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 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.