Gold Mining Stocks Fundamentals / Commodities / Gold and Silver Stocks 2021

The gold miners’ stockshave powered higher in recent months, solidifying a strong young upleg.  But the extended-correction low leading intothis latest rally has left sector psychology fairly bearish.  Traders are skeptical about gold stocks’upside potential, wary of another serious selloff.  The gold miners’ just-reported Q1’21operating and financial results reveal whether their fundamentals supportfurther big gains.

The first quarter of2021 was rough for the gold stocks. Their leading and dominant benchmark and trading vehicle remains the GDXVanEck Vectors Gold Miners ETF.  Its$15.3b in net assets in the middle of this week ran 31x bigger than itsnext-largest 1x-long major-gold-miners-ETF competitor.  During Q1, GDX dropped a sizable 9.8%.  The gold stocks were increasingly out offavor as gold itself also lost 10.0%.

The gold minersactually proved quite resilient last quarter, as the majors in GDX generally amplifygold’s material moves by 2x to 3x. Still you couldn’t give away gold stocks in early March as their lastextended correction finally bottomed at GDX $30.90.  As these miners’ earnings leverage gold pricetrends, their stocks got sucked into gold’s vexing momentum selloff.  But as that passed, the gold miners caught abid.

Over the next 2.3months into this week, GDX powered up 21.8% to $37.65.  About halfway up into that run in early April,I wrote a contrarian essay making the technical case for another gold-stock upleg being underway.  We filled the tradingbooks in our newsletters with fundamentally-superior gold stocks before that, straddlingthe sector lows.  This week their unrealizedgains are already running as high as +38.9%.

With GDX mean reverting21.8% higher in a span where gold climbed 6.6%, making for outstanding 3.3xupside leverage, you’d think traders’ sentiment would be improving.  But it hasn’t much yet based on the bearishfeedback I’m getting.  The gold stocksjust haven’t rallied long enough and high enough to overpower all the festeringresidual pessimism left in their last correction’s wake.  That sentiment shift is still coming.

While all the bearishnesshas left most traders convinced the gold miners are struggling, their strong just-reportedQ1’21 results dispel that.  For 20quarters in a row now, I’ve painstakingly analyzed the latest operating andfinancial results reported by the top 25 GDX gold miners.  These include the largest in the world, and nowaccount for a commanding 88.1% of this entire market-capitalization-weightedgold-stock ETF.

Securities regulatorsrequire American companies to report their results by 40 days after quarter-ends,while Canadian ones have 45 days.  Themiddle of this week marked 42 days since the end of Q1, so this earnings seasonis almost complete.  While it takes a lotof time, effort, and expertise to dig into these reports, the resulting knowledgeis well worth it.  These are the onlytimes gold miners’ fundamentals are clear.

This table summarizesthe operational and financial highlights from the GDX top 25 during Q1’21.  These major gold miners’ stock symbols aren’tall US listings, and are preceded by their rankings changes within GDX over thepast year.  The shuffling in their ETF weightingsreflect changing market caps, which reveal both outperformers and underperformerssince Q1’20.  The symbols are followed bycurrent GDX weightings.

Next comes these goldminers’ Q1’21 production in ounces, along with their year-over-year changes fromthe comparable Q1’20.  Output is thelifeblood of this industry, with investors generally prizing production growthabove everything else.  After are thecosts 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.

By late in the firstquarter of 2021, the gold stocks were pretty much despised.  Other than a handful of hardened contrarians,the vast majority of traders wanted nothing to do with this sector.  Yet despite gold and gold stocks correcting,the major gold miners were faring great fundamentally.  They reported one of their best quartersever, again proving why smart traders suppress their greed and fear to followthe data.

Last quarter the GDX-top-25gold miners collectively produced 8,406k ounces of gold.  That’s on the lighter side over the last 20quarters where I’ve been amassing this data, ranking as 12th.  That also shrunk 2.8% year-over-year from theGDX top 25’s output in Q1’20.  Part ofthat is due to the changing rankings within this dominant sector ETF.  One of the biggest climbers in GDX was China’sZhaojin Mining.

Two major Chinese goldminers have long been in or near the rarefied GDX-top-25 ranks in recent years,Zijin Mining and Zhaojin Mining which trade in Hong Kong under their symbols2899 and 1818.  I’ve spent way too muchtime trying to understand their very-limited quarterly reporting in English, whichis maddeningly opaque.  While the formercompany reported Q1 production, the latter didn’t bother as far as I could find.

So the GDX top 25’scollective output is one company short compared to the prior year, as Zhaojinwasn’t in those elite ranks then.  Still,the majority of the rest of these major gold miners reported decliningoutput in Q1’21.  And their 2.8%total drop last quarter is much worse than the industry trend.  After each quarter, the World Gold Councilpublishes the best global gold fundamental data available in outstanding reports.

That latest Q1’21 GoldDemand Trends revealed total world gold-mining output surged a sharp 4.2% YoYto 851.0 metric tons!  That’s theequivalent of 27,360k ounces.  Such strongproduction growth is really unusual, bucking the years-long generally-decliningtrend.  But remember the tail end of Q1’20was when governments started forcing economic lockdowns to slow the spread ofCOVID-19.  That shuttered gold mines.

So with shrinking productionagainst this rising-output backdrop, the GDX-top-25 major gold miners aren’tperforming optimally.  This is nothing new,as they have generally suffered waning production for years now.  Their gold mines are constantly depleting,and it is getting ever-more-challenging and expensive to find and develop newgold deposits into mines to offset that.  Especially at the large scales majors run at.

The major gold miners’inability to grow their outputs is one big reason I don’t trade their stocks.  Most of this industry’s growth is concentratedin smaller mid-tier and junior gold miners. As they each operate fewer gold mines, expanding existing ones andbuilding or buying new ones can fuel strong production growth.  The larger gold miners tend to have inferiorfundamentals to smaller ones, which stock prices reflect.

Next week as usual I’mdoing this same analysis with the top-25 GDXJ gold miners, the VanEck VectorsJunior Gold Miners ETF.  While reallycomprised of mid-tier gold miners, their fundamentals usually prove better thanthe majors of GDX even though there is much overlap between these ETFs’ componentstocks.  Typically the larger a goldminer, the more it struggles with depleting production and thus underperforms.

Interestingly the GDXtop 25’s total gold output peaked at 9,525k ounces way back in Q4’16.  It has been grinding lower on balance since.  One of these quarters I should include achart of that.  This major-gold-minertrend is buttressing peak-gold theories. With the world picked over for centuries, good economic gold depositsare getting harder to discover and develop. So total world gold output is doomed to shrink.

Gold-mining productiontrends are usually inversely proportional to unit mining costs, lower outputslead to higher costs.  That’s becausegold mines’ operating costs are largely fixed. They can only process so much gold-bearing ore each quarter, which requiresabout the same levels of infrastructure, equipment, and employees.  So less gold run through their fixed-capacitymills leaves fewer ounces to spread costs across.

Cash costs are theclassic measure of gold-mining costs, including all cash expenses necessary tomine each ounce of gold.  But they aremisleading as a true cost measure, excluding the big capital needed to explorefor gold deposits and build mines.  So cashcosts are best viewed as survivability acid-test levels for the major goldminers.  They illuminate the minimum goldprices necessary to keep the mines running.

The GDX top 25’s averagecash costs indeed climbed last quarter, way faster than their lower productionwould suggest.  That number surged 10.6% year-over-yearto $773 per ounce!  That was the highestby far in the 20 quarters I’ve been working on this research thread, easilyeclipsing Q3’20’s $725.  And that waswhen gold miners were spending lots of money to spin back up operations closedby COVID-19 lockdowns.

Normally the primarydriver of higher mining costs is lower-grade ores, which mine managershave to dig through before getting to higher-grade targets.  But the gold miners certainly aren’t immuneto the rising costs mounting around the world. Giant central banks led by the Fed have conjured up the equivalent of many trillions of dollars overthis past year!  That deluge of new moneyis bidding up prices of everything.

But the GDX top 25’scash costs last quarter were skewed high by a trio of outliers all reporting crazy-highones in Q1’21.  They were South Africa’sAngloGold Ashanti, Hecla Mining, and Peru’s Buenaventura.  They are increasingly struggling with variousoperational issues including older and deeper gold mines that are more expensiveto run.  Excluding them, the rest of theGDX top 25 averaged better $704 cash costs.

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 the major gold miners’ true operating profitability.

The GDX-top-25 majorgold miners reporting AISCs last quarter averaged $1,067 per ounce.  That was the highest on record, even exceedingQ4’20’s $1,038.  Surging 6.5% YoY, the majorgold miners’ AISCs also well outpaced what declining production canexplain.  Yet with gold still averaging alofty $1,793 last quarter despite its extended correction, $1,067 AISCs arestill super-profitable.  And theywere skewed high.

Those same three GDX goldminers dragging up cash costs also reported abnormally-high AISCs, led by the crazy$1,631 from Buenaventura.  Excludingthese outliers, the rest of the GDX top 25 averaged far-milder all-insustaining costs of just $1,000 per ounce. That would’ve actually been a slight improvement over Q1’20’s $1,002average.  So the major gold miners arelargely holding the line on controlling costs.

That’s reallyimpressive given the soaring input prices hammering industries around theworld.  Supply-chain disruptions don’tseem to be a real issue yet for the major gold miners, as I didn’t see muchmention of those in the GDX top 25’s Q1’21 reports.  That may become more of a problem in futurequarters.  But gold prices riding thetidal wave of monetary excess higher should let earnings growth far outpacecosts.

In overallgold-mining-sector-earnings terms, this average AISC data yields the best proxyfor tracking trends.  Subtracting the GDXtop 25’s average all-in sustaining costs reported in a quarter from its averagegold price reveals sector profitability. Last quarter’s $1,793 gold price was still up 13.4% YoY despite thismetal’s extended correction.  That remainedfar above these gold miners’ $1,067 average AISCs.

That implies these companies earned $726 per ounce mining gold in Q1’21!  That still surged 25.3% YoY from Q1’20despite the gold-correction-fueled bearish sector sentiment.  That made for very-strong profits growth,among the best in the entire stock markets. And had that trio of high-cost outliers not pooped in the punch bowl, theGDX top 25’s unit profits would’ve soared 36.8% YoY to $793.  Those are big numbers.

Even that unadjusted$726 per ounce proved the fourth-highest quarterly earnings in GDX-top-25history, after Q3’20’s peak at $884, Q4’20’s $838, and Q2’20’s $730.  As I analyzed in an essay in mid-April, the gold miners’ valuations remainreally low.  Their stock prices arefar from reflecting their incredibly-strong fundamentals.  And last quarter’s double-digit profitsgrowth was nothing new, it extended an amazing trend.

Since Q3’19, the GDXtop 25’s earnings per this proxy have skyrocketed dramatically.  During the seven quarters ending in Q1’21,these major gold miners saw their profits soar 53.5%, 57.8%, 39.0%, 66.2%,49.7%, 50.3%, and 25.3% YoY!  Thattowering record has to reign supreme, unchallenged by the rest of the stockmarkets.  There is zero fundamentaljustification for being bearish on this small contrarian sector.

Sadly most stocktraders don’t realize this.  Recenttechnical price action stokes their greed or fear, and these dangerous emotionsoverpower their reason.  That’s why mostgold-stock traders perpetually miss out on buying in relatively low.  They don’t get excited about this high-flyingsector again until greed flares later in maturing uplegs.  Then they rush to buy in high, soon beforethe next correction slaughters them.

Prudent traders alwayswatching gold stocks earn fortunes trading their uplegs and corrections.  This latest GDX surge since early March isactually its fifth upleg ofthis secular bull.  The first fouraveraged massive 99.2% gains over 7.6 months each!  With a track record like that, you’d thinktraders would never let herd bearishness cloud their judgment.  But they do, and it does, so they miss out ondoubling their capital.

The GDX top 25’s hardfinancial results reported to their securities regulators under Generally AcceptedAccounting Principles or other countries’ equivalents confirmed their strongperformances last quarter.  Despite theircollective production sliding that 2.8%, their total revenues surged 10.5% YoY to$13.7b in Q1’21.  One of their best quartersever, that jibed with lower output overcome by 13.4%-higher gold prices.

And these major goldminers’ actual bottom-line accounting earnings proved way stronger than thatgold-less-AISCs proxy.  Collectively they blasted 47.1% higher YoY to $3.2b! And while wading through these quarterly reports, I didn’t see any majornon-cash losses or gains significantly skewing this comparison.  A minor $89m impairment-reversal gain nearlyhalf offset by a $39m investment loss was all that made my notes.

So the GDX top 25’ssoaring profits in Q1 were righteous, overwhelmingly fueled by normaloperations.  These higher accounting earningswill soon be reflected in conventional valuations as measured by gold stocks’trailing-twelve-month price-to-earnings ratios. The Es in P/Es are rolling-four-quarter totals.  And this week even before Q1’21 is incorporated,fully ten of these major gold miners already had super-low P/Es.

Those ranged from an absurd7.3x earnings to a still-really-cheap 18.6x! So there are plenty of serious fundamental bargains in this overlookedspace, which will increasingly attract institutional investors.  And the major gold miners’ earnings willcontinue growing if not soaring.  Withgold rebounding sharply so far in Q2, this quarter’s average price of $1,775 sofar should soon best Q1’s $1,793.  These aregreat gold levels.

Also the GDX top 25’sall-in sustaining costs should retreat this quarter on growing output.  The biggest theme I saw in reading through allthese quarterly reports was that production growth was expected toaccelerate through the rest of this year. Many major gold miners reported their 2021 output was weighted to thesecond half as expansions come online. Higher output drives down costs, boosting profitability.

The big spread betweenprevailing gold prices and mining expenses last quarter helped the GDX top 25’stotal operating cash flows generated surge 22.0% YoY to $5.9b.  That provides a lot of capital to expandoperations, through mine expansions, builds, and purchases.  And over time traders seek out and rewardoutput growth by bidding up stock prices. Mergers and acquisitions in this realm are also already mounting.

The major gold miners’strong operations have left them flush with cash.  At the end of Q1’21, the total treasuries ofthe GDX top 25 climbed another 15.4% YoY to $20.5b.  Those huge cash hoards are thesecond-highest on record for this sector, only trailing Q4’20’s $22.8b.  And that quarter-end cash on hand doesn’tinclude the big lines of credit many major gold miners keep available to tap.  They are ready to spend.

Again the larger a goldminer, the more difficult it is to even offset depletion let alone growoutput.  As it takes well over a decadeto fully explore, permit, and construct a mine on a new gold deposit, the majorsare forced to buy existing mines to boost their production.  The big beneficiaries of this are the smallermid-tier and junior gold miners.  We aregoing to see increasing buyouts as majors race to add output.

So the major goldstocks’ strong rebound out of their recent extended-correction lows is totallyjustified fundamentally.  In fact giventhe strong Q1 numbers the GDX top 25 put up, that dominant sector ETF’s 21.8%gain at best so far over 2.3 months seems piddling.  Gold stocks easily have the potential for yetanother double in GDX terms off their early-March lows.  Their setup here remains fantasticallybullish.

Miners’ valuations areway too low relative to their strong earnings power, which will force their stockprices to mean revert dramatically higher to reflect great fundamentals.  And gold itself is likely to keep poweringhigher on balance on the deluge of extreme central-bank money printing.  The soaring inflation increasingly evidenteverywhere is stabilizinggold investment demand, paving the way for an explosion higher.

In the months surroundinggold stocks’ recent extended-correction bottoming, I’ve been pounding the tableon the huge opportunities in this sector. I’ve examined this really-bullish gold-stock setup from different anglesin many weekly essays.  We layered into fundamentally-superiorsmaller gold miners at relatively-low prices straddling that correction.  So our newsletter subscribers are already enjoyingmounting gains.

At Zeal we walk the contrarianwalk, buying low when few others are willing before later selling high when fewothers can.  We overcome popular greedand fear by diligently studying market cycles. We trade on time-tested indicators derived from technical, sentimental,and fundamental research.  That’s why all1178 stock trades recommended in our newsletters since 2001 averaged hefty +24.0%annualized realized gains!

To multiply your wealthtrading high-potential gold stocks, you need to stay informed about what’sgoing on in this sector.  Stayingsubscribed to our popular and affordable weekly and monthly newsletters is agreat way.  They draw on my vast experience,knowledge, wisdom, and ongoing research to explain what’s going on in themarkets, why, and how to trade them with specific stocks.  Subscribetoday while this gold-stock upleg remains young!  Our newly-reformatted newsletters have expandedindividual-stock analysis.

The bottom line is themajor gold miners just reported another outstanding quarter.  Despite Q1 seeing gold mostly grind lower inan extended correction, the majors achieved great results.  Even with waning production, their revenuesand operating cash flows still surged on higher average gold prices.  And their hard accounting earnings soared,exhibiting that potent profits leverage to gold this sector is famous for.

And even before those strongQ1 earnings feed into P/E ratios, many of the major gold miners already tradeat really-low valuations.  Their stockprices have to mean revert dramatically higher to reflect their fantasticunderlying fundamentals.  That means thisyoung gold-stock upleg likely has a long ways to run higher yet.  As always the earlier traders realize thisand buy in, the bigger the upleg gains they’ll win.

Adam Hamilton, CPA

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