The junior gold miners’ stocks have been thrashed in August, plummeting to brutal multi-year lows. Such carnage naturally left sentiment far more bearish than usual in this forsaken contrarian sector. But these extremely-battered gold-stock prices certainly aren’t justified fundamentally. Junior gold miners’ collective results from their just-completed Q2’18 earnings season prove their stock prices need to mean revert way higher.
Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Companies trading in the States are required to file 10-Qs with the US Securities and Exchange Commission by 45 calendar days after quarter-ends. Canadian companies have similar requirements. In other countries with half-year reporting, many companies still partially report quarterly.
The definitive list of elite “junior” gold stocks to analyze comes from the world’s most-popular junior-gold-stock investment vehicle. This week the GDXJ VanEck Vectors Junior Gold Miners ETF reported $4.5b in net assets. Among all gold-stock ETFs, that was second only to GDX’s $8.4b. That is GDXJ’s big-brother ETF that includes larger major gold miners. GDXJ’s popularity testifies to the great allure of juniors.
Unfortunately, this fame created serious problems for GDXJ a couple years ago, resulting in a stealthy major mission change. This ETF is quite literally the victim of its own success. GDXJ grew so large in the first half of 2016 as gold stocks soared in a massive upleg that it risked running afoul of Canadian securities laws. And most of the world’s smaller gold miners and explorers trade on Canadian stock exchanges.
Since Canada is the center of the junior-gold universe, any ETF seeking to own this sector will have to be heavily invested there. But once any investor including an ETF buys up a 20%+ stake in any Canadian stock, it is legally deemed to be a takeover offer that must be extended to all shareholders! As capital flooded into GDXJ in 2016 to gain junior-gold exposure, its ownership in smaller components soared to near 20%.
Obviously, hundreds of thousands of investors buying shares in an ETF have no intention of taking over gold-mining companies, no matter how big their collective stakes. That’s a totally different scenario than a single corporate investor buying 20%+. GDXJ’s managers should’ve lobbied Canadian regulators and lawmakers to exempt ETFs from that 20% takeover rule. But instead, they chose an inferior, easier fix.
Since GDXJ’s issuer controls the junior-gold-stock index underlying its ETF, it simply chose to unilaterally redefine what junior gold miners are. It rejiggered its index to fill GDXJ’s ranks with larger mid-tier gold miners, while greatly demoting true smaller junior gold miners in terms of their ETF weightings. This controversial move defying long decades of a convention was done quietly behind the scenes to avoid backlash.
There’s no formal definition of a junior gold miner, which gives cover to GDXJ’s managers pushing the limits. Major gold miners are generally those that produce over 1m ounces of gold annually. For decades juniors were considered to be sub-200k-ounce producers. So 300k ounces per year is a very-generous threshold. Anything between 300k to 1m ounces annually is in the mid-tier realm, where GDXJ now traffics.
That high 300k-ounce-per-year junior cutoff translates into 75k ounces per quarter. Following the end of the gold miners’ Q2’18 earnings season in mid-August, I dug into the top 34 GDXJ components’ results. That’s simply an arbitrary number that fits neatly into the tables below. Although GDXJ included a staggering 71 component stocks this week, the top 34 accounted for a commanding 81.1% of its total weighting.
Out of these top 34 GDXJ companies, only 4 primary gold miners met that sub-75k-ounce-per-quarter qualification to be a junior gold miner! Their quarterly production is rendered in blue below, and they collectively accounted for just 8.9% of GDXJ’s total weighting. But even that is really overstated, as 3 of these are long-time traditional major silver miners that are increasingly diversifying into gold in recent years.
GDXJ is inarguably now a pure mid-tier gold-miner ETF, and really ought to be advertised as such. While its holdings include some of the world’s best gold miners with huge upside potential, the great majority definitely aren’t classic junior gold miners. At least this ETF’s big composition changes are stabilizing, as Q2’18 was the first quarter since mid-2016 where GDXJ’s components didn’t radically change year-over-year.
I’ve been doing these deep quarterly dives into GDXJ’s top components for years now. In Q2’18, fully 32 of the top 34 GDXJ components were also GDX components! These are separate and distinct ETFs, a “Gold Miners ETF” and a “Junior Gold Miners ETF”. So they shouldn’t have to own many of the same companies. In the tables below I highlighted the symbols of rare GDXJ components not also in GDX in yellow.
These 32 GDX components accounted for 78.4% of GDXJ’s total weighting, not just its top 34. They also represented 38.0% of GDX’s total weighting. Thus nearly 4/5ths of this “Junior Gold Miners ETF” is made up of over 3/8ths of the major “Gold Miners ETF”!These GDXJ components also in GDX start at the 10th-highest weighting in that latter larger ETF and extend down to 47th. GDXJ is mostly smaller GDX stocks.
In a welcome change from GDXJ’s vast component turmoil of recent years, only 2 of its top 34 stocks are new since Q2’17. Their symbols are highlighted in light blue below. Thus the top GDXJ components’ collective results are finally getting comparable again in year-over-year terms. Analyzing ETFs is much easier if their larger components aren’t constantly in flux. Hopefully, changes going forward are relatively minor.
Despite all this, GDXJ remains the leading “junior-gold” benchmark. So every quarter I wade through tons of data from its top components’ latest results and dump it into a big spreadsheet for analysis. The highlights make it into these tables. Most of these top 34 GDXJ gold miners trade in the US and Canada, where comprehensive quarterly reporting is required by regulators. But others trade in Australia and the UK.
