Gold Juniors’ Q4’16 Fundamentals

Gold Juniors’ Q4’16 Fundamentals by Adam Hamilton

The junior gold stocks corrected hard in recent weeks, setting them up to blast higher on Wednesday’s less-hawkish-than-expected Fed.  That started to dispel some of the serious bearish sentiment that has been mounting in this sector.  The junior gold miners’ fundamentals justify much-higher stock prices, as evidenced in their recently-reported fourth-quarter operating and financial results.  They remain very bullish.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports.  Required by securities regulators, these quarterly results are exceedingly important for investors and speculators.  They banish all the sentimental distortions surrounding prevailing stock-price levels, revealing the underlying hard fundamental realities.  This greatly helps in re-anchoring perceptions.

After spending decades intensely studying and actively trading this contrarian sector, there is no gold-stock data I look forward to more than their quarterly reports.  These offer a true and clear snapshot of what’s really going on, overcoming all the misconceptions bred by the ever-shifting winds of sentiment.  If you have capital deployed in this sector but don’t watch the quarterlies, you’re shooting yourself in the foot.

Normally quarterlies are due 45 calendar days after quarter-ends, in the form of 10-Qs required by the SEC for American companies.  But after the final quarter of fiscal years, which are calendar years for most gold miners, that deadline extends out up to 90 days depending on company size.  The 10-K annual reports required once a year are bigger, more complex, and require fully-audited numbers unlike 10-Qs.

So it takes companies more time to prepare full-year financials and then get them audited by CPAs right in the heart of their busy season.  As a gold-stock trader this additional Q4 delay is irritating, since the data is getting stale by Q1’s end.  But as a CPA and former Big Six auditor of mining companies, I have some understanding of just how much work goes into an SEC-mandated 10-K annual report.  It’s enormous!

This extended Q4-reporting window naturally delays the analysis of Q4 results.  While I can start digging into the first three quarters’ results 5 or 6 weeks after those interim quarter-ends, I have to wait longer for the fiscal-year quarter-ends.  Thankfully the great majority of gold miners have reported by 8 or 9 weeks, so we don’t have to wait until early Q2 to analyze Q4 results.  The junior gold miners’ Q4’16 was quite strong!

The definitive list of elite junior gold stocks to analyze comes from the world’s most-popular junior-gold-stock investment vehicle, the GDXJ VanEck Vectors Junior Gold Miners ETF.  Born in November 2009, GDXJ is the second-largest gold-stock ETF after its big brother GDX which tracks the larger major gold miners.  This week GDXJ’s net assets ran about 46% of GDX’s, testifying to the gold juniors’ relative popularity.

Being included in GDXJ is the gold standard for gold juniors, as it requires deep analysis and vetting by elite analysts.  And due to ETF investing eclipsing individual-stock investing, major-ETF inclusion is one of the most-important considerations for picking great gold stocks.  As the vast pools of fund capital flow into leading ETFs, these ETFs in turn buy shares in their underlying companies bidding their prices higher.

This week GDXJ included a whopping 53 “junior gold miners”!  That term is used rather loosely, as this ETF also includes advanced-stage explorers not yet mining gold, primary silver miners, and gold-royalty and mine-finance companies.  GDXJ’s component stocks trade primarily in the US, Canada, Australia, and the UK.  But this junior gold miners’ ETF includes one major component that undermines its credibility.

Rather dumbfoundingly, GDXJ’s third-largest component this week is actually that GDX major-gold-miners ETF!  This decision makes no sense at all.  Investors don’t buy GDXJ because they want major exposure, they would buy GDX for that.  They are fully expecting to own junior gold miners like GDXJ is advertising.  It’s unacceptable for GDXJ’s managers to include GDX as a top component regardless of the reason.

This issue first arose a quarter ago in Q3’16, when I assumed GDX was a temporary placeholder.  Even that wasn’t justified though.  If GDXJ’s managers had to remove a top component, they could’ve simply shifted up all the component weightings underneath it.  But now after well over an entire quarter of GDX tainting GDXJ’s mission, its ongoing inclusion is troubling.  GDX’s own components are far from gold juniors.

There’s no universal definition of gold-production levels that would qualify individual miners as juniors, mid-tiers, or majors.  But after decades of analyzing this sector, I think a 300k-ounce-per-year maximum cutoff for junior-dom is a generous limit.  That translates into 75k ounces per quarter.  Out of 31 of the top 34 GDX components reporting gold production in Q4’16, only 3 had less than 75k.  Two were major silver miners.

So GDX should’ve never been included as a GDXJ component, it is misleading and makes GDXJ’s very name false advertising.  Many of GDXJ’s normal components are bigger than junior-tier too.  Out of 27 of GDXJ’s top 34 components that have reported Q4 gold production as of this week, fully 12 produced over 75k ounces last quarter!  There is also significant overlap in holdings terms between GDXJ and GDX.

Last week I dug into the Q4’16 results of the top 34 GDX components, the elite major gold miners.  GDX and GDXJ together have 104 component companies across the past couple weeks.  Fully 20 of these gold miners are included in both GDX and GDXJ!  With the same fund company running both these leading ETFs, great value would be added for investors by making GDX and GDXJ inclusion mutually-exclusive.

Anyway, I’ve been wading through the Q4’16 results of the top 34 GDXJ components in recent weeks.  That arbitrary number was chosen because it fits neatly into the tables below.  These elite junior gold miners account for 84.9% of this ETF’s total weighting, which is certainly a commanding sample.  Not all of these companies have reported yet due to the delayed fiscal-year-end reporting window, but most have.

I fed all available data as of this Wednesday into a spreadsheet, some of which made it into these tables.  Unfortunately some companies don’t sufficiently break out Q4, rolling it into full-year annual results.  It’s not surprising this is more common after weak fourth quarters, like Q4’16.  GDXJ plunged 28.8% then, driven by the Trumphoria stock-market surge blasting gold to one of its worst quarters ever at a 12.7% loss.


So when GDXJ components only reported full-year results to mask Q4 weakness, some fields had to be left blank.  Other companies hadn’t reported Q4 yet, while the foreign ones trading in Australia, the UK, and South Africa only report in half-year increments.  Since Q3’16 and Q4’16 were such wildly-different quarters for gold miners, half-year results can’t simply be divided by two.  Clean Q4 data can’t be inferred.

In these tables the first couple columns show each GDXJ component’s symbol and weighting within this ETF as of Wednesday.  While most of these gold stocks trade in the States, not all of them do.  So if you can’t find a symbol here, it’s a listing from a company’s primary foreign stock exchange.  Next comes each company’s Q4’16 gold production in ounces, which is mostly reported by them in pure-gold terms.

Most gold miners also produce byproduct metals like silver and copper.  These are valuable, as they are sold to offset some of the considerable costs of gold mining.  Some companies report their quarterly gold production including silver, a construct called gold-equivalent ounces.  I included that instead if no pure-gold numbers were reported.  Operational and financial reporting varies widely from company to company.

That’s followed by the quarter-on-quarter change, the absolute percentage difference between Q3’16 and Q4’16.  This offers a more-granular read on companies’ performance trends than year-over-year comparisons.  QoQ changes are also listed for the rest of the data, which includes cash costs per ounce of gold mined, all-in sustaining costs per ounce, operating cash flows generated, and actual accounting profits.

After spending lots of time digesting these elite gold juniors’ latest quarterly reports, it is fully apparent that gold stocks’ recent sharp selloff wasn’t fundamentally righteous at all.  Gold-stock traders got scared because gold was sliding on an extraordinary surge in futures-implied Fed-rate-hike odds, not because of bad news from these miners.  That means the recent anomalous pre-Fed selloff needs to fully mean revert.

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