Gold Mid-Tiersí Q4í20 Fundamentals

Adam Hamilton     March 26, 2021     3432 Words


The mid-tier gold minersí stocks are in this sectorís sweet spot for upside potential.  After a spectacular upleg out of last Marchís stock panic, they have mostly been correcting since early August.  That is doing its necessary work of rebalancing sentiment, paving the way for mid-tiersí next bull upleg.  These great miners are thriving fundamentally with higher prevailing gold prices, as their latest quarterly results again prove.


Mid-tier gold miners produce between 300k to 1m ounces of gold annually, more than smaller juniors but less than larger majors.  Mid-tiers are far less risky than juniors, and amplify goldís uplegs much more than majors.  Their unique mix of sizable diversified gold production, material output-growth potential, and smaller market capitalizations is ideal for outsized gains.  They are the best gold stocks for traders to own.


Ironically the leading mid-tier gold-stock benchmark and trading vehicle is the misleadingly-named GDXJ VanEck Vectors Junior Gold Miners ETF.  It has evolved to be dominated by mid-tiers, miners yielding quarterly gold output of 75k to 250k ounces.  The true juniors GDXJ now holds only account for a small fraction of its total weighting.  With $5.0b in net assets, GDXJ is the second-most-popular gold-stock ETF.


Thatís about 3/8ths the size of its big brother GDX, which is mostly controlled by larger major gold miners.  GDXJís performance trounced GDXís during this gold-stock bullís latest upleg, which blasted higher over 4.8 months last year from mid-March to early August.  GDXJís massive 188.9% skyrocketing in that short span easily bested GDXís parallel 134.1% gains!  Thatís despite these ETFs sharing many component stocks.


That blistering run left gold stocks extremely overbought, necessitating a health correction to rebalance excessively-greedy sentiment.  So over the next 7.1 months into early March this year, GDXJ gradually ground a major 30.2% lower.  That naturally left this high-potential sector deeply out of favor, with traders convinced mid-tiers are doomed to spiral lower indefinitely.  Boy is that universal bearishness misplaced!


For 19 quarters in a row now, Iíve painstakingly analyzed the mid-tier gold minersí latest quarterly results right after they are reported.  While GDXJ contained an absurd 98 component stocks this week, Iím limiting my analysis to its top 25 holdings.  These include some of the greatest mid-tiers, which command a major 62.8% of GDXJís total weighting.  Among these elite ranks are some of the best-performing gold miners.


Unfortunately Q4 results closing out calendar years arrive much later than normal quarterlies.  Since the annual reports containing Q4 numbers are bigger, more complex, and must be audited by independent CPAs, securities regulators grant extended filing deadlines.  Those are 60 days after year-ends in the US, and a ridiculous 90 days in Canada where most of the worldís gold stocks trade!  So Q4 analysis runs later.


GDXJís top stocks trade in the US, South Africa, Australia, Canada, Peru, Indonesia, and Mexico making amassing this data somewhat challenging.  There are different financial-reporting requirements around the world, and even within the same country miners report different data in different ways.  Half-year reporting is common globally, so when only six-month data was available it is split in half to approximate Q4.


This table summarizes key operational and financial highlights from the GDXJ top 25 in Q4í20.  These gold minersí symbols are listed, some of which are from their primary foreign stock exchanges.  That is preceded by their ranking changes in terms of GDXJ weightings from Q4í19.  With GDXJ largely weighted by market capitalizations, relative ranking changes help illuminate this past yearís outperforming stocks.


Next are the current weightings this week, which are highlighted in blue for the handful of true junior gold miners.  That is followed by each minerís Q4í20 gold production in ounces, and its year-over-year change from Q4í19ís results.  Then come cash costs and all-in sustaining costs per ounce mined along with their YoY changes, revealing how much it costs these miners to wrest their gold from the bowels of the earth.


Next quarterly revenues, GAAP earnings, operating cash flows generated, and cash on hand are listed along with their YoY changes.  Blank data fields mean companies hadnít reported that particular data as of the middle of this week.  Blank percentage fields indicate those changes would be either misleading or not meaningful, like comparing two negative numbers or data shifting from positive to negative and vice versa.


Despite goldís correction running through Q4í20 which drove gold stocksí parallel selloff, last quarter still enjoyed the second-highest average gold prices ever witnessed at $1,876!  So GDXJís top mid-tier gold miners shouldíve achieved blockbuster results last quarter.  That indeed proved true, with plenty of these elite companies reporting record quarterly production, sales, profits, operating cash flows, and cash last quarter.



For decades now Iíve been actively speculating and investing in fundamentally-superior gold stocks, and writing financial newsletters explaining those trades in real-time.  Being deeply immersed in this realm, I was really struck by sweeping changes to GDXJís top components in this latest quarterly research.  This ETFís managers seem to be working on addressing some of the main criticisms of GDXJís component list.


Promoted as a ďJunior Gold Miners ETFĒ, GDXJís holdings should lean heavily towards smaller miners.  Thereís no reason to include larger mid-tiers and especially majors, which should instead be found exclusively in GDX.  And the massive overlap in the same companies being included in both these ETFs really hobbled the utility and upside potential of GDXJ.  Iíve written about these serious flaws for years now.


But GDXJís managers are increasingly resolving them, gradually forging it into a better mid-tier-gold-stock ETF.  Since Q4í19, theyíve booted out two major gold miners.  Those are Kinross Gold and South Africaís Sibanye-Stillwater, which produced a gargantuan 624k and 294k ounces in Q4í20.  Those are both well above that major threshold of 250k ounces per quarter.  KGC indeed became a GDX-exclusive major miner.


SBSW didnít, and is no longer included in either GDXJ or GDX.  That is righteous, as this historical primary gold miner has grown into the worldís largest primary platinum-group-metals producer through big acquisitions.  GDXJís managers also removed a couple larger Australian gold miners that just merged into a major one, Northern Star Resources and Saracen Mineral.  They produced 253k and 155k ounces last quarter.


So now running in excess of 400k per quarter combined, the surviving Northern Star company is another major gold miner only included in GDX.  These big changes among GDXJís upper ranks are great for this ETF.  They allow overall component weightings to be redistributed lower, giving GDXJ more exposure to smaller gold miners.  The GDXJ top 25ís 62.8% total weighting is now the lowest by far since at least Q2í16.


So GDXJís managers deserve praise for slicing out some of the major gold miners really holding back their ETFís upside potential.  Now if theyíd boot out South Africaís giant Gold Fields and Harmony Gold, big established majors that mined an enormous 593k and 373k ounces last quarter, GDXJ would almost be fixed.  Most majors are dead-weight, their production and market capitalizations too large to grow rapidly.


A year ago in Q4í19, Kinross, Northern Star, Sibanye, and Saracen together accounted for a massive 22.0% of GDXJís total weighting!  Now with them gone, the year-over-year comparisons of GDXJ-top-25 aggregate numbers are really skewed.  So we have to consider how these elite mid-tiers are faring after adjusting for these sweeping component changes.  Stripping their Q4í19 results makes for better comparisons.


Also the long-vexing overlap between GDXJ and GDX holdings has been majorly reduced.  These GDXJ-top-25 gold miners again at 62.8% of its total weightings now represent just 21.9% of GDXís total weightings as of last week.  That compares to 69.0% and 33.8% in Q3í20, a big improvement!  Now only 13 of GDXJís top 25 holdings are also GDX-top-25 ones, clustered even lower in GDXís rankings from 12th to 35th.


Production is the lifeblood of the gold-mining industry.  After prevailing gold prices which miners are at the mercy of, their output levels are the most-important driver of their long-term success.  Generally the more gold miners can bring to market, the faster they can continue growing through expanding, constructing, or acquiring more gold mines.  So investors and speculators have long prized production growth above all else.


Higher output boosts revenues, earnings, operating-cash-flow generation, and thus ultimately minersí stock prices.  Unfortunately the GDXJ top 25ís total gold production in Q4í20 plunged 21.0% year-over-year to 3,733k ounces.  While ugly, that completely resulted from those four major gold miners being forced out of this ETF!  Excluding them from Q4í19ís results, the elite mid-tiersí total output actually grew 8.0% YoY.


That is super-impressive, far better than the 4.3%-YoY decline to 8,905k ounces from the GDX-top-25 majors last quarter.  I analyzed their operating and financial results in depth in last weekís essay on those GDX majors.  The GDXJ mid-tiersí adjusted 8.0% production growth in Q4í20 also proved way better than overall global gold mined slumping 2.9% YoY, according to the World Gold Councilís comprehensive data.


Unlike the majors simply too big to grow fast regardless of how well they are managed, the mid-tier and junior gold miners are coming from much-smaller bases.  These sweet-spot-for-upside-potential mid-tiers usually have a few mines or less, so expansions and new mine builds really boost their outputs.  And the mid-tiers also have way-smaller market caps, making their stock prices far more responsive to capital inflows.


When mid-tiersí lower production and market caps are combined with leveraged profits growth from higher gold prices, their upside potential during major gold uplegs trounces that of the majors.  So the mid-tiers are easily the best gold stocks to own as this secular gold bull continues marching higher in coming years.  Their future gold-production growth will far exceed the majorsí, and their earnings arenít done soaring.


In gold mining, output levels and unit costs are usually inversely proportional.  The more gold mined, the more ounces to spread this industryís big fixed costs across.  Those are generally determined when mines are being planned, then donít change much.  Quarter after quarter, individual mines require about the same levels of infrastructure, equipment, and employees to feed their fixed-capacity mills with ores to process.


Those fixed costs staying roughly steady regardless of prevailing gold prices is what gives gold minersí earnings big leverage to the yellow metal.  With overall GDXJ-top-25 unadjusted gold output falling lower last quarter, these gold minersí unit costs shouldíve risen proportionally.  That indeed proved true, with both average cash costs and all-in sustaining costs surging sharply to their highest levels since at least Q2í16.


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 GDXJ-top-25 gold miners reported average cash costs of $759 per ounce in Q4í20, which surged 11.3% YoY.  Those were the highest levels yet seen in this 19-quarter-old research thread, edging out Q1í20ís $749.  They were also considerably higher than the GDX top 25ís $700.  But interestingly the same trio of outlying companies that skewed GDXís cash-cost average high are also among the GDXJ top 25.


Hecla Mining, Peruís Buenaventura, and Harmony Gold reported extreme outlying cash costs of $1,019, $1,243, and $1,141 last quarter!  HL blamed various COVID-19-lockdown disruptions, BVN has long struggled with declining output from endless operational problems, and HMYís old and very-deep gold mines are expensive to run.  Excluding these outliers, the rest of the GDXJ top 25 averaged $689 cash costs.


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 minersí true operating profitability.


The GDXJ-top-25 mid-tiersí average AISCs surged a similar 11.5% YoY to $1,080 per ounce.  That was also the highest by far in the 19 quarters since Q2í16, eclipsing Q1í20ís $1,016.  That was again worse than the GDX-top-25 majorsí $1,038 average AISCs last quarter.  But the mid-tiersí all-in sustaining costs were also skewed high by those same three extreme outliers, along with a fourth Centamin mining gold in Egypt.


HL, BVN, HMY, and CEY reported extreme AISCs of $1,330, $1,559, $1,370, and $1,613 in Q4í20!  If those outliers are excluded, the rest of the GDXJ top 25 averaged a far-better $970.  Interestingly Hecla and Centamin are forecasting lower full-year-2021 AISCs, at midpoints of $1,250 and $1,200.  So like usual, for most gold miners quarterly cost spikes are temporary anomalies rather than new long-term trends.


And that overall skewed $1,080 average still isnít bad, far below these high prevailing gold prices.  In the four pre-pandemic quarters ending in Q1í20, the GDXJ top 25ís AISCs averaged $976.  But the average gold prices were much lower then, with a mean of just $1,461 in that span.  So gold prices have climbed much faster than mining costs even with all the pandemic disruptions, greatly boosting mid-tiersí profitability.


An excellent proxy for this sectorís earnings trends can be calculated by simply subtracting the GDXJ top 25ís average all-in sustaining costs from average gold prices.  Gold again averaged a lofty $1,876 last quarter, way above those skewed-high $1,080 AISCs.  That implies the mid-tier gold miners were earning about $796 per ounce mined!  Soaring 54.9% YoY, that was the second-highest on record after Q3í20ís $928.


Such fantastic stock-market-leading profits growth is nothing new for the mid-tier gold miners either.  In the last six reported quarters ending in Q4í20, the GDXJ top 25ís unit earnings per this proxy rocketed up 65.1%, 72.2%, 66.1%, 108.2%, 77.9%, and 54.9% YoY!  That averages out to stupendously-awesome 74.1% quarterly profits growth over this longer-term span.  Traders should be rushing to add gold-stock allocations.


Because of their outstanding profits leverage to gold, gold stocks are exceedingly lucrative to own during secular gold bulls.  Yet dumbfoundingly, speculators and investors alike keep abandoning this sector after expected major corrections.  Right when they should be aggressively buying low before the next major upleg likely doubles their capital deployed, they bury their heads in the sand wallowing in popular bearishness.


Prudent contrarian traders ignore always-pessimistic herd sentiment after corrections and instead focus on gold minersí underlying fundamentals.  Do they justify mean-reversion rebounds of gold-stock prices evolving into major bull uplegs?  The GDXJ top 25ís hard Q4í20 accounting results reported to securities regulators certainly confirmed the mid-tiersí super-strong fundamentals their stock prices arenít yet reflecting.


On the revenues front, these elite GDXJ-top-25 gold miners reported $8.5b in total sales last quarter.  That actually fell 8.6% YoY despite Q4í20ís average gold prices soaring 26.5% from Q4í19 levels.  But remember these year-over-year comparisons are heavily distorted by GDXJís managers rightfully kicking out Kinross, Northern Star, Sibanye, and Saracen.  So their Q4í19 results need to be adjusted out of that total.


Ex-removed-majors, these elite mid-tier gold minersí total sales soared 37.6% YoY in Q4í20!  That is right in line with 8.0%-higher adjusted production and 26.5%-higher average gold prices.  Had those majors not been included in earlier quartersí results, Q4í20ís revenues wouldíve easily been the best ever reported by the rest of these mid-tiers.  These sweet-spot gold miners are sure thriving in this higher-gold environment.


Their bottom-line earnings under Generally Accepted Accounting Principles in the US or their equivalents in other countries also proved outstanding.  The GDXJ top 25 collectively earned $1,569m in profits in Q4í20, which skyrocketed 127.2% YoY!  Those were also the highest earnings by far from the GDXJ top 25 in the 19 quarters Iíve been doing this research, and almost certainly ever.  And they arenít even adjusted.


Remove those kicked majors from the prior-year quarter, and that profits jump soars to 2,078% YoY!  And unlike the GDX top 25ís Q4í19 earnings which were riddled with non-cash impairment-reversal gains and impairment charges, Q4í20ís looked fairly-clean.  The mid-tier and junior gold miners are making money hand over fist in this environment, forcing their valuations lower leaving them ever-more-attractive to traders.


Their strong operational results also fueled excellent operating-cash-flow generation, with the GDXJ top 25 reporting $3.1b in OCFs last quarter.  That surged 10.4% YoY unadjusted, and 57.6% if those four removed majors are excluded.  The more cash flows gold miners generate, the more capital they have to grow their production levels by expanding existing mines along with constructing or purchasing new ones.


That will fuel higher stock prices, which ultimately mimic companiesí growth trajectories.  All those OCFs pouring in filled up the GDXJ top 25ís coffers to their highest levels yet, totaling $10.1b in cash treasuries.  That shot up 43.9% YoY unadjusted, and more than doubled at +105.1% YoY if those booted major miners are taken out.  The mid-tier gold minersí fundamentals have never looked stronger, which is super-bullish!


And the big numbers these elite gold miners are putting up arenít ending because of this gold correction extending into Q1í21.  With this current quarter almost over, gold has averaged $1,801 so far.  That is down 4.0% quarter-on-quarter, which will indeed be a drag on gold minersí earnings.  But these Q1 gold levels will still prove the third-highest ever seen, only trailing Q3í20 and Q4í20.  $1,800 is still great for miners.


If the GDXJ top 25ís AISCs this quarter come in near their last four quartersí $1,020 average which was skewed high by all the pandemic disruptions, these mid-tiers would still earn $781 per ounce in Q1í21!  That would prove their third-most-profitable quarter on record, behind the preceding couple.  That would leave unit earnings up 38.2% YoY, and only down a trivial 1.9% QoQ from Q4í20ís impressively-massive levels.


With incredibly-strong fundamentals like these, investors and speculators should be stampeding back into undervalued gold miners.  But they really arenít yet, because most are momentum traders lacking the fortitude to fight the herd and buy low while sectors are out of favor.  Yet as goldís coming bull-market upleg powers higher and gold stocks amplify its gains like usual, this sector will increasingly attract new buying.


Gold stocksí track record for multiplying wealth is unparalleled!  Todayís middle-aged gold-stock bull has already seen four uplegs, which averaged huge 99.2% absolute GDX gains over 7.6 months!  And the secular gold-stock bull before that had literally a dozen uplegs averaging 87.5% absolute gains over 7.8 months.  So playing the contrarian to buy lower early in these before selling higher later on is fantastically lucrative.


And those massive upleg gains are in major-gold-miner terms.  The fundamentally-superior smaller mid-tier and junior gold miners able to consistently grow their production will achieve gains way surpassing GDX and even GDXJ!  Uncovering these best gold stocks to own is the goal of our painstaking multi-decade research campaigns, so we can deploy capital in these outperformers during gold-stock uplegs.


At Zeal we walk the contrarian walk, buying low when few others are willing before later selling high when few others can.  We overcome popular greed and fear by diligently studying market cycles.  We trade on time-tested indicators derived from technical, sentimental, and fundamental research.  Thatís why all 1178 stock trades recommended in our newsletters since 2001 averaged hefty +24.0% annualized realized gains!


To multiply your wealth trading high-potential gold stocks, you need to stay informed about whatís going on in this sector.  Staying subscribed to our popular and affordable weekly and monthly newsletters is a great way.  They draw on my vast experience, knowledge, wisdom, and ongoing research to explain whatís going on in the markets, why, and how to trade them with specific stocks.  Subscribe today and take advantage of our 20%-off sale!  Early in a young gold-stock upleg is a great time to get deployed.


The bottom line is the mid-tier gold miners in the sweet spot for stock-price upside potential just reported one of their best quarters ever.  Adjusted for majors removed from GDXJ, the rest of its top components achieved production growth way better than their larger peers.  That along with continuing high prevailing gold prices drove record revenues, earnings, operating cash flows, and cash hoards among these elite miners.


Despite these incredibly-strong fundamentals, traders have largely abandoned this high-potential sector due to its recent extended correction.  Thatís a huge mistake.  Todayís anomalously-low gold-stock prices driven by popular bearish sentiment will mean revert dramatically higher during goldís coming next upleg.  Contrarian investors and speculators who can fight the herd to buy low now stand to earn massive gains.


Adam Hamilton, CPA     March 26, 2021     Subscribe