1. Introduction
One of my favorite holdings, Adriatic
Metals Plc (ADT:ASX; 3FN:FSE), is still under the radar for a lot of
North American investors, being an Australia listed company. It is my strong
conviction this is not really deserved, and this situation might potentially
not last very long. As it is exploring Rupice, a very high-grade polymetallic
project in Bosnia Herzegovina, Adriatic already produced several impressive
sets of drill results during 2018. It didn't stop there, as the company
released, for example, hole BR-36-18, which intercepted a very thick zone of
high-grade mineralization over 72m returning 18.3% Zn, 10.7% Pb, 211g/t Ag,
2.5/t Au, 2.5% Cu from 206m, and 46m at 25% BaSO4 from 216m on January 21,
2019.
These numbers already sound impressive just on their own for each
individual metal, but the zinc equivalent at current spot prices would be a
staggering 72m @ 49.5% ZnEq, and the gold equivalent an equally ridiculous
72m @ 31g/t. The gross metal value of such a hole is no less than US$1328/t.
And it isn't just one lucky strike, Adriatic has been pulling results
resembling this since 2017.
Granted, the mineralized area isn't very large, but the extreme grades
bode well for a very economic project, potentially suited for a mid-tier
producer. And the company isn't done drilling yet. It has applied for (and
was granted) a much larger area, including a potential extension of Rupice to
the north, containing many large IP targets to the south. The company is
awaiting approval on further drill permitting, but it is expected to be
granted at the end of this month. Adriatic is fully cashed up and will
explore most of these targets in 2019. What the end result will be in the
form of a maiden resource estimate nobody knows yet, but I'm curious enough
to do a guesstimate myself this time. It really is a gem in my view.
All presented tables are my own material, unless stated otherwise.
All pictures are company material, unless stated otherwise.
All currencies are in US Dollars, unless stated otherwise.
2. Company
After the pretty extensive analysis of Kees Dekker, which I published in October 2018, I will touch just briefly on
some company specifics. Adriatic Metals has its main listing on the main
board of the ASX, where it is trading with ADT.AX as its ticker symbol. The
company fully owns two polymetallic projects in Bosnia Herzegovina, its
flagship Rupice project and the Veovaca brownfield project.
With an average volume of in excess of 228,437 shares per day, the
company's trading pattern is quite liquid. Its secondary listing is the
Frankfurt listing, with 3FN.FWB for the ticker. Adriatic currently has 131
million shares outstanding (fully diluted 150.5 million), and 19.5 million
options of which most are in the money, which gives it a market capitalization
of A$108.36 million based on the February 22 share price of A$0.72. The
company has an estimated cash position of A$14Mmillion at the moment, and has
no plans to raise more cash soon. Management and the Board of Directors hold
the largest position, about 30%. Director Paul Cronin is the single largest
shareholder at roughly 18%.
Another meaningful shareholder (7.7%) is Sandfire Resources, a copper-gold
producer from Australia. Its Degrussa mine is depleting fast without any
potential of finding new ore in the vicinity, so it is looking for other
assets. Apparently it has a strong focus on Adriatic now, as it tried to lift
its holdings to 19.9%. Adriatic management wasn't too pleased with this
concentration of voting rights and prevented this from happening.
Share price Adriatic Metals; source company
website.
As can be seen in this chart, the share price didn't drop off after the
first results in June 2018, and it took a while before it ascended further,
as drill results came in slowly. But with every set of drill results
confirming and expanding the very high grade mineralized envelope at Rupice,
investor confidence rose further with it. The latest 10% decline didn't have
any fundamental reason, but was likely profit-taking according to Paul
Cronin. Therefore, I consider this a buying opportunity.
3. Exploration
What is Adriatic exactly up to these days? The company is awaiting the
extended Exploration permit for Rupice, after receiving the Urban planning
permit on February 6, 2019. The Exploration permit is expected
soon, within 1-2 weeks. The permitting system in Bosnia requires a scoping
study or PEA for the application of an exploitation permit, which is not
different from almost any other country; there has to be a mine plan. The
company figured out that using its nearby Veovaca site 17km away, a currently
uneconomic brownfield project hosting a former mine, would ease the
application process, so eventual ore from Rupice needs to be hauled (or
concentrated on site first) to an eventual mill and plant at Veovaca. A 2017
IP survey already indicated very interesting targets (red and magenta):
A deeper IP survey is planned to start in Q1 and will scan the recently
expanded license to further define drilling targets on the concession for the
2019 drilling campaign. Management indicated to me that these targets will
see the first drilling in May of this year. Historical data would suggest
that mineralization is quite shallow but its findings from Rupice North is
that shallower lower-grade mineralization is accompanied by higher grade at
depth if the structural conditions indeed exist.
Of course, this is all for the future, after a deposit has been
established. This is scheduled a few months from now, well into Q2. Adriatic
is currently drilling at Rupice and Veovaca. According to management, heavy
snowfall last month has slowed its progress temporarily but the company
expects to have all four rigs operating on the northern plunge and the new
zone to the South East. Adriatic will add two more rigs at JB after it has
finalized the mentioned IP survey. It will penetrate deeper than the survey
from 2017 and should help identify the mineralization deeper than 200m.
Management expects to drill about 20,000 meters this year. The next drill
results will be out in March btw.
So, Adriatic is in the middle of delineating a resource, and as a result
of the drilling so far, it seems to be able to show a good impression of
potential mineralization. Here is a table with the complete results, using
the very low cut-off of 1% Zn+Pb, as the company wants to include economic
values of silver, gold, copper and barite as well (in my view it could just
use ZnEq cut-offs to simplify things, in- or excluding barite):
It is good to see it had not too many misses when delineating the
potential resource, for last year these were holes 1, 4, 6, 9, 14, 18 to 21,
24, 28, 30 and 31. Most of these holes were to the far east across a probable
fault, or to the west, where the mineralization thins out. I received this
map with collar locations and directions from management to get a better
impression:
Hole 4-18 and 20-18 probably missed the mineralized envelopes, and 19-18
and 6-18 probably just further defined the fault line. Hole 14-18 looked like
a vertical one, going to a depth of 214.9m. It could be the western limit,
but at that location it is possible that the mineralization is located just
below that level, at least when looking at the long section to the north.
The benefits of a low cut-off can be seen in the next table, showing for
example the assay intervals of hole BR-36-18, adding another 8m to the other,
much higher-grade mineralization:
The mineralized envelope has been outlined in this well-known drill collar
map:
The sections will show that the mineralized intercepts get higher grade
and thicker the deeper the mineralized envelope goes along strike. At the
same time, the envelope is tilted, and the more near surface side (west side)
of it is thinner and lower grade as well compared to the deeper side (east
side). After intensive drilling around the mid-section, it appeared that
there are two distinct high grade zones, the Upper HG Zone and the Lower HG
Zone (projected cross sections in green):
Many of the older holes of the Upper HG Zone stopped right after the drill
hit basement/non-mineralized rock, so Adriatic has to drill deeper below the
Upper HG Zone to potentially establish an extension to the south (left in
this section) of the Lower HG Zone. All eyes are, of course, on the Lower HG
Zone at depth now, potentially extending further along strike to the north.
When the Exploration permit is granted with a week or so, drilling will test
this prime target.
The following set of cross sections gives a good indication of the
variable shapes of mineralization, and true width of many drill results:
<>
Cross section X-X' is the one that I don't exactly follow, as the long
section doesn't indicate this second, deeper located mineralized layer, but
the long section probably stays west of it, close to hole BR-10-81, missing
this layer in this section.
The mineralized envelopes vary a lot in size and shape, but the good news
is they seem to be fairly continuous, as seems the long section. When
sequencing the sections, it appears that the Upper and Lower HG Zone start
out as one, then diverge into two separate zones, of which the Upper HG Zone
seems to end close to cross section U-U' and the Lower HG Zone seems to
continue at the north. I am contemplating buying an affordable piece of geo
software in order to assist me with estimating envelopes, but for now
calculations by hand are my approach. I started with the long section,
averaged grades, looked for true widths, and this is the kind of first table
as a result:
This exercise was repeated for all cross sections as well, giving me something
of a starting point to work with. Determining an average width and height of
the envelopes in between the sections wasn't easy as there is not enough
data, and I couldn't average too much on the grades as it should actually be
a weighted average. Nevertheless, I estimated a conservative envelope for the
Upper HG Zone of 0.45M m3, and 0.7M m3 for the Lower HG Zone, which, assuming
a conservative average gravity of 3.6t/m3, leads us to 4.1Mt. I am not sure
how much Adriatic is dealing with sedimentary host rock, which would bring
down the barite (4.5t/m3) and sulphide gravity (3.6 to 4.4t/m3).
Some info on specific gravity (density) of host rock:
"Sulphide ore minerals have high densities that range generally from
about 4.0 g/cm3 for sphalerite to 4.62 g/cm3 for pyrrhotite. Galena attains
an exceptionally high value of 7.50 g/cm3. Associated minerals pyrite,
magnetite and hematite have densities of 5.02, 5.18 and 5.26 g/cm3,
respectively. A sample of densities of massive sulphides in the Bathurst
camp, determined from measurements on drill core from several sites,
indicates that they range from about 3.80 to 4.40 g/cm3. Those of
semi-massive sulphides range from about 3.60 to 3.85 g/cm3. By comparison, a
sample of density measurements made on fine-grained sedimentary and felsic
volcanic host rocks indicates densities ranging generally from about 2.70 to
2.85 g/cm3."
With the corporate tax in Bosnia Herzegovina standing at a very cheap 10%,
and a potential operation dealing with small tonnage and thus low capex,
there is no doubt in my mind that this could be a very profitable mine
someday. If I would take a 4Mt resource for the entire mineralized envelope,
conservative recoveries and payability, and using an average small-scale
underground capex/tpd of US$80,000/tpd, the total capex would come in at
US$90 million. Let's use some margin of error, and take US$100 million and
US$60/t opex. This would result in a hypothetical post-tax NPV8 of US$175
million and likely a very high post-tax IRR. This is all conservative, and
considering the current market cap of about US$80 million and exploration
ongoing there is a lot of upside.
4. Conclusion
By now it will hopefully be clear why I think Adriatic Metals is already a
pretty interesting exploration story, with lots of further upside potentially
in the making on its recently expanded licenses. If the maiden resource
estimate, which is expected in Q2, 2019, can indeed get to 4Mt or more,
hypothetical PEA economics might be spectacular. With a very low hypothetical
capex this project will be easily fundable for a wide range of parties, and
will probably attract more interest after the resource estimate comes out and
metallurgy proves to be fine. It is one of the most exciting exploration
stories around at the moment, far from nearing the end, and as a shareholder
I keep tracking them at close range with extra interest. Have a look.
I hope you will find this article interesting and useful, and will have
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Disclaimer:
The author is not a registered investment advisor, and currently has a
long position in Adriatic Metals. All facts are to be checked by the reader.
For more information go to the websites of the mentioned companies and read
the available company information and official documents on www.sedar.com,
also for important risk disclosures. This article is provided for information
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