KOZA ALTIN: Gold rally continues
At current price of gold, KOZAL would keep generating around TL2.0bn FCF per annum (including interest) indicating an attractive yield of 20%. Based on strong cash generation capacity and now greater upside potential to our TP, we upgrade our rating from Market Perform to Outperform
Gold once again emerged as a safe haven during the coronavirus pandemic, prompting another revision in our estimates and valuation of KOZAL. Our revised DCF for existing reserves points to a price target of TL88.5/share (from TL75.0/share) with average gold price assumption of USD1,700/ounce (from USD1,500). This now indicates 26% upside potential for KOZAL based on last close price of TL70.50.
No guidance released so far for 2020 after robust 2019 performance
KOZAL produced 354K ounces of gold in 2019 with an increase of +35% from 263K in 2018. With modest growth (+2%) announced in year-end reserve base, we estimate 300K ounces of production in 2020E out of the remaining 2.1mn ounces of reserves as of 2019-end. Cash costs posted a sharp improvement to USD505/ounce (USD468 excluding one-off charges) down from USD564/ounce in 2018. As a result of higher production, lower cash costs and higher gold price, EBITDA has doubled in 2019 to TL1.8bn. In 2020E, we expect another 20% increase in EBITDA to TL2.2bn as higher gold price would offset our assumption of lower production. Our cash cost estimate is flattish at USD500/ounce as possible decline in production grade (2.07 g/t grade realized in 2019 vs. 1.51 average for reserves) could be offset by the tailwind arising from lower fuel costs (thanks to the plunge in oil price).
Upgrade to Outperform
At current price of gold, KOZAL would keep generating around TL2.0bn FCF per annum (including interest) indicating an attractive yield of 20%. Based on strong cash generation capacity and now greater upside potential to our TP, we upgrade our rating from Market Perform to Outperform. The stock also remains in our model portfolio since March. With potential call for General Assembly meetings (which are not held since 2014 due to ongoing legal cases), we may see KOZAL more efficiently using its increasing cash hoard which stood at around USD750mn as of 2019-end. Note that the court decision earlier this year paved the way for seizure of 50% shares of parent Koza Group companies by the government. This would eventually help KOZAL call for General Assembly, allowing the company to either distribute hefty dividends from 2021 onwards (assuming no legal caps, current net cash equals to 41% of Mcap) or execute new growth projects. In the latter case, we estimate reinvestment of current cash would bring incremental earnings growth potential up to 40% in 2-3 years.
SERHAT KAYA, RESEARCH, Yatirim Invest