Gold Miners Fundamentals: Q4 2019 (2022)

It’s been the most volatile quarter in over a decade for the gold miners (GDXJ), and we’ve finally reached the end of the sector’s Q4 earnings season. It was a solid reporting period overall for the miners, with revenue growth jumping 26% year over year, and the price of gold (GLD) mostly to thank for this. However, costs also inched up for the sector, with all-in sustaining costs jumping from $950/oz in FY-2018 to $978/oz in FY-2019, an increase of nearly 3%. Not surprisingly, the best companies continue to outperform, with the sector laggards only getting worse in many cases from a cost standpoint. This article will examine costs across the sector, pointing out the leaders worth keeping an eye on and the laggards which are best to avoid. Based on the industry average all-in sustaining costs being $978/oz in FY-2019, I see no reason to own gold producers with costs above $1200/oz given their compressed margins, and I have no plans to buy any of these names until this changes.

(Source: Author's Chart and Data)

(Source: Author's Chart)

We finally have all of the results in from the gold producers for FY-2019, and the usual suspects continue to dominate the leaderboard from a cost standpoint. Impressively, Australia is extremely over-represented among the top 5 ranked gold producers from a cost standpoint, and would undoubtedly be taking home the gold medal for the 2019 Mining Cost Olympics if there was one. Of the top 5 gold producers, 4 of them are Australian, with Polyus Gold (OTCPK:OPYGY) coming in second based out of Russia. The top-ranked miner for 2019 was Kirkland Lake Gold (KL), with the runners-up being Gold Road Resources (OTCPK:ELKMF), Evolution Mining (OTCPK:CAHPF), and St. Barbara Resources (OTCPK:STBMF). Kirkland Lake Gold’s all-in sustaining costs (AISC) came in at $564/oz for FY-2019, with Polyus Gold coming in just behind it at $594/oz. Based on an average gold price above $1,375/oz in 2019, this means Kirkland Gold and Polyus Gold both enjoyed margins of 50% or higher, an incredible figure considering that the industry-average margins are less than 30%.

(Source: Author's Table)

Unfortunately for Kirkland Lake Gold investors, the company is going to dethroned from its top seat next year and also fall out of the top 10 rankings. This is why the stock has been under pressure in the past few months. As I pointed out, the addition of Detour Lake would be a significant drag on its margins, given that more than a third of their production is now coming from a $1,000/oz-plus cost mine. This should allow for other miners like K92 Mining (OTCQX:KNTNF) to take a run at the top 5 seats in the sector, with the company’s costs coming in at $680/oz for FY-2019, narrowly edged out of the #5 position by St. Barbara Gold. For investors looking for the gold producers that will enjoy the most substantial margins and have a track record of delivering, the top 10 ranks, highlighted in green above, are certainly an excellent place to start. The other runners-up for top-ranked names in the cost department are Alacer Gold (OTCPK:ALIAF) at $713/oz and SEMAFO Gold (OTCPK:SEMFF), which was recently acquired by Endeavour Mining (OTCQX:EDVMF) for US$690 million.

(Source: Detour Lake Mine, MyTimminsNow.com)

When it comes to the cost laggards, there are quite a few producing above $1,150/oz, and no country is overrepresented when it comes to the bottom ten names. The bottom five companies, however, are made up of Harte Gold (OTC:HRTFF), Great Panther Mining (GPL), Alio Gold (ALO), Guyana Goldfields (OTCPK:GUYFF), and New Gold (NGD). All of the bottom-five ranked companies have all-in sustaining costs above $1,200/oz, leaving little room for margins last year, based on an average gold selling price for the industry of roughly $1,375/oz for FY-2019. However, even if we look forward to FY-2020 and a potential average gold selling price above $1,500/oz, most of these names will still have negligible margins at 20% or less. It's worth noting that high costs are not the only issue, as the majority of these companies have a track record of overpromising and underdelivered-on guidance. Worse, they've all had trouble at their mines in the past year, except for Alio Gold.

(Source: Author's Table and Data)

Beginning with Harte Gold, FY-2019 was a disastrous year, from dilution to shareholders to all-in sustaining costs coming in above $2,000/oz. The company’s mine development at Sugar Zone is nearly a year behind schedule, and the company missed guidance by more than $700/oz last year on the cost side, with gold production also coming in 10,000 ounces shy of estimates. Fortunately, a management shakeup with a new CEO in place may help to drive a better 2020, but guidance is for $1,600/oz, suggesting that the company will likely keep its last-place spot for 2020.

(Source: Company News Release)

As for Guyana Goldfields, the overstated ounces issue I pointed out was only the tip of the iceberg, and the company continues to struggle since. Following the announcement of a more than 1.6 million ounce reduction in reserves in the mine plan, we've seen another underwhelming year operationally, with all-in sustaining costs for the first nine months coming in at $1,465/oz. Following the news, the Guyana Goldfields noted that it had a prudent and achievable operating plan with improved forecasting of production and costs going forward. However, this has not been the case at all, with only 124,000 ounces of gold produced in FY-2019, down 17% year over year. Given its dwindling cash balance, down to $22 million to finish FY-2019, the company is in a tough position financially heading into FY-2020, especially considering the ore gap issues. Suffice to say, I continue to see no reason to go bottom-fishing on the stock.

(Source: Company News Release, Company Presentation)

Meanwhile, in Ontario, Canada, New Gold's Rainy River Mine continues to weigh on the company's consolidated costs, and they aren't expected to improve in FY-2020. The company's all-in sustaining costs for FY-2019 came in at $1,310/oz, more than 30% above the industry average, and Rainy River FY-2020 guidance is currently set at 250,000 ounces of gold at all-in sustaining costs of $1,510/oz. Assuming the company is able to meet this guidance, the mine will still struggle to be profitable, as the company has hedged off 168,000 ounces of gold at an average price ceiling of $1,389/oz. It's worth noting that the initial mine plan for Rainy River called for all-in sustaining costs of $736/oz, so the current costs are a massive deviation from what should have been a very profitable first nine years of production for the mine. Given the fact that the company is not a play on the price of gold due to significant hedging near the $1,400/oz level, as well as the recent Rainy River shutdown, I expect another year of missed guidance on both production and costs from the company.

(Source: Company Website, Resource-World.com)

Finally, Great Panther Mining also had a horrendous year, with part of the blame coming from a pit wall deterioration at its new Tucano mine in Brazil. This led to the company slashing its guidance for the year at Tucano, with Great Panther finishing the year well shy of 178,000 gold-equivalent ounce guidance estimate at the mid-point. However, the company missed its revised guidance of 155,000 gold-equivalent ounces (GEO) by a mile as well, finishing the year with annual GEO production of just 140,000 ounces, at all-in sustaining costs of $1,484/oz. This lower production contributed to higher costs last year, leading to a net loss of $91 million for the year. While FY-2020 cost guidance is expected to come in lower at $1,200/oz, it will still leave the company a seat among the highest-cost producers in the sector. Based on the company's track record with prior guidance, however, I wouldn't hold my breath on costs coming in below $1,200/oz.

(Source: Great Panther Mining, Company Financial Statements)

As should be evident from the above table, some of these companies have costs so atrocious that they should not even be considered worthy of purchase for investments. These five names, as pointed out above, are Alio Gold, Great Panther Mining, New Gold, Harte Gold, and Guyana Goldfields. I've written on all of these companies more extensively over the past year suggesting that they were inferior investment prospects and were best avoided. However, the mantra that's been echoed the past few years has been that when gold finally does rise above $1,400/oz, you'll wish you had owned the highest-cost companies, given they will benefit the most as they'll finally be profitable. Here we are at $1,600/oz gold and the dogs of the sector are still dogs, except most of them are down 70% from when these arguments were trotted out. Unfortunately, while the above mantra sounds good in practice, it doesn't pass the smell test, and the performance of these producers in FY-2019 is all one needs to see to conclude this.

(Source: Author's Table and Data)

As we can see in the chart below, the Gold Juniors Index (GDXJ) put up a nearly 40% return in FY-2019, but Alio Gold was down 7%, Guyana Goldfields plunged 56%, Great Panther fell 28%, New Gold gained 15%, and Harte Gold fell 61%. An equal-weighted basket of these high-cost producers that were supposed to outperform all other gold stocks in a rising gold price environment actually fell 27.4% last year, in a year when the price of gold gained 20%. I have arrived at this return by averaging out the 2019 performance of all of the above five cost laggards.

(Source: TC2000.com)

As we look ahead to FY-2020, there are several names among the top-15 ranked gold producers with exceptional fundamentals, and some are working towards lowering costs even further this year. Given the strong gold price to start 2020 and solid track record of these companies, we are likely to see significant margin expansion for these names in FY-2020, which should ultimately drive further share price appreciation over the next 12-18 months. While anything is possible for the cost laggards and they may finally wake up in 2020, I continue to see no reason to go bottom-fishing for the highest-cost companies in the sector. There are far too many companies out there with exceptional fundamentals in the industry to put investment dollars to work in the ones that cannot execute on their plans consistently. Therefore, I continue to focus on the high-margin producers, regardless of the fallacious mantra that high cost, low margin is the way to generate returns in the sector.

This article was written by

Taylor Dart

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"A bull market is when you check your stocks every day to see how much they went up. A bear market is when you don't bother to look anymore."- John Hammerslough - Disclosure: I am not a financial advisor. All articles are my opinion - they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional before trading or investing.

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Disclosure: I am/we are long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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