Following on from our recent update on Adriatic Metals Serbian acquisition, we share some thoughts on the short term outlook for Adriatic.

Adriatic aim to complete a Pre-feasibility study ('PFS') on the Vares Project by September 2020 and a Definitive Feasibility Study ('DFS') by January 2021; having previously completed a Scoping Study on the project in late 2019. The Scoping Study had highlighted the world-class economics of the Vares project with the key metrics being:
Post Tax NPV8 of USD$916
Post Tax IRR of 107%
Capex payback period of 8 months
LOM Capex of US$178 million (inc. 30% contingency)

Since the completion of the Scoping Study, we note that Adriatic have made material progress on a number of fronts. The company have successfully discovered mineralisation outside the maiden Mineral Resource Estimate ('MRE') area on which the Scoping Study was based on. Phase 2 metallurgical testwork has led to materially better outcomes than those assumed in the Scoping Study itself with the new copper concentrate proposed being 95% payable vs only 30% assumed in the study. We estimate that a revised MRE has the potential to increase ore tonnage by at least 25% at a similar grade as the initial MRE. We estimate the combination of the increased MRE and payable metal may lead to a larger NPV8 figure in the PFS relative to the previous Scoping Study. We estimate that an NPV8 of circa USD$1.2 billion (AUD$1.85 billion, 0.65 FX) using similar metal price assumptions as assumed in the Scoping Study, may be achieved in the PFS.

As such we consider Adriatic to be extremely undervalued trading at a fully diluted value of around AUD$250 million which is only circa 14% of our estimated NPV8 figure for the PFS. We have noted in the past that high-quality projects generally trade or transact at small discounts to NPV - HERE. 

Adriatic's management team are directly aligned with shareholders via their substantial shareholdings in Adriatic. They have a track record of obtaining maximum value from funds spent and being cost-conscious evidenced by the recent disclosure that they are running $2 million under budget for the PFS works. There is a strong incentive to reduce dilution for the existing shareholders and preserve the value of their own holdings. Adriatic have disclosed that they are funded until the completion of the BFS and may require additional capital at some stage next year.

We believe that it may be prudent to sell a royalty over the Vares project after the completion of the BFS. This would minimise dilution for existing shareholders given the present large value differential, provide a large capital injection and cover a large portion of the project's CAPEX requirement. 

A net smelter royalty ('NSR') is a very common form of royalty in the mineral space. Usually, it is calculated as gross revenue less transport, insurance, and refining costs. A rough rule of thumb we like to use is that a 1% NSR is equivalent to a 4-5% working interest in the royalty property. 

An NSR owner benefits in a number of ways:

• Low risk - the first dollar invested in an NSR is the last dollar spent
• Bespoke to project and is tailored to project specifics - eg can contain buyback provisions and other special clauses
• positive exposure to underlying commodity price without direct production cost risk
• a relatively liquid and transferable asset

Some factors that determine the value of an NSR are:

• quality of orebody - higher value ore and a long mine life can lead to a higher NSR value
• the current stage of the project - more certainty around the project's financial and operations lead to higher NSR values
• time-frame to production - the shorter time to production the better
• monetary environment (interest rates) - low-interest rates lead to lower NSR hurdle rates

A recent NSR transaction was where the market-leading royalty company, Franco-Nevada, created a 1% NSR over Solgold's Alpala project in exchange for US$100 million. This project is at a similar stage to Adriatic with a PEA/scoping study having been completed in 2019. The NSR was sold over this project to fund DFS study costs vs Adriatic that would require capital to bring the Vares project into production. An NSR created over the Vares project would be highly sought after and highly valued given the world-class nature of the orebody, project financial metrics and near-production status; and we believe may attract a similar valuation as the Solgold royalty.

Once the Vares project is producing, surplus cash flows could be invested in the development and exploration of its numerous brownfield and greenfield prospects across Bosnia and Serbia. We feel there is clear potential for Adriatic to evolve into a mid-tier miner once Vares is developed. The recently acquired Serbian assets provide another valuable expansion opportunity in addition to the clear exploration potential remaining in Bosnia

We believe the key Catalysts over the short term remain: 

• achieving exploitation permits for Rupice & Veovaca
• the release of an updated JORC MRE for Rupice and Kizevak
• delivery of a PFS & BFS for the Vares project

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 (ADT).

Adriatic Metals announced on the 11/5/2020 that they had reached an agreement to acquire Tethyan Resources, a Serbia focused explorer, in an all-stock deal in exchange for 6.9% of the company. Adriatic appears to be focused primarily on the brownfield Serbian assets, Kizevak and Sastavci.

There are very similar historical parallels between the Raska district and Vares as a locality where Adriatic have their present operations. The Raska district has a long history as a mining region. The Kizevak and Sastavci mines were discovered in the mid-1970s and operated by the Yugoslav geological survey between 1984 and 2000 when mining ceased due to the Balkans conflict.
The projects benefit from numerous infrastructure advantages including water, power, road and rail access all within 5 kilometres, and a local workforce with a long history of mining.

No significant exploration work has been conducted on either licence since mining ceased, and the projects offer significant exploration potential for the expansion of existing mineralisation along strike and down dip from the open pits at Kizevak and Sastavci. The historical deposits have been untouched by modern exploration techniques.

Interestingly, Tethyan has historically only been able to explore the areas surrounding the historical mines as it did not hold the ground containing the historical mines. However, this ground has now been acquired as part of the Adriatic transaction and only a relatively small amount of drilling needs to be done to confirm continuity between the historical mineralisation and the mineralisation encountered by Tethyan. We note that the deposit appears to be very shallow, with very little exploration at depth with historical cores that have not been tested for precious metals.

Adriatic have proven they can add value via interpretation of historical cores and follow up exploration drilling on the brownfield assets given their experience at Veovaca and Rupice. They have also demonstrated their ability to progress projects at extraordinarily fast pace delivering a Scoping study/PEA for the Vares Project within 2 years of their ASX listing and are on track to deliver a DFS within the next 7 months.

We believe that Adriatic's management team can add significant value to the Serbian assets being acquired by the end of the calendar year. The acquisition firmly positions Adriatic as the pre-eminent Balkan polymetallic developer, whilst providing a longer-term development pipeline over and above the existing Vares Project. The acquisition provides an existing in-country team and relationships, whilst also providing the advantage of jurisdictional diversity to both sets of shareholders.

Adriatic have stated that they intend on delivering a Maiden JORC resource estimate for Kizevak and Sastavci before the end of the calendar year 2020. Assuming a small uplift on the existing non-JORC deposits, we anticipate that between 8-10 million tonnes of ore could be delineated at grades between 6-9% Zn equivalent. Adriatic aim to deliver a PFS for the acquired assets by the end of the calendar year 2021, with permitting likely to occur in conjunction with feasibility studies.

Overall, we consider this an acquisition that may prove to be extremely value accretive for Adriatic shareholders. We think the timing of the transaction at a cyclical and covid-affected low was strategically sound and well-executed. Our thesis is that the seeds of a base metal boom are being sown in the current market duress with many marginal, higher-cost mines being shut down; however, this dynamic will take time to play out. We believe that it's quite likely within the next 2-3 years, base metal prices will be considerably higher; leaving Adriatic well-positioned and strongly leveraged to a recovery in base metal spot prices.



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 (ADT).

Self Wealth (SWF) is a platform with a unique product offering that offers flat-price online broking and ancillary services.At present there are 4 separate revenue streams:

1. Broking - Self Wealth offers Australia's cheapest online broking, investors pay only $9.50 a trade irrespective of trade value with no strings attached. Investors are able to invest under their own HIN (CHESS sponsored), hold the stock directly, and without paying monthly account fees or subscriptions.
2. Interest on client funds - Self Wealth benefits by collecting an interest spread on client funds held within the platform. The client funds are held in segregated individual accounts for the benefit of the client, significantly reducing counter-party risk for clients.
3. Subscriptions - Platform users can access additional features for a subscription fee of $20 a month. This allows them access to trading and portfolio data to provide actionable insights for investors. In particular, high performing portfolios can be filtered and replicated easily by users.
4. ETF fees - An ETF has launched that is constructed using the data collected via the strategic relationship with BGL. The portfolio holds a number of liquid ASX 200 constituents, has outperformed the market benchmark, and is rebalanced quarterly.

There is significant scope for additional revenue streams to be developed at very low incremental cost that will become increasingly more valuable as the user base grows; we have made suggestions to the management team and it is to be seen whether these will be pursued. The company also has a number of significant organic growth opportunities within its current product lines: International trading, multiple trading account functionality and a new mobile app are all in development and have the potential to further increase the company's rate of growth in the near term.The strength of the self wealth model is its low touch, automated, highly scalable approach. Prior to the COVID19 curfews, it was growing strongly year on year: having grown all key metrics by more than 100% between January 2019 and January 2020. The effect of current curfews has been like pouring petrol onto an already roaring fire. In the most recent March quarter vs the December quarter: Trade volume grew over 100%, Client cash held grew over 150% and active users grew by almost 50% (achieving almost 70% of their previous annual growth target in 3 months).

​We believe this growth cannot be looked at in isolation but is a validation of the structural shift we see in the local online broking markets. Self Wealth is unequivocally the lowest cost provider in the market providing a large incentive for new users to try the service; this consequently leads to increased client 'stickiness'. The platform is very stable and in the recent market volatility, outperformed it's larger competitors (Commsec and Nabtrade) in terms of uptime. We note that market trade volumes are correlated with overall market volatility, meaning that Self Wealth may benefit from the higher than usual levels of market volatility.

It is clear that Self Wealth has been profitable since the month of March and we expect this to continue going forward. Our information gathering suggests that April may very well be another record month of growth for the company. The increasing scale of the company's operations will lead to a fall in incremental costs. Our internal growth model suggests a base case EBIT projection for FY21 of ~$6.5 million; with our upper case scenario being multiples of the base case. Currently trading at an undemanding $45 million market cap, this represents a forward projected EBIT multiple of only 7x.


This is an excerpt of Datt Capital's comprehensive research note on Self Wealth.

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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 SWF.