Gold Minersí Q4í23 Fundamentals

Adam Hamilton     March 15, 2024     3192 Words


The major gold miners are finishing reporting their latest quarterly results, which proved mixed.  Their collective production generally declined, forcing mining costs modestly higher.  Yet outliers were mostly responsible.  Unit profitability still surged dramatically due to near-record prevailing gold prices, but huge impairment charges gutted accounting earnings.  Traders need to handpick outperformers to leverage gold.


Out of each yearís four quarterly earnings seasons, Q4ís are the most challenging to analyze.  While the annual reports are more comprehensive than quarterlies, some companies report less Q4 detail focusing on full-year results.  And annual reporting deadlines are looser and more spread out than quarterly ones, running 60 days after year-ends in the US and a bewildering 90 days for gold stocks trading in Canada!


So plenty of gold miners in the Great White North wait until late March to publish Q4 results, when Q1 is almost over.  Thatís way too late, leaving shareholders with stale fundamental data.  Thus I try to split the difference between US and Canadian reporting, gathering and analyzing all available Q4 reports in mid-March.  While not fully complete then, the resulting picture of major gold stocksí fundamentals is more timely.


The GDX VanEck Gold Miners ETF remains this sectorís dominant benchmark.  Birthed way back in May 2006, GDX has parlayed its first-mover advantage into an insurmountable lead.  Its $12.9b of net assets mid-week dwarfed the next-largest 1x-long major-gold-miners ETF by nearly 31x!  GDX is undisputedly the trading vehicle of choice in this sector, with the worldís biggest gold miners commanding most of its weighting.


Gold-stock tiers are defined by minersí 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+.  Those two largest categories account for over 58% of GDX.


Unfortunately gold stocks are languishing well out of favor today because of recent dreadful underperformance relative to the metal they mine.  Gold is enjoying a strong upleg, powering 19.9% higher at best since early October achieving nine new nominal record closes!  Yet in that parallel span GDX only rallied 16.9%, making for terrible 0.9x upside leverage.  Much riskier than their metal, gold stocks need to outperform.


Normally they do, with GDXís major gold stocks tending to amplify material gold moves by 2x to 3x.  That compensates traders for minersí big additional operational, geological, and geopolitical risks heaped on top of gold price trends.  This vexing lagging has really damaged confidence in this high-potential sector.  The battered gold stocks need to stage a massive mean-reversion catch-up rally to restore bullish sentiment.


For 31 quarters in a row now, Iíve painstakingly analyzed the latest operational and financial results from GDXís 25-largest component stocks.  Mostly super-majors, majors, and larger mid-tiers, they dominate this ETF at 87.3% of its total weighting!  While digging through quarterlies is a ton of work, understanding the gold minersí latest fundamentals really cuts through the obscuring sentiment fogs shrouding this sector.


This table summarizes the operational and financial highlights from the GDX top 25 during Q4í23.  These gold minersí stock symbols arenít 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 Q4í22.  Those symbols are followed by their current GDX weightings.


Next comes these gold minersí Q4í23 production in ounces, along with their year-over-year changes from the comparable Q4í22.  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 minersí profitability.


Thatís 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 hadnít disclosed that particular data as of the middle of this week.  The annual changes arenít included if they would be misleading, like comparing negative numbers or data shifting from positive to negative or vice-versa.


Five weeks ago before this latest earnings season got underway, I wrote a Q4í23 earnings preview essay.  Based on major gold minersí latest cost guidance and Q4ís lofty prevailing gold prices, it looked like they would be reporting blockbuster results.  While the actuals have been coming in quite good on some key fronts, they arenít fantastic.  Unfortunately thereís still too much deadweight among major gold miners.



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 boosts profitability, lowering unit costs by spreading big fixed operational expenses across more ounces.  Yet the GDX top 25ís collective output in Q4 fell 4.6% YoY to 8,845k ounces.


That was worse than overall global-gold-mining output according to the World Gold Council, which only slipped 1.7% YoY to 29,925k in Q4.  Fully 14 of these GDX-top-25 miners suffered declining production last quarter.  And disappointingly plenty of them didnít expound on the reasons, focusing their analyses on full-year-2023 results with Q4 just lumped in.  Thatís likely done intentionally to obscure any Q4 challenges.


But the biggest reason the GDX top 25ís collective output shrunk last quarter was another gold-miner mega-merger.  The worldís largest super-major gold miner Newmont bought out Australian super-major Newcrest Mining last year for $16.8b.  That deal closed in early November, so NEMís Q4 output should include roughly 2/3rds of NCMís.  A year ago in Q4í22, NEM mined 1,630k ounces while NCM produced 512k.


The latterís November and December production shouldíve run near 340k, adding onto Newmontís to push it up near 1,970k.  Yet this merged companyís Q4 output merely climbed 6.7% YoY to 1,740k.  Large gold miners have to gobble up smaller ones in order to overcome relentless depletion.  But gold-stock mega-mergers have proven bad for this sector, leading to lower overall production and higher mining costs.


A year ago in Q4í22, Newcrest was the best-looking super-major fundamentally with really-profitable all-in sustaining costs of just $1,082 per ounce.  Newmontís ran $1,215 back then.  A higher-cost gold miner buying a portfolio of lower-cost gold mines should reduce overall costs, right?  A combined NEM and NCMís AISCs should be somewhere in the middle.  Yet Newmontís still soared 22.2% YoY to $1,485 in Q4í23!


Unfortunately these mega-mergers ultimately destroying value for shareholders are nothing new in this sector.  Newmont and Barrick Gold have been doing this for years, assimilating smaller great majors like Star Trekís Borg.  Those smaller majors including Newcrest and Goldcorp had far-superior fundamentals, growing production with much-lower more-profitable mining costs.  But when acquired those advantages vanish.


Together these acquisition-happy super-majors NEM and GOLD have always dominated GDX, now with a combined 21.0% weighting.  But for long years their fundamentals have usually looked worse than many of their major peersí.  Outside of the four quarters after mega-mergers, their production has been declining while costs have been rising.  Newmont and Barrick have often been deadweight restraining sector gains.


Had Newcrest not been devoured by Newmont, the GDX top 25ís collective production wouldíve likely been flat.  And average AISCs wouldíve been pulled lower.  In the previous four quarters, NCMís were averaging just $1,172 compared to NEMís $1,372!  GDX would leverage gold considerably better if NEM and GOLD weightings shrunk relative to other majors.  Their market caps are too high for their fundamentals.


A year ago Newmont guided 2023 to midpoints of 6,000k ozs of gold mined near $1,200 AISCs.  Yet last year this company only produced 5,550k ozs at way-worse $1,444 AISCs!  A big chunk of this miss was due to a major mine strike in Mexico, which I analyzed in my previous GDX-top-25 Q3í23 results essay.  But the super-majorsí ongoing misfires have really tanked institutional investorsí enthusiasm for this sector.


While GDX is this sectorís benchmark of choice, it is dominated by huge but often-floundering miners that arenít representative of gold stocks as a whole.  Smaller fundamentally-superior majors, and even-better mid-tiers and juniors, are crushing it on the fundamentals front.  They are consistently growing their outputs largely through organic expansions, and often driving down mining costs fueling increasingly-fat earnings.


Even other super-majors are way outperforming Newmont and Barrick.  Agnico Eagle Mines is the third-largest gold miner, rivaling Barrick with 903k ounces produced last quarter.  Yet that surged 13.0% YoY, partially due to AEM acquiring some of Yamana Goldís mines when Pan American Silver bought it out.  And AEMís AISCs slipped 0.3% YoY to $1,227, much more profitable than any of its super-major peers.


The point here is settling for GDX is a suboptimal way to deploy capital in gold stocks, guaranteeing underperformance.  This sector requires researched stock picking, staying with the best fundamentally-superior gold miners while avoiding all the deadweight.  Thatís not just NEM and GOLD, but also royalty company Franco-Nevada which has a radically-inflated market cap far in excess of the meager gold it ďproducesĒ.


Unit gold-mining costs are generally inversely proportional to gold-production levels.  Thatís because gold minesí 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 donít 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 miningís big fixed expenses across, lowering unit costs and boosting profitability.  But while fixed costs are the lionís share of gold mining, there are also sizable variable costs.  Thatís where recent yearsí 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 major gold miners.  They illuminate the minimum gold prices necessary to keep the mines running.


The GDX top 25 reporting cash costs as of mid-week averaged $993 per ounce in Q4, surging 5.1% YoY.  That was just under Q3í22ís record high of $996.  Like usual, outliers dragged that higher.  Perpetually-high-cost Hecla Mining was last quarterís main culprit, sporting ugly $1,702 cash costs.  Exclude those, and the rest of these major gold miners averaged a better $946.  Cash costsí relevance has long been fading.


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.


Again back in early February, I was looking for the GDX top 25ís Q4í23 AISCs to climb a slight 0.6% YoY to $1,275.  That was conservative based on their Q3 year-to-date AISCs and their full-year guidances.  But the actuals came in somewhat worse, with average AISCs climbing 3.9% YoY to $1,317.  Hecla again skewed that high with its embarrassing $1,969 AISCs, which amazingly still improved a sizable 7.6% YoY!


Kicking out Hecla alone, the rest of the GDX top 25 averaged $1,276 AISCs last quarter right in line with my forecast.  And that still includes Newmontís record-high-for-it $1,485 despite Newcrestís lower-cost mines.  Had NEM behaved, that wouldíve made for a second quarter of annual unit-cost declines.  These elite gold majors arenít particularly optimistic about 2024 AISCs either, with midpoint guidances averaging $1,334.


For reference, the 31-quarter range of GDX-top-25 AISCs has run from $825 to $1,405, with Q4í23ís $1,317 being 85% up in.  But while lower would be better, the major gold miners were still plenty profitable with last quarterís near-record average gold prices.  Those surged 14.2% YoY in Q4 to $1,976, just shy of Q2í23ís record high of $1,978.  Despite the major gold minersí challenges, they are earning fat profits.


Subtracting these quarterly-average GDX-top-25 AISCs from quarterly-average gold prices yields a great proxy for sector unit earnings.  Those ran $659 per ounce in Q4, soaring 42.3% YoY!  That followed Q3ís colossal 93.8%-YoY jump to $622, and ran 60% up into the 31-quarter range from $321 to $884.  Such impressive earnings yield rich profit margins of 33%, high levels most companies would sell their souls for.


Yet the major gold stocks remain unloved despite these strong fundamentals.  Mid-week GDX closed at just $30.29 despite gold running a near-record $2,172.  During its first full month of trading way back in June 2006, GDX averaged $35.80 while gold averaged only $596!  Make no mistake, todayís gold-stock levels are exceedingly undervalued and utterly absurd.  And that gaping disconnect is continuing to mount.


In this current almost-over Q1í24, average gold prices are clocking in at a big new record $2,049 which is up another 8.3% YoY!  Assuming GDX-top-25 average AISCs shake out around their full-year guidances of $1,334, that implies Q1 unit profits surging another 23.6% YoY to an even-fatter $715 per ounce!  As Warren Buffettís renowned mentor Benjamin Graham famously said, markets are ultimately weighing machines.


While swirling winds of sentiment bully around stock prices over the short term, eventually they will reflect some reasonable multiple of underlying corporate earnings.  Gold stocks remain overdue for a massive mean reversion higher to start normalizing their stock prices with profits.  Valuations should overshoot to the upside too, as those gains fuel increasingly-bullish sentiment that ultimately climaxes in euphoric greed.


The major gold minersí hard Q4 accounting results under Generally Accepted Accounting Principles sure didnít look as good as their unit earnings.  The GDX top 25ís total revenues climbed just 4.6% YoY to $17,546m last quarter.  That is worse than 4.6%-lower total production combined with 14.2%-higher average gold prices would suggest.  But thankfully that is due to one major gold miner oddly pushing back Q4 reporting.


British major Endeavour Mining isnít releasing its Q4 and full-year-2023 results until March 27th.  That is considerably later than last yearís March 9th, and thereís no indication why results are being delayed.  If EDVís Q4í22 sales are excluded to make these quarters more comparable, the rest of the GDX top 25 saw better 8.6%-YoY revenues growth.  Thatís right where it ought to be given production and gold prices.


Circling back to AISCs briefly, EDVís could drag the GDX top 25ís Q4 ones lower.  Over the last four reported quarters, EDVís AISCs averaged a great $1,020!  They wonít be that good in Q4í23 because its output plunged 21.1% YoY.  But even at $1,100, that would drag down GDX-top-25 AISCs to $1,305 including Hecla or just $1,266 without!  Endeavour has already guided full-year-2024 AISCs to a $995 midpoint.


The ugliest fly in the ointment of major gold minersí Q4 results were their colossal accounting losses of $3,484m.  Such dismal negative profits certainly arenít helping gold stocksí cause among institutional investors.  But the reason wasnít operational problems, but huge impairment charges led by Newmont of course.  It wrote down goodwill at three acquired mines totaling $1,881m last quarter, colossal noncash losses!


Newmont also ran though a separate $1,219m reclamation-adjustment charge at another mine due to increased water-management costs.  Franco-Nevada reported its own huge $1,169m impairment charge on the government of Panama shuttering a gigantic copper mine FNV was getting gold streams from, due to political protests.  Barrick Gold and even Agnico Eagle reported their own $289m and $667m impairments.


And that list isnít exhaustive, with a few more smaller-but-still-considerable impairment charges.  Adding up all those in Q4 totaled a jaw-dropping $5,645m!  Without those, the GDX top 25ís operating profits were closer to $2,161m.  A year ago in the comparable Q4í22, deadweight super-majors NEM and GOLD again reported horrible losses with $1,317m and $830m impairments and another Newmont $620m reclamation!


Q4í22 earnings without those and some smaller non-cash charges were about $2,098m.  So GDX-top-25 bottom-line net profits were closer to 3.0% growth last quarter.  And that is likely lowballed since it doesnít include Endeavourís Q4 results yet.  So major gold minersí hard accounting earnings are nowhere near as bad as Newmontís and Barrickís ongoing huge writeoffs for overpaying in past buyouts are making them look.


The GDX top 25ís cashflows generated from operations slipped 0.3% YoY in Q4í23 to $5,307m.  That is right in the middle of their 31-quarter range.  But again EDV hasnít reported yet, so exclude it from Q4í22 and OCFs grew a better 5.9% YoY.  Thatís still lower than it ought to be with gold prices so high, but it isnít bad.  These elite majorsí total cash treasuries fell 14.7% YoY to $13,653m, which is probably a good sign.


While acquisitions at high premiums often arenít an optimal use for cash, organically growing production with mine expansions and new mine-builds is fantastic.  A good GDX-top-25 chunk invested substantially in boosting their outputs last year, some of which will start bearing fruit this year.  Plenty of majors still have good growth potential, outside of those merger-happy super-majors.  Traders will reward growing miners.


So the major gold minersí Q4 results proved mixed, below blockbuster status but generally good.  But the smaller mid-tiersí and juniorsí should be much better.  Next Iím working on the GDXJ top 25ís results, with an essay analyzing them coming next week.  Smaller gold miners are better able to consistently grow their outputs from lower bases, while better controlling mining costs by targeting lower-cost deposits to tap.


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The bottom line is the major gold minersí latest Q4 results were mixed.  They generally suffered lower production and higher mining costs, despite another expensive super-major mega-merger.  Yet near-record average gold prices still fueled fat unit earnings that soared dramatically.  But huge impairments led by super-major writedowns hammered accounting profits far into the red, dampening sector enthusiasm.


Nevertheless the major gold stocks remain deeply undervalued relative to the metal they mine.  Their stock prices need to mean revert then overshoot far higher.  That will increasingly happen as goldís upleg continues powering higher, shifting sector sentiment back to bullish.  Higher prevailing gold prices will also drive improving fundamentals.  That should help attract institutional investors to this high-potential sector.


Adam Hamilton, CPA     March 15, 2024     Subscribe