GDX Gold Mining Stocks Fundamentals Update / Commodities / Gold and Silver Stocks 2019

The major gold miners’stocks are drifting sideways with gold, their early-year momentum sapped by therecent stock-market euphoria.  But theyare more important than ever for prudently diversifying portfolios, a raresector that surges when stock markets weaken. Their just-reported Q1’19 results reveal how gold miners are faring as asector, and their current fundamentals are way better than bearish psychologyimplies.

The wild market actionin Q4’18 again emphasized why investors shouldn’t overlook gold stocks.  Every portfolio needs a 10% allocation in gold and its miners’ stocks.  As the flagship S&P 500 broad-marketstock index plunged 19.8% largely in that quarter to nearly enter a bear market,the leading gold-stock ETF rallied 11.4% higher in that span.  That was a warning shot across the bow thatthese markets are changing.

Four times a yearpublicly-traded companies release treasure troves of valuable information inthe form of quarterly reports.  Requiredby the US Securities and Exchange Commission, these 10-Qs and 10-Ks contain thebest fundamental data available to traders. They dispel all the sentiment distortions inevitably surrounding prevailingstock-price levels, revealing corporations’ underlying hard fundamentalrealities.

The definitive list ofmajor gold-mining stocks to analyze comes from the world’s most-populargold-stock investment vehicle, the GDX VanEck Vectors Gold Miners ETF.  Launched way back in May 2006, it has aninsurmountable first-mover lead.  GDX’snet assets running $9.0b this week were a staggering 46.6x larger than the next-biggest 1x-long major-gold-miners ETF!  GDX is effectively this sector’s blue-chipindex.

It currently includes 46component stocks, which are weighted in proportion to their market capitalizations.  This list is dominated by the world’s largestgold miners, and their collective importance to this industry cannot be overstated.  Every quarter I dive into the latest operatingand financial results from GDX’s top 34 companies.  That’s simply an arbitrary number that fitsneatly into the tables below, but a commanding sample.

As of this week theseelite gold miners accounted for fully 94.3% of GDX’s total weighting.  Last quarter they combined to mine 274.4metric tons of gold.  That was 32.2% ofthe aggregate world total in Q1’19 according to the World Gold Council, whichpublishes comprehensive global gold supply-and-demand data quarterly.  So for anyone deploying capital in gold orits miners’ stocks, watching GDX miners is imperative.

The largest primarygold miners dominating GDX’s ranks are scattered around the world.  20 of the top 34 mainly trade in US stockmarkets, 6 in Australia, 5 in Canada, 2 in China, and 1 in the United Kingdom.  GDX’s geopolitical diversity is excellent forinvestors, but makes it more difficult to analyze and compare the biggest goldminers’ results.  Financial-reportingrequirements vary considerably from country to country.

In Australia, SouthAfrica, and the UK, companies report in half-yearincrements instead of quarterly.  Thebig gold miners often publish quarterly updates, but their data is limited.  In cases where half-year data is all that wasmade available, I split it in half for a Q1 approximation.  While Canada has quarterly reporting, thedeadlines are looser than in the States. Some Canadian gold miners drag their feet in getting results out.

While it is challengingbringing all the quarterly data together for the diverse GDX-top-34 gold miners,analyzing it in the aggregate is essential to see how they are doing.  So each quarter I wade through all availableoperational and financial reports and dump the data into a big spreadsheet for analysis.  The highlights make it into these tables.  Blank fields mean a company hadn’t reportedthat data as of this Wednesday.

The first couplecolumns of these tables show each GDX component’s symbol and weighting withinthis ETF as of this week.  While most of these stocks trade on USexchanges, some symbols are listings from companies’ primary foreign stockexchanges.  That’s followed by each goldminer’s Q1’19 production in ounces, which is mostly in pure-gold terms.  That excludes byproduct metals often presentin gold ore.

Those are usuallysilver and base metals like copper, which are valuable.  They are sold to offset some of theconsiderable expenses of gold mining, lowering per-ounce costs and thus raisingoverall profitability.  In cases wherecompanies didn’t separate out gold and lumped all production into gold-equivalentounces, those GEOs are included instead. Then production’s absolute year-over-year change from Q1’18 is shown.

Next comes gold miners’most-important fundamental data for investors, cash costs and all-in sustainingcosts per ounce mined.  The latter directlydrives profitability which ultimately determines stock prices.  These key costs are also followed by YoYchanges.  Last but not least the annual changesare shown in operating cash flows generated, hard GAAP earnings, revenues, andcash on hand with a couple exceptions.

Percentage changesaren’t relevant or meaningful if data shifted from positive to negative or viceversa, or if derived from two negative numbers. So in those cases I included raw underlying data rather than weird ormisleading percentage changes.  Companieswith symbols highlighted in light-blue have newly climbed into the elite ranksof GDX’s top 34 over this past year. This entire dataset together is quite valuable.

It offers a fantastic high-levelread on how the major gold miners are faring fundamentally as an industry and individually. While the endless challenge of growing production continues to vex plentyof the world’s larger gold miners, they generally performed much better in Q1’19than today’s low gold-stock prices reflect. Last quarter was also a big transition one as the recent gold-stockmega-mergers continued to settle out.

Production has alwaysbeen the lifeblood of the gold-mining industry. Gold miners have no control over prevailing gold prices, their productsells for whatever the markets offer.  Thusgrowing production is the only manageable way to boost revenues, leading toamplified gains in operating cash flows and profits.  Higher output generates more capital toinvest in expanding existing mines and building or buying new ones.

Gold-stock investorshave long prized production growth above everything else, as it is inexorably linked to company growth and thusstock-price-appreciation potential.  Butfor several years now the major gold miners have been struggling to growproduction.  Large economically-viablegold deposits are getting increasingly harder to find and more expensive to exploit,with the low-hanging fruit long since picked.

Gold miners’exploration budgets have cratered since gold collapsed in Q2’13, plummeting22.8%!  That was the yellow metal’s worstquarter in an astounding 93 years,which devastated sentiment and scared investors away from this sector.  Much less capital to explore shrank thepipeline of new finds to replace relentless depletion at existing mines.  That left major gold miners just one viable optionto grow their output.

They either have to buyexisting mines and/or deposits from other companies, or acquire those outright.  That’s unleashed a merger-and-acquisition wavethat culminated in recent quarters.  In September2018 gold giant Barrick Gold announced it was merging with Randgold.  Not to be outdone, in January 2019 the other goldbehemoth Newmont Mining declared it was acquiring Goldcorp in another colossal mega-deal.

I wrote a whole essay analyzing these mega-mergers in mid-February, and believe they are bad for this sector for a variety ofreasons.  For our purposes today, Q1’19was the first quarter fully reflecting the new Barrick including Randgold.  But Newmont’s acquisition of Goldcorp wasn’tfinalized until April 2019, so that isn’t included in NEM’s Q1’19 results.  And unfortunately Goldcorp’s weren’t publishedseparately either.

That makes analyzingthe GDX top 34’s gold production last quarter more complicated than usual.  As far as I can tell, Newmont releasednothing on Goldcorp’s Q1 operations.  As usualwhen one company buys out another, the acquired company’s website is quickly effectivelydeleted.  It is replaced with a tiny new websitelargely devoid of useful information, that redirects to the new combined company’smain website.

So Goldcorp’s Q1results were apparently cast into a black hole, never to be seen by investors.  Across last year’s four quarters, Goldcorpranked as the 5th-to-7th-largest GDX component. So excluding it from this leading gold-stock ETF skews all kinds of Q1 numbers.  This discontinuity will resolve itself over thenext couple quarters as Newmont and Goldcorp are fully integrated into the new,wait for it, “Newmont Goldcorp”.

In Q1’19 these top 34GDX gold miners produced 8.8m ounces of gold, which was down a sharp 6.3% fromQ1’18’s levels.  But Goldcorp averaged 574kounces of quarterly production in 2018.  Ifthat is added in, Q1’19’s climbs to 9.4m ounces which is only off a slight 0.2%YoY.  Stable gold output is a victory forthe major gold miners, as there have been plenty of recent quarters where their production has declined.

But depletion is stilla huge challenge for them, as they are losing market share to smaller goldminers that aren’t so unwieldy to manage. The World Gold Council publishes the best global gold fundamentalsupply-and-demand data quarterly. According to its latest Q1’19 Gold Demand Trends report, total worldmine production actually climbed 1.1% YoY in Q1.  So the larger gold miners continue to underperform.

On aquarter-over-quarter basis since Q4’18, the GDX top 34’s gold production plunged8.8%!  But again that is overstated byGoldcorp’s missing-in-action Q1 output. Add in that 2018 quarterly approximation, and that decline moderates to2.8% QoQ.  The quarter-to-quarter outputdynamics among the major gold miners are somewhat surprising.  Gold isnot produced at a steady pace year-round as logically assumed.

Going back to 2010, theworld gold mine production per the WGC has averaged sharp 7.2% QoQ drops fromQ4s to Q1s!  For many if not most majorgold miners, calendar years’ first quarters mark the low ebb in their annual output. The gold miners attribute this Q1 lull to new capital spending that slowsproduction as mine infrastructure is upgraded. That weaker output in Q1s is regained with big jumps in following quarters.

In that samedecade-long WGC dataset, Q2s saw world mine production average big 5.4% QoQ surgesfrom Q1s!  That sharp acceleration trend continuedin Q3s, which averaged additional 5.3% QoQ growth from Q2s.  Then that petered out on average in Q4s, whichwere only 0.5% better than Q3s.  So it isnormal for gold miners’ production to fallsharply in years’ Q1s before rebounding strongly in Q2s and Q3s.

There’s more to thisintra-year seasonality than capital spending though.  Mine managers play a big role in how theyplan their ore sequencing.  Individualgold deposits are not homogenous, but have varying richness throughout theirorebodies.  Mine managers have to decidewhich ore to mine in any quarter, which is fed through their fixed-capacity mills for crushing andgold recovery.  Ore grade determinesoutput.

The more gold per tonof ore dug and hauled in any quarter, the more gold produced.  Mine managers choose to process morelower-grade ores in Q1s, then move to higher-grade ore mixes in Q2s and Q3s.  That helps maximize their incentivebonuses.  Q3 results are reported inearly-to-mid Novembers soon before year-ends. Higher production boosts stock prices heading into that year-endbonus-calculation time!

Realize that Q1 resultsreported from early-to-mid Mays generally show a year’s weakest gold output.  It issurprising to see investors sell gold stocks hard when Q1’s production declinesfrom Q4’s, as this is par for the course in this industry.  The bright side is excitement later builds throughoutthe year as Q2’s and Q3’s production grows fast.  The gold miners look better fundamentally laterin years than earlier in them!

With year-over-yeargold production among the GDX top 34 effectively flat in Q1’19 with Goldcorp’slikely output added back in, odds argued against much of a change ingold-mining costs.  They are largely fixedquarter after quarter, with actual mining requiring the same levels ofinfrastructure, equipment, and employees. These big fixed costs are spread across production, making unit costs inversely proportional to it.

There are two majorways to measure gold-mining costs, classic cash costs per ounce and thesuperior all-in sustaining costs per ounce. Both are useful metrics.  Cashcosts are the acid test of gold-miner survivability in lower-gold-priceenvironments, revealing the worst-case gold levels necessary to keep the minesrunning.  All-in sustaining costs showwhere gold needs to trade to maintain current mining tempos indefinitely.

Cash costs naturallyencompass all cash expenses necessaryto produce each ounce of gold, including all direct production costs, mine-leveladministration, smelting, refining, transport, regulatory, royalty, and tax expenses.  In Q1’19 these top-34-GDX-component goldminers that reported cash costs averaged $616 per ounce.  That actually fell a sharp 7.7% YoY, down onthe low side of recent years’ cash-cost range.

Investor sentiment ingold-stock land has been really poor, as recent months’ extreme stock euphoriahas really stunted interestin gold.  If stock markets seemingly donothing but rally indefinitely, then why bother prudently diversifyingstock-heavy portfolios with counter-moving gold?  There’s been increasing chatter lately aboutthe gold-mining industry’s viability, which isn’t unusual when psychology waxesquite bearish.

Those worries areridiculous with the major gold miners’ cash costs averaging in the low $600seven in Q1’s low-quarterly-output ebb. As long as gold remains well above $616, this neglected sector faces noexistential threat.  And Q1’s top-34-GDX-averagecash costs are even skewed higher by one struggling gold miner, Peru’s Buenaventura.  In Q1’19 it suffered a sharp 22.2% YoY plungein gold production.

That was primarily dueto the company stopping extraction operations at one of its key mines inJanuary to rejigger and centralize it.  Thatlower output to spread mining’s big fixed costs across was enough to catapult BVN’sQ1 cash costs 33.1% higher YoY to an extreme $1049 per ounce.  Those are expected to mean revert much lower incoming quarters.  Ex-BVN the rest of theGDX top 34 averaged merely $600.

Way more important thancash costs are the far-superior all-in sustaining costs.  They were introduced by the World GoldCouncil in June 2013 to give investors a much-better understanding of what itreally costs to maintain gold mines as ongoing concerns.  AISCs include all direct cash costs, but thenadd on everything else that is necessary tomaintain and replenish operations at current gold-production levels.

These additionalexpenses include exploration for new gold to mine to replace depletingdeposits, mine-development and construction expenses, remediation, and minereclamation.  They also include thecorporate-level administration expenses necessary to oversee gold mines.  All-in sustaining costs are themost-important gold-mining cost metric by far for investors, revealing goldminers’ true operating profitability.

The GDX-top-34 goldminers reported average AISCs of $893 per ounce in Q1’19, up merely 1.0% YoY.  These flat AISCs are right in line with flatproduction when Goldcorp’s likely output is added back in.  The big operational challenges at Buenaventuraalso rocketed its AISCs an incredible 82.3% higher YoY to an anomalous $1382per ounce.  Excluding BVN, the rest ofthe GDX top 34 averaged $874 AISCs in Q1.

That’s right in linewith the past couple calendar years’ quarterly average of $872.  The major gold miners, despite still strugglingto grow their production enough to exceed depletion, are still holding the lineon all-important costs.  Those stablecosts regardless of prevailing gold prices are what make the gold stocks soattractive.  They have massive upsidepotential as their profits amplify thehigher gold prices still coming.

The gold price averaged$1303 in Q1’19.  Subtracting the majorgold miners’ average $893 AISCs from that yields strong profits of $410 perounce.  While recent years’ universalstock-market euphoria has capped gold at $1350 resistance, it hasstill been grinding higher on balance carving higher lows.  Gold is getting wound tighter and tightertowards a major upside breakout tonew bull highs well above $1350.

Like usual goldinvestment demand will be rekindled when the stock markets inevitably roll over materially again, propelling goldhigher.  A mere 7.7% upleg from $1300would carry gold to $1400, and just 15.4% would hit $1500.  Those are modest and easily-achievable gainsby past-gold-upleg standards.  Duringessentially the first half of 2016 after major stock-market selloffs, gold blasted29.9% higher in 6.7 months!

At $1300 and Q1’s $893average AISCs, the major gold miners are earning $407 per ounce.  But at $1400 and $1500 gold, those profitssoar to $507 and $607.  That’s 24.6% and 49.1%higher on relatively-small 7.7% and 15.4% gold uplegs from here!  This inherent profits leverage to gold is whythe major gold stocks of GDX tend to amplify gold uplegs by 2x to 3x or so.  Investorsenjoy large gains as gold rallies.

Despite investors’serious apathy for this sector, the gold miners’ costs remain well-positionedto fuel big profits growth in a higher-gold-price environment.  Investors love rising earnings, which are looking to be scarce in thegeneral stock markets this year.  The bettergold miners’ stocks are likely to see big capital inflows as gold continuesclimbing on balance, which will drive them and to a lesser extent GDX muchhigher.

The GDX top 34’s accountingresults weren’t as impressive as their flat production and costs in Q1.  The lack of Goldcorp’s operations beingaccounted for last quarter again distorted normal annual comparisons.  So all these Q1’19 numbers are compared to Q1’18’sexcluding Goldcorp.  Last quarter’saverage gold price being 1.9% lower than Q1’18’s average also played a role in weakeryear-over-year performance.

The GDX top 34’s totalrevenues fell 5.2% YoY ex-Goldcorp to $9.2b in Q1’19.  That’s reasonable given the slightly-lowerproduction and gold prices.  Lowerbyproduct silver output also contributed, as a half-dozen of these elite majorgold miners also produce sizable amounts of silver.  Again without Goldcorp, the total silveroutput among the GDX top 34 fell 8.0% YoY to 27.3m ounces in Q1 weighing on totalsales.

Their overall cashflows generated from operations mirrored this weakening trend, down 9.1% YoY to$2.8b last quarter.  Still the GDX-top-34gold miners were producing lots of cash as the big profits gap between their AISCsand prevailing gold prices implied.  Onlytwo of these major gold miners suffered significant negative OCFs, and one ofthose was naturally Buenaventura with all its production struggles.

These elite gold minersremained flush with cash at the end of Q1, reporting $11.1b on theirbooks.  That is 11.3% lower YoY withoutGoldcorp.  The gold miners tap into theircash hoards when they are building or buying mines, so declines in overall cashbalances suggest more investment in growing future output.  Investors fretting about the gold-mining industrytoday aren’t following their strong operating cash flows.

Last but not least arethe GDX top 34’s hard accounting profits under Generally Accepted AccountingPrinciples.  These are the actual quarterlyearnings reported to the SEC and other regulators.  Overall profits excluding Goldcorp only declined7.2% YoY to $731m in Q1’19.  That’sreally impressive in light of the 5.2%-lower revenues.  Prior quarters’ big mine-impairment charges onlower gold prices also dried up.

So the major goldminers included in this sector’s leading ETF are doing a lot better than investors are giving them credit for.  There’s no fundamental reason for thiscritical portfolio-diversifying contrarian sector to be shunned.  Gold stocks’ only problem is the lack of upsideaction in gold, which will quickly change once the stock markets decisivelyroll over again.  December 2018 provedthese relationships still work.

As the S&P 500 plunged9.2% that month, investors remembered the timeless wisdom of keeping some goldand gold miners’ stocks in their portfolios. So they started shifting capital back in, driving gold 4.9% higher thatmonth which GDX leveraged to a big 10.5% gain! Gold and its miners’ stocks act like portfolioinsurance when stock markets sell off. Everyone really needs a 10% allocation in gold and gold stocks!

That being said, GDXisn’t the best way to do it.  This ETF’spotential upside is retarded by the large gold miners struggling to grow theirproduction.  Investment capital will seekout the smaller mid-tier and junior gold miners actually able to increase theiroutput.  It’s far better to invest in thesegreat individual miners with superior fundamentals.  While plenty are included in GDX, theirrelatively-low weightings dilute their gains.

GDX’s little-brother ETFGDXJ is another option.  While advertisedas a “Junior Gold Miners ETF”, it is really a mid-tier gold miners ETF.  Itincludes most of the better GDX components, with higher weightings since thelargest gold majors are excluded.  Iwrote an entire essay in mid-January explaining why GDXJ is superior to GDX, andmy next essay a week from now will delve into the GDXJ gold miners’ Q1’19results.

Back in essentially thefirst half of 2016, GDXJ rocketed 202.5% higher on a 29.9% gold upleg in roughlythe same span!  While GDX somewhat keptpace then at +151.2%, it is lagging GDXJ more and more as its weightings aremore concentrated in stagnant gold super-majors.  The recent mega-mergers are going to worsenthat investor-hostile trend.  Investorsshould buy better individual gold stocks, or GDXJ, instead of GDX.

One of my core missionsat Zeal is relentlessly studying the gold-stock world to uncover the stockswith superior fundamentals and upside potential.  The trading books in both our popular weekly and monthly newsletters arecurrently full of these better gold and silver miners.  Mostly added in recent months as gold stocks recovered from deep lows, theirprices remain relatively low with big upside potential as gold rallies!

If you want to multiplyyour capital in the markets, you have to stayinformed.  Our newsletters are a greatway, easy to read and affordable.  They drawon my vast experience, knowledge, wisdom, and ongoing research to explain what’sgoing on in the markets, why, and how to trade them with specific stocks.  As of Q1 we’ve recommended and realized 1089newsletter stock trades since 2001, averaging annualized realized gains of +15.8%!  That’s nearly double the long-termstock-market average.  Subscribe today for just $12per issue!

The bottom line is the major gold minersperformed pretty well last quarter.  Theirproduction held steady despite lower prevailing gold prices and inexorabledepletion.  That led to flat costs rightin line with prior years’ average levels. That leaves gold-mining earnings positioned to soar higher in future quartersas gold continues slowly grinding higher on balance.  Another major stock-market selloff willaccelerate that trend.

Stock investors are making a seriousmistake ignoring gold and its miners’ stocks. The bearish sentiment plaguing this sector today is irrational givenminers’ solid fundamentals.  Diversifyingis best done before it is necessary, buying low with gold-stock prices sobeaten-down.  This is the only sectorlikely to rally fast amplifying gold’s upside when stock markets inevitablyswoon again.  Don’t overlook the greatopportunity here!

Adam Hamilton, CPA

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