Junior Gold Miners Could Outperform (NYSEARCA:GDXJ)


Volatility continues to characterize the commodities markets, and we have seen a downside correction in the VanEck Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) of about 17.3% since August 5th. Of course, this negative activity follows a tremendous surge in bullish momentum on longer-term time horizons. Since March 13th, GDXJ has generated gains of more than 183%, and we expect safe haven buying of precious metals to continue against rising macroeconomic uncertainties (such as the recent reports of coronavirus in the U.S. government). Overall, we believe that this environment should help the junior gold miners maintain positive momentum in upcoming earnings reports, and we rate GDXJ as an instrument that is likely to “outperform” based on its broadly diversified exposure to a sector of the market that is benefitting from an acceleration in momentum.

Source: Author via Tradingview

The VanEck Vectors Junior Gold Miners ETF is associated with an expense ratio equal to 0.53%, and the fund currently has $5.87 billion in assets under management. One of GDXJ’s distinguishing features is that it offers broad regional exposure that is diverse, and this element can be a helpful factor when investors seek to reduce additional risks associated with certain geographical areas:

Source: ETF.com

GDXJ’s 10 largest holdings count for 43.16% of the fund’s total valuation, and this is positive because figures under 50% will generally indicate favorable diversification levels. Two of the VanEck Vectors Junior Gold Miners ETF’s most important holdings include Northern Star Resources (OTCPK:NESRF) and Gold Fields Limited ADR (NYSE:GFI).

Positive earnings trends from both of these companies appear to be showing bullish momentum that could carry over into upcoming quarters, and we might see further gains in the VanEck Vectors Junior Gold Miners ETF if these companies are able to produce results that are aligned with these upbeat expectations.

Source: ETF.com

During its most recent reporting period, Gold Fields generated strong cash flow figures, with mine cash flows of $405 million and net cash flows of $320 million for the first half of 2020. Gold Fields also restructured its debt and completed a successful equity raise in February ($250 million). During the first half of 2020, Gold Fields also saw a substantial drop in its all-in costs (from $1,106 per ounce during the first half of 2019 to $1,065 during the first half of 2020).

Source: Gold Fields Limited

Looking at the company’s balance sheet, the company showed $1.2 billion in net debt (lease liabilities included). Gold Fields is also showing a net debt figure (lease liabilities included) relative to EBITDA that is equal to 0.84 and cash on its balance sheet of roughly $940 million. All of these figures show that Gold Fields is in a stable position from an operational perspective, and this should be favorable for GFI share prices going forward.

Source: Gold Fields Limited

Fortunately, similar evidence of strength can be found in Northern Star Resources, and this should help to support valuations for the VanEck Vectors Junior Gold Miners fund. For the second-quarter period in 2020, Northern Star Resources saw record sales figures (262,717 ounces) and all-in sustaining costs of $1,043.

Even after spending $31.38 million on exploration and growth capital expenditures, the firm still generated elevated levels of free cash flow during the period (at $155.42 million), and this essentially gives us another example of strong operational efficiency amongst the junior gold miners.

Source: Author via Tradingview

Recent declines in the VanEck Vectors Junior Gold Miners ETF might have blurred the effects of some of these positives, however, as corrective sentiment seems to have taken control of many assets related to the precious metals sector.

But even though these declines have topped 17%, they have failed to invalidate important Fibonacci support levels near 48.13 (which marks the 38.2% retracement of the rally that began during the middle of March 2020). This suggests that the downside risk associated with the VanEck Vectors Junior Gold Miners ETF might be relatively limited after the sizable drop that has occurred since the beginning of August.

Source: ETFdb

Over the last three-month period, the VanEck Vectors Junior Gold Miners ETF has encountered inflows of $249.54 million. This indicates a sharp reversal from the net flow trends visible over longer time frames. Over the last six-month period, the VanEck Vectors Junior Gold Miners ETF has encountered net flows of -$256.91 million, and this gives us additional evidence that GDXJ might be near its lows after a period of downside correction.

Source: Author via Tradingview

For all of these reasons, we rate GDXJ as an instrument that is likely to “outperform” due to its well-positioned roster of companies that offer diversified exposure to a sector of the market that is clearly showing an acceleration in momentum.

Since we tend to identify contrarian trades found in a favorable macroeconomic context, we have argued for patience in waiting for a downside correction before entering into GDXJ long positions. But the potential for growth and a supportive metals pricing environment might now make it possible for the VanEck Vectors Junior Gold Miners ETF to outperform – even if we see broader stock market declines before the end of 2020.

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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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