Revising TP to TL102.0/share

We are making another upward revision in our gold price assumptions as the coronavirus pandemic and the accompanying monetary response from global central banks continue to support gold. Our revised DCF for KOZAL indicates a price target of TL102.0/share (from TL91.0/share) with average gold price assumption of USD1,800/ounce (from USD1,700) from 2021E onwards (USD1,750/ounce for 2020E average). This indicates 19% upside potential for KOZAL based on last close price of TL85.65.

TWF plans to establish a mining holding company

CEO of Turkish Wealth Fund (TWF) stated in a press meeting last month that the Fund took over 20 mining assets and plans to invest in gold, coal, iron and copper assets in the future. On the other hand, president of Savings Deposit Insurance Fund, which controls the board of KOZAL as a trustee, said in a separate interview that TWF could also take over Koza Group companies once the legal process regarding ownership cases are resolved.

Recall that the initial court decision in January 2020 paved the way for the transfer of 50% of shares of Koza Group companies to the Turkish Treasury. Legal process is expected to continue for a while as the upper court would need to decide on the appeals for the final verdict. We believe possible transfer of ownership to TWF could help accelerate investments of KOZAL to maintain its production growth and possible additions to current reserve base would be positive in the long term. Currently, KOZAL accounts for c.28% of Turkey’s gold production (based on 2019 figures) and given ambitious targets of government to expand domestic production, KOZAL would a good vehicle for TWF to develop gold mining business.

Cash generation remain robust

Due to pandemic-driven slowdown, we are projecting 2020 production of KOZAL to be down by c.15% y/y to the level of 300K ounces. KOZAL management still hasn’t disclosed any guidance for 2020 operating numbers. Despite lower production, we still expect KOZAL to report 13% earnings growth in 2020E thanks to the increase in gold price and TL depreciation. We slightly increased our cash cost estimate to USD600/ounce in line with the pick-up seen in 1Q’20 (USD631/ounce), but still see EBITDA margin expansion from 64% to 66%.

The company’s cash position also continues to grow, which stood at TL4.8bn (USD730mn) as of 1Q and we expect year-end cash position to grow to TL6.4bn (50% of current Mcap). Strong cash position also supports longer-term dividend expectations once the shareholder issues are resolved.


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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and and has contributed to the financial daily Referans and the liberal daily Radikal.