Gold Miners’ Q3’19 Fundamentals

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

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Required by the US Securities and Exchange Commission, these 10-Qs and 10-Ks contain the best fundamental data available to traders. They dispel all the sentiment distortions inevitably surrounding prevailing stock-price levels, revealing corporations’ underlying hard fundamental realities.

The definitive list of major gold-mining stocks to analyze comes from the world’s most-popular gold-stock investment vehicle, the GDX VanEck Vectors Gold Miners ETF. Launched way back in May 2006, it has an insurmountable first-mover lead. GDX’s net 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-chip index.

It currently includes 45 component stocks, which are weighted in proportion to their market capitalizations. This list is dominated by the world’s largest gold miners, and their collective importance to this industry cannot be overstated. Every quarter I dive into the latest operating and financial results from GDX’s top 34 companies. That’s simply an arbitrary number that fits neatly into the tables below, but a commanding sample.

As of this week these elite gold miners accounted for fully 94.1% of GDX’s total weighting. Last quarter they combined to mine 292.0 metric tons of gold. That was 33.3% of the aggregate world total in Q3’19 according to the World Gold Council, which publishes comprehensive global gold supply-and-demand data quarterly. So for anyone deploying capital in gold or its miners’ stocks, watching GDX miners is essential.

The major gold miners dominating GDX’s ranks are scattered around the world. 21 of the top 34 mainly trade in US stock markets, 5 in Australia, 6 in Canada, 1 in China, and 1 in the United Kingdom. GDX’s geopolitical diversity is excellent for investors, but makes it more difficult to analyze and compare the larger gold miners’ results. Financial-reporting requirements vary considerably from country to country.

In Australia, South Africa, and the UK, companies report in half-year increments instead of quarterly. The big gold miners often publish quarterly updates, but their data is limited. In cases where half-year data is all that was made available, I split it in half for a Q3 approximation. While Canada has quarterly reporting, the deadlines are looser than in the States. Some Canadian gold miners drag their feet in getting results out.

While it is challenging bringing 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 available operational 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 reported that data as of this Wednesday.

The first couple columns of these tables show each GDX component’s symbol and weighting within this ETF as of this week. While most of these stocks trade on US exchanges, some symbols are listings from companies’ primary foreign stock exchanges. That’s followed by each gold miner’s Q3’19 production in ounces, which is mostly in pure-gold terms. That excludes byproduct metals often present in gold ore.

Those are usually silver and base metals like copper, which are valuable. They are sold to offset some of the considerable expenses of gold mining, lowering per-ounce costs and thus raising overall profitability. In cases where companies didn’t separate out gold but lumped all production into gold-equivalent ounces, those GEOs are included instead. Then production’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-in sustaining costs per ounce mined. The latter directly drive profitability which ultimately determines stock prices. These key costs are also followed by YoY changes. Last but not least the annual changes are shown in operating cash flows generated, hard GAAP earnings, revenues, and cash on hand with a couple exceptions.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying data rather than weird or misleading percentage changes. Companies with symbols highlighted in light-blue have newly climbed into the elite ranks of GDX’s top 34 over this past year. This entire dataset together is quite valuable.

It offers a fantastic high-level read on how the major gold miners are faring fundamentally as an industry. The world’s larger gold miners certainly thrived in Q3 with much-higher gold prices, but they continued to struggle with declining production and rising costs. Still their fundamentals are the best they’ve been in years with better gold levels, portending big future gains as gold’s bull continues marching higher on balance.

The major gold miners’ claim to fame is their stock prices amplify rising gold prices, usually by 2x to 3x. They are essentially a leveraged play on gold, so the only great time to own this sector is when gold is rallying and likely to continue. Gold surged 4.4% higher in Q3’19 after its first decisive breakout to new bull-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 strong 32.4% upleg, the best yet in this secular bull, peaked in early September. The gold-futures speculators who dominate gold’s price action were effectively all-in longs and all-out shorts, their buying firepower exhausted. And as goes gold, so go the gold stocks. So as gold started correcting into late September, GDX was dragged down with it. That cycle timing masked major gains.

Q3-to-date by early September 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 September enjoyed massive 76.2% gains over 11.8 months! That made for better 2.4x upside leverage to gold’s 32.4% run, and shows why traders are willing to put up with this sector’s considerable risks. When gold rallies, wealth multiplies fast in gold stocks.

Gold’s average price last quarter near $1474 was up a stupendous 21.7% year-over-year from Q3’18’s average! Q3’19 also had the highest prevailing prices of gold’s 3.9-year-old secular bull by far, trouncing Q3’16’s $1334 and Q1’18’s $1329. So the major gold miners couldn’t ask for a better environment to put some big numbers on the fundamentals scoreboard! They’re in real trouble if they couldn’t thrive in Q3’19.

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

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

Together the new NEM and GOLD command fully 21.9% of GDX’s capital, as much as the bottom 27 GDX components combined! So when NEM and GOLD underperform because 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 Q3’18 as if they had already merged.

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

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

Production is the lifeblood of gold mining, and the only thing the major gold miners can control. While they are at the mercy of prevailing gold prices, they can grow their outputs through diligent planning and hard work. In Q3’19 these top 34 GDX gold miners without those couple Canadian stragglers produced 9,388k ounces of gold. That was actually down 1.5% YoY from Q3’18’s total, proving an outsized decline.

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

According to the World Gold Council’s comprehensive data, Q3’19 saw world gold mined drift 0.6% lower YoY. The majors’ production shrinkage was 2.5x worse, despite them controlling most of the capital that is available in this sector to bring new mines online! That 0.6% overall retreat was the worst performance in Q3 global gold output in at least 9 years, buttressing peak-gold theories. The majors are bearing the brunt.

Investors prize production growth above everything else, so the gold miners growing their outputs are usually the best performers in stock-price terms. That’s another reason why the majors’ stocks almost always well-underperform their smaller mid-tier peers still able to grow their production. Provocatively the whole decline in the GDX top 34’s production overwhelmingly comes from those mega-merged gold miners.

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

That’s the main reason GDX’s brother GDXJ mid-tier gold miners’ ETF is so superior to GDX. It excludes the biggest majors struggling with rapid depletion, enabling larger gains during gold uplegs. Next week I’m going to extend this Q3’19 fundamental analysis to the top 34 GDXJ miners like usual. They are likely to 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 costs crucial for driving profitability should’ve risen proportionally. Gold-mining costs are largely fixed quarter after quarter, with production generally requiring the same levels of infrastructure, equipment, and employees. These big fixed costs are largely determined during mine-planning stages, and don’t change much.

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

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

There are two major ways to measure gold-mining costs, classic cash costs per ounce and the superior all-in sustaining costs per ounce. Both are useful metrics. Cash costs are the acid test of gold-miner survivability in lower-gold-price environments, revealing the worst-case gold levels necessary to keep the mines running. All-in sustaining costs show where gold needs to trade to maintain current mining tempos indefinitely.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of gold, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q3’19 these top-34-GDX-component gold miners that reported cash costs averaged $679 per ounce. That was a new high out of the 14 quarters I’ve run this research thread now, since Q2’16.

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

But despite gold majors’ higher cash costs, that $679-per-ounce average was still far below Q3’19’s great average gold price of $1474. So the gold miners, including the higher-cost ones, are certainly facing no existential threats. That sharp 21.7% YoY gain in average gold prices gives the major gold miners lots of breathing room on the cost front. They can also mine lower-grade ores that previously weren’t profitable enough.

Way more important than cash costs are the far-superior all-in sustaining costs. They were introduced by the World Gold Council in June 2013 to give investors a much-better understanding of what it really costs to maintain gold mines as ongoing concerns. AISCs include all direct cash costs, but then add on everything else that is necessary to maintain and replenish operations at current gold-production levels.

These additional expenses 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-level administration expenses necessary to oversee gold mines. All-in sustaining costs are the most-important gold-mining cost metric by far for investors, revealing gold miners’ true operating profitability.

These GDX-top-34 gold miners reported average AISCs of $910 in Q3’19. That was up 3.7% YoY, and also the highest average AISC read seen in those 14 quarters of doing this deep fundamental research. Barrick Gold again led the way, with its AISCs 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 a problem 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 the previous 4 quarters’ $889 average among the GDX top 34. As long as gold-price appreciation far outpaces rising production costs, the gold miners’ great profits leverage to gold remains intact.

The contrast between Q2’19 and Q3’19 on this sector’s potential earnings is vast. Gold only averaged $1309 in Q2, which implied major-gold-miner profit margins of $414 per ounce at that quarter’s average AISCs of $895. The very next quarter after in 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 the average gold price’s 12.6% QoQ gain by 2.9x, which is excellent profits leverage. In year-over-year terms, the major gold miners’ 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 are fantastic absolutely, but also relatively. Overall US corporate earnings have actually been shrinking, making gold miners look all the more impressive. In Q3’19, the 500 elite companies of the flagship US S&P 500 stock index saw their overall profits decline about 2.5%. So investors ought to seek out any earnings growth, and the numbers the major gold miners are putting up are phenomenal.

In wading through the GDX majors’ quarterlies this past week, another serious problem became evident. Hedging! Investors and speculators buy gold stocks because they want to leverage gold’s gains. But some gold miners, particularly the Australian ones, are substantial-to-heavy hedgers. They have sold big fractions of their future gold outputs, and most of those hedges are way underwater after Q3’s big gold surge.

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

SAR’s hedgebook continues out for the coming 12 quarters, with the next 4 committing 51.0k ounces at 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 half its production at US$1280, US$1275, US$1240, and US$1253 over the next 4 quarters. That is assuming Q3’19’s average exchange rates persist. Hedging locks in big losses during gold-bull uplegs!

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

As you’d expect with Q3’19’s far-higher prevailing gold prices, the hard GAAP accounting results of the GDX majors were impressive. Their total revenues without those Canadian stragglers soared 31.8% YoY to $12.2b last quarter! That is even still outsized considering average gold’s 21.7% YoY gains and the GDX top 34’s 1.5% total production decline. Those mega-mergers help explain that sales outperformance.

When Barrick and Newmont gobbled up 2 large peers, it made room for 2 new gold miners to rise into the GDX-top-34 ranks. These gold majors’ operating-cash-flow generation 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 new ones. Strong OCFs are crucial for future growth potential.

The major gold miners wasted no 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. Interestingly much of that came in NEM and GOLD, where total cash fell 7.7% YoY. The rest of the GDX top 34 saw a more modest 3.7% decline in their treasuries. Last quarter’s greatest financial results came on the bottom line.

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

Q3’18’s low average gold prices led to several major impairment charges, writing down the carrying value of mines on companies’ books. Newmont, Barrick, and Yamana Gold wrote off $366m, $431m, and $89m in last year’s comparable 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 monster one-time gains shunted into profits.

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

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

That was up massively from their $54m loss in Q3’18. The moral of this story? These new monster gold miners resulting from those mega-mergers are really retarding the rest of this sector. Their production is rapidly shrinking, their costs are rising, and they are really damaging their shareholders’ potential returns. They would be far better served owning smaller mid-tier gold miners actually able to grow their outputs.

GDX contains plenty of great gold miners, but its overall upside potential is greatly impaired by the largest major gold miners that dominate it. They continue to struggle to grow their production, so smart investors seek out smaller mid-tier and junior gold miners with superior fundamentals. While some are included in GDX, their relatively-low weightings greatly dilute their potential gains. A simple example illustrates this.

NEM is GDX’s largest component 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-largest component 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’s stock price radically outperformed NEM’s during gold stocks’ latest upleg.

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

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The bottom line is gold majors generally did report outstanding results in Q3 on much-higher prevailing gold prices. Revenues and operating-cash-flow generation soared, but earnings were distorted by many large one-off items. Overall the major gold miners’ implied profitability based on the average gold price and their average all-in sustaining costs blasted higher, which portends far better fundamentals going forward.

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

Adam Hamilton, CPA

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