Gold Mid-Tiers’ Q4’20 Fundamentals

Promoted as a “Junior Gold Miners ETF”, GDXJ’s holdings should lean heavily towards smaller miners. There’s no reason to include larger mid-tiers and especially majors, which should instead be found exclusively in GDX. And the massive overlap in the same companies being included in both these ETFs really hobbled the utility and upside potential of GDXJ. I’ve written about these serious flaws for years now.

But GDXJ’s managers are increasingly resolving them, gradually forging it into a better mid-tier-gold-stock ETF. Since Q4’19, they’ve booted out two major gold miners. Those are Kinross Gold and South Africa’s Sibanye-Stillwater, which produced a gargantuan 624k and 294k ounces in Q4’20. Those are both well above that major threshold of 250k ounces per quarter. KGC indeed became a GDX-exclusive major miner.

SBSW didn’t and is no longer included in either GDXJ or GDX. That is righteous, as this historical primary gold miner has grown into the world’s largest primary platinum-group-metals producer through big acquisitions. GDXJ’s managers also removed a couple of larger Australian gold miners that just merged into a major one, Northern Star Resources, and Saracen Mineral. They produced 253k and 155k ounces last quarter.

So now running in excess of 400k per quarter combined, the surviving Northern Star company is another major gold miner only included in GDX. These big changes among GDXJ’s upper ranks are great for this ETF. They allow overall component weightings to be redistributed lower, giving GDXJ more exposure to smaller gold miners. The GDXJ top 25’s 62.8% total weighting is now the lowest by far since at least Q2’16.

So GDXJ’s managers deserve praise for slicing out some of the major gold miners really holding back their ETF’s upside potential. Now if they’d boot out South Africa’s giant Gold Fields and Harmony Gold, big established majors that mined an enormous 593k and 373k ounces last quarter, GDXJ would almost be fixed. Most majors are dead-weight, their production and market capitalizations too large to grow rapidly.

A year ago in Q4’19, Kinross, Northern Star, Sibanye, and Saracen together accounted for a massive 22.0% of GDXJ’s total weighting! Now with them gone, the year-over-year comparisons of GDXJ-top-25 aggregate numbers are really skewed. So we have to consider how these elite mid-tiers are faring after adjusting for these sweeping component changes. Stripping their Q4’19 results makes for better comparisons.

Also, the long-vexing overlap between GDXJ and GDX holdings has been majorly reduced. These GDXJ-top-25 gold miners again at 62.8% of its total weightings now represent just 21.9% of GDX’s total weightings as of last week. That compares to 69.0% and 33.8% in Q3’20, a big improvement! Now only 13 of GDXJ’s top 25 holdings are also GDX-top-25 ones, clustered even lower in GDX’s rankings from 12th to 35th.

Production is the lifeblood of the gold-mining industry. After prevailing gold prices which miners are at the mercy of, their output levels are the most important driver of their long-term success. Generally, the more gold miners can bring to market, the faster they can continue growing through expanding, constructing, or acquiring more gold mines. So investors and speculators have long prized production growth above all else.

Higher output boosts revenues, earnings, operating-cash-flow generation, and thus ultimately miners’ stock prices. Unfortunately, the GDXJ top 25’s total gold production in Q4’20 plunged 21.0% year-over-year to 3,733k ounces. While ugly, that completely resulted from those four major gold miners being forced out of this ETF! Excluding them from Q4’19’s results, the elite mid-tiers’ total output actually grew 8.0% YoY.

That is super-impressive, far better than the 4.3%-YoY decline to 8,905k ounces from the GDX-top-25 majors last quarter. I analyzed their operating and financial results in depth in last week’s essay on those GDX majors. The GDXJ mid-tiers’ adjusted 8.0% production growth in Q4’20 also proved way better than overall global gold mined slumping 2.9% YoY, according to the World Gold Council’s comprehensive data.

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 major gold uplegs trounces that of the majors. So the mid-tiers are easily the best gold stocks to own as this secular gold bull continues marching higher in coming years. Their future gold-production growth will far exceed the majors’, and their earnings aren’t done soaring.

In gold mining, output levels and unit costs are usually inversely proportional. The more gold mined, the more ounces to spread this industry’s big fixed costs across. Those are generally determined when mines are being planned, then don’t change much. Quarter after quarter, individual mines require about the same levels of infrastructure, equipment, and employees to feed their fixed-capacity mills with ores to process.

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