Gold Mid-Tier Stocks Q3'21 Fundamentals / Commodities / Gold and Silver Stocks 2021

The mid-tier and juniorgold miners in their sector’s sweet spot for upside potential have been poweringhigher recently.  They’ve blasted toseveral major breakouts after getting bombed out during gold-futures speculators’taper tantrum on Fed-tightening fears last summer.  These smaller gold miners just finished theirQ3’21 earnings season, revealing whether their fundamentals support more bigstock-price gains ahead.

Gold-stock tiers aredefined by their production rates.  Smalljuniors mine less than 300k ounces of gold annually, medium mid-tiers haveoutputs running from 300k to 1m, large majors yield over 1m, and hugesuper-majors operate at vast scales exceeding 2m.  Mid-tiers offer a unique mix of sizable diversifiedgold production, considerable output-growth potential, and smaller market capitalizations ideal for outsized gains.

Mid-tiers are much-less-riskythan juniors, and amplify gold’s uplegs much more than majors.  Ironically the leading mid-tier gold-stock benchmarkis the misleadingly-named GDXJ Vectors Junior Gold Miners ETF.  It has evolved to be dominated bymid-tiers yielding quarterly outputs of 75k to 250k ounces.  True juniors now only account for a smallerfraction of the weighting in this second-most-popular gold-stock ETF.

Just over a third thesize of its big-brother GDX major-gold-miners ETF, GDXJ has certainly had awild ride this year.  Showing mid-tiers’huge potential, GDXJ skyrocketed 188.9% in a massive upleg over just 4.8months into early August 2020!  Theextreme greed and overboughtness that spawned necessitated a normal and healthymajor correction to rebalance sentiment, so the mid-tiers fell 32.0% into lateMarch 2021.

That cleared the wayfor their next upleg to start marching higher, and it clocked in at young 26.7%gains by early June.  But mid-month,gold-futures speculators started freaking out about coming Fed tightening.  Several heavy-to-extreme bouts of gold-futures selling hammered the yellow metal on these traders’ fears of distant-future rate hikesand slowing quantitative-easing money printing. Gold stocks were collateral damage.

That anticipatory QE-taper tantrum prematurelytruncated the mid-tiers’ young upleg, whacking GDXJ back down 32.2% by lateSeptember.  That devastated herdpsychology, leaving overwhelmingly-bearish sentiment in its wake.  Heading into and soon after that deep capitulationlow, I was pounding the table on getting or stayed deployed in deeply-undervaluedgold stocks.  Indeed that interrupted upleghas resumed since.

GDXJ has surged 28.2%at best since then, a good start for a major upleg.  With mid-tiers’ mounting gains rekindlingtraders’ interest, it’s a great time for quarterlies.  These reveal how gold miners are actuallyfaring fundamentally, both operationally and financially.  This hard data cuts through the obscuring andmisleading fogs of herd sentiment.  So I’vebeen advancing this research thread for 22 quarters in a row now.

After every quarterlyearnings season, I painstakingly analyze the latest results from each of thetop 25 GDXJ component stocks.  This weekthey commanded 60.2% of this ETF’s total weighting, the lowest yet seen in theselast 22 quarters.  Down from a 75.9% peakin Q4’19, this is good news for speculators and investors.  GDXJ’s holdings are gradually diversifying inweightings terms, leaving smaller miners more influential.

This table summarizesthe operational and financial highlights from the GDXJ top 25 in Q3’21.  These gold miners’ stock symbols aren’t allUS listings, and are preceded by their rankings changes within GDXJ over thispast year.  The shuffling in their ETF weightingsreflects changing market caps, which reveal both outperformers and underperformerssince Q3’20.  Those symbols are followedby their current GDXJ weightings.

Next comes these goldminers’ Q3’21 production in ounces, along with their year-over-year changes fromthe comparable Q3’20.  Output is thelifeblood of this industry, with investors generally prizing productiongrowth above everything else.  After arethe 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 abunch of hard accounting data reported to securities regulators, quarterly revenues,earnings, operating cash flows, and resulting cash treasuries.  Blank data fields mean companies hadn’treported that particular data as of the middle of this week.  The annual changes aren’t included if they wouldbe misleading, like comparing negative numbers or data shifting from positiveto negative or vice versa.

Despite Q3’s challengesled by those gold-futures selloffs and mounting inflationary cost pressures,the GDXJ gold miners are generally faring quite well.  When adjusted for huge composition changes inthis ETF, they generally enjoyed surging production.  And many held the line on costs, although theusual-suspect outliers skewed the averages. Overall the mid-tier and junior gold miners are still thriving fundamentally!

Much to their credit,GDXJ’s managers have slowly forged their baby into the world’s best gold-stockETF.  For years it included largersuper-majors, which are as far from junior-dom as miners get.  Due to their big market capitalizations, theyhad disproportionally-high weightings compared to other smaller components.  Moving some larger gold miners to the GDXmajor-gold-stock ETF where they belong has finally happened.

Super-majors KinrossGold and Gold Fields are now rightfully left exclusively in GDX, along with thenew Australian major Northern Star Resources after it gobbled up competitorSaracen Mineral.  Those four companiesalone accounted for 3/8ths of the GDXJ top 25’s gold production in Q3’20,and fully 21.4% of this ETF’s total weighting! So while their removal from GDXJ was good, it left Q3’21 not comparablewith Q3’20.

The companies that climbedinto the elite GDXJ-top-25 ranks to help fill that big vacuum left when thosemajors were booted are far smaller. They include MAG Silver, Osisko Gold Royalties, Seabridge Gold, andWesdome Gold Mines.  MAG is building a massivenew silver mine, but will have no real production until next year.  OR is a ludicrously-overvalued royalty playthat only yielded a paltry 20k ounces last quarter.

SA has a colossal world-classgold deposit, but that may as well be vaporware as this project hasn’t beendeveloped for decades.  WDO is the onlyreal gold miner among these replacements, but producing 29k ounces in Q3’21 itis still a smaller junior.  So Q3’20’shuge 1,542k ounces of gold mined by those kicked-out majors has effectively been replaced with just 49k in Q3’21! We have to adjust our year-over-year comparisons.

Ignoring those vastcomposition changes, the GDXJ top 25’s production looks terrible plunging 23.9%YoY last quarter.  But pulling those now-threemajors from Q3’20 results to make them comparable with Q3’21’s reveals awesomeproduction growth.  The 3,149k ozsproduced last quarter by these mid-tier and junior miners actually soared 21.4%YoY!  That is phenomenal, far betterthan the GDX major gold miners.

There’s lots of overlapin GDXJ and GDX components.  The formerbasically lops off the top 13 holdings of the latter, then greatly expandstheir weightings.  As I explained in myessay last week on the GDXtop 25’s Q3’21 results, the super-majors dominating its weightings arelargely deadweight.  They can’t growoutput at their vast scales, and their enormous market caps saddle their stockprices with supertanker-like inertia.

Fully 20 of these GDXJ-top-25components are also in GDX, but their total weighting in that major ETF is only22.5% compared to 60.2% in GDXJ.  Withoutthe world’s largest gold miners and their perpetually-losing battle against depletion,the mid-tiers and juniors can really shine. Their 21.4%-YoY adjusted gold-output growth thrashes the GDX top 25’s mere1.1% YoY last quarter!  Smaller minersfuel new production.

After every quarter theWorld Gold Council publishes the best-available global gold fundamental data inits fantastic must-read Gold Demand Trends reports.  In Q3’21, worldwide mined gold supply surged4.4% YoY.  While the GDX majors merelyachieved a quarter of that growth rate, the GDXJ mid-tiers and juniors collectivelynearly quintupled it!  And gold-stockprice gains are heavily correlated with output trends.

Whether mid-tiers ortrue juniors producing less than 75k ounces per quarter, fully 3/5ths of theGDXJ top 25 reported higher production in Q3’21.  The handful of actual junior primary goldminers have production highlighted in blue. With more exposure to smaller mid-tier and junior gold miners, GDXJ’s usefulnessfor traders continues to improve.  It hasway more upside potential during gold uplegs than major-dominated GDX.

Unlike the majorssimply too big to grow fast regardless of how well they are managed, the mid-tierand junior gold miners are coming from much-smaller bases.  These sweet-spot-for-upside-potential mid-tiersusually have a few mines or less, so expansions and new mine builds reallyboost their outputs.  And the mid-tiers alsohave way-smaller market caps, making their stock prices far-more-responsive tocapital inflows.

When mid-tiers’ lowerproduction and market caps are combined with leveraged profits growth from highergold prices, their upside potential during big gold uplegs trounces that of themajors.  So the mid-tiers are easily the bestgold stocks to own as this secular gold bull continues marching higher overcoming years.  Their future gold-productiongrowth will far exceed the majors’, and their earnings aren’t done soaring.

Long-term gold-stockprice levels ultimately depend on miners’ profitability, which is directlydriven by the difference between prevailing gold prices and gold-mining costs.  In per-ounce terms these are generally inverselyproportional to gold production.  That’sbecause gold mines’ operating costs are largely fixed during planningstages.  Their designed throughputs limitthe amounts of gold-bearing ore they can process.

That doesn’t change quarterto quarter, and requires about the same levels of infrastructure, equipment,and employees.  The only real variable isthe ore grades run through the fixed-capacity mills.  Richer ores yield more gold ounces to spreadthe big fixed costs of mining across, lowering unit costs which boostsprofitability.  With adjusted productionsurging, the GDXJ top 25 should’ve reported lower unit costs in Q3’21.

Cash costs are theclassic measure of gold-mining costs, including all cash expenses necessary tomine each ounce of gold.  But they are misleadingas a true cost measure, excluding the big capital needed to explore for gold depositsand build mines.  So cash costs are bestviewed as survivability acid-test levels for the mid-tier gold miners.  They illuminate the minimum gold prices necessaryto keep the mines running.

Unfortunately the GDXJtop 25’s cash costs bucked their sharply-higher output to blast 19.0% higher YoYto $862 per ounce!  While still way belowprevailing gold prices, that was the highest by far during the 22 quarters I’vebeen advancing this research.  Thankfullythat average was heavily skewed by a handful of outliers including Hecla Mining,Harmony Gold, and Buenaventura which reported super-high cash costs in Q3’21.

HL has long been ahigher-cost miner, and its anomalous cash costs actually improved considerablyfrom Q3’20.  South Africa’s HMY isoperating old very-deep gold mines that are increasingly expensive to keeprunning.  Peru’s BVN has been strugglingon the operations front for years, weaker production forces costs higher.  Excluding these usual-suspect outliers, therest of the GDXJ top 25 averaged better $790 cash costs.

Even those were skewedhigh by Equinox Gold and IAMGOLD.  Theformer is one of the fastest-growing mid-tier gold miners, constantly advancingprojects and opening new mines.  Itscosts will retreat as more come online.  IAGis dealing with lower ore grades and inflationary cost pressures in its expenses,but it is slowly transitioning to new mines that will lower costs in coming years.  So GDXJ-top-25 cash costs are fine.

All-in sustaining costsare far superior than cash costs, and were introduced by the World Gold Councilin June 2013.  They add on to cash costseverything else that is necessary to maintain and replenish gold-miningoperations at current output tempos.  AISCsgive a much-better understanding of what it really costs to maintain gold minesas ongoing concerns, and reveal mid-tier gold miners’ true operating profitability.

For the same distortingreasons, the GDXJ top 25’s all-in sustaining costs in Q3’21 also surged14.9% YoY to $1,131 contrary to much-higher adjusted production.  That was just shy of the $1,134 22-quarter highseen in Q1’21.  But last quarter’s averagewas also skewed high by those same always-outlying HL, HMY, and BVN.  Excluding them the rest of these mid-tiersand juniors reported way-better $1,049 AISCs.

That would only be up6.6% YoY, fairly-impressive given the raging price inflation unleashed by centralbanks’ epic money printing.  And if EQXand IAG are also taken out due to their temporarily-outsized costs, thataverage plunges to $993 which is right in line with Q3’20’s $985.  So the great majority of the elite mid-tierand junior gold miners are performing well in keeping costs under control.  That is really bullish!

Subtracting the GDXJ-top-25average AISCs from prevailing gold prices yields a great proxy for mid-tier unitearnings.  Despite those bouts of heavygold-futures selling on Fed-tightening fears, gold still fared quite well in Q3’21averaging $1,789.  That was down a modest6.4% YoY, ending a magnificent nine-quarter streak of higher goldprices.  Still gold remained far higher thaneven those elevated $1,131 AISCs.

Despite being pinchedby both lower gold prices and higher costs, that still yielded excellent mid-tierprofits of $658 per ounce!  Thatremained the sixth-highest ever seen, after the five preceding quarters.  The peak was $928 in Q3’20, but for three fullyears prior to Q2’20 this metric averaged $413. Gold mid-tiers are still thriving despite the inflationary costpressures they face.  And gold-pricegains should outpace inflation.

Ultimately gold will follow the money,which has exploded under this profligate Fed. In just 20.5 months since March 2020’s pandemic-lockdown stock panic,this central bank has mushroomed its balance sheet by a radically-unprecedentedand terrifying 108.3% or $4,504b!  And despitefinally starting to slow that ballooning with the QE4 taper, another $420b is stillcoming if the Fed sticks to the timeline the chair laid out.

With vastly more moneycompeting for and bidding up prices on far-slower-growing goods and services,inflation is raging.  The more investorsexperience it in their own lives, and see how it erodes earnings in these Fed-QE-levitated bubble-valued stock markets,the more they will prudently diversify stock-heavy portfolios with gold.  So gold-price gains should way-outpaceinflation, and miners’ earnings leverage those.

On the hard-accountingfront, the GDXJ top 25’s Q3’21 results were mixed even adjusted for those now-threemajors removed over this past year.  Thesemid-tier and junior gold miners did enjoy strong 14.8%-YoY adjusted revenuesgrowth to $6,937m last quarter!  That’sright where you’d expect with that big adjusted-gold-output growth of 21.4% and6.4%-lower quarterly average gold prices, certainly impressive.

But bottom-line earningsunder Generally Accepted Accounting Principles still cratered 77.9% YoY on anadjusted basis to just $212m!  Thatsounds like a disaster, not matching up with implied mid-tier earnings fromthat average-gold-less-average-AISCs proxy. That $658 in GDXJ-top-25 unit profits only retreated a far-milder 29.1% YoY.  This discrepancy was driven by big mostly-non-cashitems flushed through income statements.

In Q3’21 those includedPAAS earning $28.5m selling other shares, IAG incurring a $40.4m charge for additionalmine-reclamation expenses, EGO paying $21.4m to retire some bonds early, andCDE suffering a $35.7m unrealized loss on investments.  There were other smaller non-cash items too,but I only flag the larger ones for my spreadsheet.  Adjusted for these, GDXJ-top-25 profits werecloser to $281m last quarter.

And Q3’20 saw even moreextreme non-cash items distorting operating income, which adjusts the raw $959mexcluding those now-three major miners booted out.  BTG reversed a $174.3m impairment charge, AUYgained $241.9m selling a mine, while CG reported a $230.5m impairment chargedue to problems getting essential water at one of its mines.  Those big ones drop Q3’20 adjusted earnings near$773m.

Accounting for thesemajor unusual items alone reduces the adjusted net-income collapse to 63.7% YoYto $281m.  That’s still ugly, partiallyreflecting the rising costs of gold mining. It will be interesting to see how Q4’21 plays out, whether these lossespersist.  I was surprised to see so manyGDXJ-top-25 gold miners report accounting losses last quarter.  They should’ve fared better given gold pricesand mining costs.

Nevertheless, theirvaluations generally remained fairly-low for high-potential smaller goldminers.  Four of these elite mid-tiersand juniors had crazy-high trailing-twelve-month price-to-earnings ratios midweekdue to low earnings or losses during the past four quarters.  Excluding those 100x+ outliers, the rest ofthe GDXJ top 25 with profits over this last year averaged TTM P/Es of 24.3x.  That’s low for smaller gold miners.

Cash flows generatedfrom operations are often a more-stable measure of operating performances thanaccounting earnings, since they typically don’t contain unusual one-off items.  The adjusted GDXJ top 25’s OCFs fell 44.0% YoYto $1,573m.  But most of that was due toPeru’s endlessly-struggling BVN reporting OCFs plummeting to negative $464.3mdue to a $544.2m “Payments for tax litigation” outflow!

Presumably theincome-statement expense to go along with this huge legal settlement must havebeen already run through.  But it isn’tapparent in my past-quarters Buenaventura data, which is strange.  This settlement is with Peru’s government dueto BVN apparently expensing certain things back in 2007 to 2010 that weren’tallowed.  The $103.7m original claim morethan quintupled to $585.4m due to penalties and interest!

Excluding BVN’s OCFsfrom both Q3’21 and Q3’20, along with those now-three-kicked majors from thatyear-ago quarter, the GDXJ top 25’s OCFs only fell 25.1% YoY to $2,037m.  So operational performances look much betterthan the skewed total.  These elitemid-tiers and juniors generated enough cash to grow their adjusted treasuries amassive 46.0% YoY to $9,197m.  Those arebig warchests to grow future production.

Unlike the majors whichoften have to buy entire companies at expensive premiums to offset depletion,the mid-tiers and juniors boost output by expanding existing mines and/orbuying lone new ones from time to time. Major mine expansions and/or new mine construction is underway at asizable fraction of these GDXJ-top-25 gold miners.  $9.2b of cash is on the high side for them,lots of capital firepower for expanding outputs.

So the mid-tier andjunior gold miners are generally continuing to thrive despite Q3’schallenges.  Their upside potential incoming months and years remains huge.  Theirleveraged earnings will soar as gold powers higher on the vast torrents of new fiatmoney central banks are spewing.  Thesmaller gold stocks will really amplify their metal’s gains like usual.  So if you aren’t deployed in great ones yet,you should get going.

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The bottom line is themid-tier and junior gold miners in the sweet spot for stock-price upside potentialjust reported a solid-if-not-strong quarter. Their production growth surged, far outpacing the majors’.  While costs still rose on inflationarypressures, they remained far below prevailing gold prices which made forexcellent profits.  And these will growamplifying gold’s gains as its bull follows the money printing higher.

GDXJ’s smaller goldminers make it way better than deadweight-major-dominated GDX.  The mid-tiers and juniors will enjoy much-biggergains than their larger peers as this Fed-tightening-fears-interrupted goldupleg mounts.  But even GDXJ’s upside isstill retarded by plenty of underperformers, so better gold-stock gains will bewon in handpicked fundamentally-superior miners.  Their latest run higher is only just beginning.

Adam Hamilton, CPA

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