Is this the world's best mineral development project?

Emanuel Datt

Datt Capital

Long-term portfolio holding, Adriatic Metals, recently delivered their Definitive Feasibility Study (DFS) over the flagship Vares Project which is the final study prior to a Final Investment Decision (FID).

The DFS demonstrated the following key project metrics:

  • a 10-year mine life - reduced by 4 years by cutting out more marginal resources
  • an increase in project NPV8 to US$1.062 Billion at an IRR of 134%
  • Reduced project capex of US$168 million and a payback period of 8 months
  • an NPV8/Capex ratio of 6.3x - this is a measure of capital efficiency and it is the highest we've ever seen from a greenfield mining operation
  • a reduction of costs to US$7.3/oz of AgEq (silver equivalent) on an AISC (all-in-sustaining cost) basis - this is a 1st decile (bottom 10%) cost result relative to Adriatic's peer group
  • 15 Moz of AgEq/year production with commodity revenue streams by value being silver dominant, followed by zinc, lead and gold
The study reaffirmed the world class nature of the project with a high level of confidence. Unusually, the company has managed a trifecta in terms of improving the economic outcomes of each sequential study; generally we see the opposite.

The changes that drove the most recent outcomes are:

  • the removal of a lower quality deposit and lower value commodities such as barite which also had the benefit of reducing the number of concentrates produced to only 2 from 4 previously
  • the vast simplification of the project's processing flowsheet as a result of this decision which in turn reduces delivery risk
  • Higher base metal prices relative to the PFS
  • A modified mining sequence that prioritises mining the higher grade ore at an early stage from the core Rupice deposit
Importantly, the DFS demonstrates a robust project in any price environment. For instance, a 20% fall in metal prices would reduce the project IRR to ~100%; still a world class result by any metric.

The Vares Project is extremely important to Bosnia and Herzegovina, and will comprise over 30% of the nation's direct foreign investment over a 10 year period as measured since 2014; as well as being the nation's single largest exporter over the project's first 5 years. The project will also employ 350 staff with a strong commitment made towards workplace diversity - 30% of the present workforce are female. The company enjoy exceptional government and community support, legacy of a strong social licence-built up over years.

An exceptional gesture by the company was the formation of the Adriatic Foundation. This is a charitable trust that is focused on improving local community outcomes in 3 key areas: education, environmental protection & healthcare. The Adriatic Foundation will receive an ongoing share of project profits and was generously seeded by the founders and directors of Adriatic. 

Adriatic's strong ESG credentials have been recognised by the European Bank for Reconstruction and Development (EBRD) who have taken an equity stake in the company itself. This is an extremely strong point of validation, as the EBRD only participates in companies that demonstrate exceptional commitment towards best in class ESG principles.

A number of important catalysts are on the horizon for the company. These are:

  • offtake agreements for the produced concentrate. We expect these to be agreed imminently.
  • final environmental permits for the project, we expect these to be granted in the next month or so
  • a project financing package for construction, we expect this will be delivered next month hi
  • the commencement of construction, the company plan to break ground in October

Adriatic hold other promising assets aside from the Vares Project. The company recently hit an interval of over 20m at a grade similar to the main Rupice orebody to the north-west of the core deposit. Whilst still at an early stage, we consider that this could be a repetition of the Rupice orebody given the area is structurally controlled. This has the potential to be a real game-changer if further drilling proves this hypothesis.

Independently, Adriatic also control the rest of the mineral belt surrounding Vares which we consider highly prospective with many historical mineral deposits and occurrences. The company has a US$9 million exploration budget for this calendar year.

Adriatic's Raska project in Serbia also has strong economic potential in the current market environment. We believe that the project could be worth half of Adriatic's present market value on a risked NPV basis. Adriatic are targeting an MRE and scoping study to be delivered this year.

Any way we look at it, we believe the company is undervalued trading at only around 35% of the Vares Project's NPV, entirely ignoring its other assets. Similar assets have transacted for in excess of 80% of NPV. Another strong attraction is the company's strong commitment towards strong ESG principles which we believe are sound and essential business practices in today's world. We remain long-term shareholders of Adriatic Metals.

Our previous articles on Adriatic Metals can be found here:

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Disclaimer: This article does not take into account your investment objectives, particular needs or financial situation; and should not be construed as advice in any way. The author holds shares in Adriatic Metals.

Disclaimer: This article does not take into account your investment objectives, particular needs or financial situation; and should not be construed as advice in any way. The author may hold shares in any companies discussed.

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Emanuel Datt
Datt Capital

Emanuel is the Principal of Datt Capital, a boutique Melbourne-based investment manager focused on identifying high growth and special situation opportunities.

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