Ann: Rupice Expands with High Grade Precious Metal Intercepts, page-28

Recent report from Canaccord/Pattersons
Price Target $2.55

Rating Price TargetSPECULATIVE BUY A$2.55ADT-ASXPriceA$1.31Market Data52-Week Range (A$) : 0.54 - 1.50Avg Daily Vol (M) : 0.4Market Cap (A$M) : 234Shares Out. (M) : 177.7Enterprise Value (A$M) : 203NAV /Shr (A$) : 2.55NAV /Shr (5%) (A$) : 3.55Net Cash (A$M) : 31.1P/NAV (x) (A$) : 0.52FYE Jun 2019A 2020E 2021E 2022EZinc Production (000t)0 0 0 20Sales (£M) 0.0 0.0 0.0 32.4EBITDA (£M) (2.2) (3.9) (6.7) 4.6Free Cash Flow (£M)1.5 1.4 1.3 1.2 1.11 0.9 0.8 0.7 0.6 0.5ADT Source: FactSet(5.3) (16.3)(50.9) (108.2) Priced as of close of business November 29 2019Canaccord Genuity (Australia) Limited has received a fee as Lead Manager to the Adriatic Metals capital raising announced on 30 October 2019.Larry Hill | Analyst | Canaccord Genuity (Australia) Ltd. | [email protected] | +61.2.9263.2745 Tim McCormack | Analyst | Canaccord Genuity (Australia) Ltd. | [email protected]| +61.8.6216.2088Henry Renshaw | Associate Analyst | Canaccord Genuity (Australia) Ltd. | [email protected] | +61.2.9263.2798The Ace of baseIntroducing Rupice, a company-making assetADT has rapidly advanced its portfolio of exploration assets in Bosnia and Herzegovina (BiH), collectively known as the Vareš Project, leveraging its first-mover advantage in the highly prospective Tethyan Mineral Belt, host of several world class base metals deposits.ADT performance since IPO in April 2018 (10x growth in market cap.) reflects the scale, grade and continuity of the Rupice ore body since a maiden drilling hit 64m at 40% ZnEq (25g/t Au) in May 2018. Within a year, a Maiden Resource (83% Indicated) of 9.4Mt at 16.4% ZnEq (over 25m intercepts) was delivered, confirming Rupice as oneof the highest-grade (10.1 g/t Au) polymetallic resources to emerge globally in recent years.Since this time, a further 12,000m of extensional drilling has continued to intersect broad zones of mineralisation, pointing to a system of large scale that will drive low cost underground mining. A recent three-fold increase in the land concession provides immediate step-out potential along the current 500m strike length, with a Resource update due early 2020 the next key potential catalyst.Vareš Scoping study – plenty of meat on the bone and some fat alsoThe recently released scoping study (+/-30%, yet highly detailed) confirmed a robust development scenario at Vareš (CGe IRR 70%) that we model for 14 years of polymetallic (mostly Zn, PbAu, Ag) and barite production at ~85ktpa ZnEq, and a sector-leading C1 cost of US$0.32/lb ZnEq.Most impactful is the first four years of production from 2022 at Rupice at ~200kozpa AuEq at AISC of US$400/oz benefitting from the high grade (25% ZnEq, +12g/t Au) and lens width (>15m) of the ore body. Capital costs are modest (CGe US$185m, 65% debt financing assumed) pending DFS delivery by end of Q4’CY20.While metallurgy could be perceived as an obvious risk, test work has yielded clean (low iron) marketable concentrates (Zn/Pb payabilities 85%/94%), indicating offtake will likely be competitive, leveraging proximity to European customers.Attractive metrics suggest takeover appeal looms largeWhile foreign mining investment is nascent in BiH, we detail that high land acquisition costs rather than permitting has limited juniors replicating ADT’s success. We note recent corporate activity, with several ASX base metals small caps acquired at healthy premiums (50%) and located in foreign jurisdictions.In addition, several regional base metals asset sales (Sasa in North Macedonia and 30% of Hod Maden in Turkey) highlight the large discount to transaction multiple (3x average EV/AuEq) that ADT currently trades at. With Sandfire Resources (SFR-ASX: $5.59 | BUY, TP $8.00/sh) at 13% ownership, we believe ADT will retain high corporate appeal as the project is further de-risked.Valuation and recommendation: Our target price of A$2.55/sh. (NPV10%) is on a fully diluted basis and risked 80% to account for the pre-DFS status of the project. With$32m in cash to fund five drills in action, we view ADT as well positioned to continue to deliver meaningful news flow to sustain strong share price performance. We initiate with a SPECULATIVE BUY recommendation.