Lie Down in Golden Fields

South African gold mining companies: You were dead to me.

I'll be the first to admit it. I had written off South Africa's gold miners as relatively unattractive choices within a wide world of heavy competition. And let's face it, the challenges there are very real.

South African gold miners face nationwide electricity shortfalls; an aging mining industry that's pushing the world's deepest gold mines deeper still; a troubling miner fatality rate; and currency translation woes from a strong South African rand. These are no easy obstacles to overcome, and still, the nation's overall output from maturing assets continues to decline. I have virtually ignored Harmony Gold Mining (NYSE: HMY), and yawned over guru John Paulson's pick of AngloGold Ashanti (NYSE: AU).

Despite all of those challenges, however, South Africa still sits atop a sizeable chunk of the world's estimated gold resources. It would be downright foolhardy to turn a blind eye to a miner like Gold Fields (NYSE: GFI), which boasts 81 million ounces of reserves within a jaw-dropping combined resource (inclusive of reserves) of 271 million ounces. The unproven portion of that resource potential is greater than that of top producers Barrick Gold (NYSE: ABX) and Newmont Mining (NYSE: NEM), justifying an inward-focused growth strategy that we'll explore below.

Although still comfortably profitable at these gold prices, Gold Fields joins most South African miners in reporting elevated operating costs relative to global peers. The company's second fiscal quarter of 2010 saw costs rise 5% to $613 per ounce, on further strengthening of the rand relative to the dollar. With golden child Goldcorp (NYSE: GG) extracting the metal for less than $300 per ounce, those costs are enough to scare away many margin-hungry investors. Peering into the company's comprehensive cost structure, the pain worsens with an all-in cost of $900 per ounce. I applaud Gold Fields for divulging this important cost metric, since no other mining company that I track does so.

Even after an aggressive expansion program to raise annual production at the South Deep mine, from a current run-rate of 300,000 ounces to 750,000 ounces by 2015, Gold Fields envisions a lengthy 45-year mine life that will form the new long-term keystone of its South African operations. As with two of the company's maturing mines operating at depths of more than two miles, the path to South Deep's treasure leads directly downward.

The key to Gold Fields' future, meanwhile, involves a more lateral expansion. The company expects to collect 60% of production from outside of South Africa within five years. With no intention of conducting "M&A heroics," Gold Fields has mapped an organic growth strategy focused on conversion of existing prospects and resources into proven reserves and producing assets. With new discoveries in Peru and Mali, including the promising Chucapaca (no, not Chupacabra) joint venture with Peruvian miner Buenaventura (NYSE: BVN), Gold Fields may be the only major miner that does not have to go hunting for acquisitions to grow production for the foreseeable future. With a scale of resource potential that counteracts the annoyance of elevated operating costs, I am returning my gaze to this compelling member of the gold patch. 

Please be sure to share your views in the comments section (and vote in our Motley Poll) below.