ADTLF - Adriatic Metals: Excellent Reserve Update Significantly Extends The Mine Life

2023-12-25 01:55:01 ET

Summary

• Adriatic Metals released a reserve update with excellent grades.
• The reserve update adds 8 years to the mine life and increased the NPV by about 45%, with potential for further resource updates in the future.
• We are still just a month from the first concentrate production.

Overview

Adriatic Metals ( ADMLF ) is an Australian and UK listed mining company, with its flagship Vares project in Bosnia & Herzegovina. The Vares project is now just a month from first concentrate production and about half of the projected revenues are coming from silver & gold and most of the remaining portion are from zinc & lead. This is a stock I have covered frequently over the last few years, and the prior articles can found here .

I have also owned the stock for the better portion of the last 2 and 1/2 years, but I decided in the beginning of 2023 to sell my holdings due to potential risks of delays, cost overruns, additional bought deals, better risk-rewards elsewhere in the industry, and because of the exposure to base metals.

In 2023, we have seen some very minor increases to the initial capital cost, a few months delay, and some additional capital being raised. However, those risks are in this point mostly in the rearview.

The company has also delivered an impressive resource update during the summer and an excellent reserve update during last week. So, the project economics have in my view improved substantially during the year, but the share price has been relatively flat in 2023. So, I started to build a new position in Adriatic Metals earlier this month.

Reserve Update & NPV Growth

Adriatic Metals ((ADMLF)) did last week release a reserve update and the polymetallic reserve estimate for the Rupice mine (Vares project) is now 13.8Mt, with excellent grades that can be seen in the table below.

Take just silver as an example, which did in the feasibility study account for about 1/3 of total revenues. The silver grade is now 187 g/t and there is an estimated 83 Moz of silver in the deposit, these silver figures are better than many silver equivalent numbers for good projects elsewhere in the industry.

The total ore reserve tones grew by 89% compared to the 2021 reserve update, which the feasibility study is based on. This is slightly better than I had anticipated, which will add about 8 years to the mine life. So, the total mine life is now estimated to be a very respectable 18 years.

In the simplified net present value ("NPV") calculation below, where I have assumed flat cash flows for the life of the mine, you can see what an impact the reserve update would have on the NPV figure. Here we are looking at a 47% growth in the NPV, which I have rounded down to 45% in my calculations going forward. The reason the NPV has not grown by more is because the discount factor is rather substantial for years 11-18 when we use an 8% discount rate.

It is also worth remembering that Adriatic Metals has continued to drill following the resource update in the summer of 2023, those drill results are not included in this reserve update. So, we can expect yet another resource update during the first half of 2024.

In the figure below, we can see the valuation for Adriatic Metals based on spot prices for the metals. Note that I have relied on the feasibility study as the base, where the numbers have been adjusted based on current metals price, and an estimated 45% growth in the NPV because of the most recent reserve update.

Conclusion

The Vares project has excellent grades, low operating costs, and is according to this recent update still expected to have its first concentrate production in January 2024. I consequently find the market cap to NPV of 0.5 a very good price for this high-quality project, given that much of the execution risk is now behind us.

If the company can grow the resources further, which I think is very likely, or potentially increasing the throughput, the economics will improve even further.

2024 will be a pivotal year for Adriatic Metals with first concentrate production, ramp up to nameplate capacity, substantial positive free cash flow, and an additional resource update. So, there is a lot to look forward to over the coming year.

Any minor delays would be manageable for the company, but the biggest risk would naturally be a more substantial delay in the ramp up, which could force the company to have to turn to the equity market at an inopportune time. Having said that, investors are in my view well-compensated for that risk at the current share price.

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