Gold Miners’ Q1’22 Fundamentals

CPA, Principal & Co-Founder of Zeal LLC
May 13, 2022

The major gold miners’ stocks have plunged in recent weeks, obliterating positive sentiment.  They got sucked into the serious stock-market selloff fueled by extreme Fed hawkishness, which spawned big fear.  But that is rash given this sector’s long record of powering higher on balance through general-stock bear markets.  The gold miners’ fundamentals remain solid-to-strong, as revealed in their just-reported Q1’22 results.

The most-popular major-gold-stock benchmark remains the venerable GDX VanEck Gold Miners ETF.  Launched way back in May 2006, it has since parlayed its first-mover advantage into an insurmountable lead.  Even in its present battered state, mid-week GDX’s net assets of $13.0b dwarfed those of the next-largest 1x-long gold-miners-ETF competitor by a staggering 25.9x!  GDX is effectively the only game in town.

The larger gold miners were actually having a great year until the stock markets started crumbling several weeks ago.  By mid-April GDX had surged a smart 27.6% year-to-date!  That amplified gold’s parallel rally by a big 3.4x, better than GDX’s usual 2x-to-3x gold-leverage range.  And both the metal and its miners’ stocks were trouncing the flagship S&P 500 broad-market index, which had dropped 7.9% in that same span.

That’s how gold and gold stocks usually work during material stock-market selloffs, powering higher on balance as general stocks weaken.  Even major bear markets mostly unfold slowly, taking a couple years or so to finish their maulings.  But occasionally downlegs cascade precipitously, fueling flaring fear that infects everything including gold.  Thus its miners’ stocks can get trapped in those rare fear maelstroms.

Since gold stocks’ latest interim high in mid-April, the S&P 500 has plunged a serious 10.4%! That heavy selling spawned big safe-haven buying, fueling a monster 3.2% surge in the US Dollar Index in that short span.  That flight to cash unleashed massive gold-futures selling, hammering the yellow metal a sharp 6.3% lower.  The VIX fear gauge soared 47.1%.  All that bludgeoned GDX 22.6% lower in only 17 trading days!

So in just several weeks gold stocks have done an abrupt turn-one-eight from mounting popularity as their gains grew to being mired in universal bearishness.  But dumping this sector given the extraordinary market backdrop is a baby-with-the-bathwater type of mistake.  With inflation raging, gold and its miners’ stocks are the best investments now.  History has proven that true regardless of stock bears and Fed rate hikes.

This week’s latest US Consumer Price Index print remained red-hot, soaring 8.3% over this past year!  That’s slightly off the prior month’s worst levels since December 1981, despite this inflation gauge being intentionally lowballed by the government.  Surging general prices are the result of absurd Fed money printing.  Over 25.5 months into mid-April, the Fed mushroomed its balance sheet an insane 115.6% or $4,807b!

Effectively more than doubling the US money supply conjured up vastly-more dollars to chase relatively-less goods and services, bidding up their prices.  Monetary inflation is wildly-bullish for gold.  During the only other two similar mammoth inflation super-spikes in the 1970s, gold prices nearly tripled during the first before later more than quadrupling in the second!  The epic gold-stock gains then were truly life-changing.

And gold-futures speculators’ fears of Fed rate hikes are supremely-irrational.  The Fed’s thirteenth hiking cycle of the modern monetary era since 1971 is underway.  Gold actually thrived in the previous dozen, averaging hefty 29.2% gains during their exact spans!  Fed tightenings are bullish for gold and therefore its miners’ stocks because they are bearish for general stocks, greatly bolstering gold investment demand.

So for hardened contrarians able to buck unreasonable herd fear, this recent big-and-fast gold-stock drawdown is a fantastic buying opportunity.  Rather than succumbing to groupthink on this sector, smart traders should consider the major gold miners’ fundamentals and outlook.  We just got fresh updates on how they are actually faring operationally and financially in their latest just-finishing Q1’22 earnings season.

For 24 quarters in a row now, I’ve painstakingly analyzed the latest results released by GDX’s 25-largest component stocks.  These include the world’s biggest gold miners, which now account for a commanding 87.9% of this ETF’s entire weighting.  Digesting hard fundamental results as they are released is essential for cutting through obscuring sentiment fogs.  It helps traders rationally understand gold stocks’ real outlook.

This table summarizes the operational and financial highlights from the GDX top 25 during Q1’22.  These gold miners’ stock symbols aren’t all US listings, and are preceded by their rankings changes within GDX over this past year.  The shuffling in their ETF weightings reflects shifting market caps, which reveal both outperformers and underperformers since Q1’21.  Those symbols are followed by their current GDX weightings.

Next comes these gold miners’ Q1’22 production in ounces, along with their year-over-year changes from the comparable Q1’21.  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 reported 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.

Last quarter proved solid-to-strong for major gold miners.  While the larger ones continue to struggle with depletion which is nothing new, mining-cost rises moderated despite the severe inflationary pressures festering from this profligate Fed’s vast deluge of new money.  The resulting higher prevailing gold prices in Q1’22 really boosted implied sector profitability.  The gold miners are still making money hand-over-fist!

As long-time readers know, I’m generally not a fan of the major gold miners.  After actively speculating in gold stocks and writing popular financial newsletters about that for over two decades, their best gains by far have been won in smaller mid-tier and junior gold miners.  I’ll cover their Q1’22 results in next week’s essay on the far-superior GDXJ ETF.  The largest gold miners have been dead-weight for many years now.

They’ve mostly proven unable to overcome a crucial operational challenge, seriously retarding their stock-price gains.  Operating from such large-scale production bases, the bigger gold miners have long failed to replenish their gold mined.  They simply can’t find or purchase big-enough gold deposits to develop into new mines to overcome depletion.  That’s why I’d never trade the lion’s share of heavier-weighted GDX stocks.

The best-available global gold supply-and-demand data is published quarterly by the World Gold Council in its awesome Gold Demand Trends reports.  The latest covering Q1’22 revealed worldwide gold-mine output climbed a strong 2.6% YoY to 856.5 metric tons, or 27,537k ounces.  Yet the GDX top 25’s collective gold production last quarter plunged a steep 8.1% YoY to 7,729k ounces!  That’s despite gold surging.

Quarterly average gold prices blasted 4.8% higher to $1,879 between Q1’21 to Q1’22!  That’s certainly good incentive to maximize production to take advantage of great gold prices.  Last quarter actually saw the second-highest gold prices ever witnessed after Q3’20’s $1,912.  Yet the GDX-top-25 output still fell to its lowest levels in at least the last 24 quarters I’ve been advancing this research thread!  But that’s a bit skewed.

As of mid-week, South Africa’s Harmony Gold hadn’t yet reported its Q1’22 operational results.  This is a major gold miner, a threshold which starts at 250k ounces of quarterly production.  Excluding Harmony’s output from the comparable Q1’21 leaves overall GDX-top-25 gold production down a milder 3.7% YoY.  That’s still shrinkage though, way worse than overall world gold-mining output growth again running 2.6% YoY.

Generally the only times large major gold miners temporarily enjoy annual production boosts are in the four quarters after they acquire competitors.  That has long proved true for the mighty industry behemoths Newmont and Barrick Gold, which dominate GDX at 26.4% of its total weighting!  That’s because of their gigantic market capitalizations.  Gold-stock mega-mergers are bad, only briefly masking depletion problems.

Together NEM and GOLD produced a massive 2,334k ounces last quarter, which is enormous.  But as recently as Q4’19, these same two super-majors collectively mined 3,269k!  The only large major seeing great production growth last quarter was Agnico Eagle Mines, with impressive 27.8%-YoY growth to 661k ounces.  Yet that’s only because it acquired Kirkland Lake Gold.  A year ago those two companies mined 820k!

So the production growth investors prize above everything else is rarely seen in the major gold miners that overwhelmingly account for GDX’s weightings.  Smaller mid-tier and junior gold miners have a far-better track record of growing output, which is way-easier with their much-smaller production bases.  Just bringing single new smaller gold mines online periodically keeps their outputs generally growing on balance.

Eleven of these GDX-top-25 component stocks qualify as majors, producing 250k+ ounces in Q1’22.  Together they command a majority 56.7% of this ETF’s total weightings.  Excluding Harmony which again dragged its feet on reporting, the remaining ten true majors saw their total quarterly output fall 5.0% YoY to 6,317k ounces.  Unable to even replenish depletion, unfortunately most of the majors aren’t worth owning.

Even if they were, their upside potential is limited by their far-larger market caps.  The bigger any stock, the greater the capital inflows necessary to drive it materially higher.  Mid-week the true majors averaged hefty $20.3b market caps, compared to just $6.9b for the rest of the GDX top 25.  And if Franco-Nevada which is just a wildly-overpriced royalty play is excluded, the latter market caps are even lower averaging $5.2b.

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

So the only real variable driving quarterly gold production is the ore grades fed into the mills.  Those vary widely even within individual gold deposits.  Richer ores yield more ounces to spread the big fixed costs of mining across, lowering unit costs and boosting profitability.  So with the GDX top 25’s output falling last quarter, per-ounce costs should’ve at least risen comparably and likely more given the Fed’s raging inflation.

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 major gold miners.  They illuminate the minimum gold prices necessary to keep the mines running.

The GDX-top-25 gold miners’ average cash costs shot up 10.1% YoY to $851 per ounce, just shy of their all-time high of $853 in the preceding Q4’21.  Hecla Mining proved a wild outlier, reporting eye-popping $1,516 cash costs that skyrocketed 44.1% YoY!  Management blamed this on “inflationary cost pressures related to steel, reagents, fuel for mobile equipment, other consumables, and increased contractor costs...”

Excluding Hecla’s extreme, the rest of the GDX top 25 averaged modestly-better $812 cash costs.  And while this wasn’t true for Hecla, many of these gold miners are forecasting improving gold outputs as 2022 marches on.  That ought to lower average cash costs in coming quarters, with more ounces to bear the fixed costs of mining.  But even $851 remains far, far below prevailing gold prices averaging $1,879 in Q1.

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 major gold miners’ true operating profitability.

Surprisingly given their weaker output and the inflationary pressures on gold mining, these GDX-top-25 gold stocks reported a comparatively-mild 6.2%-YoY AISC increase to $1,133 per ounce.  That actually was a considerable improvement quarter-on-quarter from Q4’21’s all-time high of $1,188.  Nevertheless, this latest quarter proved the 14th in a row seeing average all-in sustaining costs climbing year-over-year.

That’s not necessarily a problem though as long as gold-price gains generally outpace rising costs.  That AISC-inflation streak began way back in Q4’18 when they ran $874.  Yet back then gold only averaged $1,228 per ounce.  While AISCs are now 29.6% higher in this latest quarter, average gold prices fared far better rallying 53.0%!  Mining costs naturally trend with gold prices, which impact the economics of gold deposits.

Higher-grade ore bodies usually have lower unit costs to exploit, less waste rock to dig up and process compared to the contained gold.  When gold prices are powering higher on balance in secular bulls, the mining companies can target other more-common lower-grade deposits.  Those have higher unit costs, but are much easier to find and often develop.  So better gold prices gradually reduce average grades of mines.

And Hecla’s crazy-high $1,810 AISCs also skewed the GDX-top-25 average higher in Q1.  Excluding that big outlier, the rest of these gold miners averaged $1,094.  Interestingly Hecla expects those AISCs to moderate, with full-year-2022 guidance near a $1,525 midpoint.  Out of the 16 GDX-top-25 gold miners reporting both Q1’22 AISCs and 2022 forecasts, fully 11 see average full-year AISCs below last quarter’s levels.

And those improvements weren’t trivial, with AISC guidances across this population averaging 7.0% lower than their AISCs last quarter!  So major gold miners are mostly forecasting both lower costs and higher production in Q2, Q3, and Q4.  That has big potential to really boost the gold miners’ earnings this year, as long as prevailing gold prices remain relatively-high.  They certainly should with the Fed’s inflation raging!

Gold-mining earnings are the difference between prevailing gold prices and mining costs.  The best sector proxy for gold-mining profitability simply subtracts GDX-top-25 AISCs from quarterly-average gold levels.  That proved a pleasant surprise in these latest results, with implied sector earnings actually climbing 2.6% YoY to $746 per ounce in Q1’22 despite 6.2%-higher average AISCs!  Those are hefty profits by historical standards.

Way back in Q4’18 when that 14-quarter-old streak of higher AISCs started, major gold miners’ implied unit profits by this measure merely ran $353 per ounce.  Last quarter’s impressive $746 is more than double that, and the fourth-highest on record after Q3’20’s $884, Q4’20’s $838, and Q2’21’s $778.  So the major gold miners dominating GDX really are making money hand-over-fist with these excellent gold prices.

Amazingly despite gold’s sucked-into-heavy-stock-market-selling drubbing in recent weeks, its average price so far in Q2’22 is still running $1,915!  If gold bounces soon as it ought to on extreme gold-futures selling reversing into big proportional buying, this quarter’s average gold level could rival Q3’20’s record high of $1,912.  Couple that with lower AISCs on rising output, and gold miners’ earnings could really surge.

So despite recent weeks’ big-and-fast gold-stock plunge that decimated sector sentiment, the major gold miners’ fundamentals remain really strong.  That’s also mostly reflected in their hard accounting results, just reported to securities regulators under Generally Accepted Accounting Principles or other countries’ equivalents.  The GDX top 25’s total revenues edged up 1.3% YoY to $13.9b despite their lower gold output.

Average gold prices surging 4.8% YoY certainly helped, as did some companies boosting their byproduct outputs of base metals and silver.  Despite higher sales, overall bottom-line earnings still plunged 23.1% YoY to just $2,162m.  Accounting-earnings data is noisy, skewed both ways by big unusual charges and gains.  Major sources include mine impairments and reversals, and gains and losses on asset sales and hedges.

When I wade through gold miners’ quarterly reports, I always look for unusual one-time gains and losses on their income statements.  Some larger ones in this latest quarter included Kinross Gold’s huge $671m impairment charge on trying to quickly sell its Russian operations in response to that country’s invasion of Ukraine.  Endeavour Mining suffered a big $179m “loss on financial instruments”, which included $130m of hedges.

This company is hedging over half of its remaining forecasted 2022 output around just $1,833 gold, which really irritates investors.  They buy gold stocks for leveraged upside exposure to gold, and selling that via hedges robs shareholders in gold-bull environments.  Gold-stock management teams should be fired if they hedge anything beyond limited requirements necessary to finance mine expansions and new mine-builds.

Offsetting those unusual losses was an enormous $480m gain Peru’s Buenaventura reported in selling discontinued operations.  Net these together, and GDX-top-25 accounting earnings in Q1’22 were closer to $2,532m which is only down 10.0% YoY.  The major gold stocks remain relatively-cheap in valuation terms based on classic trailing-twelve-month price-to-earnings ratios, with the GDX top 25 averaging 30.9x.

That’s close to their 24-quarter low of 29.1x seen in Q2’21.  Eight of these elite gold miners were trading with cheap P/Es below 20x mid-week, and valuations are trending even lower given the recent heavily-outsized gold-stock selling.  Cash flows generated from operations also proved solid last quarter, totaling $4,660m across the GDX top 25 which slumped 8.0% YoY.  Their total cash treasuries edged up 0.4% to $20.6b.

That’s the third-highest on record, making for big cash warchests these larger gold miners will use to try and stem their ongoing depletion-driven output shrinkage.  While they do expand existing mines and build new ones, most of their growth at major-scale comes from buying entire gold-mining companies outright.  The smaller mid-tier and junior gold miners are the prime targets, feeding majors’ insatiable gold-supply pipeline.

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The bottom line is the major gold miners fared pretty-well fundamentally last quarter.  Their long struggle failing to overcome depletion continued, with more production shrinkage like usual.  But despite lower output and monetary-inflation pressures, the GDX top 25 still held the line on all-in sustaining costs.  Those didn’t climb proportionally with weaker production, helping higher prevailing gold prices really boost earnings.

Gold-mining profitability last quarter was among the highest on record, and ought to improve further as this year marches on.  The gold miners are mostly forecasting improving outputs along with lower costs in coming quarters.  That is really-bullish for earnings growth with gold prices highly-likely to keep climbing on balance in this raging inflation.  The beaten-down gold stocks are far too low to reflect these strong fundamentals!


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.

With gold stolen by Conquistador Francisco Pizarro from the Inca Empire in 1532, Spain financed its conquest of Europe.
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