The Race to Ditch South African Gold

To the list of those avoiding exposure to gold mines within the nation that once dominated the world's production of the metal, we may soon have occasion to add some of the South African producers themselves.

Gold Fields (NYSE: GFI  ) delivered a sobering assessment of its South African operations within its release of third-quarter earnings this week. The miner suffered 35,000 ounces of lost gold production relating to the substantial labor unrest that gripped the nation's mining industry over recent months, and another 30,000 ounces stemming from the tragic underground fire at the KDC West mine in July that claimed five lives.

As consolidated production recoiled to 811,000 gold-equivalent ounces at an unsightly cash cost of $916 per ounce, Gold Fields' quarterly earnings contracted by 42% from the prior-year period to just $171 million. Exacerbated by rising energy costs, and the labor concessions granted to bring the striking miners back to work, the cumulative headwinds confronting Gold Fields and its South African peers have grown so substantial that major restructurings appear unavoidable. To my knowledge, Gold Fields is the first to state the case explicitly, citing an increasing risk of "a significant restructuring of our South African operations in the near to medium term."

The way I see it, such restructuring initiatives could take any number of potential forms, including temporary idlings, permanent shaft closures, or even sales of assets between the country's major operators. They could also take the form of simple spin-offs of South African operations, much the way Barrick Gold (NYSE: ABX  ) moved to isolate its operations on the continent with the launch of African Barrick Gold in 2010. If Gold Fields were to take the latter route, offering investors a vehicle with exposure to South African operations either removed or substantially reduced, I could become interested in the stock in a hurry!

As a gold investor, I've avoided exposure to South African operations outright. I even tried to warn hedge fund manager John Paulson back in 2009 that AngloGold Ashanti (NYSE: AU  ) might not be the best choice for a gold mining stock. The most hopeful call I could muster was "a Foolish thumbs-sideways," and sideways is precisely where that stock has drifted since that time. Had Paulson opted instead for Yamana Gold (NYSE: AUY  ) or Royal Gold (Nasdaq: RGLD  ) -- two stocks that earned my enthusiastic thumbs-up during that same time frame -- his investors would have enjoyed some truly golden returns. The following chart pits the performance of the two principle South African gold producers against my preferred selections, from May of 2009 through the present.

Although Paulson slashed his holding in Gold Fields by 63% during the third quarter, AngloGold Ashanti remains his fund's second-largest equity holding behind a monster position in the SPDR Gold Trust (NYSEMKT: GLD  ) . For my part, I remain skittish toward miners with substantial exposure to operations in South Africa, though I would welcome with vigor any restructuring that results in these stocks being freed from this heavy weight around their necks. I have considerable admiration for Gold Fields CEO Nick Holland and AngloGold CEO Mark Cutifani, and a deep appreciation for the quality of their respective asset portfolios outside of this most problematic jurisdiction.

In the meantime, investors seeking reliable outperformance from gold miners operating in decidedly less challenging jurisdictions may wish to examine my latest research report outlining a phenomenal investment opportunity in the shares of major miner Goldcorp (NYSE: GG  ) . Click here to get your copy of my report today, and keep track of all my ongoing coverage of gold and silver miners by bookmarking my article list or following me on Twitter.


Read/Post Comments (7) | Recommend This Article (12)

Comments from our Foolish Readers

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  • Report this Comment On November 28, 2012, at 7:24 PM, charliedawgg wrote:

    Hey Sinch,

    Gold Fields was rumored to be one of the parties interested in acquiring Great Basin Gold. GBG was apparently among the first to fall victim to the "cumulative headwinds" that you mentioned above. They haven't traded in almost two months. At this point, do GBG shares represent anything other than an expensive lesson? Thanxx as always.

  • Report this Comment On November 29, 2012, at 12:31 PM, Noneleft01 wrote:

    I took your advice (which made a lot of sense to me) on GG and also CGR, and gradually built large positions on declining prices for both of them over many months.

    But I have to say, right now they are both making my portfolio look very sick indeed - especially CGR. Do you still recommend CGR and do you still see future elevated prices for this miner?

    What is it about the changing situation which has resulted in such a relentless medium term collapse in the CGR share price - are there company specific issues or is it simply that sector or macro factors are hitting them harder than most others for some reason?

  • Report this Comment On November 30, 2012, at 2:59 PM, gaminsky wrote:

    I have the same questions and concerns as you, Noneleft01 re: CGR.

  • Report this Comment On December 01, 2012, at 9:03 AM, XMFSinchiruna wrote:

    Noneleft01,

    CGR is my fourth largest equity position, and I too have been adding shares into weakness to improve my cost basis.

    CGR's chart matches the general pattern for juniors over the course of the recent correction, the mini-rally leading up to QE3, and the renewed weakness since. I continue to monitor the company's activities very closely, and I have not seen any causes for concern. They are making investments in their future, and capital expenditures are being given a very short leash in the current market environment.

    I'm a buyer of the shares at this level. I know the trailing drop has been tough to watch, but the majority of my junior holdings have suffered similarly in recent months. Did you see the corporate update this week? Very encouraging.

  • Report this Comment On December 01, 2012, at 9:07 AM, XMFSinchiruna wrote:

    Goldcorp's trailing weakness adds the impact of the near-term hiccups

    http://www.fool.com/investing/general/2012/10/25/profit-from...

    Also, I've just authored a comprehensive research report on Goldcorp, which I would encourage Fools to access using the link provided in the article above.

  • Report this Comment On December 01, 2012, at 9:15 AM, XMFSinchiruna wrote:

    P.S. As the printing press continues to run, I believe a major rally in the gold price is imminent. Capital flows in this sector run in extremes, so both the rallies and the corrections unfold in dramatic fashion.

  • Report this Comment On December 03, 2012, at 9:16 AM, gaminsky wrote:

    Thank you, Sinch.

    I did read your response to me on the First Majestic article and really appreciate it.

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