L1 Capital launching new gold fund to capitalise on "huge anomaly"

The last 12 months have been an almost perfect backdrop for gold and, in particular, Aussie dollar gold prices. The groundwork for gold’s recent ascension began back in 2022, when its previously strong inverse correlation with real interest rates - defined as the risk-free rate on US government 10-year bonds minus the inflation rate - broke down at the onset of the Ukraine War. While real interest rates have since increased, gold has also shot higher.

Add to the mix increasing volatility, which has driven traditional safe-haven buying, coupled with a weaker Aussie dollar, and both the USD and AUD gold prices have surged to record highs.

While the USD gold price has rallied 45% this year, gold equities have lagged, implying a lack of belief that the earnings boom will come for investors. L1 Capital is firmly of the view that industry margins are set to surge and the gold price has structurally moved higher, due to a supportive combination of large-scale central bank buying, heightened geopolitical instability and exponential growth in US Federal debt levels, encouraging investors to diversify away from the USD and towards gold.

I recently sat down with Joint Managing Director & Co-Chief Investment Officer, Raphael Lamm, to discuss the opportunity.

Why launch the fund now?

After such a strong run, an obvious question is why launch the L1 Capital Gold Fund now? As Lamm explains, “We think that the best upside is very much in front of us in gold stocks, particularly in the mid-cap space of the gold sector globally.”

A key reason for the confidence is that central banks are increasingly buying gold, especially in emerging markets. Historically, Western central banks have held large gold reserves, while emerging markets, particularly China, have had minimal exposure - but this is changing.

As Lamm notes, “They’ve come to the realisation, gradually over time, but specifically after the Russian invasion of Ukraine and the US freeze on their assets, to diversify their reserves away from fiat currencies, which means allocating a greater proportion of assets to gold.

We believe that’s going to be an enduring dynamic and a very positive factor for the gold price over the medium term,” says Lamm.

Why invest in gold miners instead of gold itself?

While investing directly in gold is an option for those who want exposure and are willing to weather the volatility and concentration risk, L1 Capital sees greater potential for upside capture and downside protection in gold mining equities. Lamm highlights a closing of the valuation gap as the key differentiator.

“On consensus estimates, most mid-cap gold stocks today are trading on around 0.7 times NAV using a long-term gold price of around $2,300 per ounce, or 0.5 times NAV using a live gold price which is trading around $2,900.”

“Our expectation is that companies in this space are reaching an inflection point in delivering volumes, costs and cash flow, which they haven't historically done. The resulting cash flow generation is what will drive the closing of the valuation gap,” notes Lamm.

L1 Capital’s approach isn’t just about picking stocks, however, it’s about recognising deep-value opportunities.

“It’s not so often that we see huge anomalies in the share prices across a whole sector compared to our internal valuations,” says Lamm.

He draws parallels to past success in copper investments, where the L1 Capital investment team identified undervalued mid-tier copper miners trading at exceptionally low P/E multiples. As those stocks appreciated and valuations normalised, the team reduced exposure. Now, they see a similar setup in gold, with earnings from mid cap gold miners set to rise significantly.

Why gold miners haven’t kept up with gold’s rise

Over the last 12-24 months, the sector has faced a confluence of low credibility due to frequently missed targets and underestimated costs, with company-specific issues impacting delivery. These have been exacerbated by large gold ETFs selling off major gold miners, putting yet further pressure on stock prices and resulting in ~US$1.8b in outflows from gold ETFs globally.

The silver lining to this gold story is that many quality gold equities names are now extremely cheap and ready for a recovery.

Key drivers for the turnaround in gold miners’ valuations

One major reason Lamm believes in the current potential of gold miners is cost stabilisation. Inflationary pressures on mining costs have moderated, setting the stage for stronger earnings.

“We think that costs are very much rebased after about four years of high inflation rolling off,” Lamm states.

Additionally, gold miners are finally delivering on operational expectations.

“We think companies have become a bit more astute in terms of correctly setting expectations in the market. Those two factors should drive strong delivery versus expectations over the next year or two,” adds Lamm.

Another significant aspect is near term production growth. L1 Capital has identified several companies where they expect a multitude of factors to coalesce to drive increased earnings.

“Quite a few of our companies have new projects coming online, project expansions and cost-out programs, which would lead to a serious step change in free cash flow, even under a flat gold price scenario.”

Then there is the surge in the gold price - remember, rising USD gold prices have been benefitting gold producers globally, but with the AUD falling, Australian gold producers have had a double boost.

“You have to put it in the context of an Aussie dollar gold price that’s basically doubled over the last couple of years,” says Lamm.

He further illustrates, “Say 3, 4, 5 years ago, a good Aussie gold miner might’ve been able to produce an ounce at an all-in sustaining cost of around $1,300 Aussie an ounce. That’s increased from $1,300 to something like $2,000 Aussie an ounce, but at the same time, the Aussie dollar gold price has gone from $2,500 to $4,500. So you’re seeing something like a doubling of margins there or thereabouts for many companies within the gold mining space.”

Despite this, stock prices are not yet accounting for the improving fundamentals. Lamm believes this will change as miners start generating higher cash flows.

“We think as the companies deliver over the next few quarters, there’ll be a major revaluation based on their long-term prospects.”

Key positions: Westgold and Eldorado

L1 Capital’s gold portfolio includes a mix of Australian and international miners, with well over half of the holdings in offshore names. Two standout picks Lamm nominates are Westgold (ASX: WGX) and Eldorado (TSX: ELD).

Regarding Westgold, Lamm states: “It’s trading at a really low earnings multiple versus the sector and versus history - around half the sector multiple, around a six times P/E. They’ve currently got roughly zero net debt, but we see a rapid buildup in the cash balance over the coming year as CapEx starts to level out.”

Westgold is also expanding production, which should significantly boost free cash flow, according to Lamm.

“We think that they’re going to annualise around 400,000 ounces of gold production in the June quarter, which will set a really good base for FY26 to deliver a step change in earnings.”

For Canadian-listed company Eldorado, Lamm highlights its strong asset base and ongoing expansion: “They’re at a major turning point in their corporate journey over the next six to 12 months.” 

With operations in Canada, Turkey, and Greece, Eldorado benefits from geographic diversification and multiple growth catalysts. Together with its strong balance sheet and good forward momentum in a transformational gold and copper project, the L1 Captial team believes Eldorado is poised for a material re-rating.

Managing risk with hedging

While L1 Capital is bullish on gold and has been for some time, Lamm recognises the metal’s volatility and will use the index shorting and risk management techniques developed over the last 10 years in their flagship L1 Capital Long Short Fund in case gold prices come off.

To mitigate risks, L1 Capital can take short positions in gold futures and overpriced, typically large cap, gold producers while maintaining 8-12 long positions in leading mid-cap gold equities. This is designed to enable the fund to capture the upside in miners while protecting against potential declines in the gold price.

Gold’s role as a portfolio diversifier

Beyond the potential returns on offer, gold serves as a hedge against market instability.

“People talk about gold as a de-risker and having a low correlation with fixed income and equity markets, and that’s all true,” Lamm notes. More importantly, however, he states that “Gold has actually outperformed most asset classes over the last 20 years and gold equities have a correlation of around 0.8 to the gold price over that period.”

Please note that the fund is a closed-end, three-year structure with a minimum investment of $100,000. It is available to wholesale investors only. Subscriptions close 31 March 2025.