Gold Mid-Tiers’ Q2’21 Fundamentals

But such a massive component-and-weighting readjustment makes the GDXJ top 25’s quarterly results way less comparable year-over-year. So bear in mind that this analysis is more apples-to-oranges than usual. Further complicating that, changing market capitalizations have left GDXJ with more explorers in Q2’21 than a year earlier. Without any commercial production yet, they also naturally skew comparisons lower.

We can somewhat correct for this major GDXJ reshuffling by excluding those three jettisoned companies from comparable Q2’20 total results. To fill that void, I replaced those with the next-three-largest GDXJ components back then that are now top-25 ones in this just-completed Q2’21. These include Pretium Resources, Sandstorm Gold, and Coeur Mining. So this particular swapping is called “adjusted” in this essay.

The GDXJ top 25’s total gold production plummeted an ugly 38.2% YoY last quarter to 2,557k ounces. That sounds disastrous, far worse than the GDX top 25 enjoying strong 4.2% YoY output growth. But in adjusted terms, that mid-tier production decline moderates greatly to down 14.6% YoY. And there is one other big change that accounts for most of that, the merger of two larger Australian mid-tiers into a new major.

Northern Star Resources and Saracen Mineral were both GDXJ-top-25 components a year ago, yielding a combined 413k ounces of gold. The former gobbled up the latter, so the combined company is now in GDX exclusively and produced a near-super-major 451k ounces in Q2’21. So if we also exclude both the predecessor companies from Q2’20 results, that leaves the year-over-year essentially flat shrinking just 0.9%.

And without those explorers, most of the rest of the GDXJ-top-25 mid-tiers also enjoyed growing outputs. That’s evident in their individual year-over-year production results in this table. So the mid-tiers remain fundamentally superior to the majors, despite that being masked by GDXJ’s colossal holdings shake-up in this past year. Northern Star and Saracen comprised another 7.5% of GDXJ’s total weighting back in Q2’20.

Together with the booted Kinross, Gold Fields, and Sibanye, these five larger miners commanded a huge 25.0% of the capital deployed in GDXJ! And since these major component changes happened gradually over the past year, the comparisons won’t stabilize for several more quarters yet. While Kinross came out between Q3’20 and Q4’20 results, Gold Fields was only recently pulled between Q1’21 and Q2’21 reporting.

The resulting reweighting as formerly smaller GDXJ components climbed the ranks has really helped this ETF’s diversification. Last quarter its top 25 components only accounted for 61.7% of its total weighting. That was the lowest in the last 21 quarters, and way off peak-concentration of 75.9% back in Q4’19. It is good to see GDXJ’s managers take the gold-majors criticisms to heart and forge their ETF into a better one.

Yet this newer GDXJ is still mostly an expanded subset of its big-brother GDX. Fully 20 of these GDXJ-top-25 holdings are also GDX ones, clustered between this larger ETF’s 14th to 36th rankings. Those added up to 14.7% of GDX. So GDXJ essentially takes 1/7th of GDX’s holdings and expands their weightings to 5/8ths of GDXJ. Only 5 of GDXJ’s top 25 holdings are exclusive, while 10 are also GDX-top-25 ones.

This big overlap isn’t a problem, as GDXJ’s gold miners are still much smaller than GDX’s. In Q2’21 the GDXJ-top-25 producers averaged 122k ounces of output, near the lower quarter of mid-tier range. The GDX-top-25 producers I analyzed in last week’s essay more than tripled that averaging a massive 372k!So despite its common holdings with GDX, GDXJ still offers way-superior exposure to smaller gold miners.

It is wonderful to see GDXJ evolving into becoming ever-more mid-tier-centric. After years of criticizing GDXJ’s managers, I applaud them for making these changes. The more distinct GDXJ becomes from GDX, the more useful and popular both ETFs will ultimately be. GDXJ’s increasing exposure to smaller miners with superior fundamentals gives it bigger upside potential than the major-dominated GDX.

Unlike the majors simply too big to grow fast regardless of how well they are managed, the mid-tier and junior gold miners are coming from much smaller bases. These sweet-spot-for-upside-potential mid-tiers usually have a few mines or less, so expansions and new mine builds really boost their outputs. And the mid-tiers also have way-smaller market caps, making their stock prices far more responsive to capital inflows.

When mid-tiers’ lower production and market caps are combined with leveraged profits growth from higher gold prices, their upside potential during big gold uplegs trounces that of the majors. So the mid-tiers are easily the best gold stocks to own as this secular gold bull resumes marching higher over coming years. Their future gold-production growth will far exceed the majors’, and their earnings aren’t done soaring.

Long-term gold-stock price levels ultimately depend on miners’ profitability, which is directly driven by the difference between prevailing gold prices and gold-mining costs. In per-ounce terms these are generally inversely proportional to gold production. That’s because gold mines’ operating costs are largely fixed during planning stages. Their designed throughputs limit the amounts of gold-bearing ore they can process.

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