JPMorgan - Koza Gold

Koza Gold reported an improved 3Q13 result with EPS at TL0.91/sh (+6%, 2Q13: TL0.86/sh). Higher gold production at Ovacik and Mastra was partially offset by lower production at Kaymaz. Earnings for the 9m to Sep-13 of TL2.50/sh (-22%, TL3.19/sh) were adversely impacted by lower grade at Mastra and a lower received gold price. As a result the group is unlikely to achieve FY13 management guidance of 350-375koz, in our view. Koza Gold has net cash of TL859m (+6%, Jun-13: TL813m) or c$430m that’s equivalent to TL5.63/sh or c16% of its current market cap. The group has strong operational management, a sound growth track record and a robust balance sheet. Overweight.

·         3Q13 EPS of TL0.91/sh (+6%, 2Q13: TL0.86/sh). Gold production improved 8% to 88koz (82koz) at cash costs of $403/oz (-10%, $447/oz). Cash costs improved on higher production (a function of better grades & volumes at Ovacik and at Mastra) and an 8% weaker TRY. Gold sales increased to 95koz (+14%, 83koz) at a received gold price of $1,326/oz (-8%, $1,447/oz) and revenue increased 11% to TL251m (TL226m). EBITDA improved 13% to TL169m (TL149m) and the EBITDA margin to 67% (66%). Capex was up 35% to TL123m (TL92m) with increased spend at the new Himmetdede heap leach project of TL72m (+41%, TL51m).

·         9m to Sep-13 EPS of TL2.50/sh (-22%, 9m to Sep-12: 3.19/sh). Gold production for the 9m declined 7% to 242koz (261koz) and cash costs increased to $454/oz (+29%, $353/oz) as a result of sharply lower grade at Mastra in 1H13. Gold sales were 243koz (-7%, 260koz) at an average received gold price of $1,447/oz (-13%, $1,654/oz) and revenue declined 15% to TL663m (TL781m). EBITDA fell 27% to TL439m (TL601m) – an EBITDA margin of 66% (77%). Capex more than doubled to TL302m (TL139m) mainly as a result of increased spend at the new Himmetdede heap leach project of TL163m (TL21m).

·         Robust balance sheet despite higher project capex. Koza Gold had net cash of TL859m (+6%, 2Q13: TL813m) at September quarter-end (equivalent to TL5.63/sh or c16% of the current share price). The group remains cash generative with a pre-tax FCF margin of 16% (27%) based on an all-in cost (cash cost + capex) of $1,109/oz ($1,058/oz) despite the lower gold price and ongoing project spend at Himmetdede. The share is trading on a dividend yield of 2.4% currently and remains relatively undervalued given its strong defensive qualities, in our view.

·         Growth projects outlook unchanged. The Himmetdede heap leach project has a reserve of 27Mt at an average grade of 0.68g/t for 583koz gold. Process plant and heap leach pad construction started in 4Q12 and is still expected by management to be completed in 4Q13. The Mollakara heap leach project has an oxide reserve of 14.9Mt at an average grade of 0.78g/t for 373koz gold. This project remains at feasibility stage and will progress once the Himmetdede project is commissioned next year, according to management. 3Q13 result disclosure revealed no significant changes in project status.

·         Koza Gold’s summary operating and financial results are tabled below: