The first concentrate, produced in late February, will be sold against the backdrop of a resurgent silver price and recovering base metals prices.

Guidance for 2024 has been set at 240,000-300,000 tonnes of underground ore mined, with the plant expected to reach nameplate capacity of 800,000t per annum by the December quarter.

Average grades of the ore mined at the Rupice deposit in 2024 have been forecast at 4.5-5.9% zinc, 261-348 grams per tonne silver, 3.2-4.2% lead, 0.5-0.6% copper and 2.1-2.8g/t gold.

In an initiation note on Adriatic published last week, Morgans analyst Tom Sartor noted that grade was king in mining.

“Very high-grade base metals projects with compelling economics are rare beasts in current markets, and often drive premium outcomes for owners (e.g. Cannington for BHP/S32, Sepon for Oxiana DeGrussa for Sandfire and Nova for Sirius),” he said.

Adriatic’s first production also makes it the ASX’s only primary silver producer.

As per the 2021 definitive feasibility study, production in the first five years of the mine is expected to be just under 15 million ounces of silver equivalent per annum at all-in sustaining costs of US$7.30 an ounce.

Fast mover

Adriatic listed on the ASX in mid-2018 following a heavily supported A$10 million initial public offering which issued new shares at A20c apiece.

The stock had already tripled by the end of that year off the back of strong drilling results from Vares.

A maiden resource, scoping study and London Stock Exchange listing followed in 2019.

By 2022, Vares was permitted and financed and under construction.

“The progression from maiden resource to first concentrate in only 4.5 years exemplifies Vares’ bankability, Adriatic’s in-country credentials and government support,” Sartor said.

Vares represents the single largest mining foreign direct investment (FDI) and represented a quarter of Bosnia & Herzegovina’s FDI in 2023.

The project is expected to account for 2% of Bosnia’s gross domestic product and will be the country’s largest exporter.

Adriatic will enjoy a corporate tax rate of just 10%, while royalties are a low US$2.23 per tonne, equivalent to about a 1% net smelter return.

Improving metrics

The 2021 DFS returned a post-tax net present value (at an 8% discount rate) of US$1.06 billion, an internal rate of return of 134% and a payback period of 0.7 years.

Average annual EBITDA for the first five years was forecast at US$281.1 million.

The study was based on a silver price of US$25/oz, zinc price of US$3000/t, lead price of US$2300/t, copper price of US$9500/t and gold price of US$1800/oz.

While base metals prices sit slightly below those levels, precious metals have surged.

Silver has traded as high as US$29/oz in recent weeks and currently sits just below those levels, while gold reached a record US$2400/oz in recent days before easing slightly.

“We calculate a circa US$1.5 billion net asset value for Vares (un-risked, ungeared), yielding a plus-70% IRR on capex of US$189 million and a circa one-year payback,” Sartor said.

Vares was funded via a US$142.5 million debt financing package from Orion Mine Finance and US$102 million equity raise.

The debt is fully drawn down and the first repayment of US$16 million is scheduled for the December quarter.

Adriatic expects its cash balance to bottom at about US$20 million in the current quarter before positive cashflow is achieved in the September quarter.

Sartor warned there was a risk to liquidity in the case of any delays to ramp-up, but noted the company’s strong debt and equity support, as well as supportive terms from offtake partners, which include Boliden, Glencore, Trafigura and Transamine.

Sartor initiated coverage with an add rating and price target of A$5.80 (currently $4.26).

“Our A$5.80 target applies a discount for jurisdictional risk, which we think can unwind through demonstration of steady-state profitability in-country and growing recognition of Bosnia’s importance to Europe and its raw material supply,” he said.

“It’s worth noting that application of current spot silver and gold prices would lift our risked valuation to A$7.30.”

Adriatic CDIs reached an all-time high of A$4.39 this week, which gave it a market capitalisation of close to A$1.4 billion.

Sartor said Adriatic was attractive due to its circa 40% capital upside; strong cashflows; rapid payback/de-gearing; expansion and exploration upside; and clear M&A appeal.  

“Issues are to be expected through ramp-up (mining and metallurgical optimisation); however, structurally low costs/opex run-rates and very supportive stakeholders offer protection,” Sartor said.

“Jurisdictional risk is a hurdle, but a modest one in context in our view. 

“Adriatic looks like a compelling opportunity for base/precious exposure.”