It says something about the proposed expansion of North America’s leading junior gold mining fund that it could now include Gold Fields (NYSE:GFI), one of the national champions of one of the world's biggest gold mining countries, in its portfolio.
But larger companies are coming in to the GDXJ and holdings in smaller ones are being cut in a rebalancing that's scheduled for June.
How much of a junior gold mining specialist the GDXJ will then truthfully be is open to question. But those definitions are being stretched by the fund's own stellar success, and it’s hard to get too pernickety when investors are making money.
Or at least think they will.
Between the start of the year and the middle of February the GDXJ soared by around 33%, and at one point its value hit over US$5.5bn.
At the time, it was a clear sign that the junior mining markets were roaring back after years in the wilderness. The new positivity towards junior miners remains intact, just about, as most commodities have held on to gains posted in the last year or so and the market boost that Donald Trump’s election stimulated hasn’t completely worn off yet.
But the unexpected side-effect was that so much capital flowed into the GDXJ from eager investors that it has been unable to place it all within the mandated sphere of companies that it’s allowed to invest in. For regulatory reasons that are standard practice the world over, the fund is unable to go over a certain threshold in how much of a percentage it holds in any one company.
In many cases it has now reached the maximum threshold it’s allowed. The only solution: find more companies, or to put it another way, expand the investment universe to bigger and more arresting propositions.
Thus, according to analysis by BMO Capital Markets, in June the GDXJ is likely take major positions in Eldorado Gold (TSE:ELD), Yamana Gold (TSE:YRI), and Centamin Egypt (LON:CEY) (TSE:CEE), among others.
Eldorado has a market capitalisation of just over C$3bn, Yamana a market capitalisation of over C$3.5bn, and Centamin a market capitalisation of £1.9bn. Small companies these are not.
And then there’s the matter of Gold Fields (NYSE:GFI), which alongside Anglo Gold (LON:AGD), ranks as the foremost of South Africa’s gold miners, and has a market capitalisation of nearly US$3bn. Lest we forget South Africa was for many years the number one producer of gold in the world bar none. GDXJ’s probable move onto the Gold Fields register really does take it into the big leagues.
But there is a downside to all this.
First, not everyone in the market has taken a shine to the GDXJ’s decision effectively to re-brand the “J” part of its name as an apparent optional extra. After all, there’s already a GDX without the “J”, and for what it’s worth it does what it says on the tin: invest in gold companies the world over. AngloGold, that other South African champion, comprises 2.73% of the GDX’s portfolio, but at US$4.5bn its market capitalisation isn’t a particular order of magnitude different from its smaller peer Gold Fields.
Investors in the GDXJ might be forgiven for thinking that the difference between the two funds is about to become very blurred.
Especially because the rebalancing that the GDXJ is about to undertake is also likely to involve some heavy selling of existing holdings at the more junior end to make sure the scales stay level.
Thus of the overseas holdings shares in Hochschild (LON:HOC), Highland Gold (LON:HGM), Regis Resources (ASX:RRL), St Barbara (ASX:SBM), Resolute (ASX:RSG), Saracen (ASX:SAR), Westgold (ASX:WGR), Beadell (ASX:BDR), Perseus (ASX:PRU), Silver Lake (ASX:SLR), Ramelius (ASX:RMS) and Munsun Capital (HKG:1194) all fell on news of the rebalancing.
There has been similar downward pressure on companies listed in Canada, with the strange twist that the likelihood of major selling from the GDXJ portfolio has driven down valuations, in turn driving down the valuation of the GDXJ itself.
And article in April on Zerohedge.com asked “Is GDXJ killing the market?” and although the larger GDX has also dropped since news of the GDXJ rebalancing was announced, there is a significant and unexpected dose of short-term bearishness suddenly at large in the junior market.
The Canadian companies most affected by the rebalancing include Kirkland Lake Gold (TSE:KL), Silver Standard Resources (TSE:SSO), Torex Gold (TSE:TXG), Endeavour Mining Corp (TSE:EDV), Osisko Gold Royalties (TSE:OR), Centerra (TSE:CG) and Novagold Resources (TSE:NG).
Shares in Centerra are up by around 33% since the beginning of the year, but did dip significantly following the GDXJ announcement. Novagold’s shares are heavily down. Osisko Gold Royalties shares dipped and then recovered. Kirkland’s dipped and then stabilised. Silver Standard’s crashed then bounced. Torex’s weakened significantly, as did Endeavour’s.
Sure, the euphoria about Trump’s election is wearing off and the market is weaker. There are mixed signals on gold now, with the US dollar strength easing, and hawkishness from the Fed waxing and waning. But knowing that what BMO calls “a massive rebalance trade” is coming in June is having an undeniably detrimental effect right across the market.
Bradford Cooke, the chief executive of Endeavour Silver, encapsulated the effects very well in recent remarks he made to shareholders.
“Our stock has been particularly volatile in recent weeks and we believe the GDXJ ETF index fund rebalancing is the main reason,” he said.
“At the date of their most recent filing, the GDXJ held 15% of Endeavour’s issued and outstanding shares – making them by far our largest shareholder. Their holdings had been steadily creeping up as the size of the fund grew, and they were rapidly approaching the 20% threshold in many of their holdings (not just Endeavour Silver).”
So far so good. But the new need to buy into bigger companies has created selling pressure on the existing holdings.
“As a result, they have been reducing their positions in all of their current GDXJ holdings and buying the larger cap mining shares to be added to the index,” continued Cooke.
“We believe this rebalancing of the GDXJ holdings is primarily what caused the recent volatility, and price decline, in our stock. There is no other fundamental reason for the sell-off, as our operations remain on track to meet 2017 guidance, and we are cash flow positive at current metal prices.”
Other Canadian companies that are vulnerable to suffer similar effects include Novagold (TSE:NG), MAG Silver (TSE:MAG), McEwen Mining (TSE:MUX), Silvercorp (TSE:SVM), Sandstorm Gold (TSE:SSL), Klondex (TSE:KDX), Alacer (TSE:ASR), Asanko (TSE:AKG), Seabridge (TSE:SEA), China Gold International (TSE:CGG), Richmont Mines (TSE:RIC), Continental Gold (TSE:CNL), Wesdome Gold Mines (TSE:WDO), First Mining Finance (CVE:FF), Golden Star Resources (TSE:GSC), Argonaut Gold (TSE:AR), Gold Standard Ventures (CVE:GSV), Teranga Gold (TSE:TGZ), Great Panther (TSE:GPR), Primero Mining (TSE:P) and Dundee Precious Metals (TSE:DPM).
Paradoxically though, the short-term weakness created by the GDXJ rebalance may actually represent a buying opportunity for canny investors, since all this downward pressure has very little to do with fundamentals.
Pick your company, and watch for a bounce. Especially now that gold is moving upwards once more.