The major gold miners’ stocks have soared in recent months, fueled by gold’s decisive breakout to new bull-market highs. Nothing motivates traders like performance, so interest in this long-neglected sector has exploded. While gold stocks’ technicals and sentiment have greatly strengthened, their just-reported Q2’19 results reveal whether their underlying fundamentals support their powerful surge and further upside.

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 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 $11.8b this week were a staggering 44.0x larger than the next-biggest 1x-long major-gold-miners ETF! GDX is effectively this sector’s blue-chip index.

It currently includes 44 component stocks, which are weighted in proportion to their market capitalizations. This list is dominated by the world’s largest gold miners, and their collective importance to this industry cannot be overstated. Every quarter I dive into the latest operating and financial results from GDX’s top 34 companies. That’s simply an arbitrary number that fits neatly into the tables below, but a commanding sample.

As of this week these elite gold miners accounted for fully 94.5% of GDX’s total weighting. Last quarter they combined to mine 297.6 metric tons of gold. That was 33.7% of the aggregate world total in Q2’19 according to the World Gold Council, which publishes comprehensive global gold supply-and-demand data quarterly. So for anyone deploying capital in gold or its miners’ stocks, watching GDX miners is essential.

The major gold miners dominating GDX’s ranks are scattered around the world. 20 of the top 34 mainly trade in US stock markets, 6 in Australia, 5 in Canada, 2 in China, and 1 in the United Kingdom. GDX’s geopolitical diversity is excellent for investors, but makes it more difficult to analyze and compare the larger gold miners’ results. Financial-reporting requirements vary considerably from country to country.

In Australia, South Africa, and the UK, companies report in half-year increments instead of quarterly. The big gold miners often publish quarterly updates, but their data is limited. In cases where half-year data is all that was made available, I split it in half for a Q2 approximation. While Canada has quarterly reporting, the deadlines are looser than in the States. Some Canadian gold miners drag their feet in getting results out.

While it is challenging bringing all the quarterly data together for the diverse GDX-top-34 gold miners, analyzing it in the aggregate is essential to see how they are doing. So each quarter I wade through all available operational and financial reports and dump the data into a big spreadsheet for analysis. The highlights make it into these tables. Blank fields mean a company hadn’t reported that data as of this Wednesday.

The first couple columns of these tables show each GDX component’s symbol and weighting within this ETF as of this week. While most of these stocks trade on US exchanges, some symbols are listings from companies’ primary foreign stock exchanges. That’s followed by each gold miner’s Q2’19 production in ounces, which is mostly in pure-gold terms. That excludes byproduct metals often present in gold ore.

Those are usually silver and base metals like copper, which are valuable. They are sold to offset some of the considerable expenses of gold mining, lowering per-ounce costs and thus raising overall profitability. In cases where companies didn’t separate out gold but lumped all production into gold-equivalent ounces, those GEOs are included instead. Then production’s absolute year-over-year change from Q2’18 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 drives 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. Companies with symbols highlighted in light-blue have newly climbed into the elite ranks of GDX’s top 34 over this past year. This entire dataset together is quite valuable.

It offers a fantastic high-level read on how the major gold miners are faring fundamentally as an industry. In Q2’19 the world’s larger gold miners continued their longstanding struggle against declining production. Last quarter was another major transition one with this past year’s gold-stock mega-mergers finally settled out. They’ve considerably altered major gold miners’ global landscape, ramping concentration risks in GDX.

Since Q2’19 was effectively the first quarter with those gold-stock mega-mergers complete, we have to start with them. In late September 2018, the world’s second-largest gold miner Barrick Gold rocked this small contrarian sector. It declared it was buying competitor Randgold in an all-stock acquisition worth $6.5b! That deal was to make Barrick the world’s largest gold miner, and was finalized in early January 2019.

But Barrick’s arch-rival Newmont wasn’t willing to lose the pole position, so within weeks it responded with a bigger salvo. In mid-January it announced it was buying its own major gold miner Goldcorp, which was about twice as large as Randgold in gold-output terms! Size does matter for elite gold-mining executives. This massive $10.0b all-stock deal wasn’t consummated until mid-April, encompassing most of Q2’19.

So last quarter was the first one where these new bigger and badder gold-mining behemoths dominated this sector and therefore GDX. Understanding these mega-mergers and their implications is essential for gold-stock traders. Back in mid-February I wrote a comprehensive essay explaining these deals and why they were done. They were desperate and expensive attempts to mask flagging production at both giants.

By the end of 2018, Barrick had suffered colossal annual production declines in 7 of the last 9 quarters averaging 12.4% year-over-year! It had proven incapable of growing its own operations organically, and thus had to resort to buying more. While Newmont had done a far-better job of maintaining its massive gold output, that too shrunk by an average of 5.9% YoY in 2018’s first three quarters. That trend was concerning.

I doubt Newmont’s managers would’ve bought Goldcorp if Barrick hadn’t forced their hand. But seeing their largest competitor gobble up a major gold miner was a shrill wake-up call. New gold deposits that are large enough to support operations at these giants’ huge scales are almost impossible to find, and take over a decade to develop. So buying production is the only way they can maintain their mining tempos.

But sadly for Barrick and Newmont shareholders, these mega-mergers look like an epic boondoggle! Both Randgold and Goldcorp were also suffering shrinking production as I outlined in that mega-merger essay. Combining two sets of major gold miners where all four already struggled to maintain their outputs wouldn’t fix this intractable problem. The mergers just mask it, and only for the first four quarters post-deals.

Narrowly the world’s largest gold miner by market cap, Barrick Gold reported its Q2’19 results on August 12th. Its mega-merger was trumpeted as “building a business that would be a model of value creation for the mining industry.” Barrick’s Q2 gold production rocketed 26.8% higher YoY. But if Randgold’s from Q2’18 is added in to those comparable results, the combined giant actually saw a 2.0% YoY decline in output!

The inexorable depletion-driven shrinkage continues, which will become glaringly apparent when Q1’20 rolls around after 2019’s four quarters of pre-merger to post-merger comparisons. Barrick sure looks to have squandered $6.5b of shareholders’ capital on four quarters of production growth! They should have been furious. If Barrick failed to grow its own output for years, how can it grow that from Randgold’s mines?

So in these tables the year-over-year comparisons show the new post-merger Barrick versus the smaller pre-merger Barrick and Randgold combined in Q2’18. I did the same thing for Newmont and Goldcorp, comparing the newly-merged giant’s Q2’19 results with the total of both its predecessors in Q2’18. It is really important investors and speculators understand that these gold-mining behemoths are not growing.

The new Newmont Goldcorp released its Q2 results on July 25, touting its mega-merger as having “positioned Newmont Goldcorp as the world’s leading gold business for decades to come.” And not surprisingly Newmont’s quarterly gold production soaring 36.6% YoY looked amazing. With gold stocks surging with gold in the month or so before that release, the financial media celebrated Newmont’s huge growth.

Yet shockingly when this post-merger giant’s Q2’19 production is compared to both its predecessors’ from Q2’18, it actually plunged 8.4% YoY! One-upping Barrick, Newmont’s managers apparently blew $10.0b of their investors’ holdings to show four quarters of big trans-merger production growth through Q1’20. But once Q2’20 arrives, all the comparisons will be post-merger and the shrinkage will again become apparent.

These new gold-mining giants are dominating and really distorting their sector. This week Newmont and Barrick commanded a total market capitalization of $63.4b, or 28.7% of the GDX top 34’s total! In terms of GDX weighting, they now account for 21.2% together. That compares to 16.4% in Q2’18 for just the two acquiring companies, and 26.1% for all four major gold miners. GDX is very concentrated in these giants.

Together Barrick and Newmont controlled 30.7% of the total Q2’19 gold production of the GDX top 34. If either of these colossi stumble in coming quarters hurting their stock prices, GDX will get dragged down with them. Traders need to realize GDX is more risky and less diversified than it was before these gold-stock mega-mergers. If you have doubts that Barrick and Newmont can grow, be wary of owning GDX!

Prior to last quarter, the primary theme of the major gold miners was inexorably declining production. I’ve discussed it extensively in earlier essays in this series, including the ones on Q1’19’s and Q4’18’s results from the GDX top 34. The gist of their core problem is large economically-viable gold deposits are getting ever-harder to find, and increasingly-expensive and time-consuming to exploit. Gold’s scarcity is mounting.

The world has been scoured for gold for centuries, with the low-hanging fruit long since picked. Really compounding these challenges, the low gold-stock prices in recent years left these companies largely starved of capital. So their exploration budgets cratered, further pinching their pipelines of new deposits to develop into new mines to replace current depleting ones. Thus Q2’s production growth looked amazing.

Together these elite top-34 GDX majors reported mining 9.6m ounces in Q2’19, which was up a big 5.6% YoY! If we could celebrate this as the potential start of a new production-growth trend, these latest results would have a very different tone. Unfortunately this higher collective gold output is another distortion from the mega-mergers. They combined four Q2’18 GDX component stocks into two, making room for two more.

One of the replacement GDX-top-34 components that climbed into these ranks is Harmony Gold, South Africa’s third-largest gold miner. It shot from being GDX’s 44th-largest holding a year earlier to 33rd this week. Harmony produced 357k ozs of gold in Q2’19 now included in the GDX-top-34 total, while none of its was in Q2’18’s. Excluding it alone collapses the GDX top 34’s output growth to 1.7% YoY, relatively flat.

The silver miners First Majestic Silver and SSR Mining were also newly included, producing 34k and 81k ozs of gold in Q2’19. Another traditional major silver miner Pan American Silver diversified heavily into gold over this past year, buying Tahoe Resources. So Tahoe’s former gold output not included in the GDX top 34’s in Q2’18 was added to Pan American’s in Q2’19, which nearly tripled it to 155k ozs last quarter.

Adjust for these new inclusions into GDX’s top-34 ranks, and their total Q2’19 gold production among the comparable companies actually shrunk a modest 0.7% YoY! The major gold miners’ long-vexing growth problems certainly haven’t gone away. And 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.

Sooner or later global peak-gold production will be reached, after which it starts declining on balance as major gold miners fail to find enough new deposits to replace depleting ones. That will leave smaller mid-tier gold miners able to consistently grow their output far more attractive for investors than the stagnating larger majors. So the major-dominated GDX isn’t the best way to deploy investment capital in this sector.

The production-cost front in Q2’19 highlighted the majors’ challenges. Gold-mining costs are mostly 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, when engineers and geologists decide which gold-bearing ores to mine, how to dig to them, and how to recover their gold.

Because these ongoing mining costs are spread across quarterly production, gold output and unit costs are usually inversely proportional. The richer the gold ores fed through fixed-capacity mills, the more gold produced. The more gold produced, the more ounces to bear mining costs which lowers per-ounce costs and thus increases profitability. Q2’19’s slightly-lower gold output should’ve led to slightly-higher 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 Q2’19 these top-34-GDX-component gold miners that reported cash costs averaged $641 per ounce. Bucking the production trend, this was actually up a sharp 5.2% YoY from Q2’18’s read!

Neither of the new mega-miners helped, with Barrick and Newmont seeing cash costs climb by 7.6% and 1.1% YoY to $651 and $759 respectively. Dragging the average higher was Peru’s Buenaventura, which continues to struggle with production issues. Its gold mined in Q2’19 plunged 22.0% YoY, forcing cash costs up 16.7% to an extreme $930! Excluding that wild outlier, the rest of GDX’s top 34 averaged $630.

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 gold miners’ true operating profitability.

These GDX-top-34 gold miners reported average AISCs of $895 per ounce in Q2’19, surging 4.6% higher YoY despite slightly-lower production! Those were relatively high absolutely too, the highest seen out of all 13 quarters since Q2’16 when I started this deep-quarterly-results research thread. Plenty of major gold miners are seeing their own costs rise as their production declines, ratcheting up the industry average.

$895 certainly isn’t a problem with gold prices averaging $1309 in Q2’19, enabling hefty profit margins around $414 per ounce. But the trend of rising production costs among the majors leaves them relatively less attractive going forward compared to their smaller peers gradually lowering their costs through higher outputs. This rising-cost trend needs to be watched, as it will retard the majors’ profits growth if it persists.

With gold rocketing back over $1500 in the last couple weeks to hit 6.3-year secular highs, it is easy to assume the gold miners must be thriving fundamentally. And they likely are. But realize the lion’s share of the recent huge gold gains didn’t start until late June when gold decisively broke out to new bull-market highs. So these Q2 results don’t yet reflect these new higher gold prices. That will come in Q3’s results.

Gold’s lofty $1436 average price so far this quarter is a whopping 9.7% higher quarter-on-quarter than Q2’s! So the current potential profitability of the gold miners post-gold-breakout is far higher than seen last quarter. Assuming the GDX top 34’s average all-in sustaining costs hold flat near $895 this quarter, that implies Q3 profits running $541 per ounce. That’s up a massive 30.7% QoQ from what was seen in Q2!

This incredible profits leverage to gold is what makes gold stocks so alluring during major gold uplegs. Their earnings grow so darned fast, 3.2x gold’s advance in this example, that big stock-price gains are usually fundamentally-justified. In Q2’19, GDX averaged $22.03 per share. That’s when you should’ve been buying gold stocks, when they were low and out of favor. I explained their bullish outlook in early April.

So far in Q3’19 which is about half over, GDX has averaged $27.32 which is 24.0% higher QoQ. That is right in line with expected profits growth among the major gold miners this quarter given the much-higher prevailing gold prices. So gold stocks’ strong gains in recent months are likely fundamentally-righteous, supported by underlying earnings growth and sustainable as long as gold holds over $1436 into quarter-end.

The GDX top 34’s accounting results in Q2’19 didn’t match their slight production decline when adjusted for the mega-mergers. Interestingly their total revenues of $11.0b were dead flat compared to Q2’18’s, despite average gold prices being 0.2% better. A material factor in the relatively-weak sales was silver, with the GDX top 34 mining 11.3% less than they did in Q2’18. Miners are increasingly diversifying out of silver.

With its price languishing at miserable lows compared to gold for years now, it has been nowhere near as profitable to mine as gold. Silver recently started outperforming again after gold’s bull-market breakout, which began to improve precious-metals sentiment. But silver’s upside will have to exceed gold’s on balance for years to convince gold miners to invest in gold deposits with significant silver byproducts again.

Those $11.0b of sales the GDX-top-34 gold miners did yielded hard GAAP earnings of $621m in Q2, for a pathetic 5.7% profits margin. Some impairment charges contributed, led by Wheaton Precious Metals writing down $166m on a streaming agreement it overpaid for. Hedging was also a factor, as some of these major gold miners lock in future selling prices. That’s going to kill their profits in Q3 after gold’s surge.

The new monster gold miners had divergent earnings pictures last quarter. Barrick reported $223m in net profits, 35.9% of the entire GDX top 34’s! That was without any unusual gains either, clean operating results after its second merged quarter. Its $869 AISCs contributed, which were a long way below the average gold price in Q2. That was a vast improvement from Q2’18, when Barrick and Randgold lost $18m.

The newly-merged Newmont on the other hand reported a $25m loss last quarter, which was also clean with no unusual charges. Probably thanks to that $10.0b buyout of Goldcorp, expenses skyrocketed 55.1% YoY despite the flat gold prices! Shareholders should be getting out the torches and pitchforks. In Q2’18, together Newmont and Goldcorp reported decent profits of $161m. Did the merger impair that potential?

The operating-cash-flow front looked much better, with the GDX top 34’s total climbing 10.5% YoY to $3.2b in Q2’19. Strong OCF generation is essential to funding future growth, both expanding existing gold mines and adding new ones. Every single GDX-top-34 component reporting OCFs had positive ones, with 18 of those 29 seeing growth despite the flat gold prices. That’s an encouraging sign for the majors.

These elite gold miners collectively reported $10.1b of cash in their coffers at the end of Q2. While that was down 20.0% YoY, it is still a healthy treasury. The gold miners tap into their cash hoards when they are building or buying mines, so declines in overall cash balances suggest more investment in growing future production. They desperately need to do that to slow their depletion inexorably shrinking their output.

Overall the major gold miners of GDX reported a solid Q2’19, which again was mostly before gold surged in its powerful breakout rally of recent months. Unless gold collapses in the next 6 weeks, Q3’19 results should prove radically better. While the risks of a normal healthy short-term gold correction are high due to gold-futures speculators’ excessively-bullish positioning, gold-stock fundamentals support higher prices.

A quarter ago when I published my GDX Q1’19 results essay, GDX had slumped 1.6% year-to-date and no one wanted to buy gold stocks low despite their huge opportunities. That has sure changed as I forecast it would, with GDX soaring to 34.7% YTD gains as of the middle of this week! Since traders love chasing winners, gold stocks are way more popular. GDX definitely isn’t the best way to own this sector though.

This ETF’s potential upside is really retarded by large gold miners struggling to grow their production. So the smart investment capital will seek out the smaller mid-tier and junior gold miners actually able to increase their outputs. Investing in excellent individual miners with superior fundamentals has far-greater upside potential. While some are included in GDX, their relatively-low weightings seriously dilute their gains.

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The bottom line is the major gold miners’ just-reported Q2’19 earnings season was solid. Gold didn’t take off until late June, so they hadn’t yet materially benefitted from its breakout surge. With the recent mega-mergers finally settling out, gold stocks saw slightly-lower production at materially-higher costs. That hit accounting profits, but operating-cash-flow generation was strong. Higher gold will greatly improve Q3 results.

That being said, the major gold miners are still struggling to grow their production. The mega-mergers will help mask that for one year, but the intractable underlying problem persists. That leaves smaller mid-tier gold miners with superior fundamentals much more attractive for future upside potential. That is where investors should focus their capital allocations to gold stocks, which should approach 10% in all portfolios.

Adam Hamilton, CPA

August 19, 2019

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