Despite gold’s strong performance over the past year, L1 Capital believes there is still significant upside—especially in undervalued gold miners.
Over the last 12 months, a favorable environment has propelled gold prices, particularly in Australian dollars. The initial catalyst was the 2022 breakdown of gold’s traditional inverse correlation with real interest rates following the onset of the Ukraine War. Since then, even as real interest rates climbed, gold prices have continued to rise.
Additional tailwinds include increased volatility, which has spurred safe-haven buying, and a weaker Australian dollar, driving both USD and AUD gold prices to record highs. However, gold equities have not kept pace, reflecting investor skepticism about the sustainability of the sector’s earnings growth.
L1 Capital sees a structural shift in gold’s valuation, fueled by large-scale central bank buying, rising geopolitical instability, and surging U.S. federal debt levels. These factors, they argue, are pushing investors to seek refuge in gold and away from the U.S. dollar.
Why Launch the Fund Now?
Given gold’s recent rally, some may question the timing of L1 Capital’s new Gold Fund. However, Joint Managing Director & Co-Chief Investment Officer Raphael Lamm believes the best opportunities are still ahead, particularly in mid-cap gold stocks.
A key driver of L1 Capital’s bullish outlook is the shift in central bank behavior, particularly in emerging markets. Traditionally, Western central banks have held significant gold reserves, whereas emerging economies, such as China, had minimal exposure. This is now changing, largely in response to geopolitical risks and currency diversification strategies.
“The realization has set in—especially after the Russian asset freeze following the Ukraine invasion—that they need to diversify their reserves away from fiat currencies, leading to increased allocations to gold,” Lamm explains.
While direct gold investment is an option, L1 Capital sees greater upside and downside protection in gold mining equities. Lamm emphasizes that many mid-cap miners remain significantly undervalued.
“Most mid-cap gold stocks today are trading at around 0.7 times NAV using a long-term gold price of $2,300 per ounce, or just 0.5 times NAV using the current live gold price of around $2,900,” he notes.
Lamm expects these companies to reach an inflection point, delivering stronger production volumes, cost efficiencies, and cash flow—factors that should drive a revaluation of the sector.
Gold Miners Lagging Behind Gold’s Surge
Over the past two years, the gold mining sector has struggled with credibility issues due to missed production targets, cost overruns, and company-specific setbacks. Additionally, large gold ETFs have been selling off major gold miners, creating approximately $1.8 billion in outflows and further pressuring stock prices.
As a result, many quality gold miners are now trading at significant discounts, setting the stage for a recovery.
Key Drivers for a Turnaround
One of the main reasons L1 Capital sees upside in gold miners is cost stabilization. Inflationary pressures on mining costs have begun to ease, improving earnings potential.
“We believe mining costs have now rebased after four years of high inflation,” Lamm says.
Additionally, gold miners are becoming more disciplined in setting and meeting market expectations.
“We’re seeing companies take a more strategic approach to guidance, which should lead to strong performance versus expectations over the next 12 to 24 months,” he adds.
Production growth is another catalyst. L1 Capital has identified several miners with new projects, expansions, and cost-reduction initiatives that could drive a significant increase in free cash flow—even if gold prices remain flat.
Furthermore, the rising USD gold price, combined with a weaker Australian dollar, has provided an extra boost to Australian gold producers.
“Australian gold miners are benefiting from an Aussie dollar gold price that has nearly doubled in recent years,” Lamm explains.
For context, he notes that while all-in sustaining costs have risen from $1,300 to around $2,000 per ounce, the Australian dollar gold price has climbed from $2,500 to $4,500, effectively doubling profit margins.
Despite these tailwinds, gold miners’ stock prices have not yet fully reflected the improving fundamentals. Lamm expects this to change as companies generate stronger cash flows.
“As miners deliver solid results over the coming quarters, we anticipate a major revaluation,” he asserts.
Key Portfolio Holdings: Westgold & Eldorado
L1 Capital’s gold portfolio comprises a mix of Australian and international miners, with more than half of its holdings in offshore names. Two standout investments are Westgold (ASX: WGX) and Eldorado (TSX: ELD).
Westgold, according to Lamm, trades at a deeply discounted multiple compared to the sector—roughly six times P/E, about half the industry average. The company has near-zero net debt, and its cash balance is expected to rise significantly as capital expenditures stabilize.
“We believe Westgold is on track to annualize around 400,000 ounces of gold production in the June quarter, providing a solid foundation for earnings growth in FY26,” Lamm says.
Eldorado, a Canadian-listed miner, is also at a critical juncture, with significant production growth expected from its operations in Canada, Turkey, and Greece. Lamm highlights its diversified asset base and transformative gold and copper projects as key drivers for a potential re-rating.
Managing Risk Through Hedging
While bullish on gold, L1 Capital remains cognizant of its volatility. To mitigate downside risks, the firm employs hedging strategies, including shorting gold futures and overvalued large-cap gold producers while maintaining long positions in mid-cap miners.
By doing so, the fund aims to capture the upside in gold equities while protecting against price corrections.
Gold as a Portfolio Diversifier
Beyond its return potential, gold serves as a hedge against market uncertainty.
“Gold is often seen as a de-risking asset with low correlation to fixed income and equity markets—and that’s true,” Lamm notes. “But more importantly, gold has outperformed most asset classes over the past 20 years, and gold equities have maintained a strong correlation of around 0.8 to the gold price over that period.”
Fund Details & Investor Eligibility
The L1 Capital Gold Fund is a closed-end, three-year structure with a minimum investment requirement of $100,000. It is available exclusively to wholesale investors, with subscriptions closing on March 31, 2025.
Related topics:
Zespri Expands ZAG Innovation Fund to Drive Sustainable Kiwifruit Future
Hedge Funds Trim China Stock Positions for Fourth Consecutive Week as DeepSeek Optimism Dims
Manulife Investments Launches Global Semiconductor Fund in Hong Kong
