TURKEY - KOZAA - Company Update: Renewed Glitter; Ratings Upgraded to BUY, OUTPERFORM

TURKEY – KOZAA – Company Update: Renewed Glitter; Ratings Upgraded to BUY, OUTPERFORM

BUY (L/T) OUTPERFORM (S/T)

We raise our short-/long-term recommendations for Koza Anadolu to BUY/OUTPERFORM from HOLD/MARKETPERFORM, following the Company’s preliminary resource base disclosure on Friday, Dec 21, for its Konak copper project, a JV with Teck Resources. Considering the 1.174mn-tonne copper and 1.148mn-ounce gold content announced by the Company for Konak -- the outcome of 16 drillings conducted since May’12 -- we revise our target price up by 67% to TRL8.0/share, which points to 48% upside potential. Note that the Company plans to drill more than 100 holes within 2013-2014, which might reveal an even larger resource potential. The reserve base is likely to be determined once drilling is completed in 1H14. 

Initial valuation of US$367mn for the copper project -- The Company announced 518K tonnes of inferred resource base, 0.23% Cu (copper) and 0.07 Au (gold) grade,

corresponding to 1.174mn tonnes of copper and 1.148mn ounces of gold content, based on the study conducted by SRK Consulting. Although the average copper grade is lower than our initial expectation of 0.5% Cu, we still see notable value from the project. Given our preliminary DCF valuation based on the inferred resource base and US$350mn investment, we attach US$367mn value to the project. In our valuation, we incorporated the 60% stake owned by KOZAA (the rest owned by Teck Resources), implying US$220mn value. Yet, further information on the reserve potential, which should be available by 2014, as well as the investment size, would be necessary for a more elaborate study.

Target price upped by 67% to TRL8.0/share -- We scale back the discount to target NAV from 45% to 20%, as the uncertainty surrounding KOZAA’s copper project has mostly ended. The 20% discount to target NAV is justified by the following: i) Reserve details of the inferred resource base, which would reveal the feasible mine potential, have not been disclosed; ii) KOZAA still holds its loss making media assets, for which we apply a 30% discount to book values.

Contribution from the copper mine -- KOZAA’s strong ytd outperformance of 112% notwithstanding, we believe growth prospects associated with the copper mine are yet to reflect fully on the stock price. Any pullback in the stock should thus be considered as a buying opportunity, in our view.

 

efg