Gold Mid-Tiers’ Q4’20 Fundamentals

Those fixed costs staying roughly steady regardless of prevailing gold prices is what gives gold miners’ earnings big leverage to the yellow metal. With overall GDXJ-top-25 unadjusted gold output falling lower last quarter, these gold miners’ unit costs should’ve risen proportionally. That indeed proved true, with both average cash costs and all-in sustaining costs surging sharply to their highest levels since at least Q2’16.

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 GDXJ-top-25 gold miners reported average cash costs of $759 per ounce in Q4’20, which surged 11.3% YoY. Those were the highest levels yet seen in this 19-quarter-old research thread, edging out Q1’20’s $749. They were also considerably higher than the GDX top 25’s $700. But interestingly the same trio of outlying companies that skewed GDX’s cash-cost average high are also among the GDXJ top 25.

Hecla Mining, Peru’s Buenaventura, and Harmony Gold reported extreme outlying cash costs of $1,019, $1,243, and $1,141 last quarter!HL blamed various COVID-19-lockdown disruptions, BVN has long struggled with declining output from endless operational problems, and HMY’s old and very-deep gold mines are expensive to run. Excluding these outliers, the rest of the GDXJ top 25 averaged $689 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 GDXJ-top-25 mid-tiers’ average AISCs surged a similar 11.5% YoY to $1,080 per ounce. That was also the highest by far in the 19 quarters since Q2’16, eclipsing Q1’20’s $1,016. That was again worse than the GDX-top-25 majors’ $1,038 average AISCs last quarter. But the mid-tiers’ all-in sustaining costs were also skewed high by those same three extreme outliers, along with a fourth Centamin mining gold in Egypt.

HL, BVN, HMY, and CEY reported extreme AISCs of $1,330, $1,559, $1,370, and $1,613 in Q4’20!If those outliers are excluded, the rest of the GDXJ top 25 averaged a far-better $970. Interestingly Hecla and Centamin are forecasting lower full-year-2021 AISCs, at midpoints of $1,250 and $1,200. So like usual, for most gold miners quarterly cost spikes are temporary anomalies rather than new long-term trends.

And that overall skewed $1,080 average still isn’t bad, far below these high prevailing gold prices. In the four pre-pandemic quarters ending in Q1’20, the GDXJ top 25’s AISCs averaged $976. But the average gold prices were much lower then, with a mean of just $1,461 in that span. So gold prices have climbed much faster than mining costs even with all the pandemic disruptions, greatly boosting mid-tiers’ profitability.

An excellent proxy for this sector’s earnings trends can be calculated by simply subtracting the GDXJ top 25’s average all-in sustaining costs from average gold prices. Gold again averaged a lofty $1,876 last quarter, way above those skewed-high $1,080 AISCs. That implies the mid-tier gold miners were earning about $796 per ounce mined! Soaring 54.9% YoY, that was the second-highest on record after Q3’20’s $928.

Such fantastic stock-market-leading profits growth is nothing new for the mid-tier gold miners either. In the last six reported quarters ending in Q4’20, the GDXJ top 25’s unit earnings per this proxy rocketed up 65.1%, 72.2%, 66.1%, 108.2%, 77.9%, and 54.9% YoY! That averages out to stupendously-awesome 74.1% quarterly profits growth over this longer-term span. Traders should be rushing to add gold-stock allocations.

Because of their outstanding profits leverage to gold, gold stocks are exceedingly lucrative to own during secular gold bulls. Yet dumbfoundingly, speculators and investors alike keep abandoning this sector after expected major corrections. Right when they should be aggressively buying low before the next major upleg likely doubles their capital deployed, they bury their heads in the sand wallowing in popular bearishness.

Prudent contrarian traders ignore always-pessimistic herd sentiment after corrections and instead focus on gold miners’ underlying fundamentals. Do they justify mean-reversion rebounds of gold-stock prices evolving into major bull uplegs? The GDXJ top 25’s hard Q4’20 accounting results reported to securities regulators certainly confirmed the mid-tiers’ super-strong fundamentals their stock prices aren’t yet reflecting.

On the revenues front, these elite GDXJ-top-25 gold miners reported $8.5b in total sales last quarter. That actually fell 8.6% YoY despite Q4’20’s average gold prices soaring 26.5% from Q4’19 levels. But remember these year-over-year comparisons are heavily distorted by GDXJ’s managers rightfully kicking out Kinross, Northern Star, Sibanye, and Saracen. So their Q4’19 results need to be adjusted out of that total.

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