Adriatic takes big strides forward at its brownfield projects in the Balkans

Adriatic Metals (LSE: ADT1; ASX: ADT) has "an interesting few years ahead," says the company's managing director and CEO Paul Cronin, as the junior explorer progresses its brownfield projects in Bosnia-Herzegovina and Serbia.

In late January Adriatic was granted an exploitation permit for its Veovaca project near Vares in Bosnia-Herzegovina, 50 km north of the capital, Sarajevo.

"These are very exciting times for us," Cronin said in an interview. "This is only the second exploitation permit to be issued by the government in the last 30 years. So, not only is it significant for us, but it's also significant for the government of BiH [Bosnia-Herzegovina]."

The permit, issued by the Federal Ministry for Energy, Mining and Industry, initiates the project's formal exploitation period, valid for 30 years. The permit will allow Adriatic to complete detailed engineering work for the Veovaca open pit mine, flotation plant, and tailings management facility, with construction slated to start in the third quarter of 2021.

In another significant step forward for the company, the Federal Ministry of Environment and Tourism on Feb. 9 issued a positive Record of Decision (RoD) for its Rupice project, 12 km northwest of Vares. Barring any objections, the environmental permit for Rupice will be issued within 30 days of the issuance of the RoD.

Once granted, Adriatic will be able to apply for an urban planning permit on Rupice and then an exploitation permit in a process similar to that for Veovaca.

Both Veovaca and Rupice are past-producing polymetallic deposits that form part of the company's flagship Vares project, which the company acquired out of bankruptcy proceedings in 2017 for US$760,000.

A former investment banker and commodity trader, Cronin has over 20 years of corporate finance and fund management experience. He was working for a South African resources fund when, in 2013, he decided to "cross over the fence" and run Anatolia Energy Ltd, a junior uranium exploration company with assets in Turkey.

Cronin first came across the Vares project in late 2016 after a friend in Australia asked him to travel to BiH to check it out. After returning with some core samples and a "few boxes of data" from the property, he spent Christmas looking over the data. He then suggested that they should try to acquire the project.

"I'd always had a desire to look for brownfield assets in the former Yugoslavia," he said. "Historically, both Veovaca and Rupice had seen varying degrees of exploration and mining before the conflict broke out in the early 1990s, which shut down these operations and saw assets like Vares falling to the wayside."

According to Cronin, Adriatic is the first company to explore Veovaca and Rupice and the surrounding Vares district since the late 1980s.

Exploration of the Vares district started in the 1940s, when Energoinvest, an engineering and energy company based in Sarajevo, discovered several iron ore and polymetallic (lead, zinc, barite, silver, gold) deposits extending from Rupice in the northwest to Smailova Suma in the southeast.

From the late 1960s to early 1970s, exploration of the area consisted of several small programs comprising diamond core drilling and surface trenching at Veovaca and the development of exploration adits and drives, leading to a more substantial diamond program core drilling in the late 1970s and the early 1980s.

Open-pit mining commenced at the deposit in 1983, and approximately 1.2 million tonnes of mineralized material were mined over four years. By the end of the decade, however, mining operations in the country were shut down due to political instability.

The civil unrest of the 1990s, a lack of foreign investment through the early 2000s, and the bankruptcy of Energoinvest in 2012 hampered the resumption of exploration and mining in the region.

"Because of the hiatus in mining activities the region is underexplored, which gives us a significant first-mover advantage," Cronin said. "And because BiH was previously part of Yugoslavia, it has great infrastructure, with an extensive road network, a railway line that goes directly to the port, high-voltage power lines, and mains water supply."

The BiH government is also pro-business, he said, and wants to see foreign investment coming into the country, and provides assistance to companies in navigating the country's laws and procedures.

After acquiring the property in 2017, Adriatic completed a 16-hole 1,379-metre drill program on Veovaca to confirm historical drill holes. That same year, the company drilled eight holes totalling 1,458 metres at Rupice, targeting down the mineralization plunge to confirm historical results and assayed for additional metals, including copper, gold, and silver.

The drill results confirmed that the mineralisation at Rupice is open at depth and along strike.

Historical drilling and Adriatic's 2017 drilling campaign on the northerly extensions to Rupice had intersected "exceptionally high grades of base and precious metals", Cronin said. Geophysical surveys undertaken by Adriatic had also shown possible extensions of the mineralisation to the northwest and southeast.

In 2018, the company conducted a multiphase 15,000-metre infill drill program on Rupice. The first phase of the drilling focused on targets in the North zone and followed the northerly extensions over 220 metres of strike length, including down-dip and down-plunge extensions to the mineralisation.

The phase 2 drilling extended over 350 metres strike length and focussed on an area near the historical Jurasevac-Brestic underground workings and exploration drives and a large geophysical anomaly to the northeast of the workings.

Phase 3 targeted 400 metres of strike length along a corridor between Rupice in the northwest and Jurasevac-Brestic to the southwest, where geophysics had detected several chargeable anomalies.

The drill program's first drill hole, BR-2-18, was drilled in a westerly direction to test the down-dip and down-plunge extension of high-grade mineralisation intersected in the company's 2017 drilling campaign. The hole cut 64 metres grading 537 grams silver per tonne, 4.6 grams gold per tonne, 0.9% copper, 7.7% lead, 10.8% zinc, and 46% barium sulphate from 214 metres, including 754 grams silver, 6.4 grams gold, 1.6% copper, 14.7% lead, 20.2% zinc, and 39% barium sulphate from 248 metres.

"When Vares was first discovered, it was thought to be a typical VMS [volcanogenic massive sulphide] type deposit," Cronin said. "However, the more we drilled, we realised that the deposit had exceptionally high-grade silver and gold, particularly silver, and was, in fact, a sedimentary carbon replacement system."

Drilling continued to confirm and extend high-grade mineralisation on Rupice. Highlights included drillhole BR-24-18, which intersected 34 metres of 455 grams silver, 6.8 grams gold, 13.3% zinc, 6.8% lead, 0.5% copper, and 60% barium sulphate from 146 metres, including 18 metres of 508 grams silver, 3.8 grams gold, 17.6% zinc, 9.4% lead, 0.5% copper, and 52% barium sulphate from 162 metres.

Crew assessing core samples at the Vares project in Bosnia-Herzegovina. Credit: Adriatic Metals.

In September 2020, Adriatic increased the concession area for Vares by 3,212 hectares to 4,078 hectares.

The following month, a prefeasibility study for Vares envisioned a mine producing 8,000 tonnes of mineralized materially annually with average production of 15.3 million oz. of silver equivalent per year for the first five years of a 14-year mine life at average all-in sustaining costs of US$120 per tonne of milled material.

Initial pre-production capex was pegged at US$173 million, and the study estimated an after-tax payback period of just over one year. The PFS forecast an after-tax net present value of US$1.04 billion, at an 8% discount rate, and an after-tax internal rate of return of 113%. The study used metal prices of US$1,900 per oz. gold, US$24 per oz. silver, US$2,500 per tonne zinc, US$2,000 per tonne lead, US$6,500 per tonne copper, US$150 per tonne barium sulphate, and US$6,500 per tonne antimony.

This year, the company plans to release a definitive feasibility study for Vares in the summer. If the Rupice exploitation permit is issued in the expected timeframe, Cronin said, the project remains on track for construction to start in late 2021 and commissioning in late 2022.

The company also plans to explore high-conviction targets on the expanded concession to look for a repeat of the Rupice-style mineralisation and is slated to start in the second quarter, he said.

In addition to Vares, Adriatic continues to advance its Raska brownfield project in the southwest of Serbia, 160 km south of Belgrade. The project, which comprises two past-producing zinc, lead, and silver open-pit mines at Kizevak and Sastavci, was picked up by the company in May 2020 when it acquired Tethyan Resource for US$10 million in an all-share deal.

Last month, the company released initial drill results from 16 holes drilled at Kizevak and three holes at Sastavci, about 3.5 km away. Highlights from Kizevak included drill hole KZDD-030, which cut 38 metres of 2.7% zinc, 2.2% lead, 30 grams silver, and 0.6 gram gold starting from 100 metres. Another hole, KZDD-025, discovered a new, mineralized sub-parallel structure from surface, about 100 metres northeast of the mineralized trend, and returned 29 metres of 2.6% zinc, 1.2% lead, 15 grams silver starting from 2 metres downhole, including 15 metres of 4.3% zinc, 1.9% lead, and 24 grams silver.

At Sastavci, drillhole SSDD-003 cut 27.7 metres of 3.1% zinc, 1.3% lead, 22 grams silver, 0.5 gram gold from 13 metres downhole, while SSDD-004 cut 45 metres of 3.3% zinc, 1.0% lead, 17 grams silver and 0.2 gram gold from 17 metres.

"We believe there is an extensive mineralised system at Raska and could be undertaking exploration there for quite some time," Cronin said. "We plan to finish drilling in March, with drill results to date indicating that we should get a reasonable tonnage quite quickly, so we're looking to put together an initial resource for the project in quarter two of this year."

Cronin said the company has around A$50 million (US$39 million) in the treasury to fund this year's activities and is also exploring a project financing package for the development of Vares. He said Adriatic was currently "spoilt for choice" after receiving "a great deal of interest from several different financial institutions."

The company is weighing the different options, he said, including debt-royalty streams, off-take prepayments, and equipment financing, and expects to have credit-approved terms sheets agreed by April.

Major shareholders in Adriatic include the mid-tier Australian mining and exploration company Sandfire Resources (ASX: SFR), which holds a 16.2% stake in the company; Cronin holds an 8.7% stake; RBC Capital Markets holds 4.3%; and, in October 2020, the European Bank for Reconstruction and Development bank invested ?,?6.62 million (US$7.52 million) in the company, taking a 2.62% interest.

Alexander Pearce, a mining analyst at BMO Capital Markets, has a price target of A$2.40 per share. (At press time in Toronto Adriatic was trading at A$2.34 per share.) In a research note to clients on Feb. 4, Pearce stated that "2021 remains a significant year for catalysts for Adriatic as it transitions from explorer to developer."

Canaccord Genuity mining analyst Paul Howard maintains a speculative-buy rating for Adriatic and a target of price of A$3.20 per share. In a Feb. 8 research note, Howard said the company is "winning market confidence and delivering project permitting milestones. When the company initially listed [on the LSE] in 2019, many viewed Bosnia as a challenging jurisdiction, not because it was, but because it wasn't well understood from a mining standpoint. ADT has done a commendable job in demonstrating the ease of operating in the eastern European nation [of Bosnia-Herzegovina] to date."

Howard also noted that the company is a strong mergers and acquisitions target.