Gold mid-tiers’ Q4 2023 fundamentals

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The mid-tier and junior gold miners in this sector’s sweet spot for upside potential are finishing reporting their latest quarterly results. Those have proven spectacular, with these fundamentally-superior smaller gold producers delivering big on all fronts. The potent combination of growing production, lower mining costs, and near-record gold prices fueled huge windfall profits. So mid-tiers shouldn’t stay undervalued for long.

The leading mid-tier-gold-stock benchmark is the GDXJ VanEck Junior Gold Miners ETF. With $4.3b in net assets mid-week, it remains the second-largest gold-stock ETF after its big brother GDX. That is dominated by far-larger major gold miners, though there is much overlap between these ETFs’ holdings. Still misleadingly named, GDXJ is overwhelmingly a mid-tier gold-stock ETF with little weighting allocated to juniors.

Gold-stock tiers are defined 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 huge super-majors operate at vast scales exceeding 2,000k. Translated into quarterly terms, these thresholds shake out under 75k, 75k to 250k, 250k+, and 500k+. Today only two of GDXJ’s 25 biggest holdings are true juniors!

Their Q4 production is highlighted in blue in the table below. Juniors not only mine less than 75k ounces per quarter, but their gold output generates over half their quarterly revenues. That excludes both primary silver miners producing byproduct gold, and royalty and streaming companies that purchase future gold output for big upfront payments used to finance mine builds. But mid-tiers often make better investments.

These gold miners dominating GDXJ offer a unique mix of sizable diversified production, excellent output-growth potential, and smaller market capitalizations ideal for outsized gains. Mid-tiers are less risky than juniors, while amplifying gold uplegs much more than majors. Our newsletter trading books are now filled with fundamentally-superior mid-tiers and juniors, smaller gold miners which we’ve long specialized in at Zeal.

While the mid-tiers’ fundamentals are stellar as you’ll soon see, GDXJ’s recent performance has been wanting. Ultimately gold stocks are leveraged plays on gold, and its latest upleg was born back in early October. By early December, gold had surged 13.8% to its first new nominal record close in 3.3 years on gold-futures short-covering buying. GDXJ only rallied 27.9% in that early-upleg span, mere 2.0x upside leverage.

After that gold consolidated high before slipping into a mild pullback into mid-February. Gold just gave back 3.9%, yet GDXJ plunged 21.1% as gold stocks fell out of favor again! The extreme euphoria and greed spewing out of the general-stock-market bubble were overshadowing alternative investments. Gold bounced back strong, surging 9.6% over the subsequent few weeks into mid-March. But mid-tiers kept lagging.

GDXJ merely rebounded 18.5%, amplifying gold an even-worse 1.9x. At best in mid-March, gold’s upleg had powered 19.9% higher achieving nine new nominal record closes! Yet GDXJ was only up 19.6%, just pacing gold. Much riskier than their metal, gold stocks need to way outperform to compensate traders for their big additional operational, geological, and geopolitical risks that are heaped on top of gold price trends.

For 31 quarters in a row now, I’ve painstakingly analyzed the latest operational and financial results from GDXJ’s 25-largest component stocks. Mostly mid-tiers, they now account for 64.7% of this ETF’s total weighting. While digging through quarterlies is a ton of work, understanding smaller gold miners’ latest fundamentals really cuts through the obscuring sentiment fogs shrouding this sector. This research is essential.

This table summarizes the GDXJ top 25’s operational and financial highlights during Q4’23. These gold miners’ stock symbols aren’t all US listings, and are preceded by their rankings changes within GDXJ over this past year. The shuffling in their ETF weightings reflects shifting market caps, which reveal both outperformers and underperformers since Q4’22. Those symbols are followed by their recent GDXJ weightings.

Next comes these gold miners’ Q4’23 production in ounces, along with their year-over-year changes from the comparable Q4’22. 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 disclosed 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.

The mid-tier gold miners’ overall Q4’23 performance again proved spectacular! These sweet-spot-for-upside smaller gold stocks grew their production while slashing mining costs. That along with surging prevailing gold prices fueled massive earnings jumps, both per-ounce and bottom-line. Last quarter was undoubtedly one of the best the mid-tier and junior gold stocks ever reported, which should attract back investors.

Production growth trumps everything else as the primary mission for gold miners. Higher outputs boost operating cash flows which help fund mine expansions, builds, and purchases, fueling virtuous circles of growth. Mining more gold also raises profitability, lowering unit costs by spreading big fixed operational expenses across more ounces. The GDXJ-top-25 gold miners delivered again for the seventh quarter in a row!

Their collective production grew 2.8% YoY to 3,543k ounces last quarter. That trounced the larger super-majors and majors dominating GDX, which I analyzed in another essay last week. In Q4’23 the GDX-top-25 gold miners suffered a big 4.6%-YoY output drop to 8,845k ounces. The World Gold Council reported overall global gold-mining output in Q4 slipped 1.7% YoY to 29,925k. So the mid-tiers are outperforming.

But not as much as their aggregate production implies, as fully 14 of these GDXJ-top-25 stocks reported lower Q4 production. The biggest output growth came from GDXJ’s largest component, Pan American Silver which just grew into a major gold miner over this past year. Its Q4’23 gold production soared up 63.0% YoY, mostly because it acquired Yamana Gold at the end of Q1’23. PAAS’s output shot up 104k ounces.

That exceeded the GDXJ top 25’s total growth of 96k, so without that buyout aggregate production would have shrunk. But it still would’ve been much better than the GDX-top-25 majors. Some of the GDXJ mid-tiers reported great growth, including Centamin’s and Eldorado Gold’s surging 21.8% and 11.4% YoY. A sizable fraction of these elite mid-tiers and juniors have expansions going live this year that will boost output.

Equinox Gold is a great example, launching one of the biggest assaults into GDXJ’s upper ranks over this past year. One of my favorite mid-tiers which we’ve long owned, EQX operates seven gold mines. Later this year, its eighth and biggest-ever mine-build is going live. Equinox’s stake of average annual output is forecast near 240k ounces, big growth is coming. 2024’s midpoint guidance is 25% above 2023’s actual production.

And 2024 only includes a half-year of that new mine’s output, as it isn’t spinning up until the second half of this year. Even better, it is a low-cost operation with all-in sustaining costs projected near fantastic $850-per-ounce levels! That will drag down EQX’s higher overall AISCs, boosting profitability along with its production for years to come. One of Canada’s largest gold mines, it has a 14-year initial projected life.

Similar great growth stories aren’t particularly rare among smaller gold miners, helping make them such compelling investments. After decades analyzing and trading these high-potential stocks, I love learning about expansions and mine-builds nearing production. Because it is so labor-intensive to stay abreast of many dozens of smaller gold miners, surging production and falling costs tend to surprise most traders.

They then rush to buy after great quarterlies reflect new projects coming online, bidding stock prices way higher. Our newsletter trading books are full of growing mid-tiers and juniors. OceanaGold is another example, producing 477k ounces of gold in 2023 at $1,587 AISCs. But OGC has already guided to 2024, 2025, and 2026 midpoints of 540k, 570k, and 650k ounces, with AISCs falling near $1,538, $1,500, and $1,325!

While GDXJ’s smaller gold miners are far-superior to GDX’s larger ones, there is still too much overlap between these sibling ETFs. Fully 15 of these GDXJ-top-25 components are also GDX-top-25 ones, with 5 more in GDX’s lower ranks. These mutual holdings weigh in at 56.9% of GDXJ, but just 26.5% of GDX. The GDXJ top 25 are mostly clustered between GDX’s 11th to 32nd weightings, which is a big advantage.

GDXJ effectively lops off the ten biggest GDX components, which are dominated by super-majors. As I analyzed in my essay last week on the GDX top 25’s Q4’23 results, those are burdened with crushing deadweight. That means super-majors perpetually unable to overcome depletion to grow their outputs organically, so they resort to expensive corporate acquisitions. Yet still their unit mining costs inexorably climb!

Gold-stock portfolios carefully built with handpicked fundamentally-superior individual mid-tier and junior gold miners will yield the best gains by far during major gold uplegs. That’s long been our specialty at Zeal, with our newsletters detailing our active portfolios and their buying and selling. But if owning a single sector ETF somehow better suits you, GDXJ is a far-better option than GDX. I’d totally avoid the latter.

Unit gold-mining costs are generally inversely proportional to gold-production levels. That’s because gold mines’ total operating costs are largely fixed during pre-construction planning stages, when designed throughputs are determined for plants processing gold-bearing ores. Their nameplate capacities don’t change quarter to quarter, requiring similar levels of infrastructure, equipment, and employees to keep running.

So the only real variable driving quarterly gold production is the ore grades fed into these plants. Those vary widely even within individual gold deposits. Richer ores yield more ounces to spread mining’s big fixed expenses across, lowering unit costs and boosting profitability. But while fixed costs are the lion’s share of gold mining, there are also sizable variable costs. That’s where recent years’ raging inflation hit hard.

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 mid-tier gold miners. They illuminate the minimum gold prices necessary to keep the mines running.

The GDXJ top 25 reporting cash costs as of the middle of this week averaged $1,004 per ounce, which shrunk a slight 0.8% YoY. That made for the third quarter in a row these elite mid-tiers reported declining direct mining costs. And these are skewed high by Hecla Mining, which has always struggled with very-high-cost operations. Excluding its crazy-high $1,702, the rest of these GDXJ top 25 averaged $957 last quarter.

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 mid-tier gold miners’ true operating profitability.

The GDXJ top 25 knocked it out of the ballpark on the AISC front, with Q4’23’s average plunging 8.1% YoY to $1,325 per ounce! That also proved these elite mid-tiers’ third quarter in a row of declining AISCs. Excluding Hecla’s endless high-cost morass, that average drops to an even-better $1,282. Comparing the GDXJ top 25’s AISCs to the larger GDX top 25’s helps illustrate mid-tiers’ fundamental superiority.

While the GDX majors’ average AISCs were slightly lower last quarter at $1,317, they climbed 3.9% YoY. During the last 21 quarters, the GDX top 25 have only reported a single quarter of retreating AISCs! The super-majors dominating GDX argue their vast operations give them economies of scale on management. Yet smaller gold miners with way-fewer mines are achieving similar AISCs and much-better falling-cost trends.

Considered another way, the GDXJ top 25’s $1,325 AISCs were 80% up into their 31-quarter range of $860 to $1,442. Mining costs naturally climb over time, reflecting both inflation and higher prevailing gold prices making higher-cost deposits more economical to tap. In Q4 the GDX top 25’s AISCs were 85% up into their own 31-quarter range of $825 to $1,405. Smaller gold miners are outperforming on the costs front.

And the mid-tiers’ $1,325 average AISCs in Q4 made for fat profits with near-record average gold prices. Those soared 14.2% YoY to $1,976 last quarter, just a hair under Q2’23’s record of $1,978! Subtracting those quarterly-average GDXJ-top-25 AISCs from quarterly-average gold prices yields a great proxy for smaller gold miners’ unit earnings. The resulting $651 per ounce skyrocketed a stupendous 125.7% YoY!

That epic doubling-plus made for the strongest annual unit profits growth in at least the last 31 quarters. And it followed another massive 106.4%-YoY skyrocketing in the preceding Q3’23. And that streak of gargantuan earnings growth is almost certain to continue in this current almost-over Q1’24. Quarter-to-date, gold has averaged a dazzling new record $2,060 on close! And the mid-tiers are forecasting similar AISCs.

Their average full-year-2024 AISC guidances ran $1,334 per ounce, which would yield massive $726-per-ounce profits this quarter! That would make for more huge 51.9%-YoY growth! I suspect full-year AISCs will come in lower, closer to the bottom of forecast ranges than these midpoints. These elite mid-tiers have plenty of new mines and expansions coming online this year, which should soon help drive down costs.

Today’s battered mid-tier gold-stock prices are far from reflecting these awesome fundamentals. A good chunk of these GDXJ top 25 are trading at single-digit or low-double-digit trailing-twelve-month price-to-earnings ratios today, even without Q4’s windfall profits fully factored in! And as earning continue rising, undervaluations will deepen unless smaller gold miners enjoy a long-overdue massive mean reversion higher.

While swirling winds of sentiment bully around stock prices over the short term, eventually they will reflect some reasonable multiple of underlying corporate earnings. Warren Buffett’s renowned mentor, legendary investor Benjamin Graham, famously said markets are voting machines over the short run but ultimately weighing machines over the long term. Gold-stock prices need to start normalizing relative to their earnings.

The GDXJ top 25’s hard accounting results under Generally Accepted Accounting Principles also looked fantastic last quarter. Their total revenues soared 16.8% YoY to $8,563m, crushing the GDX top 25’s mere 4.6%-YoY sales growth. The mid-tiers’ 17%ish surge tracks perfectly with 3%ish production growth combined with Q4’s average gold prices shooting about 14% higher. And bottom-line earnings looked way better.

In Q4’23 the GDXJ top 25’s total accounting earnings skyrocketed 81.9% YoY to $463m! That compares to colossal $3,484m losses reported by the GDX-top-25 majors, mostly driven by super-majors’ huge non-cash writedowns. These gigantic gold miners squander shareholders’ money overpaying to acquire other gold miners. Then they later have to flush those resulting “goodwill” premiums through their income statements.

That further injures super-majors’ shareholders, as institutional investors seeing such huge accounting losses avoid buying those companies’ shares. The GDXJ-top-25 mid-tiers did have some Q4 writedowns too, but nowhere near the super-majors’ embarrassing scale. These writedowns were also for better reasons than paying too much to buy out companies, such as impairments from mining-law and tax-law changes.

Without Q4’23’s larger unusual noncash charges, the mid-tiers’ total accounting earnings soared way up to $921m. Those are understated too, as one larger British gold stock Endeavour Mining isn’t reporting its Q4 results until March 27th. This smaller major is also projecting good 11.9% midpoint output growth near 1,200k ounces in 2024 as two big new projects come online next quarter, keeping AISCs low around $995!

Comparable Q4’22 GDXJ-top-25 earnings excluding big writeoffs then were closer to $1,040m, implying that mid-tier operating earnings declined about 11.4%. That’s still way better than the super-majors and their endless goodwill writeoffs. Because bottom-line mid-tier earnings nearly doubled last quarter, these gold stocks’ valuations are heading considerably lower. Again their stock prices need to mean revert far higher.

Last quarter’s operating-cash-flows generation was also very strong, blasting up 40.6% YoY to $2,375m for the GDXJ top 25. That funneled lots of cash into their coffers to continue expanding existing mines and build new ones. They’ve been investing those cash flows, as evident in their total cash treasuries slipping 3.7% YoY to $6,173m. Once EDV reports its Q4 results, that total will surge into growth territory.

These elite mid-tiers and juniors achieved higher production, lower all-in sustaining costs, and big growth in revenues, earnings, and operating cash flows last quarter! Their implied per-ounce profits more than doubled, while their hard accounting ones almost did. That made for a heck of a quarter for these smaller fundamentally-superior gold miners. Sooner or later investors will figure this out and flood into these stocks.

By advancing great gold projects into mines and growing relatively fast, mid-tiers and juniors are the gold-production pipeline ultimately feeding the majors. We research extensively to find fundamentally-superior smaller gold miners, then ride them until gold and gold stocks get unsustainably overbought or they are acquired. Smaller gold stocks can easily double, triple, or more during major gold uplegs, multiplying wealth!

The bottom line is mid-tier gold miners just reported their second spectacular quarter in a row. They are doing everything right, led by growing their production while lowering mining costs. That combined with near-record average gold prices fueled skyrocketing profits. Smaller gold miners’ fantastic operating performances were reflected in great accounting results, a stark contrast to the super-majors’ endless struggles.

And this awesome soaring-earnings trend is set to continue. The mid-tiers are forecasting similar mining costs this year, while prevailing gold prices continue to surge to new records. So their earnings are going to grow even fatter. These great fundamentals will eventually attract back investors, fueling a dramatic mean reversion higher in undervalued gold-stock prices. More gold record highs will accelerate this process.

(By Adam Hamilton)


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