中規模金鉱株２０１９Q3ファンダメンタルズ by Zeal

最後の２段落だけ訳をいれました。

Gold Mid-Tiers’ Q3’19 Fundamentals
Adam Hamilton     November 22, 2019     4115 Words

The mid-tier gold miners just reported their results for a phenomenal gold quarter.  In Q3’19 this metal surged after its first bull-market breakout in years, driving much-higher prevailing prices.  That should’ve led to soaring profits for these mid-tiers in the sweet spot for stock-price upside potential.  Last quarter’s results are the most important this sector has seen in a long time, a key fundamental test for gold miners.

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 global nature of the gold-mining industry complicates efforts to gather this important data.  Many mid-tier gold miners trade in Australia, Canada, Mexico, the United Kingdom, and other countries with quite-different reporting requirements.  These include half-year reporting rather than quarterly, long 90-day filing deadlines after fiscal year-ends, and very-dissimilar presentations of operating and financial results.

The definitive list of mid-tier gold miners to analyze comes from the GDXJ VanEck Vectors Junior Gold Miners ETF.  Despite its misleading name, GDXJ is totally dominated by mid-tier gold miners and not juniors.  GDXJ is the world’s second-largest gold-stock ETF, with $4.8b of net assets this week.  That is only behind its big-brother GDX VanEck Vectors Gold Miners ETF that includes the major gold miners.

Major gold miners are those that produce over 1m ounces of gold annually.  The mid-tier gold miners are smaller, producing between 300k to 1m ounces each year.  Below 300k is the junior realm.  Translated into quarterly terms, majors mine 250k+ ounces, mid-tiers 75k to 250k, and juniors less than 75k.  GDXJ was originally launched as a real junior-gold-stock ETF as its name implies, but it was forced to change its mission.

Gold stocks soared in price and popularity in the first half of 2016, ignited by a new bull market in gold.  The metal itself awoke from deep secular lows and soared 29.9% higher in just 6.7 months.  GDXJ and GDX skyrocketed 202.5% and 151.2% higher in roughly that same span, greatly leveraging gold’s gains!  As capital flooded into GDXJ to own junior miners, this ETF risked running afoul of Canadian securities laws.

Canada is the center of the junior-gold universe, where most juniors trade.  Once any investor including an ETF buys up a 20%+ stake in a Canadian stock, it is legally deemed a takeover offer.  This may have been relevant to a single corporate buyer amassing 20%+, but GDXJ’s legions of investors certainly weren’t trying to take over small gold miners.  GDXJ diversified away from juniors to comply with that archaic rule.

Smaller juniors by market capitalization were abandoned entirely, cutting them off from the sizable flows of ETF capital.  Larger juniors were kept, but with their weightings within GDXJ greatly demoted.  Most of its ranks were filled with mid-tier gold miners, as well as a handful of smaller majors.  That was frustrating, but ultimately beneficial.  Mid-tier gold miners are in the sweet spot for stock-price appreciation potential!

For years major gold miners have struggled with declining production, they can’t find or buy enough new gold to offset their depletion.  And the stock-price inertia from their large market capitalizations is hard to overcome.  The mid-tiers can and are boosting their gold outputs, which fuels growth in operating cash flows and profitability.  With much-lower market caps, capital inflows drive their stock prices higher much faster.

Every quarter I dive into the latest results from the top 34 GDXJ components.  That’s simply an arbitrary number that fits neatly into the tables below, but a commanding sample.  These companies represented 82.7% of GDXJ’s total weighting this week, even though it contained a whopping 72 stocks!  5 of the top 34 were majors mining 250k+ ounces, 23 mid-tiers at 75k to 250k, 5 “juniors” under 75k, and 1 explorer with zero.

These majors accounted for 20.2% of GDXJ’s total weighting, and really have no place in a “Junior Gold Miners ETF” when they could instead be exclusively in GDX.  These mid-tiers weighed in at 53.6% of GDXJ.  The “juniors” among the top 34 represented just 6.9% of GDXJ’s total.  But only 1 of them at a mere 1.0% of GDXJ is a true junior, meaning it derives over half its revenues from actually mining gold.

The rest include 2 primary silver miners, a gold-royalty company, and a gold streamer.  GDXJ is actually a full-on mid-tier gold miners ETF, with considerable major and tiny junior exposure.  Traders must realize it is not a junior-gold investment vehicle as advertised.  GDXJ also has major overlap with GDX.  Fully 29 of these top 34 GDXJ gold miners are included in GDX too, with 24 of them also among GDX’s top 34 stocks.

The GDXJ top 34 accounting for 82.7% of its total weighting also represent 37.8% of GDX’s own total weighting!  The GDXJ top 34 mostly clustered between the 10th- to 40th-highest weightings in GDX.  Thus nearly 5/6ths of GDXJ is made up by over 3/8ths of GDX.  But GDXJ is far superior, excluding the large gold majors struggling with production growth.  GDXJ gives higher weightings to better mid-tier miners.

The average Q3’19 gold production among GDXJ’s top 34 was 158k ounces, a bit over half as big as the GDX top 34’s 303k average.  Despite these two ETFs’ extensive common holdings, GDXJ is increasingly outperforming GDX.  GDXJ holds many of the world’s best mid-tier gold miners with big upside potential as gold’s own bull continues powering higher.  Thus it is important to analyze GDXJ miners’ latest results.

So after each quarterly earnings season I wade through all available operational and financial reports and dump key data into a big spreadsheet for analysis.  Some highlights make it into these tables.  Any blank fields mean a company hadn’t reported that data as of this Wednesday.  The first couple columns show each GDXJ component’s symbol and weighting within this ETF as of this week.  Not all are US symbols.

19 of the GDXJ top 34 primarily trade in the US, 5 in Australia, 8 in Canada, and 1 each in Mexico and the UK.  Those symbols are listings from companies’ foreign stock exchanges.  That’s followed by each gold miner’s Q3’19 production in ounces, which is mostly in pure-gold terms excluding byproducts often found in gold ore like silver and base metals.  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.  In cases where foreign GDXJ components only released half-year data, I used that and split it in half where appropriate.  That offers a decent approximation of Q3 results.

Symbols highlighted in light-blue newly climbed into the ranks of GDXJ’s top 34 over this past year.  And symbols highlighted in yellow show the scarce GDXJ-top-34 components that aren’t also in GDX.  If both conditions are true, blue-yellow checkerboarding is used.  Production bold-faced in blue shows any rare junior gold miners in GDXJ’s higher ranks, under 75k ounces quarterly with over half of sales from gold mining.

This whole valuable dataset compared with past quarters offers a fantastic high-level read on how mid-tier gold miners are faring fundamentally as an industry.  Their Q3 proved awesome, with gold’s much-higher prevailing prices radically improving the mid-tiers’ fundamentals.  Revenues, operating cash flows, and earnings all soared.  The mid-tier gold miners’ stock prices certainly don’t yet reflect that huge improvement.

After 14 quarters in a row advancing this challenging research thread, I continue to be amazed at how much GDXJ’s top 34 holdings remain in flux.  Changes at the bottom of this range are understandable, as GDXJ’s rankings are largely market-capitalization-weighted.  So as mid-tier gold miners’ relative sizes change with their stock prices, better-performing stocks advance into the top 34 knocking out the laggards.

Eldorado Gold, Silvercorp Metals, and Wesdome Gold are all examples of this normal index evolution.  Between the ends of Q3’18 to Q3’19, their stock prices soared 76.6%, 57.5%, and 68.6% higher!  Big gains like that are why the mid-tier and junior gold miners are so alluring.  But GDXJ’s managers are still manually shuffling larger stocks higher up in their ETF’s ranks, trying to figure out which gold majors to include.

That’s unfortunate, as they don’t need any.  There are plenty of mid-tier gold miners out there to spread GDXJ’s weightings across without pushing into Canadian ownership limits.  The newest big additions in this past year came in Q4’18, when GDXJ added Kinross Gold and Buenaventura.  Kinross is one of the best major gold miners, well outperforming its peers.  Yet it does expect to mine 2.5m ounces of gold in 2019.

But how such a large gold miner can lead a “Junior Gold Miners ETF” is beyond me.  Kinross is way into major-dom, not barely a major with 1m+ ounces of annual production.  On the bright side, Kinross is far superior to AngloGold Ashanti which was among GDXJ’s highest-weighted components a year ago in Q3’18.  It produced a staggering 851k ounces that quarter, making it one of the world’s largest gold miners.

Buenaventura and Industrias Peñoles are solid mid-tier additions, producing 122k and 218k ounces of gold last quarter even though they are better known as major silver miners.  Q3’19 was the latter’s first quarter included in GDXJ.  But burdening a strong list of mid-tier gold miners with the struggling South African majors is utterly baffling.  Sibanye Gold, Gold Fields, and Harmony Gold have no place to be in this ETF.

They mined 287k, 523k, and 361k ounces of gold in Q3’19, all well into major-gold-miner territory over 250k ounces quarterly.  And their sizable collective 11.4% weighting in GDXJ is a serious burden for its shareholders.  The South African majors’ operational performances are terrible, with their very-old and very-deep mines being among the world’s highest-cost producers.  Government issues exacerbate that.

South Africa’s government is absurdly-corrupt, and is always attacking the miners and their owners.  This is not only squeezing out more taxes and perpetually expanding a crushing regulatory burden.  Officials in that once-proud country are arbitrarily shifting mine ownership based on skin color, an openly-racist policy hostile to foreign shareholders.  I wouldn’t invest in South African gold miners if they were the last on Earth.

They are really retarding GDXJ’s potential.  In Q3 SBGL, GFI, and HMY averaged 390k ounces of gold mined.  That compares to 134k for the rest of the GDXJ top 34.  These South African majors’ cash costs and all-in sustaining costs averaged $1112 and $1194 last quarter.  Those were a staggering 63.1% and 27.8% higher than the rest of the GDXJ top 34’s averages!  GDXJ’s managers really need to replace them.

Production has always been the lifeblood of the gold-mining industry.  Gold miners have no control over prevailing gold prices, their product sells for whatever the markets offer.  Thus growing production is the only manageable way to boost revenues, leading to amplified gains in operating cash flows and profits.  Higher production generates more capital to invest in expanding existing mines and building or buying new ones.

Thus gold-stock investors have long prized production growth above everything else, as it is inexorably linked to company growth and thus stock-price-appreciation potential.  In Q3’19 these GDXJ-top-34 gold miners collectively produced 5.2m ounces of gold, up a solid 2.7% YoY.  The mid-tier production growth was actually far stronger than that though, which was masked by those three ugly South African majors.

Their average production declined 4.5% YoY in Q3, but the rest of the GDXJ top 34 averaged awesome 21.1% YoY growth!  But even with those albatrosses around GDXJ’s neck, the overall 2.7% absolute growth from Q3’18 was quite good.  Last week I analyzed the Q3’19 performances of GDXJ’s big-brother GDX top-34-component gold miners.  Their collective production actually slumped 1.5% YoY absolutely.

According to the World Gold Council’s comprehensive quarterly data on global gold supply and demand, overall world gold mined drifted 0.6% lower YoY in Q3’19.  The majors dominating GDX fared worse than that, while the mid-tiers of GDXJ did way better even despite those South African majors.  The mid-tiers have cornered the market on gold production growth, again granting them superior stock-price upside potential.

The GDXJ mid-tiers were able to enjoy strong production growth because this ETF isn’t burdened with many struggling major gold miners that dominate GDX.  GDXJ’s components start at the 10th-highest weighting in GDX.  The 9 above Kinross averaged colossal Q3 production of 585k ounces, which is 3.7x bigger than the GDXJ top 34’s average!  Gold mining’s inherent geological limitations make it very difficult to scale.

The more gold miners produce, the harder it is to even keep up with relentless depletion let alone grow their output consistently.  Large economically-viable gold deposits are getting increasingly difficult to find and ever-more-expensive to develop, with low-hanging fruit long since exploited.  But with much-smaller production bases, mine expansions and new mine builds generate big output growth for mid-tier golds.

The majors don’t only face that large-base growth problem with their production scales, but also with their stocks’ market capitalizations.  The GDXJ top 34 companies’ averaged $2.4b in the middle of this week, compared to $6.3b in the GDX top 34 when I analyzed their Q3 results last week.   With the mid-tiers generally around a third as big as the majors, their stock prices have much less inertia restraining them.

The mid-tier gold miners continue to prove all-important production growth is achievable off smaller bases.  With a handful of mines or less to operate, mid-tiers can focus on expanding them or building a new mine to boost their output beyond depletion.  But the majors are increasingly failing to do this from the super-high production bases they operate at.  As long as majors are struggling, it is prudent to avoid them.

And Q3’19 was a fantastic quarter to be a fundamentally-superior gold miner, with gold’s average price soaring 21.7% YoY to $1474!  While gold only rallied 4.4% within Q3 proper, it had blasted up 10.2% quarter-to-date by early September.  That’s when gold’s best upleg of this current secular bull peaked at a 32.4% gain over 12.6 months.  Gold crested with gold-futures speculators’ buying firepower exhausting.

GDXJ’s parallel upleg ran 61.6% over 11.8 months, peaking on the same early-September day as gold.  GDXJ had soared 22.3% QTD at that point, although its subsequent correction with gold in Q3’s waning weeks bashed GDXJ back to a mere 3.7% gain during Q3 proper.  That is really poor, even lagging gold’s advance.  But the mid-tiers’ Q3’19 results proved they are wildly undervalued relative to prevailing gold levels!

The difference between gold prices and mining costs fuels profitability for gold miners, and Q3’s spread was the biggest and best seen in years.  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 with gold prices.

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.

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-GDXJ-component gold miners that reported cash costs averaged $713 per ounce.  That actually rose a sharp 7.5% YoY, and was worse than the GDX-top-34 majors’ $679 mean.

But Sibanye Gold, Gold Fields, and Harmony Gold were solely to blame.  Again these troubled South African gold majors reported crazy average cash costs of $1112 in Q3, 63.1% higher than the rest of the GDXJ top 34’s $682 average!  Both cash-cost measures are within the past 13 quarters’ range of $612 to $730.  With cash costs so far below prevailing gold prices, obviously mid-tiers face no existential threat.

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 companies’ true operating profitability.

The GDXJ-top-34 average AISCs also defied rising production to surge 5.8% higher YoY to $963 per ounce.  That is on the high side, and worse than the GDX majors’ $910 average.  But it is still within the past 13 quarters’ range of $855 to $1002.  And again those South African majors skewed that way higher, with their $1194 average AISCs being 27.8% higher compared to the rest of the GDX top 34’s $935 average!

But $963 is still fantastic with current prevailing gold prices.  The GDXJ mid-tiers’ implied profitability last quarter is gold’s $1474 average price less their $963 average all-in sustaining costs.  That makes for fat profit margins of $511 per ounce.  A year earlier in Q3’18, gold averaged just $1211 while GDXJ-top-34 AISCs ran $911 for $300-per-ounce profits.  Thus the GDXJ miners’ implied earnings rocketed 70.3% YoY!

That’s excellent 3.2x profits leverage to the 21.7% YoY increase in the average gold price from Q3’18 to Q3’19!  And the sequential explosion in profits from Q2’19 is even more extreme.  That quarter gold was averaging $1309 with GDXJ AISCs of $941.  That made for $368 of implied earnings, meaning Q3’19 saw epic 38.9% quarter-on-quarter growth!  This is incredible absolutely, but even more so relatively this year.

Overall US corporate profits have actually been shrinking, leading to increasing fears that an earnings recession is underway.  The 500 elite companies of the flagship US S&P 500 stock index likely saw their overall profits decline 2.4% YoY in Q3.  So the enormous earnings growth the gold miners are enjoying stands out even more.  Investors ought to seek out their best-in-stock-markets fundamental performances.

And the mid-tiers’ powerful earnings growth is likely to continue.  Even though gold is now in a necessary and healthy bull-market correction following that big latest upleg, it has averaged $1487 so far in Q4’19.  That’s even higher than that $1474 Q3 average!  With over half of Q4 over, gold’s average price is going to remain elevated even as it grinds lower.  That portends massive mid-tier earnings growth persisting in Q4.

The hard GAAP accounting numbers of the GDXJ-top-34 mid-tier gold miners confirm their fundamentals radically improved in Q3.  Their total revenues rocketed 76.8% higher YoY to $7.2b, which is amazing top-line growth.  Much of this has to do with the new additions of Kinross, Buenaventura, and Peñoles though.  The giant South African company they replaced, AngloGold, didn’t bother reporting sales in Q3’18.

But even excluding these new additions entirely, without subtracting Q3’18 sales from gold miners no longer in the GDXJ top 34, total revenues still surged 22.5% YoY.  That makes sense with 21.7%-higher average gold prices and 2.7%-higher total gold production.  All that revenue led to exploding operating-cash-flow generation, with GDXJ-top-34 OCFs rocketing a similar 79.2% higher YoY to $2.3b in Q3’19.

Even excluding KGC, BVN, and PENO again, OCFs still surged 35.7% YoY.  That boosted the GDXJ-top-34 mid-tiers’ total cash in their treasuries by 7.5% to $5.8b.  They spend a lot on expanding production, as their 21.1% average output growth without those infernal South Africa majors testifies to.  The much-higher prevailing gold prices indeed worked wonders for the mid-tier gold miners’ fundamentals as a sector.

On the bottom-line GAAP-profits front, the GDXJ top 34’s total earnings of $189m in Q3’19 were vastly better than their $379m overall loss in Q3’18.  Excluding those new additions, the comparison is similar at +$161m last quarter versus the same -$379m a year earlier.  But gold-mining earnings across this sector sometimes have large one-off non-cash items that are flushed through income statements, obscuring comparisons.

The biggest example is large impairment charges when lower gold prices make mines or deposits look like they’re worth less, and subsequent reversals when gold heads higher again.  Other one-off items include gains and losses on selling existing mines, as well as hedges.  So as I wade through the GDXJ mid-tiers’ quarterly income statements reported to regulators, I look for any big unusual items and record them.

Q3’19’s biggest ones among the GDXJ top 34 included Yamana Gold enjoying a $273m gain on selling a mine and Centerra Gold writing off $231m due to water-supply problems at one of its mines.  Adjusting for all these, the GDXJ top 34’s overall profits were closer to $265m in Q3’19.  Making similar adjustments in the comparable Q3’18 pared that loss to $1m.  The mid-tiers’ core earnings growth last quarter was still massive!

Despite all that, GDXJ’s average price of $38.81 in Q3’19 was only 30.8% higher than Q3’18’s.  The mid-tier gold miners’ stock prices certainly aren’t yet reflecting the radical fundamental improvements driven by these higher prevailing gold prices.  They will eventually, but not until gold’s own next upleg gives the green light for traders to pile back into gold stocks.  Their next upleg should prove an enormous catch-up one.

Even with those vexing South African majors, GDXJ remains the easiest way to ride it.  But the gains to be won in the better fundamentally-superior mid-tier gold miners will dwarf that of this ETF.  Again GDXJ rallied 61.6% over 11.8 months ending in early September.  But one its fast-improving components, Torex Gold, saw its stock price rocket 171.6% higher in roughly that same span!  Good stock picking trounces GDXJ.

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The bottom line is the mid-tier gold miners reported awesome results in Q3, directly driven by its much-higher prevailing gold prices.  The mid-tiers had far-better output growth than the majors, which fueled soaring revenues, operating cash flows, and earnings.  And implied earnings growth continues to look massive with gold largely holding at these better prices.  The mid-tiers’ fundamentals should keep improving.

要約すると、中規模金鉱株のQ3決算は素晴らしいものだった、ゴールド価格上昇を直接反映している。中規模銘柄は大規模銘柄に比べ遥かに生産量増加している、これが売上を急増し、営業利益、そして会計利益を増やした。そしてゴールドがこの価格領域を維持するかぎり素晴らしい収益成長が継続する。中規模金鉱株のファンダメンタルズは改善され続けるだろう。

The mid-tier gold miners’ stock prices have greatly lagged their radically-better results.  Their recent upleg was truncated prematurely by gold peaking.  But once gold’s next major upleg gets underway after its healthy correction runs its course, the mid-tier gold stocks have a lot of catching up to do.  Their coming upleg should prove really outsized as they are bid much higher to better reflect fantastic fundamentals.

素晴らしい決算に対して中規模金鉱株の株価は遅れている。ゴールドが天井を打ったことで最近の上昇が中断された。しかしいったんゴールドの次の大きな上昇となると、中規模金鉱株はそれに大いに追いつく、現在の下落は健全な調整だ。素晴らしいファンダメンタルズを反映して、次の上昇は本当に素晴らしいものになるはずだ。

Adam Hamilton, CPA     November 22, 2019     Subscribe