Koza Gold - BUY Upgrade to Buy with a new PO of TRY55

Low cost producer with resource conversion upside 

We update our model on the back of Koza's latest reserves (12YE: 3.7moz) and revise our PO up to TRY55 (from TRY48, see our valuation on p4). Accordingly, we upgrade our rating to Buy from Neutral. Koza is trading at 8.9x on 13E P/E vs 13x for its peers. Meanwhile, Koza is trading at 1.2x P/NPV vs 1.3x for the global peers. We believe low cash cost (12E: $368 vs c.$700 for its global peers), resource conversion upside and production growth in the coming years are among the key investment highlights for Koza. 

We forecast +35% gold production by 2016 (vs 2012) 

Based on latest reserves (3.7moz, +47% considering 338koz of gold production in 2012), the life of flagship Ovacik mine reached 2026 (previously 2023). Mastra will also operate one more year until 14YE. Considering Himmetdede (from 4Q13) and Diyadin (from 2H15) reserves, we expect Koza's annual gold production to reach 400-450koz in 2014-2017. 

Solid development on Sogut field may bring extra value 

In addition to its Himmetdede and Diyadin projects, the company is performing a feasibility study for its Sogut field. Nothing solid at this stage, but extra production could bring further upside in our view. 

Key risks would be softer gold price & delay in projects 

Our average gold price estimate is $1,617/oz (2019E+: $1,400/oz) in our modelling period (2013-26E). At spot gold price there is 2% upside risk on our valuation. Our commodity team expects $2,000/oz gold price by 13YE and increasing gold price could be supportive of Koza, being the only pure gold play in the ISE. However, a softer gold price is among the key risks. Assuming all else being equal, there would be 18% downside risk on our valuation at our long-term gold price estimate ($1,400/oz).

 

BofA Merrill Lynch Global Research