Gold Mining Stocks Q3' 2019 Fundamentals / Commodities / Gold and Silver Stocks 2019

The major gold minersjust enjoyed a phenomenal quarter for gold, which soared after its firstbull-market breakout in years.  Q3’19’s much-higherprevailing gold prices should’ve driven soaring earnings for the miners, due totheir big inherent profits leverage to gold. So this just-completed Q3 earnings season is the most important for thissector in a long time.  Did the goldminers’ fundamentals indeed radically improve?

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 $11.8b this week were a staggering 40.2x larger than the next-biggest 1x-long major-gold-miners ETF!  GDX is effectively this sector’s blue-chipindex.

It currently includes 45component 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 94.1% of GDX’s total weighting.  Last quarter they combined to mine 292.0metric tons of gold.  That was 33.3% ofthe aggregate world total in Q3’19 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 essential.

The major gold minersdominating GDX’s ranks are scattered around the world.  21 of the top 34 mainly trade in US stockmarkets, 5 in Australia, 6 in Canada, 1 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 larger 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 Q3 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 Q3’19 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 where companiesdidn’t separate out gold but lumped all production into gold-equivalent ounces,those GEOs are included instead.  Thenproduction’s absolute year-over-year change from Q3’18 is shown.

Next comes gold miners’most-important fundamental data for investors, cash costs and all-insustaining costs per ounce mined. The latter directly drive profitability which ultimately determinesstock prices.  These key costs are alsofollowed by YoY changes.  Last but notleast the annual changes are shown in operating cash flows generated, hard GAAPearnings, revenues, and cash 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.  The world’slarger gold miners certainly thrived in Q3 with much-higher gold prices, butthey continued to struggle with declining production and rising costs.  Still their fundamentals are the best they’vebeen in years with better gold levels, portending big future gains as gold’sbull continues marching higher on balance.

The major gold miners’claim to fame is their stock prices amplify rising gold prices, usuallyby 2x to 3x.  They are essentially aleveraged play on gold, so the only great time to own this sector is when goldis rallying and likely to continue.  Goldsurged 4.4% higher in Q3’19 after its first decisive breakout to newbull-market highs in 3.0 years in late June. GDX’s relative performance was poor, with a mere 4.5% gain in Q3.

That’s because gold’s strong32.4% upleg, the best yet in this secular bull, peaked in early September.  The gold-futures speculators who dominategold’s price action were effectively all-in longs and all-out shorts,their buying firepowerexhausted.  And as goes gold, so gothe gold stocks.  So as gold startedcorrecting into late September, GDX was dragged down with it.  That cycle timing masked major gains.

Q3-to-date by earlySeptember as gold crested, GDX had soared 21.1% higher to gold’s 10.2%.  That was normal 2.1x leverage.  GDX’s entire upleg peaking in early Septemberenjoyed massive 76.2% gains over 11.8 months! That made for better 2.4x upside leverage to gold’s 32.4% run, and showswhy traders are willing to put up with this sector’s considerable risks.  When gold rallies, wealth multiplies fast in gold stocks.

Gold’s average pricelast quarter near $1474 was up a stupendous 21.7% year-over-year from Q3’18’saverage!  Q3’19 also had the highest prevailingprices of gold’s 3.9-year-old secular bull by far, trouncing Q3’16’s $1334 andQ1’18’s $1329.  So the major gold minerscouldn’t ask for a better environment to put some big numbers on thefundamentals scoreboard!  They’re in realtrouble if they couldn’t thrive in Q3’19.

Before we dig in, theyear-over-year comparisons require some big adjustments.  This past year saw epic gold-stock mega-mergers.  In January 2019 the world’s second-largestgold miner Barrick Gold finished acquiring Randgold in a $6.5b deal.  That briefly made it the biggest goldminer.  But arch-rival Newmont Miningwasn’t ready to surrender the pole position, so it spent $10.0b buying Goldcorpconsummating in April.

Back in mid-February Iwrote an entire essay explainingthese mega-mergers and why they are bad for this sector.  That didn’t fix these miners’ inexorably-decliningproduction, just masked it for the first four quarters after the mergers.  And the new combined companies have such colossalmarket capitalizations that their huge inertia retards their upside potential.  Their GDX domination weighs on this entiresector.

Together the new NEMand GOLD command fully 21.9% of GDX’s capital, as much as the bottom 27 GDX componentscombined!  So when NEM and GOLD underperformbecause of their own issues, this whole sector lags.  If these mega-mergers aren’t adjusted for,they materially distort comparisons from Q3’18 to Q3’19.  So I combined these two sets of companies in Q3’18as if they had already merged.

Another problem is lazyCanadian managements who don’t respect their shareholders.  Both Wheaton Precious Metals and Detour Gold werewaiting until the last possible day legally to report their Q3 results, 45 daysafter quarter-end.  That happened to beafter this essay’s data cutoff of Wednesday evening.  So WPM and DGC numbers are excluded from Q3’18’sresults to keep year-over-year comparisons righteous.

In this modern era offully-automated real-time accounting systems, there are no excuses for delayingquarterly results and making shareholders wait. Those numbers should be released as soon as possible, when they arefresher.  Delaying them only makes traderswonder what those companies are trying to hide. I’m more wary of deploying capital in companies that continually dragtheir feet on crucial reporting.

Production is the lifebloodof gold mining, and the only thing the major gold miners can control.  While they are at the mercy of prevailinggold prices, they can grow their outputs through diligent planning and hard work.  In Q3’19 these top 34 GDX gold miners withoutthose couple Canadian stragglers produced 9,388k ounces of gold.  That was actually down 1.5% YoY from Q3’18’stotal, proving an outsized decline.

The major gold minershave long been struggling with relentlessly-shrinking production.  The world has been scoured for gold forcenturies, with the low-hanging fruit long since picked.  The scale of the major gold miners necessitatesthey look for large economically-viable gold deposits.  But those are getting both ever harder todiscover and increasingly expensive to develop. So the majors are failing to replace depletion.

According to the WorldGold Council’s comprehensive data, Q3’19 saw world gold mined drift 0.6% lowerYoY.  The majors’ production shrinkage was2.5x worse, despite them controlling most of the capital that is availablein this sector to bring new mines online! That 0.6% overall retreat was the worst performance in Q3 global gold outputin at least 9 years, buttressing peak-gold theories.  The majors are bearing the brunt.

Investors prize productiongrowth above everything else, so the gold miners growing their outputs areusually the best performers in stock-price terms.  That’s another reason why the majors’ stocksalmost always well-underperform their smaller mid-tier peers still able to growtheir production.  Provocatively thewhole decline in the GDX top 34’s production overwhelmingly comes from thosemega-merged gold miners.

Together the new monsterNewmont and Barrick saw their gold production plunge a miserable 9.1% YoY fromQ3’18 to Q3’19!  Without them, the restof these GDX top 34 excluding WPM and DGC saw their total gold output surge 6.8%higher YoY.  Despite squandering $16.5bof shareholder wealth to combine into behemoths, the mega-merged NEM and GOLDare deadweight dragging down this entire sector’s gains.

That’s the main reason GDX’sbrother GDXJ mid-tier gold miners’ ETF is so superior to GDX.  It excludes the biggest majors strugglingwith rapid depletion, enabling larger gains during gold uplegs.  Next week I’m going to extend this Q3’19 fundamentalanalysis to the top 34 GDXJminers like usual.  They are likelyto see much better collective results than the GDX majors.  Smaller miners’ growth outpaces depletion easier.

With the GDX top 34 majors’overall production slipping 1.5% YoY thanks to NEM and GOLD, the mining costscrucial for driving profitability should’ve risen proportionally.  Gold-mining costs are largely fixed quarterafter quarter, with production generally requiring the same levels ofinfrastructure, equipment, and employees. These big fixed costs are largely determined during mine-planningstages, and don’t change much.

That’s when engineersand geologists decide which gold-bearing ores to mine, how to dig to them, andhow to recover their gold.  The ongoingmining costs are spread across quarterly production, making gold output andunit costs usually inversely proportional.  The richer the gold ores fed throughfixed-capacity mills, the more gold produced. The more gold mined, the more ounces to bear those big fixed costs.

So lower gold output generallyleads to higher unit costs, pinching profits. Thus majors’ earnings potential is doubly compromised when theirgold production shrinks.  They have lessgold to sell, lowering profits.  And thatgold comes at higher costs, cutting earnings even more.  The drag Newmont and Barrick are exerting onthis sector with such massive production declines is enormous.  That’s reflected in the majors’ costs.

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 Q3’19 these top-34-GDX-component goldminers that reported cash costs averaged $679 per ounce.  That was a new high out of the 14 quarters I’verun this research thread now, since Q2’16.

Those cash costs wereup a sharp 7.6% YoY, far worse than inversely proportional to lower production. Barrick Gold was one of the culprits asits cash costs soared 21.0% from Q3’18, since Randgold which it bought was ahigh-cost producer.  South Africa’s HarmonyGold also saw cash costs surge to a crazy $1027 per ounce.  The once-world-leading South African goldmines are deteriorating with each passing year.

But despite gold majors’higher cash costs, that $679-per-ounce average was still far below Q3’19’sgreat average gold price of $1474.  Sothe gold miners, including the higher-cost ones, are certainly facing noexistential threats.  That sharp 21.7%YoY gain in average gold prices gives the major gold miners lots of breathingroom on the cost front.  They can alsomine lower-grade ores that previously weren’t profitable enough.

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 depleting deposits,mine-development and construction expenses, remediation, and mine reclamation.  They also include the corporate-leveladministration 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.

These GDX-top-34 gold minersreported average AISCs of $910 in Q3’19. That was up 3.7% YoY, and also the highest average AISC read seen inthose 14 quarters of doing this deep fundamental research.  Barrick Gold again led the way, with itsAISCs soaring 25.4% YoY thanks to its ill-advised mega-merger.  But AISCs generally rose across all these majors,which averaged hefty 8.0% YoY gains on that front.

That’s certainly not aproblem given the high prevailing gold prices though.  Compared to that huge 21.7%average-gold-price gain in Q3’19, 3.7%-higher all-in sustaining costs are minor.  And $910 per ounce isn’t much higher than theprevious 4 quarters’ $889 average among the GDX top 34.  As long as gold-price appreciation far outpacesrising production costs, the gold miners’ great profits leverage to goldremains intact.

The contrast between Q2’19and Q3’19 on this sector’s potential earnings is vast.  Gold only averaged $1309 in Q2, which impliedmajor-gold-miner profit margins of $414 per ounce at that quarter’s averageAISCs of $895.  The very next quarter afterin Q3, that $1474 average gold price coupled with that $910 average AISC yielded$564 in implied profits.  That’s up a staggering 36.2% sequentially quarter-on-quarter!

That amplifies theaverage gold price’s 12.6% QoQ gain by 2.9x, which is excellent profits leverage.  In year-over-year terms, the major goldminers’ implied profits growth was even more amazing.  Q3’18 saw average gold prices of just $1211,while the GDX top 34’s AISCs averaged $877. That left room for just $334 per ounce of earnings.  In Q3’19, that exploded 68.9% higher YoY!  Talk about epic profits growth.

Such huge gains arefantastic absolutely, but also relatively. Overall US corporate earnings have actually been shrinking, making goldminers look all the more impressive.  InQ3’19, the 500 elite companies of the flagship US S&P 500 stock index sawtheir overall profits decline about 2.5%.  So investors ought to seek out any earningsgrowth, and the numbers the major gold miners are putting up are phenomenal.

In wading through theGDX majors’ quarterlies this past week, another serious problem becameevident.  Hedging!  Investors and speculators buy gold stocksbecause they want to leverage gold’s gains. But some gold miners, particularly the Australian ones, are substantial-to-heavyhedgers.  They have sold big fractions oftheir future gold outputs, and most of those hedges are way underwater after Q3’sbig gold surge.

While Aussie gold-minerreporting is limited for Q3s since it is done on half-years, Saracen MineralHoldings did publish its ugly hedge book. SAR produced 96.3k ounces of gold in Q3’19, but 80.0k of that was deliveredto close out hedges at an average price of A$1863 per ounce.  That translates into US$1278, 13% below Q3’s US$1474average gold price!  That robbed SARshareholders of almost all their due gains.

SAR’s hedgebookcontinues out for the coming 12 quarters, with the next 4 committing 51.0k ouncesat A$1866, 47.0k at A$1859, 48.5k at A$1809, and 45.0k ounces at A$1827.  That means SAR will have to sell about halfits production at US$1280, US$1275, US$1240, and US$1253 over the next 4 quarters.  That is assuming Q3’19’s average exchange ratespersist.  Hedging locks in big losses during gold-bull uplegs!

So with gold poweringhigher again after that several-year hiatus, it is more important than ever tolook into the hedgebooks of any gold miner you are interested in.  Hedging sells away gold’s future upsidepotential, and is incredibly irresponsible. Gold-miner shareholders own these stocks because they want to ride gold’sbull higher.  Managements that choose to materiallyhedge destroy that, avoid them like the plague!

As you’d expect with Q3’19’sfar-higher prevailing gold prices, the hard GAAP accounting results of the GDXmajors were impressive.  Their totalrevenues without those Canadian stragglers soared 31.8% YoY to $12.2b lastquarter!  That is even still outsizedconsidering average gold’s 21.7% YoY gains and the GDX top 34’s 1.5% totalproduction decline.  Those mega-mergers helpexplain that sales outperformance.

When Barrick and Newmontgobbled up 2 large peers, it made room for 2 new gold miners to rise into theGDX-top-34 ranks.  These gold majors’ operating-cash-flowgeneration in Q3’19 was massive, soaring an incredible 56.7% YoY to $4.7b.  The more capital their operations spin off,the more they can spend on expanding existing mines and building or buying newones.  Strong OCFs are crucial for futuregrowth potential.

The major gold miners wastedno time in spending that cash windfall too, funding operational upgrades.  Their collective total cash hoard declined 5.6%YoY to $10.8b without WPM and DGC.  Interestinglymuch of that came in NEM and GOLD, where total cash fell 7.7% YoY.  The rest of the GDX top 34 saw a more modest3.7% decline in their treasuries.  Lastquarter’s greatest financial results came on the bottom line.

The GDX-top-34 goldmajors’ total GAAP profits in Q3’19 weighed in at an astounding $5.3b, whichwas radically higher than Q3’18’s $566m loss! That’s certainly an epic sector turnaround.  But this comparison is muddy, as bottom-line earningsalso include unusual charges and gains in addition to normal operatingprofitability.  We can adjust for thebiggest of these to get a clearer picture of how the majors are faring.

Q3’18’s low average goldprices led to several major impairment charges, writing down the carrying valueof mines on companies’ books.  Newmont,Barrick, and Yamana Gold wrote off $366m, $431m, and $89m in last year’scomparable quarter.  Add those back in,and the GDX-top-34 gold miners earned a lot closer to $320m in Q3’18.  Q3’19 swung to the other extreme, with monsterone-time gains shunted into profits.

In this just-finishedreporting quarter, NEM and GOLD reported mind-boggling $2366m and $1852m gainson revaluing gold mines for a joint venture in Nevada they are doing!  GOLD had an additional $872m gain onreversing an impairment charge.  Yamana hada $273m gain for selling a mine, while Centerra Gold wrote off $231m due toproblems getting sufficient water at one of its gold mines.  Those are big numbers.

Net all that out, andthe GDX top 34’s GAAP earnings in Q3’19 were closer to $170m.  That implies their actual operatingprofitability somehow plunged about 47% YoY last quarter!  That is shockingly bad, but oversimplified.  Once again the real problem is Newmont andBarrick, with their colossal mega-merger net-income distortions.  Excluding them alone, the rest of the GDX top34’s profits were $689m in Q3’19.

That was up massivelyfrom their $54m loss in Q3’18.  The moralof this story?  These new monster goldminers resulting from those mega-mergers are really retarding the rest ofthis sector.  Their production israpidly shrinking, their costs are rising, and they are really damaging theirshareholders’ potential returns.  Theywould be far better served owning smaller mid-tier gold miners actually able togrow their outputs.

GDX contains plenty ofgreat gold miners, but its overall upside potential is greatly impaired by the largestmajor gold miners that dominate it.  Theycontinue to struggle to grow their production, so smart investors seek out smallermid-tier and junior gold miners with superior fundamentals.  While some are included in GDX, their relatively-lowweightings greatly dilute their potential gains.  A simple example illustrates this.

NEM is GDX’s largestcomponent with a massive 11.1% weighting. In Q3 its gold production fell 8.1% YoY, pushing AISCs 6.5% higher to$987 per ounce.  Meanwhile GDX’s 34th-largestcomponent Torex Gold is just 0.7% of that ETF. But in Q3 its gold output soared 36.1% YoY, driving its AISCs 30.2%lower to $675 per ounce.  Naturally TXG’sstock price radically outperformed NEM’s during gold stocks’ latest upleg.

Between mid-August 2018to early-September 2019, TXG rocketed 171.6% higher!  But in roughly this same span, NEM was a totaldog rallying a mere 38.4% at best. Imagine how much mightier GDX’s big 76.2% upleg would’ve been had ailingmega-miners like Newmont not been weighing it down.  Both investors and speculators alike can dofar better picking superior individual gold stocks than settling for GDX.

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The bottomline is gold majors generally did report outstanding results in Q3 on much-higherprevailing gold prices.  Revenues andoperating-cash-flow generation soared, but earnings were distorted by manylarge one-off items.  Overall the majorgold miners’ implied profitability based on the average gold price and theiraverage all-in sustaining costs blasted higher, which portends far betterfundamentals going forward.

But GDXcontinues to be weighed down by the largest gold miners, which are still seeingrapid production declines even after their insanely-expensive mega-mergers.  That leaves smaller mid-tier gold miners withsuperior fundamentals far more attractive for future upside potential.  As gold’s breaking-out secular bull continuespowering higher on balance in coming years, the mid-tiers will enjoy the lion’sshare of the gains.

Adam Hamilton, CPA

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