miners’ fat Q3 profits would be largely ignored if this sector
was plunging to new lows. But with gold stocks surging back into
this past year’s strong uptrend, way more speculators and investors
will be paying attention. The higher and longer gold stocks rally,
the more bullish herd psychology grows, the more traders will want
to buy to chase those gains. Fantastic Q3 results are another great
excuse to do that.
This
latest quarter of record gold-mining profits growth is being
reported while gold is soaring back on big gold-futures
mean-reversion buying. And that ought to persist for at least a few
months given how lopsidedly-bearish specs’ recent gold-futures
positioning had become. Gold continuing to rally on balance is
fertile sentimental ground for blowout earnings to stoke big
gold-stock buying. Q3 results won’t be overlooked.
And
there’s one more supremely-potent factor that should supercharge
gold stocks’ coming upside. Gold-stock uplegs and corrections are
defined by gold’s own, and GDX tends to amplify those material moves
by 2x to 3x. After its last powerful 26.3% upleg peaked in early
May, gold had been grinding lower in a sub-10% pullback. But as
October dawned, gold’s violent breakdown stretched that selloff into
correction territory.
Gold’s total retreat extended to 11.3%, bottoming just under
$1,820. That mean’s this bull’s next major move higher which is
already well underway is an entirely new upleg. And it won’t
have to grow very big before gold challenges new all-time-record
highs! Gold’s nominal closing peak of $2,062 was seen back in
August 2020. Impressively gold only has to rally 13.3% from that
recent low to achieve new record highs.
That’s nothing for gold uplegs. Again the last one soared 26.3% in
7.2 months into early May, and 2020 saw a pair of 40%+ monsters
crest! As of mid-week, gold has already closed more than half that
distance surging 7.1% to $1,949. So it only has another 5.8% to
rally from here before surging back into nominal-record
territory! That’s not much, and could easily happen in coming weeks
as Q3’s earnings season unfolds.
Nothing is more bullish for herd psychology than challenging new
record highs. The closer gold nears to that $2,062 all-time
high-water mark, the more bullish financial-media coverage will
explode. All that attention will fuel widespread greed to chase
gold’s mounting gains, leading to big capital inflows in both the
metal and its miners’ stocks. This coming gold-record hype
could start building as Q3 results are reported.
That
would really amplify their bullish sentimental impact, driving even
bigger gold-stock buying that could quickly become self-feeding.
There’s still time to get deployed in still-cheap gold stocks before
far more traders start chasing them. Our newsletter trading books
are currently full of fundamentally-superior mid-tier and junior
gold miners that should enjoy way-better gains than the GDX majors
as gold nears records.
Successful trading demands always staying informed on markets, to
understand opportunities as they arise. We can help! For decades
we’ve published popular
weekly
and
monthly
newsletters focused on contrarian speculation and investment. They
draw on my vast experience, knowledge, wisdom, and ongoing research
to explain what’s going on in the markets, why, and how to trade
them with specific stocks.
Our
holistic integrated contrarian approach has proven very successful,
and you can reap the benefits for only $8 an issue (now 33% off!).
We research gold and silver miners to find cheap
fundamentally-superior mid-tiers and juniors with outsized upside
potential. Sign
up
for free e-mail notifications when we publish new content. Even
better,
subscribe today
to our acclaimed newsletters and start growing smarter and richer!
The
bottom line is the major gold miners are going to report fat profits
in their imminent Q3 results. The combination of much-higher
prevailing gold prices and forecast lower costs ought to make for
some of this sector’s best earnings growth ever. Gold stocks’
rapidly-improving fundamentals should help attract back more
professional investors including fund managers. Their big buying
will really amplify sector gains.
And
gold’s upcoming assault on nominal all-time-record territory could
supercharge the impact of blowout Q3 results. The closer gold gets
to new record closes, the more bullish financial-media coverage will
fuel popular greed. Growing ranks of traders will flock back into
the metal and its miners’ stocks to chase their strong upside
momentum. That process could start in coming weeks before Q3’s
earnings season ends. |