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.
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.