Commodities Analysis & Opinion

Gold Miners’ Q1’24 Fundamentals

The major gold miners just wrapped up another quarterly earnings season, reporting great results. Sector unit profits continued blasting higher on stable production, lower mining costs, and record prevailing gold prices. Yet individually plenty of majors still struggled with rising expenses or lower output. So deploying capital in miners to leverage gold’s remarkable breakout requires handpicking fundamentally-superior stocks.

The GDX VanEck Gold Miners ETF (NYSE:GDX) remains this sector’s dominant benchmark. Birthed way back in May 2006, GDX has parlayed its first-mover advantage into an insurmountable lead. Its $13.9b of net assets mid-week dwarfed the next-largest 1x-long major-gold-miners ETF by nearly 28x! GDX is undisputedly the trading vehicle of choice in this sector, with the world’s biggest gold miners commanding most of its weighting.

Gold-stock tiers are defined by miners’ annual production rates in ounces of gold. Small juniors have little sub-300k outputs, medium mid-tiers run 300k to 1,000k, large majors yield over 1,000k, and huge super-majors operate at vast scales exceeding 2,000k. Translated into quarterly terms, these thresholds shake out under 75k, 75k to 250k, 250k+, and 500k+. Those two largest categories account for fully half of GDX.

GDX’s Q1 performance was poor, merely edging up 2.0% despite gold powering 7.6% higher. Normally the major gold miners amplify material gold moves by 2x to 3x, so their stocks should’ve surged 15% to 23% last quarter! Traders have been slow to warm to this sector, as it languished out of favor for years. Recent months’ euphoric stock-market bubble also overshadowed gold, stealing most of markets’ limelight.

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But GDX’s dismal and super-anomalous 0.3x upside leverage to gold in Q1 has passed. Despite gold’s healthy and necessary high consolidation over this past month, the major gold stocks just hit a new upleg high mid-week. GDX has soared 39.2% since late February, amplifying gold’s parallel 17.4% gain by 2.3x! Already back into normal territory, the majors’ upside leverage to gold is dramatically mean reverting.

Gold’s recent nominal-record-high streaks are winning much-more bullish financial-media coverage, so traders are increasingly noticing and chasing. Q1’s earnings season had a great example, as the world’s largest gold miner Newmont Goldcorp Corp (NYSE:NEM) reported its latest results. Despite that being the only gold stock included in the flagship S&P 500 benchmark index, normally institutional investors still don’t follow NEM enough to care.

Yet that day its stock rocketed 12.5% higher on that Q1 report! NEM’s gains dragged the entire GDX up a big 3.7%, despite gold only climbing 0.6% that day. But considered in proper comparable context, those Newmont Q1 results actually proved weak as I’ll explain below. Yet fund managers finally starting to pay attention to gold and gold stocks again flooded in anyway. Sentiment is definitely improving in this sector!

For 32 quarters in a row now, I’ve painstakingly analyzed the latest operational and financial results from GDX’s 25-largest component stocks. Mostly super-majors, majors, and larger mid-tiers, they dominate this ETF at 86.0% of its total weighting! While digging through quarterlies is a ton of work, understanding the gold miners’ latest fundamentals really cuts through the obscuring sentiment fogs shrouding this sector.

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This table summarizes the operational and financial highlights from the GDX top 25 during Q1’24. These gold miners’ stock symbols aren’t 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 Q1’23. Those symbols are followed by their current GDX weightings.

Next comes these gold miners’ Q1’24 production in ounces, along with their year-over-year changes from the comparable Q1’23. Output is the lifeblood of this industry, with investors generally prizing production growth above everything else. After are the costs of wresting that gold from the bowels of the earth in per-ounce terms, both cash costs and all-in sustaining costs. The latter help illuminate miners’ profitability.

That’s followed by a bunch of hard accounting data reported to securities regulators, quarterly revenues, earnings, operating cash flows, and resulting cash treasuries. Blank data fields mean companies hadn’t disclosed that particular data as of the middle of this week. The annual changes aren’t included if they would be misleading, like comparing negative numbers or data shifting from positive to negative or vice-versa.

A few weeks ago as this latest earnings season was just getting underway, I wrote an essay previewing likely Q1’24 results. I concluded “…the major gold miners will soon report fantastic Q1 results. Despite higher mining costs likely in the usual Q1 production ebb, record average gold prices will still make for fat unit profits.” That proved true, although digging into the actual quarterlies revealed some surprises like usual.

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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. The GDX top 25’s collective Q1 output slipped 0.6% YoY to 7,999k ounces.

That was the fifth quarter in row these major gold miners failed to grow their production. Operating at large scales, they simply can’t find enough new gold to overcome relentless depletion. These bigger gold miners really underperformed their smaller peers last quarter. According to the World Gold Council’s new Q1’24 Gold Demand Trends report, global gold mine production actually grew an impressive 4.4% YoY in Q1!

And the GDX top 25’s production would’ve been even worse if not for Newmont’s soaring 32.3% YoY to a huge 1,680k ounces! That’s the reason institutional investors bid up NEM’s stock 12.5% that day its Q1 results were released. While sounding amazing, that big growth is a short-lived merger boost. Newmont gobbled up Australian super-major Newcrest Mining (OTC:NCMGF) for $16.8b last year, with that deal closing in early November.

Of course this newly-merged company’s first full quarter would see big output growth. But traders newer to gold stocks didn’t realize that a year ago in Q1’23 NEM’s and NCM’s combined production totaled 1,780k ounces. So somehow now together as Newmont their Q1’24 output actually dropped a sizable 5.6% YoY! Gold-stock mega-mergers have always been bad for this sector, as I analyzed in a February-2019 essay.

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Unable to organically grow production at their vast scales, super-majors spend tens of billions of dollars to buy smaller rivals. These acquired gold miners are always fundamentally superior, operating fewer gold mines at lower costs. Their resulting better profitability and lower market capitalizations give their stocks greater upside leverage to gold. But those advantages vanish once assimilated into the super-major Borg.

Newmont’s latest acquisition in a long line of them again proves this. A year ago in Q1’23, NEM’s all-in sustaining costs ran $1,376 per ounce while NCM’s were the best among super-majors at just $1,012. These two companies’ production-weighted average then was $1,272. Thus you’d think merging them would leave mining costs in that ballpark, maybe 5% higher near $1,335 in Q1’24 due to relentless inflation.

Yet somehow like in most of its past deals Newmont managed to squander Newcrest’s lower-cost mines’ advantage. NEM-NCM combined last quarter reported lofty $1,439 AISCs, the second worst out of all reporting super-majors! So while it was great to see institutional investors respond to NEM’s Q1 results, they weren’t worthy of such a blistering rally. Mergers only yield four quarters of outsized output growth.

In addition to slaying fundamentally-superior smaller majors and larger mid-tiers with much-better upside potential, gold-stock mega-mergers taint this sector in other damaging ways. Newmont and Barrick Gold (NYSE:GOLD) have long been the ringleaders of these buyouts, which they chronically overpay for wasting their shareholders’ wealth. These deals are also mostly financed by huge share issuances, heavily diluting existing owners.

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I sure wish that only hurt NEM and GOLD shareholders, but it really tarnishes this entire industry. These dominant super-majors accounting for 19.6% of GDX’s weighting are plagued by endless staggering goodwill writeoffs for their huge buyout overpayments. I saw a study at the end of Q1 pegging those at $17.2b over the years for Newmont and a jaw-dropping $39.5b for Barrick! These devastate accounting earnings.

Fund managers sometimes look at aggregate sector profitability before deciding to allocate capital to individual stocks, bottom-line earnings reported to securities regulators. Despite plenty of mid-tier and junior gold miners being wildly profitable, those colossal mega-merger writeoffs utterly gut sector earnings. They mask awesome fundamentals of smaller miners, choking off institutional capital inflows into this sector.

And because of Newmont’s and Barrick Gold’s terribly-irresponsible profligacy, their stocks have been among the GDX top 25’s worst performers. But since they dominate this ETF’s weightings, that makes it look like gold stocks as a whole are well underperforming gold. Traders naturally look to GDX’s action for a righteous read on how gold stocks are faring, but NEM’s and GOLD’s tens of billions of writeoffs retard that.

So while GDX is this sector’s benchmark of choice, it is heavily distorted by huge often-floundering miners that aren’t representative of this wider sector. 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 (NYSE:AEM) Mines is the third-largest gold miner, rivaling Barrick with 879k ounces produced last quarter. That grew a strong 8.1% YoY, partially because AEM acquired some of Yamana Gold’s mines when Pan American Silver (NYSE:PAAS) bought it out. Yet even at Agnico’s huge operating scale, its AISCs last quarter were far more profitable at just $1,190.

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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. That’s 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 “produces”.

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

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

Cash costs are the classic measure of gold-mining costs, including all cash expenses necessary to mine each ounce of gold. But they are misleading as a true cost measure, excluding the big capital needed to explore for gold deposits and build mines. So cash costs are best viewed as survivability acid-test levels for the major gold miners. They illuminate the minimum gold prices necessary to keep the mines running.

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Last quarter the GDX-top-25 majors averaged cash costs of $1,013 per ounce, a new record high for the 32 quarters I’ve been advancing this research thread. The previous one was Q3’22’s $996. But with gold so elevated, Q1’24’s difference between prevailing prices and average cash costs was still the fifth highest ever witnessed. So the major gold stocks’ direct mining expenses remain relatively low compared to gold.

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.

A few weeks ago in that GDX-top-25 Q1’24 earnings preview essay, I wrote “My best guess is those Q1 AISCs average around $1,365”. I explained the assumptions behind that estimate then. So it was quite a shocker to see the actual average last quarter retreat 2.0% YoY to just $1,277 per ounce! Those were the lowest GDX-top-25 average AISCs in five quarters. Unfortunately this was due to one extreme outlier.

Peru’s Compania de Minas Buenaventura SAA ADR (NYSE:BVN) has long been one of the higher-cost gold miners included in GDX’s upper ranks. Its many operational challenges for years have left BVN unworthy of the higher market capitalization that investors have given it. Like NEM, GOLD, Franco-Nevada Corporation (NYSE:FNV), and others, BVN is another elite gold stock I would never personally own. Yet unbelievably and contrary to pedigree, Buenaventura reported negative AISCs in Q1!

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How is such sorcery even possible? BVN isn’t a primary gold miner, with only 36% of its Q1 revenues from the yellow metal. It also produces silver, copper, zinc, and lead. But like some poly-metallic miners, Buenaventura reports in gold-centric terms since gold stocks command higher multiples. So those other metals are considered byproducts, despite being the big majority of output. Their sales are credited to gold.

While BVN’s gold production only grew 7.8% YoY last quarter, its silver, copper, zinc, and lead output rocketed up 149.7%, 26.4%, 418.6%, and 262.7%! Those colossal jumps translated into enormous byproduct credits offsetting gold-mining costs, slamming Q1 AISCs to -$121. BVN’s non-gold production should remain much higher with a new silver-zinc-lead mine just coming online, keeping gold AISCs lower.

Excluding BVN, the rest of the GDX top 25 averaged $1,370 AISCs in Q1 right in line with my $1,365 preview estimate. And the majors’ AISCs should retreat as 2024 marches on. As explained in that Q1’24 preview essay, Q1s are the low-production ebb of the global gold mining industry. This is mainly due to the winter impact on gold mining in the northern hemisphere, where most of the world’s land and mines are.

According to the WGC, over the last decade quarter-on-quarter global mined gold has averaged changes of -8.4% in Q1s, +3.7% in Q2s, +6.1% in Q3s, and +0.4% in Q4s. The strong output growth in Q2s and Q3s tends to proportionally drive down mining costs. In addition the GDX-top-25 miners giving full-year-2024 AISC guidances averaged $1,324. That’s considerably lower than last quarter’s $1,370 excluding BVN.

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In the 32-quarter history of this GDX-top-25-results research, a handful of outliers have often skewed the average AISCs higher. While I pointed that out, I always still used the actual average including them to calculate implied sector unit profits. So we need to treat BVN’s stunning negative AISCs the same way this time around. These elite majors averaged $1,277 AISCs in a quarter where gold averaged a record $2,072.

That made for fat $795 unit profits, the highest since Q4’20 and the third-richest on record! Those shot up an impressive 34.9% YoY, adding to their massive 93.8%-YoY surge in Q3’23 and 42.3% in Q4’23. There’s almost certainly no other sector in all the stock markets seeing earnings surge as fast as in the gold miners. This is going to increasingly attract fundamentally-oriented fund investors to deploy capital.

And the major gold miners’ implied unit profitability is still soaring in this currently-half-over Q2’24. So far gold has averaged an amazing record $2,333! Thus almost no matter what happens over the coming six weeks, Q2’s gold prices will be way higher than Q1’s record $2,072. And these GDX-top-25 gold miners themselves are mostly predicting lower AISCs as outputs improve, which will further expand profitability.

Conservatively though let’s assume GDX-top-25 average AISCs are merely flat in Q2 near $1,275. And that average gold prices are 5% lower in the second half of Q2 as gold pulls back to continue bleeding off April’s extreme overboughtness. That would yield gold averaging around $2,275 in Q2, making for epic record $1,000-per-ounce profits! Those would soar 67% YoY over Q2’23’s, further improving fundamentals.

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The major gold miners’ hard accounting results under Generally Accepted Accounting Principles or other countries’ equivalents were also strong in Q1. The total revenues reported by the GDX top 25 grew 2.1% YoY to a record $25.1b. But that’s not as good as you’d expect with average gold prices 9.5% higher and production off 0.6%. This discrepancy is partially explained by China’s Zhaojin Mining going dark on the web.

Zhaojin has always been a poor financial reporter in English, with partial results only published erratically and often seriously lagging. This week I can’t access its English website, despite trying for multiple days using multiple web browsers on multiple computers across our VPN. I don’t know if that site is down for good, or just temporarily offline. But excluding Zhaojin’s Q1’23 revenue, the GDX top 25’s instead climbed 3.1%.

These elite majors’ bottom-line earnings looked far worse than their implied unit ones, plunging 37.1% YoY to $2,645m. Of course bumbling Newmont can hardly get past a quarter without some big unusual loss, and Q1’24’s was another $485m non-cash impairment from “classifying six non-core assets and one project as held for sale”. Also the comparable Q1’23 GDX-top-25 total earnings were grossly overstated.

Incredibly a year ago in Q1’23 Agnico Eagle Mines booked a colossal $1,543m non-cash remeasurement gain! Newmont should be taking notes. AEM owned half of a big gold mine, then bought the other half from Yamana Gold (BMV:AUYN) when Pan American Silver acquired that company. Thus Agnico had to revalue its existing first half at the price paid for its newly-acquired second half, for a very-unusual huge one-time gain.

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Make these two adjustments, and the GDX top 25’s bottom-line profits actually surged 17.7% YoY to $3.1b. That’s more in line with operating-cash-flow generation, which also grew a big 21.3% YoY to $5.9b last quarter. Yet these elite majors’ total cash hoards still shrunk 15.8% YoY to a still-big $15.8b, as they spent billions to expand existing mines and develop new ones. The gold miners truly are thriving!

But again GDX is only up 39.2% at best so far in this upleg, merely amplifying gold’s 31.2% at best by a weak 1.3x. The historical norm is again 2x to 3x, with that top end exceeded as major gold uplegs mature. Today’s specimen is the first achieving new nominal-record-close streaks since a pair in 2020. During those gold averaged 41.4% gains, which GDX leveraged by over 2.5x with huge 105.4% average gains!

The bottom line is the major gold miners generally reported great Q1 results. Their perpetual struggle to overcome depletion continued, with slightly-lower production. But their average mining costs declined, combining with record quarterly-average gold prices to fuel big unit-earnings growth. And these gold-mining profits are almost certain to soar much fatter in this current Q2, fueled by way-higher breakout gold prices.

Despite these fantastic fundamentals, the major gold stocks remain seriously undervalued relative to their metal. Distracted by the stock-market bubble, traders initially ignored gold’s remarkable breakout surge. But they are starting to pay attention, buying in rekindling gold-stock outperformance. That will fuel a big mean reversion then overshoot in gold-stock prices, arguing the lion’s share of this upleg’s gains are still coming.

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