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This is an addendum to our investment thesis released on Adriatic Metals ('ADT'). We have been requested by several investors to share our research on similar projects as Vares. We have found that the overall quality of the Rupice deposit has been largely overshadowed by the perception of Bosnia as a mining jurisdiction. We hope this brief comparison will demonstrate the utter uniqueness of the still-growing Rupice deposit relative to other base metal peers. Base metal projects are often converted to copper equivalent (CuEq) to provide a simple method to compare different deposits, especially in the case of polymetallic deposits. ADT has not provided CuEq figures, most likely as the Vares project deposits are copper poor; and have used gold and zinc equivalents (AuEq, ZnEq) as a proxy. We thought it would be beneficial to convert the resource to CuEq just to provide a broad economic comparison relative to other projects. Accordingly, for the Rupice deposit, we come up with an approximate CuEq of ~6.2%. This includes the contribution of barite and takes into account the preliminary met recoveries disclosed by the company. We should note that 'equivalent' grades should never be used solely as the basis for an investment decision by investors, and more detailed analysis should be conducted. The following comparison charts demonstrate how unique and undervalued ADT is relative to comparable base metal projects.    It is extremely rare for a resource project to possess an IRR >100%, an NPV above AUD$1 billion and a payback period of less than 12 months. There is a material shortage of commercial base metal development projects available. This is largely due to the exploration decline post-2012 and a continuing skew towards gold relative to base metals in terms of exploration spend. The overall quality of new base metal has fallen dramatically over time, as many high grade and close to the surface deposits have already been discovered.
What's it worth? We examined a peer group of approximately 25 undeveloped resource projects globally and noted the following: Unfinanced projects on average trade at circa 30% of NPV. We believe that ADT should at minimum, trade at the peer group average. Financed projects on average trade at circa 55% of NPV. We believe that ADT should trade at a premium to the peer group average as they advance through the permitting, feasibility and initial financing processes which we believe will occur over the next 12 months. ADT is without a doubt, the standout base metal project in terms of IRR, NPV, capital efficiency, and other economic metrics. What happens now? ADT possesses a unique resource of almost unparalleled quality which drives the projects exceptional potential economic returns along with a very favourable cost jurisdiction. Over the next 12 months, we expect the company to continue to build upon the initial resource at Rupice as well as further explore brownfield and greenfield prospects selectively. We also believe that within this time frame that the company should complete a detailed feasibility study as well as completing the permits required for the mining and processing operations. We should add that any further discoveries or extensions in the project life will only increase already exceptional returns. We also note that the upcoming LSE listing will broaden ADT's investor base and likely provide another potential catalyst for the stock to rerate. 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 ADT.
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Adriatic Metals ('ADT') are a base metal developer in Bosnia & Herzegovina (BiH), with a world-class resource in a global scale mineral province.
The breakup of Yugoslavia and the consequent Bosnian war, along with high upfront costs for mining concessions has largely preserved the exploration opportunity in BiH despite a long, proud history of mining. As such, the area has barely been touched by modern exploration techniques which bode well given its geographic and geological locality. The team at ADT recognised the significant opportunity at hand and managed to secure a portfolio of high-quality assets via its first-mover advantage; it is still the only listed resource company globally with operations in the BiH. The BiH is a stable, democratic nation with a favourable regulatory environment and supportive of mining. Foreign investors possess the same rights as locals, tax and royalty rates are very attractive and the costs of operating are extremely low. Serbia, which borders Bosnia, has attracted significant investment from a multitude of mining majors in a similar geological setting. ADT's founders discovered a warehouse of Yugoslav era technical reports dating back 30 years, providing valuable information on historical brownfield projects and exploration activities that allowed it to grasp the low hanging fruit in terms of prospectivity. Consequently, the company has made a world-class, poly-metallic greenfield discovery in Rupice (9.4mt @10.1 g/t Au equivalent) along with significantly advancing a brownfield asset in Veovaca, collectively referred to as the Vares project. As a result, ADT was the ASX's best performing IPO in 2018. We believe the potential for further quality discoveries is high given the lack of systematic, modern exploration. ADT has released a very detailed Scoping Study, highlighting the incredible economic potential of the Vares project. Broadly the project economic outcomes have been modeled by the company as follows: Process Plant throughput: 800 ktpa Initial capital expenditure: USD$178 million FID to first production: 13 months Payback period: 8 months Post Tax NPV discounted at 8%: USD$916 million (approx AUD$1.3 billion) Post Tax IRR: 107% These are world-class metrics by any measure, with an economic capital intensity (initial CAPEX/NPV8) less than half of comparable projects we have examined. We examined a couple of acquisitions for comparable projects (albeit with inferior economic returns) and noted that: S32 acquired Arizona mining at a value approximately 70% of the project's NPV8 - at scoping study stage Zijin acquired Nevsun at approximately 90% of NPV8 in neighboring Serbia - at pre-feasibility study stage. ADT is currently trading at approximately 18% of NPV8 - at scoping study stage. As such we believe any transaction would need to be priced at a minimum of 60% of NPV8 for the management team (who hold ~30% of the company) to even consider. Large miners like Rio Tinto, Lundin, Freeport McMoran and Zijin are active in neighboring countries and would find ADT a very attractive acquisition now that there has been demonstrable progress in terms of feasibility studies. There is a profound lack of quality projects available globally and this has driven up acquisition prices substantially over the last 10 years. We also note that base metals are at a cyclical low and ADT's ground is still very much under-explored, which will provide comfort to any potential acquirer. Looking ahead we see several catalysts on the horizon: London stock exchange listing in progress - we expect the LSE listing to cause ADTs value to rise given the current valuation differential between Vares and similar projects Further potential exploration upside from current and future drilling programs at Vares (4 rigs onsite) - has the potential to further improve project economics Exploitation, operating and mining licences - all currently being progressed Environmental and planning permits - all currently being progressed Further geotechnical, mining, environmental and metallurgy studies leading to the completion of Definite Feasibility Study within 12 months. Risks we see are: Potential delays in permits and licences - this has been a minor issue in the past but appears to be proceeding more smoothly now. Sovereign risk - we consider this to be in line with neighboring Serbia Outcomes from further feasibility studies resulting in marginally higher CAPEX We believe ADT is a very compelling, well-priced opportunity for the resource investor with material potential upside that may be realised via a takeover from a larger miner or by the company bringing the project into production in its own right. 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 ADT. Towards the start of the 2019 calendar year, we identified a strong investment thematic in junior gold companies driven by the confluence of 3 primary ideas:
We believe this thematic is still strong and in this wire, we discuss a number of qualitative factors that help assist us in identifying high-quality gold opportunities and outline 2 names that tick our boxes. Generating our own ideasWhile it is very difficult to quantitatively screen companies due to the early-stage nature and non-financial characteristics of these companies, there are a number of different methods of discovering companies in this space. The most common of these are: sell-side (broker) research, industry comparisons and independent project assessors (typically covering later stage companies). However, we tend to rely heavily on our own proprietary research library of almost 1000 primary research pieces to generate ideas and identify broad brush investment thematics. We largely avoid secondary research, but do find it useful on occasions to confirm and question the veracity of our own primary research efforts. Geological factors1: Depth and scale These factors are very important in determining whether a deposit may be economic. A general rule of thumb is that the deeper a deposit, the higher grade it needs to be economic – this is a function of higher mining costs at depth. This should be looked at in conjunction with the scale of a deposit, as generally the larger the scale the lower the cost. 2: Geometry and mineralisation style The shape of a deposit is an important indicator of potential mining cost for example, a gently dipping equidimensional (spread consistently in all directions) shaped deposit will almost always be cheaper to mine than a steeply dipping, planar deposit. Disseminated (spread uniformly) style mineralisation deposits are preferable to vein or reef hosted mineralisation from our perspective, again due to lower processing costs. 3: Historical context and potential exploration upside We have a preference towards ‘time capsule’ projects where little modern exploration has been conducted. This could be for a number of reasons including areas where mining exploration has been banned, or where exploration was not conducted due to a low commodity price environment. We consider that exploration upside is generally considerably larger with these particular projects, given the historical context. Corporate factors1: Location/jurisdiction: This is important from an economic and strategic perspective. Government royalty rates can vary significantly between jurisdictions, along with the general legal and social environments. A resource situated near infrastructure will generally hold an advantage over a similar more isolated deposit. Being close to other producing mines allows optionality in terms of commercial outcomes for example, a smaller deposit that may not be large enough to support its own processing plant could potentially utilise a neighbouring mine’s processing plant for a fee. 2: Management team and corporate strategy Pursuing a prudent strategy can expedite the time needed to bring a deposit into production, and add considerable value to a project whilst mitigating risk. One common mistake we see is rushing into production too soon for marginal or higher-cost projects. Mineral production has its own skill set quite different from mineral exploration. 3: Overall economic evaluation To be robust and minimise downside, any economic studies on the deposit should use conservative assumptions and incorporate all costs. In the gold sector, a commonly used metric ‘AISC’ (all-in sustaining cost) is one of the most misquoted with each producing company using their own poetic licence to their quoted metric. Investors should perform their own calculations instead of relying on company provided AISC figures. In addition, we have a bias to project with relatively low capital intensity which usually results in a higher project IRR. Higher metallurgical recoveries are positive. 4: Ability to build relationships with credible larger counterparties: This is an important factor especially when considering commercial terms could be negotiated for production or exploration. A management team that can attract large partners to the company or its projects, adds credibility from our perspective. 5: Catalyst/s to rerate the stock: This is one of the more important elements in our process and can be either external, internal or multi-faceted. One must remember that the company cannot change the physical resources that may or may not lie within their ground and accordingly be very selective when investing in this space, taking a ‘resource first’ approach. Preferred namesOur preferred names in the junior gold space are Yandal Resources (YRL:ASX) and Alice Queen (AQX:ASX). Yandal Resources: Multiple catalystsYandal currently has a gold resource of approximately 200,000 ounces at their flagship Flushing Meadows deposit at a grade of 1.3 g/t. The deposit is at very shallow depths of less than 150m, is currently 1.8kms in length and is open at depth and in multiple directions. As such, we think there is strong potential for the size of this deposit to increase materially. This deposit, whilst planar and dipping is very shallow and likely to be able to be cheaply mined via an open pit. This tenement of 472 sq km has been historically held by majors during times of lower gold prices, and has had virtually no exploration over the past 20 years. Yandal's projects are located in the Yilgarn Craton, Western Australia; this locality is thought to hold up to 30% of the world’s resources and is regarded as a Tier 1 jurisdiction. All the projects are located within trucking distance of multiple gold mills operated by 3rd parties, so can be commercialised rapidly. The quality and largely oxidised nature of the current resource ensures that this ore will be sought after by gold processors. The company intend on further building out its resource base via lower risk extension drilling and have recently started a program of 20,000 metres. The management team are experienced, credible and focused having worked on the neighbouring projects that are held by Echo Resources. Northern Star, who have just acquired Echo, holds 15% of the company; with the Top 20 shareholders holding 80%. We think there are multiple potential catalysts for the company to rerate and believe the company will become increasingly attractive as they build out their resource base. Alice Queen: More upside than downsideAlice Queen has a gold resource of around 500,000 ounces at its Horn Island project, in the Torres Strait, at a grade of 1.9g/t. The deposit is shallow with a maximum depth of 250m. Horn Island was reopened to mining activities in 2014, after a 25-year hiatus. Since then, AQX has lightly explored and applied modern exploration techniques to the project, attracting Saint Barbara (SBM:ASX) as a joint venture partner. What is so unique, is that SBM agreed to excise the existing 500,000-ounce deposit and associated infrastructure from the joint venture; with an option to buy into these areas for a 70% interest by paying ‘fair value’. We believe there exists significant potential at depth for the discovery of further gold resources, along with potential extensions at shallower depths. Horn Island is located in the Torres Strait, Queensland. Northern Queensland hosts a gold endowment of around 40 million ounces, with 19 million hosted in Intrusion Related Gold System (IRGS) deposits; the system speculated to exist at Horn Island. The company intend on progressing the Horn Island project further in conjunction with SBM. The management team are committed, practical and focused; and have a world-class consultant team. Horn Island has significant existing infrastructure in place including a deep water port, a domestic airport, and existing freshwater supply. We believe that this should translate into significant savings in terms of capital expenditure and consequent superior returns, should a mining operation recommence. The company have a proven track record of attracting and working with larger counterparties, having attracted SBM and Newcrest to its projects in the past. The company also hold very prospective exploration ground in NSW, less than 1 km from Alkane’s discovery at Boda; this was regarded as the best Australian porphyry discovery in 20 years. Again, we see multiple catalysts for AQX to rerate notably, the exploration program being funded by SBM as well as further exploration success on the neighbouring tenements in NSW held by Alkane. Disclaimer: Datt Capital currently holds shares in AQX and YRL. |
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