Ann: Adriatic Metals Preliminary Metallurgical Testwork Results, page-17

The metallurgical results remove a big risk aspect from this project. With polymetallic deposits metallurgy can be very difficult. Especially recovery of precious metals can be disappointingly low if these are associated with minerals other than those recovered in copper and lead concentrates. This is obviously not the case for Rupice.

That said, the results are good, but no great. Selling a bulk copper/lead concentrate is not attractive and they will have to include an additional step to separate these, which can only lead to metal losses. This will reduce the effective payable recoveries for Cu, Pb, Au and Ag.

The calculations above about the in-situ value of the resources are somewhat flawed by excluding the effect of payability terms. The off-takers do not pay fully for the metal content. For this reason the press release uses the term "expected payability adjusted recoveries" ignoring recovery of metal to concentrates where it is not paid.

Ideally you want all the copper recovered in copper concentrate without losses to other concentrates, all lead in the lead concentrate and all the zinc in zinc concentrate. Even then, there are deductions from what is paid for, in the case of Zn typically 85% with a minimum deduction of 8% points. This means that of the 53.8% Zinc concentrate, payment will be 85% as (53.8-8)/53.8 = 85.1% is higher. There are similar, but less onerous deductions for Cu, Pb, Ag and Au.

To these revenue losses must be added "realisation charges" = transport, port charges, shipping, insurance, marketing fees, smelting, refining and potentially penalties for Sb, Hg and Pb.

Typically the net payability (value of metal realised at mine/value of metal in concentrate) of copper is 80-85%, of Pb 75% and of Zn 50% (a reflection of low payability and high treatment charges). These rates vary somewhat depending on the distance to harbour, mode of transport, etc. With transport charges, etc. already included for the main concentrate metals, payability at the indicated precious metal contents should give net payability for Au and Ag of respectively 95% and 90%. Using Seth's metal prices and assuming the net payability, I get an in-situ value of US$332/t for the Rupice resources when including barite value, US$293/t excluding. For Veovaca the value are respectively US$49/t and US$30/t. These are somewhat overstated as the metal losses from separating copper from zinc are not yet known.

In practice mining will be at a certain dilution, which also should be accounted for to get to the in-situ value of mineable blocks. This will reduce the value a bit more.

Even so, the in-situ value numbers are very, very attractive numbers, indicating a high operating profit margin that will quickly cover the required upfront investment for developing a mining project. Rupice should be bulk mineable underground, rock mechanics permitting, with relatively low mining cost and similarly the mining of Veovaca by open pit means at a low strip should give an attractive margin.

With the test work showing that the resources are amenable to upgrading the development of a mine at Rupice and Veovaca have become virtually certain. It is therefore surprising how indifferent the market has reacted to the news with low trading volume and a subdued share price rise.

The price is in my mind bound to go up from here. Now for some more exploration success. That would be a real kicker.