Gold Miners’ Q4’22 Fundamentals

By Adam Hamilton

The gold miners are finishing reporting their latest quarterly results, revealing how they are actually faring fundamentally.  This reality check is important, as sentiment is down in the dumps after this sector was pummeled lower with gold in February.  While the major gold stocks’ Q4’22 results were mixed, they are doing much better than traders are now giving them credit for.  Their interrupted bull run looks alive and well.

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 $11.3b of net assets mid-week dwarfed the next-largest 1x-long major-gold-miners ETF by fully 30.6x!  GDX is undisputedly the trading vehicle of choice in this sector.  But unfortunately it has been sucking wind in recent weeks.

The gold stocks were really building momentum and winning back traders heading into February, with GDX blasting 52.1% higher in just 4.0 months on a parallel 20.2% gold upleg!  But both the metal and its miners’ stocks were getting short-term overbought, a healthy mid-upleg pullback was due.  It hit hard and fast, quickly accomplishing its essential mission of eradicating bullish sentiment.  And it’s now tuckering out.

Three unusual events converged to first slam gold then enable the driving gold-futures selling to persist longer than usual.  On February 2nd the European Central Bank surprised dovishly, declaring it would likely pause rate hikes after one more.  The euro dropped 0.7% on that, goosing the oversold US Dollar Index up 0.6% to ignite a larger bounce.  Gold-futures speculators sold hard on their primary trading cue.

The next morning the latest US monthly jobs report really accelerated that USDX surge with a huge 1.2% rally.  The US government reported a shocking eight-standard-deviation upside surprise of 517k new jobs created!  That was super-Fed-hawkish, arguing the economy is overheating necessitating even more rate hikes.  Never mind that epic beat only existed because a record +3,022k jobs seasonal adjustment was applied!

The Bureau of Labor Statistics’ raw underlying data included in that same report showed 2,505k jobs had actually been lost in January!  Yet gold plunged 4.4% during those two days, bludgeoning GDX a brutal 7.4% lower.  Naturally that unsustainably-extreme gold-futures selling quickly abated, but lesser selling festered over the next several weeks.  But the hyper-leveraged gold-futures speculators were flying blind.

Their critical weekly positioning data in the Commitments of Traders reports went dark after a cyberattack on a major futures-clearing firm.  So they had no idea how much selling they had collectively done, or how risky their aggregate gold-futures positioning was getting!  Thus gold’s sharp pullback extended to 7.2%, crushing GDX 19.4% lower by mid-week.  That 2.7x downside leverage to gold was in the normal 2x-to-3x range.

Gold-stock bearishness has flared dramatically during this past selloff month, driving capitulation selling as traders flee in disgust.  That makes this latest Q4’22 earnings season especially important, to see if the major gold miners’ latest fundamentals justify their drubbing.  Since most companies run their accounting on calendar years, fourth-quarter reporting is delayed while big complex audited annual reports are prepared.

American companies have 60 days after year-ending quarter-ends to file their formal 10-K reports with the Securities and Exchange Commission.  But GDX includes the world’s biggest gold miners, some of which trade on other national exchanges.  Canadian companies have a stunning 90 days after fiscal-year-ends to issue annual reports!  So most of the major gold miners have reported 2022 results, but not all of them yet.

Since looking at Q4s with Q2s nearly dawning gets really stale, I’m ignoring two Canadian stragglers to further my gold-stock fundamental research.  For 27 quarters in a row now, I’ve painstakingly analyzed the latest results from GDX’s 25-largest component stocks.  They now command a whopping 88.6% of this ETF’s entire weighting!  Digesting hard fundamental results really cuts through obscuring sentiment fogs.

This table summarizes the operational and financial highlights from the GDX top 25 during Q4’22.  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 Q4’21.  Those symbols are followed by their current GDX weightings.

Next comes these gold miners’ Q4’22 production in ounces, along with their year-over-year changes from the comparable Q4’21.  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 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.

While the GDX major gold miners reported a mixed Q4, their fundamentals remain strong with prevailing gold prices still robust.  Their aggregate gold production increased, helping offset slightly-lower quarterly-average gold prices.  Despite the raging inflation unleashed by extreme central-bank money printing, the majors did a good job holding the line on costs.  But big mine-impairment charges obliterated accounting profits.

As a professional gold-stock speculator and financial-newsletter guy for over two decades, I’ve never liked the major gold stocks.  Operating at their vast scales, they never seem to manage to consistently grow their production.  And their gigantic market capitalizations saddle their stocks with too much price inertia to really soar during gold uplegs.  The smaller mid-tiers and juniors don’t suffer these serious problems.

But much to their credit, the GDX top 25 actually nicely bucked that shrinking-output trend in Q4’22.  These major gold miners collectively produced 8,723k ounces of gold last quarter, which actually grew a strong 4.4% year-over-year!  That wasn’t high absolutely, about 55% up into their production range over the past 27 quarters.  But it was still impressive, far outpacing world gold mining as a whole last quarter.

The World Gold Council publishes the best-available global gold supply-and-demand data quarterly in its fantastic Gold Demand Trends reports.  The latest Q4’22 GDT released at the end of January revealed that overall world mined gold production slumped 0.9% YoY.  So the GDX top 25 managing to achieve hefty 4.4% growth was big outperformance.  But that 371k-ounce jump was largely driven by just two stocks.

The Q4-production-growth crown was won by Agnico Eagle, which reported a monster 59.3% rocketing in output to 799k ounces!  But that growth wasn’t organic, as AEM finished acquiring Kirkland Lake Gold in Q1’22.  KL was booted from GDX in anticipation a quarter earlier, when it yielded 370k ounces of gold.  That buyout alone accounts for all of the GDX top 25’s increased production, but a rejiggering also contributed.

Australia’s Perseus Mining climbed into these elite ranks over this past year, adding 131k ounces.  But that was more than offset by Yamana Gold not reporting its Q4’22 results yet.  Last year it did that in mid-February like usual.  But with that company in the process of being acquired by Pan American Silver and AEM, it must not be in any hurry to report.  That deal should close in the coming weeks, eliminating AUY.

It had mined 217k ozs of gold in Q3’22, and likely had similar Q4 output.  So adjust for all this, and the GDX-top-25’s real production growth was probably around one fourth of that total.  That’s still growth, but not as outsized as implied.  The major gold stocks generally continue to struggle with boosting output enough to overcome depletion.  While that downward drift is bumpy, it is still large gold stocks’ prevailing trend.

Gold production is also interesting sequentially from the prior quarter.  Between Q3’22 to Q4’22, the GDX-top-25 miners grew their aggregate production a massive 6.9% quarter-on-quarter!  And AEM’s buyout of KL doesn’t affect that short-term timeline.  Sequential output growth would’ve been even bigger had AUY gotten around to reporting on time.  So this is impressive operating performance from the major gold miners.

Surprisingly global gold production isn’t consistent quarter-to-quarter according to the WGC’s GDT data.  Over the last dozen years on average, worldwide mine output has run -8.5%, +4.5%, +6.7%, and +0.3% QoQ in Q1s, Q2s, Q3s, and Q4s.  So these elite GDX majors, which accounted for only 29% of world gold mined last quarter, fared much better than their peers.  Global gold output fell 1.6% sequentially in Q4’22.

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 this past year’s raging inflation really hit.

Energy is the biggest category, including electricity to power ore-processing plants including mills and diesel fuel 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.

Examples of this were legion in the GDX top 25’s latest quarterlies.  Mighty Newmont warned of “higher direct operating costs as a result of inflationary pressures, driven by higher labor costs and higher input commodity prices, notably fuel and energy costs.”  Barrick Gold blamed “higher input costs driven by consumable and energy prices”.  Regardless of their sizes, most major gold miners shared these problems.

Kinross Gold said higher costs were “mainly due to inflationary cost pressure on key consumables such as fuel, emulsion and reagents”.  Hecla Mining reported its “increase in total cash costs was due to higher labor, contractor costs, and inflation in diesel, reagents, and other key inputs”.  I took plenty of notes on this, and could quote on.  But realize that inflationary cost pressures on the variable side remain serious.

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 GDX-top-25 gold miners reported average cash costs surging 10.6% YoY to $945 per ounce last quarter!  That’s the second highest on record, but surprisingly that wasn’t all bad news.  These cash costs actually fell 3.1% QoQ from Q3’22.  And that 10.6% YoY increase was much slower than the prior two quarters’ giant 24.9% and 22.4% YoY jumps!  So we are seeing nascent cost disinflation in gold mining.

We won’t know if this trend continues until coming earnings seasons, but the pivot is encouraging.  These major-gold-miner cash costs are also really overstated by three extreme outliers.  Hecla Mining has long been a high-cost producer, but lower production in Q4’22 catapulted its cash costs 48.4% higher way up to $1,696!  Peru’s Buenaventura has been a hot mess for years, and its cash costs are running a lofty $1,241.

South African’s Harmony Gold is also a high-cost operator, mainly due to its old super-deep gold mines.  The deeper miners follow gold veins, the more expensive extraction becomes.  Its $1,331 cash costs last quarter still actually retreated 3.7% YoY!  But exclude this trio of extreme outliers, and the rest of the GDX top 25 averaged far-better Q4’22 cash costs of $842.  That’s more representative for major gold miners.

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 last quarter looked better than cash costs, only climbing 6.6% YoY to $1,267 per ounce.  That’s certainly not low, the third highest ever reported.  But like cash costs AISCs are seeing big disinflation, with Q4’22s modest 6.6% increase far better than the scary 19.7% and 21.9% YoY rocketings seen in Q2’22 and Q3’22!  The major gold miners are holding the line on costs fairly well considering.

We are suffering the first and worst inflation super-spike since the 1970s on extreme central-bank money printing!  And those same three major-gold-miner outliers also skewed these average AISCs much higher.  If the crazy $2,132 from HL, $1,961 from BVN, and $1,600 from HMY are excluded, the rest of the GDX top 25 averaged much-better $1,141 all-in sustaining costs last quarter.  That’s really not too bad at all.

Still higher AISCs really 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 GDX top 25 including those three high-cost miners, that metric plunged 23.7% YoY to $463 per ounce.  While still solid, it is less than a fourth up into the past 27 quarters’ range.  Kicking out those outliers helps a lot.

With those $1,141 adjusted GDX-top-25 AISCs, implied unit profits jump dramatically to $589.  That looks healthier, up 3/7ths into that range seen in this entire research thread.  And gold-mining profits ought to improve in coming quarters.  Nearly 3/4ths of the way through Q1’23, gold is still averaging $1,873 on close despite its sharp pullback in February.  That is soaring 8.2% sequentially from Q4’22’s ugly $1,731!

Moving on to hard accounting data reported to securities regulators under Generally Accepted Accounting Principles or other countries’ equivalents, the major gold miners’ Q4 proved weaker.  The GDX top 25’s total revenues slumped 6.3% YoY to $16,448m.  That partially reflected Q4’22’s average gold price retreating 3.6% YoY.  But Franco-Nevada, Wheaton Precious Metals, and AUY not yet reporting Q4 also contributed.

Their sales are included in the comparable Q4’21.  But the mysterious Chinese gold miners Zijin Mining and Zhaojin Mining never timely report as far as I can tell.  These are the two numerical symbols in the GDX top 25, and I’ve been trying to find their quarterly reporting for a long time.  Sometimes they don’t do any, at least in English.  And sometimes their quarterly updates come out years after the quarter being reported!

The big, fat, hairy fly in the ointment in the GDX top 25’s Q4’22 results was their bottom-line earnings.  Those collapsed to a dismal $1,590m collective loss, the second worst out of the last 27 quarters!  This would be troubling if it was driven by operational problems, but thankfully it wasn’t.  With gold weak last quarter, the gold miners wrote down plenty of mines’ values resulting in large non-cash impairment charges.

Accounting rules require these to be flushed through income statements, offsetting operating earnings.  NEM declared a gigantic $1,317m impairment charge on three mines, and GOLD another huge $950m for three of its own mines!  Even smaller majors like Endeavour Mining and KGC reported big $360m and $350m impairments.  Some other GDX-top-25 stocks also wrote down assets on their books last quarter.

But these four alone totaled a whopping $2,977m!  Had those non-cash accounting adjustments not happened, the GDX top 25’s total profits would’ve looked radically better at +$1,387m.  While that still would’ve cratered 43.2% YoY on lower gold prices and higher costs, the gold miners are still earning money operationally.  Those accounting earnings should rebound dramatically on higher gold going forward.

These elite gold majors’ operating cashflows generated last quarter also plunged 26.3% YoY to $5,042m.  Had FNV, WPM and AUY reported, that decline would moderate somewhat.  Like the big US stocks dominating the S&P 500 I analyzed last week, the GDX top 25 burned lots of cash last year.  Their total treasuries fell a steep 31.5% YoY to $14,808m.  In inflationary times, surging input costs inevitably cut into cash.

So overall the major gold miners fared decent in Q4’22, though it wasn’t a fantastic quarter by any means.  The GDX top 25 did manage to impressively grow their production, both sequentially and year-over-year.  And they started seeing welcome disinflation as their costs increases moderated considerably.  But sales fell while earnings were wiped out by big non-cash impairment charges.  That’s definitely mixed in my book.

Despite this, the major gold miners certainly aren’t struggling operationally.  They are still mining gold for way less than prevailing prices.  That means their depressed stock prices have fundamental justification to rebound sharply with gold in coming months.  The rampant bearishness fomented by February’s sharp gold selloff isn’t righteous, it’s way overdone.  So contrarian traders can use this as a good buying opportunity.

The bottom line is the major gold miners just reported mixed quarterly results.  Uncharacteristically they enjoyed strong production growth, which was impressive.  And while their higher mining costs fueled by this raging inflation kept climbing, the rate of increases really moderated.  If this disinflation proves a trend in coming quarters, it along with higher prevailing gold prices should really boost profitability going forward.

Despite seeing their accounting profits annihilated by some huge non-cash impairment charges, the major gold miners continue to earn solid unit profits.  Those will really grow as gold’s interrupted upleg resumes.  So fundamentally the major gold miners’ operations still support much-higher stock prices.  That makes these recent out-of-favor lows great buying opportunities, as this excessively-bearish sentiment won’t last.

Adam Hamilton, CPA