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Strike Gold After the Gold Fields Limited (GFI) Spinout

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The much-anticipated firewall separating major gold miner Gold Fields Limited (NYSE:GFI) from two of its more challenging South African mining operations has now been erected.

Once the NYSE-listed ADR shares adjust to reflect the restructuring — with a move likely approximating the 13.5% drop recorded in the company’s primary Johannesburg-listed stock Monday — I will abruptly reclassify the new Gold Fields as nearly the most attractive-looking stock among the world’s major gold producers. Permit me to share the basic premise for my newfound bullish outlook.

Gold Fields Limited (ADR) (NYSE:GFI)Gold Fields advised investors to expect “a significant restructuring” last November, after a widespread labor uprising in South Africa combined with a tragic underground fire at the KDC mine to severely impact production. At the time, I indicated that I would “become interested in the stock in a hurry” if that restructuring took the form it has now taken: a share-based spinout of troubled South African assets that had previously kept me at arm’s length. By isolating two of the company’s deeper, higher-cost operations into a new entity called Sibanye Gold Limited American Depositary Shares (NYSE:SBGL*) — for which an ADR listing will begin trading shortly on the New York Stock Exchange under the ticker symbol “SBGL” — Gold Fields will have set the stage for strong operating performance that will reward long-term shareholders with a generous dividend policy.

In its bid to lead the gold mining industry’s much-needed “paradigm shift” — shunning undisciplined production growth in favor of carefully vetted high-margin growth — Gold Fields has plenty of room to deliver. The miner has long-suffered one of the highest cost structures among its peers, while providing more transparency than most with its long-standing practice of publishing all-in costs of production. Lower-cost rival Goldcorp Inc. (NYSE:GG) — which will remain my No. 1 pick among the major gold producers — began offering a comparable cost metric only recently. If Gold Fields can deliver on its target of raising its all-in cost margin from 15% to 25%, chiefly by prioritizing brownfield expansions and realizing the impressive potential of its expanding South Deep project, I believe these newly “unbundled” Gold Fields shares will flourish.

Paired with the company’s stated commitment to return between 25% and 35% of normalized earnings to shareholders as dividends, I believe the new Gold Fields will “woo back investors into the gold stocks,” just as CEO Nick Holland has set out to do. Barrick Gold Corporation (NYSE:ABX)‘s similar move to create a separate entity for its African assets back in 2010 didn’t exactly spark a rally. The world’s largest gold miner joins the rest of the industry in a sinking ship of near-52-week lows, and also as the subject of widespread investor disgust and disillusionment. The industry benchmark Market Vectors Gold Miners Index (INDEXNYSEGIS:GMI) is languishing accordingly near its own multiyear low, but I maintain that a powerful reversal of fortune awaits for those miners who learn from their failures and chart a new course forward.

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