Adriatic Metals Stock: An Attractive Investment Ahead Of Commercial Production (ADMLF)

Ron Levine Overview Adriatic Metals (OTCPK:ADMLF) is polymetallic mining company with its core Vares project in Bosnia & Herzegovina, it is listed in the UK and Australia. The company also has the earlier stage Raska project in Serbia, but gets most of its value from Vares, which this article will focus on. Vares has about half of the projected revenues coming from precious metals and half from base metals, about 2/3 of the projected revenues are from silver and zinc. Figure 1 – Source: adriaticmetals.com – Vares Projected Revenue Split I have covered Adriatic Metals since mid-2021 and I have also been long the stock during part of this period, my prior articles can be found here. The company has lately had a string of negative news, which I will discuss more in the following section. This has caused the stock price to dramatically underperform the various metals relevant to the company and most mining companies by a large margin in 2024. Figure 2 – Source: Koyfin Longer term, the stock price performance of Adriatic Metals has still done exceptionally well. I consider the recent pullback an excellent buying opportunity, similar to what we have seen in prior pullbacks to this trend line, rather than a sign of a pending disaster for the company. I have consequently increased my position size substantially in Adriatic Metals over the last few months. Figure 3 – Source: Koyfin Recent Developments In late May, Adriatic Metals decided to raise about $50M at A$4.15 per share, despite having communicated being fully funded on prior occasions. This naturally caused some weakness in the stock price and some investors were very critical about the decision. However, as mentioned in my last article on the company, I thought this was simply prudent capital management given that the stock price had been relatively strong until that point. In Q2, Adriatic Metals completed the transition to owner-operator of the Rupice Mine from the former mining contractor Nova. The underground progress did pick up during 2023 when Adriatic Metals got more involved and the advance in Q2 2024 has continued to increase. So, this decision looks to have had a positive impact so far. Figure 4 – Source: Adriatic Metals Q2 2024 Quarterly Update The main recent negative development has been the Constitutional Court ruling, which prevented the Federation of Bosnia & Herzegovina from proving certain permits for the tailings facility on public land. From the outside, this is a bit of a legal quandary which might have rather significant implications for business in the country, so this ruling is likely to be appealed by more parties than Adriatic Metals. The more direct impact for Adriatic Metals is that the company is not allowed to clear trees and continue with the planned extended tailings storage facility, which is needed from Q1 2025. The company will provide a more detailed update later this month, but Adriatic Metals is currently investigating alternative locations for the tailings storage, within the mining concession and on private land, which would not be impacted by the recent ruling. So, this should not be viewed as a roadblock, but more as something that needs to be worked around, even if this has not done wonders for the sentiment in the stock. At the beginning of August, Adriatic Metals announced that the founder and CEO Paul Cronin will be leaving the company and moving back to Australia for personal reasons. This is not ideal as Paul has done a fantastic job of getting Adriatic Metals from exploration, development, permitting, construction, to first production in a record amount of time. Laura Tyler will take over as Interim CEO, and she has an extensive experience at BHP (BHP). Given Laura’s experience and the fact that the company is relatively close to commercial production, this should likely be manageable for the company. A few weeks ago, Adriatic Metals also announced a contractor fatality, which is of course tragic. This was not during mining, but a vehicle overturned, and the driver unfortunately sustained fatal injuries. Understandably, this list of negative news has put pressure on the stock price, but the company is still on track for commercial production in Q4 2024 as of the last update. Valuation, Risks & Conclusion The stock price of Adriatic Metals on the London Stock Exchange is, at the time of this writing, £1.444, which gives us a diluted market cap of $621M and an enterprise value of $681M. The net present value (“NPV”) of Vares is somewhere in the $1.5B to $1.8B range, a little bit dependent on how aggressive we want to be with metal prices. My estimates for the net present value of Vares is based on the feasibility study, where several adjustments have been made to reflect the updates reserves, increased constructions cost, and latest value of the steam. Figure 5 – Source: My Estimates The enterprise value to NPV is around 0.4 for Adriatic Metals, which is in my view an extremely attractive valuation for a company which could be months away from commercial production. That is why I consider Adriatic Metals a “strong buy” at this level. Much of the construction risk of Vares should now be in the rearview given that first production was achieved in Q1 2024. However, ramping up any mining project to commercial production is no easy task, where delays are common occurrences. That is something every investor should be aware of. The recent ruling from the Constitutional Court is not the kind of thing you want to see for a new mining company, especially in a country which hasn’t seen a lot of foreign capital investments lately. It is hard to find a more apt time to use the quote popularized by Rick Rule in mining circles. How to snatch defeat from the jaws of victory. With that said, it does look like the impact of this court ruling will be relatively limited for Adriatic Metals. So, if the company can get a new tailings storage facility in place and achieve commercial production, I expect the stock to re-rate substantially from here. Adriatic Metals has $60M in cash at the end of Q2 2024 and is already today generating some revenues. So, unless we see major delays in reaching commercial production, the company has a decent margin of error going forward, and I very much like the risk reward at this stock price. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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