The
gold miners are in the thick of reporting their full Q1’23
operational and financial results. Those are mostly looking good so
far, making for an impressive earnings season. Higher gold
production is lowering unit costs, driving up operating cashflows
and profits. Those operating gains are being further amplified by
higher prevailing gold prices. These big fundamental improvements
are catalyzing gold-stock buying.
As a
professional speculator and financial-newsletter guy for a
quarter-century now, earnings seasons are my favorite times in the
markets. Four times a year following each calendar quarter,
companies report comprehensive operational and financial results.
These quarterly reports filed with securities regulators illuminate
how gold miners are actually faring fundamentally, dispelling
the obscuring fogs of sentiment.
While this latest Q1’23 earnings season is well underway, it isn’t
over yet. US-listed companies have 40 days after quarter-ends to
file their 10-Q quarterly reports, which is May 10th. The data
cutoff for this essay is one week before that. But Canada is the
epicenter of the gold-stock universe, and companies listed there
have 45-day deadlines. So the full extent of gold stocks’ Q1
results won’t be known until mid-May.
After every quarterly earnings season, I dig into the latest results
reported by the 25 largest component companies in both leading
gold-stock exchange-traded funds. These are the GDX VanEck Gold
Miners ETF and the GDXJ VanEck Junior Gold Miners ETF. The former
is dominated by
large major miners, while
smaller mid-tiers
and juniors comprise the latter. I’ll write Q1’23-results
essays for both in coming weeks.
But
occasionally when quarterly results are looking particularly strong,
a preview is in order. That’s the case today. We’ve long published
popular weekly and monthly subscription newsletters, which each have
their own trading books of up to 20 and 10 stocks respectively. As
our active positions report quarterlies, I analyze them in our
newsletters. The early results from our open trades in this past
week have been impressive.
One
of them is growing mid-tier gold miner Alamos Gold, which runs
several gold mines in Canada and Mexico. AGI reported its Q1 last
Wednesday April 26th, producing 128.4k ounces of gold which soared
29.8% year-over-year! More output to spread the big fixed costs of
mining across slashed Q1’s all-in sustaining costs by 13.5% YoY to
$1,176. Naturally operating cash flows and profits exploded on
that.
Alamos Gold’s OCFs last quarter more than doubled skyrocketing
102.8% YoY to $94.3m, while its bottom-line accounting earnings
swung from -$8.5m in Q1’22 to +$48.4m last quarter! Along with
fantastic results, AGI reaffirmed its 2023 guidance near midpoints
of 500k ounces of gold mined and $1,150 AISCs. We added this trade
last July, and its unrealized gains have now grown to a hefty 84.3%
as of mid-week.
Eldorado Gold is another open trade of similar vintage, which our
weekly-newsletter subscribers now have a massive 102.1% unrealized
gain in! Eldorado’s full Q1 results were released last Thursday
April 27th. This mid-tier gold miner with several mines in Turkey
and Greece produced 112.5k ounces in Q1, which surged 20.7% YoY.
That also pushed AISCs 12.0% lower YoY to $1,184, really boosting
profitability.
EGO’s hard earnings skyrocketed from -$385.0m in Q1’22 to +$20.2m
last quarter! That dire comparable number resulted from a $345.4m
impairment writedown of a non-core project in Romania. But even
excluding unusual items, Eldorado still suffered a $19.0m adjusted
loss. So its fortunes are really improving. While Alamos and
Eldorado reported Q1’23 earlier than many of their peers, they ought
to prove representative.
Strong operational and financial results should catch investors’
interest, catalyzing big buying in individual gold stocks.
That will add to the excitement of the mounting uplegs in gold
stocks and the metal they are mining. This chart looks at GDX’s
technicals over the past couple years or so. This sector has
blasted up dramatically in the past half-year, and a strong Q1’23
earnings season should accelerate these big gains.
In
mid-2022, the major gold stocks plummeted 46.5% over 5.3 months to a
brutal 2.5-year low! That was an extraordinary anomaly fueled by
the most-extreme tightening cycle in the Federal Reserve’s history.
A series of monster rate hikes
launched the US
dollar stratospheric, unleashing massive and withering
gold-futures selling. That crushed gold 20.9% lower in that same
span, the gold stocks were collateral damage.
The
major gold stocks of GDX usually leverage material gold trends by 2x
to 3x, so that 2.2x during mid-2022’s plunge was on the low side.
But it was still miserable, fueling overwhelmingly-bearish sentiment
as gold stocks collapsed to literal stock-panic levels. One
trading day before gold stocks bottomed with GDX hitting $21.87, I
published an essay explaining why that
false gold-stock
panic couldn’t and wouldn’t last.
I
concluded then “Today’s extreme lows are just as anomalous and
unsustainable, based on a false premise that recent months’ big gold
selloff was fundamentally-righteous. But that simply isn’t true.”
I showed then while despair reigned why all that gold-futures and
investment selling “has mostly been spent, with speculators’
gold-futures positioning and investors’ gold-ETF holdings at major
multi-year lows.”
Thus
“As all that reverses, gold will soar launching gold stocks way
higher.” That has indeed come to pass in spades. As of the
mid-week data cutoff for this essay, at best since then gold and GDX
have already powered 25.7% and 63.9% higher from their extreme
late-September lows! That makes for 2.5x upside leverage to gold
from the major GDX gold stocks. And both uplegs are likely to grow
much bigger still.
Why
is outside the scope of this earnings-season-preview essay, but I
analyzed gold’s
upleg still running last week. The prior couple essays before
that looked at why this
gold-stock upleg
is immature and
gold stocks are
still undervalued relative to gold. So the gold miners’
impressive Q1’23 results will feed into this surging-price
environment fueling increasing enthusiasm and bullishness for this
contrarian sector.
Price action drives sentiment, which motivates traders to buy and
sell. Strong fundamentals are icing on the cake, fueling growing
capital inflows from investors including funds. Impressive
quarterly results give fundamental cover for traders buying to chase
gains. All this converging makes for explosive gold-stock upside
potential in coming months, amplified by gold forging into new
all-time-record-nominal-high territory.
The
great Q1s reported by Alamos Gold and Eldorado Gold are likely the
vanguard of strong operational and financial results for this sector
as a whole. Several factors are contributing. The most-important
one is higher prevailing gold prices. Last quarter gold
averaged $1,892 on close, which edged up a slight 0.7% YoY. But it
blasted 9.3% higher sequentially quarter-on-quarter from Q4’22,
truly a powerful quarterly surge!
Gold
miners’ earnings naturally amplify gold prices, making for
much-better profits as gold uplegs grow. The past half-year’s
action offers an excellent real-world example. In Q4’22, the top 25
GDX gold miners excluding three extreme outliers
averaged $1,141
AISCs. In late September when gold bottomed at that
stock-panic-grade $1,623, that made for sector unit profits of
$482. Those weren’t bad despite the gloom and doom.
Fast-forward to mid-April 2023, when gold hit $2,040 on close. If
the major gold miners’ AISCs remained near similar levels, unit
earnings nearly doubled to $899 per ounce! A 25.7% gold upleg drove
implied sector unit profits 86.5% higher! That makes for strong
earnings leverage to gold of 3.4x. Since gold-mining all-in
sustaining costs shift far more gradually than gold price trends,
higher gold means fatter profits.
Very
bullishly this trend is continuing in early Q2’23. So far this
quarter, gold has averaged $2,002 on close which is running 6.9%
above Q2’22’s average! That is also up another 5.8% QoQ
sequentially from Q1’23. So these higher prevailing gold prices
alone will continue to fuel big earnings growth for the gold
miners. Stock prices ultimately follow underlying corporate
earnings, trading at some reasonable multiple of them.
But
it’s not just gold’s secular bull boosting gold-mining profits. In
their guidances for 2023 production and AISCs, the gold miners
themselves are generally forecasting growing outputs and lower
costs. Those are usually synonymous, as gold-mining costs are
largely fixed during pre-construction mine-planning stages. That’s
when mine engineers determine designed throughputs for plants
processing gold-bearing ores.
Once
operational, their nameplate capacities don’t change quarter to
quarter. They require similar levels of infrastructure, equipment,
and employees to keep running. The main variable driving quarterly
output is the ore grades fed into these plants. Richer ores yield
more ounces to spread mining’s big fixed costs across, lowering unit
costs and boosting profitability. Ore grades vary based on
sequencing of deposits.
After every quarter, I read through dozens of gold miners’ reports.
The latest full batch from Q4’22 along with the early Q1’23 ones had
a surprisingly-common theme of 2023 production weighted to the
back half of this year. That was mainly due to new mine
expansions and mine-builds coming online. Eldorado Gold just
reiterated this last week, declaring “higher production is expected
in the second half of the year.”
Alamos Gold’s latest quarterly report had a similar “Grades mined
are expected to increase in the second half of the year driving
total cash costs lower.” While cash costs are narrower than all-in
sustaining costs, AISCs are also generally expected to drift down as
2023 marches on. Some miners even segmented their overall 2023
guidances into halves to highlight their expected production growth
and resulting lower AISCs.
Higher prevailing gold prices combined with higher production and
lower costs are the best of all worlds for earnings growth!
You can’t ask for anything more bullish fundamentally for gold
miners, portending way-higher stock prices ahead. Interestingly
this ties in with another fascinating trend in global gold-mine
output. The World Gold Council’s awesome quarterly Gold Demand
Trends reports have the raw data for this.
As I
pen this essay, the WGC’s latest Q1’23 GDT hasn’t been published
yet. But using the last dozen years of total world gold-mine
production from the previous Q4’22 GDT, quarterly swings in gold
output are illuminated. On average in Q1s, Q2s, Q3s, and Q4s,
global gold-mine output ran -8.5%, +4.5%, +6.7%, and +0.3%
sequentially quarter-on-quarter. Q1s suffer shrinkage, then growth
roars back in Q2s and Q3s.
Q1s
are usually weak production-wise for several reasons. Like most of
the world’s land masses, most gold mines are in the northern
hemisphere. For ones farther north, the coldest winter months
adversely impact operations and output. One example is cold
temperatures slowing the chemical reactions needed for heap
leaching. So plenty of gold miners often schedule plant maintenance
in Q1s, further slowing output.
Q1s
are also when mine managers get new budgets to maintain and upgrade
mines. So there’s normally a global lull in gold mining in calendar
years’ opening quarters. I don’t know if Q1’23 will buck that
trend. But if it does, the gold stocks are set up for a very
strong year as the big Q2 and Q3 sequential production boosts
kick in. And we look for newsletter stock trades with better
forecast output growth than their peers.
Investors generally prize production growth above everything else in
this sector, since it gives gold miners the cashflows necessary to
expand their operations. One current fast-growing junior-gold-stock
trade we added in early November is already up 134.7% as of
mid-week! Another rapidly-growing mid-tier we bought in late
February already has 54.9% unrealized gains. Fundamentally-superior
gold stocks are really thriving.
But
sadly most speculators and investors haven’t been paying attention.
They were foolishly ostriching last autumn when gold stocks were
battered to phenomenal bargain prices, missing incredible contrarian
buying opportunities. Now they are distracted by raging inflation
and still-levitating US stock markets with dangerous bubble
valuations. So this powerful gold-stock upleg continues to still
be widely overlooked.
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We’ve actively traded gold-stock uplegs and corrections for decades,
entering and exiting specific gold stocks multiple times as
opportunities arise. I discussed the early Q1’23 results from
Alamos Gold and Eldorado Gold in this essay. Before our current
open trades, we’ve realized 17 and 32 past newsletter trades
respectively in these two gold stocks. Opportunities missed by not
paying attention are lost forever.
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The
bottom line is gold miners’ underway Q1’23 earnings season is
looking good. Companies reporting early are generally showing
strong operational and financial results. That includes growing
output and correspondingly-lower costs, greatly boosting
profitability. These improving fundamentals are likely to act as
buying catalysts, providing cover for investors to chase the big
gains in this mounting gold-stock upleg.
The
gold miners are also generally forecasting improving production and
lower all-in sustaining costs in the second half of this year, as
expansions and mine-builds go live. Couple that with higher
prevailing gold prices as its own upleg marches higher, and gold
stocks are set for exceptional profits in 2023. As stock prices
ultimately follow earnings, that portends lots more gold-stock
upside likely in coming months. |