Adriatic Metals (ADT/ADT1) - Club Company Report Preview

January 20 2021, 12:27 GMT

Adriatic Metals

  • Shares Outstanding: 207.58m
  • Share price A$2.06 (19.01.2021)
  • Market Cap: A$438m

Originally written in December 2020, get a sneak peek into the CRUX Investor Club exclusive report on Adriatic Metals (ASX:ADT, LSE:ADT1, FSE:3FN). Read through the opening Executive Summary and our Red Flags and Green Lights. 

Between 2017 and 2019, Adriatic advanced their Vareš project (located in Bosnia Herzegovina) through rounds of drilling culminating in a very positive PEA on November 2019 with an NPV8 of US$0.9 billion - far exceeding the market cap at that time. The PFS released in Q3 2020 was relatively disappointing however, offering only a marginally higher NPV8 of US$1.0 billion - largely attributable to higher metal prices than were used in the PEA.

Our report details why we assert that this is still a high value project with high margins, our calculations demonstrating that it is still trading at a harsh discount to NPV, and prospects for re-rating with an associated share price rise.

NOTE: This is only a short excerpt, not the full 40 page report which can be found in the Club. It was originally published in December 2020.

NOTE: We don't short stock or get paid to write hit pieces. If we are invested, we say so.

Executive Summary

Adriatic Metals PLC (“Adriatic”) (ASX:ADT, AIM:ADT1, FSE:3FN) is an Anglo-Australian company that owns more than 40 km2 mineral rights in Bosnia Herzegovina, which it has called the Vareš project, named after an eponymous village located between these rights.

The tenement area covers a geological belt containing numerous showings which is highly prospective for polymetallic massive sulphide deposits. The two main targets are the historical open pit mine called Veovaca and the Rupice deposit, which was known from exploration drilling when the area was still part of Yugoslavia and under communist rule.

Adriatic first became involved in early 2017 when as a private company it acquiring Eastern Mining d.o.o. Sarajevo (“Eastern Mining”), a company registered in Bosnia and Herzegovina and holder of mineral rights over Veovaca and Rupice. According to Adriatic the acquisition of Eastern Mining also came with a large amount of historical geological studies and exploration results.

A drilling programme was carried out between March and October 2017 on the basis of which JORC compliant resources could be defined for Veovaca and the prospectiveness of Rupice confirmed. With the added value of this work the company was in a position to get itself listed on the Australian Stock Exchange on 1 May 2017 and raise A$10 million. With the new funds it immediately launched a 15,000 m drilling programme with three rigs to which a fourth was added soon thereafter following some great results.

The company has since rapidly advanced the project, publishing in November 2019 a very positive scoping study (“PEA”) with a NPV8 value of more than US$0.9 billion far exceeding the market capitalisation at the time. This was followed by metallurgical testwork that improved on previous results. Small wonder the market was excited about the results of a pre-feasibility study (“PFS”) due at the end of Q3 2020, the release of which was delayed into October.

The PFS was, however, a relatively disappointing as the value was only marginally higher at US$1.0 billion, mainly achieved by assuming much higher precious metal prices than for the PEA. All the drilling subsequent to the PEA had yielded little in terms of resources apart from increasing their confidence level to qualify inclusion in a feasibility study.

It was possibly for this reason that management had already cast its eyes elsewhere and agreed in May 2020 to acquire an exploration company active in Serbia, Tethyan Resources Corporation (“Tethyan”). The consideration was moderate as it came at a favourable time with funding hard to come by just after the COVID-19 pandemic start and Tethyan having to meet a bullet payment to the local owner of the prospect concessions.

Adriatic being an Australian and London listed company, is under no obligation to publish the full PFS study, unlike companies listed on the Toronto Stock Exchange. It is a matter of the company choosing what it wants to disclose and the reader having to accept or reject the summaries and conclusions that are presented. CRUX Investor has only the summary PFS findings available, selected by Adriatic management in its press release and we do not take information at face value. Accordingly, CRUX Investor has crunched the numbers based on the limited information provided and augmented it with industry benchmarks and guidelines.

This study has used the PFS input parameters for one scenario, with a few adjustments such as rejecting the 100% payment terms for Cu in the Cu-Pb-Ag bulk concentrate as this is not realistic given the 6.3% grade; using a lower gold payability for bulk concentrate; and ignoring the salvage value of the plant at the end of the life of mine (“LOM”). A second scenario uses spot metal prices at 24 December 2020 and included corporate overheads to arrive at a value of the company, not just the project.

Despite the changes, the modelled PFS scenario gross revenue is almost exactly the same as quoted by Adriatic, but the EBITDA is 12% lower due to lower modelled payabilities for Cu and Au. What is however strange is the larger proportional difference between the calculated NPV8 of US$0.73 billion and the NPV8 of US$1.04 billion quoted by Adriatic. Without Adriatic providing net free cash flow numbers this discrepancy cannot be reconciled by CRUX Investor.

The NPV8 using spot prices is US$0.81 billion. This compares to the calculated Enterprise Value of US$0.40 billion using the share price of A$2.38 on 24 December 2020. The EV/NPV ratio is therefore only 0.51x, which is comparatively low for a project at this stage of advancement and with a relatively short lead time to production. CRUX Investor would normally expect a project at the Pre-feasbility Study stage to trade closer to 0.7x NPV8. The larger than usual discount may relate to uncertainties with respect to barite revenue and the jurisdiction of the project, Bosnia Herzegovina.

Bosnia Herzegovina is still a divided country and there is reportedly much friction between the Bosniaks (as the Muslims in Bosnia are referred to) and locals of Serbian heritage. It also explains the slower than forecast progress being made in getting permits and approvals as these have to come from various levels, national, provincial and local. Fortunately, the area in which the Vares projects occurs is almost exclusively populated by Bosniaks, which makes for homogeneity. The local population is reportedly also strongly in support of mine development to extract itself from poverty and high levels of unemployment. Finally, Serbia is very desirous to join the European Economic Union and will be hesitant to upset its chances of joining by being a spoiler in Bosnian politics.

The discount to inherent value is considered overly harsh by CRUX Investor as there are good prospects of adding LOM at Rupice with the deposit open in several directions, especially down dip to the northeast, plus the prospect of additional discoveries in the extensive Vareš tenement area and the prospect of exploration success in Serbia at the ex-Tethyan properties. Every year of additional Rupice production at average reserve grade would add approximately US$100 million to the company value.


Red Flags

CRUX Investor finds Adriatic Metals interesting due to a number of attributes that the company has, such as a really good project that is open to further resource growth, has good infrastructure and a cracking net present value. Paul Cronin is a good CEO (Mines and Money did, after all, award him CEO of the Year in 2019), he has built

a good board around him, and yet there is a whiff of trying-too-hard. Good news is heavily promoted, bad news is buried, a habit which sits at odds with the first bullet point on the ESG slide in the latest presentation “Honest and Transparent”. Hmm. Perhaps that should read “Honest and Transparent up to a point, as long as it presents the company in the best light”?

Indeed, when critically assessing the investment case for Adriatic, reviewing the challenges and opportunities for investors, writing down the Red Flags and Green Lights, most of the red flags are related to a lack of transparency. The project is good enough to withstand scrutiny, and CRUX Investor believes it would build market credibility, and add value, to publish the full study details, and incorporate all of the real-world factors such as commercial payability terms on the concentrates.

Still, these are minor gripes that can easily be addressed by the Company in the future. And after all, Sandfire Resources is still a powerful presence on the shareholder register, and Adriatic Metals is still trading at a harsh discount to the NPV8 of Vareš, a great project.

  • Presentation of PFS summary and conclusions only, the full technical document would be much better
  • Stretched interpretation of “Honest and Transparent” with a marked tendency to bury bad news and preference to release good news
  • Use of 100% payability on the bulk concentrate, which is unrealistic for copper and for gold, and therefore overstates profitability by 12%
  • Lack of explanation of results from the drilling of gravity highs as part of the regional exploration programme 


Green Lights

  • High value project with high margins and strong economics
  • Logical long-term buyer already on the shareholder register (Sandfire Resources)
  • Potential upside from exploration, and Adriatic now has a significant land package in the region, as well as targets coming through recently acquired Tethyan Resources.
  • Barite is a potentially valuable product stream should the metallurgy be viable and deleterious elements kept below critical limits
  • Overly-harsh discount to NPV, indicating a longer-term re-rating possibility with an associated share price rise
  • Commercially-minded CEO and suitable Board for development and potential sale


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