ADMLF - Adriatic Metals: Near-Term Silver Producer

2023-10-10 16:59:06 ET

Summary

• Adriatic Metals is a near-term producer with a large mine that is 88% completed and will begin production in Q4.
• The company has significant upside potential, with expected FCF of $200M a year for the first 5 years.
• They have large resources with 336 million oz's AGEQ, and high grade at 495 gpt AGEQ, plus significant exploration potential.

Introduction

Now that I have a Seeking Alpha Investing Group, I plan to post a company analysis monthly to my public Seeking Alpha page. I will work down the list of companies in my investing group ideal portfolio that I have not covered before on Seeking Alpha. This month, I'm doing Adriatic Metals (ADMLF), which is a near-term producer. I can only post companies with a share price over 50 cents on my public page, so those with less will be posted on my Investing Group.

Adriatic Metals is an exciting stock. If you haven't looked at it before, get ready for a good read.

They are building their first mine, and it is 88% completed. They will begin ramping up production in Q4. It is a large mine with 336 million oz of AGEQ at 495 gpt AGEQ. The revenue average is 34% silver, 14% gold, and the rest base metals, comprised of zinc, lead, and tin. Because the grade is so high, it has an AISC of $7 AGEQ.

They will begin production at around 15 million oz's a year AGEQ. With expected FCF at $200M a year for the first 5 years. The borrowed $142 million and the payback is less than one year.

Plus, they have a 22-kilometer corridor of high-priority drill targets once that cash flow begins. And, they want to become a leading miner in Europe, with plans to grow the company.

Company Overview

Adriatic Metals is building a large silver/zinc/gold/copper mine (Vares-Rupice) in Bosnia. It is financed and under construction, with first pour scheduled for Q4 2023. The capex was $182 million and was mostly financed with debt. They currently have $142 million in debt and $85 million in cash. So, they have plenty of extra money for any cost overruns. They sold part of the copper as a stream to finance the capex, but the AGEQ cash costs are still only about $7 per oz.

With a low AISC at $7 per oz AGEQ, I would expect a breakeven cost of around $15 per oz AGEQ in 2024.

They are expecting $200 million in FCF at $24 silver. That seems optimistic. If they produce their expected 15 million oz's with an all-in cost (breakeven) at $15, then FCF will be $135 million. I'll be happy with that.

Initial production will begin at 15 million oz's of annual production (AGEQ). They should be able to maintain that for at least 7 years, although their target is 20 years. It is a 10,000-acre property with many high-priority drill targets on a 22-kilometer corridor.

I believe they are undervalued and could even see a potential 5+ increase in the stock price if silver prices rise enough. With their potential high free cash flow, they appear to be a good spec stock.

They have several properties in Bosnia and Serbia. Vivica and Kizevak both have about 10 million oz. and are growing in size. They are not high-grade silver deposits but have significant offsets in gold, zinc, lead, and copper.

For red flags, there are potential political issues in that part of the world (Eastern Europe). Plus, only 48% of their projected revenues come from precious metals (silver and gold), although that percentage is likely to expand as gold and silver rise in value.

One of the reasons I like Adriatic is their management team, which seems impressive and ambitious. Although, let's see if they can execute and produce FCF (free cash flow). I think this could be a growth story.

Insiders own at least 31% of the company, with management and founders at 14%. So, I don't think they will give away their company if they receive hundreds of phone calls asking if they are for sale.

Company Info

Cash: $85 million.

Debt: $142 million.

Current Silver Resources: 336 million oz. AGEQ.

Estimated Future Silver Reserves: 250 million oz. AGEQ.

Estimated Future Silver Production: 12 million oz. AGEQ.

Estimated Future Silver All-in Costs (breakeven): $22 per oz. AGEQ.

Estimated Future FCF Multiple: 10.

Scorecard (1 to 10)

Properties/Projects: 8.

Costs/Grade/Economics: 8.

People/Management: 8.

Cash/Debt: 8.

Location Risk: 7.

Risk-Reward: 8.

Upside Potential: 8.

Production Growth Potential/Exploration: 8.

Overall Rating: 8.

Strengths/Positives

Significant upside potential.

Significant exploration potential.

Fast payback of their loan (one year).

Aggressive management team (they want to grow).

Silver production exposure (these are rare).

Risks/Red Flags

Dependence on higher PM prices (for large returns).

Location risk.

Speculation stock (high risk).

Production ramp-ups are never certain.

Estimated Future Valuation ($75 Silver )

Silver production estimate for the long term: 12 million oz. AGEQ.

Silver All-In Costs (break-even): $22 per oz. AGEQ.

12M oz. x ($75 - $22) = $636 million annual FCF (free cash flow).

$636 million x 10 (FCF multiplier) = $6.3 billion.

Current FD market cap: $677 million.

Upside potential: 830%.

Future Valuation Explained (recurring paragraph)

This is an estimated return and will only occur if all assumptions are correct. A more likely outcome will be something less than this amount, although it is not crazy talk to expect silver to exceed $75 or the FCF multiple to reach 15 in my opinion.

My All-In Costs are the expected costs that will generate FCF.

I used a future FCF multiplier of 10, which I think is conservative for my expectations. I expect them to receive at least a 15 multiple.

I used a future PM price of $75 silver because I am a long-term investor who plans to wait for higher silver prices. I expect to see this level reached within 3-5 years. In fact, I use $100 silver for valuations on my website since that is my expected future price. I tone it down a bit to $75 on Seeking Alpha, which I think is more reasonable.

It is my opinion that gold drives the silver price, and that macroeconomics drives the gold price. The only reason I expect to see $100 in silver is that I expect to see at least $3,000 in gold. Using a GSR (gold-silver ratio) of 30 might seem aggressive, but I think it is realistic. The GSR was 17 in 1980 and 39 in 2011.

Balance Sheet/Share Dilution

They have $142 million in debt, which could cause issues if they have any ramp-up issues. I have learned from experience that ramp-ups can be problematic. Companies do go bankrupt if they have serious problems, and these are never slam dunks. That said, they do have a large margin for error with their low expected AISC. With an expected payback of only one year, they would have to screw up badly for this mine not to work.

I do not expect them to require any more share dilution.

Risk/Reward

This risk/reward looks very good. This should be a long-life mine that generates a lot of FCF. They are expecting $1B in FCF over the first 5 years, and they should be debt-free after year one.

The risk we are taking is that silver and base metal prices rise. Without those prices rising, our investment will not pay off big, and could even languish.

This is not a pure silver mine, with an expected 48% revenue from silver and gold. However, as silver and gold blast off (my expectation), that percentage will increase. I expect revenue from silver and gold to reach 60%.

I am only valuing them using a FCF multiple of 10. I think they could easily exceed this. Also, I am using future production at 12 million oz, when they are starting production at 15 million oz. So, I think my future valuation is conservative.

Investment Thesis

Adriatic Metals fits into my strategy of being overweight producers. I believe that I will make most of my money on producers. Why? Because they will participate more fully as gold/silver prices rise. They will benefit in two ways:

First, as the gold/silver prices rise, so will their FCF. Then they will get valued higher from their higher FCF.

Second, the higher FCF will improve their balance sheet. This will have the impact of increasing their FCF multiple. Whereas today, a standard multiple might be an 8, a strong balance sheet can increase that multiple to extraordinary heights. A 20 or a 30 is not uncommon for a very strong performing company.

So, I like Adriatic because they will have high FCF and that FCF can explode even higher as PM prices go higher. They are well-leveraged for that outcome. This is perhaps my most important criterion for owning producers. However, you need to have a good entry price (buy low and sell high). I think Adriatic is cheap today and holds that criteria.

Strategy to Manage Risk

For further details see: