In my previous two articles I presented the surveys of two precious metals sectors: the silver sector and the big gold segment. Today I want to present the third and the last survey. This time it is a survey of mid-cap gold miners.
As usually, let me start from the list of the miners qualifying into my research: B2 Gold (NYSEMKT:BTG), Alamos (NYSE:AGI), Detour (OTCPK:DRGDF), Endeavour Mining (OTCQX:EDVMF), IAMGold (NYSE:IAG), New Gold (NYSEMKT:NGD), Tahoe Resources (NYSE:TAHO), Kirkland Lake (OTCPK:KGILF) and Centerra (OTCPK:CAGDF).
The main criterion to qualify into this list is revenue. Each company should have revenue of $100M - $300M per quarter. Kirkland Lake is an exception - last quarter the company had revenue of around $99M but in the not so distant future it should go up significantly (especially after a merger with Newmarket Gold).
Next, a number of companies reporting revenue above $100M were excluded from my list. Let me explain why:
- Torex Gold - due to the fact that the company started its operations this year, it is not possible to compare this year's performance to the last year's one (however, next year Torex will qualify into my survey).
- Royalty and streaming companies - these companies are not miners so they are excluded from my survey.
- Australian miners - a number of these miners qualify into my survey (as, for example, St. Barbara Ltd); unfortunately, these companies do not publish their 3Q financial results.
As in the previous surveys, I have gathered all data presented in financial statements of the above listed miners and created the joint statement of operations for the entire sector. Due to the fact that Kirkland Lake presents its results in Canadian dollars, I have recalculated all figures into US dollars.
Mid-Cap Gold - joint Statement of Operations
The table below shows the Mid-Cap Gold joint statement of operations:
Source: Simple Digressions
This year the mid-cap gold miners produced more gold than last year. What is more, an increase in production was even higher than that delivered by silver miners. The reason standing behind this fact is quite simple: mid-cap gold miners were very active in increasing their mineral resources. For example, B2 Gold was ramping up its production at the Otjikoto mine and Endeavour Mining added a new mine, Ity (acquired in November 2015), to its mineral portfolio. However, the largest increase was reported by Tahoe Resources. In April 2016 this company acquired Lake Shore Gold, an excellent gold miner operating in Ontario, Canada. This acquisition increased the company's total gold production by around 40 thousand ounces of gold per quarter. What is more, the acquisition of Lake Shore Gold converted Tahoe from a silver producer into a gold one.
What is more, mid-cap gold miners also increased the amount of metals sold. As usually, I measure the amount of metals sold using the so-called "an ounce of gold equivalent" (silver, lead, zinc, copper and other metals sold are recalculated into gold ounces). Year-to-date the mid-cap gold sector sold 3.47 million ounces of gold equivalent (an increase of 13.0%, compared to the three quarters of 2015).
Similarly to other precious metals sectors, the mid-cap gold miners cut direct production costs by 7.9%. Because it is the last survey of precious metals miners I may write that cuts in production costs are the most distinctive feature of precious metals miners this year. Using different wording - generally all precious metals miners learned their lesson from the last bear market in gold and cut costs of production.
Next, contrary to silver and big gold miners, and despite high impairment charges reported in 2015, the mid-cap gold miners reported higher depreciation expenses (an increase of 8.1%, compared to last year). Simply, as I mentioned above, this sector increased its mineral base by adding or starting new mines (Endeavour Mining, Kirkland or B2 Gold) - hence, higher depreciation.
Now, another positive phenomenon. Mid-cap gold miners increased their exploration expenses and decreased administrative costs. Once again, these developments confirm that this sector differs from its silver and big gold peers, where exploration expenses went down and administrative costs went up.
As a result of the above discussed positive developments, mid-cap gold miners converted a net loss of $747M incurred during three quarters of 2015 into a net profit of $429M this year.
Similarly to the previous editions, in this section I would like to show the economics of mining, demonstrated by mid-cap gold miners. To remind my readers, all measures are calculated using an ounce of gold equivalent. The table below shows the results. For better comparison, in the right columns (marked in grey) I have plotted the results delivered by the silver and big gold sectors:
Source: Simple Digressions
Let me comment:
- Similarly to the silver sector, mid-cap gold miners increased their sales volume by a comparable amount (13.%, compared to a 12.1% increase delivered by silver miners)
- Mid-cap gold miners spent 7.9% less to produce one ounce of gold equivalent; it ranks this sector between silver miners and big gold miners
- As a result, this year a gross margin per ounce of gold equivalent increased by 26.2%, compared to last year; once again, mid-cap gold miners are better than big gold ones and worse than silver producers.
Summarizing - the mid-cap gold sector ranks between silver and big gold miners, as far as gross margins per ounce of gold equivalent are concerned.
The joint debt held by mid-cap gold miners went slightly down from $3.0 billion at the end of 3Q 2015 to $2.9 billion at the end of 3Q 2016. However, due to the increased activity in mergers, acquisitions and the construction of new mines, cash holdings went down from $2.5 billion to $2.2 billion. As a result, net debt, held by mid-cap gold miners, went up to $1.0 billion (an increase of 8.5%, compared to 3Q 2015).
I do not think that it is an issue. During the three quarters of 2016 mid-cap gold miners delivered $1.6 billion in cash flow from operations so the current net debt may be, theoretically, paid off very quickly (in eight months).
During the three quarters of 2016 mid-cap gold miners increased their cash flow from operations by 48%, compared to 2015. Another variant of this measure, cash flow from operations, excluding working capital issues, went up by 50.2%. To remind my readers:
- Big gold sector increased cash flow from operations by 9.2% (cash flow from operations, excluding working capital issues, went up by 20.4%)
- Silver miners increased cash flow from operations by 80.7% (cash flow from operations, excluding working capital issues, went up by 116.6%)
Once again, the mid-cap gold sector is placed between silver and big gold sectors, as far as cash flow from operations is concerned.
Free cash flow, defined as cash flow from operations less capital expenditures, went up from a deficit of $168M in 2015 YTD to $36.8M in 2016 YTD. It is quite a small increase that may be read as:
"Mid-cap gold miners are very busy with extending their mineral resources. Hence, low free cash flow generation"
In my opinion, in the long - term it is a very positive event because low free cash flow now should be converted into much higher free cash flow generation in the future.
Finally, similarly to the previous editions, let me list all mid-cap gold miners, taking an increase in cash flow from operations (excluding working capital issues) as the main criterion:
Source: Simple Digressions
As the chart shows, there were three leaders: Tahoe, Alamos and Kirkland Lake. Tahoe was discussed above (the acquisition of Lake Shore Gold had a substantial, positive impact on cash generation).
Alamos Gold, due to higher production delivered by the Young Davidson mine and lower costs of production / higher gold prices increased its cash flow from operations significantly:
Source: Simple Digressions
The third miner, Kirkland Lake, is currently finalizing its merger with Newmarket Gold. Apart from that, Gold Fields (NYSE:GFI) and Silver Standard (NASDAQ:SSRI) are interested in the friendly acquisition of this excellent miner.
The mid-cap gold sector performs much better than its big gold peer. Contrary to the big gold sector, mid-cap gold miners are building their resource base by adding new mines and acquiring other miners. Similarly to silver miners, they are very busy now. What is important, mid-cap gold miners do not neglect their current operations - they are cutting costs of production and increasing margins and cash flow from operations. Simply put, the growth and efficiency are here.
In my opinion, the mid-cap gold sector, together with the silver one, present the best investment opportunities. This thesis is strengthened by the last strong correction in precious metals stock prices. Once again investors are facing another buying opportunity…
Disclosure: I am/we are long GDXJ.
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.
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