Gold Mining Stocks Fundamentals / Commodities / Gold & Silver Stocks 2024

The major gold minersjust wrapped up another quarterly earnings season, reporting greatresults.  Sector unit profits continuedblasting higher on stable production, lower mining costs, and record prevailinggold prices.  Yet individually plenty ofmajors still struggled with rising expenses or lower output.  So deploying capital in miners to leveragegold’s remarkable breakout requires handpicking fundamentally-superior stocks.

The GDX VanEck GoldMiners ETF remains this sector’s dominant benchmark.  Birthed way back in May 2006, GDX hasparlayed its first-mover advantage into an insurmountable lead.  Its $13.9b of net assets mid-week dwarfed thenext-largest 1x-long major-gold-miners ETF by nearly 28x!  GDX is undisputedly the trading vehicle ofchoice in this sector, with the world’s biggest gold miners commanding most ofits weighting.

Gold-stock tiers aredefined 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 hugesuper-majors operate at vast scales exceeding 2,000k.  Translated into quarterly terms, thesethresholds shake out under 75k, 75k to 250k, 250k+, and 500k+.  Those two largest categories account forfully half of GDX.

GDX’s Q1 performancewas poor, merely edging up 2.0% despite gold powering 7.6% higher.  Normally the major gold miners amplifymaterial gold moves by 2x to 3x, so their stocks should’ve surged 15% to23% last quarter!  Traders have been slowto warm to this sector, as it languished out of favor for years.  Recent months’ euphoric stock-market bubble also overshadowed gold, stealing most of markets’ limelight.

But GDX’s dismal andsuper-anomalous 0.3x upside leverage to gold in Q1 has passed.  Despite gold’s healthy and necessary highconsolidation over this past month, the major gold stocks just hit a new upleghigh mid-week.  GDX has soared 39.2%since late February, amplifying gold’s parallel 17.4% gain by 2.3x!  Already back into normal territory, themajors’ upside leverage to gold is dramatically mean reverting.

Gold’s recent nominal-record-high streaks are winning much-more bullish financial-media coverage, so traders areincreasingly noticing and chasing.  Q1’searnings season had a great example, as the world’s largest gold miner Newmontreported its latest results.  Despitethat being the only gold stock included in the flagship S&P 500 benchmarkindex, normally institutional investors still don’t follow NEM enough to care.

Yet that day its stockrocketed 12.5% higher on that Q1 report! NEM’s gains dragged the entire GDX up a big 3.7%, despite gold onlyclimbing 0.6% that day.  But consideredin proper comparable context, those Newmont Q1 results actually proved weak asI’ll explain below.  Yet fund managersfinally starting to pay attention to gold and gold stocks again flooded inanyway.  Sentiment is definitelyimproving in this sector!

For 32 quarters in arow now, I’ve painstakingly analyzed the latest operational and financialresults from GDX’s 25-largest component stocks. Mostly super-majors, majors, and larger mid-tiers, they dominate this ETFat 86.0% of its total weighting!  Whiledigging through quarterlies is a ton of work, understanding the gold miners’latest fundamentals really cuts through the obscuring sentiment fogs shroudingthis sector.

This table summarizesthe operational and financial highlights from the GDX top 25 during Q1’24.  These gold miners’ stock symbols aren’t allUS listings, and are preceded by their rankings changes within GDX over thispast year.  The shuffling in their ETFweightings reflects shifting market caps, which reveal both outperformers andunderperformers since Q1’23.  Thosesymbols are followed by their current GDX weightings.

Next comes these goldminers’ Q1’24 production in ounces, along with their year-over-year changesfrom the comparable Q1’23.  Output is thelifeblood of this industry, with investors generally prizing productiongrowth above everything else.  Afterare the costs of wresting that gold from the bowels of the earth in per-ounceterms, 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, quarterlyrevenues, earnings, operating cash flows, and resulting cash treasuries.  Blank data fields mean companies hadn’t disclosedthat particular data as of the middle of this week.  The annual changes aren’t included if theywould be misleading, like comparing negative numbers or data shifting frompositive to negative or vice-versa.

A few weeks ago as thislatest earnings season was just getting underway, I wrote an essay previewing likely Q1’24 results.  I concluded “...the major gold miners will soonreport fantastic Q1 results.  Despitehigher mining costs likely in the usual Q1 production ebb, record average goldprices will still make for fat unit profits.” That proved true, although digging into the actual quarterlies revealedsome surprises like usual.

Production growthtrumps everything else as the primary mission for gold miners.  Higher outputs boost operating cash flowswhich help fund mine expansions, builds, and purchases, fueling virtuouscircles of growth.  Mining more goldalso boosts profitability, lowering unit costs by spreading big fixed operationalexpenses across more ounces.  The GDX top25’s collective Q1 output slipped 0.6% YoY to 7,999k ounces.

That was the fifthquarter in row these major gold miners failed to grow their production.  Operating at large scales, they simply can’tfind enough new gold to overcome relentless depletion.  These bigger gold miners reallyunderperformed their smaller peers last quarter.  According to the World Gold Council’s newQ1’24 Gold Demand Trends report, global gold mine production actually grewan impressive 4.4% YoY in Q1!

And the GDX top 25’sproduction would’ve been even worse if not for Newmont’s soaring 32.3% YoY to ahuge 1,680k ounces!  That’s the reasoninstitutional investors bid up NEM’s stock 12.5% that day its Q1 results werereleased.  While sounding amazing, thatbig growth is a short-lived merger boost.  Newmont gobbled up Australian super-majorNewcrest Mining for $16.8b last year, with that deal closing in early November.

Of course thisnewly-merged company’s first full quarter would see big output growth.  But traders newer to gold stocks didn’trealize that a year ago in Q1’23 NEM’s and NCM’s combined production totaled1,780k ounces.  So somehow now togetheras Newmont their Q1’24 output actually dropped a sizable 5.6% YoY!  Gold-stock mega-mergers have always beenbad for this sector, as I analyzed in a February-2019 essay.

Unable to organicallygrow production at their vast scales, super-majors spend tens of billions ofdollars to buy smaller rivals.  Theseacquired gold miners are always fundamentally superior, operating fewer goldmines at lower costs.  Their resultingbetter profitability and lower market capitalizations give their stocks greaterupside leverage to gold.  But thoseadvantages vanish once assimilated into the super-major Borg.

Newmont’s latestacquisition in a long line of them again proves this.  A year ago in Q1’23, NEM’s all-in sustainingcosts ran $1,376 per ounce while NCM’s were the best among super-majors at just $1,012.  These two companies’production-weighted average then was $1,272. Thus you’d think merging them would leave mining costs in that ballpark,maybe 5% higher near $1,335 in Q1’24 due to relentless inflation.

Yet somehow like in mostof its past deals Newmont managed to squander Newcrest’s lower-cost mines’advantage.  NEM-NCM combined last quarterreported lofty $1,439 AISCs, the second worst out of all reportingsuper-majors!  So while it was great tosee institutional investors respond to NEM’s Q1 results, they weren’t worthy ofsuch a blistering rally.  Mergers onlyyield four quarters of outsized output growth.

In addition to slayingfundamentally-superior smaller majors and larger mid-tiers with much-betterupside potential, gold-stock mega-mergers taint this sector in other damagingways.  Newmont and Barrick Gold have longbeen the ringleaders of these buyouts, which they chronically overpay for wasting their shareholders’ wealth. These deals are also mostly financed by huge share issuances, heavilydiluting existing owners.

I sure wish that onlyhurt NEM and GOLD shareholders, but it really tarnishes this entireindustry.  These dominant super-majorsaccounting for 19.6% of GDX’s weighting are plagued by endless staggeringgoodwill writeoffs for their huge buyout overpayments.  I saw a study at the end of Q1 pegging thoseat $17.2b over the years for Newmont and a jaw-dropping $39.5b for Barrick!  These devastate accounting earnings.

Fund managers sometimeslook at aggregate sector profitability before deciding to allocate capital toindividual stocks, bottom-line earnings reported to securities regulators.  Despite plenty of mid-tier and junior goldminers being wildly profitable, those colossal mega-merger writeoffs utterlygut sector earnings.  They mask awesomefundamentals of smaller miners, choking off institutional capital inflows intothis sector.

And because ofNewmont’s and Barrick Gold’s terribly-irresponsible profligacy, their stockshave been among the GDX top 25’s worst performers.  But since they dominate this ETF’sweightings, that makes it look like gold stocks as a whole are well underperforminggold.  Traders naturally look to GDX’saction for a righteous read on how gold stocks are faring, but NEM’s and GOLD’stens of billions of writeoffs retard that.

So while GDX is thissector’s benchmark of choice, it is heavily distorted by huge often-flounderingminers that aren’t representative of this wider sector.  Smaller fundamentally-superior majors, andeven-better mid-tiers and juniors, are crushing it on the fundamentalsfront.  They are consistently growingtheir outputs largely through organic expansions, and often driving down miningcosts fueling increasingly-fat earnings.

Even other super-majorsare way outperforming Newmont and Barrick. Agnico Eagle Mines is the third-largest gold miner, rivaling Barrickwith 879k ounces produced last quarter. That grew a strong 8.1% YoY, partially because AEM acquired some ofYamana Gold’s mines when Pan American Silver bought it out.  Yet even at Agnico’s huge operating scale,its AISCs last quarter were far more profitable at just $1,190.

The point here issettling for GDX is a suboptimal way to deploy capital in gold stocks,guaranteeing underperformance.  Thissector requires researched stock picking, staying with the bestfundamentally-superior gold miners while avoiding all the deadweight.  That’s not just NEM and GOLD, but alsoroyalty company Franco-Nevada which has a radically-inflated market cap far inexcess of the meager gold it “produces”.

Unit gold-mining costsare generally inversely proportional to gold-production levels.  That’s because gold mines’ total operatingcosts are largely fixed during pre-construction planning stages, when designedthroughputs are determined for plants processing gold-bearing ores.  Their nameplate capacities don’t changequarter to quarter, requiring similar levels of infrastructure, equipment, andemployees to keep running.

So the only realvariable driving quarterly gold production is the ore grades fed into theseplants.  Those vary widely evenwithin individual gold deposits.  Richerores yield more ounces to spread mining’s big fixed expenses across, loweringunit costs and boosting profitability. But while fixed costs are the lion’s share of gold mining, there arealso sizable variable costs.  That’swhere recent years’ raging inflation hit hard.

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.  Socash costs are best viewed as survivability acid-test levels for the major goldminers.  They illuminate the minimum goldprices necessary to keep the mines running.

Last quarter theGDX-top-25 majors averaged cash costs of $1,013 per ounce, a new record highfor the 32 quarters I’ve been advancing this research thread.  The previous one was Q3’22’s $996.  But with gold so elevated, Q1’24’s differencebetween prevailing prices and average cash costs was still the fifth highestever witnessed.  So the major goldstocks’ direct mining expenses remain relatively low compared to gold.

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. AISCs give a much-better understanding of what it really costs tomaintain gold mines as ongoing concerns, and reveal the major gold miners’ trueoperating profitability.

A few weeks ago in thatGDX-top-25 Q1’24 earningspreview essay, I wrote “My best guess is those Q1 AISCs average around$1,365”.  I explained the assumptionsbehind that estimate then.  So it wasquite a shocker to see the actual average last quarter retreat 2.0% YoY to just$1,277 per ounce!  Those were the lowestGDX-top-25 average AISCs in five quarters. Unfortunately this was due to one extreme outlier.

Peru’s Buenaventura haslong been one of the higher-cost gold miners included in GDX’s upperranks.  Its many operational challengesfor years have left BVN unworthy of the higher market capitalization thatinvestors have given it.  Like NEM, GOLD,FNV, and others, BVN is another elite gold stock I would never personallyown.  Yet unbelievably and contrary topedigree, Buenaventura reported negative AISCs in Q1!

How is such sorcery evenpossible?  BVN isn’t a primary goldminer, with only 36% of its Q1 revenues from the yellow metal.  It also produces silver, copper, zinc, and lead.  But like some poly-metallic miners,Buenaventura reports in gold-centric terms since gold stocks command highermultiples.  So those other metals areconsidered byproducts, despite being the big majority of output.  Their sales are credited to gold.

While BVN’s goldproduction only grew 7.8% YoY last quarter, its silver, copper, zinc, and lead outputrocketed up 149.7%, 26.4%, 418.6%, and 262.7%! Those colossal jumps translated into enormous byproduct creditsoffsetting gold-mining costs, slamming Q1 AISCs to -$121.  BVN’s non-gold production should remain muchhigher with a new silver-zinc-lead mine just coming online, keeping gold AISCslower.

Excluding BVN, the restof the GDX top 25 averaged $1,370 AISCs in Q1 right in line with my $1,365preview estimate.  And the majors’ AISCsshould retreat as 2024 marches on.  Asexplained in that Q1’24 preview essay, Q1s are the low-production ebb ofthe global gold mining industry.  This ismainly due to the winter impact on gold mining in the northern hemisphere,where most of the world’s land and mines are.

According to the WGC,over the last decade quarter-on-quarter global mined gold has averagedchanges of -8.4% in Q1s, +3.7% in Q2s, +6.1% in Q3s, and +0.4% in Q4s.  The strong output growth in Q2s and Q3s tendsto proportionally drive down mining costs. In addition the GDX-top-25 miners giving full-year-2024 AISC guidancesaveraged $1,324.  That’s considerablylower than last quarter’s $1,370 excluding BVN.

In the 32-quarterhistory of this GDX-top-25-results research, a handful of outliers have oftenskewed the average AISCs higher.  While Ipointed that out, I always still used the actual average including them to calculate implied sector unit profits. So we need to treat BVN’s stunning negative AISCs the same way this timearound.  These elite majors averaged$1,277 AISCs in a quarter where gold averaged a record $2,072.

That made for fat $795unit profits, the highest since Q4’20 and the third-richest on record!  Those shot up an impressive 34.9% YoY,adding to their massive 93.8%-YoY surge in Q3’23 and 42.3% in Q4’23.  There’s almost certainly no other sector inall the stock markets seeing earnings surge as fast as in the gold miners.  This is going to increasingly attractfundamentally-oriented fund investors to deploy capital.

And the major goldminers’ implied unit profitability is still soaring in thiscurrently-half-over Q2’24.  So far goldhas averaged an amazing record $2,333! Thus almost no matter what happens over the coming six weeks, Q2’s goldprices will be way higher than Q1’s record $2,072.  And these GDX-top-25 gold miners themselves aremostly predicting lower AISCs as outputs improve, which will further expandprofitability.

Conservatively thoughlet’s assume GDX-top-25 average AISCs are merely flat in Q2 near $1,275.  And that average gold prices are 5% lower inthe second half of Q2 as goldpulls back to continue bleeding off April’s extreme overboughtness.  That would yield gold averaging around $2,275in Q2, making for epic record $1,000-per-ounce profits!  Those would soar 67% YoY over Q2’23’s,further improving fundamentals.

The major gold miners’hard accounting results under Generally Accepted Accounting Principles or othercountries’ equivalents were also strong in Q1. The total revenues reported by the GDX top 25 grew 2.1% YoY to a record$25.1b.  But that’s not as good as you’dexpect with average gold prices 9.5% higher and production off 0.6%.  This discrepancy is partially explained byChina’s Zhaojin Mining going dark on the web.

Zhaojin has always beena poor financial reporter in English, with partial results only publishederratically and often seriously lagging. This week I can’t access its English website, despite trying formultiple days using multiple web browsers on multiple computers across ourVPN.  I don’t know if that site is downfor good, or just temporarily offline. But excluding Zhaojin’s Q1’23 revenue, the GDX top 25’s instead climbed3.1%.

These elite majors’bottom-line earnings looked far worse than their implied unit ones, plunging37.1% YoY to $2,645m.  Of course bumblingNewmont can hardly get past a quarter without some big unusual loss, andQ1’24’s was another $485m non-cash impairment from “classifying sixnon-core assets and one project as held for sale”.  Also the comparable Q1’23 GDX-top-25 totalearnings were grossly overstated.

Incredibly a year agoin Q1’23 Agnico Eagle Mines booked a colossal $1,543m non-cash remeasurementgain!  Newmont should be takingnotes.  AEM owned half of a big goldmine, then bought the other half from Yamana Gold when Pan American Silveracquired that company.  Thus Agnico hadto revalue its existing first half at the price paid for its newly-acquiredsecond half, for a very-unusual huge one-time gain.

Make these twoadjustments, and the GDX top 25’s bottom-line profits actually surged 17.7%YoY to $3.1b.  That’s more in linewith operating-cash-flow generation, which also grew a big 21.3% YoY to $5.9blast quarter.  Yet these elite majors’total cash hoards still shrunk 15.8% YoY to a still-big $15.8b, as they spentbillions to expand existing mines and develop new ones.  The gold miners truly are thriving!

But again GDX is onlyup 39.2% at best so far in this upleg, merely amplifying gold’s 31.2% at bestby a weak 1.3x.  The historical norm is again2x to 3x, with that top end exceeded as major gold uplegs mature.  Today’s specimen is the first achieving newnominal-record-close streaks since a pair in 2020.  During those gold averaged 41.4% gains, whichGDX leveraged by over 2.5x with huge 105.4% average gains!

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The bottom line is themajor gold miners generally reported great Q1 results.  Their perpetual struggle to overcomedepletion continued, with slightly-lower production.  But their average mining costs declined,combining with record quarterly-average gold prices to fuel big unit-earningsgrowth.  And these gold-mining profitsare almost certain to soar much fatter in this current Q2, fueled by way-higherbreakout gold prices.

Despite these fantasticfundamentals, the major gold stocks remain seriously undervalued relative totheir metal.  Distracted by thestock-market bubble, traders initially ignored gold’s remarkable breakoutsurge.  But they are starting to payattention, buying in rekindling gold-stock outperformance.  That will fuel a big mean reversion thenovershoot in gold-stock prices, arguing the lion’s share of this upleg’s gainsare still coming.

Adam Hamilton, CPA

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