Gold Mid-Tiers’ Q4’18 Fundamentals

The mid-tier gold miners’ stocks have been rallying on balance in recent months, carving a solid young upleg. They’ve mostly finished reporting their latest fourth-quarter results, revealing how they are faring fundamentally. Their operating and financial performance is very important for investors, as the mid-tier realm is where most of the gold-stock sector’s gains accrue. They fared really well in a challenging quarter.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Required by the US Securities and Exchange Commission, these 10-Qs and 10-Ks contain the best fundamental data available to traders. They dispel all the sentiment distortions inevitably surrounding prevailing stock-price levels, revealing corporations’ underlying hard fundamental realities.

While 10-Qs with filing deadlines of 40 days after quarter-ends are required for normal quarters, 10-K annual reports are instead mandated after quarters ending fiscal years. Most gold miners logically run their accounting on calendar years, so they issue 10-Ks after Q4s. Since these annual reports are larger and must be audited by independent CPAs, their filing deadlines are extended to 60 days after quarter-end.

The global nature of the gold-mining industry complicates efforts to gather this all-important fundamental data. Many mid-tier gold miners trade in Australia, South Africa, Canada, the United Kingdom, and other countries with quite-different reporting requirements. These include half-year reporting rather than quarterly, long 90-day filing deadlines after year-ends, and dissimilar presentations of operating and financial results.

The definitive list of mid-tier gold miners to analyze comes from the GDXJ VanEck Vectors Junior Gold Miners ETF. Despite its misleading name, GDXJ is largely dominated by mid-tier gold miners and not juniors. GDXJ is the world’s second-largest gold-stock ETF, with $4.1b of net assets this week. That is only behind its big-brother GDX VanEck Vectors Gold Miners ETF that includes the major gold miners.

Major gold miners are those that produce over 1m ounces of gold annually. The mid-tier gold miners are smaller, producing between 300k to 1m ounces each year. Below 300k is the junior realm. Translated into quarterly terms, majors mine 250k+ ounces, mid-tiers 75k to 250k, and juniors less than 75k. GDXJ was originally launched as a real junior-gold-stock ETF as its name implies, but it was forced to change its mission.

Gold stocks soared in price and popularity in the first half of 2016, ignited by a new bull market in gold. The metal itself awoke from deep secular lows and surged 29.9% higher in just 6.7 months. GDXJ and GDX skyrocketed 202.5% and 151.2% higher in roughly that same span, greatly leveraging gold’s gains. As capital flooded into GDXJ to own junior gold stocks, this ETF risked running afoul of Canadian securities laws.

Canada is the center of the junior-gold universe, where most juniors trade. Once any investor including an ETF buys up a 20%+ stake in a Canadian stock, it is legally deemed a takeover offer. This may have been relevant to a single corporate buyer amassing 20%+, but GDXJ’s legions of investors certainly weren’t trying to take over small gold miners. GDXJ diversified away from juniors to comply with that archaic rule.

Smaller juniors by market capitalization were abandoned entirely, cutting them off from the sizable flows of ETF capital. Larger juniors were kept, but with their weightings within GDXJ greatly demoted. Most of its ranks were filled with mid-tier gold miners, as well as a handful of smaller majors. That was frustrating but ultimately beneficial. Mid-tier gold miners are in the sweet spot for stock-price-appreciation potential!

Major gold miners are increasingly struggling with declining production, they can’t find or buy enough new gold to offset their depletion. And the stock-price inertia from their large market capitalizations is hard to overcome. The mid-tiers can and are boosting their gold output, fueling big growth in operating cash flows and profitability. With much-lower market caps, capital inflows drive their stock prices higher much faster.

Every quarter I dive into the latest results from the top 34 GDXJ components. That’s simply an arbitrary number that fits neatly into the tables below, but a commanding sample. These companies represented 82.1% of GDXJ’s total weighting this week, even though it contained a whopping 71 stocks! 6 of the top 34 were majors mining 250k+ ounces, 17 mid-tiers at 75k to 250k, 8 “juniors” under 75k, and 3 explorers with zero.

These majors accounted for 19.8% of GDXJ’s total weighting, and really have no place in a “Junior Gold Miners ETF” when they could instead be exclusively in GDX. These mid-tiers weighed in at 44.3% of GDXJ. The “juniors” among the top 34 represented just 14.8% of GDXJ’s total. But only 4 of them at a mere 6.1% of GDXJ are true junior golds, meaning they derive over half their revenues from actually mining gold.

The rest are primary silver miners, gold-royalty companies, and gold streamers. GDXJ is overwhelmingly a mid-tier gold miners ETF, with sizable small-major exposure. Investors and speculators need to realize it is not a junior-gold investment vehicle as advertised. GDXJ also has major overlap with GDX. Fully 28 of these top 34 GDXJ gold miners are included in GDX too, with 23 of them also among GDX’s top 34 stocks.

The GDXJ top 34 accounting for 82.1% of its total weighting also represent 36.6% of GDX’s own total weighting! The GDXJ top 34 clustered between the 11th- to 40th-highest weightings in GDX. Thus over 4/5ths of GDXJ is made up by almost 3/8ths of GDX. But GDXJ is far superior, excluding the large gold majors struggling with production growth. GDXJ gives much-higher weightings to better mid-tier miners.

The average Q4’18 gold production among GDXJ’s top 34 was 164k ounces, just over half as big as the GDX top 34’s 302k average. Despite these two ETFs’ extensive common holdings, GDXJ is increasingly outperforming GDX. GDXJ holds many of the world’s best mid-tier gold miners with big upside potential as gold’s own bull gradually powers higher. Thus it is important to analyze GDXJ miners’ latest results.

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