KOZA ANADOLU METAL (Company Update - BUY (maintained), 41% upside)

KOZA ANADOLU METAL <KOZAA TI>
 

Company Update

 

Recommendation: BUY (maintained)

Morphing into a true mining company

·     Details of Konakli Copper project are out… The first phase of the exploration study (started in May 2011) is now completed with 16 drills (total of 10,711 meters). The “inferred” resources are 518mt with a grade of 0.23% (cut-off grade is 0.1% at copper price of US$3.25/lb (US$7,165/ton) and gold price of US$1,550/ton), according to JORC standards. Although there is valuable gold side product, the copper grade level is low. Koza Anadolu Metal will continue exploration at an accelerated pace in 2013. The start of the works for EIA (Environmental Impact Assessment) report, feasibility studies and construction of the facility are planned in 2014. It may take 3-4 years for the processing to begin in the field.

 

·    Following the announcement of the Konakli news, there has been some profit taking in shares… This was the long-awaited catalyst for Koza Anadolu and we observed some profit taking after the announcement on Friday last week. The weak grade data and accordingly possible higher cash cost expectations are the major reasons, in our view. In addition, the lack of short term news-flow expectation is the other main reason.

 

·    Including Konakli with rough estimates, we see a 41% upside potential in Koza Anadolu Metal… With limited information at hand (capex, production volume, cash costs and final reserve figure of the project have not been available, yet), we roughly value Konakli at US$578mn (KOZAA owns 60% of the project). Note that in the valuation of Koza Anadolu Metal, we apply 30% discount to the value coming from the indirect 44.6% stake in the gold miner Koza Altin <KOZAL TI>. Currently, investors gain exposure to Koza Anadolu Metal’s copper operations for free as its Mcap is even lower than the value from Koza Altin at 30% discount. We believe that Koza Anadolu Metal is a promising opportunity for long term investors, but the expected price appreciation may not take place in the short term due to the lack of short term expected news-flow.

·    Risks… Fluctuations in gold/copper prices/grades, cash costs, execution risk and legal cases are major downside risks. The Government’s investment incentives for mining sector and KOZAA’s other copper projects are the main upside risks.

 

 

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