Gold Mining Stocks Q2'19 Results Analysis / Commodities / Gold and Silver Stocks 2019

The gold miners’ stockscontinue to rally on balance, after a major upside breakout extended their strongupleg.  That’s driving mounting interestin this recently-forsaken sector.  Withthe latest quarterly earnings season underway, traders will soon enjoy bigfundamental updates from the gold miners. They are likely to report good Q2 results, with improving operationalperformances supporting further stock-price gains.

Four times a yearpublicly-traded companies release treasure troves of valuable information inthe form of quarterly reports.  Companiestrading in the States are required to file 10-Qs with the US Securities andExchange Commission by 40 calendar days after quarter-ends.  The gold miners generally release theirquarterly reports in the latter half of that window.  So Q2’19’s will arrive between late July tomid-August.

After spending decadesintensely studying and actively trading this contrarian sector, there’s nogold-stock data I look forward to more than the miners’ quarterly financial andoperational reports.  They offer a trueand clear snapshot of what’s really going on, shattering the misconceptionsbred by ever-shifting winds of sentiment. Nearly all fundamental analysis is based off the data gold minersprovide in quarterlies.

So for many years I’vedelved deeply into gold miners’ quarterly results.  They are the dominant source of information Iuse to winnow down the universe of gold stocks to the fundamentally-superiorones with the greatest upside potential. Every quarter after their latest earnings season ends, I research andwrite essays discussing the newest results from the major gold miners, mid-tier gold miners, and silver miners.

Q2’19’s full analysesare coming starting in mid-August once that 40-day post-quarter reportingdeadline has passed.  But before that I eagerlydive into individual companies’ results as they’re reported, since there’s somuch to digest.  Even earlier soon aftera quarter ends, I start thinking about what gold miners’ latest quarterlyresults are likely to show collectively.  Their aggregate trends canbe somewhat predicted.

In high-levelfundamental terms, gold mining is a simple business.  These companies painstakingly wrest gold fromthe bowels of the Earth, then generally sell all they can produce at prevailingmarket prices.  So their profits areeffectively the difference between current gold levels and operatingcosts.  The former is easy to calculateonce a quarter ends, and the latter can be reasonably estimated for this sectoras a whole.

Gold’s dramatic bull-market breakout amonth ago and high consolidation since have greatly improved sector psychology.  But gold’s big surge came late in Q2,minimizing its full-quarter impact.  Theearly quarter was rough, with gold slumping to a new year-to-date low near $1271in early May.  The average gold prices inApril, May, and June were $1286, $1284, and $1361.  Gold was mostly sucking wind last quarter.

Thus Q2’19’s overallaverage gold price of $1309 was just a meager 0.4% better than Q1’s $1303.  So the gold miners’ latest quarterly resultsaren’t going to get much help from gold’s young surge.  That will really change in the current Q3 ifgold can hold these high levels.  With Q3about 1/5th over, gold has averaged an awesome $1407 so far!  So the higher-gold boost to gold-stockearnings is coming, but not in Q2.

Gold stocks really leveragehigher gold prices because their mining costs are largely fixed.  Quarter after quarter mining operationsgenerally require the same levels of infrastructure, equipment, and employees.  The vast majority of any gold mine’s futurecost structure is actually determined during its planning phase, when engineersdecide which ore to mine, how to excavate it, and how to process it to recoverthe gold.

Every quarter afterresults I analyze the all-in-sustaining costs reported by the world’s goldminers.  These are the best measure ofwhat it really costs to produce an ounce of gold.  Over the past four quarters, the major goldminers of the leading GDX VanEck Vectors Gold Miners ETF reported average AISCsof $856, $877, $889, and $893.  That inturn yields a trailing-four-quarter mean of $879 per ounce, a key cost metric.

With $1309 average goldin Q2’19 and AISCs likely near $879, that implies the large gold miners as anindustry likely earned $430 per ounce last quarter.  That’s actually a decent improvementconsidering the flat quarterly gold prices. Though gold averaged a similar $1303 in Q1, the GDX miners’ average AISCsthat quarter came in a bit higher at $893. That implied $410 profits, which Q2 results should easily exceed.

$430 is up 4.9%quarter-on-quarter despite the relatively-flat average gold price!  This is really impressive sequential profitsgrowth relative to the broader stock markets, where earnings are stallingout.  But if that is all we could hopefor, I would’ve written on a different topic this week.  The gold miners’ Q2’19 earnings are likely towell exceed expectations for an entirely-different reason, portending even-highergold-stock prices.

Most traders assumegold miners produce their yellow metal at fairly-steady rates year-round.  That sure makes sense given how capital-intensivegold mining is, how individual mines’ capacities and throughputs to process oreare fixed, and how expanding mines’ outputs takes years of construction.  But surprisingly global gold mine production actually varies considerably quarter-to-quarter! This should really boost Q2 earnings.

The best global goldfundamental data is published by the World Gold Council, also on a quarterlybasis.  These Gold Demand Trends reportsare essential reading for all gold-stock speculators and investors, as theseminers are ultimately just leveraged plays on gold.  The latest GDT covering Q1’19 was released inearly May, with Q2’s due out in early August. One key number GDTs report is world gold mine production.

That happened to run 852.4metric tons in Q1, nearly a third of which came from the major gold miners of GDX.  Analyzing global gold mine production each quartersince 2010 reveals some fascinating quarter-to-quarter output trends.  Over the last 37 quarters, calendar Q1s haveseen gold mined average a sharp 7.2% QoQ plunge from the immediately-precedingcalendar Q4s!  Not a single Q1 sawsequential output growth.

From 2010 to 2019 Q1gold mined fell 7.2%, 6.9%, 7.6%, 11.2%, 8.8%, 3.3%, 8.7%, 5.7%, and 5.6% fromthe respective Q4s.  These drops and theiruniformity across radically-different gold-price environments is stunning.  For some reason the world’s gold mines sufferuniversal declines in their outputs early in calendar years.  Why?  Thiscurious industrywide Q1 production slump results from an interplay of several factors.

Most gold miners run theiraccounting on calendar years.  So earlyin new years they have new capital budgets to spend on maintaining and enhancingtheir existing operations.  If theytemporarily shut down their mills for repairs or minor upgrades, Q1s areusually when they do it.  Weather plays arole too, as the majority of the world’s gold mines are in the northern hemispherewith the majority of the world’s land masses.

Winter creates operationalchallenges for gold mines, ranging from extreme cold to heavy snow or rainsdepending on their latitudes and elevations. So in addition to short planned shutdowns to work on infrastructure,adverse weather can impair operational efficiencies.  But the main reason global gold-mine outputsplunge in Q1s is due to ore-grade-management decisions made by mine managersto maximize bonuses.

Gold deposits are nothomogeneous, ore grades vary widely within them.  So managers must choose which ore to mine,when to run it through their mills, and how to mix it with ores from other locations.  The mills that crush the gold-bearing rock intosmall-enough chunks to recover the metal have fixed capacities intonnage-per-day terms.  So the less goldcontained in the ore processed, the less gold the mines recover.

Mine managers often chooseto dig through lower-grade ores, or run lower-grade ores through their mills,in Q1s.  They save the higher-grade oresfor later in calendar years.  They often claimthese decisions are related to early-year capital budgets being spent to improveoutputs later in years.  But there’s probablymore to it, since this happens so universally across the world’s gold mines.  Incentives have to play a role.

Gold-mine managers are oftenpartially compensated based on how their stock prices are faring.  This is usually a big factor in annual bonusescalculated near year-ends.  These bonusesare the most-variable part of compensation, and can greatly boost income.  After long years of study and talking withsome of these guys, I’m convinced they choose to take any gold-output hitsearly in years to engineer strong finishes.

Q1 results are reportedby mid-Mays, a long way out from year-ends. That’s the least-beneficial time in bonus terms for strong output to booststock prices.  Q2 results released bymid-Augusts and Q3 results published by mid-Novembers are far-moreimportant.  So mine managers feed theirfixed-capacity mills better-grade ore mixes in Q2s and Q3s, after early-year maintenanceis finished and summer weather is favorable.

Thus in calendar Q2ssince 2010, global gold mine output according to the World Gold Council surgedan average of 5.4% sequentially from Q1s!  Over the past 9 years Q2s have seen huge QoQglobal-output gains of 6.7%, 7.7%, 6.3%, 7.1%, 6.1%, 5.7%, 0.7%, 4.9%, and3.4%.  There has not been a single downQ2 in this span despite wildly-different gold-price environments.  Such uniformity reveals deliberate planning.

Over roughly the past decade,world gold mine production has averaged -7.2% QoQ in Q1s, +5.4% in Q2s, anotherhefty +5.3% in Q3s, then just +0.5% in Q4s. That Q4 stalling is pretty telling too, as those Q4 results aretypically released by mid-Marches which doesn’t affect annual bonuses when thosequarters were underway.  The gold miners contrive their best output reporting from late Julies to mid-Novembers!

So in these upcoming Q2’19results, the gold miners are likely to report production about 5% higher than Q1’s!  That big sequential outputboost really increases overall corporate earnings.  And it has another key benefit of reducingall-in sustaining costs.  AISCs are calculatedby spreading the costs of gold mining across all ounces produced.  So the more gold mined, the lower the unitcosts of producing it that quarter.

A year ago in Q2’18,the GDX gold miners’ average AISCs dropped a big 3.2% sequentially from theprior quarter’s to $856 per ounce.  So itis certainly reasonable to expect Q2’19’s AISCs to retreat 3% or so from Q1’s$893, which yields $866 per ounce. Subtract that from Q2’19’s average gold price of $1309, and it yieldslikely earnings of $443 per ounce.  Thatis 8.0% higher quarter-on-quarter from Q1’s results!

That’s conservativetoo.  As detailed in my essay on the GDX gold miners’ Q1’19 results,that quarter’s average AISCs were skewed higher by a single anomalousoutlier.  That company expects costs to greatlyretreat in Q2.  Excluding it, the GDXgold miners averaged considerably-lower $874 AISCs in Q1.  A 3% reduction to that on higher Q2 output leavesan excellent $848 AISC target, implying big $461 profits!

That represents a major 12.4% quarter-on-quarter surge, which should excite tradersanytime.  And with gold-stock sentimentalready growing far more bullish thanks to gold’s bull-market breakout, there’sa good chance Q2 earnings’ positive psychological impact will be amplified.  As long as gold hangs in there and doesn’tsell off, the gold miners’ stocks have real potential to rally considerably on goodQ2 results.

A couple charts offersome quick perspective.  Gold’s breakout drovea major decisive upside breakout in gold stocks too as measured by their leading GDX benchmark.  That dominant ETF is rendered in blue here,superimposed over its key technical lines. As of the Wednesday data cutoff for this essay, GDX had powered 54.2%higher in 10.2 months in its upleg to date. But gold-stock prices still remain relatively low.

Mid-week GDX hit $27.09on close, its best levels in 2.8 years.  Butthat remains well below gold stocks’ bull-to-date peak of $31.32 in earlyAugust 2016.  The gold stocks ought to atleast exceed those levels, which is another 15.6% higher from here.  Good Q2 results interpreted through the lensof increasing sector bullishness should be enough to fuel a bull-marketbreakout.  Gold argues for highergold-stock levels.

Back in mid-2016 whenGDX peaked at $31.32, gold merely hit $1365 at best.  That was just after a quarter when the GDX goldminers’ AISCs averaged $886 per ounce. Gold was considerably higher this week, hitting $1425.  And it has averaged $1408 for nearly a monthsince its bull-market breakout.  So thehigher prevailing gold prices this summer, and lower AISCs, should support much-highergold-stock prices.

Showing just how stronggold stocks are and how unique today’s situation is, this last chart looks atgold stocks’ average performances in modern bull-market summers.  I explained this indexed chart indepth in an essay on goldsummer doldrums a couple weeks ago. The yellow lines show where the older HUI gold-stock index traded inpast modern gold-bull-market summers, and the red line averages them together.

This year’s action is renderedin dark blue, revealing gold stocks’ best summer by far since 2016 afterthis gold bull’s massive maiden upleg! In the middle of this week the HUI rocketed 32.3% higher summer-to-date,literally off this seasonal chart I’ve gradually built up over the years.  If there was ever a summer where gold stockscould punch out to new bull highs, this one is it.  Their upside momentum is incredibly strong.

All this gold-stockbullishness aside, it is always wise to be wary when everyone else is gettingexcited.  The potential for gold stocksto surge to new bull highs on good Q2 results is totally dependent on what golddoes over the coming 6 weeks or so. While gold has shown awesome resilience in consolidating high and mostlyholding $1400 over the past month, the gold selloff risk is high dueto gold-futures positioning.

I wrote a whole essaylast week explaining this in depth.  In anutshell, gold-futures speculators dominate short-term gold price action.  Their current bets on gold are excessively-bullish,warning that their capital firepower to buy gold is nearing exhaustion.  They are effectively all-in on long upsidebets, and all-out on short downside bets. That leaves them vast room to sell hard on the right catalyst, pushinggold sharply lower.

There’s a chance new-highpsychology can ignite enough investor gold buying to overpower and absorb anyspec gold-futures selling.  But realizegold-stock fortunes are still slaved to gold as always.  Gold has to stay high to support new gold-stockhighs.  If gold materially falters andslumps into a healthy pullback or correction within an ongoing bull, the goldstocks will follow it lower regardless of how good Q2 results prove.

Buying high on strong upsidemomentum is always tempting, as that’s when traders feel the best about anysector.  Bullishness and capital inflowssoar as stocks power higher.  But overtime far-larger gains are won by instead buying low, adding positions whensectors are out of favor.  Thelater you buy gold stocks in any upleg, the smaller their potential gains andthe higher the odds a major selloff is looming.

To multiply yourcapital in the markets, you have to trade like a contrarian.  That means buying low when few others arewilling, so you can later sell high when few others can.  In recent months well before gold’s breakout,we recommended buying many fundamentally-superior gold and silver miners in ourpopular weekly and monthly newsletters.  Mid-week their unrealized gains ran as highas 123.9%, 123.5%, and 116.5%!

To profitably trade high-potentialgold stocks, you need to stay informed about the broader market cycles thatdrive them.  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.  Subscribe today and take advantageof our 20%-off summer-doldrums sale!  Thebiggest gains are won by traders diligently staying abreast so they can ride entireuplegs.

Thebottom line is the gold miners’ just-starting Q2’19 earnings season shouldprove impressive.  That’s no thanks togold, as its awesome bull-market breakout came too late last quarter to push itsaverage price significantly higher.  Butthe gold miners are still likely to collectively report sharply-higher Q2output, which is normal after Q1’s deep production slump.  That will also naturally lead to proportionally-lowercosts.

Growingproduction combined with lower costs at slightly-higher gold prices shouldyield big profits growth for the gold miners. Their Q2 results will be more closely watched and better received since psychologyis shifting much more bullish in this sector. That should fuel big gold-stock buying as long as gold holds up.  The yellow metal has proven resilient so far,but faces an ominous overhang of gold-futures selling pressure.

Adam Hamilton, CPA

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