Gold Miners ETF (GDX)

[DiscoverGold]

Gold Mid-Tiers’ Q1’24 Fundamentals
By: Adam Hamilton | May 24, 2024

The mid-tier and junior gold miners in this sector’s sweet spot for upside potential recently wrapped up their latest earnings season. These fundamentally-superior smaller gold producers delivered big last quarter, reporting spectacular results. The potent combination of record gold prices, lower mining costs, and better production fueled some of their richest profits ever. Yet mid-tiers still remain way undervalued.

The leading mid-tier-gold-stock benchmark is the GDXJ VanEck Junior Gold Miners ETF. With $5.5b in net assets mid-week, it remains the second-largest gold-stock ETF after its big brother GDX. That is dominated by far-larger major gold miners, though there is much overlap between these ETFs’ holdings. Still misleadingly named, GDXJ is overwhelmingly a mid-tier gold-stock ETF with juniors having little 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, these thresholds shake out under 75k, 75k to 250k, 250k+, and 500k+. Today only one of GDXJ’s 25 biggest holdings is a true junior!

Its Q1 production is highlighted in blue in the table below. Juniors not only mine less than 75k ounces per quarter, but their gold output generates over half their quarterly revenues. That excludes streaming and royalty companies that purchase future gold output for big upfront payments used to finance mine-builds, and primary silver miners producing byproduct gold. But mid-tiers often make better investments than juniors.

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 now filled with fundamentally-superior mid-tiers and juniors, smaller gold miners which we’ve long specialized in at Zeal.

Mid-tier gold-stock outperformance accelerates as major gold uplegs mature, increasingly attracting more traders to bid up stock prices. That’s finally starting to happen again as gold-stock sentiment shifts back to bullish. Gold’s driving upleg has powered 33.2% higher at best since early October. The major gold stocks represented by GDX hit a new +44.5% highwater mark midweek, for meager 1.3x upside leverage to gold.

Historically major gold stocks tend to amplify material gold moves by 2x to 3x, with that upside leverage mounting later in uplegs. That process is underway, as since mid-February GDX’s gains have outpaced gold’s by 2.0x. The mid-tiers of GDXJ lagged their larger peers for much of this upleg, as traders hadn’t started warming to this sector. But GDXJ’s total upleg gains grew to 52.3% this week, pulling ahead of GDX.

This smaller-gold-stock outperformance should continue expanding on balance. Fundamentally-superior mid-tiers’ gains during major gold uplegs surge way ahead of the majors’, sometimes even doubling them! The longer gold and gold stocks rally, the more bullish speculators and investors wax on them, the more capital they deploy to chase those gains, the more mid-tiers’ stock prices accelerate way ahead of larger miners’.

For 32 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 66.0% 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 Q1’24. 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 Q1’23. Those symbols are followed by their recent GDXJ weightings.

Next comes these gold miners’ Q1’24 production in ounces, along with their year-over-year changes from the comparable Q1’23. 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 Q1’24 performance again proved spectacular! These sweet-spot-for-upside smaller gold stocks slashed mining costs while boosting their production. Those strong operations combined with record prevailing gold prices fueled another massive per-ounce earnings jump, the fourth consecutive quarter of those! Last quarter was among the best mid-tiers ever reported, impressively bullish.



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 for the first time in eight quarters, the GDXJ top 25’s output shrunk!

They collectively mined 3,692k ounces of gold in Q1’24, which slipped 0.8% YoY. But that is due solely to composition changes among these elite ranks. Four stocks surged dramatically over this past year to enter the GDXJ top 25, displacing four other stocks. Among the ascenders is Aya Gold & Silver, a small silver miner that produces no gold. That elbowed Lundin Gold to 26th place, which mined 112k ounces in Q1.

Replacing a producer with a non-producer skewed overall output lower. Had LUG been included instead of AYA, the GDXJ top 25’s aggregate output last quarter would’ve climbed 2.2% YoY to 3,803k ounces! That’s pretty impressive, much better than the GDX-top-25 majors’ 0.6%-YoY shrinkage I analyzed in an essay on their latest results last week. But both these elite mid-tiers’ and majors’ production is still lagging.

Every quarter the World Gold Council publishes fantastic Gold Demand Trends reports, containing the best-available global gold supply-and-demand data. The recent Q1’24 edition revealed total worldwide mine production grew 4.4% YoY. The GDXJ top 25 would’ve even bested that if not for output shortfalls in just two of its larger producers, B2Gold and Endeavour Mining. But those were both expected last quarter.

BTG suffered a permitting delay for a sizable new gold project in Mali, so it has guided 2024 to midpoint production around 900k ounces. That would make for full-year shrinkage of 15.2%. But with that project and another new mine coming online in 2025, next year is already forecast to see production surge 21.1% to a record 1,090k-ounce midpoint. So this year is a temporary lull for B2Gold before growth resumes.

Read Full Story »»»

DiscoverGold