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Gold Miners’ Q2’23 Fundamentals

CPA, Principal & Co-Founder of Zeal LLC
August 18, 2023

The gold miners’ stocks have had a tough month, disproportionally pummeled lower on a relatively-minor gold pullback.  So naturally bearishness spiked, leaving this small sector really out of favor again.  Smart contrarians are still paying attention, as major gold stocks just reported their latest quarterly results.  They always offer great insights into how gold miners are faring fundamentally, whether higher stock prices are likely.

The GDX VanEck Gold Miners ETF remains this sector’s dominant benchmark.  Birthed way back in May 2006, GDX has parlayed its first-mover advantage into an insurmountable lead.  Its $11.2b of net assets mid-week dwarfed the next-largest 1x-long major-gold-miners ETF by over 30x!  GDX is undisputedly the trading vehicle of choice in this sector, with the world’s biggest gold miners commanding most of its weighting.

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+.  These two largest categories account for nearly 4/7ths of GDX.

GDX sure isn’t winning any belle-of-the-ball contests lately, dropping 14.7% over this past month.  That included breakdowns below both uptrend support and GDX’s 200-day moving average, leaving a wake of considerable technical and sentimental damage.  The major gold stocks have been amplifying gold’s own parallel 4.3% retreat since mid-July.  That was fueled by gold-futures selling on a 3.5% US Dollar Index rally.

The gold-futures guys watch the US dollar’s fortunes for their primary trading cues.  The currency guys in turn have driven a strong USDX bounce on Fed-hawkish economic data arguing for keeping rates higher for longer.  The resulting gold-stock selling has been overdone though, as GDX leveraged gold’s pullback by 3.4x as of mid-week.  Typically this leading major-gold-stock ETF amplifies material gold moves by 2x to 3x.

So excitable gold-stock traders have been overreacting, as they are wont to do.  Their sentiment has probably been tainted by the recent general-stock selloff.  Over that past-month span, the flagship S&P 500 fell 3.3% breeding universal bearishness.  Gold stocks tend to get sucked into material stock-market selloffs, especially if gold isn’t rallying.  Their latest fundamentals reveal whether low gold-stock prices are righteous.

For 29 quarters in a row now, I’ve painstakingly analyzed the latest operational and financial results from GDX’s 25-largest component stocks.  Mostly super-majors, majors, and larger mid-tiers, they dominate this ETF at 88.1% of its total weighting!  While digging through quarterlies is a ton of work, understanding the gold miners’ latest fundamentals really cuts through the obscuring sentiment fogs shrouding this sector.

This table summarizes the operational and financial highlights from the GDX top 25 during Q2’23.  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 Q2’22.  Those symbols are followed by their current GDX weightings.

Next comes these gold miners’ Q2’23 production in ounces, along with their year-over-year changes from the comparable Q2’22.  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 major gold miners’ Q2’23 performances proved disappointing overall.  Generally their production fell which forced costs higher, eroding earnings.  The super-majors and larger majors have always struggled to grow their outputs at their vast operational scales, so I’ve long favored smaller mid-tiers and juniors.  But since the big gold stocks of GDX dominate sector price action and sentiment, we have to follow their results.

Production growth trumps everything else as the primary mission for gold miners.  Higher outputs boost operating cash flows which help fund mine expansions, builds, and purchases, fueling virtuous circles of growth.  Mining more gold also boosts profitability, lowering unit costs by spreading big fixed operational expenses across more ounces.  But most of GDX’s biggest gold miners continued suffering shrinking output.

That includes mighty Newmont, Barrick Gold, Newcrest Mining, Gold Fields, Anglogold Ashanti, Kinross Gold, and Endeavour Mining.  Together commanding almost 3/8ths of GDX’s total weighting, these seven huge gold miners produced 4,866k ounces last quarter.  Ominously that plunged 8.9% year-over-year, a serious drop for most of the world’s biggest gold miners!  That forced overall GDX-top-25 output down 4.7% YoY.

While bad performance absolutely, it looks even worse in broader context.  Every quarter the World Gold Council publishes the best-available global gold supply-and-demand data in its outstanding Gold Demand Trends reports.  As August dawned, the latest Q2’23 GDT revealed that worldwide gold-mining output last quarter actually surged 3.8% YoY to 923.4 metric tons!  So the biggest gold stocks are seriously lagging.

For decades the super-majors have failed to grow their production organically, they’ve had to instead rely on periodic expensive acquisitions.  But gold-mining mega-mergers are bad for this sector.  They merely temporarily mask ongoing depletion, usually boosting gold production for only the four quarters after these deals are consummated!  They just aggregate depleting gold mines into bigger stables, then shrinkage resumes.

These mega-mergers ultimately destroy value in this sector, hurting this industry and investors.  Acquiring shareholders suffer big dilution on large new-stock issuances to buy out smaller peers.  Even worse, their great still-growing and very-profitable mines are buried within acquirers’ large operating portfolios.  That relegates their standout operations from driving smaller stocks’ performances to barely moving larger ones’.

And every time an excellent mid-tier gold miner is bought out by a major, that leaves fewer high-potential gold stocks for investors to pick from.  I’ve been actively speculating in gold stocks and writing newsletters about it for a quarter-century now, and picking great trades is getting harder.  Thanks to all these buyouts, the pool of fundamentally-superior smaller gold miners is inexorably shrinking which discourages investment.

The world’s largest gold miner Newmont is the poster child for resorting to mega-mergers after failing to grow production organically.  In mid-2019 NEM bought out what was the best major gold miner at the time Goldcorp for $10b.  In the four full quarters before that deal was finalized, NEM’s gold output clocked in at 1,162k, 1,286k, 1,262k, and 1,230k ounces.  That pre-merger trend was mostly depleting on balance, like usual.

Newmont adding Goldcorp’s mines indeed fueled big growth during the first three fully-merged quarters.  Their output hit 1,644k, 1,830k, and 1,479k ounces.  The fourth one was Q2’20 during those COVID-19 lockdowns, so that was really poor at 1,255k.  But this super-major’s depletion problems soon returned after that acquisition was digested.  That’s certainly evident in NEM’s production in these latest four quarters.

Ending in Q2’23, Newmont’s output came in at 1,487k, 1,630k, 1,270k, and 1,240k ounces.  These last couple quarters are way back down to terrible pre-Goldcorp-buyout and pandemic-lockdown levels!  Still unable to grow production by expanding its own mines and advancing its own deposits, NEM just resorted to another mega-merger.  In mid-May it declared it was buying out Australia’s Newcrest Mining for over $19b!

The combined entity’s huge stable of mines will again really boost Newmont’s overall production for the first four quarters after this deal is done.  But then depletion-driven shrinkage will return with a vengeance.  A few years from now, NEM may very well be back down near 1,250k quarterly output.  So was the steep $29b price tag shareholders paid for Goldcorp and Newcrest worth it?  That’s crazy-big money to tread water!

As the world’s largest gold miner with the highest GDX weighting, Newmont has a disproportional impact on GDX performance and thus overall sector sentiment.  Damningly NEM reporting its lousy Q2’23 results was what ignited gold stocks’ selloff over this past month!  GDX’s upside momentum was accelerating in mid-July after a decisive 50dma breakout.  Then Newmont pooped in the punch bowl with its wretched quarterly.

The Q2 production of this supposedly best-of-breed super-major plunged a shocking 17.1% YoY, which catapulted unit mining costs 22.8% higher!  Q2’s sales, profits, and operating cash flows cratered 12.3%, 59.9%, and 36.4% on that.  So NEM stock plunged 6.0% that day, dragging GDX 3.1% lower on a day where gold merely slipped 0.4%.  NEM’s results slammed other gold stocks, fueling flaring bearish sentiment.

Analyzing quarterlies is challenging and time-consuming, requiring experience and knowledge that the vast majority of traders don’t have.  Most certainly weren’t aware Newmont had reported, just that GDX was falling sharply on a day where gold’s driving price action didn’t justify anything near that.  Of course unexplained drops really taint psychology, leaving wary traders more likely to exit intensifying subsequent selling.

Newmont’s downside surprises might not be over.  Its Q2’23-results press release declared it “Remains on Track to Achieve Full Year Guidance”.  That is running at midpoints of 6,000k ounces of gold and $1,200 all-in sustaining costs.  Yet year-to-date in the first half of 2023, NEM only mined 2,510k with far-worse AISCs averaging $1,424.  So achieving midpoint guidance will require incredible second-half results.

Newmont’s H2’23 production will have to rocket 39% above H1’s, and AISCs will have to average $976 per ounce!  Both seem really unlikely given NEM’s long track record of failing to overcome depletion.  So by the time Q3 results are released in late October, Newmont will likely have to cut 2023 guidance for production while lifting it for mining costs!  That could again weigh on sector psychology unless GDX is surging.

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 expenses 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.

But interestingly most of the GDX top 25’s Q2 reports I read through cited lower output as the main driver of higher costs, not inflation!  Newmont said its high costs were “impacted by lower production volumes”.  The biggest major that bucked last quarter’s weaker-output trend was Agnico Eagle Mines.  Yet its costs still climbed sharply from Q2’22 levels, “primarily due to higher minesite costs per tonne related to 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.

These elite GDX-top-25 majors reported average cash costs rising 4.0% YoY to $955 per ounce in Q2.  That’s the third highest on record, not far behind Q3’22’s peak of $975!  But like usual there are a couple extreme outliers from Hecla Mining and Buenaventura.  Neither bothered explaining in their quarterlies why their costs were so high.  Excluding them, the rest of these majors averaged better $896 cash costs.

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.

The GDX top 25’s average AISCs looked even more disappointing last quarter, surging 7.7% YoY to $1,380 per ounce!  That proved the second highest ever after Q3’22’s $1,391.  Again excluding those struggling perpetually-extreme-cost gold miners HL and BVN, the rest of the majors at $1,299 still didn’t come in a heck of a lot better.  Newmont and the second-largest gold miner Barrick Gold were among the worst.

Their AISCs shot up that 22.8% YoY to $1,472 and 11.8% to $1,355!  Interestingly Barrick is in a similar boat as Newmont in being way behind relative to 2023 midpoint guidance of 4,400k ounces near $1,210 AISCs.  In H1’23 it mined 1,961k averaging lofty $1,363 AISCs.  To pull this entire year back down near $1,210, the next couple quarters’ AISCs will somehow have to average $1,057!  That seems like quite a stretch.

These high all-in sustaining costs across the GDX top 25 definitely cut into profit margins, but higher gold prices helped mitigate that impact.  Subtracting average AISCs from quarterly-average gold prices offers a great proxy for how gold miners’ earnings are faring as a sector.  Despite gold’s strong upleg suffering a pullback in much of Q2, average gold prices still climbed a strong 5.6% YoY to hit an all-time-record $1,978!

That helped push major gold stocks’ unit profits up a slight 1.2% YoY to $598 per ounce, the best seen in four quarters.  Despite the GDX top 25’s struggles with rising costs, those 30% profit margins are still excellent absolutely compared to broader stock markets.  And excluding those couple of extreme-AISC outliers, the majors’ real unit profits are closer to $679 per ounce.  That would make for impressive 14.9% YoY growth!

Gold-stock profitability ought to improve in this currently-underway Q3.  Thanks to gold’s recent pullback, average gold prices have slumped to $1,939 quarter-to-date.  But that is still a whopping 12.3% higher than Q3’22’s levels, and Q3’23’s average gold prices should improve.  Given speculators’ excessively-bearish positions in gold futures, gold is due to bounce sharply in coming weeks as its powerful upleg resumes.

And despite last quarter’s high $1,380 AISCs, the GDX top 25’s average full-year guidance stayed much lower at $1,271.  Many if not most of these majors are forecasting higher gold production in the back half of this year, as mine expansions and new mines come online.  Better output will drive down costs, and to achieve guidance they will have to fall well under midpoint averages.  So gold miners’ earnings could soar.

Conservatively Q3’s average gold prices will probably best $1,950 while GDX-top-25 AISCs should fall under $1,300.  But even with these numbers, the majors are set to earn over $650 per ounce this quarter.  That would make for the best unit profits since Q2’21, which would skyrocket 94% YoY!  So despite the major gold miners’ recent challenges, their fundamentals remain bullish and easily support way-higher stock prices.

Not surprisingly with Q2’23’s GDX-top-25 gold production falling 4.7% YoY and average AISCs surging 7.7%, the majors’ financial results were weaker.  That was evident in the hard accounting data reported to national securities regulators under Generally Accepted Accounting Principles or their equivalents in other countries.  Still these latest results sure didn’t justify GDX’s recent sharp selloff, they weren’t particularly bad.

Overall GDX-top-25 reported revenues actually climbed a modest 2.3% YoY to $13,931m.  While some of the foreign majors haven’t disclosed last quarter’s sales yet, those same ones hadn’t a year ago when I did this Q2’22 analysis.  So this revenues growth is righteous, with 5.6% higher average gold prices being enough to offset that 4.7% production decline.  Better sales are ultimately essential to grow bottom lines.

The GDX top 25’s accounting earnings fell 17.2% YoY to $1,687m, which is on the lower side compared to recent years’ levels.  That is a bit skewed though, as gold miners periodically flush unusual and often non-cash items through their income statements.  Those are most commonly mine-impairment charges, but can also include big hedging losses or gains.  I always look for unusual items during my analysis work.

The only material one in Q2’23 was Endeavour Mining suffering a $178m loss selling discontinued gold mines.  Excluding that makes for adjusted GDX-top-25 earnings of $1,865m.  Also removing a couple unusual items from the comparable Q2’22, the majors’ adjusted profits only fell 8.1% YoY last quarter!  So despite earnings weakening in Q2’23, these largest gold miners still aren’t faring poorly by any means.

Cash flows generated from operations drooped a similar 6.1% YoY to $4,726m, which is pretty healthy.  Strong OCFs from existing mines help finance and build expansions and new mines.  That would have added to these elite major gold miners’ big cash hoards, but they plowed much of those fat cash flows into growing their operations.  So the GDX top 25’s treasuries collectively dropped 24.2% YoY in Q2 to $14,972m.

So overall despite proving disappointing, the major gold miners’ Q2’23 operational and financial results were fine.  They still mined gold for way less than prevailing prices, fueling solid earnings.  Those really ought to improve in Q3 and Q4 as expanding production drives down costs.  Combining those with higher average gold prices makes for strong fundamentals, leaving this sector looking very bullish and really undervalued.

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The bottom line is the major gold miners reported disappointing results last quarter.  They suffered falling production despite overall global gold-mining output climbing, again unable to overcome depletion.  Fewer ounces produced forced mining costs higher, eating into profitability.  But many of the majors still expect improving back-half production to drive costs back down, which should lead to surging earnings in coming quarters.

While Q2’s gold-mining profitability could’ve been better, it was still solid absolutely.  Major gold miners’ strong fundamentals certainly don’t justify this past month’s gold-stock selloff.  So this battered sector is due to soon rally hard amplifying gold’s mean-reversion rebound out of its own pullback.  That makes this a good opportunity to add fundamentally-superior gold-stock positions at bargain prices before gold bounces.


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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