Gold Mining Stocks Fundamentals / Commodities / Gold & Silver 2020

The major gold miners’stocks have rallied dramatically out of mid-March’s stock-panic lows, soaringto new bull-market highs.  Theirjust-reported Q1’20 operational and financial results reveal whether today’shigher gold-stock prices are fundamentally justified.  They also illuminate whether this gold-stockupleg is likely to continue powering higher, despite the catastrophic economicdamage from governments’ lockdowns.

With officials aroundthe world waging a scorched-earth war against this COVID-19 pandemic, the goldminers’ latest quarterly results are more important than ever.  While this earnings season covered Q1’20,most gold companies didn’t release their quarterly reports until the lastcouple weeks.  In them they had to disclosethe ongoing impact of governments’ COVID-19 lockdowns current to thosequarterlies’ release dates.

US securities regulationsrequire American companies to report quarterly results by 40 calendar daysafter quarter-ends, a deadline that just passed this week.  In Canada where the majority of the world’sgold stocks trade, that deadline is looser at 45 days.  Unfortunately this year Canadian companieswere granted the ability to extend their reporting by an additional 45 days to help cope with COVID-19’s impacts.

After many years ofdoing deep quarterly analyses of major gold miners’ latest results, I’ve foundthere are always some Canadian stragglers that push their reporting right tothe legal limit.  This is seriously disrespectfulto their shareholders, who deserve timely quarterly results released asearly as possible.  There’s no excuse fordelaying quarterlies which don’t require independent CPAs auditing and signingoff.

While the greatmajority of gold miners’ Q1’20 results had been released as of this essay’s datacutoff of Wednesday evening, not all of them had.  But it didn’t make sense to delay this criticalquarterly analysis since the usefulness of results for trading quickly decays thedeeper we get into the subsequent quarter. So I went through everything available from the major gold miners mid-week,and boy was Q1 fascinating!

The definitive list ofmajor gold-mining stocks to analyze comes from the world’s most-populargold-stock investment vehicle, the GDX VanEck Vectors Gold Miners ETF.  Launched way back in May 2006, it has aninsurmountable first-mover lead.  GDX’snet assets running $14.2b this week were a staggering 32.9x larger than the next-biggest 1x-long major-gold-miners ETF!  GDX is effectively this sector’s blue-chipindex.

While GDX’s holdingswere running an excessively-big 50 stocks this week, every quarter I delve intothe latest results from the top 34.  That’ssimply an arbitrary number that fits neatly into the tables below.  And it is a commanding sample, as these world’slargest gold miners accounted for fully 94.0% of GDX’s total weighting thisweek.  They trade in stock markets acrossthe globe, with differing reporting requirements.

That makes amassingthis valuable dataset for analysis rather challenging.  In different countries, major gold miners reportdifferent data in different ways.  Every individualgold miner also has its own unique reporting peculiarities, taking time tounderstand.  Some gold miners have excellentreporting formats that are easy to understand and digest, while others seem tointentionally obscure their results complicating analysis.

Half-year reportinginstead of the superior quarterly reporting found in the US and Canada is commonaround the world too.  That necessitates splittingsome numbers in half for quarterly approximations.  The GDX-top-34 gold miners’ data availablemid-week is summarized into highlights shown in these tables.  Blank fields indicate a company hadn’treported that particular data by this essay’s late-Wednesday cutoff.

Each company’s symboland weighting within GDX is followed by its quarterly gold production in Q1’20.  Not all of these stocks trade in the US, as GDXalso hosts sizable Australian and Canadian contingents.  The year-over-year change in miners’ goldoutputs from Q1’19 to Q1’20 reveals whether they are growing or shrinking.  Cash costs and all-in sustaining costs perounce show how much is spent producing that gold.

Next the YoY changes areshown in the major gold miners’ key financial data including operating cashflows generated, accounting earnings, revenues, and cash on hand.  Percentage changes aren’t recorded if theywould be misleading or not meaningful. That includes data shifting from positive to negative or vice versa fromQ1’19, or if derived from two negative numbers. Then raw underlying data is included instead.

While four GDX-top-34 goldminers dragged their feet so much they hadn’t reported Q1 results by 43 daysafter quarter-end, they collectively account for just 2.9% of GDX’s weight.  So this is an essentially-complete picture ofhow the major gold miners are faring despite governments’ draconian lockdownsto fight the COVID-19 pandemic.  Thissituation is so radically unprecedented I didn’t know what I’d find.

While reading throughthe GDX top 34’s quarterlies, there were definitely some common recurring themeson COVID-19.  The great majority of themajor gold miners cited the extreme uncertainty to withdraw their 2020production and cost guidance.  That iscertainly understandable and justified with the capriciousness of governmentofficials’ decisions to force businesses to shutter.  Those heavy-handed edicts change by the day.

While COVID-19outbreaks are generally localized within countries, most governments have takena shotgun approach of issuing blanket restrictions.  So even though most gold mines are largelyself-contained remote operations far from civilization, they’ve been hammeredby countrywide orders to stop work.  Goldminers still operating today may be forced to suspend operations tomorrow, andvice versa.

The Canadian provinceof Quebec has been a great example of the inherent unpredictability of allthese lockdowns.  In late March itsgovernment mandated a province-wide COVID-19 shutdown which forced Quebec’smajor gold-mining industry offline.  Butjust a few weeks later in mid-April, provincial officials changed their mindsand reclassified mining as essential businesses!  So Quebec’s gold mines spun back up.

Quebec claimed it exemptedminers from its lockdown because their commodities are critical in medical-equipmentsupply chains.  That may be true, but Isuspect the real reason was restarting the big lost tax revenue from mining.  Unlike the US Federal Reserve, mostgovernments simply can’t print the equivalent of trillions of dollars topaper over their lockdown-imposed economic catastrophes.  So they are reopening mines.

Gold-mining operationsare ideally suited for social distancing to retard COVID-19’s spread.  Being way out in the sticks, mining employeesare relatively isolated.  They eitherlive in small local towns near the mines or in man camps working for multi-weekshifts onsite.  One thing Quebec orderedis that fly-in shifts be extended from 14 days to 28 days to minimize infectionexposure.  Gold mines won’t stay closed forlong.

While wading throughthe GDX top 34’s quarterly results, it was interesting to see the managers of gold-miningcompanies are as angry as everyone else about governments killing their businessesby decree.  But they have to bepolitically-correct, trying not to make local officials mad who could hindertheir return to operational status.  FirstMajestic Silver exemplified this, even though it hadn’t reported Q1 byWednesday.

On April 3rd AG issued anews release explaining how it was trying to convince Mexican officials “to supportsilver mining as an essential business”. It was working with “other mining companies to make the case to theFederal Government that mining, especially silver mining, is essential andcritical to the medical industry given silver’s antibacterial properties whichis proven to reduce the spread of viruses.”

When reporting on Q1production results alone in mid-April, AG’s CEO wrote “While we support theactions being taken, we continue to engage in discussions with Federal andState authorities to raise awareness on the importance of silver mining as anessential business.”  I saw this kind ofthing in lots of quarterly reports, managers saying they supported governments’COVID-19 actions but wanted to be exempt.

The major gold miners arealso trying to be good corporate citizens, with most of the GDX top 34declaring they were donating sizable sums of money to help local communitiesfight this pandemic.  This included supportingmedical workers and people who had lost their jobs due to the lockdowns.  The great majority of these elite gold companiesalso declared they had identified no COVID-19 infections at their mines.

With most of the government-imposedeconomic lockdowns starting in the second half of March, for a lot of the majorgold miners their impact was limited. Yet in addition to nearly-universally pulling their 2020 outputforecasts, there was also an industrywide move to tap credit lines andbuild cash balances.  That certainlyseems prudent given the epic uncertainties ahead with governments’ frantic andflailing decrees.

But despite plenty ofdisruptions with Canada, Mexico, Peru, Argentina, and Bolivia including goldmines in their countrywide lockdown orders, the GDX top 34 still achievedimpressive results in Q1’20.  Andthey are even better than the following analysis suggests, as last quarter’snew totals don’t include most of the results from those four companies thathadn’t reported yet as of mid-week.  Theywill further boost all this.

The elite GDX-top-34gold miners collectively produced 9.3m ounces of gold in Q1, which still climbeda strong 5.7% year-over-year!  That’ssuper-impressive, as the largest gold miners have struggled in recent years togrow their outputs.  They are already enormous,operating at scales where materially upping their gold production isexceedingly difficult with big gold deposits ever-harder to discover and developinto mines.

The GDX top 34’sstunning output growth last quarter also bucked the broader gold trend of decliningmine supply.  The World Gold Councilresearches and publishes the best-available data on global gold supply anddemand quarterly in its outstanding Gold Demand Trends reports.  The new Q1’20 edition released early thismonth showed worldwide gold-mine output actually fell 2.6% YoY last quarter to25.6m ounces!

One reason the GDX top34 did so well may be high-grading, when mine managers choose to run betterore grades through their fixed-capacity mills.  That increases their quarterly gold outputs, atthe expense of leaving less high-grade ore available for future quarters.  At least one company explicitly reported thatis what they were doing, Australia’s Saracen Mineral.  It’s been a long time since I’ve seenhigh-grading admitted.

In its quarterly reportSaracen disclosed “Saracen has large ore stockpiles exceeding 1.7Moz at 31March; These will help insulate the business should mining be restricted fromany COVID-19 impacts; Pro-active milling of higher-grade stockpiles underway atCarosue Dam and Thunderbox to bring forward production ounces and cash flowinto FY20”.  That high-grading strategycould’ve been used more widely in Q1’20.

Interestingly silverproduction among the GDX top 34 fell sharply, plunging 9.9% YoY to 25.6mounces.  That reflected the ongoing shiftof the precious-metals-mining industry to a more-gold-centric focus.  That has been fueled by silver’srelatively-poor economics compared to gold. Silver prices have languished for years, and the white metal hit an all-time low relative to the yellow one during mid-March’s stock panic!

With the major goldminers greatly ramping their total gold output last quarter, their unit costsshould’ve fallen proportionally. Gold-mining costs are largely fixed quarter after quarter, withproduction requiring roughly the same levels of infrastructure, equipment andemployees.  The better the ore gradeschewed through by the fixed-capacity mills, the more gold ounces yielded tospread mining’s big fixed costs across.

These fixed costs arelargely determined during mine-planning stages, when engineers and geologistsdecide which gold-bearing ores to mine, how to dig to them, and how to processthem to recover their gold.  But thatusual inverse relationship between output and per-ounce costs broke downlast quarter.  COVID-19 definitelyplayed a role, as the gold miners had to implement costly procedures to protecttheir people.

Social distancing to minimizeinfection risks reduces efficiency while increasing costs.  A big part of checking COVID-19’s spread is cleaningeverything relentlessly, which requires lots of expensive labor.  And medical staff had to be hired to test andlook for symptoms.  Surprisingly to me, FirstMajestic Silver reported in early April its “staff consists of 17 full-timephysicians and several health care professionals”.

Expenses for travel andprocuring supplies increased too with borders being closed.  Endeavour Mining, which was rare in reaffirmingits 2020 guidance despite the COVID-19 disruptions, had an example of that.  In its Q1 results it said, “Key expatriatesreturned to site before suspension of commercial airline flights and closure ofborders, with shift rosters modified to ensure continuity of staffing forseveral months.”

COVID-19 definitelypushed up costs.  Cash costs are theclassic measure of gold-mining costs, including all cash expenses necessary to mine each ounce of gold.  They are misleadingas a true cost measure though, excluding big capital needed to explore for golddeposits and build mines.  Cash costs arebest viewed as an acid test of survivability for the gold miners, revealing necessarygold prices to keep mines running.

In Q1’20 the GDX-top-34gold miners averaged cash costs of $653 per ounce.  That was up 6.0% YoY, and on the high side ofthe 16-quarter range from $591 to $679. But obviously that’s far below prevailing gold prices, proving minershave no problem keeping the lights on. Q1’s impressive $1582 average gold price soared a massive 21.4% YoY from Q1’19’s $1303!  So it sure wasn’t aquarter where gold miners struggled.

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.  AISCsgive a much-better understanding of what it really costs to maintain gold minesas ongoing concerns, and reveal the major gold miners’ true operating profitability.

The elite major goldminers dominating GDX’s ranks reported average AISCs in Q1’20 of $932 perounce.  That was 4.4% higher than ayear earlier, which seems reasonable given the increased costs involved insafely and responsibly operating in this COVID-19-stricken world.  And that number was skewed higher by the newGDX inclusion of South Africa’s Harmony Gold in this past year, which had outlying$1336 AISCs.

Like the rest of the newgold stocks in GDX’s top-34 ranks, HMY’s symbol is highlighted in light-blue inthese tables.  Without Harmony, the restof these major gold miners averaged $915 AISCs. That’s way under prevailing gold prices, and still within the past 16quarters’ GDX-top-34 AISC range of $855 to $942 per ounce.  Naturally seeing gold’s massive Q1’20 gains farexceed gold-mining cost growth fueled huge profits.

This industry’s overallprofitability can be inferred based on the difference between a quarter’s goldprice levels and the major gold miners’ all-in sustaining costs.  Last quarter’s $1582 average gold less those$932 GDX-top-34 AISCs yields hefty earnings of $650 per ounce!  That continues the incredible stock-market-leadingprofits growth in this small contrarian sector, trouncing the general stock markets’ fallingearnings.

Sequentially from Q4’19,the major gold miners’ profits surged a colossal 20.1% quarter-on-quarter!  That would be awesome anytime, but isparticularly impressive given the COVID-19 impacts on plenty of gold minersinto the end of Q1.  And the year-over-yearprofits growth from Q1’19 is utterly breathtaking.  Back then the GDX top 34 averaged better $893AISCs but average gold prices that quarter were far lower at $1303.

The $650 per ounce theyjust earned in Q1’20 soared 58.5% YoY from Q1’19’s $410!  Putting up huge results like that should getthe major gold stocks on all institutional investors’ radars.  And this colossal stock-market-leadingearnings growth is likely to persist into Q2 and beyond.  With investors flooding into gold as the disastrous economic impact of governments’ lockdown orders becomes more apparent,it is surging.

With Q2’20 halfwayover, gold has already averaged a fantastic $1692!  That’s another 7.0% higher than Q1 at thispoint.  The major gold miners’ stockprices tend to amplify material gold moves by 2x to 3x because of theirsimilar profits leverage to higher gold prices. Assuming the GDX top 34’s Q2 AISCs are in line with their trailing-four-quarteraverage of $920, that implies they are earning $772 per ounce in Q2!

If that holds into theend of this quarter, it would make for another awesome 18.8% sequential gain inthe major gold miners’ earnings. Unfortunately it probably won’t, as Q2 has seen more gold mines forcedinto care and maintenance for countrywide government lockdowns than the end of Q1did.  But even if the GDX top 34 see modestsingle-digit quarterly-profits growth, that’s far better than other sectors’deep bleeding.

The major gold miners’ collectivehard accounting results reported to securities regulators proved Q1’20 was verystrong.  The following numbers totallyjustify the powerful gold-stock upleg since mid-March’s stock-panic lows.  And realize these are even understated, as financialresults from those four straggling GDX-top-34 components that hadn’t reportedQ1 as of mid-week aren’t included.  Thegold miners are thriving!

The GDX top 34’s totalsales soared 31.1% YoY to $12.1b!  Thatmakes sense given their 5.7%-higher gold output with 21.4%-higher average goldprices.  Top-line revenues growth of thatmagnitude even dwarfs that seen last quarter by the market-darling mega-captech stocks.  As discussed last week inmy essay on big US stocks’Q1’20 results, the top 5 tech stocks dominating US markets saw 14.0% sales growth.

Operating cash flowsgenerated by the GDX top 34’s gold mining rocketed 68.7% higher YoY to $4.7b!  Gold mining is spinning off lots of cash atthese gold levels, helping dramatically boost treasuries.  These elite major gold miners’ total cashbalances soared 52.3% YoY to $17.0b, the highest seen by far in the 16quarters I’ve been doing this research! Their collective cash war chests normally run $11b to $14b.

Surging cash hoardsgive the gold miners much more flexibility in adjusting to the more-expensivereality of mitigating COVID-19, giving them more survivability as heavy-handedgovernments temporarily shutter their mines. They also leave gold miners better resourced to fund future productiongrowth fueled by mine expansions, buying new mines, and acquiring entire companies.  Investors prize higher output aboveall else!

A big contributor to thisswelling cash was the GDX top 34 drawing down credit lines to ensuremaximum liquidity through this COVID-19 crisis. Kinross Gold offered a great example in its Q1 results, “On March 20,2020, Kinross drew down $750 million from its $1.5 billion revolving creditfacility as a precautionary measure to protect against economic and businessuncertainties related to the pandemic.”  Thatseems prudent.

Finally the GDX top 34’sactual hard accounting profits under Generally Accepted Accounting Principlesin the US or other countries’ rules required by securities regulatorsskyrocketed.  In Q1’20, the major goldminers’ total accounting earnings soared an epic 163.6% YoY to $1.9b!  Sector earnings growth like that is unheardof in normal markets, and absolutely astounding in this one where lockdowns slaughterprofitability.

But this is overstated dueto some big noncash gains flowing through to bottom lines.  The world’s two largest gold miners dominatingGDX’s ranks with a 30.1% total weighting are Newmont and Barrick.  They respectively reported a $593m gain onasset sales and $336m impairment reversal in Q1, which both greatly boostedtheir net incomes.  Those were partiallyoffset by Franco-Nevada’s $272m impairment charge.

Even adjusting for thesebig unusual items, the GDX top 34’s total profits still soared 73.9% YoY lastquarter!  The gold miners are makingmoney hand over fist in this higher-gold-price environment, despite their highercosts for mitigating COVID-19 risks. There’s no doubt the gold miners are the most-attractive sector in these dangerous stock markets as national economies plunge into government-imposeddepressions.

From its brutal mid-Marchstock-panic low to last week, GDX has already rocketed 84.4% higher out of thatextreme anomaly!  That included a major bull-market breakout for the gold stocks in late April, with GDX’s first new bull highs achieved in3.7 years.  Yet this massive upleg stillhas a long ways to run yet given the major gold miners’ colossalearnings growth and resulting super-low valuations even this week.

Plenty offundamentally-superior major and mid-tier gold miners included in the GDX top 34now have trailing-twelve-month price-to-earnings ratios between 11x to 15x!  That would be plenty cheap for normal stocks,but is incredibly low for the high-flying gold stocks.  And these cheap valuations are set to falleven farther as gold-mining earnings continue growing.  The COVID-19 disruptions will prove a speedbump.

Q2 is going to betougher than Q1 for the major gold miners suffering shutdowns under governments’draconian lockdowns.  But all that goldproduction is merely delayed a month or two, not lost forever like salesin many other industries!  As governmentsincreasingly struggle with lower tax revenues, they will rush to bring goldmining back online.  So this sector’s ultimateCOVID-19 impact should prove relatively modest.

At Zeal we started aggressivelybuying and recommending fundamentally-superior gold and silver miners in our weekly and monthly subscriptionnewsletters back in mid-March right after the stock-panic lows.  We’ve been layering into new positions eversince, with unrealized gains already growing huge.  And they will likely get much bigger incoming months as this gold-stock upleg keeps powering higher on big goldinvestment.

To profitably trade high-potentialgold stocks, you need to stay informed about the broader market cycles that drivegold.  Our newsletters are a great way,easy to read and affordable.  They drawon my vast experience, knowledge, wisdom, and ongoing research to explain what’sgoing on in the markets, why, and how to trade them with specific stocks.  Subscribe today and take advantageof our 20%-off sale!  Get onboardnow and mirror our many winning trades before big buying catapults this sectorway higher.

Thebottom line is the major gold miners just reported awesome Q1 results despite COVID-19impacts.  They achieved outsized goldproduction growth bucking the global trend. And the much-higher prevailing gold prices dwarfed the modest costincreases partially driven by COVID-19 mitigation efforts.  That fueled huge increases in revenues, operatingcash flows, cash in treasuries, and hard accounting earnings!

While gold-mineshutdowns have lasted longer in Q2, plenty of major gold miners remainunaffected due to where their mines are located.  And once governments green-light thoseshuttered mines, miners will rush to make up for lost production.  With gold still powering higher on mountinginvestment demand, the resulting better prevailing gold prices this quartershould make for solid Q2 results despite this crazy pandemic.

Adam Hamilton, CPA

So how can you profit from this information? We publish an acclaimed monthly newsletter, Zeal Intelligence , that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research. Please consider joining us each month for tactical trading details and more in our premium Zeal Intelligence service at … www.zealllc.com/subscribe.htm

Questions for Adam? I would be more than happy to address them through my private consulting business. Please visit www.zealllc.com/adam.htm for more information.

Thoughts, comments, or flames? Fire away at zelotes@zealllc.com . Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!

Copyright 2000 - 2019 Zeal Research ( www.ZealLLC.com )

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.