Looking at the gold mid-tiers - Q1 fundamentals May 20, 2022
(Adam Hamilton) “The mid-tier and junior gold-miners’ stocks in their sector’s sweet spot for upside potential have been clubbed like baby seals since mid-April. Sucked into the parallel serious stock-market selloff, that’s left these smaller gold stocks deeply out of favor. Yet their fundamentals remain strong as revealed in the just-finished Q1’22 earnings season. That recent brutal mid-tier-and-junior-gold-stock plunge wasn’t righteous.
Gold-stock tiers are defined by their production rates. Small juniors mine less than 300k ounces of gold annually, medium mid-tiers have outputs running from 300k to 1,000k, large majors yield over 1,000k, and huge super-majors operate at vast scales exceeding 2,000k. The mid-tiers offer a unique mix of sizable diversified production, good output-growth potential, and smaller market capitalizations ideal for outsized gains.
Mid-tiers are much-less-risky than juniors, and amplify gold’s uplegs much more than majors. These mid-tiers are nicely tracked by the GDXJ VanEck Junior Gold Miners ETF. Birthed in November 2009, it now commands $3.8b of net assets making it the second-largest sector ETF after its big-brother GDX. While GDXJ is way-superior on multiple fronts, despite its name it is overwhelmingly comprised of mid-tier gold miners.
They are universally-hated now, after GDXJ was eviscerated in a merciless 30.0% plunge in less than a month into mid-May! Speculators and investors alike have forgotten that mid-tier gold stocks were having a good 2022 before that, rallying 21.7% year-to-date by mid-April. They were nowhere near overbought then, and shouldn’t have cratered. But they were sucked into a wider market maelstrom of serious selling.
During that same span the flagship US S&P 500 stock index dropped an ugly 10.5%. The resulting big fear spike, confirmed by its VIX gauge blasting 40.4% higher, infected everything else. The safe-haven exodus from stocks into cash catapulted the US Dollar Index a monster 4.5% higher! That unleashed big leveraged gold-futures selling, hammering gold 7.6% lower which the gold stocks amplified to serious losses.
But that heavy sector selling had nothing to do with fundamentals, it was collateral damage from soaring bearish psychology. Like a match being struck, after flaring brightly extreme sentiment never lasts long. The battered mid-tier and junior gold stocks are destined to recover fast as gold resumes powering higher. Its own fundamental outlook remains super-bullish on raging inflation unleashed by extreme money printing.”
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“Reading through these gold miners’ latest quarterly reports filed with securities regulators, early 2022’s latest COVID-19 wave really stuck out. In order to keep their mines open during the height of pandemic hysteria, the gold miners instituted extensive employee testing. Those programs are still in place, and generated widespread positive-test results on the fast-spreading but much-less-dangerous omicron variant.
GDXJ’s second-largest component stock Pan American Silver led off its entire Q1’22 results warning investors that ‘…our operations experienced high levels of workforce absenteeism in January and early February due to the Omicron variant of COVID-19. Workforce deployment is now back to more normal levels, and we are maintaining our guidance for 2022 with production weighted to the second half of the year.’
Plenty of other GDXJ-top-25 companies had similar disclosures, saying their Q1 outputs were adversely impacted by widespread positive COVID-19 tests. But nearly all of the affected also reaffirmed their full-year-2022 production guidances. With operations back up to full-speed with omicron passed, most of the smaller gold miners expect to make-up those early-year losses. So last quarter’s output declines are temporary.
In last week’s essay I analyzed the GDX-top-25-majors’ Q1 ‘22 results. Many larger gold miners suffered the same COVID-19-omicron-driven workforce shortages, which similarly slowed their own operations. All that is in the rearview-mirror now, so this currently-underway Q2 ought to see a big jump in aggregate gold production from Q1. That should drive a return to year-over-year production growth among the mid-tiers.
Interestingly the ranks of true primary junior gold miners producing under 75k ounces per quarter swelled in Q1’22. Fully six of these GDXJ-top-25 stocks qualified, deriving over half their quarterly revenues from gold sales! Their productions are highlighted in blue above. That’s the highest concentration of actual juniors included in GDXJ’s upper ranks in years, since it was forced to shift from a junior ETF to a mid-tier one.”
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“Long-term gold-stock price levels ultimately depend on miners’ profitability, which is directly driven by the difference between prevailing gold prices and gold-mining costs. In per-ounce terms these are generally inversely proportional to gold production. That’s because gold mines’ operating costs are largely fixed during planning stages. Their designed throughputs limit the amounts of gold-bearing ore they can process.
That doesn’t change quarter-to-quarter, and requires about the same levels of infrastructure, equipment, and employees. The only real variable is the ore grades run through the fixed-capacity mills. Richer ores yield more gold ounces to spread the big fixed costs of mining across, lowering unit costs which boosts profitability. With COVID-19 hitting Q1’22 output, the GDXJ top 25 should’ve reported higher unit costs.
Cash costs are the classic measure of gold-mining costs, including all cash expenses necessary to mine each ounce of gold. But they are misleading as a true cost measure, excluding the big capital needed to explore for gold deposits and build mines. So cash costs are best viewed as survivability acid-test levels for the mid-tier gold miners. They illuminate the minimum gold prices necessary to keep the mines running.
These GDXJ-top-25 gold miners’ average cash costs surged 8.6% YoY to $894 per ounce, the highest on record! That’s still way below prevailing gold prices, and a reasonable jump given lower outputs and the mounting impacts of inflation on mining costs. Along with COVID-19 absenteeism, higher input prices was another common theme in these latest quarterly reports. First Majestic Silver’s had a good example.
AG warned that ‘Not only was Mexico hit hard with the Omicron COVID-19 variant which significantly reduced personnel and production rates across our operations, we experienced increasing inflationary cost pressure across the operating portfolio for reagents and consumables such as diesel, cyanide and grinding media.’ Costs spiraling out of control at one of its mines in particular really skewed GDXJ-top-25 results.”
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“All-in sustaining costs are far superior than cash costs, and were introduced by the World Gold Council in June 2013. They add on to cash costs everything else that is necessary to maintain and replenish gold-mining operations at current output tempos. AISCs give a much-better understanding of what it really costs to run gold mines as ongoing concerns, and reveal mid-tier gold miners’ true operating profitability.
Impressively despite weaker production, the GDXJ top 25’s average AISCs only climbed 6.8% YoY to $1,211 per ounce. That’s also a new record high, but not greatly above the prior-four-quarter average of $1,141. Remember adjusted for that massive Gold Fields getting kicked out of GDXJ, these elite mid-tiers’ Q1’22 production slumped 5.9% YoY. So only 6.8%-higher AISCs in raging inflation is quite an achievement.”
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“The mid-tier gold miners themselves see full-year-2022 AISCs running about 5% below their Q1 levels. Lower mining costs will make for fatter profits going forward. And despite getting sucked into that serious stock-market selloff between mid-April to mid-May, gold is very likely to resume powering higher again too. History has proven nothing is more bullish for gold investment demand and prices than raging inflation.
This profligate Federal Reserve mushroomed its balance sheet an absurd 115.6% or $4,807b higher in just 25.5 months into mid-April! Effectively more than doubling the US money supply left far more dollars chasing and bidding up the prices on relatively-much-less goods and services. Serious inflation is going to fester until the Fed unwinds the majority of that epic QE4 money printing, which will take years if it ever happens.
The last similar inflation super-spikes erupted during the 1970s. Gold prices nearly tripled during the first, then more than quadrupled during the second! Contrary to gold-futures speculators’ paranoia, Fed-rate-hike cycles are little threat to gold either. In this modern monetary era since 1971, the Fed has completed a dozen before today’s. Gold’s average gains through the exact spans of all 12 of those ran a strong 29.2%!
Fed tightenings have proven so bullish for gold primarily because they are so bearish for stock markets. As of mid-week, the S&P 500 has already rolled over 18.2% at worst since early January on the threat of accelerating rate hikes and quantitative-tightening monetary destruction. The bigger this stock-market selloff grows, the longer inflation stays high, and the more the Fed tightens, the more bullish gold’s outlook.
Gold stocks tend to outperform their metal so well during its uplegs partially because of their big profits leverage to gold. Higher gold prices coming will fuel much-higher earnings among the mid-tier and junior gold miners, helping catapult their stock prices way higher. So the smaller gold miners’ own fundamental outlooks remain very-strong. Their stocks certainly didn’t deserve to get crushed with the stock markets!”
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“The smaller gold miners are also prime acquisition targets for the majors, since those perpetually struggle to offset ongoing depletion from their large-scale operations. Building occasional new mines isn’t enough either, so most of majors’ growth comes from buying out entire mid-tier and junior gold companies. Those offers usually arrive at nice premiums, offering more upside for contrarians deploying capital in these stocks.”
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“The bottom line is the mid-tier and junior gold miners of GDXJ generally reported a good quarter. Their overall production did slump in Q1’22, but the COVID-19-omicron wave driving that has passed. Despite lower outputs and severe price inflation, they still largely held the line on costs. That fueled strong earnings, in both per-ounce and bottom-line terms. Those profits are likely to grow substantially in coming quarters.
Most of the GDXJ-top-25 gold miners are forecasting growing production and lower costs throughout this year. And gold prices are likely to resume trending higher on balance with inflation raging and the stock markets rolling over on aggressive Fed tightening. Gold and its miners’ stocks are the best places to be invested in this extraordinary time. Their recent plunge and bombed-out prices aren’t fundamentally-justified.”
[Full article highly recommended]
https://www.mining.com/web/gold-mid-tiers-q1-2022-fundamentals/