The
major gold miners just finished reporting fantastic Q3 results. A
potent combination of higher gold prices and lower mining costs
fueled skyrocketing profits, some of gold stocks’ biggest earnings
growth ever! These larger miners were generally able to overcome
depletion, leaving their collective output stable. Posting such
blowout numbers should help attract institutional investors back to
this battered sector.
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 $11.9b of
net assets mid-week dwarfed the next-largest 1x-long
major-gold-miners ETF by over 31x! 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, these thresholds shake out under
75k, 75k to 250k, 250k+, and 500k+. Those two largest categories
account for over 53% of GDX.
The
major gold stocks are languishing really out of favor today, with
GDX down 1.7% YTD despite gold rallying 7.5%. Normally the GDX gold
stocks leverage material gold moves by 2x to 3x. This past spring,
a good GDX upleg soared 63.9% higher amplifying gold’s
parallel 26.3% one by 2.4x! This sector hasn’t been devoid of
excitement this year, so this festering bearish sentiment looks
anomalous and unsustainable.
For
30 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 87.2% 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 Q3’23. 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 Q3’22. Those symbols are followed by their
current GDX weightings.
Next
comes these gold miners’ Q3’23 production in ounces, along with
their year-over-year changes from the comparable Q3’22. 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.
Before this latest earnings season got underway, in mid-October I
penned an essay on likely
gold miners’ fat
profits. My thesis then was “much-higher prevailing gold prices
and forecast lower costs ought to make for some of this sector’s
best earnings growth ever.” That all proved true, making for a
fantastic quarter for the major gold miners! This is one of
their best in the 7.3 years I’ve been advancing this research.
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. Yet the GDX top 25’s collective output in Q3
fell 6.3% YoY to 8,073k ounces.
For
years the world’s largest gold miners have
struggled to
overcome depletion, which I’ve analyzed in depth in many of this
series’ essays. The super-majors and larger majors operate at such
vast scales it is really difficult for them to grow their outputs.
That’s one reason I’ve long preferred trading smaller mid-tier and
junior gold miners. They’ve proven much more able to consistently
grow their production from littler bases.
But
the GDX top 25’s lower aggregate output in Q3 is distorted by two
unusual things. In order to write these
weekly web essays
early Thursdays, my data and charts have to be finalized by late
Wednesdays. One of the world’s biggest gold miners, South Africa’s
Gold Fields, dragged its feet in reporting even Q3 operational
results. They finally came in overnight leading into Thursday,
after my spreadsheets were finished.
Super-major GFI produced 542k ounces of gold last quarter, which
boosts the actual GDX-top-25 total to 8,615k. That’s dead-flat
compared to the comparable Q3’22’s 8,617k! So the world’s biggest
gold miners were able to overcome depletion in Q3’23. And
that’s despite king-of-the-hill Newmont really struggling, with Q3
production plunging a whopping 13.2% YoY to 1,290k ounces. That
dragged the overall total to flat.
While Newmont has warranted plenty of criticism over the years, this
latest production shortfall looks beyond its control. One of the
larger mines in NEM’s big stable of them is Penasquito in northern
Mexico, ranking as that dominant silver-producing country’s
second-largest silver mine. But its rich ores also yield large
amounts of gold, 144k ounces in Q3’22 a year ago. That accounted
for a tenth of Newmont’s total output.
Mexican mines have long been notorious for labor unrest.
Periodically some union will wax Marxist, and convince its members
to not only strike but illegally blockade access roads to mines.
The Mexican police usually don’t do much, maybe because of sympathy,
corruption, or pouring their limited resources into fighting the
violent drug wars. So mine strikes can last for a few months,
temporarily shutting down operations.
That
Penasquito mine is the second-largest employer in the Mexican state
of Zacatecas, with a workforce over 5k people. In early June that
labor union demanded Newmont double its profit-sharing benefit to
20%, and went on strike. That spanned all of Q3’23, not
being resolved until mid-October. And Newmont had to really bend
over to end that, crazily paying strikers 60% of lost wages and a
two-month bonus in 2024!
So
Penasquito’s Q3’23 production fell to zero, which explains
the great majority of Newmont’s ugly output decline. Had that
massive strike not happened, the GDX top 25’s collective production
would’ve grown on the order of 1.7% last quarter. That’s quite a
victory for these perpetually-struggling-with-depletion super-majors
and majors! That almost matches overall global gold mine production
per the World Gold Council.
The
WGC’s latest excellent Gold Demand Trends report covering Q3’23
pegged that at 2.3% YoY growth to 31,222k ounces. Interestingly the
GDX top 25 including Gold Fields merely accounted for 28% of that.
So despite their gold-stock market-capitalization dominance, these
major gold miners actually represent a surprisingly-small fraction
of this industry. Byproduct and smaller miners produce over 7/10ths
of all gold mined!
Sadly this Penasquito mess caused Newmont to welsh on its guidance.
Just three months earlier in its Q2’23 results released when that
strike was already six weeks old, NEM declared it was “On
track to achieve full-year guidance of between 5.7 and 6.3 million
ounces of attributable gold production with Gold AISC between $1,150
and $1,250 per ounce”. So it was quite a shock to see what NEM
declared in late October.
This
company warned that “Newmont is providing a revised 2023 outlook for
the standalone Newmont portfolio of 5.3 million ounces of
attributable production to incorporate the impacts of the Penasquito
strike...” The resulting volume impacts would push full-year
all-in sustaining costs way up to $1,400 per ounce. That made
for a pretty-darned-bad 11.7% output-guidance slash and 16.7% AISC
jump at the midpoints!
With
such a miserable late-year revision, NEM stock should’ve plunged 5%+
that day Q3 results were released. Yet that stock instead
inexplicably rallied up 2.0%, despite a weak gold-stock tape with
GDX sliding 0.9%. Then NEM surged another 4.0% the following day as
gold rallied 1.0% to $2,005 on Israel finally declaring its was
expanding its ground assault in Gaza. The whole sector was strong,
with GDX up 2.4%.
NEM’s resilience after that ugly Q3 report suggests peak bearish
sentiment had been reached and selling was mostly exhausted.
With quarterly production plunging 13.2% YoY, AISCs blasting up
12.2%, and full-year guidance slashed, this stock should’ve been
hammered. Back in July NEM stock plunged 6.0% the day it reported
bad Q2 results, with output collapsing 17.1% YoY catapulting AISCs
22.8% higher to $1,472!
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
provocatively as analyzed in my
pre-earnings-season essay, many gold miners including Newmont
were forecasting considerably-lower mining costs ahead. In their
Q2’23 results, plenty still guided to full-year AISCs well under
their H1’23 averages. If that came to fruition, it could mark a
turning point in major gold miners’ struggle with inflation. I was
thrilled to see that indeed proved the case in Q3’23 numbers!
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.
The
GDX top 25’s average cash costs last quarter fell 4.5% YoY to $951
per ounce. While still high, that was amazingly their first
annual decline in a whopping 20 quarters! Q4’21 to Q3’22 was
the worst of the cash-cost inflation, with those soaring 22.1%,
22.9%, 24.9%, and 25.0% YoY. While just one quarter of shrinkage
can’t confirm a trend change, it’s a great first step. And these
cash costs are still skewed high.
Two
serious outliers remain among the GDX top 25, Hecla Mining and
Peru’s Buenaventura. Both have been plagued with really-high
operating costs for long years, for different reasons. Most gold
miners would have to explain in their quarterlies why their costs
are so high, but neither HL or BVN even bother since they’ve
endlessly struggled with high costs. Excluding them, GDX-top-25
average cash costs fall to $903.
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.
Fantastically these elite gold majors’ AISCs last quarter fared even
better, dropping 7.2% YoY to $1,304 per ounce! That was also
the first annual decline in GDX-top-25 AISCs for fully 20 quarters,
since Q3’18! And many of the quarterly reports I read suggest this
is the start of a trend. These companies’ average full-year AISC
midpoint guidances are still running $1,256, which would require
even-lower Q4 AISCs to meet.
And
HL and BVN also skewed AISCs much higher than they should’ve been.
Kicking them out, the GDX top 25 averaged just $1,235 per ounce last
quarter even including Newmont’s anomalously-high mining costs on
that massive strike. So the major gold miners are finally making
real progress on forcing costs back down, which really boosts
profitability! That along with much-higher gold prices is a potent
combination.
While gold was largely out of favor mostly drifting sideways to
lower in Q3’23, its daily closes were still averaging $1,926. That
not only surged 11.6% YoY from depressed
slammed-by-monster-dollar-rally-on-epic-Fed-rate-hikes levels,
but was the second highest ever after Q2’23’s $1,978!
Subtracting average AISCs from quarterly-average gold prices offers
a great proxy for how gold miners’ sector earnings are faring.
That
yielded excellent Q3 unit profits of $622 per ounce! That was the
highest seen in six quarters since Q1’22, before the worst of the
raging inflation and the Fed’s scorching rate hikes to fight it.
And that $622 skyrocketed a phenomenal 93.8% YoY! That was
the biggest growth in at least 30 quarters! The major gold miners’
sector unit profits nearly doubled, as I had predicted was likely in
that
pre-earnings-season essay.
Awesomely the GDX top 25’s big profits growth will likely continue
in the currently underway Q4! Gold is actually averaging $1,932 on
close quarter-to-date, higher than Q3 levels. And again these gold
majors’ full-year AISC guidances in their Q3 results averaged $1,256
midpoints, or $1,189 if Hecla’s ridiculous $2,125 is
excluded! And to near $1,256 in 2023, Q4’s will have to come in
well below that to drag down averages.
But
conservatively let’s just assume Q4-to-date $1,932 gold less
skewed-high $1,256 AISCs. Incidentally that includes Newmont’s
dramatically-raised guidance on that strike. That still yields
even-fatter $676 unit profits, which would soar another 46% YoY
to their best levels since way back in Q2’21! The gold miners’
likely soaring-earnings trend is only starting, greatly improving
the fundamentals underlying this battered sector.
Not
surprisingly with gold rising and mining costs falling, the GDX top
25’s hard accounting results also looked fantastic last quarter.
These conform with Generally Accepted Accounting Principles or other
countries’ equivalents, and are officially reported to national
securities regulators. Despite flat gold output including
late-reporting GFI and stronger gold prices, majors’ top-line
revenues only inched up 1.5% YoY to $23.9b.
Gold
Fields didn’t report quarterly sales in the comparable year-ago
quarter either, so that wasn’t a factor. The South African gold
miners report in half-year increments, so they tend to just give
production updates on off quarters with way less accounting detail.
Another South African major, AngloGold Ashanti, just cut its
off-quarter data provided. It used to report revenues, but oddly
scrapped that leaving shareholders in the dark.
AU
did report those in the comparable Q3’22, but not for Q3’23. So
pulling out the former lifts GDX-top-25 sales growth to a
much-better 6.7% YoY. There are other lesser factors too, including
timing of sales. While gold miners’ operations run constantly,
their actual sales of mined gold are sometimes lumpy and offset
some. Moving gold from mine sites is often risky requiring armed
security, so it isn’t done all the time.
These elite gold majors’ bottom-line accounting profits were also
strong, blasting up 41.0% YoY to hit $2,395m last quarter! And they
should’ve been even higher. B2Gold reported a one-time $112m
non-cash impairment charge on acquiring the remaining half of a gold
project. That was purchased at a lower cost than the first half,
requiring a writedown. And Newmont’s Penasquito strike really
retarded earnings too.
It
wasn’t just NEM’s, which plunged 25.8% YoY largely thanks to that
Mexican labor unrest! The world’s biggest streaming company Wheaton
Precious Metals has a contract to buy 25% of Penasquito’s vast
silver output at super-low cash costs. For that WPM paid $485m
upfront to help finance that mine-build. With Penasquito fully
offline in Q3, WPM’s silver stream from it collapsed from 2,017k
ounces in Q3’22 to zero!
That
crushed Wheaton’s silver “production” last quarter lower by 42.8%
YoY, driving a 40.8% plunge in its accounting profits! So excluding
these unusual items and events, the GDX top 25’s earnings growth was
much bigger. My best guess is closer to 55% to 60%. Way-better
profits will help drive sector valuations lower, helping to attract
in more investors who screen for lower P/E ratios. Plenty of gold
stocks are dirt-cheap.
Naturally with revenues and earnings strong, operating cash flows
were too. Last quarter these major gold miners’ OCFs surged 27.1%
YoY to $6,754m. That was the best since Q4’21, and on the higher
side of the GDX top 25’s 30-quarter range. Operating-cash-flow
growth would’ve been even better if AU kept reporting its own, but
those were also nixed from its off-quarter reports which are way
less useful now.
AngloGold Ashanti also stopped telling its shareholders how much
cash it had on hand, contributing to the GDX top 25’s treasuries
falling 14.3% YoY to $17.5b. That’s still a big number for this
sector, giving the major gold miners lots of capital firepower to
expand existing mines or buy new ones. Smaller
mid-tier and
junior gold miners remain prime acquisition targets, the
quickest way for majors to augment depleting pipelines.
While the majors’ Q3 results were fantastic, the smaller gold
miners’ should prove considerably better. The mid-tiers’ and
juniors’ much-smaller production bases make it way easier for them
to consistently grow their outputs. And their way-littler market
capitalizations allow their stocks to be bid higher much faster.
I’m working on the GDXJ top 25’s quarterlies now, and will soon
publish another essay analyzing them.
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The
bottom line is the major gold miners just reported fantastic results
last quarter. Sector unit earnings nearly doubled on the potent
combination of higher gold prices and lower mining costs! The
miners are finally starting to overcome recent years’ raging
inflation, forcing their costs back down. That great trend fueling
fat profits is likely to continue, as gold is still forging higher
while miners forecast even lower costs ahead.
The
major gold stocks are even achieving production growth, which is
hard to do at the vast scales they operate. All that is driving
much-stronger revenues, earnings, and operating-cash-flow
generation. The bigger profits are really bullish for this sector,
pounding valuations even lower which should help attract back fund
managers. Reporting stellar numbers like these, gold stocks won’t
languish out of favor for long. |