The
gold miners’ stocks have had a tough month, disproportionally
pummeled lower on a relatively-minor gold pullback. So naturally
bearishness spiked, leaving this small sector really out of favor
again. Smart contrarians are still paying attention, as major gold
stocks just reported their latest quarterly results. They always
offer great insights into how gold miners are faring fundamentally,
whether higher stock prices are likely.
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 $11.2b of
net assets mid-week dwarfed the next-largest 1x-long
major-gold-miners ETF by over 30x! 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, those thresholds shake out under
75k, 75k to 250k, 250k+, and 500k+. These two largest categories
account for nearly 4/7ths of GDX.
GDX
sure isn’t winning any belle-of-the-ball contests lately, dropping
14.7% over this past month. That included breakdowns below both
uptrend support and GDX’s 200-day moving average, leaving a wake of
considerable technical and sentimental damage. The major gold
stocks have been amplifying gold’s own parallel 4.3% retreat since
mid-July. That was fueled by gold-futures selling on a 3.5% US
Dollar Index rally.
The
gold-futures guys watch the US dollar’s fortunes for their primary
trading cues. The currency guys in turn have driven a strong
USDX bounce on Fed-hawkish economic data arguing for keeping
rates higher for longer. The resulting gold-stock selling has been
overdone though, as GDX leveraged gold’s pullback by 3.4x as of
mid-week. Typically this leading major-gold-stock ETF amplifies
material gold moves by 2x to 3x.
So
excitable gold-stock traders have been overreacting, as they are
wont to do. Their sentiment has probably been tainted by the recent
general-stock selloff. Over that past-month span, the flagship S&P
500 fell 3.3% breeding universal bearishness. Gold stocks
tend to get sucked into material stock-market selloffs, especially
if gold isn’t rallying. Their latest fundamentals reveal whether
low gold-stock prices are righteous.
For
29 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 88.1% 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 Q2’23. 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 Q2’22. Those symbols are followed by their
current GDX 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
major gold miners’ Q2’23 performances proved disappointing
overall. Generally their production fell which forced costs
higher, eroding earnings. The super-majors and larger majors have
always struggled to grow their outputs at their vast operational
scales, so I’ve long favored smaller mid-tiers and juniors. But
since the big gold stocks of GDX dominate sector price action and
sentiment, we have to follow their results.
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. But most of GDX’s biggest gold miners continued
suffering shrinking output.
That
includes mighty Newmont, Barrick Gold, Newcrest Mining, Gold Fields,
Anglogold Ashanti, Kinross Gold, and Endeavour Mining. Together
commanding almost 3/8ths of GDX’s total weighting, these seven huge
gold miners produced 4,866k ounces last quarter. Ominously that
plunged 8.9% year-over-year, a serious drop for most of the
world’s biggest gold miners! That forced overall GDX-top-25 output
down 4.7% YoY.
While bad performance absolutely, it looks even worse in broader
context. Every quarter the World Gold Council publishes the
best-available global gold supply-and-demand data in its outstanding
Gold Demand Trends reports. As August dawned, the latest Q2’23 GDT
revealed that worldwide gold-mining output last quarter actually
surged 3.8% YoY to 923.4 metric tons! So the biggest gold
stocks are seriously lagging.
For
decades the super-majors have failed to grow their production
organically, they’ve had to instead rely on periodic expensive
acquisitions. But gold-mining
mega-mergers are
bad for this sector. They merely temporarily mask ongoing
depletion, usually boosting gold production for only the four
quarters after these deals are consummated! They just aggregate
depleting gold mines into bigger stables, then shrinkage resumes.
These mega-mergers ultimately destroy value in this sector,
hurting this industry and investors. Acquiring shareholders suffer
big dilution on large new-stock issuances to buy out smaller peers.
Even worse, their great still-growing and very-profitable mines are
buried within acquirers’ large operating portfolios. That relegates
their standout operations from driving smaller stocks’ performances
to barely moving larger ones’.
And
every time an excellent mid-tier gold miner is bought out by a
major, that leaves fewer high-potential gold stocks for
investors to pick from. I’ve been actively speculating in gold
stocks and writing newsletters about it for a quarter-century now,
and picking great trades is getting harder. Thanks to all these
buyouts, the pool of fundamentally-superior smaller gold miners is
inexorably shrinking which discourages investment.
The
world’s largest gold miner Newmont is the poster child for resorting
to mega-mergers after failing to grow production organically. In
mid-2019 NEM bought out what was the best major gold miner at the
time Goldcorp for $10b. In the four full quarters before that deal
was finalized, NEM’s gold output clocked in at 1,162k, 1,286k,
1,262k, and 1,230k ounces. That pre-merger trend was mostly
depleting on balance, like usual.
Newmont adding Goldcorp’s mines indeed fueled big growth during the
first three fully-merged quarters. Their output hit 1,644k, 1,830k,
and 1,479k ounces. The fourth one was Q2’20 during those COVID-19
lockdowns, so that was really poor at 1,255k. But this
super-major’s depletion problems soon returned after that
acquisition was digested. That’s certainly evident in NEM’s
production in these latest four quarters.
Ending in Q2’23, Newmont’s output came in at 1,487k, 1,630k, 1,270k,
and 1,240k ounces. These last couple quarters are way back down to
terrible pre-Goldcorp-buyout and pandemic-lockdown levels! Still
unable to grow production by expanding its own mines and advancing
its own deposits, NEM just resorted to another mega-merger. In
mid-May it declared it was buying out Australia’s Newcrest Mining
for over $19b!
The
combined entity’s huge stable of mines will again really boost
Newmont’s overall production for the first four quarters after this
deal is done. But then depletion-driven shrinkage will return with
a vengeance. A few years from now, NEM may very well be back down
near 1,250k quarterly output. So was the steep $29b price tag
shareholders paid for Goldcorp and Newcrest worth it? That’s
crazy-big money to tread water!
As
the world’s largest gold miner with the highest GDX weighting,
Newmont has a disproportional impact on GDX performance and thus
overall sector sentiment. Damningly NEM reporting its lousy Q2’23
results was what ignited gold stocks’ selloff over this past
month! GDX’s upside momentum was accelerating in mid-July after a
decisive 50dma
breakout. Then Newmont pooped in the punch bowl with its
wretched quarterly.
The
Q2 production of this supposedly best-of-breed super-major
plunged a shocking 17.1% YoY, which catapulted unit mining costs
22.8% higher! Q2’s sales, profits, and operating cash flows
cratered 12.3%, 59.9%, and 36.4% on that. So NEM stock plunged 6.0%
that day, dragging GDX 3.1% lower on a day where gold merely slipped
0.4%. NEM’s results slammed other gold stocks, fueling flaring
bearish sentiment.
Analyzing quarterlies is challenging and time-consuming, requiring
experience and knowledge that the vast majority of traders don’t
have. Most certainly weren’t aware Newmont had reported, just that
GDX was falling sharply on a day where gold’s driving price action
didn’t justify anything near that. Of course unexplained
drops really taint psychology, leaving wary traders more likely to
exit intensifying subsequent selling.
Newmont’s downside surprises might not be over. Its Q2’23-results
press release declared it “Remains on Track to Achieve Full Year
Guidance”. That is running at midpoints of 6,000k ounces of gold
and $1,200 all-in sustaining costs. Yet year-to-date in the
first half of 2023, NEM only mined 2,510k with far-worse AISCs
averaging $1,424. So achieving midpoint guidance will require
incredible second-half results.
Newmont’s H2’23 production will have to rocket 39% above H1’s, and
AISCs will have to average $976 per ounce! Both seem really
unlikely given NEM’s long track record of failing to overcome
depletion. So by the time Q3 results are released in late October,
Newmont will likely have to cut 2023 guidance for production
while lifting it for mining costs! That could again weigh on sector
psychology unless GDX is surging.
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.
But
interestingly most of the GDX top 25’s Q2 reports I read through
cited lower output as the main driver of higher costs, not
inflation! Newmont said its high costs were “impacted by lower
production volumes”. The biggest major that bucked last quarter’s
weaker-output trend was Agnico Eagle Mines. Yet its costs still
climbed sharply from Q2’22 levels, “primarily due to higher minesite
costs per tonne related to inflation”.
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.
These elite GDX-top-25 majors reported average cash costs rising
4.0% YoY to $955 per ounce in Q2. That’s the third highest on
record, not far behind Q3’22’s peak of $975! But like usual there
are a couple extreme outliers from Hecla Mining and Buenaventura.
Neither bothered explaining in their quarterlies why their costs
were so high. Excluding them, the rest of these majors averaged
better $896 cash 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.
The
GDX top 25’s average AISCs looked even more disappointing last
quarter, surging 7.7% YoY to $1,380 per ounce! That proved
the second highest ever after Q3’22’s $1,391. Again excluding those
struggling perpetually-extreme-cost gold miners HL and BVN, the rest
of the majors at $1,299 still didn’t come in a heck of a lot
better. Newmont and the second-largest gold miner Barrick Gold were
among the worst.
Their AISCs shot up that 22.8% YoY to $1,472 and 11.8% to $1,355!
Interestingly Barrick is in a similar boat as Newmont in being
way behind relative to 2023 midpoint guidance of 4,400k ounces
near $1,210 AISCs. In H1’23 it mined 1,961k averaging lofty $1,363
AISCs. To pull this entire year back down near $1,210, the next
couple quarters’ AISCs will somehow have to average $1,057! That
seems like quite a stretch.
These high all-in sustaining costs across the GDX top 25 definitely
cut into profit margins, but higher gold prices helped mitigate that
impact. Subtracting average AISCs from quarterly-average gold
prices offers a great proxy for how gold miners’ earnings are faring
as a sector. Despite gold’s strong upleg suffering a pullback in
much of Q2, average gold prices still climbed a strong 5.6% YoY to
hit an all-time-record $1,978!
That
helped push major gold stocks’ unit profits up a slight 1.2% YoY to
$598 per ounce, the best seen in four quarters. Despite the GDX top
25’s struggles with rising costs, those 30% profit margins
are still excellent absolutely compared to broader stock markets.
And excluding those couple of extreme-AISC outliers, the majors’
real unit profits are closer to $679 per ounce. That would make for
impressive 14.9% YoY growth!
Gold-stock profitability ought to improve in this currently-underway
Q3. Thanks to gold’s recent pullback, average gold prices have
slumped to $1,939 quarter-to-date. But that is still a whopping
12.3% higher than Q3’22’s levels, and Q3’23’s average gold prices
should improve. Given speculators’ excessively-bearish positions in
gold futures, gold is due to bounce sharply in coming weeks
as its powerful upleg resumes.
And
despite last quarter’s high $1,380 AISCs, the GDX top 25’s average
full-year guidance stayed much lower at $1,271. Many if not most of
these majors are forecasting higher gold production in the back half
of this year, as mine expansions and new mines come online. Better
output will drive down costs, and to achieve guidance they will have
to fall well under midpoint averages. So gold miners’
earnings could soar.
Conservatively Q3’s average gold prices will probably best $1,950
while GDX-top-25 AISCs should fall under $1,300. But even with
these numbers, the majors are set to earn over $650 per ounce this
quarter. That would make for the best unit profits since Q2’21,
which would skyrocket 94% YoY! So despite the major gold
miners’ recent challenges, their fundamentals remain bullish and
easily support way-higher stock prices.
Not
surprisingly with Q2’23’s GDX-top-25 gold production falling 4.7%
YoY and average AISCs surging 7.7%, the majors’ financial results
were weaker. That was evident in the hard accounting data reported
to national securities regulators under Generally Accepted
Accounting Principles or their equivalents in other countries.
Still these latest results sure didn’t justify GDX’s recent sharp
selloff, they weren’t particularly bad.
Overall GDX-top-25 reported revenues actually climbed a modest
2.3% YoY to $13,931m. While some of the foreign majors haven’t
disclosed last quarter’s sales yet, those same ones hadn’t a year
ago when I did this Q2’22 analysis. So this revenues growth is
righteous, with 5.6% higher average gold prices being enough to
offset that 4.7% production decline. Better sales are ultimately
essential to grow bottom lines.
The
GDX top 25’s accounting earnings fell 17.2% YoY to $1,687m, which is
on the lower side compared to recent years’ levels. That is a bit
skewed though, as gold miners periodically flush unusual and often
non-cash items through their income statements. Those are most
commonly mine-impairment charges, but can also include big hedging
losses or gains. I always look for unusual items during my analysis
work.
The
only material one in Q2’23 was Endeavour Mining suffering a $178m
loss selling discontinued gold mines. Excluding that makes for
adjusted GDX-top-25 earnings of $1,865m. Also removing a couple
unusual items from the comparable Q2’22, the majors’ adjusted
profits only fell 8.1% YoY last quarter! So despite earnings
weakening in Q2’23, these largest gold miners still aren’t faring
poorly by any means.
Cash
flows generated from operations drooped a similar 6.1% YoY to
$4,726m, which is pretty healthy. Strong OCFs from existing mines
help finance and build expansions and new mines. That would have
added to these elite major gold miners’ big cash hoards, but they
plowed much of those fat cash flows into growing their operations.
So the GDX top 25’s treasuries collectively dropped 24.2% YoY in Q2
to $14,972m.
So
overall despite proving disappointing, the major gold miners’ Q2’23
operational and financial results were fine. They still mined gold
for way less than prevailing prices, fueling solid earnings. Those
really ought to improve in Q3 and Q4 as expanding production drives
down costs. Combining those with higher average gold prices makes
for strong fundamentals, leaving this sector looking very bullish
and really undervalued.
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The
bottom line is the major gold miners reported disappointing results
last quarter. They suffered falling production despite overall
global gold-mining output climbing, again unable to overcome
depletion. Fewer ounces produced forced mining costs higher, eating
into profitability. But many of the majors still expect improving
back-half production to drive costs back down, which should lead to
surging earnings in coming quarters.
While Q2’s gold-mining profitability could’ve been better, it was
still solid absolutely. Major gold miners’ strong fundamentals
certainly don’t justify this past month’s gold-stock selloff. So
this battered sector is due to soon rally hard amplifying gold’s
mean-reversion rebound out of its own pullback. That makes this a
good opportunity to add fundamentally-superior gold-stock positions
at bargain prices before gold bounces. |