Gold Miners’ Q4’21 Fundamentals

The gold miners’ stocks just surged to a major upside breakout, really ramping up traders’ interest in this small contrarian sector.  Capital is flowing back into gold stocks to chase their strong upward momentum, which fuels increasing bullishness.  That buying is fundamentally-justified based on the major gold miners’ recently-reported Q4’21 results.  This latest earnings season reveals how gold stocks are actually faring.

With Q1’22 already winding down, looking at the prior quarter’s operational and financial reports seems dated.  But because most companies run on calendar years, the Q4 reporting deadlines are extended.  In the US companies don’t have to report full-year 10-K results until 60 days after quarter-ends, compared to 40 days for 10-Q quarterlies.  In Canada, the epicenter of the gold-mining universe, year-ends extend to 90 days!

So mid-March is about the earliest that enough major gold miners have reported full Q4 results to analyze them.  Right after each quarterly earnings season, I dig into the latest reports from the top-25 component companies of the leading GDX VanEck Gold Miners ETF.  This benchmark dominates its sector, with $14.8b in net assets mid-week running 26.9x larger than the next-biggest 1x-long major-gold-miners-ETF competitor!

GDX has blipped up on far more speculators’ and investors’ radars after blasting 32.8% higher between late January to early March!  Part of a larger upleg born in late September, that big-and-fast rally achieved a major upside breakout for gold stocks.  Yet with 34.6% gains at best, their latest upleg remains small.  GDX’s five previous uplegs during this secular gold bull averaged massive 85.0% gains before peaking!

Gold stocks are ultimately leveraged plays on gold, with GDX majors tending to amplify gold’s gains by 2x to 3x.  Given the extraordinarily-bullish fundamental backdrop for the yellow metal, this latest gold-stock upleg ought to grow much larger than usual before giving up its ghost.  Chief among gold’s bullish drivers is this raging inflation unleashed by the profligate Fed’s extreme money printing, which is wildly-unprecedented.

In just 24.4 months since March 2020’s pandemic-lockdown stock panic, the Fed ballooned its balance sheet by a truly-insane 114.3% or $4,752b!  Effectively more than doubling the US-dollar supply is why inflation is out-of-control.  Even lowballed government-reported inflation per the CPI is soaring 7.9% year-over-year, its hottest increase since January 1982!  Americans increasingly realize the reality is even worse.

During the last similar inflation super-spikes in the 1970s, gold prices nearly tripled during the first then more than quadrupled in the second!  The gold miners’ stocks shot stratospheric on that, generating life-changing wealth for contrarians deployed in them.  Gold has always been the ultimate inflation hedge, as its supply growth is hard-limited by geology unlike fiat-money supplies.  Gold-stock earnings amplify gold gains.

The Fed’s crazy inflation problem will persist until its QE4-mushroomed money supply radically shrinks and the Fed hikes its federal-funds rate well above headline inflation.  But either would utterly crash these QE-levitated bubble-valued stock markets, forcing the US economy into a severe recession if not a full-blown depression.  The Fed won’t risk that, so gold and gold stocks have a long inflation-fueled runway ahead.

Speculators and investors wanting to multiply wealth in this high-potential sector should understand gold miners’ fundamentals, which are only revealed in quarterly earnings seasons.  I’ve painstakingly analyzed the GDX-top-25 gold miners’ latest results for 23 quarters in a row now.  Including the world’s largest gold miners, they accounted for 88.5% of this ETF’s total weighting mid-week.  That’s certainly a commanding sample.

This table summarizes the operational and financial highlights from the GDX top 25 during Q4’21.  These gold miners’ stock symbols aren’t all US listings, and are preceded by their rankings changes within GDX over this past year.  The shuffling in their ETF weightings reflects shifting market caps, which reveal both outperformers and underperformers since Q4’20.  Those symbols are followed by their current GDX weightings.

Next comes these gold miners’ Q4’21 production in ounces, along with their year-over-year changes from the comparable Q4’20.  Output is the lifeblood of this industry, with investors generally prizing production growth above everything else.  After are the 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 a bunch of hard accounting data reported to securities regulators, quarterly revenues, earnings, operating cash flows, and resulting cash treasuries.  Blank data fields mean companies hadn’t reported that particular data as of the middle of this week.  The annual changes aren’t included if they would be misleading, like comparing negative numbers or data shifting from positive to negative or vice versa.

Last quarter proved somewhat challenging for gold miners, with mounting inflationary cost pressures and lower average gold prices squeezing profitability.  Yet the major gold miners are still earning money hand-over-fist with these high prevailing gold prices.  And profits will power dramatically higher as the Fed’s colossal deluge of freshly-conjured US dollars continues to bid up all prices in coming years, including gold’s.

After actively speculating in gold stocks and writing popular financial newsletters about that for over two decades now, not much in this sector surprises me.  But the GDX top 25’s Q4’21 results still managed to on multiple fronts.  They were solid if not good, but still below my expectations given what was happening in gold.  The gold miners earned nice profits, but those were hobbled by costs surging far faster than usual.

Starting on this table’s left and working our way to the right, GDX’s holdings have become increasingly-concentrated.  This leading sector ETF’s top-25 components accounting for 88.5% of its weighting is just shy of the 23-quarter high of 88.6% seen just after Q1’20’s earnings season.  But the top-five companies alone commanding 51.9% of this ETF is unprecedented in this dataset, GDX has become really top-heavy!

Another major-gold-stock mega-merger is one reason.  Back in late September, Canadian major Agnico Eagle Mines announced it would purchase smaller rival Kirkland Lake Gold for $10.7b in stock.  The latter had the best fundamentals by far among major gold miners, so it getting taken out was a sad day for gold investors.  That old KL ranked below the GDX top five, but is now effectively included in AEM’s gorged weighting.

More importantly with gold miners’ latest bull upleg remaining small and young, much of the recent capital inflows have poured into ETFs led by GDX.  The major gold stocks haven’t yet run high-enough for long-enough to generate sufficient bullishness to fuel big individual-stock buying by institutional and individual investors.  Differential ETF-share demand requires ETFs to buy underlying stocks proportionally to their weightings.

Thus ETF capital inflows mostly benefit their larger holdings, growing them even bigger.  That leaves less money moving into their smaller holdings, which are relatively-starved for capital.  Outsized ETF buying exceeding individual-stock buying leaves sectors increasingly-concentrated, which boosts selloff risks.  The bigger any company becomes compared to its peers, the more sector damage a selloff in it will wreak.

GDX’s high concentration risk makes it even less attractive compared to its little-brother GDXJ VanEck Junior Gold Miners ETF.  Actually mostly a mid-tier gold-stock ETF, I’ll analyze its top-25 stocks’ latest Q4’21 results in next week’s essay.  The mid-tier and junior gold miners have long been superior to the majors for stock-price-upside potential.  They have better production growth along with smaller market caps.

Mid-tier gold miners produce between 300k to 1,000k ounces per year, with juniors mining less and majors mining more.  Super-majors double the latter, running at 2,000k+ ounces of annual output.  The higher gold miners’ production bases, the harder it is for them to outpace resource depletion and grow.  That leaves their stocks less desirable to investors, since production growth heavily fuels stock-price gains.

In Q4’21 these GDX-top-25 gold miners produced 8,352k ounces, which fell a rather-sharp 6.2% YoY.  That would be ominous if it wasn’t skewed by that AEM-KL mega-merger.  This deal wasn’t consummated until early February, so AEM’s Q4 production didn’t yet include the 380.5k ounces KL mined last quarter.  If that is added on to AEM’s 501.9k, the GDX top 25’s collective output only shrunk a much-milder 1.9% YoY.

And with Kirkland Lake Gold gobbled up by Agnico Eagle, China’s Zhaojin Mining climbed into the GDX-top-25 ranks to take its place.  Unfortunately it and its larger compatriot Zijin Mining follow that country’s terrible financial-reporting standards.  Represented by their numeric Hong Kong Stock Exchange symbols in GDX, these major Chinese gold miners rarely report anything timely in English.  So they have no data.

Over the years I’ve even limped through their Chinese filings, both using translating software and having a Chinese friend wade through them with me.  While half-year financial statements are presented, they usually don’t include gold production or costs.  So had another GDX component actually reporting output taken the 25th-largest GDX spot on KL’s demise, the major gold miners’ collective output would’ve been flatter.

But stable production still isn’t growth, which is what investors prize most since it leads to bigger profits and higher share prices.  Provocatively way back in Q2’16 when I launched this quarterly deep-research thread, the GDX-top-25 gold miners produced 8,788k ounces of gold.  Fully 5.8 years later in Q4’21, that was still running 8,733k with KL added back in.  The major gold miners have long failed on the growth front!

With inflation raging across the world thanks to the epic money printing by the Fed and other big central banks, I was really attuned to gold miners lamenting it in their Q4’21 results.  Higher general price levels were indeed cited quite a bit as a key reason production costs are climbing.  But the actual magnitude of cost increases was shocking.  Q4’21 saw some of the biggest mining-cost jumps in at least the last 23 quarters!

Normally per-ounce mining costs are generally inversely-proportional to gold production.  That’s because gold mines’ total operating costs are largely fixed during planning stages, when designed throughputs for mills that process gold-bearing ores are determined.  Their nameplate capacities don’t change quarter-to-quarter, requiring similar levels of infrastructure, equipment, and employees to keep running at full-speed.

So the only real variable driving quarterly gold production is the ore grades fed into the mills.  Those vary widely even within individual gold deposits.  Richer ores yield more ounces to spread the big fixed costs of mining across, lowering unit costs and boosting profitability.  So with the GDX top 25’s output slumping between 2% to 6% last quarter depending on KL’s inclusion or not, costs should’ve climbed in a similar range.

Cash costs are the classic measure of gold-mining costs, including all cash expenses necessary to mine each ounce of gold.  But they are misleading as a true cost measure, excluding the big capital needed to explore for gold deposits and build mines.  So cash costs are best viewed as survivability acid-test levels for the major gold miners.  They illuminate the minimum gold prices necessary to keep the mines running.

These elite GDX-top-25 major gold miners reporting cash costs last quarter averaged a staggering $853 per ounce, which soared 21.8% YoY!  That dwarfed the previous high over the last 23 quarters of $773 in Q1’21.  While the raging inflation certainly contributed to higher costs, thankfully a couple of ugly outliers really skewed this metric high.  They were First Majestic Silver’s extreme $1,624 and Harmony Gold’s $1,382.

For years the major silver miners have been increasingly diversifying into gold, as it simply has far-better mining economics than silver.  Last year AG purchased its first pure gold mine to add to its stable of three silver mines, but that operation has been plagued with super-high costs.  HMY’s old and very-deep South African gold mines are ever-more-expensive to run.  Excluding these, GDX-top-25 cash costs averaged $780.

All-in sustaining costs are far superior than cash costs, and were introduced by the World Gold Council in June 2013.  They add on to cash costs everything else that is necessary to maintain and replenish gold-mining operations at current output tempos.  AISCs give a much-better understanding of what it really costs to maintain gold mines as ongoing concerns, and reveal the major gold miners’ true operating profitability.

The GDX-top-25 major gold miners’ AISCs also blasted up 14.5% YoY in Q4’21 to hit $1,188!  That too was the last 23 quarters’ peak, and a new record.  The previous high-water mark of $1,085 came in the preceding Q3’21, where inflationary cost pressures were mounting.  But these AISCs were again skewed high by those same two outliers First Majestic Silver and Harmony Gold, which reported $2,048 and $1,660!

That South African major’s AISCs aren’t heading lower, with full-year-2022’s forecast near a midpoint of $1,652.  But AG’s experienced management is making progress reining in costs at its new gold mine.  They are projected to average a still-high-but-much-better $1,555 this year.  Excluding AG and HMY, the rest of the GDX top 25 averaged $1,114 AISCs.  Still a record, those would’ve climbed a more-reasonable 7.4% YoY.

I had expected the major gold miners’ all-in sustaining costs to come in more in-line with their four-quarter average of $1,057.  Had GDX-top-25 production been stable and cost inflation run around 3.0% YoY, their AISCs would’ve shaken out around $1,088 per ounce.  That’s fully $100 lower than the actual.  Next week’s GDXJ essay will show whether these surging costs are also infecting the mid-tier and junior gold miners.

Gold-mining profits are the difference between prevailing gold prices and mining costs.  So higher costs naturally lead to lower earnings.  The best sector proxy for gold-mining profitability subtracts GDX-top-25 AISCs from quarterly-average gold levels.  Last quarter the latter came in at $1,796, down 4.3% YoY.  With major-gold-miner AISCs soaring 14.5% YoY to that lofty $1,188, sector earnings ran $608 per ounce.

That plunged 27.5% YoY, the worst drop over the last 23 quarters of this research thread.  That eclipsed the preceding Q3’21’s 20.4%-YoY decline.  So higher mining costs really slice into earnings, which sounds bad.  And unfortunately GDX-top-25 AISCs aren’t expected to improve much this year, higher costs are here to stay.  Fully 17 of these majors provided 2022 AISC guidance, which averaged $1,159 per ounce.

That’s still hovering near Q4’21’s record $1,188 read.  But higher mining costs certainly aren’t bearish for gold miners with the yellow metal’s prices remaining high.  Those $608-per-ounce profits these elite miners were collectively earning last quarter remained the seventh-highest on record, only behind the preceding six quarters.  And those averaged $777 of unit earnings, not greatly higher than last quarter’s levels.

Before Q2’20, peak GDX-top-25 per-ounce profits ran $591 in Q3’19.  And even with higher mining costs, the same raging inflation forcing gold much higher will colossally boost gold-mining earnings.  Remember gold nearly tripled and more than quadrupled during the last similar inflation super-spikes in the 1970s.  Today’s current one started accelerating a year ago in April, when the headline CPI first exceeded 4.0% YoY.

That month gold averaged $1,761, so at best by early March it had only rallied 16.5% so far.  Because the gold market today is far larger than during the 1970s, gold prices probably won’t triple or quadruple again.  But they ought to at least double, implying $3,500+ gold before the Fed unwinds enough QE money and hikes rates high enough to slay its inflation monster.  Even at much-higher average AISCs, profits would be huge!

As long as gold’s secular bull keeps powering higher on balance, so will gold miners’ earnings.  Ultimately stock prices gravitate to some reasonable multiple of underlying corporate profits.  And with gold-mining earnings amplifying higher gold prices, way-higher profits are coming as gold continues marching higher.  This is the strong fundamental foundation undergirding gold stocks’ secular bull, which will grow way bigger.

On the hard-accounting front, the GDX-top-25 gold miners’ $16.9b of total revenues reported last quarter fell 5.7% YoY.  That’s congruent with their 6.2%-lower output and 4.3%-lower average gold prices.  But sales were actually better, partially because Chinese gold miner Zhaojin now included in the GDX top 25 doesn’t report them.  The great British major Endeavour Mining also dragged its feet on reporting Q4 results.

Those finally came in after the Wednesday-evening data cutoff for this essay.  EDV’s Q4’21 revenues ran $697m.  With those added in, the GDX-top-25 sales only retreated 1.8% YoY to $17.5b.  That’s pretty impressive given the lower gold production and average gold prices last quarter.  But actual bottom-line earnings under Generally Accepted Accounting Principles or other countries’ equivalents fared much worse.

The $2,552m earned by these elite major gold miners plunged 47.8% YoY!  But that was again distorted by unusual items.  Last quarter’s included an $874m reclamation-and-remediation charge by Newmont Mining, a $106m noncash writedown on a mine by Kinross Gold, and a $301m loss on discontinued operations by Buenaventura.  These one-time charges dragged the overall GDX-top-25 profits sharply-lower.

Those were partially offset by big gains including a $157m impairment reversal at Wheaton Precious Metals and a $286m gain at Centerra Gold on a similar reversal that also created a deferred tax asset.  Net these out, and GDX-top-25 operating earnings last quarter were closer to $3,090m.  That was only down 24.5% YoY from Q4’20’s similar earnings running near $4,093m adjusted for big one-time unusual items.

So the major gold miners’ cleaner operating earnings fared better in Q4’21 than that sector unit-earnings proxy of average gold prices less average all-in sustaining costs.  Gold-miner valuations in trailing-twelve-month price-to-earnings-ratio terms still generally remained quite low this week, with seven of these GDX-top-25 companies just trading under 20x.  Gold mining remains very profitable despite those climbing costs!

That was also evident in these major gold miners’ cash flows generated from operations only dropping a milder 22.2% YoY to $6,488m.  If Endeavour Mining’s straggling OCFs are added in, that moderates to a 17.9%-YoY decline to $6,844m.  That’s again reasonable based on the GDX top 25’s lower production coupled with lower average gold prices.  These strong operating cash flows helped keep treasuries full.

The GDX top 25 reported cash balances totaling $21.6b ending Q4’21, which slumped 5.3% YoY.  But that was only because the comparable Q4’20 saw the highest on record of $22.8b!  So the major gold miners are flush with cash from their hefty profitability over the past seven quarters, starting when gold’s average price first surged over $1,700.  Their big warchests should fund plenty of expansion in coming years.

Operating at major and vast super-major scales, the GDX-top-25 gold miners have long struggled to grow their production organically.  While they do expand existing mines and build new ones, that growth is usually outpaced by depletion at existing mines.  Most of majors’ output growth comes from buying other mines and mining companies, which really benefits the smaller mid-tiers and juniors feeding gold’s supply pipeline.

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The bottom line is the major gold miners continued to thrive fundamentally in Q4, despite higher costs fueled by the raging inflation unleashed by the Fed and other big central banks.  These companies still earned good profits last quarter with prevailing gold prices remaining high.  While inflation-goosed mining costs are here to stay, gold’s coming gains on that same monetary deluge will drive mining profits way higher.

With its hard-limited supply growth, gold has always been the ultimate inflation hedge.  Yet it has barely budged so far in the Fed’s latest inflation super-spike, implying much catch-up rallying to do.  Gold prices nearly tripled and more than quadrupled during the last inflation super-spikes in the 1970s, launching gold miners’ earnings and stock prices stratospheric.  A similar fundamental windfall should play out in this inflation.

Adam Hamilton, CPA

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