Gold Miners’ Q1’20 Fundamentals

Adam Hamilton     May 15, 2020     3714 Words


The major gold miners’ stocks have rallied dramatically out of mid-March’s stock-panic lows, soaring to new bull-market highs.  Their just-reported Q1’20 operational and financial results reveal whether today’s higher gold-stock prices are fundamentally justified.  They also illuminate whether this gold-stock upleg is likely to continue powering higher, despite the catastrophic economic damage from governments’ lockdowns.


With officials around the world waging a scorched-earth war against this COVID-19 pandemic, the gold miners’ latest quarterly results are more important than ever.  While this earnings season covered Q1’20, most gold companies didn’t release their quarterly reports until the last couple weeks.  In them they had to disclose the ongoing impact of governments’ COVID-19 lockdowns current to those quarterlies’ release dates.


US securities regulations require American companies to report quarterly results by 40 calendar days after quarter-ends, a deadline that just passed this week.  In Canada where the majority of the world’s gold stocks trade, that deadline is looser at 45 days.  Unfortunately this year Canadian companies were granted the ability to extend their reporting by an additional 45 days to help cope with COVID-19’s impacts.


After many years of doing deep quarterly analyses of major gold miners’ latest results, I’ve found there are always some Canadian stragglers that push their reporting right to the legal limit.  This is seriously disrespectful to their shareholders, who deserve timely quarterly results released as early as possible.  There’s no excuse for delaying quarterlies which don’t require independent CPAs auditing and signing off.


While the great majority of gold miners’ Q1’20 results had been released as of this essay’s data cutoff of Wednesday evening, not all of them had.  But it didn’t make sense to delay this critical quarterly analysis since the usefulness of results for trading quickly decays the deeper we get into the subsequent quarter.  So I went through everything available from the major gold miners mid-week, and boy was Q1 fascinating!


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 $14.2b this week were a staggering 32.9x larger than the next-biggest 1x-long major-gold-miners ETF!  GDX is effectively this sector’s blue-chip index.


While GDX’s holdings were running an excessively-big 50 stocks this week, every quarter I delve into the latest results from the top 34.  That’s simply an arbitrary number that fits neatly into the tables below.  And it is a commanding sample, as these world’s largest gold miners accounted for fully 94.0% of GDX’s total weighting this week.  They trade in stock markets across the globe, with differing reporting requirements.


That makes amassing this valuable dataset for analysis rather challenging.  In different countries, major gold miners report different data in different ways.  Every individual gold miner also has its own unique reporting peculiarities, taking time to understand.  Some gold miners have excellent reporting formats that are easy to understand and digest, while others seem to intentionally obscure their results complicating analysis.


Half-year reporting instead of the superior quarterly reporting found in the US and Canada is common around the world too.  That necessitates splitting some numbers in half for quarterly approximations.  The GDX-top-34 gold miners’ data available mid-week is summarized into highlights shown in these tables.  Blank fields indicate a company hadn’t reported that particular data by this essay’s late-Wednesday cutoff.


Each company’s symbol and weighting within GDX is followed by its quarterly gold production in Q1’20.  Not all of these stocks trade in the US, as GDX also hosts sizable Australian and Canadian contingents.  The year-over-year change in miners’ gold outputs from Q1’19 to Q1’20 reveals whether they are growing or shrinking.  Cash costs and all-in sustaining costs per ounce show how much is spent producing that gold.


Next the YoY changes are shown in the major gold miners’ key financial data including operating cash flows generated, accounting earnings, revenues, and cash on hand.  Percentage changes aren’t recorded if they would be misleading or not meaningful.  That includes data shifting from positive to negative or vice versa from Q1’19, or if derived from two negative numbers.  Then raw underlying data is included instead.


While four GDX-top-34 gold miners dragged their feet so much they hadn’t reported Q1 results by 43 days after quarter-end, they collectively account for just 2.9% of GDX’s weight.  So this is an essentially-complete picture of how the major gold miners are faring despite governments’ draconian lockdowns to fight the COVID-19 pandemic.  This situation is so radically unprecedented I didn’t know what I’d find.



While reading through the GDX top 34’s quarterlies, there were definitely some common recurring themes on COVID-19.  The great majority of the major gold miners cited the extreme uncertainty to withdraw their 2020 production and cost guidance.  That is certainly understandable and justified with the capriciousness of government officials’ decisions to force businesses to shutter.  Those heavy-handed edicts change by the day.


While COVID-19 outbreaks are generally localized within countries, most governments have taken a shotgun approach of issuing blanket restrictions.  So even though most gold mines are largely self-contained remote operations far from civilization, they’ve been hammered by countrywide orders to stop work.  Gold miners still operating today may be forced to suspend operations tomorrow, and vice versa.


The Canadian province of Quebec has been a great example of the inherent unpredictability of all these lockdowns.  In late March its government mandated a province-wide COVID-19 shutdown which forced Quebec’s major gold-mining industry offline.  But just a few weeks later in mid-April, provincial officials changed their minds and reclassified mining as essential businesses!  So Quebec’s gold mines spun back up.


Quebec claimed it exempted miners from its lockdown because their commodities are critical in medical-equipment supply chains.  That may be true, but I suspect the real reason was restarting the big lost tax revenue from mining.  Unlike the US Federal Reserve, most governments simply can’t print the equivalent of trillions of dollars to paper over their lockdown-imposed economic catastrophes.  So they are reopening mines.


Gold-mining operations are ideally suited for social distancing to retard COVID-19’s spread.  Being way out in the sticks, mining employees are relatively isolated.  They either live in small local towns near the mines or in man camps working for multi-week shifts onsite.  One thing Quebec ordered is that fly-in shifts be extended from 14 days to 28 days to minimize infection exposure.  Gold mines won’t stay closed for long.


While wading through the GDX top 34’s quarterly results, it was interesting to see the managers of gold-mining companies are as angry as everyone else about governments killing their businesses by decree.  But they have to be politically-correct, trying not to make local officials mad who could hinder their return to operational status.  First Majestic Silver exemplified this, even though it hadn’t reported Q1 by Wednesday.


On April 3rd AG issued a news release explaining how it was trying to convince Mexican officials “to support silver mining as an essential business”.  It was working with “other mining companies to make the case to the Federal Government that mining, especially silver mining, is essential and critical to the medical industry given silver’s antibacterial properties which is proven to reduce the spread of viruses.”


When reporting on Q1 production results alone in mid-April, AG’s CEO wrote “While we support the actions being taken, we continue to engage in discussions with Federal and State authorities to raise awareness on the importance of silver mining as an essential business.”  I saw this kind of thing in lots of quarterly reports, managers saying they supported governments’ COVID-19 actions but wanted to be exempt.


The major gold miners are also trying to be good corporate citizens, with most of the GDX top 34 declaring they were donating sizable sums of money to help local communities fight this pandemic.  This included supporting medical workers and people who had lost their jobs due to the lockdowns.  The great majority of these elite gold companies also declared they had identified no COVID-19 infections at their mines.


With most of the government-imposed economic lockdowns starting in the second half of March, for a lot of the major gold miners their impact was limited.  Yet in addition to nearly-universally pulling their 2020 output forecasts, there was also an industrywide move to tap credit lines and build cash balances.  That certainly seems prudent given the epic uncertainties ahead with governments’ frantic and flailing decrees.


But despite plenty of disruptions with Canada, Mexico, Peru, Argentina, and Bolivia including gold mines in their countrywide lockdown orders, the GDX top 34 still achieved impressive results in Q1’20.  And they are even better than the following analysis suggests, as last quarter’s new totals don’t include most of the results from those four companies that hadn’t reported yet as of mid-week.  They will further boost all this.


The elite GDX-top-34 gold miners collectively produced 9.3m ounces of gold in Q1, which still climbed a strong 5.7% year-over-year!  That’s super-impressive, as the largest gold miners have struggled in recent years to grow their outputs.  They are already enormous, operating at scales where materially upping their gold production is exceedingly difficult with big gold deposits ever-harder to discover and develop into mines.


The GDX top 34’s stunning output growth last quarter also bucked the broader gold trend of declining mine supply.  The World Gold Council researches and publishes the best-available data on global gold supply and demand quarterly in its outstanding Gold Demand Trends reports.  The new Q1’20 edition released early this month showed worldwide gold-mine output actually fell 2.6% YoY last quarter to 25.6m ounces!


One reason the GDX top 34 did so well may be high-grading, when mine managers choose to run better ore grades through their fixed-capacity mills.  That increases their quarterly gold outputs, at the expense of leaving less high-grade ore available for future quarters.  At least one company explicitly reported that is what they were doing, Australia’s Saracen Mineral.  It’s been a long time since I’ve seen high-grading admitted.


In its quarterly report Saracen disclosed “Saracen has large ore stockpiles exceeding 1.7Moz at 31 March; These will help insulate the business should mining be restricted from any COVID-19 impacts; Pro-active milling of higher-grade stockpiles underway at Carosue Dam and Thunderbox to bring forward production ounces and cash flow into FY20”.  That high-grading strategy could’ve been used more widely in Q1’20.


Interestingly silver production among the GDX top 34 fell sharply, plunging 9.9% YoY to 25.6m ounces.  That reflected the ongoing shift of the precious-metals-mining industry to a more-gold-centric focus.  That has been fueled by silver’s relatively-poor economics compared to gold.  Silver prices have languished for years, and the white metal hit an all-time low relative to the yellow one during mid-March’s stock panic!


With the major gold miners greatly ramping their total gold output last quarter, their unit costs should’ve fallen proportionally.  Gold-mining costs are largely fixed quarter after quarter, with production requiring roughly the same levels of infrastructure, equipment and employees.  The better the ore grades chewed through by the fixed-capacity mills, the more gold ounces yielded to spread mining’s big fixed costs across.


These fixed costs are largely determined during mine-planning stages, when engineers and geologists decide which gold-bearing ores to mine, how to dig to them, and how to process them to recover their gold.  But that usual inverse relationship between output and per-ounce costs broke down last quarter.  COVID-19 definitely played a role, as the gold miners had to implement costly procedures to protect their people.


Social distancing to minimize infection risks reduces efficiency while increasing costs.  A big part of checking COVID-19’s spread is cleaning everything relentlessly, which requires lots of expensive labor.  And medical staff had to be hired to test and look for symptoms.  Surprisingly to me, First Majestic Silver reported in early April its “staff consists of 17 full-time physicians and several health care professionals”.


Expenses for travel and procuring supplies increased too with borders being closed.  Endeavour Mining, which was rare in reaffirming its 2020 guidance despite the COVID-19 disruptions, had an example of that.  In its Q1 results it said, “Key expatriates returned to site before suspension of commercial airline flights and closure of borders, with shift rosters modified to ensure continuity of staffing for several months.”


COVID-19 definitely pushed up costs.  Cash costs are the classic measure of gold-mining costs, including all cash expenses necessary to mine each ounce of gold.  They are misleading as a true cost measure though, excluding big capital needed to explore for gold deposits and build mines.  Cash costs are best viewed as an acid test of survivability for the gold miners, revealing necessary gold prices to keep mines running.


In Q1’20 the GDX-top-34 gold miners averaged cash costs of $653 per ounce.  That was up 6.0% YoY, and on the high side of the 16-quarter range from $591 to $679.  But obviously that’s far below prevailing gold prices, proving miners have no problem keeping the lights on.  Q1’s impressive $1582 average gold price soared a massive 21.4% YoY from Q1’19’s $1303!  So it sure wasn’t a quarter where gold miners struggled.


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 elite major gold miners dominating GDX’s ranks reported average AISCs in Q1’20 of $932 per ounce.  That was 4.4% higher than a year earlier, which seems reasonable given the increased costs involved in safely and responsibly operating in this COVID-19-stricken world.  And that number was skewed higher by the new GDX inclusion of South Africa’s Harmony Gold in this past year, which had outlying $1336 AISCs.


Like the rest of the new gold stocks in GDX’s top-34 ranks, HMY’s symbol is highlighted in light-blue in these tables.  Without Harmony, the rest of these major gold miners averaged $915 AISCs.  That’s way under prevailing gold prices, and still within the past 16 quarters’ GDX-top-34 AISC range of $855 to $942 per ounce.  Naturally seeing gold’s massive Q1’20 gains far exceed gold-mining cost growth fueled huge profits.


This industry’s overall profitability can be inferred based on the difference between a quarter’s gold price levels and the major gold miners’ all-in sustaining costs.  Last quarter’s $1582 average gold less those $932 GDX-top-34 AISCs yields hefty earnings of $650 per ounce!  That continues the incredible stock-market-leading profits growth in this small contrarian sector, trouncing the general stock markets’ falling earnings.


Sequentially from Q4’19, the major gold miners’ profits surged a colossal 20.1% quarter-on-quarter!  That would be awesome anytime, but is particularly impressive given the COVID-19 impacts on plenty of gold miners into the end of Q1.  And the year-over-year profits growth from Q1’19 is utterly breathtaking.  Back then the GDX top 34 averaged better $893 AISCs but average gold prices that quarter were far lower at $1303.


The $650 per ounce they just earned in Q1’20 soared 58.5% YoY from Q1’19’s $410!  Putting up huge results like that should get the major gold stocks on all institutional investors’ radars.  And this colossal stock-market-leading earnings growth is likely to persist into Q2 and beyond.  With investors flooding into gold as the disastrous economic impact of governments’ lockdown orders becomes more apparent, it is surging.


With Q2’20 halfway over, gold has already averaged a fantastic $1692!  That’s another 7.0% higher than Q1 at this point.  The major gold miners’ stock prices tend to amplify material gold moves by 2x to 3x because of their similar profits leverage to higher gold prices.  Assuming the GDX top 34’s Q2 AISCs are in line with their trailing-four-quarter average of $920, that implies they are earning $772 per ounce in Q2!


If that holds into the end of this quarter, it would make for another awesome 18.8% sequential gain in the major gold miners’ earnings.  Unfortunately it probably won’t, as Q2 has seen more gold mines forced into care and maintenance for countrywide government lockdowns than the end of Q1 did.  But even if the GDX top 34 see modest single-digit quarterly-profits growth, that’s far better than other sectors’ deep bleeding.


The major gold miners’ collective hard accounting results reported to securities regulators proved Q1’20 was very strong.  The following numbers totally justify the powerful gold-stock upleg since mid-March’s stock-panic lows.  And realize these are even understated, as financial results from those four straggling GDX-top-34 components that hadn’t reported Q1 as of mid-week aren’t included.  The gold miners are thriving!


The GDX top 34’s total sales soared 31.1% YoY to $12.1b!  That makes sense given their 5.7%-higher gold output with 21.4%-higher average gold prices.  Top-line revenues growth of that magnitude even dwarfs that seen last quarter by the market-darling mega-cap tech stocks.  As discussed last week in my essay on big US stocks’ Q1’20 results, the top 5 tech stocks dominating US markets saw 14.0% sales growth.


Operating cash flows generated by the GDX top 34’s gold mining rocketed 68.7% higher YoY to $4.7b!  Gold mining is spinning off lots of cash at these gold levels, helping dramatically boost treasuries.  These elite major gold miners’ total cash balances soared 52.3% YoY to $17.0b, the highest seen by far in the 16 quarters I’ve been doing this research!  Their collective cash war chests normally run $11b to $14b.


Surging cash hoards give the gold miners much more flexibility in adjusting to the more-expensive reality of mitigating COVID-19, giving them more survivability as heavy-handed governments temporarily shutter their mines.  They also leave gold miners better resourced to fund future production growth fueled by mine expansions, buying new mines, and acquiring entire companies.  Investors prize higher output above all else!


A big contributor to this swelling cash was the GDX top 34 drawing down credit lines to ensure maximum liquidity through this COVID-19 crisis.  Kinross Gold offered a great example in its Q1 results, “On March 20, 2020, Kinross drew down $750 million from its $1.5 billion revolving credit facility as a precautionary measure to protect against economic and business uncertainties related to the pandemic.”  That seems prudent.


Finally the GDX top 34’s actual hard accounting profits under Generally Accepted Accounting Principles in the US or other countries’ rules required by securities regulators skyrocketed.  In Q1’20, the major gold miners’ total accounting earnings soared an epic 163.6% YoY to $1.9b!  Sector earnings growth like that is unheard of in normal markets, and absolutely astounding in this one where lockdowns slaughter profitability.


But this is overstated due to some big noncash gains flowing through to bottom lines.  The world’s two largest gold miners dominating GDX’s ranks with a 30.1% total weighting are Newmont and Barrick.  They respectively reported a $593m gain on asset sales and $336m impairment reversal in Q1, which both greatly boosted their net incomes.  Those were partially offset by Franco-Nevada’s $272m impairment charge.


Even adjusting for these big unusual items, the GDX top 34’s total profits still soared 73.9% YoY last quarter!  The gold miners are making money hand over fist in this higher-gold-price environment, despite their higher costs for mitigating COVID-19 risks.  There’s no doubt the gold miners are the most-attractive sector in these dangerous stock markets as national economies plunge into government-imposed depressions.


From its brutal mid-March stock-panic low to last week, GDX has already rocketed 84.4% higher out of that extreme anomaly!  That included a major bull-market breakout for the gold stocks in late April, with GDX’s first new bull highs achieved in 3.7 years.  Yet this massive upleg still has a long ways to run yet given the major gold miners’ colossal earnings growth and resulting super-low valuations even this week.


Plenty of fundamentally-superior major and mid-tier gold miners included in the GDX top 34 now have trailing-twelve-month price-to-earnings ratios between 11x to 15x!  That would be plenty cheap for normal stocks, but is incredibly low for the high-flying gold stocks.  And these cheap valuations are set to fall even farther as gold-mining earnings continue growing.  The COVID-19 disruptions will prove a speed bump.


Q2 is going to be tougher than Q1 for the major gold miners suffering shutdowns under governments’ draconian lockdowns.  But all that gold production is merely delayed a month or two, not lost forever like sales in many other industries!  As governments increasingly struggle with lower tax revenues, they will rush to bring gold mining back online.  So this sector’s ultimate COVID-19 impact should prove relatively modest.


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The bottom line is the major gold miners just reported awesome Q1 results despite COVID-19 impacts.  They achieved outsized gold production growth bucking the global trend.  And the much-higher prevailing gold prices dwarfed the modest cost increases partially driven by COVID-19 mitigation efforts.  That fueled huge increases in revenues, operating cash flows, cash in treasuries, and hard accounting earnings!


While gold-mine shutdowns have lasted longer in Q2, plenty of major gold miners remain unaffected due to where their mines are located.  And once governments green-light those shuttered mines, miners will rush to make up for lost production.  With gold still powering higher on mounting investment demand, the resulting better prevailing gold prices this quarter should make for solid Q2 results despite this crazy pandemic.


Adam Hamilton, CPA     May 15, 2020     Subscribe