Three years ago, we discovered a small gold miner pulling metal out of the ground at an all-in cost of roughly $1,000 per ounce.
At the time, gold was trading around $1,800, so that low cost of production really mattered for the company’s profit margin.
Even at $1800 gold, the company was profitable, debt-free, and sitting on a growing pile of cash.
So after completing our exhaustive research, we concluded the company had tremendous potential. The macro backdrop was obvious— the US government was running $2 trillion annual deficits, the Treasury Department was increasingly weaponizing the dollar, and Congress showed zero interest in fixing anything.
Risk-averse foreign central banks who were looking to diversify some of their financial reserves away from US dollars had few alternatives… except for gold. We anticipated a major gold boom, and we felt strongly that this company would benefit.
Since then, our “why gold” thesis has only become stronger. The national debt continues surging higher, Congress appears even less competent than before, and the rest of the world is rapidly losing confidence.
That’s why gold roughly tripled over the past three years— primarily due to central banks around the world buying it by the metric ton.
But while gold tripled, our miner’s share price shot up 5x.
Here’s the crazy part: the stock is actually cheaper than when we first found it.
This isn’t a riddle; the idea is that the company is cheaper on a valuation basis, i.e. it’s price/earnings ratio is lower (hence “cheaper”) than when we first discovered it. This is what happens when profits grow faster than the share price.
Now, the Price/Earnings ratio can be a bit of a blunt instrument… which is why we tend to favor an Enterprise Value to Free Cash Flow (EV/FCF) metric.
If you’re not familiar, Enterprise Value nets out cash and debt from a company’s market capitalization, while Free Cash Flow reduces accounting trickery that can impact a company’s bottom line.
In this way, EV/FCF is a better proxy than Price/Earnings, because it tells us how much we’re truly paying for a business relative to the actual cash it has available to pay dividends to shareholders.
Initially, our gold miner’s Enterprise Value to Free Cash Flow was just 4x. That’s an incredible bargain.
Since then, the stock price has surged. Profits have climbed even more. So, incredibly, the Enterprise Value to Free Cash Flow has become even cheaper— to less than 3x.
Again, this is a business with no debt AND pays a dividend. The absurd part is that, when gold prices pulled back from the $5,600 record high, investors actually sold the stock.
Amazing. People actually said, “I don’t want to own this wildly profitable, debt-free, dividend-paying business. . .”
Even at $4,700 gold, Free Cash Flow is still far higher than what was factored into the company’s guidance, i.e. they’re earning WAY more than projected. And yet people panicked.
We bought more.
If you’re interested in hearing more about this, we have found dozens of similar stories for subscribers of our investment research newsletter, Strategic Assets.
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