The
gold miners’ stocks have spent months adrift, cast off in the long
shadow of the Trumphoria stock-market rally. This vexing
consolidation has left a wasteland of popular bearishness. But once
a quarter earnings season arrives, bright fundamental sunlight
dispelling the obscuring sentiment fogs. The major gold miners’
just-reported Q3’17 results prove this sector remains strong
fundamentally, and super-undervalued.
Four
times a year publicly-traded companies release treasure troves of
valuable information in the form of quarterly reports. Companies
trading in the States are required to file 10-Qs with the US
Securities and Exchange Commission by 45 calendar days after
quarter-ends. Canadian companies have similar requirements. In
other countries with half-year reporting, many companies still
partially report quarterly.
The
world’s major gold miners just wrapped up their third-quarter
earnings season. After spending decades intensely studying and
actively trading this contrarian sector, there’s no gold-stock data
I look forward to more than the miners’ quarterly financial and
operational reports. They offer a true and clear snapshot of what’s
really going on, shattering the misconceptions bred by ever-shifting
winds of sentiment.
The
definitive list of major gold-mining stocks to analyze comes from
the world’s most-popular gold-stock investment vehicle, the GDX
VanEck Vectors Gold Miners ETF. Its composition and performance are
similar to the
benchmark HUI gold-stock index. GDX utterly dominates this
sector, with no meaningful competition. This week GDX’s net assets
are 23.2x larger than the next-biggest 1x-long
major-gold-miners ETF!
Being included in GDX is the gold standard for gold miners,
requiring deep analysis and vetting by elite analysts. And due to
ETF investing eclipsing individual-stock investing, major-ETF
inclusion is one of the most-important considerations for
picking great
gold stocks. As the vast pools of fund capital flow into
leading ETFs, these ETFs in turn buy shares in their underlying
companies bidding their stock prices higher.
This
week GDX included a whopping 51 component “Gold Miners”. That term
is used somewhat loosely, as this ETF also contains major silver
miners, silver streamers, and gold royalty companies. Still, all
the world’s major gold miners are GDX components. Due to time
constraints, I limited my deep individual-company research to this
ETF’s top 34 components, an arbitrary number that fits neatly into
the tables below.
Collectively GDX’s 34 largest components now account for 91.9% of
its total weighting, a commanding sample. GDX’s components include
major foreign gold miners trading in Australia, the UK, and South
Africa. These companies report in half-year increments
instead of quarterly, so their Q3 data is limited. They usually
publish quarterly production results, but generally don’t disclose
quarterly financial results.
The
importance of these top-GDX-component gold miners can’t be
overstated. In Q3 they collectively produced over 9.9m ounces of
gold, or 309.4 metric tons. The World Gold Council’s
recently-released Q3 Gold Demand Trends report, the definitive
source on worldwide supply-and-demand fundamentals, pegged total
global mine production at 841.0t in Q3. GDX’s top 34 miners alone
accounted for nearly 4/10ths!
Every quarter I wade through a ton of data from these elite gold
miners’ 10-Qs, and dump it into a big spreadsheet for analysis. The
highlights made it into these tables. If a field is left blank,
that means a company didn’t report that data for Q3’17 as of this
Wednesday. Companies always try to present their quarterly results
in the best-possible light, which leads to wide variations in
reporting styles and data offered.
In
these tables the first couple columns show each GDX component’s
symbol and weighting within this ETF as of this week. While most of
these gold stocks trade in the States, not all of them do. So if
you can’t find one of these symbols, it’s a listing from a company’s
primary foreign stock exchange. That’s followed by each company’s
Q3’17 gold production in ounces, which is mostly reported in
pure-gold terms.
Most
gold miners also produce byproduct metals like silver and copper.
These are valuable, as they are sold to offset some of the
considerable costs of gold mining. Some companies report their
quarterly gold production including silver, a construct called
gold-equivalent ounces. I only included GEOs if no pure-gold
numbers were reported. That’s followed by production’s absolute
year-over-year change from Q3’16.
Next
comes the most-important fundamental data for gold miners, cash
costs and all-in sustaining costs per ounce mined. The latter
determines their profitability and hence ultimately stock prices.
Those are also followed by YoY changes. Finally the YoY changes in
cash flows generated from operations, GAAP profits, revenues, and
cash on balance sheets are listed. There’s one key exception to
these YoY changes.
Percentage changes aren’t relevant or meaningful if data shifted
from positive to negative or vice versa. Some major gold miners
earning profits in Q3’16 suffered net losses in Q3’17. So in cases
where data crossed that zero line, I included the raw numbers
instead. This whole dataset offers a fantastic high-level
fundamental read on how the major gold miners are faring today.
They’re actually doing quite well!
After spending days digesting these elite gold miners’ latest
quarterly reports, it’s fully apparent their vexing consolidation
this year isn’t fundamentally righteous at all! Traders have
abandoned this sector since the election because the allure of the
levitating
general stock markets has eclipsed gold. That has left gold
stocks exceedingly undervalued, truly the best fundamental bargains
out there in all the stock markets!
Since gold miners are in the business of wresting gold from the
bowels of the Earth, production is the best place to start. The
9947k ounces of gold collectively produced last quarter by these
elite major gold miners is up 0.5% YoY from Q3’16. That’s
relatively solid, as the World Gold Council’s supply data shows a
1.3% YoY drop in global gold mine production. So the GDX majors
effectively gained market share.
Yet
on a sequential quarter-on-quarter basis, these top-34 GDX miners
only grew production 0.9% from Q2’17. That’s definitely
disappointing. The WGC reported world mine production grew 3.1%
QoQ. Even that is down sharply from the average 7.2% sequential
growth between Q2s and Q3s from 2010 to 2016. The major gold
miners are collectively having a hard time expanding their
production, which is bullish for gold.
Gold
deposits economically viable to mine are very rare in the natural
world, and the low-hanging fruit has largely been harvested. It is
growing ever more expensive to explore for gold, in
far-less-hospitable places. Then even after new deposits are
discovered, it takes well over a decade to jump through all the
Draconian regulatory hoops necessary to secure permitting. And only
then can mine construction finally start.
That
takes additional years and hundreds of millions if not billions of
dollars per gold mine. But because gold-mining stocks have been
deeply out of favor most of the time since 2013, capital has been
heavily constrained. When banks are bearish on gold prices they
aren’t willing to lend to gold miners except with onerous terms.
And when investors aren’t buying gold stocks, issuing new shares low
is heavily dilutive.
The
large gold miners used to rely heavily on the smaller junior gold
miners to explore and replenish the gold-production pipeline. But
juniors have been devastated since 2013, starved of capital.
Not only are investors completely uninterested with general stock
markets levitating, but the rise of ETFs has funneled most
investment inflows into a handful of larger-market-cap juniors while
the rest see little meaningful buying.
So
even the world’s biggest and best gold miners are struggling to grow
production. While that isn’t great for individual gold miners, it’s
super-bullish for gold. The less gold mined, the more gold supply
will fail to keep pace with demand. That will result in higher gold
prices, making gold mining more profitable in the future. Some
analysts even think peak gold has been reached, that mine
production will decline indefinitely.
There are strong fundamental arguments in favor of peak-gold
theories. But regardless of where overall global gold production
heads in coming years, the major gold miners able to grow their own
production will fare the best. They’ll attract in relatively more
investor capital, bidding their stocks to premium prices compared to
peers who can’t grow production. Stock picking is more
important than ever in this ETF world!
But
despite these top-34 GDX components’ abnormally-slow Q3’17
production growth, they remain quite strong fundamentally.
The viability of gold miners is measured by the difference between
prevailing gold prices and what it costs to produce that gold. Even
with the average gold price falling significantly between Q3’16 and
Q3’17, the major gold miners collectively remain very profitable.
Their costs are well under control.
There are two major ways to measure gold-mining costs, classic cash
costs per ounce and the superior all-in sustaining costs per ounce.
Both are useful metrics. Cash costs are the acid test of gold-miner
survivability in lower-gold-price environments, revealing the
worst-case gold levels necessary to keep the mines running. All-in
sustaining costs show where gold needs to trade to maintain current
mining tempos indefinitely.
Cash
costs naturally encompass all cash expenses necessary to
produce each ounce of gold, including all direct production costs,
mine-level administration, smelting, refining, transport,
regulatory, royalty, and tax expenses. In Q3’17, these top-34
GDX-component gold miners that reported cash costs averaged just
$591 per ounce. That plunged a remarkable 8.8% YoY from Q3’16’s
$648! Production costs are falling.
Today the gold miners’ stocks are trading at crazy-low prices
implying their survivability is in jeopardy. This week the flagship
HUI gold-stock index was languishing near 186, despite $1278 gold.
The first time the HUI hit 186 in August 2003, gold was only in the
$360s! Gold stocks are radically undervalued today by
virtually every metric. They collectively face zero threat of
bankruptcies unless gold plummets under $600.
Way
more important than cash costs are the far-superior all-in
sustaining costs. They were introduced by the World Gold Council in
June 2013 to give investors a much-better understanding of what it
really costs to maintain a gold mine as an ongoing concern. AISC
include all direct cash costs, but then add on everything else that
is necessary to maintain and replenish operations at current
gold-production levels.
These additional expenses include exploration for new gold to mine
to replace depleting deposits, mine-development and construction
expenses, remediation, and mine reclamation. They also include the
corporate-level administration expenses necessary to oversee gold
mines. All-in sustaining costs are the most-important gold-mining
cost metric by far for investors, revealing gold miners’ true
operating profitability.
In
Q3’17, these top-34 GDX-component gold miners reporting AISC
averaged a level of just $868 per ounce. That was up a
slight 1.5% YoY and a trivial 0.1% QoQ, pretty much flat. That AISC
gold price is effectively this industry’s breakeven level. As long
as gold stays higher, the major gold miners can earn profits mining
it indefinitely. In spite of Q3’s lower gold prices, the major gold
miners remained very profitable.
Gold’s $1279 average price in Q3’17 fell a significant 4.2% YoY from
Q3’16’s $1334 average. $56 lower gold prices definitely took a bite
out of operating profits. At $1279 gold and $868 AISC, GDX’s top 34
gold miners were collectively earning $411 per ounce last
quarter! That’s down 14.2% YoY from Q3’16’s $479 fueled by higher
average gold prices and slightly-lower all-in sustaining costs. But
$411 is still hefty.
That
implies fat 32% operating margins, levels most industries would kill
for. The serious bearishness in precious metals has led many
investors to assume the gold miners must be struggling
fundamentally. But they are thriving with high-$1200s gold!
This metal would have to collapse under $900 before the long-term
viability of today’s major gold miners would be called into
question, which definitely isn’t in the cards.
Gold
miners offer such compelling investment opportunities because of
their inherent profits leverage to gold. Gold-mining costs
are largely fixed during mine-planning stages, when engineers and
geologists decide which ore to mine, how to dig to it, and how to
process it. The actual mining generally requires the same levels of
infrastructure, equipment, and employees quarter after quarter
regardless of gold prices.
So
gold-mining profits really leverage rising and falling gold prices.
Q3’17 experienced this on the downside, with a 4.2% drop in average
gold prices leading to a 14.2% YoY operating-profit decline. But
this certainly doesn’t justify the sharply-lower gold-stock prices.
Average HUI levels plunged 22.5% from 255 in Q3’16 to just 197 in
Q3’17. The latest $411-per-ounce profits are already high, and are
heading far higher.
Gold
itself is overdue for a major new upleg driven by investment
demand returning. As I discussed in depth last week,
investment demand
has stalled thanks to the extreme stock-market euphoria. These
bubble-valued
stock markets are due to roll over imminently as the Fed and
European Central Bank both start aggressively choking off
liquidity. That will
strangle this
stock bull, reigniting big gold investment demand.
The
impact of higher gold prices on major-gold-miner profitability is
easy to model. Assuming flat all-in sustaining costs at Q3’17’s
$868 per ounce, 10%, 20%, and 30% gold rallies from this week’s
levels will lead to collective gold-mining profits surging 31%, 62%,
and 93%! And another 30% gold upleg isn’t a stretch at all. In
essentially the first half of 2016 alone after the last stock-market
correction, gold surged 29.9%.
The
major gold stocks as measured by the HUI, which closely mirrors GDX,
skyrocketed 182.2% higher in roughly that same span! Gold-mining
profits and thus gold-stock prices soar when gold is powering
higher. And incidentally Q3’17’s major-gold-miner AISC levels
are overstated thanks to the South African gold miners. They
face serious political and operational problems as I discussed in my
previous Q2’17
GDX essay.
Gold-mining costs are spiraling higher in South Africa as production
fades due to both aging super-deep mines and government
interference. AngloGold Ashanti, Gold Fields, and Sibanye Gold have
extensive South African exposure and thus higher AISC. Pull those
companies out of the average, and the major-gold-miner AISC falls to
$846. That’s closer to the true global gold production cost, around
$850 per ounce.
The
key takeaway for investors is the major gold miners are very
profitable even at the lackluster high-$1200s gold prices of recent
months. Anything above $850 or so is pure profit, and those profits
really amplify higher gold prices. So the bearish-sentiment-fueled
notion today that the major gold miners are struggling fundamentally
is totally false. Their low stock prices are the result of
psychology, not operations.
While all-in sustaining costs are the single-most-important
fundamental measure that investors need to keep an eye on, other
metrics offer peripheral reads on the major gold miners’ fundamental
health. The more important ones include cash flows generated from
operations, actual accounting profits, revenues, and cash on hand.
They generally corroborated AISC in Q3’17, proving the gold miners
are faring quite well.
These top-34 GDX-component gold miners reporting operating cash
flows for Q3 collectively generated $4.1b. That’s down 28.5% YoY,
which isn’t surprising given lower prevailing gold prices.
Interestingly OCF was still up 22.0% QoQ though, a big jump
considering this gold-price environment. Every one of these
elite GDX gold miners reported positive OCF in Q3, with many results
fairly large relative to market caps.
Within individual gold miners operating cash flows can vary
considerably quarter to quarter depending on what they are doing
with their operating gold mines. As long as OCFs remain massively
positive, the gold miners’ operations are quite profitable. That
certainly remained true as a sector in Q3’17 despite the lower
prevailing gold price. The other major-gold-miner accounting
metrics remained much more stable YoY.
These top GDX gold miners’ GAAP accounting profits only retreated
6.6% YoY to $854m, which is really impressive considering the 4.2%
lower average gold price. While gold miners have struggled in the
deep bearish psychology plaguing this sector since 2013, it has
forced them to become ruthless in controlling their costs. Thus a
few of these elite gold miners are sporting super-cheap
single-digit price-to-earnings ratios.
Sequentially quarter-on-quarter these major gold miners’ profits did
plunge 64.0% from Q2’17’s, certainly sounding ominous. But as I
explained a
quarter ago, Q2’s profits were artificially boosted by huge
one-time gains from a couple companies selling interests in
major gold projects and reversing impairment charges. Such events
are rare, but they have to be watched for since they can greatly
skew accounting profits.
The
revenues front was much less volatile, just as expected given the
relatively-flat gold production. The collective sales of these top
34 GDX components fell 5.2% YoY to $10.4b, right in line with
Q3’17’s lower average gold prices. Sales moved even less QoQ,
merely retreating 2.6% from Q2. Unlike most other industries, gold
miners have no problem selling every single ounce of gold they can
manage to produce.
The
final metric for investors to watch is cash on balance sheets.
Having sufficient cash gives companies both flexibility in growing
operations and financial resilience to weather unforeseen
challenges. The more cash gold miners have on hand, the more
opportunities they have to acquire new projects and the greater
their protection against individual-mine problems. These top GDX
gold miners reported $11.8b in Q3’17.
That
was only down 6.6% YoY, proving operating-cash-flow generation was
high. Cash did drop 14.0% QoQ, but that’s not necessarily bad. As
long as gold miners are cash-flow positive, big drops in cash tend
to come from expanding operations which will yield more future
production. Bringing new gold mines online or improving
infrastructure at existing ones is very expensive, requiring big
spending to execute.
Pretium Resources is a great example, having one of the worst cash
showings in Q3’17. Its total cash plummeted 69% YoY to $54m, which
could be concerning without context. But Pretium was spending big
as planned to bring its amazing new Brucejack gold mine to
commercial production right as Q3 was dawning. Pretium went from a
mere explorer building that mine a year ago to producing 82k ounces
in Q3!
So
overall the major gold miners’ fundamentals looked quite impressive
in Q3’17, a stark contrast to the miserable sentiment plaguing this
sector. Gold stocks’ vexing consolidation this year wasn’t the
result of operational struggles, but purely bearish psychology.
That will soon shift as the stock markets roll over and gold surges,
making the beaten-down gold stocks
a coiled spring
today. They are overdue to soar again!
Though this contrarian sector is widely despised now, it was the
best-performing in all the stock markets last year despite that
sharp post-election selloff in Q4. The HUI blasted 64.0% higher in
2016, trouncing the S&P 500’s mere 9.5% gain! Similar huge 50%+
gold-stock gains are likely again in 2018, as gold mean reverts
higher on the
coming stock-market selloff. The gold miners’ strong Q3
fundamentals prove this.
While investors
and speculators alike can certainly play gold stocks’ coming rebound
rally with the major ETFs like GDX, the best gains by far will be
won in individual gold stocks with superior fundamentals. Their
upside will trounce the ETFs, which are burdened by
over-diversification and underperforming gold stocks. A
carefully-handpicked portfolio of elite gold and silver miners will
generate much-greater wealth creation.
At Zeal we’ve
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individual gold stocks and markets, so we can better decide what to
trade and when. As of the end of Q3, this has resulted in 967 stock
trades recommended in real-time to our newsletter subscribers since
2001. Fighting the crowd to buy low and sell high is very
profitable, as all these trades averaged stellar annualized realized
gains of +19.9%!
The key to this
success is staying informed and being contrarian. That means
buying low when others are scared, like late in this year’s vexing
consolidation. An easy way to keep abreast is through our acclaimed
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The
bottom line is the major gold miners’ fundamentals remained quite
strong in the just-reported third quarter. Slight production growth
coupled with stable costs helped offset some of gold’s decline from
the same quarter a year earlier. The gold miners continued to earn
hefty operating profits while generating good cash flows. Sooner or
later investors will take notice of this forgotten sector’s strong
fundamentals.
The
universally-despised gold stocks are the last dirt-cheap sector in
these Trumphoria-inflated stock markets. No one wants anything to
do with them, which is the best time to buy low before they soar.
All it will take to ignite gold stocks’ overdue mean-reversion rally
is gold investment demand returning. The miners’ profits will
really leverage gold rallying higher, making gold stocks even more
fundamentally compelling. | 
