ADTLF - Adriatic Metals: Less Than 6 Months From Production Now

2023-07-03 05:22:26 ET

Summary

• The stock price of Adriatic Metals has declined slightly from the peak earlier this year, which has in turn improved the valuation.
• First concentrate production is now expected in November of 2023 and the project is running very marginally over the budget, which the company has liquidity for.
• There is a resource update due to be released very soon, with the potential to add a few years to the mine life.

Investment Thesis

Adriatic Metals ( OTCPK:ADMLF ) is a polymetallic development company, with its core Vares project in Bosnia & Herzegovina. The stock is listed in Australia, UK, and it has an OTC listing in the U.S. I have owned the stock in the past and covered the company a few times before here on Seeking Alpha. Those articles can be found here .

The Vares project is estimated to receive most of its revenues from silver and zinc, but it also has material amounts of lead and gold. About half of the projected revenues will come from precious metals.

Over the last 18 months, it is one of very few precious metals development companies which have performed reasonably well. So, the valuation is not as depressed as during part of 2022, but the stock has declined some from the peak earlier this year, making it slightly more attractive compared to the time of my last article on the company.

Recent Developments

The company has recently announced a slight delay of a couple of months, with first concentrate production now scheduled for November 2023 instead of September. The final project cost is now estimated to $182M, which is about 8% above the 2021 feasibility study. That is in my view an impressive achievement in this inflationary environment. Most of the capital cost is fixed at this point, so there is unlikely to be further substantial cost overruns.

The company does have sufficient liquidity to cover the higher project cost and delay of positive cash flows, so it is not a major concern. However, any further significant delays could certainly cause the stock to underperform in the near term, which is a potential risk to be aware of.

With regards to the metals relevant to the Vares project, Adriatic Metals has not been getting much of a tailwind in 2023. Gold is up marginally YTD, but the poor performance in zinc, lead, to some extent silver, and recession fears have probably impacted the sentiment in the stock.

One very positive development for Adriatic Metals has been the excellent drill results from the Vares project, where a resource update is due to be released very soon, which has the potential to boost the resources of Vares and add a few years to the mine life. That would in turn make the current NPV estimate somewhat conservative despite the marginal cost overrun.

Valuation & Conclusion

For the valuation, I have relied on the feasibility study as the base case, then adjusted the NPV estimate with the difference between the commodity price assumptions in the study and current spot prices. The spot price assumptions I have used are the following: Silver $23/oz, Gold $1,900/oz, Zinc $2,350/t, and Lead $2,100/t.

Using Adriatic Metals’ fully diluted market cap, the stock is now trading with a market cap to NPV of 0.68. That is a relatively attractive price in my view for a low-cost project, with good local support, that is less than 6 months from production, and the company is likely to boost the resources in the near future.

With that said, I would need a slightly larger margin of safety to buy Adriatic Metals, as there is still some execution risk with the commissioning and ramp up over the next few quarters. The base metal exposure is less appealing now, at least to me, and there are a lot of depressed precious metals mining companies around at the moment.

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