The bull market in gold has been tremendous over the past few months, with gold hitting $2500 an ounce. People remain disappointed as most miners are underperforming, on a scale that many couldn’t have imagined. At the same time interesting opportunities open up in companies and currencies related to the gold price. In this piece we will dive into some of these opportunities and I will share my strategy to play this market.
1| General ways to play Gold
The fundamental thesis on gold probably doesn’t have to be explained, as everyone’s Twitter/X feed is irregularly filled with people explaining their gold thesis over and over again. Therefore this article is intended to be a playbook to bet on gold whenever one feels the need to go long the metal.
The most obvious way is obviously to just buy physical gold & silver. Both will help you when there is social unrest or some catastrophic event in your country. Bet let’s not paint the world to dark. What if I just want to trade gold? Well in this case, physical gold isn’t the best option as you (i) don’t want to store it, and (ii) will have to pay a premium for physical gold or silver. You can also just buy gold futures if you want the most direct way to effortlessly trade the commodity. I however have 3 other ways, that we will dive into in this article.
2| Polish Government Bonds
I have written extensively about Poland’s economic growth over the past months, so I won’t repeat it again. If you want to read more about Poland, you can check out my deep dive on Poland and my deep dive on Poland’s largest e-commerce company. The Polish Złoty (PLN) is Poland’s currency, even though the country is part of the EU. Currently there is a great opportunity to buy polish government bonds at fixed interest rates, that will pay you handsomely over the coming years (more on this later). At the same time, there is a correlation between the PLN (green) and gold (purple).
While the PLN doesn’t move with the same intensity as gold, the currency tends to move into the same direction as the metal. The question that arises is obviously why? Well, Poland has been one of the biggest Gold buyers in the world YTD and the Polish Central Bank (PZB) has announced plans to hold 20% of its reserves in Gold. For comparison, the FED holds roughly 7.5% of its reserves in Gold. As Poland ramped up Gold purchases, the country become one of the largest buyers of Gold globally in H1 2024, surpassing even India. This comes after the country became the 2nd biggest gold buyer in the world in 2023. Below we can see a chart of the polish gold reserves compared to the UK’s gold reserves.
If we look at the long term chart of the PLN, we can see that there has been a significant change in the trend of the PLN. From its bottom in 2022, the PLN has moved significantly higher and entered a bull market. The reason for the weakness in 2022 was the Ukraine war, which resulted in fearful investors selling Eastern European assets.
A weaker currency helped exports to grow even faster, lifting Poland’s economy from “emerging” to “developed” status. Over the long term, Poland will continue to grow its economy & exports quickly. Simultaneously, the country’s Central Bank is building large gold reserves. Currently polish government bonds pay interest rates ranging from 5-7% depending on the duration and type of bond. On this website you can always find the all the currently available bonds from the Republic of Poland. The website and process of buying bonds is like an auction, where you will be able to buy specific bonds each month. The details vary slightly from month to months (due to macro). Below we can see the details of one polish bond that has a duration of 3 years, pays a fixed interest rate of 5.95% and the interest gets compounded till maturity.
There are also offers for inflation linked bonds that will typically pay up to 7% interest in the first year. Following that you will receive the official polish inflation rate +2%. If you were to believe that inflation will go up a lot in Poland, you could buy those bonds and hedge against this scenario. Importantly, people without a polish bank account won’t be able to directly access new bond offering as of my knowledge. Therefore if one is interested in polish bonds, one has to either open a bank account there or buy bonds via their broker. Receiving a 5% coupon with already issued bonds shouldn’t be a problem.
I personally like the bond I shared above and bought some last month, as they were yielding 6.2% p.a. fixed, with the interest being compounded for 3 years. This isn’t a highly speculative position, but rather a safe investment without volatility that can be used as a way to allocate cash. After 3 years I will receive 20% more PLN than I initially invested, and with a strong economy, decent debt levels and a lot of gold reserves, the PLN is poised to outperform over the long run. In addition, this move is a diversification opportunity, as I won’t be entirely dependent on the USD or EUR. With the recent talk about a USD devaluation, it makes sense to diversify some of our exposure away from the USD.
3| Lunding Gold
Apart from just playing is defensive, we can also play a bit more offense by looking at equities in the gold sector. Gold miners have been a destruction of shareholder value over the past decade and I haven’t even started with junior miners. The fact that miners have to dilute shareholders and have problems with profitability with gold hitting $2500 is ridiculous and to be honest, people would have called you crazy if you told them about this a few years ago. But here we are! Only few companies have performed well and one of them is Lunding Gold. The company, part of the Lundin empire, has outperformed Gold and is one of the best companies in the industry.
While the stock isn’t deep value, it’s high quality. The company has low AISC (all in sustaining costs), great assets, strong FCF generation, a great management team and no net debt. The current dividend yield stands at 4.2% and the payout ratio stands at 50%. So if you are interested in miners to play gold, take a look Lundin Gold from time to time.
4| MLG Oz
MLG Oz is a small cap with a market cap of ~AU$100 million. It’s not a miner, but a company in the trucking and haulage business. From its founding 22 years ago, the company has grown to have contracts/relationships with the largest gold miners in Australia. As of the last quarter roughly 86.6% of revenues come from the gold division, with the other 13.4% coming mainly from Iron Ore and other metals.
As we have entered a high gold price regime, mines that previously weren’t economically feasible come online. Main profiteers will be the companies selling picks and shovels to the gold diggers. MLG Oz has a track record of growth, is profitable and has great future prospects in the current state of the market. The current valuation doesn’t seem to reflect the value of the company properly and I’m considering a long.
MLG has grown revenues at a 28.7% CAGR over the past 5 years with 24.9% growth last year.
The company is heavily investing into growth and is reducing debt, while recovering to margins before the pandemic. An undersupplied labor market coupled with inflationary pressures resulted in a crack down of margins for MLG. However, over the past months MLG is finding back to its glory, but this time with much higher revenues. With CAPEX of AU$49.6 million, the company is spending 10.5% of revenues on CAPEX. I have to note though, that most of the CAPEX is going into growth. Of the AU$49.6 million CAPEX, just AU$19 million went towards sustaining CAPEX.
Last year CAPEX amounted to AU$38 million, or 10.1% of Revenue. The main growth driver of CAPEX has been CAPEX towards growth, with sustaining CAPEX being affectively flat from last year. The company is guiding for continued growth, as the business environment for them is great supported by all time high Gold prices.
Debt is one of the key factors that determines whether a stock from a cyclical industry is worth to invest in. Lundin Gold has no net debt, which is fantastic to see. MLG Oz has debt, but they’re deleveraging and most of their debt is fixed and asset backed. As of June 30th 2024, the company has net debt (including leases) of AU$56.6 million, while MLG has available liquidity of AU$25.7 million. The company’s net assets continue to grow and currently stand at AU$130m, or 30% above the current market cap. Of course, these numbers are far from perfect, but it gives an indication of the value of MLG’s assets.
This leads as to the valuation of MLG. The stock is valued at a P/E of 10, EV/EBIT of 8 and EV/EBITDA of 3 on trailing earnings. The company is cash flow positive, even though MLG is in a high CAPEX phase. If this snowball can get bigger and bigger (revenue), while margins recover more, this company can produce huge amounts of cash flow a few years from now. If revenues grow to AU$550 million (17% growth), with a 13% EBITDA margin (11.8% currently) and CAPEX of AU$41.5 million, MLG could produce AU$30 million FCF in 2-3 years. The current market cap stands at just AU$100 million! With deleveraging over the same time, this could become a multi bagger. Risks include potentially falling gold prices and labour shortages, that would affect margins.
5| Summary & Conclusion
In summary, there are many ways to play gold, but many have underperformed massively over the past decade. Physical gold & silver serve as a protection of wealth, not as a trade to get rich. My favorite ways to play gold are polish government bonds, as they pay roughly 6% interest rates, while the PLN is likely going to strengthen over the long term.
In terms of stocks, Lundin Gold is one of the best miners globally, lead by a great managment team. The company has low AISC and zero net debt. A more indirect way is MLG Oz, which should profit from the gold mining boom in Australia. The company is well run and is valued at what I consider to be a steep discount to its intrinsic value. I personally have allocated some of my cash into polish government bonds, as a 6.2% coupon p.a. was too good to pass. I continue to watch MLG & Lundin Gold and will possibly allocate some of my remaining cash towards the sector, when the timing feels good.
Yours sincerely,
MODERN INVESTING