Gold Mid Tier Mining Stocks Fundamentals / Commodities / Gold & Silver 2024

The mid-tier and juniorgold miners in this sector’s sweet spot for upside potential recently wrappedup their latest earnings season.  Thesefundamentally-superior smaller gold producers delivered big last quarter, reportingspectacular results.  The potentcombination of record gold prices, lower mining costs, and better productionfueled some of their richest profits ever. Yet mid-tiers still remain way undervalued.

The leadingmid-tier-gold-stock benchmark is the GDXJ VanEck Junior Gold Miners ETF.  With $5.5b in net assets mid-week, it remainsthe second-largest gold-stock ETF after its big brother GDX.  That is dominated by far-larger major goldminers, though there is much overlap between these ETFs’ holdings.  Still misleadingly named, GDXJ isoverwhelmingly a mid-tier gold-stock ETF with juniors having littleweighting.

Gold-stock tiers aredefined 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 hugesuper-majors operate at vast scales exceeding 2,000k.  Translated into quarterly terms, thesethresholds shake out under 75k, 75k to 250k, 250k+, and 500k+.  Today only one of GDXJ’s 25 biggest holdingsis a true junior!

Its Q1 production ishighlighted in blue in the table below. Juniors not only mine less than 75k ounces per quarter, but their goldoutput generates over half their quarterly revenues.  That excludes streaming and royalty companiesthat purchase future gold output for big upfront payments used to finance mine-builds,and primary silver miners producing byproduct gold.  But mid-tiers often make better investmentsthan juniors.

These gold minersdominating GDXJ offer a unique mix of sizable diversified production, excellentoutput-growth potential, and smaller market capitalizations ideal foroutsized gains.  Mid-tiers are lessrisky than juniors, while amplifying gold uplegs much more than majors.  Our newsletter trading books are now filledwith fundamentally-superior mid-tiers and juniors, smaller gold miners whichwe’ve long specialized in at Zeal.

Mid-tier gold-stockoutperformance accelerates as major gold uplegs mature, increasingly attractingmore traders to bid up stock prices. That’s finally starting to happen again as gold-stock sentiment shiftsback to bullish.  Gold’s driving upleghas powered 33.2% higher at best since early October.  The major gold stocks represented by GDX hita new +44.5% highwater mark midweek, for meager 1.3x upside leverage to gold.

Historically major goldstocks tend to amplify material gold moves by 2x to 3x, with that upsideleverage mounting later in uplegs.  Thatprocess is underway, as since mid-February GDX’s gains have outpaced gold’s by2.0x.  The mid-tiers of GDXJ lagged theirlarger peers for much of this upleg, as traders hadn’t started warming to thissector.  But GDXJ’s total upleg gainsgrew to 52.3% this week, pulling ahead of GDX.

This smaller-gold-stockoutperformance should continue expanding on balance.  Fundamentally-superior mid-tiers’ gainsduring major gold uplegs surge way ahead of the majors’, sometimes evendoubling them!  The longer gold andgold stocks rally, the more bullish speculators and investors wax on them, themore capital they deploy to chase those gains, the more mid-tiers’ stock pricesaccelerate way ahead of larger miners’.

For 32 quarters in arow now, I’ve painstakingly analyzed the latest operational and financialresults from GDXJ’s 25-largest component stocks.  Mostly mid-tiers, they now account for 66.0%of this ETF’s total weighting.  Whiledigging through quarterlies is a ton of work, understanding smaller goldminers’ latest fundamentals really cuts through the obscuring sentiment fogsshrouding this sector.  This research isessential.

This table summarizesthe GDXJ top 25’s operational and financial highlights during Q1’24.  These gold miners’ stock symbols aren’t allUS listings, and are preceded by their rankings changes within GDXJ over this pastyear.  The shuffling in their ETFweightings reflects shifting market caps, which reveal both outperformers andunderperformers since Q1’23.  Thosesymbols are followed by their recent GDXJ weightings.

Next comes these goldminers’ Q1’24 production in ounces, along with their year-over-year changesfrom the comparable Q1’23.  Output is thelifeblood of this industry, with investors generally prizing productiongrowth above everything else.  Afterare the costs of wresting that gold from the bowels of the earth in per-ounceterms, both cash costs and all-in sustaining costs.  The latter help illuminate miners’profitability.

That’s followed by abunch of hard accounting data reported to securities regulators, quarterlyrevenues, earnings, operating cash flows, and resulting cash treasuries.  Blank data fields mean companies hadn’tdisclosed that particular data as of the middle of this week.  The annual changes aren’t included if theywould be misleading, like comparing negative numbers or data shifting frompositive to negative or vice-versa.

The mid-tier goldminers’ overall Q1’24 performance again proved spectacular!  These sweet-spot-for-upside smaller goldstocks slashed mining costs while boosting their production.  Those strong operations combined with recordprevailing gold prices fueled another massive per-ounce earnings jump, thefourth consecutive quarter of those! Last quarter was among the best mid-tiers ever reported, impressively bullish.

Production growthtrumps everything else as the primary mission for gold miners.  Higher outputs boost operating cash flowswhich help fund mine expansions, builds, and purchases, fueling virtuouscircles of growth.  Mining more gold alsoboosts profitability, lowering unit costs by spreading big fixed operationalexpenses across more ounces.  But for thefirst time in eight quarters, the GDXJ top 25’s output shrunk!

They collectively mined3,692k ounces of gold in Q1’24, which slipped 0.8% YoY.  But that is due solely to composition changesamong these elite ranks.  Four stockssurged dramatically over this past year to enter the GDXJ top 25, displacingfour other stocks.  Among the ascendersis Aya Gold & Silver, a small silver miner that produces no gold.  That elbowed Lundin Gold to 26th place, whichmined 112k ounces in Q1.

Replacing a producerwith a non-producer skewed overall output lower.  Had LUG been included instead of AYA, theGDXJ top 25’s aggregate output last quarter would’ve climbed 2.2% YoY to3,803k ounces!  That’s pretty impressive,much better than the GDX-top-25 majors’ 0.6%-YoY shrinkage I analyzed in an essay on their latest results last week.  But both these elitemid-tiers’ and majors’ production is still lagging.

Every quarter the WorldGold Council publishes fantastic Gold Demand Trends reports, containing thebest-available global gold supply-and-demand data.  The recent Q1’24 edition revealed totalworldwide mine production grew 4.4% YoY. The GDXJ top 25 would’ve even bested that if not for output shortfallsin just two of its larger producers, B2Gold and Endeavour Mining.  But those were both expected last quarter.

BTG suffered apermitting delay for a sizable new gold project in Mali, so it has guided 2024to midpoint production around 900k ounces. That would make for full-year shrinkage of 15.2%.  But with that project and another new minecoming online in 2025, next year is already forecast to see production surge21.1% to a record 1,090k-ounce midpoint. So this year is a temporary lull for B2Gold before growth resumes.

EDV’s weaker Q1 mostlyresulted from mining lower-grade ores. Mine sequencing sometimes requires digging through lesser ores to reachhigher-grade ones underneath.  EndeavourMining is still forecasting 2024 output near a 1,200k-ounce midpoint, “stronglyweighted towards the second half”. Achieving that would make for modest 2.3% growth this year, far betterthan Q1’s serious 27.1%-YoY output drop suggests.

Among the mid-tiersthere are plenty of great growth stories, including Eldorado Gold.  Last year it mined 485k ounces.  Due to a new gold mine ramping up in comingyears, it has already forecast midpoints of 530k ounces this year, 570k in2025, 663k in 2026, and 705k in 2027! Investors will really reward such big production growth, bidding EGOstock much higher.  Mid-tiers with goodgrowth profiles make great trades.

So we’ve alwaysprioritized high-potential smaller gold miners that have strong productiongrowth coming, adding newsletter trades before the driving expansions andnew mine-builds go live.  These make forthe most-compelling gold-stock trades and investments.  Interestingly since it takes much expertiseto stay abreast of many dozens of smaller gold miners, surging production andfalling costs tend to surprise most traders.

While handpicking greatindividual gold stocks yields the most success, GDXJ is still far superior toGDX.  Despite a big overlap in theseETFs’ holdings, GDXJ cuts out the deadweight majors and super-majors dominatingGDX.  They’ve long struggled to evenovercome depletion, let alone grow their production like mid-tiers andjuniors.  GDXJ lops off GDX’s ninelargest stocks, which just commanded 4/7ths of its total weighing!

These GDXJ-top-25components are clustered between the 10th to 40th weightings in GDX.  Again they represent 66.0% of GDXJ’s totalweighting, more than doubled from just 28.8% in GDX.  So if you aren’t willing to ownfundamentally-superior individual gold stocks, GDXJ is the next-best way to getgreat smaller-gold-miner exposure. There’s little reason to allocate capital to major-dominated GDX sinceGDXJ exists.

Unit gold-mining costsare generally inversely proportional to gold-production levels.  That’s because gold mines’ total operatingcosts are largely fixed during pre-construction planning stages, when designedthroughputs are determined for plants processing gold-bearing ores.  Their nameplate capacities don’t changequarter to quarter, requiring similar levels of infrastructure, equipment, andemployees to keep running.

So the only realvariable driving quarterly gold production is the ore grades fed into theseplants.  Those vary widely evenwithin individual gold deposits.  Richerores yield more ounces to spread mining’s big fixed expenses across, loweringunit costs and boosting profitability. But while fixed costs are the lion’s share of gold mining, there arealso sizable variable costs.  That’s where recent years’ raging inflation hit hard.

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

The GDXJ top 25’saverage cash costs edged 0.3% lower YoY to $1,012 per ounce in Q1’24.  That was impressively the mid-tiers’ fourthquarter in a row of declining cash costs. The smaller miners’ operational discipline is impressive, trouncing theGDX-top-25 majors which saw average cash costs climb in fully 21 of the last 22quarters!  Mid-tiers and juniors targetsmaller but-often-lower-cost gold deposits than majors.

All-in sustaining costsare far superior than cash costs, and were introduced by the World Gold Councilin June 2013.  They add on to cash costseverything else that is necessary to maintain and replenish gold-miningoperations at current output tempos. AISCs give a much-better understanding of what it really costs tomaintain gold mines as ongoing concerns, and reveal the mid-tier gold miners’true operating profitability.

Astoundingly the GDXJtop 25’s average AISCs plunged 8.4% YoY to just $1,294 in Q1!  That was also their fourth consecutivequarter falling considerably, down 4.4%, 10.3%, 8.1%, and 8.4% YoY.  This is phenomenal performance consideringinflation goosing mining costs in recent years. But unfortunately the mid-tiers’ latest quarterly AISC drop is reallyoverstated, largely driven by a single extreme outlier.

Peru’s Buenaventura haslong been one of the higher-cost gold miners included in GDXJ’s upperranks.  Its many operational challengesfor years have left BVN unworthy of the higher market capitalization thatinvestors have awarded it.  Given itssorry track record, this is one of many gold stocks I’ve never been interestedin owning.  Yet unbelievably and contraryto pedigree, Buenaventura reported negative AISCs in Q1!

How is such sorceryeven possible?  BVN isn’t a primary goldminer, with only 36% of its Q1 revenues from the yellow metal.  It also produces silver, copper, zinc, andlead.  But like some poly-metallicminers, Buenaventura reports in gold-centric terms since gold stockscommand higher multiples.  So those othermetals are considered byproducts, despite being the big majority ofoutput.  Their sales are credited to gold.

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

Excluding BVN’snegative Q1 AISCs, the rest of the GDXJ top 25 averaged a considerably-higher $1,389.  Even that is still down 1.8% YoY, preservingthe mid-tiers’ awesome AISC-contraction streak. Both are quite comparable to the GDX-top-25 majors’ averageAISCs, $1,277 including BVN and $1,370 without it last quarter.  Mid-tiers are achieving similar miningcosts despite lacking majors’ touted economies of scale.

In the 32-quarterhistory of this GDXJ-top-25-results research, a handful of outliers have oftenskewed the average AISCs higher.  While Ipointed 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 timearound.  These elite majors averaged$1,294 AISCs in a quarter where gold averaged a record $2,072.

That made for fantasticunit profits of $777 per ounce, the fattest since Q4’20 and the third-highestever witnessed for smaller gold miners! Those also blasted up 62.6% YoY, extending askyrocketing-earnings trend in the previous three quarters soaring 33.8%,106.4%, and 125.7% YoY!  No other sectorin all the stock markets has seen earnings rocket up as fast as thesemid-tiers, which will attract fundamental investors.

And gold-mining profitsaren’t done surging, with the best still coming.  Again gold averaged that record $2,072 in Q1,but its remarkable breakoutsurge has catapulted the Q2-to-date average all the way up to $2,342!  Even if gold suffers a pullback later in thisquarter to work off extremeoverboughtness, Q2’s average shouldn’t retreat under $2,275.  Even that would require $2,200ish gold forthe entire rest of this quarter.

And the GDXJ top 25’saverage AISCs are also likely to decline again in Q2.  Q1s have long proven the production ebb ofthe world gold-mining industry.  TheWGC’s comprehensive fundamental data reveals over the last decade quarter-on-quarter global output fell 8.4% in Q1s, grew 3.7% in Q2s, surged 6.1% in Q3s, thenedged up 0.4% in Q4s.  Again higherproduction generally proportionally lowers mining costs.

But let’sconservatively assume the mid-tiers’ average AISCs climb slightly this quarter to$1,300.  Those subtracted from $2,275average gold would yield spectacular mid-tier unit profits of $975 perounce!  That would easily be an all-timerecord for both GDXJ and GDX, and skyrocket another epic 104% YoY!  So the smaller gold miners’ already-awesomefundamentals will continue radically improving in this current Q2.

Sooner or laterfundamentally-oriented fund investors will figure this out, and rush to deploybig capital in this small sector.  Thatbuying will catapult smaller gold stocks way higher, accelerating their usualbig outperformance of larger gold stocks. Plenty of mid-tiers could still double from here during this goldupleg!  That’s amazing considering ournewsletter trades’ unrealized gains are already running as high as +112%.

The GDXJ top 25’s hardaccounting results under Generally Accepted Accounting Principles didn’t lookas fantastic last quarter, partially due to those composition changes.  Total revenues only climbed 2.1% YoY to$7,509m, which doesn’t jibe with 0.8%-lower production and 9.5%-higher averagegold prices.  But again AYA’s risedisplaced LUG, which reported far-different Q1’24 sales of $5m and $227mrespectively!

Swap them alone, andGDXJ-top-25 revenues instead grew 5.1% to $7,731m.  Other displacements in upper rankings also draggeddown year-over-year sales.  Those alsoaffected total bottom-line earnings, which plunged 49.1% YoY to $229m.  But AYA’s $3m loss replaced LUG’s $42mprofits.  Still smaller gold miners’earnings dropped, even adjusted for unusual non-cash charges flushed throughincome statements.

As a longtime CPA, Ipay special attention to financial statements in my quarterly-resultsanalyses.  I take notes on any materialunusual charges or sometimes gains that affect net income.  Not many caught my eye in Q1, merelyadjusting GDXJ-top-25 earnings near $250m. Yet the comparable Q1’23 had a couple big ones, leaving its adjustedearnings much higher around $641m.  Somid-tiers’ bottom lines still collapsed.

Lower production andaccompanying higher mining costs for many of these elite mid-tiers was the mainreason.  That should reverse in comingquarters as outputs climb driving AISCs lower. Because of everything forced through income statements, they tend to benoisy and volatile.  After decades ofgold-stock analyses, I’ve found average unit profits are a cleaner proxy for sectorearnings trends than net income.

The GDXJ top 25’soperating cash flows generated last quarter rocketed up 37.7% YoY to$1,920m!  But that surge is entirely dueto one unusual situation.  B2Gold decidedto forward sell $500m worth of gold that it will mine between July 2025to June 2026, or 265k ounces.  That’sabout a tenth of expected outputs in both years, working out to an average goldprice of $2,191.  The $500m received wasan upfront payment.

BTG’s accountantsplunked that $500m hedging prepayment in Q1 operating cashflows, though itseems more like a financing activity than an operating one.  Reverse that unusual item out, and the GDXJtop 25’s OCFs only grew 1.8% YoY in Q1 to $1,420m.  Their collective cash treasuries depleted18.6% YoY to a still-flush $6,528m, with plenty of mid-tiers investing inexpanding existing mines and building new ones.

Overall these elitemid-tiers’ latest quarterly results were outstanding.  These gold miners extended their powerfulstreak of achieving output growth while driving down mining costs.  That combined with record gold pricescatapulted per-ounce profits far higher. Sooner or later investors will figure this out and flood into thesehigh-potential stocks.  Major gold minersalways struggling with depletion also covet mid-tiers’ mines.

By advancing great goldprojects into mines and growing relatively fast, mid-tiers and juniors are thegold-production pipeline ultimately feeding the majors.  They are always circling the smaller goldminers like sharks, ready to gobble them up through buyouts.  This acquisition potential adds to mid-tiers’upside.  During major gold uplegs,smaller gold stocks can easily double, triple, or more, really multiplyingwealth!

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The bottom line is the mid-tier gold miners continued reportingspectacular quarterly results.  They keptgrowing their production when adjusted for one GDXJ-upper-ranks compositionchange.  That helped force their averagemining costs considerably lower for the fourth quarter in a row.  Combined with record gold prices, thatgenerated some of the fattest unit profits the smaller gold miners have everachieved.

And their fantastic fundamentals are still improving.  In this current quarter, mining costs arelikely to keep retreating as outputs rebound or grow.  Couple that with much-higher record goldprices, and the smaller miners are probably now earning their biggest profitsever.  That will increasingly attract bigfund investors to this small still-really-undervalued sector.  That portends much-bigger gold-stock gains stillcoming.

Adam Hamilton, CPA

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