Gold Mid-Tiers’ Q2’19 Fundamentals

Gold Mid-Tiers’ Q2’19 Fundamentals By: Adam Hamilton for Gold Seek

The mid-tier gold miners’ stocks have soared in recent months on gold’s decisive bull-market breakout.  They are this sector’s sweet spot for stock-price upside potential, with room for strong production growth which investors love.  That’s an attractive contrast to the stagnating major gold miners.  The mid-tiers’ recently-reported Q2’19 results reveal whether their fundamentals justify their strong surge this summer.

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 global nature of the gold-mining industry complicates efforts to gather this important data.  Many mid-tier gold miners trade in Australia, Canada, South Africa, the United Kingdom, and other countries with quite-different reporting requirements.  These include half-year reporting rather than quarterly, long 90-day filing deadlines after year-ends, and very-dissimilar presentations of operating and financial results.

The definitive list of mid-tier gold miners to analyze comes from the GDXJ VanEck Vectors Junior Gold Miners ETF.  Despite its misleading name, GDXJ is totally dominated by mid-tier gold miners and not juniors.  GDXJ is the world’s second-largest gold-stock ETF, with $4.5b of net assets this week.  That is only behind its big-brother GDX VanEck Vectors Gold Miners ETF that includes the major gold miners.

Major gold miners are those that produce over 1m ounces of gold annually.  The mid-tier gold miners are smaller, producing between 300k to 1m ounces each year.  Below 300k is the junior realm.  Translated into quarterly terms, majors mine 250k+ ounces, mid-tiers 75k to 250k, and juniors less than 75k.  GDXJ was originally launched as a real junior-gold-stock ETF as its name implies, but it was forced to change its mission.

Gold stocks soared in price and popularity in the first half of 2016, ignited by a new bull market in gold.  The metal itself awoke from deep secular lows and surged 29.9% higher in just 6.7 months.  GDXJ and GDX skyrocketed 202.5% and 151.2% higher in roughly that same span, greatly leveraging gold’s gains!  As capital flooded into GDXJ to own junior miners, this ETF risked running afoul of Canadian securities laws.

Canada is the center of the junior-gold universe, where most juniors trade.  Once any investor including an ETF buys up a 20%+ stake in a Canadian stock, it is legally deemed a takeover offer.  This may have been relevant to a single corporate buyer amassing 20%+, but GDXJ’s legions of investors certainly weren’t trying to take over small gold miners.  GDXJ diversified away from juniors to comply with that archaic rule.

Smaller juniors by market capitalization were abandoned entirely, cutting them off from the sizable flows of ETF capital.  Larger juniors were kept, but with their weightings within GDXJ greatly demoted.  Most of its ranks were filled with mid-tier gold miners, as well as a handful of smaller majors.  That was frustrating, but ultimately beneficial.  Mid-tier gold miners are in the sweet spot for stock-price-appreciation potential!

For years major gold miners have struggled with declining production, they can’t find or buy enough new gold to offset their depletion.  And the stock-price inertia from their large market capitalizations is hard to overcome.  The mid-tiers can and are boosting their gold output, which fuels growth in operating cash flows and profitability.  With much-lower market caps, capital inflows drive their stock prices higher much faster.

Every quarter I dive into the latest results from the top 34 GDXJ components.  That’s simply an arbitrary number that fits neatly into the tables below, but a commanding sample.  These companies represented 83.2% of GDXJ’s total weighting this week, even though it contained a whopping 70 stocks!  3 of the top 34 were majors mining 250k+ ounces, 24 mid-tiers at 75k to 250k, 5 “juniors” under 75k, and 2 explorers with zero.

These majors accounted for 12.8% of GDXJ’s total weighting, and really have no place in a “Junior Gold Miners ETF” when they could instead be exclusively in GDX.  These mid-tiers weighed in at 60.9% of GDXJ.  The “juniors” among the top 34 represented just 6.6% of GDXJ’s total.  But only 1 of them at a mere 0.9% of GDXJ is a true junior, meaning it derives over half its revenues from actually mining gold.

The rest include 2 primary silver miners, a gold-royalty company, and a gold streamer.  GDXJ is actually a full-on mid-tier gold miners ETF, with modest major and tiny junior exposure.  Traders need to realize it is not a junior-gold investment vehicle as advertised.  GDXJ also has major overlap with GDX.  Fully 29 of these top 34 GDXJ gold miners are included in GDX too, with 23 of them also among GDX’s top 34 stocks.

The GDXJ top 34 accounting for 83.2% of its total weighting also represent 39.8% of GDX’s own total weighting!  The GDXJ top 34 mostly clustered between the 10th- to 40th-highest weightings in GDX.  Thus nearly 5/6ths of GDXJ is made up by almost 4/10ths of GDX.  But GDXJ is far superior, excluding the large gold majors struggling with production growth.  GDXJ gives much-higher weightings to better mid-tier miners.

The average Q2’19 gold production among GDXJ’s top 34 was 157k ounces, a bit over half as big as the GDX top 34’s 299k average.  Despite these two ETFs’ extensive common holdings, GDXJ is increasingly outperforming GDX.  GDXJ holds many of the world’s best mid-tier gold miners with big upside potential as gold’s own bull continues powering higher.  Thus it is important to analyze GDXJ miners’ latest results.

So after each quarterly earnings season I wade through all available operational and financial reports and dump key data into a big spreadsheet for analysis.  Some highlights make it into these tables.  Any blank fields mean a company hadn’t reported that data as of this Wednesday.  The first couple columns show each GDXJ component’s symbol and weighting within this ETF as of this week.  Not all are US symbols.

19 of the GDXJ top 34 primarily trade in the US, 5 in Australia, 8 in Canada, and 2 in the UK.  So some symbols are listings from companies’ main foreign stock exchanges.  That’s followed by each gold miner’s Q2’19 production in ounces, which is mostly in pure-gold terms excluding byproducts often found in gold ore like silver and base metals.  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 drive 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.  In cases where foreign GDXJ components only released half-year data, I used that and split it in half where appropriate.  That offers a decent approximation of Q2 results.

Symbols highlighted in light blue newly climbed into the ranks of GDXJ’s top 34 over this past year.  And symbols highlighted in yellow show the rare GDXJ-top-34 components that aren’t also in GDX.  If both conditions are true, blue-yellow checkerboarding is used.  Production bold-faced in blue shows any rare junior gold miners in GDXJ’s higher ranks, under 75k ounces quarterly with over half of sales from gold.

This whole valuable dataset compared with past quarters offers a fantastic high-level read on how mid-tier gold miners are faring fundamentally as an industry.  This last quarter was interesting, as gold’s awesome breakout surge to major new secular highs didn’t get underway until just before quarter-end.  So the mid-tier gold miners had to contend with flat gold prices, with Q2’19’s average of $1309 merely 0.2% higher YoY.

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