Davids vs Goliaths: Can Junior Gold Miners Outshine the Majors - A Comparative Analysis.

Introduction

In June of this year, we published an Analyst’s Note covering the performance of major gold producers (‘the Majors”) in the current gold bull market, which started around 2017-2018. It attracted a lot of interest. For this reason, Crux Investor has decided to issue a similar report, focusing on junior to mid-tier gold producers and comparing their performance to the Majors. Whereas the previous note reviewed the degree to which the Majors had learned from squandering the benefits of the gold bull market from 2003 to 2012, this report will concentrate on whether there is a difference in performance for very small to mid-tier producing companies, with the Majors, over the 2018-2023 period. 

Information Used

Information Sources and Level of Accuracy

The information for the individual companies was derived from the annual financial statements, either provided on the company website, from the Canadian System for Electronic Document Analysis and Retrieval (“SEDAR”) website, or the USA Security and Exchange Commission (“SEC”) filings on the Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”).

As usual, the analysis is complicated by the various companies having different year-ends, for most 31 December, but for others, especially Australian companies, 30 June. This study has used the annual numbers reported on 30 June as applicable for the calendar year. Another complication is related to using currencies different from the US Dollar. DRD Gold only reports its figures in South African Rand, Robex Resources, Wesdome Gold Mines, Karora Resources, Victoria Gold in Canadian Dollars, Gold Road Resources, Westgold Resources, West Africa Resources, and Regis Resources in Australian Dollars. These numbers have been converted to US Dollars using the average exchange rate for the year in which they are reported. 

Another complication is that certain companies, such as Centerra Gold, have had considerable revenue from commodities other than gold. These have not been included in this study. However, there are companies included in this study with by-product credits, such as Eldorado Gold, Dundee Precious Metals, and McEwen, but to a much lesser degree.

Company Sample

As with our previous Note on the major gold producers, selecting companies for this Note’s sample group was not straightforward. Several companies went bust during the period, while others commenced operations and have a very short production history. 

Table 2.2_1 shows the selected gold mining companies arranged sequentially in terms of the size of gold production, with their market capitalisation and the value of their annual production of these companies as of the 15^th of July 2024.

The table includes 33 companies that in 2023 accounted for 7.2 million ounces (“Moz”) of gold production, equal to 6.2% of the total mined gold production in that year of 117.2 million ounces. Together with the Majors, less than 34% of global gold production is accounted for, which is a surprisingly low number considering that the two studies cover most of the listed companies that could be identified from public records. It is hard to believe that the balance of global production comprises gold from sources such as by-production, private companies, and informal miners. 

The companies in this report had a total market capitalisation of US$33.81 billion on 15 July 2024. The market capitalisations used for Victoria Gold and SSR were taken immediately before the collapse of heap leach stacks at their operations, causing precipitous drops in their share prices. These events took place after the modelled period ended on 31 December 2023. 

This total market capitalisation equates to US$4,688/annual ounce production of the sample group, almost two times the annual production at the current gold spot price and almost one-third lower than the US$6,889/oz number calculated for the Majors. This points to an overall lower rating for the smaller producers. However, the column on the right shows that the average hides how the various companies are rated very differently. The yellow highlighted cells show companies trading at a significant premium to the average for the group (e.g. Orla Mining), and the brown highlighted cells at a considerable discount (e.g. Hummingbird Resources). Section 4 of this report will discuss the possible reasons for these ratings.

Results For The Sample Group

Overall Performance

Table 3.1_1 shows the sample group's overall financial performance from 2018-2023. It shows separately the numbers for the sample group without new entrants and reproduces the numbers for the Majors provided in the June Analyst’s Notes. 

The table above shows that with and without new entrants, the sample group was much less successful in generating net cash from its operations after reinvestments. Whereas the Majors achieved 12%, this was around 5% for the smaller peers. The most significant difference between the Majors and their smaller peers is how their shareholders benefited from dividends and share buy-backs of almost US$30 billion, which is 9.3% of revenue. Even when ignoring the contribution of US$6.4 billion of Polyus in 2023 as an outlier for the Majors, the pay-out ratio is 7.3% of income.

Contrary to shareholders benefiting from cash returned to them in the bull market, the current sample group had to contribute almost US$1.5 billion to support their companies' finances. Surprisingly, the number is lower when new entrants are included, despite these having to fund pre-production capital expenditure.

The Exchange Rate differences calculated above differ slightly from the generated numbers (-0.17 billion for both cases), which Crux Investor explains from timing differences between mid-year rates for flows and year-end rates for balances, combined with some companies having June year-ends. 

The above table explains the higher rating given to the Majors. 

Revenue Growth

Figure 3.2_1 shows the growth in total annual gold revenue for the sample group from 2018 until 2023, compared to the average gold price that year. ‍

The graph shows that revenue grew faster than the gold price rise, explained by gold production growing around 53%, from 4.7 Moz in 2018 to 7.2 Moz in 2023. Combined with a gold price rise of 62%, total annual revenue increased by 123%. It was a good period for the industry and the smaller players far outperformed the 67% revenue growth of the Majors. This was partially caused by seven new entrants to the industry, such as Lundin Gold, Calibre Mining, and West Africa Resources. When ignoring their contribution, production growth was almost 53%, and revenue growth was at 79%, still better than for the major producers. Sections 3.3 and 3.4 of this report will focus on the sample group without the new entrants’ contribution to make the comparison to the Majors more equivalent. 

Cash Generated by Operations

Figure 3.3_1 shows cash generated by the operations as reported in the annual financial statements, and the gold price performance during the same period. ‍

The graph follows Figure 3.2_1. A total of US $18.0 billion was generated over the period, which amounts to 33% of the revenue over the same period, lower than the 37% achieved by the Majors, which are able to exercise better cost control. When new entrants are included, the margin is almost the same, at 34%. This is a very decent cash margin. It does not, however, capture the investments required to keep the company a going concern.

Figure 3.3_2 shows cash absorbed by investments compared to how much cash was generated by the operations. 

Whereas the pattern is the same as for the Majors, with investments only rapidly increasing later in the bull run, overall, the smaller producers spent more than their senior peers. Investments amounted to 28% of revenue over the period, compared to 25% for the Majors. 

Figure 3.3_3 shows the net cash generated after reinvestments. The y-axis scale has been kept the same as in Figure 3.3_2 to facilitate comparison. The diagram also shows how much funding accrued to shareholders in dividends and share buy-backs, net of equity raisings. The same graph for the Majors has been included as a comparison.

The above diagrams show the main difference between the Majors and the sample group, with the smaller producers being much more stingy in distributing free cash flow. These companies as a whole even called upon their shareholders to further fund their companies to the tune of US$718 million.

Total cash generated from operations after investments was US$2.82 billion, equal to 5.2% of the revenue earned over the period. This is a paltry margin compared to the Majors, which achieved a margin of 12.1%. 

Figure 3.3_4 has been generated to determine whether there is a relationship between net cash generation and size of production. The diagram at the top is for 2018-2023, and at the bottom for 2023 only, when the gold price was the highest. The axes have purposefully been kept the same.

The diagrams show a vague relationship with production size, with the largest companies in the sample group generating the most. Eldorado Gold is the exception, with negative cash flow. 

The top diagram hints that there is a straight-line relationship were it not for medium-sized companies with annual production in the 150,000 oz – 400,000 oz range doing particularly poorly.

The worst performers in this group in terms of cash generation are Argonaut Gold, McEwen Mining, Regis Resources, Fortuna Mining, and Pan Africa Resources. Dundee Precious Metals is the company that generated US$800 million for an average production of 0.25 Moz per annum.

Looking at the numbers for 2023, when the gold price was at its best for the period, there is again no clear relationship with production volume. What is evident is that, of the companies with a production level below 0.2 Moz per annum, almost none could generate meaningful net cash. Surprisingly, cash generation in 2023 was worse than the average. Dundee Precious Metals had the highest positive value. The worst performers were again Argonaut Gold and McEwen, and Torex Gold was cash-negative for the first time. 

Financing Activities

The cash flow statement in the company financial statements has a category “financing activities” after “cash from operations” and “investing activities.” Here, any shortfalls in net cash from operations after reinvestments are made up, and/or net cash generated is distributed to the various parties funding the company. 

Figure 3.4_1 shows how the three main categories of financiers have been looked after by the sample group. ‍

The diagram shows that servicing debt absorbed US$1.37 billion. This was mostly for interest payments and facility fees, as the loan balance dropped only US$0.32 billion over the period. Minorities and other financing (e.g. lease payments) absorbed US$1.0 billion. Instead of rewarding its shareholders, the companies collectively preferred to increase their cash balance by US$0.95 billion. Only in the last two years did shareholders get a break and were no longer required to materially fund the companies. 

The market capitalisation of all companies (without new entrants) was US$24.27 billion on 15 July 2024. Without being able to bank on share price gains, shareholders should rely on dividends to achieve a decent return. Given the varied and extensive risks associated with the mining industry, ranging from technical, economic, legal, environmental, and political, a 5% rate should be the absolute minimum. This would imply dividends and share buy-backs amounting to more than US$1.2 billion annually. Referring to the bottom diagram in Figure 3.3_4, this will not be achieved and definitely not consistently. 

The implication is that investments in the industry will have to be carefully selected. The following section will look into this. 

Value Creation For Shareholders

The above sections offer insight into overall industry performance; however, they are somewhat academic for investors. For this reason, Crux Investor has reviewed in Table 4_1 how well individual companies in the sample group have performed in terms of:

• Distributing cash back to the shareholders. To standardise the results for the size of the company, the second column gives the numbers as US$/oz produced over the period;
• Growth achieved. This has been expressed as gold production change between 2018 and 2023, and
• The change in the gold reserve base is an indication of the company's prospects. With companies being inconsistent in reporting mineral resources, most inclusive, but many exclusive of reserves, using resources as a metric is not possible.

Crux has subjectively highlighted any outperformance in a particular metric with a yellow colour and underperformance with a brown colour.

Reflecting the overall poor performance of the sample group returning cash to shareholders, the second column is dominated by brown highlighted cells. Centamin, SSR Mining, and Dundee Precious Metals are the best performers in returning cash to shareholders. The low payout ratio can be explained by the desire of companies to grow both in terms of production and mineral reserves. There, the group excelled with 52% higher gold output in 2023 than in 2018, not counting the new entrants. Reserves grew by almost 19%, not counting the reserves of New Entrants. 

The market generally does not rate small producers with an annual output below 0.12 Moz, probably because these need constant additional equity funding. Mako Mining’s rating is neutral because they managed to be cash-positive after reaching their current 35,000 oz/annum production rate. Fortitude Gold greatly benefited from being indirectly subsidised by Gold Resource Corporation after its spin-out, with a cash injection that allowed for the construction of the mine without further equity placements. Its low rating may be caused by concerns about the remaining life of mine (“LOM”). The high rating for Robex Resources is explicable with modest growth achieved, while returning cash to shareholders. The reason for the low rating of Alkane Resources is probably due to it requiring shareholders to keep funding operations, and the market may be concerned about the very high capital expenditure requirement (US$1.2 billion) to develop the Boda Kaiser porphyry project, which would push the company into a different league. Caledonia operates in a challenging jurisdiction (Zimbabwe) and has been almost consistently cash-negative. It has paid dividends by running down its cash balance and is now US$11 million in overdraft and nearly US$25 million in debt.

‍X64 has been in voluntary administration since 28 February 2023 after a dispute arose with the majority shareholder of the Co-O mine in the Philippines, in which X64 has a 40% beneficial interest, and the Mindanao Mineral Processing and Refining Company owns 80%. The market capitalisation is based on the share price just before the suspension of trading.

‍Hummingbird Resources is active in difficult jurisdictions (in West Africa) and has not once paid its shareholders a dividend. The company has ambitious plans for production expansion over the next few years, requiring significant funding. Like Hummingbird Resources, Mandalay Resources has yet to pay shareholders dividends. It is one of the companies that prefers building up its cash balance and reducing debt from any cash generated. 

The market can be blamed for suffering irrational exuberance concerning Orla Mining. The company has a good asset and prospects of expansion through developing the South Railroad asset in Nevada, but to rate its prospects more than double those of its peers is over the top. The company proudly proclaims that it has reduced debt by US$60 million but has used US$46 million of shareholders' funding for this. 

If Orla Mining is a case of irrationality, the Wesdome Gold Mines rating is totally over the top. The market seems to suffer from the same over-optimism for new start-ups as when an initial exploration discovery is made. Reason is bound to return over time when actual results demonstrate that expectations can never be met. 

‍McEwen Mining is another company that perpetually calls upon shareholders for funding, US$143 million, during a bull market. For this support, it can demonstrate little except its 47.7% beneficial interest in a large porphyry copper deposit, Los Azules, which will be the subject of the next Analyst’s Notes. 

It is not obvious why Galiano Gold is highly rated. It never returned cash to shareholders but instead built up its cash balance to US$55 million. It may benefit from the perception of being a Joint Venture (“JV”) partner of one of the Majors (Gold Fields) and the professional operation management that comes with it.

‍Gold Road Resources is another new entrant benefiting from high expectations. It has yet to earn its high rating.

The market already had a dim view of Victoria Gold before the heap leach collapse in 2024. It was a company gobbling up large chunks of shareholder support with little to show for it. The same applies to Argonaut Gold. It has added to its reserves by developing the Magino project in Canada, one that has a low grade and still needs to prove its value, and the acquisition of Alio Gold. Good luck to Alamos Gold to make it work now that it has acquired the company. 

‍Dundee Precious Metals is the class star, outperforming in all three metrics. Crux Investor believes that the market may still further re-rate the share upwards. 

It is not immediately obvious why Regis Resources has such a poor rating. It managed to grow annual production moderately, for which it called upon shareholders to chip in US$450 million in 2020. Thereafter, shareholders again benefited from dividends. It is not a money spinner, but is not much worse than its peers. 

The poor rating for Torex Gold is somewhat surprising given that it has generated good cash over the period, totalling US$555 million. However, in 2023, cash generated turned negative to almost US$198 million. 

‍Lundin Gold has a classy operation in Fruta del Norte, a real money spinner that has increased over time and, in 2023 alone, generated US$466 million. Shareholders have yet to benefit as the company has preferred to aggressively reduce debt, from a peak of US$879 million in 2019 to US$US$306 million in 2023, whilst maintaining a healthy cash balance (US$173 million in 2023). The rating reflects expectations of generous future dividends and the high expectations associated with new entrants. 

‍Eldorado Gold is surprisingly highly rated, with its production growth highly rated despite the cost of achieving this and a drop in reserves. The market seems to buy into Skouries' growth story, which is forecast to add another +40% growth in gold production by 2027.

The low rating for SSR Mining (based on a share price before the heap leach collapse) is surprising, as the company did well on all metrics. 

Conclusions

• This analysis reveals that the market rates the Majors higher. This is justified by their ability to squeeze more net cash out of their operations. Whereas the Majors could generate cash from operations net of investments amounting to 12.1%, the sample group (excluding new entrants) could only achieve 5.2%.
• The Majors used the bull market windfall by returning cash to their shareholders through dividends and share buy-backs, amounting to 7.3% of revenue - when ignoring Polyus' payout in 2023 as an aberration. The sample group companies preferentially serviced their debt to financial institutions and other financiers instead. As a group, they even called upon their shareholders to chip in further.
• The sample group exhibits the same mistake the Majors made during the 2003 - 2012 gold bull market when they were in a headlong pursuit for production and mineral reserve growth. The Majors have learned their lesson, but their smaller peers still need to. 
• There is no apparent relationship between the ability to generate net cash and annual production rate, except that the largest producers in the group are better at it. The companies in the group with annual production in the 150,000 oz – 400,000 oz range are doing particularly poorly. Worryingly, when only looking at the performance in 2023 - when the gold price was at its highest level - the financial performance was not better.
• In its pursuit for growth, the group was successful (as were the Majors in 2003-2012), with production growth of 53% (excluding new entrants) and 18.5% reserve growth. 
• Based on a combined market capitalisation (excluding new entrants) of US$24.27 billion on 15 July 2024 (and a minimum required 5% return), dividends and share buy-backs should be more than US$1.2 billion yearly. However, with the average annual net cash generation before financing of US$1.0 million over the current bull market period, there is no chance of this happening. To make a decent return investing in the Junior to Mid-Tier gold mining sector, investors will have to make judicious investments. 
• Based on the analysis of the performance of the sample group (including new entrants) in terms of cash receipt/contribution of shareholders, gold production growth, and reserve growth, Crux Investor has identified some opportunities regarding the current market rating of such companies. The market generally has excessively high expectations for new entrants, mirroring the initial hype with new exploration discoveries. The market recognises companies that are perpetually cash-negative and downrates these. Examples are Alkane Resources, McEwen Mining, Victoria Gold, Argonaut Gold, and Regis Resources. Exposure to Africa is a clear negative, as is evident for Hummingbird Resources and Caledonia. Crux Investor advises avoiding small producers as these seem to need help to generate positive cash flow (corporate overheads do not help) and cautions on investing in Orla Mining, McEwen Mining, Wesdome Gold Mines, Galiano Gold, and Gold Road Resources. Dundee Precious Metals is one company that has been a star in the class and still presents upside.