first majestic silver

Gold Mid-Tiers’ Q1’23 Fundamentals

CPA, Principal & Co-Founder of Zeal LLC
May 26, 2023

The biggest gold-stock gains during major gold uplegs are achieved by mid-tier and junior miners.  These smaller producers in the sweet spot for upside potential just finished reporting their latest quarterlies last week.  They generally enjoyed solid operational and financial results in Q1’23, which is bullish for their outlook.  How they are faring fundamentally affects their coming trajectory as gold resumes powering higher.

The leading mid-tier gold-stock benchmark is the GDXJ VanEck Junior Gold Miners ETF.  With $4.0b in net assets this week, it remains the second-largest gold-stock ETF after its big brother GDX.  That is dominated by far-larger major gold miners, although there is much overlap between these ETFs’ holdings.  Still misleadingly named, GDXJ is overwhelmingly a mid-tier gold-stock ETF with little weighting allocated to juniors.

Gold-stock tiers are defined 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 huge super-majors operate at vast scales exceeding 2,000k.  Translated into quarterly terms, those thresholds shake out under 75k, 75k to 250k, 250k+, and 500k+.  Only two of GDXJ’s 25 biggest holdings are true juniors.

That means they produce less than 75k ounces per quarter, and that gold output generates over half their quarterly revenues.  That excludes primary silver miners producing byproduct gold, and the royalty and streaming companies that buy future gold output for big upfront payments used to finance mine builds.  While we’ve traded countless great juniors over the decades, mid-tiers are really in the sweet spot for upside.

These gold miners dominating GDXJ offer a unique mix of sizable diversified production, excellent output-growth potential, and smaller market capitalizations ideal for outsized gains.  Mid-tiers are less risky than juniors, while amplifying gold uplegs much more than majors.  Our newsletter trading books are filled with both fundamentally-superior mid-tiers and juniors, smaller gold miners which we’ve long specialized in at Zeal.

GDXJ has performed well during gold’s latest upleg, which powered up 26.3% at best over 7.2 months into early May.  GDXJ enjoyed a parallel 66.9% upleg over most of that span into mid-April, making for modest 2.5x upside leverage to gold.  Mid-tier gold-stock gains usually start out slow early in gold uplegs before accelerating dramatically into their climaxes, when mounting greed fuels big momentum-chasing buying.

GDXJ has suffered a sizable 15.5% selloff in recent weeks, paralleling gold’s healthy 4.5% pullback.  That was driven by gold-futures selling spawned by a surging US dollar.  All that recent weakness has really ramped bearish psychology, rebalancing sentiment.  But all that should soon pass, with the US dollar’s bear rally failing.  Then gold-futures speculators will flock back, driving gold and thus gold stocks much higher.

For 28 quarters in a row now, I’ve painstakingly analyzed the latest operational and financial results from GDXJ’s 25-largest component stocks.  Mostly mid-tiers, they now account for 64.5% of this ETF’s total weighting.  While digging through quarterlies is a ton of work, understanding smaller gold miners’ latest fundamentals really cuts through the obscuring sentiment fogs shrouding this sector.  This research is essential.

This table summarizes the GDXJ top 25’s operational and financial highlights during Q1’23.  These gold miners’ stock symbols aren’t all US listings, and are preceded by their rankings changes within GDXJ over this past year.  The shuffling in their ETF weightings reflects shifting market caps, which reveal both outperformers and underperformers since Q1’22.  Those symbols are followed by their current GDXJ weightings.

Next comes these gold miners’ Q1’23 production in ounces, along with their year-over-year changes from the comparable Q1’22.  Output is the lifeblood of this industry, with investors generally prizing production growth above everything else.  After are the costs of wresting that gold from the bowels of the earth in per-ounce terms, both cash costs and all-in sustaining costs.  The latter help illuminate miners’ profitability.

That’s followed by a bunch of hard accounting data reported to securities regulators, quarterly revenues, earnings, operating cash flows, and resulting cash treasuries.  Blank data fields mean companies hadn’t disclosed that particular data as of the middle of this week.  The annual changes aren’t included if they would be misleading, like comparing negative numbers or data shifting from positive to negative or vice-versa.

The mid-tier gold miners’ overall Q1’23 performance proved solid.  But some big GDXJ composition changes complicate comparable analysis.  During this past year a large super-major was added in, along with a second junior explorer with no production.  A handful of extreme outliers also skewed production costs higher.  But after adjusting for these distortions, the smaller gold miners generally fared well last quarter.

VanEck pioneered gold-stock ETFs when it launched GDX way back in May 2006.  GDXJ was born a bit later in November 2009.  Still the two largest sector ETFs by far, these have long been great benchmarks and trading vehicles.  With their holdings market-capitalization-weighted and always in flux, they are way superior to the preceding largely-static gold-stock indexes.  But serious overlap still hobbles their potential.

With the same company operating both GDX and GDXJ, there’s no reason their holdings shouldn’t be mutually-exclusive.  All the super-majors and majors should only be in GDX, while all the mid-tiers and juniors alone populate GDXJ.  These gold-stock ETFs would trade differently then, dramatically boosting their utility and appeal for both speculators and investors.  That’s never been the case and certainly isn’t today.

Of these GDXJ-top-25 stocks, fully 14 are also GDX-top-25 components!  Just four are only found in GDXJ.  These mostly-mid-tier gold miners weighing in at 64.5% of GDXJ also account for 27.4% of GDX.  And those total percentages rise if the rest of these ETFs’ holdings below the top 25 are included.  So GDXJ essentially slices out about a quarter of GDX then expands those gold stocks’ weightings near two-thirds.

That’s still good, as GDX’s super-majors and majors excluded are mostly deadweight dragging down its performance.  For many years they’ve failed to grow their production from the vast scales they operate at.  And their far-larger market caps saddle them with stock-price inertia causing them to lag gold uplegs.  The GDXJ top 25 are clustered between GDX’s 12th to 35th weightings, eliminating the long-struggling majors.

Overall the GDXJ top 25’s total production of 3,204k ounces of gold in Q1’23 looks spectacular, blasting up 16.5% year-over-year!  But unfortunately much of that growth came from the inexplicable addition of Kinross Gold during this past year.  Over the last four quarters it yielded a massive 2,108k ounces, making it a super-major.  Such a huge gold producer certainly deserves no place in a “Junior Gold Miners ETF”!

Excluding Kinross which wasn’t in GDXJ back in Q1’22, the rest of the top 25 saw overall production edge 0.4% lower in Q1’23.  But that is still understated for a couple reasons.  First GDXJ’s largest component Pan American Silver acquired most of Yamana Gold’s operations.  That deal formally closed at the very end of Q1’23, so their combined output isn’t included in PAAS’s Q1’23 results but was still in Q1’22’s.

Excluding KGC from Q1’23 and AUY from Q1’22 yields outstanding 7.8% YoY output growth for the rest of the GDXJ top 25!  These mid-tiers just trounce the 0.1% YoY production shrinkage from the GDX top 25 majors last quarter, which I analyzed in another essay last week.  The GDXJ top 25 also beat the World Gold Council’s latest read on total global gold-mine production in Q1’23, which grew 1.5% YoY.

But even these adjustments are flawed because it wasn’t just PAAS that bought out AUY.  Another major gold miner Agnico Eagle Mines acquired AUY’s biggest gold mine in this complex deal.  So removing AUY’s full output from Q1’22 skews this comparison a bit higher.  Yet offsetting some of that is Filo Mining’s addition.  This explorer is advancing a big copper-gold-silver project straddling the Chile-Argentina border.

But without a mine yet it has no production, displacing a junior gold miner from GDXJ’s upper ranks.  Still net net, the mid-tiers’ and juniors’ output growth continues to far exceed the majors’ like usual.  That is the primary mission for gold miners.  Higher production boosts operating cash flows which help fund new mine expansions, builds, and purchases.  That fuels virtuous circles of growth which investors highly prize.

They chase higher output really boosting stock prices.  Among the GDXJ top 25, Alamos Gold, B2Gold, and Eldorado Gold enjoyed the strongest production growth over this past year soaring 29.8%, 27.5%, and 20.7% YoY!  The gold miners telegraph growth well in advance, with production guidances taking into account new mine expansions and builds.  So prudent stock pickers doing their homework can buy in early.

That’s what we do at Zeal, so we added newsletter trades in AGI, BTG, and EGO last July.  As of mid-week their average unrealized gains ran 56%, vastly better than GDXJ’s 22% gains during that same span!  And earlier this month before gold’s latest dollar-surge-spawned pullback, these same trades in our weekly newsletter averaged 72% gains.  Superior production growth really translates into bigger stock-price gains!

And rather bullishly plenty of these GDXJ-top-25 miners are forecasting higher output as 2023 marches on.  Endeavour Mining’s quarterly declared its production “performance weighted towards H2-2023”.  SSR Mining advised “the first quarter is expected to represent the lowest quarter of production for 2023.”  Hecla Mining reported “Expected gold production remains weighted towards the second half of 2023.”

Interestingly this isn’t unusual, with Q1s seeing the weakest gold production of calendar years.  The WGC’s latest quarterly Gold Demand Trends report covering Q1’23 includes world output data going back to early 2010.  On average in Q1s, Q2s, Q3s, and Q4s since, world mine production has swung -8.7%, +4.7%, +6.9%, and +0.3% sequentially quarter-on-quarter.  Q1’23 indeed plunged 10.4% QoQ from Q4’22!

The GDXJ top 25 fared better, experiencing a 7.3% sequential drop over the last two quarters.  Weaker Q1s usually followed by stronger Q2s and Q3s mostly result from northern-hemisphere winters, which adversely impact gold-mine operational efficiencies on multiple fronts with bitter cold and heavy rains.  Most of the world’s gold mines are found in the top half of the globe, mirroring most of the world’s land masses.

Unit gold-mining costs are generally inversely proportional to gold-production levels.  That’s because gold mines’ total operating costs are largely fixed during pre-construction planning stages, when designed throughputs are determined for plants processing gold-bearing ores.  Their nameplate capacities don’t change quarter to quarter, requiring similar levels of infrastructure, equipment, and employees to keep running.

So the only real variable driving quarterly gold production is the ore grades fed into these plants.  Those vary widely even within individual gold deposits.  Richer ores yield more ounces to spread mining’s big fixed costs across, lowering unit costs and boosting profitability.  But while fixed costs are the lion’s share of gold mining, there are also sizable variable costs.  That’s where recent years’ raging inflation really hit.

Energy is the biggest category, both electricity to power ore-processing plants including mills and diesel fuel necessary to run fleets of excavators and dump trucks hauling raw ores to those facilities.  Other smaller consumables range from explosives to blast ores free to chemical reagents necessary to process various ores to recover their gold.  So higher variable costs continue to heavily impact the world’s gold miners.

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.

The GDXJ-top-25 mid-tiers’ average cash costs surged 10.2% year-over-year to an all-time record high $1,021 per ounce in Q1’23!  Thankfully that was heavily skewed by four extreme outliers, SSR Mining, Hecla Mining, First Majestic Silver, and Buenaventura.  The first two are forecasting costs coming back down later this year as production increases.  The fourth has long been troubled, but the third is worth discussing.

First Majestic Silver operates three traditional silver mines with gold byproducts and one newer primary gold mine.  All this company’s extreme costs only come from the latter, which has struggled since its acquisition and only accounted for 27% of AG’s Q1’23 gold output.  Its ridiculous costs are really skewing the entire GDXJ top 25’s higher, which sure isn’t righteous since that mine is just 0.5% of their overall output!

That small gold mine has been such a thorn in First Majestic’s side through 22 months of running it that in late March this company declared it was “temporarily suspending all mining activities and reducing its workforce at Jerritt Canyon effective immediately.”  Without its lone primary gold mine online, AG won’t be reporting any more extreme costs.  It wouldn’t surprise me if this company just ends up selling that difficult mine.

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 maintain gold mines as ongoing concerns, and reveal the mid-tier gold miners’ true operating profitability.

The GDXJ top 25’s average AISCs also surged up 13.9% YoY to a way-too-high $1,414 in Q1’23.  That was the second highest ever after Q4’22’s $1,442.  While even that was well below last quarter’s high average gold price of $1,892 and thus still quite profitable, it was heavily skewed by those same four gold miners.  Excluding SSRM, HL, AG, and BVN, the rest of the GDXJ top 25’s AISCs averaged just $1,209.

That perfectly matches the larger gold miners of the GDX top 25, which averaged $1,210 last quarter after similar adjustments.  Those also included ignoring outlying costs at HL and BVN.  Due to its problems with that newer mine, stock selling battered AG out of the GDX top 25.  Plenty of the GDXJ-top-25 mid-tiers have guided to lower full-year AISCs even including Q1.  SSRM’s for example are forecast near $1,395.

Last quarter’s really-high AISCs certainly cut into profit margins.  A great proxy for how gold miners are faring as a sector subtracts average AISCs from quarterly-average gold prices to obtain implied unit profits.  For the entire GDXJ top 25 including those four extreme outliers, that metric plunged 25.0% YoY to $478 per ounce.  That was still solid, the slowest decline since Q1’22 to the best unit profits in three quarters.

Without that handful of outliers, the mid-tiers’ implied profitability naturally looks way better.  Those $1,209 adjusted AISCs subtracted from Q1’23’s $1,892 average gold price yields $683 per ounce.  That is on the higher side of the past 28 quarters’ range, about 5/8ths up in.  So the mid-tiers and juniors are doing a lot better fundamentally than most traders are giving them credit for.  And their earnings outlook is very bullish.

Again many gold miners are forecasting improving production lowering AISCs in coming quarters including this currently-underway Q2.  Despite recent weeks’ latest gold pullback, average gold prices are still running much higher quarter-to-date at $2,002.  That’s up a hefty 5.8% sequentially from Q1!  And with Q2 nearly 2/3rds over, its ultimate average gold price will almost certainly yet prove well higher than Q1’s $1,892.

This potent combination of higher prevailing gold prices less lower AISCs on rising production should yield much-fatter profits this quarter.  So mid-tiers’ Q2 results coming out from late July into mid-August should really impress investors.  Those better fundamentals will coincide with gold stocks’ strong seasonal autumn rally accelerating with gold’s underlying one.  That portends more big gains coming in this sector.

The GDXJ top 25’s hard accounting results reported to securities regulators under Generally Accepted Accounting Principles or other countries’ equivalents were heavily skewed by super-major Kinross Gold’s inclusion.  Their total Q1’23 revenues surged 12.3% YoY to $7,354m, but without KGC they actually slumped 1.9% YoY to $6,425m.  But excluding the acquired AUY from Q1’22 as well, sales grew a healthier 5.2%.

Bottom-line earnings were similarly chaotic with that big composition change over this past year.  The raw GDXJ-top-25 profits plunged 46.3% YoY to $449m.  Without KGC, that worsened to a 57.1% collapse to $359m.  But as typical in this industry, some large non-cash charges flushed through income statements led by mine impairments distorted profits.  In Q1’23 for example, AG wrote down that troubled mine by $125m.

Net out some of the larger unusual items from both quarters, and overall GDXJ-top-25 earnings fell closer to 20% YoY.  That’s neither great nor terrible, somewhat middling performance.  Bottom-line earnings will improve in coming quarters with higher gold prices and lower costs.  Operating-cash-flow generation in Q1’23 was much stronger, surging 33.5% YoY to $1,394m including KGC or rising a still-good 8.7% without it.

Overall cash treasuries still fell 14.2% YoY to $8,022m as mid-tiers and juniors spent money to expand and build mines.  They are actually still pretty flush relative to the past 28 quarters’ range, which ran from $3,576m to $10,144m.  So the GDXJ top 25 still have lots of capital to invest in growing their production.  They are also prime acquisition targets for super-majors and majors that can’t overcome depletion organically.

Pan American Silver and Agnico Eagle Mines teaming up to buy out Yamana Gold over this past year is a key case in point.  AUY was GDXJ’s top holding in Q1’22, producing 211k and 2,199k ounces of gold and silver that quarter.  Odds are at least one of today’s GDXJ top 25 will be bought out during the coming year, maybe more.  The mid-tiers’ and juniors’ acquisition potential adds to their stock upside during gold uplegs.

Successful trading demands always staying informed on markets, to understand opportunities as they arise.  We can help!  For decades we’ve published popular weekly and monthly newsletters focused on contrarian speculation and investment.  They draw on my vast experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks.

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The bottom line is the mid-tier gold miners just reported a solid Q1 operationally and financially.  They nicely grew their production, and investors rewarded the better performers with outsized stock-price gains.  While average costs surged, those were heavily skewed by a handful of extreme outliers.  Without them, the rest of the mid-tiers and juniors largely held the line.  Their profitability should shoot up in coming quarters.

Plenty of mid-tier gold miners are forecasting rising output and lower costs as 2023 marches on.  That combined with higher prevailing gold prices should really boost earnings.  So fundamentals continue to point to much-higher stock prices ahead.  That should help attract traders in droves as gold’s powerful upleg resumes.  This latest pullback is another excellent buying opportunity in high-potential smaller gold miners.

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Adam Hamilton, CPA, is a principal of Zeal LLC, which he co-founded in early 2000 as a pro-free market, pro-capitalism, and pro-laissez faire contrarian investing and speculating Information Age financial-services company. Hamilton is a lifelong contrarian student of the markets who lives for studying and trading them.


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