Trading at an ATH, can Bosnian developer Adriatic Metals walk the walk when its Vares silver mine becomes a producer
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You could be forgiven for thinking plenty about Adriatic Metals (ASX:ADT) seems a little unfashionable.
Its flagship Vares project is rich in silver, a precious metal commonly boasting the less than complimentary moniker of gold’s ‘poor cousin’.
Vares’ location? Bosnia and Herzegovina, one of the former Yugoslavian states which disintegrated into separate countries around the war that engulfed the region in the 1990s, a process that coined another often unflattering term – Balkanisation.
Yet Adriatic Metals, once backed by copper-gold giant Sandfire Resources (ASX:SFR) before it took a healthy profit on its investment in 2021, is up almost 1600% since its 2018 ASX listing and at a market cap of almost $700 million, has lifted almost 103% in the past 12 months over a period that has seen other stocks fall prey to global economic fears.
It is not uncommon for developers to ride a wave of exuberance and expectation ahead of the hard part of actually running a profitable mine.
But with construction on Vares over 50% done, 15,000t of development ore at surface and miners at the operation already several hundred metres underground ahead of a September 2023 commercial start, ADT managing director Paul Cronin has confidence in both the silver and Bosnian markets.
On the back a recovery in gold price, silver is up around 30% over the past six months as investor demand for precious metals has recovered from the wear and tear of a string of successive US interest rate rises in 2022.
Now fetching upwards of US$24/oz, Cronin believes the emergence of silver as an industrial metal will ensure demand for the commodity remains strong in the coming years.
“Though it’s not known as a battery metal, it is instrumental in high velocity EV charging, so there’s a lot of silver that use in those charging stations,” Cronin says.
“We’ve also got silver that’s used heavily in photovoltaic production and we’re going to continue to see growth in solar PV installations.
“And it’s amazing, just how many we’re seeing in this part of Europe at the moment where I think the geopolitical issues have really hammered home a complete rethink around energy security.”
Cronin’s assessment is silver will be a metal in its own class, straddling the border of the precious and ‘energy transition metals’ categories. They should have plenty of those given the proliferation also of other metals at Vares.
Silver will account for around a third of ADT’s revenue at current prices, with base metals like zinc and lead making up a third and gold and copper comprising another third of the polymetallic mine’s expected income, derived from underground at the VMS style Rupice deposit.
Silver equivalent production over the first five years of its decade long mine life is expected to total almost 15Moz at an operating cost of US$7.30/oz on capex of US$168 million.
Mining was prominent in Bosnia before the dissolution of Yugoslavia.
In fact the Veovaca mine, part of Vares, was excavated between 1983 and 1987, producing a zinc, lead and barite concentrate.
But opportunities to progress in mining and other forms of business dwindled in the years after the Balkan War.
Nowadays the bulk of the mineral product in the small nation on the Adriatic Sea is coal, with nine running mines, along with two base metals operations, Cronin says.
After peaking at around 4.5 million in the early 90s, Bosnia’s population has fallen to roughly 3.2 million, a ‘brain drain’ Cronin says the Vares development will help to address.
Vares, where the project is based, was no different. 55km to the north-west of the capital of Sarajevo and an hour’s drive from its airport, Vares is a mountainous and forested area sparsely populated outside of its township.
Once prosperous mining community, boasting iron ore mines, a foundry and a lead & zinc mine, in 1990 the population of Vares was around 22,200 but since the war migration has cut its numbers to 9000.
“Young people in Bosnia aren’t necessarily seeing the opportunities for career development, and moving to other parts of Europe and as a result of that, you’ve seen a steady reduction in the population of Bosnia and Herzegovina over the last 20 years,” he said.
“We’ve implemented a number of programs to try and counter that.
“So we’ve made a very affirmative decision to hire young graduates and to train them, we pay reasonably well for a mining company in Bosnia, but we also offer a lot of benefits, including short term incentive payments that are linked to productivity and performance, offer the opportunity for private health care for our employees and their families, the only employer in Bosnia that offers that.”
At 42km2, ADT holds the largest mining concession granted anywhere in the country.
Bearing in mind the distinction between the countries in scale, that would be tiny by Australian exploration standards.
The community around Vares, Bosnia and the wider West Balkans has seen mining since antiquity, with evidence of mining dating back to Roman and Saxon times, and industrialised operations under the rule of the Austro-Hungarian Empire and the Yugoslavian era.
Whilst there are a number of other base metals operations in Bosnia (and more in Serbia), other than Zijin’s Bor copper mine, ADT says, the mines are small and privately held.
Thirty years ago mineralisation was largely found on surface, meaning while there has been limited exploration at all since the start of the war, there is also a dearth at depth in the northern section of the Tethyan Belt.
Where it has been completed, ADT notes Tier 1 deposits like Reservoir Minerals at Bor, Rio Tinto at Jadar and Adriatic’s own Vares have been uncovered, while the fact little gold assaying was conducted in the Yugoslavian days leaving much ground ripe to be re-examined.
Cronin believes Bosnia and the broader Balkan region has enormous potential for mineral discoveries, but needs “more boots on the ground doing grassroots exploration”.
“What it hasn’t had is a lot of exploration and there does need to be more boots on the ground doing grassroots exploration in this country and I think that will give rise to a lot more mining operations,” he said.
But there are benefits to the location and its history as well. Vares is serviced by a single main road which joins a recently commissioned highway just 25km to the south and a dedicated railway line which will once refurbished provide rail access to the deep water Adriatic port at Ploce in Croatia.
Some of ADT’s recent drilling success has turned heads.
Results last week from the Rupice Northwest discovery, where drilling is expected to extend into 2023, include hits like 45.9m at 701g/t silver equivalent or 22.5% zinc equivalent from 216.1m and 19.4m at 681g/t AgEq or 21.9% ZnEq from 212.6m.
Those results sent ADT’s shares up 4% on the day of reporting, since rising to a record $3.51 yesterday.
Among the eye-catching numbers from the 2021 DFS were the low cost base, IRR of 134% (more than 6 times the investment return hurdle of most major mining operations) and payback period of a little over eight months.
Since then the world has undergone major inflationary challenges. But Cronin says higher operating costs from things such as reagents and diesel price spikes will be balanced out by higher prices for its core commodities.
Exploration success will also bolster the investment case, with Cronin saying ADT does not expect to have to dip back into equity markets like many other companies have to cover capex shortfalls.
“We are working on a new mine plan that is going to basically bring in some some higher grade ores in the earlier years of operation,” he said.
“We’re obviously now seeing the benefits of exploration success, we’re seeing this high grade northern zone that I think will change the economics the project as well in a positive way.
“So I’m confident that when we put out an updated resource statement and updated reserves, the market will probably see that the original valuation that we gave it or ascribed to it as part of the definitive feasibility study is a little bit understated.”
Sensing the shift in deglobalisation around commodities, accelerated by Covid and the invasion of Ukraine by Russia, ADT says it noted when it formed in 2017 its founders noted the trends that would see Europe reindustrialise and scramble to underpin its existing manufacturing base by sourcing primary raw materials from the continent.
It has prioritised closer European smelters as offtakers for its concentrate, a move that will reduce transport related Scope 3 emissions. Around 75% of the Vares product will be smelted in Europe, with zinc con to head to Boliden in Sweden and Trafigura’s Nyrstar operations in the Benelux countries, silver/lead concentrates to Glencore’s smelters in Europe and the balance to China.
Another challenge in that part of the world has been garnering community backing, even with local support for the transformation of energy systems to build more renewable power.
In neighbouring Serbia, Rio Tinto (ASX:RIO) was famously forced to postpone work on its board-approved Jadar lithium mine, the largest source of the battery metal proposed to be developed in Europe, after community opposition saw the government revoke its core permit.
In Vares, Cronin says the people both fondly remember the economic benefits of their mining past while also remembering the pitfalls of the way it was conducted three decades ago, leading locals to hold the company to account “quite properly” on matters of environment, health and infrastructure.
It may not capture hearts and minds as powerfully as the Bosnian national football team did in the young nation’s first World Cup appearance in Brazil in 2014, but with construction already well under way at Vares, Cronin says Adriatic’s experience in Bosnia has been completely different.
“I think in Bosnia there’s a strong mining tradition but the capital and the investment hasn’t been available in the last couple of decades to support that,” Cronin argues.
“I think the government want to see mining again, they want to see mining via be a big contributor to their economy, we’re certainly seeing public statements by the Serbian government along those lines as well, where they want to see mining, contribute 5% of their GDP.
“So I think when you when it comes to election time, there might be a bit of mud throwing here and there and I think Rio Tinto were unfortunate in that, … but I think ultimately, common sense prevails. And the government in Serbia and governments in Bosnia will strongly support mining in the future, particularly as companies like ours demonstrate how it’s done properly.”