Despite GDXJ managers’ fast-and-loose definition of junior gold miners, GDXJ’s components definitely collectively operated on a much-smaller scale than GDX’s.  The top 34 GDXJ miners that have reported so far produced 2190k ounces of gold last quarter.  That is just over a fifth of the 10,317k ounces mined in Q4 by the top 34 GDX components.  So GDXJ remains quite different from GDX despite the component overlap.



According to the World Gold Council which is the definitive arbiter of global gold supply-and-demand data, the total world mine supply in Q4’16 was 810.9 metric tons.  GDXJ’s top 34 components produced just 68.1t, or about 1/12th of the total.  That compares to almost 4/10ths for GDX.  On average the GDXJ junior gold miners are much smaller than the GDX majors, but GDXJ’s component list could still improve.

World Gold Councilによると、2016Q4の世界全体の全産出量は810.9トンだった。GDXJ上位34銘柄の生産量はわずか68.1トンで世界総量の1/12でしかない。GDXは4/10程度だ。平均的に見てGDXJ小型金鉱会社はGDXよりも小さい、しかしGDXJ構成銘柄はまだ改善の余地がある。


The collective top-GDXJ-component gold production in Q4 was amazingly strong.  Because this leading junior-gold-stock ETF had plunged 22.0% between early February and early March, traders assumed this stricken sector must have some serious fundamental problems.  Never mind that GDXJ had rocketed 50.1% higher between late December and early February, already regaining over 5/6ths of Q4’s losses!



The gold juniors have always been exceptionally volatile, which is a key reason they are so attractive to contrarian investors.  These elite GDXJ components’ Q4’16 results prove that they were suffering no fundamental impairment operationally.  Their 2190k ounces of gold produced last quarter soared by an incredible absolute 10.9% quarter-on-quarter from Q3’16’s results!  The junior gold miners continue to thrive.



Much of GDXJ’s quarterly production jump was due to mine expansions and new mines ramping up at a fair number of these companies.  Whenever you see double-digit quarterly increases in production at a miner, odds are major new operations are being brought online.  The junior gold miners couldn’t grow at such a scale if they were in any fundamental peril, like severely-constrained cash flows stressing them.



The most-important ongoing measure of gold miners’ fundamental health is their per-ounce costs.  As long as they can produce gold for well under prevailing prices, they will generate strong operating cash flows and ultimately profits.  Gold averaged $1218 per ounce in Q4, which was down a sharp 8.8% from Q3’16’s $1334 average.  But as long as the junior gold miners’ costs are well under gold levels, they fare fine.



The main reason why gold-mining profits are so highly leveraged to gold prices is mining costs are essentially fixed during mine-planning stages.  No matter where prevailing gold prices are, running the actual mining operations requires largely-constant costs.  Miners generally employ the same number of people, operate the same number of haul trucks and excavators, and run the same mills quarter after quarter.



So gold-mining profits, and thus potential stock prices, are determined almost solely by the difference between mining costs and current gold levels.  Whenever gold stocks see a sharp selloff like in recent weeks, the resulting bearish sentiment implies this sector suffered a big fundamental impairment.  But the excellent collective Q4’16 cost data of these elite GDXJ gold juniors decisively proves this isn’t the case.



There are two major ways to measure gold-mining costs, classic cash costs per ounce and the superior all-in sustaining costs per ounce.  Both are useful measures.  Cash costs are the acid test of gold-miner survivability in lower-gold-price environments, showing the worst-case gold levels necessary to keep the mines running.  All-in sustaining costs reveal where gold needs to trade to maintain current operations indefinitely.



Cash costs naturally encompass all cash expenses necessary to produce each ounce of gold, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses.  In Q4’16, these top GDXJ-component gold miners that reported cash costs averaged just $615 per ounce.  That’s a major 6.3% sequential improvement from Q3, and just around half current gold levels!



Rather impressively, the junior gold miners of GDXJ actually reported lower cash costs last quarter than the major gold miners of GDX at $628.  Larger operational scale, running more mines, allows for more sharing of company-wide costs which improves operational efficiencies.  Yet juniors’ excellent cost control enabled them to best the majors in cash-cost terms last quarter despite running fewer and smaller gold mines.



These elite juniors’ exceptional cash costs in Q4’16 were largely a function of their rapidly-increasing production.  As those big fixed costs of gold mining are spread across more ounces, naturally the per-ounce cost drops.  And with cash costs so darned low even compared to gold’s deep Q4 low of $1128 in mid-December right after the previous Fed rate hike, the junior gold miners were in no fundamental danger at all.



Way more important than cash costs are the far-superior all-in sustaining costs.  They were introduced by the World Gold Council in June 2013 to give investors a much-better understanding of what it really costs to maintain a gold mine as an ongoing concern.  AISC include all direct cash costs, but then add on everything else that is necessary to maintain and replenish operations at current gold-production levels.

キャッシュコストよりももっと重要なのはAISCだ。この指標は2013年6月にWorld Gold Councilによって導入された、これを見ることで投資家は金鉱会社が今の運営をそのまま継続できるかどうかをもっとよく理解できる。AISCにはすべての直接費に加えて現在のゴールド生産レベルを維持するためのすべてのコストを含んでいる。


These additional expenses include exploration for new gold to mine to replace depleting deposits, mine-development and construction expenses, remediation, and mine reclamation.  They also include the corporate-level administration expenses necessary to oversee gold mines.  All-in sustaining costs are the most-important gold-mining cost metric by far for investors, revealing miners’ true operating profitability.



The top GDXJ components’ much-higher production last quarter also led to outstanding all-in sustaining costs.  They averaged just $855 per ounce among the gold miners reporting as of the middle of this week!  That is a major 6.2% absolute QoQ decline from Q3’s $911, which is amazing.  The juniors’ AISC were well under the GDX majors’ as well, which reported average AISC in Q4 of $875 as discussed last week.



With gold again averaging $1218 last quarter, and the elite juniors able to mine it indefinitely at $855 per ounce, they were still generating a hefty $363 per ounce in operating profits in Q4’16!  That’s still a margin of nearly 30%, levels most industries would kill for.  These Q4 profits were only down 14.2% from Q3’s $423 per ounce, which was driven by GDXJ’s top components’ AISC and gold averaging $911 and $1334.



This reveals how fundamentally-absurd it was for the junior gold stocks as represented by their leading benchmark GDXJ to plummet 28.8% in Q4!  That was over twice the drop in operating profits, exposing how irrational and excessively-bearish sentiment was a bigger factor in the juniors’ steep selloff than deteriorating fundamentals.  This was true both last quarter and in recent weeks before Wednesday’s Fed surge.



So far in Q1’17, gold is averaging over $1214 which is stable from Q4’s $1218.  Assuming juniors’ all-in sustaining costs remain consistent with last quarter’s, the economics of mining gold this quarter are virtually identical.  At the top GDXJ components’ latest average $855 AISC, these elite juniors ought to be collectively earning $359 per ounce this quarter.  There was no fundamental justification to dump them!



These GDXJ gold miners themselves have largely verified this with their all-in-sustaining-cost outlooks for full-year 2017.  Of these 34 top GDXJ components, 14 had given current-year cost guidance as of the middle of this week.  That averaged $902 per ounce in AISC terms, which is likely overstated.  The gold miners have big incentives to overestimate costs early each year so they can exceed expectations later on.



So this year’s all-in sustaining costs among the top junior gold miners are unlikely to rise from last year’s levels between $850 and $900.  Thus when gold inevitably mean reverts dramatically higher as stock investors and futures speculators return, gold-mining profits will explode higher.  That will really entice capital back into these still-beaten-down junior gold stocks, catapulting them much higher from here.



Given Q4’s sharply-lower gold prices on that Trumphoria-stock-rally-fueled mass exodus, I expected to see lower operating cash flows among these top GDXJ juniors.  And indeed that was the case, as they fell 18.7% QoQ to $747m among the ones reporting.  This drop was mitigated by Q4’s sharply-higher gold production, as well as the constantly-shifting composition and weightings of GDXJ’s component companies.



But these latest operating cash flows are still understated considerably due to the delays in Q4 reporting to compile full-year results.  When I did my Q3’16 analysis on GDXJ’s top components, 29 of the 34 had reported total operating cash flows of $919m.  In this latest Q4’16 iteration, only 18 of these 34 have reported as of the middle of this week.  So the final fourth-quarter GDXJ OCF number is still heading higher.



The same is true of the top GDXJ components’ accounting profits.  They actually totaled a $10m loss last quarter.  This is partially due to non-cash writedowns of asset values due to gold’s sharp, anomalous Q4 plunge.  But I could only find net profits for 17 of the top 34 GDXJ companies due to the Q4-reporting limitations, compared to 27 of 34 in Q3’16.  So the junior gold miners’ collective profits are likely understated too.



As I had explained to our subscribers in recent weeks, the sharp drop in gold-stock prices between early February and early March was not fundamentally-righteous.  Gold-stock traders spooked by gold’s retreat on soaring Fed-rate-hike odds fueled way-disproportional gold-stock selling.  And as usual, the high-flying juniors bore the brunt of this sector’s fear-fueled dumping.  They plunged to seriously-oversold levels.



Despite gold thriving in Fed-rate-hike cycles historically, gold-futures speculators have long irrationally feared them.  So it wasn’t surprising gold surged and the thrashed gold stocks soared following the Fed’s latest rate hike this week.  Gold stocks’ pre-Fed lows also coincided with a major seasonal lull before their usual big spring rally.  This battered sector is due for a strong new upleg in the coming months!



This week’s less-hawkish-than-expected-Fed surge was only the start.  And these recently-reported Q4 results from the elite junior gold miners of GDXJ prove big gains are fundamentally justified.  The juniors are earning big operating profits even at today’s low prevailing gold prices.  And as gold itself continues to mean revert higher out of Q4’s Trumphoria anomaly, the junior-gold-mining profits will rocket again.



While investors and speculators alike can certainly play gold juniors’ coming rebound rally with this leading GDXJ ETF, the best gains by far will be won in individual gold stocks with superior fundamentals.  Their upside will trounce the ETFs’, which are burdened by over-diversification and underperforming gold stocks.  A carefully-handpicked portfolio of elite gold and silver miners will generate much-greater wealth creation.



At Zeal we’ve literally spent tens of thousands of hours researching individual gold stocks and markets, so we can better decide what to trade and when.  As of the end of Q4, this has resulted in 906 stock trades recommended in real-time to our newsletter subscribers since 2001.  Fighting the crowd to buy low and sell high is very profitable, as all these trades averaged stellar annualized realized gains of +22.0%!



The key to this success is staying informed and being contrarian, meaning buying low when others are scared.  So we aggressively added new trades in recent weeks’ selloff ahead of the Fed.  An easy way to keep abreast is through our acclaimed weekly and monthly newsletters.  They draw on our vast experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks.  For only $10 per issue, you can learn to think, trade, and thrive like a contrarian.  Subscribe today, and get deployed in great gold juniors before they surge far higher!



The bottom line is the elite gold juniors’ fundamentals in just-reported Q4’16 remained quite strong and bullish despite gold’s sharp post-election plunge.  While operating cash flows and profits suffered as expected, this industry’s critical all-in sustaining costs remained far below prevailing gold prices.  That means the gold miners continue to generate big operating cash flows to expand operations and pay down debt.



And once gold itself inevitably mean reverts higher, gold-mining profits are going to soar again like they did last year.  Investors and speculators alike are radically underdeployed in gold thanks to their huge Q4 selling.  So gold investment demand will surge as these extreme Trumphoria-distorted stock markets roll over.  That will fuel big fundamentally-justified gold-stock buying, catapulting this sector far higher.



Adam Hamilton, CPA     March 17, 2017     Subscribe